<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 15, 1996.
REGISTRATION NO. 333-1868
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CRAIG CONSUMER ELECTRONICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3651 95-4228391
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
RICHARD I. BERGER, PRESIDENT
CRAIG CONSUMER ELECTRONICS, INC.
13845 ARTESIA BOULEVARD
CERRITOS, CALIFORNIA 90703-9000
(310) 926-9944
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF PRINCIPAL EXECUTIVE OFFICE AND AGENT FOR SERVICE)
COPIES TO:
JEFFREY D. WARREN, ESQ.
KEESAL, YOUNG & LOGAN
400 OCEANGATE
LONG BEACH, CALIFORNIA 90802
(310)436-2000
STEVEN J. INSEL, ESQ.
ROBERT M. STEINBERG, ESQ.
JEFFER, MANGELS, BUTLER & MARMARO LLP
2121 AVENUE OF THE STARS, 10TH FLOOR
LOS ANGELES, CALIFORNIA 90067
(310) 203-8080
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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- ----------------------------------------------------------------------------------------------------------
TITLE OF EACH AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
CLASS OF SECURITIES TO BE OFFERING PRICE AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock ($0.01 par value).... 1,450,000(2) $ 5.50 $7,975,000 $2,750.00
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Representative's Warrants......... 125,000 $.0004 $ 50 $ 0.02
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Shares of Common Stock Underlying
Representative's Warrants......... 125,000 $ 6.60 $ 825,000 $ 284.48
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TOTAL............................. $8,635,050 $3,034.50
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</TABLE>
(1) Estimated pursuant to Rule 457(a) solely for the purpose of calculating the
registration fee.
(2) Includes 187,500 shares which may be purchased by the Underwriters to cover
over-allotments, if any.
------------------------
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 THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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<PAGE> 2
CRAIG CONSUMER ELECTRONICS, INC.
CROSS REFERENCE SHEET
(PURSUANT TO ITEM 501(B) OF REGULATION S-K)
<TABLE>
<CAPTION>
ITEM IN FORM S-1 LOCATION IN PROSPECTUS
--------------------------------------- --------------------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus............................. Facing Page; Cross-Reference Sheet; Outside Front Cover Page
of Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus.................... Inside Front Cover Page; Outside Back Cover Page
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges..... Prospectus Summary; Risk Factors
4. Use of Proceeds........................ Prospectus Summary; Use of Proceeds
5. Determination of Offering Price........ Outside Front Cover Page of Prospectus; Risk Factors;
Underwriting
6. Dilution............................... Dilution
7. Selling Security Holders............... Principal and Selling Stockholders; Underwriting
8. Plan of Distribution................... Outside Front Cover Page of Prospectus; Prospectus Summary;
Underwriting
9. Description of Securities to Be
Registered............................. Prospectus Summary; Dividend Policy; Capitalization;
Description of Capital Stock
10. Interests of Named Experts and
Counsel................................ Not Applicable
11. Information with Respect to
Registrant............................. Prospectus Summary; Risk Factors; The Company; Use of
Proceeds; Dividend Policy; Capitalization; Dilution; Selected
Financial Data; Management's Discussion and Analysis of
Financial Condition and Results of Operations; Business;
Management; Certain Transactions; Principal and Selling
Stockholders; Description of Capital Stock; Shares Eligible
for Future Sale; Additional Information; Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................ Not Applicable
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED , 1996
PROSPECTUS
1,262,500 SHARES
LOGO
COMMON STOCK
------------------------------
All of the shares of Common Stock, par value, $.01 per share ("Common
Stock"), offered hereby are being offered by Craig Consumer Electronics, Inc.
(the "Company"). Prior to this offering, there has been no public market for the
Company's Common Stock and there can be no assurance that such a market will
exist. The initial public offering price of the shares of Common Stock offered
hereby has been determined by negotiation between the Company and The Boston
Group, L.P. (the "Representative"), as representative of the several
underwriters (the "Underwriters"). See "Underwriting" for information relating
to the determination of the initial public offering price. The Common Stock has
been approved for listing, subject to official notice of issuance, on the Nasdaq
National Market under the symbol "CREG."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGE 6.
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>
<S> <C> <C> <C>
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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Per Share.......................... $5.50 $.4675 $5.0325
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Total(3)........................... $6,943,750 $590,219 $6,353,531
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</TABLE>
(1) Does not include (a) a non-accountable expense allowance payable to the
Representative, and (b) the value of the five-year Warrants granted to the
Representative to purchase up to 125,000 shares of Common Stock at 120% of
the initial public offering price per share of Common Stock
("Representative's Warrants"). For indemnification and contribution
arrangements with the Underwriters, see "Underwriting."
(2) Before deducting estimated expenses of approximately $650,000 payable by the
Company, including the Representative's non-accountable expense allowance.
(3) The Company and certain stockholders of the Company (the "Selling
Stockholders") have granted the Underwriters a 45-day option to purchase an
aggregate of up to 187,500 additional shares of Common Stock, solely to
cover over-allotments, if any. See "Underwriting." If all such shares of
Common Stock are purchased, the Total Price to Public, Underwriting
Discounts and Commissions, Proceeds to the Company, and Proceeds to the
Selling Stockholders will be $7,975,000, $677,875, $6,542,250 and $754,875,
respectively.
The Common Stock is offered by the several Underwriters when, as and if
delivered to and accepted by them and subject to their right to withdraw,
cancel, or modify the offering and reject any order in whole or in part. It is
expected that delivery of the certificates for the shares of Common Stock will
be made on or about May , 1996.
------------------------------
THE BOSTON GROUP, L.P.
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors," and financial statements and related
notes thereto appearing elsewhere in this Prospectus. Except as otherwise noted,
all information in this Prospectus (i) assumes no exercise of the Underwriters'
over-allotment option or the Representative's Warrants, and (ii) assumes no
exercise of options to purchase up to 525,000 shares of Common Stock which have
been reserved for issuance under the Company's 1996 Plan and Non-Statutory Plan
(as defined herein), and 365,559 shares issuable to Richard Berger and Richard
Miller pursuant to outstanding options. In addition, unless otherwise indicated,
all share and per-share data in this Prospectus has been adjusted to reflect the
recapitalization of the Company resulting from the conversion of 250,000 shares
of Series A Preferred Stock into 1,733,330 shares of Common Stock and a
3.81-to-one reverse stock split of the Common Stock to be effected prior to the
date of this Prospectus (the "Recapitalization"). Prospective investors should
carefully consider the information discussed under "Risk Factors."
THE COMPANY
Craig Consumer Electronics, Inc. (the "Company") designs and markets brand
name consumer electronic products under its trademark, "Craig."(R) The Company
offers value-oriented products with features that the Company believes are
comparable to those of its higher-priced competitors. The Company's products are
sold through over 200 retailers with approximately 15,000 retail outlets,
including major retail chains, such as Best Buy, Circuit City, Thrifty Payless,
Rex, Incredible Universe, Nobody Beats the Wiz, and Rite Aid, and other mass
merchandisers, such as Montgomery Ward and Price Costco. The Company also sells
through catalog and direct marketing organizations, such as QVC Network, Spiegel
Catalog, and Amway.
In recent years, the Company has emphasized the design and marketing of
home and mobile audio electronic products (such as compact music centers and car
stereos) and portable audio products (such as "boom boxes" and small personal
stereos). The Company has realized gross margins (net sales less the cost of
goods sold) exceeding 17% in each of the last three years on sales of its audio
electronic products. By contrast, the Company has experienced lower and
declining gross margins on sales of its video electronic products over the past
three years. As a result, the Company severely limited sales of video products
during 1995 and does not anticipate substantial sales of video products in 1996
or for the foreseeable future. The Company will instead devote the principal
portion of its resources to the design, sourcing, distribution and sale of audio
electronic and related products.
Primarily due to its increasing focus on the sale of audio products, the
Company's gross profit increased from approximately $11.9 million to $14.3
million to $14.4 million in 1993, 1994, and 1995, respectively, although overall
sales were $12.5 million and $16.9 million lower in 1995, when compared to 1993
and 1994, respectively. In spite of the increase in gross profits resulting from
the Company's shifting emphasis on audio products, net income went from $1.1
million to $533,000 to $791,000 in 1993, 1994, and 1995, respectively. The
failure of net income to increase along with gross profits was primarily due to
relatively high levels of general and administrative expenses associated with
the expansion of the Company's quality control operations, establishment of a
Cerritos reconditioning facility and the establishment of the Hong Kong office,
as well as increased interest expense. The following graphs demonstrate the
Company's increasing emphasis on sales of audio electronic products:
LOGO LOGO
3
<PAGE> 5
The Company's objective is to establish itself as one of the leading
suppliers of value-oriented audio electronic and related products. To achieve
this objective, the Company intends, to the extent the Company's financial
condition allows, to (i) expand the Company's distribution, targeting other
channels of distribution; (ii) continue its international expansion; (iii)
reduce its higher interest rate indebtedness in order to decrease overall
interest expense and enhance cash flow through the application of the proceeds
of this Offering; (iv) expand the Company's consumer product lines into
telephones and telephone products, and potentially other items; and (v) decrease
the costs of reconditioning goods and attempt to increase profitability and cash
flow through the use of a Chinese joint venture facility. No assurance can be
given that any of these initiatives can be implemented successfully.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the
Company............................ 1,262,500 shares(1)
Common Stock to Be Outstanding
After the Offering................. 3,396,941 shares
Use of Proceeds.................... Substantially all of the net proceeds of
this Offering will be used for the
repayment of debt. See "Use of Proceeds."
Risk Factors....................... An investment in the shares of Common
Stock offered hereby involves a high
degree of risk. Prospective investors
should carefully review and consider the
risk factors set forth in the section of
this Prospectus entitled "Risk Factors,"
as well as the other information set
forth in this Prospectus, before
investing in any of the Common Stock
offered hereby.
Proposed Nasdaq National Market
Symbol............................. CREG(2)
- ---------------
</TABLE>
(1) The Company and certain stockholders (the "Selling Stockholders") have
granted to the Underwriters a 45-day option to purchase up to 187,500
shares of Common Stock, solely to cover over-allotments, if any. See
"Underwriting."
(2) While the Common Stock has been approved, subject to official notice of
issuance, for listing on the Nasdaq National Market, there is no assurance
that a public trading market will develop, or, if developed, will be
sustained. See "Risk Factors -- No Prior Public Market for Common Stock;
Risk of Limited Market."
4
<PAGE> 6
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following Summary Financial Data is qualified by reference to the
audited financial statements and related notes thereto appearing at page F-1 of
this Prospectus, and the unaudited quarterly financial statements and related
notes thereto appearing at page F-14 of this Prospectus.
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- -------- -------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Audio sales............ $26,897 $34,052 $ 53,029 $ 71,432 $80,710 $13,113 $12,825
Video sales............ 18,791 45,256 48,186 34,207 7,966 4,619 565
------- ------- -------- -------- ------- ------- -------
Net sales.............. $45,688 $79,308 $101,215 $105,639 $88,676 17,732 13,390
Gross profit........... 7,673 10,016 11,856 14,305 14,352 2,106 1,931
Operating income
(loss)............... 1,296 2,198 2,331 2,296 3,152 (287) (277)
Net income (loss)...... 517 937 1,073 533 791 (684) (548)
Pro-forma net income
(loss) per
share(1)............. $ 0.33 $ (0.26)
Pro-forma weighted
average number of
shares
outstanding(2)....... 2,373 2,134
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995 MARCH 31, 1996
----------------- -----------------------
ACTUAL ACTUAL AS ADJUSTED
----------------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital....................................... $ 3,705 $ 3,222 $ 8,922
Total assets.......................................... 32,530 28,239 28,239
Note payable under revolving line of credit........... 15,530 11,336 5,636
Subordinated debt and capital lease obligations, net
of current portion.................................. 1,048 1,043 1,043
Stockholders' equity.................................. 4,934 4,386 10,086
</TABLE>
- ---------------
(1) Pro-forma net income per share gives pro-forma effect to the
Recapitalization. See Note 10 to the financial statements.
(2) Pro-forma weighted average number of shares outstanding is calculated based
on the number of shares outstanding after the Recapitalization, while giving
effect to the sale of the shares of Common Stock sold in this Offering and
the dilutive effect of outstanding stock options.
(3) Adjusted to reflect the sale by the Company of 1,262,500 shares of Common
Stock at an offering price of $5.50 per share, and the application of the
estimated net proceeds therefrom. See "Use of Proceeds."
------------------------
CRAIG(R) is a registered trademark of the Company. All other trademarks or
service marks used in this Prospectus are the property of their respective
holders.
------------------------
The Company was incorporated in 1989 in Delaware under the name Berel
Industries, Inc. The Company's principal executive offices are located at 13845
Artesia Boulevard, Cerritos, California 90703-9000 and its telephone number is
(310) 926-9944.
5
<PAGE> 7
RISK FACTORS
Investment in the shares of Common Stock being offered hereby involves a
high degree of risk. In addition to the other information in this Prospectus,
the following factors should be considered carefully by potential purchasers in
evaluating an investment in the Common Stock offered hereby. This Prospectus
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results of operations could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
Prospectus.
Competition. The consumer electronics industry is intensely competitive.
Pricing is aggressive and the Company expects pricing pressure to continue.
Consumers expect lower-cost, higher-quality products from year to year and, as a
result, the Company must be able to produce progressive, low-cost products, or
its ability to compete will be adversely affected. The Company competes with the
entire consumer electronics industry for consumer dollars, shelf space for
products, cooperative and other advertising, sales support, and other resources.
