AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 31, 1997
REGISTRATION NO. 333-23259
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
------------------------
BELL TECHNOLOGY GROUP LTD.
(Exact name of small business issuer in its charter)
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<S> <C>
DELAWARE 7373 13-3781263
(State or other (Primary Standard (I.R.S. Employer
jurisdiction Industrial Identification No.)
of incorporation) Classification Code No.)
MARC H. BELL
BELL TECHNOLOGY GROUP LTD.
295 LAFAYETTE 295 LAFAYETTE STREET 295 LAFAYETTE STREET
STREET NEW YORK, NEW YORK 10012 NEW YORK, NY 10012
NEW YORK, NY 10012 (212) 334-8510 (212) 334-8510
(212) 334-8510
(Address and (Address and telephone (Address and telephone
telephone number of agent for service number of business or
number of principal of process) intended place of business)
executive offices)
</TABLE>
COPIES TO:
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ARNOLD N. BRESSLER, ESQ. THOMAS A. ROSE, ESQ.
MILBERG WEISS BERSHAD HYNES & LERACH LLP SCHNECK WELTMAN & HASHMALL LLP
ONE PENNSYLVANIA PLAZA 1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10119-0165 NEW YORK, NEW YORK 10019
</TABLE>
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
If any of these securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration number of 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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
------------------------
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO AMOUNT TO BE OFFERING PRICE AGGREGATE OFFER- REGISTRATION
BE REGISTERED REGISTERED PER UNIT (1) ING PRICE (1) FEE
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10% Convertible Senior Subordinated
Debenture Due 2003 (the
"Debentures")................... 6,325 (2) $1,000 $6,325,000 $1,916.67
Common Stock, $.01 par value (the
"Common Stock")................. (3) (4) (4) (4)
Common Stock...................... 100,000 (5) $5.50 $550,000 $166.67
Underwriter's Warrants............ 1 $10 $10 1
Debentures issuable upon exercise of
Underwriter's Warrants.......... 550 $1,200 $660,000 $200.00
Common Stock...................... (6) (4) (4) (4)
Total Registration Fee............ $2,283.34*
</TABLE>
* A fee of $2,935.72 has previously been paid in connection with this
Registration Statement.
(1) Estimated solely for the purpose of calculating the registration fee.
<PAGE>
(2) Includes up to $825,000 principal amount of additional Debentures which the
Underwriter has the option to purchase solely to cover over allotments, if
any.
(3) Such number of shares of Common Stock as are issuable upon conversion of
Debentures.
(4) No additional consideration will be received for the Common Stock.
Therefore, no registration fee is required pursuant to Rule 457(i).
(5) Consisting of shares of Common Stock (estimated solely for the purpose of
calculating the registration fee) which may be paid, at the option of the
Company, as interest on the Debentures for the first year after issuance.
(6) Such number of shares of Common Stock as are issuable upon conversion of
Debentures issued pursuant to the Underwriter's Warrants.
Also registered hereunder pursuant to Rule 416(a) are such indeterminate
number of shares which may be issued pursuant to the anti-dilution provisions of
the Debentures and the Underwriter's Warrants.
Pursuant to Rule 429 of the Securities Act of 1933, as amended, this form
incorporates by reference and updates all of the information contained in the
Registration Statement on Form SB-2; File No. 33-98978.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
BELL TECHNOLOGY GROUP LTD.
CROSS-REFERENCE SHEET
SHOWING LOCATION IN PROSPECTUS OF PART I ITEMS OF FORM SB-2
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ITEM NUMBER AND HEADING IN
FORM SB-2 REGISTRATION STATEMENT LOCATION IN PROSPECTUS
- ------------------------------------------------------ -----------------------------------------------------------
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1. Front of Registration Statement and Outside Front of Registration Statement; Outside of Front Cover
Front Cover of Prospectus....................... Page
2. Inside Front and Outside Back Cover Pages of
Prospectus...................................... Inside Front and Outside Back Cover Pages
3. Summary Information and Risk Factors............ Prospectus Summary; The Company; Risk Factors
4. Use of Proceeds................................. Prospectus Summary; Use of Proceeds
5. Determination of Offering Price................. Outside Front Cover Page; Risk Factors; Underwriting
6. Dilution........................................ Not Applicable
7. Selling Security Holders........................ Not Applicable
8. Plan of Distribution............................ Outside Front Cover Page; Plan of Distribution
9. Legal Proceedings............................... Business
10. Directors, Executive Officers, Promoters and
Control Persons................................. Principal Stockholders; Management
11. Security Ownership of Certain Beneficial Owners
and Management.................................. Principal Stockholders
12. Description of Securities....................... Description of Securities
13. Interest of Named Experts and Counsel........... Not Applicable
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities..................................... Management -- Limited Liability and Indemnification Matters
15. Organization Within Last Five Years............. Prospectus Summary; Certain Transactions
16. Description of Business......................... Prospectus Summary; Risk Factors; Management's Discussion
and Analysis of Financial Condition and Results of
Operations; Business
17. Management's Discussion and Analysis or Plan of
Operation....................................... Management's Discussion and Analysis of Financial Condition
and Results of Operations
18. Description of Property......................... Business -- Properties
19. Certain Relationships and Related
Transactions.................................... Certain Transactions; Principal Stockholders
20. Market for Common Equity and Related Stockholder
Matters......................................... Outside Front Cover Page; Risk Factors; Dividend Policy;
Description of Capital Stock; Shares Eligible for Future
Sale; Market for Company's Common Stock
21. Executive Compensation.......................... Management
22. Financial Statements............................ Financial Statements
23. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure............. Not Applicable
</TABLE>
<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 BE 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 LAWS OF ANY SUCH STATE.
PRELIMINARY PROSPECTUS DATED JULY , 1997, SUBJECT TO COMPLETION
BELL TECHNOLOGY GROUP LTD.
10% CONVERTIBLE SENIOR SUBORDINATED DEBENTURES DUE 2003
This Prospectus relates to an offering (the "Offering") by Bell Technology
Group Ltd. (the "Company"), of $5,500,000 of 10% convertible senior subordinated
debentures due August __, 2003 (the "Debentures"), through Rickel & Associates,
Inc. (the "Underwriter"). Commencing one year after date of issue and continuing
until the maturity date of the Debentures, the Debentures may be converted at
the option of the holder into shares of common stock, $.01 par value per share,
of the Company (the "Common Stock"), at a conversion price of $__ per share (the
"Conversion Rate") (subject to adjustment in certain events as hereinafter
described). The Debentures are unsecured and subordinated to all present and
future Senior Debt (as hereinafter defined), which amounts to approximately
$3,000,000 as of June 30, 1997. See "Description of Securities -- Debentures."
Interest will be paid on the Debentures semi-annually at the rate of 10%
per annum commencing on _____, 1998. Interest for the first 12 months may be
paid in cash or shares of Common Stock, at the option of the Company. The
Debentures are redeemable in whole or in part by the Company at any time after
_____, 1999 (or earlier with the Underwriter's prior written consent) and until
maturity at a redemption price equal to 110% of the principal amount of the
Debentures (declining ratably over the remaining four year term of the
Debentures to 100%), plus all accrued and unpaid interest. The right of the
Company to redeem the Debentures is conditioned upon Debenture holders being
given at least 30 (but not more than 60) days prior written notice, if the last
sale price of the Common Stock has been at least 120% of the Conversion Rate on
all 20 of the trading days ending on the third day prior to the day on which
notice of redemption is given.
Prior to the Offering, there has been no public market for the Debentures
and a limited public market for the Common Stock. There can be no assurance that
a public market will develop for the Debentures or that the public market for
the Common Stock will continue after the closing of the Offering. The terms of
the Debentures were determined by negotiation between the Company and the
Underwriter and do not necessarily bear any direct relationship to the Company's
assets, earnings, book value per share or other generally accepted criteria of
value. The Common Stock is presently quoted on The Nasdaq SmallCap Market
("Nasdaq") under the trading symbol "BELT," and on the Boston Stock Exchange
("BSE") under the trading symbol "BTG." The Company intends to apply for
quotation of the Debentures on Nasdaq under the trading symbol "BELTG," and on
the BSE under the trading symbol "BTGG."
------------------------
FOR A DESCRIPTION OF CERTAIN RISKS REGARDING AN INVESTMENT IN THE COMPANY,
SEE "RISK FACTORS" AT PAGE 9
------------------------
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.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO THE
PUBLIC COMMISSIONS (1) COMPANY (2)
<S> <C>
Per Debenture........................... $1,000 $100 $900
Total (3)............................... $5,500,000 $550,000 $4,950,000
</TABLE>
(1) Does not include additional compensation to the Underwriter consisting of
(i) a non-accountable expense allowance equal to 3% of the gross proceeds of
the Offering, of which $35,000 has been paid by the Company to date, and
(ii) warrants (the "Underwriter's Warrants") entitling the Underwriter to
purchase up to $550,000 principal amount of Debentures at a price of $1,200
per Debenture. The Company has also agreed to indemnify the Underwriter
against certain civil liabilities, including those arising under 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
($165,000, or $189,750 if the Underwriter's Over-allotment Option (as
defined below) is exercised in full) and the other expenses of the Offering
payable by the Company estimated at $400,000. See "Underwriting."
(3) The Company has granted to the Underwriter an option, exercisable within 45
days after the closing of the Offering, to purchase up to an additional
$825,000 of Debentures upon the same terms and conditions solely for the
purpose of covering over-allotments, if any (the "Underwriter's
Over-allotment Option"). If the Underwriter's Over-allotment Option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $6,325,000, $632,500 and
$5,692,500, respectively. See "Underwriting."
RICKEL & ASSOCIATES, INC.
The date of this Prospectus is __________, 1997
<PAGE>
------------------------
The Debentures are being offered by the Underwriter on a firm commitment
basis, subject to prior sale and when, as and if delivered to and accepted by
the Underwriter, and subject to certain conditions. The Offering is subject to
the Underwriter's right to reject offers in whole or in part. It is expected
that delivery of the Debentures will be made at the offices of the Underwriter,
875 Third Avenue, New York, New York, on or about _____, 1997.
------------------------
IN CONNECTION WITH THE OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE DEBENTURES AT
LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Atlanta Regional Office of the Commission at
3475 Lenox Road, N.E., Suite 1000, Atlanta, Georgia 30326-7232. Copies of such
materials may also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission maintains a World Wide Web site (C://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding registrants that file such information electronically. The Common
Stock is quoted on Nasdaq and the BSE. Reports, proxy statements and other
information concerning the Company may be inspected at the offices of Nasdaq,
1735 K Street N.W., Washington, D.C. 20006, and at the offices of the BSE at One
Boston Place, Boston, Massachusetts 02108.
The Company has filed with the Commission a registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Debentures offered hereby and the Common Stock issuable upon the conversion of
the Debentures. This Prospectus, which is a part of the registration statement,
does not contain all the information set forth in, or annexed as exhibits to,
such registration statement, certain portions of which have been omitted
pursuant to rules and regulations of the Commission. For further information
with respect to the Company, the Debentures and the Common Stock, reference is
made to such registration statement, including the exhibits thereto, copies of
which may be inspected and copied at the aforementioned facilities of the
Commission. Copies of such registration statement, including the exhibits, may
be obtained from the Public Reference Section of the Commission at the
aforementioned address upon payment of the fee prescribed by the Commission.
The Company intends to furnish its Debenture holders with annual reports
containing financial statements audited and reported upon by its independent
public accountants after the end of each fiscal year, commencing with its fiscal
year ending September 30, 1997. It will make available such other periodic
reports as the Company may deem appropriate or as may be required by law.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE
IN THIS PROSPECTUS. EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS
PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITER'S OVER-ALLOTMENT OPTION.
CERTAIN TERMS USED IN THIS PROSPECTUS ARE DEFINED IN THE GLOSSARY ON PAGE
8.
THE COMPANY
Bell Technology Group Ltd., together with its wholly-owned subsidiaries
(the "Company"), is a diversified computer products and service company which is
focused on providing sophisticated Internet and computer solutions to large
corporate clients. The Company advises clients on computer solutions available,
provides, installs and services such solutions, and assists the client in
properly utilizing the benefits to be gained from using the Internet. The
Company has pursued a growth strategy of becoming a "start-to-finish" provider
of Internet solutions, which provides corporate customers with everything
necessary for their Internet needs. Using the Company's knowledge of hardware
and software as a means of entry into a new client, the Company then proceeds to
deal with all of its computer clients needs. The services offered include (i)
the sale and service of hardware and software, (ii) training in the use of
Internet and related programs, (iii) interactive development, and (iv) Internet
co-location, access and hosting services. The number of corporate Internet
customers has grown from approximately 29 in early 1996 to over 220 as of June
30, 1997, or an increase of 659%. For the six months ended March 31, 1997, the
Company reported $8.9 million in revenues versus $4.8 million for 1996, or an
increase of 87%.
The Company is authorized to sell and service high end equipment from
hardware manufacturers such as Silicon Graphics, Inc., Sun Microsystems, Inc.
and Cisco Systems, Inc. and software manufactures such as Microsoft Corporation,
Netscape Corporation, Alias/Wavefront Inc. and Checkpoint Software Corp. The
Company prepares equipment sold to customers, installs LANs, provides warranty
support for major hardware manufacturers, and provides ongoing service support
for its customers in the form of hardware repairs and software consulting.
A large number of the Company's clients are "Fortune 1000" companies. Major
customers include American Express, Amro Bank, Gannett, General Media
(Penthouse), The Hearst Corporation, Lucent Technologies, MSNBC Desktop Video,
Olgivy & Mather, Prudential, Ralph Lauren, Scholastic and Time Warner. Major
corporations which have web hosting and/or co-location services with the Company
are invited to work closely with the Company at its facility in setting up and
managing sites.
During the past fiscal year, the Company has spent over $2 million building
a state-of-the-art network operations center ("NOC") at its new location. The
2,000 square foot NOC offers customers direct, high-speed Internet connections
and World Wide Web hosting and co-location facilities. The Company assists its
clients on a personalized level with web development and hosts their web sites
by providing the appropriate hardware, network and maintenance services. The
Company firmly believes that facilities-based Internet services are the future
of the industry.
The Company maintains several classrooms at its headquarters facility,
where it conducts training for its clients. In addition, the Company provides
training at its client's facilities on a national basis. The Company uses a
variety of modern hardware and software and typically charges a fixed price
depending upon the size of the class, the complexity of the group and the
equipment required. The Company is a training center in the New York City
Metropolitan area for Alias/Wavefront and Macromedia Authorware/Director.
The Company's digital media division is involved in producing interactive
CD-ROM presentations and high-impact World Wide Web sites. The Company's main
areas of digital design development include animation, interactive and web
production. The Company's graphic arts capabilities include creating and
assembling World Wide Web sites and interactive applications such as computer
based training and promotional sales material. The Company works with content
providers such as marketing firms and provides the technical and design aspects
of a project for large-scale multimedia projects including sites to be used on
the Internet. The Company provides consulting and project management services
for companies making the transition from print to electronic to Internet
presentations or catalogs and is currently completing a nine month project for
the Thomas Register, put out by Thomas Publishing, the largest and oldest
industrial directory of products and services in the world. The
3
<PAGE>
Company is presently working with numerous customers to implement secure
commerce and audio/video streaming applications.
Other services offered by the Company to its customers include Internet
access, ISDN, leased lines, web hosting, programming, firewall, network security
and system design services. Due to the existence of its sales and service
operation, the Company is able to offer customers support and services on all
major operating systems including UNIX, IRIX, Windows NT and Mac OS. The Company
also provides consulting services in the areas of inter-networking, programming,
firewall services, computer and network security, network design and network
operation.
Among the solutions offered by the Company are Internet based commerce
solutions, which include secure credit card transaction processing, a shopping
cart for browsing and purchasing merchandise on-line, and audio/video streaming
technologies that allow for, among other things, pay-per-view programming. The
Company is able to create multi-media web sites and provide high-speed access to
the Internet for the client/user. This technology enables users to make use of
the Internet to complete "on-line" transactions. For example, the Company is
bringing a substantial catalog sales company on-line, to enable it to increase
sales and market share by completing transactions over the Internet.
In January 1996, the Company completed an initial public offering of
1,279,642 shares of its Common Stock and 661,250 redeemable Common Stock
purchase warrants (the "Warrants") to purchase an additional 661,250 shares of
Common Stock, which raised net proceeds of approximately $7,000,000.
The Company was originally incorporated in the state of New York in 1989 by
Marc H. Bell as NAFT International Ltd. ("NAFT"). In July 1994, PFM Technologies
Corporation ("PFMT") acquired the assets and liabilities of NAFT and its
affiliated corporations in a tax-free exchange of common stock. In September
1995, the Company was reincorporated by merger into Bell Technology Group Ltd.,
a Delaware corporation. The Company's executive offices are located at 295
Lafayette Street, 3rd Floor, New York, New York 10012, and its telephone number
is (212) 334-8510. The Company's address on the World Wide Web is
www.belltech.com.
4
<PAGE>
THE OFFERING
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Debentures Offered.................................... $5,500,000 principal amount of the Debentures due August
__, 2003. The Debentures will be issued in registered
form.
Offering Price........................................ $1,000 per Debenture.
Interest Payments..................................... Interest on the Debentures is payable semi-annually at
the rate of 10% per annum on ____and ____ of each
calendar year commencing on ____, 1998 and ending on the
date of redemption or conversion of the Debentures.
Interest for the first 12 months may be paid, at the
option of the Company, in cash or in shares of Common
Stock.
Conversion Rights..................................... Each Debenture is convertible, at the option of the
holder, at any time prior to redemption or maturity at a
conversion price of $_____ per share (equivalent to a
conversion rate of approximately _____ shares per $1,000
principal amount of Debenture), subject to adjustment in
certain events. Debentures called for redemption will be
convertible up to and including, but not after, the close
of business on the redemption date. See "Description of
Securities -- Debentures."
Optional Redemption................................... The Debentures are redeemable in whole or in part by the
Company at any time after _____, 1999 (or earlier with
the Underwriter's prior written consent), and until
maturity at the redemption price equal to 110% of the
principal amount of the Debenture (declining ratably over
the remaining four year term of the Debentures), plus all
accrued and unpaid interest. The right of the Company to
redeem the Debentures is conditioned upon Debenture
holders being given at least 30 (but not more than 60)
days prior written notice, if the last sale price of the
Common Stock has been at least 120% of the Conversion
Rate on all 20 of the trading days ending on the third
day prior to the day on which notice of redemption is
given.
Subordination......................................... The Debentures are subordinated in right of payment to
all present and future Senior Debt of the Company. Senior
Debt includes all secured debt and capitalized leases
created before or after this Offering. At June 30, 1997,
Senior Debt and capitalized leases aggregated
approximately $3,000,000, excluding accrued interest.
Use of Proceeds....................................... The net proceeds to the Company from the Offering,
aggregating approximately $4,385,000, will be used to:
expand and improve the Company's existing Internet
operations center, increase its sales and marketing
programs, reduce its outstanding debt and for working
capital and other general corporate purposes. See "Use of
Proceeds."
Risk Factors.......................................... The securities offered hereby involve a high degree of
risk. See "Risk Factors."
</TABLE>
5
<PAGE>
<TABLE>
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Common Stock Outstanding
Prior to the Offering (1)........................... 3,048,450
After the Offering (1)(2)...........................
</TABLE>
Trading Symbols
NASDAQ BSE
------ ---
Debentures* BELTG BTGG
Common Stock BELT BTG
Warrants BELTW BTGW
- ---------------
*Proposed trading symbols
(1) Excludes: (i) _____ shares of Common Stock issued upon conversion of the
Debentures offered hereby; (ii)____ shares of Common Stock issuable upon
conversion of Debentures subject to the Underwriter's Warrants; (iii)
661,150 shares of Common Stock issuable upon exercise of the Company's
outstanding Warrants; (iv) an aggregate of 355,000 shares of Common Stock
reserved for issuance pursuant to options available for grant under the
Company's 1995 Stock Option Plan, approximately 290,000 of which options are
currently outstanding; and (v) 172,500 shares of Common Stock issuable upon
exercise of the warrants issued to the Underwriter in connection with the
Company's initial public offering.
(2) Assumes conversion of all Debentures at a Conversion Rate of $_____. There
can be no assurance that any Debentures will be so converted.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The summary consolidated financial data for the nine month period ended
September 30, 1995 and fiscal year ended September 30, 1996, and for the six
month periods ended March 31, 1996 and March 31, 1997 have been derived from the
Company's financial statements included elsewhere in this Prospectus. The nine
month period ended September 30, 1995 and year ended September 30, 1996 have
been audited by Arthur Andersen LLP, independent public accountants, whose
report thereon is also included elsewhere in this Prospectus. The summary
consolidated financial data for the six month period ended March 31, 1997 are
unaudited and in the opinion of management include all adjustments, consisting
of only normal recurring adjustments necessary for a fair presentation of such
data. In 1995, the Company changed its fiscal year end from December 31 to
September 30. The summary consolidated financial data set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements and Notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE NINE FOR THE FOR THE SIX MONTHS ENDED
MONTHS ENDED YEAR ENDED --------------------------------
SEPTEMBER 30, 1995 SEPTEMBER 30, 1996 MARCH 31, 1996 MARCH 31, 1997
------------------ ------------------ -------------- --------------
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STATEMENT OF OPERATIONS DATA:
Revenue.................................. $8,738,410 $ 10,373,664 $4,764,877 $ 8,925,851
Gross profit............................. 1,446,178 1,774,423 874,174 1,984,958
------------------ ------------------ -------------- --------------
Income (loss) from operations............ $ 130,839 $ (1,688,721) $ (319,714) $ (1,099,677)
------------------ ------------------ -------------- --------------
Net income (loss)........................ $ 38,859 $ (1,893,480) $ (620,126) $ (1,074,008)
------------------ ------------------ -------------- --------------
------------------ ------------------ -------------- --------------
Net income (loss) per common and
equivalent share....................... $ 0.02 $ (0.72) $ (0.28) $ (0.35)
Shares used in computing net income
(loss) per common and common equivalent
share.................................. 1,725,000 2,633,400 2,176,097 3,042,248
OTHER DATA:
Deficiency of earnings to cover fixed
charges (1)............................ (75,865) (1,705,795) (590,120) (945,192)
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31, 1997
------------------------------ -------------------------------
<S> <C>
1995 1996 ACTUAL AS ADJUSTED (2)
----------- ----------- ----------- ---------------
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 222,367 $ 2,342,011 $ 1,207,305 $ 4,192,305
Working capital.......................... 179,739 3,423,313 1,734,249 6,119,249
Other assets............................. 21,364 115,093 107,425 107,425
Total assets............................. 2,961,550 7,809,782 9,622,864 12,607,864
Current liabilities...................... 2,322,141 1,720,082 4,304,320 2,904,320
Long-term liabilities.................... 340,612 0 337,092 5,837,092
Stockholders' equity..................... 298,797 6,089,700 4,981,452 4,981,452
</TABLE>
- ---------------
(1) Deficiency of earnings available to cover fixed charges consist of earnings
(losses) before income taxes. Fixed charges consist of interest on debt and
the interest component of rent expense (deemed to be one-third of the
total).
(2) As Adjusted financial information gives effect to the issuance and sale by
the Company of the $5,500,000 of Debentures pursuant to the Offering and the
application of a portion of the net proceeds thereof to repay approximately
$1,400,000 of outstanding debt. This does not include any accrual of
interest expense on the Debentures. See "Use of Proceeds."
7
<PAGE>
GLOSSARY
<TABLE>
<S> <C>
Backbone A centralized high-speed network that interconnects smaller, independent networks.
Bandwidth The number of bits of information which can move through a communications medium in
a given amount of time.
CSU/DSU A high-speed modem used with dedicated network connections, capable of handling
connection speeds of up to 45 Mbps or more.
Firewall A system placed between networks that filters data passing through it and removes
unauthorized traffic, thereby enhancing the security of the network.
HTML Hyper-Text Markup Language. Used in writing pages for the World Wide Web, it permits
the text to include code that defines font, layout, embedded graphics and hypertext
links.
Internet A global collection of interconnected computer networks which uses TCP/IP, a common
communications protocol.
Intranet The use of the hypertext transfer protocol ("http") within a private network for the
purpose of disseminating html content. An Intranet is usually confined to a local
area network ("LAN") or private wide area network ("WAN").
ISDN Integrated Services Digital Network. A communications protocol used by telephone
companies to permit copper telephone wires to carry voice, data and other source
materials at high speeds.
LAN Local Area Network. A data communications network designed to interconnect personal
computers, workstations, minicomputers, file servers and other communications and
computing devices within a localized environment.
Mbps Megabits per second. A transmission rate. One megabit equals 1,024 kilobits.
Render Farm The process of creating an image on a computer from a collection of mathematical
formulas is called rendering, a microprocessor intensive activity. A render farm is
a collection of multiple computers (and therefrom micro-processors) linked together
to act as a single unit.
Router A system placed between networks that relays data to those networks based upon a
destination address contained in the data packets being routed.
TCP/IP Transmission Control Protocol/Internet Protocol. A suite of network protocols that
allow computers with different architectures and operating system software to
communicate with other computers on the Internet.
WAN Wide Area Network. A data communications network designed to connect personal
computers, workstations, minicomputers, file servers and other communications and
computing devices over a geographically dispersed area.
World Wide Web Or Web A collection of computer systems supporting a communications protocol that permits
multi-media presentation presentation of information over the Internet.
</TABLE>
8
<PAGE>
RISK FACTORS
THE SECURITIES OFFERED HEREBY INVOLVE CERTAIN RISKS. EACH PROSPECTIVE
INVESTOR SHOULD CAREFULLY CONSIDER, ALONG WITH OTHER MATTERS REFERRED TO HEREIN,
THE FOLLOWING FACTORS IN EVALUATING AN INVESTMENT IN THE SECURITIES OFFERED
HEREBY:
1. LIMITED OPERATING HISTORY. The Company's consulting services business has
been in operation for approximately six years, and the Company's Value Added
Reseller ("VAR") business has been in operation for approximately four years.
However, the Company's Internet business has been in operation only since early
1995 and the Company's interactive development operations have been in operation
for approximately one year. There can be no assurance that the Company will be
able to successfully commercialize these operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
2. PRIOR LOSSES; ACCUMULATED DEFICIT. The Company incurred a net loss for the
fiscal year ended September 30, 1996 in the amount of $1,893,480, and a net loss
in the first six months of the current fiscal year in the amount of $1,074,008
($680,806 for the three month period ended December 31, 1996 and $393,202 for
the three month period ended March 31, 1997). As of March 31, 1997, the Company
had an accumulated deficit of $3,048,274. There can be no assurance that the
Company will be profitable in future operating periods or that it will have
sufficient cash available to meet continuing losses, necessary capital
expenditures and/or the repayment of the Debentures (including the interest
payable on the Debentures). The Company believes that as a result of the
expansion to be undertaken after the completion of the Offering, it may incur
further losses during the 1998 fiscal year due to the fact that certain expenses
(e.g. marketing) are incurred and recognized prior to the earning and
recognition of the revenue to which such expenses would relate. However, there
can be no assurance that after incurring such expenses, there will be an
increase in revenues or earnings resulting therefrom. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
3. SUBORDINATION OF THE DEBENTURES. The Debentures will be subordinate and
junior in right of payment to all Senior Debt of the Company. On a pro forma
basis after giving effect to the sale of the Debentures and the anticipated use
of the estimated net proceeds therefrom, the Senior Debt of the Company will be
approximately $2,000,000. The Indenture will not restrict the amount of
indebtedness or Senior Debt the Company may incur from time to time. Due to the
subordination of the Debentures, in the event of any payment or distribution of
assets of the Company in any dissolution, insolvency, bankruptcy or other
similar proceeding, holders of Senior Debt must be paid in full before the
holders of the Debentures may be paid. By reason of this subordination, in the
event of the dissolution, insolvency or bankruptcy of the Company, holders of
the Debentures may recover less, ratably, than holders of Senior Debt and other
creditors of the Company, or may recover nothing. In addition, the Company may
be required to stop making payments of principal and interest on the Debentures
if there is a continuing default with respect to certain Senior Debt that would
permit the holders of such Senior Debt to accelerate payment of that debt. See
"Description of Securities -- Debentures -- Subordination."
4. PRESSURE ON PROFIT MARGINS OF VALUE-ADDED RESELLERS. As a reseller of
computer and peripheral equipment to corporations and other organizations, the
Company faces intense competition and the use of mass marketing channels in
which price-cutting is the dominant form of competition. Over the past decade,
technological improvements in computer and peripheral products, and increased
competition, have been accompanied by a consistent decline in their prices. This
decline in prices has resulted in decreasing profit margins for computer
resellers, including the Company. The industry trend is for users to hire
on-staff MIS personnel or independent MIS consultants which enables the user to
purchase equipment from catalogs rather than engage the services of a reseller
such as the Company to design and/or install a computer system. See
"Business -- Product Sales and Service."
5. NEED FOR ADDITIONAL CAPITAL RESOURCES; ADDITIONAL INDEBTEDNESS. The Company
believes that this Offering may not fully satisfy its future need for capital
and that it will require additional financing in the future to fund future
acquisitions and growth. Therefore, in such event, it would seek to raise
additional capital through further public or private offerings, the call of the
Warrants (which requires consent of the Underwriter until the expiration of one
year from the date hereof) or the conversion of the Debentures. However, there
can be no assurance that the Company will be able to raise additional capital
when and as needed. The Company will not be restricted in the amount of
indebtedness it may incur in the future. The Company's amount of leverage will
affect its cost of funds, which may limit the financing available to the Company
for its operations, make it more vulnerable to
9
<PAGE>
economic downturns and limit its ability to withstand adverse changes or to
capitalize on business opportunities. If the Company is at any time unable to
generate sufficient cash flow from operations to service its debt, refinancing
of all or a portion of that debt or obtaining additional financing may be
required to avoid defaults (including cross-defaults) on some or all of its
indebtedness. A substantial portion of the Company's accounts receivable,
inventory and furniture, fixtures and equipment have been pledged to current
lenders, thereby making it unlikely that additional institutional debt financing
will be available (other than the refinancing of existing debt). There can be no
assurance that any such refinancing would be possible or that any additional
financing could be obtained, or obtained on terms that are favorable or
acceptable to the Company. If the Company is not successful with this Offering,
does not find another source of capital or fails in its efforts to increase cash
flow from current operations, the Company may not have sufficient cash resources
to continue current operations after September 30, 1998. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
6. DEPENDENCE UPON SUPPLIERS; SOLE AND LIMITED SOURCES OF SUPPLY. The Company
relies on other companies to supply certain components of its computer
inventory, service and diagnostic equipment, as well as its network
infrastructure (including telecommunications services and networking equipment)
which, in the quantities and quality required by the Company, is available only
from sole or limited sources. At the present time, Silicon Graphics and Sun
Microsystems are the Company's largest suppliers of products for both its sales
and Internet operations. Revenues from the sales from each of such suppliers
presently account for approximately 18% of the Company's total revenues. The
Company has in the past, and may from time to time, experience delays in
receiving telecommunications services and shipments of merchandise purchased for
resale. There can be no assurance that the Company will be able to obtain such
telecommunication services and shipments of merchandise on the scale and at the
times required by the Company at an affordable cost. There can be no assurance
that the Company's suppliers, will not enter into exclusive arrangements with
the Company's competitors or stop selling their products or components to the
Company at commercially reasonable prices, or at all. See
"Business -- Dependence Upon Suppliers."
7. COMPETITION WITH SUPPLIERS. The Company is dependent upon continued service
from an Internet access provider ("IAP") that may, for competitive reasons,
discontinue service to the Company at any time. Although there are other IAPs
from whom the Company could obtain a comparable level of service, a change in
access providers would likely involve significant costs and result in delays in
the Company's service to its customers. In addition, these other access
providers are, by definition, competitors of the Company, and may also
discontinue service to the Company.
In order to provide Internet access and other on-line services to its
customers, the Company leases long distance fiber optic telecommunications lines
from more than one national telecommunications services provider does. The
Company is dependent upon these providers of data communications facilities.
Certain of the Company's suppliers, including the regional Bell operating
companies ("RBOCs") and local exchange carriers ("LECs") currently are subject
to various price constraints, including tariff controls, which in the future may
change. In addition, regulatory proposals are pending that may affect the prices
charged by the RBOCs and LECs to the Company. Such regulatory changes could
result in increased prices of products and services, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
8. INTERNET RELATED RISK FACTORS.
DIFFICULTY IN ESTABLISHING INTERNET ACCESS BUSINESS. The Company's success in
the Internet access business will depend upon its ability to develop a
reputation for reliability over the long term and the security of its current
and future Internet connections. The Company must continue to expand and adapt
its network infrastructure as the number of users and the amount of information
they wish to transfer increases, and as the requirements of its customers
change. The expansion of the Company's Internet network infrastructure will
require substantial capital expenditures to purchase network-related hardware
and telecommunications lines. The Company may experience insufficient revenue
growth to achieve and maintain profitability if it is unable to obtain and
expand an ongoing client base. If the Internet access market fails to grow,
grows more slowly than anticipated, or becomes saturated with competitors, the
Company's business, financial condition and results of operations would be
materially adversely affected. See "Business -- Competition."
