AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 4, 2003
REGISTRATION NO. 333-104035
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT No. 2
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AVATECH SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 7372 84-1035353
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification No.)
Organization)
11403A Cronhill Drive
Owings Mills, Maryland 21117
(410) 902-6900
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
DONALD ("SCOTTY") WALSH
CHIEF EXECUTIVE OFFICER
11403A CRONHILL DRIVE
OWINGS MILLS, MARYLAND 21117
(410) 902-6900
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
COPY TO:
Christopher Olander
Neuberger, Quinn, Gielen, Rubin & Gibber, P.A.
One South Street
27th Floor
Baltimore, Maryland 21202
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement.
If the securities being registered on this form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED COMMON SHARE PRICE REGISTRATION FEE
common stock, $0.01 par 2,320,247(1) 1.25(2) 2,900,308(3) $ 234.63
value per share
Series C Convertible 327,992 1.69 554,306.48 $ 44.84
Preferred Stock, $0.01
Par value per share
Series C Convertible 500,000 2.50 1,250,000.00 $ 101.12
Preferred Stock, $0.01
Par value per share
(1) 120,247 shares are being offered for resale by selling shareholders of the
registrant, 1,000,000 shares are issuable in merger and acquisition transactions
in which registrant may engage in the future, 1,000,000 shares are issuable on
the Conversion of our Series C Preferred Stock, and 200,000 shares are issuable
under registrant's Restricted Stock Award Plan.
(2) Estimated solely for purposes of calculating the registration fee under Rule
457(c) and (g) under the Securities Act of 1933. The proposed maximum offering
price per share is based on the last sale price of $1.25 per share of
registrant's common stock reported on the OTC Bulletin Board on March 17, 2003.
(3) Of this amount, $1,400,308 relates to shares that may be offered for resale
by selling shareholders of the registrant, $1,250,000 relates to shares that may
be issued by the registrant in connection with merger and acquisition
transactions, and $250,000 relates to shares that registrant may issue under its
Restricted Stock Award Plan.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JUNE 4, 2003.
PROSPECTUS
AVATECH SOLUTIONS, INC.
2,320,247 SHARES OF COMMON STOCK
827,992 SHARES OF SERIES C CONVERTIBLE PREFERRED STOCK
Up to 120,247 shares of common stock covered by this Prospectus are being
offered for sale by selling stockholders of Avatech, from time to time, at
market prices prevailing at the time of the sale, at fixed prices in privately
negotiated transactions, or otherwise. We are registering these shares to
satisfy registration rights of the selling stockholders. We will receive none of
the proceeds of the sale of these shares. The selling stockholders will receive
all sale proceeds.
This Prospectus also covers up to 1,000,000 shares of our common stock that we
may issue to shareholders of companies we acquire, by merger or otherwise, in
the future, in privately negotiated transactions. Although part of the
consideration in these transactions may consist of cash, we contemplate that the
consideration received by the sellers of acquired companies will consist
primarily of shares of our common stock. We will provide the specific terms of
these transactions in supplements to this Prospectus.
We are offering up to 827,992 shares of our Series C Convertible Preferred
Stock. We are offering up to 327,992 shares of Series C Convertible Preferred
Stock at $1.69 per share. Each share of Series C Convertible Preferred Stock is
entitled to receive a cumulative dividend in the amount of 10% per annum and is
accompanied by the right to purchase an additional share of our Series C
Convertible Preferred Stock at $2.50 per share, and we may sell up to 500,000
additional shares of Series C Convertible Preferred Stock in this manner. Each
share may be converted into one share of common stock, also covered by this
Prospectus, at the option of the preferred stockholder, by tendering the
original purchase price of the preferred share. If all available shares of
Series C Convertible Preferred Stock are sold, we will receive $1,804,306.48,
which we intend to use for working capital.
This prospectus also covers 1,000,000 shares of our common stock which we may
issue in the future on the conversion of our Series C Convertible Preferred
Stock.
Up to 200,000 shares of Common Stock covered by this Prospectus may be issued
under our Restricted Stock Award Plan.
You should read this Prospectus and any supplement carefully before you invest.
Our common stock is traded on the OTC Bulletin Board under the symbol "AVSO.OB."
The last sale price on May 30, 2003 was $1.05 per share.
Investing in our securities involves risks. See "risk factors" beginning on page
2 to read about factors you should consider before buying shares of our common
stock.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The Date of this Prospectus is _____, 2003
TABLE OF CONTENTS
Prospectus Summary.......................................................................................................1
Risk Factors.............................................................................................................2
A Warning About Forward-Looking Statements...............................................................................7
Market Price and Dividend Information....................................................................................7
Use of Proceeds..........................................................................................................8
Selling Stockholders.....................................................................................................9
Selected Financial and Other Data.......................................................................................10
Management's Discussion and Analysis of Financial Condition and Results of Operations...................................12
Changes in and Disagreements with Avatech's Accountants.................................................................23
Business................................................................................................................24
Background.........................................................................................................24
General............................................................................................................25
Markets............................................................................................................26
Solutions and Products.............................................................................................27
Sales and Marketing................................................................................................28
Customers..........................................................................................................28
Competition........................................................................................................29
Intellectual Property..............................................................................................29
Employees..........................................................................................................30
Properties.........................................................................................................30
Legal Proceedings.......................................................................................................31
Management..............................................................................................................31
Directors and Executive Officers...................................................................................31
Executive Compensation.............................................................................................32
Certain Relationships and Related Transactions.....................................................................35
Security Ownership of Certain Beneficial Owners and Management..........................................................36
Plan of Distribution....................................................................................................37
Description of Securities...............................................................................................38
Summary of Avatech Solutions, Inc. Restricted Stock Award Plan..........................................................42
Tax Treatment of Shares Awarded under the Avatech Solutions, Inc. Restricted Stock Award Plan...........................43
Disclosure of Commission Position on Indemnification for Securities Act Liabilities.....................................43
Legal Matters...........................................................................................................43
Experts.................................................................................................................44
Where You Can Find More Information.....................................................................................44
What Information You Should Rely On.....................................................................................44
Index to Financial Statements .......................................................................................F - 1
Annex A: Avatech Solutions, Inc. Restricted Stock Award Plan........................................................A - 1
Annex B: Certificate of Designation of Rights and Preferences of Series C Convertible Preferred Stock ..............B - 1
Annex C: Preferred Stock Purchase Agreement.........................................................................C - 1
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PROSPECTUS SUMMARY
This summary highlights selected information from this Prospectus and
may not contain all of the information that is important to you. To understand
the terms of the securities we are offering, you should carefully read this
document with any attached Prospectus supplement. You should also read the
documents to which we have referred you in "Where You Can Find More Information"
below for additional information about our company and our financial statements.
Our Business
Avatech Solutions is a leading provider of design automation and
quality assurance solutions for the manufacturing, building design, civil
engineering, and GIS markets. Headquartered at 11403A Cronhill Drive, Owings
Mills, Maryland 21117, we specialize in software development, technical support,
training and consulting aimed at improving design and documentation efficiencies
and the seamless integration of workflow processes. These technology solutions
enable our customers to enhance productivity, profitability, and competitive
position. We are one of the largest Autodesk software integrators worldwide and
a leading provider of engineering document management solutions. We are the
developer of the award-winning PrescientQA(TM) quality assurance software and
cycle time reduction products for the manufacturing supply chain. We sell this
product line predominantly to the manufacturing industry with special focus on
the computer-aided design (CAD), manufacturing (CAM) and engineering (CAE)
markets.
We have embarked on a revised growth strategy that focuses on
providing comprehensive solutions to customers, and expanding our people
resources, product offerings, and geographic "footprint." Historically, we have
used our position as a leading Autodesk reseller to sell technical,
professional, training, and consulting services ancillary to product sales. Our
new strategy seeks to partner with major software vendors and service
organizations to provide comprehensive solutions to major businesses,
educational institutions, and government organizations. We expect to engage
certain strategic partners to augment our internal resources until these
initiatives have begun to achieve their targeted results, at which time we will
begin a measured process of recruiting and hiring. Our portfolio of products and
services will expand to include new relationships with other software
manufacturers and additional service offerings. This diversification strategy
and change in our business model is intended to match our product and service
offerings more precisely with the enterprise needs of our customers.
We have entered into an agreement with Dassault Systemes of France, a
world leader in product lifecycle management (PLM) solutions, with more than
65,000 customers in 80 countries, to become a SmarTeam partner. Dassault's
SmarTeam products are generally marketed in the United States through IBM and on
every other continent through leading resellers. We are in the process of
negotiating an agreement with IBM to become a certified IBM business partner for
the resale of Dassault's SmarTeam suite of PLM products. In connection with our
agreement with Dassault, Dassault agreed to make certain loans, and to reimburse
us for certain expenses we expect to incur in developing the resources
internally to support our PLM sales strategy.
We will support geographic expansion by targeted mergers and
acquisitions, the opening of new locations, and expanded international product
distribution relationships.
Risk Factors
Purchasers of our common stock should consider carefully, in addition
to the other information contain in or incorporated by reference into this
Prospectus or any supplement, the risk factors set forth in the Risk Factors
section beginning on page 2.
Use of Proceeds
We will not receive any proceeds from the sale of our common stock
under this Prospectus by the selling stockholders identified under "Selling
Stockholders" or from the issuance of shares under our Restricted Stock Award
Plan. We will not receive cash proceeds from the issuance of shares to
stockholders of companies we acquire by merger or otherwise, but will instead
receive all of the capital stock or all of the assets of those companies in
connection with acquisition and merger transactions.
We will receive up to $1,804,306.48 in cash proceeds in the sale of
our Series C Convertible Preferred Stock, which we intend to use as working
capital. We will not receive
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cash proceeds from the issuance of shares of common stock on the conversion of
our Series C Convertible Preferred Stock, but will be relieved of the obligation
to pay the cumulative 10% per annum dividend on the Series C Convertible
Preferred Stock.
Plan of Distribution
The selling stockholders will sell shares covered by this Prospectus
in open-market transactions effectuated on the OTC Bulletin Board or in
privately negotiated transactions. Shares issued to stockholders of companies we
acquire, by merger or otherwise, will be issued in private, negotiated merger or
other form of acquisition transaction. We have no current plans, proposals or
arrangements to enter into any specific merger or acquisition transactions. We
will issue shares of Series C Convertible Preferred Stock in private
transactions and we will issue shares of common stock on conversion
of such preferred shares at the option of the holders or as soon as practicable
after our common stock closes at or in excess of $6.76 per share for 60
consecutive trading days in on the NASDAQ national market system. In no event
will we issue shares of common stock in exchange for our Series C Convertible
Preferred Stock earlier than 120 days following the shareholder's purchase of
the Series C Convertible Preferred Stock. We will issue shares under our
Restricted Stock Award Plan directly to participating individuals. We currently
plan to issue shares under this Plan to four of our senior officers.
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, TOGETHER WITH THE OTHER
INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS, BEFORE
DETERMINING WHETHER OR NOT TO INVEST IN SHARES OF OUR COMMON STOCK.
We have a history of significant losses, expect to incur additional losses and
may never achieve profitability.
In five fiscal years of operation, we have reported a net profit only
in the fiscal year ending June 30, 2001. We expect to incur net losses for the
foreseeable future because our expected operating and marketing expenses will
increase as we attempt to grow our business. With increased expenses, we will
need to generate significant additional revenue to achieve profitability. As a
result, we may never become profitable. Even if we do achieve profitability in
any period, we may not be able to sustain or increase profitability on a
quarterly or an annual basis.
Increased costs resulting from our merger with PlanetCAD have reduced working
capital and will continue to place strains on our liquidity in future periods.
We have experienced a decline in working capital resulting from
unexpectedly high costs incurred to complete the merger with PlanetCAD, in most
cases, professional and printing costs substantially in excess of original
estimates. The result has been a reduction in the amount of working capital that
we have to fund current operations. Unless we raise additional capital or
negotiate successfully with various service providers in the merger transaction
to reduce fees and charges claimed by them, we will continue to experience
working capital deficits that could have a materially adverse effect on our
operations in future periods.
We have a limited operating history, which makes it difficult to evaluate our
business and prospects.
We began operations in 1997, with the merger of four founding
companies. Since that time, we have acquired seven additional companies, all of
which haven been operating together for less than four years. Management has
been working to successfully integrate these businesses and their disparate
operations, employees and management structures and personnel. These activities
may adversely impact our business, financial condition and results of operations
and may also delay the integration of companies to be acquired in the future.
The limited history and continuing evolution of our operations makes it
difficult to evaluate our business and prospects. Our prospects must be
considered in light of the risks, uncertainties, expenses, and difficulties
frequently encountered by companies in their early stages of development. If we
fail to address these risks and uncertainties, we may be unable to grow our
business, increase our revenue, or become profitable.
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Our cycle time reduction business line may never be successful.
Our products and services to reduce cycle time for supply chain
manufacturers are new and unproven and may never be successful. The success of
this line of products and services, acquired as a result of our merger with
PlanetCAD, depends on a number of factors. These factors include:
. competition from other supply chain management software
developers;
. the size of information technology budgets for the purchase of
our enterprise software solutions and services;
. confidence in our long-term strength as a service provider;
. our ability to introduce and sell products such as SCS-Envoy
to supply chain manufacturers of our existing customers;
. our ability to differentiate the product SCS-Envoy from those
of our competitors; and
. our ability to continue to differentiate and support our
Proof Positive line of products.
Failure of PLM software products and services to gain general market acceptance
would damage our business since we expect to devote substantial resources to the
implementation of a diversification strategy involving PLM software products.
Although we believe that PLM software products and services represent
a substantial new growth market, because of the way PLM radically enhances
manufacturers' ability to bring quality products to market and enhance and
manage them throughout their active lifecycle, there can be no assurance that
PLM will gain widespread acceptance in the manufacturing sector or that, if it
does, we will have the resources, financial and otherwise, to capitalize on the
growing PLM market due to limited financial resources, competition, and other
factors.
Our PLM reseller relationship with Dassault Systemes, if consummated, will
require us to devote resources to market and sell a product that may not
generate substantial revenue.
We have entered into a letter of understanding with that Dassault
contemplates that we will become a certified reseller of Dassault's PLM products
and we intend to dedicate personnel and other resources to marketing and selling
these products. If PLM products generally, or Dassault's PLM products
specifically, do not gain acceptance in the manufacturing sector, we may not
generate sufficient revenues to offset our costs.
Our inability to compete with competitors with superior resources may cause our
revenues and stock price to decline significantly.
The markets for our products and services are highly competitive,
rapidly changing, and subject to constant technological innovation. Participants
in these markets face constant pressure to accelerate the release of new
products, enhance existing products, introduce new product features, and reduce
prices. Most of our competitors or potential competitors have significantly
greater financial, managerial, technical, and marketing resources than we do.
Accordingly, we may be unable to compete effectively in our markets and as a
result, our revenues and stock price may decline significantly.
Our products may contain undetected errors that could harm our sales and revenue
and result in increased operating expenses and liabilities.
Our business depends on complex computer software, both internally
developed and licensed from third parties. Complex software often contains
defects, particularly when first introduced or when new versions are released.
Although we conduct extensive testing, we may not discover software defects that
affect new or current products and services or enhancements until after they are
deployed. If we market products and services that contain errors or that do not
function properly, we may experience negative publicity, loss of or delay in
market acceptance, or claims against us by customers, any of which could harm
our current and future sales or result in expenses and liabilities that could
reduce our operating results and adversely affect our financial condition and
the market for our common stock. In the past, we have discovered software errors
in some new products and enhancements after their introduction, and we may find
errors in current or future new products or releases after commencement of
commercial use.
- 3 -
Our inability to efficiently complete or integrate recent acquisitions or future
strategic acquisitions, may divert management resources away from business
operations and cause greater expenses and decreased revenues and sales.
We may find it necessary or desirable to acquire additional
complementary businesses, products or technologies. Integrating product
acquisitions and completing any future acquisitions could cause significant
diversions of management time and resources. Managing acquired businesses
entails numerous operational and financial risks. These risks include difficulty
in assimilating acquired operations, diversion of management's attention, and
the potential loss of key employees or customers of acquired operations. We may
not be able to effectively integrate any such acquisitions, and our failure to
do so could result in significant expenses and lost revenue.
If we are unable to protect our proprietary rights, our ability to compete will
suffer.
Our proprietary technologies are important to our success and ability
to compete in our cycle time reduction line of business. We rely, to some
extent, on trade secret and copyright laws to protect certain proprietary
technologies, but our efforts may be inadequate to protect these proprietary
rights. Further, effective trade secret and copyright protection may not be
available in all foreign countries. The unauthorized misappropriation of our
technology could have a material adverse effect on our ability to compete. In
addition, if we were to resort to legal proceedings to enforce our proprietary
rights, the proceedings could be burdensome and expensive and could involve a
high degree of risk.
We may inadvertently infringe on third party proprietary rights, which could
result in costly litigation, reduced sales and revenue and a decline in the
price of our stock.
We also may be subject to claims alleging that we have infringed third
party proprietary rights. Litigating such claims, whether meritorious or not, is
costly. The expenditure of such costs, and the accompanying diversion of
management time to such litigation, may cause a decrease in attention to sales
and product development and a corresponding decrease in revenue. These claims
might require us to enter into royalty or license agreements with terms
unfavorable to us. If we were found to have infringed upon the proprietary
rights of third parties, we could be required to pay damages, cease sales of the
infringing products, or redesign or discontinue such products, any of which
could materially reduce our sales and revenue and cause a decline in the market
price for our common stock.
Our certificate of incorporation, bylaws, and anti-takeover protections could
delay or prevent an acquisition or sale of Avatech and thus, prevent the
stockholders from receiving any potential benefit from an offer to acquire
Avatech.
Our charter and bylaws, resulting from our merger with PlanetCAD, as
well as the General Corporation Law of the State of Delaware, may deter,
discourage, or make more difficult a change in control, even if such a change in
control would benefit our stockholders. As a result, stockholders may be unable
to receive any economic or other benefit contained in any proposal. In
particular, the board of directors may issue preferred stock having such
designations, rights, and preferences as they determine; only stockholders
owning not less than two-thirds of the outstanding shares may call special
meetings of stockholders; advance notice is required for presentation of new
business and nominations of directors at meetings of stockholders; and our
bylaws may be amended only by the board of directors or by the holders of
two-thirds of the outstanding voting stock.
In addition, under our stockholder rights plan, in general, if a
person or group acquires more than 15% of the outstanding shares of common
stock, all of our other stockholders would have the right to purchase securities
from us at a discount to such securities' fair market value, thus causing
substantial dilution to the holdings of that acquiring person or group. Finally,
under Delaware law, a corporation may not engage in a business combination with
any holder of 15% or more of our capital stock until the holder has held the
stock for three years unless, among other possibilities, the board of directors
approves the transaction.
The high volatility of our stock price could materially and adversely affect the
price of our stock.
The market price of our common stock has been highly volatile and is
likely to continue to be volatile. Factors affecting our stock price may
include:
. fluctuations in sales or operating results;
- 4 -
. announcements of technological innovations or new software
standards by us or our competitors;
. published reports of securities analysts;
. developments in patent or other proprietary rights;
. changes in our relationships with development partners and
other strategic alliance partners; and
. general market conditions, especially regarding the general
performance of comparable technology stocks.
Many of these factors are beyond our control. These factors may materially
adversely affect the market price of our common stock, regardless of our
operating performance.
General economic conditions may reduce our net revenues and harm our business.
As our business has grown, we have become increasingly subject to the
risks arising from adverse changes in domestic and global economic conditions.
Because of the recent slowdown in the U.S. economy, many customers are delaying
or reducing technology purchases. The impact of this slowdown is difficult to
predict, but it may result in reductions in sales of our products and services,
longer sales cycles, slower adoption of new technologies, and increased price
competition. In addition, weakness in the end-user market could negatively
affect the cash flow of our customers, who could in turn delay paying their
obligations to us, which would increase our credit risk exposure. Any of these
events would likely harm our business, results of operations, and financial
condition.
Our operating results fluctuate from quarter to quarter, making our future
revenues and operating results difficult to predict.
Our quarterly operating results have fluctuated in the past and are
likely to do so in the future. Some of the factors that could cause our
operating results to fluctuate include, among other things, the timing of the
introduction of new products or delays in product releases by our major software
vendors such as Autodesk, changes in marketing or operating expenses, changes in
a major software vendor's pricing or product mix, changes in compensation
practices, the timing of large solution sales or implementation, and general
economic conditions. Additionally, our operating expenses are based in part on
our expectations for future revenues and are relatively fixed in the short term.
Accordingly, any revenue shortfall below expectations could have an immediate
and significant adverse effect on our profitability.
If we are unable to raise additional capital on favorable terms, our ability to
fund growth and otherwise operate our business will be significantly limited.
We need to raise additional capital to fund operating losses, develop
and enhance our services and products, fund expansion, respond to competitive
pressures, or acquire complementary businesses or technologies. We may not be
able to raise additional financing on favorable terms, if at all. If we raise
additional funds through the issuance of equity or convertible debt securities,
the percentage ownership of our stockholders will be reduced and the securities
issued may have rights, preferences, or privileges senior to those of our common
stock. If we cannot raise adequate funds on acceptable terms, our ability to
fund growth, take advantage of business opportunities, develop or enhance
services or products, or otherwise respond to competitive pressures will be
significantly limited. Insufficient funds may require us to scale-back or
eliminate some or all of our plans for growth.
Competition in the design software market may reduce our net revenues and
profits.
The software industry has limited barriers to entry, and the
availability of desktop computers with continually expanding capacity at
progressively lower prices contributes to the ease of competitive market entry.
The design software market in particular is fairly mature and characterized by
vigorous competition in each of the vertical markets in which we compete, both
by entry of competitors with innovative technologies and by consolidation of
companies with complementary products and technologies. In addition, some of our
competitors have greater financial, technical, sales and marketing, and other
resources. Furthermore, the availability of third-party application software is
a competitive factor within the computer aided design market. Because of these
and other factors, competitive conditions in the industry are likely to
intensify in the future. Increased competition could result in price reductions,
reduced net revenues and profit margins, and loss of market share, any of which
would likely harm our business.
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Our reliance on the sale of a single software vendor's products could decrease
our revenues and our profitability.
We derive over 90% of our net revenues from the sale and integration
of Autodesk products and from providing upgrades to those products. As such, if
sales of Autodesk products and upgrades decrease, our revenues will decrease,
which will adversely affect our profitability.
If our relationship with Autodesk is not renewed each year, our revenues would
significantly decrease and such decrease would jeopardize our viability.
Our continued growth and future success are largely dependent upon
maintaining our relationship with Autodesk. While our current relationship with
Autodesk is amicable, there can be no assurance that this relationship will
continue. Under the terms of the Autodesk Channel Partner Agreement, this
relationship must be renewed each year. Since over 90% of our revenues are
attributable to the resale of Autodesk products, Autodesk's failure to renew its
relationship with us would significantly decrease our sales, revenues and
overall financial condition, which would jeopardize our viability.
We may have sold unregistered shares of Series C Convertible Preferred
Stock without qualifying for an exemption from registration.
We sold shares of the Series C Convertible Preferred Stock to
accredited investors after filing the registration statement of which this
Prospectus forms a part, claiming the exemption from registration for such sales
provided by Section 4(2) of the Securities Act of 1933, as amended, for offers
and sales "not involving a public offering." It is the view of the Securities
and Exchange Commission that the initial filing of this registration statement,
registering future offers to sell common stock by the purchasers of our Series C
Convertible Preferred Stock, constitutes a public offering of the underlying
common stock, and our offers to sell Series C Convertible Preferred Stock
"involve" offers to resell the underlying common stock. As a result, it is the
view of the Securities and Exchange Commission that the offers and sales of the
Series C Convertible Preferred Stock made after March 26, 2003 may not have been
exempt from registration under Section 4(2) because filing the registration
statement constituted a "public offering" of the underlying common stock
"involving" our offers to sell Series C Convertible Preferred Stock.
If the offering were not exempt, we would have a contingent liability
to purchasers of the Preferred Stock for rescission of their purchases. If any
such purchaser demanded rescission of his purchase of Preferred Stock, we could
be liable for the purchase price of the Preferred Stock, plus interest at the
statutory rate, in exchange for the shares subject to such a rescission
transaction. We have made offers to each such purchaser to rescind his or her
purchase of shares of the Series C Convertible Preferred Stock, and each such
purchaser has declined to rescind his purchase. Under federal law, an investor
cannot "waive" his rights under the Securities Act of 1933; under the laws of
most states, an offer to rescind a purchase of securities bars an action agains
the issuer of the securities for rescission. In view of our offer to rescind,
and in view of the fact that the ten purchasers of shares of our Series C
Convertible Preferred Stock are either directors, family members, or close
business or personal associates of members of our management, we do not believe
we will face liability to these individuals with regard to our of sales of
Series C Convertible Preferred Stock for which an exemption may not have been
available.
Any acquisition we make could disrupt our business and harm our financial
condition and operations.
In an effort to effectively compete in the design automation solutions
market where increasing competition and industry consolidation prevail, we may
acquire complementary businesses in the future. In the event of any future
acquisitions, we could:
. issue additional stock that would dilute our current
shareholders' percentage ownership;
. incur debt and assume liabilities;
. incur amortization expenses related to goodwill and other
intangible assets; or
. incur large and immediate write-offs.
- 6 -
We may not be able to successfully expand through strategic acquisitions, which
could decrease our profitability.
A key element of our strategy is to pursue strategic acquisitions that
either expand or complement our business, in order to increase revenues. We may
not be able to identify additional attractive acquisition candidates on terms
favorable to us or in a timely manner. We may require additional debt or equity
financing for future acquisitions, which may not be available on terms favorable
to us, if at all. Moreover, we may not be able to successfully integrate any
acquired businesses into our business or to operate any acquired businesses
profitably. Each of these factors may contribute to our inability to
successfully expand through strategic acquisitions, which could ultimately
result in increased costs without a corresponding increase in revenues, which
would result in decreased profitability.
Our future success depends upon our ability to hire key personnel.
Our operations are dependent upon the efforts of senior management and
highly skilled employees. We will likely also be dependent on the senior
management of companies that may be acquired in the future. The loss of key
employees or the inability to recruit new employees would negatively impact our
business. In addition, we may experience increased compensation costs to attract
and retain skilled personnel.
Recipients of Common Stock under our Restricted Stock Award Plan will recognize
taxable income for Federal income tax purposes on each "vesting date" under
their restricted stock grant.
Recipients of restricted stock under our Restricted Stock Award Plan
will be deemed to have received income as to "vested shares" equal to the sum
obtained by multiplying the fair market value of our common stock on the vesting
date by the number of vested shares, and will be required to pay income taxes on
that amount. Alternatively, recipients can make an election under Section 83(b)
of the Internal Revenue Code of 1986, as amended, in which case, as to vested as
well as unvested shares, recipients will be taxed on the fair market value of
all shares received as of the date of issuance.
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
We have made forward-looking statements (as such term is defined in
the Private Securities Litigation Reform Act of 1995) in this document and in
documents that are incorporated by reference in this document that are subject
to risks and uncertainties. Forward-looking statements include the information
concerning possible or assumed future results of our operations. Also,
statements including words such as "believes," "expects," "anticipates,"
"intends," "plans," "estimates," or similar expressions are forward-looking
statements. Purchasers of shares offered hereby should note that many factors,
some of which are discussed elsewhere in this document and in the documents
incorporated by reference in this document, could affect our future financial
results and could cause actual results to differ materially from those expressed
in forward-looking statements contained or incorporated by reference in this
document. Important factors that could cause actual results to differ materially
from the expectations reflected in the forward-looking statements in this
Prospectus include, among others, the factors set forth under the caption "Risk
Factors," general economic, business and market conditions, changes in laws, and
increased competitive pressure in the CAD, CAM, CAE, GIS, customer management,
and product support industries.
MARKET PRICE AND DIVIDEND INFORMATION
MARKET PRICE DATA
Prior to our merger with PlanetCAD, PlanetCAD's common stock was
listed on the American Stock Exchange under the symbol "PCD". Since the date of
the merger, our common stock has been trading on the OTC Bulletin Board under
the symbol "AVSO.OB". The following table indicates the high and low sales
prices per share, rounded to the nearest whole cent, reported by the American
Stock Exchange, for the periods indicated prior to November 20, 2002 and as
available through the OTC market for the periods indicated since that date. The
OTC quotations represent prices between dealers and do not reflect the retailer
markups, markdowns or commissions, and may not represent actual transactions.
All prices shown have been restated to reflect the one-for-twenty reverse stock
split that occurred on October 22, 2002, and the high and low prices shown for
the period from November 20, 2002 through March 7, 2003 are for the period after
the reverse stock split.
- 7 -
PERIOD HIGH LOW
- -------------------------------------------------------------------------------
2000
First Quarter...................................... $ 240.00* $ 77.60*
Second Quarter..................................... 160.00* 62.60*
Third Quarter...................................... 88.80* 35.00*
Fourth Quarter..................................... 65.00* 10.00*
2001
First Quarter...................................... $ 27.60* $ 6.00*
Second Quarter..................................... 15.00* 8.00*
Third Quarter...................................... 11.00* 3.00*
Fourth Quarter..................................... 4.80* 2.00*
2002
First Quarter...................................... $ 4.40* $ 3.40*
Second Quarter..................................... 8.60* 3.40*
Third Quarter...................................... 8.60* 4.80*
Period from November 20, 2002 through March 7, 2003
OTC Bulletin Board................................ $ 1.95 $ 0.25
* These figures have been multiplied by twenty to adjust for the 1 for
20 reverse stock split occurring on October 22, 2002.
RECENT CLOSING PRICES
On May 30, 2003, the closing price for our common stock on the OTC
Bulletin Board, as reported by the Reuters, was $1.05.
DIVIDEND INFORMATION
We have never paid any cash dividends on our common stock and we
anticipate that we will continue to retain any earnings for the foreseeable
future for use in the expansion and operation of our business.
NUMBER OF STOCKHOLDERS
As of January 31, 2003, there were 219 holders of record of our common
stock.
USE OF PROCEEDS
Proceeds from the sale of shares owned by the Selling Stockholders
will be received by such stockholders and we will receive none of those
proceeds.
We will receive no proceeds from the issuance of shares under our
Restricted Stock Award Plan.
In exchange for the issuance of shares of our common stock to the
shareholders or owners of companies we acquire, by merger or otherwise, we
expect to receive all of the issued and outstanding shares of capital stock of
those companies, or all or substantially all, of their assets, business, and
properties.
We will not receive cash proceeds from our issue of common stock on
the conversion of our Series C Convertible Preferred Stock, but we will be
relieved of the obligation to pay the cumulative 10% per annum dividend on the
Series C Convertible Preferred Stock.
We will receive up to $1,804,306.48 in cash proceeds in the sale of our
Series C Convertible Preferred Stock, which we intend to use for working
capital.
- 8 -
SELLING STOCKHOLDERS
The following shows the name, address, and number of shares of our
common stock owned by the Selling Stockholders who may sell shares covered by
this Prospectus (these owners acquired common stock upon the automatic
conversion of Series B Preferred Stock at the time of our merger with PlanetCAD.
Name and Address Number of Shares
---------------- ----------------
Capstone Ventures SBIC, L.P./(1)/ 30,497
3000 Sand Hill Road
Building 1, Suite 290
Menlo Park, CA 94025
The Roser Partnershp III, SBIC, L.P./(2)/ 26,141
1105 Spruce Street
Boulder, CO 80302
J.F. Shea Co., Inc. as Nominee/(3)/ 20,041
2000-25
655 Brea Canyon Road
Walnut, CA 91789
Cypress Growth Fund III, L.P./(4)/ 17,427
300 Sand Hill Road
Building 1, Suite 140
Menlo Park, CA 94025
Dassault Systemes 17,427
9 Quai Marcel Dassault
9/150 Suresnes
France
Dolphin Offshore Partners, L.P./(5)/ 8,714
129 E. 17/th/ Street
New York, NY 10003
TOTAL: 120,247
-------
1. Eugene J. Fischer, a member of our Board of Directors, is the president and
general partner of Capstone Ventures SBIC, L.P and shares voting and dispositive
power of the shares held by Capstone with Barbera L. Santry. Before Capstone
received the Series B Convertible Preferred Stock, Mr. Fischer was the
beneficial owner of 45,101 shares of our capital stock. As of the date of this
Prospectus, Mr. Fischer was the beneficial owner of 75,598 shares of our common
stock, being 2.55% of our outstanding shares of common stock. This total
includes the 30,497 shares of our common stock received by Capstone upon
conversion of our Series B Convertible Preferred Stock and 19,630 shares of
common stock issuable upon exercise of outstanding warrants held by Capstone.
2. Christopher W. Roser and James L.D. Roser are the Managers of Roser Ventures
SBIC, LLC, the general partner of the Roser Partnership III, SBIC, L.P., and
share voting and dispositive power of the shares held by the Roser Partnership
III, SBIC, L.P.
3. J.F. Shea & Co. is acting as Nominee for Shea Ventures LLC, which has five
managers, John Shea, Edmund Shea, Peter Shea, Gilbert Shea, and Ronald Lakey,
who share voting and dispositive power over our Series B Convertible Preferred
Stock.
- 9 -
4. Jay Friedrichs and Walter F. Baumgartner share voting and dispositive power
of the shares held by the Cypress Growth Fund III, L.P.
5. Peter Salas has voting and dispositive power over the shares held by Dolphin
Offshore Partners, L.P.
SELECTED FINANCIAL AND OTHER DATA
The following selected historical annual consolidated financial data
is derived from our audited financial statements as of and for the five years
ended June 30, 2002. The financial data for the nine-month periods ended March
31, 2002 and 2003 are derived from unaudited financial statements. The unaudited
financial statements include all adjustments, consisting of normal recurring
accruals, that we consider necessary for a fair presentation of the financial
position and the results of operations for these periods. Operating results for
the nine months ended March 31, 2003 are not necessarily indicative of the
results that may be expected for the entire year ending June 30, 2003. The
following consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and related notes included
elsewhere in this Registration Statement.
