As filed with the Securities and Exchange Commission on May 5, 1997
Registration No. 333-15127
------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------
AZUREL LTD.
(Name of small business issuer in its charter)
-----------------------
Delaware 2844 13-3842844
(State or Other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Code Identification Number)
Incorporation or Number)
Organization)
----------------------------
509 Madison Avenue
New York, New York 10022
(212) 317-0712
(Address and telephone number of principal executive
offices and principal place of business)
----------------------------
Gerard Semhon, Chief Executive Officer
AZUREL LTD.
509 Madison Avenue
New York, New York 10022
(212) 317-0712
(Name, address and telephone number of agent for service)
------------------------------
Copies to:
Jay M. Kaplowitz, Esq. Jack Becker, Esq.
Gersten, Savage, Kaplowitz, Fredericks Snow Becker Krauss P.C.
& Curtin, LLP 605 Third Avenue
101 East 52nd Street New York, New York 10158-0125
New York, New York 10022 (212) 687-3860
(212) 752-9700 (212) 949-7052 (FAX)
(212) 752-9713 (FAX)
------------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this Registration Statement becomes effective.
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, as amended (the "Securities Act") check the following
box. [x]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. [ ]
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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
<S> <C> <C> <C> <C>
Proposed
Title of Each Maximum Proposed
Class of Offering Price Maximum Aggregate Amount of
Securities to Amount To Be Per Offering Registration
Be Registered Registered(1) Security(2) Price(2) Fee
Common Stock, $.001
par value (3) 1,380,000 $5.00 $6,900,000 $2,090.91
Redeemable Common
Stock Purchase
Warrants (4) 1,380,000 $.10 $ 138,000 $41.82
Common Stock (5) 1,380,000 $6.00 $8,280,000 $2,509.09
Underwriter's
Warrants (6) 120,000 $.001 $ 120 -- (7)
Common Stock (8) 120,000 $5.00 $600,000 $181.82
Redeemable Common
Stock Purchase
Warrants (8) 120,000 $.001 $120 $.04
Common Stock (9) 120,000 $6.00 $720,000 $218.18
Redeemable Common
Stock Purchase
Warrants (10) 905,500 $.10 $90,550 $27.44
Common Stock (11) 905,500 $5.00 $ 4,527,500 $1,371.97
TOTAL
REGISTRATION FEE $6,441.27 (12)
<FN>
(1) Pursuant to Rule 416, the Registration Statement also relates to an
indeterminate number of additional shares of Common Stock issuable upon
the exercise of Redeemable Warrants pursuant to anti-dilution provisions
contained therein, which shares of Common Stock are registered hereunder.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457.
(3) Includes 180,000 shares of Common Stock subject to the Underwriter's over-
allotment option.
(4) Includes 180,000 Redeemable Common Stock Purchase Warrants subject to the
Underwriter's over-allotment option.
(5) Issuable upon exercise of the Redeemable Common Stock Purchase Warrants.
Includes shares of Common Stock issuable upon exercise of the Underwriter's
over-allotment option.
(6) To be issued to the Underwriter, entitling the Underwriter to purchase up
to 120,000 Shares of Common Stock and/or 120,000 Redeemable Common Stock
Purchase Warrants.
(7) No fee due pursuant to Rule 457(g).
(8) Issuable upon exercise of the Underwriter's Warrants.
(9) Issuable upon the exercise of the Redeemable Common Stock Purchase Warrants
included in the Underwriter's Warrants.
(10) Consists of Redeemable Common Stock Purchase Warrants registered on behalf
of Selling Securityholders.
(11) 905,500 shares of Common Stock underlying Redeemable Common Stock Purchase
Warrants owned by Selling Securityholders.
(12) No filing fee accompanies this Amendment No.2 to the Registration
Statement because $7,042.05 was paid upon filing of the original
Registration Statement and $258.50 was paid upon the filing of Amendment
No.1 to the Registration Statement for an aggregate of $7,300.55, which is
in excess of of the required registration fee.
</FN>
</TABLE>
ii
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: (i) one
to be used in connection with an offering by the Company of shares of Common
Stock and Redeemable Common Stock Purchase Warrants (the "Prospectus") and (ii)
one to be used in connection with the sale of Redeemable Common Stock Purchase
Warrants and the exercise of such warrants by certain selling securityholders
(the "Selling Securityholder Prospectus"). The Prospectus and the Selling
Securityholder Prospectus will be identical in all respects except for the
alternate pages for the Selling Securityholder Prospectus included herein which
are each labeled "Alternate Page for Selling Securityholder Prospectus."
iii
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BY ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAW OF ANY SUCH STATE.
PRELIMINARY PROSPECTUS DATED MAY 5, 1997
SUBJECT TO COMPLETION
AZUREL LTD.
1,200,000 Shares of Common Stock, $.001 par value
1,200,000 Redeemable Common Stock Purchase Warrants
Azurel Ltd. (the "Company") hereby offers 1,200,000 shares of common
stock, par value $.001 per share (the "Common Stock"), and 1,200,000 redeemable
common stock purchase warrants (the "Redeemable Warrants" and together with the
Common Stock, the "Securities") to the general public (hereinafter referred to
as the "Offering"). The Securities must be purchased on the basis of one
Redeemable Warrant for each share of Common Stock purchased and will be
separately transferable immediately upon issuance. Each Redeemable Warrant
expires on ________, 2001, five years after the date of this Prospectus (the
"Expiration Date") and entitles the holder thereof, commencing one year from the
date of this Prospectus, to purchase one share of Common Stock at an exercise
price of $______ [120% of initial public offering price of Common Stock] (the
"Exercise Price"), subject to adjustment in certain events. The Redeemable
Warrants are redeemable by the Company, at a price of $.10 per Redeemable
Warrant, at any time commencing one year after the date of this Prospectus and
prior to the Expiration Date, on 30 days prior written notice to the registered
holders of the Redeemable Warrants (the "Warrantholders"), provided that the
closing bid price per share of the Common Stock exceeds 150% of the Exercise
Price for a period not less than 20 trading days in any 30 day trading period
ending not more than 15 days prior to the date of any redemption notice. The
Redeemable Warrants shall be exercisable until the close of the business day
preceding the date fixed for redemption. See "Underwriting" and "Description of
Securities- Redeemable Warrants."
Prior to this Offering, no public market for the Securities has
existed, and no assurance can be given that any market for such Securities will
develop on completion of the Offering, or if developed, be sustained. The
offering price for the shares of Common Stock and Redeemable Warrants, and the
terms of the Redeemable Warrants, have been determined by negotiations between
the Company and Network 1 Financial Securities, Inc., the underwriter of this
Offering (the "Underwriter"), and are not necessarily related to the Company's
asset value, earnings, net worth or other established criteria of value. The
anticipated offering price of the Common Stock and Redeemable Warrants is
expected to be between $4.00 and $5.00 and $.10, respectively. The Company has
applied to The Nasdaq Stock Market, Inc. for inclusion of the Securities for
trading on the NasdaqSmall Cap Market ("NASDAQ"). The proposed trading symbols
for the Common Stock and Redeemable Warrants are AZUR and AZURW, respectively.
No assurances can be given that listing of these Securities will be approved by
NASDAQ, or if approved, that the Company will continue to qualify for listing.
See "Underwriting."
Concurrently with the Offering, the Company is registering 905,500
Warrants (the "Selling Securityholders' Warrants") and 905,500 shares underlying
the Selling Securityholders' Warrants (the "Selling Securityholders' Warrant
Shares"), at its expense, on behalf of certain of its securityholders (the
"Selling Securityholders"). The Selling Securityholders' Warrants and the
Selling Securityholders' Warrant Shares (the "Concurrent Offering") are not part
of this underwritten Offering and are the subject of "lock-up" agreements for a
period of three months following the completion of the Offering. The Company
will not receive any of the proceeds from the sale of the Selling
Securityholders' Warrants, or the Selling Securityholders' Warrant Shares, but
will receive proceeds from the exercise, if any, of the Selling Securityholders'
Warrants. See "Concurrent Registration of Securities" and "Underwriting."
THESE SECURITIES ARE SPECULATIVE SECURITIES INVOLVING A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD BE PURCHASED ONLY BY PERSONS
WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT IN THE COMPANY. PURCHASERS SHOULD
CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER "RISK FACTORS" AND "DILUTION"
COMMENCING ON PAGES 9 AND 19, RESPECTIVELY, OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
<TABLE>
<S> <C> <C> <C>
Underwriting
Discounts and
Commissions Proceeds to Company
Price to Public (1) and (3) (2) and (3)
--------------- ----------- -----------
Per Share... ----- ----- -----
Per Redeemable Warrant ----- ----- -----
Total (3) ----- ----- -----
- ----------------
<FN>
(1) Does not include additional compensation to the Underwriter
consisting of (i) a non-accountable expense allowance of 3%, or $______
($______ if the Over Allotment Option (as hereinafter defined) is
exercised in full); (ii) a 24-month financial advisory and investment
banking agreement providing for an aggregate payment of $48,000,
payable in full at the closing of the Offering ("Closing"); and (iii)
warrants (the "Underwriter's Warrants") exercisable for a period of
four years commencing one year from the date of this Prospectus to
purchase an aggregate of 120,000 shares of Common Stock and/or 120,000
Redeemable Warrants at a price of $____ per share and $___ per
Redeemable Warrant [150% of initial public offering price,
respectively, of Common Stock and Redeemable Warrants]. In addition,
the Company has agreed to pay to the Underwriter a warrant solicitation
fee of 5% of the exercise price of the Redeemable Warrants exercised
under certain circumstances and to indemnify the Underwriter against
certain liabilities, including those arising under the Securities Act
of 1933, as amended (the "Securities Act"). See "Underwriting."
(2) After deducting discounts and commissions payable to the
Underwriter, but before payment of the Underwriter's non-accountable
expense allowance, the financial advisory fee or other expenses of this
Offering (estimated at $360,000) payable by the Company. See
"Underwriting."
(3) The Company has granted the Underwriter an option, exercisable within
30 calendar days after the Closing, to purchase up to 180,000
additional shares of Common Stock and/or 180,000 Redeemable Warrants
upon the same terms and conditions set forth above, solely for the
purpose of covering over-allotments, if any (the "Over-Allotment
Option"). If the Over-Allotment Option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds
to Company would be $_________, $________ and $_________, respectively.
See "Underwriting."
</FN>
</TABLE>
1
<PAGE>
The Securities are being offered by the Underwriter on a "firm
commitment" basis, subject to prior receipt and acceptance, the approval of
certain legal matters by counsel and prior sale, if and when issued. The
Underwriter reserves the right to withdraw, cancel or modify the Offering and to
reject any order in whole or in part. Delivery of the certificates representing
the Securities is expected to be made against payment therefor at the offices of
the Underwriter, The Galleria, Building 2, 2 Bridge Avenue, Red Bank, New Jersey
07701 on or about ___________, 1997.
NETWORK 1 FINANCIAL SECURITIES, INC.
The date of this Prospectus is , 1997
2
<PAGE>
[MARKETING DISPLAY]
[PICTURE TO BE INSERTED]
Members Only (R) is a registered trademark of Europe Craft Imports, Inc.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK AND WARRANTS OFFERED HEREBY, INCLUDING PURCHASES OF THE COMMON
STOCK OR WARRANTS TO STABILIZE THEIR MARKET PRICE. PURCHASES OF THE COMMON STOCK
OR WARRANTS TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK OR
WARRANTS MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
A SIGNIFICANT AMOUNT OF THE SECURITIES IN THIS OFFERING MAY BE SOLD TO
CUSTOMERS OF THE UNDERWRITER WHICH MAY AFFECT THE MARKET FOR AND LIQUIDITY OF
THE COMPANY'S SECURITIES IN THE EVENT THAT ADDITIONAL BROKER-DEALERS DO NOT MAKE
A MARKET IN THE COMPANY'S SECURITIES, OF WHICH THERE CAN BE NO ASSURANCE. SUCH
CUSTOMERS SUBSEQUENTLY MAY ENGAGE IN TRANSACTIONS FOR THE SALE OR PURCHASE OF
THE SECURITIES THROUGH AND/OR WITH THE UNDERWRITER.
ALTHOUGH IT HAS NO OBLIGATION TO DO SO, THE UNDERWRITER MAY FROM TIME
TO TIME ACT AS A MARKET MAKER AND OTHERWISE EFFECT TRANSACTIONS IN THE COMPANY'S
SECURITIES. THE UNDERWRITER, IF IT PARTICIPATES IN THE MARKET, MAY BECOME A
DOMINATING INFLUENCE IN THE MARKET FOR THE SECURITIES. HOWEVER, THERE IS NO
ASSURANCE THAT THE UNDERWRITER WILL OR WILL NOT CONTINUE TO BE A DOMINATING
INFLUENCE. THE PRICES AND LIQUIDITY OF THE SECURITIES OFFERED HEREUNDER MAY BE
SIGNIFICANTLY AFFECTED BY THE DEGREE, IF ANY, OF THE UNDERWRITER'S PARTICIPATION
IN SUCH MARKET. THE UNDERWRITER MAY DISCONTINUE SUCH ACTIVITIES AT ANY TIME OR
FROM TIME TO TIME. SEE "RISK FACTORS - NO ASSURANCE OF PUBLIC MARKET; VOLATILITY
OF STOCK PRICE."
3
<PAGE>
PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified
in its entirety by, and should be read in conjunction with, the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. As used in this Prospectus, except as otherwise
indicated or the context otherwise requires, the "Company" or "Azurel" refers to
Azurel Ltd., a Delaware corporation, and its wholly-owned subsidiaries, Private
Label Cosmetics, Inc., a New Jersey corporation ("Private Label"), P.L.C.
Specialties Inc., a New Jersey corporation ("PLC"), Fashion Laboratories, Inc.,
a Delaware corporation ("Fashion Labs"), International Cosmetic Group, Inc., a
New Jersey corporation ("International"), and Scent 123, Inc., a Delaware
corporation ("Scent 123"). This discussion contains forward-looking statements
that involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements.
Factors that might cause such a difference include those discussed in "Risk
Factors."
THE COMPANY
Azurel Ltd. (the "Company" or "Azurel"), directly and through
wholly-owned subsidiaries, manufactures, markets and sells cosmetics, fragrances
and skin care products. Through four wholly-owned subsidiaries comprising its
Private Label Group, acquired by the Company in August 1996, the Company
operates a manufacturing and filling facility which sells cosmetics principally
to major cosmetic companies for sale by each customer under the customer's own
brand name (commonly known as "Private Label" sales). In addition, in order to
take advantage of the Company's manufacturing capabilities and product
development expertise, the Company currently is developing cosmetic, skin care
and fragrance lines which it intends to market under brand names created
internally or owned by others and licensed to the Company. These products are
sometimes referred to as "Branded Products." To date the Company has developed
only one line of Branded Products internally and has obtained only one license
to sell a product line using a brand name owned by a third party. In addition,
the Company intends, through its Scent 123 subsidiary, which acquired the assets
of Scent Overnight, Inc. ("Scent Overnight") in October 1996, to sell
well-recognized men's cologne and women's fragrances directly to the consumer by
overnight delivery through toll-free telephone numbers. These products are
sometimes referred to as "Distributed Fragrances." The Company, however, has not
yet secured any sources of supply for the Distributed Fragrances.
Virtually all of the Company's present business is conducted through
the Private Label Group which manufactures, fills and packages a broad range of
cosmetics, including lipsticks, powders, eye shadows and eye liners. Although
the Private Label Group was acquired in August 1996 by the Company, the Private
Label Group has been in business for more than 49 years, and the Private Label
Group's management is remaining with the Company. See "Management," "Certain
Transactions" and "Business - Products and Services."
The Company's manufacturing plant (the "Facility") includes a
laboratory which develops cosmetic products formulae for customers according to
their specific requirements. The laboratory also develops and maintains a
library of cosmetic products formulae for use by customers who have not
developed their own formulae for a specific product. See "Business - Products
and Services."
Development of the Company's first Branded Product line, an original
unisex fragrance line and related grooming products to be sold under the Sports
Extreme USA(TM) trade name, commenced in January 1996 and was completed in
September 1996, at which time marketing of the line commenced. Presently, the
Sports Extreme USA(TM) line consists of a unisex fragrance, bath and shower gel,
muscle and body relaxer and face moisturizer containing sunscreen and
alphahydroxy fruit acids. The marketing of the Sports Extreme USA(TM) line will
feature "extreme" sports such as ice climbing, bungee jumping, sky surfing and
mountain biking. The Company anticipates retail sales of this line to commence
in the second quarter of 1997. See "Business - Products and Services."
4
<PAGE>
In June 1996, the Company began developing cosmetics, fragrances
and related products for sale under the Members Only trade name in the United
States and certain other countries pursuant to a license agreement with the
owner of the Members Only trade name. The Members Only trade name is presently
used on clothing and a wide variety of other goods and has been marketed in the
United States. The Company anticipates that development of the line will be
completed in the third quarter of 1997 and that retail sales of the Members Only
line will commence by the fall of 1997. See "Business - Products and Services."
The Company expects that it will sell Branded Products directly to
retail outlets in the United States and to international distribution
companies. To date, sales of approximately $48,000 of Branded Products have been
made. The Company is engaged in discussions with distributors relating to
distribution of the Company's Branded Products in France and the Middle East.
The Company has had discussions with other potential foreign distributors, but
no orders have yet been received. The Company expects that its relationship with
foreign distributors will be exclusive for a particular area but will not
require the distributor to purchase any minimum quantity of products. See
"Business - Products and Services."
As a complement to its marketing of Branded Products, the Company,
through its Scent 123 subsidiary, intends to sell Distributed Fragrances
directly to consumers, initially by overnight delivery, through toll-free
telephone numbers. The Company has commenced locating sources of supply,
developing concepts, logos, designs and advertising campaigns, and engaging in
other activities preliminary to the commencement of the sale of Distributed
Fragrances. The Company expects to begin test marketing of the Distributed
Fragrances in the fourth quarter of 1997 and, if successful, to begin national
marketing in February or March 1998. See "Business - Products and Services"
and "Certain Transactions."
The Company was incorporated in Delaware on June 26, 1995, Private
Label was incorporated in New Jersey on July 5, 1967, PLC was incorporated in
New Jersey on July 5, 1967, Fashion Labs was incorporated in Delaware on May 1,
1978, International was incorporated in New Jersey on May 30, 1979 and Scent 123
was incorporated in Delaware on September 6, 1996. The Company's offices are
located at 509 Madison Avenue, New York, New York, 10022, and its telephone
number is (212) 317-0712.
5
<PAGE>
<TABLE>
<CAPTION>
THE OFFERING
<S> <C>
Securities Offered by the Company (1) 1,200,000 shares of Common Stock and
1,200,000 Redeemable Warrants
Offering Price Common Stock - $_______ per share
Redeemable Warrants - $_______ per warrant
Common Stock Outstanding:
Prior to the Offering (2) 3,878,747
After the Offering (2)(3) 5,258,747
Redeemable Warrants Outstanding:
Prior to the Offering (4) 905,500
After the Offering (4) 1,200,000
Terms of the Redeemable Warrants Each Redeemable Warrant is exercisabl
from one year after the date of this
Prospectus to five years after the
date of this Prospectus and entitles
the holder thereof to purchase one
share of Common Stock at an exercise
price of $___, [120% of the initial
public offering price per share of
Common Stock] subject to adjustment in
certain circumstances (the "Exercise
Price"). The Redeemable Warrants are
redeemable by the Company, in whole or
in part, at any time commencing
one year after the date of this
Prospectus, upon 30 days prior written
notice, at a price of $.10 per
Redeemable Warrant, provided that
the closing bid price per share of the
Common Stock exceeds 150% of the
Exercise Price for a period not less
than 20 trading days in any 30 trading
day period ending not more than 15
days prior to the day on which the
Company gives notice of redemption.
See "Description of Securities-
Redeemable Warrants."
6
<PAGE>
Use of Proceeds The Company intends to use the net
proceeds of this Offering for
repayment of indebtedness incurred in
connection with acquisitions and
bridge financings, including an
aggregate of approximately $892,000
to related parties, to expand the
Company's marketing efforts, to
purchase inventory and equipment, to
pay accrued expenses, including an
aggregate of approximately $190,500
to related parties, and for working
capital. See "Use of Proceeds."
Risk Factors The Securities involve a high degree
of risk and immediate substantial
dilution and should not be purchased
by investors who cannot afford to
lose their entire investment.
Prospective investors should consider
carefully the factors set forth under
"Risk Factors" and "Dilution."
Proposed NASDAQ Common Stock - AZUR
Symbols(5) Redeemable Warrants - AZURW
<FN>
(1) Does not include (i) up to an additional 180,000 shares of
Common Stock and 180,000 Redeemable Warrants issuable upon exercise of the
Underwriter's Over-Allotment Option and (ii) the Underwriter's Warrants.
(2) Does not include (i) up to 750,000 shares of Common Stock reserved for
issuance pursuant to stock options which may be granted pursuant to the
Company's 1997 Stock Option Plan, (ii) 325,500 shares of Common Stock
reserved for issuance pursuant to options and warrants issued in
connection with financing and consulting agreements and (iii) 905,500
shares of Common Stock reserved for issuance pursuant to Redeemable
Warrants being offered concurrently with this Offering by the Selling
Securityholders pursuant to the Selling Securityholders' Prospectus.
See "Management - Stock Option Plan," "Certain Transactions" and
"Concurrent Registration of Securities."
(3) Does not include (i) up to an additional 180,000 shares of Common Stock
and 180,000 Redeemable Warrants issuable upon exercise of the
Underwriter's Over-Allotment Option; (ii) 180,000 shares of Common
Stock issuable upon exercise of the Redeemable Warrants included in the
Underwriter's Over-Allotment Option; (iii) 1,200,000 shares of Common
Stock reserved for issuance upon the exercise of the Redeemable
Warrants; (iv) up to 120,000 shares of Common Stock issuable upon
exercise of the Underwriter's Warrants or (v) up to 120,000 shares of
Common Stock issuable upon exercise of the Redeemable Warrants included
in the Underwriter's Warrants. Includes (i) 1,200,000 shares of Common
Stock offered hereby and (ii) 180,000 shares of Common Stock issuable
upon the closing of
7
<PAGE>
this Offering in connection with the acquisition of the companies
comprising the Private Label Group. See "Description of Securities,"
"Underwriting" and "Certain Transactions."
(4) Does not include (i) 180,000 Redeemable Warrants issuable upon exercise
of the Underwriter's Over-Allotment Option or (ii) 120,000 Redeemable
Warrants issuable upon exercise of the Underwriter's Warrants. See
"Underwriting."
(5) The proposed trading symbols do not imply that an active trading market
will develop for the Common Stock or Redeemable Warrants upon the
completion of this Offering or be sustained thereafter, or that the
Company's Securities will be approved for listing on NASDAQ or will
continue to be listed, if approved. See "Risk Factors."
</FN>
</TABLE>
8
<PAGE>
SUMMARY OF FINANCIAL INFORMATION
The following sets forth summary financial information regarding
Azurel including the acquisitions of the Private Label Group in August 1996 and
Scent Overnight in October 1996. The pro forma summary financial information
includes adjustments to reflect the acquisitions of the Private Label Group and
Scent Overnight as if the acquisitions had occurred on January 1, 1995.
The summary financial information as of December 31, 1996 and 1995 and
for the period June 26, 1995 (inception) to December 31, 1995 and the year ended
December 31, 1996, has been abstracted from the financial statements of the
Company included elsewhere herein (audited, with the exception of the pro forma
information).
<TABLE>
<S> <C> <C> <C> <C>
Historical (1) Pro forma (2)
----------------------------------------- ----------------------------------------
For the Period For the Period
June 26, 1995 June 26, 1995
(inception) (inception)
through December 31, through December 31,
December 31, 1996 December 31, 1996
1995 1995
------------------ ------------------ ----------------- -----------------
Statement of Operations Data:
(Dollars and outstanding shares in thousands, except per share data)
Net Sales............. $ - $ 3,745 $ 8,413 $ 10,196
Cost of goods sold.... - 2,871 6,628 7,679
Net Income (Loss)..... (288) (1,373) (1,183) (1,769)
Net Income (Loss)
per share............. (0.20) (0.42) (0.83) (0.54)
Number of Shares
used in Computation... 1,426 3,288 1,426 3,288
Balance Sheet Data:
Current Assets........ $ 276 $ 3,355 $ 5,965
Total Assets.......... 351 7,644 10,811
Current Liabilities... 403 4,549 2,620
Long term debt........ 396 2,822 2,822
Stockholders'
Equity(Deficiency).... (448) 273 5,369
Working Capital
(Deficit)............. (127) (1,194) 3,345
Accumulated Deficit.... (513) (2,111) (2,245)
<FN>
- -----------
(1) Includes the results of operations of the Private Label Group for the
period August 22, 1996 to December 31, 1996.
(2) See "Notes To Unaudited Pro Forma Financial Statements" for a description
of pro forma adjustments.
</FN>
</TABLE>
<PAGE>
RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE AND SHOULD BE
PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT IN THE
COMPANY. EACH PROSPECTIVE INVESTOR SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK
FACTORS, AS WELL AS ALL OTHER INFORMATION SET FORTH ELSEWHERE IN THIS
PROSPECTUS.
Lack of History Upon Which to Evaluate the Company. Although the
Company was organized in June 1995, it only recently (i) has commenced marketing
certain of its proposed products, (ii) acquired the companies comprising its
Private Label Group and (iii) acquired certain assets related to Scent 123's
operations. The financial statements of the Private Label Group for the years
ended December 31, 1996 and 1995 included elsewhere in this Prospectus reflect
the results of operations under prior management for all of fiscal 1995 and for
eight months of fiscal 1996. Although the President of the Private Label Group
remained with the Company, the financial statements cannot be used by
prospective investors to evaluate the ability of the Company's management to
operate the Company's business. Accordingly, the Company's prospects must be
considered in light of the risks, expenses, problems and difficulties frequently
encountered in the establishment of a new business in an industry characterized
by intense competition and changing consumer preferences, as well as in the
commercialization and marketing of new products. See "Business" and the
financial statements and related notes thereto included elsewhere in this
Prospectus.
Dependence Upon Integration of Acquired Operations; History of Losses;
No Assurance of Profitability. The business of the Private Label Group, acquired
in August 1996, currently represents 100% of the Company's revenues and
approximately 91% of the Company's tangible assets. The success of the Company
substantially depends upon the successful integration of the Private Label Group
into the Company's operations. Moreover, while the Private Label Group has been
in business for more than 49 years, and its current management is remaining with
the Company, it has operated at a loss for the years ended December 31, 1996 and
1995. As of December 31, 1996, the Company had an accumulated deficit of
approximately $2,111,000. There can be no assurance that the Company will be
able to integrate successfully the business of the Private Label Group into the
Company or operate the remainder of the Company's business profitably. See
"Business - The Company" and the financial statements and the related notes
thereto included elsewhere in this Prospectus.
Going Concern Qualification in Certified Public Accountant's Report.
Both Azurel and the Private Label Group incurred significant net losses for each
of the fiscal periods included in this Prospectus and had a working capital
deficiency of approximately $1,200,000 at December 31, 1996. In connection with
the audit of Azurel's and Private Label Group's respective financial statements
as of December 31, 1995 and Azurel's financial statements as of December 31,
1996, the Company has received a report from its independent certified public
accountants, Feldman Radin & Co., P.C., which includes a going concern
qualification in its opinion. See
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<PAGE>
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and the related notes thereto included
elsewhere in this Prospectus.
Possible Need for Additional Financing. The Company expects that cash
flow from operations, together with the net proceeds of this Offering, will fund
its cash requirements for at least 12 months following the consummation of the
Offering. However, additional financing may be required in the event that the
Company incurs operating losses in the future or operations do not generate
sufficient funds. Because there can be no assurance that adequate additional
financing will be available on terms acceptable to the Company, if at all, the
Company may be forced to limit or discontinue its existing or planned
operations. Any future financings that involve the sale of the Company's equity
securities may result in dilution to the then current stockholders. See "Use of
Proceeds."
Possible Inability to Meet Substantial Debt Service. The principal
amount of the Company's indebtedness as of December 31, 1996 was approximately
$4,804,000. Consequently, a significant portion of the Company's cash flow will
be used to pay the principal and interest on such indebtedness. It is unlikely
that the Company can meet its debt service and other cash requirements if the
Private Label Group's operations are not profitable, in which case the Company
may require alternative financing. There can be no assurance that alternative
financing will be available to the Company on acceptable terms, if at all. See
"Certain Transactions."
Secured Loans - Existence of Liens on All of Private Label Group's
Assets and Stock Pledge. All of the Private Label Group's assets have been
pledged to a financing institution to secure certain indebtedness relating to a
financing agreement. The agreement provides for cross corporate guarantees
among the members of the Private Label Group and by the Company. In the event
that the Private Label Group defaults on payment of its obligations, including
the making of required payments of principal and interest, the Private Label
Group's indebtedness could be accelerated and, in certain cases, the Private
Label Group's assets could be subject to foreclosure. Moreover, to the extent
that the Private Label Group's assets continue to be pledged to secure
outstanding indebtedness, such assets will remain unavailable to secure
additional debt financing. Such unavailability may adversely affect the
Company's ability to borrow in the future. In addition, all of the outstanding
capital stock of the entities comprising the Private Label Group has been
pledged to Michael J. Assante, an affiliate of the Company, to secure
indebtedness related to the acquisition of the Private Label Group. In the
event that the Company defaults on payment of its obligations, the pledged
capital stock could be foreclosed, in which case the Company would lose
its ownership of the Private Label Group, which would have a material
adverse effect on the Company. See "Certain Transactions."
Related Party Transactions; Loans Due From Officers. Certain of the
Company's shareholders have been retained by the Company as consultants, and
certain shareholders have made loans to the Company. The shareholders involved
in these transactions have received, or will receive, compensation for services
and for the loans. Gerard Semhon and Constantine Bezas, the Company's President
and a director, owe the Company $120,750 and $15,750, respectively, and $48,130,
joint and severally, representing advances made to them which are to be repaid
immediately following this Offering. See "Certain Transactions" and the
financial statements and the related notes thereto included elsewhere in
this Prospectus.
Proceeds to Repay Indebtedness; Benefit to Related Parties. The Company
will use a portion of the proceeds of the Offering to repay (i) the installments
of principal and interest (estimated at $448,000) due under a purchase money
promissory note payable to Michael J. Assante, the president of the Private
Label Group, (ii) principal and interest (estimated at $230,000) due under a
purchase money promissory note given as part of the purchase price for the
assets of Scent Overnight, a company of which Gerard Semhon, the Company's Chief
Executive Officer and Chairman of the Board, is a principal stockholder and
(iii) approximately $322,000 of accrued expenses, which includes accrued
consulting fees totalling approximately $223,000 as of December 31, 1996,
for consulting services rendered by Gerard Semhon, Constantine Bezas, Truitt
Bell and Van Christakos, all officers and directors of the Company, in the
amounts of approximately $67,000, $53,000, $61,000 and $42,000, respectively.
See "Use of Proceeds" and "Certain Transactions."
Dependence Upon Key Customers. Approximately 22% and 12% of Private
Label Group's revenues for the year ended December 31, 1996 were derived from
two major customers. Approximately 21% and 14% of Private Label Group's revenues
for the year ended December 31, 1995 were derived from the same two major
customers. For these periods, revenues of the Private Label Group represent all
of the Company's revenues. There can be no assurance that these customers will
maintain their volume of business with Private Label Group. A loss of the sales
to either of both of these customers could have a material adverse effect on the
Company's results of operations. See "Business" and the financial statements and
the related notes thereto included elsewhere in this Prospectus.
Sales to Affiliates. Michael J. Assante, President of Private Label
Group, is the sole officer, director and shareholder of The Contemporary
Cosmetic Group, Inc. ("Contemporary"). Mr. Assante is also a principal
shareholder of Rubigo Cosmetics, Inc.("Rubigo"). Both Contemporary and Rubigo
are customers of Private Label Group and individually comprise less than 5% of
Private Label Group's revenues. In addition, Contemporary utilizes approximately
10,000 square feet at the Facility from the Company on a month-to-month basis
for approximately $6,500 per month. The Company believes that transactions
between the Company and each of Contemporary and Rubigo are on terms no less
favorable than transactions involving unaffiliated third parties. The Company
does not believe that the loss of Contemporary and/or Rubigo as customers would
have a material adverse effect on its business. See "Certain Transactions."
Uncertainty of Market Acceptance of Branded Products; Dependence on
Marketing Efforts. The Company has not yet commenced significant marketing
activities for its Branded Products and has limited financial, personnel and
other resources to undertake marketing such activities. Moreover, the market for
fragrances, cosmetics and beauty products is sensitive to changing consumer
preferences and demand. Achieving successful market acceptance for Branded
Products will require substantial marketing efforts and expenditure of
significant funds to create consumer awareness and demand. Considering the
Company's limited financial resources, it will not be able to utilize various
promotional techniques used by competitors but will be able only to engage in
limited promotional and marketing efforts. There can be no assurance that the
Company will have sufficient funds or other resources to achieve successful
12
<PAGE>
market acceptance of its Branded Products or make sufficient sales to achieve
profitability. See "Business - Products and Services."
Seasonality of Company's Products. The cosmetic and fragrance business
in general is subject to seasonal fluctuations, with net sales in the second
half of the year substantially higher than those in the first half as a result
of increased demand by retailers in the United States in anticipation of and
during the back-to-school, Thanksgiving and Holiday seasons. The Company
anticipates that, although there can be no assurance, the sales of Branded
Products and Distributed Fragrances, will follow the general industry trend. See
"Business - - Seasonality and Backlog."
Dependence Upon License Agreements for Branded Products. The Company's
ability to develop cosmetic, skin care and fragrance lines for other companies
under brand names licensed to the Company is dependent upon the Company's
ability to obtain new licenses and retain its existing license of the Members
Only trade name. The Company's current license of the Members Only trade name
(the "License") expires on September 30, 2001. The Company has a right
to renew for an additional five year term subject to certain conditions,
including the requirement that the Company achieve certain minimum sales of the
Members Only fragrances, grooming products and cosmetics. Under the License,
the Company is obligated to pay minimum annual royalties which begin at
$100,000 for the period ending September 30, 1997 and increase to $375,000 for
the last year of the initial term. In addition, the Company's manufacture,
sale and promotion of Members Only fragrances, grooming products and cosmetics
is subject to the prior review and approval of such products by the owner of
the trade name, which approval is not to be unreasonably withheld. Such approval
has been obtained for the Members Only products now being developed. The
failure to obtain prior approval of future additions to the product line on a
timely basis could have a material adverse effect on the Company's ability to
sell Members Only fragrances, grooming products and cosmetics. In addition,
there can be no assurance that the Company will have the ability to satisfy all
of its obligations under the Members Only license agreement, that such license
agreement will be renewed or result in profitable operations or that the
Company will be able to obtain additional license agreements on favorable
terms, if at all. The failure to retain the Members Only license agreement or
to obtain new license agreements could have a material adverse effect on the
Company's business related to the Branded Products. See "Business - Products
and Services."
Marketing Uncertainties Related to Distributed Fragrances. The
Company's ability to market the Distributed Fragrances will depend upon various
factors, many of which are not within the control of the Company. These factors
include, but are not limited to, (i) consumer acceptance of the Company's
marketing concept for the Distributed Fragrances, (ii) the economic climate,
(iii) government regulations concerning the shipment of fragrances, (iv) the
availability of sources of supply of the fragrances, (v) the successful
performance of the Company's advertising and fulfillment firms engaged to assist
the Company in selling the Distributed Fragrances and (vi) the Company's lack of
experience in telemarketing. See "Business - Products and Services."
Dependence Upon Obtaining Sources of Supply for Distributed Fragrances.
The Company's success in selling the Distributed Fragrances depends upon
obtaining an adequate supply of fragrances in order to maintain an appropriate
inventory, and to ensure that such inventory is readily available to its
customers. The Company does not expect to enter into supply agreements with
fragrance manufacturers; but rather, it expects to purchase fragrances from
manufacturers and others on an "as-needed" basis. There can be no assurance that
the Company will be able to acquire such inventory, in which case the Company's
expansion into this market would be adversely affected. See "Business - Products
and Services."
Vulnerability to Economic Conditions. The Company's future operating
results are dependent upon the economic environments in which it operates.
Demand for the Company's products could be adversely affected by economic
conditions affecting consumer confidence and discretionary spending generally.
The Company expects the demand for its products (and consequently its results of
operations) to continue to be sensitive to economic conditions and other factors
beyond its control.
Competition. All aspects of the cosmetic, fragrance and skin care
industry are subject to intense competition throughout the world. In all
aspects of its business, the Company will compete with numerous companies, many
of which are better known in the industry and have established channels of
distribution and substantially all of which have greater financial and other
resources than the Company. These competitors include Estee Lauder, Revlon,
Avon and Maybelline.
In selling the Branded Products, the Company will compete against
numerous companies, many of which have international reputations and broad
distribution channels in place. To date,
13
<PAGE>
the Company has (i) developed only one line of Branded Products using a trade
name developed by it, (ii) not sold any significant amount of Branded Products
and (iii) entered into only one formal agreement with a third party regarding
the marketing of cosmetics and fragrances under a brand name owned by such
third party. There can be no assurance that the Company will successfully
develop or market any Branded Product.
In the sale of Distributed Fragrances, the Company will compete
directly with other direct marketers of such products, including catalogues,
television shopping stations, companies in the flower and gift by wire
businesses and, to a lesser degree, with retail stores. The Company expects that
its major means of competition will be its convenience and overnight order
fulfillment. The Company's method of selling the Distributed Fragrances is
not proprietary in nature and may be replicated by others. In addition, the
Company's possible lack of exclusivity with suppliers may allow such suppliers
or other third parties to engage in the direct marketing of fragrance brands
including, but not limited to, the fragrance brands offered by the Company.
There can be no assurance that the Company will be successful in selling the
Distributed Fragrances. See "Business - Competition."
Government Regulation. The Company's manufacturing activities and the
Facility are subject to extensive and rigorous governmental regulation
concerning the protection of the environment and the quality of manufacturing.
Federal, state and local regulatory agencies actively enforce these regulations
and conduct periodic inspections to determine compliance with such government
regulations. The Food and Drug Administration (the "FDA") enforces regulations
regarding the quality of manufacturing ("Good Manufacturing Practices" or "GMP")
through periodic surveillances and audits. Failure to comply with applicable
regulatory requirements may result in fines, suspension of approvals, cessation
of distribution, product recalls and criminal prosecution, any of which would
have a material adverse effect on the Company. Changes in existing regulations,
the interpretation thereof, or adoption of new regulations could impose costly
new procedures for compliance, or prevent the Company from obtaining, or affect
the timing of, additional regulatory approvals.
The Federal Trade Commission ("FTC") and state and local authorities
regulate the advertising of over-the-counter drugs and cosmetics. The Federal
Food, Drug and Cosmetic Act, as amended (the "Food and Drug Act"), and the
regulations promulgated thereunder, and other federal and state statutes and
regulations, govern, among other things, the testing, manufacture, safety,
effectiveness, labeling, composition storage, record keeping, approval,
advertising and promotion of the Company's products. In general, products
falling within the FDA's definition of "new drugs" require pre-market approval
by the FDA while products falling within the FDA's definition of "cosmetics" do
not require pre-market approval. In the Company's opinion, the Company's
products, as they are and will be promoted, fall within the FDA's definition of
"cosmetics" and therefore do not require pre-market approval. There can be no
assurance, however, that the FDA will concur in this view. In the event that
the Company fails to comply with applicable regulations with respect to any
products, the Company may be required to change its labeling, formulation or
possibly cease manufacture and marketing of such products.
The FDA may require post-marketing testing and surveillance to monitor
the record of the Company's products and continued compliance with regulatory
requirements. The FDA also may require the submission of any lot of a product
for inspection and may restrict the release of any lot that does not comply
with FDA standards, or may otherwise order the suspension of manufacture, recall
or seizure if non-compliant product is discovered. Product approvals may be
withdrawn if compliance with regulatory standards is not maintained or if
problems concerning safety or efficacy of a product are discovered following
approval.
The Company may also be subject to foreign regulatory authorities
governing testing or sales of certain of the Company's products. Whether or
not FDA approval has been obtained, approval of a product by the comparable
regulatory authorities or foreign countries must be obtained in certain cases
prior to the commencement of marketing of the product in those countries.
There can be no assurance that any product developed or marketed by the Company
will be approved by the FDA or any foreign regulatory authority.
The Company's proposed method of distributing the Distributed
Fragrances may include shipment by air transportation. The shipment of
fragrances by air is subject to federal regulation and the rules and regulations
promulgated by the Department of Transportation's (the "DOT") Research & Special
Programs Administration. The DOT considers the shipment of alcohol, a component
in fragrances, to be the transportation of hazardous material. Scent 123
obtained a DOT exemption to transport hazardous material by overnight air
transportation. As long as Scent 123 has the DOT exemption, which is in effect
until November 30, 1997, and may thereafter be renewed upon application to and
approval of the DOT, Scent 123 believes that its shipment of products will be in
compliance with current DOT regulations. Scent 123's loss of the DOT exemption
would have a material adverse effect on these business operations. There can be
no assurance that Scent 123 will retain the DOT exemption or that Scent 123 will
be able to comply with any future DOT regulations.
The Company's sale of Distributed Fragrances is intended to utilize
toll-free telephone services. Toll-free telephone service is provided to users
by federally regulated common carrier
14
<PAGE>
telephone companies. The rates, terms and technical quality of this service are
subject to regulations promulgated by the Federal Communications Commission (the
"FCC") and tariffs published by the telecommunications service provider. Except
for the sending of indecent, harassing or obscene messages or material, the
interstate sale of services or products by users of a toll-free telephone number
is not subject to direct federal regulation under the Communications Act of
1934. Fraudulent telephone messages are subject to criminal penalties under
federal and state laws. The Company does not believe that FCC regulations will
affect the proposed sale of Distributed Fragrances, but such regulations could
affect the price, terms, quality and availability of the toll-free telephone
services and may have a material adverse effect on the Company's sale of
Distributed Fragrances.
Conflict of Interest in Acquisition of Assets of Scent Overnight, Inc.;
No Independent Appraisal of Value. The Company's Scent 123 subsidiary acquired
certain intangible assets from a company controlled by Gerard Semhon, the
Company's Chief Executive Officer and Chairman of the Board. The purchase price
was arbitrarily determined between affiliates and was not determined by an
independent appraisal of the assets. The purchase price was not based upon any
recognized criteria of value and may have exceeded the fair market value of the
assets acquired. See "Certain Transactions."
Dependence on Key Employees. The Company is dependent upon the
experience and abilities of its management, particularly, Gerard Semhon, Chief
Executive Officer and Chairman of the Board, Constantine Bezas, President, and
Michael J. Assante, President and Chief Executive Officer of the Private Label
Group. While the Company has entered into employment agreements only with
Messrs. Semhon and Assante, the loss of the services of any of these or other
key employees would have a material adverse effect on the business, operations
and prospects of the Company. The Company currently has no key-person life
insurance on any of these individuals. See "Business - Management."
Influence of Principal Stockholder; Lack of Control by Management and
Lack of Independent Directors. Upon completion of the Offering Tusany Investment
and Trade, S.A. ("Tusany") will own approximately 29.6% of the outstanding
shares of Common Stock. Although Tusany will not control a majority of the
shares of Common Stock of the Company, it may be able to influence the decisions
on certain matters, including the election of all of the Company's directors,
increasing the authorized capital stock, dissolution, merger or sale of the
assets of the Company, and generally may be able to direct the affairs of the
Company. The management of the Company does not hold a majority of the voting
power in the Company, and upon completion of the Offering will own approximately
18.3% of the outstanding shares of Common Stock. As a result, the Company's
current management neither has control of any issue subject to a stockholder
vote nor the ability to control the election of the Board of Directors. As a
result, there can be no assurance that the Company's current management will be
retained by the Board of Directors. In addition, all current members of the
Company's Board of Directors are employed by the Company and, as such, there are
no current members of the Company's Board of Directors who are not affiliated or
associated with the Company and who are independent of the Company. All
decisions affecting the day-to-day operations of the Company will be made by a
board of Directors, the members of which are not independent of the Company. See
"Principal Stockholders" and "Management."
Immediate Substantial Dilution. The Company's present stockholders
acquired their shares of Common Stock at costs substantially below the
anticipated offering price of the Common Stock to be sold in this Offering.
Therefore, upon the completion of this Offering, investors will incur immediate
and substantial dilution in the per share net tangible book value of their
Common Stock, estimated to be approximately $4.23 per share or approximately 94%
of the public offering price per share (allocating no value to the Redeemable
Warrants). See "Dilution."
15
<PAGE>
No Dividends and None Anticipated. The Company has neither declared nor
paid any cash dividends on its Common Stock since its incorporation in June
1995, and the Board of Directors does not contemplate the payment of such
dividends in the foreseeable future. Any decisions regarding the payment of
dividends will depend on the Company's earnings, financial position and such
other factors as the Board of Directors deems relevant. In addition, certain
financing agreements and other documents executed in connection with the
acquisition of the Private Label Group prohibit the payment of dividends so long
as certain indebtedness is outstanding. See "Dividend Policy" and "Description
of Securities - Common Stock."
Limitation on Directors' Liabilities under Delaware Law and Board
Indemnification. Pursuant to Delaware Law and the Company's Certificate of
Incorporation, directors of the Company are not liable for monetary damages for
breach of fiduciary duty, except in connection with the following: (i) a breach
of duty of loyalty, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) dividend payment or
stock repurchases illegal under Delaware law or (iv) any transaction from which
a director has derived an improper personal benefit. In addition, the Company's
By-laws require the Company to indemnify its officers, directors,and employees
under certain circumstances, including those under which indemnification
would otherwise be discretionary, and to advance expenses in proceedings in
which they could be indemnified. See "Management - Limitation on Directors' or
Officers' Liabilities and Indemnifications."
Offering Price Arbitrarily Determined. The offering price of the
Securities has been determined by negotiation between the Company and the
Underwriter and is not necessarily related to the Company's assets, earnings,
book value or any other objective standard of value.
Authorization and Discretionary Issuance of Preferred Stock. The
Company's Certificate of Incorporation authorizes the issuance of 1,000,000
shares of "blank check" preferred stock, par value $.001 with such designations,
rights and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered, without stockholder
approval, to issue preferred stock with dividend, liquidation, conversion,
voting or other rights which could adversely affect the voting power or other
rights of the holders of the Company's Common Stock. In the event of issuance,
the preferred stock could be utilized, under certain circumstances, as a method
of discouraging, delaying or preventing a change in control of the Company.
Although the Company has no present intention to issue any shares of its
preferred stock, there can be no assurance that the Company will not do so in
the future. See "Description of Securities - Preferred Stock."
Shares Eligible for Future Sale; Potential Adverse Impact of Concurrent
Offering by Selling Securityholders. Concurrently with this Offering, the
Company is registering for sale an aggregate of 905,500 Selling Securityholders'
Warrants and 905,500 Selling Securityholders' Warrant Shares. The Selling
Securityholders have entered into agreements with the Underwriter not to sell
their Redeemable Warrants or Warrant Shares for a period of three months,
following the completion of the Offering, without the prior written consent of
the Underwriter, which may be granted or withheld in the Underwriter's
discretion. See "Underwriting."
The Company currently has 3,878,747 shares of Common Stock outstanding
that are "restricted securities," as that term is defined under Rule 144
promulgated under the Securities Act. As of April 29, 1997, 1,560,358 shares of
Common Stock were become eligible for sale under Rule 144. In general, under
Rule 144, a person who has satisfied a one-year holding period may, under
certain circumstances, sell within any three month period a number of shares of
Common Stock that does not exceed the greater of 1% of the then outstanding
shares of Common Stock or the average weekly trading volume in such shares
during the four calendar weeks prior to such sale. Rule 144 also permits, under
certain circumstances, the sale of shares without any quantity or other
limitation by a person who is not an affiliate of the Company and who has
satisfied a two-year holding period. All holders of restricted securities of the
Company have agreed not to publicly sell shares of the Company's Common Stock
for a period of between one and two years from the date of this Prospectus
without the prior written consent of the Underwriter. Any substantial sale of
securities upon the expiration or earlier release of the lock-up, under Rule 144
or otherwise could have a significant adverse effect on the market price of the
Company's securities. See "Shares Eligible for Future Sale."
Effect of Issuance of Common Stock Upon Exercise of Warrants and
Options; Possible Issuance of Additional Common Stock and Options. Immediately
after the Offering, assuming the Underwriter's Over- Allotment Option is not
exercised, the Company will have an aggregate of 16,815,753 shares of Common
Stock authorized but unissued and not reserved for specific purposes and an
additional 1,775,500 shares of Common Stock unissued but reserved for issuance
pursuant to (i) the Company's 1997 Stock Option Plan, (ii) outstanding options
and warrants, (iii) exercise of the Redeemable Warrants, (v) exercise of the
Over-Allotment Option and the Redeemable Warrants underlying the Over-Allotment
Option and (v) exercise of the Underwriter's Warrants and the Redeemable
Warrants included therein. All of such shares may be issued without any action
or approval of the Company's stockholders. Although there are no present plans,
agreements, commitments or undertakings with respect to the issuance of
additional shares or securities convertible into any such shares by the Company,
any shares issued would further dilute the percentage ownership of the Company
held by the public stockholders. The Company has agreed with the Underwriter
that, except for the issuances disclosed in or contemplated by this Prospectus
and issuances in connection with any merger or acquisition of another entity by
the Company, it will not issue any securities, without the Underwriter's
consent, including but not limited to any shares of Common Stock, for a period
of 24 months following the Effective Date, without the prior written consent of
the Underwriter. See "Underwriting."
The exercise of warrants or options and the sale of the underlying
shares of Common Stock (or even the potential of such exercise or sale) may have
a depressive effect on the market price of the Company's securities. Moreover,
the terms upon which the Company will be able to obtain additional equity
capital may be adversely affected since the holders of outstanding warrants and
options can be expected to exercise them, to the extent they are able, at a time
when the Company would, in all likelihood, be able to obtain any needed capital
on terms more favorable to the Company than those provided in the warrants and
options. See "Management - Stock Option Plan," "Description of Securities" and
"Underwriting."
No Assurance of Public Market; Volatility of Stock Price. Prior to this
Offering there has been no market for any of the Securities. There can be no
assurance that a trading market will develop after this Offering for the
Securities or that, if developed, it will be sustained.
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<PAGE>
The stock market has, from time to time, experienced significant price
and volume fluctuations that may be unrelated to the operating performance of
any particular company. Various factors and events, including future
announcements of new products by the Company or its competitors, developments or
disputes concerning, among other things, government regulations in the United
States, and general economic and other external factors, as well as fluctuations
in the Company's financial results, could have a significant impact on the
market price of the Securities.
NASDAQ Eligibility and Maintenance Requirements; Possible Delisting of
Securities. The Company has applied for listing of the Securities on NASDAQ. The
Securities and Exchange Commission (the "Commission") has approved rules
imposing listing criteria for securities on NASDAQ, including maintenance
standards. In order to qualify for initial quotation of securities on NASDAQ, a
company, among other things, must have at least $4,000,000 in total assets,
$2,000,000 in stockholders' equity, $1,000,000 in market value of the public
float and minimum bid price of $3.00 per share. To maintain NASDAQ listing, a
company, among other things, must have at least $2,000,000 in assets and
$1,000,000 in capital and surplus and its stock must have a minimum bid price of
$1.00; provided, however, that a company shall not be required to maintain the
$1.00 per share minimum bid price if it maintains a public float of $1,000,000
and $2,000,000 in capital and surplus. NASDAQ has recently proposed
revisions to its maintenance criteria which if adopted would make it more
difficult for a company to maintain its listing. If the Company is unable to
satisfy the NASDAQ maintenance criteria for listing, its Securities may be
delisted from NASDAQ. In such event, trading, if any, of the Securities would
thereafter be conducted in the over-the-counter market, the so-called "pink
sheets," or the National Association of Securities Dealers, Inc.'s (the "NASD")
"Electronic Bulletin Board." As a consequence of such delisting, an investor
would likely find it more difficult to dispose of, or to obtain quotations as
to, the price of the Securities.
Penny Stock Regulation. In the event that the Company is unable to
satisfy NASDAQ's maintenance criteria requirements, or its Common Stock falls
below the minimum bid price of $3.00 per share for the initial quotation,
trading of the Securities would be conducted in the "pink sheets" or the NASD's
Electronic Bulletin Board. In the absence of the Common Stock being quoted on
NASDAQ or the Company's having $2,000,000 in stockholders' equity, trading of
the Common Stock would be covered by Rule 15g-9 promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), for non-NASDAQ and
non-exchange listed securities. Under such rule, broker-dealers who recommend
such securities to persons other than established customers and accredited
investors must make a special written suitability determination for the
purchaser and receive the purchaser's written agreement to a transaction prior
to sale. Securities are exempt from this rule if the market price is at least
$5.00 per share.
The Commission has adopted regulations that generally define a "penny
stock" to be an equity security that has a market price of less than $5.00 per
share or an exercise price of less than $5.00 per share subject to certain
exceptions. Such exceptions include equity securities listed on NASDAQ and
equity securities issued by an issuer that has (i) net tangible assets of at
least $2,000,000, if such issuer has been in continuous operation for less than
three years, or
17
<PAGE>
(ii) net tangible assets of at least $5,000,000, if such issuer has been in
continuous operation for less than three years, or (iii) average revenue of at
least $6,000,000 for the preceding three years. Unless an exception is
available, the regulations require the delivery, prior to any transaction
involving a penny stock, of a risk disclosure schedule explaining the penny
stock market and the risks associated therewith.
If the Securities were to become subject to the regulations applicable
to penny stocks, the market liquidity for the Securities would be severely
affected, limiting the ability of broker-dealers to sell the securities and the
ability of purchasers in this Offering to sell their Securities in the secondary
market. There is no assurance that trading in the Securities will not be subject
to these or other regulations that would adversely affect the market for such
securities.
Potential Adverse Effect of Redemption of Redeemable Warrants. The
Redeemable Warrants offered hereby are redeemable, in whole or in part, at a
price of $.10 per Redeemable Warrant (the "Redemption Price"), commencing one
year after the date of this Prospectus and prior to their expiration on the
fifth anniversary of the date of this Prospectus provided that (i) prior notice
of not less than 30 days is given to the Warrantholders, (ii) the closing bid
price of the Company's Common Stock shall have exceeded $__ per share [150% of
Exercise Price] for a period not less than 20 trading days in any 30 day trading
period ending not more than 15 days prior to the date on which the notice of
redemption is given. Warrantholders shall have exercise rights until the close
of the business day preceding the date fixed for redemption. Notice of
redemption of the Redeemable Warrants could force the holders to exercise the
Redeemable Warrants and pay the Exercise Price at a time when it may be
disadvantageous for them to do so, or to sell the Redeemable Warrants at the
current market price when they might otherwise wish to hold them, or to accept
the Redemption Price, which may be substantially less than the market value of
the Redeemable Warrants at the time of redemption. The Redeemable Warrants may
not be exercised unless the registration statement pursuant to the Securities
Act, covering the underlying shares of Common Stock is current and such shares
have been qualified for sale, or there is an exemption from applicable
qualification requirements, under the securities laws of the state of residence
of the Warrantholder. Although the Company does not presently intend to do so,
the Company reserves the right to call the Redeemable Warrants for redemption
whether or not a current prospectus is in effect or such underlying shares are
not, or cannot be, registered in the applicable states. Such restrictions could
have the effect of preventing certain Warrantholders from liquidating their
Redeemable Warrants. See "Description of Securities - Redeemable Warrants."
