AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 2, 2003
REGISTRATION NO. 333- 102746
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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TERAFORCE TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 76-0471342
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1240 E. CAMPBELL ROAD
RICHARDSON, TEXAS 75081
(469) 330-4960
(Address, including zip code, and telephone
number, including area code, of registrant's
principal executive offices)
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ROBERT P. CAPPS
TERAFORCE TECHNOLOGY CORPORATION
EXECUTIVE VICE PRESIDENT
1240 E. CAMPBELL ROAD
RICHARDSON, TEXAS 75081
TELEPHONE: (469) 330-4960
FAX: (972) 367-2271
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
WILLIAM L. BOEING
HAYNES AND BOONE, LLP
2505 N. PLANO ROAD, SUITE 4000
RICHARDSON, TEXAS 75082
TELEPHONE: (972) 680-7550
FAX: (972) 680-7551
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [X]
If the registrant elects to deliver its latest annual report to
security holders, or a complete legal facsimile thereof, pursuant to Item
11(a)(1) of this Form, check the following box. [ ]
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
Proposed Maximum Proposed Maximum Amount
Title of Each Class of Amount Offering Price Aggregate of Registration
Securities to be Registered to be Registered(1) per Share (2) Offering Price (2) Fee(3)
------------------------------------------------- ------------------- ---------------- ------------------ ----------------
Common stock, par value $0.01 per share.......... 57,553,336 $0.17 $9,784,067 $835.00
(1) Reflects the registration of 27,666,668 additional shares of common stock
for resale by the holders named herein. Pursuant to Rule 416, the
Registration Statement also covers an indeterminate additional shares of
common stock as may be issuable to prevent dilution resulting from stock
splits, stock dividends or similar events.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(c) of the Securities Act of 1933, as
amended, and based on the average high and low price on April 28, 2003, as
reported on the OTC Bulletin Board.
(3) A fee of $454.00 has been previously paid with respect to 29,886,668
shares. A fee of $381 is being paid herewith with respect to the 27,666,668
shares added hereby.
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.
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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 May 2, 2003
TERAFORCE TECHNOLOGY CORPORATION
57,553,336 SHARES OF COMMON STOCK
This prospectus relates to 57,553,336 shares of common stock of
TeraForce Technology Corporation to be sold from time to time by the selling
stockholders named in this prospectus. We are not selling any shares under this
prospectus, and we will not receive any of the proceeds from the sale of the
shares of common stock by the selling stockholders. Ten of the selling
stockholders hold warrants that are exercisable for a total of 17,886,668 shares
of common stock. We would receive total proceeds of $2,563,900 if all warrant
holders elected to exercise their warrants. Seven of the selling stockholders
have conversion rights to purchase 8,333,334 shares of common stock for a total
of $1,000,000. The proceeds from these purchases must be used to repay amounts
outstanding under our revolving credit facility.
The selling stockholders may sell the shares of common stock covered by
this prospectus in a number of different ways and at varying prices. We provide
more information about how the selling stockholders may sell their shares in a
section entitled "Plan of Distribution" on page 20. 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
"TERA." On April 28, 2003, the last reported sale price of our common stock on
the OTC Bulletin Board was $0.17 per share.
YOU SHOULD READ THE SECTION ENTITLED "RISK FACTORS" BEGINNING ON PAGE 5
FOR A DISCUSSION OF FACTORS YOU SHOULD CONSIDER BEFORE BUYING OUR COMMON STOCK.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION 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.
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The date of this prospectus is , 2003
TABLE OF CONTENTS
Page
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Prospectus Summary................................................................................................3
Risk Factors......................................................................................................5
A Number of Factors Could Cause Operating Results to Fluctuate Significantly...............................6
We Have Incurred Significant Losses in the Past and Are Not Currently Profitable...........................6
Debt Service Obligations May Adversely Affect Our Cash Flow and We May Be Unable to Repay the
Debt On Time...............................................................................................7
Our Auditors Have Expressed Doubt as to Our Ability to Continue as a Going Concern.........................7
We May Not Be Able to Successfully Complete Development and Achieve Customer Acceptance of New Defense
Electronics Products.......................................................................................7
We are a Party to Lawsuits and May Be Subject to Other Contingent Liabilities..............................8
Our Failure to Quickly Adopt to Rapidly Changing Competitive and Economic Conditions Could Have a
Material Adverse Effect on Our Business and Results of Operations..........................................8
We Have a Limited Customer Base............................................................................8
We May Not Be Successful if We Do Not Attract New Customers................................................8
We Must Attract, Retain and Motivate Key Technical and Management Personnel in a Competitive
Market in Order to Sustain and Grow Our Business...........................................................9
We May Be Unable to Secure Necessary Components and Support Because We Depend Upon a Limited
Number of Third-Party Manufacturers and Support Organizations..............................................9
The Defense Electronics Products Business Is Subject to Special Risks.....................................10
The Failure to Develop and Introduce New Products That Meet Changing Customer Requirements and
Address Technological Advances Would Limit Our Ability to Sell Our Products and Services..................10
We May Not Be Able to Secure an Adequate Number of Design Wins............................................10
Product Performance Problems Could Limit Sales Prospects..................................................10
Failure to Protect Our Intellectual Property Will Adversely Affect Our Ability to Compete
in the Industry and Our Profitability.....................................................................11
We May Be Subject to Intellectual Property Infringement Claims That Are Costly to Defend
and Could Limit Our Ability to Use Some Technologies in the Future........................................11
We May Be Unable to License Third-Party Technology at a Reasonable Cost...................................12
Our Products Are Subject to Government Regulation.........................................................12
Our Common Stock Is Subject to Price Volatility...........................................................12
There May Not Be a Liquid Market for our Common Stock.....................................................12
Additional Capital May Dilute Current Stockholders........................................................13
We May Propose a Reverse-Split of Our Common Stock........................................................13
Use of Proceeds..................................................................................................14
Selling Stockholders.............................................................................................15
Plan of Distribution.............................................................................................20
Description of Capital Stock.....................................................................................22
Legal Matters....................................................................................................23
Experts ........................................................................................................23
Where You Can Find More Information..............................................................................24
Disclosure of Commission Position on Indemnification.............................................................25
2
PROSPECTUS SUMMARY
We use the terms "we," "us," and "our" to refer to TeraForce Technology
Corporation, a Delaware corporation, and its subsidiaries unless the context
indicates otherwise. This summary is qualified in its entirety by the more
detailed information appearing in other places in this prospectus and in
documents we incorporate by reference into this prospectus. Unless we indicate
otherwise, all information with regard to our capital stock in this prospectus,
including share and per share information, assumes that our outstanding options,
warrants and conversion rights have not been exercised.
THE COMPANY
We design, develop, produce and sell high-density embedded computing
platforms and digital signal processing products, primarily for applications in
the defense electronics industry. The Company is also involved, through our
subsidiaries or joint venture arrangements, in the design and sale of optical
networking equipment and the design of Internet infrastructure equipment. We
were incorporated in Delaware on May 23, 1995. Our principal executive offices
are located at 1240 E. Campbell Road, Richardson, Texas 75081 and our telephone
number at that address is (469) 330-4960.
THE OFFERING
Common stock offered by us................................ None
Common stock offered by the selling stockholders.......... A maximum of 57,553,336 shares
Common stock outstanding as of March 31, 2003............. 118,422,183 shares
Offering price............................................ Determined at the time of sale
Use of proceeds........................................... We will receive no proceeds from the
sale of our common stock by the
selling stockholders. Any proceeds we
receive upon the exercise of the
warrants outstanding will be used for
general corporate purposes.
OTC Bulletin Board Symbol................................. TERA
THE SELLING STOCKHOLDERS
The selling stockholders described below are offering shares of our
common stock from time to time under this prospectus.
In April 2002, we issued to St. James Capital Partners, L.P. and SJMB,
L.P. an aggregate of 1,000,000 shares of our common stock in exchange for
warrants they held that were exchangeable for our common stock. We also issued
1,000,000 shares of our common stock to The Coastal Corporation Second Pension
Trust in exchange for warrants it held that were exchangeable for our common
stock.
3
On September 29, 2002, we issued 833,334 shares of common stock to
Richard E. Bean for $100,000 cash.
On October 3, 2002, we issued an aggregate of 16,666,668 shares of our
common stock to Morton A. Cohn and Fayez Sarofim in exchange for $2,000,000
cash. We also issued warrants for the purchase of an aggregate of 400,000 shares
of common stock to these two investors. As part of this transaction, we also
amended the terms of warrants Messrs. Cohn and Sarofim owned for the purchase of
780,000 shares of common stock.
Also on October 6, 2002, we issued 1,250,000 shares of our common stock
to Steven A. Webster for $150,000 cash.
On October 23, 2002, we sold a total of 4,166,666 shares of common
stock to the following investors: Don A. Sanders, Katherine U. Sanders, Don and
Julie Ellen Weir, Lisa Dawn Weir, Paul and Laura Tate, and Eric Weir. Net
proceeds for these transactions amounted to $500,000 and were used for working
capital.
In connection with the restructuring and extension of certain of our
debt obligations, in December 2002 Oscar S. Wyatt agreed to provide a total of
$4,500,000 in credit support for our outstanding debt. He has also agreed to
extend the payment term related to $600,000 in notes payable to him. In
exchange, we issued warrants to Mr. Wyatt for the purchase of 960,000 shares of
common stock and have agreed to amend warrants that Mr. Wyatt already owned for
the purchase of 1,830,000 shares of our common stock.
On December 27, 2002, we issued 1,250,000 shares of common stock to
Thomas M. Porter for $150,000 cash. On January 24, 2003, we issued 833,333
shares of common stock to John Coor for $100,000 cash.
On March 17, 2003, we issued an aggregate of 4,333,333 shares of common
stock and warrants to purchase an aggregate of 4,333,333 shares of common stock
to SSJ Enterprises, LLC for $520,000 cash, and amended the securities purchase
agreement we had entered into with SSJ Enterprises, LLC on October 31, 2002.
On March 26, 2003, we entered into a Reimbursement Agreement with
Richard M. Bean, Robert E. Garrison II, Steven A. Webster, James Hawkins, Peter
Badger, John Styles and Donald Campbell. Under the Reimbursement Agreement,
these individuals agreed to guarantee a $1,000,000 revolving credit facility on
our behalf. The individuals received warrants for the purchase of an aggregate
of 9,582,334 shares of common stock and conversion rights whereby they can
purchase an aggregate 8,333,333 additional shares of common stock for $1,000,000
cash. The proceeds from the sale of these additional sales must be used to repay
and retire the revolving credit facility.
We agreed to provide registration rights to each of these investors in
connection with the issuance of these 31,333,334 shares of common stock
purchased by the investors, the 17,886,668 shares of common stock to be issued
upon the exercise of the warrants and the 8,333,334 shares of common stock
issuable upon the exercise of the conversion rights.