Nine Months Ended
March 31,
--------
STATEMENT OF OPERATIONS DATA: 2003 2002
Revenue:
Product sales $ 10,636,059 $ 14,806,538
Service revenues 4,856,978 4,606,581
Commission revenue 3,460,346 3,813,865
---------------------------------
Total revenue 18,953,383 23,226,984
Cost of revenue:
Cost of product sales 6,960,633 9,746,843
Cost of service revenue 3,230,621 3,227,757
---------------------------------
Total cost of revenue 10,191,254 12,974,600
Gross margin 8,762,129 10,252,384
Other expenses:
Selling, general and administrative 9,908,439 9,476,243
Depreciation and amortization 483,734 503,472
Impairment loss -- 283,000
Acquired in-process research and development 282,000 --
---------------------------------
Total other expenses 10,674,173 10,262,715
---------------- ---------------
Loss from operations (1,912,044) (10,331)
---------------- ---------------
Other income/(expense)
Gain on the extinguishment of debt 1,960,646 --
Interest and other income 42,683 47,699
Minority interest (56,016) --
Interest expense (221,349) (348,416)
---------------------------------
1,725,964 (300,717)
---------------- ---------------
Loss before income taxes (186,080) (311,048)
Income tax expense 400,365 40,000
---------------------------------
Net loss $ (586,445) $ (351,048)
=================================
Earnings (loss) per common share - basic and diluted $ (0.23) $ (0.16)
=================================
Weighted average number of common shares outstanding - basic and diluted 2,579,714 2,220,670
=================================
- 10 -
Year Ended June 30,
STATEMENT OF OPERATIONS -------------------
DATA: 2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------
Revenue:
Product sales $ 18,486,676 $ 20,490,029 $ 22,436,739 $ 26,668,743 $ 23,968,375
Service revenues 6,482,160 6,049,275 7,519,169 6,871,010 5,936,998
Commission revenue 4,843,751 4,332,174 3,199,443 3,432,413 1,981,224
-----------------------------------------------------------------------
Total revenue 29,812,587 30,871,478 33,155,351 36,972,166 31,886,597
Cost of revenue:
Cost of product sales 12,464,965 14,249,470 16,228,849 19,664,861 17,426,413
Cost of service revenue 3,773,041 3,813,635 4,664,518 4,980,225 3,315,193
-----------------------------------------------------------------------
Total cost of revenue 16,238,006 18,063,105 20,893,367 24,645,086 20,741,606
Gross margin 13,574,581 12,808,373 12,261,984 12,327,080 11,144,991
Other expenses:
Selling, general and administrative 12,806,324 11,519,199 12,919,902 12,940,965 10,688,583
Depreciation and amortization 589,306 694,503 692,180 736,196 586,646
Impairment loss 285,374 -- -- -- --
Acquired in-process research and
development -- -- -- -- --
-----------------------------------------------------------------------
Total other expenses 13,681,004 12,213,702 13,612,082 13,677,161 11,275,229
------------ ------------ ------------ ------------ ------------
Income/(loss) from operations (106,423) 594,671 (1,350,098) (1,350,081) (130,238)
Other income/(expense)
Gain on the extinguishment of debt -- -- -- -- --
Interest and other income/ (expense) 61,510 61,488 (61,819) (18,703) 31,996
Minority interest -- -- -- -- --
Interest expense (487,582) (553,823) (641,320) (484,932) (234,318)
-----------------------------------------------------------------------
(426,072) (492,335) (703,139) (503,635) (202,322)
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes (532,495) 102,336 (2,053,237) (1,853,716) (332,560)
Income tax expense (benefit) (285,000) 13,000 -- -- 22,049
-----------------------------------------------------------------------
Net income (loss) $ (247,495) $ 89,336 $ (2,053,237) $ (1,853,716) $ (354,609)
=======================================================================
Earnings (loss) per common share -
basic and diluted $ (0.11) $ 0.04 $ (0.91) $ (0.83) $ (0.17)
=======================================================================
Weighted average number of common
shares outstanding - basic and diluted 2,224,993 2,220,856 2,251,402 2,236,711 2,028,981
=======================================================================
As of June 30,
As of ------------------------------------------------------------------
BALANCE SHEET DATA: March 31, 2003 2002 2001 2000 1999 1998
-------------- ------------------------------------------------------------------
(unaudited)
Cash and cash equivalents $ 792,524 $ 222,562 $ 309,621 $ 423,307 $ 1,198,675 $ 900,461
Working capital (3,183,390) (1,615,747) (3,927,450) (1,257,780) 157,394 (959,977)
Total assets 7,760,443 7,108,413 8,377,015 7,920,247 9,827,994 8,648,728
Total debt 3,017,368 5,980,013 6,480,880 5,750,883 6,492,239 3,205,274
Total stockholders' deficiency (3,039,307) (3,737,862) (3,424,838) (3,427,041) (1,609,640) (132,431)
- 11 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF AVATECH SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS
PROSPECTUS.
Certain statements set forth below constitute "forward-looking statements". Such
forward-looking statements involve known and unknown risk, uncertainties and
other factors including, but not limited to, those discussed in our annual and
quarterly reports, that may cause our actual results, performance or
achievements to be materially different from any future results, performance or
achievements implied by such forward-looking statements. Given these
uncertainties, investors and prospective investors are cautioned not to place
undue reliance on such forward-looking statements. We disclaim any obligation to
update information contained in any forward-looking statement.
OVERVIEW
Avatech Solutions is a leading provider of design automation and quality
assurance solutions for the manufacturing, building design, civil engineering
and GIS markets. We specialize in software development, technical
support, training and consulting aimed at improving design and documentation
efficiencies and the seamless integration of workflow processes. These
technology solutions enable our customers to enhance productivity, profitability
and competitive position. We are one of the largest Autodesk software
integrators worldwide and a leading provider of engineering document management
solutions. Additionally, we are the developer of the award-winning
PrescientQA(TM) quality assurance software and cycle time reduction products for
the manufacturing supply chain. We sell this product line predominantly to the
manufacturing industry with special focus on the computer-aided design (CAD),
manufacturing (CAM) and engineering (CAE) markets.
We have embarked on a revised growth strategy that focuses on providing
comprehensive solutions to customers, and expanding our people resources,
product offerings, and geographic "footprint." Historically, we have used our
position as a leading Autodesk reseller to sell technical, professional,
training, and consulting services ancillary to product sales. Our new strategy
seeks to partner with major software vendors and service organizations to
provide comprehensive solutions to major businesses, educational institutions,
and government organizations. We expect to engage certain strategic partners to
augment our internal resources until these initiatives have begun to achieve
their targeted results, at which time we will begin a measured process of
recruiting and hiring. Our portfolio of products and services will expand to
include new relationships with other software manufacturers and additional
service offerings. This diversification strategy and change in our business
model is intended to match our product and service offerings more precisely with
the enterprise needs of our customers.
We have entered into an agreement with Dassault Systemes of France, a world
leader in product lifecycle management (PLM) solutions, with more than 65,000
customers in 80 countries, to become a SmarTeam partner. Dassault's SmarTeam
products are generally marketed in the United States through IBM and on every
other continent through leading resellers. We are in the process of negotiating
an agreement with IBM to become a certified IBM business partner for the resale
of Dassault's SmarTeam suite of PLM products. In connection with our agreement
with Dassault, Dassault agreed to make certain loans, and to reimburse us for
certain expenses we expect to incur in developing the resources internally to
support our PLM sales strategy.
Product Sales
Our product sales are primarily the resale of packaged design software programs
that are installed on a user workstation, on a local area network server, or in
a hosted environment. The programs perform and support a wide variety of
functions related to design, modeling, drafting, mapping, rendering, and
facilities management tasks. We are the largest domestic reseller of design
software developed by Autodesk, one of the world's leading design software and
digital content companies for building design and land development,
manufacturing, utilities, telecommunications, wireless data services and digital
media. Approximately 90% of our total product revenues are related to Autodesk
products.
- 12 -
Product sales also include hardware that we may purchase for the convenience of
its customers. During fiscal 1999, we made a strategic decision to de-emphasize
the resale of hardware products as the future profit margins for these offerings
were deteriorating. Product hardware sales do not represent a significant
percentage of our total revenues in any of the periods presented.
As a result of the merger with PlanetCAD, we offer proprietary software products
through its distribution channel. Our enterprise software products include
ProofPositive and the new SCS|Envoy(TM) supply chain solution software.
ProofPositive is quality assurance software that detects, assesses, corrects,
and even prevents product development problems caused by modeling practices that
are inaccurate, incomplete, inconsistent, or all three. These problems,
generally undetected, account for approximately 45% of the engineering change
orders in a typical organization. ProofPositive is the only quality assurance
solution that works with Autodesk Inventor(R), with a single reporting and
configuration system.
Service Revenue
We provide services in the form of training, technical support, and professional
services. Product and process education classes are offered at our training
facilities or directly at a customer site. Our class instructors are application
engineers who have formal training or industry experience in the course content.
Technical support services are provided primarily through our telephone support
center located in Omaha, Nebraska. Through its staff of full time consultants,
we provide assistance to customers making inquiries concerning software products
that we sell. Professional services are project-focused offerings that are
fulfilled primarily with our own application engineers and programmers and can
include software customization, data migration, computer aided design standards
consulting, workflow analysis, and implementation assistance for complex
software products.
Commission Revenue
We generate sales from the resale of Autodesk software to various customers of
which a portion are considered major accounts. Autodesk considers certain
customers to be major accounts based on specified criteria, primarily sales
volume. These customers typically receive certain volume discounts. We are
responsible for managing and reselling product to certain of these accounts;
however, the software product is shipped directly from Autodesk to the customer.
We have received commissions ranging from 17% to 26% on the product sales price
depending upon the product type and volume. Commission revenues are recognized
upon shipment of the product from Autodesk to the customer.
Cost of Product Sales
Cost of product sales consists of our cost of purchasing the products we sell
from the software suppliers or hardware manufacturers. Additionally, the
associated shipping and handling costs are included in cost of product sales.
Cost of Service Revenue
Cost of service revenue includes the direct costs associated with the
implementation of software and hardware solutions as well as training, support
services, and professional services. These costs consist primarily of
compensation, benefits, travel and the costs of third-party contractors we
engage. Cost of service revenue does not include an allocation of overhead
costs.
Selling, General and Administrative Expense
Selling, general and administrative expense consists primarily of compensation
and other expenses associated with management, finance, human resources and
information systems. Additionally, advertising and public relations expense as
well as expenses for facilities such as rent and utilities are included in
selling, general and administrative expense.
Depreciation and Amortization Expense
Depreciation and amortization expense represents the period costs associated
with our investment in property and equipment, consisting principally of
computer equipment, software, furniture and fixtures, and leasehold
improvements. Depreciation and amortization expense is computed using the
straight-line method. Additionally, we
- 13 -
lease all of our facilities and depreciate leasehold improvements over the
lesser of the lease term or the useful life of the asset.
Goodwill is the excess of the purchase price paid over the value of the
identifiable net assets acquired in purchase business combinations and was being
amortized over the expected period of benefit, primarily 15 years. As of July 1,
2002, we no longer amortize this goodwill, but rather make annual assessments of
impairment.
We amortize acquired intangible assets with definite lives over their estimated
useful life. These assets consist principally of technology acquired in the
acquisition of PlanetCAD, which is amortized over useful lives ranging from 4 to
6 years.
Interest Expense
Interest expense consists primarily of interest on our revolving line-of-credit
and subordinated debt, which we incurred to fund operations over the past three
years.
Critical Accounting Policies
General. Our consolidated financial statements are impacted by the accounting
policies we use and the estimates and assumptions made by management during
their preparation. Critical accounting policies and estimates that impact our
consolidated financial statements are those that relate to software revenue
recognition, estimates of bad debts, and estimates of the recoverability of
goodwill. A summary of the significant accounting policies can be found in the
Notes to the Consolidated Financial Statements. Presented below is a description
of the accounting policies that we believe are most critical to understanding
the consolidated financial statements.
Software Revenue Recognition. We derive most of our revenue from the resale of
packaged software products. Product sales also include hardware that may be
purchased for the convenience of customers. Historically, we have not
experienced significant customer returns. We also earn service revenue from
training and other professional services for the products that are sold. These
services are not essential to the functionality of the software. Additionally,
we offer annual support contracts to its customers for the software products
that we sell. Maintenance and support services are also sold under hourly
billing arrangements.
Revenue from software arrangements is recognized in accordance with the
provisions of AICPA Statement of Position No. 97-2, Software Revenue
Recognition, as amended by SOP No. 98-9, Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions. Prior to recognizing
any revenue under these arrangements, (1) persuasive evidence of an arrangement
must exist, (2) delivery of the software or service must have occurred, (3) all
fees must be assessed as fixed or determinable and (4) all fees must be probable
of collection. Determination of criteria (3) and (4) are based on management's
judgments regarding the fixed nature of the fee charged for services rendered
and products delivered and the collectibility of those fees. Should changes in
conditions cause management to determine these criteria are not met for certain
future transactions, revenue recognized for any reporting period could be
adversely affected.
Our customer arrangements can involve the sale of two or more elements. When
this occurs, revenue is allocated to each element based on the relative fair
value of each element. We limit the assessment of fair value to the price that
is charged when the element is sold separately. All of the elements included in
the multiple element arrangements have been analyzed, which may include products
that are resold, training and other professional services, and support services.
We have determined that sufficient evidence of the fair value based on these
separate sales exists to allocate revenue to the specified elements. Training
and other professional services revenue is recognized as services are delivered
and support revenue is recognized ratably over the respective contract term. All
unrecognized fees that have been billed are included in deferred revenue.
Bad Debts. We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to pay for products and services
that are sold or for disputes that affect our ability to fully collect our
accounts receivable. We estimate this allowance by reviewing the status of
past-due accounts and recording general reserves based on historical bad debt
expense. Our actual experience has not varied significantly from our estimates.
However, if the financial condition of our customers were to deteriorate,
resulting in their inability to pay for
- 14 -
products or services, we may need to record additional allowances in future
periods. To mitigate this risk, we perform ongoing credit evaluations of our
customers.
Recoverability of Goodwill. We have remaining goodwill of $0.75 million at March
31, 2003 that was recorded in connection with two business combinations that
were completed in 1998. As of July 1, 2002, we adopted Financial Accounting
Standards Board Statement No. 142, Goodwill and Other Intangible Assets
("Statement 142"). Under the new rules, goodwill and other intangible assets
deemed to have indefinite lives are no longer amortized but are subject to
annual impairment tests in accordance with the Statement. Accordingly, we no
longer amortize this goodwill, but rather make annual assessments of
impairments. During the second quarter of fiscal 2003, we completed phase one
of the transitional impairment tests required by Statement 142. We will complete
phase two of the transitional impairment tests before the end of fiscal year
2003 at which time any impairment charge for the goodwill will be recorded as of
July 1, 2002. Currently, we believe that the Company is likely to have an
impairment charge for one of its reporting units, which will approximate
$400,000 to $600,000. In the future, we will be making impairment tests during
the fourth quarter of each year. In making these assessments, we must make
subjective judgments regarding estimated future cash flows and other factors to
determine the fair value of the reporting units of its business that are
associated with its remaining goodwill. It is possible that these judgments may
change over time as market conditions or strategies change, and these changes
may cause us to record additional impairment charges to adjust goodwill to its
estimated fair value.
Effect of Recent Accounting Pronouncements
As of July 1, 2002, we adopted Financial Accounting Standards Board Statement
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
("Statement 144"). Statement 144 supersedes and serves to clarify and further
define the provisions of Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, and provides a single accounting model for long-lived assets to
be disposed of.
Statement 144 does not apply to goodwill and other intangible assets that are
not amortized, and retains our current policy to recognize an impairment loss
only if the carrying amount of a long-lived asset is not recoverable from its
undiscounted future cash flows and to measure the impairment loss as the
difference between the carrying amount and the fair value of the asset.
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 145, Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections (Statement
145). Among other changes, Statement 145 rescinds Statement 4, which required
all gains and losses from extinguishment of debt to be aggregated and classified
as an extraordinary item, net of the related tax effect. Statement 145 provides
that gains and losses from extinguishment of debt should be classified as
extraordinary items only if they are unusual or infrequent, or they otherwise
meet the criteria for classification as an extraordinary item, and observes that
debt extinguishment transactions would seldom, if ever, result in extraordinary
item classification of the resulting gains and losses. We adopted Statement 145
effective July 1, 2002, and will report as other income (expense), any
extraordinary losses or gains that we incur upon the extinguishment of debt. In
August 2002, we reported a $2.0 million gain from the early extinguishment of
certain debt.
In July 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 146, Accounting for Costs Associated with Exit
or Disposal Activities (Statement 146). Statement 146 supersedes EITF Issue No.
94-3 Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity. Statement 146 requires that costs associated with an
exit or disposal plan be recognized when incurred rather than at the date of a
commitment to an exit or disposal plan. Statement 146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002,
and early adoption is encouraged. We do not expect that our adoption of
Statement 146 will have a material effect on our reported results of operations
and financial position.
- 15 -
RESULTS OF OPERATIONS
Nine Months Ended March 31, 2003 Compared to the Nine Months Ended March 31,
2002
Revenues
Total revenues for the nine months ended March 31, 2003 decreased $4.3 million,
or 18.4%, to $19.0 million, compared to $23.2 million for the same period in
2002. Overall, the gross margin percentage increased to 46.2% for the nine
months ended March 31, 2003, compared to 44.1% for the same period in 2002. For
the nine months ended March 31, 2003, revenues from product sales and
commissions decreased, while revenues from service increased. The decrease in
revenues from product sales and commissions was due to weak economic conditions
as well as timing of product upgrade cycles. The increase in revenues from
service was a result of a realigned sales organization and our renewed focus as
a full solution, service provider for our customers. Although price changes
occurred throughout the period, they did not have a material effect on
fluctuations in revenues. Improved management over the sales organization has
enhanced sales forecasting to better exploit product sales and service
opportunities to larger customers, which attributed to an increase in service
revenues.
Product sales for the nine months ended March 31, 2003 decreased $4.2 million,
or 28.2%, to $10.6 million, compared to $14.8 million for the same period in
2002. The decrease in product sales is primarily attributed to weak economic
conditions causing customers to defer purchasing software products, as well as
the timing of product upgrade cycles by our principal supplier. The decrease in
product sales is attributable to a decline in sales volume on software product
sales. Software products sold represented 93.5% and 89.0% of total product sales
for the nine months ended March 31, 2003 and 2002, respectively. Also, the sale
of software developed by Autodesk, Inc. represented 91.6% and 94.3% of total
software sales for the nine months ended March 31, 2003 and 2002, respectively.
Service revenue for the nine months ended March 31, 2003 increased $250,000, or
5.4%, to $4.9 million, compared to $4.6 million in the same period in 2002. The
increase in service revenue is a result of an increase in professional and
technical support service contracts of $728,000, or 43.4%, partially offset by a
decline in training of $478,000, or 16.3%, attributable to the decline in
software sales. All of our professional, technical support and training services
have received additional sales focus as we transition to a full solution,
service provider of software and services for our customers.
Commission revenue for the nine months ended March 31, 2003 decreased $354,000,
or 9.3%, to $3.5 million, compared to $3.8 million for the same period in 2002.
The decrease in commission revenues resulted from weak economic conditions
causing major account customers to defer purchasing software products as well as
the timing of product upgrade cycles.
Cost of Revenues and Expenses
Costs of Revenue. Cost of product sales for the nine months ended March 31, 2003
decreased $2.8 million, or 28.6%, to $7.0 million, compared to $9.8 million for
the same period in 2002. Cost of product sales as a percentage of related
revenue for the nine months ended March 31, 2003 remained relatively consistent
at 65.4% compared to 65.8% in the same period in 2002.
Cost of service revenue for the nine months ended March 31, 2003 increased
$3,000, or 0.1%, to $3.2 million. Cost of service revenue as a percentage of
related revenue for the nine months ended March 31, 2003 decreased to 66.5% from
70.1% for the same period in 2002. The decrease in cost of service revenue as a
percentage of revenue is primarily attributable to more effective management and
improved cost controls over the delivery of these services.
Selling, General and Administrative Expense. Selling, general and administrative
expense for the nine months ended March 31, 2003 increased $432,000, or 4.6%, to
$9.9 million, compared to $9.5 million for the same period in 2002. Selling,
general and administrative expense as a percent of total revenues was 52.3% for
the nine months ended March 31, 2003, and 40.8% for the same period in 2002. The
increase in selling, general and administrative expense as a percent of total
revenues is attributable to the fixed cost required to support a nationwide
network of 21 offices and the added expenses associated with the operation of
PlanetCAD after the merger on November 19, 2002.
- 16 -
Depreciation and Amortization. Depreciation and amortization expense for the
nine months ended March 31, 2003 decreased $20,000 or 3.9%, to $484,000,
compared to $503,000 for the same period in 2002. Depreciation and amortization
expense of property and equipment increased as a result of fixed assets acquired
upon the merger with PlanetCAD. The increase was offset by amortization expense
of $72,000 on unamortized goodwill that was recorded for the nine months ended
March 31, 2002. On July 1, 2002, we adopted Statement 142 and no longer amortize
goodwill and other intangible assets deemed to have indefinite useful lives.
Acquired In-Process Research and Development. In connection with our acquisition
of PlanetCAD in November 2002, we allocated $282,000 of the purchase price to
in-process research and development projects. This allocation represents the
fair value based on discounted cash flows related to the incomplete research and
development projects. At the time of acquisition, the progress of these
technologies had not yet reached technological feasibility and the technologies
had no alternative future uses. Accordingly, these costs were expensed as of the
acquisition date.
Goodwill Impairment Charge. We determined that the goodwill and other long-lived
assets of one of our subsidiaries were likely impaired due to recurring losses
and change in the estimates of the future cash flows from these operations over
the remaining amortization period. As a result, we recorded an impairment charge
of $283,000 in the period ending March 31, 2002 to present goodwill at its net
realizable value.
Other Income (Expense). Other income (expense) for the nine months ended March
31, 2003 increased $2.0 million to $1.7 million, compared to $(301,000) for the
same period in 2002. The significant increase in other income is attributable to
a gain recorded on the extinguishment of debt. In January 1999, we borrowed $3.0
million from a junior lender. In August 2002, we executed an agreement to
extinguish the debt for a cash payment of $1.0 million, resulting in a $2.0
million gain on the extinguishment of debt.
Income Taxes. Income tax expense for the nine months ended March 31, 2003 was
$400,365. In August 2002, we realized a $2.0 million taxable gain from the
extinguishment of certain debt, which resulted in a net deferred tax asset of
$373,000 being recorded at June 30, 2002. For the nine months ended March 31,
2003, the Company recorded deferred income tax expense of $373,000 related to
the estimated reduction in deferred tax assets in 2003. This increase in
deferred income tax expense coupled with state tax expense resulted in the
additional income tax expense for the nine months ended March 31, 2003.
YEARS ENDED JUNE 30, 2002, 2001 AND 2000
The following table sets forth the percentages of total revenues
represented by selected items reflected in our audited Consolidated Statements
of Operations included elsewhere in this registration statement. The
year-to-year comparisons of financial results are not necessarily indicative of
future results.
YEARS ENDED JUNE 30,
-----------------------
2002 2001 2000
----- ----- -----
Revenue:
Product sales 62.0% 66.4% 67.7%
Service revenues 21.7% 19.6% 22.7%
Commission revenue 16.3% 14.0% 9.6%
----- ----- -----
Total revenue 100.0% 100.0% 100.0%
Cost of revenue:
Cost of product sales 41.8% 46.2% 48.9%
Cost of service revenue 12.7% 12.3% 14.1%
----- ----- -----
Total cost of revenue 54.5% 58.5% 63.0%
----- ----- -----
Gross margin 45.5% 41.5% 37.0%
- 17 -
YEARS ENDED JUNE 30,
-----------------------
2002 2001 2000
----- ----- -----
Other expenses:
Selling, general and administrative 43.0% 37.3% 39.0%
Depreciation and amortization 2.1% 2.3% 2.1%
Impairment Loss 0.8% -- --
----- ----- -----
Total other expenses 45.9% 39.6% 41.1%
Income/(loss) from operations (0.4)% 1.9% (4.1)%
Other income/(expense):
Interest and other income/(expense) 0.2% 0.2% (0.2)%
Interest expense (1.6)% (1.8)% (1.9)%
----- ----- -----
(1.4)% (1.6)% (2.1)%
Income before income taxes (1.8)% 0.3% (6.2)%
Income tax expense (benefit) (1.0)% 0.0% 0.0%
----- ----- -----
Net income (loss) (0.8)% 0.3% (6.2)%
===== ===== =====
YEAR ENDED JUNE 30, 2002 COMPARED TO YEAR ENDED JUNE 30, 2001
REVENUES
Total revenues for the year ended June 30, 2002 decreased $1.1
million, or 3.4%, to $29.8 million, compared to $30.9 million for the same
period in 2001. Overall, the gross margin percentage increased to 45.5% in the
year ended June 30, 2002, compared to 41.5% in the same period in 2001. For the
year ended June 30, 2002, revenues in two of three categories--service revenue
and commission revenue--increased as a result of a realigned sales organization
and a renewed focus by Avatech as a full solution, service provider for its
customers. Although price changes occurred throughout the period, they did not
have a material effect on fluctuations in revenues. Avatech realigned its sales
organization in September 2000 and has improved sales forecasting to better
exploit sales opportunities on high margin software products as well as sales to
major accounts, which attributed to an increase in commission revenues.
Product sales for the year ended June 30, 2002 decreased $2.0 million,
or 9.8%, to $18.5 million, compared to $20.5 million in the same period in 2001.
The fluctuation in product sales is attributed to a decrease in sales volume of
software sold through the Company's customer base. In June 2001, Autodesk
announced the release of an upgrade to it most popular version of Computer Aided
Design ("CAD") software. Maintenance support on the former version of CAD
software was phased out in January 2002, which resulted in most major customers
purchasing the software upgrades in 2002. The software sales growth was
completely offset by enhanced efforts to sell more Autodesk major accounts,
thereby increasing commission revenue but reducing product sales, as well as a
significant decline in the resale of hardware products. As Autodesk major
account sales increased, the level of focus on other end product sales then
diminished and resulted in a $1.6 million or 7.8% decrease in related revenues.
Additionally, hardware sales decreased by $436,000, or 46.3% in the period of
2002. The Company has de-emphasized the resale of hardware products to its
customers.
Service revenue for the year ended June 30, 2002 increased $433,000,
or 7.2%, to $6.5 million, compared to $6.0 million in the same period in 2001.
The increase in service revenue is a direct result of an increase in the number
of training and professional services sold through the Company's expanded
customer base during 2002, which resulted in approximately $250,000 in
additional revenue. Avatech's training and technical support services have
received additional sales focus as Avatech transitions to a full solution,
service provider of software and services for its customers.
- 18 -
Commission revenue for the year ended June 30, 2002 increased
$512,000, or 11.8%, to $4.8 million, compared to $4.3 million in the same period
in 2001. The increase in commission revenues resulted from Avatech's realigned
sales organization, which has improved sales to major accounts that provide for
commission revenue.
COST OF REVENUES AND EXPENSES
Costs of Revenue. Cost of product sales for the year ended June 30,
2002 decreased $1.8 million, or 12.5%, to $12.5 million, compared to $14.2
million for the same period in 2001. Cost of product sales as a percentage of
related revenue for the year ended June 30, 2002 decreased to 67.4% from 69.5%
in the same period in 2001. The decrease in cost of product sales as a
percentage of related revenues is attributed to an increase in sales of high
margin software products.
Cost of service revenue for the year ended June 30, 2002 decreased
$41,000, or 1.1%, to $3.8 million compared to $3.8 million for the same period
in 2001. Cost of service revenue as a percentage of related revenue for the year
ended June 30, 2002 decreased to 58.2% from 63.0% in the same period in 2001.
The decrease in cost of service revenue as a percentage of revenues is
attributed to enhanced efforts to sell higher margin training and professional
services rather than lower margin installations of hardware products.
Selling, General and Administrative Expense. Selling, general and
administrative expense for the year ended June 30, 2002 increased $1.3 million,
or 11.2%, to $12.8 million, compared to $11.5 million for the same period in
2001. Selling, general and administrative expense as a percent of total revenues
was 43.0% during the year ended June 30, 2002, and 37.3% during the same period
in 2001. The increase in selling, general and administrative expense is
attributable to the expansion of Avatech's sales force and technical support
staff in its existing locations, as well as the costs associated with opening
three new offices in Chicago, IL, St. Paul, MN, and Tampa, FL, during the third
and fourth quarters of 2001. Avatech's sales force and support staff increased
by approximately 15 employees in 2002 resulting in an approximate $1.0 million
increase in selling, general and administrative expense. New facilities costs
attributed to a $50,000 increase in selling, general and administrative expense
during the same period.
Depreciation and Amortization. Depreciation and amortization expense
for the year ended June 30, 2002 decreased $105,000 or 15.1%, to $589,000,
compared to $695,000 for the same period in 2001. Depreciation and amortization
expense of property and equipment decreased as a result of capital expenditures
for computer equipment and software made in 1999 becoming fully depreciated in
2001.
Goodwill Impairment. For the year ended June 30, 2002, Avatech
recorded an impairment charge for the write down of unamortized goodwill to its
net realizable value. The impairment charge was recorded in the third quarter of
2002 upon the recognition of an impairment indicator. During the period, Avatech
evaluated goodwill for its past business combinations by comparing its best
estimate of undiscounted future cash flows with the carrying value of goodwill.
As the carrying value of goodwill exceeded the estimate of undiscounted future
cash flows for one of these acquired companies, a discounted cash flow analysis
was performed which attributed to the goodwill impairment charge of $283,000 or
the amount by which the carrying value exceeded the fair value of the
unamortized goodwill balance at that time.
Other Income (Expense). Other expense for the year ended June 30, 2002
decreased $66,000, or 13.5%, to $426,000, compared to $492,0000 for the same
period in 2001. The reduction in other expense in 2002 is primarily attributable
to a reduction in interest expense resulting from a decrease in the variable
interest rate associated with the revolving line-of-credit.
Income Tax Benefit. In 2002, Avatech recorded an income tax benefit of
$285,000. This benefit includes current income tax expense of $88,000 for state
income taxes and a deferred tax benefit of $373,000. The deferred tax benefit of
$373,000 is the result of a change in the estimate of the amount of net
operating loss carryforwards that will likely be used to reduce 2003 income
taxes. This estimate was revised principally because Avatech recorded a $1.96
million gain from the extinguishment of certain debt in August 2002, which will
increase 2003 taxable income.
- 19 -
YEAR ENDED JUNE 30, 2001 COMPARED TO YEAR ENDED JUNE 30, 2000
REVENUES
Total revenues for the year ended June 30, 2001 decreased $2.3
million, or 6.9%, to $30.9 million compared to $33.2 million in the same period
in 2000. For the year ended June 30, 2001, revenues in two of the three
categories--product sales and service revenue--decreased as a result of the
general economic slowdown experienced in the forth quarter of fiscal 2000 as
well as the culmination of the Y2K technology spending. Additionally, the sales
cycle for Autodesk's most popular CAD software product concluded in February
2000, which contributed to the overall decline in product sales for fiscal 2001.
While revenues declined for the year ended June 2001, the gross margin
percentage increased to 41.5% in 2001 from 37.0% in 2000 principally due to
Avatech's strategic decision to discontinue reselling the low margin hardware
products and focus on selling higher margin software products on both a direct
and agency basis.
Product sales for the year ended June 30, 2001 decreased $1.9 million,
or 8.7%, to $20.5 million, compared to $22.4 million in the same period in 2000.
The decrease in product sales is attributed to the culmination of the Y2K
technology spending and the conclusion of the sales cycle for Autodesk's most
popular CAD software product in February 2000. Additionally, Avatech made a
strategic decision to discontinue reselling the low margin hardware products and
focus on selling higher margin software products. As a result, Avatech
experienced a $1.9 million, or 66.8%, decline in hardware sales.
Service revenue for the year ended June 30, 2001 decreased $1.5
million, or 19.5%, to $6.0 million, compared to $7.5 million in the same period
in 2000. The decrease in service revenue is primarily attributed to a $829,000,
or 17.5%, reduction in training service revenue in 2001. The decline is service
revenue is a result of limited resources available to focus on selling training
services. During fiscal 2000, Avatech experienced exceptional results from
training services due to intense promotional efforts and sales force focus.
These efforts were not sustained in 2001 due to the implementation of certain
cost containment measures. Additionally, support services revenue for the year
ended June 30, 2001 decreased $348,000, or 18.9%, due to changes associated with
the strategic decision to discontinue selling hardware.
Commission revenues for the year ended June 30, 2001 increased $1.1
million, or 35.4%, to $4.3 million compared to $3.2 million in the same period
in 2000. The entire increase in commission revenue during 2001 resulted from the
integration of past business combinations, which provided Avatech with the
national network to service and sell to major accounts.
COST OF REVENUE AND EXPENSES
Cost of Revenue. Cost of product sales for the year ended June 30,
2001 decreased $2.0 million, or 12.2%, to $14.2 million compared to $16.2
million for the same period in 2000. Cost of product sales as a percentage of
related revenue decreased to 69.5% in 2001 from 72.3% in 2000. The decrease in
cost of product sales as a percentage of revenues is attributable to the
application of earn-backs and other rebates received from Autodesk as a result
of Avatech achieving its sales quotas in fiscal 2001. These earn-backs and
rebates are offset against cost of product sales in the period in which they are
earned.
Cost of service revenue for the year ended June 30, 2001 decreased
$851,000, or 18.2%, to $3.8 million compared to $4.7 million for the same period
in 2000. Cost of service revenue as a percentage of related revenue remained
relatively constant at 63.0% in 2001 in comparison to 62.0% in 2000.
Selling, General and Administrative Expense. Selling, general and
administrative expense for the year ended June 30, 2001 decreased $1.4 million,
or 10.8%, to $11.5 million, compared to $12.9 million for the same period in
2000. Selling, general and administrative expense as a percent of total revenues
was 37.3% in 2001 compared to 39.0% in 2000. The reduction in selling, general
and administrative expense in 2001 is attributable to an expense reduction
program that was implemented in the fourth quarter of 2000. The expense
reduction program coupled with a 6.9% decrease in total revenues attributed to
the favorable decline in the ratio of selling, general and administrative
expenses to revenues for the year ended June 30, 2001 in comparison to the year
ended June 30, 2000.
- 20 -
Depreciation and Amortization. Depreciation and amortization expense
for the year ended June 30, 2001 increased $3,000, or 0.3%, to $695,000 compared
to $692,000 for the same period in 2000. Depreciation and amortization expense
for 2001 remained consistent with 2000 as few additions to property and
equipment were needed.
Other Income (Expense). Other expense for the year ended June 30, 2001
decreased $211,000, or 30.0%, to $492,000 compared to $703,000 for the same
period in 2000. The reduction in other expense is primarily attributable to a
decrease in interest expense of 13.6% or $87,000 in 2001. The reduction in
interest expense is a result of refinancing of Avatech's revolving
line-of-credit to provide for a lower interest rate.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed our operations and met our capital expenditure
requirements primarily through cash flows provided by operations and borrowings
under short-term and long-term debt arrangements. We had a deficiency of working
capital of $3.2 million at March 31, 2003. Current liabilities include $1.6
million of borrowings under a line-of-credit from a senior lender, $249,000 of
subordinated notes, a $500,000 note payable to a related party, and a $625,000
note payable representing the advance of proceeds from an agreed-upon sale of an
investment in stock. In October 2000, we entered into a $4.0 million revolving
line-of-credit agreement with a senior lender that expires in October 2003, but
is payable within 60 days of demand. Borrowings under the line-of-credit bear
interest at the senior lender's prime rate plus 1.5%. The amount of outstanding
borrowings is limited to 75% of eligible accounts receivable.
In January 1999, we borrowed $3.0 million from a junior lender. In August 2002,
we executed an agreement to extinguish the debt for a cash payment of $1.0
million and compliance with certain non-financial covenants. We borrowed
$500,000 from each of PlanetCAD and James Hindman, an Avatech director, to make
the cash payment. On November 19, 2002 the merger with PlanetCAD was completed
and the loan from PlanetCAD eliminated, as Avatech became a subsidiary of
PlanetCAD. Mr. Hindman's loan matures on July 1, 2003. The loan bears simple
interest at a rate of 15.0% on the outstanding principal balance of the loan and
is subordinate to our senior lender.