Many of the Company's competitors are better capitalized, have greater financial
resources, are significantly larger than the Company, and may not rely on
external financing or relationships with third-party contract manufacturers to
the same extent as the Company. The Company has adopted a marketing strategy
intended to exploit the lower-priced end of the consumer electronics market,
particularly emphasizing the mobile, portable, and home audio categories for the
foreseeable future. There are many competitors in each of the Company's product
and price categories, including Emerson, RCA, Audiovox, Sanyo, GPX, and
International Jensen. In addition, although large consumer electronic brands
such as Sony, Panasonic, JVC, Kenwood, Aiwa and similar companies do not
currently emphasize products in the lower end of the price spectrum, the Company
competes with these companies for consumer dollars, retail shelf space, and
other resources. To the extent that these larger brands enter into direct price
competition with the Company, or otherwise reduce the price of products
generally, the Company's ability to market and sell competitive products could
be severely impacted, which would have a material adverse effect on the
Company's business and financial condition. See "Business -- Business Strategy,"
"-- Competition," and "-- Marketing and Customers."
Dependence on Available Credit and Leverage. The Company's business is
capital intensive in that the Company is required to maintain a continuous
supply of products and inventory in order to meet the seasonal demands of its
various customers. Because of the Company's inventory needs and the borrowing
necessary to acquire inventory in advance of sales, the Company has a relatively
high ratio of debt to equity, which at March 31, 1996 was 2.8 to 1. In order to
obtain necessary capital, the Company relies primarily on lines of credit that
are collateralized by accounts receivable and inventory. As a result, the amount
of credit available to the Company may be adversely affected by factors such as
delays in collection or deterioration in the quality of the Company's accounts
receivable, economic trends in the consumer electronics industry, interest rate
fluctuations, and the lending policies of the Company's lenders. Many of these
factors are beyond the Company's control. The Company also uses financing from
suppliers and other third parties that result in interest charges that are
substantially higher than the cost of funds from its principal lenders. Any
decrease or material limitation on the amount of capital available to the
Company will limit the Company's ability to fill existing or projected sales and
to expand its sales levels and, therefore, would have a material adverse effect
on the Company's business and financial condition. In addition, any significant
increase in interest rates or increased utilization of higher-interest loans
from third-party lenders will increase the overall cost of financing to the
Company and would have a material adverse effect on the Company's business and
financial condition. No assurance can be given that, even with the proceeds of
this Offering, the Company will have access to sufficient capital to finance its
sales. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Inventory Risks. The Company is subject to significant risks in connection
with its inventory management. Particularly, in order to assure an adequate
supply of products to meet the relatively high demand for products during the
third and fourth quarter of each year, the Company must commit to acquire
products six to nine months in advance of delivery, which commitment is based on
the Company's forecast of its customers' orders. If the Company underestimates
its need for inventory, the Company may have to pay a significant premium to
obtain necessary manufacturing time or may be unable to provide customers with
the
6
<PAGE> 8
desired products in the quantities requested. In such event, profit margins,
sales and/or customer relationships could be materially adversely affected.
Similarly, if the Company overestimates its inventory needs, the Company will be
required to reduce prices in order to dispose of such inventory, thereby
adversely affecting its profit margins, if any. In order to operate
successfully, the Company must adequately plan, time, and budget its acquisition
of inventory in each product category so as to avoid the need for significant
cost increases or price reductions in any product or product category. To the
extent the Company is unable to do so or incurs delays in delivery, or fails to
adequately forecast prices and demand or reduce costs when necessary, the
Company's business and financial condition could be materially adversely
affected.
Seasonality and Fluctuations in Quarterly Performance. The Company's
business is highly seasonal, with operating results varying substantially from
quarter to quarter. Sales tend to be lowest in the first and second quarters and
highest in the third and fourth quarters of the calendar year. The Company has
experienced losses during the first and second quarters in the past and will
likely experience such seasonal losses in the future. In order to facilitate
sales during the year-end buying season, the Company must make financial
commitments and pay for product inventory well in advance of any sales of such
inventory. As a result, if the timing or amount of customer orders, neither of
which the Company can control, fall below the Company's expectations, operating
results and cash flow could be materially adversely affected if expenses based
on these expectations have already been incurred. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Interest Rate Fluctuations. Because of the Company's reliance on credit
lines and other sources of borrowing to finance inventory acquisitions, interest
rate fluctuations could have an adverse impact on the Company's results of
operations. An increase in the various interest rate indices to which the
Company's interest rate is tied under its principal credit line would also
increase the Company's interest expense, which could have an adverse impact upon
the Company's results of operations and financial condition. Additionally,
conditions resulting in interest rate increases would also affect the interest
rate charged by certain suppliers who finance some of the Company's inventory
acquisitions, which would adversely impact the Company's results of operations
and financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Concentration of Customers and Credit Risk. The Company has been and is
highly dependent upon its largest customers and has derived and is expected to
derive a substantial percentage of its revenues from such customers. In
particular, during fiscal 1993, 1994, and 1995, sales to the Company's top five
customers accounted for approximately 44%, 47%, and 59% of net sales,
respectively. The loss of any one of the Company's largest customers or the
failure of any one of such customers to pay its accounts receivable on a timely
basis could have a material adverse effect on the Company's business and
financial condition. The Company's largest customer, Best Buy Co., Inc. ("Best
Buy"), accounted for 24% and 35% of the Company's net sales during the years
ended December 31, 1994 and 1995, respectively. In addition, as of December 31,
1995, Best Buy accounted for approximately $3.7 million, or 25.7%, of the
Company's accounts receivable. As of March 31, 1996, the receivable owing by
Best Buy was $3.1 million or 25.5% of the Company's accounts receivable. In
January, 1996, Best Buy announced that it would be seeking more favorable terms
for the payment of its obligations to its suppliers (including the Company) and
the Company has made the accommodation to Best Buy. The Company has certain
borrowing limitations which are based on the concentration of its receivables in
any of a group of its largest customers. Under these limitations, a maximum of
30% of the Company's total receivables upon which borrowings are based may, at
any given point in time, be attributable to the accounts receivable of Best Buy.
Under these limitations, Best Buy must be rated in certain categories by Moody's
Investor Services ("Moody's") or the North American Insurance Commissioners
("NAIC"). If Best Buy's credit is not rated in the agreed-to categories by one
of the foregoing rating agencies, the availability of borrowings attributable to
the Best Buy receivables are limited to a maximum of 10% of the Company's total
receivables (unless the receivables are supported by a letter of credit or
otherwise). There are similar concentration limits for the Company's other
customers. Like Best Buy, certain of these customers must also have an agreed to
credit rating assigned by Moody's or NAIC. Therefore, a downgrade in Best Buy's
or any other major customer's credit rating is likely to adversely affect the
Company's ability to borrow and, therefore, its business and financial
condition. See "Business -- Marketing and Customers" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
7
<PAGE> 9
Risk of Product Returns and Other Liabilities. As is typical of the
consumer electronics industry, the Company incurs expenses as a result of
product returns. Such returns may result from defective goods, inadequate
performance relative to customer expectations, improper packaging, liberal
retailer return policies, and other causes which may be outside the Company's
control. Regardless of the reason for such returns, products that are returned
may generally be repackaged and resold only as "B goods" in accordance with
applicable law, including regulations imposed by the Federal Trade Commission
and similar state authorities regulating consumer trade. Such "B goods" are
typically reconditioned and sold at lower prices than comparable non-returned
goods. During the three years ended December 31, 1993, 1994, and 1995, product
returns were approximately 10.4%, 13.5%, and 13.4% of units shipped. Although
the Company attempts to recondition and remarket returned goods, only a portion
of the cost and expense associated with product returns is recovered through the
sale of such reconditioned goods. Any significant increase in the rate of
product returns could have a material adverse effect on the Company's business
and financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Design and Manufacture of
Products."
Product Liability. Although certain of the Company's products is approved
through Underwriters' Laboratories or similar testing agencies, any product
defect that results in personal injury that is not covered by the Company's
insurance policies could have a material adverse effect upon the Company's
business and financial condition. The Company maintains insurance to cover such
risks; however, the adequacy of coverage in certain events may not be adequate
to insure against all catastrophic product liability claims.
Technological Availability and Limitations. The Company does not market
high-end consumer electronic products, but instead relies upon sales of
value-oriented products. The Company currently has no intention of expanding the
Company's business into development of technology or other areas that would
attempt to develop or exploit "cutting-edge" technological advances in the audio
market. The Company does not and cannot devote a substantial portion of its
funds to research and development with a view toward creating proprietary
technology or advanced products. Instead, the Company relies on existing
technology and on stylistic and performance-based variations applying available
technologies in the conduct of its business. The Company is always subject to
the risk that a technological development will result in the obsolescence of
various of its products, including computer-based sound recording and
duplicating equipment, or other technological developments that may result in
competitive advantages to the developers of such technology. The Company is also
subject to the risk that some technological or new product development will not
be available, either due to third-party proprietary protection, cost, or
otherwise, which could render the marketing of the Company's products difficult
or not profitable due to competitive pressure from the new development. The
Company is also subject to the risk that some technological advances will be
achieved at a time when the technology is not available for incorporation into
the products manufactured for the Company. In addition, the Company's success in
the value-oriented niche of the consumer electronics market is dependent in part
upon the continued development of advanced products and features by its larger
competitors. In the event that such competitors do not develop, market, and sell
advanced products (with the advanced technology, or versions thereof, eventually
made available to the Company for inclusion in its own products) and, instead,
devote their resources to the development and sale of products incorporating
established technologies and features, the Company will be forced to compete
directly with such larger competitors, which would have a material adverse
effect on the Company's business and financial condition.
Risk of Doing Business with China; Risk of Import Limitations. The
Company's products are principally manufactured in the People's Republic of
China (the "PRC") and elsewhere in Asia by contract manufacturers. The Company
does not have long-term contracts with any of its manufacturers. Because the
Company is reliant upon various foreign manufacturers for the design, sourcing,
and manufacture of its products, the Company's business is subject to certain
risks that are not inherent in businesses that rely principally upon domestic
sources of supply. Manufacturing in the PRC and in other foreign countries is
subject to a number of risks, including but not limited to transportation delays
and interruptions, political and economic disruptions, the imposition of tariffs
and import and export controls, loss of property or revenue from expropriation
or political demands, and changes in governmental policies. While the Company to
date has not experienced any material adverse effects due to such risks, there
can be no assurance that such events will not
8
<PAGE> 10
occur in the future and possibly result in increases in costs and delays of, or
interference with, product deliveries resulting in losses of sales and damage to
customer relationships. Further, in 1996 the United States government must
determine whether to continue to grant "most favored nation" status to the PRC.
If the most favored nation status of the PRC were to terminate, or if changes in
diplomatic relations between the United States and the PRC otherwise limit the
ability to conduct business in the PRC and such termination or changes result in
increased costs of production which reduce margins or sales volume, the
Company's business could be materially adversely affected. Effective June 17,
1996, the United States government is imposing sanctions that involve tariffs on
certain products manufactured in the PRC, including telephones and answering
machines. These tariffs, if not lifted, will adversely affect the Company's
ability to import and sell telephones made in the PRC. This could limit or
eliminate the ability of the Company to expand its product line into telephones.
Additionally, sanctions could be extended to other consumer electronic products,
that would adversely affect the Company's ability to competitively price its
products, until a non-PRC supplier was located. The Company believes that
alternate sources of manufacturing are available if the need to change its
sources were to arise, although there can be no assurance that shifting
production to alternative facilities would not disrupt the Company's operations.
Generally, the PRC and other countries in which the Company does business may
not offer legal mechanisms to redress an unfair trade practice, contract breach,
or other problem requiring the enforcement of contractual provisions or other
redress. In the event of any damage to the Company resulting from the breach of
a contract, the failure to fulfill manufacturing commitments, the taking of
Company property, or other similar event creating a loss for the Company or
interruption of its business, there may not be an adequate avenue of recourse
against the parties responsible for such damages.
The Company is party to a joint venture (the "Chinese Joint Venture") with
a Chinese entity known as Chinese Southwest Computing Center (also known as
Shenzhen Zhong Mao Yuan Industry Development Co. Ltd.). With respect to this
Chinese Joint Venture, the Company is heavily dependent for management of the
operation of the manufacturing facility upon third parties who are subject to
domestic controls in the PRC. Additionally, labor practices in China vary
substantially from the labor practices in the United States and in many other
countries, and the imposition of those labor practices could have an effect on
the ability of the Company to adequately operate the manufacturing facility. To
the extent any political body, buying group, Company customer or other person
with a material interest in the Company's products, or regulators responsible
for oversight of the Company's business find any labor practice objectionable,
either because of the perception that labor practices in a given country are
inherently objectionable or otherwise, a boycott of the Company's products,
regulatory action, or similar undertaking could adversely affect the Company's
business. Further, because the Company's products are principally manufactured
overseas and include product content that is primarily composed of components
and materials from foreign sources, the Company is continually subject to the
risk that consumers, retailers, and others will prefer one of the Company's
competitors to the Company due to the source of the Company's products.
Additionally, regulations could be imposed limiting the content of products or
the source of their manufacture, which could adversely affect the Company's
ability to import products into the United States or other countries in which
the Company sells its products.
Currency Risks. Although the Company currently effects most transactions
in United States dollars and most of its sales are made in the United States, if
the Company is able to expand its international operations to include sales in
other countries, there may be situations where the Company is exposed to the
risks associated with the fluctuation of foreign currencies relative to the
United States dollar. Given the Company's plans for expansion into foreign
markets, protecting the Company from currency fluctuations through currency
hedging or otherwise could become a material part of the Company's financial
planning. Further, general risks include currency instability and currency
exchange losses when transactions are completed in currencies other than
dollars, and the ability to repatriate earnings under existing exchange control
laws. The Company attempts to effect all transactions in United States dollars
to avoid the risk of currency fluctuations. However, the Company's Chinese
operations could involve production of products and other business operations
that rely upon a currency other than the United States dollar. No assurance can
be given that an effective currency hedging policy could offset these currency
risks. The Company will effect sales in Canada in Canadian dollars. Therefore,
since most of the Company's products are purchased and financed with United
States dollars, the Company must be attentive to the risk of relative
fluctuations in these two currencies. As the Company's plans for increasing
sales in Canada evolve, if at all, the relationship of the Canadian dollar to
the U. S. dollar could
9
<PAGE> 11
have a material effect on the Company's business, and extreme currency
fluctuations in these two currencies, relative to each other, could affect the
Company's margins on products sold in Canada, absent an effective hedging
policy.