Current Prospectus and State Blue Sky Registration Required to Exercise
Redeemable Warrants. Warrantholders have the right to exercise the Redeemable
Warrants for the purchase of shares of Common Stock only if a current prospectus
which will permit the purchase and sale of the Common Stock underlying the
Redeemable Warrants is then effective, but there can be no assurance that the
Company will be able to keep effective such a Prospectus. Although the Company
intends to seek to qualify for sale the shares of Common Stock underlying the
Redeemable Warrants in those states in which the Securities are to be offered,
no assurance can be given that
18
<PAGE>
such qualification will occur. In addition, purchasers may buy Redeemable
Warrants in the aftermarket or may move to jurisdictions in which the shares of
Common Stock issuable upon exercise of the Redeemable Warrants are not so
registered or qualified during the period that the Redeemable Warrants are
exercisable. In such event, the Company would be unable to issue shares of
Common Stock to those persons desiring to exercise their Redeemable Warrants
unless and until the shares of Common Stock could be registered or qualified for
sale in the jurisdictions in which such purchasers reside, or an exemption to
such qualification exists or is granted in such jurisdiction. The Redeemable
Warrants may lose or be of no value if a prospectus covering the shares of
Common Stock issuable upon the exercise thereof is not kept current or if such
underlying shares of Common Stock are not, or cannot be, registered in the
applicable states. See "Description of Securities - Redeemable Warrants."
Relationship of Underwriter to Trading. The Underwriter may act as a
broker or dealer with respect to the purchase or sale of the Common Stock and
the Redeemable Warrants in the over-the-counter market where each is expected to
trade. The Underwriter also has the right to act as the Company's exclusive
agent in connection with any future solicitation of Warrantholders to exercise
their Redeemable Warrants. Regulation M, which was recently adopted to replace
Rule 10b-6, under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), may prohibit the Underwriter from engaging in any market-making
activities with regard to the Company's securities for a period of up to five
business days (or such other applicable period as Regulation M may provide)
prior to any solicitation by the Underwriter of the exercise of Warrants until
the later of the termination of such solicitation activity or the termination
(by waiver or otherwise) of any right that the Underwriter may have to receive a
fee for the exercise of Warrants following such solicitation. As a result, the
Underwriter and any solicitating broker/dealer may be unable to provide a market
for the Company's securities during certain periods while the Redeemable
Warrants are exercisable. Any temporary cessation of such market-making
activities could have an adverse effect on the market price of the Company's
securities.
Underwriter's Warrants and Registration Rights. In connection with this
Offering, the Company has agreed to sell to the Underwriter, for nominal
consideration, the Underwriter's Warrants which entitle the Underwriter to
purchase up to 120,000 shares of Common Stock and/or 120,000 Redeemable
Warrants. The securities issuable upon exercise of the Underwriter's Warrants
are identical to those offered pursuant to this Prospectus. The Underwriter's
Warrants are exercisable at a price of $___ per share and $___ per Redeemable
Warrant [150% of initial public offering price of Common Stock and Redeemable
Warrants] for a period of four years commencing one year from the date of this
Prospectus. The exercise of the Underwriter's Warrants and the Redeemable
Warrants contained in the Underwriter's Warrants may (i) dilute the value of the
shares of Common Stock to be acquired by holders of the Redeemable Warrants,
(ii) adversely affect the Company's ability to obtain equity capital and (iii)
adversely affect the market price of the Common Stock if the Common Stock
issuable upon the exercise of the Underwriter's Warrants and the Redeemable
Warrants contained in the Underwriter's Warrants are sold in the public market.
The Underwriter has been granted certain "piggyback" and demand registration
rights for a period of five years from the date of this Prospectus with respect
to the registration under the Securities Act of the securities directly
19
<PAGE>
or indirectly issuable upon exercise of the Underwriter's Warrants. The
exercise of such rights could result in substantial expense to the Company.
See "Underwriting."
20
<PAGE>
DILUTION
At December 31, 1996 the Company had a pro forma net tangible book
value (deficit) of approximately ($3,161,000) or ($.81) per share, which
includes adjustments to reflect the transactions occurring after December 31,
1996 as described in Note 3 of the "Notes to Unaudited Pro Forma Financial
Statements".
The proforma net tangible book value subsequent to December 31, 1996
which gives effect to the Common Stock and Redeemable Warrants offered hereby
(not including the Over-Allotment Option) and the receipt of the net proceeds
therefrom, would have been $1,423,000 or $.27 per share. This represents an
immediate increase in net tangible book value of $1.08 per share to existing
stockholders, which is due solely to the purchase of Common Stock by investors
in this Offering, and an immediate dilution of $4.23 per share to new investors
(based on an assumed price of $4.50 per share). "Dilution" is the difference
between the initial public offering price and the proforma net tangible book
value per share.
The following table illustrates the per share dilution to the new
investors as of December 31, 1996:
<TABLE>
<S> <C> <C>
Public offering price per share of Common Stock........ $4.50
Deficit pro forma net tangible book value per share
before the Offering.................................... ($0.81)
Increase attributable to new investors................. $1.08
-------
Pro forma net tangible book value per share after the
Offering............................................... $0.27
-------
Dilution to new investors.............................. $4.23
======
</TABLE>
The above table assumes no exercise or conversion of outstanding options,
warrants and debt. To the extent that stock options or warrants are exercised at
prices below the public offering price per share, there will be further dilution
to new investors. See "Risk Factors," "Certain Transactions" and "Underwriting."
The following table summarizes the differences between the existing
stockholders and new investors with respect to the number of shares of Common
Stock purchased from the Company, and the total consideration and the average
price per share paid:
<TABLE>
<S> <C> <C> <C> <C> <C>
Percentage
of Average
Outstanding Percent of Price per
Shares of Shares of Total Total Share of
Common Common Consideration Consideration Common
Stock Stock Paid Paid Stock
Existing
Stockholders.... 4,058,747 (1) 77.2% $ 1,500,000 21.71% $0.37
New Investors... 1,200,000 22.8% 5,400,000 78.3% $4.50
------------ ----------- -------------- ----------------
5,258,747 (2) 100.0% $ 6,900,000 100.0%
============ =========== ============== ================
<FN>
(1) Includes 180,000 shares to be issued to certain individuals on the date of
this Prospectus in connection with the purchase of the four companies that
comprise the Private Label Group. See "Certain Transactions."
(2) Does not include: (i) 1,200,000 shares of Common Stock issuable upon
exercise of the Warrants offered hereby; (ii) up to an additional
360,000 shares of Common Stock issuable upon exercise of the Underwriter's
Over-Allotment Option and the underlying Redeemable Warrants; (iii)
240,000 shares of Common Stock issuable upon exercise of the Underwriter's
Warrants and the Redeemable Warrants included therein; (iv) 750,000 shares
of Common Stock issuable upon exercise of options available for grant
under the 1997 Stock Option Plan; (v) 325,500 shares of Common Stock
reserved for issuance pursuant to options and warrants issued in
connection with financing and consulting agreements; and (vi) 850,000
shares reserved for issuance pursuant to warrants from private placements.
</FN>
</TABLE>
<PAGE>
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company
at December 31, 1996; and (ii) such capitalization "As Adjusted" to reflect the
issuance and sale of the Common Stock and Redeemable Warrants offered hereby,
the receipt of the net proceeds of the Offering, approximately $4,465,000, and
transactions subsequent to December 31, 1996 that have a material impact on the
financial statements. See "Notes To Unaudited Pro Forma Financial Statements"
and "Use Of Proceeds."
<TABLE>
<S> <C> <C>
Historical As Adjusted (1) (2)
(In thousands) (In thousands)
Current maturities of long term debt.................. $ 1,959 $ 922
-------------- -----------------
Long-term debt, less current portion.................. 2,822 2,822
-------------- -----------------
Stockholders' Equity:
Common Stock, $.001 par value, authorized
24,000,000 shares; 3,878,747 issued and
outstanding; 5,258,747 shares issued and
outstanding as adjusted............................... 4 5
Preferred Stock, $.001 par value, authorized
1,000,000 shares; 0 issued and outstanding;
0 issued and outstanding as adjusted.................. -- --
Additional paid-in-capital............................ 2,382 7,611
Accumulated deficit................................... (2,111) (2,245)
-------------- -----------------
275 5,371
Less: stock subscriptions receivable.................. (2) (2)
-------------- -----------------
Total Stockholders' Equity............................ 273 5,369
-------------- -----------------
Total Capitalization.................................. $ 5,054 $ 9,113
============== =================
<FN>
(1) Does not include: (i) 1,200,000 shares of Common Stock issuable upon
exercise of the Warrants offered hereby; (ii) up to an additional
360,000 shares of Common Stock issuable upon exercise of the Underwriter's
Over-Allotment Option and the underlying Redeemable Warrants; (iii)
240,000 shares of Common Stock issuable upon exercise of the Underwriter's
Warrants and the Redeemable Warrants included therein; (iv) 750,000 shares
of Common Stock issuable upon exercise of options available for grant
under the 1997 Option Plan; (v) 325,500 shares of Common Stock reserved
for issuance pursuant to options and warrants issued in connection with
financing and consulting agreements; and (vi) 850,000 shares reserved for
issuance pursuant to warrants from private placements.
(2) Includes all adjustments described in the "Notes To Unaudited Pro Forma
Financial Statements."
</FN>
</TABLE>
<PAGE>
USE OF PROCEEDS
Assuming the sale of the securities offered hereby (based on an assumed
offering price of $4.50 per share of Common Stock and $.10 per Redeemable
Warrant), the net proceeds to the Company, after deducting estimated
underwriting discounts and commissions and expenses payable by the Company in
connection with the Offering are estimated to be approximately $4,539,400
(5,259,760 if the Underwriter's Over-Allotment Option is exercised in full).
The Company expects to use the net proceeds as follows:
<TABLE>
<S> <C> <C>
Percentage of
Purpose Amount Net Proceeds
- ------- ------- ------------
Repayment of outstanding accrued
expenses and indebtedness(1) $1,937,500 42.7%
Marketing (2) $ 800,000 17.6%
Inventory (3) $1,000,000 22.0%
Equipment (4) $ 450,000 9.9%
Working Capital and General Corporate Purposes $ 351,900 7.8%
---------- -----
Total . . . . . . . . . . . . . $4,539,400 100%
========== =====
<FN>
(1) Represents (i) installments of principal and interest (estimated at
$448,000) due on the earlier of the date on which this Offering is
consummated or May 15, 1997, under purchase money promissory notes
payable to Michael J. Assante and Louis DiVita, for the
purchase of the companies comprising the Private Label Group, which
notes bear interest at 9% per annum and are due in installments through
October 2000; (ii) principal and interest (estimated at $230,000) due
under a purchase money promissory note given as part of the purchase
price for the assets of Scent Overnight a company of which Gerard
Semhon is a principal shareholder, which note bears interest at 9% per
annum and is due ten days after the date of this Prospectus; (iii) the
payment of interest due on a promissory note assumed by the Company in
connection with the acquisition of Scent Overnight (estimated at
$34,000); (iv) the payment of principal and interest (estimated at
$863,000) due under promissory notes aggregating $850,000 which were
issued in private placements which notes are due upon the earlier of
twelve months after the date of issuance or the date on which this
Offering is consummated and bear interest at the rate of 10% per annum;
(v) approximately $322,000 of accrued expenses and consulting fees,
which includes accrued consulting fees totalling approximately
$223,000 as of December 31, 1996, for consulting services rendered by
Messrs. Semhon, Bezas, Bell and Christakos in the amounts of
approximately $67,000, $53,000, $61,000, and $42,000, respectively
and (vi) the payment of $40,500 of principal and interest due under a
promissory note issued to Mr. Robert E. Lee, a principal stockholder of
the Company. See "Certain Transactions", "Management" and "Principal
Stockholders."
(2) Represents a portion of anticipated costs associated with marketing
and selling the Branded Products and the Distributed Fragrances,
including salaries, advertising, production and media costs.
25
<PAGE>
(3) Includes purchase of inventory for the sale of the Branded Products
and Distributed Fragrances.
(4) Includes purchase of production equipment for the Facility.
</FN>
</TABLE>
The Company has not determined the specific allocation of the net
proceeds within each of the various uses described above. Specific allocations
of such net proceeds will ultimately depend on the development and consumer
acceptance of the Company's products. The Company anticipates, based on
currently proposed plans and assumptions relating to its operations, that the
net proceeds of the Offering, together with cash flow from operations, will be
sufficient to satisfy the Company's anticipated cash requirements for the
12 months following the date of the Prospectus. During this period, the
Company's efforts will be directed at developing and implementing its
proposed business operations.
Prior to expenditure, the net proceeds of this Offering will be
invested in principally short-term money-market instruments. Any proceeds
received upon exercise of the Over-Allotment Option or exercise of outstanding
options and warrants will be used for working capital. Additional capital may
be required to finance the costs of implementing the Company's business plans.
26
<PAGE>
DIVIDEND POLICY
The Company has neither declared nor paid any dividends to its
stockholders since its inception and has no intention of declaring or paying any
dividends to its stockholders in the foreseeable future. See Risk Factors -
No Dividends and None Anticipated."
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
AZUREL LTD. AND SUBSIDIARIES (the Private Label Group and Scent Overnight)
GENERAL
Azurel, through its wholly-owned subsidiaries, manufactures, markets
and sells private label cosmetics, fragrances and skincare products. Prior to
the completion of the acquisitions of the subsidiaries, Azurel focused its
operations on negotiating and consummating such acquisitions and developing and
implementing marketing strategies for its Branded Products.
In August 1996, Azurel acquired the stock of the Private Label Group,
and in October 1996, Azurel acquired the stock of Scent Overnight. The
discussion below compares the pro forma 1996 period to the pro forma 1995 period
which assumes the acquisition of the Private Label Group and Scent Overnight on
January 1, 1995.
The following discussion and analysis should be read together with the
financial statements and notes for Azurel and Private Label Group included
herein.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage of net sales represented by certain items included in the pro forma
statements of operations:
<TABLE>
<S> <C> <C>
Pro forma
Year ended December 31,
1996 1995
----------------- ---------------
Net sales.............................. 100.0 % 100.0 %
Cost of goods sold..................... 75.3 78.8
----------------- ---------------
Gross profit........................... 24.7 21.2
Selling, general and
administrative expenses................ 31.6 28.1
Amortization expense................... 2.0 2.4
----------------- ---------------
Operating (loss)....................... (8.9) (9.3)
Interest expense....................... 8.5 4.8
----------------- ---------------
Net (loss)............................. (17.4) % (14.1) %
================= ===============
</TABLE>
PRO FORMA YEAR ENDED DECEMBER 31, 1996 (THE "1996 PERIOD") COMPARED TO
THE PRO FORMA YEAR ENDED DECEMBER 31, 1995 (THE "1995 PERIOD")
Net sales for the year ended December 31, 1996 increased by
$1,782,434, or approximately 21%, from the comparable period of the 1995 Period.
The increase is attributable primarily to an expansion of the Private Label
Group's customer base. In addition, a significant new customer provided sales of
approximately $500,000 in the 1996 Period. Sales to the Private Label Group's
two largest customers in the year ended December 31, 1996 accounted for 33.8% of
net sales, as compared to 35% attributable to these same two customers in the
year ended December 31, 1995. The largest customer in the 1996 Period accounted
for 21.7% of net sales in that period as compared to 21.4% in the 1995 period.
Although the Private Label Group successfully obtained new customers
and increased sales to existing customers in the 1996 Period, there can be no
assurance that the Private Label Group will continue to increase its sales to
such customers or obtain significant new customers in future periods.
Cost of goods sold for the 1996 Period were $7,679,098, or 75.3% of
net sales, as compared to $6,627,898, or 78.8% of net sales for the 1995 Period.
Although the Private Label Group experienced slightly higher material and labor
costs, the Private Label Group was able to increase the gross profit percentage
through a favorable product mix experienced during the third and fourth quarters
of 1996.
Selling, general and administrative expenses for the 1996 Period were $3,220,828
as compared to $2,362,957 for the comparable 1995 Period, representing an
increase of $857,871, or approximately 36%. As a percentage of net sales, these
expenses increased from 28.1% in the 1995 Period to 31.6% in the 1996 Period.
The increase in this ratio is primarily attributable to an increase in
consulting fees, office salaries, professional fees, advertising and royalty
expenses. Consulting fees for the 1996 Period were $407,803 as compared to
$143,288, representing an increase of $264,515. Consulting fees relate to
services provided to the Company regarding the development of its product lines.
Office salaries and professional fees increased in the 1996 Period by
approximately $95,000 and $160,000, respectively, as compared to the 1995
Period. Royalty expense and advertising expenses increased in the 1996 Period by
approximately $125,000 as compared to the 1995 Period. Such expenses increased
in the relevant time periods as a result of increased activity in the
development of product and marketing strategies.
Interest expense increased from $404,570 in the 1995 Period to
$864,828 in the 1996 Period. The increase is attributable to higher rates on
increased borrowings under the Private Label Group's revolving credit facility
and increased borrowings outstanding for a greater portion of the 1996 Period
compared to the 1995 Period and to an increase in amortization in the 1996
Period of debt discounts of $335,420 compared to $10,810 in the 1995 Period.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
From inception to date, Azurel's operations have been funded by a
combination of debt and equity financings. Azurel borrowed an aggregate of
$528,750 in the 1995 Period and repaid an aggregate of $28,750 of such
borrowings in that period (The various obligations are more fully described in
the notes to the financial statements). In the 1996 Period, Azurel borrowed an
additional aggregate amount of $1,037,829 from various lenders and repaid
$626,149 of borrowings in that same period. Azurel offered certain holders of
outstanding promissory notes the right to convert their debt into shares of
common stock at $2.00 per share. In July and October 1996, lenders with
obligations totaling $667,494 (including principal and interest) elected to
convert such loans into 438,747 shares of Common Stock. Azurel sold 750,000
shares of Common Stock at $2.00 per share from February through July 1996. In
the 1996 Period, Azurel had net proceeds of $1,283,900 from these sales.
Proceeds of the aforementioned financings were utilized from inception
to date to (i) finance operations (approximately $747,000), (ii) advance funds
to the Private Label Group ($855,600), (iii) fund increases to deferred
financing costs, furniture and equipment and deferred registration costs
($414,000), (iv) fund advances to certain stockholders ($184,000), and (v) fund
the acquisition of the Private Label Group ($665,000).
GOING CONCERN
Azurel's financial statements have been presented on a basis that it
is a going concern. Due to significant losses incurred in the 1995 and 1996
Periods, the accountants report has an explanatory paragraph stating that the
Azurel's continued existence is dependent upon its ability to become profitable
and obtain additional equity and/or debt financing of which no assurance can be
given.
Azurel plans to raise additional equity through the sale of securities
in an initial public offering. The Company believes that the net proceeds from
the public offering will provide sufficient working capital for the next twelve
months. In addition, the Company plans to achieve profitable operations by
increasing revenues from the acquisition of the Private Label Group, the
acquisition of Scent Overnight and the launching of new product lines. The
Company also plans to reduce the cost of goods sold by upgrading of equipment,
reducing costs and initiating better controls over inventory.
<PAGE>
BUSINESS
This discussion contains forward-looking statements that involve risks
and uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include those discussed in "Risk Factors."
General
The Company directly and through wholly-owned subsidiaries,
manufactures, markets and sells cosmetics, fragrances and skin care products.
Through four wholly-owned subsidiaries comprising its Private Label Group,
acquired by the Company in August 1996, Company operates a manufacturing and
filling facility which sells cosmetics principally to major cosmetic companies
for sale by each customer under the customer's own brand name (commonly known as
"privat label" sales). In addition, in order to take advantage of the Company's
manufacturing capabilities and product development expertise, the Company
currently is developing cosmetic, skin care and fragrance lines which it intends
to market under brand names created internally or owned by others and licensed
to the Company. These products are sometimes referred to as "Branded Products."
To date, the Company has developed only one line of Branded Products internally
and has obtained only one license to sell a product line using a brand name
owned by a third party. In addition, the Company intends, through its Scent 123
subsidiary, which acquired the assets of Scent Overnight in October 1996, to
sell well-recognized men's cologne and women's fragrances directly to the
consumer by overnight delivery through toll-free telephone numbers. These
products are sometimes referred to as "Distributed Fragrances."
Products and Services
Virtually all of the Company's present business is conducted through
the Private Label Group. The Company's Private Label Group consists of four
subsidiaries acquired in August 1996 from Michael J. Assante ("Assante"), who
continues to be employed as the President and CEO of the Private Label Group.
These subsidiaries operate a cosmetic facility (the "Facility") which
manufactures, fills and packages a broad range of cosmetics. The Facility also
includes a laboratory which develops cosmetic products formulae for customers
according to their specific requirements. The laboratory also develops and
maintains a library of cosmetic products formulae for use by customers who have
not developed their own formulae for a specific product. The laboratory also
performs quality control functions for the Facility and is responsible for
assuring compliance with governmental regulations regarding the manufacture and
packaging of cosmetics including compliance with GMP. Although the Private Label
Group was recently acquired by the Company, the Private Label Group has been in
business for more than 49 years and the Private Label Group's management is
remaining with the Company. Substantially all of the Private Label Group's
assets have been pledged to a financing institution to secure indebtedness
relating to a financing agreement. In addition, all of the outstanding capital
stock of the entities comprising the Private Label Group has been pledged to
Assante to secure indebtedness related to the acquisition of the Private Label
Group. See "Management," "Certain Transactions" and "Government Regulation."
The Facility manufactures and fills a wide variety of cosmetics,
including body lotions and powders, lipsticks, mascara, eye shadows, eye liners,
skin care products and hair care products. Depending upon the customer's
requirements, the Company either provides some or all of the raw ingredients and
packaging for the customer's product or uses material provided directly by the
customer. A quantity of raw ingredients and packaging material is maintained in
inventory, but generally such materials are purchased by the Company to fill
specific orders. Presently, the Facility does not manufacture or fill
fragrances, which require additional
35
<PAGE>
machinery, nor does the Facility manufacture or fill nail products or liquid
soaps.
Generally, a customer places an order for a quantity of merchandise to
be produced and shipped over a period of time, typically one to three months,
with payment due 30 days after each shipment. While the raw ingredients and
packaging materials to produce an order are generally readily available, for
cash management purposes, the necessary raw materials and packaging are ordered
by the Company for receipt by it in stages to coincide with the manufacturing/
packaging cycle and the customer's delivery requirements. In this way, the
Company minimizes the need to maintain an inventory of finished goods, and in
effect, produces product only against the order.
Except for nail products, liquid soaps and fragrances, which it does
not manufacture or fill, the Facility does not limit its services to a
particular market niche within the cosmetic industry. It manufactures a wide
variety of high and low priced products sold in department, specialty and
discount stores. The Company believes that this diversity minimizes its exposure
to business cycles and changes in customer preferences over time.
Since the manufacturing operation has been in business for over 49
years, the laboratory maintains a large library of formulae for a wide variety
of products. Moreover, the laboratory continuously develops new formulae based
on the Company's assessment of future product demand, changing consumer
preferences and the availability of new ingredients. The Company believes that
it can quickly and efficiently develop formulations for a customer's product by
using or adapting a formula from its library. When the Company develops a
formula for a customer's product, the Company, and not the customer, owns the
formula; however, since it is the Company's policy not to use the same formula
for different customers, customers generally continue purchasing from the
Company so long as they sell the product and do not change the formula or have
another laboratory replicate the product formula.
The Company's marketing efforts revolve around its sales force of two
full-time sales representatives and contacts maintained or developed by its
management.
In order to take advantage of the Company's manufacturing capabilities
and product development expertise, the Company currently is developing cosmetic,
skin care and fragrance lines which it intends to market and distribute under
brand names created internally or owned by others and licensed to the Company.
These products are sometimes referred to as "Branded Products." To date, the
Company has developed only one line of Branded Products internally and has
obtained only one license to sell a product line using a brand name owned by a
third party.
Development of the Company's first Branded Product line, an original
unisex fragrance line and related grooming products to be sold under the Sports
Extreme USA(TM) trade name, commenced in January 1996 and was completed in
September 1996, at which time marketing of the line commenced. Presently, the
Sports Extreme USA(TM) line consists of a unisex
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fragrance, bath and shower gel ("Clean Up"), muscle and body relaxer ("Soothe")
and face moisturizer containing sunscreen and alphahydroxy fruit acids
("Protect"). The marketing of the Sports Extreme USA(TM) line will feature
"extreme" sports such as mountain climbing, ice climbing, bungee jumping, sky
surfing, in-line skating, snowboarding, snow bicycling and mountain biking. The
fragrance for the Sports Extreme USA(TM) line was developed for the Company by
Firmenich Incorporated, a major developer of fragrances for the cosmetic
industry. The Company anticipates retail sales of this line to commence in the
second quarter of 1997.
The Company anticipates selling Branded Products in the United States
and internationally. In the United States, the Company expects to sell directly
to retail outlets that sell similar products, such as chain drug stores, mass
merchandisers and discount stores. Initially, the Company's personnel,
independent sales representatives or a combination of the two will sell the
Branded Products in the United States. Internationally, the Company expects to
sell to distribution companies having a major presence in each major market. To
date sales of approximately $48,000 of Branded Products have been made. The
Company is engaged in discussions with distributors relating to distribution of
the Company's Branded Products in France and the Middle East. The Company has
had discussions with other potential foreign distributors, but no orders have
yet been received. The Company expects that its relationship with the foreign
distributors will be exclusive for a particular area but will not require the
distributor to purchase any minimum quantity of products.
In June 1996, the Company began developing cosmetics, fragrances
and related products for sale under the Members Only trade name pursuant to a
license agreement with the owner of the Members Only trade name (the
"Licensor"). The Members Only trade name is a brand name used on men's
outerwear, active wear and a wide variety of other merchandise which has been
marketed on television, radio and print media in the United States.
The license agreement relating to the Members Only trade name grants
the Company the exclusive right in the United States, Canada, Great Britain,
Japan, Korea, Chile, Uruguay, Venezuela and Argentina to manufacture and
distribute fragrances, grooming products and cosmetics under the Members Only
trade name (the "License"). Under certain circumstances, the Company may also
sell Members Only cosmetics and fragrances in other countries except China and
Taiwan. The License expires on September 30, 2001. The Company has a right to
renew for an additional five year term subject to certain conditions, including
the requirement that the Company achieve certain minimum sales of the licensed
products. Under the License, the Company is required to pay a royalty of five
percent of net sales, subject to minimum royalties which begin at $100,000 for
the period ending September 30, 1997 (16.5 months) and increase to $375,000 for
the last year of the initial term. The minimum royalty is payable in
installments during the applicable year. The Company's manufacture, sale and
promotion of Members Only fragrances, grooming products and cosmetics is subject
to the prior review and approval of such products by the Licensor as is typical
in similar licenses. The Licensor has approved the products currently being
developed by the Company.
The fragrance for the Company's Members Only line was created for the
Company by International Flavors and Fragrances, Inc., a major fragrance
manufacturer. The Company anticipates that development of the line will be
completed in the third quarter of 1997 and that retail sales of the Members Only
line will commence by the fall of 1997.
While the Company has had discussions with other companies, it has not
entered into any other formal agreements for the development of cosmetic and
fragrance lines under brand names owned by other companies. There can be no
assurance that the Company will market successfully any original cosmetic or
fragrance line, or that the Company will enter into any additional formal
agreements for the development of cosmetic and fragrance lines for other
companies either under brand names created internally or owned by others and
licensed to the Company.
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<PAGE>
As a complement to, and in expansion of, its marketing and distribution
activities relating to Branded Products, the Company, through its Scent 123
subsidiary, intends to sell well-recognized men's cologne and women's
fragrances directly to consumers, initially by overnight delivery. These
products are sometimes referred to as "Distributed Fragrances". A customer will
be able place an order for the delivery of a Distributed Fragrance through
toll-free telephone numbers. The Company has secured "1-800-SCENT-123" and
"1-888-SCENT-123" as its toll-free telephone numbers.
The Company expects to begin test marketing of the Distributed
Fragrances in the fourth quarter of 1997 and, if successful, to begin national
marketing in February or March 1998. The Company has engaged, and is working
with, a communications and marketing firm to assist it in concept development
and creation of a logotype and advertising materials. In the future, the
Company may add other gift products to its product offerings and may offer
other forms of delivery.
The Company has not yet secured any sources of supply for the
Distributed Fragrances. The Company believes it will be able to purchase a
majority of the Distributed Fragrances directly from fragrance manufacturers,
but if it cannot do so, it believes other sources of supply are available. The
Company contemplates selling only a limited selection of sizes of the most
popular perfumes and colognes. From a fragrance manufacturer's perspective, the
Company believes that by not selling the full selection of fragrances, sizes and
related grooming products, it will offer a distribution channel complementing,
rather than competing with, the manufacturer's traditional distribution
channels.
The Company plans to use independent order taking, order fulfillment,
warehousing and shipping services for the sale of the Distributed Fragrances.
Although the Company has not yet engaged any such firms, the Company believes
that there are many firms available that can provide these services. A portion
of the assets acquired by the Company in the acquisition of Scent Overnight
included the results of the investigation, pricing and proposals of such firms.
The Company intends to use the results of this research to expedite the
commencement of the sale of the Distributed Fragrances. See "Certain
Transactions."
Competition
All aspects of the cosmetic, fragrance and skin care industry are
subject to intense competition throughout the world. In all aspects of its
business, the Company will compete with numerous companies, many of which are
better known in the industry and have established channels of distribution and
substantially all of which have greater financial and other resources than the
Company. These competitors include Estee Lauder, Revlon, Avon and Maybelline.
The Company competes against approximately thirty companies in the
United States which manufacture and/or package cosmetic products for
third-parties. To a lesser degree, the Company competes with cosmetic companies
which have their own manufacturing facilities that can produce all, or a part,
of their own products. The Company believes that the primary elements of
competition in the private label manufacture of cosmetics differ depending upon
the
38
<PAGE>
retail price point of the particular product. With respect to higher priced
cosmetics and fragrances, the principal methods of competition are quality,
including consistency of the work performed, and reliability of meeting delivery
dates. With respect to lower priced products, the principal method of
competition is price. The Company believes that the Facility has a reputation
in the cosmetic industry as a high quality, reliable source for manufacturing
and packaging cosmetics. It is the Company's belief that the availability of its
laboratory gives it a competitive advantage over those firms not having
laboratories to assist customers in the formulation of their products. The
Company also believes that its ability to produce a broad range of products for
sale at varying retail price points is beneficial in attracting and retaining
customers who would prefer all of their products to be produced by the same
manufacturer.
In selling the Branded Products, the Company will compete against
numerous companies, some of which are customers of the Private Label Group.
Many of these competitors are better known in the industry, have established
channels of distribution and greater financial and other resources than the
Company. To date, the Company has not sold any Branded Products, and the
Company has entered into only one formal agreement with a third party regarding
the marketing of cosmetics and fragrances under a brand name owned by such
third party.
The Company believes that the primary elements of competition in the
sale of Branded Products are product awareness and consumer acceptance of the
competing brands. Achieving market acceptance may require substantial marketing
efforts and expenditure of significant funds. Since the Company has limited
financial resources, it will not be able to utilize various promotional
techniques used by its competitors. The Company, in order to compete
successfully, intends to market its Branded Products to niche markets such as
chain drug stores, discount stores and mass merchandisers and to develop Branded
Products which it believes will appeal to the customers of these retailers. The
Company does not expect to sell its Branded Products to prestige department
stores and specialty retailers where it believes its limited financial resources
will put it at the greatest competitive disadvantage. There can be no assurance
that the Company will successfully develop or market any Branded Product.
In the sale of Distributed Fragrances, the Company will compete
directly with other direct marketers of such products, including catalogues and
television shopping stations and, to a lesser degree, with retail stores. The
Company expects that its major means of competition will be its convenience and
overnight order fulfillment. However, the Company's method of selling the
Distributed Fragrances is not proprietary in nature and may be replicated by
others. In addition, the Company's possible lack of exclusivity with suppliers
may allow such suppliers or other third parties to engage in the direct
marketing of fragrance brands including, but not limited to, the fragrance
brands offered by the Company. Management knows of several other companies that
currently market a fragrance line for direct delivery. In selling the
Distributed Fragrances, the Company also will compete directly with well-
established and widely-used companies in the flower-by-wire business, such
as Florist Transworld Delivery Association, as well as companies in the
gift-by-wire business. The Company's sale of the Distributed Fragrances also
expects to compete indirectly with retail stores selling similar fragrances.
There can be no assurance that the Company will be successful in selling the
Distributed Fragrances. See "Risk Factors - Competition."
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<PAGE>
Government Regulation
The Company's manufacturing activities and the Facility are subject to
extensive and rigorous governmental regulation relating to the protection of the
environment and the quality of manufacturing. Federal, state and local
regulatory agencies actively enforce these regulations and conduct periodic
inspections to determine compliance with such government regulations. The FDA
enforces regulations regarding GMP through periodic surveillances and audits.
The Company believes that the Private Label Group has obtained all material
approvals, permits and licenses for its manufacturing activities. In the event
that the Company seeks to expand its operations to manufacture and fill
fragrances, the Company would have to obtain new or expanded governmental
permits. However, changes in existing regulations, the interpretation thereof,
or adoption of new regulations could impose costly new procedures for
compliance, or prevent the Company from obtaining, or affect the timing of,
additional regulatory approvals. There can be no assurance that the Private
Label Group, if audited, will be found in compliance with GMP or environmental
regulations. Failure to comply with GMP, environmental or other applicable
regulatory requirements may result in fines, suspension of approvals,
cessation of distribution, product recalls and criminal prosecution, any of
which would have a material adverse effect on the Company.
The Federal Trade Commission ("FTC") and state and local authorities
regulate the advertising of over-the-counter drugs and cosmetics. The Federal
Food, Drug and Cosmetic Act, as amended (the "Food and Drug Act"), and the
regulations promulgated thereunder, and other federal and state statutes and
regulations, govern, among other things, the testing, manufacture, safety,
effectiveness, labeling, composition storage, record keeping, approval,
advertising and promotion of the Company's products. In general, products
falling within the FDA's definition of "new drugs" require pre-market approval
by the FDA while products falling within the FDA's definition of "cosmetics" do
not require pre-market approval. In the Company's opinion, the Company's
products, as they are and will be promoted, fall within the FDA's definition of
"cosmetics" and therefore do not require pre-market approval. There can be no
assurance, however, that the FDA will concur in this view. In the event that
the Company fails to comply with applicable regulations with respect to any
products, the Company may be required to change its labeling, formulation or
possibly cease manufacture and marketing of such products.
The FDA may require post-marketing testing and surveillance to monitor
the record of the Company's products and continued compliance with regulatory
requirements. The FDA also may require the submission of any lot of product for
inspection and may restrict the release of any lot that does not comply with FDA
standards, or may otherwise order the suspension of manufacture, recall or
seizure of non-compliant product is discovered. Product approvals may be
withdrawn if compliance with regulatory standards is not maintained or if
problems concerning safety or efficacy of a product are discovered following
approval.
The Company may also be subject to foreign regulatory authorities
governing testing or sales of certain of the Company's products. Whether or not
FDA approval has been obtained, approval of a product by the comparable
regulatory authorities of foreign countries must be obtained in certain cases
prior to the commencement of marketing of the product in those countries. There
can be no assurance that any product developed or marketed by the Company will
be approved by the FDA or any foreign regulatory authority.
The Company's proposed method of distributing the Distributed
Fragrances may include shipment by air transportation. The shipment of
fragrances by air is subject to federal regulation and the rules and regulations
promulgated by the DOT's Research & Special Programs Administration. The DOT
considers the shipment of alcohol, a component in fragrances, to be the
transportation of hazardous material. Scent 123 obtained a DOT exemption to
transport hazardous material by overnight air transportation. As long as Scent
123 has the DOT exemption, which is in effect until November 30, 1997, and may
thereafter be renewed upon application and approval thereof, Scent 123 believes
that its shipment of products will be in compliance with current DOT
regulations. Scent 123's loss of the DOT exemption would have a material
adverse effect on its business operations. There can be no assurance that Scent
123 will retain the DOT exemption or that Scent 123 will be able to comply with
any future DOT regulations.
The Company's sale of Distributed Fragrances is intended to utilize
toll-free telephone services. Toll-free telephone service is provided to users
by federally regulated common carrier telephone companies. The rates, terms and
technical quality of this service are subject to regulations promulgated by the
FCC and tariffs published by the telecommunications service provider. Except for
the sending of indecent, harassing or obscene messages or material, the
interstate sale of services or products by users of a toll-free telephone number
is not subject to direct federal regulation under the Communications Act of
1934. Fraudulent telephone messages are subject to criminal penalties under
federal and state laws. The Company does not believe that FCC regulations will
affect the proposed sale of Distributed Fragrances, but such regulations could
affect the price, terms, quality and availability of the toll-free telephone
services and may
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<PAGE>
have a material adverse effect on the Company.
Various laws and regulations relating to safe working conditions, and
other employment matters, including the Occupational Safety and Health Act, are
also applicable to the Company. The Company believes it is in substantial
compliance with all material federal, state and local laws and regulations
regarding safe working conditions, and other employment matters.
Trademarks
The Company has one United States registered trademark, Scent
Overnight(R), expiring on August 10, 2003, which was acquired in the acquisition
of Scent Overnight. The Company has filed applications for the registration of
trademarks for the "Scent 123(TM)" and Sports Extreme USA(TM) names in the
United States, but no registrations have yet been issued. See "Business" and
"Certain Transactions."
The right to use trademarks and trade names in connection with the sale
of the Branded Products is material to the Company's business. In cases where
the Company is the licensee of the trademark or trade name, the ownership of
the trademark or trade name will be retained by the licensor. In such cases,
the Company may be subject to material claims of infringement by third-parties
and may or may not be indemnified by the licensor.
The Company will be the owner of brand names developed by it and will
seek to establish protection of names. There can be no assurance, however, that
trademark rights would sufficiently protect the Company's right to use such
names or that, if and when the Company files trademark applications for such
names, such applications would be approved. Notwithstanding such ownership,
third-parties may claim that such names infringe such third party's rights. Such
claims may seek to require the Company to cease use of the names as well as pay
monetary damages. At the time any such claim is brought, the Company may not
have the financial resources to defend against such claim. The cessation of the
use of any brand name used by the Company might have a material adverse effect
on it.
Insurance
In view of the activities conducted by the Company, there are inherent
risks of exposure to certain liabilities including product liability and
negligence claims resulting from the use of the Company's products. The
Company currently carries a general liability insurance policy (including
products liability) which provides for coverage of $1,000,000 per occurrence
and $2,000,000 in the aggregate. The Company also carries property damage
insurance of approximately $2,000,000. The Company does not have insurance
coverage for product withdrawal or recall. Although the Company believes such
insurance is sufficient, no assurances can be given that the amount of
the Company's present coverage will prove to be adequate.
Major Customers and Suppliers
Approximately 22% and 12% of the Company's revenues for the year ended
December 31, 1996 were derived from two major customers. Approximately 21% and
14% of the Company's revenues derived from manufacturing activities for the year
ended December 31, 1995 were derived from the same two major customers. A loss
of the sales to either of both of these customers could have a material adverse
effect on the Company's results of operations. The Company's principal suppliers
of raw materials are The Mearl Corporation, Whittaker, Clark & Daniels and Chem
Central, Inc., from whom it purchases approximately 6.3%, 6.2% and 5.3%,
respectively, of the raw ingredients used by it.
Employees
The Company presently employs approximately 258 employees of which 253
are located at the Facility. Of the 253 employees located at the Facility, 43
are employed on a full-time basis and approximately 210 are employed on an
as-needed basis. The Company has regularly employed between 175 and 225
individuals on an as-needed basis for approximately 12 months and anticipates a
continued need for a minimum of 210 employees in order to maintain its
41
<PAGE>
current level of operations. Of the 253 employees located at the Facility, 224
are manufacturing personnel, 14 are laboratory personnel, three are executive
and administrative personnel and 12 are engaged in sales, marketing and customer
service. The manufacturing employees located at the Facility are covered by a
collective bargaining agreement with Local #300-S, Affiliated with the
Production Service and Sales Distribution Council, Industrial Union Council,
which expires on February 28, 1998.
Of the five employees that are not located at the Facility, four are
executive officers who, prior to this Offering, were retained by the Company as
consultants. Prior to this Offering, the Company utilized the services of
independent contractors, on consulting basis, to perform certain functions and
may continue to do so in the future. The Company believes that there is an
available pool of persons and firms who could be hired or retained by the
Company when needed. The Company considers its relationships with both union and
non-union employees to be satisfactory.
Seasonality and Backlog
The cosmetic and fragrance business in general is subject to seasonal
fluctuations, with net sales in the second half of the year substantially higher
than those in the first half as a result of increased demand by retailers in the
United States in anticipation of and during for the back-to-school, Thanksgiving
and Holiday seasons. The Company anticipates that the sales of Branded Products
and Distributed Fragrances will follow the general industry trend.
Although the Company's manufacturing business, as a whole, is not
seasonal, its product mix is subject to seasonal variations. Since the gross
profit margins on various products differ, the backlog and results of operations
in any period are not necessarily indicative of the result for the fiscal year.
At December 31, 1996 the Private Label Group's backlog of orders believed by
the Company to be firm was approximately $3,250,000 and at December 31, 1995
the amount of such orders was approximately $3,075,000. The Company expects that
approximately 90% of the current backlog will be filled during the current
fiscal year. Since the Company's orders for manufacturing and filling are
generally for the delivery of merchandise over a period of time, backlog is
viewed as an important indication of future performance.
Properties
The Company leases 2,400 square feet of space at 509 Madison Avenue,
New York, New York, which is used as its executive offices. The lease expires in
April 2001 and provides for an annual base rent of $74,000, including utilities.
These facilities are in good condition and adequate for the Company's current
needs, and substitute space is readily available.
The Company's manufacturing and packaging plant and laboratory and the
Private Label Group's general and executive offices are located at a leased
155,000 square foot building in Fairlawn, New Jersey. The lease, expiring in
August 2002 provides for annual rent of
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approximately $500,000, including common charges and real estate taxes and is
subject to increase based on increases in the Consumer Price Index. In addition,
the Company is responsible for substantially all repairs to the building. The
Facility is presently operating at less than full capacity and is in good
condition and physically adequate for the Company's present and foreseeable
purposes. The Company expects to continue to update the manufacturing and
packaging equipment at the Facility with more modern and automated equipment.
See "Use of Proceeds."
Contemporary, a related party, utilizes approximately 10,000 square
feet of the Facility on a month-to-month basis for approximately $6,500 per
month under an oral arrangement. There is no assurance that the landlord will
continue to permit this arrangement. See "Certain Transactions."
Legal Proceedings
The Company is not a party to any material legal proceeding, nor is it
aware of any pending or threatened claim of a material nature. The Company
anticipates that it will be subject to claims and suits in the ordinary course
of its business in the future, including product liability and negligence
claims. The Company believes that it will maintain adequate insurance to cover
such anticipated claims, of which, however, there can be no assurance.
The Company has defaulted in the payment of a promissory note, in the
amount of $35,000, given in settlement of a claim made by a creditor. The
Company is presently trying to negotiate an extension on the repayment of the
note until after the date of completion of the Offering.
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<PAGE>
MANAGEMENT
Directors, Officers and Significant Employees
The members of the Board of Directors, executive officers of the
Company, significant employees of the Company and their ages and positions with
the Company are as follows:
Name Age Position
Gerard Semhon 60 Chairman of the Board, Chief Executive Officer and
Director
Constantine Bezas 50 President and Director
Joseph Truitt Bell 39 Executive Vice President and Director
Van Christakos 49 Vice President-Operations, Secretary, Treasurer and
Director
Michael J. Assante 59 President and Chief Executive Officer,
Private Label Group
All of the Company's executive officers and directors intend to devote
their full business time to the affairs of the Company effective on the date of
this Prospectus. Prior to the Offering, Messrs. Semhon, Bezas, Bell and
Christakos were retained by the Company as consultants at an annual consulting
fee of $95,000, $85,000, $75,000 and $55,000, respectively, which fees are
inclusive of expenses incurred by each in the performance of their duties. As
consultants, each officer (except for Mr. Assante who has been employed
continuously by the Private Label Group) has devoted less than full time to the
affairs of the Company and has been permitted to devote time to other business
opportunities or activities. The amount of time devoted by each such officer to
the Company's affairs has varied from several hours per week to almost full time
depending upon the person involved and the period of time considered.
Additionally, each such officer has paid his own expenses incurred in performing
his services as a consultant. Commencing on the date of this Prospectus, all
executive officers will become employees. As employees they will be entitled to
employee benefits that are extended to employees generally, including
reimbursement of expenses. Directors are elected to serve until the next meeting
of stockholders and until their successors are duly elected and qualified.
Meetings of stockholders of the Company will be held on an annual basis upon the
completion of this Offering. However, if at any time an annual meeting is not
held for the election of directors, the then current directors will continue to
serve until their successors are elected and qualified. Vacancies and newly
created directorships resulting from any increase in the number of directors may
be filled by a majority vote of Directors then in office. Officers are appointed
by, and serve at the discretion of, the Board of Directors. Non-employee
directors will receive $1,500 for each Board meeting attended in person or by
conference telephone call and are eligible to reeive options under the 1997
Stock Option Plan. See "Use of Proceeds" and "Certain Transactions."
The Board of Directors has not established any committees, however,
after the completion of this Offering, it intends to establish an Audit
Committee and a Compensation Committee both of which are expected to be
comprised of two independent directors.
The following is a brief summary of the background of each director and
executive officer of the Company:
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<PAGE>
Gerard Semhon has served as Chairman of the Board and Chief Executive
Officer of the Company since its inception in June 1995. Mr. Semhon has over 30
years of management experience in consumer products. From March 1993 to May
1995, Mr. Semhon served as chairman of the board and chief executive officer of
Dominion Associates, Inc. ("Dominion"), a distributor of health and beauty aids
that he helped found. In May 1995, Dominion ceased operations due to a lack of
financial resources. From 1990 to March 1993, Mr. Semhon served as an
international consultant for several cosmetic companies, including Boots Ltd.
and Cambridge Development Corp. In 1983, Mr. Semhon founded Parlux Fragrances,
Inc.("Parlux"), where he was employed until 1990. Parlux operated as the United
States and Canadian distributor of the Giorgio Armani women's fragrance line.
From 1981 to 1983 Mr. Semhon served as Helena Rubinstein, Inc.'s president of
North American Operations. In 1976, Mr. Semhon became president of ITT Corp.
Cosmetics Division. From 1972 to 1976, Mr. Semhon served as Director of
International Marketing for Revlon International, Inc.
Constantine Bezas has served as President and a Director of the Company
since its inception. From March 1993 to May 1995, he served as president of
Dominion. From February 1991 to January 1993, he served as chairman of the
board of Bezas, Tore, Jacobson & Lawrence, Ltd., an advertising firm he
co-founded. From 1974 to 1991, Mr. Bezas was the principal owner/operator of
Aspasia, Inc. a chain of specialty jewelry stores with locations in Connecticut
and New York. During this same period Mr. Bezas also founded Video Cinema, a
four store chain of video rental stores, and Just Delicious, a specialty
gourmet food store chain. From 1971 to 1973, Mr. Bezas was employed by the
Aramis Division of Estee Lauder Cosmetics in various marketing and sales
capacities.
Mr. Bezas and his wife filed a petition under Chapter 11 of the Federal
Bankruptcy Act in December 1992. The case was converted to a proceeding under
Chapter 7 of such Act in August 1994 and Mr. Bezas received a discharge from the
proceeding in January 1995.
Joseph Truitt Bell has served as Executive Vice President and Director
of the Company since its inception. From November 1992 to June 1995, Mr. Bell
served as an independent consultant for several retail establishments. In 1983,
Mr. Bell co-founded Rosenthal-Truitt, Inc., an upscale men's furnishings and
accessories store in Los Angeles, where he worked until October 1992. That
company eventually expanded its business to four stores throughout California
and Texas.
Van Christakos has served as Secretary, Treasurer and a Director of the
Company since its inception. From March 1993 to May 1995, he was employed at
Dominion. From April 1991 to February 1993, Mr. Christakos served as president
of Hamilton Group, a marketing and consulting firm he founded. From 1975 to
1991, Mr. Christakos served as Director of Operations for Aspasia, Inc., a six
store specialty chain of jewelry stores located in Connecticut and New York.In
1984, Mr. Christakos was employed at Just Delicious, a specialty gourmet food
store chain, where he remained until 1986. From 1982 to 1984, he served as the
director of operations for Video Cinema, a four store video rental chain in the
New York Tri-State area.
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Michael J. Assante joined the Company in August 1996 as part of the
acquisition of the Private Label Group of which he had been the principal owner
and senior executive for more than 40 years. He presently serves as President
and Chief Executive Officer of the Private Label Group.
Executive Compensation
The following sets forth the compensation paid or accrued by the
Company to the Company's Chief Executive Officer and the Company's other
executive officers whose compensation exceeded $100,000 for the years ended
December 31, 1995 and 1996:
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
<S> <C> <C> <C>
Name and
Principal Position Year Salary ($) Bonus ($)
Gerard Semhon 1996 $ 95,648 (1) 0
Chairman and 1995 $ 48,000 (1) 0
Chief Executive
Officer
Michael J. 1996 $245,192 (2) 0
Assante 1995 $250,000 (2) 0
President, Private
Label Group
<FN>
(1) During the years ended December 31, 1995 and 1996, Mr. Semhon earned
such amounts for consulting services rendered to the Company, of which
approximately $28,500 and $67,500, respectively, was accrued but not
paid. See "Employment Agreements."
(2) Amounts earned prior to August 1996 represent Mr. Assante's salary as
President of the Private Label Group prior to its acquisition by the
Company. See Employment "Agreements."
</FN>
</TABLE>
The Company did not grant any stock options in the last fiscal year to
any of its executive officers. The Company does not have any long-term incentive
plans for compensating its executive officers.
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Employment Agreements
The Company entered into a three year employment agreement, to become
effective on the date of this Prospectus, with Gerard Semhon, the Company's
Chief Executive Officer and Chairman of the Board, under which Mr. Semhon will
serve as a full-time employee and officer and receive an annual salary of
$95,000 bonuses as determined by the Board of Directors. The employment
agreement entitles Mr. Semhon to an annual car allowance of $9,600 and the right
to participate in welfare plans adopted by the Company and to enjoy medical,
dental and disability insurance benefits and life insurance benefits under
policies obtained by the Company for such purposes. To date, the Company has not
instituted any employee welfare plans, nor has the Company obtained any dental
or disability insurance coverage for its employees. The agreement is
automatically renewable for successive one year terms. The employment agreement
may be terminated by the Company for cause, as described in the agreement. In
the event that the Company terminates Mr. Semhon's agreement without cause, Mr.
Semhon is to receive his full compensation for the remainder of the term of the
agreement, but in no event less than 12 months compensation. In the event of a
change in control of the Board of Directors, Mr. Semhon is to receive two times
his full compensation for the remainder of the term of the agreement. In
addition, the agreement precludes Mr. Semhon from disclosing confidential
information, and from competing with the Company during the term of his
employment and for one year thereafter. Prior to the effectiveness of the
employment agreement, Mr. Semhon served as a consultant to the Company,
receiving compensation at the rate of approximately $95,000 per annum, plus
expenses.
In August 1996, the Company entered into a three year employment
agreement with Michael J. Assante under which he will serve as President and
Chief Executive Officer of each of the four companies that comprise the Private
Label Group. Mr. Assante will receive a base annual salary of $195,000 and an
annual car allowance of $12,000. In addition, the Company will maintain a
$1.1 million life insurance policy on the life of Mr. Assante, the beneficiary
of which will be designated by Mr. Assante. The employment agreement is
renewable at his option for an additional two year period. Mr. Assante will
receive a bonus equal to 10% of the amount by which the Private Label Group's
annual profit, before interest and taxes but after depreciation and
amortization, exceeds $500,000 for each of the years ending December 31, 1997,
1998 and 1999. The employment agreement may be terminated by the Company for
cause, as described in the agreement. Mr. Assante is entitled to receive his
salary for the remaining term of the agreement as severance pay in the event
that the Company terminates the agreement without cause. In addition, the
agreement precludes Mr. Assante from disclosing confidential information
during the term of his employment and for five years thereafter, and from
competing with the Company during the term of his employment and for one year
thereafter.
Consulting Agreements
The Company entered into a consulting agreement with ETR
& Associates, Inc. ("ETR") in June 1995, pursuant to which ETR provides general
management advisory services to the Company ("Consulting Agreement"). Mr.
Robert E. Lee, an affiliate of the Company, is the President of ETR, the
General Partner of Woodward Partners, LLC ("Woodward") and exercises
investment power over the investments owned by Metco Investors, LLC ("Metco").
ETR, Woodward and Metco (sometimes referred to as the "Consulting Group")
advise the Company's Board of Directors on key policy decisions as requested by
the Company. The Consulting Group's services have been primarily related to
assistance in analyzing the acquisition of the Private Label Group and
identifying persons to enter into business relationships with the Company. These
persons include trade mark owners, packaging sources and owners of skin care
ingredients. In addition, Metco is assisting the Company in securing
distributors in England. Pursuant to the Consulting Agreement, in 1995 and
1996 the Company issued an aggregate of 175,000 shares of Common Stock to the
Consulting Group (25,000 shares to ETR, 50,000 shares to Woodward and 100,000
shares to Metco). See "Certain Transactions."
In July 1996, the Company entered into a brokerage and consulting
agreement with V.A.N. Marketing Ltd. ("VAN"). Under the agreement, VAN is
entitled to a finder's fee of 2 1/2 percent of the purchase price of the Private
Label Group, 5,000 shares of the Company's Common Stock and options to purchase
20,000 shares of the Company's Common Stock at $4.80 per share, expiring in
July 1999. $22,500 of the cash fee was paid upon closing of the acquisition
and the remaining balance is due one year thereafter. Additionally, VAN will
receive a monthly consulting fee of $3,000 for each of the first 12 months
following the closing of the acquisition and $5,000 for each of the next 12
months.
The Company entered into a two year consulting agreement with Metco
in November 1996 pursuant to which Metco provides general management consulting
services and advisory services in the establishment of distribution channels
in the United Kingdom and Ireland (the "Metco Consulting Agreement"). The
consulting fee of $16,500 due under the Metco Consulting Agreement was prepaid
in November 1996.
Mr. Louis DiVita ("DiVita"), a former shareholder of the companies
comprising the Private Label Group, serves as a consultant to the Private Label
Group pursuant to a consulting agreement dated August 17, 1993 pursuant to
which DiVita provides services relating to the Private Label Group's computer
system. The agreement provides for a monthly consulting fee of $11,117 through
August 2003. See "Certain Transactions."
Stock Option Plan
Prior to the effective date of this Prospectus, the Board of Directors
adopted, and stockholders approved, the Company's 1997 Stock Option Plan (the
"1997 Plan"). The 1997 Plan provides for grants to officers and other employees
of the Company, non-employee directors, consultants and advisors and other
persons who may perform significant services on behalf of the Company and will
be administered by the Board of Directors or a committee (the "Committee") of
two or more directors, each of whom is a "Non-Employee Director" within the
meaning of Rule 16b-3 under the Exchange Act. Pursuant to the 1997 Plan, options
to acquire an aggregate of 750,000 shares of Common Stock may be granted
subject to adjustment as provided in the 1997 Plan. As of the date of this
Prospectus, no options have been granted pursuant to the 1997 Plan.
The 1997 Plan authorizes the issuance of incentive stock options
("ISOs"), as defined in Section 422A of the Internal Revenue Code of 1986 (the
"Code"), as amended, as well as non-qualified stock options ("NQSOs"). Only
"employees" (within the meaning of Section 3401(c) of the Code) of the Company
shall be eligible for the grant of Incentive Stock Options. The exercise price
of each ISO may not be less than 100% of the fair market value of the Common
Stock at the time of grant, except that in the case of a grant to an employee
who owns 10% or more of the then outstanding stock of the Company or a
subsidiary or parent of the Company (a "10% Stockholder"), the exercise price
shall be at least 110% of the fair market value of the Common Stock on the date
of grant. The exercise price of each NQSO is determined by the
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Committee, but shall not be less than 85% of the fair market value of the
Common Stock on the date of grant. Notwithstanding the foregoing, the exercise
price of any option granted on or after the effective date of the registration
of any class of equity security of the Company pursuant to Section 12 of the
Exchange Act, and prior to six months after the termination of such
registration, may be no less than 100% of the fair market value per share on the
date of the grant. The Board or the Committee shall provide, in each stock
option agreement, when the term of the option subject to such agreement expires
and the date when it becomes exercisable, but in no event will an option granted
under the 1997 Plan be exercisable after the expiration of ten years from the
date it is granted. Options may not be transferred during the lifetime of an
option holder and are only exercisable during the optionee's lifetime only by
the optionee or by his or her guardian or legal representative. The 1997 Plan
shall terminate automatically as of the close of business on the day preceding
the 10th anniversary date of its adoption, subject to earlier termination.