Prior to the merger with PlanetCAD, Inc., we also had outstanding $1.7 million
of 10% subordinated notes. The notes were to mature on July 1, 2003 and interest
was payable quarterly until maturity or prepayment. On November 19, 2002 with
the completion of the merger with PlanetCAD, subordinated noteholders owning an
aggregate of $1.5 million of subordinated notes exchanged their notes for
preferred stock. As a result of these exchanges, our liabilities at November 19,
2002 have been reduced by $1,525,000 and we expect to reduce our interest
expense by $152,500 per year due to this exchange.
We acquired as part of the purchase of PlanetCAD an investment in the common
stock of a privately-held company valued at $625,000. On March 25, 2003, we
issued a $625,000 promissory note with 5.0% interest on the unpaid principal
balance maturing on May 9, 2003 representing the advance of proceeds from an
agreed-upon sale of the stock to a prospective buyer. On April 14, 2003 we
received an irrevocable offer from the prospective buyer to purchase the common
stock. The original stock purchase agreement contains a restriction on transfer
regarding first right of refusal by the issuer. We have delivered notice to the
issuer of its intent to transfer the common stock after the 30 day first right
of refusal period. Upon transfer of the common stock security to the prospective
buyer, the outstanding note of $625,000 will be cancelled.
For the nine months ended March 31, 2003 we used $0.9 million of cash in our
operations. For the comparable nine-month period in 2002, we generated $1.2
million of cash from our operations. Cash flow from operations before working
capital changes was a deficit of $1.4 million for the nine months ended March
31, 2003 compared to a surplus of $0.5 million in the comparable 2002 period.
Our operating assets and liabilities consist primarily of accounts receivable,
accounts payable, and inventory. Changes in these balances are affected by the
timing of sales and investments in inventory based on expected customer demand.
Inventory levels are minimized through arrangements with suppliers to ship
products with an average delivery period of two days and centralized inventory
management. For the nine-month period ended March 31, 2002, cash provided by
operations was favorably affected by decreases in accounts receivable of $0.5
million. Accounts receivable, net of allowance for doubtful accounts, decreased
approximately 12.7% for the period ended March 31, 2003. Day sales outstanding
(DSO's) in receivables increased to 66 days as of March 31, 2003 from 46 days as
of March 31, 2002. The increase in DSO's is attributable to the weak economic
conditions and the merger with PlanetCAD. The decrease in the accounts
receivable balance
- 21 -
is primarily attributable to lower sales due economic weakness and the timing of
product upgrade cycles. Our customary collection terms range from 30 to 60 days
for all of our customers.
Our investment activities consist principally of investments in computer and
office equipment. We acquired $0.2 million of fixed assets during the nine
months ended March 31, 2003. We have no outstanding purchase commitments at
March 31, 2003, and expect total fixed asset purchases in 2003 to be less than
$0.4 million. In 2003, in connection with our merger with PlanetCAD, we received
cash of $1.3 million.
As described more fully above, our financing activities in all periods have
consisted principally of borrowings and repayments under its lines of credit.
Net borrowings (repayments) under lines of credit were $0.2 million for the nine
months ended March 31, 2002. At April 30, 2003, we had additional borrowing
availability under its line of credit of $0.3 million.
As of the date of this report, Avatech and PlanetCAD have unpaid expenses due to
professional firms totaling approximately $.5 million that were incurred in
connection with the merger completed on November 19, 2002. We believe that
these fees are excessive and plan to vigorously negotiate the amounts due and
related payment terms with all of the service providers. We believe that we will
be successful in negotiating reduced fees and extended payment terms.
Because of the demand provisions of the line-of-credit and the lending
agreement, and uncertainties surrounding our ability to obtain the needed cash,
there would be substantial doubt about our ability to continue as a going
concern if the lenders exercise their demand rights under the agreement.
Although we cannot control the actions of these lenders, we believe that they
will not demand repayment of outstanding borrowings. One of our directors has
expressed his intention of lending the Company, up to $500,000, to fund any
needed working capital deficiencies. Based on an evaluation of the likely cash
generated from operations in the near term, available capital resources and the
timing of cash payments to vendors, we believe that we have sufficient sources
of working capital to fund our operations in the normal course of business. We
have engaged an investment banking firm to assist in obtaining long-term
financing. Additionally, we plan to raise between $1.0 million to $2.0 million
of short term financing on acceptable terms by June 30, 2003.
Below is a summary of our contractual obligations and commitments at March 31,
2003:
Payments due by Period
Contractual Obligations Total 2003 2004 2005 2006
- --------------------------------------------------------------------------------------------------------------
Long-term debt $1,422,426 $1,422,426 $-- $-- $--
Operating leases 1,220,911 609,841 469,621 115,934 25,515
---------- -------- -------- -------- ------
Total obligations $2,643,337 $2,032,267 $469,621 $115,934 $25,515
FINANCING ARRANGEMENTS WITH CIT
Under the CIT Revolving Line of Credit Agreement, Avatech obtained a
3-year revolving line of credit with the CIT Group/Business Credit, Inc. ("CIT")
in an amount up to $4,000,000. In consideration for granting the line of credit,
Avatech granted to CIT a warrant to purchase up to 16,213 shares of its voting
common stock at an exercise price of $.01 per share. The warrant expires on
October 25, 2003. Avatech also granted CIT certain registration and other rights
(including but not limited to drag-along rights and tag-along rights) pursuant
to that certain Warrantholders Rights Agreement of the same date.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly financial
information for each of the eight quarters in the two years ended June 30, 2002.
Management believes that this information has been prepared on the same basis as
the audited consolidated financial statements appearing elsewhere in this
Prospectus and, in managements opinion, this information includes all
adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the unaudited quarterly operating results when read in
conjunction with the audited consolidated financial statements of
- 22 -
the Company and the notes thereto appearing elsewhere in theis Prospectus. These
operating results are not necessarily indiciative of results for any future
period.
Three Months Ended
--------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, Jun. 30,
2000 2000 2001 2001
--------------------------------------------------------
Revenues $ 7,537,928 $ 7,487,901 $ 8,007,077 $ 7,838,572
Cost of sales 4,705,999 4,505,066 4,713,387 4,138,653
Gross margin 2,831,929 2,982,835 3,293,690 3,699,919
Operating income (179,088) 177,468 353,272 243,019
Net income $ (304,989) $ 48,277 $ 234,113 $ 111,935
========================================================
Earnings (loss) per
share - basic and
diluted $ (0.14) $ 0.02 $ 0.11 $ 0.05
========================================================
Shares used in
computation 2,193,902 2,233,778 2,227,754 2,227,388
========================================================
Three Months Ended
-------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, Jun. 30,
2001 2001 2002 2002
-------------------------------------------------------
Revenues $ 7,529,009 $ 7,594,629 $ 8,102,625 $ 6,586,324
Cost of sales 4,295,779 4,113,712 4,318,174 3,510,341
Gross margin 3,233,230 3,480,917 3,784,451 3,075,983
Operating income (271,266) 275,965 (74,667) (36,455)
Net income $ 37,890 $ 161,685 $ (192,190) $ (254,880)
=======================================================
Earnings (loss) per
share - basic and $ 0.02 $ 0.07 $ (0.09) $ (0.11)
diluted =======================================================
Shares used in 2,226,677 2,223,595 2,221,973 2,220,670
computation ======================================================
The Company's operating results may vary significantly from quarter to
quarter due to a variety of factors. One such significant factor is the
potential fluctuation in revenues due to seasonality of the business.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates associated with its
variable rate line-of-credit facility. At March 31, 2003, approximately 54.4% of
our outstanding debt bears interest at variable rates. Accordingly, our
earnings and cash flow are affected by changes in interest rates. Assuming the
current level of borrowings at variable rates and assuming a 100 basis point
change in the 2002 average interest rate under these borrowings, it is estimated
that our 2002 interest expense and net income would have changed by less than
$20,000. In the event of an adverse change in interest rates, we would likely
take actions to further mitigate our exposure. However, due to the uncertainty
of the actions that would be taken and their possible effects, the analysis
assumes no such actions. Further the analysis does not consider the effects of
the change in the level of overall economic activity that could exist in such an
environment.
CHANGES IN AND DISAGREEMENTS WITH AVATECH'S ACCOUNTANTS
In May 2002, the management of Avatech Solutions, Inc. engaged Ernst &
Young LLP as their independent auditors for the year ended June 30, 2002 in
anticipation of our becoming a public registrant. Our board of directors
ratified this engagement of Ernst & Young LLP effective May 28, 2002. During the
2002 fiscal year and through the date of this report, there were no
disagreements with Ernst & Young on any matter of accounting principle or
practice, financial statement disclosure, or auditing scope or procedures which,
if not resolved, would have caused them to make reference to the subject matter
in connection with their report on our consolidated financial statements for
such year. Ernst & Young LLP's report on our financial statements for the past
year did not contain an adverse opinion or a disclaimer of opinion, or was
qualified or modified as to uncertainty, audit scope, or accounting principles.
Additionally, there were no reportable events as defined in Item 304(a)(1)(v) of
Regulation S-K.
Walpert & Wolpoff, LLP had been engaged to audit our consolidated
financial statements for the fiscal years ended June 30, 2001 and 2000. During
these two fiscal years and through the date of this report, there were no
disagreements with Walpert & Wolpoff on any matter of accounting principle or
practice, financial statement disclosure, or auditing scope or procedures which,
if not resolved, would have caused them to make reference to the subject matter
in connection with their report on our consolidated financial statements for
such years. Neither of
- 23 -
Walpert & Wolpoff, LLP's reports on our financial statements for either of the
past two years contained an adverse opinion or a disclaimer of opinion, or was
qualified or modified as to uncertainty, audit scope, or accounting principles.
Additionally, there were no reportable events as defined in Item 304(a)(1)(v) of
Regulation S-K.
KPMG, LLP had been engaged to audit the financial statements of
PlanetCAD, Inc, which merged with us effective November 19, 2002, for the years
ended December 31, 2001 and 2000. During these two fiscal years and through the
date of this report, there were no disagreements with KPMG on any matter of
accounting principle or practice, financial statement disclosure, or auditing
scope or procedures which, if not resolved, would have caused them to make
reference to the subject matter in connection with their report on PlanetCAD's
financial statements for such years. Neither of KPMG's reports on PlanetCAD,
Inc's financial statements for either of the past two years contained an adverse
opinion or a disclaimer of opinion, or was qualified or modified as to
uncertainty, audit scope, or accounting principles. Additionally, there were no
reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.
BUSINESS
BACKGROUND
Avatech was formed as a Delaware corporation on September 9, 1996. On
June 20, 1997, CADWORKS, Inc., a company conducting its operations principally
in Texas providing design automation software, training, technical support and
professional services to corporations, was merged into Avatech, with such merger
being accounted for as a recapitalization. On June 30, 1997, Premier Design
Systems, Inc., a company with similar operations principally in Maryland, was
merged with a wholly-owned subsidiary of Avatech in a business combination
accounted for as a pooling-of-interests. All outstanding common stock of
CADWORKS, Inc. was exchanged for 593,525 shares of voting common stock of
Avatech. All outstanding common stock of Premier Design Systems, Inc. was
exchanged for 665,575 shares of our voting common stock.
During fiscal years 1998 through 1999, we consummated business
combinations with nine companies that provided design automation software,
training, technical support, and professional services to corporations,
government agencies, and educational institutions throughout the United States.
Seven of the business combinations were each consummated by the exchange of all
of the outstanding shares of voting common stock of the acquired company for
shares of our voting common stock and were accounted for as
pooling-of-interests. Two of these business combinations were accounted for as
purchases.
Our executive offices are located at 11403 Cronhill Drive, Suite A,
Owings Mills, Maryland 21117, and our telephone number is (410) 902-6900.
INDUSTRY BACKGROUND
Today's increasingly competitive business environment has forced many
companies in diverse industries to increase efficiencies while improving
flexibility and responsiveness to changing market conditions. In addition to
facing higher competitive standards with respect to product quality, variety and
price, businesses also recognize the need to shorten lead times, adjust
production for frequent changes in customer requirements, and quote more
accurate and reliable delivery dates. Furthermore, a company's trading network
may span multiple continents, requiring suppliers in one part of the world to
collaborate with a plant in another. These forces are prompting companies to
collaborate with technology transparency, across a broad range of suppliers and
customers to improve efficiencies within multi-enterprise value chains and
market places.
The development and proliferation of communications, desktop
automation, and software applications, including applications for specific
industry focuses such as AEC, Mechanical Design, GIS, and Facilities Management
are accelerating many companies' efforts to increase efficiencies by enabling a
platform-independent communications network. This platform independence and
demand for interoperability has prompted demand for a dynamic, open, and
integrated environment among customers, suppliers, and designers. In response to
these evolving market forces, many companies are seeking business solutions that
include re-engineering their business process to reduce manufacturing cycle
times, shifting from mass production to order-driven manufacturing, increasing
the use of outsourcing, and sharing information more readily with vendors and
customers over the Internet.
- 24 -
GENERAL
We are a leading provider of design automation and quality assurance
solutions for the manufacturing, building design, civil engineering, and GIS
markets. We specialize in software development, technical support, training, and
consulting aimed at improving design and documentation efficiencies and the
seamless integration of workflow processes. Our sales are to corporations,
government agencies, and educational institutions worldwide.
Our product sales are primarily the resale of packaged design software
programs that are installed on a user workstation, on a local area network
server, or in a hosted environment. The programs perform and support a wide
variety of functions related to design, modeling, drafting, mapping, rendering,
and facilities management tasks. We are one of the largest domestic commercial
reseller of design software developed by Autodesk, Inc. (Autodesk), one of the
world's leading design software and digital content companies for the building
design and land development, manufacturing, utilities, telecommunications, and
media and entertainment industries.
We differentiate ourselves from traditional product resellers through
the wide range of value-added services we can provide as part of an overall
business solutions engagement. Our services are structured around three areas:
training, technical support, and professional services--and are often bundled
with the associated software products that support them. Education classes are
offered through Our 30 training classroom facilities or directly at a customer
site, and include basic through advanced product training and customized
company-specific training curriculum. Our instructors are application engineers
and product specialists who have formal training or industry experience in the
course content. Technical support services are provided primarily through our
telephone support center located in Omaha, Nebraska. Through our staff of full
time consultants, we provide assistance to customers with questions or issues
concerning the suite of software products we resell, and those associated with
the professional services engagements we perform. Professional services include
project-focused offerings that are fulfilled primarily with our own application
engineers and programmers and include software customization, data migration,
computer aided design standards consulting, workflow analysis, and
implementation assistance for complex software products. Our strategic focus is
in responding to our customers' requests for interoperability and product
lifecycle management solutions that address broader, enterprise-wide
initiatives.
More than 90% of our total revenue arises from the resale of
Autodesk's software, and the delivery of related services from the sales of
these products. We are required to enter into annual channel partner agreements
with Autodesk and other software developers that we represent. These agreements
grant us authorization to sell certain software products to certain customers in
certain geographic areas of the United States. There are no clauses in these
agreements that limit or restrict the services that we can offer to customers.
We have a national sales and service delivery network of approximately
180 personnel operating out of 21 business offices across the country. Our sales
database has over 180,000 point-of-contact names collected over a 15-year time
span, and an active customer list of approximately 20,000 firms, and federal,
state and local agencies.
We own, market, and support cycle time reduction software solutions
that integrate engineering processes and data for the manufacturing supply
chain. We operate predominantly in the manufacturing industry with special focus
on the computer-aided design (CAD), manufacturing (CAM) and engineering (CAE)
markets.
These software tools and applications enhance the value of engineering
data in the manufacturing design and procurement supply chain by enabling cycle
time reduction. During the traditional manufacturing process, if the supply
chain manufacturer receives a product's specifications and design
electronically, important data may be lost if the supply chain manufacturer does
not use the same software application as used by the data originator. In that
event, a sample manufactured product is provided to the end-user or OEM for
approval or modification. If the sample does not meet the end-user's or OEM's
specifications, it must be modified by the supply chain manufacturer and sent
again for approval or modification. This process is often repeated several times
and is costly. "Cycle time" is a term used to describe the cycle of
trial-and-error iterations it takes for the supply chain manufacturer to produce
an end product satisfactory to the end-user or OEM. Our cycle time reduction
solutions enhance engineering processes and reduce product time-to-market by
addressing product data quality, communication, and downstream data
interoperability. These include, but are not limited to, computer-aided design,
data translation and data movement and data tracking solutions that enable
communication of engineering data with varying formats and precision, and data
quality assurance tools that improve design quality and reduce or even eliminate
iterations from electronic design to the finished product meeting the electronic
design standards.
- 25 -
The technology and products we acquired in our merger with PlanetCAD
are based on JAVA, which is a cross-platform, highly-scalable, and
internet-enabled development software programming platform. These JAVA-based
technologies and products enable efficient engineering information exchange and
integration for professional manufacturing and design engineers worldwide.
Engineers and managers can benefit from lower costs of production and
accelerated introduction of products to market.
Our enterprise software products include Proof Positive and our new
SCS|Envoy(TM) supply chain solution software. PrescientQA(TM) is quality
assurance software that detects, assesses, corrects, and even prevents product
development problems caused by modeling practices that are inaccurate,
incomplete, inconsistent, or all three. These problems, generally undetected,
account for approximately 45% of the engineering change orders in a typical
organization. Prescient technology is the only quality assurance solution that
works with Autodesk Inventor(R), with a single reporting and configuration
system.
SCS|Envoy is a new line of solutions for automating the distribution
of disparate data and enabling secure, rapid, and automated communication of
product data throughout the supply chain, resulting in more productive and
efficient manufacturing operations. In addition, we offer professional services
that help implement a transparent integration of cycle time reduction solutions
with existing manufacturing systems in corporate product design and production
processes.
We believe that PLM software and services represents a significant
opportunity for future growth. Our relationship with Dassault, which we expect
to result in the execution of a Business Partner Agreement with IBM by June of
2003 will not only provide us with a new potentially significant new product
line, but will also permit us to expand our higher margin services business and
significantly increase the average size of sales transactions. PLM software
significantly enhances manufacturing efficiencies and permits manufacturers to
manage products through their active lifecycles.
MARKETS
The AEC market is comprised of design services focused on the
construction of large physical assets such as buildings, roads, factories,
utility companies, and commercial infrastructure projects. Architects, builders,
and civil engineers use design automation systems to create detailed three
dimensional construction drawings, material specifications, and maintenance
records. Digital files are created and shared by multiple architects, engineers,
and suppliers of services and raw materials throughout the construction schedule
and subsequent operations of the asset.
The Mechanical Design and Manufacturing market is primarily focused on
the design, tooling, assembly, and testing of instruments, electronic devices,
machines, mechanical devices, and power-driven equipment. Inventors, engineers,
technicians, and designers use design automation software as basic tools in the
overall form, fit and function, creation, and refinement of the product or item.
Given the physical and electronic complexity of most items invented today,
software and services are critical to achieving tight production schedules and
cost targets.
EDM systems provide methodical and organized processes involved with
the storage, retrieval, management, and versioning of design files, drawings and
related documents such as customer correspondence, inventory lists, digital
images, and other items. These products are based on a client/server
architecture, and are scalable from a departmental solution to a division level
infrastructure system.
GIS software permits users to link together disparate data files
(maps, aerial photos, tax records, marketing data, etc.) and provide the user
with a unified image and knowledge base of a specific geographic location or
building location. This software can also be used to develop emergency exit and
disaster rescue plans by providing detailed information about employee
locations, communication information, distances to the closest stairwells, and
elevators, fire hose connection points, etc. New technology based on powerful
desktop computer hardware has enabled software developers to offer products that
are easier to use and less expensive than the previous applications, thus
expanding the volume of purchases, installation, and level of usage from the
traditional civil engineering, utilities, public works, and transportation
logistics markets and into the emergency services and Homeland Security
segments.
- 26 -
Facilities Management applications enable facility managers and
physical plant staff to efficiently operate and utilize all aspects of a
facility's operational systems (heating, cooling, power, communications,
security, etc.) including its internal and external space and infrastructure.
When integrated with Internet browsers, GIS, and document management tools,
users are able to have substantial knowledge about their buildings, their
neighborhoods, and their documents, which leads to better effectiveness and cost
containment.
As a result of our merger with PlanetCAD, we develop, market, and
support cycle time reduction software solutions that integrate engineering
processes and data for the manufacturing supply chain. We operate predominantly
in the manufacturing industry with special focus on the computer-aided design
(CAD), manufacturing (CAM), and engineering (CAE) markets.
We provide software tools and applications that enhance the value of
engineering data in the manufacturing design and procurement supply chain by
enabling cycle time reduction. During the traditional manufacturing process, if
the supply chain manufacturer receives a product's specifications and design
electronically, important data may be lost if the supply chain manufacturer does
not use the same software application used by the data originator. In that
event, a sample manufactured product is provided to the end-user or OEM for
approval or modification. If the sample does not meet the end-user's or OEM's
specifications, it must be modified by the supply chain manufacturer and sent
again for approval or modification. This process is often repeated several times
and is costly. "Cycle time" is a term used to describe the cycle of
trial-and-error iterations it takes for the supply chain manufacturer to produce
an end product satisfactory to the end-user or OEM. Our cycle time reduction
solutions enhance engineering processes and reduce product time-to-market by
addressing product data quality, communication, and downstream data
interoperability. This includes, but is not limited to, computer-aided design,
data translation, and data movement and tracking that enables communication of
engineering data with varying formats and precision and data quality assurance
tools that improve design quality and reduce or even eliminate iterations from
electronic design to the finished product meeting the electronic design
standards.
Product Lifecycle Management (PLM) software solutions are expected to
be a significant new tool for manufacturers in multiple vertical industries over
the next decade. According to AMR Research, the PLM software market was $2
billion in 2001 and will grow to nearly $8 billion by 2006. We believe that our
newly created relationship with Dassault Systemes, pursuant to which we will
become a reseller of Dassault's SmarTeam PLM products, will provide us with
important product diversity consistent with our new strategy of increased
investment in people, diversification of product and service offerings, and a
targeted merger and acquisition program to expand our geographic footprint.
SOLUTIONS AND PRODUCTS
As a design automation company, we sell software packages developed by
third party software developers. We provide a variety of services to assist our
customers in maximizing the benefits from these software applications. These
services include training, technical support, and professional services.
Our product sales are primarily composed of packaged software programs
that are installed on a user workstation, on a local area network server, or in
a hosted environment. The programs perform and support a wide variety of
functions related to design, drafting, manufacturing, workflow automation, and
document management activities. Product offerings include a full range of design
automation software packages from the industry leader, Autodesk, and workflow
and document management software from Cyco, Inc.
Training Services. We have a curriculum of over 30 different subjects
offered at our 30 training facilities, and through mobile labs that we can send
to a customer site. Our employees serve as class instructors and have formal
training or successful industry experience in the topics they are teaching. All
instructors must take and pass annual subject-matter exams required by Autodesk
and other software providers to retain their product-based teaching
certifications. We also provide training services that are highly tailored to
meet the needs of a particular customer, including company-specific operational
topics, customized product usage, and other general technology or process
training.
Technical Support Services. We provide end-user and corporate
technical support services through our National Support Center (NSC) located in
Omaha, Nebraska. A staff of full-time product and technology consultants assists
- 27 -
customers calling with questions about product features, functions, usability
issues, and configurations--as well as from our professional services
engagements. The NSC offers services through multiple access levels including
prepaid services, actual elapsed time, and annual support contracts. Customers
can communicate with the NSC through e-mail, telephone, and fax channels.
Standard NSC support services are offered on a 12-hour by 5-day basis, with
premium pricing for extended coverage hours.
Professional Services. Professional Services are project-focused
offerings that include software customization, data migration, computer aided
design standards consulting, supplemental staffing for design work, drawing
digitization, symbol library development, and GIS database development. We also
provide technology interoperability, engineering collaboration, and workflow
improvement solutions with design automation and manufacturing organizations.
CHANNEL SALES AGREEMENT WITH AUTODESK, OUR LARGEST VENDOR, PROPOSED RESELLER
AGREEMENT WITH DASSAULT SYSTEMES.
Our revenues are primarily derived from the resale of vendor software
products and services. These resales are made pursuant to channel sales
agreements whereby we are granted authority to purchase and resell the vendor
products and services. Under these agreements, we either resell software
directly to our customers or act as a sales agent for various vendors and
receive commissions for our sales efforts. We entered into an Authorized Channel
Partner Agreement with Autodesk, Inc. whereby Autodesk appointed us as a
non-exclusive partner to market, distribute, and support Autodesk software
products. Collectively with our subsidiaries, we must achieve a yearly minimum
revenue in the amount of $300,000 from the sale of Autodesk's software products
in order to be eligible to purchase such products directly from Autodesk.
We have reached an agreement principal with Dassault Systemes whereby
we will become a reseller of Dassault's SmarTeam PLM products. Our agreement
with Dassault contemplates that we will become an IBM Business Partner, as IBM
is Dassault's master distributor in the United States.
SALES AND MARKETING
Our merger and acquisition growth strategy, coupled with post merger
marketing efforts, has provided us with a sales database of over 180,000
point-of-contact names and an active customer base of 18,000 organizations.
We sell software products and solutions services through a direct
sales organization consisting of sales representatives, many with engineering
degrees and industry experience, and pre-sales technical consultants. Many of
our customers were successfully transitioned from acquired companies, as
dedicated sales representatives worked diligently to retain their customer
relationships.
We utilize a customer relationship system (CRM) to manage customer
communications that is deployed at all offices via a wide-area network. We also
use a sophisticated electronic marketing system for permission-based, automated,
one to one marketing communications and regular electronic publications. The
features include automatic customized e-mail messages to prospects with interest
in our products and services and automated lead distribution directly to the
sales force. In addition, we have a comprehensive and scaleable website, which
supports secure transactions and serves streaming media demonstrations and
technical tips on a 24x7 on-demand basis.
CUSTOMERS
We market our products to private companies, public corporations,
government agencies, and educational institutions throughout the United States.
In fiscal year 2002, the revenues generated by our top 10 customers represented
approximately 5% of total revenues.
- 28 -
We have a national sales and service delivery network that is
comprised of 20 business offices and 30 training classrooms across the country.
Our customers include:
AOL Time Warner Communications AT&T Baltimore Gas & Electric
Baseland Bechtel Becton Dickenson
Bell Atlantic Bouck & Lee Engineers Caterpillar
Champion Industries City of Baltimore City of Roseville, CA
Colorado Springs Utilities Consumers Energy Dewberry & Davis
Ford Motor Company General Electric General Mills
Goodyear Hellmuth, Obata & Kassabaum, Inc. Honeywell
INTEL JCPenney John Deere
Johnson & Johnson Kimley-Horn & Associates Lucent Technologies
MBNA Media One Michigan Department of Transportation
Naptheon NASA National Park Service
Nestle Nolte Engineering Norfolk Naval Air Station
Oceana Naval Base Ozark Aircraft Pacific Bell
Parker Hannifan Parsons Brinckerhoff Quade &Douglas, Inc. Pioneer Hybrid
Qwest Communications Rockwell Royal Caribbean International
RTKL Associates Sacramento Regional Transit SBC
Siemens Siemens Medical Systems Texaco
Texas Instruments The Sports Authority Trane
Union Pacific URS Greiner US Bureau of Land Management
Verizon
COMPETITION
We compete in the design automation channel, a market historically
composed of small niche, regionally focused companies. Since we began operations
in 1997, the Autodesk reseller channel has changed radically. The number of
Autodesk channel participants has declined significantly from approximately 400
at the time of our formation to approximately 200 currently. The many new
products and their increased complexity have made it very difficult for small
companies to compete. The vast majority of smaller resellers lack the technical
talent, financial resources, and business management skills to transition from
the old, single-application product model to one offering complete solutions.
While several, small, reseller competitors exist in the various
geographic territories where we conduct business, we have a competitive
advantage in terms of geographic reach, comprehensive training and support and
the provision of other products and services. We are the largest commercial
Autodesk reseller in the United States. Two national competitors that could be
compared to us in scale, size, geographical reach and target markets for the
resale of Autodesk products; INCAT International, Inc. (INCAT) and RAND A
Technology Corporation (RAND).
INCAT is a systems integrator for design automation products. They
have 30 offices in nine countries with worldwide headquarters in the United
Kingdom. They have 15 offices in the United States. They have approximately 800
employees worldwide with approximately 65 percent in consulting, design
engineering and technical support. While INCAT is larger than Avatech, we
estimate that the Autodesk portion of its business is less than one-fourth as
large as our Autodesk business.
RAND is the largest computer-aided design and engineering technology
company worldwide. However, we estimate that its Autodesk related business is
less than fifty percent as large as ours. It operates in 104 offices located
in 27 countries with headquarters in Canada. It has 38 offices in the United
States. As of December 31, 2001, it reported having over 1,200 employees
worldwide.
INTELLECTUAL PROPERTY
We regard our technology and other proprietary rights as essential to
our business. While we rely on copyright, trade secret, confidentiality
procedures, contract provisions, and trademark law to protect our technology and
intellectual property, we believe that the technological skills of our employees
and reliable service maintenance are also critical
- 29 -
to establishing and maintaining an intellectual property leadership position. We
own a number of federal trademarks, including "AVATECH SOLUTIONS," "AVANEWS,"
and "PRESCIENT QA," and have no trademark applications pending. We have no
patents or patent applications pending. We acquired a number of other trademarks
as a result of our merger with PlanetCAD.
We have entered into confidentiality agreements with our employees,
consultants and corporate partners and intend to control access to, and
distribution of our products, documentation and other proprietary information.
EMPLOYEES
As of December 31, 2002, we had approximately 170 full time employees
located in 22 offices throughout the United States. Many of our current
employees formerly were employees of the companies that we acquired.
Approximately 43 are located in Maryland where we have our corporate
headquarters, as well as two sales and training locations. Maryland is also the
location of our centralized accounting, order processing, and marketing
functions. Approximately 62 of our total work force is engaged in sales and
marketing activities, and approximately 60 employees are engaged in service
fulfillment. Our future success depends in significant part upon the continued
services of our key sales, technical, and senior management personnel and our
ability to attract and retain highly qualified sales, technical and managerial
personnel. None of our employees are represented by collective bargaining
agreements, and we have never experienced a work stoppage. We believe our
employee relations are good.
PROPERTIES
Our corporate offices are located in Owings Mills, Maryland where we
lease approximately 3,000 square feet of office space, pursuant to a lease that
expires June 30, 2003. These facilities house our executive and primary
administrative offices as well as accounting, order processing operations, IT,
and marketing. We also lease office space at the following locations:
LOCATION SQUARE FOOTAGE TERM
-------- -------------- --------------
California--Roseville................. 2,877 06/30/2003
Colorado--Englewood................... 7,250 03/31/2005
Colorado--Boulder..................... 3,720 11/1/2007
Connecticut--Milford.................. 5,342 Month to month
Florida--Sarasota..................... 2,500 7/31/2003
Florida--Tampa........................ 2,290 12/31/2003
Iowa--Cedar Rapids.................... 2,525 05/31/2003
Iowa--Clive........................... 4,310 04/30/2004
Maryland--Owings Mills................ 10,010 05/31/2004
Maryland--Rockville................... 2,616 04/01/2003
Michigan--Ann Arbor................... 5,543 02/28/2003
Minnesota--St. Paul................... 2,782 09/30/2002
Nebraska--Omaha....................... 7,150 Month to month
New Jersey--East Brunswick............ 2,000 03/31/2003
New York--Liverpool................... 2,105 05/14/2003
Texas--Austin......................... 2,125 10/31/2004
Texas--Irving......................... 10,522 12/31/2002
Virginia--Richmond.................... 2,250 03/31/2006
Virginia--Virginia Beach.............. 5,000 12/31/2002
Not listed are leases for space that has been vacated where the
sublessee's payments to us defray, in whole or in substantial part, our lease
payment obligations.
The commercial real estate market is volatile and unpredictable in
terms of available space, rental fees, and occupancy rates and preferred
locations. We cannot be certain that additional space will be available when we
require it, or that it will be affordable or in a preferred location.
- 30 -
LEGAL PROCEEDINGS
We are not currently a party to any material legal proceeding.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is information, as of the date of this Prospectus,
with respect to the individuals who serve as our directors and executive
officers. For additional information concerning each of these directors and
executive officers, see "Security Ownership of Certain Beneficial Owners and
Management" and "Executive Compensation."
NAME AGE POSITION
- --------------------- ------ ------------------------------------
W. James Hindman 67 Chairman of the Board
Henry D. Felton 60 Vice Chairman of the Board
Donald "Scotty" Walsh 66 Chief Executive Officer and Director
Eric L. Pratt 38 President and Chief Operating Officer
Gary Rever 50 Chief Financial Officer
Debra Keith 51 Senior Vice President
Scott Fischer 44 Executive Vice President
Eugene J. Fischer 56 Director
James A. Fanella 44 Director
There are no family relationships among any of our directors or
executive officers.
W. JAMES HINDMAN. Mr. Hindman has been a member of the Board of
Directors of Avatech since its inception in 1997. Previously, Mr. Hindman
founded Youth Services International, Inc. and served as its Chairman of the
Board and Chief Executive Officer from 1991 to 1997. In addition, Mr. Hindman is
the founder of Jiffy Lube International, Inc. and served as its Chairman of the
Board and Chief Executive Officer from 1980 to 1989. In addition, from 1976 to
1980, Mr. Hindman was the Head Football Coach at Western Maryland College, his
alma mater. From 1967 to 1979, Mr. Hindman was involved as the founder and
President of W.J. Hindman & Associates, Inc., a real-estate development, health
care and consulting company that owned and operated 18 nursing home facilities
throughout Maryland, Iowa, Illinois and Nebraska. He has served as a member of
the boards of directors of Morningside College and the Baltimore Symphony
Orchestra.
HENRY D. FELTON. Mr. Felton has been with Avatech since its inception
in 1997 and has served as Chairman of the Board and Chief Executive Officer
since that time. He is the former Co-Founder, President and Chief Operating
Officer of Youth Services International, Inc. Previously, Mr. Felton was
Executive Vice President of Maryland National Bank and a Management Committee
member.
DONALD R. WALSH. Before joining Avatech as its CEO in December, 2002,
Mr. Walsh was the Executive Vice President of Business & Network Systems Sales
for InterVoice-Brite, Inc., a global leader in the call automation industry, a
position he held since August 1999. From July 1997 until the 1999 merger of
Brite Voice Systems, Inc. with InterVoice, Inc., Mr. Walsh served as the
Executive Vice President of Worldwide Sales for the Brite Voice Systems. Before
joining Brite Voice Systems, Mr. Walsh served as President of PSC Information
Services, a division of a Philadelphia suburban corporation that provides data
processing products and services. Mr. Walsh's experience also includes 23 years
of experience with IBM.
EUGENE J. FISCHER. Mr. Fischer was a director of PlanetCAD from March
2000 until its merger with Avatech, and currently serves as a director of
Avatech and a member of its Executive, Audit, and Compensation Committees. Mr.
