<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 13, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
BONDED MOTORS, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 3714A23 1 95-2698520
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
Incorporation or Organization) No.)
</TABLE>
7522 S. MAIE AVENUE
LOS ANGELES, CALIFORNIA 90001
(213) 583-8631
(Address and telephone number of principal executive offices)
--------------------------
AARON LANDON
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
7522 S. MAIE AVENUE
LOS ANGELES, CALIFORNIA 90001
(213) 583-8631
(Name, address, including zip code, and telephone number of agent for service)
--------------------------
COPIES TO:
LEE R. PETILLON, ESQ. STEVEN A. MEIERS, ESQ.
MARK T. HIRAIDE, ESQ. GIBSON, DUNN & CRUTCHER LLP
PETILLON & HANSEN 333 SOUTH GRAND AVENUE
21515 HAWTHORNE BOULEVARD, SUITE 1260 LOS ANGELES, CALIFORNIA 90071-3197
TORRANCE, CALIFORNIA 90503 (213) 229-7356
(310) 543-0500
--------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
--------------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) UNIT(2) PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, no par value per share....... 2,300,000 shares $10.50 $24,150,000 $7,125
Common Stock Purchase Warrants............. 75,000 warrants $.01 $750 $1
Common Stock, no par value per share....... 75,000 shares(3) $12.60 $945,000 $279
</TABLE>
(1) Includes 300,000 shares of Common Stock that the Underwriters may purchase
from the Company to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee based
upon the last sale price of a share of Common Stock on May 12, 1998.
(3) Issuable upon exercise of Warrants to be issued to the representatives of
the Underwriters. In addition, this Registration Statement covers such
indeterminable number of shares of Common Stock as may be issued upon
exercise of the Warrants by reason of antidilution adjustments. Such
additional shares of Common Stock, if issued, will be issued for no
additional consideration, and therefore no additional registration fee is
required.
--------------------------
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 SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 13, 1998
2,000,000 Shares
[Logo] BONDED
MOTORS
Common Stock
Of the 2,000,000 shares of Common Stock offered hereby, 1,500,000 shares are
being sold by Bonded Motors, Inc. (the "Company") and 500,000 are being sold by
certain shareholders of the Company (the "Selling Shareholders"). See "Principal
and Selling Shareholders." The Company will not receive any of the proceeds from
the sale of shares by the Selling Shareholders. The Common Stock is traded on
the Nasdaq National Market under the symbol "BMTR." On May 12, 1998, the last
sale price of the Common Stock as reported by Nasdaq was $10.50 per share. See
"Price Range of Common Stock."
THE COMMON STOCK OFFERED HEREBY INVOLVES CERTAIN RISKS. SEE
"RISK FACTORS," COMMENCING ON PAGE 6 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDERS
- --------------------------------------------------------------------------------------------------------------
Per Share......... $ $ $ $
- -------------------------------------------------------------------------------------------
Total (3)......... $ $ $ $
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of $ , including the
Representatives' non-accountable expense allowance, payable by the Company.
(3) The Company has granted the Underwriters a 45-day option to purchase up to
300,000 additional shares of Common Stock for the purpose of covering
over-allotments, if any. If the Underwriters exercise such option in full,
the total Price to the Public, Underwriting Discounts and Proceeds to the
Company will be $ , $ and $ , respectively. See
"Underwriting."
The shares of Common Stock are offered, subject to prior sale, when, as and
if accepted by the Underwriters named herein, and subject to certain other
conditions. It is expected that delivery of the certificates representing such
shares will be made against payment therefor at the offices of Van Kasper &
Company in San Francisco, California on or about June , 1998.
VAN KASPER & COMPANY COMMONWEALTH ASSOCIATES
JUNE , 1998
<PAGE>
[PHOTOGRAPHS]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THIS OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS AND NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
Bonded Motors, Inc. is a leading nationwide engine remanufacturer serving
suppliers to the automotive aftermarket. The Company remanufactures and
distributes over 1,500 models and versions of replacement engines for domestic
and Japanese cars and light trucks. The Company's production facilities are in
Los Angeles and Macon, Georgia, and it has regional distribution centers in
California, Washington, Colorado, Ohio, Georgia and New York.
According to industry reports, the vehicle population in the United States
is older today than at any time during the past 50 years, with vehicles ten
years or older accounting for more than 45% of vehicles currently on the road.
With the improved quality and durability of automobile exteriors and the
increasing prices of new cars, there is a growing trend for consumers to replace
damaged or worn-out automobile engines with remanufactured engines. Industry
sources estimate that over three million engines are remanufactured in North
America annually, a $2.5 billion market.
Through 1997, the Company's principal customers were large retail automotive
parts store chains which sold primarily to automobile owners (the
"do-it-yourself" market). These customers of the Company included The Pep Boys,
CSK Automotive, Trak Auto and Paccar. In 1996 and 1997, sales to these four
national chain store customers constituted approximately 71% and 68% of the
Company's sales, respectively.
In March 1998, the Company became the primary supplier of remanufactured
automobile engines to Genuine Parts/NAPA, which is a major supplier to
professional installers (the "do-it-for-me" market). Genuine Parts/NAPA is the
largest member of the National Automotive Parts Association ("NAPA"), a trade
association formed to provide nationwide distribution of automotive parts. In
1997, Genuine Parts/ NAPA operated 750 company-owned auto parts stores located
in 43 states, as well as 62 distribution centers serving approximately 4,900
independently-owned NAPA auto parts stores nationwide. Genuine Parts/NAPA is the
Company's first major customer that supplies primarily to the "do-it-for-me"
market.
From 1994 through 1997, the Company's net sales increased from $10.5 million
to $24.1 million, a 32% compound annual growth rate. In the first quarter of
1998, net sales increased by 68% compared to the first quarter of 1997, even
though the Company sold to Genuine Parts/NAPA as its primary supplier only for
the last month of the quarter. Exclusive of sales to Genuine Parts/NAPA, net
sales for the quarter increased 42%. The Company has continued to make
significant sales to Genuine Parts/NAPA through April 1998.
During the five quarters ended March 31, 1998, the Company materially
increased its production of remanufactured engines in order to meet increased
demand. The Company experienced significant production difficulties during the
last three quarters of 1997, and production costs per engine increased $38 per
engine for the year. The Company has taken steps to address these issues,
believes that it has made significant improvements to its production processes,
and has seen production and warranty costs per engine decline by $55 from the
fourth quarter of 1997 to the first quarter of 1998. The improvement in
production costs are partially contained in inventory balances at March 31, 1998
and, accordingly, will not be fully realized in reported results of operations
until later periods.
To sustain its growth, the Company will need to significantly expand its
manufacturing capabilities in the near future. The net proceeds of the Offering
will, in effect, be used in substantial part to fund this expansion.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.................. 1,500,000 shares
Common Stock offered by the Selling Shareholders..... 500,000 shares
Common Stock to be outstanding immediately after this
Offering........................................... 4,555,040 shares
Use of Proceeds...................................... To repay the indebtedness
outstanding under its revolving bank
credit agreement. The Company
currently intends to use the balance
of the net proceeds, together with
reborrowings under that credit
agreement, to fund the expansion of
the Company's manufacturing
capabilities and for general
corporate purposes. See "Use of
Proceeds."
Nasdaq National Market symbol........................ BMTR
</TABLE>
SUMMARY FINANCIAL AND OTHER DATA
(in thousands, except per share and other data)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------ --------------------
1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Net sales......................................... $ 10,512 $ 13,621 $ 18,637 $ 24,076 $ 5,076 $ 8,508
Cost of sales..................................... 7,841 10,175 14,351 19,369 3,689 6,984
--------- --------- --------- --------- --------- ---------
Gross profit...................................... 2,671 3,446 4,286 4,707 1,387 1,524
Selling, general and administrative expenses...... 1,841 2,117 2,685 3,706 865 1,083
--------- --------- --------- --------- --------- ---------
Earnings from operations.......................... 830 1,329 1,601 1,001 522 441
Other expense net................................. (92) (15) -- (180) (8) (110)
--------- --------- --------- --------- --------- ---------
Earnings before income taxes...................... 738 1,314 1,601 821 514 331
Income tax benefit (expense)...................... 325 (152) (29) 326 (85) (125)
--------- --------- --------- --------- --------- ---------
Net earnings...................................... $ 1,063 $ 1,281 $ 1,572 $ 1,147 $ 429 $ 206
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Basic earnings per share.......................... $ 0.59 $ 0.70 $ 0.57 $ 0.38 $ 0.14 $ 0.07
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Diluted earnings per share........................ $ 0.55 $ 0.65 $ 0.56 $ 0.37 $ 0.14 $ 0.06
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Weighted average common shares
outstanding--Basic............................... 1,800 1,817 2,750 3,021 3,003 3,039
Weighted average common and common equivalent
shares outstanding--Diluted...................... 1,927 1,972 2,797 3,116 3,111 3,188
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------------
ACTUAL AS ADJUSTED(1)
--------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................................................ $ 11,230 20,058
Total assets........................................................................... 18,538 27,366
Total liabilities...................................................................... 9,832 4,381
Shareholders' equity................................................................... 8,706 22,985
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED QUARTERS ENDED
---------------------- ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1996 1997 1997 1997 1997 1997 1998
----------- --------- ----------- ----------- ----------- ----------- -----------
OTHER DATA:
Net sales (000's)................. $ 18,636 $ 24,076 $ 5,076 $ 6,272 $ 6,577 $ 6,152 $ 8,508
Net engine sales.................. 22,339 28,921 6,043 7,546 7,909 7,423 10,045
Gross profit margin............... 23.0% 19.6% 27.3% 19.0% 16.3% 17.2% 17.9%
Engine data:
Total produced.................. 25,746 30,446 6,432 6,625 8,750 8,639 10,320
Average produced per day (2).... 103 122 103 106 140 138 165
Average sold per day (2)........ 89 116 97 121 127 119 161
Cost of production (3):
Increase (decrease) from 1996
cost of production per
engine (4).................... Base $33 $22 $15 $45 $43 $(12 )
Percentage of 1996 cost of
production per engine......... 100 % 106% 104 % 103 % 108 % 107 % 98 %
</TABLE>
- ------------------------
(1) As adjusted to reflect the sale of 1,500,000 shares of Common Stock by the
Company in the Offering and the application of the estimated net proceeds
therefrom. See "Use of Proceeds."
(2) Based on an average of 250 production and sales days per year.
(3) Includes warranty costs.
(4) The information presented represents the difference in each period presented
from the Base of 1996. For example, for the period ended March 31, 1998, the
table indicates both that production costs per engine were $12 less than the
1996 Base and that production costs per engine declined by $55 per engine
from the quarter ended December 31, 1997.
------------------------
UNLESS OTHERWISE INDICATED, THE SHARE AND PER SHARE INFORMATION IN THIS
PROSPECTUS (I) DOES NOT INCLUDE 586,900 SHARES OF COMMON STOCK RESERVED FOR
ISSUANCE PURSUANT TO OUTSTANDING OPTIONS AND WARRANTS, AND (II) ASSUMES THAT THE
UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED.
5
<PAGE>
RISK FACTORS
CERTAIN STATEMENTS CONTAINED IN THIS PROSPECTUS, INCLUDING STATEMENTS
REGARDING REVENUES, PER UNIT PRODUCTION AND OTHER COSTS, INCOME FOR TAX
PURPOSES, INDUSTRY TRENDS AND THEIR IMPACT ON THE COMPANY'S BUSINESS, RESULTS OF
OPERATIONS AND FINANCIAL CONDITION, ARE FORWARD LOOKING STATEMENTS. THESE
FORWARD LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES INCLUDING BUT NOT
LIMITED TO THOSE SET FORTH BELOW. ALSO, THE FORWARD LOOKING STATEMENTS ARE BASED
UPON ASSUMPTIONS OF FUTURE EVENTS, WHICH MAY NOT PROVE TO BE ACCURATE. FOR THESE
AND OTHER REASONS, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED OR
IMPLIED IN THE FORWARD LOOKING STATEMENTS. PROSPECTIVE INVESTORS SHOULD
CAREFULLY CONSIDER THE FACTORS SET FORTH BELOW, IN ADDITION TO THE OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS, IN EVALUATING AN INVESTMENT IN THE
COMMON STOCK OFFERED HEREBY.
ABILITY TO MANAGE GROWTH; QUALITY
As the Company experienced significant growth in the past two years, its
capabilities were strained, margins decreased and the quality of its products
was adversely affected. The Company has taken steps to address these issues,
including hiring Richard Funk as its President in November 1997, and believes it
has begun to see improvement in its per unit production costs. However, the
improvements are partially reflected in data for the first quarter of 1998 only,
and no assurance can be given that the quarterly data reflects a trend or, if it
does, that the trend will continue.
In order to sustain its growth, the Company will need to significantly
expand its manufacturing capabilities in the near future. The management of
future growth will present significant challenges, and no assurance can be given
that the Company will be able to manage its growth effectively. If the Company
does not do so, the quality of the Company's products (and resulting levels of
warranty expense), its ability to retain key customers and its business,
financial condition and results of operations could be materially adversely
affected.
If the Company is not able to timely expand its manufacturing capabilities,
its ability to attract new customers and retain its key customers could be
adversely affected, with a resulting material adverse effect on the Company. The
Company does not have any contracts or arrangements for necessary additional
manufacturing facilities, and no assurance can be given that it will be able to
lease or acquire such additional facilities on acceptable terms.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts and abilities of its Chairman and
Chief Executive Officer, Aaron Landon, its President, Richard Funk, its Chief
Operating Officer, Buddy Mercer, and its Chief Financial Officer, Paul Sullivan.
If the Company were to lose the services of any of these executives before a
qualified replacement could be found, its business could be materially adversely
affected. Messrs. Landon, Mercer and Sullivan have entered into employment
agreements with the Company ending on December 31, 1999. Mr. Funk has entered
into a two-year employment agreement with the Company, which expires on December
31, 1999. That agreement provides that either party may terminate the agreement
at any time without penalty. However, Mr. Funk has been granted options to
purchase 100,000 shares of the Common Stock at an exercise price of $8.63 (54%
of the number of options granted to employees in 1997), and these options vest
50% at the end of the first year of employment and 50% at the end of the second.
The Company has key person life insurance policies on the lives of Messrs.
Landon, Mercer and Sullivan in the amounts of $1,000,000 each, as to which the
Company is the sole beneficiary.
CONCENTRATION OF SALES AND RECEIVABLES
A significant percentage of the Company's sales has been concentrated among
a relatively small number of customers. In 1996 and 1997, 71% and 68% of the
Company's sales, respectively, were made to four customers. In the first quarter
of 1998, 75% of the Company's sales were made to four customers. Receivables
from these customers comprised 90% of the Company's accounts receivable balance
at
6
<PAGE>
March 31, 1998. The Company has not in the past had, and does not now have,
contracts with any of these customers. The loss of a significant customer or a
substantial decrease in sales to such a customer could have an adverse effect on
the Company's sales and operating results.
AVAILABILITY AND PRICING OF CORES
The Company remanufactures used engines (commonly referred to as "cores").
The Company obtains cores from various sources, principally core vendors and
trade-ins. The Company's ability to obtain cores of the type, quality and in the
quantities required is essential to its ability to meet demand and expand
production. Although core supply has been adequate in the past, there can be no
assurance that the Company will be able timely to obtain sufficient cores at
acceptable prices in the future.
COMPETITION
The Company competes with companies involved in the remanufacture and
distribution of engines and related parts for domestic and Japanese automobiles.
The automotive aftermarket industry is highly competitive and a number of
companies with which the Company competes are substantially larger and have
significantly greater resources than those of the Company. The primary bases for
competition in the automotive aftermarket are price, quality, reliability, rapid
response and breadth of product selection. There are a number of engine
remanufacturers which are authorized to sell remanufactured engines to
dealerships and to automobile manufacturers and which are substantially larger
than the Company. There can be no assurance that these companies will not enter
the segment of the engine remanufacturing market in which the Company competes.
GOVERNMENT REGULATION
The Company's operations are subject to federal, state and local laws and
regulations governing, among other things, emissions to air, discharge to waters
and the generation, handling, storage, transportation, treatment and disposal of
hazardous waste and other materials. The Company believes that its business,
operations and facilities have been and are being operated in material
compliance with applicable environmental, health and safety laws, many of which
provide for substantial fines and criminal sanctions for violations. However,
the operation of automotive parts manufacturing plants entails risks in these
areas, and there can be no assurance that the Company will not incur material
costs or liabilities in connection therewith. In addition, potentially
significant expenditures could be required in order to comply with evolving
environmental and health and safety laws, regulations or requirements that may
be adopted or imposed in the future.
TAX MATTERS
Until December 31, 1997, the Company received State of California tax
credits for its hiring practices and its location within the Los Angeles
Revitalization Zone ("LARZ"), which substantially eliminated the Company's
California tax liability. The ability to earn these credits expired effective
December 31, 1997. Although legislation is being considered by the State to
re-establish the availability of these or similar credits, no such legislation
has been passed to date, and there can be no assurance that such legislation
will be passed into law.
YEAR 2000 ISSUE
The Company will commence, for all of its information systems, a year 2000
date conversion project to address necessary code changes, testing and
implementation and does not presently anticipate any material internal year 2000
issues or expenses from its own information systems, databases or programs. The
Company is in the process of developing a plan to assess the effect on the
Company that third parties who are not year 2000 compliant may have on the
operations of the Company.
7
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this Offering, the Company will have 4,555,040 shares
of Common Stock outstanding, of which 3,621,980 shares will be freely tradeable
and the remaining 933,060 shares will be restricted securities within the
meaning of the Securities Act of 1933, as amended (the "Securities Act").
Subject to the lock up agreements referred to below, the restricted securities
will be available for public resale following this Offering pursuant to Rule 144
under the Securities Act. In addition, as of March 31, 1998, there were
outstanding stock options and warrants to purchase 586,900 shares of Common
Stock. Of these shares, when and if issued, 100,400 shares will be freely
tradeable without restriction under the Securities Act, and the balance will be
saleable under Rule 144. Sales of Common Stock in the public market after this
Offering could adversely affect the market price of the Common Stock. Such sales
also might make it more difficult for the Company to sell equity securities in
the future at a time and price that it deems acceptable. The officers, directors
and holders of more than 1% of the outstanding Common Stock have agreed with the
Underwriters that they will not sell any of the shares owned by them for 120
days after the date of this Prospectus without the prior written consent of Van
Kasper & Company.
8
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,500,000 shares
offered by it are estimated to be $14.3 million, based on an assumed public
offering price of $10.50 per share after deducting estimated underwriting
discounts and offering expenses. The Company will not receive any proceeds from
the sale of shares by the Selling Shareholders.
The Company anticipates using a portion of the net proceeds to repay the
indebtedness outstanding under its bank credit facilities. At March 31, 1998,
$5.5 million was outstanding under a revolving line of credit, bearing an
interest rate at the lower of the bank's prime lending rate or LIBOR plus 2.0%,
and $760,000 was outstanding under a specific advance facility, bearing an
interest rate of the lower of the bank's prime interest rate plus 0.25%, its
cost of funds plus 2.25%, or LIBOR plus 2.25%, as selected by the Company. These
borrowings were incurred primarily to finance increases in inventory and
accounts receivable associated with the Company's growth and to purchase
inventory, plant machinery and equipment located in Macon, Georgia. The Company
currently intends to reborrow under its bank credit facilities and to use the
balance of the net proceeds of the Offering to fund the expansion of the
Company's manufacturing facilities by one or a combination of leasing or
acquiring additional facilities near its Los Angeles manufacturing facility,
expanding its Macon, Georgia manufacturing facility or, possibly, acquiring
other engine remanufacturers and for general corporate purposes.
The Company is currently involved in discussions with a major automobile
manufacturer to provide remanufactured engines to it. If the Company receives a
significant contract, as to which no assurance can be given, it may require a
separate assembly line, which could be directly or indirectly funded from the
net proceeds of the Offering.
9
<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock has been trading on the Nasdaq National Market under the
symbol "BMTR" since April 2, 1996. The following table sets forth for the
periods indicated the high and low closing bid prices of the Common Stock as
reported by Nasdaq:
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1996
Second Quarter......................................................... $ 8.63 $ 6.50
Third Quarter.......................................................... 8.13 6.38
Fourth Quarter......................................................... 11.00 6.50
1997
First Quarter.......................................................... $ 10.63 $ 7.75
Second Quarter......................................................... 10.50 6.25
Third Quarter.......................................................... 11.88 6.63
Fourth Quarter......................................................... 9.25 7.94
1998
First Quarter.......................................................... $ 11.44 $ 8.38
Second Quarter (through May 12, 1998).................................. 10.94 10.38
</TABLE>
On May 12, 1998, the last reported sale price of the Common Stock as
reported by Nasdaq was $10.50 per share.
The principal shareholder of the Company and related persons and entities
own 44.4% of the Company's Common Stock and, together with the other directors
of the Company, own 49.7% of the Common Stock. At March 31, 1998, the Company
had approximately 80 round lot shareholders of record. The Company believes,
based on information from the record holders, that it has approximately 863
beneficial owners. During the three, six and nine months ended March 31, 1998,
the average daily trading volume in the stock of the Company was 11,207, 13,754
and 14,635 shares, respectively. These factors may have caused the price of the
Common Stock to be more significantly influenced by factors unrelated to the
value of the Company than it would otherwise be and to be subject to price
fluctuations that might not occur were the stock more widely held and its
trading volume higher.
10
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1998, and as adjusted to give effect to the sale of the shares of Common
Stock offered by the Company hereby and the application of estimated net
proceeds therefrom, based on an assumed public offering price of $10.50 per
share. This table should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operation" and the financial
statements and notes thereto included herein.
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------
ACTUAL AS ADJUSTED(1)
--------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current installments of note payable to bank........................................... $ 385 $ 385
--------- -------
--------- -------
Long-term debt and notes payable to bank (1)........................................... 5,826 375
Shareholders' equity:
Preferred Stock, no par value, 1,000,000 shares authorized, no shares
outstanding...................................................................... -- --
Common Stock, no par value, 10,000,000 shares authorized, 3,040,040 shares
outstanding and 4,540,000 outstanding as adjusted (2)............................ 4,890 19,169
Retained earnings.................................................................. 3,916 3,916
Note receivable from exercise of stock options..................................... (100) (100)
--------- -------
Total shareholders' equity..................................................... 8,706 22,985
--------- -------
Total capitalization....................................................... $ 14,532 $ 23,360
--------- -------
--------- -------
</TABLE>
- ------------------------
(1) A portion of the net proceeds will be used to repay the outstanding
indebtedness. See "Use of Proceeds."
(2) As adjusted shares outstanding does not include 586,900 shares reserved for
issuance upon exercise of outstanding stock options and warrants.
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Stock, presently
intends to retain any earnings for use in its business and does not anticipate
paying any cash dividends on its Common Stock in the foreseeable future.
11
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
The selected financial data presented below with respect to the statements
of earnings for the three years ended December 31, 1997, are derived from the
financial statements and notes thereto that have been audited by KPMG Peat
Marwick LLP, independent certified public accountants, and included elsewhere
herein, and are qualified by reference to such financial statements and notes
related thereto. The balance sheet data at March 31, 1998 and the statement of
earnings data for the three months ended March 31, 1997 and 1998 are derived
from unaudited financial statements of the Company. The unaudited financial
statements include all adjustments, consisting only of normal recurring
adjustments the Company considers necessary for a fair presentation of the
financial position and results of operations at and for the three months ended
March 31, 1997 and 1998. Operating results for the three months ended March 31,
1998 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1998. The data provided should be read in conjunction
with the "Management's Discussion and Analysis of Financial Condition and
Results of Operations," financial statements, related notes and other financial
information included in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Net sales.......................................................... $ 13,621 $ 18,637 $ 24,076 $ 5,076 $ 8,508
Cost of sales...................................................... 10,175 14,351 19,369 3,689 6,984
--------- --------- --------- --------- ---------
Gross profit....................................................... 3,446 4,286 4,707 1,387 1,524
Selling, general and administrative expenses....................... 2,117 2,685 3,706 865 1,083
--------- --------- --------- --------- ---------
Earnings from operations........................................... 1,329 1,601 1,001 522 441
Other expense, net................................................. (15) -- (180) (8) (110)
--------- --------- --------- --------- ---------
Earnings before income taxes and extraordinary item................ 1,314 1,601 821 514 331
Income tax benefit (expense)....................................... (152) (29) 326 (85) (125)
--------- --------- --------- --------- ---------
Net earnings before extraordinary item............................. 1,162 1,572 1,147 429 206
Extraordinary item, net............................................ 119 -- -- -- --
--------- --------- --------- --------- ---------
Net earnings....................................................... $ 1,281 $ 1,572 $ 1,147 $ 429 $ 206
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic earnings per share:
Earnings before extraordinary item............................... $ 0.64 $ 0.57 $ 0.38 $ 0.14 $ 0.07
Extraordinary item............................................... 0.06 -- -- -- --
--------- --------- --------- --------- ---------
Net earnings..................................................... $ 0.70 $ 0.57 $ 0.38 $ 0.14 $ 0.07
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted earnings per share:
Earnings before extraordinary item............................... $ 0.59 $ 0.56 $ 0.37 $ 0.14 $ 0.06
Extraordinary item............................................... 0.06 -- -- -- --
--------- --------- --------- --------- ---------
Net earnings..................................................... $ 0.65 $ 0.56 $ 0.37 $ 0.14 $ 0.06
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average common shares outstanding--Basic.................. 1,817 2,750 3,021 3,003 3,039
Weighted average common and common equivalent shares
outstanding--Diluted............................................. 1,972 2,797 3,116 3,111 3,188
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------
ACTUAL AS ADJUSTED(1)
--------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital.............................................................................. $ 11,230 $ 20,058
Total assets................................................................................. 18,538 27,366
Total liabilities............................................................................ 9,832 4,381
Shareholders' equity......................................................................... 8,706 22,985
</TABLE>
- ------------------------------
(1) As adjusted to reflect the sale by the Company of 1,500,000 shares of Common
Stock in this Offering and the application of the estimated net proceeds
therefrom.
12
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED QUARTERS ENDED
------------------------ ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1996 1997 1997 1997 1997 1997 1998
----------- ----------- ----------- ----------- ----------- ----------- -----------
OTHER DATA:
Net sales (000's).............. $ 18,636 $ 24,076 $ 5,076 $ 6,272 $ 6,577 $ 6,152 $ 8,508
Net engine sales............... 22,339 28,921 6,043 7,546 7,909 7,423 10,045
Gross profit margin............ 23.0% 19.6% 27.3% 19.0% 16.3% 17.2% 17.9%
Engine data:
Total produced............... 25,746 30,446 6,432 6,625 8,750 8,639 10,320
Average produced per
day (1).................... 103 122 103 106 140 138 165
Average sold per day (1)..... 89 116 97 121 127 119 161
Cost of production (2):
Increase (decrease) from 1996
cost of production per
engine (3)................. Base $33 $22 $15 $45 $43 $(12 )
Percentage of 1996 cost of
production per engine...... 100 % 106 % 104 % 103 % 108 % 107 % 98 %
</TABLE>
- ------------------------
(1) Based on an average of 250 production and sales days per year.
(2) Includes warranty costs.
(3) The information presented represents the difference in each period presented
from the Base of 1996. For example, for the period ended March 31, 1998, the
table indicates both that production costs per engine were $12 less than the
1996 Base and that production costs per engine declined by $55 per engine
from the quarter ended December 31, 1997.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
COMPANY'S FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO. CERTAIN STATEMENTS
IN THIS "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS" SECTION ARE FORWARD LOOKING STATEMENTS. SEE THE FIRST PARAGRAPH
UNDER "RISK FACTORS" ABOVE.
OVERVIEW
The Company generates revenues through the sale of remanufactured engines to
the automotive aftermarket. Since the Company's inception in 1971, distribution
channels in the remanufactured engine industry have shifted from independent
garages, repair shops and traditional automobile parts stores to large
automotive parts chain stores. These automotive parts chain stores have emerged
to supply parts and services, including remanufactured engines, directly to
owners and increasingly to professional installers. A key element of the
Company's strategy has been to become a national supplier to these large
automotive chain stores.
Automotive parts chain stores now constitute a major portion of the
Company's total revenues. In 1995, 1996, 1997 and the three month period ended
March 31, 1998, sales to the Company's principal customers--The Pep Boys, CSK
Automotive, Paccar, Trak Auto and Genuine Parts/NAPA--constituted approximately
72%, 71%, 68% and 75%, respectively, of the Company's sales. From 1994 to 1997,
the Company's annual revenues increased from $10.5 million to $24.1 million.
In addition, in the three month period ended March 31, 1998, the Company
became the primary remanufactured engine supplier to Genuine Parts/NAPA, a
national distributor of automotive parts and engines. The addition of this
customer and continued business from its national chain store customers in the
three month period ended March 31, 1998, resulted in an increase in the
Company's revenues of 68%, to $8.5 million, compared to revenues in the
comparable period in 1997.
To continue its strategy of becoming a national supplier to its customers,
the Company has increased production and expanded its distribution capability by
opening regional distribution centers in the Northeast, Southeast, Midwest,
Mountain and Northwest regions of the country. In 1997, due to the successful
implementation of this national account strategy, and in order to meet the
increasing demand for its remanufactured engines, the Company rapidly increased
production and, in August 1997, acquired an additional manufacturing facility in
Macon, Georgia. To increase production in its Los Angeles manufacturing
facility, the Company hired additional personnel, increasing the number of new
employees hired from 55 in 1996 to 117 in 1997, and installed a roller-based
conveyor system, replacing its system of using carts to move engines through the
production process.
During this growth phase, the Company's gross profit as a percentage of net
sales declined from 23.0% in 1996 to 19.6% in 1997. The Company believes the
decline in gross profit margins was attributable in substantial part to plant
inefficiencies at its Los Angeles facility caused by the change in the
manufacturing process and the inexperience and training of new personnel. The
acquisition of the Macon, Georgia manufacturing facility in August 1997 also
absorbed some of management's time and further contributed to the decline in
profit margins.
To address the plant inefficiencies, the Company hired Richard Funk as its
President in November 1997. Mr. Funk had been a part-time consultant to the
Company for the previous four years and has 31 years of manufacturing experience
in the automotive engine remanufacturing industry. The Company believes it has
made significant improvements to its production process since hiring Mr. Funk.
Specifically, compared to the quarter ended September 30, 1997, per unit costs
of production and warranty costs improved slightly in the quarter ended December
31, 1997 and improved significantly in the quarter ended March 31, 1998. The
improvements in production costs are partially contained in inventory balances
at
14
<PAGE>
March 31, 1998 and, accordingly, will not be fully realized in reported results
of operations until later periods.
The improvements in quarterly cost of production for the three months ended
December 31, 1997 and March 31, 1998 are attributable in material part to
decreases in average parts and labor costs per engine offset in part by
increased indirect and warranty costs. The decrease in parts costs is partly the
result of a change in mix of product produced. The Company believes the increase
in warranty and indirect expense was primarily due to the increase of new
personnel throughout 1997, the rapid increase in production level, employee
adaptation to the conveyor system in 1997 and other new manufacturing processes
necessary to rapidly increase production, which affected quality. The Company
believes that as new employees continue to be trained and gain experience, and
personnel adapt to the conveyor system, warranty expense and indirect costs per
engine should stabilize or decline.
However, even if the Company continues to improve efficiency, the cost of
production can vary, potentially by a material amount, based on factors
partially outside the control of the Company, such as demand for particular
engine types, the amount and cost of parts requiring replacement and the degree
of remanufacturing necessary due to the condition of cores used in production.
Until December 31, 1997, the Company received State of California tax
credits for its hiring practices and its location within the Los Angeles
Revitalization Zone (LARZ). The Company earned these tax credits in excess of
the Company's California tax liability, and net deferred credits were reported
as a credit against total tax liabilities on the Company's income statement.
Although the credits may be carried forward through the year 2012 to offset
future California tax liabilities, the ability to earn these credits expired at
December 31, 1997.
In May 1998 the Company reached an agreement in principle to grant options
to purchase 25,000 shares of common stock at $7.75 per share to consultants as
compensation for services rendered. Compensation expense for the difference
between the grant price and the fair market value of the common stock plus the
fair market value of the options of $137,000 will be recognized as expense
during the quarter ended June 30, 1998.
RESULTS OF OPERATIONS
The following table presents the percentage each item shown bears to net
sales from operations.
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................................... 74.7 77.0 80.4 72.7 82.1
--------- --------- --------- --------- ---------
Gross profit................................................ 25.3 23.0 19.6 27.3 17.9
Selling, general and administrative expenses................ 15.5 14.4 15.4 17.0 12.7
--------- --------- --------- --------- ---------
Earnings from operations.................................... 9.8 8.6 4.2 10.3 5.2
Other expense net........................................... (0.1) -- (0.8) (0.2) (1.3)
--------- --------- --------- --------- ---------
Earnings before income taxes and extraordinary item......... 9.7 8.6 3.4 10.1 3.9
Income tax benefit (expense)................................ (1.2) (0.2) 1.4 (1.7) (1.5)
--------- --------- --------- --------- ---------
Net earnings before extraordinary item...................... 8.5 8.4 4.8 8.4 2.4
Extraordinary item, net..................................... 0.9 -- -- -- --
--------- --------- --------- --------- ---------
Net earnings................................................ 9.4% 8.4% 4.8% 8.4% 2.4%
</TABLE>
15
<PAGE>
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
NET SALES. Net sales increased $3.4 million, or 67.6%, to $8.5 million for
the three months ended March 31, 1998 from $5.1 million for the same period in
1997. The increase was primarily the result of increased sales volume to
existing national automobile chain store customers and the addition of a new
customer for which the Company became the principal supplier of remanufactured
engines in March 1998. Approximately 44% of the $3.4 million increase in net
sales in the three months ended March 31, 1998 was attributable to this new
customer.
COST OF SALES. Cost of sales increased $3.3 million, or 89.3%, to $7.0
million for the three months ended March 31, 1998 from $3.7 million for the same
period in 1997. Cost of sales as a percentage of net sales increased to 82.1%
from 72.7% for the same period in 1997. The increase in cost of sales was
primarily attributable to overhead costs associated with the expansion of the
Company's production capacity and increased warranty costs per engine. Cost of
sales as a percentage of net sales was significantly higher in the three months
ended March 31, 1998 than in the three months ended March 31, 1997. The increase
is attributable in substantial part to a significantly higher average cost per
engine in inventory at December 31, 1997 compared to December 31, 1996.
Improvements in cost of parts and labor in production during the three months
ended March 31, 1998, offset in part by higher costs for overhead, resulted in a
lower average cost of engines in inventory at March 31, 1998 compared to March
31, 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist primarily of management, clerical and
administrative salaries and costs of additional outside salespersons,
professional services and freight. Selling, general and administrative expenses
increased $218,000, or 25.2%, to $1.1 million for the three months ended March
31, 1998 from $865,000 for the same period in 1997. Selling, general and
administrative expenses as a percentage of sales decreased from 17.0% to 12.7%
for the same period in 1997. These changes were primarily attributable to higher
revenues in the current three month period, offset in part by increases in
distribution expenses.
OTHER EXPENSE. The increase in other expense for the three months ended
March 31, 1998 over the same period in 1997 was primarily attributable to an
increase in interest expense due to increased borrowing to finance increased
inventory and accounts receivable.
INCOME TAXES. Tax expense increased $40,000, or 47.3%, to $125,000 for the
three months ended March 31, 1998 from $85,000 for the same period in 1997. Tax
expense as a percentage of earnings before income taxes increased to 37.9% for
the three months ended March 31, 1998 from 16.6% for the same period in 1997. As
described above, during 1997 the Company earned LARZ tax credits in excess of
its state tax liability and, as a result, the excess state tax credits earned
partially offset the federal tax. During 1998 no LARZ tax credits have been
earned and, as a result, the income tax for the quarter reflects the Company's
effective Federal tax rate.
YEARS ENDED DECEMBER 31, 1997 AND 1996
NET SALES. Net sales increased $5.5 million, or 29.2%, to $24.1 million in
1997 from $18.6 million in 1996. The increase in net sales was attributable to
growth from existing customers. The Company believes that this internal growth
was attributable in part to establishment and growth of its regional
distribution centers, which increased the Company's visibility to its national
accounts. Sales to the Company's four largest customers increased 23.5%, to
$16.3 million, from $13.2 million in 1996. These four customers accounted for
approximately 68% and 71% of net sales in 1997 and 1996, respectively.
COST OF SALES. Cost of sales increased $5.0 million, or 35.0%, to $19.4
million in 1997 from $14.4 million from 1996. Cost of sales as a percentage of
net sales increased to 80.4% from 77.0% in 1996. The increase in cost of sales
was primarily attributable to the labor and overhead costs associated with the
expansion of the Company's production capacity, increased warranty expense and
expensed start-up costs associated with the new Macon, Georgia manufacturing
facility.
16
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.0 million, or 38.0%, to $3.7 million in
1997 from $2.7 million in 1996. As a percentage of sales, selling, general and
administrative expenses increased to 15.4% from 14.4% in 1996. The increase was
primarily attributable to the addition of new sales personnel and increased
administrative expenses incurred to support the growth of sales and production.
OTHER EXPENSE. The increased other expense in 1997 compared to 1996 was
attributable to an increase in interest expense due to increased borrowings to
finance increased inventory and accounts receivable.
INCOME TAXES. During 1996 and 1997 the Company earned LARZ tax credits in
excess of its California tax liability. The credits earned were reported as a
credit against total tax liabilities on the Company's income statement. Due to
the increased level of hiring during 1997, credits earned for the year were
$718,000 compared to $600,000 during 1996. This resulted in a net tax benefit of
$326,000 for the year ended December 31, 1997 compared to a tax expense of
$29,000 during 1996.
YEARS ENDED DECEMBER 31, 1996 AND 1995
NET SALES. Net sales in 1996 increased $5.0 million, or 36.8%, to $18.6
million in 1996 from $13.6 million in 1995, primarily as a result of growth of
business from existing customers. Sales to the Company's then four principal
customers increased 34.7%, to $13.2 million, from $9.8 million in 1995. Sales to
all other customers increased 42.1% to $5.4 million from $3.8 million in 1995.