To the extent Fair Market Value, as defined in the Code, of Common
Stock with respect to which Incentive Stock Options granted hereunder are
exercisable for the first time by an optionee in any calendar year exceeds
$100,000, such options granted shall be treated as NQSO's to the extent
required by Section 422 of the Code.
If the outstanding shares of Common Stock are changed by reason of an
adjustment to the capitalization of the Company or as a result of a merger or
consolidation, an appropriate adjustment shall be made by the Board or the
Committee in the number, kind and price of shares as to which options may be
granted and exercised.
Subject to the provisions of the 1997 Plan, the Board of Directors or
the Committee has the authority to determine the individuals to whom stock
options are to be granted, the number of shares to be covered by each option,
the exercise price, the type of option, the option period, the restrictions, if
any, on the exercise of the option, the terms for payment of the option price
and all other terms and provisions of such options (which need not be
identical). Payments by holders of options, upon exercise of an option, may be
made (as determined by the Board or the Committee) in cash or such other form
of payment as may be permitted under the 1996 Plan, including without
limitation, by promissory note or by delivery of shares of Common Stock.
Indemnification and Limitation on Directors' and Officers' Liabilities
As permitted by the Delaware General Corporation Law, the Company has
included in its Certificate of Incorporation a provision to eliminate the
personal liability of its directors for monetary damages for breach or alleged
breach of their fiduciary duties as directors, subject to certain exceptions. In
addition, bylaws of the Company provide that the Company is required to
indemnify its officers, directors and employees and agents under certain
circumstances, including those circumstances in which indemnification would
otherwise be discretionary, and the Company is required to advance expenses to
its officers and directors as incurred in connection with proceedings against
them for which they may be indemnified. The bylaws provide that the Company,
among other things, will indemnify such officers and directors, employees and
agents against certain liabilities that may arise by reason of their status or
service as directors, officers or employees (other than liabilities arising from
willful misconduct of a culpable nature), and to advance their expenses incurred
as a result of any proceeding against them as to which they could be
indemnified. At present the Company is not aware of any pending or threatened
litigation or proceeding involving a director, officer, employee or agent of the
Company in which indemnification would be required or permitted. The Company
believes that its charter provisions and indemnification agreements are
necessary to attract and retain qualified persons as directors and officers.
Under Delaware law, Directors of the Company are not liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty,
except for liability in connection with (i) a breach of duty of loyalty, (ii)
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) dividend payments or stock repurchased in
violation of Delaware law or (iv) any transaction in which a director has
derived an improper personal benefit.
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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 informed that in the
opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
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PRINCIPAL STOCKHOLDERS
The following table sets forth, as of the date of this Prospectus,
immediately before and after the Closing, but before the exercise of any
Redeemable Warrants, certain information concerning the shares of Common Stock
beneficially owned by each director and officer of the Company, by all officers
and directors of the Company as a group, and by each stockholder known by the
Company to be a beneficial owner of more than 5% of the outstanding shares of
Common Stock.
<TABLE>
<S> <C> <C> <C> <C>
Number of Shares Percentage of
Beneficially Owned (2) Common Stock (2)
Name and Address Before After Before After
of Beneficial Owner (1) Offering Offering Offering Offering (3)
Gerard Semhon 338,200 (4) 338,200 8.7% 6.4%
Constantine Bezas 195,634 195,634 5.0% 3.7%
Joseph Truitt Bell 146,233 146,233 3.8% 2.8%
Van Christakos 110,933 110,933 2.9% 2.1%
Tusany Investment &
Trade S.A.(5) 1,559,355 (6) 1,559,355 40.2% 29.6%
c/o Morgan and Morgan Trust Co.
Pasea Estate, P.O. Box 3149
Roadtown, Tortola BVI
Michael J. Assante 0 170,000 (7) 0 3.2%
Fred Kassner 250,000 250,000 6.4% 4.7%
69 Spring Street
Ramsey, NJ 07446
Robert E. Lee 425,000 (8) 425,000 11.0% 8.1%
465 West Saddle River Road
Upper Saddle River, NJ 07458
Liam Development 210,000 (9) 210,000 5.4% 4.0%
62 Viola Drive
Glen Cove, NY 11542
Metco Investors, LLC 200,000(10) 200,000 5.1% 3.9%
1000D Lake Street
Ramsey, NJ 07446
All officers and directors
as a group (5 persons) 791,000 961,000 20.4% 18.3%
- --------------
<FN>
(1) Unless otherwise indicated, the address of each stockholder listed is c/o
Azurel Ltd., 509 Madison Avenue, New York, New York 10022.
(2) Pursuant to the rules and regulations of the Securities and Exchange
Commission, shares of Common Stock that an individual or group has a
right to acquire within 60 days pursuant to the exercise of options or
warrants are deemed to be outstanding for the purposes of computing the
percentage ownership of such individual or group, but are not deemed to
be outstanding for the purposes of computing the percentage ownership
of any
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other person shown in the table.
(3) Includes (i) 180,000 shares of Common Stock issued on the date of this
Prospectus in connection with the acquisition of the Private Label Group
and (ii) 1,200,000 shares of Common Stock offered hereby. See "Certain
Transactions," "Underwriting" and "Concurrent Registration of Securities."
(4) Includes 107,600 shares of Common Stock owned by Diane Papas, who
is the wife of Gerard Semhon, of which shares Mr. Semhon disclaims
beneficial ownership.
(5) Jeanne Pierre Neuhaus is the beneficial owner of 69% of Tusany Investment
& Trade S.A. Tusany was formed under the Laws of the British Virgin
Islands on March 3, 1994.
(6) Does not include shares underlying 50,000 Redeemable Warrants registered
in the Concurrent Offering.
(7) Represents shares of Common Stock issued to Mr. Assante on the date of
this Prospectus as part of the purchase price for the capital stock of
the four companies that comprise the Private Label Group. See "Certain
Transactions."
(8) Includes (i) 150,000 options to purchase Common Stock beneficially owned
by ETR & Associates, Inc., of which Mr. Lee is President, (ii) 50,000
shares of Common Stock beneficially owned by Woodward Partners, of which
Mr. Lee is General Partner. and (iii) 150,000 shares of Common Stock and
shares underlying 50,000 options to purchase Common Stock beneficially
owned by Metco Investors, LLC, over which investments Mr. Lee exercises
investment power. Does not include (i) 55,500 warrants to purchase Common
Stock issued to Mr. Lee and (ii) shares underlying 25,000 Redeemable
Warrants issued to Metco Investors, LLC being registered in the Concurrent
Offering since such warrants are not yet exercisable. See "Certain
Transactions" and "Concurrent Registration of Securities." See "Certain
Transactions."
(9) Represents shares of Common Stock issued to Liam Development, Ltd. in
connection with the conversion of the principal due under a promissory
note assumed by the Company. See "Certain Transactions."
(10) Includes 150,000 shares of Common Stock and 50,000 options to purchase
Common Stock. Does not include shares underlying 25,000 Redeemable
Warrants being registered in the Concurrent Offering. See "Certain
Transactions" and "Concurrent Registration of Securities."
</FN>
</TABLE>
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CERTAIN TRANSACTIONS
In June and September 1995, the Company issued an aggregate of
2,175,000 shares of Common Stock to twelve founders. The twelve founders of the
Company named below each purchased the number of shares set forth in
parenthesis after their names at $.001 per share for an aggregate consideration
of $2,175. The founders are Gerard Semhon (264,600), Constantine Bezas
(200,934), Joseph Truitt Bell (150,933), Van Christakos (110,933), Diane Papas
(107,600), Tusany Investment & Trade, S.A. ("Tusany") (1,250,000), Edward
Pedersen (15,625), Kenneth Lee (15,625), James G. Cooley (6,250), Michalaur
International ("Michalaur") (18,750), Valerie A. Profitt (25,000) and Leslie
Bines (8,750). Tusany is a company organized under the laws of the British
Virgin Islands whose affairs are managed by Morgan & Morgan Ltd., a company
engaged in investment business on behalf of various clients. Michalaur, a
company engaged in investment related activities incorporated in New York in
1993, is controlled by John Palmieri, its president, for aggregate consideration
of $2,175.
In June 1995, the Company entered into the Consulting Agreement with
ETR pursuant to which ETR provides general management advisory services to the
Company. Mr. Robert E. Lee is the President of ETR, the General Partner of
Woodward and exercises investment power over the investments owned by Metco, the
three entities that comprise the Consulting Group. The Consulting Group advises
the Company's Board of Directors on key policy decisions as requested by the
Company. The Consulting Group's services have been primarily related to
assistance in analyzing the acquisition of the Private Label Group and
identifying persons to enter into business relationships with the Company.
These persons include trademark owners, packaging sources and owners of skin
care ingredients. In addition, Metco is assisting the Company in securing
distributors in England. Pursuant to the Consulting Agreement, in 1995 and
1996 the Company issued an aggregate of 175,000 shares of Common Stock to the
Consulting Group (25,000 shares to ETR, 50,000 shares to Woodward and 100,000
shares to Metco).
In July 1995, the Company, as an accommodation maker for Messrs. Semhon
and Bezas, issued a promissory note in the principal amount of $28,750 to ETR.
The proceeds of this loan were paid to Messrs. Semhon and Bezas. The note plus
accrued interest was repaid by the Company in September and October 1995, and
the repayment was treated as an advance to stockholders. As additional
consideration for this loan, ETR was granted an option to purchase 150,000
shares of Common Stock at $1.00 per share, which expires in July 2000.
In September 1995, the Company issued a promissory note in the
principal amount of $50,000 to Bola Business Ltd. ("Bola"). The note accrued
interest at 10% per annum and was secured by an aggregate of 200,000 shares of
Common Stock owned by Messrs. Semhon and Bezas, officers and directors of the
Company. The proceeds of this loan were utilized for working capital. As
additional consideration for the loan, the Company issued Bola 25,000 shares of
Common Stock and granted Bola the option to purchase 50,000 shares of Common
Stock at $1.00 per share, which option expires in September 2002. The note and
accrued interest were repaid in April 1996.
In October 1995, the Company issued a promissory note of $200,000 to
Tusany Investment and Trade, S.A., a founder and principal stockholder of the
Company ("Tusany"), which accrued interest at 10% per annum. The proceeds of
this loan were advanced to the Private Label Group as part of the Company's
obligation in connection with the acquisition of the Private Label Group. In
July 1996, Tusany converted the principal plus accrued interest due under the
note into 106,972 shares of Common Stock as part of a private placement
completed by the Company in July 1996 ("July 1996 Private Placement"). See
"Principal Stockholders."
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In December 1995, the Company completed a $250,000 private placement of
10 units, each unit consisting of (i) the Company's 18 month 12% promissory note
in the original principal amount of $50,000 and (ii) 25,000 shares of the
Company's Common Stock to eleven unaffiliated, accredited investors (the "1995
Private Placement"). The Company received net proceeds of $210,000 (after
deducting expenses of $7,500 and commissions of $32,500 to the Underwriter for
acting as placement agent), which were used for working capital and to repay
indebtedness. See "Underwriting".
In January 1996, the Company issued a promissory note of $50,000 to a
principal of the Underwriter. The note and accrued interest, at 8% per annum,
was repaid in April and May 1996. The Company used the proceeds of this loan as
security for its non-recourse guarantee under an agreement ("Finova Agreement")
with the Private Label Group's lender, Finova Capital Corporation ("Finova").
In January 1996, the Company issued a promissory note of $160,000 to
Metco. The note accrued interest at 10% per annum and was due, as to $100,000,
in February 1996, and, as to the remaining principal plus accrued interest, in
March 1996. In consideration for this loan, the Company issued Metco 25,000
shares of Common Stock and an option to purchase 50,000 shares of Common Stock
at $1.25 per share, which expires in January 1999. Additionally, the Company
issued 25,000 shares of Common Stock to Metco as a penalty for the Company's
late repayment of a portion of the loan. The note was repaid in February and May
1996. The Company used $10,000 of the proceeds of this loan for working capital
and $150,000 as security for its non-recourse guarantee under the
Finova Agreement.
In February 1996, the Company completed a $250,000 private placement of
5 units, each unit consisting of (i) the Company's two month 12% promissory note
in the original principal amount of $50,000, and (ii) 25,000 shares of the
Company's Common Stock to three accredited investors, including 50,000 shares
to Tusany ("February 1996 Private Placement"). The Company received net proceeds
of $210,000 (after deducting expenses of $7,500 and commissions of $32,500 to
the Underwriter for acting as placement agent). As part of the Company's
obligation in connection with the acquisition of the Private Label Group, the
net proceeds of the February 1996 Private Placement were advanced to the
Private Label Group to pay a portion of a jury award rendered in a legal
proceeding against the Private Label Group. See "Underwriting."
In connection with the 1995 and February 1996 Private Placements,
Gerard Semhon, the Company's Chief Executive Officer and Chairman of the Board,
agreed to indemnify the Company against any claims that may be asserted against
the Company by creditors of Dominion Associates, Inc. ("Dominion"), a company
that ceased operations in May 1995. Gerard Semhon, the Chief Executive Officer
and a Director of the Company, and Constantine Bezas, the President and a
Director of the Company, served as executive officers of Dominion.
In February 1996, the Company issued 10,000 shares of Common Stock for
legal services rendered to the Company.
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<PAGE>
In July 1996, the Company completed the July 1996 Private Placement of
978,747 shares of Common Stock at $2.00 per share to 28 accredited investors,
including 100,000 shares issued to Tusany for its participation in the
financing. The Company received $1,314,950 of net proceeds (after deducting
expenses of $11,050, commissions of $174,000 to the Underwriter for acting as
the placement agent and the promissory note conversions described below). As
part of the July 1996 Private Placement, certain noteholders of the Company,
including holders of notes issued in the 1995 and February 1996 Private
Placements converted an aggregate of $457,494 principal amount and interest
into 278,747 shares of Common Stock. Of the aggregate debt converted, Tusany
converted principal and interest due under a $50,000 promissory note issued in
the February 1996 Private Placement into 52,383 shares of Common Stock and
principal and interest due under a $200,000 promissory note issued in October
1995 into 106,972 shares of Common Stock. The Company used the net proceeds of
the July 1996 Private Placement (i) to repay noteholders that did not convert
their indebtedness, (ii) to repay other indebtedness, (iii) for the purchase
price of and other fees related to the Private Label Group acquisition and (iv)
for working capital. See "Underwriting."
In July 1996, the Company issued a promissory note of $22,000 to Metco.
The note and interest were repaid in September 1996. The Company used the
proceeds of this loan for working capital.
On August 22, 1996, the Company purchased all of the issued and
outstanding capital stock of the four companies that comprise the Private Label
Group from Assante. The purchase price was $2,782,500, of which $125,000 was
paid in cash at the closing, $1,675,000 (which bears interest at 9% per annum)
was paid by the delivery of the Company's promissory note (the "Assante Note"),
and $850,000 will be paid promptly after the date of this Prospectus by the
issuance of Common Stock of the Company valued at the public offering price.
$359,375 of principal of the Assante Note plus interest, will be paid at the
earlier of March 1, 1997 or upon the closing of this Offering, and the balance
will be paid in approximately nine equal installments commencing 90 days after
the first payment and each six months thereafter. The Assante Note may be
prepaid without penalty at any time and is secured by a pledge of the purchased
stock. One half of the stock will be released from the pledge when one half of
the Assante Note is paid and the balance of the stock thereafter will be
released pro rata upon payments of the Assante Note. In addition to the purchase
price, the Company is obligated to pay DiVita an amount equal to 5% of the
consideration Assante receives on the sale of the Private Label Group stock.
Therefore, at the closing, the Company paid DiVita $6,250, in cash, issued
a promissory note to DiVita in the original principal amount of $83,750
(the "DiVita Note") and upon completion of this Offering is to issue DiVita such
number of shares of the Company's Common Stock as is valued at $42,500. The
terms of the DiVita Note are substantially identical to the terms of the Assante
Note. $17,968 of principal of the DiVita Note, plus interest, will be paid at
the earlier of March 1, 1997, or upon the closing of the Offering. In addition,
upon
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<PAGE>
completion of this Offering, the Company is to issue Private Label Group's
counsel such number of shares of the Company's Common Stock as is valued at
$7,500 as payment for legal services rendered to the Private Label Group in
connection with the acquisition. See "Use of Proceeds."
As part of the redemption of the stock of the companies which comprise
the Private Label Group from DiVita (i) the companies owe the balance of the
redemption price ($390,830 as of June 30, 1996) which is payable in monthly
installments of $5,551.02 (inclusive of interest at 6% per annum) through
September 2003 and (ii) DiVita serves as a consultant to the Private Label Group
pursuant to a consulting agreement dated August 17, 1993. Mr. Divita provides
services relating to the computer system of the Private Label Group. The
agreement provides for a monthly consulting fee of $11,117 through August 2003.
In connection with the acquisition of the Private Label Group, in
February 1996 the Company (i) secured an uncommitted line of credit with Finova
to replace the Private Label Group's previous line of credit, (ii) pledged a
$250,000 certificate of deposit as security for its non-recourse guarantee
under the Finova Agreement, and (iii) paid $250,000 of a jury award of
approximately $260,000 rendered in a legal proceeding against the Private Label
Group. The Finova Agreement prohibits the payment of dividends so long as
certain indebtedness is outstanding.
As a condition, and on the closing, of the acquisition of the Private
Label Group, the Company entered into an employment agreement with Assante under
which he serves as President of each of the Private Label Group companies.
Assante receives a base annual salary of $195,000. Assante will receive a bonus
equal to 10% of the amount by which the Private Label Group's annual profit,
before interest and taxes but after depreciation and amortization, exceeds
$500,000 for each of the years ending December 31, 1997, 1998, and 1999. The
employment agreement is for three years and is renewable at his option for an
additional two year period. See "Management - Employment Agreements."
Mr. Assante is the sole officer, director and shareholder of
Contemporary, a company that subleases approximately 10,000 square feet
at the Facility from the Company on a month-to-month basis for approximately
$6,500 per month. Mr. Assante is also a principal shareholder of Rubigo. Both
Contemporary and Rubigo are customers of the Private Label Group. For the years
ended December 31, 1995 and December 31, 1994, and for the nine months ended
September 30, 1996, Contemporary accounted for approximately $337,500, $288,000
and $217,500, respectively, of Private Label Group's revenues. For the same
periods, Rubigo accounted for approximately $169,000, $441,000 and $265,000,
respectively, of Private Label Group's revenues. The Company believes that
transactions between the Company and Contemporary (including the sublease) and
Rubigo are on terms no less favorable than transactions involving unaffiliated
third parties.
In October 1996, the Company acquired all of the assets of Scent
Overnight, a company of which Gerard Semhon, the Company's Chief Executive
Officer and Chairman of the Board, is a majority stockholder for (i) $225,000
and (ii) the assumption of certain indebtedness totalling approximately
$210,000. The purchase price was arbitrarily determined between affiliates and
was not determined by an independent appraisal of the assets. The purchase
price was not based upon any recognized criteria of value and may have exceeded
the fair market value of the assets acquired. The acquisition is being accounted
for by the Company under the purchase method of accounting with the basis used
to record the assets of Scent Overnight as zero, which is Scent Overnight's
historical cost basis. See the financial statements and related notes thereto
included elsewhere in this Prospectus. The $225,000 plus interest at 9% per
annum is due upon the consummation of this Offering and is evidenced by the
Company's promissory note ("Scent Note"). The assumed obligation is due to
Liam Development Ltd. ("Liam") pursuant to a promissory note made by Scent
Overnight ("Liam Note"). In October 1995, the Company granted the right to
convert the principal due under the Liam Note into shares of the Company's
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Common Stock at $1.00 per share. Liam converted the principal due under the Liam
Note in October 1996 into 210,000 shares. The Company intends to apply
$268,500 of the proceeds of this Offering to repay the Scent Note and the
accrued interest due under the Liam Note. Scent Overnight was formed by Mr.
Semhon to engage in the Distributed Fragrances business, however, in July 1994,
it suspended its operations due to lack of capital. Prior to the suspension of
operations, Scent Overnight had conducted research into the availability of the
resources necessary for the proposed business, such as locating order taking,
order fulfillment, delivery and advertising services and sources of supply and
developed a plan for the operation of the business. This information was among
the assets acquired by the Company in the acquisition. See "Use of Proceeds"
and "Business - Trademarks."
Between June 1995 and June 1996, the Company advanced an aggregate of
$184,480 to Messrs. Semhon and Bezas, officers and directors of the Company. Of
the $184,480, $48,130 is jointly and severally owed by Messrs. Semhon and Bezas,
$120,750 is owed by Mr. Semhon and $15,750 is owed by Mr. Bezas. The advances do
not bear interest and will be repaid immediately following the Offering.
In October 1996, the Company completed a $300,000 private placement of
12 units, each unit consisting of (i) the Company's 12 month 10% promissory note
(each a "Bridge Note I") and (ii) a warrant to purchase up to 25,000 shares of
Common Stock (each a "Bridge Warrant I") ("October 1996 Private Placement") to
seven accredited investors, including Metco, Tusany and Michalaur, who invested
$25,000, $50,000 and $50,000, respectively. The Company intends to repay the
Bridge Notes I out of the proceeds of this Offering. On the date of this
Prospectus, the terms of the Bridge 300,000 Warrants I will be modified
automatically to the terms of the 300,000 Redeemable Warrants. The Company
received net proceeds of $270,000, after deducting commissions of $30,000 to
the Underwriter for acting as placement agent. The net proceeds of the October
1996 Private Placement were used for expenses related to the Offering and
working capital. See "Selling Securityholders," "Description of Securities -
Redeemable Warrants," and "Use of Proceeds" and "Underwriting."
In November 1996, the Company issued a promissory note in the amount of
$55,500 to Mr. Robert E. Lee and used the proceeds of this loan for working
capital. In December 1996 and January 1997, the Company paid $15,000 of
principal and $5,550 of prepaid interest due under the note. The remaining
principal is due on the earlier of February 1, 1997, or upon the date of the
closing of this Offering. In consideration for extending the original maturity
date of this loan, Mr. Lee received warrants to purchase 55,500 shares of Common
Stock at $4.80 per share, which expire in December 2000.
In November 1996, the Company entered into the Metco Consulting
Agreement with Metco pursuant to which Metco provides general management
consulting services and advisory services in the establishment of distribution
channels in the United Kingdom and Ireland. The Metco Consulting Agreement has
a two year term and provides for payment of a $16,500 consulting fee, which was
prepaid in November 1996.
In January 1997, the Company completed a $200,000 private placement of
8 units, each unit consisting of (i) the Company's 12 month 10% promissory
note (each a "Bridge Note II") and (ii) a warrant to purchase up to 25,000
shares of Common Stock (each a "Bridge Warrant II") ("January 1997 Private
Placement") to three accredited investors, including Edward Pedersen, one of
the Company's founders. Mr. Pedersen received a $50,000 Bridge Note II and a
50,000 Bridge Warrant II in connection with his participation in the January
1997 Private Placement. The Company intends to repay the Bridge Notes II out
of the proceeds of this Offering. On the date of this Prospectus, the terms of
the 200,000 Bridge Warrants II will be modified automatically to 200,000
Redeemable Warrants. The Company received net proceeds of $180,000
after deducting commissions of $20,000 to the Underwriter for acting as
placement agent. The net proceeds of the January 1997 Private Placement were
used for expenses related to the Offering and working capital. See "Selling
Securityholders," "Description of Securities - Redeemable Warrants," "Use of
Proceeds" and "Underwriting."
In April 1997, the Company completed a $350,000 private placement of
14 units, each unit consisting of (i) the Company's 12 month 10% promissory note
(each a "Bridge Note III") in the principal amount of $25,000 and (ii) a warrant
to purchase up to 25,000 shares of Common Stock (each a "Bridge Warrant III")
("April 1997 Private Placement") to seven accredited investors, including Metco
and Michaular, who invested $87,500 and $106,250, respectively. The Company
intends to repay the Bridge Note III out of the proceeds of this Offering.
On the date of this Prospectus, the terms of the 350,000 Bridge Warrants III
will be modified automatically to 350,000 Redeemable Warrants. The Company
received net proceeds of $315,000 after deducting commissions of $35,000 to the
Underwriter for acting as placement agent. The net proceeds of the April 1997
Private Placement were used for expenses related to the Offering and working
capital. See "Selling Securityholders," "Description of Securities - Redeemable
Warrants," "Use of Proceeds," and "Underwriting."
Except as disclosed above and pursuant to certain loan transactions
with officers, all previous transactions between the Company and its officers,
directors or 5% stockholders and their affiliates were made on terms no less
favorable to the Company than those available from unaffiliated parties. See
"Risk Factors -- Related Party Transactions; Loans Due From Officers." All
future transactions between the Company and its officers, directors or 5%
stockholders, and their affiliates, will be on terms no less favorable than
could be obtained from unaffiliated third parties.
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DESCRIPTION OF SECURITIES
The following summary description of the Securities is qualified in its
entirety by reference to the Company's Certificate of Incorporation, as amended,
and its By-laws, copies of which have been filed as Exhibits to the Registration
Statement of which this Prospectus is a part.
The Company is authorized to issue 24,000,000 shares of Common Stock,
$.001 par value per share and 1,000,000 shares of Blank Check Preferred Stock,
$.001 per share. As of the date of this Prospectus, prior to giving effect to
the Securities to be issued in the Offering, there are 3,878,747 shares of
Common Stock outstanding and held by 50 stockholders of record. No shares of
Preferred Stock have been issued by the Company. An additional 825,500 shares
of Common Stock are reserved for issuance upon the exercise of various options
and warrants outstanding as of the date of this Prospectus.
Common Stock
Holders of shares of Common Stock are entitled to one vote per share
of Common Stock on all matters submitted to a vote of stockholders of the
Company and to receive dividends when declared by the Board of Directors from
funds legally available therefor. Upon the liquidation, dissolution or winding
up of the Company, holders of shares of Common Stock are entitled to share
ratably in any assets available for distribution to stockholders after payment
of all obligations of the Company and after provision has been made with
respect to each class of stock, if any, having preference over the Common
Stock. Holders of shares of Common Stock do not have cumulative voting rights
or preemptive, subscription or conversion rights. See "Risk Factors - Dividend
Policy."
Redeemable Warrants
Each Redeemable Warrant entitles its holder to purchase one share of
Common Stock at an exercise price of _________ per share [120% of the initial
public offering price] (the "Exercise Price"). The Redeemable Warrants are
exercisable commencing one year from the date of this Prospectus and expire five
years after the date of this Prospectus.
The Redeemable Warrants will be issued pursuant to a warrant agreement
(the "Redeemable Warrant Agreement") among the Company, the Underwriter and the
warrant agent (the "Warrant Agent"), and will be evidenced by warrant
certificates in registered form.
The Exercise Price of the Redeemable Warrants and the number and kind
of shares of Common Stock or other securities and property issuable upon
exercise of the Redeemable Warrants are subject to adjustment in certain
circumstances, including stock splits, dividends, or subdivisions, combinations
or recapitalizations of the Common Stock. Additionally, an adjustment will be
made upon the sale of all or substantially all of the assets of the Company in
order to enable Warrantholders to purchase the kind and number of shares of
stock or other securities or property (including cash) receivable in such event
by a holder or the number of shares of Common Stock that might otherwise have
been purchased upon exercise of the Redeemable Warrant.
The Redeemable Warrants do not confer upon the holder any voting or
any other rights of a stockholder of the Company. Upon notice to the
Warrantholders, the Board of Directors has the
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right to reduce the exercise price or extend the expiration date of the
Redeemable Warrants.
Redeemable Warrants may be exercised upon surrender of the Redeemable
Warrant certificate evidencing those Redeemable Warrants on or prior to the
respective expiration date (or earlier redemption date) of the Redeemable
Warrants at the offices of the Warrant Agent, with the form of "Election to
Purchase" on the reverse side of the warrant certificate completed and executed
as indicated accompanied by payment of the full exercise price (by certified
check payable to the order of the warrant agent) for the number of Redeemable
Warrants being exercised.
No Redeemable Warrant will be exercisable unless at the time of
exercise the Company has filed with the Commission a current prospectus covering
the issuance of shares of Common Stock issuable upon exercise of the Redeemable
Warrant and the issuance of shares has been registered or qualified or is deemed
to be exempt from registration or qualification under the securities laws of the
state of residence of the Warrantholder. The Company has undertaken to use its
best efforts to maintain a current prospectus relating to the issuance of shares
of Common Stock upon the exercise of the Redeemable Warrant Agreement. While it
is the Company's intention to maintain a current prospectus, there can be no
assurance that it will be able to do so. See "Risk Factors - Current
Prospectus and State Blue Sky Registration Required to Exercise Redeemable
Warrants."
No fractional shares will be issued upon exercise of the Redeemable
Warrants. However, the Company will pay to that Warrantholder, in lieu of the
issuance of any fractional share which would otherwise be issuable, an amount in
cash based on the market value of the Common Stock on the last trading day prior
to the exercise date.
The Redeemable Warrants are redeemable by the Company at a price of
$.10 per Redeemable Warrant, commencing one year after the date of this
Prospectus and prior to their expiration, on 30 days prior written notice to the
registered holders of the Redeemable Warrants, provided the closing bid price
per share of the Common Stock if traded on NASDAQ (or the last sale price, if
the Common Stock is then traded on a national securities exchange or the Nasdaq
National Market) for a period not less than 20 trading days in any 30 day
trading period, ending not more than 15 days prior to the date of any redemption
notice, exceeds at least 150% of the then Exercise Price. The Redeemable
Warrants shall be exercisable until the close of the business day preceding the
date fixed for redemption. Under certain circumstances the Underwriter will
receive a warrant solicitation fee. See "Underwriting."
Preferred Stock
The Company is authorized to issue preferred stock with such
designations, rights and preferences as may be determined from time to time by
the Board of Directors. Accordingly, the Board of Directors is empowered,
without stockholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights which could adversely affect the
voting power or other rights of the holders of the Company's Common Stock. In
the event of issuance, the preferred stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company. The Company has no present intention to issue any shares
of its preferred stock.
Registration Rights
The Company is registering 905,500 Redeemable Warrants in the
Concurrent Offering of behalf of the Selling Securityholders, which securities
were issued in connection with private placements and certain financings. The
securities offered in the Concurrent Offering are being registered pursuant to
the exercise of piggyback registration rights granted by the Company. Certain
Securityholders have demand and piggyback registration rights. Such
Securityholders are subject to agreements not to sell their securities for one
to two years. See "Concurrent Registration of Securities" and "Certain
Transactions."
Underwriter's Warrants
See "Underwriting" for a description of the material terms of the
Underwriter's Warrants to be issued by the Company to the Underwriter upon
completion of the Offering.
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Delaware Law with Respect to Business Combinations
As of the date of this Prospectus, the Company will be subject to the
State of Delaware's "business combination" statute, Section 203 of the Delaware
General Corporation Law. In general, such statute prohibits a publicly held
Delaware corporation from engaging in a "business combination" with a person who
is an "interested stockholder" for a period of three years after the date of the
transaction in which that person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes a merger, asset sale or other transaction resulting in a
financial benefit to the interested stockholder. An "interested stockholder" is
a person who, together with affiliates, owns (or, within three years prior to
the proposed business combination, did own) 15% or more of the Delaware
corporation's voting stock. The statute could prohibit or delay mergers or other
takeover or change in control attempts with respect to the Company and,
accordingly, may discourage attempts to acquire the Company.
Reports to Stockholders
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and to make available such other
periodic reports as the Company may determine to be appropriate or as may be
required by law.
Application for Listing
The Company has applied for listing of the Common Stock and Redeemable
Warrants on NASDAQ under the symbols "AZUR" and "AZURW," respectively. No
assurance can be given that such applications will be approved or that a trading
market for the Securities will develop or, if developed, be sustained.
Transfer Agent and Redeemable Warrant Agent
The Company has appointed North American Transfer Co. as Transfer Agent
and Registrar for its Common Stock and Warrant Agent for its Redeemable
Warrants.
SHARES ELIGIBLE FOR FUTURE SALE
Upon sale of the Securities, the Company will have outstanding
5,258,747 shares of Common Stock and 1,200,000 Redeemable Warrants (5,438,747
shares of Common Stock, and 1,380,000 Redeemable Warrants if the Underwriter's
Over-Allotment Option is exercised in full). The Securities to be sold in this
Offering (assuming no exercise of the Underwriter's Over-Allotment Option) and
905,500 Redeemable Warrants registered concurrently with this Prospectus being
offered pursuant to the Selling Securityholder Prospectus included in the
Registration Statement of which this Prospectus forms a part, will be freely
tradable subject to "lock-up" agreements described below without restriction
under the Securities Act, except for any shares purchased by an "affiliate" of
the Company (in general, a person who has a control relationship with the
Company), which shares will be subject to the resale limitations of Rule 144
adopted under the Securities Act ("Rule 144"). There are currently 3,878,747
shares deemed to be "restricted securities," as that term is defined under Rule
144, in that such shares were issued and sold by the Company in private
transactions not involving a public offering and are not currently part of an
effective registration. Except for the "lock-up" agreements described below,
such shares will become eligible for sale under Rule 144, at various times
between April 27, 1997 and October, 1997. In addition, the Company has granted
the Underwriter demand and piggyback registration rights with respect to the
securities issuable upon exercise of the Underwriter's Warrants. No prediction
can be made as to the effect, if any, that sales of shares of Common Stock or
even the availability of such shares for sale will have on the market prices
prevailing from time to time. If the holders of the shares eligible for
registration so choose they could require the Company to register all of said
shares at any time.
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In general, under Rule 144, subject to the satisfaction of certain
other conditions, a person, including an affiliate of the Company, who has
beneficially owned restricted shares of Common Stock for at least one year is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of 1% of the total number of outstanding shares of the
same class, or if the Common Stock is quoted on NASDAQ or a stock exchange, the
average weekly trading volume during the four calendar weeks preceding the sale.
A person who has not been an affiliate of the Company for at least three months
immediately preceding the sale and who has beneficially owned the shares of
Common Stock for at least two years is entitled to sell such shares under Rule
144 without regard to any of the volume limitations described above.
All of the Company's current stockholders and warrantholders have
agreed not to sell or otherwise dispose of their shares of Common Stock
(the "Lock-Up") for a period ranging from three months to two years following
completion of the Offering without the prior written consent of the Underwriter.
Following expiration of the Lock-Up, 2,580,000 shares of Common Stock
outstanding prior to the Offering will be available for immediate resale
pursuant to Rule 144, subject to compliance with affiliates of the Company with
the volume limitations of Rule 144. Affiliates of the Company currently own an
aggregate of 2,041,000 shares Common Stock. See "Underwriting."
Prior to this Offering, no market for the Securities existed. The
effect, if any, of public sales of the restricted shares of Common Stock or the
availability of such shares for future sale on prevailing market prices cannot
be predicted. Nevertheless, the possibility exists that substantial amounts of
restricted shares may be resold in the public market may adversely affect
prevailing market prices for the Common Stock and could impair the Company's
ability to raise capital through the sale of its equity securities.
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UNDERWRITING
Subject to the terms and conditions set forth in an underwriting
agreement (the "Underwriting Agreement") between the Company and the
Underwriter, the Underwriter has agreed to purchase from the Company, on a "firm
commitment" basis, all of the Securities.
The Underwriter has advised the Company that it proposes initially to
offer the Securities to the public at the initial public offering price set
forth on the cover page of this Prospectus and to certain dealers at such
prices, less concessions not in excess of $___ per share of Common Stock and
$___ per Redeemable Warrant.
The Underwriter has informed the Company that it does not expect sales
to discretionary accounts to exceed five percent of the securities offered
hereby.
The Company has granted the Underwriter an option, exercisable during
the 30 calendar day period after the closing of the Offering, to purchase from
the Company at the initial public offering price less underwriting discounts and
the non-accountable expense allowance, up to an aggregate of 180,000 shares of
Common Stock and/or 180,000 Redeemable Warrants for the sole purpose of covering
over allotments, if any.
The Company has agreed to pay the Underwriter a non-accountable expense
allowance of 3% of the gross proceeds of the Offering, none of which has been
paid to date. Further, the Company has agreed to reimburse the Underwriter for
certain accountable expenses relating to the Offering.
Upon the exercise of any Redeemable Warrant for a period of four years
commencing one year after the date of this Prospectus, the Company has agreed to
pay to the Underwriter a fee of 5% of the exercise price for each Redeemable
Warrant exercised; provided, however, that the Underwriter will not be entitled
to receive such compensation in Redeemable Warrant exercise transactions in
which (i) the market price of Common Stock at the time of exercise is lower than
the exercise price of the Redeemable Warrants; (ii) the Redeemable Warrants are
held in any discretionary account; (iii) disclosure of compensation arrangements
is not made, in addition to the disclosure provided in this Prospectus, in
documents provided to holders of the Redeemable Warrants at the time of
exercise; (iv) the exercise of the Redeemable Warrants is unsolicited by the
Underwriter; or (v) the solicitation of exercise of the Redeemable Warrants was
in violation of Regulation M promulgated under the Exchange Act. The Underwriter
and any other soliciting broker/dealers will be prohibited from engaging in any
market making activities or solicited brokerage activites with regard to the
Company's securities during the periods prescribed by Rule 101 of Regulation M
before the solicitation of the exercise of any Warrant until the later of the
termination of such solicitation activity or the termination of any right the
Underwriter and any other soliciting broker/dealer may have to receive a fee for
the solicitation of the exercise of the Redeemable Warrants.
All of the Company's current stockholders and warrantholders have
agreed not to sell or otherwise dispose of any of their shares of Common Stock,
Redeemable Warrants or shares of Common Stock issuable upon conversion or
exercise of securities convertible into Common Stock for a period ranging from
three months to two years from the date of this Prospectus without the prior
written consent of the Underwriter. Notwithstanding these lock-up agreements,
such persons may make intra-family transfers. An appropriate restrictive legend
will be marked on the face of certificates representing all such shares of
Common Stock and Redeemable Warrants. See "Principal Stockholders."
The Underwriter has no present intention, plan, proposal, arrangement
or understanding to engage in any transactions with the Selling Securityholders
with regard to their securities of the Company or to waive or shorten any
lock-ups. If any such transaction is entered into or any such lock-ups are
waived or shortened, to the extent that the Company is aware of any such
transaction or early release and is required to disclose the same, such
information will be disclosed in a timely manner. The Underwriter has no
knowledge of present or future plans, proposals, agreements, arrangements or
understandings with respect to engaging in transactions with or by the Selling
Securityholders.
The Company has agreed, if requested by the Underwriter at any time
within three years after the date of closing of the Offering, to nominate and
use its best efforts to elect a designee of the Underwriter as a director of the
Company or, at the Underwriter's option, as a non-voting advisor to the
Company's Board of Directors. Such designee may be an officer, director,
partner, employee, affiliate of or consultant to the Underwriter. The person to
be designated by the Underwriter has not been identified to date.
The Company has also agreed to retain the Underwriter, pursuant to a
financial advisory and investment banking agreement (the "Advisory Agreement"),
as the Company's financial consultant at a monthly rate of $2,000 for 24 months
commencing on the date of this Prospectus, all of which is payable at the
closing of the Offering. Pursuant to the Advisory Agreement, the
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Underwriter will render certain financial advisory and investment banking
services to the Company, including advice as to the Company's financial public
relations, internal operations, corporate finance matters and other related
matters.
In connection with this Offering, the Company has agreed to sell to the
Underwriter, for nominal consideration, warrants to purchase from the Company
for four years 120,000 shares of Common Stock and/or 120,000 Redeemable
Warrants (the "Underwriter's Warrants"). The shares of Common Stock and
Redeemable Warrants contained in the Underwriter's Warrants will be identical
to the Securities being offered hereby. The Underwriter's Warrants contain
anti-dilution provisions identical to the Redeemable Warrants that provide for
adjustment of the exercise price upon the occurrence of certain events. The
Underwriter's Warrants are not transferable for a period of one year after the
date hereof, except to officers of the Underwriter, members of the selling
group and their officers and partners.
The Company has agreed that, upon written request of the then holder(s)
of a majority of the Redeemable Warrants and the shares of Common Stock issued
and/or issuable upon exercise of the Underwriter's Warrants (the "Underwriter's
Warrant Shares") which were originally issued to the Underwriter or to its
designees, made at any time within the period commencing one year and ending
five years after the Effective Date, the Company will file at its sole expense,
no more than once, a registration statement under the Securities Act
registering the Underwriter's Redeemable Warrants and Warrant Shares. The
Company has agreed to use its best efforts to cause such a registration
statement to become effective. The holders of the Underwriter's Warrants may
demand registration without exercising the Underwriter's Warrants and, in fact,
are never required to exercise the same.
The Company has also agreed that if, at any time within the period
commencing one year and ending five years after the Effective Date, it should
file a registration statement with the Commission pursuant to the Securities
Act, regardless of whether some of the holders of the Underwriter's Warrants
and the Underwriter's Warrant Shares shall have availed themselves of any
of the registration rights above, the Company, at its own expense, will
offer to said holders (with certain exceptions) the opportunity to register
or qualify the Underwriter's Warrant Shares. The objection of a subsequent
underwriter to the above "piggyback" registration rights would preclude such
inclusion. However, in such event the Company will, within six months of the
completion of such subsequent underwriting, file at its sole expense a
registration statement relating to such excluded securities.
During the term of the Underwriter's Warrants, the holders of the
Underwriter's Warrants are given the opportunity to profit from a rise in the
market price of the Securities. To the extent that the Underwriter's Warrants
are exercised, dilution of the interests of the Company's then stockholders will
occur. Furthermore, the terms upon which the Company will be able to obtain
additional equity capital may be adversely affected since the holder of the
Underwriter's Warrants can be expected to exercise them at a time when the
Company would, in all likelihood, be able to obtain any needed capital on terms
more favorable to the Company than to those provided in the Underwriter's
Warrants.
The Underwriting Agreement provides for reciprocal indemnification
between the Company and the Underwriter against certain liabilities in
connection with the Registration Statement of which this Prospectus constitutes
a part, including liabilities under the Securities Act. To the extent this
section may purport to provide exculpation from possible liabilities arising
under the federal securities laws, the Company has been advised that it is the
opinion of the Commission that such indemnification is against public policy and
is therefore unenforceable.
In connection with this Offering, certain underwriters and selling
group members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock and
Warrants. Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M, pursuant to which such persons may bid
for or purchase Common Stock or Warrants for the purpose of stabilizing their
respective market prices. The underwriters also may create a short position for
the account of the underwriters by selling more shares of Common Stock or
Warrants in connection with the Offering than they are committed to purchase
from the Company, and in such case may purchase shares of Common Stock or
Warrants in the open market following completion of the Offering to cover all or
a portion of such short position. The underwriters may also cover all or a
portion of such short position by exercising the Over-Allotment Option. In
addition, the underwriter may impose "penalty bids" under contractual
arrangements with other underwriters whereby it may reclaim from an Underwriter
(or dealer participating in the Offering) for the account of other underwriters,
the selling concession with respect to shares of Common Stock and Warrants that
are distributed in the Offering but subsequently purchased for the account of
the Underwriter in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Common Stock and
Warrants at a level above that which might otherwise prevail in the open market.
None of the transactions described in this paragraph is required, and, if they
are undertaken they may be discontinued at any time.
In addition, the Underwriting Agreement provides that for a period of
two years from the date of the Offering, the Company will not issue any shares
of Common Stock or Preferred Stock, or securities convertible into or
exercisable for Common Stock or Preferred Stock, without the prior written
consent of the Underwriter. However, the Company may issue securities (A) upon
(i) the exercise of any warrants or options outstanding as of the completion of
this Offering, and (ii) the exercise of the Underwriter's Warrants, (B) pursuant
to the Company's 1997 Plan, or (C) in connection with any merger or acquisition
of another entity by the Company.
The Underwriter has acted as the placement agent for the Company in
private securities offerings conducted between December 1995 and April 1997,
for which the Placement Agent received commissions and expenses aggregating
approximately $400,000. In January 1996, the Company issued a promissory note
of $50,000 to a principal of the Underwriter. The note and accrued interest
were repaid in April and May 1996. See "Certain Transactions."
The foregoing is a summary of the principal terms of the Underwriting
Agreement, the Underwriter's Warrants, and the Advisory Agreement and does not
purport to be complete. Reference is made to the copies of the Underwriting
Agreement, the Underwriter's Warrant Agreement and the Advisory Agreement that
are filed as exhibits to the Registration Statement
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of which this Prospectus constitutes a part.
Prior to the Offering, there has been no public market for the
Securities offered hereby. Consequently, the initial public offering price of
the Securities and the exercise price and other terms of the Redeemable Warrants
have been determined by negotiation between the Company and the Underwriter and
are not necessarily related to the Company's asset value, earnings, book value
or other such criteria of value. Factors considered in determining the initial
public offering price of the Securities and the exercise price of the
Redeemable Warrants include the prospects for the industry in which
the Company operates, the Company's management, the general condition of the
securities markets and the demand for securities in similar companies.
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CONCURRENT REGISTRATION OF SECURITIES
Concurrently with this Offering, 905,500 Warrants (the "Selling
Securityholders' Warrants") and 905,500 shares underlying the Selling
Securityholders' Warrant Shares have been registered by the Company under the
Securities Act on behalf of certain of Selling Securityholders, pursuant to a
Selling Securityholders' Prospectus included within the Registration Statement
of which this Prospectus forms a part. The Selling Securityholders' Warrants and
the Selling Securityholders' Warrant Shares are not part of this underwritten
offering. All of the Selling Securityholders have agreed not to sell or
otherwise dispose of the Selling Securityholders' Warrants and the Selling
Securityholders' Warrant Shares for a period of three months following
completion of the Offering without the prior written consent of the Underwriter.
The Company will not receive any of the proceeds from the sale of the Selling
Securityholders' Warrants or the Selling Securityholders' Warrant Shares, but
will receive proceeds from the exercise of the Selling Securityholders'
Warrants. See "Underwriting."
LEGAL MATTERS
The validity of the Securities offered hereby and certain other legal
matters will be passed upon for the Company by Gersten, Savage, Kaplowitz,
Fredericks & Curtin, LLP, New York, N.Y. Certain legal matters will be passed
upon for the Underwriter by Snow Becker Krauss P.C., New York, N.Y. Gersten,
Savage, Kaplowitz, Fredericks & Curtin, LLP has acted as counsel to the
Underwriter in other transactions and may so act in the future.
EXPERTS
The audited financial statements for the years ended, December 31, 1995
and 1996 included in the Prospectus have been audited by Feldman Radin & Co.,
P.C., independent certified public accountants, to the extent and for the
periods set forth in their report appearing elsewhere herein, and are included
in reliance upon such report and upon the authority of said firm as experts in
accounting and auditing.
64
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on
Form SB-2 in accordance with the provisions of the Securities Act, with respect
to the securities offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits thereto.
For further information, reference is made to the Registration Statement and to
the exhibits filed therewith. Statements herein contained concerning the
provisions of any document are not necessarily complete and, in each instance,
reference is made to the copy of such document filed as an exhibit to the
Registration Statement. The Registration Statement and the exhibits may be
inspected without charge at the offices of the Commission and, upon payment to
the Commission of prescribed fees and rates, copies of all or any part thereof
may be obtained from the Commission's principal office at the Public Reference
Section, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C.
20549. Electronic registration statements filed through the Electronic Data
Gathering, Analysis, and Retrieval system are publicly available through the
Commission's Website (http://www.sec.gov).
65
<PAGE>
AZUREL LTD. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
AZUREL LTD. AND SUBSIDIARIES
Independent Auditor's Report ........................................... F-2
Consolidated Balance Sheets ............................................ F-3
Consolidated Statements of Operations .................................. F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit) ... F-5
Consolidated Statements of Cash Flows .................................. F-6
Notes to Consolidated Financial Statements ............................. F-8
PRIVATE LABEL COSMETICS, INC. AND AFFILIATES
Independent Auditor's Report ...........................................F-22
Combined Balance Sheets ................................................F-23
Combined Statements of Operations ......................................F-24
Combined Statements of Changes in Stockholders' Deficit ................F-25
Combined Statements of Cash Flows ......................................F-26
Notes to Combined Financial Statements .................................F-27
PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
Pro Forma Balance Sheet - December 31, 1996............................. F-34
Pro Forma Statement of Operations - Year Ended December 31, 1996........ F-35
Pro Forma Statement of Operations - Year Ended December 31, 1995........ F-36
Notes to Unaudited Pro Forma Financial Statements ...................... F-37
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Azurel Ltd. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Azurel
Ltd. and Subsidiaries as of December 31, 1996 and the related statements of
operations, changes in stockholders' deficit and cash flows for the year ended
December 31, 1996 and from June 26, 1995 (inception) through December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Azurel Ltd. and
Subsidiaries as of December 31, 1996 and the results of its operations and its
cash flows for the year ended December 31, 1996 and from June 26, 1995
(inception) through December 31, 1995 in conformity with generally accepted
accounting principles. The accompanying financial statements have been prepared
assuming that Azurel Ltd. and Subsidiaries will continue as a going concern. As
discussed in Note 3 to the financial statements, the Company has incurred
significant net losses which raises substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 3. The financial statements do not include any
adjustments relating to the recoverability and classification of reported asset
amounts or the amounts and classification of liabilities that might result from
the outcome of this uncertainty.
FELDMAN RADIN & CO., P.C.
Certified Public Accountants
March 7, 1997
New York, New York
F-2
<PAGE>
<TABLE>
<CAPTION>
AZUREL LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
ASSETS
------
<S> <C>
CURRENT ASSETS:
Accounts receivable, net of allowance for doubtful
account of $50,000 $ 1,515,407
Note receivable 255,679
Inventories 1,241,509
Prepaid expenses 50,641
Due from stockholders 184,480
Other current assets 106,891
---------
TOTAL CURRENT ASSETS 3,354,607
PROPERTY AND EQUIPMENT 571,507
RESTRICTED CASH 268,731
DEFERRED FINANCING COSTS 32,797
DEFERRED REGISTRATION COSTS 175,514
GOODWILL 3,180,214
OTHER ASSETS 60,470
----------
$7,643,840
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------
CURRENT LIABILITIES:
Cash overdraft $ 10,635
Accounts payable 1,058,163
Accrued expenses 944,430
Accrued payroll taxes and penalties 519,323
Customer advances 57,760
Current portion of long-term debt 1,939,004
Current portion of capital lease obligations 19,770
---------
TOTAL CURRENT LIABILITIES 4,549,085
LONG-TERM DEBT 2,801,866
CAPITAL LEASE OBLIGATIONS 20,322
STOCKHOLDERS' EQUITY:
Common stock, par value $.001 per share,
10,000,000 shares authorized, 3,878,747 outstanding 3,879
Additional paid-in capital 2,382,190
Accumulated deficit (2,111,327)
---------
274,742
Less stock subscriptions receivable (2,175)
---------
TOTAL STOCKHOLDERS' EQUITY 272,567
---------
$ 7,643,840
=========
</TABLE>
See notes to financial statements
F-3
<PAGE>
<TABLE>
<CAPTION>
AZUREL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<S> <C> <C>
June 26, 199
Year Ended (Inception)
December 31, December 31,
1996 1995
----------- -------------
NET SALES $ 3,745,336 $ -
COST OF GOODS OF SOLD 2,870,888 -
--------- -----------
GROSS PROFIT 874,448 -
GENERAL AND ADMINISTRATIVE EXPENSES 1,652,240 259,637
--------- -----------
(LOSS) BEFORE INTEREST EXPENSE (777,792) (259,637)
INTEREST EXPENSE 595,129 28,369
--------- ----------
NET (LOSS) $ (1,372,921) $ (288,006)
========= ==========
NET LOSS PER SHARE $ (0.42) $ (0.20)
========= ==========
NUMBER OF SHARES USED IN COMPUTATION 3,287,759 1,426,146
========= ==========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
AZUREL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C> <C> <C> <C> <C>
Total
Common Stock Additional Stock Stockholders
Number of Paid-in Accumulated Subscriptions Equity
Shares Amount Capital Deficit Receivable (Deficit)
--------- ------ ---------- ----------- ----------- ---------
Balance - June 26, 1995 (Inception).......................... - $ - $ - $ - $ - $ -
Issuance of common stock 2,175,000 2,175 - - (2,175) -
Stock issued in connection with
bridge financing 125,000 125 64,734 - - 64,859
Stock issued for services 125,000 125 - - - 125
Stock issued in connection with a loan 25,000 25 - - - 25
Distribution - - - (225,400) - (225,400)
Net (loss) - - - (288,006) - (288,006)
----------- ------ -------- ---------- -------- ---------
Balance - December 31, 1995................................... 2,450,000 2,450 64,734 (513,406) (2,175) (448,397)
Stock issued in connection with
bridge financing 125,000 125 124,875 - - 125,000
Sale of common stock 750,000 750 1,283,150 - - 1,283,900
Stock issued for services 60,000 60 119,940 - - 120,000
Stock issued in connection with acquisition 5,000 5 21,245 - - 21,250
Stock issued in connection with late payment on loan 25,000 25 49,975 - - 50,000
Stock issued in connection with a loan 25,000 25 38,070 - - 38,095
Conversion of debt to common stock 438,747 439 642,701 - - 643,140
Stock options issued for services - - 37,500 - - 37,500
Distribution - - - (225,000) - (225,000)
Net (loss) - - - (1,372,921) - (1,372,921)
Balance - December 31, 1996................................... 3,878,747 $ 3,879 $2,382,190 $(2,111,327) $ (2,175) $ 272,567
</TABLE>
See notes to financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
AZUREL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<S> <C> <C>
June 26, 1995
Year Ended (Inception) to
December 31, December 31,
1996 1995
----------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (1,372,921 $ (288,006)
Adjustments to reconcile net (loss) to net cash
provided by operating activities:
Depreciation 57,384 -
Amortization of goodwill 61,992 -
Amortization of discount on notes payable 217,169 10,810
Amortization of deferred financing costs 118,271 -
Stock options issued for services 37,500 -
Stock issued for penalty 50,000 -
Interest converted into stock 29,994 -
Stock issued for services 120,000 125
Changes in assets and liabilities net of effects of acquisition:
Decrease in accounts receivable 34,613 -
Decrease in inventories 249,265 -
Increase in prepaid expenses (50,042) -
Increase in other current assets (9,694) -
Decrease in customer advance (97,382) -
Increase in accounts payable 465,329 -
Increase in accrued expenses 218,844 127,730
Increase in other assets (24,347) (490)
----------- -----------
NET CASH PROVIDED (USED) IN OPERATING ACTIVITIES 105,975 (149,831)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (87,411) -
Cash paid for acquisition of Private Label Group (665,107) -
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (752,518) -
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in cash overdraft 10,635 -
Increase in restricted cash (7,304) -
Increase in due from stockholders (92,100) (92,380)
Increase in due from the Private Label Group (675,600) (180,000)
Payment of deferred financing costs (80,860) (70,208)
Payment of deferred registration costs (171,514) (4,000)
Payment of capital lease obligations (11,520) -
Proceeds from long-term debt 1,037,829 528,750
Payment of long-term debt (626,149) (28,750)
Costs incurred in connection with stock issuance (240,455) -
Issuance of common stock 1,500,000 -
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 642,962 153,412
----------- -----------
NET INCREASE (DECREASE) IN CASH (3,581) 3,581
CASH AT BEGINNING OF PERIOD 3,581 -
----------- -----------
CASH AT END OF PERIOD $ - $ 3,581
=========== ===========
</TABLE>
See notes to financial statements
F-6
<PAGE>
<TABLE>
<CAPTION>
AZUREL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<S> <C> <C>
June 26, 1995
Year Ended (Inception) to
December 31, December 31,
1996 1995
----------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 259,083 $ -
============ ==========
Taxes $ - $ -
============ ==========
Non cash financing and investing activities:
Issuance of common stock through long-term debt $ 163,095 $ 64,884
============ ==========
Issuance of common stock through stock subscriptions receivable $ - $ 2,175
============ ==========
Issuance of common stock in connection with acquisition of Private Label $ 21,250 $ -
============ ==========
Conversion of debt to common stock $ 637,500 $ -
============ ==========
Distribution through assumption of long term-debt $ 225,000 $ 225,400
============ ==========
Purchase of equipment through capital lease obligations $ 11,304 $ -
============ ==========
Assumption of debt in connection with acquisition of Private Label $ 1,758,750 $ -
============ ==========
Stock issued for services $ 120,000 $ 125
============ ==========
Stock options issued for services $ 37,500 $ -
============ ==========
Stock issued in connection with late payment on loan $ 50,000 $ -
============ ==========
</TABLE>
See notes to financial statements
F-7
<PAGE>
AZUREL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Azurel Ltd. (the "Company") was incorporated in Delaware on June 26,
1995. The Company acquired the stock of four cosmetic manufacturing
companies, Private Label Cosmetics, Inc. and Affiliates (the "Private
Label Group") on August 22, 1996. In July 1996, the Company formed a
subsidiary, Scent 123, Inc. ("Scent 123"). In October 1996, Scent 123
acquired the assets of Scent Overnight, Inc. ("Scent Overnight") an
overnight delivery service of men's cologne and women's fragrances.