Bankruptcy of Bercor. The Company acquired the Craig brand name and
certain other assets from Bercor, Inc. ("Bercor") in 1989. Bercor operated the
business currently conducted by the Company as its Craig Consumer Electronics
Division, which the Company believes comprised approximately 20% of Bercor's
overall business. In 1988, Bercor sought protection under the United States
Bankruptcy Code and ceases to exist today. Although the Company purchased the
Craig brand name and other assets and not the entire business of Bercor, the
Company believes that Bercor's insolvency was due in part to certain of the
business risks that continue to affect the business of the Company. In the case
of Bercor, the events that led to its insolvency included the inability to
obtain suitable financing for products and diminished margins due to extreme
competitive pressures, among other causes or risks that the Company confronts in
conducting business as a value-oriented designer and marketer of consumer
electronic products. Richard Berger, the Company's President, Chief Executive
Officer and Chairman, was a founder, executive officer, and director of Bercor.
See "The Company" and "Management."
Reliance on Proprietary Protection; Risk of Infringement. The Company's
ability to compete successfully is highly dependent upon the Company's continued
ability to exploit the name CRAIG(R) under which the Company's products are
branded and sold. The Company has registered its trademarks for each of its
brand names in the United States and believes that such trademarks are valid and
provide the Company with the right to exploit those trade and brand names.
However, in the event that the Company's trade or brand names are successfully
contested, the Company could be enjoined or restricted in its use of such trade
and brand names or required to pay damages, either of which would have a
material adverse effect on the Company's business and financial condition. The
Company also maintains trademarks in several foreign countries. The Company's
ability to exploit foreign markets using the Craig name will be highly dependent
upon the proprietary protection available in these various foreign countries.
Among the countries in which the Company intends to expand its business and
distribution, the Company has registered its trademarks and is not aware of any
dispute with respect to those marks except disputes pending in Paraguay and
Argentina. The Company's inability to perfect or exploit its trade name in any
particular country could limit or prohibit the Company from entering into any
such country's market with such trade name. See "Business -- Proprietary
Protections and Trademarks."
Although the Company believes that its product designs have been
independently developed, there can be no assurance that such designs do not or
will not infringe on the proprietary rights of others. In the event that a
Company product infringes on the proprietary rights of others, the Company could
be enjoined from selling particular products and be required to pay damages,
either of which could have a material adverse effect on the Company's business
and financial condition. The Company relies generally upon its contract
manufacturers to attempt to assure that the proprietary rights in components
included in the Company's products belong or are appropriately licensed to its
manufacturers. Because the Company has no patents pertaining to its products, it
may be possible for third-parties to copy certain portions of the Company's
product designs to the Company's detriment. See "Business -- Proprietary
Protections and Trademarks."
Risk of Retail Sales. The Company is subject to the same economic factors
that impact virtually any designer or manufacturer of retail-oriented products.
Particularly, costs of materials, insurance, inflation, currency fluctuations
(with respect to international sales), transportation (and thereby fuel),
obsolescence, and retail sector and general economic conditions can impact
consumer demand in general and for the Company's products in particular. These
factors could have a material adverse effect on the Company's margins, business,
and financial condition.
Key Personnel. The Company is highly dependent on the services of Richard
Berger, its Chairman of the Board, President, and Chief Executive Officer.
Particularly, the Company is presently dependent upon Mr. Berger and his
relationships with foreign manufacturers to continue an uninterrupted supply of
the Company's products and to engage the appropriate personnel to design and
manufacture the Company's products at prices that enable the Company to compete
within the consumer electronics industry. Timing with
10
<PAGE> 12
respect to specific products or product categories can be critical, and the
Company currently relies on Mr. Berger to direct the quantity and timing of each
product or line of products acquired. Although the Company believes it has an
experienced and talented management group, the loss of Mr. Berger could have a
material adverse effect on the Company's business and financial condition. The
Company has entered into a three-year employment agreement with Mr. Berger.
Although the Company maintains key man life insurance in the face amount of
$1,000,000 on the life of Mr. Berger, the amount of such insurance and the
timing of payment thereunder may not be adequate to offset the business
interruption that could be associated with the loss of Mr. Berger's services.
See "Management."
Control by Management and Existing Stockholders. Upon consummation of this
Offering, the present directors, executive officers and principal stockholders
of the Company and their affiliates will, in the aggregate, beneficially own in
excess of 50% of the outstanding Common Stock. These stockholders, acting
together, will have the ability to control the election of the Company's
directors and most other stockholder actions and, as a result, direct the
Company's affairs and business. Such concentration may have the effect of
delaying or preventing a change of control of the Company. See "Principal and
Selling Stockholders."
Immediate Substantial Dilution. Purchasers of the shares of Common Stock
offered hereby will experience immediate substantial dilution of $2.53 per
share, or 46% of their investment, based upon the net tangible book value of the
Company at March 31, 1996. As a result, the purchasers of the shares of Common
Stock offered hereby will bear a disproportionate part of the financial risk
associated with the Company's business while effective control will remain with
the existing stockholders and management. See "Dilution."
No Prior Public Market for Common Stock; Risk of Limited Market. Prior to
this Offering, there has been no public market for the Common Stock, and there
can be no assurance that an active trading market will develop or be sustained
after this Offering or that the market price of the Common Stock will not drop
below the initial public offering price. In the absence of an active trading
market, stockholders may not have the liquidity necessary to readily dispose of
their shares of Common Stock. See "Underwriting."
No Correlation Between Offering Price and Value of Shares. The initial
public offering price of the Common Stock has been determined by negotiation
between the Company and the Representative and does not necessarily bear any
relationship to the Company's book value, assets, past operating results,
financial condition, or any other established criteria of value. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price. There can be no assurance that the Common Stock
will trade at market prices in excess of the initial public offering price, as
prices for the Common Stock in any public market which may develop will be
determined in the marketplace and may be influenced by many factors, including
the depth and liquidity of the market for the Common Stock, investor perception
of the Company, quarter-to-quarter variations in operating results, changes in
earnings estimates by analysts following the Company, if any, and general
factors affecting the consumer electronics industry, as well as general
economic, political, and market conditions. In addition, stock prices of many
companies in the consumer electronics industry may fluctuate widely for reasons
which may be unrelated to operating results. Due to analysts' expectations of
continued growth, if any, and the high price/earnings ratio at which the Common
Stock may trade, any shortfall in expectations could have an immediate and
significant adverse effect on the trading price of the Common Stock.
No Dividends. The Company's current policy will be to retain earnings, if
any, to increase its available equity and borrowings for the expansion of the
Company's business and for other corporate purposes. The Company does not intend
to pay any cash dividends in respect to the Common Stock for the foreseeable
future. The payment of cash dividends by the Company on its Common Stock is
restricted by the terms of the Company's current credit facility. Future
borrowings may contain similar restrictions. See "Use of Proceeds" and "Dividend
Policy."
Representative's Potential Influence on the Market. It is anticipated that
a significant number of the shares of Common Stock being offered hereby will be
sold to clients of the Representative. Although the Representative has advised
the Company that it currently intends to make a market in the Common Stock
following this Offering, it has no legal obligation, contractual or otherwise,
to do so. The Representative, if it becomes a market maker, could be a
dominating influence in the market for the Common Stock, if one
11
<PAGE> 13
develops. The prices and the liquidity of the Common Stock may be significantly
affected by the degree, if any, the Representative participates in such market.
There is no assurance that any market activities of the Representative, if
commenced, will be continued.
Recently Formed Representative May be Unable to Complete Offering or Make a
Market. The Representative was formed in March 1995 and has limited prior
experience with public offerings. However, the Chairman, the Vice Chairman, the
Senior Vice President, and the Director of Corporate Finance of the
Representative have prior experience with public offerings. The Chairman of the
Representative has been in the securities industries for more than 11 years. He
was associated with various national financial firms, including as a registered
principal and a registered representative. The Vice Chairman of the
Representative has been in the securities industry for over 20 years, during
which time he served in various capacities, including executive officer and
registered principal and representative, of various firms providing back office
and related services to the securities industry, and was employed in various
capacities by the National Association of Securities Dealers, Inc. Nonetheless,
due to the Representative's limited history, there is no assurance that the
Offering will be completed or, if completed, that an active trading market for
the Common Stock will develop. The Representative is not affiliated with the
Company or any controlling person of the Company. See "Underwriting."
Shares Eligible for Future Sale. Although the principal stockholders of
the Company have agreed not to sell their shares for one year following the date
of this Prospectus, at that time the shares owned by such principal stockholders
will be eligible for sale in the public market, subject to the volume and other
limitations of Rule 144 adopted under the Securities Act of 1933 ("Securities
Act") by the Securities and Exchange Commission. Additionally, because the
principal stockholders have the ability to elect a majority of the Board of
Directors of the Company, such stockholders could cause the Company to register
the shares owned by the principal stockholders under the Securities Act and
thereby make them available for distribution without regard to the volume and
other limitations imposed under Rule 144. Any substantial offering by the
principal stockholders or sale of substantial amounts of unregistered shares
under Rule 144 could have a material adverse effect on the market price of the
Company's Common Stock. See "Shares Eligible for Future Sale."
12
<PAGE> 14
THE COMPANY
In 1989, the Company acquired certain assets of an operating division of
Bercor, Inc. ("Bercor"), a publicly-owned company. Bercor was, in turn, the
successor to Craig Corporation, which began to market and sell consumer
electronics products under the "Craig" brand name during the late 1950's. Craig
Corporation went public during 1968 and was listed on the New York Stock
Exchange.
In 1985, Craig Corporation sold its consumer electronics division, along
with the rights to use the name "Craig" to Bercor, a publicly-owned distribution
company which distributed numerous products for other manufacturers, including
appliances, toys, hair care products, stationery, and other products that are
not sold by the Company. Bercor continued to distribute other manufacturers'
products and other non-proprietary and other non-branded products as an
independent distributor and reseller. The Company believes that the business
currently conducted by the Company constituted approximately 20% of the business
of Bercor by 1988. During the late 1980's, Bercor suffered from the growth of
mass merchandising and increasing direct sales by manufacturers as well as other
pressures endemic to independent distribution businesses during such period.
Bercor filed for bankruptcy protection pursuant to Chapter 11 of the United
States Bankruptcy Code on June 23, 1988.
Bercor, of which Richard Berger was a founder, executive officer, and
director, attributed its need to file for bankruptcy to an unwillingness of
major suppliers to extend credit, difficulties in obtaining necessary capital
for operations from its principal secured lenders (a function of the
collectability of receivables, excess inventory in certain product categories,
and obsolescence), and excessive operating expenses given the cash flow impact
of the receivable and inventory problems that affected product supply and, in
turn, sales, in addition to the aforementioned problems endemic to the
independent distribution business.
The Company acquired the assets of what was then the Craig Consumer
Electronics Division of Bercor pursuant to a Plan of Reorganization dated June
20, 1989 (the "Plan of Reorganization"). Since 1989, the Company has continued
to operate the business formerly conducted by the Craig Consumer Electronics
Division of Bercor. As part of the Plan of Reorganization, certain creditors of
Bercor received shares of capital stock of the Company. The shares of Common
Stock held by the Company's four principal stockholders (including the shares
distributed to former creditors of Bercor) were acquired by BJRM, Inc., an
affiliate of such stockholders, which was merged with the Company in December of
1992. The merger resulted in the four principal stockholders owning all of the
capital stock of the Company.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,262,500 shares
offered by the Company hereby at an offering price of $5.50 per share, are
estimated to be approximately $5,700,000 after deducting underwriting discounts
and commissions and estimated offering expenses, and a $50,000 fee payable to
Alan Wishnow upon consummation of the Offering. See "Underwriting." The Company
currently intends to use substantially all of the estimated net proceeds of this
Offering to pay down its existing revolving credit line.
The Company maintains a $40 million revolving line of credit secured by
inventory and receivables which is provided by a syndicate of banks led by BT
Commercial Corporation ("BTCC"), as agent. The other banks in the syndicate
include NationsBank of Texas, Sanwa Business Credit, and LaSalle National Bank.
Under the terms of the credit line with BTCC, interest accrues at alternative
rates depending upon an election by the Company. The Company has undertaken to
make the "LIBOR" election and pays interest on the BTCC loan at the rate of the
London Interbank Offered Rate, plus 2.75%, although a rate tied to the prime
rate may be elected from time to time. The Company's loan agreement and the term
of the loan expire on August 5, 1997, although they are renewable for two
one-year terms if no event of default shall have occurred and be continuing. The
loan agreement with BTCC includes various covenants including those related to
the financial condition of the Company. These financial covenants include a
covenant to maintain a certain tangible net worth (which required tangible net
worth was $5.9 million and $5.2 million on December 31, 1995 and March 31, 1996,
respectively), an acceptable ratio of funded debt to earnings before interest,
taxes, depreciation and amortization (which required ratio was 6.9 to 1 and 6.0
to 1 on December 31, 1995 and
13
<PAGE> 15
March 31, 1996, respectively), and an interest coverage ratio of earnings to
interest expense (which required ratio was 1.5 to 1 and 1.6 to 1 on December 31,
1995 and March 31, 1996, respectively). Additionally, the loan agreement imposes
restrictions on capital expenditures, the incurrence of additional indebtedness,
and the imposition of liens, and restricts the payment of dividends. The Company
believes that it is in compliance or has obtained waivers with respect to any
violations of the financial and other material covenants set forth in its loan
agreement with BTCC. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Liquidity and Capital Resources."