4
RISK FACTORS
Before you invest in our common stock, you should be aware that there
are various risks, including those described below.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
The statements in this prospectus regarding our future financial and
operating performance and results, and other statements that are not historical
facts, are forward-looking statements, as defined in Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. We use the words "may," "expect," "anticipate,"
"believe," "continue," "estimate," "project," "intend," "designed" or other
similar expressions to identify forward looking statements. You should read
statements that contain such words carefully because they discuss future
expectations, contain projections of results of operations or of our financial
condition, and/or state other "forward-looking" information. These statements
also involve risks and uncertainties, including, but not limited to:
- events, conditions and financial trends that may affect our future
plans and business strategy,
- results of expectations and estimates as to prospective events,
and
- circumstances about which we can give no firm assurance.
Examples of types of forward-looking statements include statements on future
levels of net revenue and cash flow, new product development, strategic plans
and financing. These forward-looking statements involve risks and uncertainties
that could cause actual results to differ materially from those projected or
anticipated. Factors that might cause a difference include, but are not limited
to:
- general economic conditions in the markets we operate in;
- success in the development and market acceptance of new and
existing products;
- dependence on suppliers, third party manufacturers and channels of
distribution;
- customer and product concentration;
- fluctuations in customer demand;
- the ability to obtain and maintain access to external sources of
capital;
- the ability to control costs;
- overall management of our expansion; and
- other risk factors detailed from time to time in our filings with
the Securities and Exchange Commission.
We believe it is important to communicate our expectations of future
performance to our investors. However, events may occur in the future that we
are unable to accurately predict, or over which we have no control. Any
forward-looking statement speaks only as of the date the statement was made, and
we undertake no obligation to update any forward-looking statement to reflect
events or circumstances after the date the statement was made. Because it is not
possible to predict every new factor that may emerge, forward-looking statements
should not be relied upon as a prediction of actual future financial condition
or results. When considering our forward-looking statements, keep in mind the
risk factors and other cautionary statements in this prospectus. The risk
factors noted in this section and other factors noted throughout this prospectus
provide examples of risks, uncertainties and events that may cause our actual
results to differ materially from those contained in any forward-looking
statement. If one or more of these risks or uncertainties materialize, or if
underlying assumptions prove incorrect, actual outcomes may vary materially from
those forward-looking statements included in this prospectus.
5
RISK FACTORS RELATING TO OUR BUSINESS
A Number of Factors Could Cause Operating Results to Fluctuate
Significantly.
Our revenues and operating results in any reporting period may
fluctuate significantly due to a variety of factors, including:
- changes in the price or availability of components for our
products;
- the mix of products sold to the defense electronics markets and
other markets;
- our ability to introduce new technologies and features ahead of
competitors;
- the timing and size of orders we receive from customers;
- fluctuations in demand for our products;
- delays in testing by customers;
- production delays due to quality problems with outsourced
components;
- changes in our pricing policies or the pricing policies of our
competitors;
- changes in customers' requirements, including changes or
cancellations of orders from customers;
- manufacturing and shipment delays and deferrals;
- our ability to efficiently produce and ship orders promptly on a
price-competitive basis;
- announcements or introductions of new products by our competitors;
- changes in general economic conditions as well as those specific
to the defense electronics industry.
Current economic conditions have made it more difficult to make
reliable estimates of future revenues. Fluctuations in our revenue can lead to
greater fluctuations in our operating profits. In addition, we expect to incur
significant research and development expenses as we develop products to serve
our markets, all of which are subject to rapidly changing technology, frequent
product performance improvements and evolving industry standards. The ability to
deliver superior technological performance on a timely and cost effective basis
is a critical factor in securing design wins for future generations of defense
electronics systems. Significant research and development spending by the
Company does not ensure that our products will be designed into a customer's
system. Because future production orders are usually contingent upon securing a
design win, our operating results may fluctuate if we obtain or fail to obtain
design wins for significant customer systems.
6
We Have Incurred Significant Losses in the Past and Are Not Currently
Profitable.
We are not currently profitable. In 2002, 2001 and 2000 we have
incurred net losses of $4,350,000, $21,549,00 and, $29,572,000, respectively.
These losses have been funded from borrowings under credit facilities and sales
of common stock. It is not certain when we will become profitable. The ability
to become profitable will depend, in part, on our ability to increase net
revenue from sales of defense electronics products. Because of this we have
experienced a lack of liquidity from time to time, and therefore have not paid
our obligations in a timely manner in some cases. This in turn has impacted our
ability to operate our business. If our need for capital exceeds available
resources, there can be no assurance that additional capital will be available
through public or private equity or debt financing.
Debt Service Obligations May Adversely Affect Our Cash Flow and We May
Be Unable to Repay the Debt On Time.
We have approximately $4,900,000 of debt outstanding. Of this amount,
approximately $4,000,000 is due by December 31, 2003. It is unlikely that we
will be able to generate sufficient cash flow from operations to repay all of
this debt when it comes due. While we intend to restructure or refinance this
debt, there is no assurance that we will be able to do so in a timely manner.
Even if we are able to refinance or restructure this debt, we may still be
subject to substantial interest and principal repayment obligations.
Our Auditors Have Expressed Doubt as to Our Ability to Continue as a
Going Concern.
Our independent certified public accountants have added an explanatory
paragraph to their audit opinion issued in connection with our consolidated
financial statements. The opinion states that our ability to continue as a going
concern is uncertain due to the amount of debt that is due in 2003, the
uncertainty of refinancing or restructuring the debt and our history of
operating losses. Our consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty. These
adjustments might include changes in the possible future recoverability and
classification of assets or the amounts and classification of liabilities that
might result from the outcome of this uncertainty.
We May Not Be Able to Successfully Complete Development and Achieve
Customer Acceptance of New Defense Electronics Products.
We must continually enhance our products. Certain enhancements to our
products are in the development phase and are not yet ready for commercial
manufacturing or deployment. The successful development and deployment of these
products is subject to substantial risk. The development of these products, from
laboratory prototype to customer trial, and subsequently to general
availability, involves a number of steps including the following:
- completion of product development;
- the qualification and multiple sourcing of critical components;
- validation of manufacturing methods and processes;
- extensive quality assurance and reliability testing, and staffing
of testing infrastructure;
- validation of embedded software; and
- establishment of systems integration and systems test validation
requirements.
Each of these steps in turn presents serious risks of failure, rework
or delay. Any one of these setbacks could decrease the speed and scope of
product introduction and marketplace acceptance of the product. In addition,
unexpected intellectual property disputes, failure of critical design elements,
and other
7
setbacks may delay or even prevent the introduction of these products. A lack of
working capital may also negatively impact our ability to enhance our products
in a timely manner.
Additionally, the markets for our new products may be undeveloped. The
commercial acceptance of these types of products is uncertain. We cannot assure
you that our sales and marketing efforts for these products will be successful.
We are a Party to Lawsuits and May Be Subject to Other Contingent
Liabilities.
We are a named party in a lawsuit and may be subject to significant
other contingent liabilities. Defending these matters may require a substantial
amount of our resources, and any judgments may materially affect our financial
condition and results of operations. For more information see" Item 3 - Legal
Proceedings."
Our Failure to Quickly Adopt to Rapidly Changing Competitive and
Economic Conditions Could Have a Material Adverse Effect on Our Business and
Results of Operations.
We operate in a rapidly changing and competitive and economic
environment. Our future success will depend, in part, on our ability to enhance
our current products and to develop new products on a timely and cost-effective
basis that respond to technological developments and changing customer needs.
The markets for sophisticated technology are constantly undergoing rapid
competitive and economic changes. The full scope and nature of these changes are
difficult to predict. The defense electronics market, in particular, demands
constant technological improvements as a means of gaining military advantage. We
believe that technological change will continue to attract new entrants to our
market. Industry consolidation among competitors may increase their financial
resources, which may allow our competitors to reduce their prices. This would
require us to reduce the prices of our products or risk losing market share.
We Have a Limited Customer Base.
We are dependent on a small number of customers for a large portion of
our revenues. In fiscal 2002, three customers accounted for 65% of our revenues.
Customers in the defense electronics market purchase our products in connection
with government programs that may have limited duration, leading to fluctuating
sales to any particular customer in the defense electronics market from year to
year. A significant decrease in our sales to any of our major customers, or the
loss of any of our major customers, would have a material adverse effect on our
business, financial condition and results of operations. In addition, our
revenues are largely dependent upon the ability of our customers to develop and
sell products and systems that incorporate our products. There is no assurance
that our customers will not experience financial or other difficulties that
could adversely affect our operations and, in turn, our results of operations.
We May Not Be Successful if We Do Not Attract New Customers.
Our future success will depend on our attracting additional customers.
The growth of our customer base could be adversely affected by:
- customer unwillingness to implement our defense electronics
technology;
- any delays or difficulties that we may incur in completing the
development, introduction and production manufacturing of our
planned products or product enhancements;
8
- new product introductions by our competitors;
- any failure of our products to perform as expected;
- any difficulty we may incur in meeting customers' delivery,
installation or performance requirements; or
- customer concerns over our financial condition.
We Must Attract, Retain and Motivate Key Technical and Management
Personnel in a Competitive Market in Order to Sustain and Grow Our Business.
Our success depends to a significant extent upon key technical and
management employees. Competition for highly qualified employees can be intense
and the process of locating key technical and management personnel with the
required combination of skills and attributes can be lengthy and expensive.
There can be no assurance that we will be successful in retaining our existing
key personnel or in attracting and retaining the additional employees we may
require. We must continue to recruit, train, assimilate, motivate, and retain
qualified managers and employees to manage our operations effectively. If we do
not successfully recruit, hire and retain key employees, we may be unable to
execute our business plan effectively and our results of operations could be
significantly adversely affected.
We May Be Unable to Secure Necessary Components and Support Because We
Depend Upon a Limited Number of Third-Party Manufacturers and Support
Organizations.
We depend on a limited number of suppliers for components of our
products, as well as for equipment used to design and test our products. Certain
components used in our products are only available from a single source or
limited number of vendors. Some of the sole source and limited source vendors
are companies who, from time to time, allocate parts to equipment manufacturers
due to market demand for components and equipment. Many of our competitors are
much larger and may be able to obtain priority allocations from these shared
vendors, thereby limiting or making our sources of supply unreliable for these
components. Any delay in component availability for any of our products could
result in delays in deployment of these products and in our ability to recognize
revenues. Suppliers may be concerned regarding our financial condition and
therefore may be unwilling to sell components to us, or to grant trade credit to
us.
If we are unable to obtain a sufficient supply of components from
alternative sources, reduced supplies and higher prices of components will
significantly limit our ability to meet scheduled product deliveries to
customers. A delay in receiving certain components or the inability to receive
certain components could harm our customer relationships and our results of
operations.
Failures of components affect the reliability and performance of our
products, can reduce customer confidence in our products, and may adversely
affect our financial performance. From time to time, we have experienced delays
in receipt of components and have received components that do not perform
according to their specifications. Any future difficulty in obtaining sufficient
and timely delivery of components could result in delays or reductions in
product shipments that could harm our business. In addition, a consolidation
among suppliers of these components or adverse developments in their businesses
that affect their ability to meet our supply demands could adversely impact the
availability of components that we depend on. Delayed deliveries from these
sources could adversely affect our business.