Fischer co-founded Capstone Management LLC, a venture capital firm, in July
1995, and is an executive officer in Capstone's affiliated entities. His
investment experience includes Internet, software, health care service and other
- 31 -
technology-enabled service companies. Mr. Fischer holds a B.S. from the
University of Minnesota and an M.S. from the University of California, Davis.
JAMES A. FANELLA. Mr. Fanella served as a director of PlanetCAD from
October 2001 until its merger with Avatech, and currently serves as a director
of Avatech and a member of its Audit and Compensation Committees. Mr. Fanella
recently served as Senior Vice President, Enterprise Solutions, at Yahoo!, a
position he held since August 2001. From September 2000 until July 2001, Mr.
Fanella served as a group president and general manager of global services at
CommerceOne. From November 1999 until September 2000, he served as a group
president of AppNet, Inc., which was acquired by Commerce One. From 1994 until
October 1999, Mr. Fanella was a managing principal at the Unisys Corporation.
ERIC L. PRATT. Mr. Pratt joined Avatech on April 15, 2003 as President
and Chief Operating Officer. From 2000 through 2003, he served as Vice President
of Business Development for Sonus, Inc. and as Executive Vice President for
Sales, Marketing and Professional Services Division of Telecom Technologies,
Inc. after Sonus' merger with Telecom Technologies, Inc. Before that, he served
as the Vice President of the Network Services Division of InterVoice-Brite, Inc.
from 1997 to 1999. Mr. Pratt has a BS in Industrial Engineering from Texas Tech
University and fourteen years' sales and management experience in the high-tech
and communications sectors.
GARY REVER. Mr. Rever joined Avatech in August 2000 as Senior Vice
President and Chief Financial Officer. He was formerly the President of
Mason-Dixon Services, LLC, a bank holding company subsidiary that provided
operational and IT services to affiliate companies from 1998 to 2000. Prior, he
has served as the Chief Financial Officer of Bank of Maryland Corporation and
Vice President of MNC Affiliates from 1981 to 1998. Mr. Rever is a Certified
Public Accountant and earned his BA in Economics at the University of Maryland.
SCOTT FISCHER. Mr. Fischer joined Avatech in April 2002 as Senior Vice
President, Professional Services and currently serves as our Executive Vice
President--Operations. Prior to going to Avatech, Mr. Fischer was a principal in
TenX Capital Partners from June of 2001 to April of 2002. Prior, he was Vice
President and General Manager--Americas for Wireless Knowledge, a start-up
wireless technology provider from January through May of 2001. From June of 1999
through January of 2001, Mr. Fischer was a Senior Vice President of AppNet, then
Commerce One, which acquired it. Mr. Fischer was Vice President--Sales and
Marketing, General Manager, of triSpan Internet Business Solutions, of
Conshohocken, Pennsylvania from August 1998 until June of 1999, when the company
was sold. From October 1997 to August 1998, Mr. Fischer was the President of NDC
Group, a consulting company in Alexandria, Virginia. Mr. Fischer began his
career with Anderson Consulting (Accenture) where he worked until September
1997.
DEBRA KEITH. Ms. Keith joined Avatech in July of 1998 as a Sales
Manager and became Senior Vice President of Sales and Marketing in April 2002.
Prior to joining Avatech, Ms. Keith was the Sales Development Manager for
Autodesk, Inc. from December of 1994 through July of 1998. From 1979 until 1994,
Ms. Keith held various management positions in Auto-trol Technology Corporation
of Denver, Colorado, including Business Unit Manager (1992 to 1994) and Senior
Account Manager (1987 to 1992).
EXECUTIVE COMPENSATION
The following table presents information concerning all compensation
earned during the three most recent fiscal years ended June 30 by our
immediately past Chief Executive Officer and four other most highly compensated
executive officers whose combined salary and bonus exceeded $100,000 for
services rendered during the fiscal years. These executive officers are referred
to as the "Named Executive Officers."
- 32 -
The compensation set forth in the table below does not include
medical, group life or other benefits that are available to all of our salaried
employees, and perquisites and other benefits, securities, or property that do
not exceed the lesser of $50,000 or 10% of the person's salary and bonus shown
in the table.
SUMMARY COMPENSATION TABLE
SECURITIES
NAME AND PRINCIPAL SALARY BONUS UNDERLYING ALL OTHER
POSITION YEAR ($) ($) OPTIONS (#) COMPENSATION ($)
- ---------------------------------------- ------ ---------- ------ ----------- ----------------
Henry Felton
Vice Chairman,
Former Chief Executive Officer 2002 $ 6,079 $ -- 12,674 $ --
2001 6,121 -- 12,613 --
2000 5,765 -- 18,959 --
Gary Rever,
Senior Vice President,
Chief Financial Officer 2002 114,696 -- -- --
2001 77,000 7,000 22,320 --
2000 -- -- -- --
Joel Nicholson,
Executive Vice President 2002 127,176 -- -- --
2001 109,596 -- -- --
2000 103,596 -- -- --
Debra Keith
Senior Vice President, Sales & Marketing 2002 110,051 10,895 5,580 --
2001 84,167 25,000 3,720 --
2000 80,000 25,000 670
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to stock
options granted to each of the Named Executive Officers during the 2002 fiscal
year. We granted options to purchase up to a total of 138,812 shares to
employees during the year. The table's percentage column shows how much of that
total went to the Named Executive Officers.
Potential Realizable Value
Number of Shares at Assumed Annual Rates of
Underlying Percent of Total Exercise Stock Price Appreciation for
Options Granted Options Granted to Price Option Term:
in FY 2002 Employees (%) ($ / Share) Expiration Date 5% 10%
--------------- ------------------ ----------- --------------- ------------ -------------
Henry Felton 12,674 9.1% $11.42 June 2012 $ 91,024.37 $ 230,673.63
Joel Nicholson -- -- -- -- -- --
Debra Keith 5,580 4.0% $11.42 November 2011 $ 40,075.93 $ 101,559.01
Gary Rever -- -- -- -- -- --
OPTION EXERCISES IN LAST FISCAL YEAR
The following table sets forth the number of shares the Named
Executive Officers purchased in connection with option exercises during the 2002
fiscal year and the value they realized on those exercises.
Number of Securities Underlying
Unexercised Options at Fiscal Year-End
Shares Acquired on --------------------------------------
Name Exercise Value Realized Exercisable Unexercisable
------------------ -------------- ------------- ---------------
Henry Felton -- -- 44,246 --
Joel Nicholson -- -- -- --
Debra Keith -- -- 3,918 8,283
Gary Rever -- -- 7,440 14,880
- 33 -
Compensation of Directors
On May 14, 2003, our Board of Directors adopted a Non-Employee Director's
Compensation Plan, pursuant to which each of our non-employee directors are
eligible for a $1,000 payment for each regular board meeting they attend plus an
annual stock option grant covering 2,000 shares of stock. In addition,
non-employee members of the Audit and Compensation Committees will receive $500
per scheduled committee meeting they attend.
Performance Graph
The SEC requires us to provide a five-year comparison of the cumulative total
return on Avatech common stock compared with that of a broad equity market index
and either a published industry index or an Avatech-constructed peer group
index.
The following chart compares the cumulative total stockholder return on
Avatech's common stock for the period beginning June 30, 1997 and ending June
30, 2002, with the cumulative total return on the Nasdaq Composite (U.S.) and
Nasdaq Computer and Data Processing indices. The comparison assumes $100 was
invested on June 30, 1997, in Avatech's common stock and in each of the
foregoing indices and assumes reinvestment of any dividends.
Avatech does not make, nor does it endorse, any predictions as to future stock
performance.
Value of $100 investment made on June 30, 1997,
as of the last closing price prior to the end of fiscal year ending June 30,
1997 1998 1999 2000 2001 2002
----------------------------------------------------------------------------
Nasdaq Composite Index $100 $131 $186 $275 $150 $101
Nasdaq Computer & Data Processing $100 $143 $234 $395 $183 $115
Services Index
Avatech Solutions, Inc. $100 $79 $195 $166 $21 $9
- 34 -
EMPLOYMENT CONTRACTS, CHANGE-IN-CONTROL AND INDEMNIFICATION ARRANGEMENTS
The executive officers serve at the discretion of our board of
directors. However, four of our executives, Donald "Scotty" Walsh, Eric L.
Pratt, Debra Keith, and Gary Rever, have signed employment agreements with
severance provisions that provide for specific cash compensatory arrangements to
these employees in the event of a change in control. The agreements for these
individuals provide that if the executive's employment is terminated or
substantially modified as a result of a change in control, then the executive
will receive a severance payment equal to various months' base salary then in
effect and full accelerated vesting of all unvested stock options.
Mr. Nicholson agreed to terminate his severance agreement and resign
as an officer of the Company effective as of June 1, 2003. Effective June 1,
2003, Mr. Nicholson will begin to provide services to the Company as a
consultant.
Mr. Felton is party to a severance agreement with us which entitles
him, upon a change of control or termination of employment without cause, to 18
months' severance pay.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
W. James Hindman currently owns approximately 2.68% of our outstanding
common stock and is the Chairman of our Board of Directors. Mr. Hindman loaned
us $500,000 in August 2002. The $500,000 loan bears simple interest at a rate of
15% per year with interest to be paid quarterly. The loan must be repaid on July
1, 2003.
Avatech began in 1996 and grew by acquiring corporations through
merger. Our stock was given to the owners of these founding companies in
exchange for the stock of the founding companies. The owners of these founding
companies became our controlling stockholders. After the PlanetCAD merger, these
founding stockholders, as a group, own approximately 32.6% of our outstanding
stock.
Henry D. Felton is currently the Vice Chairman and our immediate past
CEO. Mr. Felton owned approximately 8.27% of our outstanding stock and held, as
of December 31, 2002, stock options and warrants to purchase up to approximately
1.72% of our stock. As our chief executive officer, Mr. Felton was issued stock
options to purchase our common stock in lieu of cash compensation. Thus, Mr.
Felton received an option each month to purchase 1,061 shares of Avatech common
stock. Each option he received is fully vested and has an exercise price of
$11.42 per share.
On April 7, 2003, Mr. Felton agreed to purchase 28,906 shares of our
Series C Convertible Preferred Stock at $1.69 per share and a total purchase
price of $48,851. Each share of Series C Convertible Preferred Stock is
convertible into one share of common stock. The rights, preferences, and
privileges of our Series C Convertible Preferred Stock are described later in
this Prospectus under "Summary of the Series C Convertible Preferred Stock."
Pursuant to a written lease dated June 30, 1998, Frank Willson is a
member of Saltwater, L.L.C., the landlord of an office building in Virginia
Beach, Virginia in which we are a tenant. We pay $6,527.27 per month under the
lease that runs until December 31, 2003. Mr. Willson owns approximately 9.31% of
our outstanding stock.
Management has verbally agreed to enter into a written agreement with
certain stockholders of Avatech giving the right to those stockholders to
participate (through the selling of owned shares) in underwritten public
offerings. The stockholders to be given these rights are our founding
stockholders who were considered to be affiliates of Avatech prior to the merger
with PlanetCAD on November 19, 2002. Specifically, the Avatech stockholders to
be given the participation rights are Frank Willson, Jean and Brice Schaeffer,
Greg Blackwell and Keith Carter. Each of Mr. Willson, Ms. Schaeffer, Mr.
Blackwell and Mr. Carter were, until November 2002, members of our Board of
Directors. Mr. Willson, the Schaeffers, Mr. Blackwell and Mr. Carter own
approximately 9.31%, 8.27%, 7.17% and 4.21% of the outstanding shares of Avatech
common stock, respectively. The participation rights will be available on a
pro-rata basis with any other stockholder who may have similar rights, and they
will be subject at all times to the combined company's sale of securities in the
applicable underwritten offering. In addition to their right to have shares
included in underwritten public offerings, resales of shares owned by these
individuals are covered by this Prospectus.
- 35 -
We have discussed issuing the shares of restricted stock to our senior
management personnel as follows, after the effective date of the Registration
Statement of which this Prospectus forms a part, pursuant to our Restricted
Stock Award Plan. Although our Board of Directors and the Compensation Committee
of our Board of Directors have discussed these awards, we have not yet offered
or sold stock subject to such awards.
Name Position Shares Value/1/
- -----------------------------------------------------------------------------------------------------------------
Gary A. Rever Chief Operating Officer 30,000 $37,500
Debra Keith Senior Vice President - Sales & Marketing 30,000 $37,500
Scott Fischer Executive VP - Strategy & Business 30,000 $37,500
Development
Henry Felton Vice Chairman 50,000 $62,500
/1./ At $1.25 per share. The value of the award will be based on the market
price of the stock at the time it is issued. For more information, see our
discussion of the Restricted Stock Plan later in this Registration Statement.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
ownership of our common stock by (i) each of our current directors, (ii) each of
our executive officers named in the summary compensation table found on page 34,
(iii) all of such officers and directors as a group, and (iv) all those known us
to be beneficial owners of more than five percent of our common stock as of
December 31, 2002. For the purposes of this table, ownership figures are based
on reported ownership of Avatech securities as of December 31, 2002.
Beneficial Ownership/1/
------------------------------------
Name and Address of Beneficial Owner Number of Shares Percent of Shares
- ------------------------------------ ---------------- -----------------
James A. Fanella/2/ 750 *
23 Wescott Drive
South Barrington, Il 60010
Eugene J. Fischer/3/ 75,598 2.53
245 Laning Drive
Woodside, CA 94062
John W. Sasser/4/ 372 *
1820 Circle Road
Baltimore, MD 21204
W. James Hindman/5/ 85,372 2.87
2322 Nicodemus Road
Westminster, MD 21157
V. Joel Nicholson/6/ 157,312 5.30
745 N. MacEwen Drive
Osprey, FLA 34229
Henry D. Felton/7/ 249,577 8.27
13001 Dover Road
Reisterstown, MD 21136
Gary Rever/8/ 14,880 *
2204 Eastlake Road
Timonium, MD 21093
Debra Keith/9/ 7,241 *
1811 Kendall Court
Keller, TX 76248
Donald Walsh/10/ 1,860 *
3 Boxwood Lane
Lutherville, MD 21093
- ----------
* Less than one percent.
- 36 -
1. Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Avatech common stock
subject to options and warrants currently exercisable within 60 days of
December 31, 2002 are deemed outstanding for purposes of computing the
percentage of the person or entity holding such securities but are not
deemed outstanding for purposes of computing the percentage of any other
person or entity. Except as indicated by footnote, and subject to community
property laws where applicable, the persons named in the table above have
sole voting and investment power with respect to all shares of common stock
shown as beneficially owned by them.
2. Includes 750 shares subject to stock options that are exercisable within 60
days of December 31, 2002.
3. Includes 1,377 shares subject to stock options that are exercisable within
60 days of December 31, 2002, 39,343 shares held of record by Capstone
Ventures SBIC, L.P. (including 30,497 shares underlying convertible
preferred stock), and 19,630 shares of common stock issuable upon exercise
of outstanding warrants held by Capstone. Mr. Fischer is the president of
the general partner of Capstone. Mr. Fischer shares voting and dispositive
power with respect to the shares held by Capstone with Barbera L. Santry.
4. Includes 372 shares of common stock subject to a warrant that is
exercisable within 60 days of December 31, 2002.
5. Mr. Hindman serves as Chairman of the Board of Avatech. Includes 2,604
shares subject to stock options that are exercisable within 60 days of
December 31, 2002, 1,488 warrants to purchase common stock held by Mr.
Hindman's spouse, 1,860 warrants to purchase common stock held by Mr.
Hindman, and 10,952 shares held by Hindman and Associates. Mr. Hindman's
adult children beneficially own 154,287 shares of Avatech. Mr. Hindman
disclaims beneficial ownership of the shares owned by his adult children.
6. Mr. Nicholson serves as an Executive Vice President of Avatech. Includes
2,188 shares owned by Mr. Nicholson's spouse.
7. Mr. Felton serves as the Vice Chairman of the Board of Avatech. Includes
49,019 shares subject to stock options that are exercisable within 60 days
of December 31, 2002, 2,604 warrants to purchase common stock held by Mr.
Felton's spouse, and 1,860 warrants to purchase common stock owned by Mr.
Felton.
8. Mr. Rever serves as Chief Financial Officer of Avatech. Includes 14,880
shares subject to stock options that are exercisable within 60 days of
December 31, 2002.
9. Mrs. Keith serves as Senior Vice President, Sales and Marketing of Avatech.
Includes 7,241 shares subject to stock options are exercisable within 60
days of December 31, 2002.
10. Mr. Walsh serves as Chief Executive Officer of Avatech. Includes 1,860
shares subject to stock options that are exercisable within 60 days of
December 31, 2002.
PLAN OF DISTRIBUTION
This Prospectus covers:
1. Resales of shares by certain holders of our common stock, who
acquired their shares upon conversion of PlanetCAD's Series B
Convertible Preferred Stock at the time of our merger with
PlanetCAD in November 2002. These holders were granted
registration rights pursuant to which we were contractually
obligated to register their shares for resale within 120 days
after the closing of the merger.
2. The initial issuance of shares of our Series C Convertible
Preferred Stock, which is generally convertible into shares of
our common stock within 120 days from the date of issuance
thereof. The Certificate of Designation
- 37 -
of Rights and Preferences of our Series C Convertible
Preferred Stock is attached as Annex B hereto. The Series C
Convertible Preferred Stock Purchase Agreement is attached as
Annex C hereto.
3. Resales of shares of our common stock acquired upon conversion
of our Series C Convertible Preferred Stock, which is
convertible at any time after 120 days from the date of
issuance thereof.
4. The initial issuance of shares to shareholders of companies we
acquire by merger or otherwise who are issued shares in
exchange for all of the issued and outstanding shares of such
companies, or in exchange for all or substantially all of the
assets of such companies. Material terms of any such
acquisition transactions will be disclosed in Supplements to
this Prospectus prior to the issuance of such shares. We
currently have no plans, proposals, or arrangements to engage
in any such business combination transactions.
5. The initial issuance of shares to key management employees,
consultants, officers, and directors under our Restricted
Stock Award Plan in exchange for past or future services to
us. The Restricted Stock Award Plan is provided as Annex A to
this Prospectus. We currently plan to issue shares as
restricted stock awards to four of our senior officers.
Resales of shares effectuated pursuant to this Prospectus may occur from time to
time at market prices prevailing at the time of sale, at fixed prices, or in
privately negotiated transactions. We will not receive any of the proceeds from
the sale of such shares.
DESCRIPTION OF SECURITIES
The following is a summary of the material information relating to our
common stock based on our certificate of incorporation and bylaws and the
applicable provisions of the Delaware General Corporation Law. For information
on how to obtain copies of our certificate of incorporation and bylaws, see
"Where You Can Find More Information."
As of the date of Prospectus, we have the authority to issue an
aggregate of 25,000,000 shares of capital stock, consisting of 22,500,000 shares
of common stock, par value $0.01 per share, and 2,500,000 shares of preferred
stock issuable from time to time by the board of directors in one or more
classes or series. As of January 31, 2003, there were 2,965,958 shares of our
common stock outstanding, no shares of Series A Junior Participating Preferred
Stock outstanding, no shares of Series B Convertible Preferred Stock outstanding
and no shares of Series C Convertible Preferred Stock outstanding.
COMMON STOCK
Dividends. The holders of common stock are entitled to dividends when
and as declared by the board of directors from funds legally available to pay
such dividends.
Voting Rights. Each holder of Avatech's common and preferred stock is
entitled to attend all special and annual meetings of the stockholders of
Avatech, and to vote upon any matter, including, without limitation, the
election of directors, properly brought for consideration before the
stockholders. The holders of common stock are entitled to one vote for each
share held of record.
No Preemptive or Conversion Rights. Holders of Avatech common stock
have no preemptive rights and no rights to convert their common stock into any
other securities.
Liquidation Rights. In the event of a liquidation, dissolution or
winding up of Avatech, the holders of Avatech common stock and the holders of
any class or series of stock entitled to participate with such holders, will be
entitled to participate in the distribution of any assets of Avatech remaining
after Avatech has paid all of its debts and liabilities and after Avatech has
paid, or set aside for payment, to the holders an amount equal to the purchase
price for, and any accrued and unpaid dividends on, to any future class or
series of stock with a liquidation preference over the common stock the
preferential amount to which they are entitled.
- 38 -
AVATECH PREFERRED STOCK
Avatech's board of directors has designated three classes of preferred
stock: the Series A Junior Participating Preferred Stock, the Series B
Convertible Preferred Stock, and the Series C Convertible Preferred Stock. In
addition, the board of directors has the authority to designate additional
classes or series of preferred stock in the future with rights that may
adversely affect the rights of the holders of Avatech common stock. There are no
Series A or B shares outstanding. The rights, preferences and privileges of the
Series C Convertible Preferred Stock are described below.
SUMMARY OF TERMS OF SERIES C CONVERTIBLE PREFERRED STOCK
We are offering up to 827,992 shares of our Series C Convertible
Preferred Stock. As of the date of this Prospectus, we have agreed to sell
172,008 shares.
The following is a summary of the material terms of the Series C
Convertible Preferred Stock and the Preferred Stock Purchase Agreement that each
purchaser of Series C Convertible Preferred Stock has signed or will sign. We
urge you to read these documents, as they are the legal documents governing our
Series C Convertible Preferred Stock.
Number of Shares. We designated 1,000,000 shares of our preferred
stock, par value $.01 as Series C Convertible Preferred Stock.
Purchase Price. The initial purchase price for shares of Series C
Convertible Preferred Stock is $1.69 per share. Purchasers have the right to
purchase as many additional shares of Series C Convertible Preferred Stock as
that shareholder received in the initial issue of our Series C Convertible
Preferred Stock for $2.50 per share, at any time during the first year after the
initial issue of such stock.
Voting Rights. Each holder of our Series C Convertible Preferred Stock
is entitled to attend all special and annual meetings of the stockholders of
Avatech and to vote on all actions to be taken by our stockholders, including,
without limitation, the election of directors, and any other matter properly
brought for consideration before the shareholders. The holders of Series C
Convertible Preferred Stock shall vote as a class, and are entitled to one vote
for each share held of record.
Conversion Rights. Beginning 120 days after we issue the Series C
Convertible Preferred Stock, the owners of the Series C Convertible Preferred
Stock may tender their shares of Series C Convertible Preferred Stock, along
with the conversion price then in effect, for an equal number of shares of our
Common Stock. The initial conversion price is $1.69 per share, to be adjusted
for any splits, combinations, exchanges, or similar events. In the event that
our stock is listed on the NASDAQ National Market System and trades for sixty
consecutive days at a price above $6.76 per share, shares of Series C
Convertible Preferred Stock must be converted to common stock, on the same terms
as described above.
Redemption. We are required to redeem the Series C Convertible
Preferred Stock if we merge with another company and we are not the surviving
entity after the merger, subject to the approval of our directors and
shareholders.
Exchange. Holders of Series C Convertible Preferred Stock have the
right to exchange all of their shares of Series C Convertible Preferred Stock
for shares of any future series of preferred stock that contains any material
term more favorable to its holders than the Series C Convertible Preferred
Stock. A holder of Series C Convertible Preferred Stock may exchange its shares
of Series C Convertible Preferred Stock for a number of shares of preferred
stock such that the total value of the new preferred stock received by the
exchanging shareholder is equal to the total price paid for the Series C
Convertible Preferred Stock.
Dividends. The Series C Convertible Preferred Stock is eligible for
10% annual, cumulative dividends, payable quarterly when and as declared by the
Board of Directors. These dividends have priority over any declaration or
payment of any dividend or other distribution on our Common Stock or any other
class or series of stock that is junior to the Series C Convertible Preferred
Stock. Dividends on our Series C Convertible Preferred Stock rank pari
- 39 -
passu with any other shares of Preferred Stock entitled to participate pari
passu with the Series C Convertible Preferred Stock with respect to dividends
and are subject to the rights of any series of Preferred Stock that ranks, with
respect to dividends, senior to the Series C Convertible Preferred Stock.
Currently, there are no outstanding shares of stock that rank senior to or pari
passu with the Series C Convertible Preferred Stock.
Liquidation Rights. In the event of any liquidation, dissolution, or
winding up of the Corporation, either voluntary or involuntary, after payment or
provision for payment of the debts and other liabilities and obligations of the
Corporation, the holders of Series C Convertible Preferred Stock shall be
entitled to receive from the distribution of any assets of Avatech remaining
after Avatech has paid all of its debts and liabilities and after Avatech has
paid, or set aside for payment, to the holders of any future class or series of
stock with a liquidation preference over the Series C Convertible Preferred
Stock, an amount equal to the purchase price for and any accrued and unpaid
dividends on such stock, an amount equal to the original issue price of Series C
Convertible Preferred Stock ($1.69 per share) plus an amount equal to all
accumulated but unpaid dividends on the Series C Convertible Preferred Stock,
pari passu with any other shares of Preferred Stock under the terms of which
holders thereof shall be entitled to participate pari passu with the Series C
Convertible Preferred Stock.
Registration Rights. The holders of our Series C Convertible Preferred
Stock have the right to require us to register the shares of common stock into
which their Series C Convertible Preferred Stock converts, and we must file for
registration within 120 days of demand by the holder of shares of such common
stock. This Prospectus covers the shares of common stock underlying the Series C
Convertible Preferred Stock and is intended to satisfy our obligation to
register such shares.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Limitations of Liability. Delaware law authorizes corporations to
limit or eliminate the personal liability of directors to corporations and their
stockholders for monetary damages for breach of the fiduciary duty of care.
Although Delaware law does not change the duty of care, it enables corporations
to limit available relief to equitable remedies such as injunction or
rescission. Avatech's certificate of incorporation limits the liability of
directors to Avatech or its stockholders to the fullest extent permitted under
Delaware law. Specifically, directors of Avatech are not personally liable for
monetary damages to Avatech or its stockholders for breaches of the their
fiduciary duties, except for liability for acts or omissions not in good faith
or involving intentional misconduct, for knowing violations of the law, for any
transaction from which the director or executive officer derived an improper
personal benefit, or for authorizing the payment of dividends or approval of
stock repurchases or redemptions that are unlawful under Delaware law.
Indemnification. Avatech has entered into indemnification agreements
with each of its directors and executive officers that require Avatech to
indemnify each such person to the fullest extent authorized or permitted by
Avatech's certificate of incorporation and Delaware law against expenses,
judgments, fines, settlements and other amounts actually and responsibly
incurred (including expenses of a derivative action) in connection with any
proceeding, whether actual or threatened, to which they may be made a party by
reason of the fact that they are or were acting as a director, officer,
employee, or other agent of Avatech or any of its affiliated enterprises.
Delaware law permits this indemnification, provided the person acted in good
faith and in a manner reasonably believed to be in or not opposed to the best
interest of Avatech and, with respect to any criminal proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The indemnification
agreements also set forth certain procedures that will apply in the event of a
claim for indemnification thereunder. In addition, Avatech maintains director
and officer liability insurance which, subject to certain exceptions and
limitations, insures directors and officers for any alleged breach of duty,
neglect, error, misstatement, misleading statement, omission, or act in their
respective capacities as directors and officers of Avatech.
CERTAIN PROVISIONS RELATING TO A CHANGE OF CONTROL
Provisions Related To The Election Of Directors And Stockholder
Action. Avatech's certificate of incorporation requires the affirmative vote of
two-thirds of the stockholders to remove a director from the board of directors
without cause. The certificate of incorporation also provides that all board
vacancies are to be filled by the remaining directors, unless the remaining
directors approve a stockholder vote to fill a vacancy. Avatech's bylaws
prohibit less than two-thirds of Avatech's stockholders from calling a special
meeting, whether for the purpose of replacing directors or for any other
purpose. As a result, once elected, Avatech directors may not be removed from
- 40 -
office without cause until the next annual meeting of the stockholders.
Therefore, a third party interested in taking control of Avatech quickly will
not be able to do so unless the third party acquires two-thirds or more of
Avatech's voting securities at the time of the acquisition. In addition,
Avatech's certificate of incorporation and bylaws prohibit stockholders from
taking action by written consent in lieu of a meeting.
Stockholder Rights Plan. In March 2002, Avatech's board of directors
adopted a stockholders rights plan. The plan is designed to deter a takeover of
Avatech on terms other than those approved by the Avatech's board of directors.
The plan causes substantial dilution to a person or group that attempts to
acquire Avatech on terms that are not approved by the Avatech board of
directors. Under the plan, each Avatech stockholder as of March 21, 2002
received a right that entitles that stockholder to purchase one one-thousandth
of a share of Avatech's Series A Junior Participating Preferred Stock for each
share of common stock held. Generally, the rights become exercisable only if a
person or group acquires or obtains the rights to acquire 15% or more of
Avatech's outstanding common stock, or if a tender or exchange offer is
commenced, the completion of which would result in a person owning more than 15%
of Avatech's outstanding common stock. The rights, however, are not exercisable
if a person who acquires more than 15% of Avatech's outstanding common stock
offers to purchase all of Avatech's outstanding shares of common stock and
Avatech's board of directors determines by a two-thirds vote that such offer is
fair to and otherwise in the best interests of Avatech and its stockholders.
If the rights become exercisable, the rights of the person who
acquires more than 15% of Avatech's common stock become null and void. All other
stockholders will be entitled to purchase stock of Avatech, or the stock of any
company that has acquired Avatech, having a value twice that of the exercise
price of the rights. For example, at a purchase price of $5.00 per right, each
right would entitle its holder to purchase $10.00 worth of stock of Avatech or
the company that has acquired Avatech for $5.00. The rights will expire March 8,
2012, and are redeemable for $0.0001 per right at the approval of Avatech's
board of directors. It is highly probable that our Board of Directors will
redeem the rights and terminate the Plan, although as of the date of this
Prospectus, it has not done so.
Certain Statutory Provisions. Avatech is subject to the provisions of
Section 203 of the Delaware General Corporation Law. In general, this provision
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless:
. prior to such date, the corporation's board of directors
approved either the business combination or the transaction
that resulted in the stockholder becoming an interested
stockholder;
. upon consummation of the transaction that resulted in such
person becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares
outstanding, shares owned by certain directors or certain
employee stock plans; and
. on or after the date the stockholder became an interested
stockholder, the business combination is approved by the
corporation's board of directors and authorized by the
affirmative vote, and not by written consent, of at least
two-thirds of the outstanding voting stock of the corporation
excluding that owned by the interested stockholder.
A "business combination" includes a merger, asset sale, or other
transaction resulting in a financial benefit to the interested stockholder. An
"interested stockholder" is a person, other than the corporation and any direct
or indirect wholly-owned subsidiary of the corporation, who together with the
affiliates and associates, owns or, as an affiliate or associate, within three
years prior, did own 15% or more of the corporation's outstanding voting stock.
Section 203 expressly exempts from the requirements described above
any business combination by a corporation with an interested stockholder who
becomes an interested stockholder in a transaction approved by the corporation's
board of directors.
- 41 -
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
As of December 31, 2001, which, due to our merger with Planet CAD, was
the most recent fiscal year-end with respect to our common stock we had reserved
the following shares of common stock for issuance under our equity compensation
plans (these figures have been adjusted for the 1 for 20 reverse stock split
occurring on October 22, 2002):
(a) (b) (c)
------------------------- ------------------------- -------------------------
Number of securities
remaining available for
future issuance under
Number of securities to Weighted average equity compensation
be issued upon exercise exercise price of plans
of outstanding options, outstanding options, (excluding securities
Plan Category warrants, and rights warrants, and rights reflected in column a)
- ----------------------------- ------------------------- ------------------------- -------------------------
Equity compensation plans
approved by shareholders 121,361 $ 34.80 1,677,768
Equity compensation plans
not approved by shareholders N/A N/A N/A
SUMMARY OF AVATECH SOLUTIONS, INC. RESTRICTED STOCK AWARD PLAN
The Avatech Solutions, Inc. Restricted Stock Award Plan is designed to
allow us to attract and retain the services of key management employees,
consultants, officers and directors essential to our long-term growth and
financial success. The restricted stock awards will play a significant role in
our efforts to remain competitive in the market for talented individuals, and we
believe that these awards will allow us to attract and retain highly qualified
individuals in positions vital to our success.
The following is a summary of the material terms of the Restricted
Stock Award Plan, which is attached to this prospectus as Annex A and is
incorporated herein by reference. We urge you to read the Restricted Stock Award
Plan carefully as it is a legal document that governs the plan.
Administration. Our board of directors as a whole or a committee of
the board of directors made up of two non-employee directors have the authority
to make awards restricted stock and set the terms on which grants of stock
become vested.
Share Reserve. Initially, 200,000 shares of common stock are reserved
for issuance under the terms of the Restricted Stock Award Plan.
The shares of common stock issuable under the Restricted Stock Award
Plan may be drawn from shares of our authorized but unissued common stock or
from shares of our common stock which we acquire, including shares purchased on
the open market.
Shares of unvested stock that are forfeited or otherwise reacquired by
us may be reissued under the Plan.
Eligibility. Employees, and consultants of Avatech or one of its
subsidiaries are eligible to receive stock awards under the Plan if they are
already shareholders or hold options to purchase shares of our common stock.
Officers and directors are also eligible to receive stock awards without regard
to whether they are already own our stock.
Restricted Stock Awards. The board of directors (or committee) will
have the complete discretion to determine which eligible individuals will
receive stock awards, the time or times when those awards are made, the number
of shares awarded, and the conditions on vesting of the shares. However, awards
will be made only in recognition of past or future services to Avatech.
The shares will generally vest in more than one installment after
either the recipient's continued service to us for a specific term of years or
the recipient's achievement of specific, predetermined performance goals.
Generally, unvested shares may not be transferred by the recipient before they
become vested and will be held in escrow by us. Unvested shares may be exchanged
or surrendered in a tender offer, merger, split, or other reorganization and
will
- 42 -
not be subject to restrictions under the Plan in the hands of such a
recipient; however, any consideration received in such an exchange will continue
to be subject to the original vesting restrictions.
Valuation. As long as our stock is listed on the OTC Bulletin Board,
the fair market value of our common stock under the Restricted Stock Award Plan
will be deemed to be the last closing price of our common stock on the OTC
Bulletin Board as of the close of business on the last business day prior to the
date on which the shares are to be valued.
TAX TREATMENT OF SHARES AWARDED UNDER THE AVATECH SOLUTIONS, INC.
RESTRICTED STOCK AWARD PLAN
Under section 83(a) of the Internal Revenue Code of 1986, as amended,
shares of stock granted to a person in connection with their performance of
services to the issuer but subject to a "substantial risk of forfeiture" are not
subject to income taxation until risk of forfeiture lapses. Under the
regulations promulgated by the Department of the Treasury under section 83(a),
stock is subject to a "substantial risk of forfeiture" if a recipient's
continued rights in the shares are conditioned on the future performance of
substantial services to the issuer or the completion of any other condition
related to the purpose for the initial grant of shares, and if there is a
substantial possibility that the conditions will not be satisfied. The Shares
awarded under the Restricted Stock Award Plan will generally be subject to a
"substantial risk of forfeiture" while they are unvested.