10
<PAGE>
PHYSICAL RISKS ASSOCIATED WITH INTERNET ACCESS BUSINESS. The Company's Internet
operations are dependent upon the protection of its network infrastructure
against damage from acts of nature, power failures, telecommunications failures
and similar events. Physical protection of the Company's network infrastructure
will be the primary responsibility of the Company. However, because it leases
its lines from long-distance telecommunications companies, RBOCs and LECs, the
Company is dependent upon these companies for physical repair and maintenance of
the leased lines. Despite precautions taken by the Company, the occurrence of a
natural disaster or other unanticipated problems at the Company's headquarters
and network operations center in New York City, may cause interruptions in the
services provided by the Company. In addition, failure of the Company's
telecommunications providers to provide the data communications capacity
required by the Company as a result of a natural disaster, operational
disruption or for any other reason could cause interruptions in the services
provided by the Company.
SECURITY RISKS ASSOCIATED WITH INTERNET ACCESS BUSINESS. Despite the
implementation of security measures, the core of the Company's network
infrastructure is vulnerable to computer viruses and disruptive problems. The
Company and other IAPs may in the future experience interruptions in service as
a result of the accidental or intentional actions of Internet users, current and
former employees or others. Unauthorized use could also potentially jeopardize
the security of confidential information stored in the computer systems of the
Company and its customers, which may result in liability of the Company to its
customers and deter potential subscribers. Although the Company intends to
continue to implement industry-standard security measures, such measures have
been circumvented in the past, and there can be no assurance that measures
implemented by the Company will not be circumvented in the future. Eliminating
computer viruses and alleviating other security problems may cause
interruptions, delays or cessation of service to the Company's customers. The
Company does not carry any insurance against these risks due to the
unavailability of such insurance at a reasonable cost. See "Use of Proceeds" and
"Business."
9. COMPETITION. The Company engages in an array of technology and
computer-related businesses, each of which carries its own particular commercial
and financial risks. There are no substantial barriers to entry into any of the
Company's lines of business, and the Company encounters significant competition
in each of them. The Company's competitors include (i) value-added resellers of
computer, network and peripheral equipment, (ii) computer repair services and
training providers, (iii) network consultants, (iv) IAPs, and (v) graphic design
and consulting firms. Many of the Company's current and potential competitors
have substantially greater financial, technical, marketing and other resources
and larger installed customer bases than the Company. The Company expects that
competition will intensify in each of its lines of business, particularly in the
area of Internet services, as more competitors enter the marketplace. There can
be no assurance that the Company will have the financial resources, technical
expertise or marketing and support capabilities to successfully meet its
competition. See "Business -- Competition."
10. RISKS OF TECHNOLOGICAL CHANGE; DEFECTS. The markets for the Company's
products and services are generally characterized by rapidly changing
technology, evolving industry standards, emerging competition and frequent new
product and service introductions. There can be no assurance that the Company
can successfully identify new product opportunities and develop and bring new
products and services to market in a timely manner. The Company's pursuit of
necessary technological advances will require substantial time and expense, and
there can be no assurance that the Company will succeed in adapting its computer
distribution and Internet services businesses to changing technology standards
and customer requirements.
11. TECHNICAL OBSOLESCENCE. The introduction of new products and services could
render the Company's existing products and services obsolete and unmarketable.
This risk is present in each of the Company's product lines, but particularly in
its Internet services business, which relies on the continued widespread
commercial use of Transmission Control Protocol/Internetwork Protocol
("TCP/IP"). Alternative open protocol and proprietary protocol standards have
been or are being developed. If any of these alternative protocols become widely
adopted, there may be a reduction in the use of TCP/IP. There can be no
assurance that the announcement or introduction of new products or services by
the Company or its competitors or any change in industry standards will not
cause customers to defer or cancel purchases of existing products or services,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
Products and services as complex as those offered by the Company may
contain undetected errors or defects when first introduced or as new versions
are released. There can be no assurance that, despite testing by the
11
<PAGE>
Company or its customers, errors will not be found in new products after
commencement of commercial deployment, resulting in product redevelopment costs
and loss of, or delay in, market acceptance, delays in collecting accounts
receivable and additional service costs.
12. DEPENDENCE UPON CHIEF EXECUTIVE OFFICER; NEED TO MANAGE GROWTH AND
EXPANSION. The Company's success will depend upon the continued service of its
President and CEO, Marc H. Bell. Mr. Bell has entered into an employment
agreement with the Company pursuant to which Mr. Bell will be employed by the
Company through September 30, 2000. In addition, the Company has obtained a key
person life insurance policy on Mr. Bell in the amount of $1,000,000. The
Company is the beneficiary of such policy.
The Company's success also depends upon its ability to attract and retain
additional highly qualified management, technical and sales and marketing
personnel. Competition for qualified employees is intense and salaries are
escalating very quickly. In addition, the process of locating such personnel
with the combination of skills and attributes required to carry-out the
Company's strategy is often lengthy.
As of June 30, 1997, the Company had approximately 69 full-time employees
and 10 part-time employees. The Company has hired additional full-time sales
staff, engineers and technicians the cost of which, at least initially, is
greater than the revenue, which they will generate. To manage its growth, the
Company must hire and train additional qualified personnel; and must continue to
expand and upgrade its sales capacity and build its network infrastructure.
Failure to manage its growth effectively could have a material adverse effect on
the Company's business, financial condition and results of operations.
13. GEOGRAPHIC CONCENTRATION; INDUSTRY CONCENTRATION. Almost all of the
Company's current revenues are generated within the New York City metropolitan
area. In addition, approximately 50% of the Company's sales are currently made
to organizations engaged in the advertising, publishing and entertainment
industries. As a result, the Company is susceptible to fluctuations in its
business caused by economic conditions in the New York City metropolitan area
and/or in those industries.
14. GOVERNMENT REGULATION. The Internet access operations of the Company are
not currently subject to direct regulation by the Federal Communications
Commission or any other government agency, other than regulations applicable to
businesses generally. Changes in the regulatory environment relating to the
Internet access industry, including regulatory changes which directly or
indirectly affect telecommunication costs or increase the likelihood or scope of
competition from regional telephone companies or others, could have an adverse
effect on the Company's business. The Company cannot predict the impact, if any,
that future regulation or regulatory changes may have on its business.
15. SUBSTANTIAL CONTROL BY PRINCIPAL STOCKHOLDERS. Marc H. Bell and Harpoon
Holdings, Ltd. (together, the "Principal Stockholders") beneficially own or
control approximately 57.1% of the outstanding shares of Common Stock. If all
the Warrants are exercised and all the Debentures are converted, the Principal
Stockholders will own or control approximately ______% of the outstanding shares
of Common Stock. Harpoon has entered into an Irrevocable Proxy Agreement with
Marc H. Bell (the "Irrevocable Proxy") which expires on October 1, 2005,
pursuant to which Marc H. Bell has the power to vote all shares owned by Harpoon
(the "Harpoon Shares") in the election of the Company's directors. The
Irrevocable Proxy is intended to enable Mr. Bell to maintain control over the
Company. Thus, as a practical matter, Marc H. Bell will be able to control
election of the Company's Board of Directors. The Irrevocable Proxy could have
the effect of depressing the market price of the Company's securities since it
adversely affects the ability of other stockholders to effect changes in
management of the Company. See "Principal Stockholders."
16. POSSIBLE ADVERSE EFFECT OF ISSUANCE OF PREFERRED STOCK. The Company's
Certificate of Incorporation authorizes the issuance of 500,000 shares of "blank
check" Preferred Stock, with designations, rights and preferences that may be
determined from time to time by the Board of Directors. At this time, none of
the shares of Preferred Stock are issued or outstanding. However, the Board of
Directors is empowered, without further stockholder approval, to issue Preferred
Stock with dividend, liquidation, conversion, voting or other rights that could
adversely affect the voting power or other rights of the holders of the Common
Stock. In addition, such charter provisions could limit the price that certain
investors might be willing to pay in the future for shares of the
12
<PAGE>
Company's Common Stock and may have the effect of delaying or preventing a
change in control of the Company. The issuance of Preferred Stock also could
decrease the amount of earnings and assets available for distribution to the
holders of Common Stock. There can be no assurance that the Company will not
issue Preferred Stock at some time in the future. See "Description of
Securities -- Preferred Stock."
17. SHARES AVAILABLE FOR FUTURE SALE. Future sales of shares of Common Stock by
the Principal Stockholders under Rule 144 of the Securities Act or the issuance
of shares of Common Stock upon the exercise of options or warrants, or
conversion of the Debentures, could materially and adversely affect the market
price of the Common Stock and could materially impair the Company's future
ability to raise capital through an offering of equity securities. A substantial
number of shares of Common Stock will become available for sale in the public
market at various times. No predictions can be made as to the effect, if any,
that market sales of such shares or the availability of such shares for future
sale will have on the market price of the Securities prevailing from time to
time. See "Principal Stockholders."
18. BROAD DISCRETION IN APPLICATION OF PROCEEDS. Approximately $585,000 of the
net proceeds received upon the sale of the Debentures will be applied to working
capital and general corporate purposes. Accordingly, the Company will have broad
discretion as to the application of such proceeds without prior stockholder
approval. In addition, the management of the Company has broad discretion to
adjust the application and allocation of the net proceeds from the sale of the
Debentures, in order to address changed circumstances and business
opportunities. As a result of the foregoing, the success of the Company will be
substantially dependent upon the discretion and judgment of the management of
the Company. See "Use of Proceeds."
19. ABSENCE OF DIVIDENDS. The Company has not paid any cash dividends on the
Common Stock since July 1994, when NAFT and an affiliated company, both
Subchapter S corporations under the Internal Revenue Code, were acquired by
PFMT, the Company's immediate corporate predecessor. As Subchapter S
corporations, NAFT and its affiliated company made several distributions to
their sole shareholder, Marc H. Bell. The Company does not anticipate paying any
cash dividends on the Common Stock in the foreseeable future. See "Dividend
Policy."
20. SECURITIES LAWS RESTRICTIONS ON CONVERSION OF DEBENTURES. In certain cases,
the sale of the Debentures and the Common Stock issuable upon conversion of the
Debentures pursuant to the conversion rights could violate the securities laws
of certain states or other jurisdictions. The Company has used and will continue
to use its best efforts to cause the Registration Statement of which this
Prospectus is a part to be declared effective under the laws of various states
as may be required to cause the sale of securities upon exercise of the
Debentures to be lawful.
21. POSSIBLE DELISTING AND RISK OF LOW-PRICED SECURITIES. The Company's Common
Stock is listed on Nasdaq and on the BSE. There can be no assurance that the
Company will continue to be able to satisfy certain specified financial tests
and market related criteria required for continued listing on Nasdaq and the
BSE. If the Company is unable to satisfy such maintenance criteria in the
future, the Common Stock may be delisted from trading on Nasdaq or the BSE, as
the case may be. If the Common Stock were to be delisted from trading on each of
Nasdaq or the BSE, trading, if any, would thereafter be conducted in the
over-the-counter market so-called "pink sheets" or the "Electronic Bulletin
Board" of the National Association of Securities Dealers, Inc., and consequently
an investor could find it more difficult to dispose of, or to obtain accurate
quotations as to the price of, the Company's Common Stock. This could adversely
impact on the market value of the Debentures.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure relating to the market for penny stocks in connection with
trades in any stock defined as a penny stock. Commission regulations generally
define a penny stock to be an equity security that has a market price listed of
less than $5.00 per share, subject to certain exceptions. Such exceptions
include any equity security listed on Nasdaq or a national securities exchange
(such as the BSE) and any equity security 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 three years, (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 annual revenue of at least $6,000,000, if such issuer has been in
continuous operation for less than three years. Unless an exception is
available, the regulations require the delivery, prior to any transaction
involving a penny stock, of a disclosure schedule explaining the penny stock
market and the risks associated therewith.
In addition, if the Company's securities are not quoted on Nasdaq or the
BSE, or the Company does not meet the other exceptions to the penny stock
regulations cited above, trading in the Company's securities would
13
<PAGE>
be covered by Rule 15g-9 promulgated under 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, in general, also are exempt from this rule if the market
price is at least $5.00 per share.
If the Company's securities become subject to the regulations applicable to
penny stocks, the market liquidity for the Company's securities could be
adversely affected. In such an event, the regulations on penny stocks could
limit the ability of broker/dealers to sell the Company's securities and thus
the ability of purchasers of the Company's securities to sell their securities
in the secondary market.
22. LIMITED LIABILITY AND INDEMNIFICATION MATTERS. As permitted by the Delaware
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, the By-laws of the Company provide that the
Company is required to indemnify its officers and directors 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. 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.
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<PAGE>
MARKET FOR COMPANY'S COMMON STOCK
The Company's Common Stock is traded on Nasdaq and the BSE. The following
table indicates high and low sales quotations for the periods indicated based
upon information supplied by Nasdaq, since the Company's initial public offering
in January 1996. Such over-the-counter market quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
LOW HIGH
------ -------
<S> <C>
Fiscal year ended September 30, 1997
First Quarter.......................................................... $8.875 $ 9.875
Second Quarter......................................................... 9.625 13.750
Third Quarter.......................................................... 9.875 13.875
Fiscal year ended September 30, 1996
Second Quarter......................................................... $7.750 $10.500
Third Quarter.......................................................... 8.625 10.000
Fourth Quarter......................................................... 7.500 9.500
</TABLE>
The number of holders of record of the Company's Common Stock on July 28,
1997 was approximately 25, which does not include individual participants in
security position listings. The closing price for the Common Stock on July 28,
1997 was $11.00 per share.
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Debentures is
estimated to be approximately $4,385,000 after the allowance of the
Underwriter's discount and estimated offering expenses. The Company anticipates
that the proceeds will be used as follows:
<TABLE>
<CAPTION>
APPROXIMATE
PERCENTAGE OF
APPROXIMATE NET
AMOUNT PROCEEDS
----------- -------------
<S> <C>
Upgrade of Facilities and Equipment (1).............................................. $1,400,000 31.9%
Reduction of Existing Debt(2)........................................................ 1,400,000 31.9
Sales and Marketing (3).............................................................. 500,000 11.4
Upgrade of Management Information Systems (4)........................................ 500,000 11.4
Working Capital and General Corporate Purposes (5)................................... 585,000 13.4
----------- -------------
Total......................................................................... $4,385,000 100.0%
</TABLE>
- ---------------
(1) In order to upgrade the network operation center, the Company will need to
(i) purchase additional equipment and line capacity, (ii) maintain a
sufficient inventory of network capacity to satisfy customer requirements on
a timely basis, and (iii) make additional physical improvements to the
existing facilities such as an increase in electrical power and air
conditioning. Expenditures may include the purchase of additional network
servers, routers, CSU/DSUs and network computers, as well as high-speed
telecommunications lines (T-1s and T-3s). These costs are estimated to be
approximately $1,400,000 and are necessitated by the rapid growth of the
Company's Internet related operations.
(2) The Company intends to make a $1,400,000 payment to NationsCredit in order
to reduce the amount of indebtedness (presently, approximately $2,000,000)
currently outstanding under a Revolving Credit Agreement, bearing interest
at a rate of 1.75% over the prime rate (10.25% as of July 1, 1997). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
(3) Represents funds required to implement the Company's sales and marketing
program, including participation in trade shows, the hiring of additional
sales personnel, the placing of advertising in various media, and the
marketing of the Company's Internet services and promotion of the Company's
other products and services.
(4) In order to integrate more efficiently the Company's various data bases and
systems, the Company intends to upgrade its management information system.
In connection with this project the Company will need to purchase additional
equipment and programming service.
(5) The Company intends to use the balance of the net proceeds of the Offering
for working capital and other general corporate purposes.
The foregoing uses of proceeds are estimates only and there could be
significant variations in the anticipated use of the proceeds due to changes in
business or economic circumstances and the amount of capital received pursuant
to this Offering. Accordingly, the Company reserves the right to reallocate the
foregoing uses of proceeds depending upon any such change of circumstances.
Pending specific application of the proceeds of the Offering, the net
proceeds of the Offering will be invested in interest-bearing savings accounts,
certificates of deposit, money market accounts, United States government
obligations or other short-term interest-bearing obligations.
DIVIDEND POLICY
The Company has not paid any cash dividends on the Common Stock since
terminating its status as a Subchapter S corporation under the Internal Revenue
Code in 1994. The Company currently intends to retain its future earnings, if
any, to fund the development and growth of its business and, therefore does not
anticipate paying any cash dividends on the Common Stock in the foreseeable
future.
16
<PAGE>
CAPITALIZATION
The following table sets forth the Company's actual capitalization as of
March 31, 1997, without giving effect to or assuming the exercise of the
Warrants or conversion of the Debentures.
<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------------
<S> <C>
ACTUAL AS ADJUSTED(1)
----------- --------------
Notes Payable.............................................. $ 418,863 $ 418,863
10% Convertible Senior Subordinated Debentures............. -- 5,500,000
Preferred Stock, $.01 par value, 500,000
shares authorized, no shares issued and
outstanding; no shares issued and
outstanding pro forma; no shares issued
and outstanding as adjusted.............................. -- --
Common Stock, $.01 par value, 10,000,000
shares authorized, 3,044,451 shares issued
and outstanding at March 31, 1997 (1).................... 30,445 30,445
Additional paid-in capital................................. 7,999,281 7,999,281
Accumulated deficit........................................ (3,048,274) (3,048,274)
----------- --------------
Total capitalization....................................... $ 5,400,315 $ 10,900,315
----------- --------------
----------- --------------
</TABLE>
---------------------------------
(1) As Adjusted financial information gives effect to the
issuance and sale by the Company of the $5,500,000 of
Debentures pursuant to the Offering. This does not include
any accrual of interest expense on the Debentures. See
"Use of Proceeds."
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected consolidated financial data for the nine months ended
September 30, 1995 and year ended September 30, 1996 have been derived from the
Company's financial statements included elsewhere in this Prospectus which have
been audited by Arthur Andersen LLP, independent public accountants, whose
report thereon is also included elsewhere in this Prospectus. The selected
consolidated financial data for the six months ended March 31, 1997 are
unaudited and, in the opinion of management, include all adjustments, consisting
of only normal recurring adjustments, necessary for a fair presentation of such
data. The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and Notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE NINE FOR THE FOR THE SIX MONTHS ENDED
MONTHS ENDED YEAR ENDED --------------------------------
SEPTEMBER 30, 1995 SEPTEMBER 30, 1996 MARCH 31, 1996 MARCH 31, 1997
------------------ ------------------ -------------- --------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................. $8,738,410 $ 10,373,664 $4,764,877 $ 8,925,851
Costs and expenses.......................
Cost of goods sold....................... 7,292,232 8,599,241 3,890,703 6,940,893
Selling, general and administrative...... 1,212,829 3,186,718 1,126,707 2,882,344
------------------ ------------------ -------------- --------------
Income (loss) from operations............ $ 130,839 $ (1,688,721) $ (319,714) $ (1,099,677)
Interest income.......................... 0 121,256 11,869 43,204
Interest expense......................... (72,881) (98,520) (55,930) (17,535)
Income (loss) before taxes............... 57,958 (1,923,376) (620,126) (1,074,008)
Provision (benefit) for taxes............ 19,099 (29,896) -0- -0-
------------------ ------------------ -------------- --------------
Net income (loss)........................ $ 38,859 $ (1,893,480) $ (620,126) $ (1,074,008)
------------------ ------------------ -------------- --------------
------------------ ------------------ -------------- --------------
Net income (loss) per common and common
equivalent share....................... $ 0.02 $ (0.72) $ (0.28) $ (0.35)
Number of shares used in computing net
income (loss) per common and common
equivalent share....................... 1,725,000 2,633,400 2,176,097 3,042,248
OTHER DATA:
Deficiency of earnings to cover fixed
charges (1)............................ (75,865) (1,705,795) (590,120) (945,192)
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------
<S> <C>
1995 1996 MARCH 31, 1997
----------- ----------- --------------
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 222,367 $ 2,342,011 $1,207,305
Working capital.......................... 179,739 3,423,313 1,734,249
Other assets............................. 21,364 115,093 107,425
Total assets............................. 2,961,550 7,809,782 9,622,864
Current liabilities...................... 2,322,141 1,720,082 4,304,320
Long-term liabilities.................... 340,612 0 337,092
Stockholders' equity..................... 298,797 6,089,700 4,981,452
</TABLE>
- ---------------
(1) Deficiency of earnings available to cover fixed charges consist of earnings
(losses) before income taxes. Fixed charges consist of interest on debt and
the interest component of rent expense (deemed to be one-third of the
total).
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company has divided its operations for "Segment Reporting" purposes
into two segments: (a) Sale, preparation, installation and servicing of computer
hardware and software products (the "Products Segment"); and (b) Internet
programming, web hosting, design of Internet systems such as shopping malls,
on-line gaming systems, payment systems and video streaming, training in the use
of computer software, animation services, and interactive and CD ROM design
services (the "Services Segment"). The Company first reported operations based
upon segments for the fiscal year ended September 30, 1996. These segment
results were influenced by the fact that during the fiscal year ended September
30, 1996, the Company's Internet activities were essentially in a developmental
stage. During the current fiscal year, the operating revenues from the Services
Segment will be considerably higher than in the prior fiscal year, both in terms
of dollar amount and percentage of sales, as will the identifiable assets used
in the Services Segment. However, the Company makes no prediction as to the
operating results of the two segments. For a further discussion of operations:
See "Business."
For the fiscal year ended September 30, 1996, operating results on a
segment basis were:
<TABLE>
<CAPTION>
PRODUCTS SERVICES
SEGMENT SEGMENT CONSOLIDATED
---------- ---------- -----------
<S> <C>
Sales to unaffiliated customers................... $9,732,322 $ 641,342 $10,373,664
Operating loss.................................... 267,482 359,751 1,688,721*
Identifiable assets............................... 3,442,760 1,132,253 7,809,782**
</TABLE>
* Includes $1,061,488 of unallocated corporate overhead including
executive salaries of $389,000 and overhead including rent, payroll
charges for administrative staff including accounting, human resources,
MIS and other support personnel and professional fees.
** Including corporate assets not allocable to a particular segment of
$3,234,769.
RESULTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1997 COMPARED WITH SIX MONTHS ENDED MARCH 31, 1996
REVENUES. Consolidated revenues for the six months ended March 31, 1997,
compared to the same period in 1996, increased approximately 87% from
approximately $4.8 million to approximately $8.9 million. This increase was due
to an increase in every aspect of the Company's business, however, a significant
portion was due to sales of products rather than services. The Company intends
to focus its future operations primarily in the areas of high-end Internet
related sales, service and training.
COST OF REVENUES. Cost of revenues for the six months ended March 31, 1997 were
approximately $6.9 million, or approximately 78% of revenues, as compared to
$3.9 million or approximately 82% of revenues for the comparable period in
fiscal 1996. The increase in gross profit margin was due to the fact that an
increased percentage of sales came from sales of services (which generated
higher profit margins) rather than sales of products. In addition, product sales
of more sophisticated computer systems, which required greater pre-sales, and
after market customer assistance, and therefore generated higher profit margins,
increased.
SELLING, GENERAL AND ADMINISTRATIVE. For the six months ended March 31, 1997,
selling, general and administrative expenses increased from approximately $1.1
million (or 24% of revenue) to approximately $2.9 million (or 32% of revenue).
This increase was due primarily to an increase in payroll for corporate
administrative personnel and sales personnel, technicians and engineers in all
areas of operations. In addition, general overhead increased as a result of the
relocation and expansion of the Company's facilities. Starting in January 1997,
the Company has commenced an internal cost cutting program. Specifically, it has
consolidated all of its operations at 295 Lafayette Street, New York, New York
and surrendered its premises at 611 Broadway, New York, New York. This was made
possible by the exercise by the Company of an option to lease additional space
at its corporate headquarters at a price of $4.00 per square foot.
NET LOSS. For the six month period ended March 31, 1997, the Company incurred a
net loss of approximately $1,074,000 compared to a net loss of approximately
$620,000 for the corresponding six month period ended March 31, 1996. The
Company expects that as a result of the expansion to be undertaken after the
completion of this Offering, it may incur further operating losses during fiscal
1998 due to the fact that it will incur and recognize certain expenses (such as
marketing costs) in advance of the receipt and recognition of revenues expected
to be generated by such increased expenditures.
19
<PAGE>
TWELVE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1995
The financial statements contain results of operations for the twelve-month
period ended September 30, 1996 and the nine-month period ended September 30,
1995. The Company received the proceeds of its public offering on February 1,
1996. These facts should be considered in reading the following discussion.
REVENUES. Revenues increased from $8,738,410 in fiscal 1995 to $10,363,664 in
fiscal 1996 because of the longer fiscal year. In the fiscal year ended
September 30, 1995, revenues from Internet operations were small, and no other
segment of the Company's business accounted for 10% of gross revenues, operating
income/loss and identifiable assets of the Company. While the Company's actual
revenues are not steady on a month by month basis, for comparison purposes only,
average monthly revenues in fiscal 1996 were approximately $864,000 as
contrasted with average monthly revenues in fiscal 1995 of approximately
$971,000. This decline is due to a substantial reduction in the sales of Apple
computer products, which produced large sales numbers because of the price of
the products, being sold. The Company is replacing these sales in part with
sales of other products and with Internet related sales, training and service.
The Company anticipates that, in the future, a greater percentage of revenues
will result from Internet related sales which have higher gross profit margins.
COST OF REVENUES. Cost of Revenues remained constant from fiscal 1995 to fiscal
1996 at approximately 82%. However, gross profit margins for the three and nine
month periods ended June 30, 1996 were 23% and 20%, respectively. The gross
profit margin for the three month period ended September 30, 1996 was 7%. The
fourth quarter results of operations were negatively impacted by a number of
events and adjustments, all of which adversely impacted gross margins. In
particular, (a) the Company reflected a reclassification of approximately
$100,000 from selling, general and administration to cost of revenue to more
accurately reflect direct expenses of the Internet operations; (b) established a
reserve of $90,000 for returned merchandise allowances primarily with Apple
Computer, Inc., because of the Company's de-emphasis of its business with Apple
and the Company's assessment of Apple's financial situation; and (c) various
year-end adjustments of approximately $100,000. In addition, the Company
relocated its operations in the fourth quarter of fiscal 1996, which adversely
impacted revenues and gross profit margins.
NET INCOME (LOSS). Approximately $220,000 of the Company's loss before taxes in
1996 was due to depreciation and $257,000 was due to the write-off of debt
issuance costs related to a debt incurred prior to the initial public offering.
The balance of the loss (in the amount of $1,416,480) can be traced directly to
selling, general and administrative costs. Within this category, a substantial
portion of such costs was related to payroll. The monthly payroll of the Company
increased from $162,233 for the month of October 1995 to $308,115 for the month
of October 1996. This increase in payroll was primarily for corporate
administrative personnel and sales personnel, technicians and engineers in all
areas of operations. A portion of the Internet engineering payroll ($130,000)
was capitalized. In the initial phases of operation, such increased payroll
resulted in no significant revenue. This negative trend continued in the fourth
quarter so that selling, general and administrative costs as a percentage of
revenues increased from approximately 22% in the quarter ended December 31, 1995
to approximately 48% in the quarter ended September 30, 1996. The Products
Segment in the year ended September 30, 1996 had an operating loss of
approximately $267,000. For the nine months ended September 30, 1995, the
Products Segment had an operating profit of approximately $71,000. The cost of
revenues for the Products Segment for both fiscal years was approximately 85%.
The reason for the loss in 1996 can be traced to (a) an increase in payroll of
approximately $650,000 for the hiring of additional sales staff and computer
technicians offset by (b) a decrease in other selling, general and
administrative expenses of approximately $150,000, and (c) an increase in gross
profits of $200,000 based on increased revenues of approximately $1,300,000. As
noted above, the Company's focus is shifting toward its Internet operations. The
Company believes that the increase in sales staff and technicians in the
Products Segment will lead to future business for its complimentary Services
Segment.
Expenditures for research and development increased by $23,250 to $57,250.
This increase was for Internet programming work done by the Company in setting
up its Internet network.
As a result of the above, the Company reported a net loss for 1996 of
$1,893,480 or $0.72 per share as opposed to the reported net income in 1995 of
$38,859 or $0.02 per share.
LIQUIDITY AND CAPITAL RESOURCES
The Company (through its Naft subsidiary with a guaranty of the Company)
has a revolving credit agreement (the "Credit Agreement") to finance its
accounts receivable and inventory with NationsCredit ("Nations") pursuant to
which it can borrow up to $3 million based upon a formula set forth in the
Credit Agreement. As of March 31, 1997, the Company had a net outstanding
balance of approximately $1.9 million under the Credit
20
<PAGE>
Agreement. Such obligation is secured by a continuing security interest in
substantially all of the assets of the Company. The borrowings bear interest at
the prime rate plus 1.75%. Pursuant to the terms of the Credit Agreement, Naft
is required to maintain certain liquidity ratios which Naft is currently
maintaining, including: (a) tangible net worth plus indebtedness subordinated to
amounts owed to Nations, less prepaid expenses, intercompany and
officer/employee receivables and other intangible assets of not less than $1.4
million at the end of each fiscal quarter, and (b) a ratio of total liabilities
to tangible net worth of no greater than 2.5 to 1 at the end of each fiscal
quarter. As of March 31, 1997, Naft had a tangible net worth as defined in the
Credit Agreement of approximately $1.2 million and a ratio of total liabilities
to tangible net worth of 2.9 to 1. The shortfall in tangible net worth arose
because of certain intercompany transactions. Nations formally waived the
default in May 1997 and the Company anticipates that Naft is in compliance with
all requirements as of June 30, 1997. While the Credit Agreement gives Nations
the right to demand repayment if it deems itself "insecure," Nations has given
the Company no indication that it is considering utilizing this provision.
Furthermore, incurring losses as the Company builds its new businesses was
anticipated in setting its covenants with Nations in October 1996 and the
Company deems its relationship with Nations to be normal.
The Company had a negative cash flow of approximately $1.1 million for the
six months ended March 31, 1997. This resulted in part from a cash loss in
operations of approximately $1,785,000 which represents the net loss of
approximately $1,074,000 and the increase in accounts receivable of
approximately $2.1 million (offset in part, by the increase in accounts payable
of approximately $1.0 million). In addition, the Company purchased property and
equipment in the amount of approximately $1,222,000 and increased short-term
borrowings by approximately $1,526,000 (primarily from an increase in its
borrowings under the Credit Agreement).
Due to the Company's negative cash flow from operations and past and future
expenditures under its aggressive program of capital expenditures, the Company
has increased its borrowings under its Credit Agreement, and obtained a chattel
mortgage on its furniture and certain computer equipment in April 1997 in the
amount of $864,000 from FINOVA Capital Corporation. Such loan is for a term of
three years bears interest at 12.19% per annum and is self-liquidating over its
term.
To continue its pattern of growth, the Company must raise additional
capital and there can be no assurance that such capital will be available when
and as needed by the Company, or at a reasonable cost. If the Company is not
successful with this Offering, does not find another source of capital or fails
in its efforts to increase cash flow from current operations, the Company may
not have sufficient cash resources to continue current operations after
September 30, 1998.
FORWARD LOOKING STATEMENTS
The foregoing Management's Discussion and Analysis of Financial Condition
and Results of Operations contains certain forward-looking statements. Due to
the fact that the Company faces intense competition in a business characterized
by rapidly changing technology, actual results and outcomes may differ
materially from any such forward looking statements. Future results of
operations are, in general, difficult to forecast due to the fast moving pace of
the industry.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share. This
statement establishes standards for computing and presenting earnings per share
("EPS"), replacing the presentation of currently required primary EPS with a
presentation of Basic EPS. For entities with complex capital structures, the
statement requires the dual presentation of both Basic EPS and Diluted EPS on
the face of the statement of operations. Under this new standard, Basic EPS is
computed based on weighted average number of shares actually outstanding during
the year and excludes any potential dilution; Diluted EPS includes the effect of
potential dilution from the exercise of dilutive stock options and warrants into
common stock using the treasury stock method. SFAS 128 is effective for
financial statements issued for periods ending after December 31, 1997,
including interim periods, and earlier application is not permitted. When
adopted, the Company will be required to restate its EPS data for all prior
periods presented. The Company does not expect the impact of the adoption of
this statement to be material to previously reported EPS amounts.
21
<PAGE>
BUSINESS
Bell Technology Group Ltd. (the "Company"), is a diversified computer
products and service company which focuses its operation on providing
sophisticated computer/Internet business solutions to larger companies which are
engaged primarily in the graphics arts, advertising, publishing, entertainment
and financial industries. The Company has the ability to advise clients on the
various computer solutions available, provide, install and service such
solutions and then assist the client in properly utilizing the benefits to be
gained from using the World Wide Web (the "Internet"). The Company has
authorizations to sell and service equipment from hardware manufacturers such as
Silicon Graphics, Inc., Sun Microsystems, Inc. and Cisco Systems, Inc. and
software manufactures such as Microsoft Corporation, Netscape Corporation,
Alias/Wavefront Inc. and Checkpoint Software Corp. As a result of its growing
experience in the use of the Internet in commercial applications, the Company
has done substantial work in the areas of video streaming, security in credit
card transactions, and the creation of "shopping carts" for catalog sales
companies.