9
Our defense electronics products are manufactured by a limited number
of third-party manufacturers. If we were required to find alternative
third-party manufacturers, we may be forced to incur significant costs and
risks. There is no assurance that the alternative manufacturers could produce
our products with quality or costs comparable to the existing manufacturers. In
addition, the transfer of the manufacturing process to an alternative provider
could result in significant delays that could cause us to miss deadlines imposed
by our customers.
The Defense Electronics Products Business Is Subject to Special Risks.
We expect that the majority of our net revenues in the future will come
from the sale of our defense electronics products. We supply products to
sub-contractors and prime contractors whose ultimate customer is often an agency
of the United States government. Reductions in government spending on programs
that incorporate our products could have a material adverse effect on our
business, financial condition and results of operations. The contracts with the
United States government are subject to special risks including the following:
delays or cancellations of funding for programs; ability of the government to
unilaterally cancel the contract; reduction or modification as a result of
budgetary restraints or political changes; and other factors not under the
control of us or the prime contractor.
The Failure to Develop and Introduce New Products That Meet Changing
Customer Requirements and Address Technological Advances Would Limit Our Ability
to Sell Our Products and Services.
New product development often requires long-term forecasting of market
trends, and development and implementation of new technologies. If we fail or
are late to respond to new technological developments, market acceptance of our
products may be significantly reduced or delayed. The markets we participate in
are characterized by rapidly changing technology, evolving industry standards,
changes in end user requirements, and frequent new product introductions and
enhancements. The introduction of products embodying new technologies or the
emergence of new industry standards can render our existing products obsolete or
unmarketable. There can be no assurance that we will be able to develop and
introduce new products ahead of our competitors, or that our products will not
be rendered obsolete.
We May Not Be Able to Secure an Adequate Number of Design Wins.
Before buying our products, a customer will evaluate our products, and
those of our competitors, as a part of designing a larger system. When a product
is selected by a customer to be utilized in its system we refer to it as a
"design win." The design-win process is typically lengthy and expensive, and
there can be no assurance that we will be able to continue to meet the product
specifications of our customers in a timely and adequate manner. In the defense
electronics market, military planners have historically funded significantly
more design projects than actual deployments of new equipment. There can be no
assurance that we will secure an adequate number of design wins. Failure to
secure future design wins could have a material adverse effect on our business,
financial condition and results of operations.
Product Performance Problems Could Limit Sales Prospects.
The production of new products with high technology content involves
occasional problems as the technology and manufacturing methods mature. If
significant reliability, quality or network monitoring problems develop,
including those due to faulty components, a number of negative effects on our
business could result, including:
10
- costs associated with reworking the manufacturing processes;
- high service and warranty expenses;
- high inventory obsolescence expense;
- high levels of product returns;
- delays in collecting accounts receivable;
- reduced orders from existing customers; and
- declining interest from potential customers.
Although we maintain accruals for product warranties, actual costs
could exceed these amounts. From time to time, there will be interruptions or
delays in the activation of products at a customer's site. These interruptions
or delays may result from product performance problems or from aspects of the
installation and activation activities, some of which are outside our control.
If we experience significant interruptions or delays that cannot be promptly
resolved, confidence in our products could be undermined, which could have a
material adverse effect on operations.
Failure to Protect Our Intellectual Property Will Adversely Affect Our
Ability to Compete in the Industry and Our Profitability.
We rely on a combination of patents, copyright, trademark and trade
secret laws, and restrictions on disclosure to protect our intellectual
property. We also enter into confidentiality or license agreements with our
employees, consultants and corporate partners and control access to and
distribution of our software, documentation and other proprietary information.
These intellectual property protection measures may not be sufficient to prevent
wrongful misappropriation of our technology. In addition, these measures will
not prevent competitors from independently developing technologies that are
substantially equivalent or superior to our technology. The laws of many foreign
countries do not protect intellectual property rights to the same extent as the
laws of the United States. Failure to protect proprietary information could
result in, among other things, loss of competitive advantage, loss of customer
orders and decreased revenues. Monitoring the unauthorized use of our products
is difficult and we cannot be certain that the steps we have taken will prevent
unauthorized use of our technology, particularly in foreign countries where the
laws may not protect our proprietary rights as fully as in the United States. If
competitors are able to use our technology, our ability to compete effectively
could be impaired. This litigation could result in substantial costs and
diversion of resources and may not ultimately be successful.
We May Be Subject to Intellectual Property Infringement Claims That Are
Costly to Defend and Could Limit Our Ability to Use Some Technologies in the
Future.
Like other participants in our industry, we expect that we will
continue to be subject to infringement claims and other intellectual property
disputes as competition in the marketplace continues to intensify. In the
future, we may be subject to litigation and may be required to defend against
claimed infringements of the rights of others or to determine the scope and
validity of the proprietary rights of others. Any such litigation could be
costly and divert management's attention from operations. In addition, adverse
determinations in such litigation could:
- result in the loss of our proprietary rights to use the
technology;
- subject us to significant liabilities;
- require us to seek licenses from third parties;
- require us to redesign the products that use the technology; or
11
- prevent manufacturing or sale of our products that employ the
technology.
If we are forced to take any of the foregoing actions, our business may be
seriously harmed.
We May Be Unable to License Third-Party Technology at a Reasonable
Cost.
From time to time we may be required to license technology from third
parties to develop new products or product enhancements. We cannot ensure that
third-party licenses will be available to us on commercially reasonable terms.
The inability to obtain any third-party license required to develop new products
and product enhancements could require us to obtain substitute technology of
lower quality or performance standards, or to license such technology at a
greater cost. Both licensing inferior technology at a reasonable cost and
licensing necessary technology at a higher cost could seriously harm the
competitiveness of our products.
Our Products Are Subject to Government Regulation.
The export of our products and related technology may be subject at
times to regulation and restriction by the Department of Commerce. Because our
products are utilized in defense and intelligence gathering related
applications, in some cases the export of our products and related technology
may be subject to further regulation and restriction by the Department of State.
Sales to foreign countries have not been material to date, but the export
controls could limit our ability to sell our products outside the United States
or could delay such sales in the future. We also may be required to spend
substantial time and resources in order to comply with the regulations and
restrictions. We could be subject to fines if we fail to properly comply with
these regulations.
In addition, our business and operating results may also be adversely
affected by the imposition of certain tariffs, duties and other import
restrictions on components that we obtain from non-domestic suppliers or by the
imposition of export restrictions on products that we sell internationally. We
do not believe we have material exposure to environmental laws. Changes in
current or future laws or regulations, in the United States or elsewhere, could
materially and adversely affect our business and results of operations.
RISK FACTORS RELATED TO THE SECURITIES MARKET
Our Common Stock Is Subject to Price Volatility.
The price of our common stock is volatile. Fluctuations in operating
results, such as revenues or operating results being below the expectations of
public market analysts and investors, may cause additional volatility in the
price of the common stock. In such event, the market price of our common stock
could decline significantly. A significant decline in the market price of the
common stock could result in litigation that could also result in increased
costs and a diversion of management's attention and resources from operations.
There May Not Be a Liquid Market for our Common Stock.
Our common stock currently is traded on the OTC Bulletin Board operated
by Nasdaq. This market generally has less liquidity than the Nasdaq SmallCap
Market and certain institutional investors are precluded from buying stock in
this market. There can be no assurance that our investors will be able to sell
the Common Stock at prices and times that are desirable.
12
Additional Capital May Dilute Current Stockholders.
In order to provide capital for the operation of our business we may
enter into additional financing arrangements. These arrangements may involve the
issuance of new common stock, preferred stock that is convertible into common
stock, debt securities that are convertible into common stock or warrants for
the purchase of common stock. Any of these items could result in a material
increase in the number of shares of common stock outstanding which would in turn
result in a dilution of the ownership interest of existing common shareholders.
In addition these new securities could contain provisions, such as priorities on
distributions and voting rights, which could affect the value of our existing
common stock.
We May Propose a Reverse-Split of Our Common Stock.
In order to reduce the number of shares outstanding, increase the
trading price of our common stock and possibly attract additional groups of
investors we may at some time in the future propose a reverse-split of our
common stock. Such a proposal would require the approval of the majority of the
outstanding shares of voting stock to be implemented. There can be no assurance
that a reverse split would have the intended effect and therefore it could
dilute the value of our common stock.
13
USE OF PROCEEDS
We will not receive any proceeds from any sale of shares of common
stock by the selling stockholders (other than the exercise price payable upon
the exercise of any warrants issued to the selling stockholders and the
repayment of debt upon the exercise of conversion rights held by the selling
stockholders). Assuming all of the warrants held by the selling stockholders for
an aggregate of 17,886,668 shares of common stock were exercised through a cash
exercise, we would receive an aggregate of $2,563,900 of proceeds. The shares of
common stock underlying the warrants are being registered for resale in this
registration statement. We anticipate that we will use any proceeds from the
exercise of the warrants for general corporate purposes in the execution of our
business strategy. If all of the conversion rights were exercised, we would
issue 8,333,334 shares of common stock and receive proceeds aggregating
$1,000,000. These proceeds must be used to repay any amounts outstanding under
our revolving credit facility.
14
SELLING STOCKHOLDERS
General. This prospectus covers offers and sales from time to time of
our common stock by the following selling stockholders:
- St. James Capital Partners, L.P., a Delaware limited partnership
("St. James Capital");
- SJMB, L.P., a Delaware limited partnership (collectively with St.
James Capital, "St. James");
- The Coastal Corporation Second Pension Trust, a trust organized
under the laws of the State of Texas ("Coastal");
- Morton A. Cohn, an individual resident in Houston, Texas;
- Fayez Sarofim, an individual resident in Houston, Texas;
- O. S. Wyatt, Jr., an individual resident in Houston, Texas;
- Steven A. Webster, an individual resident in Houston, Texas;
- Richard E. Bean, an individual resident in Houston, Texas;
- Don A. Sanders, an individual resident in Texas;
- Katherine U. Sanders, an individual resident in Texas;
- Don and Julie Ellen Weir, individuals residing in Texas;
- Lisa Dawn Weir, an individual resident in Texas;
- Paul and Laura Tate, individuals residing in Texas;
- Eric Weir, an individual resident in Texas;
- SSJ Enterprises, LLC, a New York limited liability company;
- Robert E. Garrison II, an individual resident in Texas;
- Thomas M. Porter, an individual resident in Kansas;
- John Coor, an individual resident in Virginia;
- James Hawkins, an individual resident in Texas;
- Peter Badger, an individual resident in Texas;
- John Styles, an individual resident in Texas; and
- Donald Campbell, an individual resident in Texas.
These selling stockholders may offer and resell up to an aggregate of 57,553,336
shares of our common stock from time to time under this prospectus.
On April 11, 2002, we issued 1,000,000 shares of common stock to St.
James in exchange for the return and cancellation of warrants for the purchase
of 19,500,0000 shares of Common Stock. Both the exchange agreement and the
registration rights agreement are filed as an exhibit to the registration
statement this prospectus is a part of. St. James may also offer and sell shares
of common stock issued as a result of, among other events, stock splits, stock
dividends and similar events pursuant to Rule 416 of the Securities Act.