This increase was attributable to geographic expansion through the Company's
regional distribution centers.
COST OF SALES. Cost of sales increased $4.2 million, or 41.1%, to $14.4
million in 1996 from $10.2 million in 1995. Cost of sales as a percentage of net
sales increased to 77.0% from 74.7% in 1995. This increase in cost of sales was
primarily attributable to the labor and overhead costs associated with the
expansion of the Company's production capacity to supply its additional
distribution outlets. These increases in labor and overhead costs were partially
offset by a decrease in the average parts cost per engine during the year, due
to the mix of engines manufactured.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in 1996 increased 26.8%, to $2.7 million, from $2.1
million in 1995. This increase was primarily attributable to increased marketing
efforts and the establishment of three new regional distribution centers. As a
percentage of sales, selling, general and administrative expenses decreased in
1996 to 14.4% from 15.5% in 1995, due primarily to increased sales volume.
INCOME TAXES. The provision for income taxes in 1996 was $29,000 compared
to $152,000 in 1995. The decrease in provision for income taxes was due
primarily to the impact of earning $600,000 in LARZ tax credits in 1996, in
excess of the Company's California tax liability for the year, compared to
$315,000 in 1995.
EXTRAORDINARY ITEM. During 1995 the Company made an early settlement of its
obligations with certain creditors for amounts less than the original amounts
owed, resulting in a gain from forgiveness of debt, net of income tax effect, of
$119,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have been financed principally through the initial
public offering proceeds, borrowing under its credit agreement the ("Credit
Agreement") with Comerica Bank (the "Bank") and cash flows from operations. At
March 31, 1998, the Company's working capital was $11.2 million.
During 1996 and 1997 and the three month period ended March 31, 1998 the
Company used cash for operating activities of $2.7 million, $2.7 million and
$1.9 million, respectively, primarily to increase
17
<PAGE>
accounts receivable and inventory related to growth in sales. Accounts
receivable as at December 31, 1997 increased 96.1% over accounts receivable at
December 31, 1996, primarily resulting from December 1997 sales, which increased
80.9% over December 1996 sales. Accounts receivable increased a further $2.8
million as of March 31, 1998 due to the significant growth in first quarter
sales. The Company's inventory at December 31, 1997 was $7.3 million, which
represented an increase of $2.3 million or 46.0% over its inventory at December
31, 1996.
In 1997 and the three months ended March 31, 1998, the Company used $1.4
million and $200,000 in investing activities, respectively, primarily to
purchase new equipment for its Los Angeles manufacturing facility and to
purchase inventory, plant machinery and equipment located in Macon, Georgia.
In January 1998, the Credit Agreement was amended to increase its revolving
credit facility from $4.0 million to $7.5 million. The credit facility is
secured by a lien on substantially all of the assets of the Company. This
facility has a maturity date of May 1, 2000, and provides for an interest rate
on borrowings at the lower of the Bank's prime lending rate or LIBOR plus 2.00%,
as selected by the Company. In addition, the Bank has provided the Company with
a specific advance facility of up to $8.0 million which is secured by a lien on
substantially all of the assets of the Company. This facility has a maturity
date of two years from funding and provides for an interest rate of the lower of
the Bank's prime interest rate plus 0.25%, or its cost of funds plus 2.25% or
LIBOR plus 2.25%, as selected by the Company. At March 31, 1998, the Company had
borrowed $5.5 million under the revolving credit facility and $760,000 under the
specific advance facility, and had borrowing availability of $2.0 million and
$7.2 million under such facilities, respectively.
In order to sustain its growth, the Company will need to significantly
expand its manufacturing capabilities in the near future. The Company
anticipates expanding its manufacturing capabilities by one or a combination of
leasing or acquiring additional facilities near its Los Angeles manufacturing
facility, expanding its Macon, Georgia manufacturing facility or, possibly,
acquiring other engine remanufacturers. The Company believes it has the capital
resources to fund an expansion to sustain its current rate of growth. The
Company does not have the capital resources to fund a more significant
expansion, but should if this Offering is completed.
The Company is currently involved in discussions with a major automobile
manufacturer to provide remanufactured engines to it. If the Company receives a
significant contract, as to which no assurance can be given, it may require a
separate assembly line, which could be directly or indirectly funded from the
net proceeds of the Offering. If a portion of the proceeds of the Offering is
used for a separate assembly line, the Company believes that the remaining
proceeds from the Offering, cash flows from operations and availability under
the Credit Agreement should be sufficient to enable the Company to meet its
working capital and expansion plan requirements for the next 12 months, after
which it may require additional capital resources.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standard Board issued Statement No. 130, (Reporting
Comprehensive Income), Statement No. 131, (Disclosure about Segment of an
Enterprise and Related Information); and Statement No. 132, (Employers'
Disclosures about Pensions and other Post Retirement Benefits). These statements
are effective for fiscal years beginning after December 15, 1997. Management has
determined that the disclosure requirements from these statements will not
impact the financial statements of the Company.
INFLATION
The Company believes that inflation has not had a material effect on its net
sales or profitability in recent years.
18
<PAGE>
BUSINESS
Bonded Motors, Inc. is a leading nationwide engine remanufacturer serving
suppliers to the automotive aftermarket. The Company remanufactures and
distributes approximately 1,500 models and versions of replacement engines for
domestic and Japanese cars and light trucks. The Company has regional
distribution centers in California, Washington, Colorado, Ohio, Georgia and New
York.
Since the Company's inception in 1971, distribution channels in the
remanufactured engine industry have shifted from independent garages, repair
shops and traditional automobile parts stores to large automotive parts chain
stores. Automotive parts chain stores have emerged to supply parts and services,
including remanufactured engines, directly to owners and increasingly to
professional installers. A key element of the Company's strategy has been to
become a national supplier to these large automotive chain stores.
Through 1997, the Company's principal customers were large retail automotive
parts store chains which sold primarily direct to automobile owners (the
"do-it-yourself" segment of the aftermarket). These customers included The Pep
Boys, CSK Automotive, Trak Auto and Paccar. In 1996 and 1997, sales to the
Company's four principal national chain store customers constituted
approximately 71% and 68% of the Company's sales, respectively.
In March 1998, the Company became the primary supplier of remanufactured
automobile engines to Genuine Parts/NAPA, which is a major supplier to
professional installers (the "do-it-for-me" segment of the aftermarket). Genuine
Parts/NAPA is the largest member of the National Automotive Parts Association
("NAPA"), a trade association formed to provide nationwide distribution of
automotive parts. In 1997, Genuine Parts/NAPA operated 750 company-owned auto
parts stores located in 43 states, as well as 62 distribution centers serving
approximately 4,900 independently-owned NAPA auto parts stores nationwide.
Genuine Parts/NAPA is the Company's first major customer that primarily supplies
to the "do-it-for-me" market.
The Company believes that further expansion into the "do-it-for-me" market,
in addition to its continued growth within the "do-it-yourself" market, could be
a significant growth opportunity over the next several years. The Company's
strategy is to continue to increase sales to its national customer base and
support growth by expanding production capacity while maintaining its reputation
for high quality engines.
The Company's executive offices are located at 7522 S. Maie Avenue, Los
Angeles, California 90001, and its telephone number is (213) 583-8631.
INDUSTRY
According to industry reports, the vehicle population in the United States
is older today than at any time during the past 50 years, with vehicles ten
years or older accounting for more than 45% of vehicles now on the road in the
United States. With the improved quality and durability of automobile exteriors,
as well as the increasing prices of new cars, there is a growing trend for
consumers to replace automobile engines rather than to purchase new automobiles.
When an engine needs replacing, there are generally four alternatives
available to the owner: (i) purchase a new engine; (ii) purchase a used engine;
(iii) replace worn or broken engine parts ("rebuild"); or (iv) purchase a
remanufactured engine. The Company believes that a remanufactured engine offers
consumers significant benefits over the other alternatives, including a
significantly lower cost alternative to newly manufactured replacement engines
and typically higher quality, greater reliability and quicker availability than
used or rebuilt engines. The PRODUCTION ENGINE REMANUFACTURERS ASSOCIATION
estimates that over three million engines are remanufactured in North America
annually, a $2.5 billion market. The Company believes that demand for
remanufactured engines should continue to grow as the number and average age of
vehicles increases.
19
<PAGE>
STRATEGY
The Company's strategy is to continue to increase sales to its national
customer base and support growth by expanding production capacity while
maintaining its reputation for high quality engines. The principal elements of
this strategy include:
EXPAND PRESENT MANUFACTURING FACILITIES. The Company intends to expand its
manufacturing capacity by the end of 1998 by one or a combination of acquiring
or leasing additional facilities near its present Los Angeles manufacturing
facility, expanding its Macon, Georgia manufacturing facility or, possibly,
acquiring other engine remanufacturers.
EMPHASIZE HIGH QUALITY AND INNOVATION. The Company will continue to
emphasize high quality and innovation in its remanufacturing and distribution
process. In 1997, the Company received ISO 9002/QS 9000 certification, which is
a prerequisite to becoming a supplier to major automobile manufacturers.
INCREASE CUSTOMER BASE. In March 1998, the Company became the principal
supplier of remanufactured automobile engines to a major national supplier to
the professional installer or "do-it-for-me" aftermarket segment. The Company
intends to continue to emphasize selling to national and regional automotive
parts chain stores, which resell to both the "do-it-for-me" and the
"do-it-yourself" market segments. The Company is also in discussions to become a
supplier of remanufactured engines to a major automobile manufacturer.
OPERATIONS
In its remanufacturing operations, the Company obtains used engines,
commonly referred to as "cores." The Company encourages its customers to return
cores on a timely basis and charges its customers a core deposit in connection
with purchases of engines. The customer can satisfy this charge by returning a
usable core or making a cash payment equal to the amount of the core charge
deposit. If cores are not returned in a timely manner, the Company must procure
cores from independent core vendors. As the Company grows, its purchases from
core vendors will increase.
The process of remanufacturing an automotive engine involves a number of
steps. The engine cores, which are sorted by make and model and stored until
needed, are completely disassembled into component parts. All pistons, rings,
bearings, seals, lifters, soft plugs, oil galley plugs, timing chains, timing
gears and many other components are discarded. Other components that are to be
incorporated into the remanufactured product are thoroughly cleaned, checked for
cracks and wear and re-machined. The major engine components that are subject to
wear, such as the engine block, cylinder head, crankshaft and connecting rods,
are baked in an oven for approximately four hours and then blasted with steel
pellets to remove any remaining residue. These components are inspected, and all
wearing surfaces are re-machined. New pistons, rings and bearings are used to
restore original specifications, tolerances, proper fits and clearances. The
engine is then reassembled using new and remanufactured components.
Inspection and testing are conducted at various stages of the
remanufacturing process, and each finished engine is inspected and tested using
computerized equipment to measure compression, oil pressure and oil flow. The
Company stresses quality throughout its remanufacturing process and has
developed proprietary procedures and controls to test the quality of all of its
remanufactured engines.
The Company remanufactures a broad range of engines, currently over 1,500
different engine types and variations, in order to accommodate the numerous and
increasing varieties of vehicles in use. The Company's engines are
remanufactured for use in most domestic and Japanese automobiles and light
trucks. The Company has also remanufactured a limited number of engines
manufactured by European automakers.
20
<PAGE>
INCENTIVE BONUS PROGRAM
To provide an incentive to its non-officer employees, the Company has
adopted its YARDSTICK incentive bonus program, which emphasizes quality and
efficiency. Under the YARDSTICK program, the Company posts daily on an employee
bulletin board the previous day's unit production and other measures of
productivity. Employees are thereby able to gauge their performance and
understand how their contributions affect the Company's business. Participating
employees are entitled to receive bonuses based on a percentage of the Company's
profitability. All employees are entitled to participate at no cost to the
employee, provided that to participate employees must attend Company-sponsored
classes that teach employees how to read the YARDSTICK financial statement, how
the Company earns money, how earning money insures job security and how employee
efforts contribute to profits. Bonuses under the YARDSTICK program were paid
quarterly until March 1997, at which time the Company experienced inefficiencies
resulting from rapid expansion. The Company recently modified the plan to
provide for monthly bonuses. Bonuses were earned in April and paid in May 1998.
WARRANTIES
The Company provides limited warranties on its engines for up to 12,000
miles. It also offers three year/36,000 mile warranties at an additional cost.
The Company believes its warranty return rates have been below industry
standards. During 1997, the Company hired new personnel and experienced an
increase in warranty return rates. As the experience and training of the
Company's employees and its sales to customers who supply the professional
installer (or "do-it-for-me") market increases, the Company believes its
warranty expense should decrease. However, no assurance can be given that this
will occur.
MARKETING AND DISTRIBUTION
The Company's marketing activities have concentrated on sales to national
and regional automotive parts chain stores. The Company markets its products
principally through its senior officers and through the National Sales and
Service Alliance (NSSA), a national sales and marketing organization servicing
the automotive aftermarket. The Company historically has not engaged in
wide-scale advertising or other promotional activities. The Company's products
are marketed to its customers under the name "Bonded Motors." The Company
provides a telephonic customer support service for use by its customers.
The Company believes that the ability to meet its customers' needs on a
timely basis nationwide is an important competitive factor. In order to
facilitate this quick response, the Company maintains an inventory of its most
popular engine models and variations at its regional distribution centers in
California, Washington, Colorado, Ohio, Georgia and New York.
The Company's principal automotive parts chain store customers typically
stock from approximately four to thirty-five of the most popular engine
configurations and place special orders for other engines from among the
Company's selection of over 1,500 engine types and variations. Special orders
are usually remanufactured to order and shipped directly to the customer's
retail store. The Company's 75 most popular engine configurations constituted
50% of sales in 1997. The Company normally completes the remanufacturing process
for a special order engine, from receipt of order to shipment, in three business
days.
COMPETITION
The Company's segment of the automotive aftermarket industry, engine
remanufacturing, is highly competitive. The Company's competitors include a
number of relatively large, as well as smaller, regional and local engine
remanufacturers. The Company also competes with remanufacturers that are
authorized by certain automobile manufacturers to remanufacture their engines
for authorized distribution to the manufacturers' dealerships. Some of the
companies that sell to dealers have greater resources than those of the Company.
The Company believes that the primary competitive factors in its business are
price,
21
<PAGE>
quality, service, ability to deliver remanufactured engines swiftly, product
performance and selection of remanufactured engines offered.
EMPLOYEES
At March 31, 1998, the Company had approximately 390 full-time employees, of
whom 35 are salaried and the balance are employed on an hourly basis. None of
the Company's employees is a party to any collective bargaining agreement. The
Company has not experienced any work stoppages and considers its employee
relations to be satisfactory. All of the Company's non-officer employees are
eligible to participate in the Company's YARDSTICK incentive bonus program.
FACILITIES
The Company's principal production facility, which is leased from its
principal shareholder, is located in an unincorporated area of South-Central Los
Angeles. The lease terminates on January 31, 2015. The lease provides for a
monthly rental of $8,000 and monthly rent increases at five-year intervals based
on increases in the Consumer Price Index. The lease also provides for
indemnification of the lessor arising from claims caused by, among other things,
any hazardous substance, whether caused by the Company's use or a prior use of
the premises. The Company also leases facilities adjacent to its Los Angeles
manufacturing plant, its manufacturing facility in Macon, Georgia, and its
distribution centers in Washington, Colorado, Ohio and New York.
22
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Aaron Landon.................... 56 Chairman and Chief Executive Officer
Richard Funk.................... 61 President and Director
Paul Sullivan................... 54 Vice President of Finance and Administration, Chief
Financial Officer and Director
Buddy Mercer.................... 54 Vice President of Operations, Chief Operating Officer and
Director
Edward T. Bradford.............. 55 Director (1)
Cornelius P. McCarthy III....... 38 Director (1)(2)
John F. Creamer................. 67 Director (2)
</TABLE>
----------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
AARON LANDON, the founder of the Company, has served as its Chairman and
Chief Executive Officer since 1971 and as its President from 1971 until November
1997. Mr. Landon has over 25 years experience in the engine remanufacturing
business.
RICHARD FUNK has served as the Company's President since November 1997 and a
director since April 1996. From January 1993 until November 1997, Mr. Funk
served as a consultant to automobile engine remanufacturing companies. For over
20 years prior to 1993, Mr. Funk was the General Manager of Tam Engineering
Corp., a large automobile engine remanufacturer. He has over 30 years of
experience in the engine remanufacturing business.
PAUL SULLIVAN has served as the Company's Vice President of Finance and
Administration since February 1994 and as Chief Financial Officer since January
1994. Mr. Sullivan also served as the Company's Controller from March 1989 to
February 1994. He has over nine years experience in the engine remanufacturing
business.
BUDDY MERCER has served as the Vice President of Operations and Chief
Operating Officer of the Company since January 1994. Mr. Mercer served as the
Company's General Manager, responsible for overseeing operations and sales, from
January 1992 to January 1994. Mr. Mercer also served as the Company's Sales
Manager from 1982 to January 1992. He has over 15 years experience in the engine
remanufacturing industry.
EDWARD T. BRADFORD became a director of the Company in March 1997. Since
March 1984, he has been a principal of Bradford & Marzec, Inc., an investment
management firm in Los Angeles.
CORNELIUS P. MCCARTHY III has served as a director of the Company since
April 1996. Since December 1996, he has been a Senior Vice President of
Corporate Finance at Pennsylvania Merchant Group, an investment banking firm.
From December 1993 to December 1996, he was a Managing Director, Corporate
Finance of Laidlaw & Co., an investment banking firm. From December 1992 to
December 1993, Mr. McCarthy was President and proprietor of McCarthy & Company,
a financial consulting firm.
JOHN F. CREAMER became a director of the Company in September 1997. In 1978,
he founded, and he is President of, Distribution Marketing Services Inc., a
consulting firm that specializes in the automotive aftermarket industry,
including merger and acquisition activity and executive placement in that
industry. In 1994, Mr. Creamer was appointed President of the Automotive
Warehouse Distributors Association, and
23
<PAGE>
since 1986, has served as a member of the Board of Directors of Echlin
Corporation, a global manufacturer serving automobile manufacturers and the
automotive aftermarket.
EXECUTIVE COMPENSATION
The following table sets forth the cash and other compensation paid in 1996
and 1997 to the Company's executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION
- ----------------------------------------------------------- --------- ---------- --------- -----------------
<S> <C> <C> <C> <C>
Aaron Landon, Chairman and Chief Executive Officer......... 1997 $ 177,000 -- --
1996 $ 156,000 -- --
Richard Funk, President.................................... 1997 $ 21,250(1) -- --
1996 N/A -- --
Paul Sullivan, Chief Financial Officer..................... 1997 $ 110,250 -- --
1996 $ 83,000 -- --
Buddy Mercer, Chief Operating Officer...................... 1997 $ 114,000 -- --
1996 $ 114,000 $ 30,000 --
</TABLE>
- ------------------------
(1) For the period from November 3, 1997 to December 31, 1997. Mr. Funk's
annualized salary is $170,000.
OPTION GRANTS IN 1997
The following table sets forth information relating to grants of stock
options to the Company's executive officers in 1997.
<TABLE>
<CAPTION>
NUMBER OF SHARES TOTAL PERCENTAGE
OF COMMON STOCK OF OPTIONS GRANTED EXERCISE OR
UNDERLYING OPTIONS TO EMPLOYEES IN BASE PRICE PER EXPIRATION
NAME GRANTED FISCAL YEAR SHARE DATE
- --------------------------------------- ------------------ --------------------- --------------- --------------
<S> <C> <C> <C> <C>
Richard Funk........................... 100,000 54% $ 8.63 11/03/2002
Paul Sullivan.......................... 30,000 16% $ 8.75 02/11/2002
Buddy Mercer........................... 20,000 11% $ 10.00 06/26/2002
</TABLE>
AGGREGATED OPTION EXERCISES IN 1997 AND 1997 YEAR-END OPTION VALUES
The following table sets forth information relating to the value of all
options held by the Company's executive officers as of December 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF COMMON
STOCK UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE- MONEY OPTIONS AT
SHARES DECEMBER 31, 1997 DECEMBER 31, 1997
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------- ----------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Aaron Landon...................... -- -- 68,750 68,750 $ 168,438 $ 168,438
Richard Funk...................... -- -- -- 100,000 -- --
Paul Sullivan..................... 15,000 $ 54,375 -- 45,000 -- 45,000
Buddy Mercer...................... -- -- -- 20,000 -- --
</TABLE>
24
<PAGE>
COMPENSATION OF DIRECTORS
Pursuant to the Company's Non-Employee Directors' Stock Option Plan (the
"Directors' Plan"), the Company may grant to each director of the Company who is
not an employee of the Company options to purchase not less than 1,500 shares of
Common Stock annually, exercisable at the fair market value at the date of
grant. Each non-employee director of the Company is paid $750 for, and
reimbursed for his out-of-pocket expenses associated with, each meeting of the
Board of Directors and Board committees attended. All directors are eligible to
participate in the Company's 1996 Incentive Stock Plan, as amended (the "1996
Plan"). Employee directors receive no additional cash compensation for service
as directors. See "Incentive Stock Plans."
In December 1995, Paul Sullivan paid the exercise price of an option with a
note for $100,000, which bears interest at 8% per annum and is due in December
2002.
EMPLOYMENT AGREEMENTS
Aaron Landon, Buddy Mercer and Paul Sullivan have entered into employment
agreements with the Company that end on December 31, 1999. The term of each
employment agreement is three years, and the agreements provide for an annual
salary base of $210,000, $144,000 and $144,000 to Messrs. Landon, Mercer and
Sullivan, respectively. In November 1997, the Company entered into an employment
agreement with Richard Funk expiring in December 1999 and providing for an
annual base salary of $170,000. This agreement is terminable at any time without
penalty at the option of either party. Under these agreements, the Company has
the right to retain each employee as a consultant for a period of two years
after the end of his employment. The Company's Board of Directors also may grant
bonuses or increase the base salary payable to any executive. In addition to his
cash compensation, Mr. Landon receives an automobile allowance. Messrs. Landon,
Funk, Mercer and Sullivan each receive additional benefits, including those
generally provided to other employees of the Company.
In conformity with the Company's policy, all officers execute
confidentiality and non-disclosure agreements upon the commencement of
employment with the Company. The agreements generally provide that all
inventions or discoveries related to the Company's business and all confidential
information developed or made known during the term of employment are the
exclusive property of the Company and may not be used or disclosed to third
parties without prior approval of the Company.
INCENTIVE STOCK PLANS
The 1996 Plan provides for the issuance of options, stock awards and
restricted stock purchase offers to employees, officers and directors of, and
consultants to, the Company ("Eligible Participants") to purchase up to an
aggregate of 600,000 shares of Common Stock, subject to adjustment under certain
circumstances. Options granted under the 1996 Plan may be either "incentive
stock options" as defined by Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"), or non-statutory stock options. The 1996 Plan is
administered by the Compensation Committee of the Board of Directors.
25
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the record and,
to the knowledge of the Company, beneficial ownership of shares of Common Stock
as of April 30, 1998 and as adjusted to reflect the sale of the Common Stock
offered hereby for: (i) each director of the Company; (ii) each person known to
the Company to be the beneficial owner of more than 5% of the outstanding
shares; and (iii) all directors and executive officers as a group. Except
pursuant to applicable community property laws or as otherwise indicated, each
shareholder has sole voting and investment power with respect to the shares
beneficially owned.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP (1) BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING SHARES TO BE AFTER THE OFFERING(1)
------------------------- SOLD IN THE -------------------------
NAME AND ADDRESS SHARES PERCENTAGE OFFERING SHARES PERCENTAGE
- ------------------------------------------------ ---------- ------------- -------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Aaron Landon(2)(3).............................. 1,418,520 44.4% 480,000 938,520 20.0%
Richard Funk.................................... -- -- -- -- --
Paul Sullivan(4)................................ 132,020 4.3 -- 132,020 2.9
Buddy Mercer.................................... 50,020 1.6 20,000 30,020 *
Edward T. Bradford.............................. -- -- -- -- --
Cornelius P. McCarthy III....................... -- -- -- -- --
John F. Creamer................................. 2,000 * -- 2,000 *
Kennedy Capital Management...................... 227,400 7.4 -- 227,400 5.0
10829 Olive Blvd.
St. Louis, MO 63141
Heartland Advisors.............................. 200,000 6.5 -- 200,000 4.4
790 N. Milwaukee Street
Milwaukee, WI 53202
All directors and executive officers as a group
(7 persons).................................... 1,602,560 49.7% 500,000 1,102,560 23.3%
</TABLE>
- ------------------------
* Represents less than 1%.
(1) Shares not outstanding but deemed beneficially owned by virtue of the right
of an individual to acquire them within 60 days upon the exercise of an
option are treated as outstanding for purposes of determining beneficial
ownership and the percentage beneficially owned by such individual. The
address of all of the named individuals is c/o Bonded Motors, Inc., 7522 S.
Maie Avenue, Los Angeles, California 90001.
(2) Consists of 1,281,020 shares held by The Landon Family Trust, The Landon
Family Foundation, The Aaron P. Landon Annuity Trust and The Maude M. Landon
Annuity Trust, for which trusts Aaron Landon and Maude Landon, his wife, are
trustees or co-trustees.
(3) Includes 137,500 shares purchasable under currently exercisable options.
(4) Includes 30,000 shares purchasable under currently exercisable options.
26
<PAGE>
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Company is authorized to issue up to 10,000,000 shares of Common Stock,
no par value per share. As of April 30, 1998, there were 3,055,040 shares of
Common Stock issued and outstanding. Holders of Common Stock are entitled to one
vote for each share held of record on each matter submitted to a vote of
shareholders. Shareholders do not have the right to cumulate their votes on any
matter.
Subject to the prior rights of any series of preferred stock which may from
time to time be outstanding, holders of Common Stock are entitled to ratably
receive dividends when, as and if declared by the Board of Directors out of
funds legally available therefor and, upon the liquidation, dissolution, or
winding up of the Company, to share ratably in all assets remaining after
payment of liabilities and payment of accrued dividends and liquidation
preferences on the preferred stock, if any. Holders of Common Stock have no
preemptive rights or rights to convert their Common Stock into any other
securities. The outstanding Common Stock is validly authorized and issued, fully
paid and nonassessable.
PREFERRED STOCK
The Company is authorized to issue up to 1,000,000 shares of preferred
stock, no par value per share, none of which is outstanding. The preferred stock
may be issued in one or more series, the terms of which may be determined at the
time of issuance by the Board of Directors, without further action by
shareholders, and may include voting rights (including the right to vote as a
series on particular matters), preferences as to dividends and on liquidation,
conversion rights, redemption rights, sinking funds provisions and other rights,
privileges and preferences. Although it presently has no intention to do so, the
Board of Directors, without shareholder approval, could issue Preferred Stock
with voting and conversion rights that could adversely affect the voting power
of the holders of Common Stock. This provision may be deemed to have a potential
anti-takeover effect and could delay or prevent a change of control of the
Company.
TRANSFER AGENT
U.S. Stock Transfer Corporation, Glendale, California is the transfer agent
and registrar for the Common Stock.
27
<PAGE>
UNDERWRITING
The Underwriters, acting through Van Kasper & Company and Commonwealth
Associates, as Representatives (the "Representatives"), have severally agreed,
subject to the terms and conditions set forth in the Underwriting Agreement (the
"Underwriting Agreement"), to purchase, and the Company and the Selling
Shareholders have agreed to sell to them, severally, the number of shares of
Common Stock set forth opposite the name of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Van Kasper & Company.............................................................
Commonwealth Associates..........................................................
----------
Total........................................................................ 2,000,000
----------
----------
</TABLE>
The shares of Common Stock are being offered by the Underwriters named
herein, subject to their right to reject any order in whole or in part and to
certain other conditions. The Underwriters are committed to purchase all of the
shares of Common Stock offered hereby (other than those covered by the
Underwriters' over-allotment option described below) if any are purchased.
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock directly to the public at the price to
public set forth on the outside front cover page of this Prospectus and to
certain dealers at that price less a concession of not more than $ per share.
The Underwriters may allow and these dealers may reallow a discount not in
excess of $ to certain other dealers. After the Offering, offering price and
other selling terms may be changed by the Representatives.
The Company has granted to the Underwriters an option, pursuant to which the
Underwriters have the right, exercisable no later than 45-days after the date of
this Prospectus, to purchase up to 300,000 additional shares of Common Stock at
the initial offering price, less the underwriting discount set forth on the
cover page of this Prospectus. To the extent that the Underwriters exercise this
option, each of the Underwriters will have a firm commitment to purchase
approximately the same percentage of the additional Common Stock that the number
of shares of Common Stock to be purchased by it shown in the table above bears
to the total number of shares set forth in that table.
In connection with the Offering, the Company has agreed to sell to the
Representatives, for nominal consideration, warrants to purchase up to 75,000
shares of Common Stock (5% of the number of shares issued in the Offering) (the
"Warrants"). The Warrants are exercisable, in whole or in part, at an exercise
price of 120% of the price to public at any time during the four-year period
beginning one year after the date of this Prospectus. The Warrants will be
restricted from transfer for a period of one year from the date of this
Prospectus, except for transfers to officers or partners of the Representatives
and members of the selling group. The Warrant Agreement pursuant to which the
Warrants will be issued will contain provisions providing for adjustment of the
exercise price and the number and type of securities issuable upon exercise of
the Warrants should any one or more of certain specified events occur, including
the Company's declaration of stock dividend, a split or reverse split of the
Common Stock, reclassification of the Common Stock, the Company's distribution
of property to all holders of the Common Stock and the issuances to all such
holders of rights or warrants to purchase Common Stock at an exercise price less
than the then current market value. The Warrants grant to the holder thereof
certain rights of registration for the securities issuable upon exercise of the
Warrants under the Securities Act.
28
<PAGE>
At the closing of the Offering and, if applicable, the closing of the
purchase of shares of Common Stock pursuant to the over-allotment option, the
Company will also pay to the Representatives a non-accountable expense allowance
of 0.75% of the gross proceeds of the Common Stock sold by the Company at such
closing.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the Underwriters may be required to
make in respect thereof.
Pursuant to the terms of certain lock-up agreements, the Company's directors
and officers, and its affiliates who own more than 1.0% of the outstanding
shares of Common Stock, have agreed with the Underwriters that, for a period of
120 days after the date of this Prospectus, they will not offer to sell or
otherwise sell, dispose of or grant any rights with respect to any shares of
Common Stock, now owned or hereafter acquired directly by them or with respect
to which they have the power or disposition, without the prior written consent
of Van Kasper & Company. The Company has also agreed not to offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock, or
any options or warrants to purchase Common Stock other than shares or options
issued under the Company's stock option plans, for a period of 120 days after
the dated of this Prospectus, without the prior written consent of Van Kasper &
Company.
The Representatives have advised the Company that, pursuant to Regulation M
promulgated under the Securities Exchange Act of 1934, as amended, certain
persons participating in the Offering may engage in transactions, including
stabilizing bids, syndicate covering transactions or the imposition of penalty
bids, which may have the effect of stabilizing or maintaining the market price
of the Common Stock at a level above that which might otherwise prevail in the
open market. A "stabilizing bid" is a bid for or the purchase of the Common
Stock on behalf of the Underwriters for the purpose of pegging, fixing or
maintaining the price of the Common Stock. A "syndicate covering transaction" is
the bid for or the purchase of the Common Stock on behalf of the Underwriters to
reduce a short position created in connection with the Offering. The
Underwriters may also cover all or a portion of such short position by
exercising their over-allotment option. A "penalty bid" is an arrangement
permitting the Representatives to reclaim the selling concession otherwise
accruing to an Underwriter or syndicate member in connection with the Offering
if the Common Stock originally sold by such Underwriter or syndicate member is
purchased by the Representatives in a syndicate covering transaction and has
therefore not been effectively placed by such Underwriter or syndicate member.
The Representatives have advised the Company and the Selling Shareholders that
such transactions may be effected on the Nasdaq National Market or otherwise
and, if commenced, may be discontinued at any time.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
CERTAIN LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Petillon & Hansen, Torrance, California. Certain legal
matters in connection with the sale of the shares offered hereby will be passed
upon for the Underwriters by Gibson, Dunn & Crutcher LLP, Los Angeles,
California.
EXPERTS
The financial statements of Bonded Motors, Inc. as of December 31, 1997 and
1996, and for each of the years in the three-year period ended December 31, 1997
have been included herein and in the registration statement in reliance on the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
auditing and accounting.
29
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement (together with all amendments and
exhibits thereto, the "Registration Statement") under the Securities Act, with
respect to the Common Stock. This Prospectus, which constitutes part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the Rules and Regulations of the Commission. For further information with
respect to the Company, reference is made to the Registration Statement.
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
Commission. The Registration Statement, as well as such reports, proxy
statements and other information filed by the Company, may be inspected and
copied (at prescribed rates) at the public reference facilities maintained by
the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and
at the Commission's Regional Offices located at Northwestern Atrium Center,
Suite 1400, 500 West Madison Street, Chicago, Illinois 60661 and 7 World Trade
Center, 13th Floor, New York, New York 10048. Copies of reports, proxy
statements and other information electronically filed with the Commission by the
Company may be inspected by accessing the Commission's World Wide Web site at
http://www.sec.gov.
30
<PAGE>
BONDED MOTORS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Independent Auditors' Report............................................................................ F-2
Balance Sheets.......................................................................................... F-3
Statements of Earnings.................................................................................. F-4
Statements of Shareholders' Equity...................................................................... F-5
Statements of Cash Flows................................................................................ F-6
Notes to Financial Statements........................................................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Bonded Motors, Inc.:
We have audited the accompanying balance sheets of Bonded Motors, Inc. as of
December 31, 1996 and 1997 and the related statements of earnings, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1997. 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 Bonded Motors, Inc. as of
December 31, 1996 and 1997 and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
February 11, 1998
F-2
<PAGE>
BONDED MOTORS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
------------ ------------ MARCH 31,
------------
1998
------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.................................................................. $ 73,498 297,043 200,431
Trade accounts receivable (less allowance for doubtful accounts of
$67,866 in 1996, $118,586 in 1997 and $128,019 in 1998) (note 3)...... 1,901,619 3,728,530 6,558,080
Inventories:
Parts (note 3)...................................................... 823,383 1,320,005 1,570,074
Work in process..................................................... 293,688 622,159 698,200
Finished goods (note 3)............................................. 3,854,993 5,334,797 5,548,822
------------ ------------ ------------
4,972,064 7,276,961 7,817,096
------------ ------------ ------------
Deferred tax assets (note 6).......................................... 421,414 459,853 393,144
Prepaid expenses and other current assets............................. 143,771 183,732 264,719
Prepaid income taxes (note 6)......................................... 287,004 177,700 2,689
------------ ------------ ------------
Total current assets............................................ 7,799,370 12,123,819 15,236,159
------------ ------------ ------------
Property and equipment, at cost:
Machinery and equipment............................................... 1,478,181 2,463,791 2,672,129
Furniture and fixtures................................................ 358,215 432,397 445,985
------------ ------------ ------------
1,836,396 2,896,188 3,118,114
Less accumulated depreciation......................................... 1,131,640 1,308,166 1,367,361
------------ ------------ ------------
Net property and equipment...................................... 704,756 1,588,022 1,750,753
------------ ------------ ------------
Goodwill, less accumulated amortization of $7,946 in 1997 and $13,244 in
1998 (note 9).......................................................... -- 203,934 198,636
Deferred tax assets (note 6)............................................ 520,223 1,229,043 1,352,683
Other assets............................................................ 5,551 5,709 --
------------ ------------ ------------
$ 9,029,900 15,150,527 18,538,231
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current maturities of notes payable to related parties (note 5)......... $ 100,000 100,000 --
Current installments of notes payable to bank (note 4).................. -- 385,128 385,128
Accounts payable........................................................ 1,218,004 1,672,230 2,574,737
Accrued expenses........................................................ 319,452 427,608 575,335
Accrued warranty obligations............................................ 350,000 410,000 471,000
------------ ------------ ------------
Total current liabilities....................................... 1,987,456 2,994,966 4,006,200
------------ ------------ ------------
Notes payable to bank, excluding current installments (note 4).......... -- 471,395 375,113
Long-term debt (note 4)................................................. -- 3,200,000 5,450,808
Commitments and contingencies (note 7)
Shareholders' equity (note 10):
Preferred stock, no par value. Authorized 1,000,000 shares; none
issued and outstanding.............................................. -- -- --
Common stock, no par value. Authorized 10,000,000 shares; issued and
outstanding 3,002,940, 3,037,540 and 3,040,040 shares as of December
31, 1996, 1997 and March 31, 1998, respectively..................... 4,678,419 4,873,319 4,889,569
Retained earnings..................................................... 2,564,025 3,710,847 3,916,541
Notes receivable from exercise of stock options....................... (200,000) (100,000) (100,000)
------------ ------------ ------------
Total shareholders' equity...................................... 7,042,444 8,484,166 8,706,110
------------ ------------ ------------
$ 9,029,900 15,150,527 18,538,231
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
BONDED MOTORS, INC.