INTERNET SERVICES
The Internet services industry is comprised of many large, mid-sized, and
small companies engaged in a number of Internet-related activities including
Internet access, World Wide Web site design, Internet software development and
related consulting services. The Internet is a worldwide network of public and
private computer networks that link individuals, commercial organizations,
government agencies and educational institutions by means of a common
communication standard. Recent technological advances, including improvement in
network topologies and the development of easy-to-use graphical user interfaces,
combined with cultural and business changes, have led to the Internet being
integrated into the activities of individuals and the operations and strategies
of commercial organizations. However, direct access to the Internet is, in
general, prohibitively expensive for many organizations and individuals, without
the assistance of an Internet Access Provider, such as the Company, which has
the technological and other resources necessary to provide the connection. In
addition, while there has been significant media interest in use of the Internet
by consumers, business and professional organizations currently represent a more
significant percentage of Internet use. In June 1995, the Company, in order to
take advantage of the rapid growth in Internet usage by commercial organizations
began providing Internet-related services to such organizations.
During the past fiscal year, the Company has spent over $2 million building
a state-of-the-art network operations center at its new location. The 2,000
square foot network operations center offers customers the ultimate in network
connectivity. Connected to three Tier I Internet carriers via redundant fiber
optics, and providing connectivity to leased line clients via an OC-12 on the
NYNEX SONET ring, the Company is poised to service the most demanding companies
in New York City. Additionally, the network operations center offers secure
on-premises co-location services for those clients focused on Internet
publishing on the World Wide Web. The Company will use a portion of the proceeds
from the sale of the Debentures, to expand the network operations center
facility. See "Use of Proceeds."
With its staff of Internet engineers and systems administrators, the
Company offers multiple platforms for World Wide Web hosting and development,
and is continually working on new and unique approaches to the use of the
Internet for business solutions. The Company's state-of-the-art network
operations center (located at its corporate headquarters) provides sophisticated
Internet connectivity available for direct, high-speed Internet connections and
World Wide Web hosting and co-location facilities. The Company assists its
clients with web development and hosts their web sites by providing the
appropriate hardware, network and maintenance services. The Company operates
this aspect of its business on a highly personalized level as opposed to using a
mass market approach, paying particular attention to the particular needs of its
clients. The Company firmly believes that facilities-based Internet services are
the future of the industry. Major corporations, which have web hosting and/or
co-location services, such as MSNBC Desktop Video and General Media
International, are invited to work closely with the Company at its facility in
setting up and managing sites.
Among the services and products offered to its clients is video
streaming -- a process whereby a user can view video transmissions while
downloading the video file. This allows companies like MSNBC Desktop Video to
distribute live video feeds to its customers. The Company is also working with a
major international magazine publisher to stream multiple channels of video,
each carrying its own content, to the Internet using public. In
22
<PAGE>
effect, this enables the magazine publisher to produce its own "cable-like TV
experience" without regard to geographic boundaries.
Among the marketing approaches developed by the Company are Internet based
commerce solutions, which include secure credit card transaction processing, a
shopping cart for browsing and purchasing merchandise on-line, and audio/video
streaming technologies that allow for, among other things, pay-per-view
programming. The Company is able to create multi-media web sites and provide
high-speed access to the Internet for the client/user. This technology enables
users to make use of the Internet to complete "on-line" transactions. For
example, the Company is bringing a substantial catalog sales company on-line, to
enable it to increase sales and market share by completing transactions over the
Internet.
BASIC INTERNET ACCESS: The Company provides dedicated Internet access to
corporations and other commercial entities. The Company offers four commercial
connection bandwidths: 56 Kbps, 128 Kbps, T-1, and T-3, and the hardware
necessary for basic Internet access, including routers and CSU/DSUs. The
bandwidth, or capacity of a physical network to carry traffic, of a dedicated
digital line is far greater than that possible through use of a conventional
modem. Greater bandwidth allows faster connection and downloading capabilities
for subscribers. Businesses with medium to large LANs and WANs often require the
bandwidth offered by dedicated digital lines.
A direct link between a commercial subscriber's LAN or WAN and the Internet
through the Company gives a subscriber the ability to use all the tools
available on the Internet. A direct link involves a leased line, provided by a
local telephone service provider, between the subscriber's location and the
Company's multi-path (or "redundant") backbone connection to the Internet. The
Company derives Basic Internet Access revenues from initial connection charges
and monthly service fees, both of which vary directly with the bandwidth chosen.
Each commercial subscriber receives a numerical Internet address, a descriptive
domain name, and 24-hour access to the Internet.
The Company also offers three levels of protection against unauthorized
access to private communications, depending on subscriber needs: (i) router
configuration, (ii) host configuration, and (iii) firewall design and
configuration. Router configuration involves the filtering of information
requests. Host configuration involves the determination of who is authorized to
access information. Firewall design, which is the most secure form of protection
against unauthorized access available, involves the interposition of certain
physical devices and barriers between a LAN and the Internet.
The Company assists subscribers in achieving full integration of their
existing LAN or WAN into the Internet once the basic Internet connection is
established. Where commercial subscribers utilize standard internal e-mail
applications, such as QuickMail or cc:Mail, the Company is able to assist them
with the setup of a mail gateway for proactive mail delivery to the desktop. In
addition, the Company provides a configuration service for LAN-based computers
by installing and configuring Internet-related software needed for applications
such as (i) File Transfer Protocol ("FTP"), an application which allows an
Internet user to retrieve entire files and documents from remote databases and
networks, and (ii) telnet, a utility which allows users to log-on to remote
systems easily.
Other services offered by the Company to it's customers include Internet
access, ISDN, leased lines, web hosting, programming, firewall, network security
and system design services. Due to the existence of its sales and service
operation the Company is able to offer customers support and services on all
major operating systems including UNIX, IRIX, Windows NT and Mac OS. However,
the Company does not intend to go into the consumer "dial-up" market. The
Company also provides consulting services in the areas of inter-networking,
computer and network security, network design and network operations.
PRODUCT SALES AND SERVICE
The Company has been shifting its emphasis from the sale of low margin
products with intense price competition such as Apple to higher-end, higher
margin hardware products such as Silicon Graphics, Integraph, Sun Microsystems,
Cisco, Digital Equipment, and software products such as SoftImage,
Alias/Wavefront and Avid. These products are generally not purchased through
mail order (as are Compaq and Apple products, for example) and require a higher
level of sales effort and after-market support such as training.
The Company services the products, which it sells by providing, warranty
repair services as well as contract support of system software and hardware.
Hardware contracts are issued for a fixed price and for a fixed term.
23
<PAGE>
Contracts for software support and maintenance are issued on the basis of
prepaid hours where a customer prepays for a block of hours, which may be used
at any time. Payments for service contracts are accounted for ratably over the
period of the contract. Payments for prepaid hours are accounted for as the
hours are used.
When requested by the client, the Company will prepare all equipment sold
by it by loading customer programs, connecting equipment to a network, and
servicing the client's hardware and software. The Company is authorized to carry
out warranty and other repairs on many of the products, which it sells. However,
the Company does not consider its repair and service activity to be a mainstream
activity but rather a service, which is maintained for the convenience of its
clients.
TRAINING
The Company maintains several classrooms at its headquarters facility,
which it rents out to corporations for the training of their professional staff.
The Company also provides training at the client's site on a national basis. The
Company provides a variety of modern operating equipment and current programs,
together with instructors to teach how to use such equipment and programs. Some
instructors are on staff and others are hired on a freelance basis, as needs
dictate. The Company typically charges a fixed price depending upon the size of
the class, the complexity of the group and the equipment required.
In September 1996, the Company began an aggressive program to market its
in-house training facilities. The Company provides training services for the
more sophisticated computer software program which it sells. Training is
marketed to large advertising and publishing firms, banks, large financial
institutions, clothing manufacturers, and the like, which send their personnel
to the Company's facility to attend one to five day programs. The Company's
modern classrooms at its corporate headquarters can accommodate groups of up to
150. Training rooms are equipped with modern hardware, computer desks and other
appropriate classroom equipment and various programs are loaded into equipment
as required by the users. In addition, T-1 access is provided in each classroom
for use in teaching Internet usage and programs. Course materials and training
methodology are custom developed to fit each client's specific needs. The
Company markets it training on a value-added basis, rather than as a
price-focused commodity product. The Company intends to expand this operation
into a significant source of revenue. The Company also provides training
sessions at its customers' sites. In such events, it provides trainers,
materials and any software or special hardware required.
The Company is a training center for Alias/Wavefront for the New York City
Metropolitan area. Alias programs are used for high-end (e.g. broadcast and
film) animation, 3-D modeling, and rendering. The Company is also an authorized
training provider for Macromedia Authorware/Director. Training is provided on a
wide range of platforms, including PC, IRIX and Mac OS.
INTERACTIVE DEVELOPMENT
The Company's graphic arts capabilities include creating and assembling
World Wide Web sites, interactive applications such as computer based training
and promotional sales material. The Company works with content providers such as
marketing firms to provide the technical and design aspects of a project for
large-scale multimedia projects including sites to be used on the Internet.
The Company designs internal communications products used by businesses for
computer based in-house training and Intranet development. In addition, the
Company provides front-end interfaces and graphics for database driven web
sites.
The Company's main areas of digital design development include animation,
interactive and web production. The animation capability extends to working in
Alias and SoftImage (the two animation packages with the greatest market share)
and to render work on a state-of the-art render farm from Silicon Graphics. The
Silicon Graphics render farm is made available to major national broadcast
companies which rent time on the farm when the Company is not using it. The
Company's Authorware division is responsible for creating computer-based
training and computer-based sales tools for major corporations. Most recently,
the Company has leveraged its Internet knowledge and instructional design
expertise to develop interactive training applications with rich multi-media
content for delivery over corporate Intranets. The Company recently completed an
intranet based interactive training program utilizing Macromedia Shockwave
technology for an international pharmaceutical company.
24
<PAGE>
The Company provides consulting and project management services for
companies making the transition from print to electronic to Internet
presentations and is currently doing such project for the largest and oldest
industrial directory of products and services in the world.
COMPETITION
The Company engages in an array of technology and computer related
businesses, each of which carries its own particular commercial and financial
risks. All of the businesses in which the Company engages faces competition from
significantly larger and better capitalized companies.
The market for Internet access services is extremely competitive. There are
no substantial barriers to entry in this industry, and the Company expects that
competition will intensify in the future. The Company believes that its ability
to compete successfully depends upon a number of factors including the pricing
policies of its competitors and suppliers; the timing of introductions of new
products and services by the Company and its competitors; and the Company's
ability to maintain or exceed industry service standards. The Company expects
that, because of the specialized nature of the Internet services business, it
may initially enjoy a competitive advantage because of its existing knowledge of
the advertising and publishing industries.
The Company's current and prospective competitors in the Internet services
industry generally may be divided into the following two groups: (1) other IAPs,
such as UUNET, and its strategic partner Microsoft, PSI, NETCOM, BBN, and other
national and regional providers; and (2) telecommunications companies, such as
AT&T, MCI, Sprint, MFS, WilTel, the RBOCs and various cable companies. All of
these competitors have greater market presence, engineering and marketing
capabilities, and financial, technological and personal resources than those
available to the Company.
Although most of the established telecommunications companies currently
offer only limited Internet access, many have announced plans to offer expanded
Internet access capabilities. The Company expects that all of the major
telecommunications companies will compete fully in the Internet access market.
The Company believes that new competitors, including large hardware, software,
media and other technology and telecommunications companies will enter the
Internet access market, resulting in even greater competition for the Company.
Certain companies, including America On-Line, GTE and PSI, have obtained or
expanded their Internet access products, services and customer bases as a result
of acquisitions. Such acquisitions may permit the Company's competitors to
devote greater resources to the development and marketing of new and existing
competitive products and services. In addition, the ability of some of the
Company's competitors to market other products and services with Internet access
services could place the Company at a competitive disadvantage. For example,
certain of the Company's competitors which are telecommunications companies may
be able to provide customers with reduced communications costs in connection
with their Internet access services, reducing the overall cost of their Internet
access solution and significantly increasing price pressure on the Company.
As a result of increased competition, the Company expects to encounter
significant pricing pressure in each of its business areas, which in turn could
result in significant reductions in the prices that the Company can charge for
its services. There can be no assurance that the Company will be able to offset
the effects of any such price reductions with an increase in the number of its
customers, higher revenues from enhanced services, cost reductions or otherwise.
In addition, the Company believes that the Internet access and on-line services
businesses are likely to encounter consolidation in the near future, which could
result in increased price and other competition in the industry. There can be no
assurance that the Company will have the financial resources, technical
expertise or marketing and support capabilities to successfully meet its
competition. See "Risk Factors -- Dependence upon Chief Executive Officer; Need
to Manage Growth and Expansion."
As a reseller of computer and peripheral equipment to business
organizations, the Company faces intense competition from mass marketing
channels in which price-cutting is the dominant form of competition. Over the
past decade, technological improvements have been accompanied by a consistent
decline in prices. This decline in prices has resulted in decreasing profits
margins. Consequently, in order to achieve and maintain profitability, the
Company must attain increased sales in this area of the business, or achieve
greater sales in other areas of the business, which have higher profit margins.
Furthermore, as companies hire their own internal computer specialists, the
companies are in a better position to fulfill their computer needs through mail
order purchases at lower prices than the Company can provide.
25
<PAGE>
The market for new commercial computer equipment is characterized by rapid
technological advancements, intense competition and the use of mass marketing
channels in which price-cutting is the dominant form of competition. The Company
can be distinguished from other computer equipment providers on the basis of
added services, such as consultation and advisory services, and its ability to
work with clients in the more sophisticated areas of computer usage such as 3D
animation, training and Internet access, which the Company's sales and technical
staff is trained to provide.
The market for the servicing of computers and peripheral equipment is a
local market. As a result, the Company's main competitors are local New York
City computer resellers. The Company has scaled back its computer service and
repair operation and offers it primarily as a convenience to its clients.
The Company relies on other companies to supply certain components of its
computer inventory, service and diagnostic equipment, as well as its network
infrastructure (including telecommunications services and networking equipment)
which, in the quantities and quality required by the Company, are available only
from sole or limited sources. The Company has in the past, and may from time to
time, experience delays in receiving telecommunication services and shipments of
merchandise. There can be no assurance that the Company will be able to obtain
such telecommunication services and merchandise on the scale and at the times
required by the Company at an affordable cost.
EMPLOYEES
As of June 30, 1997, the Company employed approximately 69 full time and 10
part time employees. Of the full time employees, approximately 10 are in
management positions, 10 are in administrative and support positions, 14 are in
sales positions, and 35 are in technical, engineering, design and service
positions. None of the Company's employees are covered by a collective
bargaining agreement. The Company believes that its employee relations are
satisfactory.
PROPERTIES
The Company leases approximately 32,000 square feet of space in New York,
New York, which it uses as its principal executive offices, sales, service and
training center, shipping and receiving depot, for a term expiring the year
2007. The initial rent under the lease is $309,250, and escalates over the term
of the lease to $563,547 in the year 2007. The Company intends to use a portion
of the proceeds of the Offering to expand its facilities. See "Use of Proceeds."
The Company considers that, in general, its physical properties are well
maintained, in good operating condition and adequate for its purposes.
LEGAL PROCEEDINGS
In January 1997, a company, which allegedly provides website services,
commenced an action in the Supreme Court of the State of New York, County of New
York against General Media International Ltd., the Company and two individuals.
The Complaint alleges that the Company tortiously interfered with the
plaintiff's contractual and business relations with General Media International,
Inc. The Company believes that the action against it is without merit and
intends to vigorously defend itself. No papers have been filed in the action
since the original summons and complaint filed by the plaintiff and the answer
by the Company.
26
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The following sets forth information with respect to the executive officers
and directors of the Company as of the date of the Prospectus.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------- --- -----------------------------------
<S> <C>
Marc H. Bell 29 Chairman, Chief Executive Officer
and Director
Robert B. Bell 58 Executive Vice President, Chief
Financial Officer and Director
William T. Jahnke 43 Vice President
Marc Jaffe 30 Vice President
Alan Levy 35 Treasurer (Chief Accounting
Officer)
Scott Safran 41 Vice President -- Training &
Interactive Development
Tsuyoshi Shiraishi 52 Director
Martin Fox 62 Director
Dr. Richard Videbeck 73 Director
</TABLE>
MARC H. BELL has been the President and Chief Executive Officer since he
founded the Company in 1989. He has had more than eight years of experience in
the computer industry. Mr. Bell has a B.S. degree in accounting from Babson
College and an M.S. degree in Real Estate Development and Investment from New
York University.
ROBERT BELL has served as Executive Vice President and Chief Financial
Officer of the Company and its corporate predecessor since 1994. Prior to
joining the Company, Mr. Bell was a practicing attorney in New York City for
more than five years. Prior to 1994, Mr. Bell was for many years also an Adjunct
Professor at New York University. He is primarily responsible for the Company's
financial policies. Robert Bell is the father of Marc H. Bell.
WILLIAM T. JAHNKE has been a Vice President of the Company since March 1997
and the Director of Corporate Sales of the Company since August 1995. Prior to
joining the Company, Mr. Jahnke was president and chief operating officer of
Vernon Computer Rentals and Leasing from February 1989 to December 1994, where
he pioneered and implemented a nationwide asset management program for Apple
which is used by several thousand U.S. sales representatives. Mr. Jahnke
received a B.S. Degree in Computer Science from Seneca College in 1975.
MARC JAFFE a Vice President of the Company since March 1997 and Director of
On-Line Services, joined the Company in early 1995 to run the Company's Internet
services business. Prior to joining the Company, Mr. Jaffe had extensive
experience in the use of computers and telecommunications in the advertising and
marketing industry. Mr. Jaffe recently developed an Internet-focused marketing
strategy that won the prestigious CreaTech Award, presented by ADVERTISING AGE
magazine, and has spoken at numerous Internet conferences sponsored by Apple
Computer. Prior to joining the Company, Mr. Jaffe was a department manager at
Sid Patterson Advertising Inc. in New York City since 1989. Mr. Jaffe graduated
from Colgate University in 1989, where he received a Bachelor of Arts Degree.
ALAN LEVY joined the Company as Treasurer and Chief Accounting Officer in
February 1997. From March 1994, to February 1997, Mr. Levy was the Assistant to
the Vice President of Finance of Del Laboratories, Inc., a manufacturer and
wholesaler of cosmetics and over-the-counter pharmaceuticals. Prior to that, Mr.
Levy was a Technical Manager with the American Institute of Certified Public
Accountants from August 1990 to March 1994. He is a Certified Public Accountant
and received his Bachelor's degree in Public Accounting from Long Island
University, C.W. Post Campus.
SCOTT SAFRAN has been Vice President-Training and Interactive Development
since June 1997 and the Director of Corporate Training since joining the Company
in March 1996. Prior to joining the Company he was a Senior Account Executive at
IBM Skill Dynamics Corporation from December 1994 to October 1995. From December
1989 to December 1994 Mr. Safran was in various sales positions with AT&T
Networking Systems.
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<PAGE>
Mr. Safran has a Bachelor of Arts in English Literature and Master of Business
Administration degrees from St. John's University.
TSUYOSHI SHIRAISHI has been a director of the Company since July 1, 1994.
Mr. Shiraishi has been the Chairman of Century World PTE Ltd., an investment
consulting firm and the Managing Director of Harpoon since 1992. Prior to that,
Mr. Shiraishi was the Director of Marketing & Investment for Kajima Overseas
Asia PTE Ltd., a subsidiary of Kajima Corporation, an international construction
company, since 1990. In addition, since 1990, Mr. Shiraishi has been Vice
Chairman of Century International Hotels, which operates and manages 17 hotels
in the Pacific Rim. He is the sole shareholder of Harpoon. Mr. Shiraishi is a
Japanese citizen and a resident of Singapore.
MARTIN FOX has been a director of the Company since October 1995. Mr. Fox
has been, for more than five years, the President and a director of Initio,
Inc., a publicly owned mail order retailer of consumer products.
RICHARD VIDEBECK has been a director of the Company since October 1995.
Since 1983, Dr. Videbeck has been an independent consultant in consumer risk
analysis, particularly for retailers and banks. From 1974 until 1986, Dr.
Videbeck was a professor of sociology at the University of Illinois at Chicago.
From 1974 until 1977, Dr. Videbeck was the Dean of the Doctor of Arts Program of
the Graduate College of the University of Illinois at Chicago.
The directors serve until the next annual meeting of the Company's
stockholders and until their respective successors are duly elected and
qualified or until their earlier resignation, death or removal. Officers are
appointed by, and serve at the discretion of, the Board. Marc H. Bell and Robert
Bell have each entered into employment agreements with the Company. See
" -- Employment Arrangements."
OTHER KEY EMPLOYEES
MARC MANDEL, 30, currently serves as the Director of Publishing Sales and
is an Internet Sales Account Executive for the Company. Mr. Mandel has been with
the Company since August 1993. Prior to joining the Company, Mr. Mandel was
President of Desktop Designs Ltd., a VAR of Apple and Silicon Graphics systems,
which he founded in 1986. Mr. Mandel has degrees in Marketing and Management
from Western New England College.
JERROLD HOFFMAN, 52, the Company's Director of Purchasing since January
1994, has extensive experience in purchasing, production, sales and budgeting.
Prior to joining the Company, Mr. Hoffman served for eight years as production
manager at A. Kamhi, Inc., an apparel manufacturer. He received his Bachelor's
degree in economics from Hunter College.
RICHARD TOPOLEWSKI, JR., 35, has been the Company's Director of Internet
Sales since May 1997. Mr. Topolewski has thirteen years experience in the
telecommunications industry. Prior to joining the Company, Mr. Topolewski was
the Director of Northeast Agent Sales for MFS Communications from February 1993
through May 1997. Prior to that, he was with Metromedia Communications as
National Sales Manager from November 1990 through February 1993. He received a
Bachelors of Science from Johnson and Wales University in Business Management.
CHRISTOPHER PECKHAM, 32, has been the Company's Director of Network
Operations since October 1995. Prior to that, Mr. Peckham was a Senior System
Administrator for the New Jersey Institute of Technology. He received a Bachelor
of Science and Masters of Science in Electrical Engineering from New Jersey
Institute of Technology.
BOARD COMPENSATION
Each director of the Company who is not employed by the Company, and who
does not beneficially own more than 5% of the outstanding Common Stock of the
Company, receives (i) the sum of $1,000 per meeting attended by such outside
director and (ii) an annual grant of options to purchase a total of 3,000 shares
of Common Stock. Such options are immediately exercisable, have a ten-year term,
subject to certain restrictions, and are exercisable at the fair market value of
the Common Stock at the date of the grant. Of the current board members, only
Mr. Fox and Dr. Videbeck are entitled to receive such compensation. The stock
options granted to them expire in October 2005 and October 2006 and are
exercisable at $7.00 and $8.625, respectively. In addition,
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<PAGE>
at the discretion of the Board of Directors, directors may be reimbursed for
reasonable travel expenses in attending Board and committee meetings.
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth information concerning the compensation
received for services rendered to the Company during the past three fiscal years
by Marc H. Bell, the Chief Executive Officer. No other executive officer
received compensation in excess of $100,000 during any of the past three fiscal
years.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
NAME AND
PRINCIPAL POSITION YEAR SALARY
----------------- ---- ---------
<S> <C>
Marc H. Bell....................................................... 1996 $165,000
President and Chief 1995 45,000
Executive Officer 1994(1) 149,000
</TABLE>
---------------------------------
(1) Prior to July 1, 1994, the Company was a Subchapter S
corporation for purposes of the Internal Revenue Code. The
amount shown is for a twelve-month period and includes
dividend distributions made by the Company.
STOCK OPTION PLAN
The Company has adopted the 1995 Stock Option Plan (the "Stock Option
Plan"), pursuant to which options to acquire an aggregate of 360,000 shares of
Common Stock have been reserved for issuance to employees, officers or directors
of, or consultants to, the Company. The Board has discretionary authority to
determine the types of stock options to be granted, the persons eligible to
receive stock options, those to whom options may be granted, the number of
shares to be subject to such options, the exercise price of such options and the
terms of the stock option agreements. The exercise price may be paid in cash,
certified or bank check, or in stock of the Company valued at its then fair
market value. Options are non-transferable (including pursuant to a final
divorce decree or property division settlement or agreement) except by will or
by the laws of descent and distribution. The Company has filed a registration
statement on Form S-8 with respect to the shares of Common Stock to be issued
upon the exercise of the options granted under the 1995 Stock Option Plan.
As of March 31, 1997, the Company had granted options to purchase 266,563
shares of Common Stock under the Stock Option Plan of which 262,564 options are
unexercised. The unexercised number includes options to purchase 90,000 shares
granted to Robert Bell, the Company's Executive Vice President; options to
purchase 6,000 shares granted to Martin Fox, a director; and options to purchase
6,000 shares granted to Dr. Richard Videbeck, a director. The exercise price of
all such options is between $7.00 and $8.75 per share and the term of the
options is ten years from the date of grant.
SHARE DEPOSIT AGREEMENT
Pursuant to a Share Deposit Agreement between the Principal Stockholders,
the Company and the Underwriter entered into in January 1996, the Principal
Stockholders have deposited with the Company an aggregate of 420,000 of the
shares of Common Stock owned by them. The Share Deposit Agreement was negotiated
between the Principal Stockholders and the Underwriter as a means for the
Principal Stockholders to demonstrate their confidence in the Company's future
and their commitment to the Company. The Principal Stockholders retain the right
to vote such shares during the term of the agreement. The shares so deposited by
them will not be released until January 24, 2004 unless the Company reports
"pre-tax net income" (as defined in the Share Deposit Agreement) in excess of
$3,500,000 during the eight quarters ending March 31, 1998, in which event all
of such shares will be released.
29
<PAGE>
EMPLOYMENT ARRANGEMENTS
In October 1995, the Company entered into an employment agreement with Marc
H. Bell, which extends for a period of five years, terminating on September 30,
2000. Pursuant to the terms of the agreement, Mr. Bell receives a base salary of
$200,000 per year effective January 1, 1996. Mr. Bell's base salary will
increase 5% per year for each year that the Company reports net income. Pursuant
to his existing employment agreement, in the third quarter of fiscal 1997, the
Company made loans to Mr. Bell bearing interest at 8.75% per annum in the amount
of $145,408. Such loan matures in April, 2002 to the extent of $114,000 and in
June 2002 for the balance. The agreement also provides for a severance payment
to Mr. Bell in the event of a "change of control" of the Company equal to 2.99
times his average annual compensation, including bonus, during the term of the
agreement.
The Company has entered into an employment agreement with Robert Bell,
Executive Vice President, for a term of two years, terminating on September 30,
1997. Pursuant to the terms of this agreement, effective January 1, 1996, Mr.
Bell's base salary is $125,000 per annum. Mr. Bell's base salary will increase
5% per year for each year that the Company reports net income. Mr. Bell also has
the right to terminate his employment agreement on 60 days prior written notice.
The Company has also entered into employment agreements with all of its
executive and key personnel listed above. See "Management -- Executive Officers,
Key Employees and Directors." Many of these agreements contain non-competition
provisions in the event of termination for cause by the Company, or termination
without cause by the employee.
In addition to base compensation, the Company intends to reserve at the end
of each fiscal year, a sum equal to ten (10%) percent of the consolidated net
income of the Company (computed before provision for federal and state income
taxes) (the "Bonus Pool"), for allocation among the officers of the Company and
certain key employees (including Marc H. Bell). Marc H. Bell will receive an
amount equal to 5% of the pre-tax income over $1 million (50% of the Bonus Pool
to the extent, if any, that the Bonus Pool exceeds $100,000). The Board of
Directors of the Company will determine the allocation of the Bonus Pool to
other employees to the extent the Bonus Pool is in excess of Mr. Bell's
allocable share as set forth above.
The Company has obtained a key person life insurance policy on Mr. Bell in
the amount of $1,000,000. The Company is the beneficiary of such policy.
LIMITED LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the Delaware 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, the
By-laws of the Company provide that the Company is required to indemnify its
officers and directors 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. 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 the provisions discussed above are necessary to attract and retain
qualified persons as directors and officers.
The Company has been advised that it is the position of the Commission that
insofar as the foregoing provision may be invoked to disclaim liability for
damages arising under the Securities Act, such provision is against public
policy as expressed in the Securities Act and is therefore unenforceable.
30
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of June 30, 1997 by each beneficial
owner of more than 5% of the outstanding shares thereof known to the Company,
and by each director and executive officer named in the Summary Compensation
Table and all executive officers and directors of the Company as a group, both
before and after giving effect to this Offering.
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING
COMMON STOCK
BENEFICIALLY OWNED(3)
SHARES OF ----------------------------
NAME AND ADDRESS OF COMMON STOCK BEFORE AFTER
BENEFICIAL OWNER(1) BENEFICIALLY OWNED(2) OFFERING OFFERING(4)
------------------- --------------------- -------- -----------
<S> <C>
Marc H. Bell(5).......................................... 1,802,142 56.9% ___%
Tsuyoshi Shiraishi (5)(6)
Harpoon Holdings, Ltd.
2 Handy Road, #11-09 Cathay
Building, Singapore 229233............................... 862,500 28.3% ___%
Robert B. Bell (7)....................................... 90,000 2.9% ___%
Martin Fox (7)
2001 Tonnelle Avenue
North Bergen, NJ 07047................................... 6,000 * *
Richard Videbeck (7)
3249 East Angler's Stream
Avon Park, FL 33825...................................... 6,000 * *
All executive officers and directors
as a group (9 persons) (8)............................... 1,822,142 57.1% ___%
</TABLE>
- ---------------
* Less than 1%
(1) The address for Messrs. Marc and Robert Bell is c/o Bell Technology Group
Ltd., 295 Lafayette Street, New York, NY 10012.
(2) Under the rules of the Securities and Exchange Commission, a person is
deemed to be the beneficial owner of a security if such person has or shares
the power to vote or direct the voting of such security or the power to
dispose or direct the disposition of such security. A person is also deemed
to be a beneficial owner of any securities if that person has the right to
acquire beneficial ownership within 60 days. Accordingly, more than one
person may be deemed to be a beneficial owner of the same securities. Unless
otherwise indicated by footnote, the named entities or individuals have sole
voting and investment power with respect to the shares of Common Stock
beneficially owned.
(3) Represents the number of shares of Common Stock beneficially owned as of
June 30, 1997 by each named person or group, expressed as a percentage of
all of the shares of such class outstanding as of such date. The total
number of shares of Common Stock to be outstanding after the Offering
assumes the conversion of all Debentures offered hereby.
(4) Assumes conversion of all Debentures offered hereby (not including
Debentures issuable upon exercise of the Underwriter's Over-allotment Option
or the Underwriter's Warrant), at the Conversion Rate. There can be no
assurance that any Debentures will be converted.
(5) Includes the 862,500 Harpoon Shares which are subject to the October 1995
Irrevocable Proxy Agreement entered into between Harpoon and Marc H. Bell,
pursuant to which Harpoon has granted Mr. Bell the sole right to vote the
Harpoon Shares with respect to the election of the Company's directors. The
Irrevocable Proxy Agreement terminates in October 2005. Also includes
420,000 Shares subject to the Share Deposit Agreement. See
"Management -- Share Deposit Agreement." Also includes 90,000 shares with
respect to which Robert Bell, the Company's Executive Vice President, and
30,000 with respect to which Leslie Bell, the Company's Assistant Secretary,
have currently exercisable options to purchase. Robert Bell and his daughter
Leslie Bell, have entered into an agreement pursuant to which Marc H. Bell,
or in the alternative,
31
<PAGE>
the Company has the right to acquire any shares purchased pursuant to the
exercise of such options for the fair market value of such shares on the
date of exercise.
(6) Mr. Shiraishi, a director of the Company, is the sole shareholder of
Harpoon. See "Management -- Executive Officers and Directors."
(7) The named individual has the right to acquire the number of shares shown
above pursuant to a currently exercisable stock option.
(8) Includes currently exercisable stock options to purchase 140,000 shares.
CERTAIN TRANSACTIONS
During the past two years, there have been no transactions between the
Company and any of its officers, directors and/or principal stockholders other
than the creation of five year, 8.75% term loans to Marc Bell in the amount of
$145,408. Such loans, which mature in the third quarter of fiscal 2002, were
made pursuant to Mr. Bell's Employment Agreement. See "Management -- Employment
Arrangements."
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<PAGE>
DESCRIPTION OF SECURITIES
GENERAL
The authorized capital stock of the Company consists of 10,000,000 shares
of Common Stock, par value $.01 per share, and 500,000 shares of Preferred
Stock, par value $.01 per share. The Preferred Stock may be issued with such
rights, designations and privileges (including redemption and voting rights) as
the Board may, from time to time, determine.
COMMON STOCK
There are currently 3,048,450 shares of Common Stock outstanding. holders
of Common Stock are entitled to one vote per share on all matters to be voted
upon by the stockholders of the Company. The holders of the Common Stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Board of Directors out of funds legally available therefor. See "Dividend
Policy." In the event of a liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to the prior liquidation rights
of any outstanding Preferred Stock. The Common Stock has no preemptive,
redemption, conversion or other subscription rights. The outstanding shares of
Common Stock are, and the shares to be issued by the Company upon the conversion
of the Debentures, will be fully paid and non-assessable. The rights,
preferences and privileges of holders of Common Stock are subject to, and may be
adversely affected by, the rights of the holders of shares of any series of
Preferred Stock, which the Company may designate and issue in the future.