On April 11, 2002, we issued 1,000,000 shares of common stock to
Coastal in exchange for the return and cancellation of warrants for the purchase
of 6,517,308 shares of Common Stock that Coastal held. Coastal may also offer
and sell shares of common stock issued as a result of, among other events, stock
splits, stock dividends and similar events pursuant to Rule 416 of the
Securities Act.
On September 29, 2002, we sold 833,334 shares of common stock to
Richard E. Bean for $100,000 in cash. The net proceeds from the sale to Mr.
Bean were used for working capital.
15
On October 3, 2002, we issued 16,666,668 shares of common stock to
Morton A. Cohn and Fayez Sarofim for an aggregate of $2,000,000 in cash.
Pursuant to the stock purchase agreements, we issued warrants to these investors
for the purchase of an aggregate of 400,000 shares of common stock at $0.12 per
share. These warrants can be exercised at any time before September 30, 2005. We
also amended warrants for the purchase of 780,000 shares of common stock that
Mr. Cohn and Mr. Sarofim already owned to allow for an exercise price of $0.12
per share. Of these, warrants for the purchase of 300,000 shares of common stock
can be exercised at any time before December 31, 2003 and warrants for the
purchase of 480,000 shares of common stock can be exercised at any time before
May 31, 2004. These investors had previously provided letters of credit that
secured a portion of our debt. Pursuant to the terms of the agreements, the
investors agreed to vote their shares in favor of a reverse split of common
stock with a range from 1:6 to 1:12 that the Company proposes to its
stockholders on or before October 3, 2003.
The proceeds from the sales of common stock to Mr. Cohn and to Mr.
Sarofim were used to reduce by $2,000,000 the amount outstanding under our
$4,500,000 Business Loan Agreement with Bank One, N.A. ("Bank One"), dated June
1, 2002, as amended. We had previously reported that an additional $2,000,000 of
common equity sales would be required to complete these transactions, but the
investors waived this condition. We amended our credit agreement with Bank One,
N.A. to decrease the total credit limit from $4,500,000 to $2,700,000, and to
extend the maturity date to March 31, 2004. The amended credit facility is
secured by an irrevocable letter of credit provided by O. S. Wyatt, Jr. Pursuant
to the terms of the credit agreement currently in effect, the amount available
for borrowing under the facility will be reduced according to the following
schedule: $90,000 on April 27, 2003; $810,000 on June 27, 2003; $450,000 on
September 27, 2003; and $450,000 on December 27, 2003. We are currently engaged
in discussions with Mr. Wyatt and Bank One regarding further amendments to this
agreement.
On October 6, 2002, we sold 1,250,000 shares of common stock to Steven
A. Webster for $150,000. The net proceeds from the sale to Mr. Webster were used
for working capital.
On October 23, 2002, we issued 2,500,000 shares to Don A. Sanders in
exchange for $300,000, 666,666 shares of common stock to Katherine U. Sanders in
exchange for $80,000 cash, 400,000 shares to Don and Julie Weir in exchange for
$48,000 cash, 250,000 shares to Lisa Dawn Weir in exchange for $30,000, 250,000
shares to Paul and Laura M. Tate in exchange for $30,000 cash and 100,000 shares
to Eric Glenn Weir in exchange for $12,000 cash.
On December 27, 2002, we issued 1,250,000 shares of common stock to
Thomas M. Porter for $150,000 cash. The net proceeds from the sale to Mr. Porter
were used for working capital.
In April 2003, we amended our $1,500,000 Loan Agreement with Bank One
dated October 12, 2001 to extend its maturity date to June 30, 2003. Our
obligations under this facility are secured by the unconditional guarantee of
Oscar S. Wyatt. Mr. Wyatt has agreed to continue to provide this guarantee. We
are engaged in discussions with Mr. Wyatt and Bank One regarding further
modifications to this agreement.
On January 11, 2003, we executed a note payable to Mr. Wyatt in the
amount of approximately $647,000 in satisfaction of four notes payable to Mr.
Wyatt, including accrued interest. The new note payable is due September 15,
2003. Concurrent with the completion of these transactions, we entered into a
reimbursement agreement with Mr. Wyatt. Under the reimbursement agreement, which
supercedes reimbursement agreements dated June 1, 2001 and October 19, 2001, we
have agreed to indemnify and reimburse Mr. Wyatt for any amounts he may incur
pursuant to the letter of credit and unconditional guarantee that he has
provided as collateral for our loan agreements with Bank One. As consideration
for this
16
on-going credit support and the new note payable, we have issued to Mr. Wyatt
warrants for the purchase of 960,000 shares of common stock at a price of $0.12
per share. These warrants may be exercised at any time before October 31, 2004.
In addition the Company amended warrants previously held by Mr. Wyatt to provide
for an exercise price of $0.12. These amended warrants allow Mr. Wyatt to
purchase a total of 1,830,000 shares of common stock. Pursuant to the amended
warrants, Mr. Wyatt may purchase 960,000 shares at any time before October 31,
2004, 150,000 shares at any time before December 31, 2003, and 720,000 shares at
any time before May 31, 2004.
On January 24, 2003, we issued 833,333 shares of common stock to John
Coor for $100,000 cash. The net proceeds from the sale to Mr. Coor were used for
working capital.
On March 17, 2003, we completed the sale of 4,333,333 shares of common
stock and warrants for the purchase of an additional 4,333,333 shares of common
stock to SSJ Enterprises, LLC for $520,000. The warrants have an exercise price
of $0.15 per share and may be exercised at any time through March 31, 2007. The
net proceeds from this transaction were $520,000 and were used for working
capital.
On March 26, 2003, we entered into a $1,000,000 revolving credit
agreement with FirstCapital Bank, SSB. The facility matures, and any amounts
outstanding under the agreement are due, on March 31, 2004. The maturity may be
extended by six months at our option, provided certain conditions are
maintained. This facility is secured by the limited guarantees of the following
individuals: Richard M. Bean; Robert E. Garrison II; Steven A. Webster; James
Hawkins; Peter Badger; John Styles; and Donald Campbell. We have entered into a
Reimbursement Agreement with these individuals in connection with these
guarantees. Under the Reimbursement Agreement, and in consideration for
providing the guarantees, we have issued to these individuals warrants for the
purchase of an aggregate of 9,582,334 shares of common stock and have granted
conversion rights to them whereby they can purchase an additional 8,333,334
shares of common stock. The warrants have an exercise price of $0.15 per share
and may be exercised at any time through March 31, 2007. The conversion rights
allow individuals to purchase a total of 8,333,334 shares of common stock for
$1,000,000. Proceeds from the exercise of the conversion rights must be used to
repay any amounts outstanding under the revolving credit agreement, with a
corresponding reduction in the amount available for borrowing under the
facility. Upon the exercise of the conversion rights, the guarantees are to be
released in amounts corresponding to the amount of proceeds from the exercise.
We entered into registration rights agreements with each of these
investors, and have agreed to file a registration statement registering the
31,333,334 shares of common stock purchased by the investors, the 17,886,668
shares of common stock to be issued upon the exercise of the warrants and the
8,333,334 shares of common stock issuable upon the exercise of the conversion
rights.
Selling stockholders table. The following table lists the name of each
selling stockholder, the number of shares of common stock owned by each selling
stockholder before this offering, the number of shares of common stock that may
be offered by each selling stockholder pursuant to this prospectus and the
number of shares of common stock to be owned by each selling stockholder upon
completion of the offering if all shares registered for resale by this
registration statement are sold. None of the selling stockholders have held any
position or office or had any other material relationship with us in the last
three years, other than as described herein. The information below is as of
March 31, 2003 and has been furnished by the respective selling stockholders.
17
--------------------------------------------------------------------------------------------------------------------
NAME OF NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES
SELLING STOCKHOLDER OWNED BEFORE THIS BEING REGISTERED OWNED AFTER THIS
OFFERING FOR RESALE OFFERING (1)
--------------------------------------------------------------------------------------------------------------------
St. James Capital Partners, L.P................... 178,390 178,390 --
--------------------------------------------------------------------------------------------------------------------
SJMB, L.P. ....................................... 741,610 741,610 --
--------------------------------------------------------------------------------------------------------------------
Falcon Seaboard Investment Company, L.P. ......... 80,000 80,000 --
--------------------------------------------------------------------------------------------------------------------
Coastal........................................... 9,896,251 1,000,000 8,896,251
--------------------------------------------------------------------------------------------------------------------
Morton A. Cohn.................................... 9,123,334(2) 8,923,334(3) 200,000
--------------------------------------------------------------------------------------------------------------------
Fayez Sarofim..................................... 8,923,334(4) 8,923,334(4) --
--------------------------------------------------------------------------------------------------------------------
Steven A. Webster................................. 4,166,667(5) 4,166,667(5) --
--------------------------------------------------------------------------------------------------------------------
Richard E. Bean................................... 4,938,493(6) 4,583,335(7) 355,158
--------------------------------------------------------------------------------------------------------------------
Don A. Sanders.................................... 2,670,000(8) 2,500,000 170,000(9)
--------------------------------------------------------------------------------------------------------------------
Katherine U. Sanders.............................. 726,666(10) 666,666 60,000(11)
--------------------------------------------------------------------------------------------------------------------
Don and Julie Ellen Weir.......................... 430,000(12) 400,000 30,000(13)
--------------------------------------------------------------------------------------------------------------------
Lisa Dawn Weir.................................... 250,000 250,000 --
--------------------------------------------------------------------------------------------------------------------
Paul and Laura Tate............................... 250,000 250,000 --
--------------------------------------------------------------------------------------------------------------------
Eric Weir......................................... 100,000 100,000 --
--------------------------------------------------------------------------------------------------------------------
SSJ Enterprises, LLC.............................. 9,766,666(14) 8,666,666(15) 1,100,000
--------------------------------------------------------------------------------------------------------------------
Robert E. Garrison II............................. 3,987,537(16) 2,916,667(17) 1,070,870
--------------------------------------------------------------------------------------------------------------------
Thomas M. Porter.................................. 2,010,400 1,250,000 760,040
--------------------------------------------------------------------------------------------------------------------
John Coor......................................... 1,533,569 833,333 700,236
--------------------------------------------------------------------------------------------------------------------
James Hawkins..................................... 4,166,666(18) 4,166,666(18) --
--------------------------------------------------------------------------------------------------------------------
Peter Badger...................................... 2,500,000(19) 2,500,000(19) --
--------------------------------------------------------------------------------------------------------------------
John Styles....................................... 833,334(20) 833,334(20) --
--------------------------------------------------------------------------------------------------------------------
Donald Campbell................................... 973,334(21) 833,334(20 140,000
--------------------------------------------------------------------------------------------------------------------
O.S. Wyatt, Jr. .................................. 3,177,601(22) 2,790,000(23) 387,601
--------------------------------------------------------------------------------------------------------------------
TOTAL.................................... 57,553,336
--------------------------------------------------------------------------------------------------------------------
----------------
(1) Assumes all shares registered under this registration statement will be
offered and sold.
(2) Represents (a) 8,533,334 shares currently held by the holder, and (b)
590,000 shares currently issuable to the holder upon exercise of warrants
to purchase shares of our common stock.