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------- --------------------
1995 1996 1997 1997 1998
------------ ----------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales......................................... $ 13,620,736 18,636,604 24,076,192 5,075,773 8,508,042
Cost of sales..................................... 10,174,434 14,351,214 19,368,877 3,689,416 6,984,237
------------ ----------- ----------- --------- ---------
Gross profit.............................. 3,446,302 4,285,390 4,707,315 1,386,357 1,523,805
Selling, general and administrative expenses...... 2,117,879 2,685,029 3,706,203 864,587 1,082,596
------------ ----------- ----------- --------- ---------
Earnings from operations.................. 1,328,423 1,600,361 1,001,112 521,770 441,209
Other (expense) income:
Interest expense.............................. (80,328) (68,657) (193,247) (12,293) (110,424)
Interest income............................... -- 68,650 16,971 4,077 2,085
Other......................................... 65,651 -- (3,520) -- (1,896)
------------ ----------- ----------- --------- ---------
Earnings before income taxes and
extraordinary item........................ 1,313,746 1,600,354 821,316 513,554 330,974
Income tax (benefit) expense...................... 152,000 28,671 (325,506) 85,034 125,280
------------ ----------- ----------- --------- ---------
Earnings before extraordinary item........ 1,161,746 1,571,683 1,146,822 428,520 205,694
Extraordinary item--gain from forgiveness of debt
net of income tax effect of $15,000.............. 119,000 -- -- -- --
------------ ----------- ----------- --------- ---------
Net earnings.............................. $ 1,280,746 1,571,683 1,146,822 428,520 205,694
------------ ----------- ----------- --------- ---------
------------ ----------- ----------- --------- ---------
Basic earnings per share:
Earnings before extraordinary item............ $ .64 .57 .38 .14 .07
Extraordinary item............................ .06 -- -- -- --
------------ ----------- ----------- --------- ---------
Net earnings.............................. $ .70 .57 .38 .14 .07
------------ ----------- ----------- --------- ---------
------------ ----------- ----------- --------- ---------
Diluted earnings per share:
Earnings before extraordinary item............ $ .59 .56 .37 .14 .06
Extraordinary item............................ .06 -- -- -- --
------------ ----------- ----------- --------- ---------
Net earnings.............................. $ .65 .56 .37 .14 .06
------------ ----------- ----------- --------- ---------
------------ ----------- ----------- --------- ---------
Weighted average common shares
outstanding--Basic............................... 1,817,000 2,750,000 3,021,000 3,003,000 3,039,000
------------ ----------- ----------- --------- ---------
------------ ----------- ----------- --------- ---------
Weighted average common and common equivalent
shares outstanding--Diluted...................... 1,972,000 2,797,000 3,116,000 3,111,000 3,188,000
------------ ----------- ----------- --------- ---------
------------ ----------- ----------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
BONDED MOTORS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
RETAINED FROM NET
COMMON STOCK EARNINGS EXERCISE SHAREHOLDERS'
------------------------ (ACCUMULATED OF STOCK EQUITY
SHARES AMOUNT DEFICIT) OPTIONS (DEFICIENCY)
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994............... 1,800,000 $ 12,500 (288,404) -- (275,904)
Issuance of common stock................... 200,000 200,000 -- -- 200,000
Notes receivable from exercise of stock
options................................... -- -- -- (200,000) (200,000)
Net earnings............................... -- -- 1,280,746 -- 1,280,746
---------- ------------ ------------ ------------ ------------
Balance at December 31, 1995............... 2,000,000 212,500 992,342 (200,000) 1,004,842
Public sale of common stock at $5.875 per
share, net of expenses.................... 1,000,000 4,436,151 -- -- 4,436,151
Issuance of common stock to employees...... 2,940 29,768 -- -- 29,768
Net earnings............................... -- -- 1,571,683 -- 1,571,683
---------- ------------ ------------ ------------ ------------
Balance at December 31, 1996............... 3,002,940 4,678,419 2,564,025 (200,000) 7,042,444
Exercise of stock options.................. 34,600 194,900 -- -- 194,900
Payment of notes receivable................ -- -- -- 100,000 100,000
Net earnings............................... -- -- 1,146,822 -- 1,146,822
---------- ------------ ------------ ------------ ------------
Balance at December 31, 1997............... 3,037,540 4,873,319 3,710,847 (100,000) 8,484,166
---------- ------------ ------------ ------------ ------------
Exercise of stock options.................. 2,500 16,250 -- -- 16,250
Net earnings............................... -- -- 205,694 -- 205,694
---------- ------------ ------------ ------------ ------------
Balance at March 31, 1998 (Unaudited)...... 3,040,040 $ 4,889,569 3,916,541 (100,000) 8,706,110
---------- ------------ ------------ ------------ ------------
---------- ------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
BONDED MOTORS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------------------------- ------------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings.................................. $1,280,746 1,571,683 1,146,822 428,520 205,694
Adjustments to reconcile net earnings to net
cash used in operating activities:
Depreciation and amortization............... 50,700 107,297 184,526 32,828 64,597
Gain from forgiveness of debt............... (119,000) -- -- -- --
Loss on sale of property and equipment...... -- -- 3,520 -- 1,896
(Increase) decrease in assets:
Accounts receivable....................... (729,036) (323,436) (1,826,911) (817,302) (2,829,550)
Inventories............................... (465,748) (2,869,308) (2,167,221) (744,136) (540,135)
Prepaid expenses and other assets......... (164,726) 109,334 (40,118) (119,467) (75,278)
Deferred tax assets....................... (182,000) (422,637) (747,259) (90,702) (56,931)
Increase (decrease) in liabilities:
Accounts payable.......................... 106,723 (275,367) 454,226 (125,868) 902,507
Accrued expenses.......................... 54,170 (8,640) 108,156 43,720 147,727
Accrued warranty obligations.............. 60,000 60,000 60,000 15,000 61,000
Income taxes payable...................... 310,916 (609,939) 109,304 175,736 175,011
---------- ---------- ---------- ----------- -----------
Total adjustments....................... (1,078,001) (4,232,696) (3,861,777) (1,630,191) (2,149,156)
---------- ---------- ---------- ----------- -----------
Net cash provided by (used in) operating
activities............................ 202,745 (2,661,013) (2,714,955) (1,201,671) (1,943,462)
---------- ---------- ---------- ----------- -----------
Cash flows from investing activities:
Purchases of equipment........................ (102,956) (647,607) (755,405) (49,215 (224,426)
Acquisition of assets......................... -- -- (667,318) -- --
Proceeds from sale of equipment............... -- -- 9,800 -- 500
---------- ---------- ---------- ----------- -----------
Net cash used in investing activities... (102,956) (647,607) (1,412,923) (49,215) (223,926)
Cash flows from financing activities:
Net proceeds from exercise of stock options... -- -- 194,900 -- 16,250
Net proceeds from sale of common stock........ -- 4,436,151 -- -- --
Borrowings from bank.......................... 250,000 1,820,000 5,730,000 1,200,000 3,654,652
Repayments of notes payable to related
parties..................................... (149,919) (917,770) -- -- (100,000)
Repayments of bank borrowings................. -- (2,070,000) (1,673,477) -- (1,500,126)
Repayment on notes receivable from exercise of
options..................................... -- -- 100,000 -- --
Repayment of amounts due to creditors under
deferral/reduction arrangement.............. (320,696) -- -- -- --
---------- ---------- ---------- ----------- -----------
Net cash (used in) provided by financing
activities............................ (220,615) 3,268,381 4,351,423 1,200,000 2,070,776
---------- ---------- ---------- ----------- -----------
Net increase (decrease) in cash......... (120,826) (40,239) 223,545 (50,886) (96,612)
Cash at beginning of year....................... 234,563 113,737 73,498 73,498 297,043
---------- ---------- ---------- ----------- -----------
Cash at end of year............................. $ 113,737 73,498 297,043 22,612 200,431
---------- ---------- ---------- ----------- -----------
---------- ---------- ---------- ----------- -----------
Supplemental disclosure of cash flow
information:
Cash paid for:
Interest...................................... $ 83,015 74,476 159,368 12,293 110,424
Income taxes.................................. -- 1,073,000 278,998 -- 7,200
---------- ---------- ---------- ----------- -----------
---------- ---------- ---------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
BONDED MOTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(1) THE COMPANY
Bonded Motors, Inc. (the Company) remanufactures automobile engines
primarily for domestic and Japanese imported cars and light trucks in the United
States for resale to automotive retailers, end users and installers.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
QUARTERLY UNAUDITED FINANCIAL STATEMENTS
In the opinion of management, the unaudited financial statements contained
herein include all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly and in accordance with generally accepted accounting
principles the financial position, results of operations and cash flows as of
and for the periods ended March 31, 1997 and 1998.
INVENTORIES
Inventories are stated at the lower of average cost or market (net
realizable value). Included in inventories were cores of $492,973, $1,190,801
and $1,778,179 at December 31, 1995, 1996 and 1997, respectively.
REVENUE RECOGNITION AND CORE ACCOUNTING
Revenue is recognized upon shipment of product, net of a provision for core
returns. The Company's customers are encouraged to return their old, rebuildable
core for a credit against the engine purchased. The Company identifies the
returned core to the original customer invoice and issues a credit memo equal to
the core charge reflected on the original invoice. These core returns, recorded
as a reduction in net sales, were $3,122,824, $5,024,263 and $6,729,801 during
the years ended December 31, 1995, 1996 and 1997, respectively.
Cores returned from customers are recorded into inventory on the same basis
as the Company records purchases of cores from independent core suppliers into
inventory, at the lower of average cost or market (net realizable value).
PRODUCT WARRANTY
The Company provides the ultimate customer with a warranty with each engine.
Warranty expense is accrued at the time of sale based upon actual claims
history.
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of
the net assets acquired resulting from a business combination and is being
amortized on a straight-line basis over ten years.
DEPRECIATION AND AMORTIZATION
The Company provides for depreciation of machinery and equipment by use of
the straight-line and declining-balance methods over the estimated useful lives
of the related assets, which range from 3 to 12 years. Amortization of leasehold
improvements is provided under the straight-line method over the term of the
lease, not to exceed the economic useful lives of the related assets.
F-7
<PAGE>
BONDED MOTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred. Research
and development costs aggregated approximately $124,000 and $66,000 during the
year ended December 31, 1995 and 1996, respectively. No research and development
costs were incurred in 1997.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," on
January 1, 1996. This statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net
operating cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value, less costs to sell. Adoption of this statement did not
have a material impact on the Company's financial position, results of
operations or liquidity.
COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130
"Comprehensive Income" (SFAS 130) on January 1, 1998. The Company has no items
of comprehensive income and as a result SFAS 130 has no impact on the Company's
financial reporting.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method,
whereby deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. The realizability of deferred tax assets is
assessed throughout the year and a valuation allowance is established
accordingly.
EARNINGS PER SHARE
The Financial Accounting Standards Board issued statement No. 128, "Earnings
per Share" (SFAS No. 128), in March 1997, effective for fiscal years ending
after December 15, 1997. The Company adopted SFAS No. 128 in 1997. This
statement requires the presentation of "Basic" earnings per share which
represents net earnings divided by the weighted average shares outstanding,
excluding all common stock equivalents. A dual presentation of "Diluted"
earnings per share reflecting the dilutive effects of all common stock
equivalents is also required. Earnings per share amounts for all periods
presented have been restated for the effects of the adoption of SFAS No. 128.
The weighted average common shares outstanding during the years ended
December 31, 1995, 1996 and 1997 were 1,817,00, 2,750,000 and 3,021,000,
respectively. For purposes of Diluted earnings per share,
F-8
<PAGE>
BONDED MOTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the incremental common equivalent shares due to outstanding stock options and
warrants during the years ended December 31, 1995, 1996 and 1997 were 155,000,
47,000 and 95,000, respectively. No adjustments to net income were made for the
purpose of computing diluted earnings per share.
STOCK-BASED COMPENSATION
The Company has two option plans for which shares of common stock are
reserved for issuance to executives, key employees and directors. Effective
January 1, 1996 the Company adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). Accordingly, the Company is recognizing
compensation cost pursuant to the provisions of Accounting Principles Board
Opinion No. 25. Had compensation cost for the Company's two stock option plans
been determined based on the fair value at the grant date for awards in 1996 and
1997 consistent with the provisions of SFAS No. 123, the Company's net earnings
and earnings per share would have been reduced to the pro forma amount as
indicated below:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Net earnings as reported.............................................................. $ 1,571,683 1,146,822
Pro forma net earnings................................................................ 952,151 453,567
Basic net earnings per share as reported.............................................. .57 .38
Pro forma basic net earnings per share................................................ .35 .15
Diluted net earnings per share as reported............................................ .56 .37
Pro forma diluted net earnings per share.............................................. .34 .15
------------ ------------
------------ ------------
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1996 and 1997: dividend yield of 0%; expected
volatility of 35% and 34%, respectively; risk-free interest rate of between 6.0%
and 6.7%; and expected lives of five years.
The weighted average fair value of options granted during 1996 and 1997 is
and $2.48 and $3.62 respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of accounts receivable, inventories, accounts payable,
accrued expenses and notes payable to bank and related parties approximate fair
value because of the short maturity of these items.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions. These affect the reported amounts of assets, liabilities, revenues
and expenses and the amount of any contingent assets or liabilities disclosed in
the financial statements. Actual results could differ from the estimates made.
F-9
<PAGE>
BONDED MOTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) CORE CREDITS
The Company has a core exchange program, whereby customers are entitled to
receive a credit for any cores returned. A core provision is recorded against
accounts receivable for the credits expected to be issued with respect to sales
made during the year. This provision totaled $181,000 and $301,000 for the years
ended December 31, 1996 and 1997, respectively. In addition, the cost of those
cores expected to be returned are added to parts inventory at cost. This
adjustment totaled $108,000 and $180,000 at December 31, 1996 and 1997,
respectively.
(4) LONG-TERM DEBT AND NOTES PAYABLE TO BANK
LONG-TERM DEBT
In January 1998, the Company entered into an amended credit agreement (the
Credit Agreement) providing for a revolving line of credit for borrowings up to
$7,500,000 through May 1, 2000. Borrowings under the Credit Agreement bear
interest at LIBOR (5.84% at December 31, 1997) plus 2.0% or at the bank's prime
interest rate (8.50% at December 31, 1997) as selected by the Company.
Borrowings under the line of credit are secured by the Company's assets. Total
amounts outstanding under the revolving line of credit at December 31, 1997 were
$3,200,000 ($5,450,808 at March 31, 1998 (unaudited)). The Company had available
borrowings under the line of credit of $4,300,000 at December 31, 1997
($2,049,192 at March 31, 1998 (unaudited)).
The Credit Agreement also provides for an acquisition facility for
borrowings up to $8,000,000 for a period of two years from the date of funding.
This facility is to be used for general corporate purposes and in the event the
Company enters into an acquisition in the automotive industry. Borrowings under
the Credit Agreement bear interest at the bank's prime interest rate plus 0.25%
or LIBOR plus 2.25% or the bank's cost of funds plus 2.25%, as selected by the
Company, and are secured by the assets of the Company and of the acquired
company. At December 31, 1997, $856,523 ($760,241 at March 31, 1998 (unaudited))
had been drawn down and were outstanding under this facility. The Company had
available borrowings under this facility of $7,143,477 at December 31, 1997
($7,239,759 at March 31, 1998 (unaudited)).
The Credit Agreement includes various financial covenants, the more
significant of which are tangible net worth, debt coverage ratio, senior debt to
tangible net worth and quick ratio. The Company was in compliance with all such
covenants as of December 31, 1997.
F-10
<PAGE>
BONDED MOTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(4) LONG-TERM DEBT AND NOTES PAYABLE TO BANK (CONTINUED)
NOTES PAYABLE TO BANK
The Company's notes payable to bank consisted of the following at December
31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Note payable to bank, payable in monthly installments of $3,188 plus
interest at prime plus .375%, maturing December 2, 1999............. $ -- 73,323
Note payable to bank, payable in monthly installments of $20,833 plus
interest at prime, maturing August 1, 2002.......................... -- 465,491
Note payable to bank, payable in monthly installments of $8,073 plus
interest at prime plus .37%, maturing August 1, 2002................ -- 317,709
---------- ----------
Total notes payable to bank......................................... -- 856,523
Less installments due within one year................................. -- 385,128
---------- ----------
Notes payable to bank, excluding current installments $ -- 471,395
---------- ----------
---------- ----------
</TABLE>
In January 1998, all the above term loans were consolidated under the
$8,000,000 acquisition facility under the Credit Agreement.
(5) RELATED PARTY TRANSACTIONS
Notes payable to related parties consisted of the following:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Note payable to affiliate of shareholder, non-interest bearing,
unsecured and due on demand....................................... $ 100,000 100,000
---------- ----------
100,000 100,000
Less current maturities............................................. 100,000 100,000
---------- ----------
$ -- --
---------- ----------
---------- ----------
</TABLE>
Interest incurred on notes payable to related parties was $72,146 and
$17,251 during the year ended December 31, 1995 and 1996, respectively. No
interest was incurred in 1997.
In the normal course of business, the Company purchased cores from a
relative of the Chief Executive Officer and majority shareholder. Total
purchases were $94,000 and $462,000 in the years ended December 31, 1995 and
1996, respectively. No amounts were outstanding in relation to those purchases
by the Company at December 31, 1995 or 1996. No such purchases were made during
1997.
F-11
<PAGE>
BONDED MOTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) INCOME TAXES
Income tax (benefit) expense is comprised of the following:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal.................................................................. $ 334,000 446,390 409,774
State.................................................................... -- 4,918 11,978
----------- ----------- -----------
334,000 451,308 421,752
----------- ----------- -----------
Deferred:
Federal.................................................................. 44,000 25,674 (109,959)
State.................................................................... (226,000) (448,311) (637,299)
----------- ----------- -----------
(182,000) (422,637) (747,258)
----------- ----------- -----------
$ 152,000 $ 28,671 $ (325,506)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Actual income tax (benefit) expense differs from those obtained by applying
the Federal income tax rate of 34% to earnings before income taxes and
extraordinary item as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Computed "expected" income taxes........................................... $ 455,000 544,000 279,000
State income taxes, net of Federal income tax benefit...................... 82,000 98,000 89,000
State income tax credits earned............................................ (227,000) (600,000) (718,000)
Change in the valuation allowance for deferred tax assets.................. (315,000) -- --
Other...................................................................... 157,000 (13,329) 24,494
----------- ----------- -----------
$ 152,000 28,671 (325,506)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The primary components of temporary differences which give rise to deferred
tax assets and liabilities at December 31, 1996 and 1997 are:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
State tax credits.............................................. $ 716,267 1,387,850
Warranty provision............................................. 140,350 139,400
Sales returns allowance........................................ 114,201 160,893
Allowance for doubtful accounts................................ 27,214 40,319
Other.......................................................... 32,213 176,037
----------- -----------
Total gross deferred tax assets.............................. 1,030,245 1,904,499
----------- -----------
Deferred tax liabilities:........................................
Depreciation................................................... 15,910 23,807
Sales returns allowance........................................ 72,698 102,402
Other.......................................................... -- 89,394
----------- -----------
Total gross deferred tax liabilities......................... 88,608 215,603
----------- -----------
Net deferred tax assets...................................... $ 941,637 1,688,896
----------- -----------
----------- -----------
</TABLE>
F-12
<PAGE>
BONDED MOTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) INCOME TAXES (CONTINUED)
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods which the deferred tax assets are deductible, at December 31, 1997
management believes it is more likely than not the Company will realize the
benefits of these deductible differences. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if the
Company's estimate of future taxable income is reduced.
At December 31, 1995, 1996 and 1997, the Company had California state tax
credit carryforwards of approximately $680,000, $716,000 and $1,388,000,
respectively, available to offset future taxable income, if any, through 2012.
Effective January 1, 1998, the California state credit program ceased.
(7) COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain facilities under a noncancelable operating lease
through 2015 from its major shareholder. The Company also leases other
facilities and certain equipment under noncancelable operating leases through
2000. Rental expense for the years ended December 31, 1995, 1996 and 1997 was
$135,474, $132,066 and $282,847, respectively, of which approximately $90,000,
$96,000 and $96,000 was incurred under the lease with the shareholder in 1995,
1996 and 1997, respectively.
Future minimum lease payments under these leases at December 31, 1997 are as
follows:
<TABLE>
<S> <C>
1998.................................................... $ 315,000
1999.................................................... 258,000
2000.................................................... 136,000
2001.................................................... 96,000
2002.................................................... 96,000
Thereafter.............................................. 1,248,000
---------
$2,149,000
---------
---------
</TABLE>
ENVIRONMENTAL
The Company operates two wastewater clarifiers at its Los Angeles production
facility and a third clarifier was removed in 1994. In February 1996, the
Company retained an environmental consultant to perform soil sampling in the
area of the closed and the two active clarifiers. Based on the consultant's
conclusions as to the remedial costs, assuming any remediation is required,
management does not believe the cost to the Company would be material.
OTHER
In December 1995, the Company entered into employment agreements with its
officers for three-year terms providing for base salaries plus bonuses.
F-13
<PAGE>
BONDED MOTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(7) COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is subject to certain miscellaneous legal claims in the ordinary
course of business. Management does not believe that any liability as a result
of such claims would have a material impact on the Company's results of
operations or financial condition.
(8) CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company had sales to four significant customers with sales constituting
72%, 71% and 68% of net sales in 1995, 1996 and 1997, respectively. These
customers comprised 82% and 81% of accounts receivable at December 31, 1996 and
1997, respectively. The loss of any of these customers could have a material
adverse effect on the Company.
Management performs regular evaluations concerning the ability of its
customers to satisfy their obligations and records a provision for doubtful
accounts based upon these evaluations. The Company's credit losses for the
period presented were not material and have not exceeded management's estimates.
(9) ACQUISITION
On August 6, 1997, the Company acquired certain assets of Wheeler
Manufacturing of Macon, Georgia, an automotive engine remanufacturing firm. The
Company accounted for the acquisition using the purchase method. This purchase
included manufacturing machinery and equipment, plant equipment, office
furniture, fixtures and equipment, automotive parts inventory and supplies. The
excess of acquisition costs over the fair value of net assets acquired is
included in and has been allocated to goodwill. Goodwill is amortized on a
straight-line basis over a ten-year period. The fair values of the assets
acquired were as follows on the acquisition date.
<TABLE>
<S> <C>
Inventories............................................... $ 137,676
Plant, machinery and equipment............................ 317,762
Goodwill.................................................. 211,880
---------
Total acquisition costs................................... $ 667,318
---------
---------
</TABLE>
(10) SHAREHOLDERS' EQUITY, STOCK OPTIONS AND STOCK WARRANTS
In April 1996, the Company completed its initial public offering of
1,000,000 shares of its common stock at a public offering price of $5.875 per
share. The net proceeds from the Offering of approximately $4,436,151 were used
in part to repay a portion of the Company's debt, and the balance was used to
fund working capital requirements.
In December 1995, the Company amended its Articles of Incorporation to
authorize 1,000,000 shares of preferred stock and increase the authorized shares
of common stock to 10,000,000 shares. In connection with this amendment, the
Company effected a 3,600-for-1 common stock split.
During March 1994, the Company granted, at estimated fair market value,
stock options to two of its officers for the purchase of an ownership interest
in the Company aggregating 10%. These stock options were exercised during
December 1995 for an aggregate amount of $200,000. Shares issued pursuant to
these stock options were paid for by promissory notes from these officers. The
notes are secured by the underlying shares and certain real property, bear
interest at 8% and are due on or before December 7, 2002. During 1997, one of
the officers repaid his note of $100,000.
F-14
<PAGE>
BONDED MOTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(10) SHAREHOLDERS' EQUITY, STOCK OPTIONS AND STOCK WARRANTS (CONTINUED)
The Company adopted a stock option plan in January 1996 which provides for
the issuance of options to employees, officers and directors of the Company to
purchase up to an aggregate of 400,000 shares of common stock. In 1997, the plan
was amended to increase the number of shares of common stock that could be
purchased to an aggregate of 600,000 shares. During 1996 and 1997, the Company
granted 255,000 and 185,000 options, respectively, with exercise prices ranging
between $5.50 and $10.00, the estimated fair market value at date of grant, with
vesting periods of between one and three years and exercise dates of between one
and five years from the date of issuance of the option. During 1997, 34,600
options were exercised for total proceeds of $194,900 and 7,500 options were
canceled upon termination of employment by one of the employees. At December 31,
1997, 400,400 shares were subject to options under this plan, of which options
for 119,500 shares were exercisable.
The Company also adopted a directors' plan in January 1996 which provides
for the issuance of options to outside directors of the Company to purchase up
to an aggregate of 50,000 shares of common stock. During 1996 and 1997, options
to purchase 20,000 and 6,000 shares, respectively, were granted with exercise
prices ranging between $6.50 and $7.38, the estimated fair market value at date
of grant. During 1997, options to purchase 10,000 shares were canceled. At
December 31, 1997 options to purchase 16,000 shares were outstanding under this
plan, of which options to purchase 10,900 shares were exercisable.
During 1996, the Company granted warrants to purchase 100,000 shares of
common stock to the Company's underwriters in the Company's initial public
offering. These warrants have exercise prices of $7.05 per share, the then
estimated fair market value, and a five-year term. These warrants were
outstanding and exercisable as of December 31, 1997.
(11) SIGNIFICANT FOURTH-QUARTER ADJUSTMENT
During the fourth quarter of the year ended December 31, 1996, the Company
recorded an adjustment of $447,977 for the effects of a change in the Company's
estimate of overhead costs included in finished engine inventory.
(12) EXTRAORDINARY ITEM
During 1995, the Company settled its obligations with these creditors for
amounts less than the original amounts due resulting in a gain from forgiveness
of debt, net of income tax effect, of $119,000.
(13) SUBSEQUENT EVENT (UNAUDITED)
In May 1998, the Company reached an agreement in principle to grant options
to purchase 25,000 shares of common stock exercisable at $7.75 per share to
consultants as compensation for services rendered. Compensation expense for the
difference between the grant price and the fair market value of the common stock
plus the fair market value of the options of $137,000 will be recognized as
expense during the quarter ended June 30, 1998.
F-15
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE SECURITIES OFFERED BY THIS PROSPECTUS OR ANY OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY JURISDICTION TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
Use of Proceeds................................ 9
Price Range of Common Stock.................... 10
Capitalization................................. 11
Dividend Policy................................ 11
Selected Financial and Other Data.............. 12
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 14
Business....................................... 19
Management..................................... 23
Principal and Selling Shareholders............. 26
Description of Capital Stock................... 27
Underwriting................................... 28
Certain Legal Matters.......................... 29
Experts........................................ 29
Available Information.......................... 30
Index to Financial Statements.................. F-1
</TABLE>
------------------------
2,000,000 Shares
[LOGO] BONDED
MOTORS
Common Stock
----------------
PROSPECTUS
------------------
VAN KASPER & COMPANY
COMMONWEALTH
ASSOCIATES
JUNE , 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Amended and Restated Articles of Incorporation include an
authorization for the Company to indemnify its agents (as defined in Section 317
of the California Code), through bylaw provisions, by agreement or otherwise, to
the fullest extent permitted by law. Pursuant to this provision, the Company's
Amended and Restated Bylaws provide for indemnification of the Company's
directors, officers and employees. In addition, the Company, at its discretion,
may provide indemnification to persons whom the Company is not otherwise
obligated to indemnify. The Amended and Restated Bylaws also allow the Company
to enter into indemnity agreements with individual directors, officers,
employees and other agents. Any such indemnity agreements, together with the
Company's Amended and Restated Bylaws and Amended and Restated Articles of
Incorporation, may require the Company, among other things, to indemnify these
persons against certain liabilities that may arise by reason of their status as
such or service in such capacity (other than liabilities resulting from willful
misconduct of a culpable nature), to advance expenses to them as they are
incurred, provided that they undertake to repay the amount advanced if it is
ultimately determined by a court that they are not entitled to indemnification,
and to obtain directors' and officers' insurance if available on reasonable
terms.
Section 317 of the California Code and the Company's Amended and Restated
Bylaws make provision for the indemnification of officers, directors and other
corporate agents in terms sufficiently broad to indemnify such persons, under
certain circumstances, for liabilities (including reimbursement of expenses
incurred) arising under the Securities Act of 1933, as amended (the "Securities
Act") or the Exchange Act.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses for the issuance and distribution of the shares of
Common Stock registered hereby, other than underwriting commissions, fees and
Underwriters' nonaccountable expense allowance, are set forth in the following
table:
<TABLE>
<CAPTION>
ITEM AMOUNT
- ---------------------------------------------------------------------------------- ----------
<S> <C>
SEC Registration Fee.............................................................. $ 7,405
NASD Filing Fee................................................................... 3,001
Blue Sky Fees and Expenses........................................................ 5,000
Transfer Agent Fees............................................................... 1,000
Legal Fees........................................................................ 50,000
Accounting Fees................................................................... 75,000
Printing and Engraving Costs...................................................... 75,000
Miscellaneous..................................................................... 33,595
----------
Total........................................................................... $ 250,000
----------
----------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Since January 1, 1995, the Registrant sold and issued the following
unregistered securities:
In December 1995, the Company issued 100,000 shares of Common Stock each to
Buddy Mercer and Paul Sullivan pursuant to their exercise of stock options in
full at an exercise price of $1.00 per share.
In April 1996, the Company issued warrants to purchase 100,000 shares of
Common Stock to the underwriters of the Company's initial public offering.
In 1996 and 1997, the Company issued unregistered options to purchase an
aggregate of 340,000 shares of Common Stock pursuant to its 1996 Incentive Stock
Plan and options to purchase an aggregate of 26,000 shares of Common Stock
pursuant to its 1996 Non-Employee Directors Stock Option Plan.
II-1
<PAGE>
The sales and issuances of securities described above were deemed to be
exempt from registration under the Securities Act by virtue of Section 4(2) or
Regulation D promulgated under the Securities Act. The purchasers in each case
represented their intention to acquire the securities for investment only and
not with a view to the distribution thereof. Appropriate legends are affixed to
the stock certificates issued in such transactions.
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
1.2 Form of Agreement Among Underwriters.
3.1 Amended and Restated Articles of Incorporation as filed with the California Secretary of State on March
15, 1996. (1)
3.3 Amended and Restated Bylaws. (1)
4.1 Form of Underwriters' Warrant Agreement (including form of Underwriters' Warrants).
4.2 Form of Common Stock Certificate. (1)
4.3 1996 Incentive Stock Plan, as amended. (3)
4.4 1996 Non-Employee Directors Stock Option Plan. (1)
5.1 Opinion of Petillon & Hansen, a partnership of professional corporations.
10.1 Lease Agreement, dated January 11, 1990, between Aaron Landon and Maude Landon and Production Engine
Rebuilding Co., Inc.(1)
10.3 Employment Agreement with Aaron Landon, as amended.*
10.4 Employment Agreement with Buddy Mercer, as amended.*
10.5 Employment Agreement with Paul Sullivan, as amended.*
10.6 Amended and Restated Loan Agreement, dated January 27, 1998, with Comerica.*
10.7 Form of Financial Consulting Agreement with Commonwealth Associates. (1)
10.8 Agreement for Purchase and Sale of Assets and Real Property, dated as of August 6, 1997, by and between
Bonded Motors, Inc. and Wheelers Manufacturing Company, Inc. (2)
10.9 Employment Agreement with Richard Funk. (4)
10.10 Lease Agreement between the Company and KEW Management Corp., dated as of December 5, 1997. (4)
10.11 Lease Agreement between the Company and Charles H. Wheeler, dated as of August 6, 1997. (4)
23.1 Consent of KPMG Peat Marwick LLP, Independent Certified Public Accountants.
23.2 Consent of Petillon & Hansen (included in the opinion filed as Exhibit 5).
24.0 Power of Attorney (included in Part II, page II-4).
27 Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
(1) Incorporated by reference to the Company's Registration Statement on Form
SB-2 (No. 333-00402-LA) declared effective on April 2, 1996 (the
"Registration Statement").
II-2
<PAGE>
(2) Incorporated by reference to the Company's Form 8-K filed August 14, 1997
(No. 000-28102).
(3) Incorporated by reference to the Company's Form S-8 filed dated November 7,
1997.(No. 333-39829)
(4) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1997 filed March 24, 1998. (No. 000-28102)
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
For the purpose of determining any liability under the Securities Act, to
treat each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement
and the offering of such securities at that time as the initial bona fide
offering of those securities.
Insofar as indemnification for liabilities arising under the Securities Act
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 Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized its Registration
Statement or amendment thereto to be signed on its behalf by the undersigned in
the City of Los Angeles, State of California, on the 12th day of May, 1998.
<TABLE>
<S> <C>
Bonded Motors, Inc.
By /s/ AARON LANDON
-----------------------------------------
Aaron Landon
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Aaron Landon, as his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments (including post-effective amendments) to this registration
statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
foregoing, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement or amendment thereto has been signed by the following
persons in the capacities and on the dates stated.
SIGNATURE TITLE DATE
- ----------------------------------- ------------------------- ----------------
Chairman of the Board and
/s/ AARON LANDON Chief Executive Officer
- ----------------------------------- (Principal Executive May 12, 1998
Aaron Landon Officer)
/s/ RICHARD FUNK
- ----------------------------------- President and Director May 12, 1998
Richard Funk
Vice President of Finance
and Administration,
/s/ PAUL SULLIVAN Chief Financial Officer
- ----------------------------------- and Director (Principal May 12, 1998
Paul Sullivan Financial Officer and
Principal Accounting
Officer)
Vice President of
/s/ BUDDY MERCER Operations, Chief
- ----------------------------------- Operating Officer and May 12, 1998
Buddy Mercer Director
- ----------------------------------- Director May , 1998
Edward T. Bradford
- ----------------------------------- Director May , 1998
Cornelius P. McCarthy, III
- ----------------------------------- Director May , 1998
John F. Creamer
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
1.2 Form of Agreement Among Underwriters.
3.1 Amended and Restated Articles of Incorporation as filed with the California Secretary of State on March
15, 1996. (1)
3.3 Amended and Restated Bylaws. (1)
4.1 Form of Underwriters' Warrant Agreement (including form of Underwriters' Warrants).
4.2 Form of Common Stock Certificate. (1)
4.3 1996 Incentive Stock Plan, as amended. (3)
4.4 1996 Non-Employee Directors Stock Option Plan. (1)
5.1 Opinion of Petillon & Hansen, a partnership of professional corporations.
10.1 Lease Agreement, dated January 11, 1990, between Aaron Landon and Maude Landon and Production Engine
Rebuilding Co., Inc.(1)
10.3 Employment Agreement with Aaron Landon, as amended.*
10.4 Employment Agreement with Buddy Mercer, as amended.*
10.5 Employment Agreement with Paul Sullivan, as amended.*
10.6 Amended and Restated Loan Agreement, dated January 27, 1998, with Comerica.*
10.7 Form of Financial Consulting Agreement with Commonwealth Associates. (1)
10.8 Agreement for Purchase and Sale of Assets and Real Property, dated as of August 6, 1997, by and between
Bonded Motors, Inc. and Wheelers Manufacturing Company, Inc. (2)
10.9 Employment Agreement with Richard Funk. (4)
10.10 Lease Agreement between the Company and KEW Management Corp., dated as of December 5, 1997. (4)
10.11 Lease Agreement between the Company and Charles H. Wheeler, dated as of August 6, 1997. (4)
23.1 Consent of KPMG Peat Marwick LLP, Independent Certified Public Accountants.
23.2 Consent of Petillon & Hansen (included in the opinion filed as Exhibit 5).
24.0 Power of Attorney (included in Part II, page II-4).
27 Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
(1) Incorporated by reference to the Company's Registration Statement on Form
SB-2 (No. 333-00402-LA) declared effective on April 2, 1996 (the
"Registration Statement").
(2) Incorporated by reference to the Company's Form 8-K filed August 14, 1997
(No. 000-28102).
(3) Incorporated by reference to the Company's Form S-8 filed dated November 7,
1997.(No. 333-39829)
(4) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1997 filed March 24, 1998. (No. 000-28102)
<PAGE>
BONDED MOTORS, INC.
UNDERWRITING AGREEMENT
__________, 1998
VAN KASPER & COMPANY
COMMONWEALTH ASSOCIATES
As Representatives of the
Several Underwriters
c/o Van Kasper & Company
600 California Street, Suite 1700
San Francisco, California 94111
Ladies and Gentlemen:
Bonded Motors, Inc., a California corporation (the "Company") and the
persons named in Schedule I hereto (the "Selling Shareholders"), propose to
issue and sell to the several Underwriters named in Schedule II hereto (the
"Underwriters") an aggregate of 2,500,000 shares (the "Firm Shares") of the
Company's Common Stock, no par value (the "Common Stock"). The Company also
proposes to grant to the Underwriters an option to purchase up to 300,000
additional shares of Common Stock (the "Option Shares") for the sole purpose of
covering over-allotments, if any, in connection with the sale of the Firm
Shares. The Firm Shares and any Option Shares purchased pursuant to this
Agreement are referred to below as the "Shares." Van Kasper & Company and
Commonwealth Associates are acting as representatives of the several
Underwriters and in that capacity are referred to in this Agreement as the
"Representatives."
The Company and the Selling Shareholders hereby confirms their agreement
with the several Underwriters as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to and agrees with each Underwriter as follows:
(a) The Company meets the requirements for use of Form SB-2 under the
Securities Act of 1933, as amended (the "Securities Act"), and a registration
statement (Registration No. 333-______) on Form SB-2 relating to the Shares,
including such amendments to such registration statement as may have been
required to the date of this Agreement, has been prepared by the Company under
and in conformity with the provisions of the Securities Act and the rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") thereunder and has been filed with the Commission.