The Company also intends to market and develop original cosmetic and
fragrance lines.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of consolidation - The financial statements for the
year ended December 31, 1996 include the accounts of the
Company and its wholly owned subsidiaries, Private Label Group
and Scent 123. All material intercompany transactions have
been eliminated.
b. Accounting estimates - The preparation of financial statements
in accordance with generally accepted accounting principles
requires management to make significant estimates and
assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
c. Inventories - Inventories are recorded at the lower of cost
or market. Cost was determined using the average cost method.
d. Property and equipment - Property and equipment are stated
at cost and depreciated using the straight-line method over
the estimated useful lives of the assets.
e. Deferred registration costs - Deferred registration costs will
be charged against additional paid-in capital upon the
successful completion of the Company's proposed public
offering. In the event the offering is not completed, such
costs will be charged to expense.
f. Deferred financing costs - Deferred financing costs will be
charged to interest expense over the terms of the respective
loans.
F-8
<PAGE>
g. Fair value of financial instruments - The carrying amounts
reported in the balance sheet for cash, receivables, accounts
payable, and accrued expenses approximate fair value based on
the short-term maturity of these instruments.
h. Income taxes - The Company accounts for income taxes under
the provisions of Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (SFAS No. 109). SFAS
No. 109 requires the recognition of deferred tax assets and
liabilities for both the expected impact of differences
between the financial statements and tax basis of assets and
liabilities, and for the expected future tax benefit to be
derived from tax loss and tax credit carryforwards. SFAS No.
109 additionally requires the establishment of a valuation
allowance to reflect the likelihood of realization of deferred
tax assets.
i. Stock based compensation - The Company accounts for stock
transactions in accordance with APB Opinion No. 25,
"Accounting For Stock Issued To Employees." The Company has
adopted the proforma disclosure requirements of Statement of
Financial Accounting Standards No. 123, "Accounting For
Stock-Based Compensation."
j. Goodwill - Goodwill resulting from the acquisition of the
Private Label Group represents the remaining unamortized value
of the excess of the purchase price over the fair value of the
net assets of the Private Label Group. Goodwill is amortized
on a straight line basis over a period of 20 years.
k. Impairment of long - lived assets - The Company has adopted
Statement of Financial Accounting Standards No. 121,
"Accounting For The Impairment Of Long-Lived Assets And For
Long-Lived Assets To Be Disposed Of" as of January 1, 1996.
Such adoption had no material effect on the financial position
of the Company.
3. BASIS OF PRESENTATION
The Company's financial statements have been presented on the basis
that it is a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business. The Company intends to seek additional equity capital through
an initial public offering to adequately fund operations, working
capital needs and growth plans.
The Company had incurred significant net losses from June 26, 1995
(inception) through December 31, 1996 and has a working capital
deficiency of approximately $1,200,000 at December 31, 1996 which
raises substantial doubt about its ability to continue as a going
concern. Accordingly, continued existence is dependent upon the
Company's ability to become profitable and to obtain additional equity
capital, neither of which can be assured.
F-9
<PAGE>
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<S> <C>
December 31,
1996
--------------------
Raw Materials $ 672,769
Work In Process 483,282
Finished Goods 85,458
--------------------
$ 1,241,509
====================
</TABLE>
5. DUE FROM STOCKHOLDERS
As of December 31, 1996, the Company is owed $184,480 from
stockholders representing short term non-interest bearing advances.
6. NOTE RECEIVABLE
As of December 31, 1996, the Private Label Group is owed $255,679
representing a non-interest bearing note which is due on demand.
7. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1996:
<TABLE>
<S> <C> <C>
Estimated
useful lives
---------------------
Machinery and equipment held under
capital lease obligations 5-7 $ 41,478
Machinery and equipment 5-7 585,036
Leasehold improvements 15 2,377
---------
628,891
Less accumulated depreciation 57,384
---------
$ 571,507
=========
</TABLE>
F-10
<PAGE>
8. LONG-TERM DEBT
The following is a summary of long-term debt:
<TABLE>
<S> <C>
December 31,
1996
---------------
Note payable bears interest at the rate of 6% per annum.
Monthly payments consisting of principal and interest are
approximately $5,551 through August 2003. $ 390,829
Notes payable bear interest at the rate of 8.5% per annum. Due in
June 1997. 91,375
Note payable to Finova Financial Corporation, bears interest at the
rate of prime plus 3% per annum. Payments of $10,150 are due
each month with the remaining balance due in February 1998. 1,829,966
Notes payable to bridge lenders, bearing interest at 10% per annum,
payable at the earlier of the completion of a public offering or
October 1997.
300,000
Note payable to bridge lenders, bearing interest at 10% per annum,
payable at the earlier of the completion of a public offering or
December 1997.
100,000
Notes payable, bearing interest at 9% per annum, due at the earlier of
the completion of a public offering or December 31, 1998. 225,000
Notes payable, bearing interest at 9% per annum, principal and interest
due in installments through November 2000. 1,758,750
Other
44,950
----------
4,740,870
Less current portion 1,939,004
----------
$2,801,866
==========
</TABLE>
F-11
<PAGE>
Long-term debt maturities for the next five years are as follows:
<TABLE>
<S> <C>
1997 $ 1,939,004
1998 2,531,322
1999 51,788
2000 54,982
2001 58,374
</TABLE>
9. ACCRUED PAYROLL TAXES AND PENALTIES
At December 31, 1996, the Private Label Group owed $519,323 in accrued
payroll taxes and penalties for the period September 1996 through
December 1996.
10. CAPITAL LEASE OBLIGATIONS
The Company leases machinery and equipment under non-cancelable lease
agreements which expire at various times through December 1999.
<TABLE>
<S> <C>
Principal portion of capital lease payments $ 40,092
Less: current portion 19,770
-------------
$ 20,322
=============
</TABLE>
The future minimum principal payments under capital leases are as
follows:
<TABLE>
<S> <C>
1997 $ 19,770
1998 18,714
1999 1,608
</TABLE>
11. PRIVATE PLACEMENTS AND OTHER FINANCING
a. In July 1995, the Company issued a promissory note in the
principal amount of $28,750 bearing interest at the rate of
10% per annum. The loan was repaid in September and October
1995. Additionally, the Company granted the lender the option
to purchase 150,000 shares of common stock at $1.00 per share
which expires in five years.
F-12
<PAGE>
b. In September through December 1995, the Company obtained
bridge loans totaling $250,000. The convertible promissory
notes bore interest at the rate of 12% per annum and were
payable at the earlier of (i) 18 months from the date of
issuance or (ii) upon the receipt by the Company of gross
proceeds of a minimum of $1,000,000 through any public or
private offering. Additionally, as consideration for the
bridge loans, the Company issued an aggregate of 125,000
shares of common stock to the lenders. These shares were
valued at $64,859. In July 1996, notes plus interest totaling
$138,784 were converted into 69,392 shares of common stock,
and $132,859 was repaid.
c. In September 1995, the Company issued a promissory note in the
principal amount of $50,000 bearing interest at the rate of
10% per annum and secured by an aggregate of 200,000 shares of
common stock owned by two officers/directors of the Company.
As additional consideration for the loan, the Company issued
25,000 shares of common stock valued at $25 and granted the
lender the option to purchase 50,000 shares of common stock at
$1.00 per share, which expires in September 2002. The note and
accrued interest were repaid in April 1996.
d. In September 1995, the Company was negotiating the purchase
of Scent and assumed a promissory note owed by Scent in the
principal amount of $210,000 plus accrued interest of $15,400
which was recorded as a stockholder distribution. The note
bore interest at the rate of 8% per annum and was due with
accrued interest at the earlier of December 31, 1996 or upon
the closing of the Company's initial public offering. In
October 1996, the lender converted the principal due under the
note into 210,000 shares of common stock. In January 1997, the
accrued interest was extended and is due at the earlier of
March 31, 1997 or upon the effective date of a public
offering.
e. In October 1995, the Company issued a promissory note in the
principal amount of $200,000. The note bore interest at the
rate of 10% per annum and was due in October 1997. In July
1996, the lender converted the principal plus accrued interest
due under the note into 106,972 shares of common stock.
f. In December 1995 and February 1996 the Private Label Group
issued promissory notes in the principal amounts of $50,000
and $50,200 to the former stockholder. The remaining principal
balance of $91,375 plus interest at the rate of 8.5 % per
annum is due in June 1997.
g. In January 1996, the Company issued a promissory note in
the principal amount of $160,000 bearing interest at the rate
of 10% per annum and due, as to $100,000, in February 1996,
and, as to the remaining principal plus accrued interest, in
March 1996. In consideration for this loan, the Company issued
the lender 25,000 shares of common stock valued at $38,095 and
an option to purchase 50,000 shares of common stock at $1.25
per share which was valued at $37,500 and expires in February
2003. Additionally, the Company issued 25,000 shares of common
stock to the lender valued at $50,000 as a penalty for the
Company's late repayment of a
F-13
<PAGE>
portion of the loan. The note was repaid in February and May
1996.
h. In January 1996, the Company issued a demand promissory
note to an individual in the principal amount of $50,000
bearing interest at the rate of 8% per annum. The note was
repaid in April and May 1996.
i. In February 1996, the Company obtained bridge loans
totaling $250,000. The promissory notes bear interest at the
rate of 12% per annum and are payable at the earlier of (i)
two months from the date of issuance, or (ii) upon the receipt
by the Company of gross proceeds of a minimum of $1,000,000
through any public or private offering. Additionally, as
consideration for the bridge loans, the Company issued an
aggregate of 125,000 shares of common stock to the lenders
which were valued at $125,000. In April and July 1996, notes
plus interest totaling $104,767 were converted into 52,383
shares of common stock and $104,767 was repaid.
j. In February 1996, the Private Label Group entered into a
two year loan agreement with Finova Financial Corporation
("Finova"). Pursuant to the agreement, the line of credit is
$2,000,000, bears interest at the rate of prime plus 3% per
annum, is secured by the Private Label Group's accounts
receivable, inventory and equipment and is guaranteed by the
Private Label Group's former stockholder and the Company.
Monthly principal installments of $10,150 are due on the last
day of each month with the remaining balance due in February
1998. Additionally, the Company deposited $250,000 with Finova
as additional collateral. As of December 31, 1996 the
collateral balance was $268,731.
k. In July 1996, the Company completed a private placement of
978,747 shares of common stock at a purchase price of $2.00
per share. The Company issued 750,000 shares of common
stock at $2.00 per share and converted various notes into
228,747 shares of common stock at $2.00 per share.
l. On August 22, 1996 in connection with the acquisition of the
Private Label Group, the Company issued to former stockholders
of the Private Label Group promissory notes for a principal
sum of $1,758,750 bearing interest at the rate of 9% per
annum. The first and second installments totaling $359,375 and
$17,968 plus their respective accrued interest are due May 15,
1997. Remaining principal installments plus accrued interest
are due through November 2000.
m. In July 1996, the Company issued a promissory note in the
amount of $22,000 representing $20,000 in principal and $2,000
in prepaid interest. The note was due on the earlier of (i)
180 days or (ii) upon consummation of a public offering. The
note was paid in full in September 1996.
n. In October 1996, the Company acquired all of the assets of
Scent Overnight and issued a $225,000 promissory note which
was recorded as a stockholder distribution. The note bears
interest at the rate of 9% per annum and is due upon the
earlier of
F-14
<PAGE>
December 31, 1998 or upon the receipt of gross proceeds of at
least $1,000,000 pursuant to any public or private debt or
equity financing of any securities.
o. In October 1996, the Company completed a $300,000 private
placement of 12 units, each consisting of (i) the Company's
promissory note bearing interest at the rate of 10% per annum
and due at the earlier of 12 months or at the closing of the
Company's initial public offering and (ii) a warrant to
purchase up to 25,000 shares of common stock at $4.80 per
share exercisable after one year and expiring three years from
the exercise date.
p. On November 8, 1996, the Company issued a promissory note
in the amount of $55,500 representing $49,950 in principal and
$5,550 in prepaid interest. The note was due on the earlier of
(i) December 8, 1996 or (ii) within three days of closing any
portion of the concurrent bridge loan. In November 1996, the
promissory note was extended and was due, as to $15,000 by
December 8, 1996, and, as to, the remaining balance of $40,500
on or before January 15, 1997 or upon the effective date of a
public offering. As consideration for extension of the note
the Company granted the lender an option to purchase up to
55,500 shares of common stock at $4.80 per share which expires
in November 2000. The note was further extended to May 1997
when the remaining principal of $44,950 plus interest of
$5,550 is due.
q. In December 1996 and January 1997, the Company completed a
$200,000 private placement of 8 units, each consisting of (i)
the Company's 10% promissory note due at the earlier of 12
months or at the closing of the Company's initial public
offering and (ii) a warrant to purchase up to 25,000 shares of
common stock at $4.80 per share exercisable after one year and
expiring three years from the date of exercise.
12. STOCKHOLDERS' EQUITY
a. The Company is authorized to issue an aggregate of
10,000,000 shares of common stock, $.001 par value per share.
b. In July and September 1995, the Company issued 2,175,000
shares of common stock to the founders of the Company.
c. In July 1995, the Company granted a financial consultant the
option to purchase 150,000 shares of common stock at an
exercise price of $1.00 per share, which expires in July 2000.
d. In September 1995, the Company issued 25,000 shares of common
stock in consideration for a $50,000 loan. The shares were
valued at $25. Additionally, the Company granted the lender
the option to purchase 50,000 shares of common stock for an
exercise price of $1.00 per share, which expires in September
2002.
F-15
<PAGE>
e. In September 1995 through December 1995, the Company issued an
aggregate of 125,000 shares of common stock to eleven bridge
lenders which shares were valued at $64,859.
f. In September 1995, the Company issued 125,000 shares of
common stock for consulting services which were valued at
$125.
g. In January 1996, the Company, in consideration for a $160,000
loan, issued the lender 25,000 shares of common stock valued
at $38,095 and an option to purchase 50,000 shares of common
stock at $1.25 per share, which was valued at $37,500 and
expires in February 2003. Additionally, the Company issued
25,000 shares of common stock valued at $50,000 to the lender
as a penalty for the Company's late repayment of a portion of
the loan.
h. In February 1996, the Company issued an aggregate of 125,000
shares of common stock to three bridge lenders which were
valued at $125,000.
i. In February and March 1996, the Company issued 60,000
shares of common stock for professional services which were
valued at $120,000.
j. In February through July 1996, the Company issued 750,000
shares of common stock at $2.00 per share in a private
placement.
k. In July 1996, the Company granted a consultant the option to
purchase 20,000 shares of common stock at an exercise price of
$4.80 per share, which expires in July 1999. Additionally, the
Company issued 5,000 shares of common stock to the consultant
in August 1996 for services rendered which was valued at
$21,250.
l. In July 1996, the Company converted various notes into
228,747 shares of common stock at $2.00 per share.
m. In October 1996, the lender of a $210,000 note converted
the principal of the note into 210,000 shares of common stock.
n. In August through October 1996, the Company granted lenders of
a $300,000 private placement warrants to purchase up to
300,000 shares of common stock at $4.80 per share which are
exercisable after one year and expire three years from the
exercise date.
o. In November 1996, the Company granted the lender of a $55,500
promissory note a warrant to purchase up to 55,500 shares of
common stock at $4.80 per share which expires in November
2000.
F-16
<PAGE>
p. In December 1996 and January 1997, the Company granted to
lenders of $200,000 in bridge loans, private placement
warrants to purchase up to 200,000 shares of common stock at
$4.80 per share which are exercisable after one year and
expire three years from the exercise date.
13. INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No.
109"). SFAS No. 109 requires the recognition of deferred tax assets and
liabilities for both the expected impact of differences between the
financial statements and tax basis of assets and liabilities, and for
the expected future tax benefit to be derived from tax loss and tax
credit carryforwards. SFAS No. 109 additionally requires the
establishment of a valuation allowance to reflect the likelihood of
realization of deferred tax assets. At December 31, 1996, the Company
had net deferred tax assets of $965,000. The Company has recorded a
valuation allowance for the full amount of the net deferred tax assets.
The following table illustrates the source and status of the Company's
major deferred tax assets and (liabilities):
<TABLE>
<S> <C>
Net operating loss carryforward $ 877,000
Accounts receivable allowance 18,000
Inventory allowance 70,000
Valuation allowance (965,000)
---------------
Net deferred tax asset recorded $ -
===============
</TABLE>
The provision for income taxes differs from the amount computed
applying the statutory federal income tax rate to income before income
taxes as follows:
<TABLE>
<S> <C> <C>
December 31,
-----------------
1996 1995
-------------- --------------
Income tax benefit computed at statutory rate $ (480,000) $ (100,000)
Tax benefit not recognized 480,000 100,000
--------------- --------------
Provision for income taxes (benefit) $ - $ -
=============== ==============
</TABLE>
F-17
<PAGE>
The Company has net operating loss carryforwards for tax purposes
totaling $2,660,000 at December 31, 1996 expiring in the years 2008 to
2011. Substantially all of the carryforwards are subject to limitations
on annual utilization because there are "equity structure shifts" or
"owner shifts" involving 5% stockholders (as these terms are defined in
Section 382 of the Internal Revenue Code), which have resulted in a
more than 50% change in ownership. The annual limitation is based on
the value of the Private Label Group as of the date of the ownership
change multiplied by the applicable Federal Long Term Tax Exempt Bond
Rate.
14. COMMITMENTS
a. In February 1996, the Company entered into a guarantee
agreement with Finova for a $2,000,000 line of credit for the
Private Label Group. Additionally, the Company, on behalf of
the Private Label Group, deposited $250,000 with Finova as
security for its guarantee.
b. In May 1996, the Company entered into a license agreement
with the owner of the "Members Only" trademark. The agreement
grants the Company the exclusive right to manufacture and
distribute cosmetics and other items under the "Members Only"
mark. The agreement expires in September 2001, with the
Company's option to renew the license agreement for an
additional five year term. Under this agreement, the Company
is to required to pay minimum royalties of $1,225,000 through
September 2001.
c. In August 1996, the Company entered into a three year
employment agreement with the former sole stockholder
("Stockholder") of the Private Label Group. The Stockholder
will receive a base annual salary of $195,000 with the
Stockholder's option to renew the agreement for an additional
two years. Additionally, the Stockholder will receive a bonus
equal to 10% of the Private Label Group's net profits in
excess of $500,000 for the years ending December 31, 1997
through December 31, 1999.
d. In July 1996, the Company entered into a brokerage and
consulting agreement with V.A.N. Marketing Ltd. ("VAN"). Under
the agreement, VAN will receive a finder's fee of
approximately $69,000 which represents two and one half
percent of the purchase price of the Private Label Group,
5,000 shares of the Company's common stock and 20,000 stock
options at an exercise price of $4.80 per share, which expire
in July 1999. The finder's fee is payable as follows: $22,500
upon signing of the contract and the remaining balance due one
year later. Additionally, VAN will receive for the two years
commencing at the close of the contract a monthly consulting
fee of $3,000 for the first twelve months and $5,000 for the
remaining twelve months.
F-18
<PAGE>
e. In November 1996, the Company entered into a consulting
agreement where the consultant is to receive $16,500 over a
two year period. The consulting fee of $16,500 was prepaid in
November 1996.
f. Rent expense under all operating leases was $212,000 and
$7,600 for the year ended December 31, 1996 and from June 26,
1995 (inception) to December 31, 1995, respectively.
The future minimum rental payments to be made under
noncancellable operating leases as of December 31, 1996 is as
follows:
<TABLE>
<S> <C>
1997 $ 541,702
1998 557,419
1999 573,200
2000 589,055
2001 605,479
</TABLE>
g. The Company is paying a monthly consulting fee of $11,117
to a former stockholder of the Private Label Group through
August 2003.
h. The Company does not have insurance coverage for product
withdrawal / recall.
i. In January 1997, the Company entered into an agreement for the
full settlement of an advertising expense claim with a payment
of $5,000 and delivery of a non interest bearing promissory
note for the sum of $35,000 due April 20, 1997. The settlement
of $40,000 was accrued at December 31, 1996.
j. Under the Company's 1997 Stock Option Plan, up to 750,000
shares of common stock are reserved for issuance. The exercise
price of the options will be determined by a committee
selected by the Board of Directors, but the exercise price
will not be less than 85% of the fair market value on the date
of grant. No options have been issued under this plan.
15. SIGNIFICANT CUSTOMERS
Approximately 22% and 12% of the Private Label Group's revenue was
derived from two major customers for the year ended December 31, 1996.
F-19
<PAGE>
16. ACQUISITIONS
a. On August 22, 1996, the Company purchased all of the issued
and outstanding capital stock of the Private Label Group for a
purchase price of $2,782,500 of which $131,250 in cash was
paid at closing, $1,758,750 was paid by the delivery of the
Company's promissory notes (which bear interest at the rate of
9% per annum) and $892,500 will be paid promptly after the
closing of the initial public offering by the issuance of
common stock valued at the public offering price. In addition,
upon completion of the closing of the initial public offering,
the Company is to issue to Private Label Group's counsel such
number of shares of common stock as is valued at $7,500.
The acquisition of the Private Label Group has been accounted
for as a purchase, and accordingly, the assets acquired and
liabilities assumed have been recorded at their estimated fair
values which approximates book value. The following table
summarizes this acquisition:
<TABLE>
<S> <C>
Purchase Price, including acquisition costs $ 2,174,790
Liabilities assumed 4,754,844
Assets acquired (3,687,428)
---------------
Goodwill $ 3,242,206
===============
</TABLE>
The results of operations for the Private Label Group for the
period August 22, 1996 to December 31, 1996 are included in
the accompanying consolidated financial statements for the
year ended December 31, 1996.
The following schedule combines the unaudited pro forma
results of operations of the Company for the year ended
December 31, 1996 and from June 26, 1995 (inception) to
December 31, 1995 and the Private Label Group for the years
ended December 31, 1996 and 1995 as if the acquisition had
occurred on January 1, 1995 and includes such adjustments
which are directly attributable to the acquisition. It should
not be considered indicative of the results that would have
been achieved had the acquisitions not occurred or the results
that would have been obtained had the acquisition actually
occurred on January 1, 1995.
<TABLE>
<S> <C> <C>
Year Ended December 31,
------------------------------------
1996 1995
--------------- ----------------
Net sales $ 10,195,659 $ 8,413,225
Net loss (1,769,455) (1,182,560)
Net loss per share (0.54) (0.83)
Shares used in computation 3,287,759 1,426,146
</TABLE>
F-20
<PAGE>
b. In October 1996, the Company acquired all of the assets of Scent
Overnight, a company of which the Company's Chief Executive Officer and
Chairman of the Board is a majority stockholder, for (i) a $225,000
promissory note bearing interest at the rate of 9% per annum and due at
the earlier of the closing of the Company's initial public offering or
December 31, 1998, and (ii) the assumption of a promissory note of
$210,000 plus accrued interest of $15,400 which was assumed by the
Company in September 1995.
The acquisition was accounted for under the purchase method of
accounting with the basis used to record the assets of Scent Overnight
as zero which is the transferor's historical cost basis. The assets of
Scent Overnight consisted of only intangible assets which is primarily
Scent Overnight's name and the debt assumption which are considered a
stockholder distribution to the majority stockholder. Scent had no
operations during the year ended December 31, 1996.
F-21
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Board of Directors
Private Label Cosmetics, Inc. and affiliates
We have audited the accompanying combined balance sheet of Private
Label Cosmetics, Inc. and affiliates as of December 31, 1995 and the related
combined statements of operations, changes in stockholders' deficit and cash
flows for the year then ended. These financial statements are the responsibility
of the Private Label Group's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the combined financial position of Private
Label Cosmetics, Inc. and affiliates as of December 31, 1995 and the results of
its combined operations and its combined cash flows for the year then ended in
conformity with generally accepted accounting principles.
The accompanying combined financial statements have been prepared
assuming that Private Label Cosmetics, Inc. and affiliates will continue as a
going concern. As discussed in Note 3 to the combined financial statements, the
Private Label Group incurred significant net losses for the year ended December
31, 1995 which raises substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 3. The financial statements do not include any adjustments relating to the
recoverability and classification of reported asset amounts or the amounts and
classification of liabilities that might result from the outcome of this
uncertainty.
FELDMAN RADIN & CO., P.C.
Certified Public Accountants
December 20, 1996
New York, New York
F-22
<PAGE>
<TABLE>
<CAPTION>
PRIVATE LABEL COSMETICS, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
DECEMBER 31, 1995
<S> <C>
ASSETS
------
CURRENT ASSETS:
Accounts receivable, net of allowance for doubtful
account of $15,000 $ 1,127,920
Inventories 1,108,696
Prepaid insurance and taxes 33,452
Due from related parties 327,512
------------
TOTAL CURRENT ASSETS 2,597,580
MACHINERY AND EQUIPMENT 521,375
OTHER ASSETS 38,303
------------
$ 3,157,258
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
--------------------------------------
CURRENT LIABILITIES:
Cash overdraft $ 30,711
Accounts payable 958,255
Accrued expenses 297,533
Accrued payroll taxes and penalties 420,045
Accrued lawsuit settlement 257,000
Customer advances 113,628
Advances by Azurel Ltd. 180,000
Current portion of long-term debt 168,786
Current portion of capital lease obligations 92,651
------------
TOTAL CURRENT LIABILITIES 2,518,609
LONG-TERM LIABILITIES:
Long-term debt 1,462,574
Capital lease obligations 103,245
------------
TOTAL LONG-TERM LIABILITIES 1,565,819
STOCKHOLDERS' DEFICIT:
Common stock 59,223
Accumulated deficit (230,643)
Treasury stock (755,750)
------------
TOTAL STOCKHOLDERS' DEFICIT (927,170)
------------
$ 3,157,258
============
</TABLE>
See notes to combined financial statements
F-23
<PAGE>
<TABLE>
<CAPTION>
PRIVATE LABEL COSMETICS, INC. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<S> <C>
NET SALES $ 8,413,225
COST OF GOODS SOLD 6,627,898
---------
GROSS PROFIT 1,785,327
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 2,103,320
---------
INCOME (LOSS) FROM OPERATIONS (317,993)
INTEREST EXPENSE (197,663)
---------
NET (LOSS) $ (515,656)
=========
</TABLE>
See notes to combined financial statements
F-24
<PAGE>
<TABLE>
<CAPTION>
PRIVATE LABEL COSMETICS, INC. AND AFFILIATES
COMBINED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
International
Private Label Fashion P.L.C. Cosmetics
Cosmetics, Inc. Laboratories, Inc. Specialties, Inc. Group, Inc.
-------------- ----------------- --------------- -------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
Balance - December 31, 1994......... 50 $ 46,623 49 $ 10,100 500 $ 500 500 $ 2,000
Net loss - - - - - - - -
----- ------ ----- ------- ----- ----
Balance - December 31, 1995........ 50 46,623 49 10,100 500 500 500 2,000
Shares authorized, no par value 2,500 1,000 2,500 1,000
===== ===== ===== =====
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Retained
Total Earnings Total
Common (Accumulated Treasury Stockholders'
Stock Deficit) Stock (Deficit)
------ ----------- -------- -------------
Balance - December 31, 1994......... $59,223 $ 285,013 $ (755,750) $ (411,514)
Net loss - (515,656) - (515,656)
------ ------- -------- ---------
Balance - December 31, 1995........ 59,223 (230,643) (755,750) (927,170)
Shares authorized, no par value
</TABLE>
See notes to combined financial statements
F-25
<PAGE>
<TABLE>
<CAPTION>
PRIVATE LABEL COSMETICS, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (515,656)
Adjustments to reconcile net (loss) to net cash
provided by operating activities:
Depreciation 160,677
Changes in assets and liabilities:
Decrease in accounts receivable 232,042
(Increase) in inventories (212,552)
Decrease in prepaid insurance and taxes 2,085
(Increase) in other assets (7,670)
Increase in accounts payable 76,779
Increase in accrued expenses 110,939
Increase in accrued payroll taxes 384,696
(Decrease) in customer advances (9,254)
-------
NET CASH PROVIDED BY OPERATING ACTIVITIES 222,086
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (28,129)
-------
NET CASH USED IN INVESTING ACTIVITIES (28,129)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt (340,284)
Payment of capital lease obligations (81,823)
Decrease in due from related parties 64,411
Proceeds from advances by Azurel Ltd. 180,000
-------
NET CASH USED IN FINANCING ACTIVITIES (177,696)
NET INCREASE IN CASH 16,261
CASH OVERDRAFT AT BEGINNING OF PERIOD (46,972)
-------
CASH OVERDRAFT AT END OF PERIOD $ (30,711)
=======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 207,789
=======
Taxes $ 1,679
=======
Noncash activity:
Purchase of machinery through capital lease obligations $ 64,000
=======
</TABLE>
See notes to combined financial statements
F-26
<PAGE>
PRIVATE LABEL COSMETICS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1995
1. BUSINESS
Private Label Cosmetics, Inc. and affiliates (the "Private Label
Group") are located in Fairlawn, New Jersey and manufacture cosmetics
for sale to major cosmetic companies. In August 1996, Azurel Ltd. (the
"Company") purchased all of the issued and outstanding capital stock of
the Private Label Group for a purchase price of $2,782,500 of which
$131,250 in cash was paid at closing, $1,758,750 was paid by the
delivery of the Company's promissory notes (which bear interest at the
rate of 9% per annum) and $892,500 will be paid promptly after the
closing of the initial public offering by the issuance of common stock
valued at the public offering price. In addition, upon completion of
the closing of the initial public offering, the Company is to issue to
Private Label Group's counsel such number of shares of common stock as
is valued at $7,500.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Combination - The combined financial statements
include the accounts of Private Label Cosmetics, Inc., P.L.C.
Specialties, Inc., Fashion Laboratories, Inc. and International
Cosmetic Group, Inc. The accompanying financial statements of the
Private Label Group are combined as all entities are under common
control. Material intercompany accounts and transactions are
eliminated in the combination.
b. Accounting estimates - The preparation of financial statements in
accordance with generally accepted accounting principles requires
management to make significant estimates and assumptions that
effect the reporting amount of assets and liabilities at the date
of the financial statements and the reported amount of revenues
and expenses during the reported period. Actual results could
differ from those estimates.
c. Inventories - Inventories are recorded at the lower of cost or
market. Cost was determined using the average cost method.
d. Property and equipment - Property and equipment is stated at cost
and is depreciated using the straight line method over their
estimated useful lives. Capitalized leases are stated at cost and
are depreciated using the straight line method over the lower of
the life of the lease or its estimated useful life.
e. Income taxes - The Private Label Group accounts for income
taxes under the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
SFAS No. 109 requires the recognition of deferred tax assets and
liabilities for both the expected impact of differences between
the financial statement
F-27
<PAGE>
and tax basis of assets and liabilities, and for the expected
future tax benefit to be derived from tax loss and tax credit
carryforwards. SFAS No. 109 additionally requires the
establishment of a valuation allowance to reflect the likelihood
of realization of deferred tax assets.
f. Fair value of financial instruments - The carrying amounts
reported in the balance sheet for cash, trade receivables,
accounts payable and accrued expenses approximate fair value based
on the short-term maturity of these instruments.
3. BASIS OF PRESENTATION
The Private Label Group's financial statements have been presented on a
basis that it is a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business. The Private Label Group intends to seek additional equity
capital through an initial public offering to adequately fund
operations, working capital needs and growth plans.
The Private Label Group had incurred significant net losses for the
year ended December 31, 1995 which raises substantial doubt about its
ability to continue as a going concern. Accordingly, continued
existence is dependent upon the Private Label Group's ability to become
profitable and to obtain additional equity capital, neither of which
can be assured.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<S> <C>
December 31,
1995
-------------------
Raw Materials $ 362,500
Work In Process 642,422
Finished Goods 103,774
-------------------
$ 1,108,696
===================
</TABLE>
F-28
<PAGE>
5. TRANSACTIONS WITH RELATED PARTIES
<TABLE>
<S> <C> <C> <C> <C> <C>
Receipts from
allocated general
and
Sales to administrative
Due from Trade accounts affiliates Consulting fee expenses
affiliates receivable Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31, (c)
1995 (a) 1995 1995 1995 1995
--------------- ---------------- ----------------- ----------------- ------------------
D & A
Advertising
Corp. $ 2,833 $ - $ - $ 10,000 $ -
The
Contemporary
Cosmetic Group,
Inc. (b) 324,679 146,678 355,000 - 200,000
Rubigo
Cosmetics, Inc. - 22,562 166,000 - -
-------------- ---------------- ----------------- ----------------- ----------------
$ 327,512 $ 169,240 $ 521,000 $ 10,000 $ 200,000
=============== ================ ================= ================= ================
<FN>
(a) These amounts are due on demand and are non-interest bearing.
(b) The most recent unaudited financial statement at May 31, 1995
states a negative net worth of $223,226 for The Contemporary
Cosmetic Group, Inc.
(c) Reported in sales.
</FN>
</TABLE>
6. MACHINERY AND EQUIPMENT
Machinery and equipment consist of the following at December 31, 1995:
<TABLE>
<S> <C> <C>
Estimated
useful lives
----------------
Machinery and equipment held under
capital lease obligations 5-7 $ 351,927
Machinery and equipment 5-7 2,057,563
Leasehold improvements 15 211,498
-------------
2,620,988
Less accumulated depreciation 2,099,613
-------------
$ 521,375
=============
</TABLE>
F-29
<PAGE>
7. ACCRUED PAYROLL TAXES AND PENALTIES
At December 31, 1995, the Private Label Group owed $420,045 in accrued
payroll taxes and penalties for the period September 30, 1995 through
December 31, 1995.
8. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1995:
<TABLE>
<S> <C>
Note payable to bank, bears interest at the rate of
prime plus 1 1/4% per annum, monthly payments consist of
principal and interest are approximately $20,429 through
July 1997, collateralized by machinery and equipment. $ 358,333
Revolving bank loan, bears interest at the rate of prime
plus 1 1/4%, matures in March 1996, interest payable
monthly, collateralized by accounts receivable,
inventory and machinery. 850,620
Note payable to former majority stockholder, bears
interest at the rate of 6% per annum. Monthly payments
consisting of principal and interest are approximately
$5,551 through August 2003. 422,407
--------------
1,631,360
Less current portion 168,786
--------------
$ 1,462,574
==============
</TABLE>
In February 1996, the Private Label Group repaid the note payable to
bank and the revolving bank loan and entered into a two year loan
agreement with Finova Financial Corporation ("Finova"). Pursuant to the
agreement, the line of credit is $2,000,000, bears interest at the rate
of prime plus 3% per annum, is secured by the Private Label Group's
accounts receivable, inventory and equipment and is guaranteed by the
Private Label Group's sole stockholder and the Company. Monthly
installments of $10,150 are due on the last day of each month with the
remaining balance due in February 1998. Additionally, the Company on
behalf of the Private Label Group deposited $250,000 with Finova as
collateral for the agreement. The financial statements reflect the
terms of the Finova agreement.
F-30
<PAGE>
Long-term debt maturities based on the Finova debt for the next five
years are as follows:
<TABLE>
<S> <C>
1996 $ 168,786
1997 167,746
1998 1,024,283
1999 51,788
2000 54,983
</TABLE>
9. CAPITAL LEASE OBLIGATIONS
The Private Label Group leases machinery and equipment under
non-cancelable lease agreements which expire at various times through
December 1998.
<TABLE>
<S> <C>
Principal portion of capital lease payments $ 195,896
Less: current portion 92,651
-----------------
$ 103,245
=================
</TABLE>
The future minimum principal payments under capital leases are as
follows:
<TABLE>
<S> <C>
1996 $ 92,651
1997 70,082
1998 33,163
</TABLE>
10. ADVANCES BY AZUREL LTD.
In October 1995, the Company advanced the Private Label Group $180,000
for working capital. In February 1996, the Company advanced the Private
Label Group $250,000 for a lawsuit settlement and $250,000 as security
for a loan (see Notes 8 and 14). In August 1996, the Company advanced
the Private Label Group an additional $150,000 for working capital.
F-31
<PAGE>
11. INCOME TAXES
The Private Label Group accounts for income taxes under Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes
("SFAS No. 109"). SFAS No. 109 requires the recognition of deferred tax
assets and liabilities for both the expected impact of differences
between the financial statements and tax basis of assets and
liabilities, and for the expected future tax benefit to be derived from
tax loss and tax credit carryforwards. SFAS No. 109 additionally
requires the establishment of a valuation allowance to reflect the
likelihood of realization of deferred tax assets. At December 31, 1995,
the Private Label Group had net deferred tax assets of $620,000. The
Private Label Group has recorded a valuation allowance for the full
amount of the net deferred tax assets.
The following table illustrates the source and status of the Private
Label Group's major deferred tax assets and (liabilities):
<TABLE>
<S> <C>
Net operating loss carryforward $ 495,000
Litigation accruals 90,000
Inventory allowance 35,000
Valuation allowance (620,000)
------------------
Net deferred tax asset recorded $ -
====================
</TABLE>
The provision for income taxes differs from the amount computed
applying the statutory federal income tax rate to income before income
taxes as follows:
<TABLE>
<S> <C>
December 31,
1995
--------------------
Income tax benefit computed at statutory rate $ (180,000)
Tax benefit not recognized 180,000
--------------------
Provision for income taxes (benefit) $ -
====================
</TABLE>
The Private Label Group has net operating loss carryforwards for tax
purposes totaling $1,413,000 at December 31, 1995 expiring in the years
2008 to 2010. Substantially all of the carryforwards are subject to
limitations on annual utilization because there are "equity structure
shifts" or "owner shifts" involving 5% stockholders (as these terms are
defined in Section 382 of the Internal Revenue Code), which have
resulted in a more than 50% change in ownership. The annual limitation
is based on the value of the Private Label Group as of the date of the
ownership change multiplied by the applicable Federal Long Term Tax
Exempt Bond Rate.
F-32
<PAGE>
12. COMMITMENTS AND CONTINGENCIES
a. The Private Label Group leases office and warehouse space under a
non-cancelable operating lease. Rent expense under this lease was
approximately $482,000 for the year ended December 31, 1995. The
lease expires in August 2002. Minimum rental commitments for the
next five years are as follows:
<TABLE>
<S> <C>
1996 $ 453,000
1997 466,000
1998 480,000
1999 493,000
2000 506,000
</TABLE>
b. The Private Label Group is paying a monthly consulting fee of
$11,117 to a former stockholder through August 2003.
c. The Private Label Group does not have insurance coverage for
product withdrawal / recall.
13. SIGNIFICANT CUSTOMERS
Approximately 21% and 14% of the Private Label Group's revenue was
derived from two major customers for the year ended December 31, 1995.
14. ACCRUED LAWSUIT SETTLEMENT
A jury verdict against the Private Label Group was entered on December
22, 1995 in the net amount of $223,095, together with prejudgment
interest and costs of suit. Judgment subsequently entered on such
verdict in the amount of $257,000 including costs and interest, was
satisfied on behalf of the Private Label Group in full in February 1996
with an advance by the Company of $250,000. The judgment of $257,000
was accrued at December 31, 1995.
F-33
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA BALANCE SHEET (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
December 31,
1996 Adjustments Pro forma Adjustments
Azurel Dr Cr adjusted Dr Cr As adjusted
ASSETS ----------- ----- ------- ---------- ----- ------- -----------
CURRENT ASSETS: Cash $ - e 90,000 $ 405,500 h 263,000 $ 2,610,316
f 315,000 i 1,652,875
g 4,640,514 k 519,323
Accounts receivable 1,515,407 1,515,407
Note receivable 255,679 255,679
Inventories 1,241,509 1,241,509 1,241,509
Prepaid expenses 50,641 50,641 50,641
Due from stockholders 184,480 184,480 184,480
Other current assets 106,891 106,891 106,891
--------- --------- --------
TOTAL CURRENT ASSETS 3,354,607 3,759,607 5,964,923
MACHINERY AND EQUIPMENT 571,507 571,507 571,507
RESTRICTED CASH 268,731 268,731 268,731
DEFERRED FINANCING COSTS 32,797 e 10,000 77,797 i 77,797 -
f 35,000
DEFERRED REGISTRATION COSTS 175,514 175,514 g 175,514 -
GOODWILL 3,180,214 3,180,214 j 765,000 3,945,214
OTHER ASSETS 60,470 60,470 60,470
--------- ------- -------
$ 7,643,840 $8,093,840 $ 10,810,845
============ ========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
CURRENT LIABILITIES:
Cash overdraft $ 10,635 $ 10,635 $ 10,635
Accounts payable 1,058,163 1,058,163 1,058,163
Accrued expenses 944,430 944,430 h 263,000 572,051
i 109,379
Accrued payroll taxes and penalties 519,323 519,323 k 519,323 -
Customer advances 57,760 57,760 57,760
Current portion of long-term debt 1,939,004 e 100,000 2,389,004 i 1,487,293 901,711
f 350,000
Current portion of capital lease
obligations 19,770 19,770 19,770
--------- ------- -------
TOTAL CURRENT LIABILITIES 4,549,085 4,999,085 2,620,090
LONG-TERM DEBT 2,801,866 2,801,866 2,801,866
CAPITAL LEASE OBLIGATIONS 20,322 20,322 20,322
STOCKHOLDERS' EQUITY
Common stock 3,879 3,879 g 1,000 5,059
j 180
Additional paid-in capital 2,382,190 2,382,190 g 4,463,800 7,610,810
j 764,820
Accumulated deficit (2,111,327) (2,111,327) i 134,000 (2,245,327)
---------- --------- ---------
274,742 274,742 5,370,742
Less stock subscriptions receivable (2,175) (2,175) (2,175)
TOTAL STOCKHOLDERS' EQUITY 272,567 272,567 5,368,567
----------- -------- -------- --------- --------- --------- ---------
$ 7,643,840 450,000 450,000 8,093,840 7,918,509 7,918,509 $10,810,845
============ ======== ======== ========= ========= ========= ==========
</TABLE>
F-34
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA FINANCIAL STATEMENTS
The following pro forma financial statements at December 31, 1996 and
for the year ended December 31, 1996 is based on historical financial
data. These pro forma financial statements are not necessarily
indicative of the results that will be achieved for future periods.
These pro forma financial statements should be read in conjunction
with the Company's financial statements included elsewhere in this
Prospectus.
Pro forma Statement of Operations (Unaudited)
<S> <C> <C> <C> <C>
Year Ended
December 31,
1996 Adjustments
Azurel Dr Cr As adjusted
----------- ---------- ----------- -----------
Net Sales $ 3,745,336 c 6,450,323 $ 10,195,656
Cost of Sales 2,870,888 c 4,808,210 7,679,098
--------- ----------
Gross Profit 874,448 2,516,561
Selling, General and
Administrative Expenses 1,590,248 c 1,630,580 3,220,828
Amortization Expense 61,992 a 138,368 200,360
--------- ----------
Income (Loss) From
Operation (777,792) (904,627)
--------- ----------
Interest Expense 595,129 b 101,044 864,828
c 151,780
d 16,875
--------- ----------
595,129 864,828
--------- ----------
Net (Loss) $ (1,372,921) $(1,769,455)
========= ==========
</TABLE>
F-35
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA FINANCIAL STATEMENTS
The following pro forma financial statements for the year ended
December 31, 1995 of the Company and the Private Label Group are based
on historical financial data of the aforementioned companies, as if
the acquisition of the Private Label Group had occurred at the
beginning of the fiscal year ended December 31, 1995 for the statement
of operations. These pro forma financial statements are not
necessarily indicative of the results that will be achieved for future
periods. These pro forma financial statements and the notes thereto
should be read in conjunction with the Company's financial statements
and the financial statements of the Private Label Group included
elsewhere in this Prospectus.
Pro forma Statement of Operations (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1995
Azurel Private Label Combined Adjustments
Dr Cr As adjusted
------ ------------- -------- -------- -------- -----------
(Historical)
Net Sales $ - $ 8,413,225 $ 8,413,225 $ 8,413,225
Cost of Sales - 6,627,898 6,627,898 6,627,898
-------- ----------- --------- ---------
Gross Profit - 1,785,327 1,785,327 1,785,327
Selling, General and
Administrative Expenses 259,637 2,103,320 2,362,957 2,362,957
Amortization Expense - - - a 200,360 200,360
-------- ----------- --------- ---------
Income (Loss) From
Operation (259,637) (317,993) (577,630) (777,990)
-------- ----------- --------- ---------
Interest Expense 28,369 197,663 226,032 b 158,288 404,570
d 20,250
-------- ----------- --------- ---------
28,369 197,663 226,032 404,570
-------- ----------- --------- ---------
Net Income (Loss) $(288,006) $ (515,656) $ (803,662) $ (1,182,560)
======== =========== ========= =========
</TABLE>
F-36
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(1) The unaudited pro forma balance sheet at December 31,
1996 and statement of operations for the year ended
December 31, 1996 and year ended December 31, 1995
presents pro forma results of operations of the Company
and the Private Label Group as if the acquisition of the
Private Label Group had occurred at the beginning of the
period. It should not be considered indicative of the
results that would have been achieved had the
acquisition actually occurred on such date.
(a) The amortization of goodwill arising from the acquisition
of the Private Label Group over 20 years.
(b) To record the interest on notes of $1,758,750 from the
Private Label Group acquisition at 9% per annum.
(c) To record the operations of the Private Label
Group for the period January 1, 1996 to August
22, 1996 (date of acquisition by the Company).
(2) The acquisition of Scent Overnight in October 1996 has
been accounted for as a distribution from stockholders'
equity under the purchase method of accounting.
(d) To record the interest on notes of $225,000 from the Scent
Overnight acquisition at 9% per annum.
(3) The following adjustments to the pro forma financial
statements described in (e) through (f) below reflect
transactions post December 31, 1996 that have a material
impact on the financial statements:
(e) Proceeds of $100,000 from a private placement totaling
$200,000 net of commissions and fees of $10,000.
(f) Proceeds of $350,000 from a private placement net of
commissions and fees of $35,000.
(4) The following adjustments to the pro forma financial
statements described in (g) through (k) below reflect
gross proceeds and applications of the net proceeds of
the Offering:
(g) The receipt of the gross proceeds of the
Offering, $5,520,000, less estimated costs of
the Offering of approximately $1,055,000, which
includes, the Underwriter's discounts,
commissions and non-accountable expense
allowance.
F-37
<PAGE>
(h) Payment of consulting fees $263,000 from the proceeds of
the Offering.
(i) Payment of the following notes and interest: (i) first and
second installments of $377,343 on notes from the Private
Label Group acquisition plus interest (ii) principal and
interest due under promissory note of $225,000 (iii) principal
and interest due under promissory notes aggregating $300,000
(iv) interest due under note assumption of $210,000 (v)
remaining principal and interest due under promissory note of
$55,500 and (vi) principal and interest due under promissory
notes aggregating $200,000 (vii) principal and interest due
under promissory note aggregating $350,000.
(j) The issuance of 180,000 shares of the Company's Common
Stock valued at $765,000 (the approximated $5.00 quoted market
price per share less a 15% discount for restrictions on
resale) from the acquisition of the Private Label Group with
the resulting goodwill of $765,000.
(k) Payment of past due payroll taxes and penalties of
$519,323 for the proceeds of the Offering.
F-38
<PAGE>
[Marketing Display]
<PAGE>
No underwriter, dealer, salesman or
other person has been authorized to
give any information or to make any
representations other than those
contained in this Prospectus, and,
if given or made, such information
or representation must not be relied
upon as having been authorized by the
Company or the Underwriter. This
Prospectus does not constitute an AZUREL LTD.
offer or solicitation to any person 1,200,000 Shares of Common Stock and
in any jurisdiction where such offer 1,200,000 Redeemable Common Stock
or solicitation would be unlawful. Purchase Warrants
Neither delivery of this Prospectus
nor any sale hereunder shall, under
any circumstances, create any implication
that there has been no change in the
affairs of the Company since the date
hereof.
TABLE OF CONTENTS
Page
Prospectus Summary.....................
Risk Factors...........................
Dilution...............................
Capitalization.........................
Use of Proceeds........................
Dividend Policy........................
Management's Discussion and
Analysis of Financial
Condition and Results
of Operations......................... PROSPECTUS
Business................................
Management..............................
Principal Stockholders..................
Certain Transactions.................... NETWORK 1 FINANCIAL SECURITIES, INC.
Description of Securities...............
Shares Eligible for Future Sale.........
Underwriting............................
Concurrent Registration of
Securities.............................
Legal Matters...........................
Experts.................................
Additional Information.................. __________
Financial Statements....................
Until _______, 1997 (25 days after the
date of this Prospectus), all dealers
effecting transactions in the Company's
securities, whether or not participating
in this distribution, may be required to
deliver a Prospectus. This is in addition
to the obligation of dealers to deliver a
Prospectus with respect to their unsold
allotments or subscriptions.
<PAGE>
[Alternate Page for Selling Securityholders' Prospectus]
DATED MAY ___, 1997
PROSPECTUS
AZUREL LTD.
905,500 Redeemable Common Stock Purchase Warrants
This prospectus relates to 905,500 Redeemable Warrants (the "Selling
Securityholders' Warrants") and the 905,500 shares of Common Stock issuable upon
exercise thereof (the "Selling Securityholders' Warrant Shares") which are being
offered for sale by certain Selling Warrantholders (the "Selling
Warrantholders").
Each Redeemable Warrant expires on _______, 2002, five years after the
date of this Prospectus (the "Expiration Date") and entitles the holder thereof,
commencing one year from the date of this Prospectus, to purchase one share of
Common Stock at an exercise price of $______ [120% of initial public offering
price of Common Stock] (the "Exercise Price"), subject to adjustment in certain
events. The Redeemable Warrants are redeemable by the Company, at a price of
$.10 per Redeemable Warrant, at any time commencing one year after the date of
this Prospectus and prior to the Expiration Date, on 30 days prior written
notice to the Selling Warrantholders, provided that the closing bid price per
share of the Common Stock exceeds 150% of the Exercise Price for a period not
less than 20 trading days in any 30 day trading period ending not more than 15
days prior to the date of any redemption notice. The Redeemable Warrants shall
be exercisable until the close of the business day preceding the date fixed for
redemption. See "Underwriting" and "Description of Securities Redeemable
Warrants."
The Selling Warrantholders may not sell or otherwise dispose of any of the
Selling Securityholders' Warrants for a period of three (3) months after the
Effective Date without the prior written consent of the Underwriter. See
"Selling Securityholders and Plan of Distribution."
The Company will not receive any of the proceeds from the sales of the
Selling Securityholders' Warrants although it will receive the exercise price of
the Selling Securityholders' Warrants, if exercised. The Company is paying the
expenses incurred in connection with the registration for sale of the Selling
Securityholders.' The Selling Securityholders' may be offered from time to time
by the Selling Warrantholders, their pledgee and/or their donees (who will be
identified in a prospectus supplement as appropriate), through ordinary
brokerage transactions in the over-the-counter market, in negotiated
transactions or otherwise, at market prices prevailing at the time of sale or at
negotiated prices. No underwriting arrangements have been entered into by the
Selling Warrantholders. Usual and customary or specifically negotiated brokerage
fees or commissions may be paid by the Selling Warrantholders, their pledgees
and/or their pledgees and/or their donees, in connection with sales of the
Selling Securityholders' Warrants.
THESE SECURITIES ARE SPECULATIVE SECURITIES INVOLVING A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD BE PURCHASED ONLY BY PERSONS
WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT IN THE COMPANY. PURCHASERS SHOULD
CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER "RISK FACTORS" AND "DILUTION"
COMMENCING ON PAGES 9 AND 19, RESPECTIVELY, OF THIS PROSPECTUS.
The Selling Warrantholders, their pledges and/or their donees, may be
deemed to be "Underwriters" as defined in the Securities Act of 1933, as amended
(the "Securities Act"). If any broker-dealers are used by the Selling
Warrantholders, their pledgees and/or their donees, any commissions paid to
broker-dealers and, if broker-dealers purchase any Selling Securityholders'
Warrants as principals, any profits received by such broker-dealers on the
resale of the Selling Securityholders' Warrants may be deemed to be underwriting
discounts or commissions under the Securities Act. In addition, any profits
realized by the Selling Warrantholders, their pledgees and/or their donees, may
be deemed to be underwriting commissions. All costs, expenses and fees in
connection with the registration of the Selling Securityholders' Warrants will
be borne by the Company except for any commission paid to
<PAGE>
broker-dealers or other selling expenses.
On the date of this Prospectus, a registration statement under the
Securities Act with respect to a public offering underwritten by Network 1
Financial Securities, Inc. (the "Underwriter") of 1,200,000 shares of Common
Stock and 1,200,000 Redeemable Warrants (without giving effect to the
Underwriter's over-allotment option to purchase an additional 180,000 shares of
Common Stock and/or 180,000 Redeemable Warrants (the "Over-Allotment Option")
was declared effective by the Securities and Exchange Commission (the
"Offering"). In connection with the Offering of the Common Stock and Redeemable
Warrants, the Company granted the Underwriter warrants to purchase 120,000
shares of Common Stock and/or 120,000 Redeemable Warrants (the "Underwriter's
Warrant"). Prior to the Offering, no public market for the Securities has
existed, and no assurance can be given that any market for such Securities will
develop on completion off the Offering or, if developed, be sustained.
--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION ORANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSIONOR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The Date of this Prospectus is ________________, 1997
<PAGE>
[Alternate Page for Selling Securityholders' Prospectus]
THE OFFERING
Securities Offered 905,500 Redeemable Warrants and 905,500
shares of Common stock underlying Redeemable
Warrants
Common Stock Outstanding Before 5,258,747
the Offering(1)
Common Stock Outstanding After the 5,258,747
Offering(1)(2)
Redeemable Warrants Outstanding 2,105,500
After the Offering(3)
Terms of the Redeemable Warrants Each Redeemable Warrant is exercisable from
one year after the date of this Prospectus
to five years after the date of this
Prospectus and entitles the holder thereof
to purchase one share of Common Stock at an
exercise price of $___, [120% of the initial
public offering price per share of Common
Stock] subject to adjustment in certain
circumstances (the "Exercise Price"). The
Redeemable Warrants are redeemable by the
Company, in whole or in part, at any time
commencing one year after the date of this
Prospectus, upon 30 days prior written
notice, at a price of $.10 per Redeemable
Warrant, provided that the closing bid price
of the Common Stock exceeds 150%
of the Exercise Price for a period not less
than 20 trading days in any 30 trading day
period ending not more than 15 days prior to
the day on which the Company gives notice of
redemption. See "Description of
Securities-Redeemable Warrants."
Use of Proceeds The Company intends to use the proceeds
received from the exercise of the Redeemable
Warrants, if any, for working capital.
<PAGE>
Risk Factors The Securities involve a high degree of risk
and should not be purchased by investors
who cannot afford to lose their entire
investment. Prospective investors should
consider carefully the factors set
forth under "Risk Factors."
Proposed NASDAQ Common Stock - AZUR
Symbols (4) Redeemable Warrants - AZURW
(1) Does not include (i) up to 750,000 shares of Common Stock reserved for
issuance pursuant to stock options which may be granted pursuant to the
Company's 1997 Stock Option Plan, (ii) 325,500 shares of Common Stock
reserved for issuance pursuant to options and warrants issued in
connection with financing and consulting agreements or (iii) 905,500
shares of Common Stock reserved for issuance pursuant to Redeemable
Warrants being offered hereby. See "Management - Stock Option Plan"
and "Certain Transactions."