(3) Represents (a) 8,333,334 shares currently held by the holder, and (b)
590,000 shares currently issuable to the holder upon exercise of warrants
to purchase shares of our common stock.
(4) Represents (a) 8,333,334 shares currently held by the holder, and (b)
590,000 shares currently issuable to the holder upon exercise of warrants
to purchase shares of our common stock.
(5) Represents (a) 1,250,000 shares currently held by the holder, (b) 1,250,000
shares currently issuable to the holder upon the exercise of conversion
rights, and (c) 1,666,667 shares currently issuable to the holder upon the
exercise of warrants to purchase shares of our common stock.
(6) Represents (a) 1,188,492 shares currently held by the holder, (b) 1,666,667
shares currently issuable to the holder upon the exercise of conversion
rights, and (c) 2,083,334 shares currently issuable to the holder upon the
exercise of warrants to purchase shares of our common stock.
(7) Represents (a) 833,334 shares currently held by the holder, (b) 1,666,667
shares currently issuable to the holder upon the exercise of conversion
rights, and (c) 2,083,334 shares currently issuable to the holder upon the
exercise of warrants to purchase shares of our common stock.
(8) Represents (a) 2,500,000 shares currently held by the holder, and (b)
170,000 shares currently issuable to the holder upon exercise of warrants
to purchase shares of our common stock.
(9) Represents 170,000 shares currently issuable to the holder upon exercise of
warrants to purchase shares of our common stock.
(10) Represents (a) 666,666 shares currently held by the holder, and (b) 60,000
shares currently issuable to the holder upon exercise of warrants to
purchase shares of our common stock.
(11) Represents 60,000 shares currently issuable to the holder upon exercise of
warrants to purchase shares of our common stock.
18
(12) Represents (a) 400,000 shares currently held by the holder, and (b) 30,000
shares currently issuable to the holder upon exercise of warrants to
purchase shares of our common stock.
(13) Represents 30,000 shares currently issuable to the holder upon exercise of
warrants to purchase shares of our common stock.
(14) Represents (a) 5,433,333 shares currently held by the holder, and (b)
4,333,333 shares currently issuable to the holder upon the exercise of
warrants to purchase shares of our common stock.
(15) Represents (a) 4,333,333 shares currently held by the holder, and (b)
4,333,333 shares currently issuable to the holder upon the exercise of
warrants to purchase shares of our common stock.
(16) Represents (a) 70,870 shares currently held by the holder, (b) 1,250,000
shares currently issuable to the holder upon the exercise of conversion
rights, (c) 1,666,667 shares currently issuable to the holder upon the
exercise of warrants to purchase shares of our common stock, and (d)
1,000,000 shares currently issuable to the holder upon the exercise of
stock options.
(17) Represents (a) 1,250,000 shares currently issuable to the holder upon the
exercise of conversion rights, and (b) 1,666,667 shares currently issuable
to the holder upon the exercise of warrants to purchase shares of our
common stock.
(18) Represents (a) 2,083,333 shares currently issuable to the holder upon the
exercise of conversion rights, and (b) 2,083,333 shares currently issuable
to the holder upon the exercise of warrants to purchase shares of our
common stock.
(19) Represents (a) 1,250,000 shares currently issuable to the holder upon the
exercise of conversion rights, and (b) 1,250,000 shares currently issuable
to the holder upon the exercise of warrants to purchase shares of our
common stock.
(20) Represents (a) 416,667 shares currently issuable to the holder upon the
exercise of conversion rights, and (b) 416,667 shares currently issuable to
the holder upon the exercise of warrants to purchase shares of our common
stock.
(21) Represents (a) 140,000 shares currently held by the holder, (b)416,667
shares currently issuable to the holder upon the exercise of conversion
rights, and (c) 416,667 shares currently issuable to the holder upon the
exercise of warrants to purchase shares of our common stock.
(22) Represents (a) 387,601 shares currently held by the holder, and (b)
2,790,000 shares currently issuable to the holder upon exercise of warrants
to purchase shares of our common stock.
(23) Represents 2,790,000 shares currently issuable to the holder upon exercise
of warrants to purchase shares of our common stock.
19
PLAN OF DISTRIBUTION
The selling stockholders, their pledgees, donees, transferees or other
successors-in-interest, may, from time to time, sell all or a portion of the
shares of common stock being registered hereunder in privately negotiated
transactions or otherwise, at fixed prices that may be changed, at market prices
prevailing at the time of sale, at prices related to such market prices or at
negotiated prices. The selling stockholders may sell their shares of common
stock by one or more of the following methods, without limitation:
- block trades in which the broker or dealer so engaged will attempt
to sell the shares of common stock as agent but may position and
resell a portion of the block as principal to facilitate the
transaction;
- purchases by a broker or dealer as principal and resale by such
broker or dealer for its account pursuant to this prospectus;
- an exchange distribution in accordance with the rules of the
applicable exchange;
- ordinary brokerage transactions and transactions in which the
broker solicits purchasers;
- privately negotiated transactions;
- short sales;
- a combination of any such methods of sale; and
- any other method permitted pursuant to applicable law.
From time to time the selling stockholders may engage in short sales,
short sales against the box, puts and calls and other transactions in our
securities or derivatives thereof, and may sell and deliver the shares of common
stock in connection therewith or in settlement of securities loans. If the
selling stockholders engage in such transactions, the applicable conversion
price may be affected. From time to time the selling stockholders may pledge
their shares of common stock pursuant to the margin provisions of their customer
agreements with their respective brokers. Upon a default by the selling
stockholders, the broker may offer and sell the pledged shares of common stock
from time to time.
In effecting sales, brokers and dealers engaged by the selling
stockholders may arrange for other brokers or dealers to participate in such
sales. Brokers or dealers may receive commissions or discounts from the selling
stockholders (or, if any such broker-dealer acts as agent for the purchaser of
such shares, from such purchaser) in amounts to be negotiated which are not
expected to exceed those customary in the types of transactions involved.
Broker-dealers may agree with the selling stockholders to sell a specified
number of such shares of common stock at a stipulated price per share, and, to
the extent such broker-dealer is unable to do so acting as agent for a selling
stockholder, to purchase as principal any unsold shares of common stock at the
price required to fulfill the broker-dealer commitment to the selling
shareholder. Broker-dealers who acquire shares of common stock as principal may
thereafter resell such shares of common stock from time to time in transactions
(which may involve block transactions and sales to and through other
broker-dealers, including transactions of the nature described above) in the
over-the-counter market or otherwise at prices and on terms then prevailing at
the time of sale, at prices then related to the then-current market price or in
negotiated transactions and, in connection with such resales, may pay to or
receive from the purchasers of
20
such shares commissions as described above. The selling stockholders may also
sell the shares of common stock in accordance with Rule 144 under the Securities
Act, rather than pursuant to this prospectus.
The selling stockholders and any broker-dealers or agents that
participate with the selling stockholders in sales of the shares of common stock
may be deemed to be "underwriters" within the meaning of the Securities Act in
connection with such sales. In such event, any commissions received by such
broker-dealers or agents and any profit on the resale of the shares of common
stock purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act.
We are required to pay all fees and expenses incident to the
registration of the shares of common stock other than fees and expenses of the
selling shareholder. We have agreed to indemnify the selling stockholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
In order to comply with certain states' securities laws, if applicable,
the shares of common stock will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
common stock may not be sold unless the common stock has been registered or
qualified for sale in such state or an exemption from registration or
qualification is available and is satisfied.
21
DESCRIPTION OF CAPITAL STOCK
Our Certificate of Incorporation permits the issuance of up to
200,000,000 shares of common stock and 50,000,000 shares of preferred stock. As
of March 31, 2003, there were 118,422,183 shares of our common stock and no
shares of our preferred stock outstanding. The following description of our
capital stock is intended to be a summary, and you should read it in conjunction
with our amended and restated articles of incorporation filed with the SEC.
COMMON STOCK
Under our Certificate of Incorporation, we may issue 200,000,000 shares
of common stock, par value $0.01 per share. All shares of our common stock have
one vote per share. Stockholders of our common stock may receive dividends, when
and as declared by the board of directors, if funds are legally available for
the payment of dividends. Shares of our common stock have no preemptive,
conversion, sinking fund, redemption or similar provisions. In the event of our
liquidation, stockholders of our common stock participate on a pro rata basis in
the distribution of any of our assets that are remaining after the payment of
liabilities and any liquidation preference on outstanding shares of convertible
preferred stock. All outstanding shares of our common stock are fully paid and
nonassessable.
Our Common Stock is traded on the OTC Bulletin Board operated by Nasdaq
under the symbol "TERA." Prior to June 19, 2001, our common stock was quoted on
the Nasdaq SmallCap Market under the symbol "ICOM." On June 19, 2001, Nasdaq
delisted our common stock for failing to maintain a minimum bid price of $1.00.
On January 30, 2001, we changed our trading symbol to "TERA" from "ICOM" to
reflect our name change to TeraForce Technology Corporation from Intelect
Communications, Inc.
The high and low bid prices for our common stock for each full quarter
of the last two fiscal years, as reported on the OTC Bulletin Board and Nasdaq,
are as follows (these prices are inter-dealer prices, without mark-up,
mark-downs or commission included and may not necessarily represent actual
transactions):
Quarter period ended High Low
-------------------- ---- ---
2003
March 31........................................ 0.230 0.130
2002
March 31........................................ 0.180 0.100
June 20......................................... 0.330 0.110
September 30.................................... 0.230 0.100
December 31..................................... 0.240 0.105
2001
March 31........................................ 1.438 0.344
June 30......................................... 0.960 0.330
September 30.................................... 0.420 0.150
December 31..................................... 0.200 0.080
22
As of March 31, 2003, there were approximately [43,000] owners of
record (including nominee holders such as banks and brokerage firms who hold
shares for the benefit of beneficial owners) of our common stock.
PREFERRED STOCK
Our certificate of incorporation authorizes the issuance of up to
50,000,000 shares of preferred stock with a par value of $0.01 per share. No
shares of our preferred stock were outstanding as of the date of this
prospectus. We may issue the preferred stock in series, and the shares of each
series shall have rights and preferences as designated by the resolution of the
board of directors. In the designation of any series of preferred stock, the
board of directors has authority, without further action by the holders of our
common stock, to fix the number of shares constituting that series and to fix
the dividends rights, dividend rate, conversion rights, terms of redemption and
the liquidation preferences of that series of preferred stock. The issuance of
preferred stock could adversely affect the voting power of holders of our common
stock and the likelihood that holders of our common stock will receive dividend
payments and payments upon liquidation and could have the effect of delaying,
deferring or preventing a change in control.
WARRANTS
As of March 31, 2003, there were outstanding warrants to purchase an
aggregate of 17,409,103 shares of common stock at prices ranging from $0.12 to
$10.29. The warrants expire at various times on or before March 31, 2007.
CONVERSION RIGHTS
As of March 31, 2003, there were outstanding conversion rights to
purchase an aggregate of 8,333,333 shares of common stock for $0.12 per share.
The conversion rights expire at various times on or before September 26, 2004.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American Stock
Transfer and Trust Company.