After the execution of this Agreement, the Company will file with the Commission
either (i) if such registration statement, as it may have been amended, has been
declared by the Commission to be effective under the Securities Act, either
(A) if the Company relies on Rule 434 under the Securities Act, a Term Sheet
(defined below) relating to the Shares, that identifies the Preliminary
Prospectus (defined below) that it supplements and contains such information as
is required or permitted by Rules 434, 430A and 424(b) of the Rules and
Regulations or (B) if the
1
<PAGE>
Company does not rely on Rule 434 under the Securities Act, a prospectus in
the form most recently included in an amendment to such registration
statement (or, if no such amendment has been filed, in such registration
statement), with such changes or insertions as are required by Rule 430A of
the Rules and Regulations or permitted by Rule 424(b) of the Rules and
Regulations, and in the case of either (i)(A) or (i)(B) of this sentence, as
has been provided to and approved by the Representatives prior to the
execution of this Agreement, or (ii) if such registration statement, as it
may have been amended, has not been declared by the Commission to be
effective under the Securities Act, an amendment to such registration
statement, including a form of prospectus, a copy of which amendment has been
furnished to and approved by the Representatives prior to the execution of
this Agreement. As used in this Agreement, the term "Registration Statement"
means such registration statement, as amended at the time when it was or is
declared effective, including all financial schedules and exhibits thereto,
any information omitted therefrom pursuant to Rule 430A of the Rules and
Regulations and included in the Prospectus (defined below) and further
including all filings or other documents incorporated therein; the term
"Preliminary Prospectus" means each prospectus subject to completion filed
with such registration statement or any amendment thereto (including the
prospectus subject to completion, if any, included in the Registration
Statement or any amendment thereto at the time it was or is declared
effective and further including all filings or documents incorporated
therein); and the term "Prospectus" means the following, including any
filings or documents incorporated therein:
(A) if the Company relies on Rule 434 under the Securities Act, the Term
Sheet relating to the Securities that is first filed pursuant to
Rule 424(b)(7) under the Securities Act, together with the Preliminary
Prospectus identified therein that such Term Sheet supplements;
(B) if the Company does not rely on Rule 434 under the Securities Act, the
prospectus first filed with the Commission pursuant to Rule 424(b)
under the Securities Act; or
(C) if the Company does not rely on Rule 434 under the Securities Act and
if no prospectus is required to be filed pursuant to Rule 424(b) under
the Securities Act, the prospectus included in the Registration
Statement;
provided that if any revised prospectus that is provided to the Underwriters by
the Company for use in connection with the offering of the Shares differs from
the prospectus on file with the Commission at the time the Registration
Statement became or becomes, as the case may be, effective, whether or not the
revised prospectus is required to be filed with the Commission pursuant to Rule
424(b)(3) of the Rules and Regulations, the term "Prospectus" will mean such
revised prospectus (including all filings and documents incorporated therein)
from and after the time it is first provided to the Underwriters for such use.
The term "Term Sheet" as used in this Agreement means any term sheet that
satisfies the requirements of Rule 434 under the Securities Act. Any reference
in this Agreement to the "date" of a Prospectus that includes a Term Sheet means
the date of such Term Sheet.
2
<PAGE>
(b) No order suspending the effectiveness of the Registration Statement
or preventing or suspending the use of any Preliminary Prospectus or the
Prospectus has been issued and no proceedings for that purpose are pending or,
to the best knowledge of the Company, threatened or contemplated by the
Commission; no stop order suspending the sale of the Shares in any jurisdiction
has been issued and no proceedings for that purpose are pending or, to the best
knowledge of the Company, threatened or contemplated, and any request of the
Commission for additional information (to be included in the Registration
Statement, any Preliminary Prospectus or the Prospectus or otherwise) has been
complied with.
(c) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has full power (corporate and other) and authority to own or
lease its properties and conduct its business as described in the Registration
Statement and the Prospectus and as is currently being conducted by it and is
duly qualified as a foreign corporation and in good standing in all
jurisdictions in which the character of the property owned or leased or the
nature of the business transacted by it makes qualification necessary (except
where the failure to be so qualified would not have a material adverse effect on
the business, properties, condition (financial or otherwise), results of
operations or prospects of the Company). The Company is in possession of and
operating in compliance in all material respects with all authorizations,
licenses, certificates, consents, orders and permits from federal, state, local
and other governmental or regulatory authorities that are material to the
conduct of its business, all of which are valid and in full force and effect.
The Company does not have any "subsidiaries" (defined below) or own any equity
securities of any other Entity (defined below). As used in this Agreement, the
word "subsidiary" means any corporation, partnership, limited liability company
or other entity (each an "Entity") of which the Company directly or indirectly
owns 50% or more of the equity or that the Company directly or indirectly
controls.
(d) When any Preliminary Prospectus was filed with the Commission it
(i) contained all statements required to be contained therein and complied in
all material respects with the requirements of the Securities Act, the Rules and
Regulations, the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and the rules and regulations of the Commission thereunder (the "Exchange
Act Rules and Regulations") and (ii) did not include any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. When the Registration Statement or any amendment thereto
was or is declared effective (the "Effective Date"), it (i) contained or will
contain all statements required to be contained therein and complied or will
comply in all material respects with the requirements of the Securities Act, the
Rules and Regulations, the Exchange Act and the Exchange Act Rules and
Regulations and (ii) did not or will not include any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein not misleading. When the Prospectus or any Term Sheet that
is a part thereof or any amendment or supplement to the Prospectus is filed with
the Commission pursuant to Rule 424(b) (or, if the Prospectus or part thereof or
such amendment or supplement is not required to be so filed, when the
Registration Statement or the amendment thereto containing such amendment or
supplement to the Prospectus was or is declared effective) and on the Closing
Date (defined below) and any other
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date on which Option Shares are to be purchased, the Prospectus, as amended
or supplemented at any such time, (i) contained or will contain all
statements required to be contained therein and complied or will comply in
all material respects with the requirements of the Securities Act, the Rules
and Regulations, the Exchange Act and the Exchange Act Rules and Regulations
and (ii) did not or will not include any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. The foregoing provisions of this paragraph (d) do not apply to
statements or omissions made in any Preliminary Prospectus, the Registration
Statement or any amendment thereto or the Prospectus or any amendment or
supplement thereto in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through the
Representatives specifically for use therein.
(e) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), there has not been any
material loss or interference with the business of the Company from fire,
explosion, flood, earthquake, riot or other civil disturbance or other calamity,
whether or not covered by insurance, or from any court or governmental action,
order or decree, or any changes in the capital stock or long-term debt of the
Company, or any dividend or distribution of any kind declared, paid or made on
the capital stock of the Company, or any material change, or a development known
to the Company that might cause or result in a material change, in or affecting
the business, properties, condition (financial or otherwise), results of
operations or prospects of the Company, whether or not arising from transactions
in the ordinary course of business, in each case other than as may be set forth
in the Registration Statement and the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus), and since such dates,
except in the ordinary course of business, the Company has not entered into any
material transaction not described in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(g) There is no agreement, contract, license, lease or other document
required to be described in the Registration Statement or the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus) or
to be filed as an exhibit to the Registration Statement which is not described
or filed as required. All contracts described in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus), if any,
are in full force and effect on the date hereof, and neither the Company nor, to
the best knowledge of the Company, any other party, is in material breach of or
default under any such contract.
(h) The authorized and outstanding capital stock of the Company is set
forth in the Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus), and the description of the Common Stock therein
conforms with and accurately describes the rights set forth in the instruments
defining the Common Stock. The Shares to be issued and sold by the Company are
duly authorized and will, when issued and delivered in accordance with the terms
of this Agreement and against payment therefor, be validly issued, fully paid
and non-assessable, and the issuance of the Shares by the Company is not subject
to any preemptive or similar rights.
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(i) All of the outstanding shares of capital stock of the Company have
been duly authorized and validly issued and are fully paid and nonassessable,
have been issued in compliance with all applicable federal and state securities
laws and were not issued in violation of or subject to any preemptive rights or
other rights to subscribe for or purchase securities. The description of the
Company's stock option, stock bonus and other stock plans or arrangements, and
the options or other rights granted or exercised thereunder, set forth in the
Prospectus (or, if the Prospectus is not in existence, in the most recent
Preliminary Prospectus), accurately and fairly present the information required
to be shown with respect to such plans, arrangements, options and rights. Other
than this Agreement, the "Warrant Agreement" (as defined in Section 1(cc) below)
and the options and warrants to purchase Common Stock described in the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), there are no options, warrants or other rights
outstanding to subscribe for or purchase any shares of the Company's capital
stock. There are no preemptive rights applicable to any shares of capital stock
of the Company. There are no restrictions upon the voting or transfer of any of
the Firm Shares or Option Shares pursuant to the Company's Certificate of
Incorporation, bylaws or other governing documents or any agreement to which the
Company is a party or by which it may be bound. Except as is provided in the
Warrant Agreement and for the Shares, neither the filing of the Registration
Statement nor the offering or sale of the Shares as contemplated by this
Agreement gives rise to any rights, other than those which have been waived, for
or relating to the registration of any securities (other than the Shares) of or
issued by the Company.
(j) The Company has full right, power and authority to enter into and
perform its obligations under this Agreement and the Warrant Agreement and to
issue, sell and deliver the Shares to be delivered by it. This Agreement and
the Warrant Agreement have each been duly authorized, executed and delivered by
the Company and constitute the valid and binding agreements of the Company, and
each is enforceable against the Company in accordance with its terms except
insofar as enforceability may be affected by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights generally
or by general equitable considerations and except insofar as the indemnification
and contribution provisions of Section 9 hereof and Section 3(f) of the Warrant
Agreement may be affected by public policy concerns.
(k) The Company is not, nor with the giving of notice or lapse of time or
both would it be, in violation of or in default under, nor will the execution or
delivery of this Agreement or the Warrant Agreement or the consummation of the
transactions contemplated by this Agreement or the Warrant Agreement result in a
violation of or constitute a breach of or a default (including without
limitation with the giving of notice, the passage of time or otherwise) under
the Articles of Incorporation, bylaws or other governing documents of the
Company or any obligation, agreement, covenant or condition contained in any
bond, debenture, note or other evidence of indebtedness or in any contract,
indenture, mortgage, deed of trust, loan agreement, lease, license, joint
venture or other agreement or instrument to which the Company is a party or by
which any of its properties may be bound or affected. The Company has not
incurred any liability, direct or indirect, for any finders' or similar fees
payable on behalf of the Company or the Underwriters in connection with the
transactions contemplated by this Agreement. The performance by the Company of
its obligations under this Agreement and the Warrant
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Agreement will not violate any law, ordinance, rule or regulation (provided
that no representation or warranty is made hereby with respect to the effect,
if any, of public policy concerns on the indemnification and contribution
provisions of Section 9 hereof and Section 3(f) of the Warrant Agreement), or
any order, writ, injunction, judgment or decree of any governmental agency or
body or of any court having jurisdiction over the Company or any of its
properties, or result in the creation or imposition of any lien, charge,
claim or encumbrance upon any property of the Company. Except for permits
and similar authorizations required under the Securities Act, the Exchange
Act or under state securities or Blue Sky laws and for such permits and
authorizations that have been obtained, no consent, approval, authorization
or order of any court, governmental agency or body, financial institution or
any other person is required in connection with the consummation of the
transactions contemplated by this Agreement or the Warrant Agreement.
(l) The Company owns, or has valid rights to use, all items of real and
personal property which are material to the business of the Company, free and
clear, except as described in the Registration Statement and the Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary Prospectus),
of all liens, encumbrances, claims and rights of third parties of any type or
description that might materially interfere with the business, properties,
condition (financial or otherwise), results of operations or prospects of the
Company.
(m) The Company owns or possesses adequate rights to use all material
patents, patent rights, inventions, trade secrets, know-how, trademarks, service
marks, tradenames and copyrights which are necessary for the conduct of its
business as described in the Registration Statement and the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus); and
the Company has not received any notice of infringement of or conflict with
asserted rights of others with respect to any patents, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, tradenames or
copyrights which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, might have a material adverse effect on the
business, properties, condition (financial or otherwise), results of operations
or prospects of the Company.
(n) There is no litigation or governmental proceeding to which the
Company is a party or to which any property of the Company is subject which is
pending or, to the best knowledge of the Company, is threatened or contemplated
against the Company that might have a material effect on, or might result in any
material adverse change in the business, properties, condition (financial or
otherwise), results of operations or prospects of the Company, that might
prevent consummation of the transactions contemplated by this Agreement or the
Warrant Agreement or that is required to be disclosed in the Registration
Statement or Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus) and are not so disclosed.
(o) The Company is not in violation of any law, order, ordinance, rule or
regulation, or any order, writ, injunction, judgment or decree of any
governmental agency or body or of any court, to which it or its properties
(whether owned or leased) may be subject, which violation might have a material
adverse effect on the business, properties, condition (financial or otherwise),
results of operations or prospects of the Company.
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(p) The Company has not taken and shall not take, directly or indirectly,
any action designed to cause or result in, or which has constituted or which
might reasonably be expected to cause or result in, under the Exchange Act, the
Exchange Act Rules and Regulations or otherwise, the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Shares. No bid or purchase by the Company and, to the best
knowledge of the Company, no bid or purchase that could be attributed to the
Company (as a result of bids or purchases by an "affiliated purchaser" within
the meaning of Regulation M under the Exchange Act) for or of the Common Stock,
any securities of the same class or series as the Common Stock or any securities
convertible into or exchangeable for or that represent any right to acquire the
Common Stock is now pending or in progress or will have commenced at any time
prior to the completion of the distribution of the Shares.
(q) KPMG Peat Marwick LLP, whose report appears in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus) is, and during the periods covered by its
report in the Registration Statement was, independent accountants as required by
the Securities Act and the Rules and Regulations. The financial statements and
schedules included in the Registration Statement, each Preliminary Prospectus
and the Prospectus present fairly (or, if the Prospectus has not been filed with
the Commission, as to the Prospectus, will present fairly) the financial
condition, results of operations, cash flow and changes in shareholders' equity
of the Company at the dates and for the periods indicated, and the financial
statements and schedules included in the Registration Statement present fairly
the information required to be stated therein. Such financial statements and
schedules have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis throughout the periods presented,
except as may be stated therein. The selected and summary financial and
statistical data included in the Registration Statement and the Prospectus
present fairly (or, if the Prospectus has not been filed with the Commission, as
to the Prospectus, will present fairly) the information shown therein and have
been compiled on a basis consistent with the audited financial statements
presented therein. No other financial statements or schedules are required to
be included in the Registration Statement.
(r) Any PRO FORMA financial or other information and related notes
included in the Registration Statement, each Preliminary Prospectus and the
Prospectus comply (or, if the Prospectus has not been filed with the Commission,
as to the Prospectus, will comply) in all material respects with the
requirements of the Securities Act and the Rules and Regulations and present
fairly the PRO FORMA information shown, as of the dates and for the periods
covered by such PRO FORMA information. Such PRO FORMA information, including
any related notes and schedules, has been prepared on a basis consistent with
the historical financial statements and other historical information, as
applicable, included in the Registration Statement, the Preliminary Prospectus
and the Prospectus (if filed with the Commission), except for the PRO FORMA
adjustments specified therein, and give effect to assumptions made on a
reasonable basis to give effect to historical and, if applicable, proposed
transactions described in the Registration Statement, each Preliminary
Prospectus and the Prospectus (if filed with the Commission).
(s) The books, records and accounts of the Company accurately and fairly
reflect, in reasonable detail, the transactions in and dispositions of the
assets of the Company. The systems
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of internal accounting controls maintained by the Company are sufficient to
provide reasonable assurances that: (i) transactions are executed in
accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary (x) to permit preparation of financial
statements in conformity with generally accepted accounting principles and
(y) to maintain accountability for assets; (iii) access to assets is
permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared
with the existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(t) The Company has delivered to the Representatives the written
agreement of each of its officers, directors and its affiliates who own 1.0% or
more of the outstanding Common Stock prior the purchase of the Shares pursuant
to this Agreement (collectively, "Material Holders"), to the effect that, except
for sales to the several Underwriters pursuant to this Agreement by the Selling
Shareholders, each of the Material Holders will not, for a period of 120 days
following the date of this Agreement, without the prior written consent of the
Van Kasper & Company, offer, sell or contract to sell, grant any option to
purchase or otherwise dispose of, or announce the offer of, any Common Stock or
options or convertible securities exercisable or exchangeable for, or
convertible into, Common Stock.
(u) No labor disturbance by the employees of the Company exists, is
imminent or, to the knowledge of the Company, is contemplated or threatened; and
the Company is not aware of an existing, imminent or threatened labor
disturbance by the employees of any principal suppliers, manufacturers,
contractors or others that might be expected to result in any material change in
the business, properties, condition (financial or otherwise), results of
operations or prospects of the Company. No collective bargaining agreement
exists with any of the Company's employees and, to the best knowledge of the
Company, no such agreement is imminent.
(v) The Company has filed all federal, state, local and foreign tax
returns which are required to be filed or has requested extensions thereof and
has paid all taxes, including withholding taxes, penalties and interest,
assessments, fees and other charges to the extent that those taxes have become
due and payable. No tax assessment or deficiency has been made or proposed
against the Company nor has the Company received any notice of any proposed tax
assessment or deficiency.
(w) Except as set forth in the Prospectus (or, if the Prospectus not in
existence, the most recent Preliminary Prospectus), there are no outstanding
loans, advances or guaranties of indebtedness by the Company to or for the
benefit of any of (i) its "affiliates," as such term is defined in the Rules and
Regulations, or (ii) any of the members of the families of any of them.
(x) The Company has not, directly or indirectly, at any time: (i) made
any contributions to any candidate for political office, or failed to disclose
fully any such contribution, in violation of law; (ii) made any payment to any
local, state, federal or foreign governmental officer or official, or other
person charged with similar public or quasi-public
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duties, other than payments required or allowed by all applicable laws; or
(iii) violated any provision of the Foreign Corrupt Practices Act of 1977, as
amended.
(y) The Company has no liability, absolute or contingent, relating to:
(i) public health or safety; (ii) worker health or safety; (iii) product defect
or warranty (except, as to product defect or warranty, as is disclosed in the
Registration Statement and Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus)); or (iv) pollution, damage
to or protection of the environment, including, without limitation, relating to
damage to natural resources, emissions, discharges, releases or threatened
releases of hazardous materials into the environment (including, further without
limitation, ambient air, surface water, groundwater, land surface or subsurface
strata) or otherwise relating to the manufacture, processing, use, treatment,
storage, generation, disposal, transport or handling of any hazardous materials.
As used herein, "hazardous material" includes chemical substances, wastes,
pollutants, contaminants, hazardous or toxic substances, constituents, materials
or wastes, whether solid, gaseous or liquid in nature.
(z) The Company has not distributed and will not distribute prior to the
Closing Date or on or prior to any date on which the Option Shares are to be
purchased, as the case may be, any prospectus or other offering material in
connection with the offering and sale of the Shares other than the Preliminary
Prospectus(es), the Prospectus, the Registration Statement and any other
material which may be permitted by the Securities Act and the Rules and
Regulations.
(aa) The Common Stock is traded on and, subject to official notice of
issuance, the Shares to be issued by the Company have been approved for
inclusion for quotation on the Nasdaq National Market.
(bb) The Company is not now, and intends to conduct its affairs in the
future in such a manner so that it will not become, an investment company within
the meaning of the Investment Company Act of 1940, as amended.
(cc) The "Warrants" (as defined in the Warrant Agreement between the
Company, Van Kasper & Company and Commonwealth Associates (the "Warrant
Agreement")) to purchase 75,000 shares of the Common Stock have been duly and
validly authorized by all requisite corporate action of the Company and, when
issued and delivered against payment therefor as provided in Section 3(l) below,
will be valid and binding obligations of the Company in accordance with their
terms; the "Warrant Shares" (as defined in the Warrant Agreement) have been duly
and validly authorized for issuance upon exercise of the Warrants and when so
issued against payment therefor as provided in the Warrant Agreement will be
validly issued, fully paid and non-assessable; and no person has any preemptive
rights with respect to the Warrants or the Warrant Shares.
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2. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDERS. Each
Selling Shareholder, as to himself only, represents and warrants to and agrees
with each Underwriter as follows:
(a) Such Selling Shareholders now have, and on the Closing Date will have,
valid and marketable title to the Shares to be sold by such Selling
Shareholders, free and clear of any lien, mortgage, pledge, charge, equity,
claim, security interest or other encumbrance, including, without limitation,
any restriction on transfer.
(b) Such Selling Shareholder now have, and on the Closing Date will have,
full legal right, power and authorization, and any approval required by law, to
sell, assign transfer and deliver such Shares in the manner provided in this
Agreement, and upon delivery of and payment for such Shares hereunder, the
several Underwriters will acquire good and marketable title to such Shares free
and clear of any lien, claim, mortgage, pledge, charge, equity, security
interest or other encumbrance of any kind.
(c) This Agreement has been duly authorized, executed and delivered by or
on behalf of such Selling Shareholders and is the valid and binding agreement of
such Selling Shareholders enforceable against such Selling Shareholder in
accordance with its terms except insofar as enforceability may be affected by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally or by general equitable considerations and
except insofar as the indemnification and contribution provisions of Section 9
hereof may be affected by public policy concerns.
(d) Neither the execution and delivery of this Agreement by or on behalf
of such Selling Shareholder nor the consummation of the transactions herein
contemplated by or on behalf of such Selling Shareholder requires any consent,
approval, authorization or order of, or filing or registration with, any court,
regulatory body, administrative agency or other governmental body, agency or
official (except such as may be required under the Securities Act or such as may
be required under state securities or Blue Sky laws governing the purchase and
distribution of the Shares) or conflicts or will conflict with or constitutes or
will constitute a breach of, or default under, or violates or will violate, any
agreement, indenture or other instrument to which such Selling Shareholder is a
party or by which such Selling Shareholder is or may be bound or to which any of
such Selling Shareholder's property or assets is subject, or any statute, law,
rule, regulation, ruling, judgment, injunction, order or decree applicable to
such Selling Shareholder or to any property or assets of such Selling
Shareholder.
(e) The information under the caption "Principal and Selling Shareholders"
in the Prospectus, insofar as it relates to such Selling Shareholder, does not
and will not contain an 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 not misleading.
(f) Such Selling Shareholder does not have any knowledge or any reason to
believe that the Registration Statement or the Prospectus (or any amendment or
supplement thereto) contains any untrue statement of a material fact relating to
such Selling Shareholder or omits to
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state any material fact relating to such Selling Shareholder required to be
stated therein or necessary to make the statements therein not misleading.
(g) Such Selling Shareholder has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares, except for the lock-up arrangements
described in the Prospectus.
3. PURCHASE, SALE AND DELIVERY OF SHARES.
(a) On the basis of the representations, warranties, covenants and
agreements of the Company and the Selling Shareholders contained in this
Agreement and subject to the terms and conditions set forth in this Agreement,
the Company agrees to sell to the several Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company, at
a purchase price of $___ per share (the "purchase price per share"), that number
of Firm Shares which bears the same proportion to the aggregate number of Firm
Shares to be issued and sold by the Company as the number of Firm Shares set
forth opposite the name of such Underwriter in Schedule II hereto (subject to
adjustment as determined by the Representatives to avoid fractional shares and
as provided in Section 10 of this Agreement) bears to the aggregate number of
Firm Shares to be sold by the Company and the Selling Shareholders.
(b) On the basis of the representations, warranties, covenants and
agreements of the Company and the Selling Shareholders contained in this
Agreement and subject to the terms and conditions set forth in this Agreement,
the Selling Shareholders agree to sell to the several Underwriters, and each of
the Underwriters agrees, severally and not jointly, to purchase from each
Selling Shareholder, at the purchase price per share, that number of Firm Shares
which bears the same proportion to the number of Firm Shares set forth opposite
the name of such Selling Shareholder in Schedule I hereto as the number of Firm
Shares set forth opposite the name of such Underwriter in Schedule II hereto
(subject to adjustment as determined by the Representatives to avoid fractional
shares and as provided in Section 10 of this Agreement) bears to the aggregate
number of Firm Shares to be sold by the Company and the Selling Shareholders.
(c) With respect to Section 3(a) and 3(b) above, if a Pricing Agreement
is used and the purchase price per share has not been agreed upon and the
Pricing Agreement has not been executed and delivered by all parties thereto by
the close of business on the fourth business day following the date of this
Agreement, this Agreement shall terminate forthwith, without liability or other
obligation of any party to the other party, provided that the engagement letter,
dated as of April 14, 1998, between the Company and Van Kasper & Company will
remain in full force and effect to the extent stated in the next to the last
paragraph of such letter.
(d) On the basis of the several (and not joint) covenants and agreements
of the Underwriters contained in this Agreement and subject to the terms and
conditions set forth in this Agreement, the Company grants an option to the
several Underwriters to purchase from the Company, severally and not jointly,
all or any portion of the Option Shares at the same purchase price per share as
the Underwriters are to pay for the Firm Shares. This option may be exercised
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only to cover over-allotments in the sale of the Firm Shares by the
Underwriters and may be exercised in whole or in part at any time on or
before the 45th day after the date of the Prospectus upon written, telecopied
or telegraphic notice by the Representative to the Company setting forth the
aggregate number of Option Shares as to which the several Underwriters are
exercising the option and the settlement date. The Option Shares shall be
purchased severally, and not jointly, by each Underwriter, if purchased at
all, in the same proportion that the number of Firm Shares set forth opposite
the name of the Underwriter in Schedule II to this Agreement bears to the
total number of Firm Shares to be purchased by the Underwriters under Section
2(a) above, subject to such adjustments as the Representative in its absolute
discretion shall make to eliminate any fractional shares. Delivery of
certificates for the Option Shares, and payment therefor, shall be made as
provided in Section 3(e) and Section 3(f) below.
(e) Delivery of the Firm Shares and the Option Shares (if the option
granted by the Company in Section 3(d) above has been exercised not later than
6:30 a.m., West Coast time, on the date two business days preceding the Closing
Date), and payment therefor, less the nonaccountable expense allowance provided
for in Section 6(a)(ii) of this Agreement, shall be made at the office of Van
Kasper & Company, 600 California Street, Suite 1700, San Francisco, California
94111, at 6:30 a.m., West Coast time, on __________, 1998, or at such time on
such other day, not later than seven full business days after such date, as
shall be agreed upon in writing by the Company and the Representative, or as
provided in Section 10 of this Agreement. The date and hour of delivery and
payment for the Firm Shares are referred to in this Agreement as the "Closing
Date." As used in this Agreement, "business day" means a day on which the Nasdaq
National Market is open for trading and on which banks in New York and
California are open for business and not permitted by law or executive order to
be closed.
(f) If the option granted by the Company in Section 3(d) above is
exercised after 6:30 a.m., Los Angeles time, on the date two business days
preceding the Closing Date, delivery of the Option Shares and payment therefor,
less the applicable portion of the nonaccountable expense allowance provided for
in Section 6(a)(ii) of this Agreement, shall be made at the office of Van Kasper
& Company, 600 California Street, Suite 1700, San Francisco, California 94111,
at 6:30 a.m., West Coast time, on the date specified by the Representative
(which shall be three or four, or fewer, business days after the exercise of the
option, but not in excess of the period of time specified in the Rules and
Regulations).
(g) Payment of the purchase price for the Shares by the several
Underwriters shall be made by certified or official bank check or checks drawn
in next-day funds, payable to the order of the Company and the Selling
Shareholders. Such payment shall be made upon delivery of certificates for the
Shares to you for the respective accounts of the several Underwriters.
Certificates for the Shares to be delivered to you shall be registered in such
name or names and shall be in such denominations as the Representatives may
request at least two business days before the Closing Date, in the case of Firm
Shares, and at least one business day prior to the purchase of the Option
Shares, in the case of the Option Shares. Such certificates will be made
available to the Underwriters for inspection, checking and packaging at the
offices of [_____________________], not less than one full business day prior to
the Closing Date or, in
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the case of the Option Shares, by 3:00 p.m., New York time, on the first
business day preceding the date of purchase.
It is understood that the Representatives, individually and not on behalf
of the Underwriters, may (but shall not be obligated to) make payment to the
Company and the Selling Shareholders for Shares to be purchased by any
Underwriter whose check shall not have been received by the Representative on
the Closing Date or any later date on which Option Shares are purchased for the
account of such Underwriter. Any such payment shall not relieve such
Underwriter from any of its obligations hereunder.
(h) It is understood that the several Underwriters propose to offer the
Shares for sale to the public as soon as the Representatives deem it advisable
to do so. The Firm Shares are to be initially offered to the public at the
public offering price set forth (or to be set forth) in the Prospectus. The
Representatives may from time to time thereafter change the public offering
price and other selling terms.
(i) The information set forth in the last paragraph on the front cover
page (insofar as such information relates to the Underwriters), the legends
respecting stabilization and passive market making transactions set forth on the
inside front cover page and the statements set forth in the third paragraph and
in the final two paragraphs under the caption "Underwriting" in any Preliminary
Prospectus and in the final form of Prospectus filed pursuant to Rule 424(b)
constitute the only information furnished by the Underwriters to the Company for
inclusion in any Preliminary Prospectus, the Prospectus or the Registration
Statement.
4. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants and agrees
with the several Underwriters as follows:
(a) The Company will use its best efforts to cause the Registration
Statement, and any amendment thereof, if not effective at the time of execution
of this Agreement, to become effective as promptly as possible. If the
Registration Statement has become or becomes effective pursuant to Rule 430A, or
filing of the Prospectus is otherwise required under Rule 424(b), the Company
will file the Prospectus, properly completed (and in form and substance
reasonably satisfactory to the Underwriters) pursuant to Rule 424(b) within the
time period prescribed and will provide evidence satisfactory to the
Representatives of such timely filing. The Company will not file the
Prospectus, any amended Prospectus, any amendment (including post-effective
amendments) to the Registration Statement or any supplement to the Prospectus
without (i) advising the Representatives of and, a reasonable time prior to the
proposed filing of such amendment or supplement, furnishing the Representatives
with copies thereof and (ii) obtaining the prior consent of the Representatives
to such filing. The Company will prepare and file with the Commission, promptly
upon the request of the Representatives, any amendment to the Registration
Statement or supplement to the Prospectus that may be necessary or advisable in
connection with the distribution of the Shares by the Underwriters and use its
best efforts to cause the same to become effective as promptly as possible.
(b) The Company will promptly advise the Representatives (i) when the
Registration Statement becomes effective, (ii) when any post-effective amendment
thereof becomes effective,
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(iii) of any request by the Commission for any amendment of or supplement to
the Registration Statement or the Prospectus or for any additional
information, (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the institution
or threatening of any proceeding for that purpose and (v) of the receipt by
the Company of any notification with respect to the suspension of the
registration, qualification or exemption from registration or qualification
of the Shares for sale in any jurisdiction or the initiation or threatening
of any proceeding for such purpose. The Company will use its best efforts to
prevent the issuance of any such stop order or suspension and, if issued, to
obtain as soon as possible the withdrawal thereof.
(c) The Company will (i) on or before the Closing Date, deliver to you
and your counsel a signed copy of the Registration Statement as originally filed
and of each amendment thereto filed prior to the time the Registration Statement
becomes effective and, promptly upon the filing thereof, a signed copy of each
post-effective amendment, if any, to the Registration Statement (together with,
in each case, all exhibits thereto unless and to the extent previously furnished
to each of you and your counsel) and all documents filed by the Company with the
Commission under the Exchange Act and deemed to be incorporated by reference
into any Preliminary Prospectus or the Prospectus, if any, and will also deliver
to you, for distribution to the several Underwriters, a sufficient number of
additional conformed copies of each of the foregoing (excluding exhibits) so
that one copy of each may be distributed to each Underwriter, (ii) as promptly
as possible deliver to each of you and send to the several Underwriters, at such
office or offices as you may designate, as many copies of the Prospectus as you
may reasonably request and (iii) thereafter from time to time during the period
in which a prospectus is required by law to be delivered by an Underwriter or a
dealer, likewise send to the Underwriters as many additional copies of the
Prospectus and as many copies of any supplement to the Prospectus and of any
amended Prospectus, filed by the Company with the Commission, as you may
reasonably request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is required by
law to be delivered by an Underwriter or a dealer any event occurs as a result
of which it is necessary to supplement or amend the Prospectus in order to make
the Prospectus not misleading or so that the Prospectus will not omit to state a
material fact necessary to be stated therein, in each case at the time the
Prospectus is delivered to a purchaser of the Shares, or if it is necessary to
amend or to supplement the Prospectus to comply with the Securities Act or the
Rules and Regulations, the Company will forthwith prepare and file with the
Commission a supplement to the Prospectus or an amended Prospectus so that the
Prospectus as so supplemented or amended will not contain any untrue statement
of a material fact or omit to state any material fact necessary in order to make
the statements therein not misleading and so that it then will otherwise comply
with the Securities Act and the Rules and Regulations. If, after the public
offering of the Shares by the Underwriters and during such period, the
Underwriters propose to vary the terms of offering thereof by reason of changes
in general market conditions or otherwise, you will advise the Company in
writing of the proposed variation and if, in the opinion either of counsel for
the Company or counsel for the Underwriters, such proposed variation requires
that the Prospectus be supplemented or amended, the Company will forthwith
prepare and file with the Commission a supplement to the Prospectus or an
amended Prospectus setting forth such variation. The
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Company authorizes the Underwriters and all dealers to whom any of the Shares
may be sold by the Underwriters to use the Prospectus, as from time to time
so amended or supplemented and for the period when a prospectus is required
to be delivered, in connection with the sale of the Shares in accordance with
the applicable provisions of the Securities Act and the Rules and Regulations.
(e) The Company will cooperate with you and your counsel in the
qualification or registration of the Shares for offer and sale under the
securities or blue sky laws of such jurisdictions as you may designate and, if
applicable, in connection with exemptions from such qualification or
registration and, during the period in which a Prospectus is required by law to
be delivered by an Underwriter or a dealer, in keeping such qualifications,
registrations and exemptions in effect; PROVIDED, HOWEVER, that the Company
shall not be obligated to file any general consent to service of process or to
qualify to do business as a foreign corporation in any jurisdiction in which it
is not so qualified. The Company will, from time to time, prepare and file such
statements, reports and other documents as are or may be required to continue
such qualifications, registrations and exemptions in effect for so long a period
as you may reasonably request for the distribution of the Shares.
(f) During a period of five years commencing with the date of this
Agreement, the Company will promptly furnish to you and to each Underwriter who
may so request in writing copies of (i) all periodic and special reports
furnished by it to its shareholders, (ii) all information, documents and reports
filed by it with the Commission, the Nasdaq National Market, any securities
exchange or the National Association of Securities Dealers, Inc., (iii) all
press releases and material news items or articles in respect of the Company,
its products or affairs released or prepared by the Company (other than
promotional and marketing materials disseminated solely to customers and
potential customers of the Company in the ordinary course of business) and
(iv) any additional information concerning the Company or its business which the
Representatives or either of them reasonably request.
(g) As soon as practicable, but not later than the 45th day following the
end of the fiscal quarter first ending after the first anniversary of the
Effective Date, the Company will make generally available to its securities
holders and furnish to the Representative an earnings statement or statements in
accordance with Section 11(a) of the Securities Act and Rule 158 thereunder.
(h) The Company agrees that, without the prior written consent of Van
Kasper & Company, the Company will not, directly or indirectly, sell, offer,
contract to sell, grant any option to purchase or otherwise dispose of any
shares of Common Stock, or any securities convertible into, exchangeable for or
exercisable for Common Stock, or any rights to purchase or acquire Common Stock,
for a period of 120 days following the date of this Agreement, excluding only
(i) the sale of the Shares to be sold to the Underwriters pursuant to this
Agreement and (ii) the grant of options to purchase Common Stock, exercisable
after that 120-day period, or the issuance of shares of Common Stock upon the
exercise of options granted under the Company's presently authorized employee
plans that are described in the Prospectus
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or, if applicable, in documents incorporated therein, in accordance with the
provisions of such plans as so authorized.
(i) The Company will apply the net proceeds from the offering received by
it in the manner set forth under the caption "Use of Proceeds" in the
Prospectus.
(j) The Company will, and at all times for a period of at least five
years after the date of this Agreement, unless such securities are then listed
on a national securities exchange, cause the Common Stock (including the Shares)
to be included for quotation on the Nasdaq National Market, and the Company will
comply with all registration, filing, reporting and other requirements of the
Exchange Act and the Nasdaq National Market which may from time to time be
applicable to the Company.
(k) The Company will use its best efforts to maintain insurance of the
types and in the amounts which it deems adequate for its business consistent
with insurance coverage maintained by companies of similar size and engaged in
similar businesses including, but not limited to, general liability insurance
covering all real and personal property owned or leased by the Company against
theft, damage, destruction, acts of vandalism and all other risks customarily
insured against.
(l) In accordance with the Warrant Agreement, which the Company has
executed and delivered, the Company agrees, upon its receipt of the purchase
price therefor (as specified in the Warrant Agreement), to deliver to you
(individually and not as the Representatives of the Underwriters) on the Closing
Date and simultaneously with completion of the purchase and sale of the Firm
Shares, in such amounts as you supplementally advise the Company in writing,
Warrants (in the form attached as Exhibit A to the Warrant Agreement)
representing the right to purchase 75,000 shares of Common Stock at a price
equal to 120% of the offering price per share to the public as set forth or to
be set forth on the Cover Page of the Prospectus or in the Term Sheet.
5. FURTHER AGREEMENTS OF THE SELLING SHAREHOLDERS. Each of the Selling
Shareholders covenants and agrees with the several Underwriters as follows:
(a) Such Selling Shareholder will cooperate to the extent necessary to
cause the Registration Statement or any post-effective amendment thereto to
become effective at the earliest possible time.
(b) Such Selling Shareholder will pay all Federal, state, foreign and
other taxes, if any on the transfer or sale of the Shares being sold by the
Selling Shareholder to the Underwriters.
(c) Such Selling Shareholder will do or perform all things required to be
done or performed by the Selling Shareholder prior to the Closing Date to
satisfy all conditions precedent to the delivery of the Shares pursuant to this
Agreement.
(d) Such Selling Shareholder has executed or will execute an agreement
referred to in Section 1(f) and will not, in each case directly or indirectly,
sell, offer, contract to sell, grant any
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option to purchase or otherwise dispose of any shares of Common Stock, or any
securities convertible into, exchangeable for or exercisable for Common
Stock, or any rights to purchase or acquire Common Stock, for a period of 120
days following the date of this Agreement.
(e) Such Selling Shareholder will not take, directly or indirectly, any
action designed to or that might reasonably be expected to cause or result in
stabilization or manipulation of the price of the Common Stock to facilitate the
sale or resale of the Shares.
(f) Such Selling Shareholder will advise you promptly, and if requested
by you, will confirm such advice in writing, within the period of time referred
to in Section 7(f) hereof, of any change in information relating to such Selling
Shareholder or any new information relating to such Selling Shareholder which is
stated in the Prospectus or any amendment or supplement thereto which comes to
the attention of such Selling Shareholder that suggests that any statement made
in the Registration Statement or the Prospectus relating to such Selling
Shareholder (as then amended or supplemented, if amended or supplemented) is or
may be untrue in any material respect or that the Registration Statement or
Prospectus (as then amended or supplemented, if amended or supplemented) omits
or may omit to state a material fact or a fact necessary to be stated therein in
order to make the statements therein relating to such Selling Shareholder not
misleading in any material respect, or of the necessity to amend or supplement
the Prospectus (as then amended or supplemented, if amended or supplemented) in
order to comply with the Securities Act or any other law.