Ordinarily, a recipient of unvested shares under the Restricted Stock
Award Plan will not pay income tax on the value of the shares until the shares
become vested. The recipient will then have a basis in the shares equal to the
value of the shares on the day they vest and are taxed. When the recipient
subsequently sells the shares, any gain or loss will be treated as a capital
gain or loss. If a recipient sells unvested shares despite the transfer
restrictions, he or she must pay taxes on the larger of the sale price or the
fair market value of the shares on the day they are sold.
A person who receives unvested shares of stock in connection with
services performed for the issuer may make an election under section 83(b) of
the Internal Revenue Code of 1986, as amended, to be taxed on the value of the
shares in the year in which the shares are received rather than when the shares
vest. The election must be made within thirty days of the award of stock and is
generally irrevocable. If the recipient of shares makes this "83(b) election,"
he or she will pay ordinary income tax on the value of the shares when they are
received and will have a basis in the stock equal to the value of the shares
when they are issued. If the shares vest and the recipient sells the shares, any
gain or loss on the transaction will be a capital gain or loss. However, if the
recipient forfeits the shares, he or she may not claim a loss, even though he or
she paid taxes on the shares when they were received.
When the value of the shares is taxed, the shares will be treated as
salary if the recipient is an employee of Avatech and otherwise will be treated
as shares received in exchange for services. If necessary, we may withhold taxes
from the recipient at the time the shares are taxed.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers or persons
controlling the registrant pursuant to the foregoing provisions, the registrant
has been informed that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
LEGAL MATTERS
Certain legal matters will be passed upon for Avatech by Neuberger,
Quinn, Gielen, Rubin & Gibber, P.A., Baltimore, Maryland.
- 43 -
EXPERTS
The consolidated financial statements and schedule of Avatech
Solutions, Inc. and subsidiaries at June 30, 2002 and for the year then ended,
included in this registration statement, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon appearing elsewhere
herein, and are included in reliance upon such reports given on the authority of
such firm as experts in accounting and auditing.
The consolidated financial statements and schedule of Avatech
Solutions, Inc. and subsidiaries as of June 30, 2001 and 2000, and for each of
the two years in the period ended June 30, 2001, included in this registration
statement have been audited by Walpert and Wolpoff, LLP, independent auditors,
as stated in their report appearing herein, and upon the authority of such firm
as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any reports, statements or
other information we file at the SEC's public reference rooms at the following
locations:
Public Reference Section Northeast Regional Office Midwest Regional Office
450 Fifth Street, N.W. 233 Broadway Northwestern Atrium Center
Washington, D.C. 20549 New York, NY 10279 500 West Madison Street, Suite 1400
Chicago, IL 60661
Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. Our SEC filings are also available to the public from
commercial document retrieval services and at the website maintained by the SEC
at www.sec.gov.
We filed a registration statement on Form S-1 to register with the SEC
the common stock to be issued or sold hereunder. This Prospectus is a part of
our registration statement.
WHAT INFORMATION YOU SHOULD RELY ON
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION THAT DIFFERS FROM, OR ADDS TO, THE INFORMATION DISCUSSED IN THIS
PROSPECTUS.THEREFORE, IF ANYONE GIVES YOU DIFFERENT OR ADDITIONAL INFORMATION,
YOU SHOULD NOT RELY ON IT.
THIS DOCUMENT IS DATED JUNE 4, 2003. THE INFORMATION CONTAINED IN THIS
PROSPECTUS SPEAKS ONLY AS OF ITS DATE UNLESS THE INFORMATION SPECIFICALLY
INDICATES THAT ANOTHER DATE APPLIES. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO EXCHANGE OR SELL, OR A SOLICITATION OF AN OFFER TO EXCHANGE OR
PURCHASE, SHARES OF AVETECH COMMON STOCK OR TO ASK FOR PROXIES, TO OR FROM ANY
PERSON TO WHOM IT IS UNLAWFUL TO DIRECT THESE ACTIVITIES.
- 44 -
INDEX TO FINANCIAL STATEMENTS
Reports of Independent Auditors............................................F - 2
Audited Financial Statements
Consolidated Balance Sheets.............................................F - 4
Consolidated Statements of Operations...................................F - 5
Consolidated Statements of Stockholders' Deficiency.....................F - 6
Consolidated Statements of Cash Flows...................................F - 7
Notes to Consolidated Financial Statements.................................F - 8
F - 1
REPORTS OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Avatech Solutions, Inc.
We have audited the accompanying consolidated balance sheet of Avatech
Solutions, Inc. and subsidiaries as of June 30, 2002, and the related
consolidated statements of operations, stockholders' deficiency and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
Since the date of completion of our audit of the accompanying
financial statements and initial issuance of our report thereon dated September
3, 2002, the Company, as discussed in Note 14, has experienced a decline in
working capital resulting principally from costs incurred to complete the
acquisition of PlanetCAD, Inc. Note 14 describes management's plans to address
this liquidity issue.
In our opinion, the 2002 financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Avatech Solutions, Inc. and subsidiaries at June 30, 2002 and the consolidated
results of its operations and its cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Baltimore, Maryland
September 3, 2002 (except Note 3 and 14, as to which the date is
March 10, 2003)
F - 2
To the Board of Directors and Stockholders
Avatech Solutions, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Avatech
Solutions, Inc. and Subsidiaries as of June 30, 2001 and 2000, and the related
consolidated statements of operations, stockholders' deficiency, and cash flows
for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Avatech Solutions, Inc. and Subsidiaries as of June 30, 2001 and 2000, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of America.
Since the date of completion of our audit of the accompanying financial
statements and initial issuance of our report thereon dated October 3, 2001,
the Company, as discussed in Note 14, has experienced a decline in working
capital resulting principally from costs incurred to complete the acquisition of
PlanetCAD, Inc. Note 14 describes management's plans to address this liquidity
issue.
WALPERT & WOLPOFF, LLP
Baltimore, Maryland
October 3, 2001 (except for Note 3 and 14, as to which the date is
March 10, 2003)
F - 3
Avatech Solutions, Inc. and Subsidiaries
Audited Financial Statements
Consolidated Balance Sheets
June 30, March 31,
2001 2002 2003
--------------------------------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 309,621 $ 222,562 $ 792,524
Accounts receivable, less allowance of $212,000 in 2001, $111,897
in 2002, and $82,455 at March 31, 2003 5,123,773 4,108,372 3,651,400
Investments in equity securities - - 625,000
Inventory 462,660 356,013 275,617
Deferred income taxes - 373,000 -
Prepaid expense 232,202 113,469 418,961
Other current assets 150,209 - 105,963
-------------------------------------------
Total current assets 6,278,465 5,173,416 5,869,465
Property and equipment:
Computer software and equipment 2,381,422 2,664,168 2,999,144
Office furniture and equipment 799,526 778,037 800,390
Leasehold improvements 191,908 198,002 316,909
-------------------------------------------
3,372,856 3,640,207 4,116,443
Less accumulated depreciation and amortization 2,461,630 2,889,000 3,288,153
-------------------------------------------
911,226 751,207 828,290
Goodwill 1,108,920 752,920 752,920
Other intangible assets, net of accumulated amortization of $22,889 - - 216,017
Other assets 78,404 430,870 93,751
-------------------------------------------
Total assets $ 8,377,015 $ 7,108,413 $ 7,760,443
===========================================
Liabilities and stockholders' deficiency
Current liabilities:
Accounts payable and accrued expenses $ 4,021,062 $ 3,655,902 $ 4,584,378
Accrued compensation and related benefits 293,780 223,919 218,165
Borrowings under line-of-credit 1,916,912 1,422,901 1,643,019
Note payable to related party - - 500,000
Note payable - - 625,000
Current portion of long-term debt 2,968,030 500,000 249,349
Deferred revenue 794,916 650,511 933,611
Other current liabilities 211,215 335,930 299,333
-------------------------------------------
Total current liabilities 10,205,915 6,789,163 9,052,855
Other long-term liabilities - - 221,895
Long-term debt (including $775,000 payable to related parties) 1,595,938 4,057,112 -
Commitments and contingencies - - -
Minority interest - - 1,525,000
Stockholders' deficiency:
Common stock, $.01 par value; 22,500,000 shares authorized; issued
and outstanding shares of 2,227,394, 2,220,670, and 2,965,958 at
June 30, 2001 and 2002 and March 31, 2003, respectively 22,274 22,207 29,660
Additional paid-in capital 1,764,438 1,698,976 2,976,523
Accumulated deficit (5,211,550) (5,459,045) (6,045,490)
-------------------------------------------
Total stockholders' deficiency (3,424,838) (3,737,862) (3,039,307)
-------------------------------------------
Total liabilities and stockholders' deficiency $ 8,377,015 $ 7,108,413 $ 7,760,443
===========================================
See Accompanying Notes.
F - 4
Avatech Solutions, Inc. and Subsidiaries
Consolidated Statements of Operations
Year Ending Nine Months Ending
June 30, March 31,
2000 2001 2002 2002 2003
------------------------------------------------------------------------
(unaudited)
Revenue:
Product sales $ 22,436,739 $ 20,490,029 $ 18,486,676 $14,806,538 $10,636,059
Service revenue 7,519,169 6,049,275 6,482,160 4,606,581 4,856,978
Commission revenue 3,199,443 4,332,174 4,843,751 3,813,865 3,460,346
------------------------------------------------------------------------
33,155,351 30,871,478 29,812,587 23,226,984 18,953,383
Cost of revenue:
Cost of product sales 16,228,849 14,249,470 12,464,965 9,746,843 6,960,633
Cost of service revenue 4,664,518 3,813,635 3,773,041 3,227,757 3,230,621
------------------------------------------------------------------------
20,893,367 18,063,105 16,238,006 12,974,600 10,191,254
Gross margin 12,261,984 12,808,373 13,574,581 10,252,384 8,762,129
Other expenses:
Selling, general and administrative 12,919,902 11,519,199 12,806,324 9,476,243 9,908,439
Depreciation and amortization 692,180 694,503 589,306 503,472 483,734
Impairment loss - - 285,374 283,000 -
Acquired in-process research and development - - - - 282,000
------------------------------------------------------------------------
13,612,082 12,213,702 13,681,004 10,262,715 10,674,173
------------------------------------------------------------------------
Income (loss) from operations (1,350,098) 594,671 (106,423) (10,331) (1,912,044)
Other income (expense):
Gain on the extinguishment of debt - - - - 1,960,646
Interest and other income (expense) (61,819) 61,488 61,510 47,699 42,683
Minority interest - - - - (56,016)
Interest expense (641,320) (553,823) (487,582) (348,416) (221,349)
------------------------------------------------------------------------
(703,139) (492,335) (426,072) (300,717) 1,725,964
------------------------------------------------------------------------
Income (loss) before income taxes (2,053,237) 102,336 (532,495) (311,048) (186,080)
Income tax expense (benefit) - 13,000 (285,000) 40,000 400,365
------------------------------------------------------------------------
Net income (loss) $ (2,053,237) $ 89,336 $ (247,495) $ (351,048) $ (586,445)
========================================================================
Earning (loss) per common share - basic and
diluted $ (0.91) 0.04 $ (0.11) $ (0.16) $ (0.23)
========================================================================
Shares used in computation 2,251,402 2,220,856 2,224,993 2,220,670 2,579,714
========================================================================
See Accompanying Notes.
F - 5
Avatech Solutions, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Deficiency
Years ended June 30, 2002, 2001, 2000 and
Nine Months ended March 31, 2003
Common Stock Additional
Number of Paid-In Accumulated
Shares Par Value Capital Deficit Total
------------------------------------------------------------------------
(Restated -Note 1)
Balance at July 1, 1999 2,217,005 $ 22,169 $ 1,615,840 $ (3,247,649) $ (1,609,640)
Issuance of common stock for cash 37,966 380 410,245 - 410,625
Issuance of common stock in connection with
the 1998 Employee Stock Purchase Plan 6,967 70 67,839 - 67,909
Purchase of common stock from former
employees (25,143) (251) (242,447) - (242,698)
Net loss for fiscal year 2000 - - - (2,053,237) (2,053,237)
------------ ----------- ------------- ------------- -------------
Balance at June 30, 2000 2,236,795 22,368 1,851,477 (5,300,886) (3,427,041)
Issuance of common stock for cash 2,288 23 26,225 - 26,248
Purchase of common stock from former
employees (11,691) (117) (113,264) - (113,381)
Net income for fiscal year 2001 - - - 89,336 89,336
------------ ----------- ------------- ------------- ------------
Balance at June 30, 2001 2,227,392 22,274 1,764,438 (5,211,550) (3,424,838)
Purchase of common stock from current and
former employees (6,722) (67) (65,462) - (65,529)
Net loss for fiscal year 2002 - - - (247,495) (247,495)
------------ ----------- ------------- ------------- ------------
Balance at June 30, 2002 2,220,670 22,207 1,698,976 (5,459,045) (3,737,862)
Issuance of shares of common stock to
purchase PlanetCAD, Inc. (unaudited) 745,288 7,453 1,277,547 - 1,285,000
Net loss for the nine months ended March 31,
2003 (unaudited) - - - (586,445) (586,445)
------------ ----------- ------------- ------------- ------------
Balance at March 31, 2003 (unaudited) 2,965,958 $ $29,660 $ 2,976,523 $ (6,045,490) $ (3,039,307)
============ =========== ============= ============= ============
See Accompanying Notes.
F - 6
Avatech Solutions, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Nine Months Ended
Year Ended June 30, March 31
2000 2001 2002 2002 2003
--------------------------------------------------------------------
(Unaudited)
Cash flows from operating activities
Net income (loss) $ (2,053,237) $ 89,336 $ (247,495) $ (351,048) $ (586,445)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Provision for bad debts 55,367 73,893 75,542 53,060 57,390
Gain on extinguishment of debt - - - - (1,960,646)
Impairment loss - - 285,374 283,000 -
Depreciation and amortization 692,180 694,503 612,918 503,472 483,734
Deferred income taxes 23,802 - (373,000) - 373,000
Gain on available-for-sale securities (2,205) - -
Write-off of in-process research and development - - - - 282,000
Loss (gain) on disposal of property and equipment 17,420 1,420 7,575 7,266 (3,532)
Amortization of debt discount charged to interest
expense 3,838 2,694 3,844 - -
Other - - - 2,883 2,883
Changes in operating assets and liabilities: - -
Accounts receivable (1,869) (1,027,531) 893,017 1,077,690 520,376
Inventory 385,182 (7,065) 106,647 86,934 80,396
Prepaid expenses and other current assets 437,728 96,987 190,804 134,538 (300,273)
Accounts payable and accrued expenses 272,247 (295,547) (240,179) (371,611) 200,434
Accrued compensation and related benefits 23,451 (23,439) (69,862) (54,563) (27,376)
Deferred revenue 213,915 14,144 (144,405) (186,750) 53,774
Other current liabilities 141,401 29,410 (4,058) 26,426 (36,597)
--------------------------------------------------------------------
Net cash provided by (used in) operating activities 209,220 (351,195) 1,096,722 1,211,297 (860,882)
Cash flows from investing activities
Cash (paid) received in merger, net of acquisition
costs - - (302,228) - 382,643
Purchase of property and equipment (535,161) (394,060) (258,944) (210,155) (179,453)
Proceeds from sale of property and equipment 4,436 6,343 10,584 10,890 3,532
Proceeds from sale of available-for-sale securities 16,807 - - - -
--------------------------------------------------------------------
Net cash provided by (used in) investing activities (513,918) (387,717) (550,588) (199,265) 206,722
Cash flows from financing activities
Proceeds from borrowings under line-of-credit 31,870,180 30,977,721 31,166,171 23,803,690 18,689,709
Repayments of borrowings under line-of-credit (32,571,042) (30,244,758) (31,660,182) (24,816,732) (18,469,591)
Proceeds from issuance of long-term debt 137,269 - - - 1,800,000
Repayments of long-term debt (188,894) (6,810) - (41,884) (1,000,000)
Proceeds from issuance of common stock 478,534 26,248 - - -
Repurchase of common stock (242,698) (113,381) (65,529) (65,529) -
Change in other assets related to financing costs 45,891 (13,794) (73,653) (25,934) -
Change in other long-term liabilities - - - - 221,895
Payments of preferred stock dividends by subsidiary - - - - (17,891)
Change in other assets related to financing costs - - - - -
--------------------------------------------------------------------
Net cash provided by (used in) financing activities (470,760) 625,226 (633,193) (1,146,389) 1,224,122
--------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (775,458) (113,686) (87,059) (134,357) 569,962
Cash and cash equivalents--beginning of period 1,198,765 423,307 309,621 309,621 222,562
--------------------------------------------------------------------
Cash and cash equivalents--end of period $ 423,307 $ 309,621 $ 222,562 $ 175,264 $ 792,524
====================================================================
See Accompanying Notes.
F - 7
AVATECH SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Basis of Presentation. Avatech Solutions, Inc.
provides design automation software, hardware, training, technical support and
professional services to corporations, government agencies and educational
institutions throughout the United States.
The consolidated financial statements include the accounts of Avatech
Solutions, Inc. and its majority-owned subsidiaries (collectively, the
"Company"). One of the Company's subsidiaries has issued and outstanding
preferred stock, which is accounted for as minority interest. All intercompany
accounts and transactions between the Company and its consolidated subsidiaries
have been eliminated in consolidation.
Unaudited Interim Financial Information. All interim financial
information as of March 31, 2003 and for the nine month periods ended March 31,
2002 and 2003 is unaudited and has been prepared in accordance with generally
accepted accounting principles for interim financial information and with
instructions to Article 10 of Regulation S-X. In the opinion of management, such
information contains all adjustments, consisting only of normal recurring
adjustments considered necessary for a fair presentation of such periods. The
operating results for any interim period are not necessarily indicative of
results for any future period.
Use of Estimates. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Cash and Cash Equivalents. The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.
Inventory. Inventory, consisting of computer software and hardware, is
stated at the lower of first-in, first-out cost, or market.
Property and Equipment. Property and equipment is stated at cost.
Depreciation for computer software and equipment and office furniture and
equipment is provided for by the straight-line method over estimated useful
lives ranging from three to seven years. Leasehold improvements are depreciated
over the lesser of the lease term or the useful life of the asset using the
straight-line method.
Impairment of Long-Lived Assets Excluding Goodwill. Long-lived assets,
excluding goodwill, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset or group of assets
may not be fully recoverable. These events or changes in circumstances may
include a significant deterioration of operating results, changes in business
plans, or changes in anticipated future cash flows. If an impairment indicator
is present, the Company evaluates recoverability by a comparison of the carrying
amount of the assets to future undiscounted net cash flows expected to be
generated by the assets. Assets are grouped at the lowest level for which there
is identifiable cash flows that are largely independent of the cash flows
generated by other asset groups. If the assets are impaired, the impairment
recognized is measured by the amount by which the carrying amount exceeds the
fair value of the assets. Fair value is generally determined by estimates of
discounted cash flows. The discount rate used in any estimate of discounted cash
flows would be the rate required for a similar investment of like risk.
Goodwill. Goodwill is the excess of the purchase price paid over the
fair value of the identifiable net assets acquired in purchase business
combinations. Prior to July 1, 2002, goodwill was amortized on a straight-line
basis over 15 years. Commencing July 1, 2002, goodwill is not amortized but is
tested annually for impairment at the reporting unit level. Impairment is the
condition that exists when the carrying amount of goodwill exceeds its implied
fair value. The implied fair value of goodwill is the amount determined by
deducting the estimated fair value of all tangible and identifiable intangible
net assets of the reporting unit from the estimated fair value of the reporting
unit.
F - 8
If the recorded value of goodwill exceeds its implied value, an impairment
charge is recorded for the excess. (See also Note 1, Recent Accounting
Pronouncements).
Stock Options Granted to Employees. On January 1, 2003, the Company
adopted Statement of Financial Accounting Standards No 148, Accounting for
Stock-Based Compensation--Transition and Disclosure, ("Statement 148") which
requires disclosure in the summary of significant accounting policies of the
effects of an entity's policy with response to stock-based employee compensation
on reported net income and earnings per share in annual and interim financial
statements.
The Company records compensation expense for all stock-based compensation plans
using the intrinsic value method prescribed by APB Opinion No. 25, Accounting
for Stock Issued to Employees ("APB No. 25"). Under APB No. 25, compensation
expense is recorded over the vesting period to the extent that the fair value of
the underlying stock on the date of grant exceeds the exercise or acquisition
price of the stock or stock-based award. Financial Accounting Standards Board
Statement No. 123, Accounting for Stock Based Compensation, ("Statement 123")
encourages companies to recognize expense for stock-based awards based on their
estimated fair value on the date of grant. Statement 123 requires the disclosure
of pro forma income and earnings per share data in the notes to the financial
statements if the fair value method is not adopted.
The following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of Statement 123 to
stock-based employee compensation.
Year Ended Nine Months Ended
June 30, March 31,
------------------------------------------- -------------------------------
2000 2001 2002 2002 2003
------------- -------------- ----------- ------------- ---------------
Net loss, as reported $ (2,053,237) $ 89,336 $ (247,495) $ (351,048) $ (586,445)
Add: Stock-based employee
compensation cost included in net
income, net of taxes - - - - -
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of taxes (110,273) (188,792) (116,362) (102,800) (124,337)
------------- -------------- ----------- ------------- ---------------
Pro forma net loss $ (2,163,510) $ (99,456) $ (363,857) $ (453,848) $ (710,782)
------------- -------------- ----------- ------------- ---------------
Loss per common share:
Basic and diluted--as reported $ (0.91) $ 0.04 $ (0.11) $ (0.16) $ (0.23)
Basic and diluted--pro forma $ (0.96) $ (0.04) $ (0.16) $ (0.20) $ (0.28)
For the three years ended June 30, 2002, required pro forma net income
(loss) and income (loss) per share information assuming that stock options were
recorded at their fair value at the grant date was determined using the minimum
value method. The minimum value method calculates the fair value of options as
the excess of the estimated fair value of the underlying stock at the date of
grant over the present value of both the exercise price and the expected
dividend payments, each discounted at the risk-free rate, over the expected life
of the option. In determining the estimated fair value of granted stock options
under the minimum value method, the risk-free interest rate was assumed to be
5.5%, 5.21%, and 4.48% in 2000, 2001 and 2002, respectively, the dividend yield
was estimated to be 0% and the expected life of granted options was assumed to
be five years.
Because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the minimum value
method and other methods of estimating fair value do not necessarily provide a
single measure of the fair value of its employee stock options.
Revenue Recognition and Accounts Receivable. The Company generates
revenue from three sources, the resale of prepackaged software products,
professional services and commissions. Software products are frequently sold in
an
F - 9
arrangement that includes implementation services or maintenance services.
Maintenance services are limited to help desk support and training. The Company
allocates the total arrangement fee among each element based on vendor-specific
objective evidence of the relative fair value of each of the elements. The
Company limits its assessment of fair value of each element to the price charged
when the same element is sold separately.
Revenues for software product sales are recognized as revenue when
four criteria are met. These four criteria are (i) a signed purchase order has
been obtained (ii) delivery of the software has occurred (iii) the fee is fixed
or determinable and (iv) the fee is probable of collection. Software product
sales billed and not recognized as revenue are included in deferred revenue. The
Company generally does not require collateral. The Company provides a 30-day
return policy to its customers. The Company has historically not experienced
significant returns, and accordingly, allowances for returned products are not
recorded.
Revenues from maintenance services are recognized ratably over the
contractual service period. Revenues from implementation and training services
are recognized as the services are provided. Advance payments for these services
are deferred and recognized in the periods when the services are performed.
The Company also receives commissions from vendors for transactions in
which the Company does not take title to the product or have responsibility for
the delivery of the services, has no risk of loss for collection, and has acted
as an agent or broker. These commissions are recorded as revenue when earned.
Cost of Product Sales. Cost of product sales includes the costs of
purchasing software and hardware from suppliers and the associated shipping and
handling costs.
Cost of Service Revenue. Cost of service revenue consists primarily of
direct employee compensation and related benefits, the cost of subcontracted
services and direct expenses billable to customers. Cost of service revenue does
not include an allocation of overhead costs.
Warranty Costs. The Company does not provide for warranty costs for
its products as such costs are incurred by the manufacturer of the products.
Advertising Costs. Costs incurred for producing and communicating
advertisements are expensed as incurred and included in selling, general and
administrative expenses in the accompanying statements of operations.
Advertising expenses approximated $399,000, $412,000 and $549,000 for years
ended June 30, 2000, 2001 and 2002, respectively.
Business Segment Reporting. The Company's operating segments are
established based on geographical areas managed by location managers and for
which discrete financial information is prepared and reviewed by the Company's
chief operating decision maker. These segments are aggregated for segment
reporting purposes into one reporting segment because the operating segments
have similar economic characteristics and generate revenues from sales of
similar products and services to similar types of customers.
Income Taxes. The Company uses the liability method to account for
income taxes. Income tax expense includes income taxes currently payable and
deferred taxes arising from temporary differences between financial reporting
and income tax bases of assets and liabilities. Deferred income taxes are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Concentration of Credit Risk. The Company maintains cash in bank
accounts, which at times, may exceed federally insured limits. The Company has
not experienced any losses on these accounts.
Earnings (Loss) Per Share of Common Stock. Basic earnings (loss) per
common share is computed as net income (loss) divided by the weighted-average
number of common shares outstanding for the period. Diluted earnings per common
share include the potential dilution that would occur from common shares
issuable upon the exercise of outstanding stock options and warrants. Basic and
diluted earnings (loss) per common share are equal for all years presented
because the assumed exercise of options and warrants is antidilutive.
F - 10
Recent Accounting Pronouncements
Goodwill and Other Intangible Assets. As of July 1, 2002, the Company
adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets ("Statement 142"). Under the new rules, goodwill and other
intangible assets deemed to have indefinite lives are no longer amortized, but
are subject to annual impairment tests in accordance with the Statement. Other
intangible assets with finite lives will continue to be amortized over their
useful lives. The goodwill amortization expense and net income (loss) of the
Company for the three years ended June 30, 2002 and the nine months ended
March 31, 2002 and 2003 are as follows:
Nine Months Ended
Year Ended June 30, March 31
--------------------------------------------------------------------------------
2000 2001 2002 2002 2003
--------------------------------------------------------------------------------
(Unaudited)
Reported net income (loss) $ (2,053,237) $ 89,336 $ (247,495) $ (351,048) $ (586,445)
Goodwill amortization, net of
income taxes 89,000 87,297 73,000 72,651 -
--------------------------------------------------------------------------------
Adjusted net income (loss) $ (1,964,237) $ 176,633 $ (174,495) $ (278,397) $ (586,445)
================================================================================
Earnings per common share, basic:
Reported net income (loss) $ (0.91) $ 0.04 $ (0.11) $ (0.16) $ (0.23)
Goodwill amortization, net
of income taxes 0.04 0.04 0.03 0.03 -
--------------------------------------------------------------------------------
Adjusted net income (loss) per share $ (0.87) $ 0.08 $ (0.08) $ (0.13) $ (0.23)
================================================================================
During the second quarter of fiscal year 2003, the Company completed
phase one of the transitional impairment test under Statement 142. Based on the
results of this test, management believes that the Company is likely to have an
impairment charge for one of its reporting units, which will approximate
$400,000 to $600,000. The Company will complete phase two of the transitional
impairment test before the end of fiscal year 2003, at which time it will record
the impairment charge as of July 1, 2002. There were no changes in the carrying
amount of goodwill, other than the purchase price adjustment described in Note
13 for the nine months ended March 31, 2003.
Accounting for the Impairment or Disposal of Long-Lived Assets. As of
July 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
("Statement 144"). Statement 144 supersedes and serves to clarify and further
define the provisions of Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, and provides a single accounting model for long-lived assets to
be disposed of.
Statement 144 does not apply to goodwill and other intangible assets
that are not amortized, and retains the Company's current policy to recognize an
impairment loss only if the carrying amount of a long-lived asset is not
recoverable from its undiscounted future cash flows and to measure the
impairment loss as the difference between the carrying amount and the fair value
of the asset.
Reporting Extraordinary Items. In April 2002, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections (Statement 145). Among other changes, Statement
145 rescinds Statement 4, which required all gains and losses from
extinguishment of debt to be aggregated and classified as an extraordinary item,
net of the related tax effect. Statement 145 provides that gains and losses from
extinguishment of debt should be classified as extraordinary items only if they
are unusual or infrequent or they otherwise meet the criteria for classification
as an extraordinary item, and observes that debt extinguishment transactions
would seldom, if ever, result in extraordinary item classification of the
resulting gains and losses. The Company adopted Statement
F - 11
145 in July 2002, and reports as other expenses (income) any losses or gains
that it incurs upon the extinguishment of debt.
Accounting for Costs Associated with Exit or Disposal Activities. In
July 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, Accounting for Costs Associated with
Exit or Disposal Activities (Statement 146). Statement 146 supersedes EITF Issue
No. 94-3 Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity. Statement 146 requires that costs associated
with an exit or disposal plan be recognized when incurred rather than at the
date of a commitment to an exit or disposal plan. Statement 146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002,
with early application encouraged. The adoption of Statement 146 is not expected
to have a significant effect on the Company's results of operations and
financial position.
2. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The Company paid interest of approximately $629,000, $553,000 and
$416,000 in 2000, 2001 and 2002, respectively. Additionally, interest of
$335,000 and $215,000 was paid for the nine months ended March 31, 2002 and
2003, respectively.
3. REVERSE MERGER AND CAPITAL STOCK
As discussed in Note 13, the Company entered into a merger with PlanetCAD Inc.
on November 19, 2002 whereby Avatech stockholders received three shares of
PlanetCAD for each share of PlanetCAD outstanding on the closing date. On
November 19, 2002, PlanetCAD Inc. changed its name to Avatech Solutions, Inc.
and assumed the June 30th year-end of Avatach. The merger constitutes a reverse
acquisition purchase in which Avatech is treated as the acquiror of PlanetCAD
for financial accounting purposes. As a result, the historical capital stock of
the Company has been retroactively restated to present as common stock the
equivalent number of shares received in the merger and to give effect to the
change in par value of the common stock received in the merger. All share and
per share data included in the consolidated financial statements have been
restated to reflect this transaction.
4. IMPAIRMENT LOSS
In fiscal year 2002, the Company determined that the goodwill and
other long-lived assets of one of its subsidiaries were likely impaired due to
recurring operating losses and changes in the estimates of the future estimated
cash flows from these operations over the remaining amortization period. The
Company determined that the carrying value of these assets exceeded their
estimated fair values by $285,374 and recorded an impairment loss in that
amount. The fair value of the long-lived assets was determined using discounted
cash flows over the remaining estimated useful life of the assets. Of the
recorded impairment loss of $285,374, $283,000 related to goodwill and the
remainder related to fixed assets.
5. BORROWINGS UNDER LINE-OF-CREDIT
The Company has entered into a revolving line-of-credit agreement with
a financial institution which expires October 30, 2003, but is payable within 60
days of demand by the lender. The credit extended under this financing agreement
is limited to the lesser of $4.0 million or 75% of the Company's aggregate
outstanding eligible accounts receivable. The balance outstanding under this
line-of-credit was $1.6 million at March 31, 2003. Borrowings under this
line-of-credit bear interest at the prime rate plus 1.5% and are secured by the
assets of the Company. In addition, the bank has the right to restrict any
prepayment of other indebtedness by the Company.
Because the interest rate adjusts with changes in the prime rate, the
estimated fair value of the borrowings under the line of credit is equal to the
carrying amount.
6. LONG-TERM DEBT, WARRANTS AND GAIN ON THE EXTINGUISHMENT OF DEBT
At June 30, 2002, the Company was obligated to a junior lender under a
note agreement in the amount of $2.96 million, bearing interest at 6.5% per
annum. The note required interest only payments through September 30, 2001, with
subsequent quarterly payments of principal and interest of $621,311 until
maturity in December 2002. In August 2002, the Company entered into an agreement
to extinguish the outstanding $2.96 million debt for a cash payment of $1.0
million and compliance with certain non-financial covenants. The Company
obtained the $1.0 million due the lender from borrowings from a director and
shareholder and from PlanetCAD Inc., each in the
F - 12
amount of $500,000. These borrowings totaling $1.0 million bear interest at 15%
per annum. The loan from the director and shareholder matures on July 1, 2003
and is recorded as a note payable to related party in the accompanying balance
sheet at March 31, 2003. The loan from PlanetCAD was due at the earlier of
(i) the date on which Avatech became unable or refused to complete the merger,
or (ii) July 1, 2003. Accordingly, this note was eliminated in consolidation
when the Company completed its merger with PlanetCAD on November 19, 2002. The
gain on the extinguishment of the debt of $1.96 million was recorded in August
2002 upon the settlement of the $2.96 million note for cash of $1.0 million and
compliance with certain non-financial covenants.
Prior to the merger with PlanetCAD, the Company had issued
approximately $1.8 million of 10% subordinated notes with attached
nontransferrable stock purchase warrants to purchase 71,000 shares. These notes
bear simple interest at the rate of 10% per annum until all principal and
accrued and unpaid interest has been paid. Interest only is payable quarterly
until maturity. The notes are fully subordinated to the payment of senior
indebtedness (line-of-credit) of the Company. In connection with the merger with
PlanetCAD, Inc. in November 2002, approximately $1.5 million of subordinated
notes were converted into 610,000 shares of preferred stock in a subsidiary of
the Company. The remaining notes of $249,349 at March 31, 2003 are due at July
1, 2003.
In connection with the merger with PlanetCAD, Inc., Avatech acquired
an investment in the common stock of a private company valued at $625,000. On
March 25, 2003, the Company issued a $625,000 promissory note to a prospective
buyer representing the advance of proceeds for an agreed upon sale of the stock.
The note bears interest at 5.0% and matures on May 9, 2003.
Contemporaneously with the execution of the promissory note, the Company
entered into an irrevocable offer to sell the investment in common stock to this
prospective buyer pending the outcome of a 30-day right of refusal held by the
issuer of the common stock. Avatech has delivered notice to the issuer of its
intent to transfer the common stock after the 30-day right of refusal period
expires. Upon transfer of the common stock to the buyer, the outstanding
promissory note of $625,000 will be cancelled.
As of March 31, 2003, the Company has outstanding warrants to
purchase 25,668 shares of common stock issued in connection with the 10%
subordinated notes that are exercisable for $15.46 per share and expire five
years after their date of issuance. Warrants for the purchase of 23,436 shares
and 372 shares of common stock will expire in 2003 and 2004, respectively. The
remaining 1,860 stock purchase warrants will expire in 2007. The number of
shares or exercise price will be adjusted in the event of any stock dividend,
stock splits, or recapitalization of the Company.
The warrants issued in conjunction with the 10% subordinated notes
were valued at $19,840, an estimate based on a valuation using the Black-Scholes
Pricing Model, a generally accepted warrant valuation methodology. The estimated
value of the warrants was recorded as additional paid-in capital and the notes
have been recorded net of a discount of $19,840. The estimated fair value of the
options was based on the Black-Scholes Pricing Model. The valuation assumptions
used included an expected life of five years; an expected price volatility of
0.10; no dividend yield; risk-free interest rate of 5.5%; and the stock price at
the date of grant of $11.42. At December 31, 2002, the balance outstanding under
the 10% subordinated notes was $248,388.