LEGAL MATTERS
The validity of the shares of common stock offered hereby have been
passed upon for us by our counsel, Haynes and Boone, LLP.
EXPERTS
Our consolidated financial statements incorporated in this Prospectus
by reference to our Annual Report on Form 10-K for each of the three years in
the period ended December 31, 2002, have been incorporated in reliance on the
report of Grant Thornton LLP, independent certified public accountants, given on
the authority of Grant Thornton LLP as experts in accounting and auditing.
23
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-2 under
the Securities Act with respect to the securities offered by this prospectus.
This prospectus constitutes a part of that registration statement and does not
contain all of the information in the registration statement. This prospectus
contains a description of the material terms and features of some material
contracts, indentures, agreements, reports or exhibits required to be disclosed.
However, as the descriptions are summaries of the contracts, indentures,
agreements, reports or exhibits, we urge you to refer to the copy of each
material contract, report and exhibit filed with the registration statement.
Copies of the registration statement, including the exhibits, as well as the
periodic reports, proxy statements and other information we file with the SEC,
may be examined without charge and copies of the materials may be obtained at
prescribed rates from the public reference facilities maintained by the SEC at
its principal offices located at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. You can get information about the operation of the
public reference facilities by calling the SEC at 1-800-SEC-0330. In addition,
the SEC maintains a website that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the SEC at the address http://www.sec.gov.
The SEC allows us to "incorporate" into this prospectus information
that we file with the SEC in other documents. This means we can disclose
important information to you by referring to other documents that contain that
information. The information incorporated by reference is considered to be part
of this prospectus. We incorporate by reference the documents listed below:
- our Annual Report on Form 10-K for the fiscal year ended December
31, 2002, filed with the SEC on April 15, 2003;
- our Current Report on Form 8-K filed with the SEC on October 21,
2002;
- our amendment to our Current Report on Form 8-K/A filed with the
SEC on November 13, 2002;
- our amendment to our Current Report on Form 8-K/A filed with the
SEC on January 15, 2003;
- our amendment to our Current Report on Form 8-K/A filed with the
SEC on March 25, 2003; and
- our Current Report on Form 8-K filed with the SEC on March 28,
2003.
We will provide without charge to each person to whom this prospectus
is delivered, including any beneficial owner, upon the written or oral request
of each person, a copy of any and all of the documents incorporated by reference
(other than exhibits to the documents unless the exhibits are specifically
incorporated by reference in the documents). Any request should be directed to:
Attn: Robert P. Capps
Executive Vice President - Chief Financial Officer
1240 E. Campbell Road
Richardson, Texas 75081
Telephone (469) 330-4960
24
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Pursuant to the registration rights agreements among the company and
the selling stockholders, we have agreed to indemnify each selling stockholder
and their respective officers, directors, agents, brokers, investment advisors,
employees and any person who controls the selling stockholder against any
losses, claims, damages, liabilities, costs and expenses arising out of or
relating to (1) any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or any prospectus, including any
amendments or supplements thereto, or (2) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein (in the case of any prospectus or form of prospectus
or supplement thereto, in light of the circumstances under which they were made)
not misleading, except to the extent that these liabilities arise out of or are
based upon and in conformity with any information furnished in writing to us by
each selling stockholder expressly for use in the Registration Statement or an
amendment or supplement thereto. In addition, each selling stockholder, acting
severally and not jointly, under the registration rights agreement has agreed to
indemnify us and our officers, directors, employees, agents and any person who
controls us against any losses, claims, damages, liabilities, costs or expenses
arising out of or based upon and in conformity with written information
furnished by the selling stockholder expressly for use in the Registration
Statement or an amendment or supplement thereto. However, the foregoing
indemnity shall not apply to amounts paid in settlement of any such liability if
the settlement is effected without the consent of such selling stockholder.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
issuer pursuant to the foregoing provisions, or otherwise, the issuer has been
informed that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
25
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all expenses (subject to future
contingencies) incurred or to be incurred by the registrant in connection with
the issuance and distribution of the securities being offered. All items below
are estimates other than the Securities and Exchange Commission fees. All
expenses will be borne by us.
Securities and Exchange Commission Registration Fee .............. $ 835
Listing Fee ...................................................... 0
Printing Expenses ................................................ 0
Accounting Fees and Expenses ..................................... 10,000
Legal Fees and Expenses .......................................... 18,000
Blue Sky Fees and Expenses ....................................... 0
-------
Miscellaneous Expenses ........................................... 1,165
-------
Total ......................................................... $30,000
=======
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Amended and Restated Certificate of Incorporation, as amended (the
"Certificate of Incorporation"), provides that no director of the Company will
be personally liable to the Company or any of its stockholders for monetary
damages arising from the director's breach of fiduciary duty as a director.
However, this does not apply with respect to any action in which the director
would be liable under Section 174 of the General Corporation Law of the State of
Delaware ("Delaware Code") nor does it apply with respect to any liability in
which the director (i) breached his duty of loyalty to the Company or its
stockholders; (ii) did not act in good faith or, in failing to act, did not act
in good faith; (iii) acted in a manner involving intentional misconduct or a
knowing violation of law or, in failing to act, shall have acted in a manner
involving intentional misconduct or a knowing violation of law; or (iv) derived
an improper personal benefit.
The Certificate of Incorporation of the Company provides that the
Company shall indemnify its directors and officers and former directors and
officers to the fullest extent permitted by the Delaware Code. Pursuant to the
provisions of Section 145 of the Delaware Code, the Company has 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 (other than
an action by or in the right of the Company) by reason of the fact that he is or
was a director, officer, employee, or agent of the Company, against any and all
expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred in connection with such action, suit, or proceeding. The
power to indemnify applies only if such person acted in good faith and in a
manner he reasonably believed to be in the best interest, or not opposed to the
best interest, of the Company and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
The power to indemnify applies to actions brought by or in the right of
the Company as well, but only to the extent of defense and settlement expenses
and not to any satisfaction of a judgment or settlement
II-1
of the claim itself and with the further limitation that in such actions no
indemnification shall be made in the event of any adjudication of negligence or
misconduct unless the court, in its discretion, believes that in light of all
the circumstances indemnification should apply.
The statute further specifically provides that the indemnification
authorized thereby shall not be deemed exclusive of any other rights to which
any such officer or director may be entitled under any bylaws, agreements, vote
of stockholders or disinterested directors, or otherwise.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
Article XI of the Company's Restated Bylaws provides that the Company
shall indemnify each of its directors and officers, its former directors and
officers and agents of the Company against expenses actually and reasonably
incurred by him or her in connection with the defense of any action, suit or
proceeding, civil or criminal, in which such person is made a party by reason of
being or having been such director or officer, except in situations where he or
she shall be adjudged in such action, suit or proceeding to be liable for
negligence or misconduct in the performance of his or her duty to the Company.
In the event of a criminal conviction (whether based on a plea of guilty or nolo
contendere or its equivalent, or after trial), such conviction shall not be
deemed an adjudication of liability for negligence or misconduct in the
performance of duty to the Company if such director or officer acted in good
faith in what he or she considered to be the best interest of the Company and
without reasonable cause to believe that his or her actions were illegal. In
absence of an adjudication which expressly absolves the director or officer of
liability to the Company or its stockholders for negligence or misconduct, or in
the event of a settlement, the right to indemnification of a director or officer
shall be conditioned upon prior resolution adopted by two-thirds of the
disinterested members of the Board or by independent counsel.
Article XI of the Company's Restated Bylaws also provides that the
Company may purchase and maintain insurance on behalf of any person who 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 any liability asserted against him or her and incurred by
him or her in any such capacity, or arising out of his or her status as such,
whether or not the Corporation would have the power to indemnify him or her
against such liability under the provisions of the DGCL. The Company maintains
insurance on behalf of its directors and officers to protect them against such
claims.
II-2
ITEM 16. EXHIBITS
The exhibits listed below are filed as part of or incorporated by
reference in this registration statement. Where such filing is incorporated by
reference to a previously filed report, such report is identified. See the Index
of Exhibits with the exhibits files as part of this registration statement.
Exhibit Description of Exhibit
4.1 Warrant issued to Hambrecht & Quist LLC exercisable to purchase up to
33,036 shares of Common Stock at an exercise price of $10.292 per
share, expiring May 20, 2003 filed as an exhibit to the Company's Form
10-Q filed on August 14, 1998 and incorporated by reference herein.
4.2 Form of Registration Rights Agreement between the Company and the
Buyers, dated as of December 22, 1998 filed as an exhibit to the
Company's Form 8-K filed on March 2, 1999 and incorporated by reference
herein.
4.3 Form of Warrant to Purchase Common Stock of Intelect Communications,
Inc. at an exercise price of $2.998 filed as an exhibit to the
Company's Form 8-K filed on March 2, 1999 and incorporated by reference
herein.
4.4 Registration Rights Agreement between the Company and Coastal filed as
an exhibit to the Company's Form 8-K filed on August 18, 1999 and
incorporated by reference herein.
4.5 Registration Rights Agreement among the Company and the Buyers, dated
February 24, 1999, relating to the Series E Convertible Preferred Stock
and warrants filed as an exhibit to the Company's Form 8-K filed on
March 2, 1999 and incorporated by reference herein.
4.6 Form of Warrant to Purchase Common Stock of Intelect Communications,
Inc., relating to the Series E Preferred Stock filed as an exhibit to
the Company's Form 8-K filed on March 2, 1999 and incorporated by
reference herein.
4.7 Form of Amended and Restated Promissory Notes held by officer,
convertible into Common Stock of the Company at a rate of $1.00 per
share filed as an exhibit to the Company's Form 10-K filed on March 30,
2000 and incorporated by reference herein.
4.8 Securities Purchase Agreement dated September 30, 2002 between the
Company and Morton A. Cohn and Fayez Sarofim, filed as an exhibit to
the Company's Form 8-K filed October 21, 2002 and incorporated by
reference herein.
4.9 Registration Rights Agreement dated September 30, 2002 between the
Company and Morton A. Cohn and Fayez Sarofim, filed as an exhibit to
the Company's Form 8-K filed October 21, 2002 and incorporated by
reference herein.
4.10 Form of Amended and Restated Warrant expiring May 31, 2004 with an
exercise price of $0.12 per share, filed as an exhibit to the Company's
Form 8-K filed October 21, 2002 and incorporated by reference herein.
II-3
4.11 Form of Warrant expiring October 31, 2004 with an exercise price of
$0.12 per share, filed as an exhibit to the Company's Form 8-K filed
October 21, 2002 and incorporated by reference herein.
4.12 Form of Amended and Restated Warrant expiring December 31, 2003 with an
exercise price of $0.12 per share, filed as an exhibit to the Company's
Form 8-K filed October 21, 2002 and incorporated by reference herein.
4.13 Warrant expiring October 31, 2004 with an exercise price of $0.12 per
share, filed as an exhibit to the Company's Form 8-K/A filed January
15, 2003 and incorporated by reference herein.
4.14 Amended and Restated Warrant expiring October 31, 2004 with an exercise
price of $0.12 per share, filed as an exhibit to the Company's Form
8-K/A filed January 15, 2003 and incorporated by reference herein.