The foregoing represents the Company's best estimates of its use of the net
proceeds of this Offering based upon its present plans, the state of its
business operations, and current conditions in the consumer electronics
industry. The Company reserves the right to change the use of the net proceeds
if unanticipated developments in the Company's business or business
opportunities, or changes in economic, regulatory or competitive conditions in
the industry, make shifts in the allocations of net proceeds necessary or
desirable. Pending such uses, the net proceeds will be invested in investment
grade, short-term, interest-bearing securities.
DIVIDEND POLICY
Since its inception, the Company has not declared or paid any dividends on
shares of its Common Stock. The Company has previously paid dividends on its
outstanding Series A Preferred Stock, and has accrued dividends on the Series A
Preferred Stock during the years ended December 31, 1994 and 1995. Prior to the
date of this Prospectus, the 250,000 outstanding shares of Series A Preferred
Stock were converted into 1,733,330 shares of Common Stock. Prior to the
conversion, the four holders of the Company's Common Stock owned all of the
Series A Preferred Stock. On the date hereof, the Company will deliver separate
subordinated notes for a total of $780,798, reflecting the Company's long-term
obligation to pay accumulated, unpaid dividends on its Series A Preferred Stock
to its four preferred stockholders. Each subordinated note is a general
unsecured obligation maturing in four years. These subordinated notes bear
interest at the rate of 10% per annum. Semi-annual interest payments shall
commence November 1, 1996 and semi-annual, fully amortized principal repayments
shall commence May 1, 1997. Under the terms of the subordinated notes, the four
holders of the Series A Preferred Stock will agree to subordinate the Company's
obligation to pay the accumulated dividend to payment of all amounts owing to
any secured lenders, and all trade vendors of the Company, and acknowledge that
no payment will be made to the extent that such payment would cause any
violation or default of any material agreement to which the Company is a party,
including its existing loan agreement with BTCC. See "Principal and Selling
Stockholders" and "Certain Transactions."
The Company's loan agreement with BTCC limits the payment of dividends. The
Company intends to retain all available funds for use in its business and
therefore does not expect to pay any cash dividends in the foreseeable future.
Any future determination relating to dividend policy will be made at the
discretion of the Board of Directors of the Company and will depend on a number
of factors, including future earnings, capital requirements, financial
condition, future prospects of the Company and such other factors as the Board
of Directors may deem relevant.
14
<PAGE> 16
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
as of March 31, 1996, and (ii) the as adjusted capitalization of the Company
after giving effect to the Recapitalization and sale of the 1,262,500 shares of
Common Stock offered by the Company hereby at an initial public offering price
of $5.50 per share, after deducting underwriting discounts and commissions and
the estimated expenses of the Offering, and the application of the net proceeds
therefrom as set forth in "Use of Proceeds." The information set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
the related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
(IN THOUSANDS)
--------------------------
(UNAUDITED) (UNAUDITED)
ACTUAL AS ADJUSTED(1)
------- --------------
<S> <C> <C>
Short-term debt, including line of credit......................... $11,336 $ 11,336
======= ===========
Long-term debt, including capital leases.......................... 84 84
Notes payable to related parties.................................. 982 982
Total long-term debt.............................................. 1,066 1,066
Stockholders' Equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized;
250,000 shares of Series A Preferred Stock issued and
outstanding, none issued or outstanding, as adjusted(2)...... 2,500 --
Common stock, $.01 par value, 15,000,000 shares authorized;
6,405,995 shares issued and outstanding, 3,396,941 shares
issued and outstanding, as adjusted(2)....................... 64 34
Additional paid in capital...................................... 815 9,045
Retained earnings............................................... 1,007 1,007
------- -----------
Total equity................................................. 4,386 10,086
------- -----------
Total capitalization....................................... $ 5,452 $ 11,152
======= ===========
</TABLE>
- ---------------
(1) Adjusted to reflect the sale by the Company of 1,262,500 shares of Common
Stock at an assumed offering price of $5.50 per share, and the application
of the estimated net proceeds therefrom.
(2) Prior to the effective date of this Prospectus, the Company effected a
recapitalization resulting in the conversion of 250,000 shares of Series A
Preferred Stock into 1,733,330 shares of Common Stock and a subsequent
3.81-to-one reverse stock split resulting in the conversion of 8,139,325
shares of Common Stock into 2,134,441 outstanding shares of Common Stock.
See "Certain Transactions" and "Description of Capital Stock."
15
<PAGE> 17
DILUTION
The net tangible book value of the Company's Common Stock at March 31, 1996
was approximately $4,258,000, or $1.99 per share. Net tangible book value per
share represents the amount of total tangible assets less liabilities, divided
by the number of shares of Common Stock outstanding. After giving effect to the
sale of the 1,262,500 shares of Common Stock offered hereby at the price of
$5.50 per share (after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by the Company) and the
application of the net proceeds therefrom, the pro forma, net tangible book
value of the Company at March 31, 1996 would have been approximately
$10,086,000, or $2.97 per share. This represents an immediate dilution in net
tangible book value of $2.53 per share to purchasers of shares of Common Stock
offered hereby and an immediate increase in net tangible book value of $.98 per
share to existing stockholders. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share.............................. $5.50
Net tangible book value per share at March 31, 1996................ $1.99
Increase in net tangible book value per share attributable to new
investors....................................................... .98
-----
Pro forma, as adjusted, net tangible book value per share after
Offering........................................................... 2.97
-----
Dilution per share to new investors.................................. $2.53
=====
</TABLE>
The following table summarizes, as of March 31, 1996, the number of shares
of Common Stock purchased from the Company, the total consideration paid and the
average price per share paid by existing stockholders and by purchasers of the
shares of Common Stock offered hereby (at the initial public offering price of
$5.50 per share before deducting the underwriting discounts and commissions and
the estimated offering expenses payable by the Company).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL INVESTMENT AVERAGE
------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------- ------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders(1).......... 2,134,441 63% $3,379,360 33% $1.58
New Stockholders.................. 1,262,500 37 6,943,750 67 $5.50
--------- ------- ----------- ---- ---
Total........................... 3,396,941 100% $10,323,110 100%
========= ======= =========== =======
</TABLE>
- ---------------
(1) Excludes 402,000 shares of Common Stock issuable upon exercise of
outstanding stock options, 365,559 shares issuable to Messrs. Berger and
Miller pursuant to outstanding stock options, the 37,500 shares to be sold
by the Company pursuant to the Underwriters' over-allotment option, if
exercised, and the 125,000 shares of Common Stock issuable upon exercise of
the Representative's Warrants. See "Management" and Note 7 of Notes to
Financial Statements.
16
<PAGE> 18
SELECTED FINANCIAL DATA
The following selected statement of income data for each of the three years
in the period ended December 31, 1995, and the balance sheet data as of December
31, 1994, and 1995, are derived from and qualified by the audited financial
statements and the related notes thereto included elsewhere in this Prospectus
that have been audited by Arthur Andersen LLP, independent public accountants,
as set forth in their report. The statement of income data set forth below with
respect to the years ended December 31, 1991 and 1992 and the balance sheet data
as of December 31, 1993, are derived from audited financial statements of the
Company not included in this Prospectus. The financial data for the three months
ended March 31, 1995 and 1996 and as of March 31, 1996 have been derived from
unaudited financial statements which, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position and results of operations of the
Company for such interim periods. Operating results for the three months ended
March 31, 1996 are not indicative of the results for a full fiscal year. The
data set forth below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and the
financial statements and the related notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Audio sales............................... $26,897 $34,052 $53,029 $71,432 $80,710 $13,113 $12,825
Video sales............................... 18,791 45,256 48,186 34,207 7,966 4,619 565
------- ------- ------- ------- ------- ------- -------
Net sales................................. 45,688 79,308 101,215 105,639 88,676 17,732 13,390
Cost of goods sold........................ 38,015 69,292 89,359 91,334 74,324 15,626 11,459
------- ------- ------- ------- ------- ------- -------
Gross profit.............................. 7,673 10,016 11,856 14,305 14,352 2,106 1,931
------- ------- ------- ------- ------- ------- -------
Selling expenses........................ 2,818 3,361 4,809 5,165 4,664 986 750
General and administrative expenses..... 3,235 4,111 4,611 6,681 6,336 1,371 1,421
Product development expenses............ 324 346 105 163 200 36 37
------- ------- ------- ------- ------- ------- -------
Operating expenses........................ 6,377 7,818 9,525 12,009 11,200 2,393 2,208
------- ------- ------- ------- ------- ------- -------
Operating income (loss)................... 1,296 2,198 2,331 2,296 3,152 (287) (277)
Interest expense, net..................... 740 1,029 1,221 1,692 2,200 536 382
------- ------- ------- ------- ------- ------- -------
Income (loss) before tax provision
(benefit)............................... 556 1,169 1,110 604 952 (823) (659)
Provision for taxes (income tax
benefit)................................ 39 182 37 71 161 (139) (111)
Extraordinary item........................ -- 50 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income (loss)......................... $ 517 $ 937 $ 1,073 $ 533 $ 791 $ (684) $ (548)
======= ======= ======= ======= ======= ======= =======
Pro-forma net income (loss) per share
(1)..................................... $ 0.33 $ (0.26)
Weighted average shares outstanding (2)... 2,373 2,134
======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- -----------
1993 1994 1995 1996
------- ------- ------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................... $ 4,533 $ 3,528 $ 3,705 $ 3,222
Total assets...................................... 33,716 41,145 32,530 28,239
Notes payable under revolving line of credit...... 14,478 20,914 15,530 11,336
Subordinated debt and capital lease obligations,
net of current portion.......................... -0- 634 1,048 1,043
Stockholders' equity.............................. 4,486 4,581 4,934 4,386
</TABLE>
- ---------------
(1) Pro-forma net income per share reflects the pro forma effect of the
Recapitalization undertaken upon the effectiveness of this Prospectus and
prior to consummation of sales of Common Stock in this Offering. See Note
10 to the Notes to Financial Statements.
(2) Pro-forma weighted average number of shares outstanding is calculated based
on the number of shares outstanding after the Recapitalization, while
giving effect to the sale of the 1,262,500 shares of Common Stock sold in
this Offering and the dilutive effect of the outstanding stock options.
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the financial
statements and related notes thereto included elsewhere in this Prospectus.
OVERVIEW AND OPERATING HIGHLIGHTS
The Company derives substantially all of its revenues from sales of
consumer electronics products, including audio electronic products such as home
and mobile sound systems and, previously, video products such as televisions and
video cassette recorders. Because the Company has experienced lower and
declining gross margins on sales of video products, the Company's current
strategy is to curtail sales of its video products and focus its resources on
sales of audio products, which have generated higher gross margins than video
items. The Company does not anticipate substantial sales of video products for
the foreseeable future.
The Company attempts to order products and maintain inventory controls in
an effort to control the costs and risks of inventory obsolescence and the
retention of significant inventories, either of which results in financing and
other costs. This inventory management philosophy is frequently difficult to
implement. Such difficulty is increased by the relatively long product
development and ordering cycle and the unpredictability of consumer demand.
Maintaining inventory levels at or just above normal demands throughout the year
is critical, given the Company's capital requirements and limitations.
The Company is subject to significant risks in connection with its
inventory management. Particularly, in order to assure an adequate supply of
products to meet the relatively high demand for products during the third and
fourth quarter of each year, the Company must commit to acquire products six to
nine months in advance of delivery, which commitment is based on the Company's
forecast of its customers' orders. If the Company underestimates its need for
inventory, the Company may have to pay a significant premium to obtain necessary
manufacturing time or may be unable to provide customers with the desired
products in the quantities requested. In such event, profit margins, sales
and/or customer relationships could be materially adversely affected. Similarly,
if the Company overestimates its inventory needs, the Company will be required
to reduce prices in order to dispose of such inventory, thereby adversely
affecting its profit margins, if any. In order to operate successfully, the
Company must adequately plan, time, and budget its acquisition of inventory in
each product category so as to avoid the need for significant cost increases or
price reductions in any product or product category. To the extent the Company
is unable to do so or incurs delays in delivery, or fails to adequately forecast
prices and demand or reduce costs when necessary, the Company's business and
financial condition could be materially adversely affected.
The Company's business is highly seasonal, with operating results varying
substantially from quarter to quarter. Sales tend to be lowest in the first and
second quarters and highest in the third and fourth quarters of the calendar
year. The Company has experienced losses during the first and second quarters in
the past and will likely experience such seasonal losses in the future. The
Company experienced an operating loss of approximately $277,000 and a net
pre-tax loss of approximately $659,000 in the first quarter of 1996. In order to
facilitate sales during the year-end buying season, the Company must make
financial commitments and pay for product inventory well in advance of any sales
of such inventory. As a result, if the timing or amount of customer orders,
neither of which the Company can control, fall below the Company's expectations,
operating results and cash flow could be materially adversely affected if
expenses based on these expectations have already been incurred.
The Company's product development activities generally involve designing
products from various prototypes manufactured by large consumer electronics
manufacturers. These designs generally involve the modification and application
of existing available technologies. The Company's product development is
therefore generally focused on selection of features, cosmetic design, and
obtaining a cost-effective means to incorporate available technology into the
Company's products rather than attempting to develop new technology. Product
development costs are those costs typically associated with the Company's
cosmetic design, testing, and features of its products.