DEBENTURES
THE FOLLOWING DESCRIPTION OF CERTAIN TERMS OF THE DEBENTURES DOES NOT
PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
INDENTURE PURSUANT TO WHICH THE DEBENTURES WILL BE ISSUED, A COPY OF THE
PROPOSED FORM OF WHICH IS AN EXHIBIT TO THE REGISTRATION STATEMENT (SEE
"AVAILABLE INFORMATION"), AND TO THOSE TERMS MADE PART OF THE INDENTURE BY
REFERENCE TO THE TRUST INDENTURE ACT OF 1939, AS AMENDED (THE "TRUST INDENTURE
ACT"). TERMS (WHETHER OR NOT CAPITALIZED) USED BUT NOT DEFINED IN THIS SECTION
HAVE THE MEANINGS GIVEN TO THEM IN THE INDENTURE.
GENERAL: The Debentures will be general unsecured senior subordinated
obligations of the Company and will be issued under an Indenture between the
Company and Continental Stock Transfer & Trust Company, as Trustee (the
"Trustee"). The Debentures will be limited to an aggregate principal amount of
$5,500,000 ($6,875,000 if the Underwriter's Over-allotment Option and the
Underwriter's Warrants are exercised in full) and will mature on __________,
2003. The Debentures will bear interest at the rate of 10% per annum, payable
semi-annually in arrears on ________ and ______ of each calendar year,
commencing on _________, 1998 to holders of record ("Holders") at the close of
business on the third day preceding the date set for payment. Interest will be
payable in cash; provided, however, at the Company's option, interest during the
first 12 months after the date hereof may be paid in freely-transferable shares
of Common Stock. The number of shares of Common Stock to be issued shall be
determined based upon the average of the daily closing prices of the Common
Stock for the ten trading days preceding the interest payment date. Any
fractional shares shall be paid in cash. The Debentures will be issued in
registered form in denominations of $1,000.
The Debentures will be subordinated and junior in right of payment to all
Senior Debt, as hereinafter described. There will be no restrictions upon the
payment of dividends other than those imposed by state law, on intra-Company
transactions such as sales, loans or dividends, or during any period when there
exists an "Event of Default" (as hereinafter defined). The Debentures will be
fully guaranteed as to payment of principal, premium and interest by the
wholly-owned subsidiary corporations of the Company in existence on the date
hereof.
Principal, premium and interest on the Debentures will be payable, and the
Debentures may be presented for registration of transfer or exchange, at the
offices of the Trustee in New York, New York. Payments may be made by check
mailed to the registered address of the holders of record. The holders must
surrender the Debentures to the Trustee, which also acts as the paying agent
(the "Paying Agent") to collect principal payments. The Company may require
appropriate endorsements, transfer documents, and payment of a sum sufficient to
cover any transfer tax or other governmental charge payable in connection with
certain transfers or exchanges of the Debentures. The Company may change any
Paying Agent or registrar without prior notice to the Holders.
CONVERSION OF DEBENTURES: The Holder of a Debenture will be entitled at any
time prior to the close of business on __________, subject to prior redemption,
to convert the Debentures (or portions thereof which are in
33
<PAGE>
denominations of $1,000, or multiples thereof), at the principal amount thereof,
into shares of Common Stock of the Company at the Conversion Rate of $________
(subject to adjustment as provided below). Interest is required to be paid on
any semi-annual interest payment date with respect to the Debentures surrendered
for conversion after the record date therefor to the registered Holder thereof
on that record date. No other payment or adjustment will be made on conversion
of any Debenture for interest accrued thereon or for dividends payable on Common
Stock. The Company will not issue fractional shares upon conversion of
Debentures and, in lieu thereof, will pay a cash adjustment based upon the
current market price of the Common Stock on the last business day prior to the
date of conversion. In the case of Debentures called for redemption, conversion
rights will expire at the close of business on the redemption date.
The Conversion Rate is subject to adjustment in certain events, as set
forth in the Indenture. Such adjustments include the issuance of stock of the
Company as a dividend or distribution on the Common Stock; subdivisions,
combinations and reclassifications of the Common Stock; the issuance to all
holders of Common Stock of certain rights (but only when the rights become
exercisable) or warrants entitling them to subscribe for Common Stock at less
than the current market price; except for cash dividends permitted by the
Indenture, the distribution to all holders of Common Stock of assets or debt
securities of the Company or rights (other than those referred to above, but
only when such additional rights become exercisable) or warrants (other than
those referred to above) to purchase assets, debt securities or other securities
of the Company; the issuance, in certain circumstances, of shares of Common
Stock for less than the then current market price; and the issuance in certain
circumstances of securities which are convertible into or exchangeable for
Common Stock (other than pursuant to transactions described above) for a
consideration per share less than the then current market price of the Common
Stock. No adjustment in the conversion price will be required unless the
adjustment would require a change of at least 1% in the conversion price then in
effect, but any adjustment which would otherwise be required to be made will be
carried forward and taken into account in any subsequent adjustment. The Company
may at any time reduce the conversion price by any amount, provided that the
period during which the reduced price is available is at least 20 days and the
reduced price is irrevocable during that period.
If the Company consolidates or merges with or into or transfers or leases
all or substantially all of its assets to any Person, the Debentures will become
convertible into the kind and amount of securities, cash or other assets which
the holders of the Debentures would have owned immediately after the transaction
had they converted the Debentures into Common Stock immediately before the
transaction occurred.
REDEMPTION: The Company may redeem any or all the Debentures at any time or
some of them from time to time at any time after August __, 1999 (or earlier
with the Underwriter's prior written consent). The right of the Company to
redeem the Debentures is conditioned upon Debenture Holders being given at least
30 (but not more than 60) days prior written notice, if the last sale price of
the Common Stock has been at least 120% of the Conversion Rate on all 20 of the
trading days ending on the third day prior to the day on which notice of
redemption is given. The redemption price for Debentures so redeemed shall be
the redemption prices (expressed in percentages of principal amount) set forth
below, plus accrued interest to the redemption date, if redeemed during the 12
month period beginning August ____ of the years starting with the year indicated
below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
1999.......................................................................... 110.0%
2000.......................................................................... 107.5
2001.......................................................................... 105.0
2002.......................................................................... 102.5
2003.......................................................................... 100.0
</TABLE>
SELECTION AND NOTICE: If less than all of the Debentures are to be redeemed
at any time, selection of the Debentures to be redeemed will be made by the
Trustee from among the outstanding Debentures by lot or in compliance with the
requirements of the principal national securities exchange, if any, on which the
Debentures are then listed. Notice of redemption will be mailed at least 30
days, but not more than 60 days, before the redemption date to each Holder whose
Debentures are to be redeemed at the registered address of such Holder. On and
after the redemption date, interest shall cease to accrue on the Debentures or
portions thereof called for redemption.
SUBORDINATION: The Debentures will be subordinate and junior in right of
payment, to the extent and in the manner to be set forth below, to all "Senior
Debt" of the Company. The Indenture will define "Senior Debt" as all present or
future secured debt and capitalized leases created, incurred, assumed or
guaranteed (to the extent of
34
<PAGE>
the guarantee) by the Company (and all wholly-owned subsidiary corporations of
the Company), and all renewals, extensions or refundings thereof. However,
Senior Debt shall not include any debt of the Company or guarantees of Debt by
the Company which by its terms or the terms of the instrument creating or
evidencing it expressly provides that such Debt or guarantee is expressly
subordinated in right of payment to any other Debt of the Company.
At June 30, 1997, the Senior Debt of the Company was approximately $3
million.
In the event of a liquidation or dissolution of the Company or in a
bankruptcy, reorganization, insolvency, receivership or other similar proceeding
relating to the Company or its property, upon any distribution of assets,
holders of Senior Debt will be entitled to be paid principal and interest in
full before principal or interest payments may be made on the Debentures.
Furthermore, the holders of Debentures will be required to pay over their share
of such distribution to the holders of Senior Debt until such Senior Debt is
paid in full, except that holders of Debentures may receive securities that are
subordinated at least to the same extent as the Debentures are to Senior Debt.
By reason of this subordination, in the event of dissolution, insolvency or
bankruptcy of the Company, holders of the Debentures may recover less, ratably,
than holders of Senior Debt and other creditors of the Company, or may recover
nothing.
The Company may not pay principal of, or interest on, the Debentures and
may not acquire any Debentures for cash or property (other than securities that
are subordinated to at least the same extent as the Debentures are subordinated
to Senior Debt) if (i) a default in the payment of any principal or other
obligations with respect to Senior Debt occurs and is continuing beyond any
applicable grace period or (ii) a default, other than a payment default, on
Senior Debt occurs and is continuing that then permits holders of the Senior
Debt to accelerate its maturity and the Trustee receives a notice of the default
from a person permitted to give such notice under the Indenture requesting that
payment of principal or interest with respect to the Debentures be prohibited.
Notwithstanding the foregoing, the Company may resume payments in respect of the
Debentures upon the earlier of (a) the date upon which the default is cured or
waived or (b) in the case of a default referred to in (ii) above, 179 days pass
after notice is received (a "Payment Blockage Period"), provided that the terms
of the Indenture otherwise permit the payment, distribution or acquisition of
the Debentures at the time in question. Only one Payment Blockage Period may be
commenced within any consecutive 365-day period with respect to the Debentures.
AFFIRMATIVE COVENANTS: In addition to the covenants described below, the
Indenture will require the Company, subject to certain limitations described
therein, to, among other things, do the following: (a) deliver to the Trustee
copies of all reports filed with the Commission; (b) deliver to the Trustee
quarterly officers' certificates with respect to the Company's compliance with
its obligations under the Indenture; (c) maintain its corporate existence,
subject to the provisions described below relating to mergers and acquisitions;
and (d) pay its taxes when due except where such taxes are being contested in
good faith.
EVENTS OF DEFAULT: An Event of Default is defined in the Indenture as
being: default in payment of any principal of and premium, if any, on the
Debentures; default for 15 days in payment of interest on Debentures; default
for 60 days after notice in the observance or performance of any other covenant
in the Indenture; or certain events of bankruptcy, insolvency or reorganization.
In case an Event of Default shall occur and be continuing, the Trustee or
the Holders of not less than 25% in principal amount of the Debentures then
outstanding may declare the principal amount of all the Debentures to be due and
payable. The Indenture provides that the Trustee shall within 60 days after the
occurrence of a default, mail to the Holders of the Debentures notice of all
uncured defaults known to it (the term default to include the events specified
above without regard to periods of grace); provided that, except in the case of
default in the payment of principal of (or premium, if any) of interest on any
of the Debentures, the Trustee shall be protected in withholding such notice if
it in good faith determines that the withholding of such notice is in the
interest of the holders of the Debentures.
The Indenture includes a covenant that the Company will file with the
Trustee and the Securities and Exchange Commission (the "Commission"), in
accordance with the rules and regulations of the Commission, such additional
information, documents and reports with respect to compliance by the Company
with the conditions and covenants provided for in the Indenture as may be
required by such rules and regulations. Subject to the provisions of the
Indenture relating to the duties of the Trustee in case an Event of Default
shall occur and be continuing, the Trustee is under no obligation to exercise
any of the rights or powers under the Indenture at the request, order or
direction of any of the Debenture Holders unless such Debenture Holders shall
have offered to
35
<PAGE>
the Trustee reasonable security and indemnity. Subject to the provisions for the
indemnification of the Trustee and certain limitations contained in the
Indenture, the Holders of a majority in principal amount of the Debentures at
the time outstanding shall have the right to direct the time, method and place
of conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred on the Trustee.
MODIFICATION OF THE INDENTURE: The Indenture contains provisions permitting
the Company and the Trustee, with the consent of the Holders of not less than 66
2/3% in principal amount of the Debentures at the time outstanding, to modify
the Indenture or any supplemental indenture or the rights of the Holders of the
Debentures except that no such modification shall: (i) extend the fixed maturity
of any Debenture, reduce the rate or extend the time or payment of interest
thereon, reduce the principal amount thereof or change the currency in which the
Debentures are payable, or impair the right to convert the Debentures into
Common Stock on the terms set forth in the Indenture, without the consent of
each Debenture Holder so affected; or (ii) reduce the aforesaid percentage of
Debentures, the consent of the Holders of which is required for any such
modification, without the consent of the Holders of all the Debentures.
GOVERNING LAW: The Indenture and each Debenture is 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 the State of New York.
WARRANTS
The Company has outstanding 661,150 Warrants to purchase shares of its
Common Stock. The holders of the Warrants are entitled to purchase one share of
Common Stock at a price of $7.70 per share at any time until January 23, 2001.
Unless exercised, the Warrants will automatically expire on January 23, 2001.
The Warrants are subject to redemption by the Company at a redemption price of
$.10 per Warrant upon 30 days prior written notice to the holders of the
Warrants. The redemption is conditioned upon the average closing bid quotation
of the Common Stock as reported on Nasdaq, if traded thereon, (or if not traded
thereon, the average closing price if listed on a national securities exchange
or other reporting system that provides last sale price), having been at least
150% of the then current exercise price of the Warrants (initially $11.55 per
share) for a period of 20 consecutive trading days ending on the third day prior
to the date on which the Company gives notice of redemption. The Warrants are
exercisable until the close of business on the day immediately preceding the
date fixed for redemption. The Company has agreed with the Underwriter not to
redeem the Warrants during the twelve month period commencing on the date hereof
without the Underwriter's prior written consent. The Warrant Agreement may be
amended, subject to certain exceptions, by the Company and the warrant agent
with the consent in writing of the holders of at least a majority of the
Warrants.
PREFERRED STOCK
The Board of Directors is authorized, without further stockholder approval,
to issue up to 500,000 shares of "blank check" Preferred Stock in one or more
series. The Board has the right to fix the rights, preferences, privileges and
restrictions granted or imposed upon any unissued shares of Preferred Stock, fix
the number of shares constituting any series and the designations of such
series.
The issuance of Preferred Stock may have the effect of delaying or
preventing a change in control of the Company. The issuance of Preferred Stock
could decrease the amount of earnings and assets available for distribution to
the holders of Common Stock or could adversely affect the rights and powers,
including voting rights, of the holders of the Common Stock. In certain
circumstances, such issuance could have the effect of decreasing the market
price of the Common Stock. As of the closing of the Offering, no shares of
Preferred Stock will be outstanding, and the Company currently has no plans to
issue any shares of Preferred Stock.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Company is a Delaware corporation and subject to Section 203 of the
Delaware General Corporation Law (the "Delaware Law"), an anti-takeover law. In
general, Section 203 of the Delaware Law prevents an "interested stockholder"
(defined generally as a person owning 15% or more of a corporation's outstanding
voting stock) from engaging in a "business combination" (as defined) with a
Delaware corporation for three years following the date such person became an
interested stockholder, subject to certain exceptions such as the approval of
the Board of Directors and the holders of at least 66 2/3% of the outstanding
shares of voting stock not owned by the interested stockholder. The existence of
this provision would be expected to have the effect of discouraging takeover
attempts, including attempts that might result in a premium over the market
price for the shares of Common Stock held by stockholders.
36
<PAGE>
The Company's Certificate of Incorporation provides that any action
required or permitted to be taken by the stockholders of the Company may be
taken only at a duly called annual or special meeting of the stockholders. The
Certificate of Incorporation and Bylaws leave to the directors the sole right to
change the size of the Board of Directors and to fill vacancies on the Board of
Directors. The Bylaws also establish procedures, including advance notice
procedures, with regard to the nomination, other than by or at the direction of
the Board of Directors, of candidates for elections as directors or for
stockholder proposals to be submitted at stockholder meetings.
These and other provisions could have the effect of making it more
difficult for a third party to effect a change in control of the Board of
Directors and therefore may discourage another person or entity from making a
tender offer for the Company's Common Stock, including offers at a premium over
the market price of the Common Stock, and might result in a delay in changes in
control of management. In addition, these provisions could have the effect of
making it more difficult for proposals favored by the stockholders to be
presented for stockholder consideration.
The Company's Certificate of Incorporation also includes provisions to
eliminate the personal liability of its directors for monetary damages resulting
from breaches of their fiduciary duty to the extent permitted by the Delaware
Law and to indemnify its directors and officers to the fullest extent permitted
by the Delaware Law.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock and
Warrants is Continental Stock Transfer & Trust Company.
DEBENTURE TRUSTEE
The trustee for the Debentures is Continental Stock Transfer & Trust
Company.
SHARES ELIGIBLE FOR FUTURE SALE
Except as discussed below, all the Company's Securities will be freely
tradable without restriction under the Securities Act, unless purchased by
"affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act.
The Company currently has 3,048,450 shares of Common Stock outstanding. Of
these, 1,682,142 shares of Common Stock were issued by the Company in private
transactions in reliance upon the "private placement" exemption under Section
4(2) of the act in two separate transactions in July 1994 and in October 1995.
Such shares are "restricted securities" within the meaning of Rule 144 under the
Securities Act of 1933 ("Restricted Shares").
In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose shares are aggregated) who has beneficially owned for at
least one year shares of Common Stock which are treated as "restricted
securities," including persons who may be deemed affiliates of the Company,
would be entitled to sell within any three-month period a number of shares that
does not exceed the greater of: (i) one percent of the number of shares of
Common Stock then outstanding (approximately 30,485 shares immediately after the
Offering); or (ii) the average weekly trading volume of the Common Stock during
the four calendar weeks preceding the filing of a form 144 with respect to such
sale. Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about the Company. Under Rule 144(k), a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least two
years, is entitled to sell such shares without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
Prior to the Offering, there has been no public market for the Debentures
of the Company and no predictions can be made as to the effect, if any, that the
issuance of the Debentures will have on the market price of the Common Stock
prevailing from time to time.
37
<PAGE>
UNDERWRITING
The Company has agreed to sell, and the Underwriter has agreed to purchase
from the Company, $5,500,000 face value of Debentures. The Underwriting
Agreement provides that the obligations of the Underwriter are subject to
certain conditions precedent. The Underwriter is committed to purchase all of
the securities offered hereby if any are purchased.
The Underwriter proposes to offer the Debentures directly to the public at
the initial public offering price set forth on the cover page of this
Prospectus, and it may allow to selected dealers who are members of the NASD
concessions not in excess of $____ per Debenture, of which not more than $____
per Debenture may be re-allowed to certain other dealers.
The Underwriting Agreement provides further that the Underwriter will
receive a non-accountable expense allowance of 3% of the gross proceeds of the
Offering. The Company has also agreed to pay all expenses in connection with
qualifying Debentures offered hereby for sale under the laws of such states as
the Underwriter may designate, including expenses of counsel retained for such
purpose by the Underwriter.
The Company has granted to the Underwriter an option exercisable for 45
calendar days after the closing of the Offering to purchase up to an aggregate
of $825,000 face value of additional Debentures to cover over-allotments, if
any.
The Company has agreed to sell to the Underwriter for nominal consideration
the Underwriter's Warrants to purchase at face value 10% of the Debentures sold
to the public (excluding the Over-allotment Option). The Underwriter's Warrants
will be non-exercisable for one year after the date of this Prospectus, and
thereafter will be exercisable for a period of four years at $1,200 per
Debenture. The Underwriter's Warrants are non-transferable for a period of one
year after the date of this Prospectus, except to officers of the Underwriter
and to members of the selling group and their officers and partners. The Company
has also granted certain "piggy back" and demand registration rights to the
holders of the Underwriter's Warrants with respect to the registration of such
securities under the Securities Act until the expiration of the Underwriter's
Warrants. Generally, the Company is required to bear the expense of such
registration.
For the life of the Underwriter's Warrants, the holders thereof are given,
at nominal cost, the opportunity to profit from a rise in the market price of
the Common Stock above the Debenture Conversion Rate with a resulting dilution
in the interest of the other stockholders. Further, the holders may be expected
to exercise the Underwriter's Warrants at a time when the Company would in all
likelihood be able to obtain equity capital on terms more favorable than those
provided in the Underwriter's Warrants.
The Company has agreed, for a period of 12 months after the date of this
Prospectus, not to issue any shares of Common Stock or Preferred Stock or any
warrants, options or other rights to purchase Common Stock or Preferred Stock
without the prior written consent of the Underwriter, except (i) options to
purchase up to 360,000 shares of Common Stock under the Option Plan and shares
issuable upon the exercise of such options, (ii) Common Stock issued in
connection with the acquisition of assets or businesses by the Company, (iii)
shares issuable upon exercise of the Warrants, and (iv) shares or options issued
to attract or retain key employees. Notwithstanding the foregoing, the Company
may issue shares upon exercise of any warrants or options outstanding upon
closing of the Offering as described herein. Marc H. Bell, the Company's
President and Chief Executive Officer and the Directors (other than Mr.
Shiraishi), have agreed not to sell or otherwise dispose of any shares of Common
Stock, for twelve months after the effective date of this prospectus without the
Underwriter's prior written consent provided however, that Marc H. Bell will be
permitted to sell up to 30,000 shares of Common Stock in the event the Common
Stock trades at a price of at least $15.00 per share for 20 consecutive trading
days and an additional 30,000 shares in the event the Common Stock trades at a
price of at least $20.00 per share for 20 consecutive trading days.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriter against certain liabilities in connection with
the Offering, including liabilities under the Securities Act.
The Company has agreed that upon the closing of the Offering it will, for a
period of not less than three years, engage a designee of the Underwriter as
advisor to the Board. In addition and in lieu of the Underwriter's right to
designate an advisor, the Company has agreed, if requested by the Underwriter
during such three-year
38
<PAGE>
period, to nominate and use its best efforts to cause the election of a designee
of the Underwriter as a director of the Company. A person to be designated by
the Underwriter has not yet been identified.
The Underwriter intends to act as a market maker for the Debentures after
the closing of this Offering.
The Company has agreed to retain the Underwriter to manage the Debentures
at an annual fee of $36,000 for a three-year period commencing on the date of
this Prospectus. The entire fee ($108,000) is payable upon the closing of the
Offering. Pursuant to this Agreement, the Underwriter will be obligated to
provide services to the Company on an as needed basis with respect to the
conversion or redemption of the Debentures by the Company and related matters.
This Agreement does not require the Underwriter to provide any minimum number of
hours of services to the Company.
Prior to the Offering, there has been no public market for the Debentures.
The public offering price of the Debentures and the conversion rights thereunder
were negotiated between the Company and the Underwriter. The terms of the
Debentures were determined by negotiation between the Company and the
Underwriter and do not necessarily bear any direct relationship to the Company's
assets, earnings, book value per share or other generally accepted criteria of
value.
LEGAL MATTERS
The validity of the Debentures offered will be passed upon for the Company
by Milberg Weiss Bershad Hynes & Lerach LLP, One Pennsylvania Plaza, New York,
New York 10119. Certain legal matters relating to the Offering will be passed
upon for the Underwriter by Schneck Weltman & Hashmall LLP, 1285 Avenue of the
Americas, New York, New York 10019.
EXPERTS
The audited consolidated financial statements included in this Prospectus
and elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto. Such reports are included herein in reliance upon the authority of said
firm as experts in giving said reports.
39
<PAGE>
BELL TECHNOLOGY GROUP LTD. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Report of Independent Public Accountants................................................................ F-2
Financial Statements of Bell Technology Group Ltd. and Subsidiaries.....................................
Consolidated Balance Sheets -- September 30, 1996 and September 30, 1995................................ F-3
Consolidated Statements of Operations -- For the Year Ended September 30, 1996 and Nine Months Ended
September 30, 1995.................................................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity -- For the Year Ended September 30, 1996 and
Nine Months Ended September 30, 1995.................................................................. F-5
Consolidated Statements of Cash Flows -- For the Year Ended September 30, 1996 and Nine Months Ended
September 30, 1995.................................................................................... F-6
Notes to Consolidated Financial Statements -- For the Year Ended September 30, 1996..................... F-7
Consolidated Balance Sheets as of March 31, 1997 and September 30, 1996................................. F-15
Consolidated Statements of Operations for the Six Months Ended March 31, 1997 and 1996.................. F-16
Consolidated Statements of Cash Flows for the Six Months Ended March 31, 1997 and 1996.................. F-17
Notes to Consolidated Financial Statements for the Six Months Ended March 31, 1997...................... F-18
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO: BELL TECHNOLOGY GROUP LTD.:
We have audited the accompanying consolidated balance sheets of Bell
Technology Group Ltd. (a Delaware corporation) and Subsidiaries as of September
30, 1996 and September 30, 1995, and the related consolidated statements of
operations, and cash flows for the year and nine months then ended,
respectively. 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 audits provide 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 the Bell Technology Group
Ltd. and Subsidiaries as of September 30, 1996 and September 30, 1995, the
results of its operations and its cash flows for the year and nine months then
ended, respectively, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
December 23, 1996
New York, New York
F-2
<PAGE>
BELL TECHNOLOGY GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------- -------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 2,342,011 $ 222,367
Accounts receivable, net of allowance for doubtful accounts of $64,842 and
$11,212 as of September 30, 1996 and September 30, 1995, respectively......... 1,847,918 1,423,548
Inventories...................................................................... 758,353 843,904
Prepaid expenses and other current assets........................................ 195,113 12,061
------------- -------------
TOTAL CURRENT ASSETS.......................................................... 5,143,395 2,501,880
Property and equipment, net........................................................ 2,151,294 413,306
Deferred stock offering costs...................................................... -- 25,000
Long-term investment............................................................... 400,000 --
Other assets....................................................................... 115,093 21,364
------------- -------------
TOTAL ASSETS.................................................................. $ 7,809,782 $ 2,961,550
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short term borrowings............................................................ $ -- $ 711,952
Current portion of notes payable................................................. 39,152 75,865
Accounts payable................................................................. 1,274,197 1,319,532
Accrued expenses................................................................. 240,116 118,414
Deferred revenues................................................................ 166,617 75,562
Deferred income taxes............................................................ -- 20,816
------------- -------------
TOTAL CURRENT LIABILITIES..................................................... 1,720,082 2,322,141
Long term note payable, net of current portion................................... -- 47,050
Note payable -- Stockholder...................................................... -- 287,000
Deferred income taxes............................................................ -- 6,562
------------- -------------
TOTAL LIABILITIES............................................................. 1,720,082 2,662,753
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value; 500,000 shares authorized; no shares issued and
outstanding................................................................... -- --
Common Stock, $.01 par value; 10,000,000 shares authorized; 3,083,210 and
1,725,000 shares issued and outstanding....................................... 30,832 17,250
Additional paid-in capital....................................................... 8,033,134 362,333
Accumulated deficit.............................................................. (1,974,266) (80,786)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY.................................................... 6,089,700 298,797
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $ 7,809,782 $ 2,961,550
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
BELL TECHNOLOGY GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------ ------------------
<S> <C>
REVENUES.................................................................. $ 10,373,664 $8,738,410
COSTS AND EXPENSES:
Cost of revenues........................................................ 8,599,241 7,292,232
Selling, general and administrative..................................... 3,186,718 1,212,829
Depreciation and amortization........................................... 219,176 68,510
Research and development................................................ 57,250 34,000
------------------ ------------------
Total costs and expenses............................................. 12,062,385 8,607,571
Net Income (loss) from operations......................................... (1,688,721) 130,839
Interest income......................................................... 121,256 --
Interest expense........................................................ (98,520) (72,881)
Write-off of Debt Issuance Costs........................................ (257,391) --
------------------ ------------------
Income (loss) before taxes................................................ (1,923,376) 57,958
(Benefit from) provision for taxes........................................ (29,896) 19,099
------------------ ------------------
Net income (loss)......................................................... $ (1,893,480) $ 38,859
------------------ ------------------
------------------ ------------------
Net earnings (loss) per share............................................. $ (0.72) $ 0.02
Weighted average shares outstanding....................................... 2,633,400 1,725,000
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
BELL TECHNOLOGY GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
PAID-IN ACCUMULATED STOCKHOLDERS
SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- ------- ---------- ----------- ------------
<S> <C>
BALANCE, DECEMBER 31, 1994.................... 1,725,000 $10,625 $ 368,958 $ (119,645) $ 259,938
Adjustment related to the Merger of PFMT and
the Company................................. -- 6,625 (6,625) -- --
Net income.................................... -- -- -- 38,859 38,859
--------- ------- ---------- ----------- ------------
BALANCE, SEPTEMBER 30, 1995................... 1,725,000 17,250 362,333 (80,786) 298,797
Stock insurance in connection with bridge
financing................................... 35,710 357 249,643 -- 250,000
Proceeds from Initial Public Offering, net of
expenses of $1,602,175...................... 1,322,500 13,225 7,421,158 -- 7,434,383
Net Loss...................................... -- -- -- (1,893,480) (1,893,480)
--------- ------- ---------- ----------- ------------
BALANCE, SEPTEMBER 30, 1996................... 3,083,210 $30,832 $8,033,134 $(1,974,266) $ 6,089,700
--------- ------- ---------- ----------- ------------
--------- ------- ---------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
BELL TECHNOLOGY GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------ ------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income....................................................... $ (1,893,480) $ 38,859
Adjustments to reconcile net (loss) income to net cash used in operating
activities
Depreciation and amortization........................................ 219,176 68,510
Write-off and amortization of debt issuance.......................... 250,000 0
(Benefit) for deferred taxes......................................... (29,896) (838)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
(Increase) in accounts receivable.................................. (424,370) (111,434)
Decrease (increase) in inventories................................. 85,551 (422,991)
(Increase) decrease in prepaid expenses and other current assets... (183,052) 4,354
(Increase) in other assets......................................... (68,729) (31,890)
(Decrease) increase in accounts payable............................ (45,337) 99,211
Increase in accrued expenses....................................... 121,702 6,347
(Decrease) in payable due to officers.............................. -- (5,250)
Increase in deferred revenues...................................... 91,057 48,762
------------------ ------------------
Net cash used in operations............................................... (1,877,378) (306,360)
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net of landlord reimbursement...... (1,954,646) (149,917)
Purchase of long-term investment........................................ (400,000) --
------------------ ------------------
Net cash used in investing activities..................................... (2,354,646) (149,917)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments of) proceeds from short term borrowings................. (711,952) 417,739
Repayments of stockholder loan.......................................... (287,000) (13,000)
Repayments of notes payable............................................. (83,763) (48,990)
Proceeds from initial public offering, net of offering costs of
$1,602,175........................................................... 7,434,383 --
------------------ ------------------
Net cash provided by financing activities................................. 6,351,668 355,749
------------------ ------------------
Net increase (decrease) in cash and cash equivalents...................... 2,119,644 (100,528)
Cash and cash equivalents,
beginning of period.................................................. 222,367 322,895
------------------ ------------------
Cash and cash equivalents,
ending of period..................................................... $ 2,342,011 $ 222,367
------------------ ------------------
------------------ ------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................................. 53,887 60,157
Cash paid for income taxes.............................................. 12,736 --
Noncash investing and financing activities:
Issuance of common stock in connection with bridge financing......... 250,000 --
Equipment acquired under capital lease obligations................... -- 121,422
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
BELL TECHNOLOGY GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Bell Technology Group Ltd. and Subsidiaries (the "Company") was
incorporated in the State of Delaware in September 1995. Shortly thereafter, the
Company succeeded by merger to all the assets and liabilities of PFM
Technologies Corporation ("PFMT"), a New York corporation (See Note 3). In July
1994, the sole stockholder of NAFT International Ltd. ("NAFT") and Stellar
Graphics Corp. ("Stellar Graphics") exchanged 100% of the common stock of both
companies for 100 shares (100%) of PFMT, then a newly formed corporation, in a
tax free exchange. Subsequent to this transaction, an additional 100 shares of
PFMT were issued to Harpoon Holdings, Ltd. ("Harpoon") in consideration for
$200,000, of which $198,000 represented additional paid-in capital. The Company
also owns 100% of the equity of NAFT Computer Service Corp. ("NCS") a New York
corporation formed in September 1994, PFM Communications Inc. ("PFMC"), a New
York corporation formed in March 1995 and GameNet Corp. ("GameNet"), a New York
corporation formed in March 1995. Prior to the merger of PFMT into the Company,
these entities were wholly owned subsidiaries of PFMT. During 1996, the Company
changed the name of Stellar Graphics Corp. to Bluestreak Digital Inc.
("Bluestreak").
The consolidated financial statements herein include the accounts of the
Company, NAFT, PFMC, NCS, GameNet and Bluestreak. All material intercompany
accounts and transactions have been eliminated. The activities of NAFT and
Bluestreak from January 1, 1994 until the formation of PFMT are included in
these consolidated financial statements at their carryover basis as they were
under common control prior to the tax free exchange discussed above. In
September 1995, the Company changed its fiscal year end from December 31 to
September 30. Accordingly, the period ended September 30, 1995 is for a nine
month period.
OPERATIONS
The Company's activities presently fall into two main segments. One segment
consists of computer products sales, service, network installation and
maintenance. The second segment consists of all Internet related activities
including Web hosting and interactive CD ROM design and preparation.
SEGMENT INFORMATION
The following is a summary of segment information for the year ended
September 30, 1996. The Company started its Internet operations during the
second half of the fiscal period ended September 30, 1995. For the fiscal year
ended September 30, 1995 no operating segment of the Company had sufficient
Gross Revenues, Operating Income/Loss or Identifiable Assets to require the
reporting of results for that period on a Segment basis.