(2) Does not include (i) up to an additional 180,000 shares of Common Stock
and 180,000 Redeemable Warrants issuable upon exercise of the
Underwriter's Over-Allotment Option; (ii) 180,000 shares of Common
Stock issuable upon exercise of the Redeemable Warrants included in the
Underwriter's Over-Allotment Option; (iii) 1,200,000 shares of Common
Stock reserved for issuance upon the exercise of the Redeemable
Warrants offered by the Company; (iv) up to 120,000 shares of Common
Stock issuable upon exercise of the Underwriter's Warrants or (v) up to
120,000 shares of Common Stock issuable upon exercise of the Redeemable
Warrants included in the Underwriter's Warrants. Includes (i) 1,200,000
shares of Common Stock offered by the Company, (ii) 180,000 shares
of Common Stock issuable upon the closing of the Company's offering in
connection with the acquisition of the companies comprising the Private
Label Group and (iii) 905,500 shares of Common Stock reserved for
issuance pursuant to Redeemable Warrants being offered hereby. See
"Description of Securities," "Underwriting," and "Certain
Transactions."
(3) Does not include (i) 180,000 Redeemable Warrants issuable upon exercise
of the Underwriter's Over-Allotment Option, (ii) 180,000 Redeemable
Warrants issuable upon exercise of the Underwriter's Warrants or
(iii) 905,500 shares of Common Stock reserved for issuance pursuant to
Redeemable Warrants being offered hereby. Includes 1,200,000 Redeemable
Warrants offered by the Company. See "Underwriting."
(4) The proposed trading symbols do not imply that an active trading market
will develop for the Common Stock or Redeemable Warrants upon the
completion of this Offering or be sustained thereafter or that the
Company's Securities will be approved for listing on NASDAQ or will
continue to be listed, if approved. See "Risk Factors."
<PAGE>
[Alternate Page for Selling Securityholder Prospectus]
SELLING SECURITYHOLDERS AND PLAN OF DISTRIBUTION
The Company has issued an aggregate of 905,500 Redeemable Warrants to
the Selling Securityholders that are being offered pursuant to this Prospectus.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and "Certain Transactions." The
Selling Securityholders have advised the Company that sales of the Redeemable
Warrants may be effected from time-to-time by themselves, their pledgees and/or
their donees, in transactions (which may include block transactions) in the
over-the- counter market, in negotiated transactions, through the writing of
options on the Common Stock and Redeemable Warrants, or a combination of such
methods of sale or otherwise, at fixed prices that may be changed, at market
prices prevailing at the time of sale, or at negotiated prices. The Selling
Securityholders, their pledgees and/or their donees, may effect such
transactions by selling Redeemable Warrants directly to purchasers or through
broker-dealers that may act as agents or principals. Such broker-dealers may
receive compensation in the form of discounts, concessions or commissions from
the Selling Securityholder and/or the purchasers of Redeemable Warrants for whom
such broker-dealers may act as agents or to whom they sell as principals, or
both.
The Selling Securityholders, their pledgees and/or their donees, any
broker-dealers that act in connection with the sale of the Redeemable Warrants
as principals may be deemed to be "Underwriters" within the meaning of Section
2(11) of the Securities Act and any commissions received by them and any profit
on the resale of the Redeemable Warrants as principals might be deemed to be
underwriting discounts and commissions under the Securities Act. The Selling
Securityholders' Warrants being registered on behalf of the Selling
Securityholders are restricted securities while held by the Selling
Securityholders and the resale of such securities by the Selling Securityholders
is subject to prospectus delivery and other requirements of the Act. The Selling
Securityholders, their pledgees and/or their donees, may agree to indemnify any
agent, dealer or broker-dealer who participates in transactions involving sale
of the Redeemable Warrants against certain liabilities, including liabilities
arising under the Securities Act. The Company will not receive any proceeds from
the sales of the Selling Securityholders' Warrants by the Selling
Securityholders except upon exercise of the Redeemable Warrants. Sales of the
Selling Securityholders' Securities by the Selling Securityholders, or even the
potential of such sales, would likely have an adverse effect on the market price
of the Company's Securities.
At the time a particular offer of the securities is made by or on
behalf of the Selling Securityholders, to the extent required, a prospectus
supplement will be distributed which will set forth the number of shares being
offered and the terms of the Offering, including the name or names of any
Underwriters, dealers or agents, the purchase price paid by any Underwriters for
shares purchased from the selling stockholders and any discounts, commissions or
concessions allowed or reallowed or paid to dealers, and the proposed selling
price to the public.
<PAGE>
Under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the regulations thereto, any person engaged in distribution of
Company securities offered by this prospectus may not simultaneously engage in
market-making activities with respect to Company securities during the
applicable "cooling off" period prior to the commencement of such distribution.
In addition, and without limiting the foregoing, the Selling Securityholders
will be subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including without limitation, Regulation M in connection
with transactions in the shares, which provisions may limit the timing of
purchases and sales of the Company's securities by the Selling Securityholders.
The following table sets forth certain information with respect to
persons for whom the Company is registering the Selling Securityholders'
for resale to the public. Beneficial ownership of the Selling Securityholders'
Securities by such Selling Securityholders after the Offering will depend on
the number of Selling Securityholders' Securities sold by each Selling
Securityholder. The securities held by the Selling Securityholders are
restricted securities while held by such Selling Securityholders and the
resale of such securities by the Selling Securityholders is subject to
prospectus delivery and other requirements of the Act. The Selling
Securityholders' Securities offered by the Selling Securityholders are not being
underwritten by the Underwriter.
<PAGE>
[Alternate Page for Selling Securityholders' Prospectus]
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Beneficial Beneficial
Ownership Ownership
Prior to Selling After Selling
Securityholders' Amount Securityholders'
Offering Being Registered Offering(1)
------------------------------- ------------------------- ------------------------
Redeemable Redeemable
Warrants Redeemable Warrants
Securityholder Shares and/or options (2) Shares Warrants(1) Shares and/or options (2) Percentage
- -------------- ------ -------------- ------ --------- ------- ---------------- ----------
Margaret Amarante 0 50,000 0 50,000 0 0 0
Bola Business Ltd. 25,000 50,000 0 0 25,000 50,000 *
Comax Co. Ltd. 0 25,000 0 25,000 0 0 0
John DeAngelis 0 50,000 0 50,000 0 0 0
Richard Epstein 0 25,000 0 25,000 0 0 0
ETR & Associates, Inc.(3) 25,000 150,000 0 25,000 25,000 125,000 4%
Ernest Gottdiener 0 25,000 0 25,000 0 0 0
Angela James 0 50,000 0 50,000 0 0 0
Martin & Miriam Knecht 0 25,000 0 25,000 0 0 0
Robert E. Lee(3) 425,000 55,500 0 55,500 425,000 0 4%
Metco Investors LLC (3) 150,000 162,500 0 112,500 150,000 50,000 4%
Michalaur International (4) 18,750 156,250 0 156,250 0 0 0
Robert Molfetta 0 25,000 0 25,000 0 0 0
Robert E. Murello 0 50,000 0 50,000 0 0 0
Edward W. Pedersen (4) 15,625 50,000 0 50,000 15,625 0 *
John J. Scamardella 0 100,000 0 100,000 0 0 0
Tusany Investment &
Trade S.A. (4) 1,559,355 50,000 309,355 50,000 1,559,355 0 24.7%
James J. Wrynn 0 56,250 0 56,250 0 0 0
- ------------
<FN>
* Less than 1%
(1) Assumes all of the Selling Securityholder Securities offered hereby are
sold and no additional securities are acquired.
(2) Represent Redeemable Warrants acquired by the Selling Securityholder in
exchange for warrants containing substantially idential terms pursuant to
an exchange exempt from registration under Section 3(a)(9) of the
Securities Act, or options granted to the Selling Securityholder.
(3) Mr. Robert E. Lee is the President of ETR & Associates, Inc. ("ETR"), the
General Partner of Woodward Partners, LLC ("Woodward") and exercises
investment power over the investments owned by Metco Investors, LLC
("Metco"). ETR, Woodward and Metco provide general management advisory
services to the Company. The percentage ownership after the Selling
Securityholders' Offering, includes securities owned by Mr. Lee, ETR,
Woodward and Metco. See "Principal Stockholders" and "Certain
Transactions."
(4) Such Selling Stockholder is one the founders of the Company. See "Certain
Transactions."
</FN>
</TABLE>
II-16
<PAGE>
[Alternate Page for Selling Securityholder's Prospectus]
LEGAL MATTERS
The validity of the Securities offered hereby and certain other legal
matters will be passed upon for the Company by Gersten, Savage, Kaplowitz,
Fredericks & Curtin, LLP, New York, N.Y. Certain legal matters will be passed
upon for the Underwriter by Snow Becker Krauss P.C., New York, N.Y. Gersten,
Savage, Kaplowitz. Fredericks & Curtin, LLP has acted as counsel to the
Underwriter in other transactions, and may so act in the future.
EXPERTS
The audited financial statements for the years ended 1995 and 1996
included in the Prospectus have been audited by Feldman Radin & Co., P.C.,
independent certified public accountants, to the extent and for the periods set
forth in their report appearing elsewhere herein, and are included in reliance
upon such report and upon the authority of said firm as experts in accounting
and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on
Form SB-2 in accordance with the provisions of the Securities Act, with respect
to the securities offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits thereto.
For further information, reference is made to the Registration Statement and to
the exhibits filed therewith. Statements herein contained concerning the
provisions of any document are not necessarily complete and, in each instance,
reference is made to the copy of such document filed as an exhibit to the
Registration Statement. The Registration Statement and the exhibits may be
inspected without charge at the offices of the Commission and, upon payment to
the Commission of prescribed fees and rates, copies of all or any part thereof
may be obtained from the Commission's principal office at the Public Reference
Section, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C.
20549. Electronic registration statements filed through the Electronic Data
Gathering, Analysis, and Retrieval system are publicly available through the
Commission's Website (http://www.sec.gov).
On the Effective Date, the Company will become subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and, in accordance therewith, will file reports, proxy and information
statements and other information with the Securities and Exchange Commission.
Such reports, proxy and information statements and other information can be
inspected and copies at the Public Reference Section of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and
copies of such material may also be obtained from the Public Reference Section
of the Commission at prescribed rates. The Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants that file electronically. The Company
intends to furnish its stockholders with annual reports containing audited
financial statements and such other reports as the Company deems appropriate or
as may be required by law.
<PAGE>
No underwriter, dealer, salesman or
other person has been authorized to
give any information or to make any
representations other than those
contained in this Prospectus, and,
if given or made, such information or
representation must not be relied upon
as having been authorized by the
Company or the Underwriter. This AZUREL LTD.
Prospectus does not constitute an
offer or solicitation to any person 905,500 Redeemable Common Stock
in any jurisdiction where such offer Purchase Warrants
or solicitation would be unlawful.
Neither delivery of this Prospectus
nor any sale hereunder shall, under
any circumstances, create any implication
that there has been no change in the
affairs of the Company since the date
hereof.
TABLE OF CONTENTS
Page
Prospectus Summary.....................
Risk Factors...........................
Dilution...............................
Capitalization.........................
Use of Proceeds........................
Dividend Policy........................
Management's Discussion and
Analysis of Financial
Condition and Results
of Operations........................ PROSPECTUS
Business...............................
Management.............................
Principal Stockholders.................
Certain Transactions...................
Description of Securities..............
Shares Eligible for Future Sale........
Selling Securityholders................ _____________ , 1997
Plan of Distribution...................
Legal Matters..........................
Experts................................
Additional Information.................
Financial Statements...................
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law, among other
things, and subject to certain conditions, authorizes the Company to indemnify
its officers and directors against certain liabilities and expenses incurred by
such persons in connection with claims made by reason of their being such an
officer or director. The Certificate of Incorporation and By-Laws of the Company
provide for indemnification of its officers and directors to the full extent
authorized by law.
Reference is made to the Underwriting Agreement, the proposed form of
which is filed as Exhibit 1.1, pursuant to which the Underwriter agrees to
indemnify the directors and certain officers of the Registrant and certain other
persons against certain civil liabilities.
Under Delaware law, directors of the Company are not liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty,
except for liability in connection with (i) a breach of duty of loyalty, (ii)
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) dividend payments or stock repurchased in
violation of Delaware law or (iv) any transaction in which a director has
derived an improper personal benefit.
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 informed that in the
opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
Item 25. Other Expenses of Issuance and Distribution
The following is a statement of the expenses to be paid by
the Company, after payment of commissions and expenses to the Underwriter, in
connection with the issuance and distribution of the securities being
registered:
SEC Registration Fee...................................................$7,301*
NASD Filing Fee.........................................................3,000*
NASDAQ Filing Fee......................................................10,000*
Printing and Engraving Expenses........................................50,000*
Legal Fees and Expenses (other than blue sky).........................120,000*
Accounting Fees and Expenses..........................................110,000*
Blue Sky Fees and Expenses.............................................45,000*
Transfer Agent and Registrar Fees and Expenses..........................4,500*
Miscellaneous..........................................................10,000*
TOTAL.......................................................$359,801*
*Estimated
Item 26. Recent Sales of Unregistered Securities
During the past three years, the Company has issued securities to a
limited number of persons, without registering the securities under the
Securities Act. There were no underwriting discounts or commissions paid in
connection with the issuance of any of said securities, except as noted.
In reliance upon Section 4(2) of the Securities Act, which provides an
exemption for a
II-1
<PAGE>
transaction not involving a public offering, in June and September 1995, the
Company issued an aggregate of 2,175,000 shares of Common Stock to the twelve
founders of the Company for $.001 per share: Gerard Semhon, Constantine Bezas,
Joseph Truitt Bell, Van Christakos, Diane Papas, Tusany Investment & Trade,
S.A., Edward Pedersen, Kenneth Lee, James G. Cooley, Michalaur International,
Valerie A. Profitt and Leslie Bines.
In 1995 and 1996, the Company issued an aggregate of 175,000 shares of
Common Stock valued at $100,125 to the Consulting Group (25,000 shares to ETP,
50,000 shares to Woodward and 100,000 shares to Metco) in exchange for
consulting services. The issuances were made in reliance upon Section 4(2) of
the Securities Act, which provides an exemption for a transaction not involving
a public offering.
In July 1995, the Company granted ETR an option to purchase 150,000
shares of Common stock at $1.00 per share, which expires in July 2000, as
additional consideration for a loan in the original principal amount of $28,750,
which was subsequently repaid. The grant was made in reliance upon
Section 4(2) of the Securities Act, which provides an exemption for a
transaction not involving a public offering.
In September 1995, the Company issued Bola 25,000 shares of Common
Stock, valued at $25, and granted Bola the option to purchase 50,000 shares of
Common Stock at $1.00 per share, which expires in September 2002, as additional
consideration for a loan. The issuance and grant were made in reliance upon
Section 4(2) of the Securities Act, which provides an exemption for a
transaction not involving a public offering.
In December 1995, the Company completed a $250,000 private placement of
10 units in reliance upon Rule 506 of Regulation D of the Securities Act, which
provides a safe harbor under the Section 4(2) exemption for a transaction not
involving a public offering. Each unit consisted of (i) the Company's 18 month
12% promissory note in the original principal amount of $50,000, and (ii) 25,000
shares of Common Stock. The Company received $210,000 of net proceeds after
deducting expenses of $7,500 and commissions of $32,500 to the Underwriter for
acting as placement agent. In connection with this private placement, the
Company issued the securities described in the following table to 11
unaffiliated investors, each an "accredited investor" within the meaning of
Regulation D of the Securities Act:
<TABLE>
<S> <C> <C>
Dollar Amount of Number of
Name Note Purchased Shares Issued
Drew Dellinger $25,000 12,500
Wayne Robbins $25,000 12,500
Betty Presley $25,000 12,500
William Kennedy $25,000 12,500
II-2
<PAGE>
Louis D. Zachau $12,500 6,250
Larry Bucsek $50,000 25,000
Ronald I. Harris $10,000 5,000
Shelby Goldring $10,000 5,000
Bruce Levenbrook $10,000 5,000
Wolf Financial Group Inc., DIP $47,500 23,750
Ronald S. Mack - IRA $10,000 5,000
</TABLE>
In February 1996, the Company completed a $250,000 private placement of
5 units in reliance upon Rule 506 of Regulation D of the Securities Act, which
provides a safe harbor under the Section 4(2) exemption for a transaction not
involving a public offering. Each unit consisted of (i) the Company's 18 month
12% promissory note in the original principal amount of $50,000, and (ii) 25,000
shares of Common Stock. The Company received $210,000 of net proceeds (after
deducting expenses of $7,500 and commissions of $32,500 to the Underwriter for
acting as the placement agent. In connection with this private placement, the
Company issued the securities described in the following table to two affiliated
and one unaffiliated investors, each an "accredited investor" within the
meaning of Regulation D of the Securities Act:
<TABLE>
<S> <C> <C>
Dollar Amount Number of
of Note Shares
Name Purchased Issued
Wolf Financial Group Inc., DIP $100,000 50,000
Bola Business Ltd. $ 50,000 25,000
Tusany Investment & Trade, S.A. $100,000 50,000
</TABLE>
In February 1996, the Company issued 10,000 shares of Common Stock in
exchange for legal services rendered to the Company. The issuance was made in
reliance upon Section 4(2) of the Securities Act, which provides an exemption
for a transaction not involving a public offering.
In March 1996, the Company issued Metco 25,000 shares of Common Stock
and an option to purchase 50,000 shares of Common Stock at $1.25 per share,
which expires in January 1999, in consideration for a loan. In March 1996, the
Company issued an additional 25,000 shares of Common Stock to Metco as a penalty
for the Company's late payment of a portion of a loan. These issuances were
made in reliance upon Section 4(2) of the Securities Act, which provides an
exemption for a transaction not involving a public offering.
In July 1996, the Company completed a private placement of 978,747
shares of Common Stock at $2.00 per share in reliance upon Rule 506 of
Regulation D of the Securities Act, which provides a safe harbor under the
Section 4(2) exemption for a transaction not involving a public offering.
The Company received $1,314,950 of net proceeds after deducting expenses of
$11,050 and commissions of $174,000 to the Underwriter for acting as
placement agent. As part of this private placement, certain
II-3
<PAGE>
noteholders of the Company converted $457,494 principal amount and interest into
278,747 shares of Common Stock. Of the aggregate debt converted, Tusany
converted principal and interest due under a $50,000 promissory note issued
in the February 1996 private placement into 52,383 shares of Common Stock and
principal and interest due under a $200,000 promissory note issued in October
1995 into 106,972 shares of Common Stock. In connection with this private
placement, the Company issued the securities described in the following table
to 24 unaffiliated and one affiliated investor, each an "accredited investor"
within the meaning of Regulation D of the Securities Act:
<PAGE>
<TABLE>
<S> <C> <C>
Number
of Shares
Name Purchase Price of Common Stock
Alan J. Rubin $50,000 25,000
Vahik Babaian $100,000 50,000
William M. Kennedy $100,000 50,000
David's Art, Inc. d/b/a Art Connection $50,000 25,000
Derek C. Ferguson $50,000 25,000
Mark Frankel $50,000 25,000
Steven M. Frankel $50,000 25,000
Levanthal, Paget LLC $50,000 25,000
Fred Kassner $500,000 250,000
David E. Ruggieri $100,000 50,000
Jeffrey P. & Jacalyn K. Flack $50,000 25,000
David Edward Blockstein $25,000 12,500
Robert J. Roehrich $50,000 25,000
Richard J. Brown $25,000 12,500
Robert J. Stein $25,000 12,500
Anthony and Maya Cirillo $25,000 12,500
Tusany Investment & Trade, S.A. $518,710 259,355
Drew Dellinger $27,440 13,720
Wayne Robbins $27,440 13,720
Betty Presley $27,432 13,716
Louis Zachau $13,682 6,841
Ronald Harris $10,716 5,358
Shelby Goldring $10,716 5,358
Bruce Levenbrook $10,716 5,358
Ronald Mack-IRA $10,642 5,321
</TABLE>
In August 1996 the Company issued to V.A.N. Marketing Ltd. ("VAN")
5,000 shares of Common Stock, valued for accounting purposes at $21,250, and
granted options to purchase 20,000 shares of the Company's Common Stock at
$4.80 per share, expiring in July 1999 for services rendered under a brokerage
and consulting agreement. The issuance was made in reliance upon Section 4(2)
of the Securities Act, which provides an exemption for a transaction not
involving a public offering.
In October 1996, the Company issued 210,000 shares of Common Stock to
Liam Development Ltd. upon conversion of a promissory note into shares of the
Company's Common Stock at $1.00 per share. The issuance was made in reliance
upon Section 4(2) of the Securities Act, which provides an exemption for a
transaction not involving a public offering.
In October 1996, the Company completed a $300,000 private placement of
12 units in reliance upon Rule 506 of Regulation D of the Securities Act, which
provides a safe harbor under the Section 4(2) exemption for a transaction not
involving a public offering. Each unit consisted of (i) the Company's 12 month
10% promissory note in the original principal amount of $25,000, and (ii) a
warrant to purchase up to 25,000 shares of Common Stock. The warrants by their
terms convert to Redeemable Warrants on the effective date hereof and may be
sold by their holders subject to three month lock-up agreements. The Company
received net proceeds of $270,000 after deducting commissions of $30,000 to the
Underwriter for acting as placement agent. In connection with this private
placement, the Company issued the securities described
II-4
<PAGE>
in the following table to three affiliated and four unaffiliated investors, each
an "accredited investor" within the meaning of Regulation D of the Securities
Act:
<TABLE>
<S> <C> <C>
Dollar Amount Number of
Name of Note Purchased Warrants Issued
Michalaur International $50,000 50,000
Robert E. Murello $50,000 50,000
Margaret Amarante $50,000 50,000
Angela James $50,000 50,000
Metco Investors LLC $25,000 25,000
Robert Molfetta $25,000 25,000
Tusany Investment & Trade,
S.A. $50,000 50,000
</TABLE>
In November 1996, the Company issued Mr. Robert E. Lee warrants to
purchase 55,500 shares of Common Stock at an exercise price of $4.80 per share,
which expire in December 2000, as consideration for the extension of the
maturity date of a loan made by Mr. Lee to the Company. The warrants by their
terms convert to Redeemable Warrants on the effective date hereof and may be
sold by their holders subject to three month lock-up agreements. The issuances
made in reliance upon Section 4(2) of the Securities Act, which provides an
exemption for a transaction not involving a public offering.
In January 1997, the Company completed a $200,000 private placement of
8 units in reliance upon Rule 506 of Regulation D of the Securities Act, which
provides a safe harbor under the Section 4(2) exemption for a transaction not
involving a public offering. Each unit consisted of (i) the Company's 12 month
10% promissory note in the original principal amount of $25,000, and (ii) a
warrant to purchase up to 25,000 shares of Common Stock. The warrants by their
terms convert to Redeemable Warrants on the effective date hereof and may be
sold by their holders subject to three month lock-up agreements. The Company
received net proceeds of $180,000 after deducting commissions of $20,000 to the
Underwriter for acting as placement agent. In connection with this private
placement, the Company issued the securities described in the following table to
one affiliated and two unaffiliated investors, each an "accredited investor"
within the meaning of Regulation D of the Securities Act:
<TABLE>
<S> <C> <C>
Dollar Amount Number of
Name of Note Purchased Warrants Issued
- ---- ----------------- ---------------
John DeAngelis $50,000 50,000
Edward Pedersen $50,000 50,000
John J. Scamardella $100,000 100,000
</TABLE>
In April 1997, the Company completed a $350,000 private placement of 14
units in reliance upon Rule 506 of Regulation D of the Securities Act, which
provides a safe harbor under the Section 4(2) exemption for a transaction not
involving a public offering. Each unit consisted of (i) the Company's 12 month
10% promissory note in the original principal amount of $25,000 and (ii) a
warrant to purchase up to 25,000 shares of Common Stock. The Company received
net proceeds of $315,000 after deducting commissions of $35,000 to the
Underwriter for acting as placement agent. In connection with this private
placement, the Company issued the securities described in the following table to
two affiliated and five unaffiliated investors, each an "accredited investor"
within the meaning of Regulation D of the Securities Act:
<TABLE>
<S> <C> <C>
Dollar Amount Number of
Name of Note Purchased Warrants Issued
- ---- ----------------- ---------------
Michalaur International $106,250 $106,250
Metco Investors LLC 87,500 87,500
James J. Wrynn 56,250 56,250
Richard Epstein 25,000 25,000
Ernest Gottdiener 25,000 25,000
Comax Co. Ltd. 25,000 25,000
Martin & Miriam Knecht 25,000 25,000
</TABLE>
Item 27. List of Exhibits
Exhibit Number Description of Exhibit
1.1**** Form of Underwriting Agreement
1.2**** Form of Financial Advisory and Investment Banking Agreement.
3.1* Certificate of Incorporation of the Registrant.
3.2**** Amended By-Laws of the Registrant.
4.1** Specimen Common Stock Certificate.
4.2** Specimen Redeemable Common Stock Purchase Warrant Certificate.
4.3**** Form of Public Warrant Agreement.
4.4**** Form of Warrant Agreement between the Registrant and Network
1, including Form of Underwriter's Warrant Certificate.
5.1**** Opinion of Gersten, Savage, Kaplowitz, Fredericks &
Curtin, LLP.
10.1* Employment Agreement between the Registrant and Gerard
Semhon dated October 28, 1996.
10.2* Employment Agreement between the Registrant and Michael J.
Assante dated August 22, 1996.
II-5
<PAGE>
10.3*** Lease for 509 Madison Avenue, New York, New York 10022 dated
April 29, 1996.
10.4*** Lease for 20-10 Maple Avenue, Fair Lawn, New Jersey dated
April 11, 1991.
10.5* License Agreement between the Registrant and Europe Craft
Imports, Inc. dated May 15, 1996.
10.6* Stock Purchase and Sale Agreement dated July 17, 1996 by and
among Michael J. Assante, Azurel Ltd., Private Label
Cosmetics, Inc., P.L.C. Specialties, Inc., International
Cosmetic Group, Inc. and Fashion Laboratories, Inc.
10.7* Agreement by and between Scent Overnight, Inc. and Scent 123,
Inc. dated September 9, 1996.
10.8** Registrant's 1997 Stock Option Plan.
10.9* Registrant's Promissory Note dated August 22, 1996 in the
principal amount of $1,675,000 issued to Michael J. Assante.
10.10* Registrants' Promissory Note dated August 22,
1996 in the principal amount of $83,750 issued
to Louis DiVita.
10.11* Consulting Services Agreement dated August 12, 1993 between
Louis DiVita and Private Label Cosmetics, Inc. PLC
Specialties, Inc., Fashion Laboratories, Inc., Contemporary
Cosmetic Group, Inc., International Cosmetic Group, Inc.,
D.A. Advertising Group International, Inc. and Intra-Africa
Corporation.
10.12* Security Agreement dated February 16, 1996 between
Finova Capital Corporation and the Private Label Group and
Guaranty by Michael J. Assante and Denise Assante.
10.13* Collective Bargaining Agreement, dated May 24, 1995. between
10.14* Rubigo Cosmetics Agreement - January 1992
10.15* Revolving Credit Agreement and Guarantees.
21.1** Subsidiaries of the Registrant.
23.1**** Consent of Independent Certified Public Accountants for the
Registrant.
23.2**** Consent of Gersten, Savage, Kaplowitz & Curtin, LLP counsel
for Registrant (included in Exhibit 5.1).
24.1* Power of Attorney (Included with signature page).
27.1 Financial Data Schedule
* Previously filed.
** To be filed by amendment.
*** Exempt from filing because Registrant received a harship exemption.
**** Filed herewith
Item 28. Undertakings
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a) of the Securities
Act of 1933;
(ii) To reflect in the prospectus any facts or events 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 and 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 20 percent 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 additional or changed material information with respect
to the plan of distribution;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
(d) The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
(e) 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 any charter provision, by-law, contract, arrangements,
statute 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 Securities 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 whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(f) For purposes of determining any liability under the Securities Act, the
Registered will treat the information omitted from the from of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the small business issuer under Rule
424(b)(1), or (4) or 497(h), under the Securities Act as part of this
registration statement as of the time the Commission declared it effective.
For purposes of determining any liability under the Securities Act, the
Registrant will treat each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities offered in the
registration statement, and treat that offering of the securities at that time
as the initial bona fide offering of those securities.
(g) Transactions with or by Selling Security Holders; Lock-Up Periods.
The undersigned small business issur hereby undertakes:
(1) To file a post-effective amendment to this Registration Statement in
the event that there is a change in the plans, proposals, agreements,
arrangements or understandings, if any, with respect to transactions
with or by Selling Security Holders or plans to waive or shorten the
lock-up periods applicable to such Selling Security Holders from those
set forth in the Registration Statement; and
(2) In the event that all or a port of the Selling Security Holders are
released by the Underwriter from their respective lock-up agreements,
to file (i) a post-effective amendment to this Registration Statement
if more than 10% of the Selling Security Holders' Securities are
proposed to be released and (ii) a sticker prospectus supplement if
between 5% and 10% of the Selling Security Holders' Securities are
proposed to be released.
II-7
<PAGE>
SIGNATURES
In accordance with the requirements to 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 SB-2 and authorized this
amendment to the Registration Statement to be signed on its behalf by the
undersigned, in the City of New York, State of New York on May __ , 1997.
AZUREL LTD.
By:/s/ Gerard Semhon
Gerard Semhon, Chief Executive
Officer and Chairman of the Board
(Principal Executive Officer,
Principal Financial and Accounting
Officer)
In accordance with the requirements of the Securities Act of 1933, this
amendment to the Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
Signature Title Date
/s/ Gerard Semhon Chief Executive Officer and May __ , 1997
Gerard Semhon Chairman of the Board (Principal
Executive Officer, Principal
Financial and Accounting Officer)
/s/ Constantine Bezas President and Director May __ , 1997
Constantine Bezas
/s/ Joseph Truitt Bell Executive Vice President and Director May __ , 1997
Joseph Truitt Bell
/s/ Van Christakos Secretary, Treasurer and Director May __ , 1997
Van Christakos
AZUREL LTD.
1,000,000 Shares of Common Stock
and
1,000,000 Redeemable Common Stock Purchase Warrants
UNDERWRITING AGREEMENT
__________, 1997
Network 1 Financial Securities, Inc.
One Financial Galleria
2 Bridge Avenue
Red Bank, New Jersey 07701
Gentlemen:
Azurel Ltd., a Delaware corporation (the "Company"), hereby confirms
its agreement with Network 1 Financial Securities, Inc. (the "Underwriter") as
set forth below.
The Company proposes to issue and sell to the Underwriter an aggregate
of (i) 1,000,000 shares (the "Firm Shares") of the Company's common stock, par
value $.001 per share (the "Common Stock"), and (ii) 1,000,000 redeemable
warrants to purchase Common Stock (the "Firm Warrants"). The Company also
proposes to grant to the Underwriter an option to purchase (i) an additional
150,000 shares of Common Stock and (ii) an additional 150,000 redeemable
warrants to purchase Common Stock, as provided in section 2(c) of this agreement
(the "Agreement"). Any and all shares of Common Stock to be purchased pursuant
to such option are referred to herein as the "Option Shares," and the Firm
Shares and any Option Shares are collectively referred to herein as the
"Shares." Any and all redeemable warrants to purchase Common Stock to be
purchased pursuant to such option are referred to herein as the "Option
Warrants," and the Firm Warrants and any Option Warrants are collectively
referred to herein as the "Warrants." Any shares of Common Stock issuable upon
the exercise of any Warrants are referred to herein as "Warrant Shares." The
Firm Shares and the Firm Warrants are collectively referred to herein as the
"Firm Securities;" the Option Shares and the Option Warrants are collectively
referred to herein as the "Option Securities;" and
<PAGE>
the Firm Securities, the Option Securities and the Warrant Shares are
collectively referred to herein as the "Securities."
Pursuant to an agreement to be entered into among the Company, the
Underwriters and North American Transfer Co. (the "Warrant Agreement"), each
Warrant will be exercisable during the period commencing on the first
anniversary of the effective date of the Registration Statement (as hereinafter
defined) (the "Effective Date") and expiring on the fifth anniversary thereof,
subject to redemption by the Company (as described below), at an initial
exercise price (subject to adjustment as set forth in the Warrant Agreement)
equal to $____ per share [120% of the Exercise Price]. The Warrants will be
redeemable at a price of $.10 per Warrant, commencing on the first anniversary
of the Effective Date and prior to their expiration, upon not less than 30 days
prior written notice to the holders of the Warrants, provided the average
closing bid quotations of Common Stock as reported on the Nasdaq Stock Market if
traded thereon, or if not traded thereon, the average closing sale price if
listed on a national or regional securities exchange (or other reporting system
that provides last sales prices), shall have been at least 150% of the then
current Warrant exercise price (initially $____ per share, subject to
adjustment), for 20 trading days during the 30 trading day period ending 15 days
prior to the date on which the Company gives notice of redemption, subject to
the right of the holder to exercise such Warrants prior to redemption.
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the Underwriters that:
(a) A registration statement on Form SB-2 (File No.
333-15127), with respect to the Securities and the Underwriter's Warrant
Securities (as hereinafter defined), including a prospectus subject to
completion, has been filed by the Company with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Act "), and one or more amendments to that registration statement may have been
so filed. Copies of such registration statement and of each amendment heretofore
filed by the Company with the Commission have been delivered to the Underwriter.
After the execution of this Agreement, the Company will file with the Commission
either (i) if the registration statement, as it may have been amended, has been
declared by the Commission to be effective under the Act, a prospectus in the
form most recently included in that registration statement (or, if an amendment
thereto shall have been filed, in such amendment), with such changes or
insertions as are required by Rule 430A under the Act or permitted by Rule
424(b) under the Act and as have been provided to and approved by the
Underwriter prior to the execution of this Agreement, or (ii) if that
registration statement, as it may have been amended, has not been declared by
the Commission to be effective under the Act, an amendment to that registration
statement, including a form of prospectus, a copy of which amendment has been
furnished to and approved by the Underwriter prior to the execution of this
Agreement. The Company also may file a related registration statement with the
Commission pursuant to Rule 462(b) under the Act for purposes of registering
certain additional Securities, which registration statement shall become
effective upon filing with the Commission (the "Rule 462(b) Registration
Statement). As used in this Agreement, the term "Registration Statement" means
that registration statement, as amended at the time it was or is declared
effective, and any amendment
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<PAGE>
thereto that was or is thereafter declared effective, including all
financial schedules and exhibits thereto and any information omitted
therefrom pursuant to Rule 430A under the Act and included in the Prospectus
(as hereinafter defined), together with any Rule 462(b) Registration Statement;
the term "Preliminary Prospectus" means each prospectus subject to completion
filed with that registration statement or any amendment thereto (including the
prospectus subject to completion, if any, included in the Registration Statement
at the time it was or is declared effective); and the term "Prospectus" means
the prospectus first filed with the Commission pursuant to Rule 424(b) under the
Act or, if no prospectus is so filed pursuant to Rule 424(b), the prospectus
included in the Registration Statement. The Company has caused to be delivered
to the Underwriter copies of each Preliminary Prospectus and has consented to
the use of those copies for the purposes permitted by the Act. If the Company
has elected to rely on Rule 462(b) and the Rule 462(b) Registration Statement
has not been declared effective, then (i) the Company has filed a Rule 462(b)
Registration Statement in compliance with and that is effective upon filing
pursuant to Rule 462(b) and has received confirmation of its receipt and (ii)
the Company has given irrevocable instructions for transmission of the
applicable filing fee in connection with the filing of the Rule 462(b)
Registration Statement, in compliance with Rule 111 promulgated under the Act or
the Commission has received payment of such filing fee.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus. When each Preliminary
Prospectus and each amendment and each supplement thereto was filed with the
Commission it (i) contained all statements required to be stated therein, in
accordance with, and complied with the requirements of, the Act and the rules
and regulations of the Commission thereunder and (ii) did not include any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. When the Registration Statement was or is
declared effective, it (i) contained or will contain all statements required to
be stated therein in accordance with, and complied or will comply with the
requirements of, the Act and the rules and regulations of the Commission
thereunder and (ii) did not or will not include any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein not misleading. When the Prospectus and each amendment or
supplement thereto is filed with the Commission pursuant to Rule 424(b) (or, if
the Prospectus or such amendment or supplement is not required so to be filed,
when the Registration Statement containing such Prospectus or amendment or
supplement thereto was or is declared effective) and on the Firm Closing Date
and any Option Closing Date (as each such term is hereinafter defined), the
Prospectus, as amended or supplemented at any such time, (i) contained or will
contain all statements required to be stated therein in accordance with, and
complied or will comply with the requirements of, the Act and the rules and
regulations of the Commission thereunder and (ii) did not or will not include
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The foregoing
provisions of this paragraph (b) do not apply to statements or omissions made in
any Preliminary Prospectus, the Registration Statement or the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with written
information furnished to the Company by the Underwriter specifically for use
therein.
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<PAGE>
(c) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the state of
Delaware and is duly qualified or authorized to transact business as a foreign
corporation and is in good standing in each jurisdiction where the ownership or
leasing of its property or the conduct of its business requires such
qualification or authorization.
(d) The Company has full corporate power and authority, and
all necessary material authorizations, approvals, orders, licenses, certificates
and permits of and from all governmental regulatory authorities, to own or lease
its property and conduct its business as now being conducted and as proposed to
be conducted as described in the Registration Statement and the Prospectus (and,
if the Prospectus is not in existence, the most recent Preliminary Prospectus).
(e) Except for the subsidiaries listed in Exhibit 21.1 to the
Registration Statement (the "Subsidiaries"), the Company does not own, directly
or indirectly, an interest in any corporation, partnership, limited liability
company, joint venture, trust or other business entity. Each Subsidiary is duly
qualified and licensed and in good standing as a foreign corporation in each
jurisdiction where the ownership or leasing of its property or the conduct of
its business requires such qualification or licensing. Each Subsidiary has full
corporate power and authority, and all necessary material authorizations,
approvals, orders, licenses, certificates and permits of and from all
governmental regulatory authorities, to own or lease its properties and conduct
its business as now being conducted and as proposed to be conducted as described
in the Prospectus (and, if the Prospectus is not in existence, the most recent
Preliminary Prospectus)
(f) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus). All of the issued shares of
capital stock of the Company have been duly authorized and validly issued and
are fully paid, nonassessable and free of preemptive rights. There are no
outstanding options, warrants or other rights granted by the Company to purchase
shares of its Common Stock or other securities, other than as described in the
Prospectus (and, if the Prospectus is not in existence, the most recent
Preliminary Prospectus). The Shares and the Warrant Shares have been duly
authorized, and the Warrant Shares have been duly reserved for issuance, by all
necessary corporate action on the part of the Company and, when the Shares are
issued and delivered to and paid for by the Underwriter pursuant to this
Agreement and the Warrant Shares are issued and delivered to and paid for by the
holders of Warrants upon exercise of the Warrants in accordance with the terms
thereof, the Shares and the Warrant Shares will be validly issued, fully paid,
nonassessable and free of preemptive rights and will conform to the description
thereof in the Prospectus (and, if the Prospectus is not in existence, the most
recent Preliminary Prospectus). No holder of outstanding securities of the
Company is entitled as such to any preemptive or other right to subscribe for
any of the Securities, and no person is entitled to have securities registered
by the Company under the Registration Statement or otherwise under the Act other
than as described in the Prospectus (and, if the Prospectus is not in existence,
the most recent Preliminary Prospectus).
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<PAGE>
(g) The capital stock of the Company conforms to the
description thereof contained in the Prospectus (and, if the Prospectus is not
in existence, the most recent Preliminary Prospectus).
(h) All issuances of securities of the Company have been
effected pursuant to an exemption from the registration requirements of the Act.
Except as previously disclosed in writing to the Underwriter, no compensation
was paid to or on behalf of any member of the National Association of Securities
Dealers, Inc. ("NASD"), or any affiliate or employee thereof, in connection with
any such issuance.
(i) The consolidated financial statements of the Company
included in the Registration Statement and the Prospectus (and, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) fairly
present the financial position of the Company and its subsidiaries as of the
dates indicated and the results of operations of the Company and its
subsidiaries for the periods specified. Such consolidated financial statements
have been prepared in accordance with generally accepted accounting principles,
consistently applied, except to the extent that certain footnote disclosures
regarding unaudited interim periods may have been omitted in accordance with the
applicable rules of the Commission under the Securities Exchange Act of 1934, as
amended (the "1934 Act"). The consolidated financial data set forth under the
caption "Summary Financial Information" in the Prospectus (and, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) fairly
present, on the basis stated in the Prospectus (or such Preliminary Prospectus),
the information included therein.
(j) Feldman Radin & Co., P.C., who have audited certain
financial statements of the Company and delivered their report with respect to
the consolidated financial statements included in the Registration Statement and
the Prospectus (and, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), are independent public accountants with respect to the
Company as required by the Act and the applicable rules and regulations
thereunder.
(k) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus (and, if the Prospectus
is not in existence, the most recent Preliminary Prospectus), (i) except as
otherwise contemplated therein, there has been no material adverse change in the
business, operations, condition (financial or otherwise), earnings or prospects
of the Company and the Subsidiaries, whether or not arising in the ordinary
course of business, (ii) except as otherwise stated therein, there have been no
transactions entered into by the Company or the Subsidiaries and no commitments
made by the Company or the Subsidiaries that, individually or in the aggregate,
are material with respect to the Company and the Subsidiaries, (iii) there has
not been any change in the capital stock or indebtedness of the Company and the
Subsidiaries, and (iv) there has been no dividend or distribution of any kind
declared, paid or made by the Company in respect of any class of its capital
stock.
(l) The Company has full corporate power and authority
to enter into and perform its obligations under this Agreement, the Warrant
Agreement and the Underwriter's Warrant
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<PAGE>
Agreement (as hereinafter defined). The execution and delivery of this
Agreement and the Underwriter's Warrant Agreement have been duly authorized by
all necessary corporate action on the part of the Company and this Agreement,
the Warrant Agreement and the Underwriter's Warrant Agreement have each been
duly executed and delivered by the Company and each is a valid and binding
agreement of the Company, enforceable against the Company in accordance with its
terms, except as the enforceability thereof may be limited by bankruptcy,
insolvency, reorganization, fraudulent conveyance, moratorium and other similar
laws affecting creditors' rights generally and by general principles of equity
(regardless of whether enforcement is considered in a proceeding in equity or at
law), and except as rights to indemnity and contribution under this Agreement
may be limited by applicable law. The issuance, offering and sale by the Company
to the Underwriter of the Securities pursuant to this Agreement or the
Underwriter's Securities pursuant to the Underwriter's Warrant Agreement, the
compliance by the Company with the provisions of this Agreement, the Warrant
Agreement and the Underwriter's Warrant Agreement, and the consummation of the
other transactions contemplated by this Agreement, the Warrant Agreement and the
Underwriter's Warrant Agreement do not (i) require the consent, approval,
authorization, registration or qualification of or with any court or
governmental or regulatory authority, except such as have been obtained or may
be required under state securities or blue sky laws and, if the registration
statement filed with respect to the Securities (as amended) is not effective
under the Act as of the time of execution hereof, such as may be required (and
shall be obtained as provided in this Agreement) under the Act, or (ii) conflict
with or result in a breach or violation of, or constitute a default under, any
material contract, indenture, mortgage, deed of trust, loan agreement, note,
lease or other material agreement or instrument to which the Company or any
Subsidiary is a party or by which the Company or any Subsidiary or any of its
property is bound or subject, or the certificate of incorporation or by-laws of
the Company or any Subsidiary, or any statute or any rule, regulation, judgment,
decree or order of any court or other governmental or regulatory authority or
any arbitrator applicable to the Company or any Subsidiary.
(m) No legal or governmental proceedings are pending to which
the Company or any Subsidiary is a party or to which the property of the Company
or any Subsidiary is subject, and no such proceedings have been threatened
against the Company or any Subsidiary or with respect to any of its property,
except such as are described in the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus). No contract or other
document is required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement that is
not described therein (and, if the Prospectus is not in existence, in the most
recent Preliminary Prospectus) or filed as required.
(n) Neither the Company nor any Subsidiary is in (i) violation
of its certificate of incorporation or by-laws, (ii) violation in any material
respect of any law, statute, regulation, ordinance, rule, order, judgment or
decree of any court or any governmental or regulatory authority applicable to
it, or (iii) default in any material respect in the performance or observance of
any obligation, agreement, covenant or condition contained in any material
contract, indenture, mortgage, deed of trust, loan agreement, note, lease or
other material agreement or instrument to
- 6 -
<PAGE>
which it is a party or by which it or any of its property may be bound or
subject, and no event has occurred which with notice or lapse of time or both
would constitute such a default.
(o) The Company and the Subsidiaries currently own or possess
adequate rights to use all intellectual property, including all trademarks,
service marks, trade names, copyrights, inventions, know-how, trade secrets,
proprietary technologies, processes and substances, or applications or licenses
therefor, that are described in the Prospectus (and if the Prospectus is not in
existence, the most recent Preliminary Prospectus), and any other rights or
interests in items of intellectual property as are necessary for the conduct of
the business now conducted or proposed to be conducted by them as described in
the Prospectus (or, such Preliminary Prospectus), and, except as disclosed in
the Prospectus (and such Preliminary Prospectus), the Company is not aware of
the granting of any patent rights to, or the filing of applications therefor by,
others, nor is the Company aware of, nor has the Company received notice of,
infringement of or conflict with asserted rights of others with respect to any
of the foregoing. All such intellectual property rights and interests are (i)
valid and enforceable and (ii) to the best knowledge of the Company, not being
infringed by any third parties.
(p) The Company and each Subsidiary possesses adequate
licenses, orders, authorizations, approvals, certificates or permits issued by
the appropriate federal, state or foreign regulatory agencies or bodies
necessary to conduct its business as described in the Registration Statement and
the Prospectus (and, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), and, except as disclosed in the Prospectus (and, if the
Prospectus is not in existence, the most recent Preliminary Prospectus), there
are no pending or, to the best knowledge of the Company, threatened, proceedings
relating to the revocation or modification of any such license, order,
authorization, approval, certificate or permit.
(q) The Company and each Subsidiary has good and marketable
title to all of the properties and assets reflected in the Company's
consolidated financial statements or as described in the Registration Statement
and the Prospectus (and, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), subject to no lien, mortgage, pledge, charge or
encumbrance of any kind, except those reflected in such consolidated financial
statements or as described in the Registration Statement and the Prospectus (and
such Preliminary Prospectus). Except as disclosed in the Prospectus, the Company
and each Subsidiary occupies its leased properties under valid and enforceable
leases conforming to the description thereof set forth in the Registration
Statement and the Prospectus (and such Preliminary Prospectus).
(r) The Company is not and does not intend to conduct its
business in a manner in which it would be an "investment company" as defined in
Section 3(a) of the Investment Company Act of 1940 (the "Investment Company
Act").
(s) Except as listed on Schedule 1 hereto, the Company has
obtained and delivered to the Underwriter the agreements (the "Lock-up
Agreements") with the officers, directors and other security holders owning or
having rights to acquire shares of Common Stock or preferred
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<PAGE>
stock to the effect that, among other things, each such person (i) will not,
commencing on the Effective Date and continuing for the period thereafter set
forth opposite their names on Schedule 1, directly or indirectly, sell, offer or
contract to sell or grant any option to purchase, transfer, assign or pledge, or
otherwise encumber, or dispose of any shares of Common Stock or preferred stock
or any securities convertible into or exercisable for Common Stock or preferred
stock now or hereafter owned by such person without the prior written consent of
the Underwriter, and (ii) will comply with any additional restriction or
condition on the disposition of such Common Stock or preferred stock which may
be required to qualify the offering of the Securities in any state in accordance
with the blue sky or securities laws of such state.
(t) No labor dispute with the employees of the Company or any
Subsidiary exists, is threatened or, to the best of the Company's knowledge, is
imminent that could result in a material adverse change in the condition
(financial or otherwise), business, prospects, net worth or results of
operations of the Company and the Subsidiaries, except as described in or
contemplated by the Prospectus (and, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).
(u) The Company and the Subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which they are
engaged; neither the Company nor any Subsidiary has been refused any insurance
coverage sought or applied for; and neither the Company nor any Subsidiary has
reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost that
would not materially and adversely affect the condition (financial or
otherwise), business, prospects, net worth or results of operations of the
Company and the Subsidiaries, except as described in or contemplated by the
Prospectus (and, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(v) The Underwriter's Warrants (as hereinafter defined) will
conform to the description thereof in the Registration Statement and in the
Prospectus (and, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) and, when sold to and paid for by the Underwriter in
accordance with the Underwriter's Warrant Agreement, will have been duly
authorized and validly issued and will constitute valid and binding obligations
of the Company entitled to the benefits of the Underwriter's Warrant Agreement.
The shares of Common Stock issuable upon exercise of the Underwriter's Warrants
and the Warrants issuable upon exercise thereof (the "Underwriter's Warrant
Shares") have been duly authorized and reserved for issuance upon exercise of
the Underwriter's Warrants and the Warrants issuable upon exercise thereof by
all necessary corporate action on the part of the Company and, when issued and
delivered and paid for upon such exercise in accordance with the terms of the
Underwriter's Warrant Agreement, the Underwriter's Warrants, and the Warrants
issuable upon exercise thereof, respectively, will be validly issued, fully
paid, nonassessable and free of preemptive rights and will conform to the
description thereof in the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
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<PAGE>
(w) No person has acted as a finder in connection with, or is
entitled to any commission, fee or other compensation or payment for services as
a finder for or for originating, or introducing the parties to, the transactions
contemplated herein and the Company will indemnify the Underwriter with respect
to any claim for finder's fees in connection herewith. Except as set forth in
the Registration Statement and the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), the Company has no
management or financial consulting agreement with anyone. No promoter, officer,
director or stockholder of the Company is, directly or indirectly, affiliated or
associated with an NASD member and no securities of the Company have been
acquired by an NASD member, except as previously disclosed in writing to the
Underwriter.
(x) The Company and each Subsidiary has filed all federal,
state, local and foreign tax returns which are required to be filed through the
date hereof, or has received extensions thereof, and has paid all taxes shown on
such returns and all assessments received by it to the extent that the same are
material and have become due.
(y) Neither the Company nor any director, officer, agent,
employee or other person associated with or acting on behalf of the Company has,
directly or indirectly: used any corporate funds for unlawful contributions,
gifts, entertainment, or other unlawful expenses relating to political activity;
made any unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns from
corporate funds; violated any provision of the Foreign Corrupt Practices Act of
1977, as amended; or made any bribe, rebate, payoff, influence payment,
kickback, or other unlawful payment. No transaction has occurred between or
among the Company and any of its officers or directors or any affiliates of any
such officer or director, that is required to be described in and is not
described in the Registration Statement and the Prospectus.
(z) Neither the Company nor any of its officers, directors or
affiliates (as defined in the Regulations), has taken or will take, directly or
indirectly, prior to the completion of the Offering, any action designed to
stabilize or manipulate the price of any security of the Company, or which has
caused or resulted in, or which might in the future reasonably be expected to
cause or result in, stabilization or manipulation of the price of any security
of the Company, to facilitate the sale or resale of any of the Securities or the
Option Securities.
2. Purchase, Sale and Delivery of the Securities and the Warrant
Securities.
(a) On the basis of the representations, warranties,
agreements and covenants herein contained and subject to the terms and
conditions herein set forth, the Company agrees to issue and sell to the
Underwriter, and the Underwriter agrees to purchase from the Company, the Firm
Shares at a purchase price of $_____ per share and the Firm Warrants at a
purchase price of $_____ per warrant.
(b) Certificates in definitive form for the Firm Securities
that the Underwriter has agreed to purchase hereunder, and in such denomination
or denominations and registered in such
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<PAGE>
name or names as the Underwriter requests upon notice to the Company at
least 48 hours prior to the Firm Closing Date, shall be delivered by or on
behalf of the Company to the Underwriter, against payment by or on behalf of the
Underwriter of the purchase prices therefor by certified or official bank check
or checks drawn upon or by a New York Clearing House bank and payable in
next-day funds to the order of the Company. Such delivery of and payment for the
Firm Securities shall be made at the offices of Counsel for the Underwriter, 605
Third Avenue, New York, New York at 9:30 A.M., New York time on ___________,
1997, or at such other place, time or date as the Underwriter and the Company
may agree upon, such time and date of delivery against payment being herein
referred to as the "Firm Closing Date. The Company will make such certificates
for the Firm Securities available for checking and packaging by the Underwriter,
at such offices as may be designated by the Underwriter, at least 24 hours prior
to the Firm Closing Date.
(c) For the purpose of covering any over-allotments in
connection with the distribution and sale of the Firm Securities as contemplated
by the Prospectus, the Company hereby grants to the Underwriter an option to
purchase any or all of the Option Securities, exercisable by the Underwriter on
behalf of and for the account of the Underwriter. The purchase price to be paid
for any of the Option Securities shall be the same price per share or warrant as
the price per share or warrant for the Firm Securities set forth above in
paragraph (a) of this section 2. The option granted hereby may be exercised as
to all or any part of the Option Securities from time to time within 45 calendar
days after the Firm Closing Date. The Underwriter shall not be under any
obligation to purchase any of the Option Securities prior to the exercise of
such option. The Underwriter may from time to time exercise the option granted
hereby by giving notice in writing or by telephone (confirmed in writing) to the
Company setting forth the aggregate number of Option Securities as to which the
Underwriter is then exercising the option and the date and time for delivery of
and payment for such Option Securities. Any such date of delivery shall be
determined by the Underwriter but shall not be earlier than two business days or
later than three business days after such exercise of the option and, in any
event, shall not be earlier than the Firm Closing Date. The time and date set
forth in such notice, or such other time on such other date as the Underwriter
and the Company may agree upon, is herein called the "Option Closing Date" with
respect to such Option Securities. Upon exercise of the option as provided
herein, the Company shall become obligated to sell to the Underwriter, and,
subject to the terms and conditions herein set forth, the Underwriter shall
become obligated to purchase from the Company, the Option Securities as to which
the Underwriter is then exercising its option If the option is exercised as to
all or any portion of the Option Securities, certificates in definitive form for
such Option Securities, and payment therefor, shall be delivered on the related
Option Closing Date in the manner, and upon the terms and conditions, set forth
in paragraph (b) of this section 2, except that reference therein to the Firm
Securities and the Firm Closing Date shall be deemed, for purposes of this
paragraph (c), to refer to such Option Securities and Option Closing Date,
respectively.
(d) On the Firm Closing Date, the Company will further issue
and sell to the Underwriter or, at the direction of the Underwriter, to bona
fide officers of the Underwriter, for an aggregate purchase price of $10,
warrants to purchase Common Stock and redeemable warrants to purchase Common
Stock (the "Underwriter's Warrants") entitling the holders thereof to purchase
an
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<PAGE>
aggregate of 100,000 shares of Common Stock and 100,000 redeemable warrants to
purchase Common Stock for a period of four years,
such period to commence on the first anniversary of the Effective Date. The
Underwriter's Warrants shall be exercisable at a price equal to 150% of the
initial public offering price of the Common Stock and Warrants, respectively,
and shall contain terms and provisions more fully described herein below and as
set forth more particularly in the warrant agreement relating to the
Underwriter's Warrants to be executed by the Company on the Effective Date (the
"Underwriter's Warrant Agreement"), including, but not limited to, (i) customary
anti-dilution provisions in the event of stock dividends, split mergers, sales
of all or substantially all of the Company's assets, sales of stock below then
prevailing market or exercise prices and other events, and (ii) prohibitions of
mergers, consolidations or other reorganizations of or by the Company or the
taking by the Company of other action during the five-year period following the
Effective Date unless adequate provision is made to preserve, in substance, the
rights and powers incidental to the Underwriter's Warrants. As provided in the
Underwriter's Warrant Agreement, the Underwriter may designate that the
Underwriter's Warrants be issued in varying amounts directly to bona fide
officers of the Underwriter. As further provided, no sale, transfer, assignment,
pledge or hypothecation of the Underwriter's Warrants shall be made for a period
of 12 months from the Effective Date, except (i) by operation of law or
reorganization of the Company, or (ii) to the Underwriter and bona fide
partners, officers of the Underwriter and selling group members. The shares of
Common Stock issuable upon exercise of the Underwriter's Warrants and the
Warrants issuable upon exercise thereof are referred to herein as the
"Underwriter's Warrant Shares"; and the Underwriter's Warrants, the Warrants
issuable upon exercise thereof, and the Underwriter's Warrant Shares are
collectively referred to herein as the "Underwriter's Securities."