18
<PAGE> 20
Net sales represent gross sales after excluding product returns, but
include the resale of reconditioned products. For 1993, 1994, and 1995, product
returns approximated 10.4%, 13.5%, and 13.4%, respectively, of total units
shipped. Any increase in the rate of product returns would have a material
adverse effect on the Company's business and financial condition.
The Company's sales are concentrated among its largest customers. During
1993, 1994, and 1995, sales to the Company's top five customers accounted for
approximately 44%, 47%, and 59% of net sales, respectively. Approximately 25%,
24%, and 35% of net sales were attributable to Best Buy, during such periods.
The Company is therefore highly dependent upon its largest customers, and its
business and financial condition could be adversely affected to the extent that
any of its largest customers discontinued the purchase of the Company's products
for any reason, including general economic conditions affecting the demand for
products at the Company's price point or other conditions affecting business of
any particular retail chain or other large customer. The Company expects that
concentration of sales will continue.
The Company's selling expenses are composed of both variable expenses,
which generally correlate to sales levels, and non-variable expenses. Variable
expenses averaged approximately 70% of selling expense over the past three
years, and include primarily commissions, freight, and promotional expenses.
Non-variable expenses include, among other customary selling expenses, the costs
of attendance at the Consumer Electronics Show and other trade shows. General
and administrative expenses typically include office and warehouse space and
payroll, among other customary general and administrative expenses.
The Company opened an office in Hong Kong in February 1994, to facilitate
acquisition of products in a timely fashion and to promote the Company's
relationships with its contract manufacturers. In August 1995, the Company
entered into a Chinese Joint Venture, of which it is a 50% owner. The Chinese
Joint Venture operates a reconditioning and assembly facility in Shenzhen, PRC.
The facility is currently intended to serve only as a reconditioning facility.
In January 1996, the PRC reconditioning facility began operations. The Company
made a capital investment in the Chinese Joint Venture of approximately
$350,000.
Taxes were not material to the Company's financial condition during the
years ended December 31, 1993 and 1994, due to the ongoing availability of a net
operating loss ("NOL") carryforward. During the year ended December 31, 1995,
the Company applied a portion of its NOL carryforward to the reduction of its
federal income taxes. The State of California, the Company's principal place of
business, also has an income tax imposed on corporations subject to its
jurisdiction. In California, the availability and use of NOL carryforwards has
been severely limited, and during the year ended 1995, the Company incurred
state income taxes of $146,077 that were not subject to any reduction by reason
of the availability of NOL carryforwards. When reviewing the financial
statements and related notes thereto appearing elsewhere in this Prospectus,
provision for state income taxes should be taken into account inasmuch as it is
not anticipated that the NOL carryforwards will be available to reduce tax
liabilities to the State of California. There can be no assurance that the
availability and use of NOL carryforwards to reduce federal tax liabilities will
be continued in the future or that future legislation or the sale of securities
will not limit or eliminate the Company's use of NOL carryforwards. As of
December 31, 1995, the Company had an NOL carryforward for federal income tax
purposes of approximately $5,101,000.
During the first quarter of 1996, the Company recognized a tax benefit of
approximately $110,000 which represents the projected quarterly tax benefit to
be realized by the Company as a result of the use of NOL carryforwards in 1996.
No assurances can be given, however, that the Company's results of operations
for 1996 will enable it to utilize the NOL carryforwards as projected.
Prior to the date of this Prospectus, the Company effected a
recapitalization pursuant to which 250,000 outstanding shares of Series A
Preferred Stock were converted into 1,733,330 shares of the Company's Common
Stock. Immediately upon conversion of the Series A Preferred Stock, the Company
effected a 3.81-to-one reverse stock split resulting in the 2,134,441 shares of
Common Stock issued and outstanding immediately prior to the completion of the
Offering (the "Recapitalization").
19
<PAGE> 21
RESULTS OF OPERATIONS
The following tables set forth various items both in dollars and as a
percentage of net sales for the five years ended December 31, 1991, 1992, 1993,
1994, and 1995, and for the quarterly periods ended March 31, 1995 and 1996.
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Audio sales..................... $26,897 $34,052 $53,029 $71,432 $80,710 $13,113 $12,825
Video sales..................... 18,791 45,256 48,186 34,207 7,966 4,619 565
------- ------- ------- ------- ------- ------- -------
Net sales....................... 45,688 79,308 101,215 105,639 88,676 17,732 13,390
Cost of goods sold.............. 38,015 69,292 89,359 91,334 74,324 15,626 11,459
------- ------- ------- ------- ------- ------- -------
Gross profit.................... 7,673 10,016 11,856 14,305 14,352 2,106 1,931
------- ------- ------- ------- ------- ------- -------
Selling expenses................ 2,818 3,361 4,809 5,165 4,664 986 750
General and administrative
expenses...................... 3,235 4,111 4,611 6,681 6,336 1,371 1,421
Product development expenses.... 324 346 105 163 200 36 37
------- ------- ------- ------- ------- ------- -------
Operating expenses.............. 6,377 7,818 9,525 12,009 11,200 2,393 2,208
Operating income (loss)......... 1,296 2,198 2,331 2,296 3,152 (287) (277)
Interest expense, net........... 740 1,029 1,221 1,692 2,200 536 382
------- ------- ------- ------- ------- ------- -------
Income (loss) before provision
for taxes..................... 556 1,169 1,110 604 952 (823) (659)
Provision for taxes (income tax
benefit)...................... 39 182 37 71 161 (139) (111)
Extraordinary item.............. -- 50 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income (loss)............... $ 517 $ 937 $ 1,073 $ 533 $ 791 $ (684) $ (548)
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------- ---------------
1991 1992 1993 1994 1995 1995 1996
----- ----- ----- ----- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Audio sales..................... 58.9% 42.9% 52.4% 67.6% 90.8% 74.0% 95.8%
Video sales..................... 41.1 57.1 47.6 32.4 9.2 26.0 4.2
----- ----- ----- ----- ----- ----- -----
Net sales....................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of goods sold.............. 83.2 87.4 88.3 86.5 83.8 88.1 85.6
----- ----- ----- ----- ----- ----- -----
Gross profit.................... 16.8 12.6 11.7 13.5 16.2 11.9 14.4
Selling expenses................ 6.2 4.2 4.7 4.9 5.3 5.6 5.6
General and administrative
expenses...................... 7.1 5.2 4.6 6.3 7.1 7.7 10.6
Product development expenses.... 0.7 0.4 0.1 0.1 0.2 .2 .3
----- ----- ----- ----- ----- ----- -----
Operating income (loss)......... 2.8 2.8 2.3 2.2 3.6 (1.6) (2.1)
Interest expense, net........... 1.6 1.3 1.2 1.6 2.5 3.0 2.8
----- ----- ----- ----- ----- ----- -----
Income (loss) before provision
for taxes (benefit)........... 1.2 1.5 1.1 0.6 1.1 (4.6) (4.9)
Provision for taxes (income tax
benefit)...................... 0.1 0.2 -- 0.1 .20 (.7) (.8)
Extraordinary item.............. -- 0.1 -- -- -- -- --
----- ----- ----- ----- ----- ----- -----
Net income (loss)............... 1.1% 1.2% 1.1% 0.5% 0.9% (3.9)% (4.1)%
===== ===== ===== ===== ===== ===== =====
</TABLE>
20
<PAGE> 22
COMPARISON OF YEARS ENDED DECEMBER 31, 1994 AND 1995
Net sales. Net sales decreased by $16.9 million, or 16.0%, from $105.6
million in 1994 to $88.7 million for 1995. The decrease is primarily a function
of the planned reduction in sales of video products. Due to the Company's
efforts to reduce the sales of lower-margin video products, sales of such video
products decreased by $26.2 million, or 76.6%, from $34.2 million in 1994 to
$8.0 million in 1995. Home and portable audio and mobile audio sales increased
by $9.3 million, or 13%, from $71.4 million in 1994 to $80.7 million in 1995.
Gross profit. Gross profit increased by $0.1 million, or 1.0%, from $14.3
million in 1994 to $14.4 million for 1995. As a percent of sales, gross profit
increased from 13.5% in 1994 to 16.2% in 1995. The increase in the gross profit
margin is directly attributable to increased sales of higher-margin audio
products and a decrease in sales of lower-margin video products.
Selling expenses. Selling expenses decreased $0.5 million, or 9.6%, from
$5.2 million in 1994 to $4.7 million in 1995. The reduction in selling costs is
directly attributable to the corresponding decrease in net sales.
General and administrative expenses. General and administrative expenses
decreased $0.4 million, or 6.0%, from $6.7 million in 1994 to $6.3 million in
1995. The decrease in general and administrative expenses is primarily due to an
increase in operating efficiencies in the Company's reconditioning operations.
Product development expenses. Product development expenses, which are not
included in the foregoing discussion with respect to selling or general and
administrative expenses, increased $37,000, or 22.7%, from $163,000 in 1994 to
$200,000 in 1995.
Interest expense. Interest expense increased $0.5 million, or 29.4%, from
$1.7 million for 1994 to $2.2 million in 1995. Interest expense increased both
in absolute numbers and as a percentage of sales as a result of higher average
interest rates paid on the Company's borrowings.
Net income. Net income increased from $533,000 in 1994 to $791,000 in
1995. As in prior years, net income was affected by the application of the
Company's NOL carryforward, which resulted in a federal tax savings of
approximately $389,000 in 1995. During 1995, the NOL carryforward, by reason of
changes in California law, could not be applied to reduce California income
taxes to which the Company is subject by reason of its principal business
location in that state. During 1994, net income was increased by reason of the
application of the NOL to both federal and California state taxes, totalling
$329,000 in tax savings for that year. The Company does not anticipate and
cannot assure that the NOL carryforward will have a material beneficial effect
on the Company's financial condition and results of operations in the future.
COMPARISON OF YEARS ENDED DECEMBER 31, 1993 AND 1994
Net sales. Net sales increased by $4.4 million, or 4.3%, from $101.2
million in 1993 to $105.6 million in 1994. The increase in net sales was
primarily due to increased audio sales, increased marketing efforts, and
increased dealer and consumer acceptance of the Company's audio products. During
this time period, video sales decreased by $14 million, or 29.1%, from $48.2
million to $34.2 million, while audio sales increased $18.4 million, or 34.7%,
from $53.0 million to $71.4 million.
Gross profit. Gross profit increased $2.4 million, or 20.2%, from $11.9
million in 1993 to $14.3 million in 1994. Gross profit for 1994 increased in
both absolute numbers and on a percentage-of-sales basis as compared to 1993.
The Company realized a 20.2% increase in gross profit in 1994 although revenues
increased by only 4.3%. As a percentage of sales, gross profit was 11.7% for
1993 and 13.5% for 1994. This increase in gross profit is primarily attributable
to the greater margins obtained as a result of the Company's product mix away
from video products, and a focus on higher-margin audio products.
Selling expenses. Selling expenses increased $0.4 million, or 8.3%, from
$4.8 million in 1993 to $5.2 million in 1994. The increase is attributable to
increased variable selling expenses due to increased sales. Selling expense
remained essentially the same as a percentage of sales in 1993 as compared to
1994.
21
<PAGE> 23
General and administrative expenses. General and administrative expenses
increased $2.1 million, or 45.7%, from $4.6 million in 1993 to $6.7 million in
1994. This increase is primarily due to the expansion of the Company's quality
control operations, the establishment of the reconditioning facility in
Cerritos, and the establishment of the Hong Kong office.
Product development expenses. Product development expenses increased
$58,000, or 55.2%, from $105,000 in 1993 to $163,000 in 1994.
Interest expense. Interest expense increased $0.5 million, or 41.7%, from
$1.2 million in 1993 to $1.7 million in 1994. The increase was primarily due to
the Company's increased borrowings on its lines of credit, as well as a higher
average interest rate on the Company's borrowings.
Net income. Net income decreased from $1.1 million in 1993 to $533,000 in
1994. An NOL carryforward was applied to achieve a tax savings of $578,000
during 1993 and $329,000 during 1994.
COMPARISON OF QUARTERS ENDED MARCH 31, 1995 AND 1996
Net sales. Net sales decreased by $4.3 million, or $24.5%, from $17.7
million during the first quarter of 1995 to $13.4 million for the quarter ended
March 31, 1996. The decrease is primarily a result of the continuing shift away
from lower margin video products. Home and portable audio sales decreased by $.3
million, or 2.2%, during the first quarter of 1996 when compared to the same
period of the prior year. Sales of video products decreased from $4.6 million
for the quarter ended March 31, 1995 to only $.6 million during the first
quarter of 1996. The Company's business is highly seasonal and net sales are
consistently lower during the first quarterly period of each year.
Gross profit. Gross profit decreased by $200,000, or 9.5%, from $2.1
million during the quarter ended March 31, 1995, to $1.9 million for the same
period in 1996. As a percentage of sales, however, gross profit increased from
approximately 11.9% during the quarter ended March 31, 1995 to approximately
14.4% during the first quarter of 1996. The increase in profitability in
relation to total sales is a result of the sale of a greater percentage of
higher margin audio products and a continuing de-emphasis of lower margin video
products.
Selling expenses. Selling expenses decreased by $250,000, or 25%, from
approximately $1 million during the first quarter of 1995 to $0.75 million for
the same period of 1996. The decrease directly correlates with the decrease in
sales of video products. However, as a percentage of overall sales, selling
expenses remained substantially the same.
General and administrative expenses. General and administrative expenses
were approximately $1.4 million during each of the first quarters of 1995 and
1996.
Product development expenses. Product development costs were nominal
during the first quarter of each of 1995 and 1996. During each quarterly period,
product development expenses were approximately $37,000.
Interest expense. Interest expense during the first quarter of 1995 was
approximately $537,000, as compared to $383,000 during 1996. The decrease
reflects the lower cost of carrying inventory during the first quarter of 1996
as compared to 1995, primarily as a function of the progressive discontinuation
of video products in accordance with the Company's strategy. As a percentage of
sales, interest expense declined from approximately 3% in the first quarter of
1995 to 2.8% in the first quarter of 1996.