4.15 Amended and Restated Warrant expiring October 31, 2004 with an exercise
price of $0.12 per share, filed as an exhibit to the Company's Form
8-K/A filed January 15, 2003 and incorporated by reference herein.
4.16 Amended and Restated Warrant expiring December 31, 2003 with an
exercise price of $0.12 per share, filed as an exhibit to the Company's
Form 8-K/A filed January 15, 2003 and incorporated by reference herein.
4.17 Amended and Restated Warrant expiring May 31, 2004 with an exercise
price of $0.12 per share, filed as an exhibit to the Company's Form
8-K/A filed January 15, 2003 and incorporated by reference herein.
4.18 Form of Registration Rights Agreement between the Company and certain
private investors, filed as an exhibit to the Company's Form 8-K/A
filed January 15, 2003 and incorporated by reference herein.
4.19 Exchange Agreement dated April 11, 2002 between the Company and
Coastal, filed as an exhibit to the Company's Form 10Q filed May 10,
2002 and incorporated herein by reference.
4.20 Exchange Agreement dated April 11, 2002 between the Company and St.
James, filed as an exhibit to the Company's Form 10Q filed May 10, 2002
and incorporated herein by reference.
4.21 Form of Securities Purchase Agreement dated September 30, 2002 between
the Company and certain private investors, filed as an exhibit to the
Company's Form 8-K/A filed November 13, 2002 and incorporated by
reference herein.
4.22 Form of Registration Rights Agreement dated September 30, 2002 between
the Company and certain private investors, filed as an exhibit to the
Company's Form 8-K/A filed November 13, 2002 and incorporated by
reference herein.
4.23 Form of Warrant expiring March 31, 2007, filed as an exhibit to the
Company's Form 10-K filed April 15, 2003 and incorporated herein by
reference.
5.1* Opinion of Haynes and Boone, LLP regarding validity of shares issued.
II-4
10.1** Employment Agreement between the Company and Herman Frietsch and
Amendment thereto filed as an exhibit to the Company's Form 10-K filed
on March 30, 2000 and incorporated by reference herein.
10.2** Employment Agreement dated as of January 1, 2001 between the Company
and Eugene Helms filed as an exhibit to the Company's Form 10-K filed
April 15, 2002 and incorporated by reference herein.
10.3 Lease Agreement between Campbell Place One Joint Venture and DNA
Enterprises, dated February 1, 1997 filed as an exhibit to the
Company's Form 10-K filed April 15, 2003 and incorporated by reference
herein.
10.4 Agreement to Form Joint Venture dated August 17, 2001 between the
Company and Singapore Technologies Electronics Limited filed as an
exhibit to the Company's Form 8-K filed September 7, 2001 and
incorporated by reference herein.
10.5 Sharing Agreement dated August 30, 2001 among the Company, Intelect
Network Technologies Company and Intelect Technologies Inc. filed as an
exhibit to the Company's Form 8-K filed September 7, 2001 and
incorporated by reference herein.
10.6 Stockholders Agreement dated August 30, 2001 among the Company,
Intelect Technologies Inc. and Singapore Technologies Electronics
Limited filed as an exhibit to the Company's Form 8-K filed September
7, 2001 and incorporated by reference herein.
10.7 Transition Services Agreement dated August 30, 2001 between the Company
and Intelect Technologies Inc. filed as an exhibit to the Company's
Form 8-K filed September 7, 2001 and incorporated by reference herein.
10.8 Asset Purchase Agreement dated January 11, 2002 among the Company,
Flextronics Design S.D., Inc. and DNA Enterprises, Inc. filed as an
exhibit to the Company's Form 8-K filed January 15, 2002 and
incorporated by reference herein.
10.9 Design / Engineering Services Agreement dated January 11, 2002 between
the Company and Flextronics Design S.D. filed as an exhibit to the
Company's Form 8-K filed January 15, 2002 and incorporated by reference
herein.
10.10 Form of Promissory Note dated June 1, 2001 in favor of Bank One, N.A.
filed as an exhibit to the Company's Form 10-Q filed August 14, 2001
and incorporated by reference herein.
10.11 Business Loan Agreement dated June 1, 2001 between the Company and Bank
One, N.A. filed as an exhibit to the Company's Form 10-Q filed August
14, 2001 and incorporated by reference herein.
10.12 Reimbursement Agreement dated June 1, 2001 among the Company and Oscar
S. Wyatt, Jr., Fayez Sarofim and Morton Cohn filed as an exhibit to the
Company's Form 10-Q filed August 14, 2001 and incorporated by reference
herein.
10.13 Form of Promissory Note dated October 12, 2001 in favor of Bank One,
N.A. filed as an exhibit to the Company's Form 10-Q filed November 14,
2001 and incorporated by reference herein.
II-5
10.14 Loan Agreement dated October 12, 2001 between the Company and Bank One,
N.A. filed as an exhibit to the Company's Form 10-Q filed November 14,
2001 and incorporated by reference herein.
10.15 Reimbursement Agreement dated October 12, 2001 between the Company and
Oscar S. Wyatt, Jr. filed as an exhibit to the Company's Form 10-Q
filed November 14, 2001 and incorporated by reference herein.
10.16 Promissory Note dated October 5, 2001 filed as an exhibit to the
Company's Form 10-Q filed November 14, 2001 and incorporated by
reference herein.
10.17 Promissory Note dated October 12, 2001 filed as an exhibit to the
Company's Form 10-Q filed November 14, 2001 and incorporated by
reference herein.
10.18 Promissory Note dated September 29, 2001 filed as an exhibit to the
Company's Form 10-K filed April 15, 2002 and incorporated by reference
herein.
10.19 Promissory Note dated November 30, 2001 filed as an exhibit to the
Company's Form 10-K filed April 15, 2002 and incorporated by reference
herein.
10.20 Promissory Note dated December 14, 2001 filed as an exhibit to the
Company's Form 10-K filed April 15, 2002 and incorporated by reference
herein.
10.21 Promissory Note dated February 11, 2001 filed as an exhibit to the
Company's Form 10-K filed April 15, 2002 and incorporate by reference
herein.
10.22** Employment Agreement dated January 1, 2001 between the Company and
Robert P. Capps filed as an exhibit to the Company's Form 10-K filed
April 15, 2002 and incorporated by reference herein.
10.23 Release and Settlement Agreement dated January 19, 2001 between the
Company and Savage Arms, Inc. filed as an exhibit to the Company's Form
10-K filed April 15, 2002 and incorporated by reference herein.
10.24 Settlement and Release Agreement dated March 4, 2002 among the Company,
DNA Enterprises, Inc. and Cadence Design Systems, Inc. filed as an
exhibit to the Company's Form 10-K filed April 15, 2002 and
incorporated by reference herein.
10.25** Amended and Restated Stock Incentive Plan filed as an exhibit to the
Company's Definitive Proxy Statement filed on April 30, 2001 and
incorporated by reference herein.
10.26 Amendment to Credit Agreement dated October 3, 2002 between the Company
and Bank One, NA, filed as an exhibit to the Company's Form 8-K filed
October 21, 2002 and incorporated by reference herein.
10.27 Reimbursement Agreement by and between the Company and O.S. Wyatt, Jr.
dated as of December 30, 2002, filed as an exhibit to the Company's
Form 8-K/A filed January 15, 2003 and incorporated by reference herein.
II-6
10.28 Promissory Note dated October 1, 2002, filed as an exhibit to the
Company's Form 8-K/A filed January 15, 2003, and incorporated by
reference herein.
10.29 Reimbursement Agreement dated March 26, 2003, filed as an exhibit to
the Company's Current Report on Form 8-K filed March 28, 2003 and
incorporated herein by reference.
10.30 Loan Agreement dated March 26, 2003 between DNA Computing Solutions,
Inc. and FirstCapital Bank, SSB, filed as an exhibit to the Company's
Annual Report on Form 10-K filed on April 15, 2003, and incorporated
herein by reference.
10.31 Note Modification Agreement dated March 31, 2003 between the Company
and Bank One, NA, filed as an exhibit to the Company's Annual Report on
Form 10-K filed on April 15, 2003, and incorporated herein by
reference.
13.1 Annual Report to stockholders on Form 10-K for the year ended December
31, 2002, filed on April 15, 2003 and incorporated by reference herein.
23.1* Consent of Grant Thornton LLP
23.2* Consent of Haynes and Boone, LLP (included in their opinion filed as
Exhibit 5.1)
24.1* Power of Attorney of officers and directors of TeraForce Technology
Corporation (included on signature page hereto)
--------------------------
* Filed herewith.
** Management contract or other compensatory plan or arrangement.
II-7
ITEM 17. UNDERTAKINGS
1. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the registrant's Amended and Restated
Certificate Incorporation or otherwise, the registrant has been advised 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.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
2. The undersigned registrant hereby undertakes:
To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) 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 volume of securities offered (if the total
dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than a
20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
provided, however, that paragraphs (i) and (ii) will not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in this
registration statement.
That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment that contains a form of
prospectus that contains a form of prospectus 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;
To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
II-8
For the purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
II-9
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
TERAFORCE TECHNOLOGY CORPORATION
(Registrant)
Date: April 30, 2003 By: /s/ HERMAN M. FRIETSCH
-----------------------------------------
Herman M. Frietsch
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned officers and
directors of TeraForce Technology Corporation, a Delaware corporation, which is
filing a Registration Statement on Form S-2 with the Commission, Washington,
D.C. 20549 under the provisions of the Securities Act of 1933, as amended (the
"Securities Act"), hereby constitute and appoint Herman M. Frietsch and Robert
P. Capps, and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign such Registration Statement
and any or all amendments, including post-effective amendments, to the
Registration Statement, including a Prospectus or an amended Prospectus therein
and in any registration statement for the same offering that is to be effective
upon filing pursuant to Rule 462(b) under the Securities Act and all other
documents in connection therewith to be filed with the Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact as agents or any of them, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons and in the
capacities and on the dates indicated.
/s/ HERMAN M. FRIETSCH April 30, 2003
---------------------------------------------
Herman M. Frietsch
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ ROBERT P. CAPPS April 30, 2003
---------------------------------------------
Robert P. Capps
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ DAVID H. YEDWAB April 30, 2003
---------------------------------------------
David H. Yedwab, Director
/s/ ANTON VON AND ZU LIECHTENSTEIN April 30, 2003
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Anton von and zu Liechtenstein, Director
/s/ ROBERT E. GARRISON, II April 30, 2003
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Robert E. Garrison, II, Director
II-10
INDEX OF EXHIBITS
Exhibit Description of Exhibit
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4.1 Warrant issued to Hambrecht & Quist LLC exercisable to purchase up to
33,036 shares of Common Stock at an exercise price of $10.292 per
share, expiring May 20, 2003 filed as an exhibit to the Company's Form
10-Q filed on August 14, 1998 and incorporated by reference herein.
4.2 Form of Registration Rights Agreement between the Company and the
Buyers, dated as of December 22, 1998 filed as an exhibit to the
Company's Form 8-K filed on March 2, 1999 and incorporated by reference
herein.