<TABLE>
<CAPTION>
COMPUTER
PRODUCT & INTERNET
SERVICE SALES OPERATIONS CONSOLIDATED
--------------- ----------- ------------
<S> <C>
Sales to unaffiliated Customers..................................... $ 9,732,322 $ 641,342 $ 10,373,664
Operating Loss...................................................... 267,482 359,751 1,688,721*
Identifiable assets at September 30, 1996........................... 3,442,760 1,132,253 7,809,782**
</TABLE>
- ---------------
* Includes $1,061,488 of unallocated corporate overhead including executive
salaries of $389,000 and overhead including rent, payroll charges for
administrative staff including accounting, human resources, MIS and other
support personnel and professional fees.
** Including corporate assets not allocable to a particular segment of
$3,234,769.
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is based on the weighted average number
of shares outstanding during the periods presented. The impact of outstanding
and stock options has not been included in the calculation as the effect would
be anti-dilutive.
F-7
<PAGE>
BELL TECHNOLOGY GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1 -- THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES -- Continued
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash and cash equivalents.
CONCENTRATIONS OF CASH AND ACCOUNTS RECEIVABLE
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash equivalents and
accounts receivable. As of September 30, 1996, the Company had concentrations of
cash in a bank in the form of demand deposits and money market accounts,
totaling approximately $2,103,416. The Company believes that concentrations of
credit risk with respect to trade accounts receivable are limited due to the
large number of entities comprising the Company's customer base. The Company
primarily operates in the New York City metropolitan area.
INVENTORIES
Inventory consists of computer hardware and software, parts and related
items. Inventories are carried at the lower of cost or market determined by the
first-in, first-out method.
PROPERTY AND EQUIPMENT
Furniture, equipment and internally developed software are recorded at cost
and are depreciated on a straight-line basis over their estimated useful lives,
generally five years. Leasehold improvements are recorded at cost and amortized
over the term of the lease or life of the asset, whichever is shorter. Property
and equipment consist of the following.
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1996 1996
------------- -------------
<S> <C>
Leasehold improvements............................................................. $ 510,057 $ 43,935
Computer and network equipment..................................................... 1,862,416 520,805
Furniture and delivery equipment................................................... 193,054 40,312
Less Accumulated depreciation...................................................... (414,233) (191,746)
------------- -------------
Property and equipment, net........................................................ $ 2,151,294 $ 413,306
------------- -------------
------------- -------------
</TABLE>
Included in computer and network equipment is $155,507 of assets held under
capital lease obligations at September 30, 1996 and 1995. Also included in
computer and network equipment at September 30, 1996 and September 30, 1995 is
$184,086 and $28,333, respectively, related to internally developed software
costs.
REVENUE RECOGNITION
Revenues consist primarily of computer hardware sales, maintenance
contracts, Internet access fees, network installation charges and repair fees.
Generally, maintenance contracts are for an agreed upon number of hours and are
prepaid by customers. Repair fees and maintenance charges are recognized as the
service is provided. Payments received in advance of providing services are
deferred until the period such services are provided. Equipment sales and
installation charges are recognized when installation is completed.
Monthly subscription service revenue related to Internet access is
recognized over the period services are provided. Subscription service and
equipment installation revenues, which require the use of Company-provided
installation of equipment at a subscriber's location, are recognized at
completion of installation and upon commencement of service. Revenues related to
the Web and to 2-D and 3-D animation are recognized at the completion of each
project. Projects are generally completed within a three month period.
F-8
<PAGE>
BELL TECHNOLOGY GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1 -- THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES -- Continued
COST OF REVENUES
Cost of revenues in the Company's Internet businesses, PFMC and GameNet,
consist primarily of local access costs, leased network backbone circuit costs,
the cost of equipment and applications sold to customers and depreciation of
network-related equipment. NAFT's primary cost of revenues is the cost of the
computer products it sells. NCS's cost of revenues consist of parts, internal
and third-party labor costs, and training and certification costs. Bluestreak's
cost of revenues consist primarily of labor, printing expenses and camera work.
RESEARCH & DEVELOPMENT
Research and development costs are expensed as incurred.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Although these estimates are based on management's knowledge
of current events and actions it may undertake in the future, they may
ultimately differ from actual results.
RECENT PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"),
which is effective for financial statements for fiscal years beginning after
December 15, 1995. SFAS 121 requires that long-lived assets and certain
identifiable intangible assets held and used by a company be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amounts of the assets may not be recoverable. The Company believes
that, as of September 30, 1996, no assets covered by SFAS 121 have been
impaired.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"). SFAS 123 allows companies to account for stock-based
compensation to employees under either (i) the new provisions of SFAS 123 or
(ii) the provisions of APB 25 with pro forma disclosure in the footnotes to the
financial statements as if the measurement provisions of SFAS 123 had been
adopted. The Company intends to continue accounting for its stock-based
compensation to employees in accordance with the provisions of APB 25. As the
Company did not issue options to non-employees, the implementation of SFAS 123
had no impact on the financial position, results of operations and cash flows of
the Company.
NOTE 2 -- RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 1996
Revenues increased from $8,738,410 in fiscal 1995 to $10,363,664 in fiscal
1996 because of the longer fiscal year. In the fiscal year ended September 30,
1995, revenues from Internet operations were small, and no other segment of the
Company's business accounted for 10% of Gross Revenues, Operating Income/Loss
and Identifiable Assets of the Company. While the Company's actual revenues are
not steady on a month by month basis, for comparison purposes only, average
monthly revenues in fiscal 1996 were approximately $864,000 as contrasted with
average monthly revenues in fiscal 1995 of approximately $971,000. This decline
is due to a substantial reduction in the sales of Apple computer products which
produced large sales numbers because of the price of the products being sold.
The Company is replacing these sales in part with sales of other products and
with Internet related sales, training and service. The Company anticipates that,
in the future, a greater percentage of revenues will result from Internet
related sales which have higher gross profit margins.
Cost of Revenues remained constant from fiscal 1995 to fiscal 1996 at
approximately 82%. However, gross profit margins for the 3 and 9 month periods
ended June 30, 1996 were 23% and 20%, respectively. The gross profit margin for
the 3 month period ended September 30, 1996 was 7%. The fourth quarter results
of operations
F-9
<PAGE>
BELL TECHNOLOGY GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 2 -- RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 1996 -- Continued
were negatively impacted by a number of events and adjustments, all of which
adversely impacted gross margins. In particular, (a) the Company reflected a
reclassification of approximately $100,000 from selling, general and
administration to cost of revenue to more accurately reflect direct expenses of
the Internet operations; (b) established a reserve of $90,000 for returned
merchandise allowances primarily with Apple Computer Company, because of the
Company's de-emphasis of its business with Apple and the Company's assessment of
Apple's financial situation; and (c) various year-end adjustments of
approximately $100,000. In addition, the Company relocated its operations in the
fourth quarter of fiscal 1996, which adversely impacted revenues and gross
profit margins.
Approximately $220,000 of the Company's loss before taxes in 1996 was due
to depreciation and $257,000 was due to the write-off of Debt Issuance Costs
related to a debt incurred prior to the initial public offering. The balance of
the loss (in the amount of $1,416,480) can be traced directly to Selling,
General and Administrative costs. Within this category, a substantial portion of
such costs were related to payroll. The monthly payroll of the Company increased
from $162,233 for the month of October 1995 to $308,115 for the month of October
1996. In the Company's Form 10-KSB filed January 13, 1997 the Company attributed
the increase in payroll to the hiring of additional sales staff, engineering
staff and technicians working in the Internet sales and engineering departments
of the Company. More particularly stated: This increase in payroll was primarily
for corporate administrative personnel and sales personnel, technicians and
engineers in all areas of operations. A portion of the Internet engineering
payroll ($130,000) was capitalized. In the initial phases of operation, such
increased payroll resulted in no significant revenue. This negative trend
continued in the fourth quarter so that selling, general and administrative
costs as a percentage of revenues increased from approximately 22% in the
quarter ended December 31, 1995 to approximately 48% in the quarter ended
September 30, 1996. The Computer Product and Service Sales segment in the year
ended September 30, 1996 had an operating loss of approximately $267,000. For
the nine months ended September 30, 1995, the segment had an operating profit of
approximately $71,000. The cost of revenues for Computer Product and Service
Sales for both fiscal years was approximately 85%. The reason for the loss in
1996 can be traced to (a) an increase in payroll of approximately $650,000 for
the hiring of additional sales staff and computer technicians offset by (b) a
decrease in other selling, general and administrative expenses of approximately
$150,000 and (c) an increase in gross profits of $200,000 based on increased
revenues of approximately $1,300,000. As noted above, the Company's focus is
shifting toward its Internet operations. The Company believes that the increase
in sales staff and technicians in Computer Sales and Service will lead to future
business for its complimentary Internet segment.
Expenditures for Research and Development increased by $23,250. This
increase was for Internet programming work done by the Company in setting up its
Internet network.
As a result of the above, the Company reported a net loss for 1996 of
$1,893,480 or $0.72 per share as opposed to the reported net income in 1995 of
$38,859 or $0.02 per share. Losses will continue in the first half of the
current fiscal year.
NOTE 3 -- DEBT
The Company (through its NAFT subsidiary) has available a total of
$1,400,000 pursuant to a Business Financing Agreement and an Agreement for
Wholesale Financing with Deutsche Financial Services ("DFSO") to finance its
accounts receivable and inventory. On certain inventory purchased from Apple and
financed through DFS, Apple pays the finance charges for a thirty day period. As
of September 30, 1995 and 1996, the Company had outstanding a total of $377,261
and $1,386,170, respectively, under these agreements, of which $377,261 and
$674,218, respectively, represent the portion of the line used for the Wholesale
Financing Agreement and are included in accounts payable in the accompanying
balance sheet. At September 30, 1996, the Company had not drawn upon the
Business Financing Agreement.
F-10
<PAGE>
BELL TECHNOLOGY GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 3 -- DEBT -- Continued
The borrowings under these agreements bear interest at the prime rate plus
1.5% (9.75% as of September 30, 1996) and are secured by a continuing security
interest in substantially all of the assets of NAFT and the guarantee of the
Company. Interest expense related to such agreements was $45,000 for 1996 and
$55,000 for 1995. Pursuant to the terms of these agreements, NAFT is required to
obtain prior written consent from DFS before it engages in certain transactions
outside of NAFT's ordinary course of business. These agreements also require
that NAFT comply with certain financial covenants and prohibit dividends. NAFT
presently has an accumulated deficit. Future retained earnings will be
restricted as to the payment of dividends.
The Company borrowed $300,000 from Harpoon, a stockholder of the Company,
in 1994. The debt incurred by this borrowing was repaid in full during fiscal
year 1996.
NOTE 4 -- STOCKHOLDERS' EQUITY AND STOCK OPTIONS
INITIAL PUBLIC OFFERING
In January, 1996. the Company sold, in an initial public offering,
1,150,000 shares of Common Stock at an initial offering price of $7.00 per
share, and 575,000 Redeemable Common Stock Purchase Warrants for $.10 per
warrant. Each warrant entitles the holder to purchase one share of the Company's
common stock for $7.70 per share. The are redeemable by the Company at $.10 per
warrant at any time after January 24, 1997 if certain conditions are met. The
net proceeds, which the Company received, from the public offering amounted to
approximately $6,600,000.
In March 1996, the underwriter of the initial public offering exercised its
over-allotment option to purchase 129,642 common shares from the Company for
$7.00 per share. The net proceeds amounted to approximately $800,000.
BRIDGE FINANCING
In October 1995, the Company borrowed $250,000 in a Bridge Financing. The
Bridge Notes issued in connection with the Bridge Financing carried interest at
9% per annum. Such loans were repaid at the closing of the initial public
offering. In connection with the Bridge Financing, the Company issued 35,710
shares of Common Stock to the Bridge Lenders at no cost, which were registered
as part of the initial public offering. Debt issuance costs of $257,391 and
interest expense of $37,149 were incurred by the Company as a result of the
bridge loan transaction.
STOCK OPTIONS
The Company has an Employee Stock Option Plan (the "Stock Option Plan").
Under the Option Plan, options are exercisable for a period up to 10 years from
the date of the grant. The number of shares of Common Stock reserved for
issuance under the Option Plan is 360,000. The purchase price of the stock will
be equal to or greater than 100% of the fair market value at the date of issue.
As of September 30, 1996, options to purchase approximately 202,730 shares,
at exercise prices between $7.00 and $8.75 have been issued under the plan. In
the opinion of management, options were issued at the fair market value of the
Company's Common Stock as of the date of the grant.
MERGER
Pursuant to the terms of the merger of PFMT and the Company, in September
1995, each of the 200 shares of outstanding common stock of PFMT was
exchangeable for 8,625 shares of common stock of the Company. As a result, as of
September 30, 1996 there were a total of 1,725,000 shares of common stock of the
Company issued and outstanding. All per share amounts have been adjusted
retroactively to reflect this merger.
F-11
<PAGE>
BELL TECHNOLOGY GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 4 -- STOCKHOLDERS' EQUITY AND STOCK OPTIONS -- Continued
DEPOSIT SHARES
In connection with the Company's initial public offering, Marc Bell and
Harpoon have each deposited 210,000 shares of the Common Stock owned by them
(the "Deposit Shares") with the Company. The Company will hold such shares
pursuant to a Share Deposit Agreement. The Deposit Shares will be returned to
their respective owners no later than at the end of eight years from the date of
the Prospectus for the initial public offering. However, the Deposit Shares may
be returned prior to such time, if certain levels of profitability are met.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
CAPITAL AND OPERATING LEASES
The Company leases office equipment and office space under various
non-cancelable operating leases. Rent expense for the year ended September 30,
1996 and the nine months ended September 30, 1995 was approximately $253,402 and
$81,280, respectively. The Company has entered into capital leases for computer
equipment. These capital lease obligations have been recorded at interest rates
ranging from 8% to 8.75%.
In February 1996 the Company entered into a lease for its corporate
headquarters effective July 1996. The lease is for eleven years and six months
starting with an initial annual base rental of $309,250 escalating to $563,547
in the final year. Under the lease, the landlord is to reimburse the Company
$500,000 for leasehold improvements. The Company was required by the terms of
the lease to maintain a letter of credit in the amount of $400,000 for the
duration of the lease. In order to meet such requirement, the Company maintains
a restricted certificate of deposit in the amount of $400,000, which is
classified as a long-term investment as of September 30, 1996.
Future minimum lease payments under these lease agreements are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
SEPTEMBER 30, OPERATING CAPITAL
- ---------------------------------------------------------------------------------------- ----------- --------
<S> <C>
1997.................................................................................... $ 421,160 $ 54,071
1998.................................................................................... 392,548 --
1999.................................................................................... 423,319 --
2000.................................................................................... 447,362 --
2001.................................................................................... 456,309 --
Thereafter.............................................................................. 3,240,388 --
Less: Amount representing interest.................................................... -- (14,919)
Present value of net minimum lease payments........................................... $ 5,381,086 $ 39,152
</TABLE>
NOTE 6 -- INCOME TAXES
Income taxes are accounted for under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Under this method, deferred
tax assets and liabilities are determined based on differences between the
financial reporting and income tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The provision for income taxes on
historical net income for the year ended September 30, 1996 and the nine months
ended September 30, 1995 differs from the amount computed by applying the
federal statutory rate due to the effects of state and local taxes, net of
federal tax benefit and for the year ended September 30, 1996, the difference is
also the result of the Company recording a valuation allowance.
The Company is in an accumulated loss position for both financial reporting
and income tax purposes. No current federal tax benefit has been recorded due to
the uncertainty of the Company's ability to realize benefits by generating
taxable income in the future. The Company has a tax loss carry-forward of
approximately $1.5 million at September 30, 1996. This carry-forward expires in
2011. The benefit from the provision for taxes of $29,896 represents the
reversal of deferred taxes provided in prior years.
F-12
<PAGE>
BELL TECHNOLOGY GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 6 -- INCOME TAXES -- Continued
Income tax (benefit) expense consists of the following:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------- -------------
<S> <C>
CURRENT:
Federal.......................................................................... $ -- $ 8,410
State and local.................................................................. -- 11,527
------------- -------------
Total......................................................................... -- 19,937
------------- -------------
DEFERRED:
Federal.......................................................................... $ (19,759) (398)
State and local.................................................................. (10,137) (440)
------------- -------------
Total......................................................................... (29,896) (838)
------------- -------------
Total......................................................................... $ (29,896) $19,099
------------- -------------
------------- -------------
</TABLE>
The provision for income taxes on historical net income for the year ended
September 30, 1996 and the nine months ended September 30, 1995 differs from the
amount computed by applying the federal statutory rate due to the following:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------- -------------
<S> <C>
Statutory federal income tax rate.................................................. (34)% 34%
Effect of federal graduating tax rate.............................................. -- (18)%
State and local taxes, net of federal benefit...................................... (11)% 14%
Other: (1)% 3%
Valuation allowance................................................................ (44)% --
Effective income tax rate.......................................................... (2)% 33%
------------- -------------
Total......................................................................... (29,896) (838)
------------- -------------
Total......................................................................... (29,896) 19,099
------------- -------------
------------- -------------
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
------------- -------------
<S> <C>
Deferred tax assets (liabilities):
Tax depreciation and amortization in excess of book depreciation and
amortization..................................................................... $ (12,920) $ (6,708)
Income not recognized due to the change from the cash to the accrual method of
accounting for income tax purposes............................................ -- (25,828)
Net operating loss carry forward................................................. 733,393 --
Allowance for doubtful accounts.................................................. 29,176 5,158
Valuation allowance.............................................................. (749,649) --
------------- -------------
Total net deferred tax liabilities............................................ $ -- $ (27,378)
------------- -------------
------------- -------------
</TABLE>
NOTE 7 -- EMPLOYMENT AGREEMENT
In October 1995, the Company entered into an employment agreement with Marc
H. Bell, which extends for a period of five years, terminating on September 30,
2000. Pursuant to the terms of the agreement, Mr. Bell
F-13
<PAGE>
BELL TECHNOLOGY GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 7 -- EMPLOYMENT AGREEMENT -- Continued
receives a base salary of $200,000 per year and a bonus equal to 5% of the
annual pre-tax net income of the Company in excess of $1 million.
The Company also entered into employment agreements on October 1, 1995 with
two officers of the Company, which extend for a period of two years. Pursuant to
the terms of these agreements, annual base salaries totaled $125,000 and $64,000
per annum. In addition to base compensation, the Company intends to reserve at
the end of each fiscal year, a sum equal to ten (10%) percent of the
consolidated net income of the Company (computed before provision for federal
and state income taxes) (the "Bonus Pool"), for allocation among the officers of
the Company and certain key employees (including Marc H. Bell) as the Board of
Directors of the Company may determine. Marc Bell will receive an amount equal
to 5% of the pre-tax income over $1 million (50% of the Bonus Pool) to the
extent, if any, that the Bonus Pool exceeds $100,000.
Because the increases in the officer's base salaries did not become
effective until January 1, 1996, the salary expense recognized in the 1996
financial statements for all officers was approximately $330,000, of which
$165,000 related to Marc H. Bell.
NOTE 8 -- SUBSEQUENT EVENT
NEW CREDIT AGREEMENT
In October 1996, the Company entered into a new credit agreement with
NationsCredit, to replace the DFS facility discussed in Note 2. This agreement
provides for a revolving credit line of up to $3,000,000 based upon 100% of
eligible inventory and 80% of eligible trade receivables. On inventory items,
Naft will finance the purchase invoice through the line of credit and pay no
interest for the first 30 days. After the expiration of such 30 day period,
interest will accrue at the prime rate plus 1.75%. Any borrowings under this
agreement are secured by substantially all of the assets of Naft and a cross
guaranty of the Company.
F-14
<PAGE>
BELL TECHNOLOGY GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1996
----------- -------------
<S> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................................... $ 1,207,305 $ 2,342,011
Accounts receivable, net of allowance for doubtful accounts of $151,676 and
$64,843 as of March 31, 1997 and September 30, 1996, respectively.............. 3,910,353 1,847,918
Inventories....................................................................... 799,073 758,353
Prepaid expenses and other current assets......................................... 121,838 195,113
----------- -------------
TOTAL CURRENT ASSETS........................................................... 6,038,569 5,143,395
Property and equipment, net......................................................... 3,076,870 2,151,294
Long-term investment................................................................ 400,000 400,000
Other assets........................................................................ 107,425 115,093
----------- -------------
TOTAL ASSETS................................................................... $ 9,622,864 $ 7,809,782
----------- -------------
----------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings............................................................. $ 1,526,062 $ --
Current portion of notes payable.................................................. 81,771 39,152
Accounts payable.................................................................. 2,276,795 1,274,197
Accrued expenses.................................................................. 208,823 240,116
Deferred revenues................................................................. 210,869 166,617
----------- -------------
TOTAL CURRENT LIABILITIES...................................................... 4,304,320 1,720,082
----------- -------------
Notes payable, less current portion............................................... 337,092 --
----------- -------------
TOTAL LIABILITIES.............................................................. 4,641,412 1,720,082
----------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value; 500,000 shares authorized; no shares issued and
outstanding.................................................................... -- --
Common Stock, $.01 par value; 10,000,000 shares authorized; 3,044,451 and
3,040,352 shares issued and outstanding........................................ 30,445 30,404
Additional paid-in capital........................................................ 7,999,281 8,033,562
Accumulated deficit............................................................... (3,048,274) (1,974,266)
----------- -------------
TOTAL STOCKHOLDERS' EQUITY..................................................... 4,981,452 6,089,700
----------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................................... $ 9,622,864 $ 7,809,782
----------- -------------
----------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-15
<PAGE>
BELL TECHNOLOGY GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
-------------------------
<S> <C>
1997 1996
----------- ----------
REVENUES............................................................................. $ 8,925,851 $4,764,877
COSTS AND EXPENSES:
Cost of revenues................................................................... 6,940,893 3,890,703
Selling, general and administrative................................................ 2,882,344 1,126,707
Depreciation and amortization (net of $93,799 included in cost of revenues
for the six months ended March 31, 1997)........................................... 202,291 67,181
----------- ----------
Total costs and expenses........................................................ 10,025,528 5,084,591
----------- ----------
Loss from operations................................................................. (1,099,677) (319,714)
Interest income (expense), net..................................................... 25,669 (44,061)
Write-off of debt issuance costs................................................... -- (256,351)
----------- ----------
Loss before taxes.................................................................... (1,074,008) (620,126)
Provision for taxes.................................................................. -- --
----------- ----------
NET LOSS............................................................................. $(1,074,008) $ (620,126)
----------- ----------
----------- ----------
NET LOSS PER SHARE................................................................... $ (0.35) $ (0.28)
Weighted average shares outstanding.................................................. 3,042,248 2,176,097
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-16
<PAGE>
BELL TECHNOLOGY GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
--------------------------
<S> <C>
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................................................... $(1,074,008) $ (620,126)
Adjustments to reconcile net (loss) to net cash used in operating activities
Depreciation and amortization.................................................. 296,090 67,181
Provision for bad debts........................................................ 86,833 --
Write off of amortization of debt issuance costs............................... -- 293,500
Provision for deferred taxes................................................... -- (327)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
(Increase) in accounts receivable................................................. (2,149,268) (31,884)
Decrease (increase) in inventories................................................ (40,720) 267,113
Decrease (increase) in prepaid expenses and other current assets.................. 73,275 (43,183)
Decrease (increase) in other assets............................................... 7,668 (68,442)
Increase (decrease) in accounts payable........................................... 1,002,598 (904,153)
(Decrease) in accrued expenses.................................................... (31,293) (23,754)
Increase in deferred revenues..................................................... 44,252 13,239
----------- -----------
Net cash used in operations.................................................... (1,784,573) (1,050,836)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net of landlord reimbursement................ (1,221,666) (205,658)
----------- -----------
Net cash used in investing activities.......................................... (1,221,666) (205,658)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from short term borrowings........................................... 1,526,062 (711,952)
Net proceeds of notes payable..................................................... 321,711 (332,782)
Proceeds initial public offering, net of offering costs of $1,602,175............. -- 7,412,819
Proceeds from exercise of stock options........................................... 23,760 --
----------- -----------
Net cash provided by financing activities...................................... 1,871,533 6,368,085
----------- -----------
NET INCREASE (DECREASE) in cash and cash equivalents................................ (1,134,706) 5,111,591
CASH AND CASH EQUIVALENTS, beginning of period...................................... 2,342,011 222,367
----------- -----------
CASH AND CASH EQUIVALENTS, end of period............................................ $ 1,207,305 $ 5,333,958
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-17
<PAGE>
BELL TECHNOLOGY GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated balance sheets as of March 31, 1997, statements of
operations for the three and six months ended March 31, 1997 and 1996 and the
statements of cash flows for the six months ended March 31, 1997 and 1996 have
been prepared by Bell Technology Group Ltd. (the "Company") without audit. All
material inter-company accounts and transactions have been eliminated. The
consolidated results should be read in conjunction with the audited financial
statements and notes thereto included in the Company's Form 10KSB/A on file with
the Securities and Exchange Commission. Results of operations for the three
month and six month period are not necessarily indicative of the operating
results for the full year. Interim statements are prepared on a basis consistent
with year-end statements.
In the opinion of management, the unaudited interim financial statements
furnished herein include all adjustments necessary for a fair presentation of
the results of operations of the Company. All such adjustments are of a normal
recurring nature.
NOTE 2 -- REVOLVING CREDIT AGREEMENT
The Company (through its Naft subsidiary with a guaranty of the Company)
has a revolving credit agreement (the "Credit Agreement") to finance its
accounts receivable and inventory with NationsCredit ("Nations") pursuant to
which it can borrow up to $3 million based upon a formula set forth in the
Credit Agreement. As of March 31, 1997, the Company had a net outstanding
balance of approximately $1.9 million under the Credit Agreement. Such
obligation is secured by a continuing security interest in substantially all of
the assets of the Company. The borrowings bear interest at the prime rate plus
1.75%. Pursuant to the terms of the Credit Agreement, Naft is required to
maintain certain liquidity ratios which Naft is currently maintaining,
including: (a) tangible net worth plus indebtedness subordinated to amounts owed
to Nations, less prepaid expenses, intercompany and officer/employee receivables
and other intangible assets of not less than $1.4 million at the end of each
fiscal quarter, and (b) a ratio of total liabilities to tangible net worth of no
greater than 2.5 to 1 at the end of each fiscal quarter. As of March 31, 1997,
Naft had a tangible net worth as defined in the Credit Agreement of
approximately $1.2 million and a ratio of total liabilities to tangible net
worth of 2.9 to 1. The shortfall in tangible net worth arose because of certain
intercompany transactions. Nations formally waived the default in May 1997 and
the Company anticipates that Naft is in compliance with all requirements as of
June 30, 1997. While the Credit Agreement gives Nations the right to demand
repayment if it deems itself "insecure," Nations has given the Company no
indication that it is considering utilizing this provision. Furthermore,
incurring losses as the Company builds its new businesses was anticipated in
setting its covenants with Nations in October 1996 and the Company deems its
relationship with Nations to be normal.
NOTE 3 -- NOTES PAYABLE
The Company has entered into leases for various items of its office
furniture and equipment as well as for its telephone system. The terms on the
leases call for monthly payments of approximately $8,300 per month for 60
months. The office furniture and equipment lease commenced in January, 1997. The
telephone equipment lease will commence when certain performance guaranties are
met.
NOTE 4 -- COMMITMENTS AND CONTINGENCIES
In February 1996 the Company entered into a lease for its corporate
headquarters effective July 1996. The lease is for eleven years and six months
starting with an initial annual base rental of $309,250 escalating to $563,547
in the final year. Under the lease, the landlord is to reimburse the Company
$500,000 for leasehold improvements. As of March 31, 1997 approximately $450,000
has been received from the landlord and $50,000 has been recorded as Due from
landlord. The Company was required by the terms of the lease to maintain a
letter of credit in the amount of $400,000 for the duration of the lease. To
secure its obligation to meet such requirement, the Company has pledged a
certificate of deposit in the amount of $400,000. This amount is included in
"Long-term investments" on the Company's consolidated balance sheet at March 31,
1997 and September 30,
F-18
<PAGE>
BELL TECHNOLOGY GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 4 -- COMMITMENTS AND CONTINGENCIES -- Continued
1996. Under the terms of such lease, $75,000 of the letter of credit and
accompanying certificate of deposit will be released in July 1998, and an
additional $75,000 will be released in July 1999 and $150,000 of the letter of
credit will be released in July 2000, if the Company is not in default under the
terms of the lease.
NOTE 5 -- RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. This
statement establishes standards for computing and presenting earnings per share
(EPS), replacing the presentation of currently required primary EPS with a
presentation of Basic EPS. For entities with complex capital structures, the
statement requires the dual presentation of both Basic EPS and Diluted EPS on
the face of the statement of operations. Under this new standard, Basic EPS is
computed based on weighted average shares outstanding and excludes any potential
dilution; Diluted EPS reflects potential dilution from the exercise or
conversion of securities into common stock or from other contracts to issue
common stock and is similar to the currently required fully diluted EPS. SFAS
128 is effective for financial statements issued for periods ending after
December 31, 1997, including interim periods, and earlier application is not
permitted. When adopted, the Company will be required to restate its EPS data
for all prior periods presented. The Company does not expect the impact of the
adoption of this statement to be material to previously reported EPS amounts.
F-19
<PAGE>
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
NO 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 REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES IN ANY CIRCUMSTANCES WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................................... 3
Glossary............................................. 8
Risk Factors......................................... 9
Market for Company's Common Stock.................... 15
Use of Proceeds...................................... 16
Dividend Policy...................................... 16
Capitalization....................................... 17
Selected Consolidated Financial Information.......... 18
Management's Discussion and Analysis of
Financial Condition and Results
of Operations...................................... 19
Business............................................. 22
Management........................................... 27
Principal Stockholders............................... 31
Certain Transactions................................. 31
Description of Securities............................ 33
Shares Eligible for Future Sale...................... 37
Underwriting......................................... 38
Legal Matters........................................ 39
Experts.............................................. 39
Index to Consolidated Financial Statements........... F-1
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE 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 WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
BELL TECHNOLOGY GROUP LTD.
10% CONVERTIBLE
SENIOR SUBORDINATED
DEBENTURES DUE 2003
----------------
PROSPECTUS
----------------
RICKEL & ASSOCIATES, INC.
, 1997
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. The Company's Certificate of Incorporation limits the liability of
Directors to the maximum extent permitted by Delaware General Corporation Law.
Delaware law provides that the directors of a corporation will not be personally
liable to such corporation or its stockholders for monetary damages for breach
of their fiduciary duties as directors, except for liability (i) for any breach
of their duty of loyalty to the corporation or its stockholders; (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) for unlawful payments of dividends or unlawful
stock repurchases or redemptions as provided in Section 174 of the Delaware
General Corporation Law; or (iv) for any transaction from which the director
derives an improper personal benefit. The Company's By-laws provide that the
Company shall indemnify its directors and officers 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 directors and officers of the Company are insured (subject to certain
exemptions and deductions) against liabilities that they may incur in their
capacity as such, including liabilities under the Act, other than liabilities
thereunder arising in connection with this Offering, under a liability insurance
policy carried by the Company. Such policy provides coverage in an aggregate
amount of $1,000,000 (subject to retentions ranging from $75,000 to $150,000).
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses payable by the Company in connection with this
offering, other than the Underwriter's discount, are as follows:
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
SEC Registration Fee.................................................................................. $ 2,283
NASD Filing Fee....................................................................................... 1,250
Nasdaq Filing Fee..................................................................................... 4,000
Printing.............................................................................................. 50,000*
Underwriter's Non-accountable Expense Allowance....................................................... 148,000**
Underwriter's Debenture Management Fee................................................................ 108,000
Boston Stock Exchange Filing Fee...................................................................... 7,500
Legal Fees and Expenses............................................................................... 100,000*
Accounting Fees and Expenses.......................................................................... 40,000*
"Blue Sky" Fees and Expenses.......................................................................... 50,000*
Indenture Trustee's Fee............................................................................... 1,500
Miscellaneous......................................................................................... 35,467*
--------
Total................................................................................................. $548,000
--------
--------
</TABLE>
- ---------------
* Indicates expenses that have been estimated for purposes of this filing.
** Represents 3% of the total proceeds of the offering.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In the past three years, the Company has made the following sales of
unregistered securities, which were exempt from the registration requirements of
the Act pursuant to Section 4(2) thereof:
In October 1995, the Company issued 9% promissory notes in the aggregate
principal amount of $250,000 to eight individual lenders to evidence loans for
such amount, and also issued to the eight lenders, for $.01 per share, an
aggregate of 35,710 shares of the Company's fully paid and non assessable Common
Stock as a fee for making the loan. The loan was repaid out of the proceeds of
the Company's initial public offering in January 1996.
II-1
<PAGE>
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NO.
------ ------------- ------
<S> <C>
1 Form of Underwriting Agreement the Company and Rickel & Associates, Inc. ("Rickel"), the
Underwriter.*
3(a) Certificate of Incorporation of the Company, dated September 29, 1995. (1)
3(b) By-laws of the Company. (1)
4(a) Indenture.
4(b) Form of Underwriter's Warrant.*
5 Opinion of Milberg Weiss Bershad Hynes & Lerach LLP.
10(a) Sublease for Penthouse Suite 907D between Rhodes Associates, Rose Associates, Electric
Curtain Inc. and Stellar Graphics Corp., dated as of July 1, 1997. (2)
10(b) Bell Technology Group Ltd. 1995 Stock Option Plan, adopted September 29, 1995. (1)(+)
10(c) Irrevocable Proxy Agreement between Harpoon Holdings Ltd. and Marc H. Bell, dated as of
October 1, 1995. (1)
10(d) Employment Agreement between Marc H. Bell and the Company dated as of October 1, 1995.