7. MINORITY INTEREST
The Company has issued and outstanding Series A Convertible Preferred
Stock in one of its subsidiaries. The Preferred Stock accrues dividends at a
rate of 10% per annum on the principal value. Dividends may be paid each quarter
from available cash of the Company beginning October 1, 2002. The dividends of
the subsidiary's preferred stock is recorded as minority interest in the
consolidated statement of operations. All accrued but unpaid dividends shall be
paid in cash at or before a liquidation event as defined in the preferred stock
agreement. Each share of preferred stock shall automatically convert into 1.1
shares of Avatech Solutions, Inc. upon the earlier of (i) 24 months from the
issuance of the preferred stock or (ii) immediately preceding a liquidation
event. On all matters submitted to the stockholders of the Company, the shares
of Preferred Stock will vote together as a single class with the share of common
stock on a one share, one vote basis. The preferred stock is presented as
minority interest in the accompanying balance sheet at March 31, 2003.
F - 13
8. EMPLOYEE STOCK PLANS
Effective April 2, 1998, the Company adopted the Avatech Solutions,
Inc. 1998 Stock Option Plan. Effective January 1, 2000, the Company adopted the
Avatech Solutions, Inc. 2000 Stock Option Plan. Both plans are administered by
the Board of Directors and provide for the granting of either qualified or
non-qualified stock options to purchase an aggregate of up to 279,000 shares of
common stock to eligible employees, officers, and directors of the Company. The
options granted under this plan vest in three equal installments on the
anniversary date of the grant over a three year period.
A summary of stock option activity and related information is included
in the table below:
Year Ended June 30,
2000 2001 2002
------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------------------------------------------------------------------------
Outstanding at beginning of year 63,880 $ 11.42 102,040 $ 11.42 148,497 $ 11.42
Granted 64,892 11.42 65,604 11.42 157,364 11.42
Exercised - - - - - -
Forfeited (26,732) 11.42 (19,147) 11.42 (47,211) 11.42
------------------------------------------------------------------------------
Outstanding at end of year 102,040 $ 11.42 148,497 $ 11.42 258,650 $ 11.42
==============================================================================
Exercisable at end of year 35,526 $ 11.42 69,374 $ 11.42 140,761 $ 11.42
==============================================================================
Weighted-average fair value of
options granted during the year $ 3.17 $ 2.55 $ 1.77
========== ========== ==========
Weighted-average remaining
contractual life 9.2 Years 8.8 Years 8.7 Years
========== ========== ==========
Effective May 1, 1998, the Company adopted the 1998 Employee Stock
Purchase Plan for all employees meeting certain eligibility requirements. Under
the Plan, employees may purchase shares of the Company's common stock, subject
to certain limitations, at 85% of its market value as determined by the Board of
Directors. Purchases are limited to 10% of an employee's eligible compensation.
A total of 55,800 shares are available for sale to employees under this Plan.
The Board of Directors authorized the suspension of this Plan in March 2000.
During 2000, the Company sold approximately 6,997 shares to employees under this
Plan. The Plan does not contain a provision requiring the Company to repurchase
shares from terminated employees. However, the Company elected to purchase
11,742 shares for $113,381 in 2001 and 6,751 shares for $65,529 in 2002 from
former employees.
At June 30, 2002, the Company has reserved 302,808 shares of common
stock for future issuance upon the exercise of any stock options granted under
the 1998 and 2000 Stock Option Plans and upon the exercise of outstanding
warrants.
F - 14
9. INCOME TAXES
Significant components of the Company's deferred tax assets and
liabilities are as follows:
June 30,
-----------------------------
2001 2002
-----------------------------
Deferred tax assets:
Net operating loss carryforward $ 1,688,082 $ 1,860,991
Allowance for doubtful accounts 81,974 43,214
Accrued vacation pay 1,822 -
Book over tax depreciation 76,571 77,341
-----------------------------
Total deferred tax assets 1,848,449 1,981,546
Valuation allowance for deferred tax assets (1,848,449) (1,608,546)
-----------------------------
Net deferred tax assets $ - $ 373,000
=============================
As of June 30, 2001, the Company recorded a valuation allowance equal
to its deferred tax assets due to the inability to conclude that it was more
likely than not that those assets would be realized from future taxable income.
In August 2002, as described more fully in Note 6, the Company realized a $1.96
million taxable gain from the extinguishment of certain debt. This gain provided
significant evidence of the likelihood of taxable income in fiscal year 2003,
and the Company therefore at June 30, 2002 recorded a valuation allowance of
$1.6 million that resulted in net deferred tax assets of $373,000, or the amount
that management estimated was likely to be realizable from taxable income in
2003. The ultimate amount of the net operating loss carryforward used to reduce
2003 taxable income may ultimately differ from the amount estimated, and it is
reasonably possible that the difference may be material.
The Company's provision for income taxes resulted in effective tax
rates that varied from the statutory federal income tax rate of 34%, as
summarized in the table below.
Year Ended June 30,
2000 2001 2002
------------------------------------------------
Expected federal income tax expense (benefit) at 34% $ (698,100) $ 30,374 $ (181,048)
Expenses not deductible for income tax purposes 47,419 26,879 153,566
State income taxes, net of federal benefit (94,860) 8,580 (24,601)
Change in valuation allowance for deferred taxes 735,900 (54,441) (239,903)
Other 9,641 1,608 6,986
------------------------------------------------
$ - $ 13,000 $ (285,000)
================================================
At June 30, 2002, the Company has net operating loss carryforwards
totaling approximately $4,800,000, which will begin to expire in 2012. Certain
net operating loss carryforwards at June 30, 2002, are related to subsidiaries
of the Company, and are available only to offset future taxable income of those
subsidiaries.
During the nine months ended March 31, 2003, the Company recorded
deferred income tax expense of $373,000 related to the estimated reduction in
deferred tax assets in fiscal 2003. This increase in deferred income tax expense
coupled with certain state income tax expense resulted in the additional income
tax expense for the nine months ended March 31, 2003. The Company estimates
that its total income tax expense in fiscal year 2003 will approximate $408,000.
10. COMMITMENTS AND CONTINGENCIES
Operating Leases. The Company leases certain office space and
equipment under noncancellable operating lease agreements that expire in various
years through 2006, and generally do not contain significant renewal options.
The Company also leases one office location from an entity controlled by a
stockholder under a noncancellable operating
F - 15
lease, which expires in 2003. Future minimum payments under all noncancellable
operating leases with initial terms of one year or more consisted of the
following at June 30, 2002:
Related
Year ended June 30 Party Other Total
------------------------------------------
2003 $ 42,552 $ 821,490 $ 864,042
2004 - 469,621 469,621
2005 - 115,934 115,934
2006 - 25,515 25,515
------------------------------------------
Total minimum lease payments $ 42,552 $ 1,432,560 $ 1,475,112
==========================================
2000 2001 2002
------------------------------------------
Office space $ 1,009,056 $ 1,066,818 $ 1,162,344
Equipment 99,915 69,132 40,361
------------------------------------------
$ 1,108,971 $ 1,135,950 $ 1,202,705
==========================================
Rent expense for the years ended June 30, 2000, 2001 and 2002 included
amounts paid to related parties of approximately $82,000, $83,000 and $85,000,
respectively.
Agreements with Executives. The Company has entered into agreements
with three executives that provide for payments of eighteen months of salary and
immediate vesting of all stock options not previously vested upon termination of
the executive or change in control of the Company, as defined. At March 31,
2003, the total contingency was approximately $500,000.
Litigation. On May 21, 2002, a former employee filed a lawsuit against
the Company alleging breach of employment contract in connection with the former
employee's dismissal. The lawsuit alleges damages in the amount of $187,500.
This lawsuit was settled for an agreed upon cash payment.
11. EMPLOYEE BENEFIT AND INCENTIVE COMPENSATION PLANS
Effective January 1, 1998, the Company adopted the Avatech Solutions,
Inc. 401(k) Retirement Savings Plan and Trust (the "Plan"). The Plan is a
defined contribution plan, which covers substantially all employees of the
Company, or its wholly-owned subsidiaries, who have attained age 21 and have
completed 6 months of service. Participants may elect to contribute from 1% to
15% of eligible annual compensation to the Plan. Maximum salary deferrals are
currently $10,000 per year. The Company will match 25% of the participant salary
deferrals up to 6% of a participant's compensation for all participants employed
on the last day of the Plan year. The Company may also make discretionary
profit-sharing contributions to the Plan for all participants who are employed
on the last day of the Plan year. The total amount recorded by the Company as
expense during the years ended June 30, 2000, 2001 and 2002, was approximately
$86,000, $79,000 and $62,000, respectively. The Company did not contribute to
the plans for the nine months ended March 31, 2002 and 2003, respectively.
12. SIGNIFICANT SUPPLIER
Approximately 80%, 87% and 92% of the Company's purchases for the
years ended June 30, 2000, 2001 and 2002, respectively, were from one vendor and
approximately 85% and 81% of accounts payable at June 30, 2001 and 2002,
respectively, were due to this vendor.
The Company's purchases for the nine months ended March 31, 2003 were
95% from this same vendor and approximately 60.0% of accounts payable at March
31, 2003 were due to this vendor.
F - 16
13. BUSINESS COMBINATION - MERGER WITH PLANETCAD, INC. (UNAUDITED)
On November 19, 2002, the Company consummated a merger with PlanetCAD
Inc., whereby shareholders of the Company exchanged their shares of the
Company's common stock for common stock of PlanetCAD. Upon completion of the
merger, the shareholders of the Company owned 75% of the outstanding common
stock of PlanetCAD. PlanetCAD develops, markets, and supports cycle time
reduction software solutions that integrate engineering processes and data for
the manufacturing supply chain. In connection with the merger, options and
warrants to purchase the common stock of the Company were converted into options
and warrants to acquire common stock of the post-merger entity based on the
merger exchange ratio.
For accounting purposes, the Company was deemed to have acquired
PlanetCAD, as its shareholders own a majority of the outstanding common stock of
the surviving entity. Upon the completion of the merger, the Company has
2,965,958 shares of outstanding common stock, 2,220,670 of which were issued to
shareholders of Avatech upon the closing date. The results of operations of
PlanetCAD are included in the accompanying statements of operations since
November 1, 2002 or the effective date of the merger. The purchase method of
accounting was used to record the acquisition, and the cost of acquiring
PlanetCAD of $2.2 million, including estimated acquisition costs of $1.0
million, was assigned to acquired assets and liabilities based on their
estimated fair value, as determined by an independent appraisal. The Company has
not finalized the allocation process as management continues to assess the fair
value of certain assets as well as negotiate with service providers over certain
merger costs. Accordingly, the allocation of the purchase price is preliminary,
however; management believes that the final purchase price will not vary
significantly from the preliminary allocation included in the accompanying
consolidated financial statements. The purchase price allocation to acquired
assets and liabilities at the acquisition date is summarized below:
ASSETS
Cash $ 995,000
Accounts receivable 120,000
Investments in equity securities 625,000
Prepaid expenses and other current assets 611,000
Property and equipment 337,000
Acquired technology and other amortizable intangible assets 216,000
--------------
Total assets $ 2,904,000
--------------
LIABILITIES
Accounts payable and accrued expenses 720,000
Deferred revenue 229,000
--------------
Total liabilities 949,000
--------------
Cost of net assets acquired, excluding acquired in-process
research and development assets of $282,000 $ 1,955,000
==============
The value allocated to projects identified as in-process research and
development of PlanetCAD products was charged to expense immediately following
the completion of the merger. This write-off was necessary because the acquired
in-process research and development had not yet reached technological
feasibility and has no future alternative uses, and the related products under
development may not achieve commercial viability. The value of acquired
technology was determined by taking into account risks related to the
characteristics and applications of the developed technology, existing and
future markets and assessments of the stage of the developed technology's life
cycle. This analysis resulted in a valuation for developed technology that had
reached technological feasibility and therefore was capitalized. The developed
technology and other intangible assets are being amortized on a straight-line
basis over 4 to 6 years.
F - 17
The following summarizes the unaudited pro forma statements of
operations information for the years ended June 30, 2001 and 2002 and the nine
months ended March 31, 2002 and 2003, assuming that the acquisition was
completed on July 1, 2001. The in-process research and development charge is
excluded from the pro forma statements of operations information because the
charge is non-recurring. The results are not necessarily indicative of what
would have occurred had this transaction been consummated as of the beginning of
the period nor of future operations:
Year ended June 30 Nine Months Ended March 31
-----------------------------------------------------------------
2001 2002 2002 2003
-----------------------------------------------------------------
Revenue $ 33,396,903 $ 31,580,291 $ 24,623,983 $ 19,360,756
Net loss $ (14,130,629) $ (8,210,294) $ (7,222,861) $ (2,225,568)
Loss per common share, basic and diluted $ (4.87) $ (2.80) $ (3.25) $ (0.86)
14. LIQUIDITY AND CAPITAL RESOURCES
As discussed more fully in Note 13, in November 2002, the Company
completed the acquisition of PlanetCAD, Inc. In connection with the acquisition,
the Company incurred approximately $1.0 million of merger costs, and PlanetCAD
incurred approximately $1.3 million of merger costs. These costs have reduced
the amount of working capital that the Company has available for its operations.
Management continues to negotiate with service providers to reduce the amounts
billed and extend the terms for payment of unpaid obligations related to the
merger. One of the Company's directors has expressed their intention of lending
the Company up to $500,000 to fund any needed working capital deficiencies.
Based on an evaluation of the likely cash generated from operations in the near
term, available capital resources and the timing of cash payments to vendors,
management believes that it has sufficient sources of working capital to fund
its operations in the normal course of business. The Company has engaged an
investment banking firm to assist in obtaining long-term financing.
Additionally, the Company plans to raise between $1.0 million to $2.0 million of
short term financing on acceptable terms by June 30, 2003.
F - 18
ANNEX A: AVATECH SOLUTIONS, INC. RESTRICTED STOCK AWARD PLAN
Section 1. Purpose. The Avatech Solutions, Inc. Restricted Stock
Award Plan (the "Plan") is intended to provide incentives which will attract and
retain highly competent persons as officers, directors, key employees and
consultants of Avatech Solutions, Inc. (the "Company") and its present or future
subsidiaries ("Subsidiaries"), by providing them with opportunities to acquire
common stock of the Company, par value par value $0.01 per share ("Common
Stock") pursuant to terms and restrictions contained in this Plan and in an
agreement with the Company (an "Award").
Section 2. Administration. The Board of Directors ("Board") of
the Company shall supervise and administer the Plan.
2.1. The Board will resolve any questions of
interpretation of the Plan or of any Awards, and such determination shall be
final and binding upon all persons.
2.2. A Committee of the Board of Directors comprised
solely of two non-employee directors (within the meaning of Rule 16b-3 under the
Exchange Act of 1934, 17 C.F.R. Section 240.16b-3(b)(3)) (the "Committee") shall
have any or all of the powers and discretions vested in the Board under the
Plan, except the power to amend or terminate the Plan. Any determination of the
Committee under the Plan may be made without notice or meeting of the Committee,
by a writing signed by a majority of the Committee members.
Section 3. Awards. "Award Shares" are shares of Common Stock
transferred to Participants (as defined in 3.2.3) pursuant to an Award in
exchange for past or future service to the Company or its Subsidiaries without
other payment therefor.
3.1. Governing Agreements. Each Award will be governed
by an "Award," which may contain any provision the Board determines appropriate,
including without limitation, provisions for the forfeiture of and restrictions
on the sale, resale or other disposition of shares acquired under any Award,
provisions giving the Company the right to repurchase shares acquired under any
Award, provisions to comply with federal and state securities laws, or
understandings or conditions as to the Participant's employment, in addition to
those specifically provided for under the Plan.
3.2. Nontransferability. Except as provided below or as
explicitly provided in the Award, a Participant may not transfer Common Stock
represented by an Award that is subject to forfeiture, redemption or other
restriction on resale imposed by its governing Award ("Unvested Shares").
3.2.1. Unvested Shares (i) may be tendered in
response to a tender offer for a request or invitation to tenders of greater
than 50 percent of the outstanding Common Stock of the Company or (ii) may be
surrendered in a merger, consolidation or share exchange involving the Company;
provided, in each case, that the securities or other consideration (including
any cash) received in exchange for the Unvested Shares will be subject to the
restrictions and conditions on the Unvested Shares set forth in the Award. In
the event of and immediately upon receipt by a third party of Unvested Shares by
any person or entity other than the Company pursuant to a transaction under this
Section 3.2, the Unvested Shares will no longer be subject to restrictions on
transfer, sale, assignment, etc. imposed by this Plan or any Award.
3.2.2. In the event of any change in the
outstanding Common Stock resulting from a subdivision or consolidation of
shares, whether through reorganization, recapitalization, share split, reverse
share split, share distribution or combination of shares or the payment of a
share dividend, the Unvested Shares shall be treated in the same manner in any
such transaction as other Common Stock. Any Common Stock or other securities
received by the Grantee with respect to the Unvested Shares in any such
transaction shall be subject to the restrictions and conditions set forth in
this Award.
A - 1
3.2.3. In the event that Unvested Shares are
transferred by will or the laws of descent and distribution, any payments shall
be made only to the executor or administrator of the estate of the deceased
Participant or the person or persons to whom the deceased Participant's rights
under the Award shall pass by will or the laws of descent and distribution and
only to the extent, if any, that the deceased Participant was entitled at the
date of the Participant's death.
Section 4. Participants. The Board, in its sole discretion, will
designate "Participants" to receive Award Shares. Notwithstanding this
authority, the Board may designate as Participants only natural persons who:
4.1. are employees, officers, directors, or consultants
of the Company or one of its Subsidiaries and immediately prior to receiving the
designated Award, are owners of common stock or options to purchase common stock
of the Company; or
4.2. are officers or directors of the Company regardless
of ownership of any common stock or options to purchase common stock of the
Company.
Award Shares may be granted under this Plan to persons who have previously
received Award Shares or other benefits under this or other plans of the
Company.
Section 5. Shares Reserved Under the Plan. There is hereby
reserved for issuance as Award Shares under the Plan an aggregate of 200,000
shares of Common Stock, which may be authorized but unissued or treasury shares.
5.1. Reissue of Shares. Any shares of Common Stock
subject an Award may thereafter be subject to a new Award under the Plan if the
shares of Common Stock are issued under an Award and are subsequently reacquired
by the Company pursuant to the terms of the Award.
5.2. Adjustment Provisions. If the Company at any time
changes the number of issued shares of Common Stock without new consideration to
the Company (by stock dividend, stock split, or a similar transaction), the
total number of shares reserved for issuance under the Plan and the number of
shares covered by each outstanding Award shall be adjusted so that the value of
each such Award shall not be changed. Awards may contain provisions for their
continuation or for other equitable adjustments after changes in the Common
Stock resulting from reorganization, sale, merger, consolidation or similar
occurrences.
Section 6. Valuation. The fair market value of the Award Shares
on any given day will be:
6.1. if the Common Stock is listed on a national
securities exchange, the mean between the highest and lowest sale prices
reported as having occurred on the primary exchange with which the Stock is
listed and traded on the date prior to such date, or, if there is no such sale
on that date, then on the last preceding date on which such a sale was reported;
6.2. if the Common Stock is not listed on any national
securities exchange but is quoted in the National Market System of the National
Association of Securities Dealers Automated Quotation System on a last sale
basis, the average between the high bid price and low ask price reported on the
date prior to such date, or, if there is no such sale on that date, then on the
last preceding date on which a sale was reported;
6.3. if the common stock is listed on the OTC Bulletin
Board, the last closing price of the common stock of the Company on the OTC
Bulletin Board as of the close of business on the last business day prior to the
date on which the shares are to be valued.
6.4. if the Common Stock is not listed on a national
securities exchange nor quoted in the National Market System of the National
Association of Securities Dealers Automated Quotation System on a last sale
basis, nor listed on the OTC Bulletin Board, the most recent price at which
shares of the Company's common stock traded in any recognized securities market.
A - 2
6.5. if the Common Stock is not listed on a national
securities exchange nor quoted in the National Market System of the National
Association of Securities Dealers Automated Quotation System on a last sale
basis, nor listed on the OTC Bulletin Board, nor traded in any recognized
securities market, the amount determined by the Board to be the fair market
value based upon a good faith attempt to value the Stock accurately and computed
in accordance with applicable regulations of the Internal Revenue Service; or
6.6. in the event of a transaction pursuant to judicial
order, state law, or a vote of the majority of the Company's shareholders which
results in receipt of value by the shareholders in exchange for their shares of
common stock, that same amount received by the shareholders.
Section 7. No Employment Agreement. Neither this Plan nor any
Award are, nor should either be construed to embody or contain, an agreement or
promise of future employment of the Participant by the Company or its
Subsidiaries. A Participant's right, if any, to continue to serve the Company or
its Subsidiaries as an officer, employee or otherwise, shall not be enlarged or
otherwise affected by the Plan.
Section 8. Duration, Amendment and Termination.
8.1. The Board may not grant Award Shares more than ten
years after the date on which the Plan is adopted by the Board; provided,
however, that the terms and conditions of any Award may thereafter be amended or
modified by mutual agreement between the Company and the Participant or such
other persons as may then have an interest in the Award.
8.2. The Board, pursuant to a mutual agreement between
the affected Participant and the Company, may grant Award Shares under the Plan
or any future plan of the Company in substitution and in exchange for, and in
cancellation of, any previously-granted Award Shares.
8.3. The Board may amend the Plan from time to time or
terminate the Plan at any time. However, no action authorized by this paragraph
shall reduce the amount of any existing Award or change the terms and conditions
thereof without the Participant's consent. No amendment of the Plan shall,
require the approval of the stockholders of the Company, except to the extent
required by law, regulation or stock exchange requirements.
A - 3
ANNEX B: CERTIFICATE OF DESIGNATIONS
SERIES C CONVERTIBLE PREFERRED STOCK
($0.01 Par Value)
of
AVATECH SOLUTIONS, INC.
----------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
----------
Avatech Solutions, Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation"), in
accordance with the provisions of Section 103 thereof, DOES HEREBY CERTIFY:
FIRST: That pursuant to the authority conferred upon the Board of Directors
by the Amended and Restated Certificate of Incorporation of the Corporation, the
Board of Directors of the Corporation adopted the following resolutions creating
a series of One Million (1,000,000) shares of Preferred Stock, $0.01 par value
per share, designated as Series C Convertible Preferred Stock:
RESOLVED: That pursuant to the authority vested in the Board of Directors
of this Corporation in accordance with the provisions of Article SIXTH, Section
2 of the Corporation's Amended and Restated Certificate of Incorporation, a
series of Preferred Stock of the Corporation (the "Series C Convertible
Preferred Stock") be, and it hereby is, created, and that the designation and
amount thereof and the voting powers, preferences and relative, participating,
optional and other special rights of the shares of the Series C Convertible
Preferred Stock, and the qualifications, limitations or restrictions thereof,
shall be as set forth in Exhibit A attached hereto.
RESOLVED: That the Chairman and Chief Executive Officer, President or any
Vice President and the Secretary or any Assistant Secretary of the Corporation
be, and they hereby are, authorized and directed, in the name and on behalf of
the Corporation, to file the Certificate of Designations in accordance with the
provisions of the Delaware General Corporation Law and to take such actions as
they may deem necessary or appropriate to carry out the intent of the foregoing
resolution.
SECOND: That the aforesaid resolutions were duly and validly adopted in
accordance with the applicable provisions of Section 151 of the General
Corporation Law of the State of Delaware and the Amended and Restated
Certificate of Incorporation and the By-Laws of the Corporation.
THIRD: That the aforesaid designations shall become effective upon the
filing of this Certificate with the office of the Secretary of State of the
State of Delaware.
B - 1
IN WITNESS WHEREOF, said Avatech Solutions, Inc. has caused this
Certificate to be executed and attested, this 4th day of April, 2003.
AVATECH SOLUTIONS, INC.
By:
--------------------------------
Donald R. Walsh
Chief Executive Officer
Attest:
-----------------------------------
Gary Rever, Secretary
B - 2
1. Designation. The Corporation hereby designates a single series of
Preferred Stock, the designation of which shall be "Series C Convertible
Preferred Stock," $0.01 par value per share (hereinafter called the "Series C
Convertible Preferred Stock"), and the number of authorized shares constituting
the Series C Convertible Preferred Stock shall be one million (1,000,000)
shares.
2. Certain Definitions.
(a) "Board" shall mean the Board of Directors of the Corporation.
(b) "Common Stock" shall mean the Common Stock, $.01 par value, of
the Corporation.
(c) "Corporation" shall mean Avatech Solutions, Inc., a Delaware
corporation.
(d) "Liquidity Event" shall mean (i) a sale of all or substantially
all of the assets or Common Stock of the Corporation, (ii) a merger or
consolidation of the Corporation with any other entity that results in the
existing holders of Common Stock (on a fully diluted basis) owning less than 50%
of the combined entities (on a fully diluted basis), or (iii) a liquidation,
dissolution or winding-up of the Corporation.
(e) "Original Issuance Date" for any share of the Series C
Convertible Preferred Stock shall mean the date on which such share of the
Series C Convertible Preferred Stock was originally issued.
(f) "Original Series C Issuance Price" shall mean $1.69 per share for
the Series C Convertible Preferred Stock as adjusted to reflect any stock
splits, stock dividends or other recapitalizations involving the Series C
Convertible Preferred Stock.
(g) "Preferred Stock" shall mean any series of preferred stock of the
Corporation.
3. Voting. Except as may be otherwise provided in these terms of the
Series C Convertible Preferred Stock or by law, the Series C Convertible
Preferred Stock shall vote together with all other classes and series of stock
of the Corporation as a single class on all actions to be taken by the
stockholders of the Corporation. Each share of Series C Convertible Preferred
Stock shall entitle the holder thereof to one vote per share on each such
action.
4. Dividends. The holders of the Series C Convertible Preferred Stock
shall be entitled to receive, out of funds legally available therefor, quarterly
dividends when, as and if declared by the Board, at the rate of ten percent
(10.0%) per annum of the Original Series C Issuance Price from the Original
Issuance Date. Such dividends are (i) prior and in preference to any declaration
or payment of any dividend or other distribution on Common Stock (other than a
dividend payable in shares of Common Stock) or on any other class or series of
capital stock ranking junior to the Series C Convertible Preferred Stock with
respect to dividends, (ii) pari passu with any other shares of Preferred Stock
entitled to participate pari passu with the Series C Convertible Preferred Stock
with respect to dividends and (iii) subject to the rights of any series of
Preferred Stock that ranks, with respect to dividends, senior to the Series C
Convertible Preferred Stock. Except as otherwise provided in Section 7 hereof,
such dividends shall accrue on each share of Series C Convertible Preferred
Stock on a daily basis from the Original Issuance Date whether or not earned or
declared and whether or not there shall be net assets or profits of the
Corporation legally available for the payment of such dividends. Such dividends
shall be cumulative, so that if such dividends with respect to any previous or
current dividend period at the rate provided for herein have not been paid on
all shares of Series C Convertible Preferred Stock at the time outstanding, the
deficiency shall be fully paid on such shares before any distribution shall be
paid on, or declared and set apart for, Common Stock or any other class or
series of capital stock ranking junior to the Series C Convertible Preferred
Stock with respect to dividends. All accrued but unpaid dividends shall be paid,
in cash, at or before any Liquidity Event.
5. Liquidation.
(a) Except as otherwise provided in Section 7 hereof, in the event of
any liquidation, dissolution or winding up of the Corporation, either voluntary
or involuntary, after payment or provision for
B - 3
payment of the debts and other liabilities and obligations of the Corporation,
the holders of Series C Convertible Preferred Stock shall be entitled to receive
for each share of Series C Convertible Preferred Stock, prior and in preference
to any distribution of any of the assets or surplus funds of the Corporation to
the holders of Common Stock, and subject to the rights of any series of
Preferred Stock that ranks, on liquidation, senior to the Series C Convertible
Preferred Stock ("Senior Securities"), but pari passu with any other shares of
Preferred Stock under the terms of which holders thereof shall be entitled to
participate pari passu with the Series C Convertible Preferred Stock upon
liquidation, an amount equal to the Original Series C Issuance Price, plus an
amount equal to all accumulated but unpaid dividends thereon to and including
the date full payment is tendered to the holders of Series C Convertible
Preferred Stock (collectively the "Series C Preference Amount"). If upon the
occurrence of such event the assets and funds thus distributed among the holders
of Series C Convertible Preferred Stock and any other shares of Preferred Stock
entitled to participate pari passu with the Series C Convertible Preferred Stock
upon liquidation are insufficient to permit the payment to such holders of their
full preferential amount described herein, then the entire assets and funds of
the Corporation legally available for distribution, after satisfaction of the
rights of any Senior Securities, shall be distributed ratably among the holders
of the then outstanding Series C Convertible Preferred Stock and any other
shares of Preferred Stock entitled to participate pari passu with the Series C
Convertible Preferred Stock, upon liquidation, in proportion to the preferential
amount that each such holder is otherwise entitled to receive.
(b) For purposes of this Section 5, a liquidation, dissolution or
winding up of the Corporation shall include the Corporation's sale of all or
substantially all of its assets. The Corporation shall not consummate any
transaction deemed to constitute a liquidation, dissolution or winding up of the
affairs of the Corporation under this subsection (b) until the provisions of
this Section 5 have been satisfied.
6. Protective Provisions. So long as any shares of Series C Convertible
Preferred Stock remain outstanding, the Corporation shall not, without the vote
or written consent of the holders of at least a majority of the then outstanding
shares of Series C Convertible Preferred Stock, voting as a single class:
(a) amend the Certificate of Incorporation or the bylaws of the
Corporation in any manner that would alter, change or repeal any of the
designations, powers, preferences and relative, participating, optional or other
special rights, and the qualifications, limitations and restrictions thereof, of
the Series C Convertible Preferred Stock, or
(b) effect any liquidation, dissolution or winding up of the affairs
of the Corporation, whether voluntary or involuntary, including the sale of all
or substantially all of its assets.
7. Conversion. The holders of shares of Series C Convertible Preferred
Stock shall have the following conversion rights:
(a) Optional Conversion. At any time from and after 120 days
following the Original Issuance Date.
(b) Mandatory Conversion. Upon the Corporation's common stock being
listed on the NASDAQ National Market System, and the Corporation's common stock
closing at or in excess of $6.76 per share for 60 consecutive trading days in
such market.
(c) Conversion Mechanics.
(i) In the case of a conversion pursuant to Section 7(b)
above, the Corporation shall give the holders of the Series C Convertible
Preferred Stock written notice of a Mandatory Conversion, no less than 20
business days prior to the closing thereof. As soon as practicable after the
closing of a Mandatory Conversion or after the Corporation receives written
notice of an Optional Conversion, the Corporation shall send written
instructions to the holders of the shares of Series C Convertible Preferred
Stock being converted (the "Converting Shares") regarding surrender of
certificates representing Converting Shares, and the holders of the Converting
Shares shall surrender the certificate(s) evidencing the Converting Shares,
which were automatically converted at the principal office of the Corporation
(or such other office or agency of the Corporation as the Corporation may
B - 4
designate by notice in writing to the holders of such class of capital stock) at
any time during its usual business hours, together with written notice by the
holder of the Converting Shares, giving the name(s) (with addresses) and
denominations in which the certificate(s) evidencing the shares of Common Stock
shall be issued and instructions for the delivery thereof (the "Notice of
Recipients of Common Stock"). If the person(s) named in the Notice of Recipients
of Common Stock are not the same as the names of the registered holder of the
Converting Shares, the notice provided by the holder of the Converting Shares to
the Corporation shall include a duly executed written instrument or instruments
of transfer in a form which is reasonably satisfactory to the Corporation. As
soon as practicable after receipt by the Corporation of the Notice of Recipients
of Common Stock, together with the certificate(s) evidencing the shares of
Series C Convertible Preferred Stock which were automatically converted (and
written instruments of transfer, if necessary), the Corporation shall be
obligated to, and shall, issue and deliver in accordance with such instructions
the certificate(s) evidencing the Common Stock issuable upon such conversion.
(ii) All shares of Series C Convertible Preferred Stock which
are converted pursuant to this Section 7 as herein provided shall no longer be
deemed to be outstanding and all rights with respect to such shares, including
rights, if any, to receive notices and to vote, shall immediately cease and
terminate as of the effective date of conversion, and in the case of a
conversion pursuant to a Liquidating Event prior to the closing of the
Liquidating Event), except only the right of the holders thereof to receive
shares of Common Stock in exchange therefor and payment of any accrued and
unpaid dividends thereon. Any shares of Series C Convertible Preferred Stock so
converted shall be retired.
(iii) Upon any conversion of Series C Convertible Preferred
Stock pursuant to this Section 7, no adjustment to the Conversion Price shall be
made for any accrued but unpaid dividends on the Series C Convertible Preferred
Stock converted or to be converted, which dividends shall be paid in accordance
with clause (ii) above.
(iv) Upon the issuance of the Common Stock in accordance with
this Section 7, such shares shall be deemed to be duly authorized, validly
issued, fully paid and non-assessable.
(d) Conversion Rate. The "Conversion Rate" as used in this Section 7
refers to the conversion of a share of Series C Convertible Preferred Stock into
a number of shares of Common Stock equal to the Series C Preference Amount
divided by the Conversion Price (as defined below) in effect from time to time.
The "Conversion Price" per share applicable to the Series C Convertible
Preferred Stock shall initially be the Original Series C Issuance Price,
provided that the Conversion Price shall be subject to adjustment as hereinafter
provided.
(e) Adjustment for Stock Splits and Combinations. If the Corporation
shall at any time or from time to time after the Original Issuance Date effect a
subdivision of the outstanding shares of Common Stock into a greater number of
shares of Common Stock, the applicable Conversion Price then in effect
immediately before that subdivision shall be proportionately decreased;
conversely, if the Corporation shall at any time or from time to time after the
Original Issuance Date effect a combination of the outstanding shares of Common
Stock into a smaller number of shares of Common Stock, the applicable Conversion
Price then in effect immediately before the combination shall be proportionately
increased. Any adjustment under this Section 7(e) shall become effective at the
time the subdivision or combination becomes effective.
(f) Adjustment for Certain Dividends and Distributions. In the event
the Corporation at any time or from time to time after the Original Issuance
Date shall make or issue, or fix a record date for the determination of holders
of Common Stock entitled to receive, a dividend or other distribution payable in
additional shares of Common Stock, then and in each such event the applicable
Conversion Price then in effect shall be decreased as of the time of such
issuance or, in the event such a record date shall have been fixed, as of the
close of business on such record date, by multiplying the applicable Conversion
Price then in effect by a fraction;
(i) the numerator of which shall be the total number of
shares of Common Stock issued and outstanding immediately prior to the time of
such issuance or at the close of business on such record date; and
B - 5
(ii) the denominator of which shall be the total number of
shares of Common Stock issued and outstanding immediately prior to the time of
such issuance or at the close of business on such record date, plus the number
of shares of Common Stock issuable in payment of such dividend or distribution;
provided, however, that if such record date shall have been fixed and such
dividend is not fully paid or if such distribution is not fully made on the date
fixed therefor, the applicable Conversion Price shall be recomputed accordingly
as of the close of business on such record date and thereafter the Conversion
Price shall be adjusted pursuant to this Section 7(e) as of the time of actual
payment of such dividends or distributions.