6. FEES AND EXPENSES.
(a) The Company agrees with each Underwriter that:
(i) The Company will pay and bear all costs and expenses in connection
with: the preparation, printing and filing of the Registration Statement
(including financial statements, schedules and exhibits), Preliminary
Prospectuses and the Prospectus, any drafts of each of them and any amendments
or supplements to any of them; the duplication or, if applicable, printing
(including all drafts thereof) of this Agreement, the Agreement Among
Underwriters, any Selected Dealer Agreements, the Warrant Agreement, the
Preliminary Blue Sky Survey and any Supplemental Blue Sky Survey or Memorandum,
the Underwriters' Questionnaire and the Power of Attorney and the duplication
and printing (including of drafts thereof) of any other underwriting documents
and material (including but not limited to marketing memoranda and other
marketing material) in connection with the offering, purchase, sale and delivery
of the Shares; the issuance and delivery of the Shares under this Agreement to
the several Underwriters, including all expenses, taxes, duties, fees and
commissions on the purchase and sale of the Shares and Nasdaq National Market
brokerage and transaction levies with respect to the purchase and, if
applicable, the sale of the Shares (x) incident to the sale and delivery of the
shares by the Company and the Selling Shareholders to the several Underwriters
and (y) incident to the sale and delivery of the Shares by the Underwriters to
the initial purchasers thereof; the cost of printing all stock certificates; the
Transfer Agents' and Registrars' fees; the fees and disbursements of counsel for
the Company; all fees and other charges of the Company's independent public
accountants; the cost of furnishing to the several Underwriters copies of the
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Registration Statement (including appropriate exhibits), Preliminary
Prospectus(es) and the Prospectus, the agreements and other documents and
instruments referred to above and any amendments or supplements to any of the
foregoing; NASD filing fees and the cost of qualifying or registering the
Shares (or obtaining exemptions from qualification or registration) under the
laws of such jurisdictions as you may designate (including filing fees in
connection with such NASD filings and filing fees and fees and disbursements
and costs/charges of Underwriters' counsel in connection with such state
securities or Blue Sky qualifications, registrations and exemptions); all
fees and expenses in connection with qualification of the Shares for
inclusion for quotation on the Nasdaq National Market; advertising and
roadshow expenses; and all other expenses incurred by the Company in
connection with the performance of its obligations hereunder.
(ii) In addition to its obligations under Section 6(a)(i) above, the
Company agrees to pay the Representative a non-accountable expense allowance
equal to 0.75% of the public offering price of the Shares. Such allowance shall
be paid to the Representatives as provided in Sections 3(e) and 3(t) of this
Agreement.
(iii) In addition to its obligations under Section 9(a) of this
Agreement, the Company agrees that, as an interim measure during the pendency of
any claim, action, investigation, inquiry or other proceeding arising out of or
based upon any loss, claim, damage or liability described in Section 9(a) of
this Agreement, it will reimburse or advance to or for the benefit of the
Underwriters, and each of them, on a monthly basis (or more often, if requested)
for all legal and other expenses incurred in connection with investigating or
defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Company's obligation to reimburse or advance for the
benefit of the Underwriters for such expenses or the possibility that such
payments might later be held to have been improper by a court of competent
jurisdiction. To the extent that any portion, or all, of any such interim
reimbursement payments or advances are so held to have been improper, the
Underwriters receiving the same must promptly return such amounts to the Company
together with interest, compounded daily, at the prime rate (or other commercial
lending rate for borrowers of the highest credit standing) announced from time
to time by Bank of America, NT&SA, San Francisco, California (the "Prime Rate"),
but not in excess of the maximum rate permitted by applicable law. Any such
interim reimbursement payments or advances that are not made to or for the
Underwriters within 30 days of a request for reimbursement or for an advance
will bear interest at the Prime Rate, but not in excess of the maximum rate
permitted by applicable law, from the date of such request until the date paid.
(b) In addition to their obligations under Section 9(b) of this
Agreement, the Selling Shareholders severally and in proportion to their
obligation to sell Firm Shares as set forth on Schedule I hereto, agree that, as
an interim measure during the pendency of any claim, action, investigation,
inquiry or other proceeding arising out of or based upon any loss, claim, damage
or liability described in Section 9(b) of this Agreement, they will reimburse or
advance to or for the benefit of the Underwriters, and each of them, on a
monthly basis (or more often, if requested) for all legal and other expenses
incurred in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the
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absence of a judicial determination as to the propriety or enforceability of
the Selling Shareholders' obligation to reimburse or advance for the benefit
of the Underwriters for such expenses and the possibility that such payments
or advances might later be held to have been improper by a court of competent
jurisdiction. To the extent that any portion, or all, of any such interim
reimbursement payments or advances are so held to have been improper, the
Underwriters receiving the same must promptly return such amounts to the
Underwriters together with interest, compounded daily, at the Prime Rate, but
not in excess of the maximum rate permitted by applicable law. Any such
interim reimbursement payments or advances that are not made to or for the
Underwriters within 30 days of a request for reimbursement or for an advance
will bear interest at the Prime Rate, but not in excess of the maximum rate
permitted by applicable law, from the date of such request until the date
paid.
(c) In addition to their obligations under Section 9(c) of this
Agreement, the Underwriters severally and in proportion to their obligation to
purchase Firm Shares as set forth on Schedule I hereto, agree that, as an
interim measure during the pendency of any claim, action, investigation, inquiry
or other proceeding arising out of or based upon any loss, claim, damage or
liability described in Section 9(c) of this Agreement, they will reimburse or
advance to or for the benefit of the Company or any Selling Shareholder on a
monthly basis (or more often, if requested) for all legal and other expenses
incurred by the Company or any Selling Shareholder in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety or enforceability of the Underwriters' obligation to reimburse or
advance for the benefit of the Company or any Selling Shareholder for such
expenses and the possibility that such payments or advances might later be held
to have been improper by a court of competent jurisdiction. To the extent that
any portion, or all, of any such interim reimbursement payments or advances are
so held to have been improper, the Company and the Selling Shareholders, as the
case may be, must promptly return such amounts to the Underwriters together with
interest, compounded daily, at the Prime Rate, but not in excess of the maximum
rate permitted by applicable law. Any such interim reimbursement payments or
advances that are not made to the Company or the Selling Shareholders within 30
days of a request for reimbursement or for an advance will bear interest at the
Prime Rate, but not in excess of the maximum rate permitted by applicable law,
from the date of such request until the date paid.
(d) Any controversy arising out of the operation of the interim
reimbursement and advance arrangements set forth in Sections 6(a)(iii), 6(b) and
6(c) above, including the amounts of any requested reimbursement payments or
advance, the method of determining such amounts and the basis on which such
amounts shall be apportioned among the indemnifying parties, shall be settled by
arbitration conducted under the provisions of the Constitution and Rules of the
Board of Governors of the New York Stock Exchange, Inc. or pursuant to the Code
of Arbitration Procedure of the NASD. Any such arbitration must be commenced by
service of a written demand for arbitration or a written notice of intention to
arbitrate, therein electing the arbitration tribunal. If the party demanding
arbitration does not make a designation of an arbitration tribunal in the demand
or notice, then the party responding to the demand or notice is authorized to do
so. Any such arbitration will be limited to the interpretation and obligations
of the parties under the interim reimbursement and advance provisions contained
in Sections
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6(a)(iii), 6(b) and 6(c) above and will not resolve the ultimate propriety or
enforceability of the obligation to indemnify for or contribute to expenses
that is created by the provisions of Section 9 of this Agreement.
(e) If the sale of the Shares provided for herein is not consummated
because any condition to the obligations of the Underwriters set forth in
Section 7 of this Agreement is not satisfied, or because of any termination
pursuant to Section 11(b) of this Agreement, or because of any refusal,
inability or failure on the part of the Company or any Selling Shareholder to
perform any covenant or agreement set forth in this Agreement or to comply with
any provision of this Agreement other than by reason of a default by any of the
Underwriters, the Company agrees to reimburse the several Underwriters upon
demand for all out-of-pocket expenses (including fees and disbursements of
counsel) that have been incurred by any or all of them in connection with
investigating, preparing to market or marketing the Shares or otherwise in
connection with this Agreement.
7. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several obligations of
the Underwriters to purchase and pay for the Shares is subject, in the sole
discretion of the Representatives, to the accuracy as of the date of execution
of this Agreement, the Closing Date and the date on which the Option Shares are
to be purchased, as the case may be, of the representations and warranties of
the Company and of the Selling Shareholders set forth in this Agreement, to the
accuracy of the statements of the Selling Shareholders and of Company and its
officers made in any certificate delivered pursuant to this Agreement, to the
performance by the Company and by the Selling Shareholders of all of their
respective obligations to be performed under this Agreement at or prior to the
Closing Date or any later date on which Option Shares are to be purchased, as
the case may be, to the satisfaction of all conditions to be satisfied or
performed by the Company and by the Selling Shareholders at or prior to the
applicable date and to the following additional conditions:
(a) The Registration Statement must have become effective (or, if a
post-effective amendment is required to be filed pursuant to Rule 430A under
the Securities Act, such post-effective amendment shall become effective and
the Company shall have provided evidence satisfactory to the Representatives
of such filing and effectiveness) not later than 5:00 p.m., New York time, on
the date of this Agreement or at such later date and time as you may approve
in writing and, at the Closing Date or, with respect to the Option Shares,
the date on which such Option Shares are to be purchased; no stop order
suspending the effectiveness of the Registration Statement or any
qualification, registration or exemption from qualification or registration
for the sale of the Shares in any jurisdiction shall have been issued and no
proceedings for that purpose shall have been instituted or threatened; and
any request for additional information on the part of the Commission shall
have been complied with to the reasonable satisfaction of the Representatives
and their counsel.
(b) You must have received from Gibson, Dunn & Crutcher LLP, counsel for
the Underwriters, an opinion, dated the Closing Date, with respect to the
issuance and sale of the Shares and such other related matters as the
Representatives may reasonably require, and the
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Company and the Selling Shareholders shall have furnished such counsel with
all documents which they may request for the purpose of enabling them to pass
upon such matters.
(c) You must have received on the Closing Date and on any later date on
which Option Shares are purchased, as the case may be, the opinion of Petillon &
Hansen, counsel for the Company, addressed to the Underwriters and dated the
Closing Date or such later date, with reproduced copies or signed counterparts
thereof for each of the Underwriters, covering the matters set forth in Annex A
to this Agreement and in form and substance satisfactory to you.
(d) You must have received on the Closing Date the opinion of Petillon &
Hansen, counsel for the Selling Shareholders, addressed to the Underwriters and
dated the Closing Date or such later date, with reproduced copies or signed
counterparts thereof for each of the Underwriters, covering the matters set
forth in Annex B to this Agreement and in form and substance satisfactory to
you.
(e) You must be satisfied that there has not been any material change in
the market for securities in general or in political, financial or economic
conditions as to render it impracticable in your sole judgment to make a public
offering of the Shares, or a material adverse change in market levels for
securities in general (or those of companies in particular) or financial or
economic conditions which render it inadvisable to proceed.
(f) You shall have received on the Closing Date and on any later date on
which Option Shares are purchased a certificate, dated the Closing Date or such
later date, as the case may be, and signed by the Chief Executive Officer and
the Chief Financial Officer of the Company stating that:
(i) the representations and warranties of the Company set forth
in Section 1 of this Agreement are true and correct with the
same force and effect as if expressly made at and as of the
Closing Date or such later date, and the Company has
complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or
prior to the Closing Date or such later date;
(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings
for that purpose have been instituted or are pending or are
threatened under the Securities Act; and
(iii) (A) the respective signers of the certificate have carefully
examined the Registration Statement in the form in which it
originally became effective and the Prospectus and any
supplements or amendments to any of them and, as of the
Effective Date, the statements made in the Registration
Statement and the Prospectus were true and correct in all
material respects and neither the Registration Statement nor
the Prospectus omitted to state any material fact required
to be stated therein or necessary in order to make the
statements therein not misleading, (B) since the Effective
Date, no event has occurred that should have been set forth
in an amendment to the Registration Statement
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or a supplement or amendment to the Prospectus that has not
been set forth in such an amendment or supplement, (C) since
the respective dates as of which information is given in the
Registration Statement in the form in which it originally
became effective and the Prospectus contained therein, there
has not been any material change or any development
involving a prospective material change in or affecting the
business, properties, condition (financial or otherwise),
results of operations or prospects of the Company, whether
or not arising from transactions in the ordinary course of
business, and, since such dates, except in the ordinary
course of business, the Company has not entered into any
material transaction not referred to in the Registration
Statement in the form in which it originally became
effective and the Prospectus contained therein, (D) there
are not any pending or known threatened legal proceedings to
which the Company is a party or of which property of the
Company is the subject which are material and which are not
disclosed in the Registration Statement and the Prospectus
and (E) there are not any license agreements, contracts,
leases or other documents that are required to be filed as
exhibits to the Registration Statement that have not been
filed as required.
(g) You must have received on the Closing Date and on any later date on
which Option Shares are purchased a certificate from each Selling Shareholder,
dated the Closing Date and signed by or on behalf such Selling Shareholder,
stating that the representations and warranties of the Selling Shareholder set
forth in Section 2 of this Agreement are true and correct with the same force
and effect as if expressly made at and as of the Closing Date and the Selling
Shareholder has complied with all the agreements and satisfied all the
conditions on his part to be performed or satisfied at or prior to the Closing
Date.
(h) You must have received from KPMG Peat Marwick LLP a letter or
letters, addressed to the Underwriters and dated the Closing Date and any later
date on which Option Shares are purchased, confirming that they are independent
accountants with respect to the Company within the meaning of the Securities Act
and the applicable published Rules and Regulations thereunder and, based upon
the procedures described in their letter, referred to below, delivered to you
concurrently with the execution of this Agreement (the "Original Letter"), but
carried out to a date not more than five business days prior to the Closing Date
or such later date on which Option Shares are purchased, (i) confirming, to the
extent true, that the statements and conclusions set forth in the Original
Letter are accurate as of the Closing Date or such later date, as the case may
be, and (ii) setting forth any revisions and additions to the statements and
conclusions set forth in the Original Letter that are necessary to reflect any
changes in the facts described in the Original Letter since the date of the
Original Letter or to reflect the availability of more recent financial
statements, data or information. Such letters shall not disclose any change, or
any development involving a prospective change, in or affecting the business,
properties or condition (financial or otherwise), results of operations or
prospects of the Company which, in your sole judgment, makes it impractical or
inadvisable to proceed with the public offering of the Shares or the purchase of
the Option Shares as contemplated by the Prospectus (or, if the Prospectus is
not in existence, the most recent
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Preliminary Prospectus). In addition, you shall have received from KPMG Peat
Marwick LLP, on or prior to the Closing Date, a letter addressed to the
Company and made available to you for the use of the Underwriters stating
that their review of the Company's system of internal controls, to the extent
they deemed necessary in establishing the scope of their examination of the
Company's financial statements as of December 31, 1997 or in delivering their
Original Letter, did not disclose any weaknesses in internal controls that
they considered to be a material weaknesses.
(i) Prior to the Closing Date, the Shares must have been designated
national market system securities, duly authorized for quotation on the Nasdaq
National Market upon official notice of issuance.
(j) On or prior to the Closing Date, you must have received from all
Material Holders executed agreements covering the matters described in
Section 1(t) of this Agreement.
(k) On or prior to the Closing Date, the Company must have entered into
the Warrant Agreement, substantially in the form filed as Exhibit 4.1 to the
Registration Statement; and on the Closing Date, concurrently with the purchase
and sale of the Firm Shares, the Company must have issued, sold and delivered
the Warrants to the Representatives.
(l) The Company and each Selling Shareholder must have furnished to you
such further certificates and documents as you reasonably request (including
certificates of officers of the Company), as to the accuracy of the
representations and warranties of the Company or either Selling Shareholder set
forth in this Agreement, the performance by the Company or either Selling
Shareholder of their respective obligations under this Agreement and the other
conditions concurrent and precedent to the obligations of the Underwriters under
this Agreement.
All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement will be in compliance with the provisions of this
Agreement only if they are reasonably satisfactory to the Representatives. The
Company and each Selling Shareholder must furnish you with such number of
conformed copies of such opinions, certificates, letters and documents as you
reasonably request.
If any of the conditions specified in this Section 7 have not been
fulfilled in all material respects when and as provided in this Agreement, time
being of the essence, or if any of the opinions and certificates mentioned above
or elsewhere in this Agreement are not in all material respects reasonably
satisfactory in form and substance to the Representatives and their counsel,
this Agreement and all obligations of the Underwriters hereunder may be canceled
by the Representatives at, or at any time prior to, the Closing Date or (with
respect to the Option Shares) prior to the date upon which the Option Shares are
to be purchased, as the case may be. Notice of such cancellation must be given
to the Company and the Selling Shareholders in writing or by telephone, telecopy
or telegraph confirmed in writing. Any such termination shall be without
liability of the Company or the Selling Shareholders to the Underwriters (except
as provided in Section 6 or Section 9 of this Agreement) and without liability
of the Underwriters to the Company or the Selling Shareholders (except to the
extent provided in Section 9 of this Agreement).
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8. CONDITIONS OF THE OBLIGATION OF THE COMPANY. The obligations of the
Company and the Selling Shareholders to sell and deliver the Shares required
to be delivered as and when specified in this Agreement are subject to the
condition that, at the Closing Date or (with respect to the Option Shares)
the date upon which the Option Shares are to be purchased, no stop order
suspending the effectiveness of the Registration Statement is in effect and
no proceedings therefor are pending or threatened by the Commission.
9. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person (including each partner or officer thereof) who controls any
Underwriter within the meaning of Section 15 of the Securities Act from and
against any and all losses, claims, damages or liabilities, joint or several,
to which such indemnified parties or any of them may become subject under the
Securities Act, the Exchange Act or other federal or state statute, law or
regulation, at common law or otherwise, specifically including but not
limited to losses, claims, damages or liabilities (or actions in respect
thereof) related to negligence on the part of any Underwriter, and the
Company agrees to reimburse each such Underwriter and controlling person for
any legal or other expenses (including, except as otherwise provided below,
settlement expenses and fees and disbursements and costs/charges of counsel)
incurred by the respective indemnified parties in connection with defending
against any such losses, claims, damages or liabilities or in connection with
any investigation or inquiry of, or other proceeding that may be brought
against, the respective indemnified parties, in each case insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon, in whole or in part, (i) any breach of any
representation, warranty, covenant or agreement of the Company in this
Agreement, (ii) any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement in the form originally
filed or in any amendment thereto (including in the Prospectus) or any
post-effective amendment thereto, or the omission or alleged 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 they
were made, not misleading, (iii) any untrue statement or alleged untrue
statement of a material fact contained in any Preliminary Prospectus or the
Prospectus (as amended or as supplemented if the Company has filed with the
Commission any amendment thereof or supplement thereto) or the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading or (iv) any
untrue statement or alleged untrue statement of a material fact contained in
any application or other document, or any amendment or supplement thereto,
executed by the Company or based upon written information furnished by or on
behalf of the Company filed in any jurisdiction in order to qualify or
register the Shares under the securities or Blue Sky laws thereof or to
obtain an exemption from such qualification or registration or filed with the
Commission or any securities association, the Nasdaq National Market or any
securities exchange, or the omission or alleged 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 they were made,
not misleading; PROVIDED, HOWEVER, that (1) the indemnity agreements of the
Company contained in this Section 9(a) will not apply to any such losses,
claims, damages, liabilities or expenses if such statement or omission was
made in
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reliance upon and in conformity with information furnished in writing to the
Company by or on behalf of any Underwriter through the Representatives
specifically for use in the Registration Statement, any Preliminary
Prospectus or the Prospectus or any such amendment thereof or supplement
thereto and (2) the indemnity agreement contained in this Section 9(a) with
respect to any Preliminary Prospectus shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages,
liabilities or expenses purchased the Shares that are the subject thereof (or
to the benefit of any person controlling such Underwriter) if the Company can
demonstrate that at or prior to the written confirmation of the sale of such
Shares a copy of the Prospectus (or the Prospectus as amended or
supplemented) (excluding the documents incorporated therein by reference, if
any) was not sent or delivered to such person and the untrue statement or
omission of a material fact contained in such Preliminary Prospectus was
corrected in the Prospectus (or the Prospectus as amended or supplemented),
unless the failure is the result of noncompliance by the Company with Section
4 of this Agreement. The indemnity agreements of the Company contained in
this Section 9(a) and the representations and warranties of the Company
contained in Section 1 of this Agreement will remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
indemnified party and will survive the delivery of and payment for the
Shares. This indemnity agreement is in addition to any liabilities which the
Company may otherwise have.
(b) Each Selling Shareholder, severally and not jointly, agrees to
indemnify and hold harmless each Underwriter and each person (including each
partner or officer thereof) who controls such Underwriter within the meaning
of Section 15 of the Securities Act from and against any and all losses,
claims, damages or liabilities, joint or several, to which such indemnified
parties or any of them may become subject under the Securities Act, the
Exchange Act, or other federal or state statute, law or regulation, at common
law or otherwise and to reimburse each of them for any legal or other
expenses (including, except as otherwise provided below, settlement expenses
and fees and disbursements and costs/charges of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any
investigation or inquiry of, or other proceeding that may be brought against,
the respective indemnified parties, in each case arising out of or based upon
(i) any breach of any representation, warranty, covenant or agreement of the
indemnifying Selling Shareholder in this Agreement, (ii) any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement (including in the Prospectus) or any post-effective amendment
thereto, or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading or
(iii) any untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus or the Prospectus (as amended or as
supplemented if the Company has filed with the Commission any amendment
thereof or supplement thereto) or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary in order
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, but in each case under clauses (ii) and (iii)
above, as the case may be, only if such statement or omission was made in
reliance upon and in conformity with information furnished in writing by or
on behalf of such indemnifying Selling Shareholder specifically for use in
the Registration Statement, any Preliminary Prospectus or the Prospectus or
any such amendment
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thereof or supplement thereto. The indemnity agreement of each Selling
Shareholder contained in this Section 9(b) will remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
indemnified party and will survive the delivery of and payment for the
Shares. This indemnity agreement shall be in addition to any liabilities
which each Selling Shareholder may otherwise have.
(c) Each Underwriter, severally and not jointly, agrees to indemnify
and hold harmless the Company, each of its officers who signs the
Registration Statement, each of its directors, each Selling Shareholder, each
other Underwriter and each person (including each partner or officer thereof)
who controls the Company or any such other Underwriter within the meaning of
Section 15 of the Securities Act from and against any and all losses, claims,
damages or liabilities, joint or several, to which such indemnified parties
or any of them may become subject under the Securities Act, the Exchange Act,
or other federal or state statute, law or regulation or at common law or
otherwise and to reimburse each of them for any legal or other expenses
(including, except as otherwise provided below, settlement expenses and fees
and disbursements and costs/charges of counsel) incurred by the respective
indemnified parties in connection with defending against any such losses,
claims, damages or liabilities or in connection with any investigation or
inquiry of, or other proceeding that may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any breach
of any representation, warranty, covenant or agreement of the indemnifying
Underwriter in this Agreement, (ii) any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement
(including the Prospectus) or any post-effective amendment thereto, or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading or (iii) any
untrue statement or alleged untrue statement of a material fact contained in
any Preliminary Prospectus or the Prospectus (as amended or as supplemented
if the Company has filed with the Commission any amendment thereof or
supplement thereto) or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, but in each case under clauses (ii) and (iii) above, as
the case may be, only if such statement or omission was made in reliance upon
and in conformity with information furnished in writing by or on behalf of
such indemnifying Underwriter through the Representatives specifically for
use in the Registration Statement, any Preliminary Prospectus or the
Prospectus or any such amendment thereof or supplement thereto. The Company
and the Selling Shareholders acknowledge and agree that the matters described
in Section 3(i) of this Agreement constitute the only information furnished
in writing by or on behalf of the several Underwriters for inclusion in the
Registration Statement, any Preliminary Prospectus or the Prospectus. The
indemnity agreement of each Underwriter contained in this Section 9(c) will
remain operative and in full force and effect regardless of any investigation
made by or on behalf of any indemnified party and will survive the delivery
of and payment for the Shares. This indemnity agreement shall be in addition
to any liabilities which each Underwriter may otherwise have.
(d) Each person or entity indemnified under the provisions of Sections
9(a), 9(b) and 9(c) above agrees that, upon the service of a summons or other
initial legal process upon it in
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any action or suit instituted against it or upon its receipt of written
notification of the commencement of any investigation or inquiry of, or
proceeding against, it in respect of which indemnity may be sought on account
of any indemnity agreement contained in such Sections, it will, if a claim in
respect thereunder is to be made against the indemnifying party or parties
under this Section 9, promptly give written notice (the "Notice") of such
service or notification to the party or parties from whom indemnification may
be sought hereunder. No indemnification provided for in Sections 9(a), 9(b)
or 9(c) above will be available to any person who fails to so give the Notice
if the party to whom such Notice was not given was unaware of the action,
suit, investigation, inquiry or proceeding to which the Notice would have
related, but only to the extent such party was materially prejudiced by the
failure to receive the Notice, and the omission so to notify such
indemnifying party or parties will not relieve such indemnifying party or
parties from any liability which it or they may have to the indemnified party
for contribution or otherwise than on account of Sections 9(a), 9(b) and
9(c). Any indemnifying party will be entitled at its own expense to
participate in the defense of any action, suit or proceeding against, or
investigation or inquiry of, an indemnified party. Any indemnifying party
will be entitled, if it so elects within a reasonable time after receipt of
the Notice by giving written notice (the "Notice of Defense") to the
indemnified party, to assume (alone or in conjunction with any other
indemnifying party or parties) the entire defense of such action, suit,
investigation, inquiry or proceeding, in which event the defense will be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to
the indemnified party or parties; PROVIDED, HOWEVER, that (i) if the
indemnified party or parties reasonably determine that there may be a
conflict between the positions of the indemnifying party or parties and of
the indemnified party or parties in conducting the defense of such action,
suit, investigation, inquiry or proceeding or that there may be legal
defenses or rights available to such indemnified party or parties different
from or in addition to those available to the indemnifying party or parties,
then separate counsel for and selected by the indemnified party or parties
shall be entitled to conduct the defense of the indemnified parties at the
expense of the indemnifying parties and (ii) PROVIDED, FURTHER, that the
indemnifying party will not be liable for the fees and expenses of more than
one separate counsel, reasonably approved by the indemnifying party, for all
of the indemnified parties, plus, if applicable, local counsel in each
jurisdiction. In addition, in any event, the indemnified party or parties
shall be entitled to have counsel selected by such indemnified party or
parties participate in, but not conduct, the defense. If, within a
reasonable time after receipt of the Notice, an indemnifying party gives a
Notice of Defense and, unless separate counsel is to be chosen by the
indemnified party or parties as provided above, the counsel chosen by the
indemnifying party or parties is reasonably satisfactory to the indemnified
party or parties, the indemnifying party or parties will not be liable under
Sections 9(a) through 9(d) for any legal expenses subsequently incurred by
the indemnified party or parties in connection with the defense of the
action, suit, investigation, inquiry or proceeding, except that (A) the
indemnifying party or parties shall bear and pay the legal and other expenses
incurred in connection with the conduct of the defense as referred to in
clause (i) of the PROVIDED, HOWEVER the preceding sentence and (B) the
indemnifying party or parties will bear and pay such other expenses as it or
they have authorized to be incurred by the indemnified party or parties. If,
within a reasonable time after receipt of the Notice, no Notice of Defense
has been given, the indemnifying party or
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parties will be responsible for any legal or other expenses incurred by the
indemnified party or parties in connection with the defense of the action,
suit, investigation, inquiry or proceeding.
(e) In order to provide for just and equitable contribution in any
action in which a claim for indemnification is made pursuant to this Section
9 but is judicially determined (by the entry of a final judgment or decree by
a court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right to appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 9 provides
for indemnification in such case, each indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of the
losses, claims, damages, liabilities and expenses referred to in Section
9(a), 9(b) or 9(c) above (i) in such proportion as is appropriate to reflect
the relative benefits received by each indemnifying party from the offering
of the Shares or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of each party in connection with the statements or omissions
that resulted in such losses, claims, damages or liabilities, or actions in
respect thereof, as well as any other relevant equitable considerations. The
relative benefits received by the Company, the Selling Shareholders and the
Underwriters will be deemed to be in the same respective proportions as the
total proceeds from the offering of the Shares, net of the underwriting
discounts, received by the Company and the Selling Shareholders and the total
underwriting discount retained by the Underwriters bear to the aggregate
public offering price of the Shares. Relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by a party and the party's
relative intent, knowledge, access to information and opportunity to correct
or prevent such untrue statement or omission.
The parties agree that it would not be just and equitable if
contribution pursuant to this Section 9(e) were to be determined by PRO RATA
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into
account the considerations referred to in the first paragraph of this Section
9(e). The amount paid by an indemnified party as a result of the losses,
claims, damages or liabilities, or actions in respect thereof, referred to in
the first sentence of this Section 9(e) will be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating, preparing to defend or defending against any action or
claim which is the subject of this Section 9(e). Notwithstanding the
provisions of this Section 9(e), no Underwriter shall be required to
contribute any amount in excess of the underwriting discount applicable to
the Shares purchased by that Underwriter. For purposes of this Section 9(e),
each person who controls an Underwriter within the meaning of the Securities
Act shall have the same rights to contribution as such Underwriter, and each
person who controls the Company within the meaning of the Securities Act,
each officer of the Company who signed the Registration Statement and each
director of the Company shall have the same rights to contribution as the
Company, subject in each case to the immediately preceding and immediately
following sentences. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled
to contribution from any person who was not guilty of such fraudulent
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misrepresentation. The Underwriters' obligations to contribute in this
Section 9(e) are several in proportion to their respective underwriting
obligations and not joint.
Each party or other entity entitled to contribution agrees that upon
the service of a summons or other initial legal process upon it in any action
instituted against it in respect of which contribution may be sought, it will
promptly give written notice of such service to the party or parties from
whom contribution may be sought, but the omission so to notify such party or
parties of any such service shall not relieve the party from whom
contribution may be sought from any obligation it may have hereunder or
otherwise (except as specifically provided in Section 9(d) above).
(f) Neither the Company nor any Selling Shareholder may, without the
prior written consent of each Underwriter, settle or compromise or consent to
the entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be sought
hereunder (whether or not such Underwriter or any person who controls such
Underwriter within the meaning of Section 15 of the Securities Act is a party
to such claim, action, suit or proceeding), unless such settlement,
compromise or consent includes an unconditional release of each such
Underwriter and each such controlling person from all liability arising out
of such claim, action, suit or proceeding.
(f) No Underwriter may, without the consent of the Company or
indemnified Selling Shareholder, as the case may be, settle or compromise or
consent to the entry of any judgment in any pending or threatened claim,
action, suit or proceeding in respect of which indemnification or
contribution may be sought hereunder (whether or not the Company or such
Selling Shareholder is a party to such claim, action, suit or proceeding),
which consent shall not be unreasonably withheld, unless such settlement,
compromise or consent includes an unconditional release of the Company, each
of its officers who signed the Registration Statement, each of its directors
and each person who controls the Company within the meaning of Section 15 of
the Securities Act, or such Selling Shareholder, from all liability arising
out of such claim, action, suit or proceeding.
(g) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions of this Agreement, including, without
limitation, the provisions of Sections 6(a)(iii), 6(b) and 6(c) and this
Section 9 of this Agreement and that they are fully informed regarding all
such provisions. They further acknowledge that the provisions of Sections
6(a)(iii), 6(b) and 6(c) and this Section 9 fairly allocate the risks in
light of the ability of the parties to investigate the Company and its
business in order to assure that adequate disclosure is made in the
Registration Statement, each Preliminary Prospectus and the Prospectus as
required by the Securities Act, the Rules and Regulations, the Exchange Act
and the Exchange Act Rules and Regulations. The parties are advised that
federal or state policy, as interpreted by the courts in certain
jurisdictions, may be contrary to certain provisions of Sections 6(a)(iii),
6(b) and 6(c) and this Section 9 and, to the extent permitted by law, the
parties hereto hereby expressly waive and relinquish any right or ability to
assert such public policy as a defense to a claim under
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Sections 6(a)(iii), 6(b) or 6(c) or this Section 9 and further agree not to
attempt to assert any such defense.
10. SUBSTITUTION OF UNDERWRITERS. If for any reason one or more of
the Underwriters fails or refuses (otherwise than for a reason sufficient to
justify the termination of this Agreement under the provisions of Section 7
or Section 11 of this Agreement) to purchase and pay for the number of Firm
Shares agreed to be purchased by such Underwriter or Underwriters, the
Company shall immediately give notice thereof to the Representatives and the
non-defaulting Underwriters shall have the right within 24 hours after the
receipt by the Representatives of such notice to purchase, or procure one or
more other Underwriters to purchase, in such proportions as may be agreed
upon among the Representatives and such purchasing Underwriter or
Underwriters and upon the terms set forth herein, all or any part of the Firm
Shares that such defaulting Underwriter or Underwriters agreed to purchase.
If the non-defaulting Underwriters fail to make such arrangements with
respect to all such Shares, the number of Firm Shares that each
non-defaulting Underwriter is otherwise obligated to purchase under this
Agreement shall be automatically increased on a PRO RATA basis to absorb the
remaining Shares that the defaulting Underwriter or Underwriters agreed to
purchase; PROVIDED, HOWEVER, that the non-defaulting Underwriters shall not
be obligated to purchase the Shares that the defaulting Underwriter or
Underwriters agreed to purchase if the aggregate number of such Shares
exceeds 10% of the total number of Firm Shares that all Underwriters agreed
to purchase under this Agreement. If the total number of Firm Shares that
the defaulting Underwriter or Underwriters agreed to purchase will not be
purchased or absorbed in accordance with the two preceding sentences, the
Company and the Selling Shareholders will have the right, within 24 hours
next succeeding the first 24-hour period above referred to, to make
arrangements with other underwriters or purchasers satisfactory to you for
purchase of such Shares on the terms set forth in this Agreement. In any
such case, either you or the Company shall have the right to postpone the
Closing Date determined as provided in Section 3(e) of this Agreement for not
more than seven business days after the date originally fixed as the Closing
Date pursuant to Section 3(e) in order that any necessary changes in the
Registration Statement, the Prospectus or any other documents or arrangements
may be made.
If neither the non-defaulting Underwriters nor the Company makes
arrangements within the time periods provided in the first three sentences of
the first paragraph of this Section 10 for the purchase of all the Firm
Shares that the defaulting Underwriter or Underwriters agreed to purchase
hereunder, this Agreement will be terminated without further act or deed and
without any liability on the part of the Company or the Selling Shareholders
to any non-defaulting Underwriter (except as provided in Section 6 or Section
9 of this Agreement) and without any liability on the part of any
non-defaulting Underwriter to the Company (except to the extent provided in
Section 9 of this Agreement). Nothing in this Section 10, and no action
taken hereunder, shall relieve any defaulting Underwriter from liability, if
any, to the Company or any non-defaulting Underwriter for damages occasioned
by its default under this Agreement. The term "Underwriter" in this
Agreement shall include any persons substituted for an Underwriter under this
Section 10.
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11. EFFECTIVE DATE OF AGREEMENT AND TERMINATION.
(a) If the Registration Statement has not been declared effective
prior to the date of this Agreement, this Agreement will become effective at
such time, after notification of the effectiveness of the Registration
Statement has been released by the Commission, as you, the Company and the
Selling Shareholders will agree upon the public offering price and the
purchase price of the Shares. If the public offering price and the purchase
price of the Shares has not been determined prior to 5:00 p.m., New York
time, on the fifth full business day after the Registration Statement has
become effective, this Agreement shall thereupon terminate without liability
on the part of the Company or the Selling Shareholders to the Underwriters
(except as provided in Section 6 or Section 9 of this Agreement) or the
Underwriters to the Company or the Selling Shareholders (except as set forth
in Section 9 of this Agreement). By giving notice before the time this
Agreement becomes effective, you, as Representatives of the several
Underwriters, may prevent this Agreement from becoming effective without
liability of any party to the other party, except that the Company and the
Selling Shareholders shall remain obligated to pay costs and expenses to the
extent provided in Section 6 and Section 9 of this Agreement. If the
Registration Statement has been declared effective prior to the date of this
Agreement, this Agreement will become effective upon execution and delivery
by you, the Company and the Selling Shareholders.
(b) This Agreement may be terminated by you in your absolute
discretion by giving written notice to the Company and the Selling
Shareholders at any time on or prior to the Closing Date or, with respect to
the purchase of the Option Shares, on or prior to any later date on which the
Option Shares are to be purchased, as the case may be, if prior to such time
any of the following has occurred or, in your opinion, is likely to occur:
(i) after the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change or
development involving a prospective material adverse change in or affecting
particularly the business, properties, condition (financial or otherwise),
results of operations or prospects of the Company, whether or not arising in
the ordinary course of business, occurs which would, in your sole judgment,
make the offering or the delivery of the Shares impracticable or inadvisable;
(ii) if there has been the engagement in hostilities or an escalation of
major hostilities by the United States or the declaration of war or a
national emergency by the United States on or after the date hereof, or any
outbreak of hostilities or other national or international calamity or crisis
or change in economic or political conditions, if the effect of such
outbreak, calamity, crisis or change in economic or political conditions on
the financial markets of the United States would, in your sole judgment, make
the offering or delivery of the Shares impracticable or inadvisable; (iii) if
there has been a suspension of trading in securities generally or a material
adverse decline in value of securities generally on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market or
limitations on prices (other than limitations on hours or numbers of days of
trading) for securities on either such exchange or system; (iv) if there has
been the enactment, publication, decree or other promulgation of any federal
or state statute, regulation, rule or order of, or commencement of any
proceeding or investigation by, any court, legislative body, agency or other
governmental authority which in your sole judgment materially and adversely
affects or may materially and adversely affect the business, properties,
condition (financial or other otherwise), results of operations or prospects
31
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of the Company; (v) if there has been the declaration of a banking moratorium
by federal, New York or California state authorities; (vi) if there shall
have been the taking of any action by any federal, state or local government
or agency in respect of its monetary or fiscal affairs which in your sole
judgment has a material adverse effect on the securities markets in the
United States; or (vii) existing international monetary conditions shall have
undergone a material change which, in your sole judgment, makes the offering
or delivery of the Shares impracticable or inadvisable. If this Agreement is
terminated pursuant to this Section 11, there will be no liability of the
Company or the Selling Shareholders to the Underwriters (except pursuant to
Section 6 and Section 9 of this Agreement) and no liability of the
Underwriters to the Company or the Selling Shareholders (except to the extent
provided in Section 9 of this Agreement).
12. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing and, if to the Underwriters, shall be mailed,
telecopied or telegraphed or delivered to Van Kasper & Company, 600
California Street, Suite 1700, San Francisco, California 94111, Attention:
Syndicate Manager (telecopier: (415) 954-8335); and if to the Company or
either Selling Shareholder, shall be mailed, telecopied or delivered to the
Company or to the Selling Shareholders c/o the Company at its office at 7522
South Maie Ave., Los Angeles, California 90001 (telecopier: (213) 589-2900)
Attention: President. All notices given by telecopy or telegraph shall be
promptly confirmed by letter.
13. PERSONS ENTITLED TO THE BENEFIT OF THIS AGREEMENT. This Agreement
shall inure to the benefit of the Company, the Selling Shareholders and the
several Underwriters and, with respect to the provisions of Section 6 and
Section 9 of this Agreement, the several parties (in addition to the Company,
the Selling Shareholders and the several Underwriters) indemnified under the
provisions of Section 6 and Section 9, and their respective personal
representatives, successors and assigns. Nothing in this Agreement is
intended or may be construed to give to any other person, firm or corporation
any legal or equitable remedy or claim under or in respect of this Agreement
or any provision contained herein. The term "successors and assigns" as
herein used does not include any purchaser, as such purchaser, of any of the
Shares from the several Underwriters.
14. GENERAL. Notwithstanding any provision of this Agreement to the
contrary, the reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties, covenants
and agreements in this Agreement will remain in full force and effect
regardless of (a) any termination of this Agreement, (b) any investigation
made by or on behalf of any Underwriter or controlling person thereof or by
or on behalf of the Company or their respective directors or officers or any
Selling Shareholder and (c) delivery and payment for the Shares under this
Agreement; PROVIDED, HOWEVER, that if this Agreement is terminated prior to
the Closing Date, the provisions of Sections 4(f), 4(g), 4(h), 4(i), 4(j) and
4(k) of this Agreement shall be of no further force or effect.
This Agreement may be executed in two or more counterparts, each of
which shall constitute an original, but all of which together shall
constitute one and the same instrument, and may be delivered by facsimile
transmission of signature pages.
32
<PAGE>
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
INTERNAL LAWS, AND NOT THE LAWS PERTAINING TO CHOICE OR CONFLICT OF LAWS, OF THE
STATE OF NEW YORK.
13. AUTHORITY OF THE REPRESENTATIVES. In connection with this Agreement,
the Representatives will act for and on behalf of the several Underwriters, and
any action taken under this Agreement by the Representatives, as representatives
of the several Underwriters, will be binding on all the Underwriters.
If the foregoing correctly sets forth your understanding, please so
indicate by signing in the space provided below for that purpose, whereupon this
letter shall constitute a binding agreement among the Company, the Selling
Shareholders and the several Underwriters.
Very truly yours,
BONDED MOTORS, INC.
By:
---------------------------------------------
Chairman and Chief Executive Officer
By:
---------------------------------------------
Secretary
SELLING SHAREHOLDERS
------------------------------------------------
Aaron Landon
------------------------------------------------
Buddy Mercer
Confirmed as of the date first above mentioned on behalf of themselves and
the other several Underwriters named in Schedule II hereto.
33
<PAGE>
VAN KASPER & COMPANY
COMMONWEALTH ASSOCIATES
As Representatives of the Several Underwriters
By: VAN KASPER & COMPANY
By:
--------------------------------------
34
<PAGE>
SCHEDULE I
SELLING SHAREHOLDERS
<TABLE>
<CAPTION>
Number of
Selling Shareholders Firm Shares
-------------------- -----------
<S> <C>
Aaron Landon
Buddy Mercer
----------
Total................................ 500,000
</TABLE>
I-1
<PAGE>
SCHEDULE II
UNDERWRITERS
<TABLE>
<CAPTION>
Number of
Firm Shares to
Underwriters be Purchased
- ------------ ------------
<S> <C>
Van Kasper & Company..................................
Commonwealth Associates...............................
Total............................................. 2,000,000
---------
---------
</TABLE>
II-1
<PAGE>
ANNEX A
MATTERS TO BE COVERED IN THE OPINION OF COUNSEL FOR THE COMPANY
(i) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of California;
(ii) The Company has the corporate power to own, lease and operate its
properties and to conduct its business as described in the
Prospectus;
(iii) The Company is duly qualified to do business as a foreign
corporation and is in good standing in all jurisdictions in the
United States, if any, in which the ownership or leasing of its
properties or the conduct of its business requires such
qualification, except where the failure so to qualify would not
have a material adverse effect on the business, properties,
condition (financial or otherwise), results of operations or
prospects of the Company;
(iv) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus under the caption
"Capitalization" as of the dates stated therein; the issued and
outstanding shares of capital stock of the Company have been duly
and validly authorized and issued, are fully paid and
nonassessable and, to the best knowledge of such counsel, have not
been issued in violation of any preemptive right or other rights
to subscribe for or purchase securities or in violation of any
applicable federal or state securities laws;
(v) The Shares will, upon issuance and delivery against payment
therefor in accordance with the terms of the Agreement, be duly
authorized, validly issued, fully paid and nonassessable and, to
the best knowledge of such counsel, will not have been issued in
violation of any preemptive right or other rights to subscribe for
or purchase securities;
(vi) The Company has corporate power and authority to enter into the
Agreement and to issue, sell and deliver to the Underwriters the
Shares to be sold by it;
(vii) The Agreement has been duly authorized by all necessary corporate
action on the part of the Company and has been duly executed and
delivered by the Company and, assuming its due authorization,
execution and delivery by you and the Selling Shareholders, is the
valid and binding agreement of the Company, enforceable against
the Company in accordance with its terms, except insofar as the
indemnification and contribution provisions of the Agreement may
be limited by public policy concerns and except insofar as
enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors'
rights generally or by general equitable principles;
A-1
<PAGE>
(viii) The Registration Statement has become effective under the
Securities Act and, to the best knowledge of such counsel, no stop
order suspending the effectiveness of the Registration Statement
has been issued and no proceedings for that purpose have been
instituted or are pending or threatened under the Securities Act;
(ix) The Registration Statement and the Prospectus, and each amendment
or supplement thereto (other than the financial statements
included therein, as to which such counsel need express no
opinion), as of the effective date of the Registration Statement,
complied as to form in all material respects with the requirements
of the Securities Act and the applicable Rules and Regulations;
(x) The terms and provisions of the capital stock of the Company
conform in all material respects to the description thereof
contained in the Registration Statement and Prospectus, and the
information in the Prospectus under the caption "Description of
Capital Stock," to the extent it constitutes matters of law or
legal conclusions, has been reviewed by such counsel and is
correct and the forms of certificates evidencing the Common Stock
comply with California law;
(xi) The description in the Registration Statement and the Prospectus
of the Articles of Incorporation and bylaws of the Company and of
statutes and contracts are accurate in all material respects and
fairly present in all material respects the information required
to be presented by the Securities Act and the Rules and
Regulations;
(xii) To the best knowledge of such counsel, there are no agreements,
contracts, licenses, leases or documents of a character required
to be described or referred to in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration
Statement that are not described or referred to therein and filed
as required;
(xiii) The performance of the Agreement and the Warrant Agreement and the
consummation of the transactions contemplated by each of them will
not violate or result in the breach of or a default (including
without limitation with the giving of notice, the passage of time
or otherwise) of any of the terms and provisions of the Company's
Articles of Incorporation or bylaws or any contract, indenture,
mortgage, deed of trust, loan agreement, lease, license, joint
venture or, without limitation, other agreement or instrument
known to such counsel to which the Company is a party or by which
any of its properties are bound or (other than performance of the
Company's indemnification and contribution obligations under the
Agreement, concerning which no opinion need be expressed), any
law, ordinance, rule or regulation or, to the best knowledge of
such counsel, any order, writ, injunction, judgment or decree of
any governmental agency or body or of any
A-2
<PAGE>
court having jurisdiction over the Company or over any of its
properties; provided, however, that no opinion need be rendered
concerning state securities or Blue Sky laws;
(xiv) No authorization, approval or consent of any governmental
authority or agency is necessary in connection with the
consummation of the transactions contemplated by the Agreement or
the Warrant Agreement, except such as have been obtained under the
Securities Act, are necessary under the Securities Act in
connection with the registration of the Warrant Shares or as may
be required under state securities or Blue Sky laws in connection
with the purchase and the distribution of the Shares by the
Underwriters or the registration and sale of the Warrant Shares;
(xv) To the best knowledge of such counsel, there are no legal or
governmental proceedings pending or threatened against the Company
of a character which are required to be disclosed in the
Registration Statement or the Prospectus by the Securities Act or
the applicable Rules and Regulations, other than those described
therein;
(xvi) To the best knowledge of such counsel, the Company is not
presently in breach of, or in default under, any bond, debenture,
note or other evidence of indebtedness or any contract, indenture,
mortgage, deed of trust, loan agreement, lease, license or,
without limitation, other agreement or instrument to which the
Company is a party or by which any of its properties are bound
which is material to the business, properties, condition
(financial or otherwise), prospects or results of operations or
prospects of the Company;
(xvii) To the best knowledge of such counsel, except as set forth in the
Registration Statement and Prospectus, no holders of Common Stock
or, except as is provided in the Warrant Agreement, other
securities of the Company have unexercised registration rights
with respect to any securities of the Company that have not been
waived with respect to the Offering being made pursuant to the
Registration Statement;
(xviii) The Warrant Agreement has been duly authorized by all necessary
corporate action on the part of the Company and has been duly
executed and delivered by the Company and, assuming due
authorization, execution and delivery by Van Kasper & Company and
Commonwealth Associates, is the valid and binding agreement of the
Company, enforceable against the Company in accordance with its
terms, except insofar as the indemnification and contribution
provisions of the Warrant Agreement may be limited by public
policy concerns and except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally or by general equitable
principles;
A-3
<PAGE>
(xix) The Warrants have been duly and validly authorized and constitute
valid and binding obligations of the Company enforceable in
accordance with their terms (except as enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting creditors' rights generally or by general
equitable principles); the Warrant Shares have been duly and
validly authorized for issuance upon exercise of the Warrants
against payment therefor as provided in the Warrant Agreement
(including, as provided in the Warrant Agreement, by surrender of
Warrants) and, when so issued, will be validly issued, fully paid
and nonassessable; and to the best knowledge of such counsel, no
shareholder has any preemptive rights or other rights to subscribe
for or purchase with respect to the Warrants or the Warrant
Shares;
In addition, such counsel shall state that such counsel has participated
in conferences with officers and other representatives of the Company, the
independent public accountants of the Company, the Representatives and counsel
to the Underwriters, at which conferences the contents of the Registration
Statement and the Prospectus and related matters were discussed and, although
they have not independently verified the accuracy, completeness or fairness of
the statements contained in the Registration Statement or the Prospectus,
nothing has come to the attention of such counsel that caused them to believe
that, at the time the Registration Statement became effective, the Registration
Statement (except as to financial statements contained therein, as to which such
counsel need express no opinion) contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or at the Closing Date
or any later date on which the Option Shares are to be purchased, as the case
may be, the Prospectus contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
Counsel rendering the foregoing opinion may rely as to questions of law
not involving the laws of the United States or the State of California on
opinions of local counsel (provided that such counsel states that they believe
they and the Underwriters are justified in relying thereon) and, as to questions
of fact, upon representations or certificates of officers of the Company and
government officials, in which case their opinion is explicitly to state that
they are so relying thereon and that they have no knowledge of any material
misstatement or inaccuracy in such opinions, representations or certificate.
Copies of any opinion, representation or certificate so relied upon shall be
delivered to you, as Representatives of the Underwriters, and to Underwriters'
counsel.
A-4
<PAGE>
ANNEX B
MATTERS TO BE COVERED IN THE OPINION OF COUNSEL FOR EACH SELLING SHAREHOLDERS
(i) The Agreement has been duly executed and delivered by or on behalf
of the Selling Shareholders and is the valid and binding agreement
of the Selling Shareholders enforceable against the Selling
Shareholders in accordance with its terms, except insofar as the
indemnification and contribution provisions of the Agreement may
be limited by public policy concerns and except insofar as
enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors'
rights generally or by general equitable principles;
(ii) The Selling Shareholders each have full legal right, power and
authority to enter into the Agreement and sell, transfer and
deliver to the Underwriters the Shares to be sold by him, and upon
delivery of the Shares pursuant to this Agreement and payment
therefor as contemplated herein and assuming that the Underwriters
are bona fide purchasers, the Underwriters will be the owners of
the Shares free and clear of any claims, liens, encumbrances or
rights of third parties of any type or description;
(iii) The performance of the Agreement and the consummation of the
transactions contemplated herein will not violate or result in the
breach of or a default (including without limitation with the
giving of notice, the passage of time or otherwise) of any of the
terms and provisions of any contract, indenture, mortgage, deed of
trust, loan agreement, lease, license, joint venture or, without
limitation, other agreement or instrument known to such counsel to
which either Selling Shareholder is a party or by which either
Selling Shareholder or any of his properties are bound, or any
law, ordinance, rule or regulation or, to the best knowledge of
such counsel, any order, writ, injunction, judgment or decree of
any governmental agency or body or of any court having
jurisdiction over either Selling Shareholder or over any of his
properties;
(iv) No authorization, approval or consent of any governmental
authority or agency is necessary or required to be obtained by the
Selling Shareholder in connection with the consummation of the
transactions contemplated by the Agreement, except such as have
been obtained under the Securities Act or as may be required under
state securities or Blue Sky laws, in connection with the purchase
and the distribution of the Shares by the Underwriters;
B-1
<PAGE>
CA981180.024
<PAGE>
BONDED MOTORS, INC.
AGREEMENT AMONG UNDERWRITERS
__________, 1998
VAN KASPER & COMPANY
COMMONWEALTH ASSOCIATES
As Representatives of the
Several Underwriters
c/o Van Kasper & Company
600 California Street, Suite 1700
San Francisco, California 94111
Ladies and Gentlemen:
We wish to confirm as follows the agreement among you, the undersigned, and
the other underwriters named in Schedule I to the Underwriting Agreement
attached hereto as Exhibit A (the "Underwriting Agreement"), as it is to be
executed (all such parties being herein called the "Underwriters") with respect
to the several purchases by the Underwriters, from Bonded Motors, Inc., a
California corporation (the "Company"), of Common Stock, no par value per share,
of the Company (the "Common Stock"), aggregating 2,000,000 shares (the "Firm
Shares"), pursuant to Section 3 of the Underwriting Agreement, and the grant by
the Company to the Underwriters of an option, solely for the purpose of covering
over-allotments in the sale of the Firm Shares and on the terms and conditions
set forth in the Underwriting Agreement, to purchase up to 300,000 additional
shares of Common Stock (those additional shares are referred to below in this
Agreement as the "Option Shares" and, together with the Firm Shares, are
collectively referred to below in this Agreement as the "Shares").
1. AUTHORITY TO ACT. We hereby authorize you, on our behalf, to enter
into the Underwriting Agreement with the Company substantially in the form
attached hereto as Exhibit A, with such changes thereto as you in your sole
discretion determine may be necessary or advisable. Without limiting the
generality of this authority, we understand that changes may be made in those
who are to be Underwriters and in the respective number of the Shares which they
agree to purchase, but that the number of the Shares to be purchased by us, as
set forth in Schedule I to the Underwriting Agreement, will not be changed
without our consent, except as provided in this Agreement or in the Underwriting
Agreement.
We authorize you, as Representatives of the several Underwriters, to
exercise all of the authority and discretion vested in the Underwriters and in
you by the provisions of the Underwriting Agreement (including the authority to
waive any conditions to the obligations of the Underwriters under the
Underwriting Agreement), to take all such actions as you believe desirable to
carry out the provisions of the Underwriting Agreement this Agreement and the
transactions contemplated thereby and hereby, and to take such other actions as
in your discretion are necessary or advisable to carry out the purchase,
carrying, sale and distribution of the Shares.
We authorize you to file with any governmental agency and/or the National
Association of Securities Dealers, Inc. (the "NASD") any reports required to be
filed by you in connection with the transactions contemplated by this Agreement
or the Underwriting Agreement. We will furnish any information in our
possession needed for such reports.
<PAGE>
2. COMMENCEMENT OF PUBLIC OFFERING. A public offering of the Shares is to
be made, as provided herein, as soon after the Registration Statement relating
thereto becomes effective as in your judgment is advisable. The Shares shall
initially be offered to the public at the public offering price thereof set
forth on the cover page of the Prospectus referred to in the Underwriting
Agreement. As used herein, the terms "Registration Statement," "Prospectus" and
"Preliminary Prospectus" have the meanings given to them in the Underwriting
Agreement.
You will advise us by telegraph, telecopy or telephone when the Shares are
released for offering. After notice from you that the Shares are released for
public sale, we will commence to offer to the public in conformity with the
provisions and terms of the offering set forth in the Prospectus those of our
Shares that you advise us may be retained by us for direct sale. We authorize
you, after the initial public offering, to vary the offering price, in your sole
discretion, by reason of changes in general market conditions or otherwise. The
offering price at any time in effect is herein called the "Offering Price."
3. OFFERING AND SALE OF THE SHARES. We authorize you to reserve for
offering and sale, and on our behalf to sell, to institutions or other retail
purchasers ("Retail Sales") and to dealers selected by you ("Selected Dealers"),
among whom we may be included, all or any part of the Shares as you determine.
Such sales, if any, will be made (a) in the case of Retail Sales, at the
Offering Price and (b) in the case of sales to Selected Dealers, at the Offering
Price less such concession as you from time to time determine, all as set forth
in the Prospectus.
You agree to notify us promptly as to the number of the Shares which we
will retain for direct sale. Prior to the termination of this Agreement, you
may reserve for offering and sale, as provided above, any of the Shares
remaining unsold theretofore retained by us, and we may, with your consent,
retain any of the Shares remaining unsold theretofore reserved by you. Upon the
termination of this Agreement you will, or prior thereto at your discretion you
may, deliver to us any of the Shares purchased by us and then reserved for sale
in Retail Sales or to Selected Dealers but not so sold.
You, and with your prior consent, any of the several Underwriters, may make
purchases or sales of any of the Shares (a) from or to any of the other
Underwriters, at the Offering Price less all or any part of the underwriting
commission, and (b) from or to any of the Selected Dealers, at the Offering
Price less all or any part of the concession to Selected Dealers. You may in
your discretion sell to another Underwriter any of the Shares so reserved for
our account if you determine that such sales are advisable for state securities
or blue sky purposes. Any transfer tax on any such sales shall be charged to
the accounts of the several Underwriters in proportion to their respective
underwriting obligations.
We authorize you to determine the form and manner of any communications or
agreements with Selected Dealers. If there are any such agreements with
Selected Dealers, you are authorized to act as managers thereunder, and we
agree, in such event, to be governed by the terms and conditions of such
agreements to the extent we act as a Selected Dealer. The form of Selected
Dealer Agreement attached hereto as Exhibit B is satisfactory to us. If there
shall not be any written agreements with Selected Dealers, we agree to be
governed by the terms and conditions of Exhibit B to the extent we act as a
Selected Dealer.
It is understood that any Selected Dealer to whom any offer may be made as
provided above will be a dealer actually engaging in the investment banking or
securities business and be either (a) a member of the NASD which agrees to
comply with the provisions of Rule 2740 of the Rules of Fair Practice of the
NASD (the "Rules") or (b) a foreign dealer or institution ineligible for
membership in the NASD which agrees (i) not to resell the Shares (A) to
purchasers in, or to persons who are nationals of, the United States of America,
its territories or its possessions or (B) when there is a public demand for the
Shares, to persons specified as those
2
<PAGE>
to whom members of the NASD participating in a distribution may not sell and
(ii) to comply with the NASD's interpretations with respect to free-riding
and withholding and to comply, as though such foreign dealer or institution
were a member of the NASD, with the provisions of Rules 2420, 2730 and 2740,
to the extent applicable to foreign non-member brokers or dealers, and 2750
of the Rules. We may allow, and the Selected Dealers, if any, may reallow
such discount or discounts as you may determine on sales of any of the Shares
to any eligible broker or dealer, all subject to the Rules.
We authorize you to determine the form and manner of any public
advertisement for the Shares, which advertisement shall include each of our
names as Underwriters.
4. REPURCHASES IN THE OPEN MARKET. Any Shares sold by us (otherwise than
through you) which, prior to the termination of this Agreement or such earlier
date as you determine, are contracted for or purchased in the open market by you
on behalf of us will be repurchased by us on demand at a price equal to the cost
of such purchase plus commissions and taxes on redelivery. In lieu of delivery
of such Shares to us, you may (a) sell such Shares in any manner for our account
and charge us with the amount of any loss or expense or credit us with the
amount of any profit, less any expense, resulting from such sale or (b) charge
our account with an amount not in excess of the concession to Selected Dealers
for such Shares.
5. DELIVERY AND PAYMENT FOR THE SHARES. We agree to deliver to you before
6:30 a.m., San Francisco time, on the Closing Date referred to in the
Underwriting Agreement, and on any later date on which the Option Shares are to
be purchased, at the office of Depository Trust Company, New York, New York or
at such other place as you designate, a certified or official bank check in next
day funds payable to the order of Van Kasper & Company, in an amount equal to
the aggregate initial Offering Price of the Shares to be purchased by us from
the Company on such date, less the aggregate concession to Selected Dealers for
such Shares. We authorize you to deliver such funds, less that portion of the
non-accountable expense allowance provided for in Section 6(a)(ii) of the
Underwriting Agreement allocable to the Shares to be purchased by us, against
delivery to you for our account of such Shares. You are authorized to accept
delivery of the Shares, to give a receipt therefor and to make deliveries for
our account of such Shares, if any, as are reserved for sale in Retail Sales or
to Selected Dealers. You may in your discretion cause some or all of our
reserved Shares to be delivered to you registered in your name or in such other
name as you designate, but such registration will be for administrative
convenience only and will not affect our title to such reserved Shares or the
severalty of the obligations of the Underwriters to the Company. You agree to
cause to be delivered to us promptly any Shares which have not been sold for our
account or reserved for sale.
If we fail (whether or not such failure constitutes a default hereunder) to
deliver to you, or you fail to receive, our check or checks for the Shares that
we have agreed to purchase, at the time or times and in the manner provided in
this Section 5, either or both of you, in your individual capacities and not on
behalf of the Underwriters, are authorized (but shall not be obligated) to make
payment to the Company for such Shares for our account, but any such payment by
you shall not relieve us of any of our obligations under the Underwriting
Agreement or under this Agreement, and we agree to repay you on demand the
amount so advanced for our account, together with interest at current interest
rates (but not in excess of the maximum amount permitted by applicable law).
Upon receipt by you of payment for the Shares sold by or through you for
our account, you will remit to us promptly an amount equal to the purchase price
paid by us to the Company for such Shares and credit or debit our account on
your books with the difference between the selling price and such purchase
price. In case any Shares reserved for sale in Retail Sales or to Selected
Dealers are not purchased and paid for in due course, we agree (a) to accept
delivery when tendered by you of any Shares so reserved for our account and not
so purchased and paid
3
<PAGE>
for and (b) in case we shall have received payment from you in respect of any
such Shares, to reimburse you on demand for the full amount which you shall
have paid us in respect of such Shares.
6. COMPENSATION TO THE REPRESENTATIVE. As compensation for your services
in connection with the purchase of the Shares and the management of the offering
thereof, we agree to pay you, and you may charge our account on your books with,
$ for each of the Firm Shares which we agree to purchase pursuant to
Section 3 of the Underwriting Agreement and, if the notice referred to in
Section 3(b) of the Underwriting Agreement shall be given, a like amount for
each of the Option Shares which we are obligated to purchase.
7. AUTHORITY TO BORROW. We authorize you to advance your own funds,
charging current interest rates (but not in excess of the maximum amount
permitted by applicable law), or to arrange loans for our account for the
purpose of carrying out the purchase and sale of the Shares, and in connection
therewith to pledge as security therefor all or any part of the Shares purchased
hereunder for our account. Any lending bank is hereby authorized to accept your
instructions on behalf of the Underwriters in all matters relating to such
loans.
8. ALLOCATION OF EXPENSES. We authorize you to charge our account with
and we agree to pay (a) all transfer taxes on sales made by you for our account
and (b) our proportionate share (based upon our underwriting obligation) of all
other expenses (i) incurred by you in finding or developing this public offering
and (ii) arising in connection with the purchase, carrying and distribution of
the Shares or other shares of the Common Stock or under the terms of the
Underwriting Agreement or this Agreement. Your determination of such expenses
and your allocation thereof shall be final and conclusive. Funds for our
account at any time in your hands acting hereunder may be held in your general
funds without accountability for interest. As soon as practicable after the
termination of this Agreement, the net credit or debit balance in our account,
after proper charge and credit for all interim payments and receipts, must be
paid to or paid by us, provided that you in your discretion may reserve for
distribution to the several Underwriters such amounts as you deem advisable to
cover possible additional expenses. Neither any statement by you of any credit
or debit balance in our account nor any reservation from distribution to cover
possible additional expenses relating to the Shares will constitute any
representation by you as to the existence or nonexistence of possible expenses
or liabilities of, or charges against, the several Underwriters not fully
reflected in such credit or debit balance, for which we will remain responsible
notwithstanding any such statement, reservation or any payment. If one or more
Underwriters default in the payment of any amount required to be paid by this
paragraph, each nondefaulting Underwriter agrees to pay, on request, its
proportionate share (based upon its underwriting obligations and without regard
to the underwriting obligations of such defaulting Underwriter or Underwriters)
of such amount.
9. INDEMNIFICATION AND CONTRIBUTION. Each of the several Underwriters
agrees to indemnify and hold harmless each other Underwriter and each person
(including each officer or partner thereof) who controls any such other
Underwriter within the meaning of Section 15 of the Securities Act of 1933, as
amended (the "Securities Act"), to the extent and upon the terms that such
Underwriter will agree to indemnify, hold harmless and reimburse the Company as
set forth in Section 9 of the Underwriting Agreement. The foregoing will be in
addition to, and will not supersede, any other indemnification to which you or
any other Underwriter or any controlling person is entitled by virtue of this
Agreement, by operation of law or otherwise.
If any claim or claims are asserted against you or any investigation,
inquiry or other proceeding is brought against you, at any time, as agent of the
several Underwriters, or otherwise involving the Underwriters generally, or
relating to any Preliminary Prospectus, the Prospectus or the Registration
Statement or any actual or alleged misstatements or omissions in any of them, or
the public offering of the Shares or the selling or any advertising material
used
4
<PAGE>
therewith, or any of the transactions contemplated by this Agreement, the
undersigned authorizes you to make such investigation, to retain such counsel
and to take such other action as you deem necessary or desirable under the
circumstances, including settlement of any such claim, investigation, inquiry
or proceeding, if such course of action is recommended by counsel retained by
you. The undersigned agrees to pay to you, upon request, its proportionate
share (based on its final total obligation to purchase the Shares pursuant to
the Underwriting Agreement) of all expenses incurred by you (including, but
not limited to, the fees and disbursements and costs/charges of counsel
retained by you) in investigating and defending against such claim or
investigation, inquiry or other proceeding and the undersigned's
proportionate share of any liability incurred by you in respect of such claim
or claims, whether such liability shall be the result of a judgment against
you or as a result of any such settlement. In addition, if one or more
Underwriters default in the payment of any amount required to be paid by this
paragraph, each nondefaulting Underwriter agrees to pay, on request, its
proportionate share (based upon its underwriting obligations and without
regard to the underwriting obligations of such defaulting Underwriter or
Underwriters) of such amount.
The indemnification, contribution and reimbursement agreement of each
Underwriter contained in this Section 9 shall remain operative and in full force
and effect regardless of (i) any termination of this Agreement or (ii) any
investigation made by or on behalf of any Underwriter or controlling person.
Any successor or any Underwriter or any Underwriter acting as such by
substitution in accordance with the Underwriting Agreement shall be entitled to
the benefits contained in this Section 9. In determining amounts payable
pursuant to this Section 9, any loss, claim, damage, liability or expense
incurred by any person controlling any Underwriter within the meaning of
Section 15 of the Securities Act which has been incurred by reason of such
control relationship shall be deemed to have been incurred by such Underwriter.
10. TRADING AND STABILIZATION. We authorize you (a) until termination of
this Agreement, to make purchases and sales of the Common Stock, in the open
market or otherwise, on a when-issued basis or otherwise, for long or short
account, and on such terms and at such price, all as you in your sole discretion
deem desirable, (b) in arranging for sales of the Shares to Selected Dealers, to
over-allot and (c) either before or after the termination of this Agreement, to
cover any short position incurred pursuant to this Section 10; subject, however,
to the applicable rules and regulations of the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Such purchases and sales and over-allotments shall be made for our
account as nearly as practicable in proportion to our underwriting commitment;
PROVIDED that our net position, in the case of short account computed on the
assumption that all of the Option Shares are acquired, resulting from such
purchases and sales and over-allotments, shall not at any time exceed, either
for long or short account, 15% of the number of the Firm Shares which we agree
to purchase from the Company pursuant to Section 2 of the Underwriting
Agreement. Notwithstanding the foregoing limitation, we agree to assume our
proportionate share (based upon our underwriting obligations and without regard
to the underwriting obligations of any defaulting Underwriter) of the liability
of any Underwriter in default with respect to its obligations under this
Section 10. We agree, either before or after the termination of this Agreement,
to pay you, on demand, the cost of any such Common Stock so purchased for our
account (including, for this purpose, any amount which may be due pursuant to
the preceding sentence) and to deliver to you, on demand, any Shares sold or
over-allotted for our account (including, for this purpose, pursuant to the
preceding sentence) pursuant to the authority conferred by this Section 10. In
the event of our default in respect of our obligations under this Section 10,
you may assume our share of the underwriting obligation without relieving us of
our liability hereunder. We understand that the existence of this provision is
no assurance that the price of the Common Stock will be stabilized or that
stabilizing, if commenced, will not be discontinued at any time.
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If you engage in any stabilizing transactions on behalf of us, you shall
promptly notify us of that fact and maintain the records required by Rule 17a-2
of the General Rules and Regulations under the Exchange Act. We agree to
promptly provide you with the information required by Rule 17a-2 with respect to
our own transactions which are subject thereto.
We agree to advise you from time to time, upon request, prior to the
termination of this Agreement, of the number of the Shares purchased by us under
the Underwriting Agreement not reserved and remaining unsold at the time of such
request and, if in your opinion, any of such Shares are needed to make
deliveries of the Shares sold or over-allotted for the account of one or more of
the several Underwriters, we will forthwith upon your request grant to you, for
the account or accounts of such Underwriter or Underwriters, the right,
exercisable promptly after receipt of notice from us that such right has been
granted, to purchase, at the Offering Price less the concession to Selected
Dealers or such part thereof as you shall determine, such number of the Shares
owned by us as are specified in your request.
11. OPEN MARKET TRANSACTIONS. We represent to you and agree that in
connection with the offering of the Shares we have conformed and will conform
with the provisions of Regulation M under the Exchange Act, including the
provisions of such rules relating to trading by underwriters. We further
represent and agree not to effect, or attempt to induce others to effect,
directly or indirectly, any transactions in or relating to put or call options
on any securities of the Company or to engage in any market-making activity,
except to the extent permitted by Regulation M under the Exchange Act as
interpreted by the Commission.
12. BLUE SKY. Prior to the public offering by the Underwriters, you will
inform us as to the jurisdictions under the respective securities or blue sky
laws of which it is believed that sale of the Shares have been qualified or
registered for sale or are exempt from such qualification or registration, but
you do not assume any responsibility or obligation as to the accuracy of any
such information or as to the right of any Underwriter or dealer to sell Shares
in any jurisdiction.
13. EFFECT OF CANCELLATION OR TERMINATION OF UNDERWRITING AGREEMENT. If
the Underwriting Agreement is canceled or terminated in accordance with the
terms thereof, our obligations hereunder shall nevertheless continue with
respect to payment by us of our proportionate share of all expenses and
liabilities.
14. DEFAULT BY UNDERWRITERS. Default by one or more Underwriters in
respect of their obligations under the Underwriting Agreement will not release
us from any of our obligations or in any way affect the liability of any
defaulting Underwriter to the other Underwriters for damages resulting from the
default.
15. TERMINATION OF AGREEMENT. Unless earlier terminated by you, this
Agreement will terminate 45 full business days after the date hereof, but may be
extended by you for an additional period or periods not exceeding 45 full
business days in the aggregate. No such termination shall affect our
obligations under Sections 4, 5, 6, 7, 8, 9, 10, 13 and 14 of this Agreement.
16. GENERAL. In taking action under this Agreement, you will act only as
agent of the several Underwriters. As such, your authority will include the
taking of such action as you deem advisable in respect of all matters pertaining
to any and all offers and sales of the Shares, including the right to make any
modifications which you consider necessary or desirable in the arrangements with
Selected Dealers or others. You will not be under any liability for or in
respect of the value of the Shares, the validity or the form thereof or the
Registration Statement, any Preliminary Prospectus, the Prospectus, the
Underwriting Agreement or any other instrument executed by the Company, or by
others, the delivery of certificates representing the Shares, the performance by
the Company, or by others, of any agreement on its or their part, or
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any judgment referred to in the Underwriting Agreement as to the advisability
or practicability of proceeding with the offering after the occurrence of
specified events or the exercise or failure to exercise the option granted
pursuant to Section 3(d) of the Underwriting Agreement. You will not, in
such capacity or otherwise, be liable under any of the provisions hereof or
for any matters connected herewith, except for want of good faith and except
for any liability specifically assumed under this Agreement or under the
Securities Act. Any obligation that you have not expressly assumed herein
will not be implied by this Agreement. In representing the Underwriters
hereunder, you will represent each of them respectively. Nothing contained
in this Agreement will constitute the several Underwriters partners with you
or with each other or render any Underwriter liable for the commitments of
any other Underwriter, except as specifically provided for herein and by the
Underwriting Agreement. The commitments and liabilities of each of us are
several in accordance with our respective underwriting obligations and not
joint.
If for Federal income tax purposes the Underwriters should be deemed to
constitute a partnership, then each Underwriter elects to be excluded from the
application of Subchapter K, Chapter 1, Subtitle A, of the Internal Revenue Code
of 1986, as amended, and agrees not to take any position inconsistent with such
election. You are authorized, in your discretion, to execute and file on behalf
of the Underwriters such evidence of such election as may be required by the
Internal Revenue Service.
17. ACKNOWLEDGMENT OF REGISTRATION STATEMENT AND DELIVERY OF PROSPECTUS.
We confirm that (i) we have examined the Registration Statement (including all
amendments, if any, thereto) relating to the Shares as previously filed with the
Securities and Exchange Commission, (ii) we are familiar with the final form of
the Prospectus proposed to be filed, (iii) we are willing to accept the
responsibilities of an Underwriter thereunder and (iv) we are willing to proceed
as contemplated therein and in the Underwriting Agreement. We further confirm
that the statements made under the heading "Underwriting" in such proposed final
form of the Prospectus, insofar as they relate to us, are correct, and we
authorize you so to represent and warrant to the Company on our behalf. We
understand that the aforementioned documents are subject to further change and
that we will be supplied with copies of any amendment or amendments to the
Registration Statement and of any amended or supplemental Prospectus promptly if
and when received by you, but the making of such changes, amendments or
supplements will not release us or affect our obligations hereunder or under the
Underwriting Agreement. We agree, if you so request, to furnish a copy of any
revised or supplemented Preliminary Prospectus to each person to whom we have
delivered a copy of any previous Preliminary Prospectus. We further represent
that we have delivered all preliminary prospectuses and agree that we will
deliver all final prospectuses required for compliance with the provisions of
Rule 15c2-8 of the General Rules and Regulations under the Exchange Act.
18. NASD REPRESENTATION. We hereby confirm that we are a dealer actually
engaging in the investment banking or securities business and either (a) we are
a member of the NASD and agree to comply with the provisions of Rule 2740 of the
Rules or (b) we are a foreign dealer or institution ineligible for membership in
the NASD and agree (i) not to sell any of the Shares (A) to purchasers in, or to
persons who are nationals of, the United States of America, its territories or
its possessions, except in Retail Sales and to Selected Dealers pursuant to
Section 3 hereof or (B) when there is a public demand for the Shares, to persons
specified as those to whom members of the NASD participating in a distribution
may not sell, and (ii) to comply with the NASD's interpretations with respect to
free-riding and withholding and to comply, as though we were a member of the
NASD, with Rules 2420, 2730 and 2740 and, to the extent applicable to foreign
non-member brokers or dealers, and Rule 2750 of the Rules.
19. CAPITAL REQUIREMENTS. We confirm that the ratio of our aggregate
indebtedness to our net capital is such that we may, in accordance with and
pursuant to Rule 15c3-l of the
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General Rules and Regulations under the Exchange Act, obligate ourselves to
purchase, and purchase, the number of the Shares which we agree to purchase
under the Underwriting Agreement.