(1)(+)
10(e) Employment Agreement between Robert Bell and the Company dated as of October 1, 1995.
(1)(+)
10(f) Share Deposit Agreement between Marc H. Bell, Harpoon Holdings Ltd., the Company, and
Rickel & Associates. (3)
10(g) Form of Consulting Agreement between the Company and Rickel. (1)
10(h) Amendment to Employment Agreement between Marc H. Bell and the Company dated as of
January 1, 1996. (4)(+)
10(i) Amendment to Employment Agreement between Robert Bell and the Company dated as of
January 1, 1996. (4)(+)
10(j) Agreement of Lease between Bell Technology Group Ltd. and Puck Associates dated as of
July 23, 1996. (4)
10(k) Security Agreement with NationsCredit Commercial Corporation of America
("NationsCredit") and NAFT International Ltd. ("NAFT") dated October 1996. (4)
10(l) Agreement for Wholesale Financing between NAFT and NationsCredit dated as of October
1996.
10(m) Lock Box Service Agreement between NAFT, European American Bank and NationsCredit dated
as of October 1996.
10(n) Loan and Security Agreement between FINOVA Capital Corporation ("FINOVA") and the
Company, dated as of May 1, 1997. (6)
10(o) Guaranty by NAFT in favor FINOVA, dated as of May 1, 1997. (6)
10(p) Guaranty by NAFT Computer Service Corp. in favor of FINOVA, dated as of May 1, 1997. (6)
10(q) Guaranty by Bluestreak Digital, Inc. in favor of FINOVA, dated as of May 1, 1997. (6)
10(r) Guaranty by PFM Communications, Inc. in favor FINOVA, dated as of May 1, 1997. (6)
10(s) Form of Debenture Management Agreement between the Company and Rickel.*
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
10(t) Promissory Notes to Bell Technology Group Ltd. from Marc H. Bell dated April 2, 1997 and
June 30, 1997.
21 List of Subsidiaries. (5)
23(a) Consent of Arthur Andersen LLP.*
23(b) Consent of Milberg Weiss Bershad Hynes & Lerach LLP (included in its opinion filed as
Exhibit 5 to this Registration Statement)
25 Statement of Eligibility Under the Trust Indenture Act of Of 1939 of a Corporation
Designated to Act as Trustee on Form T-1.
</TABLE>
(+) Denotes a management contract or compensatory plan, contract or
agreement.
(*) Filed herewith.
<TABLE>
<S> <C>
(1 ) Incorporated by reference to Registration Statement on Form SB-2 (File No. 33- 98978)
(the "Registration Statement") filed November 3, 1995.
(2 ) Incorporated by reference to Amendment No. 1 to the Registration Statement, filed
December 20, 1995.
(3 ) Incorporated by reference to Amendment No. 2 to the Registration Statement filed January
23, 1996, declared effective January 24, 1996.
(4 ) Incorporated by reference to the Company's Annual Report on Form 10-KSB/A for the year
ended September 30, 1996.
(5 ) Incorporated by reference to the Company's Registration Statement on Form SB-2 filed
March 13, 1997 (File No. 333-23259).
(6 ) Incorporated by reference to the Company's Report on Form 8-K/A filed July 18, 1997.
</TABLE>
- ---------------
ITEM 28. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities,
a post-effective amendment to this registration statement to
include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act of 1933,
treat each post-effective amendment as a new registration
statement of the securities offered, and the offering of the
securities at that time to be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the
offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable ground to believe that it meets all
the requirements for filing on Form SB 2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: July , 1997
BELL TECHNOLOGY GROUP LTD.
By: /s/____________________________
MARC H. BELL
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
registration statement has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ------------------------------------------------------ ------------------------------------- --------------
<S> <C>
/s/ Chief Executive Officer July 31, 1997
- ------------------------------------------------------ and Director
MARC H. BELL
/s/ Executive Vice President, July 31, 1997
- ------------------------------------------------------ Chief Financial Officer
ROBERT B. BELL and Director
Director July 31, 1997
- ------------------------------------------------------
MARTIN FOX
Director July 31, 1997
- ------------------------------------------------------
TSUYOSHI SHIRAISHI
/s/ Director July 31, 1997
- ------------------------------------------------------
RICHARD VIDEBECK
/s/ Treasurer and July 31, 1997
- ------------------------------------------------------ Chief Accounting Officer
ALAN LEVY
</TABLE>
II-4
BELL TECHNOLOGY GROUP LTD.
$5,500,000 PRINCIPAL AMOUNT, 10%
CONVERTIBLE SENIOR SUBORDINATED
DEBENTURES, DUE AUGUST , 2003
UNDERWRITING AGREEMENT
, 1997
Rickel & Associates, Inc.
875 Third Avenue
New York, New York 10022
Dear Sirs:
Bell Technology Group Ltd., a Delaware corporation (the "Company"), hereby
confirms its agreement with Rickel & Associates, Inc. ("you" or the
"Underwriter"), as follows:
1. DESCRIPTION OF THE SECURITIES.
The Company proposes to issue and sell to the Underwriter $5,500,000
principal amount of 10% convertible senior subordinated debentures, due August
, 2003 (the "Debentures"), of the Company (the Debentures being sometimes
referred to as the "Securities"). The Company proposes to grant to the
Underwriter an option to purchase up to $825,000 additional principal amount of
Debentures (the "Additional Securities"). The Debentures will be offered in
multiples of $1,000 per Debenture. The offering of Securities and Additional
Securities contemplated hereby may sometimes be referred to as the "Offering."
(a) Underwriter's Securities.
The Company will sell to the Underwriter, for nominal consideration,
warrants to purchase up to $550,000 principal amount of Debentures at a
price equal to $1,200 per Debenture (the "Underwriter's Warrants"). The
Underwriter's Warrants and shares of Common Stock underlying the
Underwriter's Warrants are hereinafter referred to collectively as the
"Underwriter's Securities." The Underwriter's Warrants shall be
non-exercisable and non-transferable (other than to officers and partners
of the Underwriter and to members of the selling group and their officers
or partners) for a period of 12 months following the Effective Date.
Thereafter, the Underwriter's Warrants shall be exercisable and
transferable for a period of four years (provided such transfer is in
accordance with the Securities Act and any other applicable securities
laws). If the Underwriter's Warrants are not exercised during their term,
they shall, by their terms, automatically expire. The Underwriter's
Securities shall be registered for sale to the public and shall be included
in the Registration Statement filed in connection with the Offering.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to the Underwriter that:
(a) The Company has filed with the Securities and Exchange Commission
(the "Commission"), a registration statement, and one or more amendments
thereto, on Form SB-2 (File No. 333-23259), including in each such
registration statement and each such amendment any related preliminary
prospectus ("Preliminary Prospectus"), for the registration of the
Securities under the Securities Act of 1933 (the "Act"). The Company will,
if required, file a further amendment to said registration statement in the
form to be delivered to you and will not, before the registration statement
becomes effective, file any other amendment thereto to which you shall have
reasonably objected in writing after having been furnished with a copy
thereof. Except as the context may otherwise require, such registration
statement, as amended, on file with the Commission at the time such
registration statement becomes effective (including the prospectus,
financial statements, exhibits and all other documents, as amended, filed
as a part thereof), is hereinafter called the "Registration Statement," and
the prospectus, in the form filed with the Commission pursuant to Rule
424(b) of the General Rules and Regulations of the Commission under the Act
(the "Regulations") or, if no such filing is made, the definitive
prospectus used in the Offering, is hereinafter called the "Prospectus."
The Company
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has delivered to you copies of each Preliminary Prospectus as filed with
the Commission and has consented to the use of such copies for purposes
permitted by the Act.
(b) The Commission has not issued any orders preventing or suspending
the use of any Preliminary Prospectus, and, as of the date filed with the
Commission, each Preliminary Prospectus conformed in all material respects
with the requirements of the Act and did not include any untrue statement
of a material fact or omit to state any material fact required to be stated
therein and necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided,
however, that this representation and warranty does not apply to statements
or omissions made in reliance upon and in conformity with written
information furnished to the Company by or on your behalf for use in such
Preliminary Prospectus and except that this representation and warranty
does not apply to statements or omissions that have been cured in a
subsequent preliminary prospectus or in the Prospectus.
(c) When the Registration Statement becomes effective under the Act
and at all times subsequent thereto to and including the Closing Date
(hereinafter defined) and the Option Closing Date (hereinafter defined) and
for such longer periods as a Prospectus is required to be delivered in
connection with the sale of the Securities by the Underwriter, the
Registration Statement and Prospectus, and any amendment thereof or
supplement thereto, will contain all material statements which are required
to be stated therein in accordance with the Act and the Regulations, and
will in all material respects conform to the requirements of the Act and
the Regulations, and neither the Registration Statement nor the Prospectus,
nor any amendment or supplement thereto, will contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided,
however, that this representation and warranty does not apply to statements
or omissions made in reliance upon and in conformity with written
information furnished to the Company by you for use in the Registration
Statement or Prospectus, or in any amendment thereof or supplement thereto.
It is understood that the statements set forth in the Prospectus with
respect to (i) the amounts of the selling concession and reallowance; (ii)
the identity of counsel to the Underwriter under the heading "Legal
Matters"; (iii) information under the heading "Underwriting," including the
information concerning the National Association of Securities Dealers, Inc.
("NASD") affiliation of the Underwriter; and (iv) the stabilization legend
in the Prospectus constitute the only information supplied by you for use
in the Registration Statement or Prospectus.
(d) The Company is, and at the Closing Date and the Option Closing
Date will be, a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. Exhibit 22 to the
Registration Statement correctly sets forth the names of each of the
Company's subsidiaries (the "Subsidiaries"). The Subsidiaries are the only
subsidiaries of the Company are, and at the Closing Date and the Option
Closing Date will be, corporations duly organized, validly existing and in
good standing under the laws of the State of New York. Each of the Company
and the Subsidiaries is duly qualified and in good standing as a foreign
corporation in each jurisdiction in which its ownership or leasing of any
properties or the character of its operations requires such qualification,
except those jurisdictions in which the failure to so qualify would not
have a material adverse effect on the business or operations of the Company
and its subsidiaries, taken as a whole ("Material Adverse Effect"). Each of
the Company and the Subsidiaries has all requisite corporate powers and
authority, and all necessary authorizations, approvals, orders, licenses,
certificates and permits of and from all governmental regulatory officials
and bodies to own or lease its properties and conduct its business as
described in the Prospectus except where the failure to have any such
authorizations, approvals, orders, licenses, certificates or permits would
not have a Material Adverse Effect, and each of the Company and the
Subsidiaries is doing business and has been doing business during the
period described in the Registration Statement in compliance with all such
material authorizations, approvals, orders, licenses, certificates and
permits and all material federal, state and local laws, rules and
regulations concerning the business in which the Company or the
Subsidiaries is engaged, except where the failure to comply with any such
authorizations, approvals, orders, licenses, certificates or permits or any
such laws, rules or regulations would not have a Material Adverse Effect.
The disclosures in the Registration Statement concerning the effects of
federal, state and local regulation on the Company's and the Subsidiaries'
business as currently conducted and as contemplated are correct in all
material respects and do not omit to state a material fact required to be
stated therein in light of the circumstances under which such disclosures
were made. The Company has all corporate power and authority to enter into
this Agreement and carry out the provisions
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and conditions hereof, and all consents, authorizations, approvals and
orders required in connection therewith have been obtained or will have
been obtained prior to the Closing Date. In the event the Company forms a
subsidiary after the Closing Date but before the Option Closing Date, the
foregoing shall apply to the new subsidiary as appropriately modified.
(e) This Agreement and the Indenture between the Company and
Continental Stock Transfer & Trust Co. (the "Indenture"), have been duly
and validly authorized and executed by the Company. The Securities
(including the shares of common stock, $.01 par value per share (the
"Common Stock"), issuable upon conversion of the Debentures (the "Shares"),
or in payment of interest thereon (the "Interest Shares")), and the
Underwriter's Securities have been duly authorized (and, in the case of the
Shares, have been duly reserved for issuance) and, when issued and paid for
in accordance with this Agreement (and, in the case of such Shares and
Interest Shares, upon issuance), will be validly issued, fully paid and
non-assessable; the Securities, Additional Securities, Shares and Interest
Shares, and Underwriter's Securities are not and will not be subject to the
preemptive rights of any stockholder of the Company and conform and at all
times up to and including their issuance will conform in all material
respects to all statements with regard thereto contained in the
Registration Statement and Prospectus; and all corporate action required to
be taken for the authorization, issuance and sale of the Securities, the
Additional Securities, Shares and Interest Shares and Underwriter's
Securities has been taken, and this Agreement constitutes a valid and
binding obligation of the Company, enforceable in accordance with its
terms, to issue and sell, upon exercise in accordance with the terms
thereof, the number and kind of securities called for thereby, except as
enforceability may be limited by bankruptcy, reorganization, moratorium,
insolvency or other laws affecting the enforceability of creditors' right
generally and rules of law governing specific performance, injunctive
relief and other equitable remedies.
(f) The consummation of the transactions contemplated by this
Agreement and the fulfillment of the terms hereof will not result in a
breach or violation of any of the terms or provisions of, or constitute a
default under, the Certificate of Incorporation or by-laws, in each case as
amended, of the Company or of any evidence of indebtedness, lease, contract
or other agreement or instrument to which the Company or any of the
Subsidiaries is a party or by which the Company or any of the Subsidiaries
or any of their respective properties is bound, or under any applicable
law, rule, regulation, judgment, order or decree of any government,
administrative agency or court, domestic or foreign, having jurisdiction
over the Company or the Subsidiaries or their respective properties, in
each case except for any breach, violation or default that would not have a
Material Adverse Effect, or result in the creation or imposition of any
material lien, charge or encumbrance upon any of the properties or assets
of the Company or the Subsidiaries; and no consent, approval, authorization
or order of any court or governmental or other regulatory agency or body is
required for the consummation by the Company of the transactions on its
part herein contemplated, except such as may be required under the Act or
under state securities or blue sky laws or under the rules and regulations
of the NASD, and except where the breach, violation or failure to obtain
such consent, approval, authorization or order would not have a Material
Adverse Effect.
(g) Subsequent to the date hereof, and prior to the Closing Date and
the Option Closing Date, except as otherwise described in or contemplated
by the Prospectus, neither the Company nor the Subsidiaries will issue or
acquire any equity securities.
(h) The consolidated financial statements and notes thereto included
in the Registration Statement and the Prospectus fairly present the
consolidated financial position and the results of operations of the
Company and the Subsidiaries at the respective dates and for the respective
periods to which they apply; and such financial statements have been
prepared in conformity with generally accepted accounting principles,
consistently applied throughout the periods involved.
(i) Except as set forth in the Registration Statement, neither the
Company nor any of the Subsidiaries is, and at the Closing Date and at the
Option Closing Date neither the Company nor any of the Subsidiaries will
be, in violation or breach of, or default in, the due performance and
observance of any term, covenant or condition of any indenture, mortgage,
deed of trust, note, loan or credit agreement, or any other agreement or
instrument evidencing an obligation for borrowed money, or any other
agreement or instrument to which the Company or the Subsidiaries is a party
or by which the Company or the Subsidiaries may be bound or to which any of
the property or assets of the Company or the Subsidiaries is subject, which
violations,
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breaches, default or defaults, singularly or in the aggregate, have not
been waived and would have a Material Adverse Effect. Neither the Company
nor any of the Subsidiaries has and at the Closing Date or Option Closing
Date neither the Company nor the Subsidiaries will have taken any action in
violation of the provisions of the Certificate of Incorporation or by-laws,
in each case as amended, of the Company or the Subsidiaries, as the case
may be, or any statute or any order, rule or regulation of any court or
regulatory authority or governmental body having jurisdiction over or
application to either the Company or the Subsidiaries or its business or
properties, except for any violations that, singularly or in the aggregate,
would not have a Material Adverse Effect.
(j) The Company and the Subsidiaries have, and at the Closing Date and
at the Option Closing Date will have, good and marketable title to all
properties and assets described in the Prospectus as owned by them, free
and clear of all liens, charges, encumbrances, claims, security interests,
restrictions and defects of any material nature whatsoever, except such as
are described or referred to in the Prospectus and liens for taxes not yet
due and payable or such as in the aggregate will not have a Material
Adverse Effect. All of the material leases and subleases under which the
Company or the Subsidiaries is the lessor or sublessor of properties or
assets or under which the Company or the Subsidiaries holds properties or
assets as lessee as described in the Prospectus are, and will on the
Closing Date and the Option Closing Date be, in full force and effect, and
except as described in the Prospectus, each of the Company and the
Subsidiaries is not and will not be in default in respect of any of the
terms or provisions of any of such leases or subleases (except for defaults
which would not have a Material Adverse Effect), and no claim has been
asserted by anyone adverse to rights of the Company or the Subsidiaries as
lessor, sublessor, lessee or sublessee under any of the leases or subleases
mentioned above, or affecting or questioning the right of the Company or
the Subsidiaries to continue possession of the leased or subleased premises
or assets under any such lease or sublease, except as described or referred
to in the Prospectus or such as in the aggregate would not have a Material
Adverse Effect, and the Company and the Subsidiaries owns or leases all
such properties as are necessary to its operations as now conducted and,
except as otherwise stated in the Prospectus, as proposed to be conducted
as set forth in the Prospectus (except where the failure to own or lease
such properties would not have a Material Adverse Effect).
(k) The authorized, issued and outstanding capital stock of the
Company as of the date referenced in the Prospectus is, and the authorized,
issued and outstanding capital stock of the Company on the Closing Date
will be, as set forth in the Prospectus under "Capitalization" (in each
case based on the assumptions set forth therein and except that issuance
and sale of the Additional Securities will not be reflected therein); the
shares of issued and outstanding capital stock of the Company set forth
thereunder have been (or as of the Closing Date will be) duly authorized
and validly issued and are (or as of the Closing Date will be) fully paid
and non-assessable; except as set forth in the Prospectus, no options,
warrants or other rights to purchase, agreements or other obligations to
issue, or agreements or other rights to convert any obligation into, any
shares of capital stock of the Company have been granted or entered into by
the Company; and the Common Stock, the Warrants and all such options and
warrants conform in all material respects, to all statements relating
thereto contained in the Registration Statement and Prospectus.
(l) Except as described in the Prospectus, neither the Company nor the
Subsidiaries owns or controls any capital stock or securities of, or has
any proprietary interest in, or otherwise participates in any other
corporation, partnership, joint venture, firm, association or business
organization (other than those direct or indirect subsidiaries of the
Company disclosed in Exhibit 22 to the Registration Statement); PROVIDED,
HOWEVER, that this provision shall not be applicable to the investment, if
any, of the net proceeds from the sale of the Securities sold by the
Company or other funds thereof in interest-bearing savings accounts,
certificates of deposit, money market accounts, United States government
obligations or other short-term obligations.
(m) Arthur Andersen LLP, who have reported on the financial statements
of the Company which have been filed with the Commission as a part of the
Registration Statement, are independent accountants with respect to the
Company as required by the Act and the Regulations.
(n) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, and except as may
otherwise be indicated or contemplated herein or therein, neither the
Company nor the Subsidiaries has (i) issued any securities or incurred any
liability or obligation, direct or
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contingent, for borrowed money; or (ii) entered into any transaction other
than in the ordinary course of business; or (iii) declared or paid any
dividend or made any other distribution on or in respect of its capital
stock; PROVIDED, HOWEVER, that this provision shall not be applicable to
any transaction between or among the Company and its Subsidiaries.
(o) There is no litigation or governmental proceeding pending or to
the knowledge of the Company or the Subsidiaries threatened against, or
involving the properties or business of the Company or the Subsidiaries
which might have a Material Adverse Effect, except as referred to in the
Prospectus. Further, except as referred to in the Prospectus, there are no
pending actions, suits or proceedings related to environmental matters or
related to discrimination on the basis of age, sex, religion or race, nor
is the Company or the Subsidiaries charged with or, to its knowledge, under
investigation with respect to any violation of any statutes or regulations
of any regulatory authority having jurisdiction over its business or
operations, which violations might have a Material Adverse Effect, and no
labor disturbances by the employees of the Company or the Subsidiaries
exist or, to the knowledge of the Company or the Subsidiaries, have been
threatened.
(p) Each of the Company and the Subsidiaries has, and at the Closing
Date and at the Option Closing Date will have, filed all necessary federal,
state and foreign income and franchise tax returns required to be filed or
has requested extensions thereof (except in any case where the failure so
to file would not have a Material Adverse Effect), and has paid all taxes
which it believes in good faith were required to be paid by it except for
any such taxes that currently, or on the Closing Date or Option Closing
Date, as the case may be, are being contested in good faith or as described
in the Prospectus.
(q) Neither the Company nor the Subsidiaries has at any time (i) made
any contribution to any candidate for political office, or failed to
disclose fully any such contribution, in violation of law, or (ii) made any
payment to any state, federal, foreign governmental or professional
regulatory agency, officer or official or other person charged with similar
public, quasi-public or professional regulatory duties, other than payments
or contributions required or allowed by applicable law.
(r) Except as set forth in the Registration Statement, to the
knowledge of the Company or the Subsidiaries, neither the Company or the
Subsidiaries nor any officer, director, employee or agent of the Company or
the Subsidiaries has made any payment or transfer of any funds or assets of
the Company or the Subsidiaries or conferred any personal benefit by use of
the Company's or the Subsidiaries' assets or received any funds, assets or
personal benefit in violation of any law, rule or regulation, which is
required to be stated in the Registration Statement or necessary to make
the statements therein not misleading.
(s) On the Closing Date and on the Option Closing Date, all transfer
or other taxes, if any (other than income tax), which are required to be
paid, and are due and payable, in connection with the sale and transfer of
the Securities by the Company to the Underwriter will have been fully paid
or provided for by the Company as the case may be, and all laws imposing
such taxes will have been fully complied with in all material respects.
(t) There are no contracts or other documents of the Company or the
Subsidiaries which are of a character required to be described in the
Registration Statement or Prospectus or filed as exhibits to the
Registration Statement which have not been so described or filed.
(v) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (1) transactions are
executed in accordance with management's general or specified
authorizations; (2) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; and (3)
access to assets is permitted only in accordance with management's general
or specific authorizations.
(w) Except as set forth in the Prospectus, no holder of any securities
of the Company has the right (which has not been effectively waived or
terminated) to require registration of any securities because of the filing
or effectiveness of the Registration Statement.
(x) The Company has not taken and at the Closing Date will not have
taken, directly or indirectly, any action designed to cause or result in,
or which has constituted or which might reasonably be expected to
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constitute, the stabilization or manipulation of the price of the Common
Stock or the Warrants to facilitate the sale or resale of such securities.
(y) To the Company's knowledge, there are no claims for services in
the nature of a finder's origination fee with respect to the sale of the
Securities hereunder, except as set forth in the Prospectus.
(z) No right of first refusal exists with respect to any sale of
securities by the Company.
(aa) No statement, representation, warranty or covenant made by the
Company in this Agreement or made in any certificate or document required
by this Agreement to be delivered to the Underwriter was, when made, or as
of the Closing Date or as of the Option Closing Date will be materially
inaccurate, untrue or incorrect.
3. COVENANTS OF THE COMPANY.
The Company covenants and agrees with the Underwriter that:
(a) It will deliver to the Underwriter, without charge, two conformed
copies of each Registration Statement and of each amendment or supplement
thereto, including all financial statements and exhibits.
(b) The Company has delivered to the Underwriter, and each of the
Selected Dealers (as hereinafter defined) without charge, as many copies as
have been reasonably requested of each Preliminary Prospectus heretofore
filed with the Commission in accordance with and pursuant to the
Commission's Rule 430 under the Act and will deliver to the Underwriter and
to others whose names and addresses are furnished by the Underwriter or a
Selected Dealer, without charge, on the Effective Date, and thereafter from
time to time during such reasonable period as you may request if, in the
reasonable opinion of counsel for the Underwriter, the Prospectus is
required by law to be delivered in connection with sales by the Underwriter
or a dealer, as many copies of the Prospectus (and, in the event of any
amendment of or supplement to the Prospectus, of such amended or
supplemented Prospectus) as the Underwriter may reasonably request for the
purposes contemplated by the Act. The Company will take all necessary
actions to furnish to whomever directed by the Underwriter, when and as
requested by the Underwriter, all necessary documents, exhibits,
information, applications, instruments and papers as may be reasonably
required in order to permit or facilitate the sale of the Securities.
(c) The Company has authorized the Underwriter to use, and make
available for use by prospective dealers, the Preliminary Prospectus, and
authorizes the Underwriter, all dealers selected by you in connection with
the distribution of the Securities (the "Selected Dealers") to be purchased
by the Underwriter and all dealers to whom any of such Securities may be
sold by the Underwriter or by any Selected Dealer, to use the Prospectus,
as from time to time amended or supplemented, in connection with the sale
of the Securities in accordance with the applicable provisions of the Act,
the applicable Regulations and applicable state law, until completion of
the distribution of the Securities and for such longer period as you may
reasonably request if the Prospectus is required under the Act, the
applicable Regulations or applicable state law to be delivered in
connection with sales of the Securities by the Underwriter or the Selected
Dealers.
(d) The Company will use its best efforts to cause the Registration
Statement to become effective and will notify the Underwriter immediately,
and confirm the notice in writing: (i) when the Registration Statement or
any post-effective amendment thereto becomes effective; (ii) of the receipt
of any comments from the Commission regarding the Registration Statement or
of the receipt of any stop order or of the initiation, or to the best of
the Company's knowledge, the threatening, of any proceedings for that
purpose; (iii) the suspension of the qualification of the Securities and
the Underwriter's Warrants, or underlying securities, for offering or sale
in any jurisdiction or of the initiating, or to the best of the Company's
knowledge the threatening, of any proceeding for that purpose; and (iv) of
the receipt of any comments from the Commission. If the Commission shall
enter a stop order at any time, the Company will make every reasonable
effort to obtain the lifting of such order as promptly as practicable.
(e) During the time when a prospectus relating to the Securities is
required to be delivered under the Act, the Company will use its best
efforts to comply with all requirements imposed upon it by the Act and the
Securities Exchange Act of 1934 (the "Exchange Act"), as now and hereafter
amended and by the Regulations, as from time to time in force, as necessary
to permit the continuance of sales of or dealings in the Securities in
accordance with the provisions hereof and the Prospectus and the Company
shall use its best
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efforts to keep the Registration Statement effective so long as a
Prospectus is required to be delivered in connection with the sale of the
Securities or Additional Securities by the Underwriter or by dealers
effecting transactions therein in connection with the initial public
offering thereof. If at any time when a prospectus relating to the
Securities is required to be delivered under the Act, any event shall have
occurred as a result of which, in the reasonable opinion of counsel for the
Company or counsel for the Underwriter, the Prospectus as then amended or
supplemented (or the prospectus contained in a new registration statement
filed by the Company pursuant to Paragraph 3(q)), includes an untrue
statement of a material fact or omits to state any material fact required
to be stated therein or necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading, or
if, in the reasonable opinion of either such counsel, it is necessary at
any time to amend the Prospectus (or the prospectus contained in such new
registration statement) to comply with the Act, the Company will notify you
promptly and prepare and file with the Commission an appropriate amendment
or supplement in accordance with Section 10 of the Act and will furnish to
you copies thereof.
(f) The Company will endeavor in good faith, in cooperation with you,
at or prior to the time the Registration Statement becomes effective, to
qualify the Securities for offering and sale under the securities laws or
blue sky laws of such jurisdictions as you may reasonably designate;
PROVIDED, HOWEVER, that in connection therewith the Company shall not be
required to qualify as a foreign corporation or to file a general consent
to service of process in any jurisdiction or to make any changes in its
capital structure or certificate of incorporation or in any other material
aspects of its business or to enter into any material agreement with any
Blue Sky commissioner. In each jurisdiction where such qualification shall
be effected, the Company will, unless you agree that such action is not at
the time necessary or advisable, use it best efforts to file and make such
statements or reports at such times as are or may reasonably be required by
the laws of such jurisdiction to continue such qualification until none of
the Warrants are outstanding.
(g) The Company will make generally available (within the meaning of
Section 11(a) of the Act and the Regulations) to its security holders, as
soon as practicable, but in no event later than the first day of the
eighteenth full calendar month following the Effective Date, an earnings
statement of the Company, which will be in reasonable detail but which need
not be audited, covering a period of at least twelve months beginning after
the Effective Date, which earnings statements shall satisfy the
requirements of Section 11(a) of the Act and the Regulations as then in
effect. The Company may discharge this obligation in accordance with Rule
158 of the Regulations.
(h) During the period of five years commencing on the Effective Date
(unless the Company shall no longer have a class of equity securities
registered under Section 12(b) or 12(g) of the Exchange Act), the Company
will furnish to its stockholders an annual report (including financial
statements audited by its independent public accountants), in accordance
with Rule 14a-3 under the Exchange Act, and, at its expense, furnish to the
Underwriter (i) within 90 days after the end of each fiscal year of the
Company, a consolidated balance sheet of the Company and its consolidated
subsidiaries and a separate balance sheet of each subsidiary of the Company
the accounts of which are not included in such consolidated balance sheet
as of the end of such fiscal year, and consolidated statements of
operations, stockholder's equity and cash flows of the Company and its
consolidated subsidiaries and separate statements of operations,
stockholder's equity and cash flows of each of the subsidiaries of the
Company the accounts of which are not included in such consolidated
statements, for the fiscal year then ended all in reasonable detail and all
certified by independent accountants (within the meaning of the Act and the
Regulations), (ii) within 45 days after the end of each of the first three
fiscal quarters of each fiscal year, similar balance sheets as of the end
of such fiscal quarter and similar statements of operations, stockholder's
equity and cash flows for the fiscal quarter then ended, all in reasonable
detail, and subject to year end adjustment, all certified by the Company's
principal financial officer or the Company's principal accounting officer
as having been prepared in accordance with generally accepted accounting
principles applied on a consistent basis, (iii) as soon as available, each
report furnished to or filed with the Commission or any securities exchange
and each report and financial statement furnished to the Company's
stockholders generally, and (iv) as soon as available, such other material
as the Underwriter may from time to time reasonably request regarding the
financial condition and operations of the Company; PROVIDED, HOWEVER, that
the Underwriter shall use such other material only in connection with its
activities as Underwriter hereunder and shall otherwise keep such other
material confidential.
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(i) For a period of twelve months from the Closing Date, the Company,
at its expense, shall cause its regularly engaged independent certified
public accountants to review (but not audit), the Company's financial
statements for each of the first three quarters prior to the announcement
of quarterly financial information, the filing of the Company's 10-Q
quarterly report and the mailing,if any, of quarterly financial information
to stockholders.
(j) Prior to the Closing Date or the Option Closing Date (if any), the
Company will not, directly or indirectly, without your prior written
consent, which shall not be unreasonably withheld or delayed, 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 or otherwise required by law).
(k) The Company will deliver to you prior to filing, any amendment or
supplement to the Registration Statement or Prospectus proposed to be filed
after the Effective Date and will not file any such amendment or supplement
to which you shall reasonably object after being furnished such copy.
(l) During the period of 120 days commencing on the date hereof, the
Company will not at any time take, directly or indirectly, any action
designed to, or which will constitute or which might reasonably be expected
to cause or result in stabilization or manipulation of the price of the
Securities to facilitate the sale or resale of any of the Securities.
(m) The Company will apply the net proceeds from the Offering received
by it substantially in the manner set forth under "Use of Proceeds" in the
Prospectus.
(n) Counsel for the Company, the Company's accountants, and the
officers and directors of the Company will, respectively, furnish the
opinions, the letters and the certificates referred to in subsections of
Paragraph 9 hereof, and, if the Company shall file any amendment to the
Registration Statement relating to the offering of the Securities or any
amendment or supplement to the Prospectus relating to the offering of the
Securities subsequent to the Effective Date, such counsel, such
accountants, and such officers and directors, respectively, will, at the
time of such filing or at such subsequent time as you shall specify, so
long as Securities being registered by such amendment or supplement are
being underwritten by the Underwriter, furnish to you such opinions,
letters and certificates, each dated the date of its delivery, of the same
nature as the opinions, the letters and the certificates referred to in
said Paragraph 9, as you may reasonably request, or, if any such opinion or
letter or certificate cannot be furnished by reason of the fact that such
counsel or such accountants or any such officer or director believes that
the same would be inaccurate, such counsel or such accountants or such
officer or director will furnish an accurate opinion or letter or
certificate with respect to the same subject matter.
(o) The Company will comply in all material respects with all of the
provisions of any undertakings contained in the Registration Statement.
(p) The Company will reserve and keep available for issuance that
maximum number of its authorized but unissued shares of Common Stock which
are issuable upon conversion of the Debentures or upon conversion of the
Debentures issuable upon exercise of the Underwriter's Warrants outstanding
from time to time.
(q) The Company will timely prepare and file at its sole cost and
expense one or more post-effective amendments to the Registration Statement
or a new registration statement as required by law as will permit
Underwriter's Warrant holders to be furnished with a current prospectus in
the event and at such time as the Underwriter's Warrants are exercised, and
the Company will use its best efforts and due diligence to have the same be
declared effective (with the intent that the same be declared effective as
soon as the Underwriter's Warrants become exercisable) and to keep the same
effective so long as the Underwriter's Warrants are outstanding. The
Company will deliver a draft of each such post-effective amendment or new
registration statement to the Underwriter at least ten days prior to the
filing of such post-effective amendment or registration statement.