(g) Adjustment for Reclassification, Exchange or Substitution. If the
Common Stock shall be changed into or exchanged for the same or different number
of shares of any class or classes of stock of the Corporation, whether by
capital reorganization, reclassification or otherwise (other than a subdivision
or combination of shares of Common Stock provided for in Section 7(e)), then and
in each such event the holder of each share of Series C Convertible Preferred
Stock shall have the right thereafter to convert such share into the kind and
amounts of shares of stock and other securities and property receivable upon
such reorganization, reclassification or other change, by holders of the numbers
of shares of Common Stock into which such shares of Series C Convertible
Preferred Stock might have been converted immediately prior to such
reorganization, reclassification or change, all subject to further adjustment as
provided herein or with respect to such other securities or property by the
terms thereof.
(h) Adjustments to Conversion Price for Certain Diluting Issues.
(i) Special Definitions. For purposes of this Section 7(h),
the following definitions shall apply:
(1) "Additional Common Stock" shall mean all Common
Stock issued (or, pursuant to Section 7(h)(iii) below, deemed to be issued) by
the Corporation after the Original Issue Date, other than Common Stock issued or
issuable:
(A) as a dividend or distribution on the Series C
Convertible Preferred Stock;
(B) shares of Common Stock issued upon a
subdivision or combination of shares of Common Stock as provided in Section 7(e)
above or as a dividend as provided in Section 7(f) above or securities issued
pursuant to a recapitalization or other event specified in Section 7(g) above;
(C) shares of Common Stock as compensation to
employees, consultants, officers or directors of the Corporation pursuant to
stock option, restricted stock or other equity compensation plans or agreements,
as approved by the Board;
(D) shares of Common Stock issued or issuable in
a registered public offering;
(E) shares of Common Stock or instruments
convertible or exercisable into shares of Common Stock issued to a financial
institution in connection with a credit facility or other debt financing, as
approved by the Board; and
(F) shares of Common Stock or instruments
convertible or exercisable into shares of Common Stock of the Corporation issued
in connection with a merger, consolidation, acquisition or similar business
combination that has been approved by at least a majority of the then
outstanding Series C Convertible Preferred Stock.
(2) "Convertible Securities" shall mean any evidence
of indebtedness, shares or other securities, issued after the Original Issue
Date, convertible into or exchangeable for Common Stock.
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(3) "Options" shall mean rights, options or warrants
to subscribe for, purchase or otherwise acquire either Additional Common Stock
or Convertible Securities.
(ii) Adjustment of Series C Conversion Price Upon Issuance of
Additional Common Stock. If the Corporation issues Additional Common Stock
before conversion or redemption of the Series C Convertible Preferred Stock
(including Additional Common Stock deemed to be issued pursuant to Section
7(h)(iii) below) for a consideration per share less than the Original Series C
Issuance Price of any outstanding share of Series C Convertible Preferred Stock
in effect on the date of and immediately prior to such issuance, then, in each
such event, the Conversion Price of such share then in effect shall be reduced,
concurrently with such issuance, to a price determined by multiplying such
Conversion Price by a fraction, (A) the numerator of which shall be (1) the
number of shares of Common Stock outstanding immediately prior to such issuance
plus (2) the number of shares of Common Stock which the aggregate consideration
received by the Corporation for the total number of Additional Common Stock so
issued would purchase at such Conversion Price in effect immediately prior to
such issuance, and (B) the denominator of which shall be (1) the number of
shares of Common Stock outstanding immediately prior to such issuance plus (2)
the number of such Additional Common Stock so issued. For the purpose of the
above calculation, the number of shares of Common Stock outstanding immediately
prior to such issuance shall be calculated as if any Convertible Securities had
been fully converted into shares of Common Stock immediately prior to such
issuance and all outstanding Options had been exercised.
(iii) Deemed Issuance of Additional Common Stock.
(1) Options and Convertible Securities. If the
Corporation, at any time or from time to time after the Original Issuance Date,
issues any Options or Convertible Securities or fixes a record date for the
determination of holders of any class of securities entitled to receive any such
Options or Convertible Securities, then the Corporation shall be deemed to have
issued Additional Common Stock as of the time of such issuance or, if such a
record date has been fixed, as of the close of business on such record date, in
the amount and for the consideration per share provided herein.
(A) Number of Additional Shares. The number of
shares of Additional Common Stock deemed issued with respect to such Options or
Convertible Securities shall be the maximum number of shares (as set forth in
the instrument relating thereto without regard to any provisions contained
therein for a subsequent adjustment of such number) of Common Stock issuable
upon the exercise of such Options and/or the conversion or exchange of such
Convertible Securities.
(B) Consideration Per Share. The consideration
per share received by the Corporation for Additional Common Stock deemed to have
been issued pursuant to Options and Convertible Securities, shall be determined
by dividing: (1) the total amount, if any, received or receivable by the
Corporation as consideration for the issuance of such Options or Convertible
Securities, plus the minimum aggregate amount of additional consideration (as
set forth in the instruments relating thereto, without regard to any-provision
contained therein for a subsequent adjustment of such consideration) payable to
the Corporation upon the exercise of such Options or the conversion or exchange
of such Convertible Securities, or in the case of Options for Convertible
Securities, the exercise of such Options for Convertible Securities and the
conversion or exchange of such Convertible Securities, by (2) the maximum number
of shares of Common Stock (as set forth in the instruments relating thereto,
without regard to any provision contained therein for a subsequent adjustment of
such number) issuable upon the exercise of such Options or the conversion or
exchange of such Convertible Securities.
(2) Adjustments. In any such case in which Additional
Common Stock are deemed to be issued:
(A) no further adjustment in the Series C
Conversion Price shall be made upon (a) the subsequent issue of Convertible
Securities or shares of Common Stock upon the exercise of such Options or (b)
the conversion or exchange of such Convertible Securities;
(B) if such Options or Convertible Securities by
their terms provide, with the passage of time or otherwise, for any decrease in
the consideration payable to the Corporation, or increase in the number of
shares of Common Stock issuable upon the exercise, conversion or exchange
thereof, then
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the Series C Conversion Price computed upon the original issuance thereof (or
upon the occurrence of a record date with respect thereto) and any subsequent
adjustments based thereon shall, upon any such increase or decrease becoming
effective, be recomputed to reflect such increase or decrease insofar as it
affects such Options or the rights of conversion or exchange under such
Convertible Securities;
(C) if such Options or Convertible Securities by
their terms provide, with the passage of time or otherwise, for any increase in
the consideration payable to the Corporation, or decrease in the number of
shares of Common Stock issuable, upon the exercise, conversion or exchange
thereof, then the Series C Conversion Price computed upon the original issuance
thereof (or upon the occurrence of a record date with respect thereto) and any
subsequent adjustments based thereon shall, upon any such increase or decrease
becoming effective, be recomputed to reflect such increase or decrease insofar
as it affects such Options or the rights of conversion or exchange under such
Convertible Securities;
(D) if the conversion privilege or similar right
represented by any such Convertible Securities shall expire or be cancelled or
terminated without having been exercised, the Series C Conversion Price as
adjusted upon the original issuance of such Convertible Securities shall be
readjusted to the Series C Conversion Price that would have been in effect had
an adjustment been made on the basis that the only Additional Common Stock
deemed to be issued were the Additional Common Stock, if any, actually issued or
sold on the exercise of such conversion or similar right with respect to such
Convertible Securities, and such Additional Common Stock, if any, were issued or
sold for the consideration actually received by the Corporation upon such
exercise, plus the consideration, if any, actually received by the Corporation,
whether or not converted, for issuing or selling the Convertible Securities; and
(E) no readjustment pursuant to clause 2 above
shall have the effect of increasing the Series C Conversion Price above the
Series C Conversion Price that would be in effect if such Option or Convertible
Securities had not been issued.
(iv) Determination of Consideration. For purposes of this
Section 7(h), the consideration received by the Corporation for the issuance of
any Additional Common Stock shall:
(1) insofar as it consists of cash, be computed at the
aggregate amount of cash received by the Corporation excluding amounts paid or
payable for accrued interest or accrued dividends;
(2) insofar as it consists of property other than
cash, be computed at the fair value thereof at the time of such issuance, as
determined in good faith by the Board; and
(3) if Additional Common Stock is issued together with
other shares or securities or other assets of the Corporation for consideration
that covers both, be the proportion of such consideration so received, computed
as provided in clauses (1) and (2) above, as determined in good faith by the
Board.
(i) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Series C Conversion Price pursuant to this
Section 7, the Corporation at its expense shall promptly compute such adjustment
or readjustment in accordance with the terms of this Section 7 and furnish to
each holder of Series C Convertible Preferred Stock a certificate setting forth
such adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based, including a statement of (i) the
consideration received or to be received by the Corporation for any Additional
Common Stock issued or sold or deemed to have been issued or sold, (ii) the
Series C Conversion Price at the time in effect for the Series C Convertible
Preferred Stock, and (iii) the number of shares of Common Stock and the type and
amount, if any, or other property that at the time would be received upon
conversion of the Series C Convertible Preferred Stock. Upon the written request
of any holder of Series C Convertible Preferred Stock, the Corporation will as
soon as reasonably practicable provide to such holder written statement of the
Series C Conversion Price at the time in effect for the Series C Convertible
Preferred Stock and the number of shares of Common Stock which at the time would
be received upon conversion of the Series C Convertible Preferred Stock.
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(j) Payment of Taxes. The Corporation will pay all taxes and other
governmental charges (other than taxes measured by the revenue or income of the
holders of the Series C Convertible Preferred Stock) that may be imposed in
respect o the issue or delivery of shares of PlanetCAD Common Stock upon
conversion of the shares of Series C Convertible Preferred Stock.
(k) Minimum Adjustment. No adjustment of the Series C Conversion
Price shall be made in an amount less than $.01 per share; provided, however,
that any adjustments which are not required to be made as a result of the
operation of this subsection shall be carried forward and shall be taken into
account in any subsequent adjustment.
8. Reissue of Shares. Shares of Series C Convertible Preferred Stock
acquired by the Corporation by reason of redemption, purchase, conversion or
otherwise shall not be cancelled, retired or eliminated from the shares which
the Corporation is authorized to issue, and may be reissued as shares of Series
C Convertible Preferred Stock or redesignated as part of another series of
preferred stock
9. Exchange for Other Preferred Stock. If the Corporation issues shares
of another series of Preferred Stock containing (a) a higher preference for
dividends or (b) a lower Conversion Price than the Series C Convertible
Preferred Stock, a holder of shares of Series C Convertible Preferred Stock may
exchange all, but not less than all, of his shares for the number of shares of
such new Preferred Stock that equal the largest whole number equal to or less
than the total amount paid by the holder for his Series C Convertible Preferred
Stock divided by the purchase price per share of such new Preferred Stock. In
order to exercise this right of exchange, the Purchaser must notify the
Corporation in writing of his intent and must sign any agreement the Corporation
reasonably requires to effect the exchange, including, but not limited to, any
agreement relating to the registration of such stock with the SEC or any State.
10. Redemption. The Corporation shall redeem any outstanding shares of
Series C Convertible Preferred concurrently with, or as soon as practicable
after, the Corporation is merged with or consolidated into another corporation
("Business Combination"), provided that all of the following conditions are
satisfied: (a) the Corporation's Board of Directors has approved the Business
Combination and, if required by Delaware law, has submitted the Business
Combination to a vote of the Corporation's shareholders, and the shareholders
have approved the Business Combination, and (b) at the meeting at which the
Corporation's Board of Directors has approved the Business Combination, any
director who holds, directly or indirectly, any shares of the Series C
Convertible Preferred Stock shall not vote on the proposed Business Combination.
11. Notices. Unless otherwise specified, any notice required by the
provisions of these designations shall be deemed given upon the earlier of the
following events: (a) personal delivery to the party to be notified, (b)
facsimile transmission to the party to be notified (with written or facsimile
confirmation of receipt), (c) delivery by an overnight express courier service
to the party to be notified (delivery, postage or freight charges prepaid), or
(d) on the third business day following deposit in the United States Post Office
(if sent by registered or certified mail, return receipt requested, with
delivery, postage or freight charges prepaid), addressed in the case of notice
to the holders of record of Series C Convertible Preferred Stock to each holder
at such holder's address appearing on the books of the Corporation and in the
case of notice to the Corporation to the President at the principal executive
offices of the Corporation.
12. Exclusion of Other Rights. Except as may otherwise be required by law,
the shares of Series C Convertible Preferred Stock shall not have any voting
powers, preferences and relative, participating, optional or other special
rights, other than those specifically set forth in this designation (as such
designation may be amended from time to time) and in the Certificate of
Incorporation of the Corporation.
13. Headings of Subdivisions. The headings of the various subdivisions
hereof are for convenience of reference only and shall not affect the
interpretation of any of the provisions hereof.
14. Severability of Provisions. If any voting powers, preferences and
relative, participating, optional and other special rights of the Series C
Convertible Preferred Stock and qualifications, limitations and restrictions
thereof set forth in this designation (as such designation may be amended from
time to time) is held invalid, unlawful or incapable of being enforced by reason
of any rule of law or public policy, all other voting powers,
B - 9
preferences and relative, participating, optional and other special rights of
Series C Convertible Preferred Stock and qualifications, limitations and
restrictions thereof set forth in this designation (as so amended) that can be
given effect without the invalid, unlawful or unenforceable voting powers,
preferences and relative, participating, optional and other special rights of
Series C Convertible Preferred Stock and qualifications, limitations and
restrictions thereof shall, nevertheless, remain in full force and effect, and
no voting powers, preferences and relative, participating, optional or other
special rights of Series C Convertible Preferred Stock and qualifications,
limitations and restrictions thereof herein set forth shall be deemed dependent
upon any other such voting powers, preferences and relative, participating,
optional, or other special rights of Series C Convertible Preferred Stock and
qualifications, limitations and restrictions thereof unless so expressed herein.
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ANNEX C: PREFERRED STOCK PURCHASE AGREEMENT
AVATECH SOLUTIONS, INC.
This Preferred Stock Purchase Agreement (this "Agreement") is made and
entered into as of the _____ day of ______________, 2003, by and among Avatech
Solutions Inc., a Delaware corporation (the "Company"), and each of the persons
and/or entities identified on Schedule 1 hereto (the "Purchasers").
RECITALS
WHEREAS, the Company wishes to sell to the Purchasers shares of Series C
Convertible Preferred Stock (the "Shares"), pursuant to the terms and conditions
set forth below; and
WHEREAS, the Purchasers wish to purchase the Shares on the terms and
subject to the conditions set forth below;
AGREEMENT
NOW THEREFORE, in consideration of the mutual covenants, agreements,
conditions, representations, and warranties contained in this Agreement, the
Company and the Purchasers hereby agree as follows:
SECTION 1: PURCHASE AND SALE OF PREFERRED STOCK
1.1. Authorization of Shares. On or after the Closing Date (as defined in
Section 1.4), (a) the Company shall have authorized the issuance of the Shares
to Purchasers, and (b) the Company shall have reserved the proper number of
shares of Common Stock of the Company issuable upon conversion of the Shares
(the "Conversion Shares"). The Shares shall have the rights, preferences,
privileges and restrictions set forth in a certificate of designations filed
with the Secretary of the State of Delaware, substantially in the form attached
hereto as Exhibit A (the "Designation").
1.2. Purchase and Sale. Subject to the terms and conditions hereof, the
Company agrees to issue to each Purchaser that number of Shares set forth
opposite each Purchaser's name on Schedule 1. In exchange for the issuance of
the Shares, each Purchaser agrees to purchase the Shares at a purchase price of
$1.69 per share, for a total price as set forth opposite the Purchaser's name on
Schedule 1 (the "Total Purchase Price").
1.3. Election to Purchase Additional Shares. The Purchaser may elect to
purchase additional shares of Series C Convertible Preferred Stock of the
Company (the "Additional Shares") on the same terms and conditions contained in
this Agreement, except as specifically set forth in this Section 1.3. This
election (the "Additional Share Election") must be received by the Company, in
writing on or before the first anniversary of the Closing Date.
(a) Price. In the event that a Purchaser makes an Additional Share
Election, the "Conversion Price" of any Shares purchased will be $2.50 per
share. The "Additional Share Purchase Price" shall be the Conversion Price
multiplied by the number of Additional Shares.
(b) Number of Shares. Each Purchaser may elect under this Section 1.3
to purchase any whole number of Additional Shares, up to the amount of the Total
Purchase Price.
(c) Delivery. The Additional Shares and the Additional Share Purchase
Price shall be issued and delivered (the "Additional Share Closing") at such
time (the "Additional Share Closing Date") and place and by such method as
agreed upon by the Company and the Purchaser. As soon as practicable after the
issuance of the Additional Shares, the Company will deliver to each Purchaser a
certificate representing the Additional Shares.
(d) Application of Entire Agreement. Except where specifically
superceded by a provision of this Section 1.3, the term "Share" or "Shares" in
this Agreement shall be construed to include Additional Shares.
C - 1
Notwithstanding this construction, no portion of this Agreement shall be
construed to provide rights to a Purchaser with respect to Additional Shares
which have not yet been issued or which are not yet eligible for registration.
1.4. Closing. The issuance of the Shares (but not any Additional Shares)
under this Agreement (the "Closing") shall take place on ________________, 2003
(the "Closing Date"). At or as soon as practicable after the Closing, subject to
the terms and conditions hereof, the Company will deliver to each Purchaser a
certificate representing the number of Shares set forth opposite that
Purchaser's name on Schedule 1, against delivery to the Company of this executed
Agreement, and the Purchaser will deliver the Total Purchase Price to the
Company.
1.5 Covenants of the Company related to Conversion. The Company agrees,
at all times from the Closing Date until all of the Shares are converted into
Conversion Shares, to reserve and keep available out of its authorized but
unissued shares of Common Stock, solely for the purpose of effecting the
Conversion of the Shares into Conversion Shares, the number of shares of its
common stock as are then required to effect the conversion of all outstanding
Shares.
SECTION 2: REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company, as applicable, hereby represents and warrants to each Purchaser as
follows:
2.1. Organization, Good Standing, and Qualification. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. The Company has all requisite corporate power and
authority to own and operate its properties and assets, to execute and deliver
this Agreement and to file the Designation (collectively, the "Preferred Stock
Agreement"), to issue and sell the Shares, to carry out the provisions of the
Preferred Stock Agreement, and to carry on its business as presently conducted.
The Company is duly qualified and is authorized to do business and is in good
standing in each jurisdiction in which the nature of its activities and of its
properties (both owned and leased) makes such qualification necessary; except
for those jurisdictions in which failure to do so would not have a material
adverse effect on the Company or its business.
2.2. Capitalization. The authorized capital stock of the Company,
immediately prior to the Closing and prior to filing the Designation, consists
of a total of 25,000,000 shares, of which (a) 22,500,000 shares are Common
Stock, of which 2,965,958 shares are issued and outstanding and 657,808 shares
of which are reserved for future issuance upon the exercise of any stock options
granted under the 1998, 2000, and 2002 Stock Option Plans, the 2003 Restricted
Stock Award Plan, and upon the exercise of outstanding warrants and (b)
2,500,000 shares are Preferred Stock, of which 100,000 shares are designated
Series A Junior Participating Preferred Stock and 1,202,463 are designated as
Series B Preferred Stock, none of which are issued and outstanding. All issued
and outstanding shares of the Company's Common Stock (x) have been duly
authorized and validly issued, (y) are fully paid and nonassessable, and (z)
were issued in compliance with all applicable state and federal laws concerning
the issuance of securities. The Conversion Shares have been duly and validly
reserved for issuance. When issued in compliance with the provisions of this
Agreement and the Designation, the Conversion Shares will be validly issued,
fully paid and nonassessable, and will be free of any liens or encumbrances,
provided, however, that the Conversion Shares may be subject to restrictions on
transfer under state and federal securities laws.
2.3. Authorization. All corporate action on the part of the Company, its
officers, directors and stockholders, necessary for the authorization of this
Agreement and the Designation, the performance of all obligations of the Company
thereunder, and the authorization, sale, issuance and delivery of the Shares and
Conversion Shares thereto have been taken or will be taken prior to the Closing.
This Agreement, when executed and delivered, will be a valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms, except as limited by (a) applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting
enforcement of creditors' rights, (b) general principles of equity that restrict
the availability of equitable remedies, and (c) applicable law related to the
enforceability of the indemnification provisions set forth in Section 5 of this
Agreement. The sale of the Shares and the subsequent conversion of the Shares
into Conversion Shares are not and will not be subject to any preemptive rights
or rights of first refusal that have not been properly waived or complied with.
C - 2
2.4. Registration Statement on Form S-1. A draft or filed version of a
Registration Statement on Form S-1, dated February ___, 2003 (the "Registration
Statement") was provided to each Purchaser and, when filed, will be available at
http://www.sec.gov. The Registration Statement contains information regarding
the current businesses of the Company and certain information regarding future
plans of the company.
2.5. Compliance With Other Instruments. The Company is not in violation of
or default under (a) any term of its certificate of incorporation or bylaws, (b)
any material provision of any mortgage, indenture, contract, agreement,
instrument or contract to which it is party or by which it is bound, (c) any
judgment, decree, order, writ or, to the Company's knowledge, or (d) any
statute, rule or regulation applicable to the Company, which violation of or
default under would materially and adversely affect the business, assets,
liabilities, financial condition, operations or prospects of the Company. The
execution, delivery, and performance of and compliance with the Preferred Stock
Agreement, and the issuance and sale of the Shares and the Conversion Shares
pursuant thereto will not, with or without the passage of time or giving of
notice, result in any such material violation or be in conflict with or
constitute a default under any such term or result in the creation of any
mortgage, pledge, lien, encumbrance, or charge upon any of the properties or
assets of the Company or the suspension, revocation, impairment, forfeiture, or
non-renewal of any permit license, authorization, or approval applicable to the
Company, its business or operations or any of its assets or properties.
2.6. Litigation. Except as set forth in the Registration Statement, there
are no actions, suits, or legal, administrative, or other proceedings or
investigations pending or, to the Company's knowledge, threatened before any
court, agency, or other tribunal to which the Company is a party or against or
affecting any of the property, assets, businesses, or financial condition of the
Company. The Company is not in default with respect to any order, writ,
injunction, or decree of any federal, state, local or foreign court, department,
agency, or instrumentality to which it is a party.
2.7. Governmental Approvals: Third Party Consents. Except for certain
filings required by federal and state securities laws, all consents, approvals,
or authorizations of, or registrations, qualifications, designations,
declarations, or filings with, any federal or state governmental authority, and
all consents, approvals or authorizations of any third party required in
connection with the execution of the Preferred Stock Agreement and the
performance of the transactions contemplated thereby (including the issuance and
sale of the Shares and Conversion Shares) have been obtained by the Company or
shall be obtained prior to the Closing or the Additional Share Closing, as
applicable. The Company has, or has rights to acquire, all licenses, permits,
and other similar authority necessary for the conduct of its business as now
being conducted by it, the lack of which could materially and adversely affect
the operations or condition, financial or otherwise, of the Company, and it is
not in default in any material respect under any of such licenses, permits or
other similar authority.
2.8. Offering Valid. Assuming the accuracy of the representations and
warranties of Purchasers contained in Section 3 hereof, the offer, sale, and
issuance of the Shares and the Conversion Shares will be exempt from the
registration requirements of the Securities Act and will have been registered or
qualified or are exempt from registration and qualification under the
registration, permit, or qualification requirements of all applicable state
securities laws.
2.9. Disclosure. All information relating to or concerning the Company and
its subsidiaries set forth in this Agreement or provided to the Purchasers in
writing in connection with the transactions contemplated hereby is true and
correct in all material respects and the Company has not omitted to state any
material fact necessary in order to make the statements made herein or therein,
in light of the circumstances under which they were made, not misleading;
provided, however, that this representation and warranty shall not apply to any
information contained within any of the foregoing related to future events, or
the projected future financial performance of the Company, including any
financial projections, or descriptions of potential strategic or business
relationships between the Company and third parties.
2.10. No Integrated Offering. Neither the Company, any of its affiliates,
nor any person acting on its or their behalf, has, directly or indirectly, made
any offers or sales of any security or solicited any offers to buy any security
under circumstances that would require registration of the Shares being offered
hereby under the Securities Act or cause this offering of Shares to be
integrated with any prior offering of securities of the Company for purposes of
the Securities Act or any applicable stockholder approval provisions.
C - 3
SECTION 3: REPRESENTATIONS AND WARRANTIES OF PURCHASERS.
Each Purchaser hereby represents and warrants to the Company as follows:
3.1. Requisite Power and Authority.
(a) If the Purchaser is an individual, the Purchaser has all
requisite power and authority under all application provisions of law to execute
and deliver this Agreement and to carry out the provisions hereof.
(b) If the Purchaser is a corporation, limited liability company, or
limited partnership, the Purchaser is duly organized, validly existing, and in
good standing under the laws of the jurisdiction of its formation and has all
requisite limited liability company, partnership or corporate power and
authority to own its assets and operate its business. If the Purchaser is a
corporation, limited liability company, or limited partnership, the Purchaser
has all necessary corporate, limited liability company, or partnership power and
authority under all applicable provisions of law to execute and deliver this
Agreement and to carry out the provisions hereof. All action on Purchaser's part
required for the lawful execution and delivery of this Agreement has been or
will be effectively taken prior to the Closing or the Additional Share Closing,
as applicable.
(c) Upon its execution and delivery, this Agreement will be a valid
and binding obligation of Purchaser, enforceable in accordance with its terms,
except as limited by (a) applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application affecting enforcement of
creditors' rights, (b) general principles of equity that restrict the
availability of equitable remedies and (c) applicable law related to the
enforceability of the indemnification provisions set forth in Section 5 of this
Agreement.
3.2. Investment Representations. Purchaser understands that the Shares
have not been registered under the Securities Act. Purchaser also understands
that the Shares and/or the Conversion Shares are being offered and sold pursuant
to an exemption from registration contained in the Securities Act based in part
upon Purchaser's representations contained in this Agreement. Each Purchaser, as
to itself, hereby represents and warrants to the Company as follows:
(a) Acquisition for Own Account. Purchaser is acquiring the Shares
for the Purchaser's own account for investment purposes only, and not with a
view towards their distribution.
(b) Accredited Investor Purchaser represents that it is an
"accredited investor" within the meaning of Regulation D under the Securities
Act.
(c) Company Information. Purchaser has had an opportunity to ask
questions of, and receive answers from, directors, officers and management of
the Company relating to the Company's business, management, and financial
affairs and to the terms and conditions of this investment. Purchaser has had a
chance to review the Registration Statement provided to the Purchaser.
(d) Rule 144. Purchaser acknowledges and agrees that the Shares
and/or the Conversion Shares must be held indefinitely unless they are
subsequently registered under the Securities Act or an exemption from such
registration is available. Purchaser has been advised or is aware of the
provisions of Rule 144 promulgated under the Securities Act, which permits
limited resale of securities purchased in a private placement subject to the
satisfaction of certain conditions, including, among other things: the
availability of certain current public information about the Company; the resale
occurring not less than one year after a party has purchased and paid for the
security to be sold; the sale being through an unsolicited "broker's
transaction" or in transactions directly with a market maker (as said term is
defined under the Securities Act); and the number of securities being sold
during any three-month period not exceeding specified limitations.
(e) Residence. The residence of Purchaser (if an individual), or the
office or offices of Purchaser in which its investment decision was made is
located at the address or addresses of Purchaser as stated on the signature
pages hereto.
C - 4
SECTION 4: CONDITIONS TO CLOSING.
4.1. Conditions to Purchasers' Obligations at the Closing. Purchasers'
obligations to accept the Shares at the Closing, or the Additional Shares at the
Additional Share Closing, are subject to the satisfaction, at or prior to the
Closing or the Additional Share Closing, as applicable, of the following
conditions:
(a) Representations and Warranties True; Performance of Obligations.
The representations and warranties made by the Company in Section 2 hereof shall
be true and correct in all material respects as of the Closing or the Additional
Share Closing, as applicable, with the same force and effect as if they had been
made as of the Closing Date or the Additional Share Closing Date, as applicable,
and the Company shall have performed all obligations and conditions herein
required to be performed or observed by it on or prior to the Closing or the
Additional Share Closing, as applicable.
(b) Legal Investment. On the Closing Date or the Additional Share
Closing Date, as applicable, the issuance of the Shares, and the proposed
issuance of the Conversion Shares, shall be legally permitted by all laws and
regulations to which Purchasers and the Company are subject.
(c) Consents, Permits, and Waivers. The Company shall have obtained
any and all consents, permits and waivers necessary or appropriate for
consummation of the transactions contemplated by the Preferred Stock Agreement
(except for such as may be properly obtained subsequent to the Closing or the
Additional Share Closing, as applicable).
(d) Filing of Designation. The Designation shall have been filed with
the Secretary of State of the State of Delaware.
(e) Corporate Documents. The Company shall have delivered to
Purchasers or their counsel, copies of all corporate documents of the Company,
as Purchasers shall have reasonably requested.
(f) Reservation of Conversion Shares. The Conversion Shares issuable
upon conversion of the Shares shall have been duly authorized and reserved for
issuance upon such conversion.
(g) Closing Certificates. The Company shall have delivered to
Purchasers:
(i) a certificate of the Secretary of the Company dated
as of the Closing Date, or the Additional Share Closing Date, as applicable,
certifying as to the incumbency of the officers of the Company executing the
Agreement and attaching thereto a copy of the Designation, as filed with the
Secretary of State of the State of Delaware and a copy of the resolutions or
consent of the board of directors of the Company authorizing and approving the
Company's execution, delivery and performance of this Agreement and the filing
of the Designation; and
(ii) a certificate, executed by the Chief Executive
Officer of the Company as of the Closing Date, or the Additional Share Closing
Date, as applicable, certifying as to the fulfillment of all of the conditions
of Purchasers' obligations under this Agreement.
(h) Proceedings and Documents. All corporate and other proceedings in
connection with the transactions contemplated at the Closing or the Additional
Share Closing and all documents and instruments incident to such transactions
shall be reasonably satisfactory in substance and form to Purchasers and their
special counsel, and Purchasers and their special counsel shall have received
all such counterpart originals or certified or other copies of such documents as
they may reasonably request.
C - 5
4.2. Conditions to Obligations of the Company at Closing. The Company's
obligation to issue the Shares at the Closing, or the Additional Share Closing,
as applicable, is subject to the satisfaction, on or prior to the Closing, of
the following conditions:
(a) Representations and Warranties True; Performance of Obligations.
The representations and warranties made by Purchasers in Section 3 hereof shall
be true and correct in all material respects at the Closing or the Additional
Share Closing, as applicable, with the same force and effect as if they had been
made on and as of the Closing Date or the Additional Share Closing Date, as
applicable, and Purchasers shall have performed all obligations and conditions
herein required to be performed or observed by Purchasers on or prior to the
Closing or the Additional Share Closing, as applicable.
(b) Filing of Designation. The Designation shall have been filed with
the Secretary of State of the State of Delaware.
(c) Consents, Permits, and Waivers. The Company shall have obtained
any and all consents, permits and waivers necessary or appropriate for
consummation of the transactions contemplated by the Preferred Stock Agreement
(except for such as may be properly obtained subsequent to the Closing or the
Additional Share Closing, as applicable).
SECTION 5: COVENANTS OF THE PARTIES FOR THE REGISTRATION PERIOD.
5.1. Covenants of the Company to Register the Conversion Shares.
(a) The Company shall file with the SEC, on or prior to the date
which is one hundred and twenty (120) days after the Closing a registration
statement on Form S-1 (or, if Form S-1 is not then available, on such form of
registration statement as is then available, to effect a registration (the "New
Registration Statement") of all of the shares covering the resale of the
Registrable Securities (as defined below). The New Registration Statement (and
each amendment or supplement thereto and each request for acceleration of
effectiveness thereof) shall be provided to (and subject to the review by) the
Purchasers and a single firm of counsel designated by the Purchasers (the
"Purchasers' Counsel") at least five business days prior to its filing or other
submission in the case of the New Registration Statement, and at least two
business days prior to its filing (or such lesser time as may be necessary) in
the case of each amendment or supplement thereto.
(b) "Registrable Securities" means the Conversion Shares and any
shares of capital stock issued or issuable, from time to time (with any
adjustments), as a distribution or in exchange for or otherwise with respect to
the foregoing; provided, however, that Registrable Securities shall not include
any such Registrable Securities that (i) have previously been registered
pursuant to the Securities Act, (ii) are eligible for public resale under Rule
144(k) under the Securities Act, or (iii) are eligible for public resale under
the Securities Act pursuant to an exemption from registration under the
Securities Act.
(c) The Purchasers may offer and sell the Registrable Securities
pursuant to the New Registration Statement in an underwritten offering. In any
such underwritten offering, the Purchasers who hold a majority in interest of
the Registrable Securities subject to such underwritten offering, shall have the
right to select the Purchasers' Counsel and an investment banker or bankers and
manager or managers to administer the offering, which investment banker or
bankers or manager or managers shall be reasonably satisfactory to the Company.
In the event that any Purchasers elect not to participate in such underwritten
offering, the New Registration Statement covering all of the Registrable
Securities shall contain appropriate plans of distribution reasonably
satisfactory to the Purchasers participating in such underwritten offering and
the Purchasers electing not to participate in such underwritten offering
(including, without limitation, the ability of nonparticipating Purchasers to
sell from time to time and at any time during the effectiveness of such New
Registration Statement).
C - 6
(d) In connection with the registration of the Registrable
Securities, the Company has the following obligations:
(i) The Company will prepare and file with the SEC, on
or before 120 days following the Closing, the New Registration Statement, and
will use its best efforts to cause such New Registration Statement to become
effective as soon as practicable after such filing. The Company will keep such
New Registration Statement effective pursuant to Rule 415 at all times until the
earlier of (A) the date on which all of the Registrable Securities (in the
reasonable opinion of counsel to the Purchasers) may be immediately sold to the
public without registration or restriction pursuant to Rule 144(k) under the
Securities Act and (B) such time as all the Registrable Securities have been
sold (the "Registration Period").
(ii) The Company will prepare and file with the SEC such
amendments (including post-effective amendments) and supplements to the New
Registration Statement and the prospectus used in connection with the New
Registration Statement as may be necessary to keep the New Registration
Statement effective at all times during the Registration Period and, during such
period, will comply with the provisions of the Securities Act with respect to
the disposition of all Registrable Securities of the Company covered by the New
Registration Statement until such time as all of such Registrable Securities
have been disposed of in accordance with the intended methods of disposition by
the seller or sellers thereof as set forth in the New Registration Statement.