20. GENERAL. (a) Any notice hereunder from us to you will be deemed to
have been duly given if sent by mail, telecopier or telegraph to you at 600
California Street, Suite 1700, San Francisco, California 94111 (telephone:
(415) 391-5600 and telecopier: (415) 397-2744) and to us at our address as set
forth in the Underwriters' Questionnaire furnished to us by you.
(b) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS, AND NOT THE LAWS PERTAINING TO CHOICE OR CONFLICT OF LAWS, OF
THE STATE OF NEW YORK.
(c) This Agreement may be signed by the Underwriters in various
counterparts which together constitute one and the same agreement among all the
Underwriters and will become effective at such time as all the Underwriters
shall have signed such counterparts and you shall have confirmed all such
counterparts.
Please confirm that the foregoing correctly states the understanding among
us by signing and returning to us the enclosed copies of this letter.
Very truly yours,
Underwriters (Named in Schedule I to the
Underwriting Agreement attached hereto as
Exhibit A)
By
-------------------------------------
(Attorney-in-fact)
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
VAN KASPER & COMPANY
COMMONWEALTH ASSOCIATES
By: VAN KASPER & COMPANY
By
--------------------
Authorized Signatory
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WARRANT AGREEMENT
Van Kasper & Company
Commonwealth Associates
c/o Van Kasper & Company
600 California Street, Suite 1700
San Francisco, California 94111
Ladies and Gentlemen:
Bonded Motors, Inc., a California corporation (the "Company"), hereby
agrees, on the terms and subject to the conditions of this Warrant Agreement
(the "Agreement"), to sell and deliver to Van Kasper & Company and
Commonwealth Associates (together, the "Purchasers"), individually and not as
Representatives of the underwriters referred to in the "Underwriting
Agreement" (defined below), warrants to purchase 75,000 shares of the "Common
Stock" (defined below) (5% five percent) of the aggregate number of shares
(excluding "Option Shares" (defined in the Underwriting Agreement) of the
Common Stock sold to the underwriters pursuant to the Underwriting
Agreement), of which warrants to purchase ___ shares of the Common Stock will
be sold to Van Kasper & Company and warrants to purchase ___ shares of the
Common Stock will be sold to Commonwealth Associates. The Purchasers agree,
on the terms and subject to the conditions of this Agreement, to purchase
such warrants from the Company.
Each of the warrants will be exercisable by the "Holder" thereof
(defined below), as to all or any lesser number of shares of the Common Stock
covered by the Holder's warrants, at the "Exercise Price" per share (defined
below), at any time and from time to time beginning at 9:00 a.m., San
Francisco time, on the day that begins one year after the Closing Time
(defined below) and ending at 5:00 p.m., San Francisco time, on the day that
is five years after the Closing Time. The warrants will be evidenced by
instruments in the form of Exhibit A hereto (those instruments and all
instruments issued after the date hereof in replacement thereof are referred
to below as the "Warrants").
The purchase price of the Warrants is $0.01 (one cent) for each share
of Common Stock purchasable on exercise of the Warrants. The delivery of the
Warrants and payment of the purchase price of the Warrants are to be made on
the "Closing Date" (defined in the Underwriting Agreement), at the offices of
Van Kasper & Company at 600 California Street, Suite 1700, San Francisco,
California, or such other time and place as may be agreed upon between the
Company and the Purchasers (the date of such purchase of the Warrants is
referred to in this Agreement as the "Closing Time").
1. DEFINITIONS. As used in this Agreement, the following terms,
unless the context otherwise clearly requires, have for all purposes the
following respective meanings, and capitalized terms used herein without
definition have the meanings ascribed to them in the Underwriting Agreement:
(a) The term "Common Stock" means the Common Stock, no par value, of
the Company, and all other shares of any class or classes (however
designated) of the common equity of the Company, now or hereafter authorized,
the holders of which by operation of law
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shall have the right, without limitation as to amount, either to all or to a
part of the balance of current dividends and liquidating dividends and
distributions after the payment of dividends and distributions on any shares
entitled to preference and the holders of which ordinarily, in the absence of
contingency, are entitled to vote for the election of the directors of the
Company (even though the right so to vote has been suspended by the
occurrence of such a contingency), other than those directors of the Company
(constituting a portion of the Board of Directors) who, pursuant to the
Articles of Incorporation or other charter documents of the Company, are then
to be elected by a designated class or series of the capital stock of the
Company.
(b) "Common Stock Outstanding" means the aggregate of all Common Stock
outstanding plus all Common Stock issuable upon exercise of all outstanding
Options and conversion of all outstanding Convertible Securities.
(c) "Convertible Securities" means any indebtedness, shares of stock
or other rights granted by the Company (other than Options) convertible into
or exchangeable for Common Stock.
(d) The term "Exercise Price" means the per share purchase price of
the Warrant Shares subject to this Warrant Agreement. The Exercise Price
shall initially be $ per share (120% of the initial per share price to
the public of the shares of Common Stock sold pursuant to the Underwriting
Agreement), subject to adjustment as provided in Section 6 below.
(e) The term "Holder", when used with respect to the Warrants or the
Warrant Shares, means the person registered on the books and records of the
Company as being the holder of record of the Warrants or the Warrant Shares,
as the case may be, and, so long as the Purchasers hold of record any
Warrants or Warrant Shares, they must be included in the definition of
"Holder," and any action to be taken or approval to be given by the Holders,
unless otherwise provided in this Agreement, will require the action by, or
approval of, the Holder or Holders of at least that number of Warrants and
Warrant Shares which in the aggregate constitute a majority of all Warrant
Shares issued or issuable under this Agreement.
(f) "Options" means any warrants, options or, without limitation,
other rights granted by the Company to purchase Common Stock or Convertible
Securities.
(g) The term "Other Securities" means any stock (other than Common
Stock) and other securities of the Company or any other person (corporate or
otherwise) which the Holders of the Warrants at any time are entitled to
receive, or have received, upon the exercise of the Warrants, in lieu of or
in addition to Common Stock, or which at any time shall be issuable or shall
have been issued in exchange for or in replacement of Common Stock or Other
Securities, whether pursuant to Section 6 below or otherwise.
(h) The term "Prospectus" refers the prospectus which is part of the
Company's Registration Statement on Form SB-2 in the form first filed with
the Securities and Exchange Commission (the "Commission") pursuant to Rule
424(b) of the applicable rules and regulations (the "Rules and Regulations")
of the Commission under the Securities Act of 1933, as amended (or successor
law, as amended) (the " Securities Act").
(i) The term "Registration Statement" refers the Company's
Registration Statement on Form SB-2 (No. 333-______), as amended, when it
first became effective under the Securities Act.
(j) The term "Warrant Shares" means the shares of Common Stock (or
Other Securities) issued or issuable upon the exercise, in whole or in part,
of any of the Warrants.
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2.1 REPRESENTATIONS AND WARRANTIES. The Company represents and
warrants to the Purchasers as follows:
(a) CORPORATE ACTION. The Company has all requisite power and
authority, and has taken all necessary action, to enter into and perform all
of its obligations under this Agreement, to issue and deliver the Warrants
and to authorize and reserve for issuance, and upon payment from time to time
of the Exercise Price in accordance with the terms of this Agreement, to
issue and deliver the Warrant Shares; and this Agreement has been duly
authorized, executed and delivered by the Company and constitutes the legal,
valid and binding agreement of the Company, enforceable against the Company
in accordance with its terms, except (i) as such enforceability may be
subject to or limited by bankruptcy, insolvency, reorganization, moratorium
and other similar laws or equitable principles now or hereafter in effect
relating to or affecting creditors' rights generally (collectively,
"Equitable Defenses") and (ii) insofar as the indemnification and
contribution provisions hereof may be limited under federal and state
securities laws and the public policies underlying such laws.
(b) OUTSTANDING COMMON STOCK. The outstanding shares of Common Stock
have been duly and validly authorized and issued and are fully paid and
non-assessable and free of preemptive rights. The Warrant Shares (i) are
duly authorized under the Company's Articles of Incorporation, (ii) have been
duly and validly authorized to be issued and adequately reserved by the Board
of Directors of the Company, (iii) will, when issued and delivered to the
Holders pursuant to this Agreement, be duly and validly issued, fully paid
and non-assessable and free and clear of all liens, charges, encumbrances or
rights of others except for those which may be created by the Holder, and
(iv) and have been approved for inclusion, when issued, in the Nasdaq
National Market ("NASDAQ"). The holders of outstanding shares of capital
stock of the Company are not entitled to any preemptive or similar rights to
subscribe for or purchase Warrant Shares or other shares of capital stock of
the Company and, except as otherwise set forth or incorporated by reference
in the Prospectus, there are no outstanding rights, warrants or options to
acquire, or instruments convertible into or exchangeable for, or agreements
or understandings with respect to the sale or issuance of, any shares of
capital stock of the Company.
(c) NO VIOLATION. None of the execution or delivery of this
Agreement, the consummation of the transactions contemplated by this
Agreement or compliance with the terms and provisions of this Agreement will
(i) conflict with or constitute a breach of, or a default (or default with
notice, the passage of time or otherwise) under any bond, debenture, note or
other evidence of indebtedness or any indenture, mortgage, deed of trust or
any other agreement or instrument to which the Company is a party or by which
it is bound or to which any of its property or assets is subject, (ii) result
in the imposition of a lien on any properties of the Company or an
acceleration of indebtedness of the Company or (iii) result in a violation of
any law, administrative regulation or order of any court or governmental
agency or authority applicable to the Company or to any of their respective
properties or assets. No consent, approval, authorization or other order of
any regulatory body, administrative agency or other governmental body is
required for the valid issuance and sale of the Warrant Shares to the
Purchasers or the other transactions contemplated by this Agreement, except
for registration under the federal securities laws and for permits and
similar authorizations required under state blue sky laws or similar laws.
(d) UNDERWRITING AGREEMENT. All representations and warranties made
by the Company in Section 1 of the Underwriting Agreement, dated __________,
1998, by and among the Company, Aaron Landon and Buddy Mercer (the "Selling
Shareholders") and VKCO and Commonwealth, as Representatives of the several
underwriters named therein (the "Underwriting Agreement"), are and will be at
and as of the Closing Time true and correct and
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are hereby incorporated by reference into this Agreement as if such
representations and warranties were set forth in full herein.
2.2 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. The Purchasers
represent and warrant to the Company that they have all requisite corporate
power and corporate authority, and have taken all necessary corporate action,
to enter into and perform all of their obligations under this Agreement and
that this Agreement has been duly authorized, executed and delivered by them
and constitutes their legal, valid and binding agreement, enforceable against
them in accordance with its terms, except (i) as such enforceability may be
subject to or limited by Equitable Defenses and (ii) insofar as the
indemnification and contribution provisions hereof may be limited under
federal and state securities laws and the public policies underlying such
laws.
3. COMPLIANCE WITH THE SECURITIES ACT.
(a) TRANSFERABILITY OF WARRANTS. The Purchasers agree that the
Warrants may not be transferred, sold, assigned or hypothecated except: (i)
to their successors in a merger or consolidation or other business
combination; (ii) to purchasers of all or substantially all of their assets;
(iii) to any officers or partners of the Purchasers; (iv) by operation of
law; or (v) as permitted below in this Section 3. The Purchasers further
agree that the Company has no obligation to effect any transfer of the
Warrants for one year after the date of this Agreement, unless the
transferee, purchaser, assignee or pledgee, as the case may be, has executed
an agreement obligating the transferee to comply with all terms and
conditions of this Warrant Agreement applicable to the transferor.
(b) TRANSFERABILITY OF WARRANT SHARES.
(i) Except as otherwise provided in this Section 3(b), each
certificate for Warrant Shares initially issued upon the exercise of any
Warrants shall be stamped or otherwise imprinted with a legend in
substantially the following form:
"The Shares represented by this certificate are subject to
the conditions specified in a Warrant Agreement, dated
____________, 1998, between Bonded Motors, Inc., Van Kasper &
Company and Commonwealth Associates. Except to the extent
permitted by the Warrant Agreement, no transfer, sale, pledge,
hypothecation, encumbrance or other disposition of the shares
represented by this certificate shall be valid or effective until
registered under the Securities Act of 1933, as amended (or, if
applicable, a successor law thereto) or the Company has been
advised by an opinion of counsel that such shares will be
transferred in a transaction exempt from such registration and
until any applicable conditions contained in the Warrant
Agreement have been fulfilled. A copy of the Warrant Agreement
is on file at the offices of Bonded Motors, Inc. The holder of
this certificate, by acceptance of this certificate, agrees to be
bound by the provisions of the Warrant Agreement."
(ii) Prior to any transfer, sale, pledge, assignment, hypothecation
or other disposition (each, a "Transfer") of any Warrant Shares, the Holder
of such Warrant Shares must (a) give three business days prior written notice
(a "Transfer Notice") to the Company of such Holder's intention to effect the
Transfer, generally describing the manner and circumstances of the proposed
Transfer, and (b) obtain from counsel to such Holder an opinion reasonably
satisfactory to the Company that the proposed Transfer of such Warrant Shares
may be effected without registration under the Securities Act. Each
certificate evidencing such Warrant Shares
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issued upon such Transfer shall bear the restrictive legend set forth in
Section 3 (b)(i), unless in the opinion of counsel to such Holder reasonably
satisfactory to the Company that such legend is not required in order to
ensure compliance with the Securities Act.
(iii) Notwithstanding the foregoing provisions of this Section
3(b), the restrictions imposed by subsections (i) and (ii) of this Section
upon the transferability of the Warrant Shares and the legend requirements of
Section 3(b)(i) will terminate as to any particular Warrant Shares (A) when
and so long as the transfer, sale, pledge, hypothecation, encumbrance or
other disposition thereof is registered under the Securities Act or (B) when
the Holder or Holders of any Warrants or Warrant Shares has delivered to the
Company the written opinion of counsel to such Holder or Holders, which shall
be reasonably satisfactory to the Company, stating that such legend is not
required in order to ensure compliance with the Securities Act. Whenever the
restrictions imposed by this Section terminate as to any Warrant Shares, as
provided above, the Holder thereof shall be entitled to receive from the
Company, at the Company's expense, a new certificate representing such
Warrant Shares not bearing the restrictive legend set forth in Section
3(b)(i).
(c) DEMAND REGISTRATION. At any time after the day that begins one
year after the effective date of the Registration Statement and on or before
the end of the day that is five years after the effective date of the
Registration Statement, upon written, or telegraphic or telephonic notice
followed as soon as practicable by written confirmation thereof, from any
Holder or Holders (the "Requesting Holders") of that number of Warrants
and/or Warrant Shares which in the aggregate shall constitute a majority of
all Warrant Shares issued or issuable under this Agreement (excluding Warrant
Shares which have been previously sold, transferred or otherwise disposed of
in a registered public offering, pursuant to Rule 144 under the Securities
Act, as such rule may be amended from time to time, or pursuant to Regulation
S under the Securities Act, as such Regulation may be amended from time to
time, or which in the opinion of both counsel to the Company and counsel to
the Requesting Holders may otherwise then be publicly sold without
registration under the Securities Act), that such Holder or Holders request
the registration under the Securities Act of any of the Warrant Shares, the
Company must (i) immediately give notice to the other Holders and afford them
the opportunity to participate in the registration statement and (ii) as
promptly as possible after the receipt of such notice from the Requesting
Holders, but in any event within 45 days of the receipt of such notice, and
solely at its cost and expense, file a registration statement with respect to
the offering and sale or other disposition of the Warrant Shares with respect
to which it shall have received such notice. Such registration statement
may, if the Company satisfies the applicable requirements, be made on Form
S-3. If a registration requested pursuant to this Section 3(c) is an
underwritten registration, the Company and other holders of securities of the
Company may include securities in such registration without the written
consent of the Holders of the Warrant Shares for which registration has been
requested pursuant to this Section 3(c) if, but only if, the managing
underwriters of such registration advise the participating Holders of Warrant
Shares in writing that in their opinion such inclusion will not materially
affect the successful marketing of the Warrant Shares. The Holders will not
be deemed to have effected a demand registration pursuant to this Section
3(c) unless and until the registration statement is declared effective. The
Company will be obligated to file only one registration statement pursuant to
this Section 3(c) which becomes effective, whether or not the registration
statement at the time it becomes effective covers all or a portion of the
Warrant Shares.
(d) PIGGYBACK REGISTRATION. If, at any time during the period
commencing on the day that begins one year from the Closing Time and ending
at the end of the day that is six years after the Closing Time, the Company
proposes to register any shares of Common stock or Other Securities (but
excluding any shares or securities being registered pursuant to Form S-8 or
Form S-4 or any successor form to either of them), the Company must (i) give
each Holder written notice, or telecopy and telephonic notice followed as
soon as practicable by written
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confirmation thereof, of such proposed registration at least 20 business days
prior to the filing of such registration statement and (ii) upon written
notice, or telegraphic or telephonic notice followed as soon as practicable
by written confirmation thereof, given to the Company by any Holder within 15
days after the giving of such written confirmation or written notice by the
Company, the Company shall include or cause to be included in any such
registration statement all or such portion of the Warrant Shares as such
Holder may request; PROVIDED, HOWEVER, that the Company may at any time
withdraw or cease proceeding with any such registration if it shall at the
same time withdraw or cease proceeding with the registration of the Common
Stock or Other Securities originally proposed to be registered; and,
PROVIDED, FURTHER, that in connection with any registered public offering
involving an underwriting, the managing underwriter(s) may (if in its
reasonable opinion marketing factors so require) limit the number of
securities (including any Warrants or Warrant Shares) included in such
offering (other than securities of the Company). In the event of any such
limitation, the total number of Warrant Shares to be offered for the account
of the Holders participating in the registration shall be reduced pro rata in
proportion to the respective number of shares requested to be included
therein to the extent necessary to reduce the total number of shares proposed
to be registered to the number of shares recommended by the managing
underwriter; PROVIDED, HOWEVER, that if the amount or kind of securities to
be offered for the accounts of Holders is reduced in accordance with this
sentence, the Company will not be permitted to include securities of any
persons (other than the Company) unless the Holders are permitted to
participate on a pro rata basis with other selling securityholders.
(e) COMPANY'S OBLIGATIONS IN REGISTRATION. If any Holder timely
elects to participate in an offering by including Warrant Shares in a
registration statement pursuant to Section 3(c) or (d) above, the Company
must use its best efforts to effect such registration to permit the sale of
Warrant Shares in accordance with the intended method or methods of
disposition thereof and, without limitation, pursuant thereto the Company
must:
(i) notify the Holders as to the filing of the registration
statement and of all amendments or supplements thereto filed prior to the
effective date thereof;
(ii) use its best efforts to cause any registration statement filed
under the Securities Act pursuant to Section 3(c) or (d) above to become
effective at the earliest possible date after the filing thereof and to comply
with all applicable rules and regulations of the Commission in connection
therewith; PROVIDED, that before filing a registration statement or prospectus
or any amendments or supplements thereto, including documents which would be
incorporated or deemed to be incorporated by reference in the registration
statement after the initial filing of any registration statement, the Company
will furnish to the Holders, their respective counsel and the underwriters, if
any, to be engaged in connection with the offering and sale (for purposes of
this Section 3 (e) and Section 3(f), the "Underwriters"), copies of all such
documents proposed to be filed, which documents will be subject to the review of
the Holders, their respective counsel and the Underwriters, and the Company will
not file any registration statement, or amendment thereto, or any prospectus or
any supplement thereto relating in whole or in part to the Holders' Warrant
Shares (including such documents incorporated or deemed to be incorporated by
reference) to which the Holders or the Underwriters, if any, shall reasonably
object;
(iii) notify the Holders immediately, and confirm the notice in
writing, (1) when the registration statement or any post-effective amendment
thereto becomes effective, (2) when a prospectus or prospectus supplement or
post-effective amendment has been filed, (3) of any request by the Commission
for amendments, supplements or additional information related to a
registration statement or prospectus or otherwise, (4) of the issuance by the
Commission of any stop order or of the initiation, or the threatening, of any
proceedings for that purpose known to the Company, (5) of the receipt by the
Company of any notification with respect to the suspension of qualification
of the Warrant Shares for sale in any jurisdiction or of the initiation,
6
<PAGE>
or the threatening, of any proceedings for that purpose known to the Company,
(6) of the receipt of any comments from the Commission or any state
regulatory authority, (7) of the happening of any event which requires the
making of any changes in a registration statement or the related prospectus
or any prospectus supplement so that such documents will not 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 not
misleading and (8) of the determination of the Company that a post-effective
amendment to a registration statement is necessary or appropriate;
(iv) make every reasonable effort to obtain the withdrawal of any
order suspending the effectiveness of a registration statement, or the
lifting of any suspension of the qualification (or exemption from
qualification) of any of the Warrant Shares for sale in any jurisdiction, at
the earliest possible moment;
(v) if reasonably requested by the Underwriters, if any, or the
Holders, immediately incorporate in a prospectus supplement or post-effective
amendment such information as the Holders and the Underwriters, if any, agree
should be included therein relating to the sale and distribution of the
Warrant Shares, including, without limitation, information with respect to
the number of Warrant Shares being sold to such Underwriters, the purchase
price being paid therefor by such Underwriters and with respect to any other
terms of the underwritten offering of the Warrant Shares to be sold in such
offering; make all required filings of such prospectus supplement or
post-effective amendment as soon as notified of the matters to be
incorporated in such prospectus supplement or post-effective amendment; and
supplement or amend any registration statement if reasonably requested by the
Holders or any Underwriter of Warrant Shares covered by such registration
statement;
(vi) furnish to each of the Holders whose Warrant Shares have
been included therein, their respective counsel and each Underwriter, if any,
without charge, at least one manually executed copy of any registration
statement (including all amendments thereto) and any post-effective amendment
thereto, including financial statements and schedules, all documents
incorporated therein by reference and all exhibits (including those
incorporated by reference);
(vii) during the time when a prospectus is required to be
delivered under the Securities Act in connection with the distribution of the
Warrant Shares, comply so far as it is able with all requirements imposed
upon it by the Securities Act, as now and hereafter amended, and by the Rules
and Regulations promulgated by the Commission thereunder, as from time to
time in force, so far as necessary to permit the continuance of sales of or
dealings in the Warrant Shares. If at any time when a prospectus relating to
the Warrant Shares is required to be delivered under the Securities Act any
event shall have occurred as a result of which, in the opinion of counsel for
the Company or counsel for the Holders, the prospectus relating to the
Warrant Shares as then amended or supplemented 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 not misleading, or if it
is necessary at any time to amend such prospectus to comply with the
Securities Act, the Company will use its best efforts promptly to prepare and
file with the Commission an appropriate amendment or supplement in form and
substance reasonably satisfactory to the Holders;
(viii) make generally available to its security holders as soon as
practicable, but not later than 15 months following the effective date (and
each other deemed effective date) of such registration statement, an earnings
statement or statements of the Company and any subsidiaries it may then have
covering a period of at least 12 months beginning after the effective date of
the registration statement (but in no event commencing later than 90 days
after such date), which shall satisfy the provisions of Section 11(a) of the
Securities Act and Rule 158 promulgated thereunder;
7
<PAGE>
(ix) prepare and promptly file with the Commission such
amendments and post-effective amendments to each registration statement as
may be necessary to keep such registration statement continuously effective
for a period of nine months; cause the related prospectus to be supplemented
by any required prospectus supplement and, as so supplemented, to be timely
filed pursuant to Rule 424 under the Securities Act; and comply with the
provisions of the Securities Act with respect to the disposition of all
Warrant Shares covered by such registration statement during the applicable
period in accordance with the intended methods of disposition as set forth in
such registration statement or supplement to such prospectus; and in these
regards the Company will not be deemed to have used its best efforts to keep
a registration statement effective during the applicable period if it takes
any action that would result in any Holder whose Warrant Shares have been
included therein not being able to sell such Warrant Shares at any time
during such period or for more than 30 days, whether or not consecutive, in
such period;
(x) deliver to each of the Holders, their respective counsel and
the Underwriters, if any, without charge, as many copies of the prospectus or
prospectuses (including each preliminary prospectus) and any amendment or
supplement thereto as such persons may reasonably request; and the Company
consents to the use of any such prospectus or any amendment or supplement
thereto by the Holders and each of the Underwriters, if any, in connection
with the offering and sale of the Warrant Shares covered by such prospectus
or any amendment or supplement thereto;
(xi) prior to any public offering of Warrant Shares, register or
qualify or cooperate with the Holders, the Underwriters, if any, and their
respective counsel in connection with the registration or qualification (or
exemption from such registration or qualification) of such Warrant Shares for
offer and sale under the securities or blue sky laws of such jurisdictions as
the Holders or any Underwriter reasonably requests in writing; keep each such
registration or qualification (or exemption therefrom) effective during the
period the applicable registration statement is required to be kept effective
and do any and all other acts or things necessary or advisable to enable the
disposition in such jurisdictions of the Warrant Shares covered by the
applicable registration statement; PROVIDED, that the Company will not be
required to qualify generally to do business in any jurisdiction where it is
not then so qualified or to take any action which would subject it to general
service of process in any such jurisdiction where it is not then so subject;
(xii) cooperate with the Holders and the Underwriters, if any, to
facilitate the timely preparation and delivery of certificates representing
Warrant Shares to be sold, which certificates will not bear any restrictive
legends; and enable such Warrant Shares to be in such denominations and
registered in such names as the Underwriters request at least two business
days prior to any sale of Warrant Shares to the Underwriters;
(xiii) use its best efforts to cause the Warrant Shares covered by
the applicable registration statement to be registered with or approved by
such other governmental agencies or authorities as may be necessary to enable
the Holders and the Underwriters, if any, to consummate the disposition of
such Warrant Shares;
(xiv) enter into such agreements in form and substance reasonably
acceptable to the Company and its counsel (including an underwriting
agreement) and take all such other actions in connection therewith as may be
necessary to expedite or facilitate the disposition of such Warrant Shares
and, in such connection, whether or not an underwriting agreement is entered
into and whether or not the registration is an underwritten registration:
(1) make such representations and warranties to the Holders with respect to
the business of the Company and any subsidiaries it may then have, the
registration statement, the prospectus (and, if applicable, prospectus
supplement) and documents, if any, incorporated or deemed to be incorporated
by
8
<PAGE>
reference in the registration statement (and, if applicable, prospectus
supplement), in each case in such form, substance and scope as are reasonably
requested by the Holders and confirm the same if and when requested; (2)
obtain opinions of counsel to the Company and updates thereof addressed to
the Holders with respect to the matters referred to in the preceding clause
(1) in such form, scope and substance as are reasonably requested by the
Holders; (3) in the case of an underwritten offering, enter into an
underwriting agreement in form, scope and substance as is customary in
underwritten offerings and obtain (a) opinions of counsel to the Company and
updates thereof (which counsel and opinions (in form, scope and substance)
shall be reasonably satisfactory to the Underwriters), addressed to the
Underwriters and covering the matters customarily covered in opinions
requested by underwriters in underwritten offerings and such other matters as
may be reasonably requested by the Underwriters, and (b) obtain opinions of
counsel to the Company and updates thereof (which counsel and opinions (in
form, scope and substance) shall be reasonably satisfactory to the Holders)
addressed to the Holders covering matters reasonably requested by the Holders
(whether or not such matters are different from, or in addition to, the
matters described in subclause (a) of this section 3(e)(xiv)(3); (4) obtain
"comfort" letters and updates thereof from the independent certified public
accountants of the Company (and, if necessary, any other independent
certified public accountants of any subsidiary of the Company or of any
business acquired by the Company for which financial statements and financial
data is or is required to be included in the registration statement),
addressed to the Holders and each of the Underwriters, if any, such letters
to be in customary form and covering matters of the type customarily covered
in "comfort" letters to underwriters in connection with underwritten
offerings; (5) if an underwriting agreement is entered into, it will set
forth in full the indemnification and contribution provisions and procedures
of Section 3(f) hereof (or such other indemnification and contribution
provisions as shall be acceptable to the Holders and the Underwriters of such
underwritten offering) with respect to all parties to be indemnified pursuant
to Section 3(f); and (6) the Company must deliver such documents and
certificates as are requested by the Holders and the Underwriters, if any, to
evidence the continued truth and correctness of the representations and
warranties made pursuant to clause (1) of this Section 3(e)(iv) above and to
evidence compliance with any customary conditions contained in the
underwriting agreement or other agreement entered into by the Company. Each
of the above shall be done at each closing under such underwriting or similar
agreement or as and to the extent required thereunder;
(xv) make available for inspection by a representative of the
Holders or any Underwriter participating in any disposition pursuant to such
registration statement and any attorney or accountant retained by the Holders
or such Underwriter, all financial and other records, pertinent corporate
documents and properties of the Company and its subsidiaries and cause the
officers, directors and employees of and independent accountants and
attorneys for the Company and its subsidiaries personally to meet with and to
supply all information reasonably requested by any such representative,
Underwriter, attorney or accountant in connection with any registration of
Warrant Shares; provided, that any records, information or documents that are
designated by the Company in writing as confidential shall be kept
confidential by such persons unless (i) disclosure of such records,
information or documents is required by court or administrative order, (ii)
disclosure of such records, information or document is, in the opinion of
counsel to the Holders or to any Underwriter, required pursuant to the
requirements of the Securities Act or (iii) such records, information or
documents are otherwise publicly available;
(xvi) pay all costs and expenses incident to the performance of
the Company's obligations under Sections 3(c) and (d) above and under this
Section 3(e) (collectively "Registration Expenses"), including without
limitation the fees and disbursements and cost/charges of the Company's
auditors, legal counsel, any special legal counsel and of legal counsel
(including, if applicable, counsel to the Underwriters) responsible for
qualifying the Warrant Shares under securities or blue sky laws of any
jurisdiction, all filing fees and printing expenses, all expenses in
connection with the transfer and delivery of the Warrant Shares all
9
<PAGE>
expenses in connection with the qualification or registration of the Warrant
Shares under applicable securities or blue sky laws of such jurisdictions as
are designated by the Holders (or obtaining exemptions from such
qualification or registration under state securities or blue sky laws) and,
if applicable, the fee of the National Association of Securities Dealers,
Inc. in connection with its review; PROVIDED, that in no event shall
Registration Expenses include any underwriting discounts, commissions or fees
or the fees of counsel retained by the Holders or, except with respect to
such securities or blue sky matters in any jurisdictions, Underwriters in
connection with the sale of Warrant Shares pursuant to Section 3(c) or 3(d)
above; and
(xvii) in connection with the filing of a registration statement
pursuant to Section 3(c) or (d) above, use its best efforts to obtain
indemnification of the Holders by the Underwriter to the same extent said
Underwriter provides indemnification to the Company.
As used in this Section 3(e), the term "Holders" refers only to those
Holders who have timely elected to sell Warrants Shares in an offering.
(f) INDEMNIFICATION.
(i) The Company agrees to indemnify and hold harmless the
Purchasers, the Holders and any underwriter (as defined in the Securities
Act) for the Purchasers and the Holders, and each person, if any, who
controls (within the meaning of Section 15 of the Securities Act) any
Purchaser, any of the Holders or such underwriter against any losses, claims,
damages, liabilities (or actions in respect thereof) and all expenses
(including, but not limited to, all expenses incurred in investigating, or
defending against any litigation, commenced or threatened, or any claim),
joint or several, to which any Purchasers, any Holders or such underwriter,
or such controlling person, becomes subject, under the Securities Act, the
Securities Exchange Act of 1934, as amended (or successor law, as amended)
(the "Exchange Act"), or other federal or state statute, law or regulation,
at common law or otherwise, specifically including but not limited to losses,
claims, damages or liabilities (or actions in respect thereof) or expenses
related to negligence on the part of any such indemnified party, insofar as
any such loss, claim, damage, liability or expense (or actions in respect
thereof) (1) arises out of or is based upon any breach of any representation,
warranty or covenant of the Company in this Agreement or upon any untrue
statement or alleged untrue statement of any material fact contained in (A)
Section 2 of this Agreement, (B) any registration statement covering the
Warrant Shares as originally filed or in any amendment thereof, in the
prospectus contained therein or in an amendment or supplement thereto or (C)
in any application or other document, or any amendment or supplement thereto
(in this Section collectively called "application") executed by or on behalf
of the Company or based upon written information furnished by or on behalf of
the Company filed in any jurisdiction in order to qualify or register the
Warrant Shares under the securities or blue sky laws thereof (or to obtain
exemptions from such qualifications or registration requirements) or filed
with the Commission or any securities association or securities exchange, or
(2) arises out of or is based upon the omission or alleged omission to state
in any of the documents described in subclauses (1)(A), (B) or (C) above a
material fact required to be stated therein or necessary to make the
statements therein not misleading, and agrees to reimburse each such
indemnified person, as incurred, for any legal or other expenses incurred by
them in connection with investigation or defending any such loss, claim,
damage, liability or action; PROVIDED, HOWEVER, that the Company will not be
obligated to indemnify in any such case to the extent that any such loss,
claim, damage, liability or expense arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged omission made
therein in reliance upon, and in conformity with, written information
furnished to the Company by the indemnified person, concerning itself,
specifically for use therein. The Company will not, without the prior
written consent of Van Kasper & Company, settle or compromise or consent to
the entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder
(whether or not
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<PAGE>
such Van Kasper & Company is a party to such claim, action, suit or
proceeding), unless such settlement, compromise or consent includes, without
payment by the Purchasers, an unconditional release of all indemnified
parties from all liability arising out of such claim, action, suit or
proceeding, satisfactory in form and substance to the Purchasers.
(ii) Any Holder that includes all or a part of such Holder's
Warrant Shares in a registration statement pursuant to Sections 3 (c) or (d)
above agrees to indemnify and hold harmless the Company and each of its
directors and officers who have signed any such registration statement, any
other Holder of Warrant Shares included in such registration statement and
any underwriter (as defined in the Securities Act) for the Company or the
Holders of Warrant Shares, and each person, if any, who controls (within the
meaning of Section 15 of the Securities Act) the Company or such underwriter
to the same extent as the indemnity by the Company in Section 3(f)(i), but
only with respect to any untrue statement or alleged untrue statement or
omission or alleged omission, if any, made in such registration statement, or
any amendment or supplement thereto, or in any application in reliance upon,
and in conformity with, written information furnished by the indemnifying
Holder, concerning the indemnifying Holder, to the Company or such
controlling person expressly for use in the registration statement, or any
amendment or supplement thereto, or any such application, as the case may be.
If any action shall be brought in respect of which indemnity may be sought
against any of the Holders, such Holder(s) shall have the rights and duties
given to the indemnifying party, and the persons so indemnified shall have
the rights and duties given to the indemnified party, by the provisions of
Section 3(f)(iii) below.
(iii) If any action is brought against a person in respect of
which indemnity may be sought hereunder against an indemnifying party, such
person shall promptly notify the indemnifying party in writing of the
institution of such action (but the failure to so notify shall not affect the
indemnification and other rights provided for herein except to the extent, if
any, that the indemnifying party is materially prejudiced by the failure to
so give or timely give such notice) and the indemnifying party shall assume
the defense of the action, including the employment of counsel satisfactory
to the indemnified person and payment as incurred of all fees and expenses
related thereto. The indemnified person will have the right to employ its
own counsel in any such case, but the fees and expenses of such counsel will
be at the expense of such indemnified person unless (1) the employment of
such counsel and the payment of fees and expenses thereof has been authorized
in writing by the indemnifying party in connection with the defense of the
action, (2) the indemnifying party has failed promptly after notice by such
indemnified person to assume the defense of such action or proceeding and to
employ counsel satisfactory to the indemnified person in any such action or
proceeding or (3) the named parties to any such action or proceeding
(including any impleaded parties) include both such indemnified person and
the indemnifying party, and such indemnified person have been advised by
counsel that there may be legal defenses or rights available to such
indemnified person which are different from or additional to those available
to the indemnifying party (in which case, if such indemnified person notifies
the indemnifying party in writing that it elects to employ separate counsel
at the expense of the indemnifying party, the indemnifying party will not
have the right to assume the defense of such action, it being understood,
however, that the indemnifying party will not, in connection with any one
such action or proceeding or separate but substantially similar or related
actions or proceedings in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the fees and expenses of
more than one separate firm of attorneys (together with appropriate local
counsel) at any time for such indemnified person. Anything in this paragraph
to the contrary notwithstanding, the indemnifying party will not be liable
for any settlement of any claim or action effected without its written
consent. The indemnity agreements contained in this Section shall remain in
full force and effect regardless of any investigation made by or on behalf of
any indemnified person and shall survive the sale of the Warrant Shares
pursuant to any registration statement or otherwise any termination of this
Agreement. The indemnifying party agrees promptly to notify
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<PAGE>
the indemnified party of the commencement of any litigation or proceedings
against the indemnifying party or any of its officers or directors in
connection with any registration statement referred to in Section 3(c) or (d)
above.
(iv) If the indemnification provided for in subsections (i), (ii)
and (iii) of this Section 3(f) from the indemnifying party is unavailable to
an indemnified party in respect of any losses, claims, damages, liabilities
or expenses referred to therein, then the indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims,
damages, liabilities or expenses in such proportion as is appropriate to
reflect not only the relative benefits received by the indemnified party and
the indemnifying party, but also the relative fault of the indemnifying party
and indemnified parties in connection with the actions which resulted in such
losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative fault of the indemnifying
party and indemnified parties will be determined by reference to, among other
things, whether any action in question, including any untrue or alleged
untrue statement of a material fact or omission or alleged omission to state
a material fact, has been made by, or relates to information supplied by, the
indemnifying party or indemnified parties, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action. The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed
to include, subject to the limitations set forth in subsection (iii) of this
Section 3(f), any legal or other fees or expenses incurred by such party in
connection with any investigation or proceeding. The parties agree that it
would not be just and equitable if contribution pursuant to this subsection
(iv) of this Section 3(f) were determined by pro rata allocation or by any
other method of allocation which does not take account of the equitable and
other considerations referred to in this paragraph. If the full amount of
the contribution specified in this subsection (iv) of this Section 3(f) is
not permitted by law, then such indemnified person shall be entitled to
contribution from the indemnifying party to the full extent permitted by law.