(r) So long as any of the Underwriter's Warrants remain outstanding,
the Company will timely deliver and supply sufficient copies of the
Company's current Prospectus, as will enable a holder to deliver a copy
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of such Prospectus to any Underwriter's Warrant or other holder where such
Prospectus delivery is by law required to be made.
(s) For a period of three years from the Effective Date, the Company
shall continue to employ the services of a firm of independent certified
public accountants reasonably acceptable to the Underwriter in connection
with the preparation of the financial statements to be included in any
registration statement to be filed by the Company hereunder, or any
amendment or supplement thereto. During the same period, the Company shall
employ the services of a law firm(s) reasonably acceptable to the
Underwriter in connection with all legal work of the Company, including the
preparation of a registration statement to be filed by the Company
hereunder, or any amendment or supplement thereto.
(t) The Company agrees that it will, upon the Effective Date, for a
period of no less than three years, engage a designee of the Underwriter as
an advisor (the "Advisor") to its Board of Directors where such Advisor
shall attend meetings of the Board, receive all notices and other
correspondence and communications sent by the Company to members of its
Board of Directors. In addition, such Advisor shall be entitled to receive
reimbursement for all reasonable costs incurred in attending such meetings
including, but not limited to (if reasonably required in connection with
any meeting held outside the New York City metropolitan area),
reimbursement for food, lodging and transportation. The Company further
agrees that, during said three year period, it shall schedule no less than
four (4) formal meetings (at least one of which shall be held "in person"
and the others which may be held telephonically) of its Board of Directors
in each such year and such 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. Further, during such three year period, the
Company shall give notice to the Underwriter with respect to any proposed
acquisitions, mergers, reorganizations or other similar transactions;
provided, however, that the Underwriter agrees to keep all such information
confidential and not to use such information in any way in violation of
applicable securities laws. 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 other
non-officer Directors, including, but not limited to (if reasonably
required in connection with any meeting held outside the New York City
metropolitan area), reimbursement for food, lodging and transportation, but
excluding any warrants, options or shares of equity securities issued to
any other Directors as an inducement for joining the Board or for
continuing membership on the Board. It is currently anticipated that
Directors shall receive $1,000 for each board meeting attended in person.
The Company agrees to 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 your designee at any such meeting described herein. In the
event the Company maintains a liability insurance policy affording coverage
for the acts of its officers and directors, it agrees, if possible, to
include the Underwriter's designee as an insured under such policy.
(u) Upon the Closing Date, the Company shall have entered into an
agreement with the Underwriter in form reasonably satisfactory to the
Underwriter (the "Debenture Management Agreement"), pursuant to which the
Underwriter will be retained as a Debenture management consultant for a
three-year period commencing as of the Closing Date, and will be paid a fee
of $3,000 a month for a term of three years, all of which ($108,000) shall
be paid upon the Closing Date.
(v) The Debentures (and the Shares issuable upon conversion thereof)
shall be quoted on The Nasdaq SmallCap Market ("Nasdaq"), not later than
the Closing Date. Thereafter, (unless the Company is acquired) the Company
will effect and use its best efforts to maintain such listing or cause such
securities to be listed on a national securities exchange or in a
comparable inter-dealer quotation system for at least five years from the
date of this Agreement.
(w) The Company will apply for listing in Standard and Poors
Corporation Reports or Moodys OTC Guide and shall use its best efforts to
have the Company included in such publications for at least five years from
the Closing Date (unless the Common Stock is listed on the New York Stock
Exchange or the American Stock Exchange or unless the Company shall no
longer have a class of equity securities registered under Section 12(b) or
12(g) of the Exchange Act).
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(x) The Company has obtained from each person who is currently an
officer or director of the Company or a stockholder of the Company who
holds (after taking into account the issuance of the Securities in the
Offering) greater than 5% of the Company's outstanding securities (except
for Tsuyoshi Shiraishi and Harpoon Holdings, Ltd.), a written agreement, in
form and substance reasonably satisfactory to you and your counsel, to the
effect that such person shall not offer, sell or contract to sell, or
otherwise dispose of, directly or indirectly, without your prior written
consent (or pursuant to such other agreement with respect to the sale of
capital stock as may be required by state "Blue Sky" laws in order to
qualify the Offering in any such State), any shares of the Common Stock
owned by such person or any securities convertible into, or exchangeable
for, or warrants to purchase or acquire, shares of Common Stock, for a
period of twelve months from the Effective Date. Notwithstanding the
foregoing, Marc Bell will be permitted to sell up to 30,000 shares of
Common Stock in the event the Common Stock trades at a price of at least
$15.00 per share for 20 consecutive trading days and an additional 30,000
shares in the event the Common Stock trades at a price of at least $20.00
per share for 20 consecutive trading days. For a period of twelve months
from the Effective Date, the Company shall not issue any Debentures, shares
of Common Stock or preferred stock or any warrants, options or other rights
to purchase Common Stock or preferred stock without the consent of the
Underwriter, except for (i) the Securities and the Additional Securities,
(ii) the Underwriter's Securities, (iii) securities issuable upon the
exercise of other options or warrants outstanding as of the Closing Date,
(iv) options to purchase up to 355,000 shares of Common Stock pursuant to
the Company's existing stock option plan and shares of Common Stock
issuable upon the exercise of such options, (v) shares, options or warrants
issuable in connection with the hiring or retention of senior executives
who are not currently affiliated or associated with the Company, and (vi)
shares of Common Stock or preferred stock or any warrants, options or other
rights to purchase Common Stock or preferred stock in connection with
strategic alliances, partnerships, mergers, acquisitions or joint ventures,
with the consent of the Underwriter which shall not be unreasonably
withheld or delayed; PROVIDED, HOWEVER, that the Underwriter will bear its
own expenses incurred in connection with the granting of such consent
(including, but not limited to any independent due diligence and
reimbursement to the Company for any costs associated with obtaining a
fairness opinion at the request of the Underwriter).
(y) The Company will use its best efforts to maintain liability
insurance covering its officers and directors.
(z) The Company agrees that it will employ the services of a financial
public relations firm reasonably acceptable to the Underwriter for a period
of at least twelve months following the Effective Date.
(aa) The Company agrees not to call for redemption the Company's
outstanding publicly traded warrants until 12 months from the date hereof,
without the prior written consent of the Underwriter.
4. SALE, PURCHASE AND DELIVERY OF SECURITIES; CLOSING DATE; PUBLIC
OFFERING.
(a) On the basis of the warranties, representations and agreements
herein contained, and subject to the satisfaction of all the terms and
conditions of this Agreement, the Company agrees to issue and sell to the
Underwriter, and the Underwriter agrees to purchase from the Company, the
Securities at a price of $1,000 per Debenture, less, in the case of each
such Security, an underwriting discount of ten percent (10%) of the price
for such Security. The Underwriter may allow a concession not exceeding
$. per Debenture to Selected Dealers who are members of the NASD, and to
certain foreign dealers, and such dealers may reallow to NASD members and
to certain foreign dealers a concession not exceeding $. per Debenture.
(b) Delivery of the Securities and payment therefor shall be made at
10:00 A.M., New York time on the Closing Date, as hereinafter defined, at
the offices of the Underwriter or such other location as may be agreed upon
by you and the Company. Delivery of certificates for the Debentures (in
definitive form and registered in such names and in such denominations as
you shall request by written notice to the Company delivered at least four
business days' prior to the Closing Date), shall be made to you for the
account of the Underwriter against payment of the purchase price therefor
by certified or bank check or wire transfer payable in New York Clearing
House funds to the order of the Company. The Company will make such
certificates available for inspection at least one business day prior to
the Closing Date at such place as you shall designate.
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(c) The "Closing Date" shall be , 1997, or such other date
not later than the fourth business day following the effective date of the
Registration Statement as you shall determine and advise the Company by at
least three full business days' notice.
(d) The cost of original issue tax stamps, if any, in connection with
the issuance and delivery of the Securities by the Company to the
Underwriter shall be borne by the Company. The Company will pay and hold
the Underwriter, and any subsequent holder of the Securities, harmless from
any and all liabilities with respect to or resulting from any failure or
delay in paying federal and state stamp taxes, if any, which are payable in
connection with the original issuance or sale to the Underwriter of the
Securities or any portions thereof.
(e) As soon, on or after the Effective Date, as the Underwriter deems
advisable, the Underwriter shall make a public offering of the Securities
(other than to residents of or in any jurisdiction in which qualification
of the Securities is required and has not become effective) at the initial
public offering prices and upon the other terms set forth in the
Prospectus. The Underwriter may from time to time increase or decrease the
public offering prices of the Securities after the distribution thereof has
been completed to such extent as the Underwriter, in its sole discretion,
deems advisable.
5. SALE, PURCHASE AND DELIVERY OF ADDITIONAL SECURITIES; OPTION CLOSING
DATE.
(a) Upon the basis of the representations, warranties and agreements
herein contained, and subject to the satisfaction of all the terms and
conditions of this Agreement, the Company agrees to sell to the
Underwriter, and the Underwriter shall have the option (the "Option") to
purchase from the Company, the Additional Securities at the same price per
Security as set forth in Paragraph 4(a) above. Additional Securities may be
purchased solely for the purpose of covering over-allotments made in
connection with the distribution and sale of the Securities as contemplated
by the Prospectus.
(b) The Option to purchase all or part of the Additional Securities
covered thereby is exercisable by you at any time and from time to time
before the expiration of a period of 45 calendar days from the date of the
Effective Date (the "Option Period") by written notice to the Company
setting forth the number of Additional Securities for which the Option is
being exercised, the name or names in which the certificates for such
Additional Securities are to be registered and the denominations of such
certificates. Upon each exercise of the Option, the Company shall sell to
the Underwriter the aggregate number of Additional Securities specified in
the notice exercising such Option.
(c) Delivery of the Additional Securities with respect to which
Options shall have been exercised and payment therefor shall be made at
10:00 A.M., New York time on the Option Closing Date, as hereinafter
defined, at the offices of the Underwriter or at such other locations as
may be agreed upon by you and the Company. Delivery of certificates for
Additional Securities shall be made to you for the account of the
Underwriter against payment of the purchase price therefor by certified or
bank check or wire transfer in New York Clearing House Funds to the order
of the Company. The Company will make certificates for Additional
Securities to be purchased at the Option Closing Date available for
inspection at least one business day prior to such Option Closing Date at
such place as you shall designate.
(d) The "Option Closing Date" shall be the date not later than three
business days after the end of the Option Period as you shall determine and
advise the Company by at least three full business days' notice, unless
some other time is agreed upon between you and the Company.
(e) The obligations of the Underwriter to purchase and pay for
Additional Securities at such Option Closing Date shall be subject to
compliance as of such date with all the conditions specified in Paragraph 9
herein and the delivery to you of opinions, certificates and letters, each
dated such Option Closing Date, substantially similar in scope to those
specified in Paragraph 9 herein.
(f) The cost of original issue tax stamps, if any, in connection with
the issuance and delivery of the Additional Securities by the Company to
the Underwriter shall be borne by the Company. The Company will pay and
hold the Underwriter, and any subsequent holder of Additional Securities,
harmless from any and all liabilities with respect to or resulting from any
failure or delay in paying federal and state stamp taxes, if any, which are
payable in connection with the original issuance or sale to the Underwriter
of the Additional Securities or any portion thereof.
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6. INTENTIONALLY OMITTED
7. REPRESENTATIONS AND WARRANTIES OF THE UNDERWRITER.
The Underwriter represents and warrants to the Company that:
(a) The Underwriter is a member in good standing of the NASD, and has
complied with all NASD requirements concerning net capital and compensation
to be received in connection with the Offering.
(b) To the Underwriter's knowledge, there are no claims for services
in the nature of a finder's or origination fee with respect to the sale of
the Securities hereunder, which the Company is, or may become, obligated to
pay.
8. PAYMENT OF EXPENSES.
(a) The Company will pay and bear all costs, fees and expenses
incident to and in connection with: (i) the preparation, printing and
filing of the offering documents and amendments thereto, including NASD,
SEC and filing fees, preliminary and final Prospectus and the printing of
the Underwriting Agreement, the Agreement Among Underwriters and the
Selected Dealer's Agreement, a Blue Sky Memorandum, material to be
circulated to any underwriter by the Underwriter and other incidental
material; (ii) the mailing and distribution costs for the preliminary and
final Prospectus; (iii) the issuance and delivery of certificates
representing the Securities, including original issue and transfer taxes,
if any; (iv) the qualification of the Securities and any shares of
Company's Common Stock underlying the Securities under state securities or
Blue Sky Laws, including counsel fees of the Underwriter relating thereto,
not to exceed $25,000 (not including fees for the after-market survey in
the amount of $10,000) ($15,000 of which shall be due and payable upon the
commencement of Blue Sky filings together with appropriate state filing
fees), plus disbursements relating to, but not limited to, long-distance
telephone calls, photocopying, messengers, excess postage, overnight mail
and courier services; (v) the fees and disbursements of counsel for the
Company and the accountants for the Company; and (vi) advertising costs and
expenses, including, but not limited to, the costs and expenses in
connection with the "road show," memorabilia and "tombstones" in
publications selected by the Underwriter.
(b) In addition to the expenses to be paid and borne by the Company
referred to in Paragraph 8(a) above, the Company shall reimburse you at
closing for expenses incurred by you in connection with the Offering (for
which you need not make any accounting), in the amount of 3% of the price
to the public of the Securities and Additional Securities sold in the
Offering. This 3% non-accountable expense allowance shall cover the fees of
your legal counsel, but shall not include any expenses for which the
Company is responsible under Paragraph 8(a) above, including the fees and
disbursements of your legal counsel with respect to Blue Sky matters.
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9. CONDITIONS OF UNDERWRITER'S OBLIGATIONS.
The obligations of the Underwriter to consummate the transactions
contemplated by this Agreement shall be subject to the continuing accuracy in
all material respects of the representations and warranties of the Company
contained herein (except those representations and warranties that speak as of a
specific date) and the accuracy in all material respects of the statements of
the Company and its officers and directors made pursuant to the provisions
hereof, as of the date hereof and as of the Closing Date, and to the performance
by the Company in all material respects of its covenants and agreements
hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective not later
than 5:00 p.m., New York time, on the date following the date of this
Agreement, or such later date and time as shall be consented to in writing
by you and, on or prior to the Closing Date, no stop order suspending the
effectiveness of the Registration Statement and no proceedings for that
purpose shall have been instituted or to your knowledge or the knowledge of
the Company, shall be pending or contemplated by the Commission and any
request on the part of the Commission for additional information shall have
been complied with to the reasonable satisfaction of counsel to the
Underwriter and after the date hereof no amendment or supplement shall have
been filed to the Registration Statement or Prospectus without your prior
consent, which shall not have been unreasonably withheld or delayed.
(b) The Underwriter shall not have advised the Company that the
Registration Statement or the Prospectus or any amendment thereof or
supplement thereto contains an untrue statement of a fact which, in the
Underwriter's reasonable opinion, is material, or omits to state a fact
which, in the Underwriter's reasonable opinion, is material and is required
to be stated therein or is necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
(c) Between the time of the execution and delivery of this Agreement
and the Closing Date, there shall be no litigation instituted against the
Company or any of its officers or directors and between such dates there
shall be no proceeding instituted or, to the Company's knowledge,
threatened against the Company or any of its officers or directors before
or by any federal, state or county commission, regulatory body,
administrative agency or other governmental body, domestic or foreign, in
which litigation or proceeding an unfavorable ruling, decision or finding
would have a Material Adverse Effect.
(d) The representations and warranties of the Company contained herein
and in each certificate and document contemplated under this Agreement to
be delivered to you shall be true and correct in all material respects at
the Closing Date as if made at the Closing Date, and all covenants and
agreements contained herein to be performed on the part of the Company, and
all conditions contained herein to be fulfilled or complied with by the
Company at or prior to the Closing Date shall be fulfilled or complied with
in all material respects.
(e) At the Closing Date, you shall have received the opinion of
Milberg Weiss Bershad Hynes & Lerach LLP, counsel to the Company, dated as
of such Closing Date, addressed to the Underwriter and in form and
substance satisfactory to counsel to the Underwriter, to the effect that:
(i) The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware and each of
the Subsidiaries is a corporation duly organized, validly existing and
in good standing under the laws of the State of New York, each with all
requisite corporate power and authority to own its properties and to
conduct its business as described in the Registration Statement. Each of
the Company and the Subsidiaries is duly qualified to do business as a
foreign corporation and is in good standing in all jurisdictions where
its ownership, leasing, licensing or use of property and assets or the
conduct of its business as described in the Registration Statement makes
such qualification necessary, except where failure to be so qualified or
in good standing will not have a Material Adverse Effect.
(ii) The Company has all requisite corporate power and authority to
execute, deliver and perform the Underwriting Agreement, the Debenture
Management Agreement (to be entered into as of the Closing Date), the
Indenture and the Underwriter's Warrants and to consummate the
transactions contemplated thereby. The execution, delivery and
performance of the Underwriting Agreement, the Debenture Management
Agreement, the Indenture and the Underwriter's Warrants by the Company,
the consummation by the Company of the transactions therein contemplated
and the compliance by the
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Company with the terms of the Underwriting Agreement, the Debenture
Management Agreement, the Indenture and the Underwriter's Warrants have
been duly authorized by all necessary corporate action, the Underwriting
Agreement and the Indenture have been duly executed and delivered by the
Company, and each of the Debenture Management Agreement and the
Underwriter's Warrants will have been duly executed and delivered by the
Company as of the Closing Date. The Underwriting Agreement is, and, as
of the Closing Date each of the Debenture Management Agreement, the
Indenture and the Underwriter's Warrants will be, a valid and binding
obligation of the Company, enforceable in accordance with its terms,
except insofar as enforceability of indemnification and contribution
provisions may be limited by applicable law or policy or equitable
principles, and except as enforceability may be limited by bankruptcy,
reorganization, moratorium, insolvency or other laws affecting the
enforceability of creditors' rights generally and rules of law governing
specific performance, injunctive relief and other equitable remedies.
(iii) The execution, delivery and performance of the Underwriting
Agreement, the Debenture Management Agreement, the Indenture and the
Underwriter's Warrants by the Company, and the consummation by the
Company of the transactions therein or herein contemplated will not,
with or without the giving of notice or the lapse of time, or both, (A)
result in a violation of the Certificate of Incorporation or by-laws of
the Company, in each case as the same may be amended, (B) to the best of
such counsel's knowledge, result in a breach of, or conflict with, any
terms or provisions of or constitute a default under, or result in the
modification or termination of, or result in the creation or imposition
of any lien, security interest, charge or encumbrance upon any of the
properties or assets of the Company pursuant to, any indenture,
mortgage, note, contract, commitment or other material agreement or
instrument known to such counsel to which the Company is a party or by
which the Company or any of its properties or assets are bound or
affected, except where any of the foregoing would not have a Material
Adverse Effect; (C) to the best of such counsel's knowledge, violate any
existing applicable law, rule or regulation or judgment, order or decree
known to such counsel of any governmental agency or court, domestic or
foreign, having jurisdiction over the Company or any of its properties
or business, which judgment, order or decree is binding on the Company
or to which any of its business or operations is subject, except where
any such violation would not have a Material Adverse Effect; or (D) to
the best of such counsel's knowledge, have any material adverse effect
on any permit, certification, registration, approval, consent, license
or franchise necessary for the Company to own or lease and operate its
properties and to conduct its business or the ability of the Company to
make use thereof, in each case in the State of New York.
(iv) To the best of such counsel's knowledge, no authorization,
approval, consent, order, registration, license or permit of any court
or governmental agency or body (other than under the Act, the
Regulations and applicable state securities or Blue Sky laws) is
required for the authorization, issuance, sale and delivery of the
Securities, the Additional Securities or the Underwriter's Warrants, and
the consummation by the Company of the transactions contemplated by the
Underwriting Agreement, the Debenture Management Agreement, the
Indenture or the Underwriter's Warrants. The Indenture has been duly
qualified under the Trust Indenture Act of 1939.
(v) Such counsel has been advised by the staff of the Commission
that the Registration Statement was declared effective under the Act by
the Commission on , 1997; to the best of such counsel's knowledge, no
stop order suspending the effectiveness of the Registration Statement
has been issued by the Commission, and no proceedings for that purpose
have been instituted or are pending or threatened under the Act.
(vi) The Registration Statement and the Prospectus, as of the
Effective Date (except for the financial statements and other financial
data included therein or omitted therefrom, as to which such counsel
need express no opinion), comply as to form in all material respects
with the requirements of the Act and Regulations and, to the best of
such counsel's knowledge, the conditions for use of a registration
statement on Form SB-2 have been satisfied by the Company.
(vii) The description in the Registration Statement and the
Prospectus of statutes, regulations, contracts and other documents have
been reviewed by such counsel, and, based upon such review, are accurate
summaries of such statutes, regulations, contracts and other documents
in all material respects
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and, to the best of such counsel's knowledge, there are no material
contracts or documents of a character required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to
the Registration Statement, which are not so described or filed as
required.
(viii) Each share of Common Stock outstanding as of the date of the
Prospectus or immediately prior to the Closing Date has been duly
authorized and validly issued and is fully paid and nonassessable. To
the best of such counsel's knowledge, none of the Common Stock
outstanding as of either such date or time has been issued in violation
of the preemptive rights of any stockholder of the Company. The
authorized Debentures and Common Stock conforms in all material respects
to the description thereof contained in the Registration Statement and
Prospectus. To the best of such counsel's knowledge, except as set forth
in the Prospectus, no holders of any of the Company's securities has any
rights, "demand," "piggyback" or otherwise (which has not been waived or
terminated), to have such securities registered under the Act.
(ix) The issuance and sale of the Securities, the Additional
Securities, the Shares, the Interest Shares and the Underwriter's
Warrants have been duly authorized and, when issued, paid for and
delivered in accordance with the terms hereof and thereof, the Shares
and the Interest Shares will be validly issued, fully paid and
nonassessable. Neither the Securities nor the Additional Securities are
subject to statutory preemptive rights of any stockholder of the
Company. The certificates representing the Securities are in proper
legal form.
(x) The Underwriter's Warrants constitute valid and binding
obligations of the Company, enforceable in accordance with its terms, to
issue and sell, upon exercise thereof and payment pursuant to the terms
thereof, the numbers and types of securities of the Company called for
thereby, except as enforceability may be limited by bankruptcy,
reorganization, moratorium, insolvency or other laws affecting the
enforceability of creditors' rights generally and rules of law governing
specific performance, injunctive relief and other equitable remedies.
The Underwriter's Warrants conform in all material respects to the
descriptions thereof contained in the Registration Statement and
Prospectus.
(xi) Good title to the Securities, free and clear of all liens,
encumbrances, equities, security interests and claims (except those that
may arise from actions or inactions of the Underwriter), has been
transferred to the Underwriter, provided that the Underwriter purchased
the Securities in good faith and without notice of any such lien,
encumbrance, equity, security or claim or any other adverse claim within
the meaning of the New York Uniform Commercial Code.
(xii) Assuming that the Underwriter exercises the Option to
purchase the Additional Securities and makes payments therefor in
accordance with the terms of the Underwriting Agreement, upon issuance
of the Additional Securities to the Underwriter pursuant hereto, good
title to the Additional Securities, free and clear of any liens,
encumbrances, equities, security interests and claims (except those that
may arise from actions or inactions of the Underwriter), will have been
transferred to the Underwriter, provided that the Underwriter purchased
the Additional Securities in good faith and without notice of any such
lien, encumbrance, equity, security or claim or any other adverse claim
within the meaning of the New York Uniform Commercial Code.
(xiii) To the best of such counsel's knowledge, other than as set
forth or contemplated in the Prospectus, there are no claims, actions,
suits, proceedings, arbitrations, investigations or inquiries before any
governmental agency, court or tribunal, or before any private
arbitration tribunal, pending or threatened against the Company or to
which its properties or business is subject, which, individually or in
the aggregate, would have a Material Adverse Effect.
In addition, such counsel shall state that during the course of the
preparation of the Registration Statement and the Prospectus, such counsel
participated in conferences with officers of the Company, and, while such
counsel are not passing upon, has not verified or independently investigated,
and does not assume any responsibility for the accuracy, completeness or
fairness of the statements or documents contained in the Registration Statement
or the Prospectus, during the course of such preparation and the foregoing
conferences, no facts came to such counsel's attention which caused such counsel
to believe that (A) the Registration Statement (except as to the financial
statements and other financial data contained therein, as to which such counsel
need express no opinion), as of the Effective Date, contained any untrue
statement of a material fact required to be stated therein
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or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, or that (B) the Prospectus (except as to
the financial statements and other financial data contained therein, as to which
such counsel need express no opinion), as of its date, contained any untrue
statement or a material fact or omitted 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.
In rendering such opinions, such counsel may limit their opinions to
matters governed by the federal laws of the United States, the laws of the State
of New York and the general corporation laws of the State of Delaware, and may
rely as to matters of fact, to the extent they deem proper, on certificates and
written statements of officers of the Company and certificates or other written
statements of officers of departments of various jurisdictions having custody of
documents respecting the corporate existence or good standing of the Company,
provided that copies of any such statements or certificates shall be delivered
to counsel to the Underwriter.
(f) On or prior to the Closing Date, counsel for the Underwriter shall
have been furnished such documents, certificates and opinions as they may
reasonably require for the purpose of enabling them to review the matters
referred to in subparagraph (e) of this Paragraph 9, or in order to
evidence the accuracy, completeness or satisfaction of any of the
representations, warranties or conditions herein contained.
(g) Prior to the Closing Date:
(i) There shall have been no material adverse change in the
condition or prospects or the business activities, financial or
otherwise, of the Company from the latest dates as of which such
condition is set forth in the Registration Statement and Prospectus;
(ii) There shall have been no transaction, outside the ordinary
course of business, entered into by the Company from the latest date as
of which the financial condition of the Company is set forth in the
Registration Statement and Prospectus which is material to the Company,
which is (x) required to be disclosed in the Prospectus or Registration
Statement and is not so disclosed, and (y) likely to have a Material
Adverse Effect;
(iii) The Company shall not be in default under any material
provision of any instrument relating to any outstanding indebtedness,
except as described in the Prospectus and except such as will not have a
Material Adverse Effect;
(iv) No material amount of the assets of the Company shall have
been pledged, mortgaged or otherwise encumbered, except as set forth in
the Registration Statement and Prospectus;
(v) No action, suit or proceeding, at law or in equity, shall have
been pending or to its knowledge threatened against the Company or
affecting any of its properties or businesses before or by any court or
federal or state commission, board or other administrative agency
wherein an unfavorable decision, ruling or finding would have a Material
Adverse Effect, except as set forth in the Registration Statement and
Prospectus;
(vi) No stop order shall have been issued under the Act and no
proceedings therefor shall have been initiated or, to the Company's
knowledge, threatened by the Commission; and
(vii) Each of the representations and warranties of the Company
contained in this Agreement and in each certificate and document
contemplated under this Agreement to be delivered to you was, when
originally made and is at the time such certificate is dated, true and
correct in all material respects.
(h) Concurrently with the execution and delivery of this Agreement and
at the Closing Date, you shall have received a certificate of the Company
signed by the Chief Executive Officer of the Company and the principal
financial officer of the Company, dated as of the Closing Date, to the
effect that the conditions set forth in subparagraph (g) above have been
satisfied in all material respects and that, as of the Closing Date, the
representations and warranties of the Company set forth in Paragraph 2
herein are true and correct, as if made on and as of the Closing Date, in
all material respects. Any certificate signed by any officer of the Company
and delivered to you or to counsel for the Underwriter shall be deemed a
representation and warranty by the Company to the Underwriter as to the
statements made therein.
(i) At the time this Agreement is executed, and at the Closing Date,
you shall have received a letter, addressed to the Underwriter and in form
and substance reasonably satisfactory in all material respects to
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you and counsel for the Underwriter, from Arthur Anderson LLP dated as of
the date of this Agreement and as of the Closing Date, substantially in the
form of EXHIBIT A hereto.
(j) All proceedings taken in connection with the authorization,
issuance or sale of the Securities, Additional Securities and the
Underwriter's Securities as herein contemplated shall be reasonably
satisfactory in form and substance to you and to counsel to the
Underwriter, and the Underwriter shall have received from such counsel an
opinion, dated as the Closing Date with respect to such of these
proceedings as you may reasonably require.
(l) The obligation of the Underwriter to purchase Additional
Securities hereunder is subject to the accuracy of the representations and
warranties of the Company contained herein on and as of the Option Closing
Date in all material respects and to the satisfaction on and as of the
Option Closing Date of the conditions set forth herein in all material
respects.
(m) On the Closing Date there shall have been duly tendered to you for
your account the appropriate number of Debentures constituting the
Securities.
10. INDEMNIFICATION AND CONTRIBUTION.
(a) Subject to the conditions set forth below, the Company agrees to
indemnify and hold harmless the Underwriter, each of its agents and counsel
and each person, if any, who controls the Underwriter ("controlling
person") within the meaning of either Section 15 of the Act or Section 20
of the Exchange Act, against any and all losses, liabilities, claims,
damages, actions and expenses or liability, joint or several, whatsoever
(including but not limited to any and all expense whatsoever reasonably
incurred in investigating, preparing or defending against any litigation,
commenced or threatened, or any claim whatsoever), joint or several, to
which it or such controlling persons may become subject under the Act, the
Exchange Act or under any other statute or at common law or otherwise,
arising out of or based upon any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or any
Preliminary Prospectus or the Prospectus (as from time to time amended and
supplemented); in any post-effective amendment or amendments or any new
registration statement and prospectus in which is included the Warrant
Shares of the Company issued or issuable upon exercise of the Underwriter's
Warrants; or in any application or other document or written communication
(in this Paragraph 10 collectively called "application") executed by the
Company or based upon written information furnished by the Company filed in
any jurisdiction in order to qualify the Securities, Additional Securities,
Underwriter's Warrants and Underwriter's Securities under the securities
laws thereof or filed with the Commission or any securities exchange; or
the omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not
misleading (in light of the circumstances under which they were made),
unless such statement or omission was made in reliance upon or in
conformity with written information furnished to the Company with respect
to the Underwriter by or on behalf of the Underwriter expressly for use in
any Preliminary Prospectus, the Registration Statement or Prospectus, or
any amendment or supplement thereof, or in any application, as the case may
be. Notwithstanding the foregoing, the Company shall have no liability
under this Paragraph 10(a) if any such untrue statement or omission made in
a Preliminary Prospectus, is corrected in the Prospectus and the
Underwriter failed to deliver to the person or persons alleging the
liability upon which indemnification is being sought, at or prior to the
written confirmation of such sale, a copy of the Prospectus. This indemnity
will be in addition to any liability which the Company may otherwise have.
(b) The Underwriter agrees to indemnify and hold harmless the Company
and each of the officers and directors of the Company who have signed the
Registration Statement, each of its agents and counsel, and each other
person, if any, who controls the Company within the meaning of Section 15
of the Act or Section 20(a) of the Exchange Act, to the same extent as the
foregoing indemnity from the Company to the Underwriter in Paragraph 10(a),
but only with respect to any untrue statement or alleged untrue statement
of any material fact contained in or any omission or alleged omission to
state a material fact required to be stated in any Preliminary Prospectus,
the Registration Statement or Prospectus or any amendment or supplement
thereof or necessary to make the statements therein not misleading or in
any application made in reliance upon, and in conformity with, written
information furnished to the Company by you expressly for use in the
preparation of such Preliminary Prospectus, the Registration Statement or
Prospectus with respect to the
17
<PAGE>
Underwriter or directly relating to the transactions effected or to be
effected by the Underwriter in connection with the Offering. This indemnity
agreement will be in addition to any liability which the Underwriter may
otherwise have.
(c) If any action is brought against any indemnified party (the
"Indemnitee") in respect of which indemnity may be sought against another
party pursuant to the foregoing (the "Indemnitor"), the Indemnitor shall
assume the defense of the action, including the employment and fees of
counsel (reasonably satisfactory to the Indemnitee) and payment of
expenses. Any Indemnitee shall have the right to employ its or their own
counsel in any such case, but the fees and expenses of such counsel shall
be at the expense of such Indemnitee unless the employment of such counsel
shall have been authorized in writing by the Indemnitor in connection with
the defense of such action. If the Indemnitor shall have employed counsel
to have charge of the defense or shall previously have assumed the defense
of any such action or claim, the Indemnitor shall not thereafter be liable
to any Indemnitee in investigating, preparing or defending any such action
or claim. Each Indemnitee shall promptly notify the Indemnitor of the
commencement of any litigation or proceedings or any other action against
the Indemnitee in respect of which indemnification is to be sought.