4.3 Form of Warrant to Purchase Common Stock of Intelect Communications,
Inc. at an exercise price of $2.998 filed as an exhibit to the
Company's Form 8-K filed on March 2, 1999 and incorporated by reference
herein.
4.4 Registration Rights Agreement between the Company and Coastal filed as
an exhibit to the Company's Form 8-K filed on August 18, 1999 and
incorporated by reference herein.
4.5 Registration Rights Agreement among the Company and the Buyers, dated
February 24, 1999, relating to the Series E Convertible Preferred Stock
and warrants filed as an exhibit to the Company's Form 8-K filed on
March 2, 1999 and incorporated by reference herein.
4.6 Form of Warrant to Purchase Common Stock of Intelect Communications,
Inc., relating to the Series E Preferred Stock filed as an exhibit to
the Company's Form 8-K filed on March 2, 1999 and incorporated by
reference herein.
4.7 Form of Amended and Restated Promissory Notes held by officer,
convertible into Common Stock of the Company at a rate of $1.00 per
share filed as an exhibit to the Company's Form 10-K filed on March 30,
2000 and incorporated by reference herein.
4.8 Securities Purchase Agreement dated September 30, 2002 between the
Company and Morton A. Cohn and Fayez Sarofim, filed as an exhibit to
the Company's Form 8-K filed October 21, 2002 and incorporated by
reference herein.
4.9 Registration Rights Agreement dated September 30, 2002 between the
Company and Morton A. Cohn and Fayez Sarofim, filed as an exhibit to
the Company's Form 8-K filed October 21, 2002 and incorporated by
reference herein.
4.10 Form of Amended and Restated Warrant expiring May 31, 2004 with an
exercise price of $0.12 per share, filed as an exhibit to the Company's
Form 8-K filed October 21, 2002 and incorporated by reference herein.
4.11 Form of Warrant expiring October 31, 2004 with an exercise price of
$0.12 per share, filed as an exhibit to the Company's Form 8-K filed
October 21, 2002 and incorporated by reference herein.
Exhibit Description of Exhibit
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4.12 Form of Amended and Restated Warrant expiring December 31, 2003 with an
exercise price of $0.12 per share, filed as an exhibit to the Company's
Form 8-K filed October 21, 2002 and incorporated by reference herein.
4.13 Warrant expiring October 31, 2004 with an exercise price of $0.12 per
share, filed as an exhibit to the Company's Form 8-K/A filed January
15, 2003 and incorporated by reference herein.
4.14 Amended and Restated Warrant expiring October 31, 2004 with an exercise
price of $0.12 per share, filed as an exhibit to the Company's Form
8-K/A filed January 15, 2003 and incorporated by reference herein.
4.15 Amended and Restated Warrant expiring October 31, 2004 with an exercise
price of $0.12 per share, filed as an exhibit to the Company's Form
8-K/A filed January 15, 2003 and incorporated by reference herein.
4.16 Amended and Restated Warrant expiring December 31, 2003 with an
exercise price of $0.12 per share, filed as an exhibit to the Company's
Form 8-K/A filed January 15, 2003 and incorporated by reference herein.
4.17 Amended and Restated Warrant expiring May 31, 2004 with an exercise
price of $0.12 per share, filed as an exhibit to the Company's Form
8-K/A filed January 15, 2003 and incorporated by reference herein.
4.18 Form of Registration Rights Agreement between the Company and certain
private investors, filed as an exhibit to the Company's Form 8-K/A
filed January 15, 2003 and incorporated by reference herein.
4.19 Exchange Agreement dated April 11, 2002 between the Company and
Coastal, filed as an exhibit to the Company's Form 10Q filed May 10,
2002 and incorporated herein by reference.
4.20 Exchange Agreement dated April 11, 2002 between the Company and St.
James, filed as an exhibit to the Company's Form 10Q filed May 10, 2002
and incorporated herein by reference.
4.21 Form of Securities Purchase Agreement dated September 30, 2002 between
the Company and certain private investors, filed as an exhibit to the
Company's Form 8-K/A filed November 13, 2002 and incorporated by
reference herein.
4.22 Form of Registration Rights Agreement dated September 30, 2002 between
the Company and certain private investors, filed as an exhibit to the
Company's Form 8-K/A filed November 13, 2002 and incorporated by
reference herein.
4.23 Form of Warrant expiring March 31, 2007, filed as an exhibit to the
Company's Form 10-K filed April 15, 2003 and incorporated herein by
reference.
5.1* Opinion of Haynes and Boone, LLP regarding validity of shares issued.
Exhibit Description of Exhibit
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10.1** Employment Agreement between the Company and Herman Frietsch and
Amendment thereto filed as an exhibit to the Company's Form 10-K filed
on March 30, 2000 and incorporated by reference herein.
10.2** Employment Agreement dated as of January 1, 2001 between the Company
and Eugene Helms filed as an exhibit to the Company's Form 10-K filed
April 15, 2002 and incorporated by reference herein.
10.3 Lease Agreement between Campbell Place One Joint Venture and DNA
Enterprises, dated February 1, 1997 filed as an exhibit to the
Company's Form 10-K filed April 15, 2003 and incorporated by reference
herein.
10.4 Agreement to Form Joint Venture dated August 17, 2001 between the
Company and Singapore Technologies Electronics Limited filed as an
exhibit to the Company's Form 8-K filed September 7, 2001 and
incorporated by reference herein.
10.5 Sharing Agreement dated August 30, 2001 among the Company, Intelect
Network Technologies Company and Intelect Technologies Inc. filed as an
exhibit to the Company's Form 8-K filed September 7, 2001 and
incorporated by reference herein.
10.6 Stockholders Agreement dated August 30, 2001 among the Company,
Intelect Technologies Inc. and Singapore Technologies Electronics
Limited filed as an exhibit to the Company's Form 8-K filed September
7, 2001 and incorporated by reference herein.
10.7 Transition Services Agreement dated August 30, 2001 between the Company
and Intelect Technologies Inc. filed as an exhibit to the Company's
Form 8-K filed September 7, 2001 and incorporated by reference herein.
10.8 Asset Purchase Agreement dated January 11, 2002 among the Company,
Flextronics Design S.D., Inc. and DNA Enterprises, Inc. filed as an
exhibit to the Company's Form 8-K filed January 15, 2002 and
incorporated by reference herein.
10.9 Design / Engineering Services Agreement dated January 11, 2002 between
the Company and Flextronics Design S.D. filed as an exhibit to the
Company's Form 8-K filed January 15, 2002 and incorporated by reference
herein.
10.10 Form of Promissory Note dated June 1, 2001 in favor of Bank One, N.A.
filed as an exhibit to the Company's Form 10-Q filed August 14, 2001
and incorporated by reference herein.
10.11 Business Loan Agreement dated June 1, 2001 between the Company and Bank
One, N.A. filed as an exhibit to the Company's Form 10-Q filed August
14, 2001 and incorporated by reference herein.
10.12 Reimbursement Agreement dated June 1, 2001 among the Company and Oscar
S. Wyatt, Jr., Fayez Sarofim and Morton Cohn filed as an exhibit to the
Company's Form 10-Q filed August 14, 2001 and incorporated by reference
herein.
10.13 Form of Promissory Note dated October 12, 2001 in favor of Bank One,
N.A. filed as an exhibit to the Company's Form 10-Q filed November 14,
2001 and incorporated by reference herein.
Exhibit Description of Exhibit
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10.14 Loan Agreement dated October 12, 2001 between the Company and Bank One,
N.A. filed as an exhibit to the Company's Form 10-Q filed November 14,
2001 and incorporated by reference herein.
10.15 Reimbursement Agreement dated October 12, 2001 between the Company and
Oscar S. Wyatt, Jr. filed as an exhibit to the Company's Form 10-Q
filed November 14, 2001 and incorporated by reference herein.
10.16 Promissory Note dated October 5, 2001 filed as an exhibit to the
Company's Form 10-Q filed November 14, 2001 and incorporated by
reference herein.
10.17 Promissory Note dated October 12, 2001 filed as an exhibit to the
Company's Form 10-Q filed November 14, 2001 and incorporated by
reference herein.
10.18 Promissory Note dated September 29, 2001 filed as an exhibit to the
Company's Form 10-K filed April 15, 2002 and incorporated by reference
herein.
10.19 Promissory Note dated November 30, 2001 filed as an exhibit to the
Company's Form 10-K filed April 15, 2002 and incorporated by reference
herein.
10.20 Promissory Note dated December 14, 2001 filed as an exhibit to the
Company's Form 10-K filed April 15, 2002 and incorporated by reference
herein.
10.21 Promissory Note dated February 11, 2001 filed as an exhibit to the
Company's Form 10-K filed April 15, 2002 and incorporated by reference
herein.
10.22** Employment Agreement dated January 1, 2001 between the Company and
Robert P. Capps filed as an exhibit to the Company's Form 10-K filed
April 15, 2002 and incorporated by reference herein.
10.23 Release and Settlement Agreement dated January 19, 2001 between the
Company and Savage Arms, Inc. filed as an exhibit to the Company's Form
10-K filed April 15, 2002 and incorporated by reference herein.
10.24 Settlement and Release Agreement dated March 4, 2002 among the Company,
DNA Enterprises, Inc. and Cadence Design Systems, Inc. filed as an
exhibit to the Company's Form 10-K filed April 15, 2002 and
incorporated by reference herein.
10.25** Amended and Restated Stock Incentive Plan filed as an exhibit to the
Company's Definitive Proxy Statement filed on April 30, 2001 and
incorporated by reference herein..
10.26 Amendment to Credit Agreement dated October 3, 2002 between the Company
and Bank One, NA, filed as an exhibit to the Company's Form 8-K filed
October 21, 2002 and incorporated by reference herein.
10.27 Reimbursement Agreement by and between the Company and O.S. Wyatt, Jr.
dated as of December 30, 2002, filed as an exhibit to the Company's
Form 8-K/A filed January 15, 2003 and incorporated by reference herein.
Exhibit Description of Exhibit
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10.28 Promissory Note dated October 1, 2002, filed as an exhibit to the
Company's Form 8-K/A filed January 15, 2003, and incorporated by
reference herein.
10.29 Reimbursement Agreement dated March 26, 2003, filed as an exhibit to
the Company's Current Report on Form 8-K filed March 28, 2003 and
incorporated herein by reference.
10.30 Loan Agreement dated March 26, 2003 between DNA Computing Solutions,
Inc. and FirstCapital Bank, SSB, filed as an exhibit to the Company's
Annual Report on Form 10-K filed on April 15, 2003, and incorporated
herein by reference.
10.31 Note Modification Agreement dated March 31, 2003 between the Company
and Bank One, NA, filed as an exhibit to the Company's Annual Report on
Form 10-K filed on April 15, 2003, and incorporated herein by
reference.
13.1 Annual Report to stockholders on Form 10-K for the year ended December
31, 2002, filed on April 15, 2003 and incorporated by reference herein.
23.1* Consent of Grant Thornton LLP
23.2* Consent of Haynes and Boone, LLP (included in 5.1)
24.1* Power of Attorney of officers and directors of TeraForce Technology
Corporation (included on signature page hereto)
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* Filed herewith.
** Management contract or other compensatory plan or arrangement.