Notwithstanding the provisions of this Section 3(f)(iv), no Holder shall be
required to contribute any amount in excess of the amount by which the total
price at which the Warrant Shares of such Holder were sold to the public
exceeds the amount of any damages which such Holder has otherwise been
required to pay by reason of such untrue statement or omission. No party
found guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) will be entitled to contribution from any party
who was not found guilty of such fraudulent misrepresentation.
(v) Whenever any indemnifying or contributing party is requested
by the indemnified party or the party entitled to contribution to make a
payment pursuant to the forgoing provisions of this Section 3(f), such
payment must be made within five business days after the request and, if not
so paid, the amount due will thereafter bear interest at ten percent per
annum, compounded annually (but not in excess of the maximum amount permitted
by law).
4. EXERCISE OF WARRANTS.
(a) EXERCISE OF WARRANTS. The Warrants may be exercised from time to
time and in full or in part by the Holder thereof by surrender of the
Warrants, with the Election to Purchase attached thereto duly executed by
such Holder, to the Company at its offices at 7522 South Maie Street, Los
Angeles, California 90001, or at such other office or agency as the Company
may from time to time designate in writing to each Holder, accompanied by
payment, in cash or by cashier's check payable to the order of the Company or
as provided in Section 4(c), in the amount obtained by multiplying the number
of Warrant Shares designated by the Holder in the Election to Purchase by the
Exercise Price per share. Exercise of any Warrant shall constitute an
acknowledgment by the purchasing Holder that it will not dispose of the
Warrant Shares acquired upon such exercise except in compliance with Section
3(b) hereof and the Securities Act. Upon any partial exercise of the
Warrants, the Company at its expense will forthwith issue
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<PAGE>
and deliver to the purchasing Holder a new Warrant, in the name of such
Holder and for the number of Warrant Shares equal to the number of shares
called for by the surrendered Warrant (after giving effect to any adjustment
therein as provided in Section 6 below) minus the number of such Warrant
Shares (after giving effect to such adjustment) purchased by the Holder
pursuant to such exercise.
(b) COMPANY TO REAFFIRM OBLIGATIONS. On the date of any exercise of
any Warrants (except that if, on that date, the stock transfer books of the
Company are closed, in which case on the next succeeding date on which such
stock transfer books are open), the Holder exercising the same will be deemed
to have become, and thereafter will be considered, a holder of record of the
shares of Common Stock purchased upon such exercise for all purposes.
Holders of Warrants shall have no rights of share ownership until they
exercise their Warrants. The Company will, at the time of any exercise of
any Warrant, upon the request of the Holder thereof, acknowledge in writing
its continuing obligation to afford to that Holder any rights (including
without limitation any right to registration of the Warrant Shares issued
upon such exercise) to which the Holder continues to be entitled after such
exercise in accordance with the provisions of this Agreement; PROVIDED,
HOWEVER, that if the Holder of a Warrant fails to make any such request, such
failure shall not affect the continuing obligation of the Company to afford
those rights to the Holder.
(c) NET EXERCISE OF WARRANTS. Notwithstanding anything to the
contrary contained in this Section 4, any Holder may elect to exercise any
Warrant in whole or in part by receiving shares of Common Stock equal to the
value (determined below) of the Warrant (or any part hereof), upon surrender
of the Warrant (or any part thereof) at the office or agency described in
Section 4(a) above, together with notice of such election, specifying the
part of the Warrant so surrendered, in which event the Company shall issue
and deliver to the Holder a number of shares of Common Stock determined using
the following formula:
X = (Y) (A-B)
---------
A
where
X = the number of shares of Common Stock to be
issued to the Holder;
Y = the number of shares of Common Stock purchasable
under the Warrant, or portion of the Warrant,
surrendered;
A = the Current Market Price per share of the Common
Stock, determined pursuant to Section 6(d) of this
Agreement; and
B = the then current Exercise Price per share of Common
Stock.
5. DELIVERY OF STOCK CERTIFICATES, ETC., ON EXERCISE; NO FRACTIONAL
SHARES.
(a) STOCK CERTIFICATES, ETC. As soon as practicable after the exercise
of any Warrants and in any event within five business days thereafter, the
Company, at its expense (including the payment by it of any applicable issue
taxes), will cause to be issued in the name of and delivered to the
purchasing Holder a certificate or certificates for the number of fully paid
and nonassessable Warrant Shares to which such Holder shall be entitled upon
such exercise, together with any Other Securities and property (including
cash, where applicable) to which such Holder is entitled upon such exercise
pursuant to Section 6 of this Agreement or otherwise.
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<PAGE>
(b) NO FRACTIONAL SHARES. The Company will not issue a fractional share
of Common Stock upon exercise of a Warrant. Rather, if a fractional share would
otherwise be issued, the Company will instead issue a number of whole shares
equal to the next lowest number of whole shares and shall pay to the exercising
Holder an amount in cash equal to amount obtained by multiplying (x) the
fractional shares not issued by (y) the Current Market Price (as defined in
Section 6(d)) per share of the Common Stock on the last trading day prior to the
exercise date.
6. ANTI-DILUTION PROVISIONS. The Warrants are subject to the following
additional terms and conditions:
(a) ADJUSTMENT FOR CHANGE IN CAPITAL STOCK. If, after the date of this
Agreement, the Company:
(1) pays a dividend or makes a distribution on its Common Stock in shares
of its capital stock (including Common Stock);
(2) subdivides its outstanding shares of Common Stock into a greater
number of shares;
(3) combines its outstanding shares of Common Stock into smaller number of
shares; or
(4) issues by reclassification of its Common Stock any shares of its
capital stock or Other Securities (including without limitation any
such reclassification in connection with a consolidation or merger in
which the Company is the continuing entity);
then the Exercise Price in effect at the time of the record date of such
dividend, distribution, subdivision, combination or reclassification must be
adjusted so that the Exercise Price shall be equal to the price determined by
multiplying the Exercise Price in effect immediately prior to such event by a
fraction, (x) the numerator of which is the total number of outstanding shares
of Common Stock of the Company immediately prior to such event and (y) the
denominator of which is the total number of outstanding shares of Common Stock
of the Company immediately after such event and, as so adjusted or readjusted,
the Exercise Price will remain in effect until a further adjustment or
readjustment is required by this Section 6.
Whenever the Exercise Price payable upon exercise of each Warrant is
adjusted pursuant to this Section 6(a), the Warrant Shares shall simultaneously
be adjusted by multiplying the number of Warrant Shares issuable upon exercise
of each Warrant immediately prior to such event by the Exercise Price in effect
on the date thereof and dividing the product so obtained by the Exercise Price
as adjusted.
These adjustments referred to in the preceding paragraph will become
effective on (x) in the case of a dividend or distribution, the earlier of the
record date thereof or the distribution date thereof and (y) in the case of a
subdivision, combination or reclassification, the earlier of the record date
thereof or the effective date thereof.
(b) ADJUSTMENTS FOR OTHER DISTRIBUTIONS. If, after the date of this
Agreement, the holders of Common Stock generally have received or, on or after
the record date fixed for the determination of eligible stockholders, have
become entitled to receive (i) securities other than capital stock,
(ii) evidences of its indebtedness, (iii) assets (including cash dividends or
distributions), (iv) rights, options, warrants or convertible or exchangeable
securities (other than Convertible Securities or Options) containing the right
to subscribe for or purchase securities of the Company, then and in each such
case the Holder of each Warrant, upon the exercise thereof
14
<PAGE>
as provided in Section 4 above, shall be entitled to receive, in addition to
the Warrant Shares otherwise receivable on such exercise, the amount of
securities, indebtedness, assets (including cash in the case referred to in
subdivision (iii) of this Section 6(b)) and such rights, options, warrants or
convertible or exchangeable securities which such Holder would hold on the
date of such exercise if on the date of this Agreement such Holder had been
the holder of record of the number of shares of Common Stock called for by
the Warrants held by such Holder and had thereafter, during the period from
the date of this Agreement to and including the date of such exercise,
retained such shares, giving effect to all adjustments called for during such
period by this Section 6.
(c) ADJUSTMENTS FOR SALE OR OTHER ISSUANCE OF COMMON STOCK.
(i) If at any time prior to the exercise of the Warrants in full,
the Company issues or sells any Common Stock without consideration or for
consideration per share less than the Current Market Price per share (as defined
in Section 6(d)) on the date of such issuance or sale and the opportunity to
purchase has been afforded to the holders of Common Stock generally, the
Exercise Price must be adjusted so that the Exercise Price equals the price
determined by multiplying the Exercise Price in effect immediately prior to the
date of such sale or issuance (which date in the event of distribution to
shareholders will be deemed to be the record date set by the Company to
determine shareholders entitled to participate in such distribution) by a
fraction, (x) the numerator of which will be (i) the number of shares of Common
Stock outstanding on the date of such sale or issuance, plus (ii) the number of
additional shares of Common Stock which the aggregate consideration received by
the Company upon such issuance or sale would purchase at such Current Market
Price per share of the Common Stock and (y) the denominator of which will be
(i) the number of shares of Common Stock outstanding on the date of such
issuance or sale, plus (ii) the number of additional shares of Common Stock
offered for purchase. Any adjustments required by this Section 6(c) must be
made immediately after such issuance or sale or record date, as the case may
be. Such adjustments shall be made successively whenever the event occurs.
(ii) For the purpose of making any adjustment in the Exercise
Price, or number of shares of Common Stock purchasable upon exercise of the
Warrants, as provided above and in Section 6(c)(vii) below, the consideration
received by the Company for any issue or sale of securities will:
(A) To the extent it consists of cash, be computed as the gross
amount of cash received by the Company before deduction of any underwriting or
similar commissions, compensation, discounts or concessions paid or allowed by
the Company in connection with such issue or sale and before deduction of any
other expenses payable in connection therewith.
(B) In case of the issuance (otherwise than upon conversion or
exchange of Convertible Securities) or sale of additional Common Stock, Options
or Convertible Securities for a consideration other than cash or a consideration
a part of which is other than cash, be the fair value of such consideration as
determined by the Board of Directors of the Company in the good faith exercise
of its business judgment, regardless of the accounting treatment thereof.
(iii) OPTIONS AND CONVERTIBLE SECURITIES. If the Company in any
manner issues or grants any Options or any Convertible Securities -- but only to
the extent (i) such Options are exercisable at less than the Current Market
Price at the date of issue of such Options or (ii) the amount paid for such
Convertible Securities per share plus any additional amount payable per share
upon conversion thereof is less than the Current Market Price per share at the
date of issue of the Convertible Securities -- and the Options are granted or
made available for purchase to the holders of Common Stock generally, the total
maximum number of shares of Common Stock
15
<PAGE>
issuable upon the exercise of such Options or upon conversion or exchange of
the total maximum amount of such Convertible Securities at the time such
Convertible Securities first become convertible or exchangeable will (as of
the date of issue or grant of such Options or, in the case of the issue or
sale of Convertible Securities other than where they are issuable upon the
exercise of Options, as of the date of such issue or sale) be deemed to be
issued and to be outstanding for the purpose of this Section 6(c) and to have
been issued for the sum of the amount (if any) paid for such Options or
Convertible Securities and the amount (if any) payable upon the exercise of
such Options or upon conversion or exchange of such Convertible Securities at
the time such Convertible Securities first become convertible or
exchangeable; provided that, subject to the other provisions of this Section
6(c), no further adjustment of the Exercise Price will be made upon the
actual issuance of any such Common Stock or Convertible Securities or upon
the conversion or exchange of any such Convertible Securities.
(iv) CHANGE IN OPTION PRICE OR CONVERSION RATE. If the purchase
price provided for in any Option referred to in Section 6(c)(iii), or the rate
or price at which any Convertible Securities referred to in Section 6(c)(iii)
are convertible into or exchangeable for shares of Common Stock, changes at any
time (other than under or by reason of conventional provisions designed to
protect against dilution), the Exercise Price in effect at the time of such
event will be readjusted -- but only to the extent the change does not result in
either the per share Option exercise price or the amount per share payable for
such Convertible Securities plus the amount payable per share on the conversion
of such Convertible Securities to be greater than the lesser of the Current
Market Price per share at the time such Options or Convertible Securities were
issued, as referred to in Section 6(c)(iii), or the Current Market Price at the
effective date of such change -- to the Exercise Price that would have been in
effect at the time such Options or Convertible Securities then still outstanding
were initially granted, issued or sold, as if such changed purchase price,
additional consideration or conversion rate, as the case may be, was in effect
at such initial date of grant, issuance or sale, as the case may be. If the
purchase price provided for in any such Option, or the additional consideration
(if any) payable upon the conversion or exchange of any such Convertible
Securities, or the rate or price at which any such Convertible Securities are
convertible into or exchangeable for shares of Common Stock shall be changed at
any time under or by reason of conventional provisions designed to protect
against dilution, then in case of, but only to the extent of, the delivery of
shares of Common Stock upon the exercise of any such Option or upon conversion
or exchange of any such Convertible Security, the Exercise Price then in effect
hereunder will, upon issuance of such shares of Common Stock, be adjusted -- but
only to the extent such change does not result in either the per share Option
exercise price or the amount per share payable for such Convertible Securities
plus the amount payable per share on the conversion of such Convertible
Securities to be greater than the Current Market Price per share at the time
such Options or Convertible Securities were issued, as referred to in
Section 6(c)(iii) -- to such amount as would have obtained had such Option or
Convertible Security never been issued and had adjustments been made based only
upon the issuance of the shares of Common Stock for the consideration actually
received for such Option or Convertible Security and such Common Stock.
(v) EXPIRATION OF OPTION OR CONVERSION RIGHTS. In the event of
the termination or expiration of any right to purchase Common Stock under any
Option or of any right to convert or exchange Convertible Securities, the
Exercise Price will, upon such termination, be changed to the Exercise Price
that would have been in effect at the time of such expiration had such Option or
Convertible Security, to the extent outstanding immediately prior to such
expiration, never been issued, and the shares of Common Stock issuable
thereunder shall no longer be deemed to be Common Stock Outstanding. As used in
this Section 6.3(c)(v), the word "Expiration" includes a termination, without
payment of consideration by the Company, of a right to purchase, convert or
exchange.
16
<PAGE>
(vi) EXCLUDED EVENTS. Notwithstanding anything in this Section 6
to the contrary, the Exercise Price will not be adjusted by virtue of (i) the
Warrants or the existence or exercise of any options of the Company outstanding
on the date hereof and disclosed in the Prospectus or (ii) the issuance or sale
of, or the grant of Options to purchase, Common Stock to employees, directors or
officers of the Company or its subsidiaries, if any, in each case who do not
beneficially own more than five percent of the Common Stock (assuming for this
purpose that all Options then held by the person, including new options then
being granted, but no other Option or Convertible Securities, have then been
exercised in full) or are not the children of such a five percent or greater
shareholder or the spouses of such children, pursuant to stock option plans
currently existing, or hereafter approved by the Board of Directors of the
Company, at a price which is less than the Current Market Price at the time of
such issuance or sale (all as determined in accordance with this Section 6(c)).
(vii) ADJUSTMENT IN NUMBER OF WARRANT SHARES. Whenever the Exercise
Price payable upon exercise of a Warrant is adjusted pursuant to this Section
6(c), the Warrant Shares issuable on exercise of the Warrant shall
simultaneously be adjusted by multiplying the number of the Warrant Shares
issuable upon exercise of the Warrant immediately prior to such event by the
Exercise Price in effect on the date thereof and dividing the product so
obtained by the Exercise Price, as adjusted.
(d) CURRENT MARKET PRICE. For the purpose of any computation under
Section 6, the "Current Market Price" per share of Common Stock at any date
shall be the average of the daily closing prices for the 15 consecutive trading
days commencing 20 trading days before such date. The closing price for each
day will be (i) the last reported sale price, regular way or, in case no such
reported sale takes place on such day, the average of the closing bid and asked
prices, regular way, for such day, in either case on the principal national
securities exchange on which the shares are listed or admitted to trading, or
(ii) if the shares are not listed or admitted to trading on any national
securities exchange, but are traded in the NASDAQ, or if the shares are
otherwise securities for which transaction reports are required to be made on a
real-time basis pursuant to an effective transaction reporting plan under Rule
11a3-1 of the Rules of the Commission under the Exchange Act, the last reported
sales price or (iii) if the shares are not listed or admitted to trade, and if
last sale data is not then available from NASDAQ, but they are traded in the
over-the-counter market, the average of the representative closing bid and asked
quotations for the Common Stock on NASDAQ or any comparable system, or if the
Common Stock is not listed on NASDAQ or a comparable system, the average of the
closing bid and asked prices as furnished by two members of the National
Association of Securities Dealers, Inc. selected from time to time by the
independent members of the Board of Directors of the Company for that purpose.
(e) MINIMUM ADJUSTMENT. No adjustment in the number of Warrant Shares
purchasable hereunder will be required unless the adjustment would require an
increase or decrease of at least one percent in the number of Warrant Shares
purchasable upon the exercise of each Warrant. No adjustment in the Exercise
Price payable hereunder will be required unless such adjustment would require an
increase or decrease in the Exercise Price of at least $.01 per share. Any
adjustments that by reason of this Section 6(e) are not required to be made must
be carried forward and taken into account in any subsequent adjustment and,
notwithstanding the foregoing, all adjustments so carried forward shall be made
at the time of, and in connection with, each exercise of any of the
Warrants. All calculations shall be made to the nearest one-thousandth of a
share, or cent, as the case may be.
(f) OTHER SECURITIES. If at any time, as a result of an adjustment made
pursuant to this Section 6, the Holders shall become entitled to purchase any
shares of capital stock or Other Securities of the Company other than shares of
Common Stock, thereafter the number of such Other Securities so purchasable upon
exercise of each Warrant and the Exercise Price for such
17
<PAGE>
securities shall be subject to adjustment from time to time in a manner and
on terms as nearly equivalent as practicable to the provisions with respect
to the Warrant Shares contained in this Section 6, and the provisions of
Sections 3, 4, 5 and 7, inclusive, with respect to the Warrant Shares, shall
apply on like terms to any such Other Securities.
(g) CONSOLIDATIONS, MERGERS AND OTHER TRANSACTIONS. In case of any
consolidation of the Company with or merger of the Company into another
corporation or entity or in case of any sale or conveyance to another
corporation or entity of the property of the Company as an entirety or
substantially as an entirety, the Company or such successor or purchasing
corporation or entity, as the case may be, will execute a binding agreement
agreeing that each Holder will have the right thereafter upon payment of the
Exercise Price in effect immediately prior to such action to purchase upon
exercise of each Warrant the kind and amount of shares and other securities and
property which the Holder would have owned or have been entitled to receive
after the happening of such consolidation, merger, sale or conveyance had such
Warrant been exercised immediately prior thereto. The Company must not complete
any such consolidation, merger, sale or conveyance unless the agreement referred
to in the immediately preceeding sentence is executed and delivered, is binding
and the mailing thereof provided for in the immediately following sentence is
done at the time of such completion. The Company must mail by first class mail,
postage prepaid, to each Holder, notice of the execution of and a copy of such
agreement. Such agreement shall provide for adjustments, which must be as
nearly equivalent as is practicable to the adjustments provided for in this
Section 6 and for other protections and rights (including without limitation
registration rights) for the Holders as are as nearly equivalent as is practical
to those they have under this Warrant Agreement. The provisions of this Section
6 shall similarly apply to successive consolidations, mergers, sales or
conveyances. No Holder shall have any duty or responsibility to determine the
correctness of any provisions contained in any such agreement relating either to
the kind or amount of shares of stock or Other Securities or property receivable
upon exercise of Warrants or with respect to the method employed and provided
therein for any adjustments.
(h) NOTICE OF ADJUSTMENTS. Whenever the Exercise Price or the kind or
amount of securities purchasable under the Warrants is adjusted pursuant to any
of the provisions of this Warrant Agreement, the Company must forthwith
thereafter cause to be sent to the Purchasers and all other Holders a
certificate setting forth the adjustments in the Exercise Price and the number
of shares and, in addition, setting forth in detail the facts requiring such
adjustments. In addition, the Company at its expense must within 90 days
following the end of each of its fiscal years during the term of this Agreement
and promptly upon the reasonable request of the Holders of at least ten percent
of the Warrants in connection with the exercise from time to time of all or any
portion of any Warrants, cause independent public accountants of nationally
recognized standing selected by the Company to compute any such adjustment in
accordance with the terms of the Warrants and prepare and deliver to the Holders
a certificate setting forth such adjustment and showing in detail the facts upon
which the adjustment is based.
(i) NOTICE OF CERTAIN EVENTS. In the event of (i) any taking by the
Company of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution, any right to subscribe for, purchase or otherwise acquire
any shares of stock of any class or any Other Securities or property or to
receive any other right, (ii) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company or any
sale or conveyance of all or substantially all of the assets of the Company to,
or consolidation or merger of the Company with or into, any other corporation or
other entity or (iii) any voluntary or involuntary dissolution or liquidation of
the Company, then and in each such event the Company will mail or cause to be
mailed to each Holder and, in addition, on the same date as the earliest such
mailing, telecopied and mailed to the Purchasers, a notice specifying the date
upon which any such record date is to be taken for the purpose of such dividend,
distribution or right, stating the amount and
18
<PAGE>
character of such dividend, distribution or right and the date on which any
such reorganization, reclassification, recapitalization, sale, conveyance,
consolidation, merger, dissolution, liquidation or winding-up is to take
place and the time, if any, as of which the holders of record of Common Stock
(or Other Securities) will be entitled to exchange their shares of Common
Stock (or Other Securities) for securities or other property deliverable upon
such reorganization, reclassification, recapitalization, sale, conveyance,
consolidation, merger, dissolution, liquidation or winding-up. In all
events, such notice must be mailed at least 15 business days prior to the
proposed record date therefor.
(j) OTHER EVENTS ALTERING EXERCISE PRICE. Upon the occurrence of any
event not specifically denominated in this Section 6 as altering the Exercise
Price and the amount of Common Stock purchasable upon the exercise of the
Warrants, if the reasonable exercise of the business judgment of the independent
members of the Board of Directors of the Company (or, if none, the Board of
Directors or the Company) requires, on equitable principles, one or more of the
alteration of the Exercise Price in a manner favorable to Holders or a
corresponding adjustment in a manner favorable to Holders to the number of
shares for which the Warrants are exercisable, the Exercise Price and such
number of shares shall be so equitably altered.
7. FURTHER COVENANTS OF THE COMPANY. The Company hereby agrees as
follows:
(a) RESERVATION OF STOCK. The Company must at all times reserve and keep
available, solely for issuance and delivery upon the exercise of the Warrants,
all Warrant Shares from time to time issuable upon the exercise of the Warrants.
(b) TITLE TO STOCK. All of the Warrant Shares delivered upon the
exercise of the Warrants and payment of the Exercise Price (including for this
purpose by a net exercise of Warrants as permitted by Section 4(c)) will be
validly issued, fully paid and nonassessable; each Holder of a Warrant will
receive good and marketable title to the Warrant Shares, free and clear of all
voting and other trust arrangements, liens, encumbrances, equities, preemptive
rights and, without limitation, claims of any type whatsoever; and the Company
will at or before the time of issuance, have paid all taxes, if any, in respect
of the issuance thereof.
(c) EXCHANGE OF WARRANTS. Subject to Section 3(a) hereof, upon surrender
for exchange of any Warrant to the Company, the Company at its expense will
promptly issue and deliver to the Holder thereof a new Warrant or Warrants of
like tenor, in the name of such Holder, calling in the aggregate for the number
of Warrant Shares called by the Warrants so surrendered.
(d) REPLACEMENT OF WARRANTS. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
Warrants and, in the case of any such loss, theft or destruction, upon delivery
of an indemnity agreement by the Warrant Holder reasonably satisfactory in form
and amount to the Company or, in the case of any such mutilation, upon surrender
by the Holder and cancellation of such Warrants, the Company at its expense will
execute and deliver, in lieu thereof, new Warrants of like tenor and amount.
(e) REPORTING BY THE COMPANY. The Company agrees that, during the term
of the Warrants, it will use its best efforts to keep current in the filing of
all forms and other materials which it may be required to file with the
appropriate regulatory authority pursuant to the Exchange Act and all other
forms and reports required to be filed with any regulatory authority having
jurisdiction over the Company. The Company will take such further action as any
Holder may reasonably request, all to the extent required from time to time to
enable such Holder to sell Warrant Shares without registration under the
Securities Act within the limitation of the exemptions provided by (a) Rule 144
under the Securities Act, as such Rule may be
19
<PAGE>
amended from time to time, or (b) any similar rule or regulation hereafter
adopted by the Commission.
8. OTHER HOLDERS. The Warrants are issued upon the following terms, to
all of which each Holder or owner thereof by the taking thereof consents and
agrees: (a) any person who shall become a transferee, within the limitations on
transfer imposed by Section 3(a) hereof, of a Warrant properly endorsed, must
take such Warrant subject to the provisions of Sections 3(a) and 3(b) hereof and
thereupon will be authorized to represent that such transferee is the absolute
owner thereof and, subject to the restrictions contained in this Warrant
Agreement, will be empowered to transfer absolute title by endorsement and
delivery thereof to a permitted BONA FIDE purchaser for value; and (b) each
prior taker or owner waives and renounces all equities or rights in such Warrant
in favor of each such permitted BONA FIDE purchaser, and each such permitted
BONA FIDE purchaser will acquire absolute title thereto and to all rights
presented thereby; and (c) until such time as the respective Warrant is
transferred on the books of the Company, the Company may treat the registered
Holder thereof as the absolute owner thereof for all purposes, notwithstanding
any notice to the contrary.
9. GENERAL PROVISIONS. All notices, certificates and other
communications from or at the request of the Company to the Holder of any
Warrant or Warrant Share as such must be mailed by first class, registered or
certified mail, postage prepaid to the Holder, with a copy to each of Van Kasper
& Company, 600 California Street, Suite 1700, San Francisco, California 94111,
Attn.: President, and Commonwealth Associates, _________________, Attn:
___________, or to such other address for itself as either Purchaser has
furnished to the Company in writing. This Warrant Agreement and any of the
terms hereof may be changed, waived, discharged or terminated only by an
instrument in writing signed by the party against which enforcement of such
change, waiver, discharge or termination is sought. In addition and
notwithstanding the foregoing, the provisions of Section 3(c) and (d) and
Section 6 hereof cannot be changed, waived, discharged or terminated in a manner
adverse to the Holders without the written consent of one or more Holder or
Holders who collectively own, of record, that number of Warrants and Warrant
Shares which in the aggregate constitute two-thirds of all Warrant Shares issued
or issuable under this Agreement (excluding Warrant Shares which have been
previously sold, transferred or otherwise disposed of in a registered public
offering, pursuant to Rule 144 under the Securities Act, as such Rule may be
amended from time to time, or pursuant to Regulation S, as such regulation may
be amended from time to time). The headings in this Warrant Agreement are for
purposes of reference only and shall not limit or otherwise affect any of the
terms hereof. This Warrant Agreement, together with the forms of instruments
annexed hereto, supersedes all prior negotiations and all prior written and
prior and contemporaneous oral agreements, representations, warranties and
inducements and constitutes the full and complete agreement of the parties
hereto with respect to the subject matter hereof.
10. GOVERNING LAW. THIS WARRANT AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS, AND NOT THE LAW PERTAINING TO
CHOICE OR CONFLICT OF LAWS, OF THE STATE OF NEW YORK.
11. EXECUTION AND DELIVERY. This Agreement may be executed in two or
more counterparts, each of which shall constitute an original, but all of which
together shall constitute one and the same instrument, and may be delivered by
facsimile transmission of signature pages.
20
<PAGE>
BONDED MOTORS, INC.
By:
--------------------------------------
Name:
Title:
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written
VAN KASPER & COMPANY
COMMONWEALTH ASSOCIATES
By: Van Kasper & Company
By:
--------------------------------
Name:
Title:
21
<PAGE>
EXHIBIT A
FORM OF WARRANT
THE WARRANTS REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE CONDITIONS
SPECIFIED IN A WARRANT AGREEMENT, DATED __________, 1998, BETWEEN BONDED MOTORS,
INC. (THE "COMPANY"), VAN KASPER & COMPANY AND COMMONWEALTH ASSOCIATES. EXCEPT
TO THE EXTENT PERMITTED BY THE WARRANT AGREEMENT, NO TRANSFER, SALE, PLEDGE,
HYPOTHECATION, ENCUMBRANCE OR OTHER DISPOSITION OF THESE WARRANTS OR THE SHARES
OF COMMON STOCK OF THE COMPANY ACQUIRED ON EXERCISE OF THESE WARRANTS WILL BE
VALID OR EFFECTIVE UNTIL REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(OR, IF APPLICABLE, A SUCCESSOR LAW THERETO) OR THE COMPANY HAS BEEN ADVISED BY
AN OPINION OF COUNSEL THAT THESE WARRANTS OR SUCH SHARES OF COMMON STOCK WILL BE
TRANSFERRED IN A TRANSACTION EXEMPT FROM SUCH REGISTRATION AND UNTIL ANY
APPLICABLE CONDITIONS CONTAINED IN THE WARRANT AGREEMENT HAVE BEEN FULFILLED. A
COPY OF THE WARRANT AGREEMENT IS ON FILE AT THE OFFICES OF THE COMPANY. THE
HOLDER OF THIS CERTIFICATE, BY ACCEPTANCE OF THIS CERTIFICATE, AGREES TO BE
BOUND BY THE PROVISIONS OF THE WARRANT AGREEMENT.
No._______
Warrant to Purchase up to ______ Shares of Common Stock
EXERCISABLE COMMENCING 9:00 A.M., SAN FRANCISCO TIME, ON ___________, 1999 AND
ENDING 5:00 P.M., WEST COAST TIME, ON _______________________ , 2003
BONDED MOTORS, INC.
COMMON STOCK PURCHASE WARRANT
This certifies that ___________________________, or registered assigns, is
the holder (the "Holder") of this Warrant to purchase, subject to adjustment,
the number of fully paid and nonassessable shares set forth above (the "Warrant
Shares") of Common Stock, no par value (the "Common Stock"), of Bonded Motors,
Inc., a California corporation (the "Company"), at the per share exercise price,
subject to adjustment (the "Exercise Price"), set forth in the Warrant
Agreement, dated __________, 1998 (the "Warrant Agreement"), between the
Company, Van Kasper & Company and Commonwealth Associates, at any time prior to
the Expiration Date (defined below), by surrendering this Warrant, with the form
of subscription set forth hereon duly executed, to the Company at the Company's
offices at 7522 South Maie Street, Los Angeles, California 90001, or at such
other office or agency as the Company may designate and by paying in full, in
the manner provided in Section 4 of the Warrant Agreement, the Exercise Price
for the Warrant Shares then purchased. Payment of the Exercise Price may be
made in cash, cashier's check payable to the order of the Company or surrender
of a portion of this Warrant as provided in Section 4(c) of the Warrant
Agreement.
This Warrant may be exercised at any time and from time to time, in whole
or in part, at the option of the Holder, commencing 9:00 a.m., San Francisco
time, on _________, 1999 until 5:00 p.m., San Francisco time, on __________,
2003 (the "Expiration Date"). Upon the purchase of fewer than all of the
Warrant Shares, there must be issued to the Holder a new Warrant exercisable for
the number of Warrant Shares for which this Warrant has not been exercised or
surrendered as payment. Prior to the Expiration Date, the Holder is entitled to
<PAGE>
exchange this Warrant, without charge, for another Warrant or Warrants
exercisable for the same aggregate number of Warrant Shares.
Prior to the Expiration Date, subject to any applicable laws restricting
transferability and to any restriction on transferability that may appears on
this Warrant or is contained in the Warrant Agreement, the Holder is entitled to
transfer this Warrant upon delivery thereof, duly endorsed by the Holder or by
his, her or its duly authorized attorney-in-fact or representative, or
accompanied by proper evidence of succession, assignment or authority to
transfer, with the form of assignment set forth hereon duly executed. Upon any
such transfer, a new Warrant or Warrants exercisable for the same aggregate
number of Warrant Shares will be issued by the Company, without charge, in
accordance with instructions in the form of assignment.
This Warrant is issued under and in accordance with the Warrant Agreement
and, except as otherwise provided in this Warrant, is subject to the terms and
provisions contained in the Warrant Agreement. Upon certain events provided for
in the Warrant Agreement, the Exercise Price and the number of shares of Common
Stock issuable upon the exercise of this Warrant are subject to adjustment. No
fractional shares will be issued upon the exercise of a Warrant. Instead, the
Company shall pay the value of such fractional share to the Holder in cash, as
provided in the Warrant Agreement.
THIS WARRANT WILL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
INTERNAL LAWS AND NOT THE LAW PERTAININGS TO CHOICE OR CONFLICT OF LAWS, OF THE
STATE OF NEW YORK.
The Company has caused this Warrant to be duly executed.
BONDED MOTORS, INC.
By:
------------------------------
Name:
Title:
Attest:
------------------------------
Name:
Title: Secretary
2
<PAGE>
ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise this Warrant to
purchase ______________ shares of Common Stock, acknowledges that it will not
dispose of such shares except in compliance with Section 3(b) of the Warrant
Agreement and the Securities Act of 1933, as amended, and requests that
Certificates for such shares be issued and delivered as follows:
Issue to:
---------------------------------------------------
(Name)
---------------------------------------------------
(Address, including Zip Code)
---------------------------------------------------
(Social Security or Tax Identification Number)
Deliver to:
---------------------------------------------------
(Name)
---------------------------------------------------
(Address, including Zip Code)
In full payment of the aggregate purchase price with respect to the number
of shares being purchased upon exercise of this Warrant, the undersigned hereby
(check applicable payment method): (i) / / tenders payment of $_________ by
cashier's check payable to the order of Bonded Motors, Inc. or (ii) / /
surrenders to the Company Warrants to purchase ________ shares of Common
Stock. If the Warrant is exercised hereby (and, if applicable, surrendered to
purchase shares of Common Stock) so as to purchase fewer than all the shares of
Common Stock that may be purchased pursuant to this Warrant, the undersigned
requests that a new Warrant representing the number of full shares for which the
Warrant has not been exercised or surrendered be issued and delivered as set
forth below.
Name of Warrant holder or Assignee:
---------------------------------
(Please Print)
Address:
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Signature Dated:
(Signature must conform in all respects to name of holder as specified on the
face of the Warrant)
3
<PAGE>
ASSIGNMENT
For value received, the undersigned hereby sells, assigns and transfers to
the Assignee named below all of the rights of the undersigned represented by
the within Warrant, with respect to the number of shares of Common Stock set
forth below:
Number of
Name of Shares of Taxpayer Identification
Assignee Address Common Stock Number
- ----------------- -------------------- ------------ ------------------------
and does hereby irrevocably authorizes the Company to make such transfer on the
Warrant Register maintained at the principal office of the Company and, if
applicable, to issue to the undersigned a Warrant for the portion of such
Warrant not so sold, assigned or transferred.
Dated:
------------, ----- -------------------------------
Signature
(Signature must conform in all respects to name of the Holder as specified on
the face of the Warrant).
4
<PAGE>
PETILLON & HANSEN
May 13, 1998
Bonded Motors, Inc.
7522 S. Maie Avenue
Los Angeles, California 90001
Ladies and Gentlemen:
At your request, we are rendering this opinion in connection with the
proposed sale by Bonded Motors, Inc., a California corporation (the
"Company"), of up to 1,800,000 shares of Common Stock, no par value per share
(the "Common Stock"), of the Company (the "Company Shares"), 500,000 shares
of Common Stock by certain selling shareholders (the "Selling Shareholders'
Shares"), warrants to purchase up to 75,000 shares of Common Stock to be
issued to the Representatives of the Underwriters (the "Representatives'
Warrants"), 75,000 shares of Common Stock underlying the Representatives'
Warrants (the "Warrant Shares"), and any additional shares of Common Stock of
the Company which may be registered pursuant to Rule 462(b) under the
Securities Act of 1933, as amended.
We have examined instruments, documents, and records that we deemed relevant
and necessary for the basis of our opinion hereinafter expressed. In such
examination, we have assumed the following: (a) the authenticity of original
documents and the genuineness of all signatures; (b) the conformity to the
originals of all documents submitted to us as copies; and (c) the truth,
accuracy and completeness of the information, representations, and warranties
contained in the records, documents, instruments and certificates we have
reviewed.
Based on such examination we are of the opinion that, upon the issuance
against payment of the purchase price therefor and sale of the Company Shares
by the Company (of which up to 300,000 shares are to be issued to cover
over-allotments, if any) in conformity with and pursuant to the Registration
Statement, the Company Shares will be duly authorized, validly issued, fully
paid and nonassessable.
We are of the opinion that the Selling Shareholders' Shares have been duly
authorized and are validly issued, fully paid and non-assessable.
<PAGE>
Bonded Motors, Inc.
May 13, 1998
Page 2
We are of the opinion that, upon the issuance and sale of the
Representatives' Warrants in conformity with and pursuant to the Registration
Statement, the Representatives' Warrants will be duly authorized, validly
issued, fully paid and non-assessable.
We are of the opinion that, upon exercise and payment of the exercise price
therefor in accordance with the terms of the Representatives' Warrants, the
Warrant Shares will be duly authorized, validly issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the use of our name wherever it appears in the
Registration Statement and Prospectus included therein, and any amendment or
supplement thereto. In giving such consent, we do not consider that we are
"experts" within the meaning of such terms as used in the Securities Act of
1933, as amended, or the rules and regulations of the Securities and Exchange
Commission issued thereunder, with respect to any part of the Registration
Statement, including this opinion as an exhibit or otherwise.
Very truly yours,
Petillon & Hansen
<PAGE>
EXHIBIT 23.1
ACCOUNTANTS' CONSENT
The Board of Directors
Bonded Motors, Inc.:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Los Angeles, California
May 13, 1998
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<PAGE>
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<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 MAR-31-1998
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0 0
0 0
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<INCOME-PRETAX> 821,316 330,974
<INCOME-TAX> (325,506) 125,280
<INCOME-CONTINUING> 1,146,822 205,694
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