3. Offering by the Underwriter. The Underwriter proposes to
offer the Firm Securities for sale to the public upon the terms set forth in the
Prospectus.
4. Covenants of the Company. The Company covenants and agrees
with the Underwriter that:
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the time of execution of this
Agreement, to become effective as promptly as possible. If required, the Company
will file the Prospectus and any amendment or supplement thereto with the
Commission in the manner and within the time period required by Rule 424(b)
under the Act. During any time when a prospectus relating to the Securities is
required to be delivered under the Act, the Company (i) will comply with all
requirements imposed upon it by the Act and the rules and regulations of the
Commission thereunder to the extent necessary to permit the continuance of sales
of or dealings in the Securities in accordance with the provisions hereof and of
the Prospectus, as then amended or supplemented, and (ii) will not file with the
Commission any prospectus or amendment referred to in the first sentence of
section (a) (i) hereof, any amendment or supplement to such prospectus or any
amendment to the Registration Statement as to which the Underwriter shall not
previously have been advised and furnished with a copy for a reasonable period
of time prior to the proposed filing and as to which filing the Underwriter
shall not have given its consent. The Company will prepare and file
with the Commission, in accordance with the rules and regulations
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of the Commission, promptly upon request by the Underwriter or counsel to the
Underwriter, any amendments to the Registration Statement or amendments or
supplements to the Prospectus that may be necessary or advisable in connection
with the distribution of the Securities by the Underwriter, and will use its
best efforts to cause any such amendment to the Registration Statement to be
declared effective by the Commission as promptly as possible. The Company will
advise the Underwriter, promptly after receiving notice thereof, of the time
when the Registration Statement or any amendment thereto has been filed or
declared effective or the Prospectus or any amendment or supplement thereto has
been filed and will provide evidence satisfactory to the Underwriter of each
such filing or effectiveness.
(b) The Company will advise the Underwriter, promptly after
receiving notice or obtaining knowledge thereof, of (i) the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or any order preventing or suspending the use of any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, (ii) the
suspension of the qualification of any Securities for offering or sale in any
jurisdiction, (iii) the institution, threat or contemplation of any proceeding
for any such purpose or (iv) any request made by the Commission for amending the
Registration Statement, for amending or supplementing the Prospectus or for
additional information. The Company will use its best efforts to prevent the
issuance of any such stop order and, if any such stop order is issued, to obtain
the withdrawal thereof as promptly as possible.
(c) The Company will, in cooperation with counsel to the
Underwriter, arrange for the qualification of the Securities for offering and
sale under the blue sky or securities laws of such jurisdictions as the
Underwriter may designate and will continue such qualifications in effect for as
long as may be necessary to complete the distribution of the Securities.
(d) If, at any time when a prospectus relating to the
Securities is required to be delivered under the Act, any event occurs as a
result of which the Prospectus, as then amended or supplemented, would include
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if for any other
reason it is necessary at any time to amend or supplement the Prospectus to
comply with the Act or the rules or regulations of the Commission thereunder,
the Company will promptly notify the Underwriter thereof and, subject to section
4(a) hereof, will prepare and file with the Commission, at the Company's
expense, an amendment to the Registration Statement or an amendment or
supplement to the Prospectus that corrects such statement or omission or effects
such compliance.
(e) So long as any Warrants are outstanding, the Company shall
use its best efforts to cause post-effective amendments to the Registration
Statement to become effective in compliance with the Act and without any lapse
of time between the effectiveness of any such post-effective amendments and
cause a copy of each Prospectus, as then amended, to be delivered to each holder
of record of a Warrant and to furnish to the Underwriter and any dealer as many
copies of each such Prospectus as the Underwriter or dealer may reasonably
request. The Company
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shall not call for redemption of the Warrants unless a registration
statement covering the securities underlying the Warrants has been declared
effective by the Commission and remains current at least until the date
fixed for redemption. In addition, for so long as any Warrant is outstanding,
the Company will promptly notify the Underwriter of any material change in the
business, financial condition or prospects of the Company. So long as any of the
Warrants remain outstanding, the Company will timely deliver and supply to its
Warrant Agent sufficient copies of the Company's current Prospectus, as will
enable such Warrant agent to deliver a copy of such Prospectus to any Warrant or
other holder where such Prospectus delivery is by law required to be made.
(f) The Company will, without charge, provide to the
Underwriter and to counsel for the Underwriter (i) as many signed copies of the
registration statement originally filed with respect to the Securities and each
amendment thereto (in each case including exhibits thereto) as the Underwriter
may reasonably request, (ii) as many conformed copies of such registration
statement and each amendment thereto (in each case without exhibits thereto) as
the Underwriter may reasonably request and (iii) so long as a prospectus
relating to the Securities is required to be delivered under the Act, as many
copies of each Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto as the Underwriter may reasonably request.
(g) The Company, as soon as practicable, will make generally
available to its security holders and to the Underwriter an earnings statement
of the Company that satisfies the provisions of section 11 (a) of the Act and
Rule 158 thereunder.
(h) The Company will reserve and keep available for issuance
that maximum number of authorized but unissued shares of Common Stock which are
issuable upon exercise of the Warrants and the Underwriter's Warrants (including
the underlying securities) outstanding from time to time.
(i) The Company will apply the net proceeds from the sale of
the Securities as set forth under "Use of Proceeds" in the Prospectus. The
Company will timely file, and will provide or cause to be provided to the
Underwriter and counsel to the Underwriter a copy of the report on Form SR
required to be filed by the Company pursuant to Rule 463 under the Act.
(j) The Company will not, without the prior written consent of
the Underwriter, directly or indirectly offer, agree to sell, sell, grant any
option to purchase or otherwise dispose (or announce any offer, agreement to
sell, sales grant of any option to purchase or other disposition) of any shares
of Common Stock, preferred stock or any securities convertible into, or
exchangeable or exercisable for, shares of Common Stock or preferred stock for a
period of 24 months after the Effective Date, except (i) the Shares and Warrants
issued pursuant to this Agreement, (ii) the Warrant Shares issuable upon
exercise of the Warrants, (iii) the Warrants, (iv) the Underwriter's Warrant
Shares and Warrants issuable upon the exercise of the Underwriter's Warrants,
and (v) shares of Common Stock issuable upon the exercise of options granted and
to be granted under the Company's Stock Option Plan as in effect as of the
date hereof. The Company also will not for a period of 36 months following the
Effective Date, without the prior written consent of the
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Underwriter, (i) issue or sell any of its securities pursuant to Regulation S
promulgated under the Act or (ii) file a registration on Form S-8 for the sale
of securities by a person other than an employee of the Company or a Subsidiary.
(k) Prior to the Closing Date or the Option Closing Date (if
any), the Company will not, directly or indirectly, without prior written
consent of the Underwriter, issue any press release or other public announcement
or hold any press conference with respect to the Company or its activities with
respect to the Offering (other than trade releases issued in the ordinary course
of the Company's business consistent with past practices with respect to the
Company's operations).
(l) If, at the time that the Registration Statement becomes
effective, any information shall have been omitted therefrom in reliance upon
Rule 430A under the Act, then immediately following the execution of this
Agreement, the Company will prepare, and file or transmit for filing with the
Commission in accordance with Rule 430A and Rule 424(b) under the Act, copies of
the Prospectus including the information omitted in reliance on Rule 430A, or,
if required by such Rule 430A, a post-effective amendment to the Registration
Statement (including an amended Prospectus), containing all information so
omitted.
(m) The Company will cause the Securities to be included in
The Nasdaq Small Cap Market and the Boston Stock Exchange on the Effective Date
and to maintain such listings thereafter. The Company will file with The Nasdaq
SmallCap Market and the Boston Stock Exchange all documents and notices that are
required by companies with securities that are traded on The Nasdaq SmallCap
Market and the Boston Stock Exchange.
(n) During the period of five years from the Firm Closing
Date, the Company will, as promptly as possible, not to exceed 135 days, after
each annual fiscal period render and distribute reports to its stockholders
which will include audited statements of its operations and changes of financial
position during such period and its audited balance sheet as of the end of such
period, as to which statements the Company's independent certified public
accountants shall have rendered an opinion.
(o) During a period of three years commencing with the Firm
Closing Date, the Company will furnish to the Underwriter, at the Company's
expense, copies of all periodic and special reports furnished to stockholders of
the Company and of all information, documents and reports filed with the
Commission.
(p) The Company has appointed North American Transfer Co. as
transfer agent for the Common Stock and warrant agent for the Warrants, subject
to the Closing. The Company will not change or terminate such appointment for a
period of three years from the Firm Closing Date without first obtaining the
written consent of the Underwriter. For a period of three years after the
Effective Date, the Company shall cause the transfer agent and warrant agent to
deliver promptly to the Underwriter a duplicate copy of the daily transfer
sheets relating to trading of the Securities.
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<PAGE>
The Company shall also provide to the Underwriter, promptly upon their
request, up to four times in any calendar year, copies of DTC or equivalent
transfer sheets.
(q) During the period of 180 days after the date of this
Agreement, the Company will not at any time, directly or indirectly, take any
action designed to or that will constitute, or that might reasonably be expected
to cause or result in, the stabilization of the price of the Common Stock or the
Warrants to facilitate the sale or resale of any of the Securities.
(r) The Company will not take any action to facilitate the
sale of any shares of Common Stock pursuant to Rule 144 under the Act if any
such sale would violate any of the terms of the Lock-up Agreements.
(s) Prior to the 120th day after the Firm Closing Date, the
Company will provide the Underwriter and its designees with three bound volumes
of the transaction documents relating to the Registration Statement and the
closing(s) hereunder, in form and substance reasonably satisfactory to the
Underwriter.
(t) The Company shall consult with the Underwriter prior to
the distribution to third parties of any financial information news releases or
other publicity regarding the Company, its business, or any terms of this
offering and the Underwriter will consult with the Company prior to the issuance
of any research report or recommendation concerning the Company's securities.
Copies of all documents that the Company or its public relations firm intend to
distribute will be provided to the Underwriter for review prior to such
distribution.
(u) The Company and the Underwriter will advise each other
immediately in writing as to any investigation, proceeding, order, event or
other circumstance, or any threat thereof, by or relating to the Commission or
any other governmental authority, that could impair or prevent this Offering.
Except as required by law or as otherwise mutually agreed in writing, neither
the Company nor the Underwriter will acquiesce in such circumstances and each
will actively defend any proceedings or orders in that connection.
(v) The Company will, for a period of no less than three years
commencing immediately after the Effective Date, engage a designee by the
Underwriter as advisor (the "Advisor") to the Company's Board of Directors, who
shall attend meetings of the Board, receive all notices and other correspondence
and communications sent by the Company to its Board of Directors and receive
compensation equal to that of other non officer directors; provided, that in
lieu of the Underwriter's right to designate an Advisor, the Underwriter shall
have the right during such three-year period, in its sole discretion, to
designate one person for election as a director of the Company and the Company
will utilize its best efforts to obtain the election of such person who shall be
entitled to receive the same compensation, expense reimbursements and other
benefits as set forth above. In addition, such Advisor shall be entitled to
receive reimbursement for all costs incurred in attending such meetings
including, but not limited to, food, lodging and transportation. The Company,
during said three-year period, shall schedule no less than four formal meetings
(at least
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one of which shall be "in person" and the others may be held telephonically) of
its Board of Directors in each such year at which meetings such Advisor shall
be permitted to attend (in person, for each meeting held "in person") as set
forth herein; said meetings shall be held quarterly each year and advance notice
of such meetings identical to the notice given to directors shall be given to
the Advisor. The Company and its principal stockholders shall, during such
three year period, give the Underwriter timely prior written notice of any
proposed acquisitions, mergers, reorganizations or other similar transactions.
The Company shall indemnify and hold the Underwriter and such Advisor or
director harmless against any and all claims, actions, damages, costs and
expenses, and judgments arising solely out of the attendance and participation
of such Advisor or director at any such meeting described herein, and, if the
Company maintains a liability insurance policy affording coverage for the acts
of its officers and directors, it shall, if possible, include such Advisor or
director as an insured under such policy.
(w) The Company shall first submit to the Underwriter
certificates representing the Securities for approval prior to printing, and
shall, as promptly as possible, after filing the Registration Statement with the
Commission, obtain CUSIP numbers for the Securities.
(x) The Company shall engage the Underwriter's counsel to
provide the Underwriter, at the closing of any sale of Securities hereunder and
quarterly thereafter, with an opinion, setting forth those states in which the
Common Stock and Warrants may be traded in non-issuer transactions under the
blue sky or securities laws of the 50 states. The Company shall pay such counsel
a one-time fee of $12,500 for such opinions at the closing of the sale of the
Firm Securities.
(y) The Company will prepare and file a registration statement
with the Commission pursuant to section 12 of the 1934 Act, and will use its
best efforts to have such registration statement declared effective by the
Commission on an accelerated basis on the day after the Effective Date. For this
purpose the Company shall prepare and file with the Commission a General Form of
Registration of Securities (Form 8-A or Form 10).
(z) For so long as the Securities are registered under the
1934 Act, the Company will hold an annual meeting of stockholders for the
election of directors within 180 days after the end of each of the Company's
fiscal years and within 135 days after the end of each of the Company's fiscal
years will provide the Company's stockholders with the audited consolidated
financial statements of the Company as of the end of the fiscal year just
completed prior thereto. Such consolidated financial statements shall be those
required by Rule 14a-3 under the 1934 Act and shall be included in an annual
report pursuant to the requirements of such Rule.
(aa) Prior to the Effective Date, the Company shall obtain
key-man life insurance in the minimum amount of [$1,000,000] on Gerard Semhon on
such terms and conditions as are reasonably satisfactory to the Underwriter,
assuming such coverage is available on commercially reasonable terms.
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<PAGE>
(bb) The Company shall retain the Underwriter as a financial
advisor at an annual fee of $24,000 for a 24-month period commencing on the
Closing Date. The entire fee of $48,000 shall be payable on the Closing Date.
(cc) The Company will engage a financial public relations firm
reasonably satisfactory to the Underwriter on or before the Firm Closing Date,
and continuously engage such firm, or a substitute firm reasonably acceptable to
the Underwriter, for a period of twelve (12) months following the Firm Closing
Date.
(dd) The Company will take all necessary and appropriate
actions to be included in Standard and Poor's Corporation Descriptions or other
equivalent manual and to maintain its listing therein for a period of five (5)
years from the Effective Date.
(ee) On or prior to the Effective Date, the Company will give
written instructions to the transfer agent for the Common Stock directing said
transfer agent to place stop-order restrictions against, and appropriate legends
advising of the Lock-up Agreements on, the certificates representing the
securities of the Company owned by the persons who have entered into the Lock-up
Agreements.
5. Expenses
(a) The Company shall pay all costs and expenses incident to
the performance of its obligations under this Agreement, whether or not the
transactions contemplated hereby are consummated or this Agreement is terminated
pursuant to section 10 hereof, including all costs and expenses incident to (i)
the preparation, printing and filing or other production of documents with
respect to the transactions, including any costs of printing the registration
statement originally filed with respect to the Securities and any amendment
thereto, any Preliminary Prospectus and the Prospectus and any amendment or
supplement thereto, this Agreement, the selected dealer agreement and the other
agreements and documents governing the underwriting arrangements and any blue
sky memoranda, (ii) all reasonable and necessary arrangements relating to the
delivery to the Underwriter of copies of the foregoing documents, (iii) the fees
and disbursements of the counsel, the accountants and any other experts or
advisors retained by the Company, (iv) the preparation, issuance and delivery to
the Underwriter of any certificates evidencing the Securities, including
transfer agent's, warrant agent's and registrar's fees or any transfer or other
taxes payable thereon, (v) the qualification of the Securities under state blue
sky or securities laws, including filing fees and fees and disbursements of
counsel for the Underwriter relating thereto (such counsel fees not to exceed
$35,000, of which $10,000 shall be due and payable upon the commencement of blue
sky filing, together with the related filing fees) and any fees and
disbursements of local counsel, if any, retained for such purpose, (vi) the
filing fees of the Commission and the NASD relating to the Securities, (vii) the
inclusion of the Securities on The Nasdaq SmallCap Market, the Boston Stock
Exchange and in the Standard and Poor's Corporation Descriptions Manual, (viii)
any "road shows" or other meetings with prospective investors in the Securities,
including transportation, accommodation, meal, conference room, audio-visual
presentation and similar expenses of the
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<PAGE>
Underwriter or its representatives or designees (other than as shall have been
specifically approved by the Underwriter to be paid for by the Underwriter)
and (ix) the placing of "tombstone advertisements" in The Wall Street Journal
and the Investment Dealers Digest and the manufacture of prospectus memorabilia.
In addition to the foregoing, the Company shall reimburse the Underwriter for
its expenses on the basis of a non-accountable expense allowance in the amount
of 3.00% of the gross offering proceeds to be received by the Company, $______
of which has been paid by the Company to the Underwriter. The Underwriter
hereby acknowledges receipt of such $______, which shall be credited against
the non-accountable expense allowance to be paid by the Company. The unpaid
portion of the expense allowance, based on the gross proceeds from the sale of
the Firm Securities, shall be deducted from the funds to be paid by the
Underwriter in payment for the Firm Securities, pursuant to section 2 of this
Agreement, on the Firm Closing Date. To the extent any Option Securities are
sold, any remaining non-accountable expense allowance based on the gross
proceeds from the sale of the Option Securities shall be deducted from the
funds to be paid by the Underwriter in payment for the Option Securities,
pursuant to section 2 of this Agreement, on the Option Closing Date. The
Company warrants, represents and agrees that all such payments and
reimbursements will be promptly and fully made.
(b) Notwithstanding any other provision of this Agreement, if
the offering of the Securities contemplated hereby is terminated for any reason,
the Company agrees that, in addition to the Company paying its own expenses as
described in subparagraph (a) above, (i) the Company shall reimburse the
Underwriter only for its actual accountable out-of-pocket expenses (in addition
to blue sky legal fees and expenses referred to in subparagraph (a) above), and
(ii) the Underwriter shall be entitled to retain the non-accountable expense
allowance paid by the Company pursuant to subparagraph (a) above; provided,
however, that the amount retained pursuant to this clause (ii) shall not exceed
the Underwriter's expenses on an accountable basis to the date of such
cancellation and that all unaccounted for amounts shall be refunded to the
Company. Such expenses shall include, but are not to be limited to, fees for the
services and time of counsel for the Underwriter to the extent not covered by
clause (i) above, plus any additional expenses and fees, including, but not
limited to, travel expenses, postage expenses, duplication expenses,
long-distance telephone expenses, and other expenses incurred by the Underwriter
in connection with the proposed offering.
6. Warrant Solicitation Fee. The Company agrees to pay the Underwriter
a fee of five percent (5%) of the aggregate exercise price of the Warrants if
(i) the market price of the Common stock is greater than the exercise price of
the Warrants on the date of exercise; (ii) the exercise of the Warrants is
solicited by a member of the NASD; (iii) the Warrants are not held in a
discretionary account; (iv) the disclosure of compensation arrangements is made
both at the time of this offering and at the time of the exercise of the
Warrant; and (v) the solicitation of the Warrant exercise is not in violation of
Rule 10b-6 under the 1934 Act. The Company agrees not to solicit the exercise of
any Warrant other than through the Underwriter and will not authorize any other
dealer to engage in such solicitation without the prior written consent of the
Underwriter which will not be unreasonably withheld. The Warrant solicitation
fee will not be paid in a non solicited transaction. Any request for exercise
will be presumed to be unsolicited unless the customer states in writing that
the transaction was solicited and designates in writing the broker/dealer to
receive compensation for the
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<PAGE>
exercise. No Warrant solicitation by the Underwriter will occur for a period of
12 months after the Effective Date.
7. Conditions of the Underwriter's Obligations. The obligations of the
Underwriter to purchase and pay for the Firm Shares shall be subject, in the
Underwriter's sole discretion, to the accuracy of the representations and
warranties of the Company contained herein as of the date hereof and as of the
Firm Closing Date as if made on and as of the Firm Closing Date, to the accuracy
of the statements of the Company's officers made pursuant to the provisions
hereof, to the performance by the Company of its covenants and agreements
hereunder and to the following additional conditions:
(a) If the registration statement, as heretofore amended, has
not been declared effective as of the time of execution hereof, the registration
statement, as heretofore amended or as amended by an amendment thereto to be
filed prior to the Firm Closing Date, shall have been declared effective not
later than 11 A.M., New York time, on the date on which the amendment to such
registration statement containing information regarding the initial public
offering price of the Securities has been filed with the Commission, or such
later time and date as shall have been consented to by the Underwriter; if
required, the Prospectus and any amendment or supplement thereto shall have been
filed with the Commission in the manner and within the time period required by
Rule 424(b) under the Act, no stop order suspending the effectiveness of the
Registration Statement shall have been issued, and no proceedings for that
purpose shall have been instituted or threatened or, to the knowledge of the
Company or the Underwriter, shall be contemplated by the Commission; and the
Company shall have complied with any request of the Commission for additional
information (to be included in the Registration Statement or the Prospectus or
otherwise).
(b) The Underwriter shall have received an opinion, dated the
Firm Closing Date, of Gersten, Savage, Kaplowitz, Fredericks & Curtin LLP,
counsel to the Company, to the effect that:
(1) the Company and each Subsidiary has been
duly incorporated and is validly existing as a corporation in good standing
under the laws of the state of its incorporation and is duly qualified to
transact business as a foreign corporation and is in good standing under the
laws of each other jurisdiction in which its ownership or leasing of any
properties or the conduct of its business requires such qualification, except
where the failure to so qualify would not have a materially adverse effect upon
the Company;
(2) the Company and each Subsidiary has full
corporate power and authority to own or lease its property and conduct its
business as now being conducted and as proposed to be conducted, as described
in the Registration Statement and the Prospectus, and the Company has full
corporate power and authority to enter into this Agreement, the Warrant
Agreement and the Underwriter's Warrant Agreement and to carry out all the
terms and provisions hereof and thereof to be carried out by it;
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(3) to the knowledge of such counsel, there are
no outstanding options, warrants or other rights granted by the Company to
purchase shares of its Common Stock, preferred stock or other securities other
than as described in the Prospectus; the Shares have been duly authorized and
the Warrant Shares and the Underwriter's Warrant Shares have been duly
reserved for issuance by all necessary corporate action on the part of the
Company and, the Shares when issued and delivered to and paid for by the
Underwriter pursuant to this Agreement, the Warrant Shares when issued upon
payment of the exercise price specified in the Warrants, Underwriter's Warrants
when issued and delivered and paid for in accordance with this Agreement and
the Underwriter's Warrant Agreement by the Underwriter and the Warrant Shares
when issued upon payment of the exercise price specified in the Underwriter's
Warrants, will be validly issued, fully paid, nonassessable and free of
preemptive rights and will conform to the description thereof in the Prospectus;
to the knowledge of such counsel, no holder of outstanding securities of the
Company is entitled as such to any preemptive or other right to subscribe for
any of the Shares, the Warrant Shares, or the Underwriter's Warrant Shares;
and to the knowledge of such counsel, no person is entitled to have securities
registered by the Company under the Registration Statement or otherwise under
the Act other than as described in the Prospectus;
(4) the Shares have been approved for inclusion
in The Nasdaq SmallCap Market and the Boston Stock Exchange;
(5) the execution and delivery of this
Agreement, the Warrant Agreement, the Underwriter's Warrant Agreement and the
Financial Advisory and Investment Banking Agreement have been duly authorized
by all necessary corporate action on the part of the Company and this Agreement,
the Warrant Agreement, the Underwriter's Warrant Agreement and the Financial
Advisory and Investment Banking Agreement have been duly executed and delivered
by the Company, and each is a valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium and other similar laws affecting creditors'
rights generally and to general principles of equity (regardless of whether
enforcement is considered in a proceeding in equity or at law) and except as
rights to indemnity and contribution under this Agreement, the Warrant
Agreement and the Underwriter's Warrant Agreement may be limited by applicable
law;
(6) the Underwriter's Warrants conform to the
description thereof in the Registration Statement and in the Prospectus and are
duly authorized and upon payment of the purchase price therefore specified in
Section 2(d) of this Agreement are validly issued and constitute valid and
binding obligations of the Company entitled to the benefits of the Underwriter's
Warrant Agreement;
(7) the statements set forth in the Prospectus
under the caption "Description of Securities" in the Prospectus, insofar as
those statements purport to summarize the terms of the capital stock and
warrants of the Company, provide a fair summary of such terms; the statements
in the Prospectus, insofar as those statements constitute matters of law or
legal
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<PAGE>
conclusions, or summaries of the contracts, agreement instruments, leases
or licenses referred to therein, constitute a fair summary of those matters,
legal conclusions, contracts, agreement instruments, leases or licenses and
include all material terms thereof, as applicable;
(8) none of (A) the execution and delivery of
this Agreement, the Warrant Agreement and the Underwriter's Warrant Agreement,
(B) the issuance, offering and sale by the Company to the Underwriter of the
Securities pursuant to this Agreement and the Underwriter's Warrant Securities
pursuant to the Underwriter's Warrant Agreement, nor (C) the compliance by the
Company with the other provisions of this Agreement, the Warrant Agreement and
the Underwriter's Warrant Agreement and the consummation of the transactions
contemplated hereby and thereby, (1) requires the consent, approval,
authorization, registration or qualification of or with any court or
governmental authority known to us, except such as have been obtained and such
as may be required under state blue sky or securities laws, or (2) conflicts
with or results in a breach or violation of, or constitutes a default under,
any material contract, indenture, mortgage, deed of trust, loan agreement,
note, lease or other material agreement or instrument known to us to which the
Company is a party or by which the Company or any of its property is bound or
subject, or the certificate of incorporation or by-laws of the Company, or any
material statute or any judgment, decree, order, rule or regulation of any
court or other governmental or regulatory authority known to us applicable to
the Company;
(9) to the knowledge of such counsel, (A) no
legal or governmental proceedings are pending to which the Company or a
Subsidiary is a party or to which the property of the Company or a Subsidiary
is subject and (B) no contract or other document is required to be described
in the Registration Statement or the Prospectus or to be filed as an exhibit
to the Registration Statement that is not described therein or filed as
required;
(10) the Company and each of the Subsidiaries
possesses adequate licenses, orders, authorizations, approvals, certificates or
permits issued by the appropriate federal or state regulatory agencies or
bodies necessary to conduct its business as described in the Registration
Statement and the Prospectus, and, to the knowledge of such counsel, there are
no pending or threatened proceedings relating to the revocation or modification
of any such license, order, authorization, approval, certificate or permit,
except as disclosed in the Registration Statement and the Prospectus;
(11) neither the Company nor the Subsidiary is
in violation or breach of, or in default with respect to, any term of its
certificate of incorporation or by-laws, and to the knowledge of such counsel,
neither the Company nor any Subsidiary is in (i) violation in any material
respect of any law, statute, regulation, ordinance, rule, order, judgment or
decree of any court or any governmental or regulatory authority applicable to
it, or (ii) default in any material respect in the performance or observance
of any obligation, agreement, covenant or condition contained in any material
contract, indenture, mortgage, deed of trust, loan agreement, note, lease or
other material agreement or instrument to which it is a party or by which it or
any of its property
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<PAGE>
may be bound or subject, and no event has occurred which with notice, lapse of
time or both would constitute such a default.
(12) the Registration Statement is effective
under the Act; any required filing of the Prospectus pursuant to Rule 424(b)
has been made in the manner and within the time period required by Rule 424(b);
and no stop order suspending the effectiveness of the Registration Statement or
any amendment thereto has been issued, and no proceedings for that purpose have
been instituted or threatened or, to the best knowledge of such counsel, are
contemplated by the Commission;
(13) the registration statement originally filed
with respect to the Securities and each amendment thereto and the Prospectus
(in each case, other than the financial statements and schedules and other
financial and statistical information contained therein, as to which such
counsel need express no opinion) comply as to form in all material respects
with the applicable requirements of the Act and the rules and regulations of
the Commission thereunder; and
(14) the Company is not an "investment company"
as defined in Section 3(a) of the Investment Company Act and, if the Company
conducts its business as set forth in the Prospectus, it will not become an
"investment company" and will not be required to register under the Investment
Company Act.
Counsel also shall state in its opinion that it has participated in the
preparation of the Registration Statement and the Prospectus and that nothing
has come to its attention that has caused them to believe that the Registration
Statement, at the time it became effective (including the information deemed to
be a part of the Registration Statement at the time of effectiveness pursuant to
Rule 430A(b), if applicable), contained an untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
to make the statements therein not misleading or that the Prospectus, as of its
date or as of the Firm Closing Date, contained an untrue statement of material
fact or omitted to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials, copies of which certificates will
be provided to the Underwriter, and, as to matters of the laws of certain
jurisdictions, on the opinions of other counsel to the Company, which opinions
shall also be delivered to the Underwriter, in form and substance acceptable to
the Underwriter, if such other counsel expressly authorize such reliance and
counsel to the Company expressly states in their opinion that such counsel's and
the Underwriter's reliance upon such opinion is justified.
References to the Registration Statement and the Prospectus in this
paragraph (b) shall include any amendment or supplement thereto at the date of
such opinion.
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<PAGE>
(c) The Underwriter shall have received from Feldman,
Radin & Company, P.C. a letter dated the Firm Closing Date and dated each
Option Closing Date (as defined below), if applicable, in form and substance
satisfactory to the Underwriter, to the effect that (i) they are independent
public accountants with respect to the Company within the meaning of the Act
and the applicable rules and regulations thereunder; (ii) in their opinion,
the consolidated financial statements audited by them and included in the
Registration Statement and the Prospectus comply as to form in all material
respects with the applicable accounting requirements of the Act and the
related published rules and regulations thereunder; (iii) based upon procedures
set forth in detail in such letter, nothing has come to their attention which
causes them to believe that (A) the unaudited financial statements as of
September 30,1996 included in the Registration Statement was not determined on
a basis substantially consistent with that used in determining the corresponding
amounts in the audited financial statements as of December 31, 1995 included in
the Registration Statement or (B) at a specified date not more than five days
prior to the date of this Agreement, there has been any change in the capital
stock of the Company, any increase in the long-term debt or decrease in net
sales of the Company and its Subsidiaries, as compared with the amounts
shown in the September 30,1996 balance sheet included in the Registration
Statement or as of the date of the most recent financial statements made
available by the Company there has been any change in the capital stock of the
Company, any increase in the long-term debt or any decrease in net sales,
working capital or net assets of the Company and its Subsidiaries as compared
with the amounts shown in the September 30, 1996 balance sheet included in the
Registration Statement or, during the period from September 30, 1996 through
date of the most recent financial statement made available by the Company and
its Subsidiaries, there were any decreases, as compared with the corresponding
period in the preceding year, in revenues, or any increase in net loss of the
Company, except in all instances for changes, increases or decreases which the
Registration Statement and the Prospectus disclose have occurred or may occur;
and (iv) in addition to the audit referred to in their opinion and the limited
procedures referred to in clause (iii) above, they have carried out certain
specified procedures, not constituting an audit, with respect to certain
amounts, percentages and financial information (including the summary of
consolidated financial information and secured financial information) which are
included in the Registration Statement and Prospectus and which are specified by
the Underwriter, and have found such amounts, percentages and financial
information to be in agreement with the relevant accounting, financial and other
records of the Company identified in such letter. References to the Registration
Statement and the Prospectus in this paragraph (c) with respect to the letter
referred to above shall include any amendment or supplement thereto at the date
of such letter.
(d) The representations and warranties of the Company
contained in this Agreement shall be true and correct as if made on and as of
the Firm Closing Date; the Registration Statement shall not include any untrue
statement of a material fact or omit to state any material fact required to be
stated therein necessary to make the statements therein not misleading, and the
Prospectus, as amended or supplemented as of the Firm Closing Date, shall not
include any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
- 23 -
<PAGE>
and the Company shall have performed all covenants and agreements and
satisfied all conditions on its part to be performed or satisfied at or prior
to the Firm Closing Date.
(e) No stop order suspending the effectiveness of the
Registration Statement or any amendment thereto shall have been issued, and no
proceedings for that purpose shall have been instituted or threatened or
contemplated by the Commission.
(f) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, there shall not have
been any material adverse change, or any development involving a prospective
material adverse change, in the business, operations, condition (financial or
otherwise), earnings or prospects of the Company and the Subsidiaries, except in
each case as described in or contemplated by the Prospectus (exclusive of any
amendment or supplement thereto).
(g) The Underwriter shall have received a certificate, dated
the Firm Closing Date, of the Chief Executive Officer and the Secretary of the
Company to the effect set forth in subparagraphs (d) through (f) above.
(h) The Common Stock and Warrants shall be qualified in such
jurisdictions as the Underwriter may reasonably request pursuant to section
4(c), and each such qualification shall be in effect and not subject to any stop
order or other proceeding on the Firm Closing Date.
(i) The Company shall have executed and delivered to the
Underwriter the Underwriter's Warrant Agreement and a certificate or
certificates evidencing the Underwriter's Warrants, in each case in a form
acceptable to the Underwriter.
(j) The Underwriter shall have received Lock-up Agreements
executed by the persons listed on Schedule 1 annexed hereto.
(j) On or before the Firm Closing Date, the Underwriter and
counsel for the Underwriter shall have received such further certificates,
documents, letters or other information as they may have reasonably requested
from the Company.
All opinions, certificates, letters and documents delivered pursuant to
this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Underwriter and counsel
for the Underwriter. The Company shall furnish to the Underwriter such conformed
copies of such opinions, certificates, letters and documents in such quantities
as the Underwriter and counsel for the Underwriter shall reasonably request.
The obligation of the Underwriter to purchase and pay for any Option
Securities shall be subject, in its discretion, to each of the foregoing
conditions to purchase the Firm Securities, except that all references to the
Firm Securities and the Firm Closing Date shall be deemed to refer to such
Option Securities and the related Option Closing Date, respectively.
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<PAGE>
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless the
Underwriter and each person, if any, who controls the Underwriter within the
meaning of section 15 of the Act or section 20 of the 1934 Act against any
losses, claims, damages, amounts paid in settlement or liabilities, joint or
several, to which the Underwriter or such controlling person may become subject
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof arise out of or are based upon:
(i) any untrue statement or alleged untrue
statement of any material fact contained in (A) the Registration Statement or
any amendment thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto or (B) any application or other document, or
any amendment or supplement thereto, executed by the Company or based upon
written information furnished by or on behalf of the Company filed in any
jurisdiction in order to qualify the Securities under the Blue Sky or
securities laws thereof or filed with the Commission or any securities
association or securities exchange (each an "Application"), or
(2) the omission or alleged omission to state
in such Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, or any
Application a material fact required to be stated therein or necessary to
make the statements therein not misleading, and will reimburse, as incurred,
the Underwriter and such controlling person for any legal or other expenses
reasonably incurred by the Underwriter or such controlling person in connection
with investigating, defending against or appearing as a third-party witness in
connection with any loss, claim, damage, liability, action, investigation,
litigation or proceeding; provided, however, that the Company will not be
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon any untrue statement or alleged
untrue statement or omission or alleged omission made in such registration
statement or any amendment thereto, any Preliminary Prospectus, the Prospectus
or any amendment or supplement thereto, or any Application in reliance upon
and in conformity with written information furnished to the Company by the
Underwriter specifically for use therein. This indemnity agreement will be in
addition to any liability which the Company may otherwise have. The Company
will not, without the prior written consent of the Underwriter, settle or
compromise or consent to the entry of any judgment in any pending or threatened
claim, action, suit or proceeding in respect of which indemnification may be
sought hereunder (whether or not the Underwriter or any person who controls the
Underwriter within the meaning of section 15 of the Act or section 20 of the
1934 Act is a party to such claim, action, suit or proceeding), unless such
settlement, compromise or consent includes an unconditional release of the
Underwriter and each such controlling person from all liability arising out of
such claim, action, suit or proceeding.
(b) The Underwriter will indemnify and hold harmless the
Company, each of its directors, each of its officers who signed the Registration
Statement and each person, if any, who controls the Company within the meaning
of section 15 of the Act or section 20 of the Exchange Act against, any losses,
claims, damages or liabilities to which the Company or any such director,
officer
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<PAGE>
or controlling person may become subject under the Act or otherwise, but
only insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon (i) any untrue statement
or alleged untrue statement of any material fact contained in the
Registration Statement or any amendment thereto, any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or any Application, or
(ii) the omission or the alleged omission to state therein a material fact
required to be stated in the Registration Statement or any amendment thereto,
any Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, or any Application, or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company by the Underwriter specifically for use therein; and, subject to the
limitation set forth immediately preceding this clause, will reimburse, as
incurred, any legal or other expenses reasonably incurred by the Company or any
such director, officer or controlling person in collection with investigating or
defending any such loss, claim, damage, liability or any action in respect
thereof. This indemnity agreement will be in addition to any liability which the
Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this
section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this section 8, notify the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party otherwise than under
this section 8. In case any such action is brought against any indemnified
party, and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein and, to the extent
that it may wish, jointly with any other indemnifying party similarly notified,
to assume the defense thereof, with counsel satisfactory to such indemnified
party; provided, however, that if the defendants in any such action include both
the indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be one or more legal defenses available
to it and/or other indemnified parties which are different from or additional to
those available to the indemnifying party, the indemnifying party shall not have
the right to direct the defense of such action on behalf of such indemnified
party or parties and such indemnified party or parties shall have the right to
select separate counsel to defend such action on behalf of such indemnified
party or parties. After notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof and approval by such
indemnified party of counsel appointed to defend such action, the indemnifying
party will not be liable to such indemnified party under this section 8 for any
legal or other expenses, other than reasonable costs of investigation,
subsequently incurred by such indemnified party in connection with the defense
thereof, unless (i) the indemnified party shall have employed separate counsel
in accordance with the proviso to the next preceding sentence or (ii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party. After such notice from the
indemnifying party to such indemnified party, the indemnifying party will not be
liable for the costs and expenses of any settlement of such action effected by
such indemnified party without the consent of the indemnifying party.
- 26 -
<PAGE>
(d) In circumstances in which the indemnity agreement provided
for in the preceding paragraphs of this section 8 is unavailable or insufficient
to hold harmless an indemnified party in respect of any losses, claims, damages
or liabilities (or actions in respect thereof), each indemnifying party, in
order to provide for just and equitable contribution, shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect (i) the relative benefits received by
the indemnifying party or parties on the one hand and the indemnified party on
the other from the offering of the Securities or (ii) if the allocation provided
by the foregoing clause (i) is not permitted by applicable law, not only such
relative benefits but also the relative fault of the indemnifying party or
parties on the one hand and the indemnified party on the other in connection
with the statements or omissions or alleged statements or omissions that
resulted in such losses, claims, damages or liabilities (or actions in respect
thereof). The relative benefits received by the Company on the one hand and the
Underwriter on the other shall be deemed to be in the same proportion as the
total proceeds from the offering (net of underwriting discounts and commissions
but before deducting expenses) received by the Company bear to the total
underwriting discounts and commissions received by the Underwriter. The relative
fault of the parties shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Underwriter, the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission, and the other equitable considerations appropriate in the
circumstances. The Company and the Underwriter agree that it would not be
equitable if the amount of such contribution were determined by pro rata or per
capita allocation or by any other method of allocation that does not take into
account the equitable considerations referred to in the first sentence of this
paragraph (d). Notwithstanding any other provision of this paragraph (d), the
Underwriter shall not be obligated to make contributions hereunder that in the
aggregate exceed the total public offering price of the Securities purchased by
the Underwriter under this Agreement, less the aggregate amount of any damages
that the Underwriter has otherwise been required to pay in respect of the same
or any substantially similar claim, and no person guilty of fraudulent
misrepresentation (within the meaning of section 11 (f) of the Act) shall be
entitled to contribution from any person who is not guilty of such fraudulent
misrepresentation. For purposes of this paragraph (d), each person, if any, who
controls an Underwriter within the meaning of section 15 of the Act or section
20 of the 1934 Act shall have the same rights to contribution as the
Underwriter, and each director of the Company, each officer of the Company who
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of section 15 of the Act or section 20 of the 1934
Act, shall have the same rights to contribution as the Company.
9. Survival. The respective representations, warranties,
agreements, covenants, indemnities and other statements of the Company, any of
its officers or directors and the Underwriter set forth in this Agreement or
made by or on behalf of them, respectively, pursuant to this Agreement shall
remain in full force and effect, regardless of (i) any investigation made by
or on behalf of the Company, any of its officers or directors, the
Underwriter or any controlling person referred to in section 8 hereof and
(ii) delivery of and payment for the Securities. The respective agreements,
- 27 -
<PAGE>
covenants, indemnities and other statements set forth in sections 5
and 8 hereof shall remain in full force and effect, regardless of any
termination or cancellation of this Agreement.
10. Termination.
(a) This Agreement may be terminated with respect to the Firm
Securities or any Option Securities in the sole discretion of the Underwriter by
notice to the Company given prior to the Firm Closing Date or the related Option
Closing Date, respectively, in the event that the Company shall have failed,
refused or been unable to perform all obligations and satisfy all conditions on
its part to be performed or satisfied under Section 7 hereunder at or prior
thereto or if at or prior to the Firm Closing Date or such Option Closing Date,
respectively.
(1) the Company sustains a loss by reason of
explosion, fire, flood, accident or other calamity, which, in the opinion of the
Underwriter, substantially affects the value of the properties of the Company
or which materially interferes with the operation of the business of the
Company regardless of whether such loss shall have been insured; there shall
have been any material adverse change, or any development involving a
prospective material adverse change (including, without limitation, a change in
management or control of the Company), in the business, operations, condition
(financial or otherwise), earnings or prospects of the Company, except in each
case as described in or contemplated by the Prospectus (exclusive of any
amendment or supplement thereto);
(2) any action, suit or proceeding shall be
threatened, instituted or pending, at law or in equity, against the Company, by
any person or by any federal, state, foreign or other governmental or
regulatory commission, board or agency wherein any unfavorable result or
decision could materially adversely affect the business, operations, condition
(financial or otherwise), earnings or prospects of the Company;
(3) trading in the Common Stock or Warrants
shall have been suspended by the Commission or the NASD, or trading in
securities generally on the New York Stock Exchange shall have been suspended
or minimum or maximum prices shall have been established on either such
exchange or quotation system;
(4) a banking moratorium shall have been
declared by New York or United States authorities;
(5) there shall have been (A) an outbreak of
hostilities between the United States and any foreign power (or, in the case of
any ongoing hostilities, a material escalation thereof), (B) an outbreak of any
other insurrection or armed conflict involving the United States or (C) any
other calamity or crisis or material change in financial, political or
economic conditions, having an effect on the financial markets that, in any case
referred to in this clause (5), in the sole judgment of the Underwriter makes it
impracticable or inadvisable to proceed with the public offering or the delivery
of the Securities as contemplated by the Registration Statement;
- 28 -
<PAGE>
(6) termination of this Agreement pursuant to
this section 10 shall be without liability of any party to any other party,
except as provided in section 5(b) and section 8 hereof.
11. Information Supplied by the Underwriter. The statements set forth
in the penultimate paragraph on page 3, in the third and eleventh paragraphs
under the heading "Underwriting" in any Preliminary Prospectus or the Prospectus
(to the extent such statements relate to the Underwriter) constitute the only
information furnished by the Underwriter to the Company for the purposes of
sections 1 (b) and 8(b) hereof. The Underwriter confirm that such statements (to
such extent) are correct.
12. Notices. All notice hereunder to or upon either party hereto shall
be deemed to have been duly given for all purposes if in writing and (i)
delivered in person or by messenger or an overnight courier service against
receipt, or (ii) send by certified or registered mail, postage paid, return
receipt requested, or (iii) sent by telegram, facsimile, telex or similar means,
provided that a written copy thereof is sent on the same day by postage paid
first-class mail, to such party at the following address:
To the Company at: Azurel Ltd.
509 Madison Avenue
New York, New York 10022
Attn: Gerard Semhon
Fax: (212) 317-0713
To the Underwriter at: Network 1 Financial Securities, Inc.
One Financial Galleria
2 Bridge Avenue
Red Bank, New Jersey 07701
Attn: Corporate Finance Department
Fax: (908) 758-6671
or such other address as either party hereto may at any time, or from time to
time, direct by notice given to the other party in accordance with this section.
The date of giving of any such notice shall be, in the case of clause (i), the
date of the receipt; in the case of clause (ii), five business days after such
notice or demand is sent; and, in the case of clause (iii), the business day
next following the date such notice is sent.
13. Amendment. Except as otherwise provided herein, no amendment
of this Agreement shall be valid or effective, unless in writing and signed by
or on behalf of the parties hereto.
14. Waiver. No course of dealing or omission or delay on the part of
either party hereto in asserting or exercising any right hereunder shall
constitute or operate as a waiver of any such right. No waiver of any provision
hereof shall be effective, unless in writing and signed by or on
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<PAGE>
behalf of the party to be charged therewith. No waiver shall be deemed a
continuing waiver or waiver in respect of any other or subsequent breach or
default, unless expressly so stated in writing.
15. Applicable Law. This agreement shall be governed by, and
interpreted and enforced in accordance with, the laws of the State of New York
without regard to principles of choice of law or conflict of laws.
16. Jurisdiction. Each of the parties hereto hereby irrevocably
consents and submits to the exclusive jurisdiction of the Supreme Court of the
State of New York and the United States District Court for the Southern District
of New York in connection with any suit, action or other proceeding arising out
of or relating to this Agreement or the transactions contemplated hereby, waives
any objection to venue in the County of New York, State of New York, or such
District and agrees that service of any summons, complaint, notice or other
process relating to such suit, action or other proceeding may be effected in the
manner provided by clause (ii) of Section 12.
17. Remedies. In the event of any actual or prospective breach or
default by either party hereto, the other party shall be entitled to equitable
relief, including remedies in the nature of rescission, injunction and specific
performance. All remedies hereunder are cumulative and not exclusive, and
nothing herein shall be deemed to prohibit or limit either party from pursuing
any other remedy or relief available at law or in equity for such actual or
prospective breach or default, including the recovery of damages.
18. Attorneys' Fees. The prevailing party in any suit, action or
other proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby, shall be entitled to recover its costs and
reasonable attorneys' fees.
19. Severability. The provisions hereof are severable and in the event
that any provision of this Agreement shall be determined to be invalid or
unenforceable in any respect by a court of competent jurisdiction, the remaining
provisions hereof shall not be affected, but shall, subject to the discretion of
such court, remain in full force and effect, and any invalid or unenforceable
provision shall be deemed, without further action on the part of the parties
hereto, amended and limited to the extent necessary to render the same valid and
enforceable.
20. Counterparts. This agreement may be executed in counterparts,
each of which shall be deemed an original and which together shall constitute
one and the same agreement.
21. Successors. This agreement shall inure to the benefit of and be
binding upon the Underwriter, the Company and their respective successors and
assigns. Nothing expressed or mentioned in this Agreement is intended or shall
be construed to give any other person any legal or equitable right, remedy or
claim under or in respect of this Agreement or any provisions herein contained,
this Agreement and all conditions and provisions hereof being intended to be and
being for the sole and exclusive benefit of such persons and for the benefit of
no other person except that (i) the indemnities of the Company contained in
section 8 of this Agreement shall also be for the
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<PAGE>
benefit of any person or persons who control any Underwriter within the meaning
of section 15 of the Act or section 20 of the Exchange Act and (ii) the
indemnities of the Underwriter contained in section 8 of this Agreement shall
also be for the benefit of the directors of the Company, the officers of the
Company who have signed the Registration Statement and any person or persons
who control the Company within the meaning of section 15 of the Act or section
20 of the Exchange Act. No purchaser of Securities from the Underwriter shall
be deemed a successor because of such purchase.
22. Titles and Captions. The titles and captions of the articles
and sections of this Agreement are for convenience of reference only and do not
in any way define or interpret the intent of the parties or modify or otherwise
affect any of the provisions hereof.
23. Grammatical Conventions. Whenever the context so requires, each
pronoun or verb used herein shall be construed in the singular or the plural
sense and each capitalized term defined herein and each pronoun used herein
shall be construed in the masculine, feminine or neuter sense.
24. References. The terms "herein," "hereto," "hereof,"
"hereby," and "hereafter," and other terms of similar import, refer to this
Agreement as a whole, and not to any Article, Section or other part hereof.
25. Entire Agreement. This Agreement embodies the entire
agreement of the parties hereto with respect to the subject matter hereof and
supersedes any prior agreement, commitment or arrangement relating thereto.
If the foregoing correctly sets forth our understanding, please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter shall constitute an agreement binding the Company and the
Underwriter.
Very truly yours,
AZUREL LTD.
By: /s/ Gerard Sehmon
Name: Gerard Sehmon
Title: Chief Executive Officer
The foregoing agreement is hereby confirmed and accepted as of the date first
above written.
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<PAGE>
NETWORK 1 FINANCIAL SECURITIES, INC.
By:
Name:
Title:
- 32 -
FINANCIAL ADVISORY AND INVESTMENT BANKING AGREEMENT
This Agreement is made and entered into as of the ____ day of _________
, 1997 between Network 1 Financial Securities, Inc. a New Jersey corporation
("Network 1"), and Azurel Ltd., a Delaware corporation (the "Company").
In consideration of the mutual promises made herein and for other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. Purpose: The Company hereby engages Network 1 for the term specified
in Paragraph 2 hereof to render advice to the Company as an investment banker
relating to financial and similar matters upon the terms and conditions set
forth herein.
2. Term: Except as otherwise specified in Paragraph 4 hereof, this
Agreement shall be effective from _________, 1997 to _________________, 1999.
3. Duties of Network 1: During the term of this Agreement, Network 1
shall, upon the request of the Company, provide the Company with corporate
finance and related financial advisory services, advice with respect to
potential acquisitions and other business transactions and advice with respect
to stockholder relations matters. All obligations of the Consultant contained
herein shall be subject to the Consultant's availability to perform such
services and the amount of notice received from the Company. The Consultant
shall devote such time and effort to the
<PAGE>
performance of its duties hereunder as the Consultant shall determine
is reasonably necessary. The Consultant may look to such others for
such factual information, investment recommendations, economic advice and/or
research, upon which to base its advice to the Company hereunder, as it shall
deem appropriate. The Company recognizes that Network 1 now renders and may
continue to render financial and other advisory services to other companies
which may or may not have policies and conduct activities similar to those of
the Company, and acknowledges that Network 1 shall be free to render advice and
to perform those services for such other companies.
4. Compensation: In consideration for the services rendered by Network 1
to the Company pursuant to this Agreement (and in addition to the expenses
provided for in Paragraph 5 hereof), the Company shall pay Network 1 a
non-refundable fee of $48,000, payable in advance, upon the execution of this
Agreement. In addition, if any Transaction (as defined below) occurs during the
term of this Agreement or within twelve months thereafter, the Company shall pay
fees to Network 1 as follows:
<TABLE>
<S> <C>
Consideration Fee
First $1,000,000 5% of First $1,000,000
Second $1,000,000 4% of Second $1,000,000
Third $1,000,000 3% of Third $1,000,000
Fourth $1,000,000 2% of Fourth $1,000,000
Consideration in excess of the 1% of Consideration in excess
fourth $1,000,0000 of the fourth $1,000,000
</TABLE>
2
<PAGE>
For the purposes of this Agreement, a "Transaction" shall mean (i) any
transaction originated by Network 1, other than in the ordinary course of trade
or business of the Company, whereby, directly or indirectly, control of, or a
material interest in, the Company and its subsidiaries or the business or assets
of the Company and its subsidiaries, is transferred for Consideration, or (ii)
any transaction originated by Network 1 whereby the Company acquires any other
company, or the assets of any other company or an interest in any other company;
and "Consideration" shall mean the total market value on the day of the closing
of stock, cash, assets and all other property (real or personal) exchanged or
received, directly or indirectly by the Company or any of its security holders
in connection with any Transaction. Any co-broker retained by Network 1 shall be
paid by Network 1. All Transaction fees to be paid pursuant to this Agreement,
except as otherwise specified, are due and payable to Network 1 in cash at the
closing or closings of a Transaction. In the event that this Agreement shall not
be renewed or is terminated for any reason, notwithstanding any such non-renewal
or termination, Network 1 shall be entitled to the entire fee provided in this
Paragraph 4, for any Transaction for which the discussions were initiated during
the term of this Agreement and which is consummated within a period of twelve
months after non-renewal or termination of this Agreement. Nothing herein shall
impose any obligation on the part of the Company to enter into any Transaction.
3
<PAGE>
5. Expenses of Network 1: In addition to the fees payable hereunder and
regardless of whether any Transaction is proposed or consummated, the Company
shall reimburse Network 1 for the reasonable fees and disbursements of Network
1's counsel and Network 1's reasonable travel and out-of-pocket expenses
incurred in connection with the services performed by Network 1 pursuant to this
Agreement and at the request of the Company, including without limitation,
hotels, food and associated expenses and long-distance telephone calls.
6. Liability of Network 1:
(a) In furnishing the Company with advice and other services as
herein provided, neither Network 1 nor any officer, director or agent thereof
shall be liable to the Company or its creditors for errors of judgment or for
anything, except for the Consultant's intentional or willful misconduct in the
performance of its duties under this Agreement.
(b) It is further understood and agreed that Network 1 may rely
upon information furnished to it reasonably believed to be accurate and
reliable and that, except as herein provided, Network 1 shall not be accountable
for any loss suffered by the Company by reason of the Company's action or
inaction on the basis of any advice, recommendation or approval of Network 1,
its partners, employees or agents.
(c) The Company acknowledges that all opinions and advice (written
or oral) given by Network 1 to the Company in connection with Network 1's
engagement are intended solely for the
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benefit and use of the Company in considering the transaction to which they
relate, and the Company agrees that no person or entity other than the Company
shall be entitled to make use of or rely upon the advice of Network 1 to be
given hereunder, and no such opinion or advice shall be used for any other
purpose or reproduced, disseminated, quoted or referred to at any time, in any
manner or for any purpose, nor may the Company make any public references to
Network 1, or use Network 1's name in any annual reports or any other reports or
releases of the Company without Network 1's prior written consent.
(d) The Company acknowledges that Network 1 makes no commitment
whatsoever as to making a market in the Company's securities or to recommending
or advising its clients to purchase the Company's securities. Research reports
or corporate finance reports that may be prepared by Network 1 will, when and
if prepared, be done solely on the merits based upon an analysis performed
by Network 1 and its corporate finance personnel.
7. Company Information:
(a) The Company shall furnish to the Consultant all data,
material and other information relevant to the performance by the Consultant
of its obligations under this Agreement, or particular projects as to which
the Consultant is acting as advisor, which will permit the Consultant to
know all facts material to the advice to be rendered, and all material or
information reasonably requested by the Consultant. The Company acknowledges and
agrees that in performing its services under this
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<PAGE>
engagement, Network 1 may rely upon the data, material and other information
supplied by the Company without independently verifying the accuracy,
completeness or veracity of same. In the event that the Company fails or refuses
to furnish any such data, material or information reasonably requested by the
Consultant, and thus prevents or impedes the Consultant's performance hereunder,
any inability of the Consultant to perform shall not be a breach of its
obligations hereunder.
(b) Except as contemplated by the terms hereof or as required by
applicable law, Network 1 shall keep confidential all non-public information
provided to it by the Company and shall not disclose such information to any
third party without the Company's prior written consent, other than to such
of its employees and advisors as Network 1 determines in its sole judgment
need to have access thereto. Notwithstanding the foregoing, the Consultant
shall not be required to maintain confidentiality with respect to information
(i) which is or becomes part of the public domain; (ii) of which it had
independent knowledge prior to disclosure; (iii) which comes into the
possession of the Consultant or its employees or agents in the normal and
routine course of its own business from and through independent non-confidential
sources; or (iv) which is required to be disclosed by the Consultant pursuant to
legal process or in accordance with governmental or regulatory requirements. If
the Consultant is requested or required (by oral questions, interrogatories,
requests for information or document subpoenas,
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civil investigative demands, or similar process) to disclose any confidential
information supplied to it by the Company, or the existence of other
negotiations in the course of its dealings with the Company or its
representatives, the Consultant shall, unless prohibited by law, promptly notify
the Company of such request(s) so that the Company may seek an appropriate
protective order.