The Company will furnish to each Purchaser whose
Registrable Securities are included in the New Registration Statement and to
Purchasers' Counsel promptly after the same is prepared and publicly
distributed, filed with the SEC, or received by the Company, one copy of the New
Registration Statement and any amendments thereto, each preliminary prospectus
and prospectus and each amendment or supplement thereto. At the request of any
Purchaser, the Company will provide to that Purchaser (A) a copy of each letter
written by or on behalf of the Company to the SEC or the staff of the SEC no
later than the date of submission of such letter (including, without limitation,
any request to accelerate the effectiveness of any New Registration Statement or
amendments thereto), and, promptly upon receipt, each item of correspondence
from the SEC or the staff of the SEC, in each case relating to the New
Registration Statement (other than any portion, if any, thereof which contains
information for which the Company has sought confidential treatment), and the
Company will cooperate with each Purchaser in making all reasonable
modifications requested by such Purchaser or Purchasers' Counsel to any portion
of any letter or other correspondence from the Company to the SEC that addresses
the transactions contemplated by this Agreement, (B) on or as soon as
practicable after the date the New Registration Statement (or any amendments to
the New Registration Statement) becomes effective (the "New Registration
Effective Date"), a notice stating that the New Registration Statement or
amendment has been declared effective, and (C) such number of copies of a
prospectus, including a preliminary prospectus, and all amendments and
supplements thereto and such other documents as such Purchaser may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such Purchaser.
(iv) The Company will use its best efforts to (A)
register and qualify the Registrable Securities covered by the New Registration
Statement under the securities or "blue sky" laws of those jurisdictions in the
United States as each Purchaser who holds Registrable Securities being offered
reasonably requests, (B) prepare and file in those jurisdictions any amendments
(including post-effective amendments) and supplements to the registrations or
qualifications as may be necessary to maintain the effectiveness of the
registrations or qualifications during the Registration Period, (C) take such
other actions as may be necessary to maintain such registrations and
qualifications in effect at all times during the Registration Period, and (D)
take all other actions reasonably necessary or advisable to qualify the
Registrable Securities for sale in the requested jurisdictions; provided,
however, that the Company will not be required in connection herewith or as a
condition thereto to (V) qualify to do business in any jurisdiction where it
would not otherwise be required to qualify but for this Section 5.1(d)(iv), (W)
subject itself to general taxation in any such jurisdiction, (X) file a general
consent to service of process in any such jurisdiction, (Y) provide any
undertakings that cause the Company undue expense or burden, or (Z) make any
change in its certificate of incorporation or bylaws, which in each case the
board of directors of the Company determines to be contrary to the best
interests of the Company and its stockholders.
(v) In the event that the Purchasers who hold a majority
in interest of the Registrable Securities being offered in an offering select
underwriters for the offering, the Company shall enter into and perform its
obligations under an underwriting agreement, in usual and customary form,
including, without limitation, customary indemnification and contribution
obligations, with the underwriters of such offering.
C - 7
(vi) As promptly as practicable after becoming aware of
such event, the Company will notify each Purchaser by telephone or facsimile of
the happening of any event of which the Company has knowledge and as a result of
which the prospectus included in the New Registration Statement, as then in
effect, includes an untrue statement or omission of a material fact required to
be stated therein or necessary to make the statements therein not misleading and
will use its best efforts promptly to prepare a supplement or amendment to the
New Registration Statement to correct the untrue statement or omission and
deliver the number of copies of any supplement or amendment to each Purchaser as
the Purchaser may reasonably request.
(vii) The Company will use its best efforts to prevent the
issuance of any stop order or other suspension of effectiveness of the New
Registration Statement and, if such an order is issued, to obtain the withdrawal
of the order at the earliest practicable date (including in each case by
amending or supplementing such New Registration Statement) and to notify each
Purchaser who holds Registrable Securities being sold (or, in the event of an
underwritten offering, the managing underwriters) of the issuance of the order
and its resolution (and if the New Registration Statement is supplemented or
amended, deliver such number of copies of any supplement or amendment to each
Purchaser as the Purchaser may reasonably request).
(viii) In the event of an underwritten offering, at the
request of any Purchaser whose Registrable Securities are included in the
Registration Statement, the Company shall furnish, on the New Registration
Effective Date (A) an opinion, dated as of the New Registration Effective Date,
from counsel representing the Company, addressed to the Purchaser in the form
delivered to the underwriters, if any opinion is delivered to the underwriters
and (B) a letter, dated as of the New Registration Effective Date, from the
Company's independent certified public accountants in the form delivered to the
underwriters, if any such "Comfort Letter" is delivered to the underwriters.
(ix) The Company will provide a transfer agent and
registrar, which may be a single entity, for the Registrable Securities not
later than the New Registration Effective Date.
(x) The Company will cooperate with the Purchasers who
hold Registrable Securities being offered and the managing underwriter or
underwriters, if any, to facilitate the timely preparation and delivery of
certificates (not bearing any restrictive legends) representing the Registrable
Securities to be offered pursuant to the New Registration Statement and enable
such certificates to be in such denominations or amounts, as the case may be, as
the managing underwriter or underwriters, if any, or the Purchasers may
reasonably request and registered in such names as the managing underwriter or
underwriters, if any, or the Purchasers may request, and, within three (3)
business days after the New Registration Effective Date, the Company shall
deliver, and shall cause legal counsel selected by the Company to deliver, to
the transfer agent for the Registrable Securities (with copies to the Purchasers
whose Registrable Securities are included in such New Registration Statement) an
opinion of such counsel that such Registrable Securities have been registered
under the Securities Act and that the restrictive legends on the certificates
representing such Registrable Securities may be removed.
(xi) At the request of Purchasers who hold a
majority-in-interest of the Registrable Securities, the Company will prepare and
file with the SEC any amendments (including post-effective amendments) and
supplements to the New Registration Statement and the prospectus used in
connection with the New Registration Statement as are necessary to change the
plan of distribution set forth in the New Registration Statement.
(xii) The Company will comply with all applicable laws
related to the New Registration Statement and the offer and sale of securities
and all applicable rules and regulations of governmental authorities in
connection therewith (including without limitation the Securities Act and the
Exchange Act, and the rules and regulations promulgated by the SEC).
(e) All reasonable expenses incurred by the Company or the Purchasers
in connection with registrations, filings or qualifications pursuant to this
Section 5 (excluding brokers' fees, underwriting discounts and commissions, and
similar selling expenses), including, without limitation, all registration,
listing and qualifications fees, printers and accounting fees, the fees and
disbursements of counsel for the Company, and the fees and disbursements of
Purchasers' Counsel, not in excess of $15,000, shall be borne by the Company.
C - 8
5.2. Covenants of The Purchasers Related to Registration. In connection
with the registration of the Registrable Securities, the Purchasers shall have
the following obligations.
(a) The obligation of the Company under this Agreement to
complete the registration of the Registrable Securities of a particular
Purchaser is expressly conditioned on (i) the provision by the Purchaser to the
Company of all information regarding itself, the Registrable Securities held by
it, and the intended method of disposition of the Registrable Securities held by
it as are reasonably required to effect the registration of such Registrable
Securities and (ii) the execution by the Purchaser of all documents in
connection with the registration as the Company may reasonably request. At least
five (5) business days before the first anticipated filing date of the New
Registration Statement the Company will notify each Purchaser of any information
the Company requires from each such Purchaser.
(b) Each Purchaser, by the Purchaser's acceptance of the
Registrable Securities, agrees to cooperate with the Company as reasonably
requested by the Company in connection with the preparation and filing of the
New Registration Statement, unless the Purchaser has notified the Company in
writing of such Purchaser's election to exclude all of the Purchaser's
Registrable Securities from the New Registration Statement.
(c) In the event that Purchasers holding a majority in interest
of the Registrable Securities being offered determine to engage the services of
an underwriter, each Purchaser agrees to enter into and perform such Purchaser's
obligations under an underwriting agreement, in usual and customary form,
including, without limitation, indemnification and contribution obligations,
with the underwriter(s) of such offering and the Company, and take such other
actions as are reasonably required in order to expedite or facilitate the
disposition of the Registrable Securities, unless such Purchaser has notified
the Company in writing of the Purchaser's election not to participate in such
underwritten distribution.
(d) A Purchaser may not participate in any underwritten
distribution under this Agreement unless the Purchaser (i) agrees to sell the
Purchaser's Registrable Securities on the basis provided in any underwriting
arrangements in usual and customary form entered into by Company, (ii) completes
and executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms of such
underwriting arrangements, and (iii) agrees to pay its pro rata share of all
underwriting discounts and commissions and any expenses in excess of those
payable by the Company pursuant to Section 5.1(d).
5.3. Mutual Indemnification Related to Registration.
(a) Indemnification by the Company. In the event of any registration
of Registrable Securities under the Securities Act pursuant to this Agreement,
to the full extent permitted by law, the Company agrees to indemnify each
Purchaser, its affiliates, and their officers, directors, trustees, partners,
employees, advisors and agents (including brokers or dealers acting on their
behalf), and each person who controls the Purchaser (within the meaning of the
Securities Act and the Exchange Act) against all losses, claims, damages,
liabilities and expenses caused by (i) any violation by the Company of the
Securities Act, the Exchange Act, any state securities or blue sky laws or any
rule or regulation thereunder, or (ii) any untrue or allegedly untrue statement
of material fact contained in any registration statement under which such
Registrable Securities were registered under the Securities Act, any prospectus
or preliminary prospectus contained therein or any omission or alleged omission
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances under which such
statements were made, provided, however, that the Company will not be liable in
any such case if and to the extent that any such loss, claim, damage, liability
or expense arises out of or is based upon (i) an untrue or allegedly untrue
statement or omission or alleged omission resulted from information that the
Purchaser furnished in writing to the Company expressly for use therein or (ii)
an untrue statement or alleged untrue statement or omission or alleged omission
that was contained in a preliminary prospectus and corrected in a final
prospectus, and such seller failed to deliver a copy of the final prospectus,
which was provided to seller in a timely manner and in accordance with the
delivery requirements of the Securities Act. In connection with a firm or best
efforts underwritten offering, to the extent customarily required by the
managing underwriter, the Company will indemnify the underwriters, their
officers and directors and each person who controls the underwriters (within the
meaning of the Securities Act and the Exchange Act), to the extent customary in
such agreements.
C - 9
(b) Indemnification by Purchasers. In connection with any
registration statement, each participating Purchaser will furnish to the Company
in writing such information and affidavits as the Company reasonably requests
for use in connection with any registration statement or prospectus and each
Purchaser agrees to indemnify, to the extent permitted by law, the Company, its
directors, officers, trustees, partners, employees, advisors and agents
(including brokers or dealers acting on their behalf), and each person who
controls the Company (within the meaning of the Securities Act and the Exchange
Act) against any losses, claims, damages, liabilities and expenses resulting
from any untrue or allegedly untrue statement of a material fact or any omission
or alleged omission to state a material fact required to be stated in the
registration statement or prospectus or any amendment thereof or supplement
thereto necessary to make the statements therein not misleading in light of the
circumstances under which such statements were made, but only to the extent that
the untrue or allegedly untrue statement or omission or alleged omission is
contained in or omitted from any information or affidavit the Purchaser
furnished in writing to the Company expressly for use therein and only in an
amount not exceeding the net proceeds received by the Purchaser with respect to
securities sold pursuant to such registration statement. In connection with a
firm or best efforts underwritten offering, to the extent customarily required
by the managing underwriter, each participating Purchaser will indemnify the
underwriters, their officers and directors and each person who controls the
underwriters (within the meaning of the Securities Act and the Exchange Act), to
the extent customary in such agreements.
(c) Indemnification Proceedings. Any person entitled to
indemnification under this Agreement will (i) give prompt notice to the
indemnifying party of any claim with respect to which it seeks indemnification
and (ii) unless in the indemnified party's reasonable judgment a conflict of
interest may exist between the indemnified and indemnifying parties with respect
to the claim, permit the indemnifying party to assume the defense of the claim
with counsel reasonably satisfactory to the indemnified party. If the
indemnifying party does not assume the defense, the indemnifying party will not
be liable for any settlement made without its consent (but that consent may not
be unreasonably withheld). No indemnifying party will consent to entry of any
judgment or will enter into any settlement (i) that does not include as an
unconditional term thereof the claimant's or plaintiff's release of the
indemnified party from all liability concerning the claim or litigation or (ii)
that contains any admission of guilt on the part of any indemnified party. An
indemnifying party who is not entitled to or elects not to assume the defense of
a claim will not be under an obligation to pay the fees and expenses of more
than one counsel in each applicable jurisdiction for all parties indemnified by
the indemnifying party with respect to the claim, unless in the reasonable
judgment of any indemnified party a conflict of interest may exist between the
indemnified party and any other indemnified party with respect to the claim, in
which event the indemnifying party shall be obligated to pay the fees and
expenses of no more than one additional counsel for the indemnified parties.
(d) Contribution. If the indemnification provided for in Section
5.3(a) or 5.3(b) is unavailable to an indemnified party in respect of any
losses, claims, damages, liabilities or expenses referred to therein, (the
"Unindemnified Losses") then each party responsible for indemnification under
Section 5.3(a) or 5.3(b) shall contribute to the amount paid or payable by the
indemnified party as a result of any Unindemnified Losses in the proportion
appropriate to reflect the relative fault of the Company and the participating
Purchasers in connection with the statements or omissions that resulted in the
Unindemnified Losses, as well as any other relevant equitable considerations.
The relative fault of the Company and the participating Purchasers will be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or by the
participating Purchasers and the parties' relative intent, knowledge, and
opportunity to correct the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact.
The parties to this Agreement agree that it would not be just and
equitable if contribution pursuant this Section 5.3(d) were determined by pro
rata allocation or by any other method of allocation that does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. Notwithstanding anything to the contrary in this Agreement, no
Purchaser contributing pursuant to this Section 5.3(d) will be required to
contribute any amount in excess of the lesser of (i) the net proceeds of the
offering (before deducting expenses, if any) received by that Purchaser, less
the amount of any damages that the Purchaser has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission, and (ii) the proportion of the total losses, claims, damages,
liabilities or expenses indemnified against equal to the proportion of the total
amount of securities sold under such registration statement sold by the
participating Purchaser. Notwithstanding any other provision of this Agreement,
no person guilty of fraudulent misrepresentation (within the meaning of Section
C - 10
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
SECTION 6. MISCELLANEOUS.
6.1. Governing Law. This Agreement shall be governed by the laws of the
State of Maryland as such laws are applied to agreements between Maryland
residents entered into and performed entirely in Maryland, without reference to
the law of conflicts, except that the Delaware General Corporation Law will
govern as to matters of corporate law.
6.2. Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto and shall inure to the benefit of and be enforceable by each
person who shall be a holder of the Shares from time to time.
6.3. Entire Agreement. This Agreement, the Designation, Exhibits,
Schedules, and the other documents delivered pursuant hereto constitute the full
and entire understanding and agreement between the parties with regard to the
subjects hereof and no party shall be liable or bound to any other in any manner
by any representations, warranties, covenants and agreements except as
specifically set forth herein and therein.
6.4. Severability. In case any provision of this Agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
6.5. Amendment. This Agreement may be amended or modified only upon the
written consent of the Company, and the holders representing at least a majority
of the Shares (treated as if converted and including any Conversion Shares into
which the Shares have been converted), except that Schedule 1 of this Agreement
may be amended prior to the Closing Date to add or remove a Purchaser or change
the number of Shares purchased by a Purchaser with the written consent of the
Company and the affected Purchaser(s).
6.6. Delays or Omissions. The failure of any party to exercise any right
or remedy under this Agreement or otherwise, or delay by a party in exercising
such right or remedy, shall not operate as a waiver thereof. It is further
agreed that any waiver of any provisions or conditions of this Agreement must be
in writing and shall be effective only to the extent specifically set forth in
such writing.
6.7. Notices. All notices required or permitted hereunder shall be in
writing and shall be deemed effectively given upon the earlier of receipt and:
(a) the day sent by confirmed facsimile if sent during normal business hours of
the recipient, if not, then on the next business day; (b) three business days
after having been sent by registered or certified mail, return receipt
requested, postage prepaid; or (c) one day after deposit with a nationally
recognized overnight courier, specifying next day delivery, with written
verification of receipt. All communications shall be sent to the Company at its
principal place of business and to Purchasers at the addresses set forth on the
signature pages hereto or at such other address as the Company or Purchaser may
designate by ten days advance written notice to the other parties hereto
pursuant to this Section 6.7.
6.8. Titles and Subtitles. The titles of the sections and subsections of
this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
6.9. Counterparts. This Agreement may be delivered via facsimile and may
be executed in any number of counterparts, each of which shall be an original,
but all of which together shall constitute one instrument.
6.10. Pronouns. All pronouns contained herein, and any variations thereof,
shall be deemed to refer to the masculine, feminine or neutral, singular or
plural, as the identity of the parties hereto may require.
[Signatures Appear on Following Page]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date above first written.
COMPANY:
AVATECH SOLUTIONS, INC.
By:
----------------------------------------
Donald R. "Scotty" Walsh
Chief Executive Officer
PURCHASER:
------------------------------------------
Signature
------------------------------------------
Name and Title
Address of Purchaser:
------------------------------------------
------------------------------------------
------------------------------------------
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SCHEDULE 1
Purchase
Purchaser Shares Price
--------- ----------- ----------
1. ____________________ ___________ __________
2. ____________________ ___________ __________
3. ____________________ ___________ __________
4. ____________________ ___________ __________
5. ____________________ ___________ __________
6. ____________________ ___________ __________
7. ____________________ ___________ __________
TOTAL: ___________ __________
C - 13
UNTIL __, 2003, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13: OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION:
The following table sets forth the fees and expenses, other than any
underwriting discounts and commissions incurred by us in connection with the
issue and distribution of the common stock being registered. Items marked with
asterisks (*) are estimated fees as of the date of this filing.
Item Cost
- ----
Accounting Fees $15,000*
Costs of Printing $5,000*
Legal Fees $50,000
Registration Fees $234.63
Federal Taxes $0
State Taxes and Fees $0
Trustees' and Transfer Agents' Fees $0
Expenses Borne by Security Holder $0
Premium on Indemnification Policy $0
ITEM 14: INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Delaware General Corporation Law, a corporation shall have the
power to indemnify any person who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that the person is
or was a director, officer, employee, or agent of the corporation or is or was
serving at the request of the corporation as a director, officer, employee, or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorney's fees), judgments, fines, and
amounts paid in settlement actually and reasonably incurred by the person in
connection with such action, suit, or proceeding if the person acted in good
faith and in a manner such person reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe the person's conduct was
unlawful.
Although Delaware General Corporation Law permits a corporation to
indemnify any person referred to above against expenses (including attorney
fees) that are actually and reasonably incurred by such person ("Expenses"), in
connection with the defense or settlement of an action by or in the right of the
corporation, provided that such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the corporation's best
interests, if such person has been judged liable to the corporation,
indemnification for such expenses is only permitted to the extent that the Court
of Chancery, or the court in which the action or suit was brought, determines
that, despite the adjudication of liability, such person is entitled to
indemnity for such Expenses as the Court of Chancery, or such other court, deems
proper.
The determination, with respect to a person who is a director of
officer at the time of such determination, as to whether a person seeking
indemnification has met the required standard of conduct is to be made (i) by a
majority vote of the directors who are not parties to such action, suit, or
proceeding, even though less than a quorum, or (ii) by a committee of such
directors designated by majority vote of such directors, even though less than a
quorum, or (iii) if there are no such directors, or if such directors so direct,
by independent legal counsel in a written opinion, or (iv) by the stockholders.
II - 1
Delaware General Corporation Law also provides that to the extent that
a present or former director or officer of a corporation has been successful on
the merits or otherwise in the defense of any action, suit, or proceeding
covered by the statute, such person shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by such person in
connection therewith. In addition, Delaware General Corporation Law provides for
the general authorization of advancements of a director's or officer's
litigation expenses, subject to an undertaking by such person to repay any such
advancement if such person is ultimately found not to have been entitled to
reimbursement for such expenses and that indemnification and advancement of
expenses provided by the statute shall not be deemed exclusive of any other
rights to which those seeking indemnification or advancement of expenses may be
entitled under any bylaw, agreement, vote of stockholders or disinterested
directors, or otherwise. Avatech's Restated certificate of incorporation
provides that Avatech shall indemnify its directors, officers, employees, and
agents to the fullest extent permitted by Delaware General Corporation Law.
Avatech also is authorized to secure insurance on behalf of any person it is
required or permitted to indemnify. Pursuant to this provision, Avatech
maintains liability insurance for the benefit of its directors and officers.
ITEM 15: RECENT SALE OF UNREGISTERED SECURITIES
Terms of
Number Exemption Exercise
of Purchase from (for Use of
Date Title/Class Shares Name of Purchaser Price Registration options) Proceeds
- ---- ----------- ------ ------------------------------ -------- ------------ -------- ---------------
4/7/03 Series C Preferred 15,000 Dennis Oldorff Trustee for 25,350 4(2) N/A Working Capital
Stock Dennis Oldorff Revocable Trust
4/7/03 Series C Preferred 14,792 Richard D. & Marlyce Larsen 25,000 4(2) N/A Working Capital
Stock
4/7/03 Series C Preferred 14,792 Gary Loney 25,000 4(2) N/A Working Capital
Stock
4/7/03 Series C Preferred 14,792 Paul H. Feinberg & Cynthia Hind $25,000 4(2) N/A Working Capital
Stock
4/7/03 Series C Preferred 13,017 Vincent Arioso II $22,000 4(2) N/A Working Capital
Stock
4/7/03 Series C Preferred 28,906 Henry D. Felton $48,851 4(2) N/A Working Capital
Stock
4/7/03 Series C Preferred 30,000 Robert M. Stafford Trustee for $50,700 4(2) N/A Working Capital
Stock Stafford Family Trust
4/7/03 Series C Preferred 14,792 Colonel Richard Singleton $25,000 4(2) N/A Working Capital
Stock
4/18/03 Series C Preferred 20,000 Vincent and Norma Arioso $33,800 4(2) N/A Working Capital
Stock
5/6/03 Series C Preferred 5,917 Evelyn Bukowitz $10,000 4(2) N/A Working Capital
Stock
10/17/02 10% Convertible Notes ______ Victor & Nancy Frenkil $50,000 4(2) N/A Working Capital
7/9/02 10% Convertible Notes ______ Raloid Corp. $25,000 4(2) N/A Working Capital
11/6/02 10% Convertible Notes ______ Myles Wittenstein $50,000 4(2) N/A Working Capital
All past sales of Registrant's Series C Preferred Stock were made in reliance
upon the exemption in Section 4(2) of the Securities Act of 1933 for sales to
accredited investors only. The Commission has asserted that the filing of a
registration statement covering resales of the common stock into which the
Series C Convertible Preferred Stock is convertible (even though a shelf
registration with no distribution of a preliminary prospectus and, therefore, no
offers to resell common stock having been made) may have constituted "general
advertising," thereby precluding the registrant's reliance on the section 4(2)
exemption. The registrant offered each purchaser to date the right to rescind
his purchase and all elected not to do so. All sales of 10% Convertible Notes
were made in reliance upon the Section 4(2) exemption for sales to "accredited
investors" only.
ITEM 16: EXHIBITS AND FINANCIAL SCHEDULES
(a) EXHIBITS
EXHIBIT PAGE NO./
NO. EXHIBIT DESCRIPTION (REFERENCE)
2.1 Agreement and Plan of Merger (S)
3.1 Restated Certificate of Incorporation (SB)
3.2 First Amendment to Restated Certificate of Incorporation (SB)
3.3 Reverse Split Amendment to Restated Certificate of Incorporation (S)
3.4 Amendment of PlanetCAD's Certificate of Incorporation to change the name of PlanetCAD Inc. to
Avatech Solutions, Inc. (S)
3.5 Certificate of Designation, Preferences and Rights of Series A Junior Participating
Preferred Stock (A)
3.6 Certificate of Designation, Preferences and Rights of Series B Convertible Preferred Stock (K1)
3.6A Certificate of Designation, Preferences and Rights of Series C Convertible Preferred Stock (P)
3.7 By-Laws (SB)
5.1 Opinion of Neuberger, Quinn, Gielen, Rubin & Gibber, P.A. regarding the legality of the shares (P)
of common stock being registered
10.01 Autodesk Authorized Channel Partner Agreement by and among Avatech Solutions, Inc. and (S)
Autodesk, Inc. effective as of February 1, 1997 and as later amended on February 1, 2002
10.02 Bentley Reseller Agreement by and among Avatech Solutions, Inc. and Bentley Systems, (S, T)
Incorporated dated June 11, 2001 and as later amended on March 15, 2002
II - 2
EXHIBIT PAGE NO./
NO. EXHIBIT DESCRIPTION (REFERENCE)
10.03 CIT Revolving Line of Credit Agreement by and among CIT Group/Business Credit, Inc. and Avatech (S)
Solutions, Inc. and its subsidiaries dated October 25, 2000, in the amount up to $4,000,000
10.04 Warrant to purchase up to 16,213 shares of Common Stock issued by Avatech to CIT Group/Business (S)
Credit, Inc. dated October 25, 2000
10.05 Warrantholders Rights Agreement by and among CIT Group/Business Credit, Inc. and Avatech (S)
Solutions, Inc. and its subsidiaries dated October 25, 2000
10.06 Autodesk Loan Agreement by and among Autodesk, Inc. and Avatech Solutions, Inc. and its (SA2)
subsidiaries dated January 25, 1999
10.07 Autodesk Subordination Agreement by and among Autodesk, Inc., Avatech Solutions, Inc. and its (S)
subsidiaries, and CIT Group/Business Credit, Inc., dated October 25, 2000
10.08 Master Lease Agreement by and between Allstate Leasing, Inc. and Avatech Solutions, Inc. dated (S)
July 17, 2001
10.09 Form of 10% Subordinated Note with attached Warrant issued by Avatech Solutions, Inc. to (S)
certain note holders in connection with Avatech Solutions, Inc.'s 1998 $2,600,000 Subordinated
Debt Offering
10.10 Avatech Solutions Subsidiary, Inc. 1998 Stock Option Plan (S)
10.11 Avatech Solutions Subsidiary, Inc. 2000 Stock Option Plan (S)
10.12 2002 Stock Option Plan (S)
10.13 Restricted Stock Award Plan (included in Annex A) A-1
10.14 Avatech Solutions, Inc. Stockholders' Agreement by and among Avatech Solutions, Inc. and (S)
certain stockholders of Avatech Solutions, Inc. who acquired shares of Avatech Solutions, Inc.
common stock under Avatech Solutions, Inc.'s terminated employee stock purchase plan
10.15 Severance Agreement dated February 26, 1998, and made effective January 1, 1998, by and between (S)
Avatech Solutions, Inc. and Henry D. Felton
10.16 Severance Agreement dated February 27, 1998, and made effective January 1, 1998, by and between (S,T)
Avatech Solutions, Inc. and V. Joel Nicholson
10.17 Letter Agreement dated July 25, 2000, by and between Avatech Solutions, Inc. and A. Gary Rever (S)
10.18 Settlement Agreement between Autodesk and Avatech Solutions, Inc. dated August 14, 2002 (SA3)
10.19 Senior Subordinated Promissory Note, principal amount $500,000.00, issued by Avatech Solutions, (SA2)
Inc. in favor of PlanetCAD Inc
10.20 Senior Subordinated Promissory Note, principal amount $500,000.00, issued by Avatech Solutions, (SA2)
Inc. in favor of W. James Hindman
II - 3
EXHIBIT PAGE NO./
NO. EXHIBIT DESCRIPTION (REFERENCE)
10.21 Subordination Agreement by and among PlanetCAD Inc., Avatech Solutions, Inc., Technical (K2)
Learningware Company, Inc. and CIT Group/Business Credit, Inc. dated August 14, 2002
10.22 Subordination Agreement by and among W. James Hindman, Avatech Solutions, Inc., Technical (SA2)
Learningware Company, Inc. and CIT Group/Business Credit, Inc. dated August 13, 2002
10.23 Change in Control Agreement between PlanetCAD and David Hushbeck dated November 2001, as amended (SA3)
10.24 Change in Control Agreement between PlanetCAD and Joy Godesiabois dated November 2001, as (SA3)
amended
10.25 Employment Agreement by and between Donald R. "Scotty" Walsh and Avatech Solutions, Inc. dated (P)
December 2, 2002
10.26 Autodesk Authorized Channel Partner Agreement by and among Avatech Solutions, Inc. and (P)
Autodesk, Inc. effective as of February 1, 2003.
10.27 Employment Agreement by and between Eric L. Pratt and Avatech Solutions, Inc. dated April 15, 2003 E - 1
10.28 Employment Agreement by and between Debra Keith and Avatech Solutions, Inc. dated April 4, 2003 E - 6
10.29 Consulting Agreement by and among V. Joel Nicholson and Avatech Solutions, Inc. effective as of E-11
June 1, 2003
15.1 Letters regarding unaudited interim financial information (included with financial statement II - 5
schedules)
21.1 Subsidiaries of the Registrant (P)
23.1 Consent of Ernst & Young LLP E - 16
23.2 Consent of Walpert and Wolpoff, LLP (P)
23.3 Consent of Neuberger, Quinn, Gielen, Rubin & Gibber, P.A. (included in Exhibit 5.1) (P)
24.1 Power of attorney (included on signature page) (P)
99.1 Current Report on Form 8-K filed on January 31, 2003 (K3)
99.2 Preferred Stock Purchase Agreement (Annex C) (P)
99.3 Current Report on Form 8-K filed on February 19, 2003 (K4)
99.4 Current Report on Form 8-K filed on March 4, 2003 (K5)
99.5 Current Report on Form 8-K filed on April 16, 2003 (K6)
- ----------
A Incorporated by reference to the Registrant's Registration Statement on
Form 8-A, filed on March 11, 2002.
K1 Incorporated by reference to the Registrant's Current Report on Form 8-K,
filed on May 28, 2002.
K2 Incorporated by reference to the Registrant's Current Report on Form 8-K,
filed on August 21, 2002.
K3 Incorporated by reference to the Registrant's Current Report on Form 8-K,
filed on January 31, 2003.
K4 Incorporated by reference to the Registrant's Current Report on Form 8-K,
filed on February 19, 2003.
K5 Incorporated by reference to the Registrant's Current Report on Form 8-K,
filed on March 4, 2003.
K6 Incorporated by reference to the Registrant's Current Report on Form 8-K,
filed on April 16, 2003.
P Previously Filed.
S Incorporated by reference to the Registrant's form S-4 filed on May 30,
2002.
SA2 Incorporated by reference to the Registrant's amended form S-4 filed on
September 13, 2002.
SA3 Incorporated by reference to the Registrant's amended form S-4 filed on
September 27, 2002.
SB Incorporated by reference to the Registrant's registration statement on
form SB-2 filed on November 21, 2000.
T Terminated.
II - 4
(b) FINANCIAL STATEMENT SCHEDULES
Schedule II Valuation and Qualifying Accounts
REPORTS OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULES
The Board of Directors and Stockholders
Avatech Solutions, Inc.
We have audited the consolidated financial statements of Avatech
Solutions, Inc. as of June 30, 2002 and for the year then ended, and have issued
our report thereon dated September 3, 2002 (except Note 3 and 14, as to which
the date is March 10, 2003) (included elsewhere in this Registration Statement).
Our audit also included the 2002 amounts included in the financial statement
schedule responsive to Item 21(b) of this Registration Statement. This schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audit.
In our opinion, the 2002 amounts in the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, present fairly in all material respects the information set
forth therein.
/s/ Ernst & Young LLP
Baltimore, Maryland
September 3, 2002
The Board of Directors and Stockholders
Avatech Solutions, Inc.
We have audited the consolidated financial statements of Avatech
Solutions, Inc. as of June 30, 2001 and 2000 and for the years then ended, and
have issued our report thereon dated October 3, 2001 (except Note 3 and 14,
as to which the date is March 10, 2003) (included elsewhere in this Registration
Statement). Our audit also included the 2001 and 2000 amounts included in the
financial statement schedule responsive to Item 21(b) of this Registration
Statement. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audit.
In our opinion, the 2001 and 2000 amounts in the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
/s/ Walpert & Wolpoff, LLP
Baltimore, Maryland
October 3, 2001
II - 5
Avatech Solutions, Inc. and Subsidiaries Valuation and Qualifying Accounts
Additions
---------
Charged to
Balance at Charged to other
beginning costs and accounts Deductions Balance at
Description of period expenses - describe - describe end of period
Year Ended June 30, 2002:
Deducted from assets accounts:
Allowance for doubtful accounts: ........ $ 212,000 $ 76,000 $ - $ (176,000)/1/ $ 112,000
Year Ended June 30, 2001:
Deducted from assets accounts:
Allowance for doubtful accounts: ........ $ 282,000 $ 7,000 $ - $ (77,000)/1/ $ 212,000
Year Ended June 30, 2000:
Deducted from assets accounts:
Allowance for doubtful accounts: ........ $ 83,000 $ 289,000 $ - $ (90,000)/1/ $ 282,000
/1/ Uncollectible accounts written off, net of recoveries.
ITEM 17: UNDERTAKINGS
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
a. To include any prospectus required by section 10(a)(3)
of the Securities Act of 1933;
b. To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in the volume
of securities offered (if the total dollar value of the securities offered would
not exceed that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
c. To include any material information with respect to any
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
2. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold t the
termination of the offering.
4. The undersigned registrant hereby undertakes to deliver or
cause to be delibered with the prospectus, to each person to whom the prospectus
is sent or given, the latest annual report to security holders that is
incorporated by reference in the prospectus and furnished pursuant to and
meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities
Exchange Act of 1934; and where interim financial information required to be
presented by Article 3 of Regulation S-X are not set forth in the prospectus, to
deliver, or cause to be delivered to
II - 6
each person to whom the prospectus in sent or given, the latest quarterly report
that is specifically incorporated by reference in the prospectus to provide such
interim financial information.
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this First Amendment to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Owings
Mills, State of Maryland on June 4, 2003.
AVATECH SOLUTIONS, INC.
By: /s/ Donald R. Walsh
---------------------------------
Donald R. "Scotty" Walsh
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as
amended, this First Amendment to Registration Statement on Form S-1 has been
signed on June 4, 2003 by the following persons in the capacities indicated:
Name Title Date
- ---- ----- ----
/s/ Donald Walsh Chief Executive Officer and Director June 4, 2003
- -------------------------------------
Donald "Scotty" Walsh
/s/ Gary Rever Chief Financial Officer June 4, 2003
- -------------------------------------
Gary Rever
/s/ W. James Hindman Chairman of the Board June 4, 2003
- -------------------------------------
W. James Hindman
By: Gary Rever, Attorney-in-Fact
/s/ Hank Felton Vice Chairman of the Board June 4, 2003
- -------------------------------------
Hank Felton
By: Gary Rever, Attorney-in-Fact
/s/ Eugene J. Fischer Director June 4, 2003
- -------------------------------------
Eugene J. Fischer
By: Gary Rever, Attorney-in-Fact
/s/ James A. Fanella Director June 4, 2003
- -------------------------------------
James A. Fanella
By: Gary Rever, Attorney-in-Fact
/s/ John W. Sasser Director June 4, 2003
- -------------------------------------
John W. Sasser
By: Gary Rever, Attorney-in-Fact
/s/ Gary Rever
- -------------------------------------
Gary Rever
II - 8