Net loss. The net loss for the first quarter of 1996 was approximately
$548,000, as compared to approximately $684,000 during the same period of 1995.
The decrease in the net loss experienced during the first quarter of 1996
resulted primarily from a tax benefit of approximately $110,000 as well as
savings on interest expense incurred due to reduced levels of video inventory.
LIQUIDITY AND CAPITAL RESOURCES
Since 1989, the Company has financed its operations, inventory needs, and
other capital requirements through a combination of bank borrowings, vendor
financing, and internally generated cash flow. The Company's inventory and
receivable line of credit is currently made available by a syndicate of banks
led by
22
<PAGE> 24
BTCC. Under the Company's loan agreement (the "Loan Agreement") with BTCC and
the syndicate members, borrowings are secured by inventory and receivables, and
the amount of available credit is based on the eligible amount of inventory and
receivables. The portion of inventory purchases that is not financed through the
BTCC line of credit is financed by suppliers or other third-party financing
sources and the Company's equity and cash flow. This line of credit allows
maximum borrowings of $40 million, the exact amount dependent upon the amount of
receivables and inventory meeting certain criteria. As of April 30, 1996, the
Company had borrowed approximately $10,211,000, which was the maximum available
amount it could borrow at that date under the BTCC line of credit. The interest
rate on such line of credit may, at the Company's option, be tied to either the
London Interbank Offered Rate ("LIBOR") plus 2.75% or the prime rate plus 1.25%
quoted by Bankers Trust Company, New York. For 1995 and through the present
date, the Company elected to utilize the LIBOR rate (which was 5.83% at December
31, 1995) plus 2.75%. The Company also periodically finances its inventory
acquisitions through supplier or other third-party financing that is generally
unsecured short-term financing, for which the Company pays significantly higher
interest rates than it pays under its available line of credit with BTCC. The
rate for vendor and other third-party financing for the Company's products
ranged from approximately 6.8% to 18.0% during 1995.
Significant deterioration in prevailing industry conditions or receivable
quality, through payment delay or other credit risks associated with the
Company's customers, could affect the Company's ability to finance inventory
acquisitions at any given point in time, which could materially adversely impact
the Company's business and financial operations. The Company cannot anticipate
the contingencies to borrowing availability, nor can management predict the
assessment of the contingencies by BTCC, acting as the agent on behalf of the
syndicate of banks that participates in the Company's loan, or any other
financing sources.
The Company is subject to several affirmative and negative covenants
imposed pursuant to its loan agreement with BTCC. Such covenants include
covenants to provide quarterly and annual financial statements and to affirm the
"borrowing base" calculations (the formula of inventory and receivables applied
to determine the maximum of available borrowings). The Company is also subject
to various negative financial covenants that require the Company to maintain a
certain consolidated tangible net worth, a ratio of funded debt to earnings
before interest, taxes, depreciation and amortization and a ratio of earnings
before interest, taxes, depreciation and amortization to interest expense, among
others. Additionally, the Company is limited in the amount of additional
indebtedness it may incur, including indebtedness for equipment and other
capital expenditures, the granting of liens, and other limitations which are
intended to preserve the integrity and value of the assets of the Company that
are pledged to secure the borrowings from BTCC. The Company is also limited in
the amount of borrowings it may secure with the receivables from certain of its
largest customers, including, most notably, Best Buy. There can be no assurance
that borrowing availability will continually be made available if one or more of
these significant customers is perceived as a credit risk. See "Risk
Factors -- Concentration of Customers and Credit Risk." Certain financial
covenants may have been violated by the Company in connection with the provision
for accrued dividends payable on the Preferred Stock and the accrued bonus
payment to Richard Berger prior to this Offering. BTCC has waived such
violations.
The Company also maintains various unsecured credit lines and unsecured
vendor financing with its principal product suppliers, in addition to the
Company's principal credit line with the BTCC syndicate. Until August 31, 1995,
the Company maintained a credit line with Heller Financial Corp. and additional
credit provided by other third-party lenders for borrowings of between
approximately $500,000 and $2,000,000 during 1995. These financings were not
renewed when they matured in August of 1995 and the Company believes the
inability to renew this financing had an adverse impact on the Company's ability
to acquire inventory during 1995.
The Company's cash flow and the ability to finance inventory acquisitions
is affected by its concentration of customers. Particularly, the Company relies
on its five largest customers for a significant portion of its sales. The
Company's largest customer, Best Buy, accounted for 24% and 35% of net sales
during 1994 and 1995, respectively. In addition, as of December 31, 1995, Best
Buy accounted for approximately $3.7 million, or 25.7%, of the Company's
accounts receivable. To the extent the credit quality of any of the Company's
significant customers, including Best Buy, is significantly diminished or in the
event of the loss of any of these
23
<PAGE> 25
significant customers, the Company's financial condition and cash flow could be
materially adversely affected. Best Buy has recently announced plans to
temporarily defer payment to certain vendors, including the Company, or seek
other concessions and may be considered by the Company's financing sources to be
an unacceptable credit risk for the Company, given the Company's substantial
reliance upon Best Buy. To the extent that Best Buy or any other major customer
is unable to pay for products sold by the Company at a point in time when a
significant percentage of the Company's sales is attributable to Best Buy or
such other customers, the Company's ability to finance inventory acquisitions
and its results of operations could be materially and adversely affected.
The Company used net cash in operating activities and did not generate cash
flows from operations during 1993 and 1994. Particularly, net cash used in
operating activities increased $1.6 million, or 35.6%, from $4.5 million in 1993
to $6.1 million in 1994. Increases in inventory financed by the Company's line
of credit during 1993 and 1994 are the predominant reason for the increase in
net cash used during such time. Additionally, during 1994 the Company incurred
significant expenses associated with the implementation of its credit line with
BTCC.
Net cash used in operating activities was $6.1 million in 1994 as compared
to net cash provided by operating activities of $5.3 million in 1995. The
increase in cash provided by operating activities was predominantly due to a
reduction in inventory and accounts receivable. The Company's net cash and
borrowing availability as of December 31, 1995 was improved over the prior two
fiscal years. Net cash flow from operating activities was applied to the
repayment and reduction of the outstanding balance of the Company's principal
credit line with BTCC and other vendors. Specifically, $5.4 million of the
increased cash flow was used to pay down the Company's indebtedness to the
syndicate of banks led by BTCC.
In connection with the termination of the Company's phantom stock plan, the
Company is obligated to issue subordinated notes aggregating $206,800. See
"Certain Transactions." The Company is also obligated to issue subordinated
notes in the aggregate principal amount of $780,798 reflecting the Company's
obligation to pay accumulated, unpaid dividends on its Series A Preferred Stock.
See "Dividend Policy."
The Company believes the proceeds of the Offering, together with amounts
available from bank borrowings and cash generated by operations, will be
adequate to meet the Company's anticipated cash needs for working capital and
capital expenditures through at least the next 12 months. The Company's
long-term capital requirements will depend on numerous factors, including the
rate of increases in revenues, if any, accounts receivable aging, interest rate
fluctuations, and the rate of product returns. The Company's need for capital
arises primarily from the acquisition of inventory and related operational
expenses. The Company does not have significant capital expenditures, other than
the expenditure for the Company's share of improvement costs and related
equipment for the Chinese Joint Venture reconditioning facility. The Company
anticipates that its future capital needs will be met with additional bank and
supplier borrowings and the equity made available by this Offering.
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BUSINESS
OVERVIEW
Craig Consumer Electronics, Inc. (the "Company") designs and markets brand
name consumer electronic products under its trademark, "Craig."(R) The Company
offers value-oriented products with features that the Company believes are
comparable to those of its higher-priced competitors. The Company's products are
sold through over 200 retailers with approximately 15,000 retail outlets,
including major retail chains, such as Best Buy, Circuit City, Thrifty Payless,
Rex, Incredible Universe, Nobody Beats the Wiz, and Rite Aid, and other mass
merchandisers, such as Montgomery Ward and Price Costco. The Company also sells
through catalog and direct marketing organizations, such as the QVC Network,
Spiegel Catalog, and Amway.
In recent years, the Company has emphasized the design and marketing of
home and mobile audio electronic products (such as compact music centers and car
stereos) and portable audio products (such as "boom boxes" and small personal
stereos). The Company has realized gross margins exceeding 17% over the last
three years on sales of its audio electronic products. By contrast, the Company
has experienced lower and declining gross margins on sales of its video
electronic products over the past three years. As a result, the Company's recent
strategy has been to curtail sales of video products, and the Company does not
anticipate substantial sales of video products during 1996. The Company will
instead devote the principal portion of its resources to the design and
distribution of audio electronic and peripheral products. Primarily due to its
increasing focus on the sale of audio products, the Company's operating income
increased from $2.3 million in 1994 to $3.2 million in 1995, although overall
sales were $16.9 million lower in 1995 than in 1994.
According to data compiled by the Consumer Electronics Manufacturers
Association ("CEMA"), it is estimated that total factory sales of consumer
electronics products were $62.3 billion during 1995. During 1995, according to
CEMA data, it is estimated that approximately 7 million audio systems, 32
million compact disc ("CD") players (including portables and home CD players),
and 32 million tape players were sold. According to the CEMA sales outlet
figures, the estimated average price for these products during the 1995 year is,
in each category, greater than the Company's average price for the same product
categories.
BUSINESS STRATEGY
In recent years, the Company has emphasized the design and marketing of
brand name audio products, including specifically products designed for the home
or mobile and portable audio products, including "boom boxes" and personal
stereos. The Company has experienced lower and declining gross margins in the
video product categories and due to returns, component supply, and associated
problems. As a result, the Company severely limited sales of video products
during 1995, does not anticipate substantial sales of video products during
1996, and will devote the principal portion of the Company's resources to the
design, sourcing, sale, and distribution of audio electronic, and related
products. The following table demonstrates the Company's increasing emphasis on
audio electronic products:
NET SALES BY PRODUCT CATEGORIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1991 1992 1993 1994 1995
------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Audio and audio peripherals............... $26,897 $34,052 $ 53,029 $ 71,432 $80,710
Video..................................... 18,791 45,256 48,186 34,207 7,966
------- ------- -------- -------- -------
Total................................... $45,688 $79,308 $101,215 $105,639 $88,676
======= ======= ======== ======== =======
</TABLE>
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The Company's objective is to establish itself as a leading supplier of
value-oriented audio electronic and peripheral products. The Company has
conceived various strategies to achieve this primary objective. In addition to
the following strategies, the Company must continue to be responsive to consumer
demand in the design and marketing of its audio and other products and be able
to introduce them in a timely fashion. In addition to the Company's current
business, future strategies include all of the following:
- Expand Distribution. The Company intends to expand domestic distribution
channels and outlets. In this regard, during the fourth quarter of 1995 and the
first quarter of 1996, the Company has established new distribution
relationships with K mart and Fred Meyer. The Company is also restructuring its
Canadian distribution relationships and will sell direct to merchandisers in
Canada, rather than through a third-party distributor.
- Expand Internationally. The Company currently sells its products in
Australia, Mexico, Germany, and the Philippines. However, less than 2% of 1995
net sales were in these foreign countries. The Company believes that with
additional capital provided by this Offering, the Company will have the ability
to enhance its sales and marketing efforts in these countries, as well as to
market products in other countries throughout the world.
- Reduce Interest Expense. The Company has frequently paid relatively high
interest rates on the unsecured portion of its borrowings. The Company expects
to experience a significant reduction in its need for such high interest rate
financing and, as a result, its average interest rate due to the application of
the proceeds of this Offering. Particularly, the Company anticipates that the
proceeds of the Offering will enable it to finance more of its inventory
acquisitions with borrowings under its existing revolving line of credit (by
increasing credit availability as a result of the ratios and credit availability
formulae), which borrowings bear lower effective interest rates than vendor and
other unsecured borrowings historically utilized by the Company, assuming that
the BTCC loan agreement and the borrowing availability formula remain in effect,
of which there can be no assurance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
- Expand Consumer Product Lines. The Company intends to introduce several
consumer telephone products during 1996. These products will include a line of
cordless telephones, "feature" telephones, answering machines, and other
telephones and telephone-related products. President Clinton has approved
sanctions by the United States government (effective June 17, 1996) that impose
a 100 percent tariff on telephones and answering machines made in the PRC. If
these tariffs are not lifted, the Company's ability to undertake any meaningful
expansion into these product categories could be severely limited. The Company
is exploring the market potential for other product lines such as audio home
theater enhancements, microwave ovens, citizens' band radios, mobile security
systems, youth electronics, and clocks and watches. Entry into these product
categories may be implemented through business acquisitions or direct entry.
- Increase Margins, Improve Cash Flow by Reconditioning at the Chinese
Joint Venture Facility. The industry, in general, and the Company, in
particular, incur costs of returned products, due to liberal return policies of
retailers and other causes. The Company has generally accepted products for
return and reconditioning at its Cerritos facility (or returned them to vendors
at Company expense). In 1995, the Company entered into a joint venture known as
Shenzhen Kuoli Electronics, Ltd. (the "Chinese Joint Venture"), of which it is a
50% owner, for the purpose of establishing and operating a facility to
recondition the Company's products. The Company commenced processing products at
the Chinese Joint Venture facility, located in Shenzhen, PRC, in January, 1996.