8. Indemnification: The Company agrees to indemnify and hold harmless
the Consultant, its partners, employees, agents, representatives and controlling
persons (and the officers, directors, employees, agents, representatives and
controlling persons of each of them) from and against any and all losses,
claims, damages, liabilities, costs and expenses (and all actions, suits,
proceedings or claims in respect thereof) and any legal or other expenses in
giving testimony or furnishing documents in response to a subpoena or otherwise
(including, without limitation, the costs of investigating, preparing or
defending any such action, suit, proceeding or claim, whether or not in
connection with any action, suit, proceeding or claim in which the Consultant is
a party), as and when incurred, directly or indirectly, caused by, relating to,
based upon or arising out of the Consultant's service pursuant to this
Agreement. The Company further agrees that the Consultant shall incur no
liability to the Company or any other party on account of this Agreement or any
acts or omissions arising out of or related to the actions of the Consultant
relating to this Agreement or the performance or failure to perform any services
under this Agreement, except for the Consultant's intentional or
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<PAGE>
willful misconduct. The obligations of the Company under the Section shall
survive the termination of this Agreement.
9. Independent Contractor: Network 1 shall perform its services
hereunder as an independent contractor and not as an employee of the Company or
an affiliate thereof. It is expressly understood and agreed to by the parties
hereto that Network 1 shall have no authority to act for, represent or bind the
Company or any affiliate thereof in any manner, except as may be agreed to
expressly by the Company in writing from time to time.
10. Miscellaneous:
(a) This Agreement between the Company and Network 1 constitutes
the entire agreement and understanding of the parties hereto and supersedes
any and all previous agreements and understandings, whether oral or written,
between the parties with respect to the matters set forth herein.
(b) Any notice or communication permitted or required hereunder
shall be in writing and shall be deemed sufficiently given if hand-delivered
or sent (i) postage prepaid by registered mail, return receipt requested,
or (ii) by facsimile, to the respective parties as set forth below, or to
such other address as either party may notify the other in writing: If to
the Company, to:
Azurel Ltd.
509 Madison Avenue
New York, New York 10022
Attn: Gerard Semhon
Telecopy No.: (212) 317-0713
8
<PAGE>
with a copy to: Jay M. Kaplowitz, Esq.
Gersten, Savage, Kaplowitz,
Fredericks & Curtin
101 East 52nd Street
New York, New York 10022
Telecopy No.: (212) 980-5192
If to Network 1, to: Network 1 Financial
Securities, Inc.
One Financial Galleria
2 Bridge Avenue
Red Bank, New Jersey 07701
Attn: Virginia Sourlis, Esq.
Telecopy No.: (908) 758-6671
with a copy to: Jack Becker, Esq.
Snow Becker Krauss P.C.
605 Third Avenue
New York, New York 10158-0125
Telecopy No.: (212) 949-7052
(c) This Agreement shall be binding upon and inure to the
benefit of each of the parties hereto and their respective successors,
legal representatives and assigns.
(d) This Agreement may be executed in any number of counterparts,
each of which together shall constitute one and the same original document.
(e) No provision of this Agreement may be amended, modified or
waived, except in a writing signed by all of the parties hereto.
(f) This Agreement shall be construed in accordance with and
governed by the laws of the State of New York, without giving effect to
conflict of law principles. The parties hereby agree that any dispute which may
arise between them arising out of or in connection with this Agreement shall be
adjudicated before a court located in New York City, and they hereby submit to
the
9
<PAGE>
exclusive jurisdiction of the courts of the State of New York located in New
York, New York and of the Federal District Court for the Southern District of
New York with respect to any action or legal proceeding commenced by any party,
and they irrevocably waive any objection they now or hereafter may have
respecting the venue of any such action or proceeding brought in such a court or
respecting the fact that such court is an inconvenient forum, relating to or
arising out of this Agreement, and consent to the service of process in any such
action or legal proceeding by means of registered or certified mail, return
receipt requested, in care of the address set forth in Section 10(b) hereof.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.
NETWORK 1 FINANCIAL
SECURITIES, INC.
By:________________________________
Name:
Title:
AZUREL LTD.
By: /s/ Gerard Semhon
Gerard Semhon
Chief Executive Officer
11
BY-LAWS
OF
AZUREL LTD.
--------------------------------------------
ARTICLE I
OFFICES
1.1 Registered Office: The registered office shall be established
and maintained at and shall be the registered agent of the Corporation in charge
hereof.
1.2 Other Offices: The corporation may have other offices, either
within or without the State of Delaware, at such place or places as the Board of
Directors may from time to time appoint or the business of the corporation may
require, provided, however, that the corporation's books and records shall be
maintained at such place within the continental United States as the Board of
Directors shall from time to time designate.
ARTICLE II
STOCKHOLDERS
2.1 Place of Stockholders' Meetings: All meetings of the
stockholders of the corporation shall be held at such place or places, within or
outside the State of Delaware as may be fixed by the Board of Directors from
time to time or as shall be specified in the respective notices thereof.
2.2 Date and Hours of Annual Meetings of Stockholders: An annual
meeting of stockholders shall be held each year within five months after the
close of the fiscal year of the Corporation.
2.3 Purpose of Annual Meetings: At each annual meeting, the
stockholders shall elect the members of the Board of Directors for the
succeeding year. At any such annual meeting any further proper business may be
transacted.
2.4 Special Meetings of Stockholders: Special meetings of the
stockholders or of any class or series thereof entitled to vote may be called by
the President or by the Chairman of the Board of Directors, or at the request in
writing by stockholders of record owning at least fifty (50%) percent of the
issued and outstanding voting shares of common stock of the corporation.
2.5 Notice of Meetings of Stockholders: Except as otherwise
expressly required
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or permitted by law, not less than ten days nor more than sixty days before the
date of every stockholders' meeting the Secretary shall give to each stockholder
of record entitled to vote at such meeting, written notice, served personally by
mail or by telegram, stating the place, date and hour of the meeting and, in the
case of a special meeting, the purpose or purposes for which the meeting is
called. Such notice, if mailed shall be deemed to be given when deposited in the
United States mail, postage prepaid, directed to the stockholder at his address
for notices to such stockholder as it appears on the records of the corporation.
2.6 Quorum of Stockholders: (a) Unless otherwise provided by the
Certificate of Incorporation or by law, at any meeting of the stockholders, the
presence in person or by proxy of stockholders entitled to cast a majority of
the votes thereat shall constitute a quorum. The withdrawal of any shareholder
after the commencement of a meeting shall have no effect on the existence of a
quorum, after a quorum has been established at such meeting.
(b) At any meeting of the stockholders at which a quorum shall
be present, a majority of voting stockholders, present in person or by proxy,
may adjourn the meeting from time to time without notice other than announcement
at the meting. In the absence of a quorum, the officer presiding thereat shall
have power to adjourn the meeting from time to time until a quorum shall be
present. Notice of any adjourned meeting, other than announcement at the
meeting, shall not be required to be given except as provided in paragraph (d)
below and except where expressly required by law.
(c) At any adjourned session at which a quorum shall be
present, any business may be transacted which might have been transacted at the
meeting originally called but only those stockholders entitled to vote at the
meeting as originally noticed shall be entitled to vote at any adjournment
thereof, unless a new record date is fixed by the Board of Directors.
(d) If an adjournment is for more than thirty days, or if after
the adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each stockholder of record entitled
to vote at the meeting.
2.7 Chairman and Secretary of Meeting: The President, shall
preside at meetings of the stockholders. The Secretary shall act as secretary of
the meeting or if he is not present, then the presiding officer may appoint a
person to act as secretary of the meeting.
2.8 Voting by Stockholders: Except as may be otherwise provided by
the Certificate of Incorporation or these by-laws, at every meeting of the
stockholders each stockholder shall be entitled to one vote for each share of
voting stock standing in his name on the books of the corporation on the record
date for the meeting. Except as otherwise provided by these by-laws, all
elections and questions shall be decided by the vote of a majority in interest
of the stockholders present in person or represented by proxy and entitled to
vote at the meeting.
2.9 Proxies: Any stockholder entitled to vote at any meeting of
stockholders
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may vote either in person or by proxy. Every proxy shall be in writing,
subscribed by the stockholder or his duly authorized attorney-in-fact, but need
not be dated, sealed, witnessed or acknowledged.
2.10 Inspectors: The election of directors and any other vote by
ballot at any meeting of the stockholders shall be supervised by at least two
inspectors. Such inspectors may be appointed by the presiding officer before or
at the meeting; or if one or both inspectors so appointed shall refuse to serve
or shall not be present, such appointment shall be made by the officer presiding
at the meeting.
2.11 List of Stockholders: (a) At least ten days before every
meeting of stockholders, the Secretary shall prepare and make a complete list of
the stockholders entitled to vote at the meeting, arranged in alphabetical
order, and showing the address of each stockholder and the number of shares
registered in the name of each stockholder.
(b) During ordinary business hours, for a period of at least
ten days prior to the meeting, such list shall be open to examination by any
stockholder for any purpose germane to the meeting, either at a place within the
city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or if not so specified, at the place where the meeting is
to be held.
(c) The list shall also be produced and kept at the time and place
of the meeting during the whole time of the meeting, and it may be inspected by
any stockholder who is present.
(d) The stock ledger shall be the only evidence as to who are the
stockholders entitled to examine the stock ledger, the list required by this
Section 2.11 or the books of the corporation, or to vote in person or by proxy
at any meeting of stockholders.
2.12 Procedure at Stockholders' Meetings: Except as otherwise
provided by these by-laws or any resolutions adopted by the stockholders or
Board of Directors, the order of business and all other matters of procedure at
every meeting of stockholders shall be determined by the presiding officer.
2.13 Action by Consent Without Meeting: Unless otherwise provided
by the Certificate of Incorporation, any action required to be taken at any
annual or special meeting of stockholders, or any action which may be taken at
any annual or special meeting, may be taken without a meeting, without prior
notice and without a vote, if a consent in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted. Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those stockholders who
have not consented in writing.
By - Laws - 3
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ARTICLE III
DIRECTORS
3.1 Powers of Directors: The property, business and affairs of the
corporation shall be managed by its Board of Directors which may exercise all
the powers of the corporation except such as are by the law of the State of
Delaware or the Certificate of Incorporation or these by-laws required to be
exercised or done by the stockholders.
3.2 Number, Method of Election, Terms of Office of Directors: The
number of directors which shall constitute the Board of Directors shall be four
(4) unless and until otherwise determined by a vote of a majority of the entire
Board of Directors. Each Director shall hold office until the next annual
meeting of stockholders and until his successor is elected and qualified,
provided, however, that a director may resign at any time. Directors need not be
stockholders.
3.3 Vacancies on Board of Directors: Removal: (a) Any director may
resign his office at any time by delivering his resignation in writing to the
Chairman of the Board or to the President. It will take effect at the time
specified therein, or, if not time is specified, it will be effective at the
time of its receipt by the corporation. The acceptance of a resignation shall
not be necessary to make it effective, unless expressly so provided in the
resignation.
(b) Any vacancy in the authorized number of directors may be
filled by majority vote of the stockholders and any director so chosen shall
hold office until the next annual election of directors by the stockholders and
until his successor is duly elected and qualified or until his earlier
resignation or removal.
(c) Any director may be removed with or without cause at any time
by the majority vote of the stockholders given at a special meeting of the
stockholders called for that purpose.
3.4 Meetings of the Board of Directors: (a) The Board of Directors
may hold their meetings, both regular and special, either within or outside the
State of Delaware.
(b) Regular meetings of the Board of Directors may be held at
such time and place as shall from time to time be determined by resolution of
the Board of Directors. No notice of such regular meetings shall be required. If
the date designated for any regular meeting be a legal holiday, then the meeting
shall be held on the next day which is not a legal holiday.
(c) The first meeting of each newly elected Board of Directors
shall be held immediately following the annual meeting of the stockholders for
the election of officers and the transaction of such other business as may come
before it. If such meeting is held at the place of the stockholders' meeting, no
notice thereof shall be required.
(d) Special meetings of the Board of Directors shall be held
whenever called by direction of the Chairman of the Board or the President or at
the written request of any one director.
By - Laws - 4
<PAGE>
(e) The Secretary shall give notice to each director of any
special meeting of the Board of Directors by mailing the same at least three
days before the meeting or by telegraphing, telexing, or delivering the same not
later than the date before the meeting.
Unless required by law, such notice need not include a
statement of the business to be transacted at, or the purpose of, any such
meeting. Any and all business may be transacted at any meeting of the Board of
Directors. No notice of any adjourned meeting need be given. No notice to or
waiver by any director shall be required with respect to any meeting at which
the director is present.
3.5 Quorum and Action: Unless provided otherwise by law or by the
Certificate of Incorporation or these by-laws, a majority of the Directors shall
constitute a quorum for the transaction of business; but if there shall be less
than a quorum at any meeting of the Board, a majority of those present may
adjourn the meeting from time to time. The vote of a majority of the Directors
present at any meeting at which a quorum is present shall be necessary to
constitute the act of the Board of Directors.
3.6 Presiding Officer and Secretary of the Meeting: The President,
or, in his absence a member of the Board of Directors selected by the members
present, shall preside at meetings of the Board. The Secretary shall act as
secretary of the meeting, but in his absence the presiding officer may appoint a
secretary of the meeting.
3.7 Action by Consent Without Meeting: Any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting if all members of the Board or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes or proceedings of the Board or committee.
3.8 Action by Telephonic Conference: Members of the Board of
Directors, or any committee designated by such board, may participate in a
meeting of such board or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in such a meeting shall
constitute presence in person at such meeting.
3.9 Committees: The Board of Directors shall, by resolution or
resolutions passed by a majority of Directors designate one or more committees,
each of such committees to consist of one or more Directors of the Corporation,
for such purposes as the Board shall determine. The Board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of such committee.
3.10 Compensation of Directors: Directors shall receive such
reasonable compensation for their service on the Board of Directors or any
committees thereof, whether in the form of salary or a fixed fee for attendance
at meetings, or both, with expenses, if any, as the Board of Directors may from
time to time determine. Nothing herein contained shall be construed to preclude
any Director from serving in an other capacity and receiving compensation
therefor.
By - Laws - 5
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ARTICLE IV
OFFICERS
4.1 Officers, Title, Elections, Terms: (a) The elected officers of
the corporation shall be a President, a Treasurer and a Secretary, and such
other officers as the Board of Directors shall deem advisable. The officers
shall be elected by the Board of Directors at its annual meeting following the
annual meeting of the stockholders, to serve at the pleasure of the Board or
otherwise as shall be specified by the Board at the time of such election and
until their successors are elected and qualified.
(b) The Board of Directors may elect or appoint at any time,
and from time to time, additional officers or agents with such duties as it may
deem necessary or desirable. Such additional officers shall serve at the
pleasure of the Board or otherwise as shall be specified by the Board at the
time of such election or appointment. Two or more offices may be held by the
same person.
(c) Any vacancy in any office may be filled for the unexpired
portion of the term by the Board of Directors.
(d) Any officer may resign his office at any time. Such
resignation shall be made in writing and shall take effect at the time specified
therein or, if no time has been specified, at the time of its receipt by the
corporation. The acceptance of a resignation shall not be necessary to make it
effective, unless expressly so provided in the resignation.
(e) The salaries of all officers of the corporation shall be
fixed by the Board of Directors.
4.2 Removal of Elected Officers: Any elected officer may be
removed at an time, either with or without cause, by resolution adopted at any
regular or special meeting of the Board of Directors by a majority of the
Directors then in office.
4.3 Duties: (a) President: The President shall be the principal
executive officer of the corporation and, subject to the control of the Board of
Directors, shall supervise and control all the business and affairs of the
corporation. He shall, when present, preside at all meetings of the stockholders
and of the Board of Directors. He shall see that all orders and resolutions of
the Board of Directors are carried into effect (unless any such order or
resolution shall provide otherwise), and in general shall perform all duties
incident to the office of president and such other duties as may be prescribed
by the Board of Directors from time to time.
(b) Treasurer: The Treasurer shall (1) have charge and custody
of and be responsible for all funds and securities of the Corporation; (2)
receive and give receipts for moneys due and payable to the corporation from any
source whatsoever; (3) deposit all such moneys in the name of the corporation in
such banks, trust companies, or other depositories as shall be selected by
By - Laws - 6
<PAGE>
resolution of the Board of Directors; and (4) in general perform all duties
incident to the office of treasurer and such other duties as from time to time
may be assigned to him by the President or by the Board of Directors. He shall,
if required by the Board of Directors, give a bond for the faithful discharge of
his duties in such sum and with such surety or sureties as the Board of
Directors shall determine.
(c) Secretary: The Secretary shall (1) keep the minutes of the
meetings of the stockholders, the Board of Directors, and all committees, if
any, of which a secretary shall not have been appointed, in one or more books
provided for that purpose; (2) see that all notices are duly given in accordance
with the provisions of these by-laws and as required by law; (3) be custodian of
the corporate records and of the seal of the corporation and see that the seal
of the corporation is affixed to all documents, the execution of which on behalf
of the corporation under its seal, is duly authorized; (4) keep a register of
the post office address of each stockholder which shall be furnished to the
Secretary by such stockholder; (5) have general charge of stock transfer books
of the Corporation; and (6) in general perform all duties incident to the office
of secretary and such other duties as from time to time may be assigned to him
by the President or by the Board of Directors.
ARTICLE V
CAPITAL STOCK
5.1 Stock Certificates: (a) Every holder of stock in the
corporation shall be entitled to have a certificate signed by, or in the name
of, the corporation by the President and by the Treasurer or the Secretary,
certifying the numbers of shares owned by him.
(b) If such certificate is countersigned by a transfer agent
other than the corporation or its employee, or by a registrar other than the
corporation or its employee, the signatures of the officers of the corporation
may be facsimiles, and, if permitted by law, any other signature may be a
facsimile.
(c) In case any officer who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer before such certificate is issued, it may be issued by the corporation
with the same effect as if he were such officer at the date of issue.
(d) Certificates of stock shall be issued in such form not
inconsistent with the Certificate of Incorporation as shall be approved by the
Board of Directors, and shall be numbered and registered in the order in which
they were issued.
(e) All certificates surrendered to the corporation shall be
canceled with the date of cancellation, and shall be retained by the Secretary,
together with the powers of attorney to transfer and the assignments of the
shares represented by such certificates, for such period of time as shall be
prescribed from time to time by resolution of the Board of Directors.
5.2 Record Ownership: A record of the name and address of the
holder of such
By - Laws - 7
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certificate, the number of shares represented thereby and the date of issue
thereof shall be made on the corporation's books. The corporation shall be
entitled to treat the holder of any share of stock as the holder in fact
thereof, and accordingly shall not be bound to recognize any equitable or other
claim to or interest in any share on the part of any other person, whether or
not it shall have express or other notice thereof, except as required by law.
5.3. Transfer of Record Ownership: Transfers of stock shall be
made on the books of the corporation only by direction of the person named in
the certificate or his attorney, lawfully constituted in writing, and only upon
the surrender of the certificate therefor and a written assignment of the shares
evidenced thereby. Whenever any transfer of stock shall be made for collateral
security, and not absolutely, it shall be so expressed in the entry of the
transfer if, when the certificates are presented to the corporation for
transfer, both the transferor and the transferee request the corporation to do
so.
5.4 Lost, Stolen or Destroyed Certificates: Certificates
representing shares of the stock of the corporation shall be issued in place of
any certificate alleged to have been lost, stolen or destroyed in such manner
and on such terms and conditions as the Board of Directors from time to time may
authorize.
5.5 Transfer Agent: Registrar: Rules Respecting Certificates: The
corporation may maintain one or more transfer offices or agencies where stock of
the corporation shall be transferable. The corporation may also maintain one or
more registry offices where such stock shall be registered. The Board of
Directors may make such rules and regulations as it may deem expedient
concerning the issue, transfer and registration of stock certificates.
5.6 Fixing Record Date for Determination of Stockholders of
Record: The Board of Directors may fix, in advance, a date as the record date
for the purpose of determining stockholders entitled to notice of, or to vote
at, any meeting of the stockholders or any adjournment thereof, or the
stockholders entitled to receive payment of any dividend or other distribution
or the allotment of any rights, or entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or to express consent to corporate
action in writing without a meeting, or in order to make a determination of the
stockholders for the purpose of any other lawful action. Such record date in any
case shall be not more than sixty days nor less than ten days before the date of
a meeting of the stockholders, nor more than sixty days prior to any other
action requiring such determination of the stockholders. A determination of
stockholders of record entitled to notice or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting: provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
5.7 Dividends: Subject to the provisions of the Certificate of
Incorporation, the Board of Directors may, out of funds legally available
therefor at any regular or special meeting, declare dividends upon the capital
stock of the corporation as and when they deem expedient. Before declaring any
dividend there may be set apart out of any funds of the corporation available
for dividends, such sum or sums as the Board of Directors from time to time in
their discretion deem proper for working capital or as a reserve fund to meet
contingencies or for equalizing dividends or
By - Laws - 8
<PAGE>
for such other purposes as the Board of Directors shall deem conducive to the
interests of the corporation.
ARTICLE VI
SECURITIES HELD BY THE CORPORATION
6.1 Voting: Unless the Board of Directors shall otherwise order,
the President, the Secretary or the Treasurer shall have full power and
authority, on behalf of the corporation, to attend, act and vote at any meeting
of the stockholders of any corporation in which the corporation may hold stock,
and at such meeting to exercise any or all rights and powers incident to the
ownership of such stock, and to execute on behalf of the corporation a proxy or
proxies empowering another or others to act as aforesaid. The Board of Directors
from time to time may confer like powers upon any other person or persons.
6.2 General Authorization to Transfer Securities Held by the
Corporation
(a) Any of the following officers, to wit: the President and
the Treasurer shall be, and they hereby are, authorized and empowered to
transfer, convert, endorse, sell, assign, set over and deliver any and all
shares of stock, bonds, debentures, notes, subscription warrants, stock purchase
warrants, evidence of indebtedness, or other securities now or hereafter
standing in the name of or owned by the corporation, and to make, execute and
deliver, under the seal of the corporation any and all written instruments of
assignment and transfer necessary or proper to effectuate the authority hereby
conferred.
(b) Whenever there shall be annexed to any instrument of
assignment and transfer executed pursuant to and in accordance with the
foregoing paragraph (a), a certificate of the Secretary of the corporation in
office at the date of such certificate setting forth the provisions of this
Section 6.2 and stating that they are in full force and effect and setting forth
the names of persons who are then officers of the corporation, then all persons
to whom such instrument and annexed certificate shall thereafter come, shall be
entitled, without further inquiry or investigation and regardless of the date of
such certificate, to assume and to act in reliance upon the assumption that the
shares of stock or other securities named in such instrument were theretofore
duly and properly transferred, endorsed, sold, assigned, set over and delivered
by the corporation, and that with respect to such securities the authority of
these provisions of the by-laws and of such officers is still in full force and
effect.
ARTICLE VII
MISCELLANEOUS
7.1 Signatories: All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the corporation shall be signed by such officer or officers or such other person
or persons as the Board of Directors may from time to time designate.
By - Laws - 9
<PAGE>
7.2 Seal: The seal of the corporation shall be in such form and
shall have such content as the Board of Directors shall from time to time
determine.
7.3 Notice and Waiver of Notice: Whenever any notice of the time,
place or purpose of any meeting of the stockholders, directors or a committee is
required to be given under the law of the State of Delaware, the Certificate of
Incorporation of these by-laws, a waiver thereof in writing, signed by the
person entitled to such notice, whether before or after the holding thereof, or
actual attendance at the meeting in person or, in the case of any stockholder,
by his attorney-in-fact, shall be deemed equivalent to the giving of such notice
to such persons.
7.4 Indemnity: The corporation shall indemnify its directors,
officers and employees to the fullest allowed by law, provided, however, that it
shall be within the discretion of the Board of Directors whether to advance any
funds in advance of disposition of any action, suit or proceeding, and provided
further that nothing in this section 7.4 shall be deemed to obviate the
necessity of the Board of Directors to make any determination that
indemnification of the director, officer or employee is proper under the
circumstances because he has met the applicable standard of conduct set forth in
subsections (a) and (b) of Section 145 of the Delaware General Corporation Law.
7.5 Fiscal Year: Except as from time to time otherwise determined
by the Board of Directors, the fiscal year of the corporation shall end on
_____________.
By - Laws - 10
WARRANT AGREEMENT
AMONG
AZUREL LTD.
a Delaware corporation,
NETWORK 1 FINANCIAL SECURITIES, INC.
and
NORTH AMERICAN TRANSFER CO.
<PAGE>
TABLE OF CONTENTS
Section Page
- ------- ----
1. APPOINTMENT OF WARRANT AGENT.......................................2
2. FORM OF WARRANT....................................................2
3. COUNTERSIGNATURE AND REGISTRATION..................................4
4. TRANSFERS AND EXCHANGES............................................4
5. EXERCISE OF WARRANTS; PAYMENT OF WARRANT SOLICITATION
FEE...............................................................5
6. PAYMENT OF TAXES...................................................9
7. MUTILATED OR MISSING WARRANTS......................................9
8. RESERVATION OF COMMON STOCK.......................................10
9. ADJUSTMENTS OF WARRANT PRICE AND NUMBER OF SECURITIES.............11
10. FRACTIONAL INTERESTS..............................................22
11. NOTICES TO WARRANTHOLDERS.........................................22
12. DISPOSITION OF PROCEEDS ON EXERCISE OF WARRANTS...................24
13. REDEMPTION OF WARRANTS............................................24
14. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF WARRANT
AGENT.............................................................25
15. DUTIES OF WARRANT AGENT...........................................26
16. CHANGE OF WARRANT AGENT...........................................29
17. IDENTITY OF TRANSFER AGENT........................................30
18. NOTICES...........................................................30
19. SUPPLEMENTS AND AMENDMENTS........................................31
20. NEW YORK CONTRACT.................................................32
21. BENEFITS OF THIS AGREEMENT........................................32
22. SUCCESSORS........................................................32
i
<PAGE>
WARRANT AGREEMENT, dated as of __________ ___, 1997, among Azurel Ltd.,
a Delaware corporation (the "Company"), Network 1 Financial Securities, Inc.
(the "Underwriter") and North American Stock Transfer Co., as warrant agent (the
"Warrant Agent").
The Company proposes to issue and sell through an initial public
offering (the "IPO") underwritten by the Underwriter, an aggregate of 1,000,000
shares of common stock, par value $.001 per share (the "Common Stock"), and
1,000,000 redeemable Common Stock purchase warrants ("Warrants") and, pursuant
to the Underwriter's over-allotment option (the "Over-allotment Option"), an
additional 150,000 shares of Common Stock and 150,000 Warrants.
In connection with the IPO the Company proposes to sell to the
Underwriter warrants (the "Underwriter's Warrants") to purchase 100,000 shares
of Common Stock and 100,000 Warrants.
The Company has issued and sold warrants to purchase an aggregate of
500,000 shares of Common Stock (the "Bridge Warrants") in private placements of
its securities. The Bridge Warrants automatically will be converted into
Warrants having terms identical to the Warrants being offered in the IPO on the
date the Company's registration statement under the Securities Act of 1933
registering the securities to be offered in the IPO is declared effective by
the Securities and Exchange Commission.
Each Warrant will entitle the holder to purchase one share of Common
Stock.
The Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing so to act, in connection with the
issuance, registration, transfer, exchange and exercise of the Warrants.
THEREFORE, the parties hereto agree as follows:
<PAGE>
Section 1. APPOINTMENT OF WARRANT AGENT. The Company hereby
appoints the Warrant Agent to act as Warrant Agent for the Company in accordance
with the instructions hereinafter set forth in this Agreement, and the Warrant
Agent hereby accepts such appointment.
Upon the execution of this Agreement, certificates representing
1,000,000 Warrants to purchase an aggregate of 1,000,000 shares of Common Stock
(subject to modification and adjustment as provided in Section 9 hereof) shall
be executed by the Company and delivered to the Warrant Agent.
Upon the exercise of the Over-allotment Option, certificates
representing up to 150,000 Warrants to purchase an aggregate of 150,000 shares
of Common Stock (subject to adjustment as provided in Section 9 hereof) shall be
executed by the Company and delivered to the Warrant Agent.
Upon exercise of the Underwriters' Warrant as provided therein,
certificates representing 100,000 Warrants to purchase an aggregate of 100,000
shares of Common Stock (subject to adjustment as provided in Section 9 hereof)
shall be executed by the Company and delivered to the Warrant Agent.
Section 2. FORM OF WARRANT. The text of the Warrants and the form of
election to purchase Common Stock to be printed on the reverse thereof shall be
substantially as set forth in Exhibit A attached hereto (the provisions of which
are hereby incorporated herein). All of the certificates for the Warrants may
have such letters, numbers or other marks of identification or designation and
such legends, summaries or endorsements printed, lithographed or engraved
thereon as the Company may deem appropriate and as are not
2
<PAGE>
inconsistent with the provisions of this Agreement, or as may be required to
comply with any law or with any rule or regulation made pursuant thereto or
with any rule or regulation of any stock exchange on which the Warrants may be
listed, or to conform to usage. Each Warrant shall initially entitle the
registered holder thereof to purchase one share of Common Stock at a purchase
price of ____ dollars and _____ cents ($___) [120% of the IPO price of
the shares of Common Stock issued in the IPO ] (as adjusted as hereinafter
provided, the "Warrant Price"), at any time during the period (the "Exercise
Period") commencing on __________ __ 1998 [the first anniversary of the date of
the Company's prospectus (the "Prospectus") pursuant to which the Warrants are
being sold in the IPO] and expiring at 5:00 p.m. New York time, on __________
__, 2002 [the fifth anniversary of the date of the Prospectus]. The Warrant
Price and the number of shares of Common Stock issuable upon exercise of the
Warrants are subject to adjustment upon the occurrence of certain events, all as
hereinafter provided. The Warrants shall be executed on behalf of the Company by
the manual or facsimile signature of the present or any future Chairman of the
Board or Vice Chairman, Chief Executive Officer, President or Vice President of
the Company, and attested to by the manual or facsimile signature of the present
or any future Secretary or Assistant Secretary of the Company.
Warrants shall be dated as of the date of issuance by the Warrant Agent
either upon initial issuance or upon transfer or exchange.
In the event the aforesaid expiration date of the Warrants falls on a
day that is not a business day, then the Warrants shall expire at 5:00 p.m. New
York time on the next succeeding business day. For purposes hereof, the term
"business day" shall mean any day
3
<PAGE>
other than a Saturday, Sunday or a day on which banking institutions in
New York City, New York, are authorized or obligated by law to be closed.
Section 3. COUNTERSIGNATURE AND REGISTRATION. The Warrant Agent shall
maintain books for the transfer and registration of the Warrants. Upon the
initial issuance of the Warrants, the Warrant Agent shall issue and register the
Warrants in the names of the respective holders thereof. The Warrants shall be
countersigned manually or by facsimile by the Warrant Agent (or by any successor
to the Warrant Agent then acting as warrant agent under this Agreement) and
shall not be valid for any purpose unless so countersigned. The Warrants may,
however, be so countersigned by the Warrant Agent (or by its successor as
Warrant Agent) and be delivered by the Warrant Agent, notwithstanding that the
persons whose manual or facsimile signatures appear thereon as proper officers
of the Company shall have ceased to be such officers at the time of such
countersignature or delivery.
Section 4. TRANSFERS AND EXCHANGES. The Warrant Agent shall transfer,
from time to time, any outstanding Warrants upon the books to be maintained by
the Warrant Agent for that purpose, upon surrender thereof for transfer properly
endorsed or accompanied by appropriate instructions for transfer. Upon any such
transfer, a new Warrant shall be issued to the transferee and the surrendered
Warrant shall be cancelled by the Warrant Agent. Warrants so cancelled shall be
delivered by the Warrant Agent to the Company from time to time upon request.
Warrants may be exchanged at the option of the holder thereof, when surrendered
at the office of the Warrant Agent, for another Warrant, or other Warrants of
different denominations of like tenor and representing in the aggregate the
right to purchase
4
<PAGE>
a like number of shares of Common Stock. No certificates for Warrants shall be
issued except for (i) Warrants initially issued hereunder in accordance with
Section 1 hereof, (ii) Warrants issued upon any transfer or exchange of
Warrants, (iii) Warrants issued in replacement of lost, stolen, destroyed or
mutilated certificates for Warrants pursuant to Section 7 hereof, and (iv) at
the option of the Board of Directors of the Company, Warrants in such form as
may be approved by its Board of Directors, to reflect any adjustment or change
in the Warrant Price or the number of shares of Common Stock purchasable upon
exercise of the Warrants made pursuant to Section 9 hereof.
Section 5. EXERCISE OF WARRANTS; PAYMENT OF WARRANT SOLICITATION FEE.
Subject to the provisions of this Agreement, each registered holder of Warrants
shall have the right, at any time during the Exercise Period, to exercise such
Warrants and purchase the number of fully paid and non-assessable shares of
Common Stock specified in such Warrants upon presentation and surrender of such
Warrants to the Company at the corporate office of the Warrant Agent, with the
exercise form on the reverse thereof duly executed, and upon payment to the
Company of the Warrant Price, determined in accordance with the provisions of
Sections 2, 9 and 10 of this Agreement, for the number of shares of Common Stock
in respect of which such Warrants are then exercised. Payment of such Warrant
Price shall be made in cash or by certified or bank check payable to the
Company. Subject to Section 6 hereof, upon such surrender of Warrants and
payment of the Warrant Price, the Warrant Agent on behalf of the Company shall
cause to be issued and delivered with all reasonable dispatch to or upon the
written order of the registered holder of such Warrants and in such name or
names as such registered holder may designate, a certificate or certificates for
5
<PAGE>
the number of full shares of Common Stock so purchased upon the exercise of such
Warrants. Such certificate or certificates shall be deemed to have been issued
and any person so designated to be named therein shall be deemed to have become
a holder of record of such shares of Common Stock immediately prior to the close
of business on the date of the surrender of such Warrants and payment of the
Warrant Price as aforesaid. The rights of purchase represented by the Warrants
shall be exercisable during the Exercise Period, at the election of the
registered holders thereof, either as an entirety or from time to time for a
portion of the shares specified therein and, in the event that any Warrant is
exercised in respect of less than all of the shares of Common Stock specified
therein at any time prior to the date of expiration of the Warrants, a new
Warrant or Warrants will be issued to the registered holder for the remaining
number of shares of Common Stock specified in the Warrant so surrendered, and
the Warrant Agent is hereby irrevocably authorized to countersign and to deliver
the required new Warrants pursuant to the provisions of this Section and of
Section 3 of this Agreement and the Company, whenever requested by the Warrant
Agent, will supply the Warrant Agent with Warrants duly executed on behalf of
the Company for such purpose. Upon the exercise of any one or more Warrants, the
Warrant Agent shall promptly notify the Company in writing of such fact and of
the number of securities delivered upon such exercise and, subject to the
provisions below, shall cause all payments of an amount, in cash or by check
made payable to the order of the Company, equal to the aggregate Warrant Price
for such Warrants, less any amounts payable to the Underwriters, as provided
below, to be deposited promptly in the Company's bank account. The Company
and Warrant Agent shall
6
<PAGE>
determine, in their sole and absolute discretion, whether a Warrant
certificate has been properly completed for exercise by the registered holder
thereof.
Anything in the foregoing to the contrary notwithstanding, no Warrant
will be exercisable and the Company shall not be obligated to deliver any
securities pursuant to the exercise of any warrant unless at the time of
exercise the Company has filed with the Securities and Exchange Commission a
registration statement under the Securities Act of 1933, as amended (the "Act"),
covering the securities issuable upon exercise of such Warrant and such
registration statement shall have been declared and shall remain effective and
shall be current, and such shares have been registered or qualified or be exempt
under the securities laws of the state or other jurisdiction of residence of the
holder of such Warrant and the exercise of such Warrant in any such state or
other jurisdiction shall not otherwise be unlawful. During the Exercise Period,
the Company shall use its best efforts to have a current registration statement
on file with the Securities and Exchange Commission covering the issuance of
Common Stock underlying the Warrants so as to permit the Company to deliver to
each person exercising a Warrant a prospectus meeting the requirements of
Section 10(a) (3) of the Act and otherwise complying therewith, and will deliver
such prospectus to each such person. During the Exercise Period, the Company
shall also use its best efforts to effect appropriate qualifications of the
Common Stock underlying the Warrants under the laws and regulations of the
states and other jurisdictions in which the Common Stock and Warrants are sold
by the Underwriters in the IPO in order to comply with applicable laws in
connection with the exercise of the Warrants.
7
<PAGE>
(a) If at the time of exercise of any Warrant (i) the market
price of the Common Stock is equal to or greater than the then exercise price of
the Warrant, (ii) the exercise of the Warrant is solicited by the Underwriter at
such time as it is a member of the National Association of Securities Dealers,
Inc. ("NASD") , (iii) the Warrant is not held in a discretionary account, (iv)
disclosure of the compensation arrangement is made in documents provided to the
holders of the Warrants, and (v) the solicitation of the exercise of the Warrant
is not in violation of Rule 10b-6 (as such rule or any successor rule may be in
effect as of such time of exercise) promulgated under the Securities Exchange
Act of 1934, as amended, then the Underwriter shall be entitled to receive from
the Company following exercise of each of the Warrants so exercised a fee of
five percent (5%) of the aggregate exercise price of the Warrants so exercised
(the "Exercise Fee") The procedures for payment of the Exercise Fee are set
forth in Section 5(b) below.
(b) (i) Within five (5) days after the last day of each month
commencing with __________ ___, 1998, the Warrant Agent will notify the
Underwriters of each Warrant certificate which has been properly completed for
exercise by holders of Warrants during the last month. The Warrant Agent will
provide the Underwriter with such information, in connection with the exercise
of each Warrant, as the Underwriter shall reasonably request.
(ii) The Company hereby authorizes and instructs
the Warrant Agent to deliver to the Underwriter the Exercise Fee, if payable,
in respect of each exercise of Warrants, promptly after receipt by the Warrant
Agent from the Company of a check payable to the order of the Underwriter in
the amount of such Exercise Fee. In the event that an Exercise Fee is paid to
the Underwriter with respect to a Warrant which the Company or the
8
<PAGE>
Warrant Agent determines is not properly completed for exercise or in respect
of which the Underwriter is not entitled to an Exercise Fee, the Underwriter
will return such Exercise Fee to the Warrant Agent which shall forthwith
return such fee to the Company.
The Underwriters and the Company may at any time during business hours
examine the records of the Warrant Agent, including its ledger of original
Warrant certificates returned to the Warrant Agent upon exercise of Warrants.
Notwithstanding any provision to the contrary, the provisions of paragraph 5 (a)
and 5 (b) may not be modified, amended or deleted without the prior written
consent of the Underwriter.
Section 6. PAYMENT OF TAXES. The Company will pay any documentary stamp
taxes attributable to the initial issuance of Common Stock issuable upon the
exercise of Warrants; provided, however, that the Company shall not be required
to pay any tax which may be payable in respect of any transfer involved in the
issuance or delivery of any certificates for shares of Common Stock in a name
other than that of the registered holder of Warrants in respect of which such
shares are issued, and in such case neither the Company nor the Warrant Agent
shall be required to issue or deliver any certificate for shares of Common Stock
or any Warrant until the person requesting the same has paid to the Company the
amount of such tax or has established to the Company's satisfaction that such
tax has been paid or that no such tax is required to be paid.
Section 7. MUTILATED OR MISSING WARRANTS. In case any of the Warrants
shall be mutilated, lost, stolen or destroyed, the Company may, in its
discretion, issue and the Warrant Agent shall countersign and deliver in
exchange and substitution for and upon cancellation of the mutilated Warrant, or
in lieu of and in substitution for the Warrant
9
<PAGE>
lost, stolen or destroyed, a new Warrant of like tenor and representing an
equivalent right or interest, but only upon receipt of evidence satisfactory
to the Company and the Warrant Agent of such loss, theft or destruction and,
in case of a lost, stolen or destroyed Warrant, indemnity or bond, if
requested, also satisfactory to them. Applicants for such substitute Warrants
shall also comply with such other reasonable regulations and pay such
reasonable charges as the Company or the Warrant Agent may prescribe.
Section 8. RESERVATION OF COMMON STOCK. There have been reserved, and
the Company shall at all times keep reserved, out of its authorized shares of
Common Stock, a number of shares of Common Stock sufficient to provide for the
exercise of the rights of purchase represented by the Warrants, and the transfer
agent for the shares of Common Stock and every subsequent transfer agent for any
shares of Common Stock issuable upon the exercise of any of the aforesaid rights
of purchase are irrevocably authorized and directed at all times to reserve such
number of authorized shares of Common Stock as shall be required for such
purpose. The Company agrees that all shares of Common Stock issued upon exercise
of the Warrants shall be, at the time of delivery of the certificates for such
shares against payment of the Warrant Price therefor, validly issued, fully paid
and nonassessable and listed on any national securities exchange or included in
any interdealer automated quotation system upon or in which the other shares
of outstanding Common Stock are then listed or included. The Company will keep a
copy of this Agreement on file with the transfer agent for the shares of Common
Stock (which may be the Warrant Agent) and with every subsequent transfer agent
for any shares of Common Stock issuable upon the exercise of the rights of
purchase represented by the Warrants. The Warrant Agent is irrevocably
authorized to
10
<PAGE>
requisition from time to time from such transfer agent stock
certificates required to honor outstanding Warrants. The Company will supply
such transfer agent with duly executed stock certificates for that purpose. All
Warrants surrendered in the exercise of the rights thereby evidenced shall be
cancelled by the Warrant Agent and shall thereafter be delivered to the Company,
and such cancelled Warrants shall constitute sufficient evidence of the number
of shares of Common Stock which have been issued upon the exercise of such
Warrants. Promptly after the date of expiration of the Warrants, the Warrant
Agent shall certify to the Company the total aggregate amount of Warrants then
outstanding, and thereafter no shares of Common Stock shall be subject to
reservation in respect of such Warrants which shall have expired.
Section 9. ADJUSTMENTS OF WARRANT PRICE AND NUMBER OF
SECURITIES.
(a) Computation of Adjusted Price. Except as hereinafter
provided, in case the Company shall, at any time after the date of closing of
the sale of securities pursuant to the IPO (the "Closing Date"), issue or sell
any shares of Common Stock (other than the issuances or sales referred to in
Section 9 (f) hereof), including shares held in the Company's treasury and
shares of Common Stock issued upon the exercise of any options, rights or
warrants to subscribe for shares of Common Stock (other than the issuances or
sales of Common Stock pursuant to rights to subscribe for such Common Stock
distributed pursuant to Section 9(h) hereof) and shares of Common Stock issued
upon the direct or indirect conversion or exchange of securities for shares of
Common Stock, for a consideration per share less than both the "Market Price"
(as defined in Section 9(a)(vi) hereof) per share of Common Stock on the
11
<PAGE>
trading day immediately preceding such issuance or sale and the Warrant Price
in effect immediately prior to such issuance or sale, or without consideration,
then forthwith upon such issuance or sale, the Warrant Price shall (until
another such issuance or sale) be reduced to the price (calculated to the
nearest full cent) determined by multiplying the Warrant Price in effect
immediately prior to such issuance or sale by a fraction, the numerator of
which shall be the sum of (1) the number of shares of Common Stock outstanding
immediately prior to such issuance or sale multiplied by the Warrant Price
immediately prior to such issuance or sale plus (2) the consideration received
by the Company upon such issuance or sale, and the denominator of which shall
be the product of (x) the total number of shares of Common Stock outstanding
immediately after such issuance or sale, multiplied by (y) the Warrant Price
immediately prior to such issuance or sale; provided, however, that in no event
shall the Warrant Price be adjusted pursuant to this computation to an amount
in excess of the Warrant Price in effect immediately prior to such computation,
except in the case of a combination of outstanding shares of Common Stock, as
provided by Section 9(c) hereof.
For the purposes of any computation to be made in accordance with this
Section 9(a), the following provisions shall be applicable:
(i) In case of the issuance or sale of shares
of Common Stock for a consideration part or all of which shall be cash, the
amount of the cash consideration therefor shall be deemed to be the amount of
cash received by the Company for such shares (or, if shares of Common Stock are
offered by the Company for subscription, the subscription price, or, if such
securities shall be sold to underwriters or dealers for public offering without
a subscription offering, the public offering price) before deducting therefrom
any compensation
12
<PAGE>
paid or discount allowed in the sale, underwriting or purchase thereof by
underwriters or dealers or others performing similar services, or any expenses
incurred in connection therewith.
(ii) In case of the issuance or sale (otherwise
than as a dividend or other distribution on any stock of the Company) of
shares of Common Stock for a consideration part or all of which shall be other
than cash, the amount of the consideration therefor other than cash shall be
deemed to be the value of such consideration as determined in good faith by the
Board of Directors of the Company.
(iii) Shares of Common Stock issuable by way of
dividend or other distribution on any stock of the Company shall be deemed to
have been issued immediately after the opening of business on the day following
the record date for the determination of shareholders entitled to receive such
dividend or other distribution and shall be deemed to have been issued without
consideration.
(iv) The reclassification of securities of the
Company other than shares of Common Stock into securities including shares of
Common Stock shall be deemed to involve the issuance of such shares of Common
Stock for a consideration other than cash immediately prior to the close of
business on the date fixed for the determination of security holders entitled
to receive such shares, and the value of the consideration allocable to such
shares of Common Stock shall be determined as provided in subsection (ii) of
this Section 9(a).
(v) The number of shares of Common Stock at
any one time outstanding shall include the aggregate number of shares issued
or issuable upon the exercise
13
<PAGE>
of options, warrants or rights and upon the conversion or exchange of
convertible or exchangeable securities.
(vi) As used herein, the phrase "Market Price"
at any date shall be deemed to be the average of the last reported sale price,
or, in case no such reported sale takes place on such day, the average of the
last reported sale prices for the last three trading days, in either case as
officially reported by the principal securities exchange on which the Common
Stock is listed or admitted to trading or as reported in the Nasdaq Stock
Market, or, if the Common Stock is not listed or admitted to trading on any
national securities exchange or quoted on the Nasdaq Stock Market, the closing
bid quotation as furnished by the National Association of Securities Dealers,
Inc. through Nasdaq or a similar organization if Nasdaq is no longer reporting
such information, or if the Common Stock is not quoted on Nasdaq, as determined
in good faith by resolution of the Board of Directors of the Company, based on
the best information available to it for the day immediately preceding such
issuance or sale, the day of such issuance or sale and the day immediately
after such issuance or sale. If the Common Stock is listed or admitted to
trading on a national securities exchange and also quoted on the Nasdaq Stock
Market, the Market Price shall be determined as hereinabove provided by
reference to the prices reported in the Nasdaq Stock Market; provided that if
the Common Stock is listed or admitted to trading on the New York Stock
Exchange, the Market Price shall be determined as hereinabove provided by
reference to the prices reported by such exchange.
(b) Options, Rights, Warrants and Convertible and Exchangeable
Securities. Except in the case of the Company issuing rights to subscribe for
shares of
14
<PAGE>
Common Stock distributed pursuant to Section 9(h) hereof, if the
Company shall at any time after the Closing Date issue options, rights or
warrants to subscribe for shares of Common Stock, or issue any securities
convertible into or exchangeable for shares of Common Stock, in each case other
than the issuances or sales referred to in section 9 (f) hereof, (i) for a
consideration per share less than the lesser of (a) the Warrant Price in effect
immediately prior to the issuance of such options, rights or warrants, or such
convertible or exchangeable securities, and (b) the Market Price on the trading
day immediately preceding such issuance, or (ii) without consideration, the
Warrant Price in effect immediately prior to the issuance of such options,
rights or warrants, or such convertible or exchangeable securities, as the case
may be, shall be reduced to a price determined by making a computation in
accordance with the provisions of Section 9(a) hereof; provided that:
(i) The aggregate maximum number of shares of
Common Stock, as the case may be, issuable under all the outstanding options,
rights or warrants shall be deemed to be issued and outstanding at the time all
the outstanding options, rights or warrants were issued, and for a consideration
equal to the minimum purchase price per share provided for in the options,
rights or warrants at the time of issuance, plus the consideration (determined
in the same manner as consideration received on the issue or sale of shares in
accordance with the terms of Section 9(a)), if any, received by the Company for
the options, rights or warrants, and if no minimum purchase price is provided
in the options, rights or warrants, then the minimum purchase price shall be
equal to zero; provided, however, that upon the expiration or other termination
of the options, rights or warrants, if any thereof shall not have been
exercised, the number of shares of Common Stock deemed to be issued and
outstanding
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pursuant to this subsection (b) (and for the purposes of subsection
(v) of Section 9(a) hereof) shall be reduced by such number of shares as to
which options, warrants or rights shall have expired or terminated unexercised,
and such number of shares shall no longer be deemed to be issued and
outstanding, and the Warrant Price then in effect shall forthwith be readjusted
and thereafter be the price which it would have been had adjustment been made
on the basis of the issuance only of shares actually issued or issuable upon
the exercise of those options, rights or warrants as to which the exercise
rights shall not have expired or terminated unexercised.
(ii) The aggregate maximum number of shares of
Common Stock issuable upon conversion or exchange of any convertible or
exchangeable securities shall be deemed to be issued and outstanding at the
time of issuance of such securities, and for a consideration equal to the
consideration (determined in the same manner as consideration received on the
issue or sale of shares of Common Stock in accordance with the terms of
Section 9 (a)) received by the Company for such securities, plus the minimum
consideration, if any, receivable by the Company upon the conversion or
exchange thereof; provided, however, that upon the expiration or other
termination of the right to convert or exchange such convertible or
exchangeable securities (whether by reason of redemption or otherwise), the
number of shares deemed to be issued and outstanding pursuant to this
subsection (ii) (and for the purpose of subsection (v) of Section 9(a)
hereof) shall be reduced by such number of shares as to which the conversion
or exchange rights shall have expired or terminated unexercised, and such
number of shares shall no longer be deemed to be issued and outstanding, and
the Warrant Price then in effect shall forthwith be readjusted and thereafter
16
<PAGE>
be the price which it would have been had adjustment been made on the basis of
the issuance only of the shares actually issued or issuable upon the
conversion or exchange of those convertible or exchangeable securities as to
which the conversion or exchange rights shall not have expired or terminated
unexercised. No adjustment will be made pursuant to this subsection (ii) upon
the issuance by the Company of any convertible or exchangeable securities
pursuant to the exercise of any option, right or warrant exercisable therefor,
to the extent that adjustments in respect of such options, rights or warrants
were previously made pursuant to the provisions of subsection (i) of this
subsection 9 (b) .
(iii) If any change shall occur in the price per
share provided for in any of the options, rights or warrants referred to in
subsection (i) of this Section 9 (b), or in the price per share at which the
securities referred to in subsection (ii) of this Section 9(b) are convertible
or exchangeable, or if any such options, rights or warrants are exercised at a
price greater than the minimum purchase price provided for in such options,
rights or warrants, or any such securities are converted or exercised for more
than the minimum consideration receivable by the Company upon such conversion or
exchange, the options, rights or warrants or conversion or exchange rights, as
the case may be, shall be deemed to have expired or terminated on the date when
such price change became effective in respect of shares not theretofore issued
pursuant to the exercise or conversion or exchange thereof, and the Company
shall be deemed to have issued upon such date new options, rights or warrants or
convertible or exchangeable securities at the new price in respect of the number
of shares issuable upon the exercise of such options, rights or warrants or the
conversion or exchange of such convertible or exchangeable securities; provided,
however, that no adjustment shall
17
<PAGE>
be made pursuant to this subsection (iii) with respect to any change in the
price per share provided for in any of the options, rights or warrants referred
to in subsection (b) (i) of this Section 9 (b), or in the price per share at
which the securities referred to in subsection (b) (ii) of this Section 9(b)
are convertible or exchangeable, which change results from the application of
the anti-dilution provisions thereof in connection with an event for which,
subject to subsection (iv) of this Section 9(f), an adjustment to the Warrant
Price and the number of securities issuable upon exercise of the Warrants will
be required to be made pursuant to this Section 9.
(c) Subdivision and Combination. In case the Company shall at
any time after the Closing Date subdivide or combine the outstanding shares of
Common Stock, the Warrant Price shall forthwith be proportionately decreased in
the case of subdivision or increased in the case of combination.
(d) Adjustment in Number of Shares. Upon each adjustment
of the Warrant Price pursuant to the provisions of this Section 9, the number
of shares of Common Stock issuable upon the exercise of the Warrants shall be
adjusted to the nearest full whole number by multiplying a number equal to the
Warrant Price in effect immediately prior to such adjustment by the number of
shares of Common Stock issuable upon exercise of the Warrants immediately prior
to such adjustment and dividing the product so obtained by the adjusted Warrant
Price.
(e) Reclassification, Consolidation, Merger, etc. In case of
any reclassification or change of the outstanding shares of Common Stock (other
than a change in par value to no par value, or from no par value to par value,
or as a result of a subdivision or
18
<PAGE>
combination), or in the case of any consolidation of the Company with, or merger
of the Company into, another corporation (other than a consolidation or merger
which does not result in any reclassification or change of the outstanding
shares of Common Stock, except a change as a result of a subdivision or
combination of such shares or a change in par value, as aforesaid), or in the
case of a sale or conveyance to another corporation of the property of the
Company as an entirety, the Holder shall thereafter have the right to purchase
the kind and number of shares of stock and other securities and property
receivable upon such reclassification, change, consolidation, merger, sale or
conveyance as if the Holder were the owner of the shares of Common Stock
underlying the Warrants immediately prior to any such events at a price equal
to the product of (x) the number of shares issuable upon exercise of the
Warrants and (y) the Warrant Price in effect immediately prior to the record
date for such reclassification, change, consolidation, merger, sale or
conveyance as if such Holder had exercised the Warrant.
(f) No Adjustment of Warrant Price in Certain Cases.
Notwithstanding anything herein to the contrary, no adjustment of the Warrant
Price shall be made:
(i) Upon the issuance or sale of the
Underwriters' Warrant, the shares of Common Stock or Warrants issuable upon the
exercise of the Underwriters' Warrant or the shares of Common Stock issuable
upon exercise of the Warrants underlying the Underwriters' Warrant; or
(ii) Upon the issuance or sale of (A) the
shares of Common Stock or Warrants issued by the Company in the IPO (including
pursuant to the Over-allotment Option) or other shares of Common Stock or
warrants issued by the Company upon
19
<PAGE>
consummation of the IPO or, (B) the shares of Common Stock (or other
securities) issuable upon exercise of Warrants; or
(iii) Upon (i) the issuance of options pursuant to
the Company's stock option plan in effect on the date hereof or as hereafter
amended in accordance with the terms thereof or any other employee or executive
stock option plan approved by stockholders of the Company or the sale by the
Company of any shares of Common Stock pursuant to the exercise of any such
options, or (ii) the sale by the Company of any shares of Common Stock pursuant
to the exercise of any options or warrants issued and outstanding on the date of
closing of the sale of Common Stock and Warrants pursuant to the IPO or (iii)
the issuance or sale by the Company of any shares of Common Stock in connection
with any merger, acquisition or other business combination, the terms of which
have been approved in writing by the Underwriter; or
(iv) If the amount of said adjustment shall be
less than five cents (5(cent)) per share of Common Stock.
(g) Dividends and Other Distributions with Respect to
Outstanding Securities. In the event that the Company shall at any time after
the Closing Date and prior to the exercise or expiration of all Warrants declare
a dividend (other than a dividend consisting solely of shares of Common Stock or
a cash dividend or distribution payable out of current or retained earnings) or
otherwise distribute to the holders of Common Stock any monies, assets,
property, rights, evidences of indebtedness, securities (other than such a cash
dividend or distribution or dividend consisting solely of shares of Common
Stock), whether issued by the Company or by another person or entity, or any
other thing of value, the Holders
20
<PAGE>
of the unexercised Warrants shall thereafter be entitled, in addition to the
shares of Common Stock or other securities receivable upon the exercise
thereof, to receive, upon the exercise of such Warrants, the same monies,
property, assets, rights, evidences of indebtedness, securities or any other
thing of value that they would have been entitled to receive at the time of
such dividend or distribution as if the Holders were the owners of the shares
of Common Stock underlying such Warrants. At the time of any such dividend or
distribution, the Company shall make appropriate reserves to ensure the timely
performance of the provisions of this Section 9(g).