(d) In order to provide for just and equitable contribution under the
Act in any case in which: (i) the Underwriter makes a claim for
indemnification pursuant to Paragraph 10 hereof, but it is judicially
determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the time to appeal has expired or the last right
of appeal has been denied) that such indemnification may not be enforced in
such case notwithstanding the fact that this Paragraph 10 provides for
indemnification of such case; or (ii) contribution under the Act may be
required on the part of the Underwriter in circumstances for which
indemnification is provided under this Paragraph 10, then, and in each such
case, the Company and the Underwriter shall contribute to the aggregate
losses, claims, damages or liabilities to which they may be subject (after
any contribution from others) in such proportion so that the Underwriter is
responsible for the portion represented by dividing the total compensation
received by the Underwriter herein or in connection with the Offering by
the total purchase price of all Securities sold in the public offering and
the Company is responsible for the remaining portion; provided, that in any
such case, no person guilty of a fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation.
The foregoing contribution agreement shall in no way affect the
contribution liabilities of any persons having liability under Section 11
of the Act other than the Company and the Underwriter. As used in this
Paragraph 10, the term "Underwriter" includes any officer, director, or
other person who controls the Underwriter within the meaning of Section 15
of the Act, and the word "Company" includes any officer, director or person
who controls the Company within the meaning of Section 15 of the Act. If
the full amount of the contribution specified in this paragraph is not
permitted by law, then the Underwriter and each person who controls the
Underwriter shall be entitled to contribution from the Company to the full
extent permitted by law. No contribution shall be requested with regard to
the settlement of any matter from any party who did not consent in writing
to the settlement.
(e) Within fifteen (15) days after receipt by any party to this
Agreement (or its representative) of notice of the commencement of any
action, suit or proceeding, such party will, if a claim for contribution in
respect thereof is made against another party (the "contributing party"),
notify the contributing party of the commencement thereof, but the omission
so to notify the contributing party will not relieve it from any liability
it may have to any other party other than for contribution hereunder.
In case any such action, suit or proceeding is brought against any
party, and such party notifies a contributing party or his or its
representative of the commencement thereof within the aforesaid fifteen
(15) days, the contributing party will be entitled to participate therein
with the notifying party and any other contributing party similarly
notified. Any such contributing party shall not be liable to any party
seeking contribution on account of any settlement of any claim, action or
proceeding effected by such party seeking contribution without the written
consent of such contributing party. The indemnification provisions
contained in this Paragraph 11 are in addition to any other rights or
remedies which either party hereto may have with respect to the other or
hereunder.
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<PAGE>
11. REPRESENTATIONS, WARRANTIES, AGREEMENTS TO SURVIVE DELIVERY.
The respective indemnity and contribution agreements by the Underwriter and
the Company contained in Paragraph 10 hereof, and the covenants, representations
and warranties of the Company and the Underwriter set forth in this Agreement,
shall remain operative and in full force and effect regardless of (i) any
investigation made by the Underwriter or on its behalf or by or on behalf of any
person who controls the Underwriter, or by the Company or any controlling person
of the Company or any director or any officer of the Company, (ii) acceptance of
any of the Securities and payment therefor, or (iii) any termination of this
Agreement, and shall survive the delivery of the Securities; and any successor
of the Underwriter or the Company, or of any person who controls you or the
Company or any other indemnified party, as the case may be, shall be entitled to
the benefit of such respective indemnity and contribution agreements. The
respective indemnity and contribution agreements by the Underwriter and the
Company contained in Paragraph 10 above shall be in addition to any liability
which the Underwriter and the Company may otherwise have.
12. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION THEREOF.
(a) This Agreement shall become effective at 10:00 A.M., New York
time, on the first full business day following the day on which you and the
Company receive notification that the Registration Statement became
effective.
(b) This Agreement may be terminated by the Underwriter by notifying
the Company at any time on or before the Closing Date, if any domestic or
international event or act or occurrence has materially disrupted, or in
your reasonable opinion will in the immediate future materially disrupt,
securities markets in the United States; or if trading in securities
generally on the New York Stock Exchange, the American Stock Exchange, or
in the over-the-counter market in the United States shall have been
suspended, or minimum or maximum prices for trading in securities generally
shall have been fixed, or maximum ranges for prices for securities shall
have been required, on the over-the-counter market by the NASD or NASDAQ or
by order of the Commission or any other governmental authority having
jurisdiction; or if a moratorium in foreign exchange trading by major
international banks or persons has been declared in the United States; or
if the Company shall have sustained a loss material or substantial to the
Company taken as a whole by fire, flood, accident, hurricane, earthquake,
theft, sabotage or other calamity or malicious act which, whether or not
such loss shall have been insured, will, in your reasonable opinion, make
it inadvisable to proceed with the offering, sale and delivery of the
Securities; or if there shall have been a material adverse change in the
conditions of the United States securities market in general, as in your
reasonable judgment would make it inadvisable to proceed with the offering,
sale and delivery of the Securities.
(c) If you elect to terminate this Agreement as provided in this
Paragraph 12, the Company shall be notified promptly by you by telephone or
facsimile, confirmed by letter.
(d) Anything in this Agreement to the contrary notwithstanding, if
this Agreement shall terminate or shall not be carried out within the time
specified herein by reason of any failure on the part of the Company to
perform any undertaking, or to satisfy any condition of this Agreement by
it to be performed or satisfied, the sole liability of the Company to the
Underwriter, in addition to the obligations assumed by the Company pursuant
to Paragraph 8 herein, will be to reimburse the Underwriter on an
accountable basis for the following: (i) reasonable Blue Sky counsel fees
and expenses to the extent set forth in Paragraph 8(a)(iv); (ii) Blue Sky
filing fees to that same extent; and (iii) such other reasonable
out-of-pocket expenses actually incurred by the Underwriter (including the
reasonable fees and disbursements of their counsel), to the extent set
forth in Paragraph 8(a), in connection with this Agreement and the proposed
offering of the Securities, but in no event to exceed the sum of $100,000
less such amounts as shall have already been paid pursuant to Section 8(b)
or otherwise. The Company shall not in any event be liable to the
Underwriter for the loss of anticipated profits from the transactions
covered by this Agreement.
Anything in this Agreement to the contrary notwithstanding, if this
Agreement shall be terminated by you because you have exercised your rights
pursuant to Paragraph 12(b) above, the Company shall not be under any liability
to you except, on an accountable basis, for the portion of the non-accountable
expense allowance referred to in Paragraph 8(b) for which expenses have actually
been paid or incurred by you, and any balance will be returned by you to the
Company.
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13. NOTICES.
All communications hereunder, except as herein otherwise specifically
provided, shall be in writing and, if sent to the Underwriter, shall be mailed,
delivered or telegraphed and confirmed to the Underwriter at Rickel &
Associates, Inc., 875 Third Avenue, New York, New York 10022, Attention: Elliot
J. Smith, with a copy thereof to Thomas A. Rose, Esq., Schneck Weltman &
Hashmall LLP, 1285 Avenue of the Americas, New York, New York 10019, and, if
sent to the Company, shall be mailed, delivered or telegraphed and confirmed to
the Company at 295 Lafayette Street, New York, New York 10012, Attention: Marc
H. Bell, Chairman, with a copy thereof to Arnold N. Bressler, Esq., Milberg
Weiss Bershad Hynes & Lerach LLP, One Pennsylvania Plaza, New York, New York
10119.
14. PARTIES.
This Agreement shall inure solely to the benefit of and shall be binding
upon, the Underwriter, the Company and the controlling persons, directors and
officers referred to in Paragraph 10 hereof, and their respective successors,
legal representatives and assigns, and no other person shall have or be
construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provision herein contained. No
purchaser of any of the Securities or Additional Securities from the Underwriter
shall be deemed a successor or assign by reason merely of such purchase.
15. CONSTRUCTION.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of New York, without giving effect to the
rules governing conflict of laws, and shall supersede any agreement or
understanding, oral or in writing, express or implied, between the Company and
you relating to the sale of any of the Securities.
16. JURISDICTION AND VENUE.
The Company agrees that the courts of the State of New York shall have
jurisdiction over any litigation arising from this Agreement, and venue shall be
proper in the Southern District of New York.
17. COUNTERPARTS.
This agreement may be executed in counterparts.
If the foregoing correctly sets forth the understanding between you and the
Company, please so indicate in the space provided below for that purpose,
whereupon this letter shall constitute a binding agreement between us.
Very truly yours,
BELL TECHNOLOGY GROUP LTD.
By: _______________________________
Marc H. Bell, Chairman
Accepted as of the date first above
written:
RICKEL & ASSOCIATES, INC.
BY: _____________________________________________
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NO SALE OR TRANSFER OF THIS WARRANT OR THE SECURITIES
UNDERLYING THIS WARRANT MAY BE MADE UNTIL
THE EFFECTIVENESS OF A REGISTRATION STATEMENT
OR OF A POST-EFFECTIVE AMENDMENT THERETO
UNDER THE SECURITIES ACT OF 1933 (THE "ACT"),
COVERING THIS WARRANT OR THE SECURITIES UNDERLYING
THIS WARRANT, OR UNTIL THE COMPANY IS IN RECEIPT OF AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM
THE REGISTRATION REQUIREMENTS OF THE ACT. TRANSFER OF
THIS WARRANT IS RESTRICTED UNDER PARAGRAPH 2 BELOW.
UNDERWRITER'S WARRANT TO PURCHASE
10% CONVERTIBLE SENIOR SUBORDINATED DEBENTURES DUE AUGUST , 2003
BELL TECHNOLOGY GROUP LTD.
(A DELAWARE CORPORATION)
Dated: , 1997
THIS CERTIFIES THAT, for value received, Rickel & Associates, Inc. (the
"Underwriter") or its registered assigns (the "Holder") is the owner of options
(the "Underwriter's Option") to purchase from Bell Technology Group Ltd., a
Delaware corporation (the "Company"), during the period and at the prices
hereinafter specified, up to $550,000 principal amount of 10% convertible senior
subordinated debentures due August , 2003 (the "Debentures" or the
"Securities").
This Underwriter's Option is issued pursuant to an Underwriting Agreement
dated , 1997, between the Company and the Underwriter in connection
with a public offering through the Underwriter (the "Public Offering"), of
$5,500,000 principal amount of Debentures, and, pursuant to the Underwriter's
overallotment option, an additional $825,000 principal amount of Debentures. The
Debentures (including those issuable pursuant to the exercise of the
Underwriter's Option) will be issued pursuant to and subject to the terms and
conditions set forth in an agreement between the Company and Continental Stock
Transfer & Trust Company (the "Indenture").
1. EXERCISE OF THE UNDERWRITER'S OPTION.
(a) The rights represented by this Underwriter's Option shall be
exercisable at the prices and during the period specified below, upon the terms
and subject to the conditions as set forth herein:
(i) During the period from , 1997 to , 1998,
inclusive, the Holder shall have no right to purchase any Securities
hereunder.
(ii) Between , 1998 and , 2002, inclusive,
the Holder shall have the option to purchase Debentures hereunder at a
price of $1,200 per $1,000 Debenture, the purchase price of the Debentures
being 120% of the public offering price for the Debentures set forth in the
Prospectus forming a part of the registration statement on Form SB-2 (File
No. 333-23259) of the Company, as amended (the "Registration Statement").
(iii) After , 2002, the Holder shall have no right to
purchase any Securities hereunder and this Underwriter's Option shall
expire effective at 5:00 p.m., New York time on such date.
(b) The rights represented by this Underwriter's Option may be exercised at
any time within the period above specified, in whole or in part, by (i) the
surrender of this Underwriter's Option (with the purchase form at the end hereof
properly executed) at the principal executive office of the Company (or such
other office or agency of the Company as it may designate by notice in writing
to the Holder at the address of the Holder appearing on the books of the
Company); (ii) payment to the Company of the exercise price then in effect for
the number of Debentures specified in the above-mentioned purchase form together
with applicable stock transfer taxes, if any; and (iii) delivery to the Company
of a duly executed agreement signed by the person(s) designated
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in the purchase form to the effect that such person(s) agree(s) to be bound by
the provisions of Paragraph 5 and subparagraphs (b), (c) and (d) of Paragraph 6
hereof. This Underwriter's Option shall be deemed to have been exercised, in
whole or in part to the extent specified, immediately prior to the close of
business on the date this Underwriter's Option is surrendered and payment is
made in accordance with the foregoing provisions of this Paragraph 1, and the
person or persons in whose name or names the certificates for the Securities
shall be issuable upon such exercise shall become the holder or holders of
record of such Debentures at that time and date. The Debentures so purchased
shall be delivered to the Holder within a reasonable time, not exceeding ten
(10) business days, after the rights represented by this Underwriter's Option
shall have been so exercised.
2. RESTRICTIONS ON TRANSFER.
This Underwriter's Option shall not be transferred, sold, assigned or
hypothecated for a period of one year commencing , 1997, except
that it may be transferred to successors of the Holder, and may be assigned in
whole or in part to any person who is an officer of the Underwriter or an
officer or partner of any other member of the selling group during such period.
Any such assignment shall be effected by the Holder by (i) completing and
executing the transfer form at the end hereof and (ii) surrendering this
Underwriter's Option with such duly completed and executed transfer form for
cancellation, accompanied by funds sufficient to pay any transfer tax, at the
office or agency of the Company referred to in Paragraph 1 hereof, accompanied
by a certificate (signed by a duly authorized representative of the Holder),
stating that each transferee is a permitted transferee under this Paragraph 2;
whereupon the Company shall issue, in the name or names specified by the Holder
(including the Holder), a new Underwriter's Option or Underwriter's Options of
like tenor and representing in the aggregate rights to purchase the same number
of Securities as are then purchasable hereunder. The Holder acknowledges that
this Underwriter's Option may not be offered or sold except pursuant to an
effective registration statement under the Act or an opinion of counsel
satisfactory to the Company that an exemption from registration under the Act is
available.
3. COVENANTS OF THE COMPANY.
(a) The Company covenants and agrees that all Debentures issuable upon the
exercise of this Underwriter's Option will, upon issuance thereof and payment
therefor in accordance with the terms hereof, and all Common Stock issuable upon
conversion of the Debentures underlying this Underwriter's Option, will upon the
issuance thereof in accordance with the terms of the Indenture, be duly and
validly issued, fully paid and nonassessable and no personal liability will
attach to the holder thereof by reason of being such a holder, other than as set
forth herein.
(b) The Company covenants and agrees that during the period within which
this Underwriter's Option may be exercised, the Company will at all times have
authorized and reserved a sufficient number of Debentures and shares of Common
Stock to provide for the exercise of this Underwriter's Option and conversion of
the Debentures included therein.
(c) The Company covenants and agrees that for so long as the Securities
shall be outstanding (unless the Securities shall no longer be registered under
Paragraph 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended) the
Company shall use its best efforts to cause all Debentures and shares of Common
Stock issuable upon the exercise of the Underwriter's Option and the conversion
of the Debentures contained herein, to be quoted by The Nasdaq SmallCap Stock
Market or listed on a national securities exchange.
4. NO RIGHTS OF STOCKHOLDER.
This Underwriter's Option shall not entitle the Holder to any voting rights
or other rights as a stockholder of the Company, either at law or in equity, and
the rights of the Holder are limited to those expressed in this Underwriter's
Option and are not enforceable against the Company except to the extent set
forth herein.
5. REGISTRATION RIGHTS.
(a) During the period of four years from , 1998, the Company
shall advise the Holder, whether the Holder holds this Underwriter's Option or
has exercised this Underwriter's Option and holds Debentures or Common Stock
underlying the Debentures (the "Debenture Shares"), by written notice at least
30 days prior to the filing of any post-effective amendment to the Registration
Statement or of any new registration statement or
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<PAGE>
post-effective amendment thereto under the Act, covering any securities of the
Company, for its own account or for the account of others, and upon the request
of the Holder made during such four-year period, include in any such
post-effective amendment or registration statement such information as may be
required to permit a public offering of any of the Debentures or Debenture
Shares issuable hereunder (the "Registerable Securities"); provided, that this
Paragraph 5(a) shall not apply to any registration statement filed pursuant to
Paragraph 5(b) hereof or to registrations of shares in connection with an
employee benefit plan or a merger, consolidation or other comparable acquisition
or solely for registration of non-convertible debt or preferred equity
securities of the Company; and provided, further, that, notwithstanding the
foregoing, the Holder shall have no right to include any Registrable Securities
in any new registration statement or post-effective amendment thereto unless as
of the effective date thereof the Registration Statement (as it may hereafter be
amended or supplemented) or any new registration statement under which the
Registrable Securities are registered shall have ceased to be effective or the
prospectus contained in such Registration Statement shall have ceased to be
current. The Company shall supply prospectuses in order to facilitate the public
sale or other disposition of the Registerable Securities, use its best efforts
to register and qualify any of the Registerable Securities for sale in such
states in which the Debentures are offered and sold in the Public Offering as
such Holder reasonably designates and do any and all other acts and things which
may be necessary to enable such Holder to consummate the public sale of the
Registerable Securities, provided that, without limiting the foregoing, 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, and furnish indemnification in the manner provided in
Paragraph 6 hereof. The Holder shall furnish information reasonably requested by
the Company in accordance with such post-effective amendments or registration
statements, including its intentions with respect thereto, and shall furnish
indemnification as set forth in Paragraph 6. The Company shall continue to
advise the Holders of the Registerable Securities of its intention to file a
registration statement or amendment pursuant to this Paragraph 5(a) until the
earliest of (i) , 2002; or (ii) such time as all of the Registerable
Securities have been registered and sold under the Act; or (iii) all of the
Registrable Securities have been otherwise transferred, new certificates for
them not bearing a legend restricting further transfer shall have been delivered
by the Company and subsequent public distribution of them shall not require
registration or qualification of them under the Act, or (iv) in the opinion of
legal counsel for the Company, the Registrable Securities may be offered and
sold by the holders thereof without being registered under the Act and such
securities, upon receipt by the purchasers thereof pursuant to such sale, will
not constitute "restricted securities" as such term is defined in Rule 144 under
the Act.
(b) If any fifty-one (51%) percent holder (as defined below) shall give
notice to the Company at any time during the four (4) year period beginning one
(1) year from , 1997 to the effect that such holder desires to
register under the Act any Registerable Securities, under such circumstances
that a public distribution (within the meaning of the Act) of any such
Registerable Securities will be involved (and the Registration Statement or any
new registration statement under which such Registerable Securities are
registered shall have ceased to be effective or the Prospectus contained therein
shall have ceased to be current), then the Company will as promptly as
practicable after receipt of such notice, but not later than thirty (30) days
after receipt of such notice, at the Company's option, file a post-effective
amendment to the current Registration Statement or a new registration statement
pursuant to the Act to the end that the Registerable Securities may be publicly
sold under the Act as promptly as practicable thereafter and the Company will
use its best efforts to cause such registration to become and remain effective
as provided herein (including the taking of such steps as are reasonably
necessary to obtain the removal of any stop order); provided, that such
fifty-one (51%) percent holder shall furnish the Company with appropriate
information in connection therewith as the Company may reasonably request; and
provided, further, that the Company shall not be required to file such a
post-effective amendment or registration statement pursuant to this Paragraph
5(b) on more than one occasion; and provided, further, that, the registration
rights of the 51% holder under this Paragraph 5(b) shall be subject to the
"piggyback" registration rights of other holders of securities of the Company to
include such securities in any registration statement or post-effective
amendment filed pursuant to this Paragraph 5(b). The Company will maintain such
registration statement or post-effective amendment current under the Act for a
period of at least nine months from the effective date thereof. The Company
shall supply prospectuses in order to facilitate the public sale of the
Registerable Securities, use its best efforts to register and qualify any of the
Registerable Securities for sale in such states in which the Debentures are
offered and sold in the Public Offering as such holder reasonably designates and
furnish indemnification in the manner provided in Paragraph 6 hereof, provided
that, without limiting the foregoing, the Company shall
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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.
(c) The Holder may, in accordance with Paragraphs 5(a) or (b), at his or
its option, and subject to the limitations set forth in Paragraph 1(a) hereof,
request the registration of any of the Registerable Securities in a filing made
by the Company prior to the acquisition of the Securities upon exercise of this
Underwriter's Option. The Holder may thereafter exercise this Underwriter's
Option at any time or from time to time subsequent to the effectiveness under
the Act of the registration statement in which the Debentures underlying the
Underwriter's Options were included.
(d) The term "51% holder," as used in this Paragraph 5, shall include any
owner or combination of owners of Underwriter's Options or Registerable
Securities if the aggregate number of shares of Common Stock issuable upon
conversion of the Debentures included in and underlying the Underwriter's
Options and Registerable Securities held of record by it or them, would
constitute a majority of the aggregate of such shares of Common Stock underlying
the Debentures issuable upon exercise of the Underwriter's Option and
Registrable Securities as of the date of the initial issuance of the
Underwriter's Option.
(e) The following provisions of this Paragraph 5 shall also be applicable:
(i) Within ten (10) days after receiving any notice pursuant to
Paragraph 5(b), the Company shall give notice to the other Holders of
Underwriter's Options or Registerable Securities, advising that the Company
is proceeding with such post-effective amendment or registration and
offering to include therein the Registerable Securities of such other
Holders, provided that they shall furnish the Company with all information
in connection therewith as shall be necessary or appropriate and as the
Company shall reasonably request in writing. Following the effective date
of such post-effective amendment or registration, the Company shall, upon
the request of any Holder of Registerable Securities, forthwith supply such
number of prospectuses meeting the requirements of the Act, as shall be
reasonably requested by such Holder. The Company shall use its best efforts
to qualify the Registerable Securities for sale in such states in which the
Debentures are offered and sold in the Public Offering as the 51% holder
shall reasonably designate at such times as the registration statement is
effective under the Act, provided that, without limiting the foregoing, 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.
(ii) The Company shall bear the entire cost and expense of any
registration of securities initiated by it under Paragraph 5(a) hereof
notwithstanding that the Registerable Securities subject to this
Underwriter's Option may be included in any such registration. The Company
shall also comply with the one request for registration made by the 51%
holder pursuant to Paragraph 5(b) hereof at the Company's own expense and
without charge to any holder of the Registerable Securities.
Notwithstanding the foregoing, any Holder whose Registerable Securities are
included in any such registration statement pursuant to this Paragraph 5
shall, however, bear the fees of any counsel retained by him and any
transfer taxes or underwriting discounts or commissions applicable to the
Registerable Securities sold by him pursuant thereto and, in the case of a
registration pursuant to Paragraph 5(a) hereof, any additional registration
or "blue sky" or state securities fees attributable to the registration or
qualification of such Holder's Registerable Securities.
(iii) If the underwriter or managing underwriter in any underwritten
offering made pursuant to Paragraph 5(a) hereof shall advise the Company
that it declines to include a portion or all of the Registerable Securities
requested by the Holders to be included in the registration statement, then
distribution of all or a specified portion of the Registerable Securities
shall be excluded from such registration statement (in case of an exclusion
as to a portion of such Registerable Securities, such portion to be
allocated among such Holders in proportion to the respective numbers of
Registerable Securities requested to be registered by each such Holder). In
such event the Company shall give the Holder prompt notice of the number of
Registerable Securities excluded. Further, in such event the Company shall,
commencing six (6) months after the completion of such underwritten
offering, file and use its best efforts to have declared effective, at its
sole expense (subject to the last sentence of Paragraph 5(a)(ii)), a
registration statement relating to such excluded securities.
(iv) Notwithstanding anything to the contrary contained herein, the
Company shall have the right at any time after it shall have given written
notice pursuant to Paragraph 5(a) or 5(b) (irrespective of whether a
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written request for inclusion of any Registerable Securities shall have
been made) to elect not to file or to delay any such proposed registration
statement or post-effective amendment thereto, or to withdraw the same
after the filing but prior to the effective date thereof. In addition, the
Company may delay the filing of any registration statement or
post-effective amendment requested pursuant to Paragraph 5(b) hereof by not
more than 120 days if the Company, prior to the time it would otherwise
have been required to file such registration statement or post-effective
amendment thereto, determines in good faith that the filing of the
registration statement would require the disclosure of non-public material
information that, in its judgment, would be detrimental to the Company if
so disclosed or would otherwise adversely affect a financing, acquisition,
disposition, merger or other material transaction.
(v) If a registration pursuant to Paragraph 5(a) hereof involves an
underwritten offering, the Company shall have the right to select the
investment banker or investment bankers and manager or managers that will
serve as underwriter with respect to the underwritten offering. No Holder
of Registerable Securities may participate in any underwritten offering
under this Agreement unless such holder completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements
and other documents required under the terms of such underwritten offering,
in each case, in the form and upon terms reasonably acceptable to the
Company and the underwriters. The requested registration pursuant to
Paragraph 5(b) hereof shall not involve an underwritten offering unless the
Company shall first give its written approval of each underwriter that
participates in the offering, such approval not to be unreasonably
withheld.
6. INDEMNIFICATION.
(a) Whenever pursuant to Paragraph 5, a registration statement relating to
any Registerable Securities is filed under the Act, amended or supplemented, the
Company will indemnify and hold harmless each Holder of the Registerable
Securities covered by such registration statement, amendment or supplement (such
holder hereinafter referred to as the "Distributing Holder"), each person, if
any, who controls (within the meaning of the Act) the Distributing Holder, and
each officer, employee, partner or agent of the Distributing Holder, if the
Distributing Holder is a broker or dealer, and each underwriter (within the
meaning of the Act) of such securities and each person, if any, who controls
(within the meaning of the Act) any such underwriter and each officer, employee,
agent or partner of such underwriter against any losses, claims, damages or
liabilities, joint or several, to which the Distributing Holder, any such
underwriter or any other 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 any untrue statement or alleged untrue
statement of any material fact contained in any such registration statement or
any preliminary prospectus or final prospectus constituting a part thereof or
any amendment or supplement thereto, or arise out of or are based upon the
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which such statements were made, not misleading; and will reimburse the
Distributing Holder and each such underwriter or such other person for any legal
or other expenses reasonably incurred by the Distributing Holder, or underwriter
or such other person, in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that the Company
will not be liable in any such case (i) to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in said
registration statement, said preliminary prospectus, said final prospectus or
said amendment or supplement in reliance upon and in conformity with written
information furnished by such Distributing Holder, any other Distributing Holder
or any such underwriter for use in the preparation thereof, or (ii) such losses,
claims, damages or liabilities arise out of or are based upon any actual or
alleged untrue statement or omission made in or from any preliminary prospectus,
but corrected in the final prospectus, as amended or supplemented.
(b) Whenever pursuant to Paragraph 5 a registration statement relating to
the Registerable Securities is filed under the Act, or is amended or
supplemented, the Distributing Holder will indemnify and hold harmless the
Company, each of its directors, each of its officers who have signed said
registration statement and such amendments and supplements thereto, and each
person, if any, who controls the Company (within the meaning of the Act) against
any losses, claims, damages or liabilities to which the Company or any such
director, officer or 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 any untrue or alleged untrue
statement of any material fact contained in any such registration statement or
any preliminary prospectus or final prospectus
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constituting a part thereof, or any amendment or supplement thereto, or arise
out of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein 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 said registration statement, said preliminary prospectus,
said final prospectus or said amendment or supplement in reliance upon and in
conformity with written information furnished by such Distributing Holder for
use in the preparation thereof; and will reimburse the Company or any such
director, officer or controlling person for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action.
(c) Promptly after receipt by an indemnified party under this Paragraph 6
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against any indemnifying party, give the
indemnifying party notice of the commencement thereof; but the omission to so
notify the indemnifying party will not relieve it from any liability which it
may have to any indemnified party otherwise than under this Paragraph 6.
(d) In case any such action is brought against any indemnified party, and
it notifies an indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof with counsel reasonably satisfactory to such indemnified party,
and after notice from the indemnifying party to such indemnified party of its
election to so assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this Paragraph 6 for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation.
7. [INTENTIONALLY OMITTED]
8. FRACTIONAL SHARES.
(a) The Company shall not be required to issue fractions of Debentures on
the exercise of this Underwriter's Option.
(b) The Holder of this Underwriter's Option, by acceptance hereof,
expressly waives his right to receive any fractional Debentures upon exercise of
this Underwriter's Option.
9. MISCELLANEOUS.
(a) This Underwriter's Option shall be governed by and in accordance with
the laws of the State of New York without regard to the conflicts of law
principles thereof.
(b) All notices, requests, consents and other communications hereunder
shall be made in writing and shall be deemed to have been duly made when
delivered, or mailed by registered or certified mail, return receipt requested:
(i) if to a Holder, to the address of such Holder as shown on the books of the
Company, or (ii) if to the Company, 295 Lafayette Street, New York, New York
10012.
(c) The Company and the Underwriter may from time to time supplement or
amend this Underwriter's Option without the approval of any other Holders 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 not to materially adversely affect the
interest of the Holders.
(d) All the covenants and provisions of this Underwriter's Option by or for
the benefit of the Company and the Holders shall bind and inure to the benefit
of their respective successors and assigns hereunder.
(e) Nothing in this Underwriter's Option shall be construed to give to any
person or corporation other than the Company and the Underwriter and any other
registered Holder or Holders, any legal or equitable right, and this
Underwriter's Option shall be for the sole and exclusive benefit of the Company
and the Underwriter and any other Holder or Holders.
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(f) This Underwriter's Option 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.
IN WITNESS WHEREOF, the Company has caused this Underwriter's Warrant to be
signed by its duly authorized officer and this Underwriter's Option to be dated
, 1997.
BELL TECHNOLOGY GROUP LTD.
By: /s/ MARC H. BELL
------------------------
Marc H. Bell
President
PURCHASE FORM
(To be signed only upon exercise of the Underwriter's Option)
The undersigned, the Holder of the foregoing Underwriter's Option, hereby
irrevocably elects to exercise the purchase rights represented by such
Underwriter's Option for, and to purchase thereunder, $ Debentures of Bell
Technology Group Ltd. and herewith makes payment of $ therefor, and
requests that the certificates for the Debentures be issued in the name(s) of,
and delivered to whose address(es) is (are)
and whose social
security or taxpayer identification number is .
Dated: ____________________________
__________________________________*
___________________________________
Address
* Signature must conform in all respects to name of registered Holder.
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TRANSFER FORM
(To be signed only upon transfer of the Underwriter's Option)
For value received, the undersigned hereby sells, assigns, and transfers
unto the right to purchase Debentures of Bell Technology
Group Ltd. represented by the foregoing Underwriter's Option to the extent of
$ Debentures, and appoints ,
attorney to transfer such rights on the books of Bell Technology Group Ltd.,
with full power of substitution in the premises.
Dated: _________________________________________________________________________
________________________________________________________________________________
(name of holder)
________________________________________________________________________________
Address
________________________________________________________________________________
In the presence of:
________________________________________________________________________________
________________________________________________________________________________
July 24, 1997
DEBENTURE MANAGEMENT AGREEMENT
, 1997
Bell Technology Group Ltd.
295 Lafayette Street
New York, New York 10012
Attention: Marc H. Bell, Chairman
Gentlemen:
This will confirm the arrangements, terms and conditions pursuant to which
Rickel & Associates, Inc. (the "Consultant"), have been retained to serve as a
debenture management consultant and advisor to Bell Technology Group Ltd., a
Delaware corporation (the "Company"), on a non-exclusive basis for the term set
forth in Section 2 below in connection with the Company's 10% Convertible Senior
Subordinated Debentures, Due , 2003 (the "Debentures"). The
undersigned hereby agrees to the following terms and conditions:
1. DUTIES OF CONSULTANT.
(A) CONSULTING SERVICES. Consultant will provide such consulting services
and advice pertaining to the Debentures as the Company may from time to time
reasonably request. Without limiting the generality of the foregoing, Consultant
will assist the Company in administrative aspects concerning the Debentures and
in studying and evaluating matters concerning the redemption or retirement of
the Debentures, prepare reports and studies thereon when advisable, and assist
in negotiations and discussions pertaining thereto.
(b) WALL STREET LIAISON. Consultant will, when appropriate, arrange
meetings between representatives of the Company and individuals and financial
institutions in the investment community, such as security analysts, portfolio
managers and market makers.
The services described in this Section 1 shall be rendered by Consultant
under the supervision of the Company, but at such time and place and in such
manner (whether by conference, telephone, letter or otherwise) as Consultant may
determine. Consultant will keep the Company advised of its activities hereunder.
2. TERM.
This Agreement shall continue for a period of three years from the date
hereof (the "Term").
3. COMPENSATION.
(a) As compensation for Consultant's services hereunder, the Company shall
pay to the Consultant the sum of $108,000 (an aggregate of three thousand
($3,000) dollars per month), all of which shall be due and payable as of the
date hereof.
4. RELATIONSHIP.
Nothing herein shall constitute Consultant as an employee or agent of the
Company, except to such extent as might hereinafter be agreed upon for a
particular purpose. Except as might hereinafter be expressly agreed, Consultant
shall not have the authority to obligate or commit the Company in any manner
whatsoever.
5. CONFIDENTIALITY.
Except in the course of the performance of its duties hereunder, Consultant
agrees that it shall not disclose any trade secrets, know-how, or other
proprietary information not in the public domain learned as a result of this
Agreement unless and until such information becomes generally known.
6. ASSIGNMENT AND TERMINATION.
This Agreement shall not be assignable by any party except to successors to
all or substantially all of the business of either party for any reason
whatsoever without the prior written consent of the other party, which consent
may not be unreasonably withheld.
Very truly yours,
RICKEL & ASSOCIATES, INC
By: __________________________
Agreed and Accepted:
BELL TECHNOLOGY GROUP LTD.
By: ___________________________________________________________________________
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
registration statement on Form SB-2 registering 10% Convertible Senior
Subordinated Debentures.
ARTHUR ANDERSEN LLP
New York, New York
July 31, 1997