Although the Company does not intend to use the joint venture facility in the
immediate future for purposes other than reconditioning, it is possible that the
Chinese Joint Venture could be used to assemble original products that are
currently outsourced to other vendors and could recondition products for other
manufacturers. The Company intends to conduct reconditioning of product returns
and other ancillary manufacturing services predominantly at a facility leased in
the PRC by the Chinese Joint Venture. Although there can be no assurances, the
Company believes that reconditioning products in the PRC will enhance cash flow
by enhancing its ability to more quickly and efficiently process and sell
reconditioned goods. Generally, the Company cannot borrow the same percentage of
value on "B goods" as it can against new inventory and receivables. Therefore,
quicker turnaround and sale of reconditioned goods will generate greater
borrowing availability under the Company's secured line of credit.
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<PAGE> 28
PRODUCT LINES
The Company's core business currently and for the foreseeable future will
consist primarily of the sale of audio products. The Company designs and sells
products targeted to value-oriented consumers who are reluctant to pay a premium
for brand name products or highly advanced product features. In 1996, the
Company will offer approximately 125 different products ranging in suggested
retail price from approximately $7.00 to $200.00, depending upon the features
employed. Among the Company's products are the following:
Home and Portable Audio Products.
- Home audio systems
- Portable CD systems with detachable speakers
- Portable CD systems with single cassette decks
- Portable CD systems with dual cassette decks
- Portable CD players
- Personal CD players
- Portable single cassette players
- Portable dual cassette players
- Personal electronic devices
- Personal sports electronics products designed for use when exercising or
traveling
- Electronic clock radios
- Hand-held microcassette recorders for voice-operated recording
Mobile Audio Products.
- CD player radios with detachable face-plates
- CD changers that hold six and ten CDs
- Cassette players, including those with detachable face-plates
- Amplifiers
- Speakers
Telephone Products.
- Corded and cordless telephones
- "Feature" telephones
- Answering machines
The Company's philosophy is to market products that are designed to be
attractive to the consumer seeking an alternative to higher-priced audio
products. The Company believes the Craig brand name is well accepted among the
value-oriented retail consumer group based on the Company's ability to provide
an attractive combination of price and performance. The Company believes that
engineering controls help the Company maintain its competitiveness relative to
other entities that sell products in the same product categories. Timely
response to market demand for design changes, selection of features, and
relationships with manufacturers are critical to maintaining the quality of the
Company's products and its ability to compete.
The Company offers, at any given point in time, between six and ten
separate models of home audio systems. Typically these are compact systems that
include compact disc players, cassette players, tuners and amplifiers, and
speakers. In addition, the Company markets and sells a wide variety of portable
stereo models, including portable compact disc and cassette players. The
Company's portable systems include compact audio systems containing CD players,
tape players, and stereo radios. The Company markets and sells approximately 54
portable audio systems including portable CD, cassette, and/or radio players
commonly known as "boom boxes." The Company also offers personal CD players in a
variety of models that are adaptable for inclusion in a larger stereo system or
may be used in conjunction with automobile sound systems.
In the mobile audio category, the Company currently markets approximately
24 models of cassette stereos and CD players for automobiles. The Company
believes that its price for these automobile stereo
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<PAGE> 29
systems is competitive given the features employed in each device. The Company
also markets a variety of amplifiers and speakers to complement its mobile audio
products.
MARKETING AND CUSTOMERS
The Company sells its products through multiple channels such as large mass
merchandising retailers, including major retail chains (such as Best Buy,
Circuit City, Thrifty Payless, Rex, Incredible Universe, Nobody Beats the Wiz,
and Rite Aid) and general mass merchandisers (such as Montgomery Ward and Price
Costco). Additionally, the Company offers its products through direct marketing
organizations such as QVC Network, Spiegel Catalog, and Amway and through
independent distributors.
The Company has four regional vice presidents who are responsible for sales
in various geographic regions throughout the United States. Additionally, the
Company has 20 independent sales organizations that are paid commissions based
on the amount of their net sales. Certain of the Company's material accounts are
serviced directly by the regional vice presidents and others are served by
independent sales organizations.
The Company does not undertake any direct independent advertising.
Advertising is undertaken by the Company's retail dealers and large retail
chains, frequently at the request of the Company or in consideration for
payments or other concessions. Advertising undertaken by the Company's customers
generally tends to promote the Company's brand name by advertising in newspapers
and other publications, catalogs, flyers, and by display point-of-purchase
advertising.
The Company markets its products through regional distribution channels and
its sales staff and by appearance at trade shows, including the annual Consumer
Electronics Show in Las Vegas, Nevada in January. The Company does not market
its products at "boutique" stereo stores or attempt to compete with products at
significantly higher price points. The Company does not have any long-term
commitments from its customers for the purchase of products on an ongoing basis.
The Company's largest customers account for a significant portion of the
Company's sales. The Company's largest customer, Best Buy, accounted for
approximately 24% and 35% of the Company's sales during 1994 and 1995,
respectively. No other single customer accounted for more than 10% of the
Company's sales in either year. The Company's top five customers accounted for
approximately 59% of total sales during 1995. The Company believes its
relationship with these significant customers continues to be good. However, the
Company is attempting to diversify the Company's customer base, including
diversification into other geographic markets.
DESIGN AND MANUFACTURE OF PRODUCTS
The Company is responsible for the final design and manufacturing
specifications of its products. Actual assembly, utilizing components specified
by the Company, is outsourced to third-party manufacturers in accordance with
specifications mandated by the Company. The Company determines the specific
options desired on each product and product line and makes decisions about the
functional and cosmetic features to be employed in each product. The Company's
Hong Kong office implements the selection and acquisition process and attempts
to oversee product sourcing and the design and development that is undertaken in
conjunction with the Company's contract manufacturers. Personnel at the Hong
Kong office also enable the Company to monitor quality control and timeliness of
product deliveries. The Company believes that such oversight by its Hong Kong
office will help the Company achieve its goal to increase overall average
margins for the Company's products, although no assurances can be given that
these objectives are obtainable.
The Company's strategy does not involve extensive research and development
or significant marketing expenditures, which are typically associated with
bringing new technology to consumer markets at a price point that would allow
the Company to compete effectively. The Company believes that product
development employing technologically advanced "state of the art" products such
as digital audio tape or mini disc players are not an effective use of the
Company's resources. The Company has relied instead upon design and acquisition
of its products and employment of currently available technology, to bring
products to market in an expedient fashion. The Company is dependent upon
technological developments in adding features and
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<PAGE> 30
additional stylistic modifications to its products in order to continue to grow
the business and effect sales of products that satisfy consumer demand. The
Company hopes to continue to explore evolving technology without the expenditure
of funds for progressive research and development. Instead, the Company intends
to focus its product development efforts (including design, testing, and feature
selection) on the design and refinement of basic audio products that do not
involve significant technological advances.
In designing products, the Company attempts to select features and cosmetic
characteristics that will enable the Company to compete at its price point.
Given the Company's technological limitations, selection of features and
appearance of the Company's products can be critical. Typically, the Company's
contract manufacturers produce prototypes that are examined and tested by the
Company's design team, modifications are made, and manufacturing time is
committed to create the number of products in each product category selected by
the Company's management.
The Company's three largest manufacturers/suppliers are Hong Kong companies
with facilities located in the PRC. During 1995, these manufacturers supplied
over 50% of the Company's total product supply. Other manufacturers utilized by
the Company are located in South Korea and elsewhere in Asia. To the extent any
of these significant suppliers were unable to devote the necessary manufacturing
capacity to the production of the Company's products or to the extent the
Company suffered any other limitation on its ability to manufacture products
using these manufacturers, the Company's business could be interrupted and
adversely affected. Currently, the Company is purchasing product from
approximately 25 suppliers and plans to purchase from up to five to ten new
suppliers to limit the risk of supply concentration. The Company changes
suppliers from time to time as market conditions require. Substantially all of
these suppliers assemble products with components manufactured by third parties.
The Company believes that this is the standard method of operating and
contracting for the manufacture of products in the consumer electronics
industry. The Company has on-site personnel to monitor and facilitate timely
manufacture and delivery of products produced to the Company's specifications.
The Company does not have long-term contractual relationships with its
manufacturers in the PRC and elsewhere. Instead, the Company must design and
source these products on a case-by-case basis in an attempt to meet the demand
of its customers. The Company imports product by ocean freight, typically to Los
Angeles, and stores the product in a warehouse for shipment to customers.
The Company considers its relationships with its overseas manufacturers to
be good and believes that, absent extreme circumstances affecting the supply of
materials or the demand on manufacturing time, the supply of products should be
available when needed. Although the Company does believe that there are
alternative sources of supply, should the Company be required to obtain a
commitment for manufacturing time from a new manufacturer due to the failure of
any manufacturer to satisfactorily meet its commitments, it may be difficult to
produce and import products in a timely fashion that could be sold profitably.
PRODUCT DEVELOPMENT
The Company does not devote a substantial amount of its resources to
research and development in order to create completely new products, but instead
devotes its resources to quality assurance, the upgrading of design of the
Company's products, and the testing and packaging of the Company's products. The
Company adopts existing technologies which are generally available to the
manufacturers with whom the Company contracts for production of its products. In
establishing the specifications for the Company's contract manufacturers, the
products must be engineered and tested to produce cost-effective products which
adapt and implement the available technology and features that the Company
believes to be marketable to its target consumers. The Company utilizes various
processing laboratories, such as Underwriters Laboratories and other testing
agencies, to obtain laboratory approvals for its products as required by the
majority of the Company's customers and, in certain circumstances, by applicable
state laws relating to consumer protection.
PRODUCT RETURNS AND RECONDITIONED PRODUCTS
As is typical of the consumer electronics industry, the Company incurs
expenses in connection with the return of products. Such returns may result from
defective goods, inadequate performance relative to customer
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<PAGE> 31
expectations, improper packaging, liberal retailer return policies and other
causes which may be beyond the Company's control. During 1994 and 1995, the
Company received product returns totaling approximately 13.5% and 13.4% of total
units shipped, respectively. Although the Company experiences returns due to
product defects, the Company believes that the majority of returns are the
result of liberal return policies by retailers and are beyond the control of the
Company. The Company attempts to minimize returns due to product defects by
attempting to impose quality assurance standards in order to limit the effect of
returns for manufacturing or other defects or operational problems. The
Company's presence in Hong Kong enables the Company to review and have input
into the quality controls of its various manufacturers. As a proposal to make a
line of products is evolving, the Company reviews the process and attempts to
impose quality assurance standards upon the manufacturers. The Company will
discontinue the use of a manufacturer if that manufacturer fails to satisfy the
Company's specifications or if excessive returns result from a given product or
line of products despite a manufacturer's apparent compliance with these quality
control standards.
At the Company's Cerritos, California headquarters and main operating
facility, the Company devotes a limited portion of its space to reconditioning
returned products for resale as "B goods" (specifically, goods manufactured,
reconditioned, and sold "as is" or with a limited warranty). Regardless of the
reason for product returns, products that are returned may only be reconditioned
and resold as "B goods" in accordance with applicable Federal and State laws
regulating consumer trade. Such "B goods" are typically reconditioned and sold
at lower prices than comparable non-returned goods. The Company markets "B
goods" in the United States and to a lesser extent in Mexico and elsewhere in
Central and South America. The Company is attempting to phase out reconditioning
on any significant scale at its Cerritos facility in favor of using the Chinese
Joint Venture. The Company expects that the Chinese Joint Venture will allow the
Company to recondition returned products at a lower cost and to resell those
products more quickly and in certain cases, at higher prices than previously
realized on reconditioned goods.
The Company entered into the Chinese Joint Venture for the operation of a
reconditioning and assembly facility in the area of Shenzhen, PRC. The Chinese
Joint Venture will recondition products for the Company and may eventually be
used as a manufacturing facility to manufacture certain audio products for the
Company. The Company's Chinese Joint Venture operates an 86,000 square foot
factory with an adjoining 38,000 square foot dormitory and canteen for local
employees working in the facility. The facility has the capacity to recondition
up to approximately 70,000 units per month, and the Company believes that, given
its current staffing, this capacity far exceeds the amount of product to be
reconditioned at the Chinese facility. The Chinese Joint Venture facility
commenced reconditioning products in January 1996, and as of March 31, 1996, had
effectively reconditioned approximately 10,000 units for return to the Company.
Although the Company cannot estimate with any certainty the cost savings
associated with the operation of the Chinese Joint Venture facility, the Company
believes that there will be significant cost savings associated with the
reconditioning of products in China, assuming that product returns continue to
represent the same percentage of total units shipped, and assuming a moderate
amount of sales growth after giving effect to the proceeds of this Offering. The
Company anticipates that certain of the products will be capable of being
reconditioned at the Chinese Joint Venture facility and sold in the United
States and elsewhere as original goods, not subject to the significant reduction
in price associated with "B goods." The Company's ability to sell reconditioned
goods in the United States as anything other than "B goods" is likely to be
limited to goods that have only cosmetic or packaging defects that can be
corrected by complete replacement of the affected part or packaging. The Company
cannot anticipate what percentage of these returned products can be sold in the
U.S. or elsewhere as other than "B goods."
The Company's inventory of "B goods" has increased from 2.9% at December
31, 1994 to 5.4% at December 31, 1995. This increase is a result of a decrease
in inventory levels as of year-end 1995 and of the Company's own efforts to
minimize the amount of products that are returned to vendors for repair
(generally undertaken at the Company's expense). The Chinese Joint Venture
facility should allow the Company to employ new components and other materials
in the remanufacturing process, which will hopefully accelerate the processing
of returned goods and enable the Company, in certain instances, to sell these
products as other than "B goods."
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The Company generally provides warranties on certain of its products which
range in duration from three months to one year. The Company does not currently
offer an extended service contract. The Company receives limited product support
from various of its manufacturers, although Starlight Electronics, Great Wall
Electronics and the Company's other current major suppliers provide certain
product support or arrangements pursuant to which the Company may receive
arrangements that generally involve credits for defective merchandise. The
Company processes warranty claims through its main office and accepts returned
merchandise and reconditions that merchandise as an incident to the Company's
warranties. Certain of the Company's products are approved through Underwriters'
Laboratories or similar testing agencies. See Note 4 to the financial statements
included herewith.