(h) Subscription Rights for Shares of Common Stock or
Other Securities. In case the Company or an affiliate of the Company shall at
anytime after the date hereof and prior to the exercise of all the Warrants
issue any rights to subscribe for shares of Common Stock or any other
securities of the Company or of such affiliate to all the holders of Common
Stock, the Holders of the unexercised Warrants shall be entitled, in addition
to the shares of Common Stock or other securities receivable upon the exercise
of the Warrants, to receive such rights at the time such rights are
distributed to the other stockholders of the Company but only to the extent of
the number of shares of Common Stock, if any, for which the Warrants remain
exercisable.
(i) Notice in Event of Dissolution. In case of the
dissolution, liquidation or winding-up of the Company, all rights under the
Warrants shall terminate on a date fixed by the Company, such date to be no
earlier than ten (10) days prior to the effectiveness of such dissolution,
liquidation or winding-up and not later than five (5) days prior to such
effectiveness. Notice of such termination of purchase rights shall be given to
each registered
21
<PAGE>
holder of the Warrants, as the same shall appear on the books of
the Company maintained by the Warrant Agent, by registered mail at least thirty
(30) days prior to such termination date.
(j) Computations. The Company may retain a firm of independent
public accountants (who may be any such firm regularly employed by the Company)
to make any computation required under this Section 9, and any certificate
setting forth such computation signed by such firm shall be conclusive evidence
of the correctness of any computation made under this Section 9.
Section 10. FRACTIONAL INTERESTS. The Warrants may only be
exercised to purchase full shares of Common Stock and the Company shall not be
required to issue fractions of shares of Common Stock on the exercise of
Warrants. However, if a Warrant holder exercises all Warrants then owned of
record by him and such exercise would result in the issuance of a
fractional share, the Company will pay to such Warrantholder, in lieu of the
issuance of any fractional share otherwise issuable, an amount of cash based
on the Market Price on the last trading day prior to the exercise date.
Section 11. NOTICES TO WARRANTHOLDERS.
(a) Upon any adjustment of the Warrant Price and the number of
shares of Common Stock issuable upon exercise of a Warrant, then and in each
such case, the Company shall give written notice thereof to the Warrant Agent,
which notice shall state the Warrant Price resulting from such adjustment and
the increase or decrease, if any, in the number of shares purchasable at such
price upon the exercise of a Warrant, setting forth in reasonable detail the
method of calculation and the facts upon which such calculation is based. The
Company shall also mail such notice to the holders of the Warrants at their
respective
22
<PAGE>
addresses appearing in the Warrant register. Failure to give or mail
such notice, or any defect therein, shall not affect the validity of the
adjustments.
(b) In case at any time after the Closing Date:
(i) the Company shall pay dividends payable in
stock upon its Common Stock or make any distribution (other than regular cash
dividends) to the holders of Common Stock; or
(ii) the Company shall offer for subscription
pro rata to all of the holders of Common Stock any additional shares of stock
of any class or other rights; or
(iii) there shall be any capital reorganization
or reclassification of the capital stock of the Company, or consolidation or
merger of the Company with, or sale of substantially all of its assets to
another corporation; or
(iv) there shall be a voluntary or involuntary
dissolution, liquidation or winding-up of the Company; then in any one or more
of such cases, the Company shall give written notice to the Warrant Agent and
the holders of the Warrants in the manner set forth in Section 11(a) of the date
on which (A) a record shall be taken for such dividend, distribution or
subscription rights, or (B) such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up shall take
place, as the case may be. Such notice shall also specify the date as of which
the holders of Common Stock of record shall participate in such dividend,
distribution or subscription rights, or shall be entitled to exchange their
Common Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding-up, as the case may be. Such notice shall be given at
least ten (10) days prior to the action in question and
23
<PAGE>
not less than ten (10) days prior to the record date in respect thereof.
Failure to give such notice, or any defect therein, shall not affect the
legality or validity of any of the matters set forth in this Section 11(b).
(c) The Company shall cause copies of all financial statements
and reports, proxy statements and other documents that are sent to its
stockholders to be sent by an identical class of mail, postage prepaid, on the
date of mailing to such stockholders, to each registered holder of Warrants at
his address appearing in the Warrant register as of the record date for the
determination of the stockholders entitled to such documents.
Section 12. DISPOSITION OF PROCEEDS ON EXERCISE OF WARRANTS.
(a) The Warrant Agent shall promptly forward to the Company
all monies received by the Warrant Agent for the purchase of shares of Common
Stock through the exercise of these Warrants.
(b) The Warrant Agent shall keep copies of this Agreement
available for inspection by holders of Warrants during normal business hours.
Section 13. REDEMPTION OF WARRANTS. The Warrants are redeemable by the
Company commencing on the first anniversary the date of the Prospectus, in whole
or in part, on not less than thirty (30) days' prior written notice at a
redemption price of $.10 per Warrant, provided the average closing bid quotation
of the Common Stock as reported on the Nasdaq Stock Market, if traded thereon,
or if not traded thereon, the average closing sale price if listed on a national
securities exchange (or other reporting system that provides last sale prices),
has been in excess of 150% of the Exercise Price for a period of 20 trading days
in any 30 trading day period ending not more than 15 days prior to the date on
which the Company
24
<PAGE>
gives notice of redemption. Any redemption in part shall be made
pro rata to all Warrant holders. The redemption notice shall be mailed to
the holders of the Warrants at their respective addresses appearing in the
Warrant register. Any such notice mailed in the manner provided herein shall be
conclusively presumed to have been duly given in accordance with this Agreement
whether or not the registered holder receives such notice. No failure to mail
such notice nor any defect therein or in the mailing thereof shall affect the
validity of the proceedings for such redemption except as to a registered holder
of a Warrant (i) to whom notice was not mailed or (ii) whose notice was
defective. An affidavit of the Warrant Agent or the Secretary or
Assistant Secretary of the Company that notice of redemption has been mailed
shall, in the absence of fraud, be prima facie evidence of the facts stated
therein. Holders of the Warrants will have exercise rights until the close of
business on the day immediately preceding the date fixed for redemption.
Section 14. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF WARRANT AGENT.
Any corporation or company which may succeed to the corporate trust business of
the Warrant Agent by any merger or consolidation or otherwise shall be the
successor to the Warrant Agent hereunder without the execution or filing of any
paper or any further act on the part of any of the parties hereto; provided,
that such corporation would be eligible for appointment as a successor Warrant
Agent under the provisions of Section 16 of this Agreement. In case at the time
such successor to the Warrant Agent shall succeed to the agency created by this
Agreement any of the Warrants shall have been countersigned but not delivered,
any such successor to the Warrant Agent may adopt the countersignature of the
original Warrant Agent and deliver such Warrants so countersigned.
25
<PAGE>
In case at any time the name of the Warrant Agent shall be changed and
at such time any of the Warrants shall have been countersigned but not
delivered, the Warrant Agent may adopt the countersignature under its prior name
and deliver Warrants so countersigned. In all such cases such Warrants shall
have the full force provided in the Warrants and in this Agreement.
Section 15. DUTIES OF WARRANT AGENT. The Warrant Agent undertakes
the duties and obligations imposed by this Agreement upon the following terms
and conditions, by all of which the Company and the holders of Warrants, by
their acceptance thereof, shall be bound:
(a) The statements of fact and recitals contained herein and
in the Warrants shall be taken as statements of the Company, and the Warrant
Agent assumes no responsibility for the correctness of any of the same except as
such describe the Warrant Agent or action taken or to be taken by it. The
Warrant Agent assumes no responsibility with respect to the distribution of the
Warrants except as herein expressly provided.
(b) The Warrant Agent shall not be responsible for any failure
of the Company to comply with any of the covenants in this Agreement or in the
Warrants to be complied with by the Company.
(c) The Warrant Agent may consult at any time with counsel
satisfactory to it (who may be counsel for the Company) and the Warrant Agent
shall incur no liability or responsibility to the Company or to any holder of
any Warrant in respect of any action taken, suffered or omitted by it hereunder
in good faith and in accordance with the opinion or the advice of such counsel.
26
<PAGE>
(d) The Warrant Agent shall incur no liability or
responsibility to the Company or to any holder of any Warrant for any action
taken in reliance on any notice, resolution, waiver, consent, order, certificate
or other instrument believed by it to be genuine and to have been signed, sent
or presented by the proper party or parties.
(e) The Company agrees to pay to the Warrant Agent reasonable
compensation for all services rendered by the Warrant Agent in the execution of
this Agreement, to reimburse the Warrant Agent for all expenses, taxes and
governmental charges and other charges incurred by the Warrant Agent in the
execution of this Agreement and to indemnify the Warrant Agent and save it
harmless against any and all liabilities, including judgments, costs and
reasonable counsel fees, for anything done or omitted by the Warrant Agent in
the execution of this Agreement except as a result of the Warrant Agent's
negligence, willful misconduct or bad faith.
(f) The Warrant Agent shall be under no obligation to
institute any action, suit or legal proceeding or to take any other action
likely to involve expenses unless the Company or one or more registered holders
of Warrants shall furnish the Warrant Agent with reasonable security and
indemnity for any costs and expenses which may be incurred, but this provision
shall not affect the power of the Warrant Agent to take such action as the
Warrant Agent may consider proper, whether with or without any such security or
indemnity. All rights of action under this Agreement or under any of the
Warrants may be enforced by the Warrant Agent without the possession of any of
the Warrants or the production thereof at any trial or other proceeding. Any
such action, suit or proceeding instituted by the Warrant Agent shall be brought
in its name as Warrant Agent, and any recovery of judgment shall be for the
27
<PAGE>
ratable benefit of the registered holders of the Warrants, as their respective
rights and interests may appear.
(g) The Warrant Agent and any stockholder, director, officer,
partner or employee of the Warrant Agent may buy, sell or deal in any of the
Warrants or other securities of the Company or become pecuniarily interested in
any transaction in which the Company may be interested, or contract with or lend
money to or otherwise act as fully and freely as though it were not the Warrant
Agent under this Agreement. Nothing herein shall preclude the Warrant Agent
from acting in any other capacity for the Company or for any other legal
entity.
(h) The Warrant Agent shall act hereunder solely as agent and
its duties shall be determined solely by the provisions hereof.
(i) The Warrant Agent may execute and exercise any of the
rights or powers hereby vested in it or perform any duty hereunder either itself
or by or through its attorneys, agents or employees, and the Warrant Agent shall
not be answerable or accountable for any such attorneys, agents or employees or
for any loss to the Company resulting from such neglect or misconduct, provided
reasonable care had been exercised in the selection and continued employment
thereof.
(j) Any request, direction, election, order or demand of the
Company shall be sufficiently evidenced by an instrument signed in the name of
the Company by its President or a Vice President or its Secretary or an
Assistant Secretary or its Treasurer or an Assistant Treasurer (unless other
evidence in respect thereof be herein specifically prescribed); and any
28
<PAGE>
resolution of the Board of Directors may be evidenced to the Warrant Agent by a
copy thereof certified by the Secretary or an Assistant Secretary of the
Company.
Section 16. CHANGE OF WARRANT AGENT. The Warrant Agent may
resign and be discharged from its duties under this Agreement by giving to the
Company notice in writing, and to the holders of the Warrants notice by mailing
such notice to the holders at their respective addresses appearing on the
Warrant register, of such resignation, specifying a date when such resignation
shall take effect. The Warrant Agent may be removed by like notice to the
Warrant Agent from the Company and the like mailing of notice to the holders
of the Warrants. If the Warrant Agent shall resign or be removed or shall
otherwise become incapable of action, the Company shall appoint a successor to
the Warrant Agent. If the Company shall fail to make such appointment within a
period of thirty (30) days after such removal or after it has been notified in
writing of such resignation or incapacity by the resigning or incapacitated
Warrant Agent or after the Company has received such notice from a registered
holder of a Warrant (who shall, with such notice, submit his Warrant for
inspection by the Company), then the registered holder of any Warrant may
apply to any court of competent jurisdiction for the appointment of a successor
to the Warrant Agent. Any successor Warrant Agent, whether appointed by the
Company or by such a court, shall be a bank or trust company, in good standing,
incorporated under New York or federal law. After appointment, the successor
Warrant Agent shall be vested with the same powers, rights, duties and
responsibility as if it had been originally named as Warrant Agent without
further act or deed and the former Warrant Agent shall deliver and transfer to
the successor Warrant Agent all canceled Warrants, records and property at the
time held by it hereunder, and execute and
29
<PAGE>
deliver any further assurance or conveyance necessary for this purpose. Failure
to file or mail any notice provided for in this Section, however, or any defect
therein, shall not affect the validity of the resignation or removal of the
Warrant Agent or the appointment of the successor Warrant Agent, as the case
may be.
Section 17. IDENTITY OF TRANSFER AGENT. Forthwith upon the
appointment of any transfer agent (other than North American Transfer Co.) for
the shares of Common Stock or of any subsequent transfer agent for the shares
of Common Stock, the Company will file with the Warrant Agent a statement
setting forth the name and address of such transfer agent.
Section 18. NOTICES. Any notice pursuant to this Agreement to be given
by the Warrant Agent or the registered holder of any Warrant to the Company,
shall be sufficiently given if sent by first-class mail, postage prepaid,
addressed (until another is filed in writing by the Company with the Warrant
Agent) as follows:
AZUREL, LTD.
509 Madison Avenue
New York, New York 10022
Attention: Gerard Semhon, Chief Executive Officer
and a copy thereof to:
Gersten, Kaplowitz, Fredericks & Curtin, LLP
101 East 52nd Street
New York, New York 10022
Attention: Jay M. Kaplowitz, Esq.
Any notice pursuant to this Agreement to be given by the Company or the
registered holder of any Warrant to the Warrant Agent shall be sufficiently
given if sent by first-class
30
<PAGE>
mail, postage prepaid, addressed (until another address is filed in writing by
the Warrant Agent with the Company) as follows:
North American Transfer Co.
147 W. Merrick Road
Freeport, New York 11520
Attention: Mildred Rostolder
Any notice pursuant to this Agreement to be given by the Warrant Agent
or the Company to the Underwriter shall be sufficiently given if sent by
first-class mail, postage prepaid, addressed (until another address is filed
in writing with the Warrant Agent) as follows:
Network 1 Financial Securities, Inc.
One Financial Galleria
2 Bridge Avenue
Red Bank, New Jersey 07701
Attn: Virginia Sourlis, Esq.
and a copy thereof to:
Snow Becker Krauss, P.C.
605 Third Avenue
New York, New York 10158-0125
Attention: Jack Becker, Esq.
Section 19. SUPPLEMENTS AND AMENDMENTS. The Company and the Warrant
Agent may from time to time supplement or amend this Agreement in order to cure
any ambiguity or to correct or supplement any provision contained herein which
may be defective or inconsistent with any other provision herein, or to make any
other provisions in regard to matters or questions arising hereunder which the
Company and the Warrant Agent may deem necessary or desirable and which shall
not be inconsistent with the provisions of the Warrants and which shall not
materially adversely affect the interest of the holders of
31
<PAGE>
Warrants; and in addition the Company and the Warrant Agent may modify,
supplement or alter this Agreement with the consent in writing of the
registered holders of the Warrants representing not less than a majority of the
Warrants then outstanding.
Section 20. NEW YORK CONTRACT. This Agreement and each Warrant
issued hereunder shall be deemed to be a contract made under the laws of the
State of New York and shall be construed in accordance with the laws of New
York without regard to the conflicts of law principles thereof.
Section 21. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement
shall be construed to give to any person or corporation other than the Company,
the Warrant Agent and the registered holders of the Warrants any legal or
equitable right, remedy or claim under this Agreement; but this Agreement shall
be for the sole and exclusive benefit of the Company, the Warrant Agent and the
registered holders of the Warrants.
Section 22. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Warrant Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
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<PAGE>
IN WITNESS WHEREOF, the parties have entered into this Agreement on the
date first above written.
AZUREL LTD.
By: /s/ Gerard Semhon
Name: Gerard Semhon
Title: Chief Executive Officer
NORTH AMERICAN TRANSFER CO.
By: ________________________________
Name:
Title:
NETWORK 1 FINANCIAL
SECURITIES, INC.
By: ________________________________
Name:
Title:
33
<PAGE>
No. W_______________________ VOID AFTER_____________, 2002
WARRANTS
REDEEMABLE WARRANT CERTIFICATE TO
PURCHASE ONE SHARE OF COMMON STOCK
AZUREL LTD.
CUSIP [ ]
THIS CERTIFIES THAT, FOR VALUE RECEIVED
or registered assigns (the "Registered Holder") is the owner of the
number of Redeemable Warrants (the "Warrants") specified above. Each Warrant
initially entitles the Registered Holder to purchase, subject to the terms and
conditions set forth in this Certificate and the Warrant Agreement (as
hereinafter defined), one fully paid and nonassessable share of Common Stock,
par value $.001 per share (the "Common Stock"), of Azurel Ltd., a Delaware
corporation (the "Company"), at any time from _________ __, 1998 (the "Initial
Warrant Exercise Date") , and prior to the Expiration Date (as hereinafter
defined) upon the presentation and surrender of this Warrant Certificate with
the Exercise Form on the reverse hereof duly executed, at the corporate office
of North American Transfer Co., 147 Merrick Road, Freeport, New York 11520, as
Warrant Agent, or its successor (the "Warrant Agent"), accompanied by payment of
$____, subject to adjustment (the "Exercise Price"), in lawful money of the
United States of America in cash or by certified or bank check made payable to
the Company.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement, dated as of ___________ ___, 1997 (the "Warrant
Agreement"), among the Company, Network 1 Financial Securities, Inc. (the
"Underwriter") and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Exercise Price and the number of shares of Common Stock subject
to purchase upon the exercise of each Warrant represented hereby are subject to
modification or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional shares will be issued. In the case of the
exercise of less than all the Warrants represented hereby, the Company shall
cancel this Warrant Certificate upon the surrender hereof
<PAGE>
and shall execute and deliver a new Warrant Certificate or Warrant Certificates
of like tenor, which the Warrant Agent shall countersign, for the balance of
such Warrants.
The term "Expiration Date" shall mean 5:00 p.m. (New York time)
on_________ ___, 2002 [the date which is the fifth anniversary of the Initial
Warrant Exercise Date]; provided, that if such date is not a business day, it
shall mean 5:00 p.m., New York City time, on the next following business day.
For purposes hereof, the term "business day" shall mean any day other than a
Saturday, Sunday or a day on which banking institutions in New York City, New
York, are authorized or obligated by law to be closed.
The Company shall not be obligated to deliver any securities pursuant
to the exercise of the Warrants represented hereby unless at the time of
exercise the Company has filed with the Securities and Exchange Commission a
registration statement under the Securities Act of 1933, as amended (the "Act"),
covering the securities issuable upon exercise of the Warrants represented
hereby and such registration statement has been declared and shall remain
effective and shall be current, and such securities have been registered or
qualified or be exempt under the securities laws of the state or other
jurisdiction of residence of the Registered Holder and the exercise of the
Warrants represented hereby in any such state or other jurisdiction shall not
otherwise be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by
the Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon the presentment and payment of any tax or other
charge imposed in connection therewith or incident thereto for registration of
transfer of this Warrant Certificate at such office, a new Warrant Certificate
or Warrant Certificates representing an equal aggregate number of Warrants will
be issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder, as such, shall not be entitled to any rights of a stockholder of the
Company, including, without limitation, the right to vote or to receive
dividends or other distributions, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided in the Warrant
Agreement.
Subject to the provisions of the Warrant Agreement, this Warrant may be
redeemed at the option of the Company, at a redemption price of $.10 per
Warrant, at any time commencing __________ ___, 1998 [the first anniversary of
the date of the Prospectus], provided that the average closing bid quotation of
the Common Stock as reported on The Nasdaq Stock Market, if traded thereon, or
if not traded thereon, the average closing sale price if listed on national
exchange (or other reporting system that provides last sale prices), shall have
for a period of 20 trading days in any 30 day period ending nor more than 15
days prior to the date on which the Company gives the Notice of Redemption (as
defined below) exceeded 150% of the Exercise Price. Notice of redemption (the
"Notice of Redemption") shall be given by the Company no less than thirty days
2
<PAGE>
before the date fixed for redemption, all as provided in the Warrant
Agreement. On and after the date fixed for redemption, the Registered Holder
shall have no right with respect to this Warrant except to receive the $0.10
per Warrant upon surrender of this Certificate.
Under certain circumstances described in the Warrant Agreement, the
Underwriter shall be entitled to receive as a solicitation fee an aggregate of
five percent (5%) of the Exercise Price of the Warrants represented hereby.
Prior to due presentment for registration of transfer hereof, the
Company and the Warrant Agent may deem and treat the Registered Holder as the
absolute owner hereof and of each Warrant represented hereby (notwithstanding
any notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary, except as provided in the
Warrant Agreement.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New York without regard to the
conflicts of law principles thereof.
This Warrant Certificate is not valid unless countersigned by the
Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
Dated __________ ___, 1997
SEAL AZUREL LTD.
By: /s/ Gerard Semhon
Gerard Semhon
Chief Executive Officer
By: ____________________________________
Van Christakos
Secretary
COUNTERSIGNED:
NORTH AMERICAN TRANSFER CO.,
as Warrant Agent
By: __________________________________________________
Authorized Officer
3
<PAGE>
EXERCISE FORM
To Be Executed by the Registered Holder
in order to Exercise Warrant
The undersigned Registered Holder hereby irrevocably elects to exercise
_________ Warrants represented by this Warrant Certificate, and to purchase the
securities issuable upon the exercise of such Warrants, and requests that
certificates for such securities shall be issued in name of
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
--------------------------
--------------------------
--------------------------
(please print or type name and address)
and be delivered to
--------------------------
--------------------------
--------------------------
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
IMPORTANT: PLEASE COMPLETE THE FOLLOWING:
1. If the exercise of this Warrant was solicited by Network 1
Financial Securities, Inc., please check the following box. [ ]
2. The exercise of this warrant was solicited by
---------------------------------------------------------------
4
<PAGE>
3. If the exercise of this Warrant was not solicited, please check
the following box. [ ]
Dated: _____________________________ X__________________________________
______________________________________
______________________________________
Address
______________________________________
Social Security or Taxpayer
Identification Number
______________________________________
Signature Guaranteed
5
<PAGE>
ASSIGNMENT
To be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, ____________________________, hereby sells, assigns and
transfers unto
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
-------------------------
-------------------------
-------------------------
(please print or type name and address)
________________________ of the Warrants represented by this Warrant
Certificate, and hereby irrevocably constitutes and appoints
______________________________________ as its/his/her attorney-in-fact to
transfer this Warrant Certificate on the books of the Company, with full power
of substitution in the premises.
Dated: ______________________ x_______________________________
Signature Guaranteed
THE SIGNATURE TO THE ASSIGNMENT OR THE EXERCISE FORM MUST CORRESPOND TO THE NAME
AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER AND MUST BE
GUARANTEED BY A BANK, BROKER, DEALER, CREDIT UNION, SAVINGS ASSOCIATION OR OTHER
ENTITY WHICH IS A MEMBER IN GOOD STANDING OF THE SECURITIES TRANSFER AGENTS
MEDALLION PROGRAM.
6
AZUREL LTD.
AND
NETWORK 1 FINANCIAL SECURITIES, INC.
UNDERWRITER'S
WARRANT AGREEMENT
<PAGE>
UNDERWRITER'S WARRANT AGREEMENT dated as of _____________, 1997 by
and between AZUREL LTD. (the "Company") and NETWORK 1 FINANCIAL SECURITIES,
INC. ("Underwriter").
Preliminary Statement
The Underwriter has agreed, pursuant to an underwriting
agreement (the "Underwriting Agreement") dated ______________, 1997, between the
Underwriter and the Company, to act as the underwriter in connection with the
Company's proposed initial public offering of 1,000,000 shares of the Company's
common stock, par value $0.001 per share (the "Common Stock") and 1,000,000
Redeemable Common Stock Purchase Warrants (the "Warrants"), at an initial public
offering price of $_____per share of Common Stock and $_____ per Warrant (the
"Initial Public Offering").
The Company proposes to issue to the Underwriter at the closing of
the Initial Public Offering as part of the Underwriter's compensation in
connection therewith, warrants (the "Underwriter's Warrants") to purchase an
aggregate of 100,000 shares of Common Stock and/or 100,000 Warrants. The
Warrants being offered in the Initial Public Offering and the Warrants
purchasable upon exercise of the Underwriter's Warrants will be identical in all
respects and will be issued pursuant to, and governed by, the provisions of a
Warrant Agreement among the Company, the Underwriter and North American Transfer
Co., as Warrant Agent (the "Warrant Agreement").
NOW, THEREFORE, in consideration of the premises, the payment by
the Underwriter to the Company of Ten Dollars ($10.00), the agreements herein
set forth and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree as follows:
<PAGE>
1. Grant. The Holders (as defined in Section 3 below) are
hereby granted the right to purchase, at any time from __________, 1998 until
5:00 p.m., New York time, on _________, 2002 an aggregate of 150,000 shares of
Common Stock and/or 150,000 Warrants, at an initial purchase price of $_____per
share of Common Stock (subject to adjustment as provided in Section 6 hereof)
and $_____ per Warrant (150% of the Initial Public Offering price of the Common
Stock and Warrants, respectively), subject to the terms and conditions of this
Agreement.
2. Warrant Certificates. The warrant certificates (the
"Underwriter's Warrant Certificates") to be delivered pursuant to this Agreement
shall be in the form set forth in Exhibit A attached hereto and made a part
hereof, with such appropriate insertions, omissions, substitutions and other
variations as required or permitted by this Agreement.
3. Exercise of Underwriter's Warrants. The Underwriter's
Warrants are exercisable during the term set forth in Section 1 hereof and the
Purchase Price (as hereinafter defined) is payable by certified or cashier's
check or money order payable in lawful money of the United States. Upon
surrender of an Underwriter's Warrant Certificate with the annexed Form of
Election to Purchase duly executed, together with payment of the Purchase Price
for the shares of Common Stock or Warrants issuable upon exercise thereof (and
such other amounts, if any, arising pursuant to Section 4 hereof) at the
Company's principal office in New York (presently located at 509 Madison Avenue,
New York, New York 10022), the registered holder of an Underwriter's Warrant
Certificate ("Holders" or "Holders") shall be entitled to receive a certificate
or certificates for the shares of Common Stock or Warrants so purchased. The
purchase rights represented by each Underwriter's Warrant Certificate are
exercisable at the option of the Holders thereof, in whole or in part, as to
the whole number of shares of Common Stock or Warrants purchasable therewith
(but
2
<PAGE>
not as to fractions thereof). In the case of the purchase of less than all the
shares of Common Stock or Warrants purchasable upon the exercise of the
Underwriter's Warrants represented by an Underwriter's Warrant Certificate, the
Company shall cancel the Underwriter's Warrant Certificate represented thereby
upon the surrender thereof and shall execute and deliver a new Underwriter's
Warrant Certificate of like tenor for the number of Underwriter's Warrants
which have not been exercised.
4. Issuance of Certificates. Upon the exercise of the
Underwriter's Warrants and payment of the Purchase Price therefor, the issuance
of certificates representing the shares of Common Stock or Warrants issuable
upon exercise thereof, shall be made forthwith (and in any event within five (5)
business days thereafter) without further charge to the Holder thereof, and such
certificates shall (subject to the provisions of Sections 5 and 7 hereof) be
issued in the name of, or in such names as may be directed by, the Holder
thereof; provided, however, that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the issuance and
delivery of any such certificates in a name other than that of the Holder, and
the Company shall not be required to issue or deliver such certificates unless
or until the person or persons requesting the issuance thereof shall have paid
to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid. The Underwriter's
Warrant Certificates and the certificates representing the shares of Common
Stock or Warrants (and such other securities, property or rights as may be
represented by certificates) issuable upon exercise thereof shall be executed on
behalf of the Company by the manual or facsimile signature of the then Chairman
or Vice Chairman of the Board of Directors, Chief Executive Officer, President
or Vice President of the Company under its corporate seal reproduced thereon,
attested to
3
<PAGE>
by the manual or facsimile signature of the then Secretary or
Assistant Secretary or Treasurer or Assistant Treasurer of the Company.
Underwriter's Warrant Certificates shall be dated the date of issuance thereof
by the Company upon initial issuance, transfer or exchange, or in lieu of
mutilated, lost, stolen or destroyed Underwriter's Warrant Certificates.
5. Restriction On Transfer of Underwriter's Warrants. The
Holder of an Underwriter's Warrant Certificate (and its Permitted Transferees,
as defined below), by its acceptance thereof, covenants and agrees that the
Underwriter's Warrants are being acquired as an investment and not with a view
to the distribution thereof; that the Underwriter's Warrants may be sold,
transferred, assigned, hypothecated or otherwise disposed of, in whole or in
part, to any person (a "Permitted Transferee"), provided such transfer,
assignment, hypothecation or other disposition is made in accordance with the
provisions of the Securities Act of 1933, as amended (the "Act"); and provided,
further, that until ____________, 1998 [one year following the effective date of
the Initial Public Offering] only officers and partners of the Underwriter, or
any selling group member in the Initial Public Offering and their respective
officers and partners, shall be Permitted Transferees.
6. Purchase Price.
The initial purchase price of the Underwriter's Warrants shall
be $________ per share of Common Stock (the "Common Stock Purchase Price") and
$_______ per Warrant. The Common Stock Purchase Price shall be subject to
adjustment in accordance with the provisions of Section 9 of the Warrant
Agreement, which provisions are hereby incorporated by reference herein and
made a part hereof.
4
<PAGE>
7. Registration Rights.
(a) Registration Under the Securities Act of 1933. The
Underwriter's Warrants have not been registered under the Act. The Underwriter's
Warrant Certificates shall bear the following legend:
The securities represented by this certificate have not been
registered under the Securities Act of 1933 (the "Act"), and
may not be offered for sale or sold except pursuant to (i) an
effective registration statement under the Act, or (ii) an
opinion of counsel, if such opinion shall be reasonably
satisfactory to counsel to the issuer, that an exemption from
registration under such Act is available.
(b) Demand Registration. (i) At any time commencing one (1)
year and expiring five (5) years after the effective date of the Company's
Registration Statement relating to the Initial Public Offering (the "Effective
Date"), the Holders of a majority (as hereinafter defined) of the shares of
Common Stock purchased and purchasable upon exercise of the Underwriter's
Warrants and the Warrants purchasable therewith shall have the right,
exercisable by written notice to the Company, to have the Company prepare and
file with the Securities and Exchange Commission (the "Commission"), solely on
one (1) occasion, a registration statement on Form SB-2 (or other appropriate
form), and such other documents, including a prospectus, as may be necessary in
the opinion of both counsel for the Company and counsel for the Holders, in
order to comply with the provisions of the Securities Act, so as to permit a
public offering and sale for a period of nine (9) months of the shares of Common
Stock and Warrants purchased or purchasable by such Holders and any other
Holders of the Underwriter's Warrants upon exercise of the Underwriter's
Warrants and the Warrants purchasable therewith ( such shares of Common Stock
and Warrants being hereinafter referred to as the "Registrable Securities").
The Holders of the Underwriter's Warrants may demand registration without
exercising the Underwriter's Warrants, and are never required to exercise same.
5
<PAGE>
The Company covenants and agrees to give written notice of any registration
request under this Section 7(b) to all other registered Holders of the
Underwriter's Warrants and the Registrable Securities within ten (10) days
from the date of the receipt of any such registration request and upon the
written request of any Holder within fifteen (15) days after receipt of such
notice to include in such registration statement, the Registrable Securities of
such Holder. As used herein, the term "Majority" in reference to the Holders
of the Underwriter's Warrants shall mean in excess of fifty percent (50%) of
the shares of Common Stock issued or issuable upon exercise of the
Underwriter's Warrants and the Warrants purchasable therewith that (i) are not
held by the Company, an affiliate, officer, creditor, employee or agent
thereof or any of their respective affiliates, members of their family, persons
acting as nominees or in conjunction therewith, or (ii) have not been resold
to the public pursuant to a registration statement filed with the Commission
under the Act.
(c) Piggyback Registration. If, at any time within the period
commencing one (1) year and expiring five (5) years after the Effective Date,
the Company should file a registration statement with the Commission under the
Securities Act (other than in connection with a merger or other business
combination transaction or pursuant to Form S-8) it will give written notice by
registered mail, at least thirty (30) calendar days prior to the filing of each
such registration statement, to the Underwriter and to all other Holders of the
Underwriter's Warrants and the shares of Common Stock and Warrants purchased or
purchasable upon exercise thereof of its intention to do so. If the Holders of
the Registrable Securities notify the Company within twenty (20) calendar days
after receipt of any such notice of its or their desire to include any
Registrable Securities in such proposed registration statement, the Company
shall afford the Holders of the Registrable Securities the opportunity to have
such Registrable Securities included in such registration statement, unless
6
<PAGE>
the underwriter for each proposed objects to the inclusion of the Registrable
Securities in such registration statement. However, in such event, the
Company will, within six (6) months of completion of such underwritten
offering, file at the expense of the Company, a registration statement so
as to permit a public offering and sale of the Registrable Securities so
excluded for a period of nine (9) months, which shall be in addition to any
registration statement required to be filed pursuant to Section 7(b).
Notwithstanding the provisions of this Section 7(c) and the provisions of
Section 7(d), the Company shall have the right at any time after it shall have
given written notice pursuant to this Section 7(c) (irrespective of whether a
written request for inclusion of any such securities shall have been made) to
elect not to file any such proposed registration statement, or to withdraw the
same after the filing but prior to the effective date thereof.
d. Covenants of the Company With Respect to
Registration. In connection with any registrations under Sections 7(b) and
7(c) hereof, the Company covenants and agrees as follows:
(1) The Company shall use its best efforts to
file a registration statement within forty-five (45) calendar days of receipt
of any demand therefor pursuant to section 7(b); provided, however, that
the Company shall not be required to produce audited or unaudited financial
statements for any period prior to the date such financial statements are
required to be filed in a report on Form 10-KSB or Form 10-QSB, as the case may
be. The Company shall use its best efforts to have any registration statement
declared effective at the earliest possible time, and shall furnish each Holder
desiring to sell Registrable Securities such number of prospectuses as shall
reasonably be requested.
7
<PAGE>
(2) The Company shall pay all costs (excluding
fees and expenses of Holders' counsel and any underwriting discounts or
selling fees, expenses or commissions), fees and expenses in connection with
any registration statement filed pursuant to Sections 7(b) and 7(c) hereof
including, without limitation, the Company's legal and accounting fees,
printing expenses, blue sky fees and expenses. If the Company shall fail to
comply with the provisions of Section 7(d), the Company shall, in addition to
any other equitable or other relief available to the Holders, be liable for
any or all incidental and special damages and damages due to loss of profit
sustained by the Holders requesting registration of their Registrable
Securities.
(3) The Company will take all necessary action
which may be required to qualify or register the Registrable Securities included
in a registration statement for offering and sale under the securities or blue
sky laws of such states as reasonably are requested by the Holders, provided
that the Company shall not be obligated to execute or file any general consent
to service of process or to qualify as a foreign corporation to do business
under the laws of any such jurisdiction.
(4) The Company shall indemnify the Holders of
the Registrable Securities to be sold pursuant to any registration statement
and each person, if any, who controls such Holders within the meaning of
Section 15 of the Securities Act or Section 20(a) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), against all loss, claim, damage,
expense or liability (including all expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever) to which
any of them may become subject under the Securities Act, the Exchange Act or
otherwise, arising from such registration statement, but only to the same
extent and with the same effect as the provisions pursuant to which the Company
has
8
<PAGE>
agreed to indemnify the Underwriter contained in Section 8 of the
Underwriting Agreement, and the Holders shall indemnify the Company to the same
extent and with the same effect as the provisions pursuant to which the
Underwriter has agreed to indemnify the Company contained in Section 8 of the
Underwriting Agreement.
(5) The Holders of the Registrable Securities
to be sold pursuant to a registration statement, and their successors and
assigns, shall indemnify the Company, its officers and directors and each
person, if any, who controls the Company within the meaning of Section 15 of
the Securities Act or Section 20(a) of the Exchange Act, against all loss,
claim, damage or expense or liability to which they may become subject under
the Securities Act, the Exchange Act or otherwise, arising from information
furnished by or on behalf of such Holders, or their successors or assigns, for
specific inclusion in such registration statement to the same extent and with
the same effect as the provisions contained in Section 8 of the Underwriting
Agreement pursuant to which the Underwriter has agreed to indemnify the Company.
(6) Nothing contained in this Agreement shall
be construed as requiring the Holders to exercise their Underwriter's Warrants
(or the Warrants purchasable upon exercise thereof) prior to the initial
filing of any registration statement or the effectiveness thereof.
(7) The Company shall not be entitled to
include any securities other than the Registrable Securities in any
registration statement filed pursuant to Section 7(b) hereof without the
prior written consent of the Holders of a Majority of the Registrable
Securities.
(8) The Company shall furnish to a designated
representative of the Holders participating in the offering and to each
underwriter, if any, a signed counterpart, addressed to such Holder or
underwriter of (i) an opinion of counsel to the Company, dated the
effective date
9
<PAGE>
of such registration statement (and if such registration relates to an
underwritten public offering, an opinion dated the date of the closing under
the underwriting agreement), and (ii) a "cold comfort" letter dated the
effective date of such registration statement (and, if such registration
relates to an underwritten public offering, a letter dated the date of the
closing under the underwriting agreement) signed by the independent public
accountants who have issued a report on the Company's financial statements
included in such registration statement (the "Accountants"), in each case
covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) and, in the case of the
accountants' "cold comfort" letter, with respect to events subsequent to the
date of such financial statements, as are customarily covered in opinions of
issuer's counsel and in "cold comfort" letters, with respect to events
subsequent to the date of such financial statements, as are customarily
covered in opinions of issuer's counsel and in "cold comfort" letters
delivered to underwriters in underwritten public offerings of securities.
(9) The Company shall as soon as practicable
after the effective date of the registration statement make "generally
available to its security holders" (within the meaning of Rule 158 under the
Act) an earnings statement (which need not be audited) complying with Section
ll(a) of the Securities Act and covering a period of at least 12 consecutive
months beginning after the effective date of the registration statement.
(10) The Company shall deliver promptly to each
Holder participating in the offering requesting the correspondence described
below and any managing underwriter copies of all correspondence between the
Commission and the Company, its counsel or Accountants with respect to the
registration statement and permit each Holder and underwriter to do such
investigation, upon reasonable advance notice, with respect to information
contained in or omitted from the
10
<PAGE>
registration statement as it deems reasonably necessary to comply with
applicable securities laws or rules of the National Association of Securities
Dealers, Inc. ("NASD"). Such investigation shall include access to books,
records and properties and opportunities to discuss the business of the Company
with its officers and representatives of the Accountants, all to such reasonable
extent and at such reasonable times and as often as any such Holder shall
reasonably request.
(11) The Company shall enter into an underwriting
agreement with the managing underwriter selected for such underwriting by
Holders holding a Majority of the Registrable Securities requested to be
included in such underwriting; provided, however, that (i) such managing
underwriter shall be reasonably acceptable to the Company, except that in
connection with an offering for which the Holders have piggyback rights, the
Company shall have the sole right to select the managing underwriter, and (ii)
the Holders shall be responsible for any selling fees or commissions in
connection with such underwriting. Such underwriting agreement shall be
satisfactory in form and substance to the Company, a Majority of such Holders
and such managing underwriters, and shall contain such representations,
warranties and covenants by the Company and such other terms as are customarily
contained in agreements of that type used by the managing underwriter. The
Holders shall be parties to any underwriting agreement relating to an
underwritten sale of their Registrable Securities and may, at their option,
require that any or all the representations, warranties and covenants of the
Company to or for the benefit of such underwriters shall also be made to and
for the benefit of such Holders. Such Holders shall not be required to make
any representations or warranties to or agreements with the Company or the
underwriters except as they may relate to such Holders and their intended
methods of distribution.
11
<PAGE>
e. Further Registrations. The Company will cooperate with the
Holders of the Registrable Securities in preparing and signing any registration
statement, in addition to the registration statements discussed above, required
in order to sell or transfer the Underwriter's Securities and will supply all
information required therefor, but such additional registration statement
expenses or offering statement expenses will be prorated between the Company and
the Holders of the Registrable Securities according to the aggregate sales price
of the securities being issued. The provisions of Section 7(d) shall apply to
any such registration statement.
8. Exchange and Replacement of Warrant Certificates. Each
Underwriter's Warrant Certificate is exchangeable without expense, upon the
surrender thereof by the registered Holders at the principal executive office of
the Company, for a new Underwriter's Warrant Certificate of like tenor and date
representing in the aggregate the right to purchase the same number of shares of
Common Stock and/or Warrants in such denominations as shall be designated by the
Holders thereof at the time of such surrender. Upon receipt by the Company of
evidence reasonably satisfactory to it of the loss, theft, destruction or
mutilation of any Underwriter's Warrant Certificate, and, in case of loss, theft
or destruction, of indemnity or security reasonably satisfactory to it, and
reimbursement to the Company of all reasonable expenses incidental thereto, and
upon surrender and cancellation of the Underwriter's Warrant Certificates, if
mutilated, the Company will make and deliver a new Underwriter's Warrant
Certificate of like tenor, in lieu thereof.
9. Elimination of Fractional Interests. The Company shall not
be required to issue certificates representing fractions of shares of Common
Stock upon the exercise of the Underwriter's Warrants, nor shall it be required
to issue scrip or pay cash in lieu of fractional
12
<PAGE>
interests; provided, however, that if a Holder exercises all Underwriter's
Warrants held of record by such Holder, the fractional interests shall be
eliminated by rounding any fraction up to the nearest whole number of shares
of Common Stock.
10. Reservation and Listing of Securities. The Company shall
at all times reserve and keep available out of its authorized shares of Common
Stock, solely for the purpose of issuance upon the exercise of the Underwriter's
Warrants, such number of shares of Common Stock or other securities, properties
or rights as shall be issuable upon the exercise thereof. The Company covenants
and agrees that, upon exercise of Underwriter's Warrants and payment of the
Purchase Price therefor, all the shares of Common Stock and other securities
issuable upon such exercise shall be duly and validly issued, fully paid,
non-assessable and not subject to the preemptive rights of any stockholder. The
Company further covenants and agrees that as long as the Underwriter's Warrants
shall be outstanding, the Company shall use its best efforts to cause the Common
Stock and Warrants to be listed (subject to official notice of issuance) on
all securities exchanges on which the Common Stock and the Warrants issued
in the Initial Public Offering may then be listed or quoted.
11. Notices to Underwriter's Warrant Holders. Nothing
contained in this Agreement shall be construed as conferring upon the Holders
the right to vote or to consent or to receive notice as a stockholder in respect
of any meetings of stockholders for the election of directors or any other
matter, or as having any rights whatsoever as a stockholder of the Company. If,
however, at any time prior to the expiration of the Underwriter's Warrants and
their exercise, any of the following events shall occur:
13
<PAGE>
(a) the Company shall take a record of the
holders of its shares of Common Stock for the purpose of entitling them to
receive a dividend or distribution payable otherwise than in cash, or a cash
dividend or distribution payable otherwise than out of current or retained
earnings, as indicated by the accounting treatment of such dividend or
distribution on the books of the Company; or
(b) the Company shall offer to all the holders
of its Common Stock any additional shares of capital stock of the Company or
securities convertible into or exchangeable for shares of capital stock of the
Company, or any option, right or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of
the Company (other than in connection with a consolidation or merger) or a
sale of all or substantially all of its property, assets and business as an
entirety shall be proposed; then, in any one or more of said events, the
Company shall give written notice of such event at least fifteen (15) days
prior to the date fixed as a record date or the date of closing the transfer
books for the determination of the stockholders entitled to such dividend,
distribution, convertible or exchangeable securities or subscription rights, or
entitled to vote on such proposed dissolution, liquidation, winding up or sale.
Such notice shall specify such record date or the date of closing the transfer
books, as the case may be. Failure to give such notice or any defect therein
shall not affect the validity of any action taken in connection with the
declaration or payment of any such dividend, or the issuance of any convertible
or exchangeable securities, or subscription rights, options or warrants, or
any proposed dissolution, liquidation, winding up or sale.
14
<PAGE>
12 Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
duly made when delivered, or mailed by registered or certified mail, return
receipt requested:
(a) If to the registered Holders of the
Underwriter's Warrants, to the address of such Holders as shown on the books
of the Company; or
(b) If to the Company to the address set
forth in Section 3 hereof or to such other address as the Company may
designate by notice to the Holders.
13. Supplements and Amendments. The Company and the
Underwriter may from time to time supplement or amend this Agreement without
the approval of any Holders of Underwriter's Warrant Certificates (other than
the Underwriter) in order to cure any ambiguity, to correct or supplement any
provision contained herein which may be defective or inconsistent with any
provisions herein, or to make any other provisions in regard to matters or
questions arising hereunder which the Company and the Underwriter may deem
necessary or desirable and which the Company and the Underwriter deem shall not
adversely affect the interests of the Holders of Underwriter's Warrant
Certificates.
14. Successors. All the covenants and provisions of
this Agreement shall be binding upon and inure to the benefit of the Company,
the Underwriter, the Holders and their respective successors and assigns
hereunder.
15 Termination. This Agreement shall terminate at the close of
business on _____________, 2002. Notwithstanding the foregoing, the
indemnification provisions of Section 7 shall survive such termination until the
close of business on the expiration of any applicable statute of limitations.
15
<PAGE>
16. Governing Law: Submission to Jurisdiction. This Agreement
and each Underwriter's Warrant Certificate issued hereunder shall be deemed to
be a contract made under the laws of the State of New York and for all purposes
shall be construed in accordance with the laws of said state without giving
effect to the rules of said state governing the conflicts of laws. The Company,
the Underwriter and the Holders hereby agree that any action, proceeding or
claim against it arising out of, or relating in any way to, this Agreement shall
be brought and enforced in the courts of the State of New York or of the United
States of America for the Southern District of New York, and irrevocably submits
to such jurisdiction, which jurisdiction shall be exclusive. The Company, the
Underwriter and the Holders hereby irrevocably waive any objection to such
exclusive jurisdiction or inconvenient forum. Any such process or summons to be
served upon any of the Company, the Underwriter and the Holders (at the option
of the party bringing such action, proceeding or claim) may be served by
transmitting a copy thereof, by registered or certified mail, return
receipt requested, postage prepaid, addressed to it at the address set forth in
Section 12 hereof. Such mailing shall be deemed personal service and shall be
legal and binding upon the party so served in any action, proceeding or claim.
17 Entire Agreement; Modification. This Agreement (including
the Underwriting Agreement, to the extent portions thereof are referred to
herein) contains the entire understanding between the parties hereto with
respect to the subject matter hereof and thereof. Subject to Section 13, this
Agreement may not be modified or amended except by a writing duly signed by the
Company and the Holders of a Majority of the Registrable Securities.
16
<PAGE>
18. Severability. If any provision of this Agreement
shall be held to be invalid or unenforceable, such invalidity or
unenforceability shall not affect any other provision of this Agreement.
19. Captions. The caption headings of the Sections of
this Agreement are for convenience of reference only and are not intended, nor
should they be construed as, a part of this Agreement and shall be given no
substantive effect.
20. Benefits of this Agreement. Nothing in this Agreement
shall be construed to give to any person or corporation other than the Company
and the Underwriter and any other registered Holders of the Underwriter's
Warrant Certificates or Registrable Securities any legal or equitable right,
remedy or claim under this Agreement, and this Agreement shall be for the sole
and exclusive benefit of the Company and the Underwriter and any other Holders
of the Underwriter's Warrant Certificates or Registrable Securities.
21. Counterparts. This Agreement may be executed in any
number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and such counterparts shall together constitute but
one and the same instrument.
22. Binding Effect. This Agreement shall be binding upon
and inure to the benefit of the Company, the Underwriter and their respective
successors and assigns and the Holders from time to time of the Underwriter's
Warrant Certificates.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.
17
<PAGE>
AZUREL LTD.
By: /s/ Gerard Semhon, Chief Executive Officer
Gerard Semhon, Chief Executive Officer
NETWORK 1 FINANCIAL SECURITIES, INC.
By:
Name:
Title:
18
<PAGE>
EXHIBIT A
AZUREL LTD.
WARRANT CERTIFICATE
THE SECURITIES ISSUABLE UPON EXERCISE OF THE WARRANTS REPRESENTED BY THIS
CERTIFICATE MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE EXTENT
APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING
TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF SUCH
OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANT REPRESENTED BY THIS
CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT
REFERRED TO HEREIN.
EXERCISABLE COMMENCING______________, 1998 THROUGH
5:00 P.M., NEW YORK TIME ON_____________, 2002
No. UW-1 150,000 Warrants
This Warrant Certificate certifies that _____________, or registered
assigns, is the registered holder of 150,000 Warrants to purchase initially, at
any time from _____________, 1998 until 5:00 p.m., New York time on
________________ (the "Expiration Date"), 150,000 fully paid and non-assessable
shares of Common Stock, $.001 par value (the "Common Stock"), of Azurel Ltd., a
Delaware corporation (the "Company") at a purchase price of $______ per share
(the "Common Stock Purchase Price"), and/or 150,000 Redeemable Common Stock
Purchase Warrants ("Warrants") of the Company at the purchase price of $_______
per Warrant (the "Warrant Purchase Price"), upon the surrender of this Warrant
Certificate and payment of the applicable Purchase Price at an office or agency
of the Company, but subject to the conditions set forth herein and in the
warrant agreement dated as of _______________, 1997 (the "Warrant Agreement")
between the Company and Network 1 Financial Securities, Inc. (the
"Underwriter"). Payment of the applicable Purchase Price shall be made by
certified or cashier's check or money order payable to the order of the Company.
A-1
<PAGE>
No Warrant may be exercised after 5 :00 p.m., New York time, on
the Expiration Date, at which time all Warrants evidenced hereby, unless
exercised prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a
duly authorized issue of Warrants issued pursuant to the Warrant Agreement
between the Company and the Underwriter, which Warrant Agreement is hereby
incorporated by reference in and made a part of this instrument and is hereby
referred to for a description of the rights, limitation of rights, obligations,
duties and immunities thereunder of the Company and the holders (the words
"holders" or "holder" meaning the registered holders or registered holder) of
the Warrants.
The Warrant Agreement provides that upon the occurrence of certain
events the respective Purchase Prices and the type and/or number of the
Company's securities issuable upon the exercise of this Warrant, may, subject to
certain conditions, be adjusted. In such event, the Company will, at the request
of the holder, issue a new Warrant Certificate evidencing the adjustment in the
Purchase Price and the number and/or type of securities issuable upon the
exercise of the Warrants; provided, however, that the failure of the Company to
issue such new Warrant Certificates shall not in any way change, alter, or
otherwise impair, the rights of the holder as set forth in the Warrant
Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange as provided herein,
without any charge except for any tax or other governmental charge imposed in
connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by
this Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as
the absolute owner(s) of this Warrant Certificate (notwithstanding any notation
of ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the
Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
A-2
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this certificate
this ____ day of _____________________, 1997.
AZUREL LTD.
By: /s/ Gerard Semhon, Chief Executive Officer
Gerard Semhon, Chief Executive Officer
ATTEST
By:
Secretary
A-3
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Warrant
Certificate.)
FOR VALUE RECEIVED hereby sells, assigns and transfers unto
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint his or its attorney-in-fact
to transfer the within Warrant Certificate on the books of Azurel Ltd., with
full power of substitution.
Dated:
Signature
(Signature must conform in all
respects to the name of holder
as specified on the face of the
Warrant Certificate.)
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
FORM OF ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise the right represented by
this Warrant Certificate to purchase:
___________shares of Common Stock
___________Redeemable Common Stock Warrants
and herewith tenders in payment for such securities a certified or cashier's
check or money order payable to the order of Azurel Ltd. in the amount of $ ,
all in accordance with the terms hereof. The undersigned requests that
certificates for such securities be registered in the name of whose address is
and that such certificates be delivered to_____________________________________
whose address is______________________________________________________________.
Dated:
Signature
(Signature must conform in all
respects to the name of holder
as specified on the face of the
Warrant Certificate.)
(Insert Social Security or Other
Identifying Number of Holder)
Gersten, Savage, Kaplowitz, Fredericks & Curtin LLP
May 5, 1997
Azurel, Ltd.
509 Madison Avenue
Suite 804
New York, New York 10022
Gentlemen:
You have requested our opinion in connection with the Registration
Statement on Form SB-2 (the "Registration Statement) of Azurel, Ltd, (the
"Company"), relating to the following securities of the Cocmpany (the
"Securities") to be issue dpursuant to the Company's initial public ofering and
pursuant to exercise of registered warrants as set forth therein:
1,380,000 shares of Common Stock (including 180,000 shares which the
Underwriters have the option to purchase to cover over-allotments) (the "Common
Stock");
(b) 1,380,000 Common Stock Purchase Warrants (including 180,000
warrants which the Underwriters have the option to purchase to cover
over-allotments) (the "Warrants"); and
2,285,500 shares of Common Stock issuable upon exercise of the
Warrants, and other warrants registered under the Registration Statement
("Outstanding Warrants"), all pursuant to the Warrant Agreement between the
Company and American Stock Transfer & Trust Company to be executed in connection
with the Company's initial offering (the "Warrant Agreement").
We have made such examination of the corporate records and proceedings
of the Company and have taken such further action as we deemed necessary or
appropriate to the rendering of our opinion herein.
Based on the foregoing, we are of the opinion that the Common Stock and
Warrants, when issued as contemplated by the Registration Statement, will be
legally issued, fully paid and non-assessable. We are of the opinion that the
Common Stock underlying the Warrants and the Outstanding Warrants, when paid for
and issued as contemplated by the Warrant Agreement, will be legally issued,
fully paid and non-assessable.
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statement and to the
reference to our firm under the heading "Legal Matters" therein.
Sincerely,
/s/ Gersten, Savage, Kaplowitz, Fredericks & Curtin, LLP
Gersten, Savage, Kaplowitz, Fredericks & Curtin, LLP
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form SB-2 of our report dated March 7, 1997, relating
to the financial statement of Azurel Ltd. and Subsidiaries, which is contained
in that Prospectus. We also consent to the reference to our Firm under the
caption "Experts" in the Prospectus.
/s/ Feldman Radin & Co., P.C.
Feldman Radin & Co., P.C.
Certified Public Accountant
New York, New York
May 5, 1997
Gersten, Savage, Kaplowitz, Fredericks & Curtin LLP
May 5, 1997
Azurel, Ltd.
509 Madison Avenue
Suite 804
New York, New York 10022
Gentlemen:
You have requested our opinion in connection with the Registration
Statement on Form SB-2 (the "Registration Statement) of Azurel, Ltd, (the
"Company"), relating to the following securities of the Cocmpany (the
"Securities") to be issue dpursuant to the Company's initial public ofering and
pursuant to exercise of registered warrants as set forth therein:
1,380,000 shares of Common Stock (including 180,000 shares which the
Underwriters have the option to purchase to cover over-allotments) (the "Common
Stock");
(b) 1,380,000 Common Stock Purchase Warrants (including 180,000
warrants which the Underwriters have the option to purchase to cover
over-allotments) (the "Warrants"); and
2,285,500 shares of Common Stock issuable upon exercise of the
Warrants, and other warrants registered under the Registration Statement
("Outstanding Warrants"), all pursuant to the Warrant Agreement between the
Company and American Stock Transfer & Trust Company to be executed in connection
with the Company's initial offering (the "Warrant Agreement").
We have made such examination of the corporate records and proceedings
of the Company and have taken such further action as we deemed necessary or
appropriate to the rendering of our opinion herein.
Based on the foregoing, we are of the opinion that the Common Stock and
Warrants, when issued as contemplated by the Registration Statement, will be
legally issued, fully paid and non-assessable. We are of the opinion that the
Common Stock underlying the Warrants and the Outstanding Warrants, when paid for
and issued as contemplated by the Warrant Agreement, will be legally issued,
fully paid and non-assessable.
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statement and to the
reference to our firm under the heading "Legal Matters" therein.
Sincerely,
/s/ Gersten, Savage, Kaplowitz, Fredericks & Curtin, LLP
Gersten, Savage, Kaplowitz, Fredericks & Curtin, LLP