BACKLOG
The Company's larger customers typically place firm orders only 30 to 90
days in advance of the anticipated delivery date. Additionally, these customers
may from time to time publish forecasts for 90 days in advance of their
particular product needs. The Company, due to its method of designing and
supplying products, frequently obtains inventory in advance of orders to fill
forecasted demand. However, the Company periodically receives orders for
products for which the Company does not have supply commitments or inventory.
The Company's failure to fulfill an order in such a situation could result in a
loss of a significant customer or extraordinary expense in supplying the
particular product. The Company's attempt to obtain manufacturing commitments
based on the forecasted demand of its customers and consumer demand for the
Company's products does not generally create what in most industries would be
considered backlog that is material to the Company's business. The Company does
receive orders for which supply commitments must be obtained. However, any
substantial backlog is eliminated at the end of the Company's fourth quarter.
PROPRIETARY PROTECTIONS AND TRADEMARKS
The Company has eight registered trademarks in the United States. The most
critical trademark owned by the Company is the name "Craig" and the associated
script logo. The name CRAIG(R) has been trademarked or a trademark application
is pending in more than 40 countries. The Company believes that the CRAIG(R)
trademark is critical in order to continue to effectively market the Company's
products. The Company does not consider the other Company trademarks material to
its business, although the Company intends to protect its interest in those
trademarks.
The Company believes that it has proprietary protection for the CRAIG(R)
trademark in those foreign countries in which sales of the Company's products
are currently targeted, with the exception of Argentina and Paraguay. In
Argentina, the Company is party to a dispute with an individual who has
evidently trademarked the name "Craig," but not for consumer electronics
purposes. The Company is unable to predict the outcome of this trademark
dispute. Additionally, the Company's trademark has not been perfected in
Paraguay.
COMPETITION
The consumer electronics industry is extremely competitive and is dominated
by well-capitalized and diverse companies. The Company faces competition from
both foreign manufacturers and importers of products made by third-party
manufacturers at its price point. The most significant competitors to the
Company are Emerson, RCA, Audiovox, Sanyo, GPX, and International Jensen. Other
competitors include the major brands such as Sony, Panasonic, JVC, Kenwood, and
Aiwa, and other companies that do not necessarily emphasize the price point in
which the Company attempts to sell its products.
Because the Company does not have the resources to undertake the research
necessary to implement significant technological advances, the Company is
dependent upon its ability to select products applying available technology and
to timely deliver them to market in order to maintain its competitive advantage
and margins. Although the capital requirements of the business and the ability
to obtain consumer electronic products do not provide a significant barrier to
entry, product and name recognition are likely to have a material impact on the
ability to effectively enter the market due to the associated marketing costs.
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At the price point at which the Company competes, several of the Company's
competitors have, and future potential competitors may have, substantially
greater financial, marketing, distribution, and other resources than the Company
and have, or may have, greater name recognition and market acceptance of their
products. There can be no assurance that product developments and technological
advances will not reduce the cost of higher-end products that would not directly
compete with the Company's products but for such advances which would adversely
affect the Company's ability to market its products in the value-oriented niche.
Notwithstanding the risk that technological developments will result in products
that the Company cannot effectively acquire and market, the Company is at the
same time dependent upon technological advances in order to continue to market
products that continue to evolve in a manner that makes the products appealing
to consumers on a year-to-year basis. See "Risk Factors--Competition" and
"Technological Availability and Limitations."
GOVERNMENT REGULATION
The Company is subject to numerous tariffs, duties, charges and assessments
on the import of its various products. The Company retains import agencies and
expediters to facilitate the import of its products and the payment of these
charges and duties. Although these duties and charges have not substantially
impacted the ability of the Company to market its products for delivery in the
United States and elsewhere, regulations affecting these charges and duties are
subject to change, which could have the effect of increasing the cost of goods
imported and sold by the Company. Currently, because the bulk of the Company's
products are manufactured in the PRC, the continual availability of "most
favored nation" status for the PRC pursuant to treaties with the United States
and stable diplomatic relations with the PRC are critical to the ongoing and
continuous supply of products. Additionally, the Company's investment in the
Chinese Joint Venture could be impacted by the loss of most favored nation
status by the PRC or adverse changes in diplomatic relations between the United
States and the PRC. Additional regulation implemented in the United States or
elsewhere could also limit the ability to manufacture, transport, or import
goods.
The Company is subject to disclosure obligations associated with the sale
of B goods in accordance with the regulations of the Federal Trade Commission
and various state consumer protection laws. The Company undertakes to comply
with all fair pricing and consumer protection laws with respect to the resale of
the goods, and the Company believes that its procedures for complying with these
laws are adequate to assure continuing compliance with them.
LEGAL PROCEEDINGS
The Company is not currently a party to any pending legal proceedings, the
adverse outcome of which, individually or in the aggregate, would have a
material adverse effect on the business, financial condition or results of
operations of the Company. The Company is from time to time involved in various
legal proceedings, including collection matters and disputes over product
defects, individual employment disputes, and similar matters. The Company
maintains insurance to attempt to insure against liability associated with a
product defect. However, to the extent that any such defect were pervasive in
any particular product or line of products, the Company could be required to
undertake to recall those products or could be subject to significant exposure
with respect to the institution of legal proceedings.
EMPLOYEES
As of May 14, 1996, the Company had a total of 86 full-time employees.
Among these employees, 58 were located in the Cerritos, California facility,
three were located elsewhere in the United States, and 25 were residing in Hong
Kong or China. Of the employees in the Cerritos facility, 15 were in management,
20 were clerical or administrative employees, five were in sales and marketing,
and 18 were in warehouse, manufacturing, or quality assurance operations. All
United States employees located outside of Cerritos, California, are sales and
marketing personnel. The Hong Kong employees consist of three in management and
the balance in product design, quality control, product development and support,
export, and administrative functions. The Company believes that its
relationships with its employees are good. During May 1996, the Company, in
connection with the reduction of reconditioning activity at its Cerritos,
California facility, laid off six quality
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control/assembly employees. The Company believes termination of these employment
arrangements was appropriately undertaken and will have no material adverse
impact on the Company's business. The Company is not party to any collective
bargaining agreement, nor is the Company aware of any effort to organize
employees of the Company into any union or similar labor organization.
The Chinese Joint Venture, in which the Company is a 50% partner, employs
approximately 60 persons, most of whom are factory workers engaged in the
reconditioning and manufacturing processes conducted at the facility. The
Chinese Joint Venture is obligated to provide dormitory space and board to these
employees, and the Chinese Joint Venture has 38,000 square feet of dormitory
space and a canteen for the provision of these services to the Chinese
employees.
FACILITIES
The Company's main office, administrative, warehouse, and reconditioning
facilities have been located in 68,200 square feet of space in two separate
buildings located in Cerritos, California. The Company's lease for this space
expired on March 31, 1996. Rent for such space was $28,000 per month. Due to the
reduced space required for reconditioning goods and related warehousing in the
United States, the Company has reduced the space leased at the Cerritos location
to approximately 45,000 square feet in one building. The lease provides for
monthly rent of $19,193 per month. The lease expires in the year 2000.
The Company's Hong Kong facilities consist of office space totaling 3,032
square feet located in Kwai Fong, Hong Kong. Monthly rental on the Hong Kong
office facility is approximately $10,000 (U.S.) per month. The Company also
leases an apartment in Hong Kong provided to Bonnie Metz the Company's Vice
President-Managing Director, Hong Kong. The monthly rental is approximately
$6,400 (U.S.).
The Company's Chinese Joint Venture's facilities consist of an 86,000
square foot manufacturing facility with an adjoining 38,000 square foot
dormitory and canteen. The Company pays the entire rent at this facility,
$16,000 per month. The Company does not assert any direct ownership interest in
the Chinese Joint Venture facilities, and the Company's investment in those
facilities will be lost to the extent that the Company ceases to conduct active
business in the PRC through the Chinese Joint Venture.
33
<PAGE> 35
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- ---------------------------------------------
<S> <C> <C>
Richard I. Berger(1)............. 52 President, Chief Executive Officer and
Chairman of the Board
Donna Richardson................. 40 Treasurer, Secretary, and Chief Financial
Officer
Anthony Mirando.................. 49 Senior Vice President
Bonnie Metz...................... 46 Vice President-Managing Director, Hong Kong
Richard A. Miller(2)............. 53 Director
Peter Behrendt(1)................ 68 Director
Bernard Taran(1)(2).............. 57 Director Nominee
James Koblensky(2)............... 62 Director Nominee
</TABLE>
- ---------------
(1) Proposed member of the Compensation Committee.
(2) Proposed member of the Audit Committee.
Richard I. Berger is one of four individuals who provided the initial
capital to acquire the assets of what is now the Company from Bercor out of
Bercor's Chapter 11 bankruptcy reorganization. Mr. Berger has served as the
Chief Executive Officer of the Company and as its Chairman of the Board of
Directors since its formation in 1989 and has served as its President since
1991. Mr. Berger was employed by Corwin Hall as a salesperson and was also
employed by Newcraft Corporation, an affiliate of Corwin Hall, for a combined
total of 12 years. These companies were engaged in the distribution of Panasonic
Consumer Electronics. Mr. Berger ultimately became the president of Newcraft and
a vice president of Telecor (a New York Stock Exchange traded company which was
the parent company of Newcraft).
On April 1, 1979, Mr. Berger formed Bercor. Bercor was engaged in the
distribution of various products, including consumer electronics and household
appliances. Bercor became a public company in 1985, and primarily due to
competitive pressures and problems associated with the distribution of certain
non-proprietary product lines, Bercor filed a petition on June 23, 1988 and was
subsequently reorganized under Chapter 11 of the United States Bankruptcy Code.
Mr. Berger, together with Messrs. Rollnick, Johannsmeier, and Miller, formed a
group to acquire the consumer electronics assets, including the "Craig" brand
name, from Bercor on June 20, 1989.
The United States Securities and Exchange Commission undertook an
investigation and commenced a proceeding in 1988 to consider possible violations
of federal securities laws by Bercor and certain of its personnel (including Mr.
Berger), specifically alleging that the Company improperly claimed tax
carryforward benefits in a manner inconsistent with generally accepted
accounting principles and that the Company improperly reserved for inventory
obsolescence. Mr. Berger was alleged to have aided those violations. Mr. Berger
neither admitted nor denied these violations, but entered into a consent decree
in order to forego the time and expense of litigation, on the advice of counsel.
Bercor entered into a similar consent decree, which did not result in any
administrative finding or other determination of liability of Bercor. Mr.
Berger, as an incident to the consent decree, was enjoined from future
violations of provisions of the Securities Exchange Act of 1934. No private
civil cause of action was commenced in connection with these alleged violations.
Donna Richardson is the Company's Treasurer, Secretary, and Chief Financial
Officer and has served as the chief accounting officer of the Company since
1989. Prior to employment by the Company in 1989, Ms. Richardson held several
management and accounting positions with Wang Laboratories Inc., a computer
products company, and eventually served as the Western Federal Systems District
Controller for several Western states with that company.
34
<PAGE> 36
Anthony J. Mirando has served as the Company's Senior Vice President
responsible for marketing and sales in North and South America since the
Company's organization in 1989. Prior to 1989, Mr. Mirando was employed by one
of Bercor's predecessors and has also served as the National Sales and Marketing
Manager of the Car Audio Division of JVC, a manufacturer of consumer electronics
products.
Bonnie Metz is the Vice President-Managing Director, Hong Kong of the
Company, a position she has held since 1995. Prior to joining the Company, in
1989, Ms. Metz was employed by Bercor prior to its bankruptcy. Ms. Metz served
as the Company's Director of Operations from 1989 to 1993 and as Director of
International Trade from 1994 to 1995.
Richard A. Miller has been a director of the Company since its formation in
1989. Mr. Miller is an attorney and Certified Public Accountant employed in his
own private law practice for over 15 years. Mr. Miller also spent several years
in the Los Angeles office of what is now KPMG/Peat Marwick and has also been
employed by the Internal Revenue Service. Mr. Miller was also a director of
Bercor.
Peter M. Behrendt has served as a director of the Company since 1989. Mr.
Behrendt is currently, and since 1988 has been, self-employed as a management
consultant and has served as a consultant to the Company. Mr. Behrendt has also,
at different times since 1988, served as a consultant to Radix Group
International, a customs broker and freight forwarder, Thomas America, an
importer and specialty electronics products dealer, and Innovative Equipment
Co., an importer of printing equipment.
Bernard L. Taran is a director nominee of the Company. Mr. Taran has been a
contractor to and part-time employee of the Company since January 1995. Mr.
Taran performs insurance reviews and risk management, valuations, evaluation of
executive incentives, and general business management. Prior to this Offering,
Mr. Taran performed such services for the Company as a part-time employee. These
services, if provided, will be performed by Mr. Taran as a consultant in the
future. From 1991 to 1995, Mr. Taran acted as an independent investment,
business, financial, and marketing consultant for several clients, including the
Company and Sunset Paper Products, Inc., a manufacturer of paper baking
products. From 1980 to 1991, Mr. Taran was employed by C.M. Meiers Company,
Inc., a property and casualty insurance agency, as a Vice President responsible
for marketing, sales, and servicing of commercial accounts.
James F. Koblensky is a director nominee of the Company. Since 1993, Mr.
Koblensky has been self-employed as a consultant, operating his consulting
business as N. K. Management Company. In addition to performing consulting
services for the Company, Mr. Koblensky has performed consulting services for
American Greetings Consumer Groups, among others. From 1992 to 1993, Mr.
Koblensky was employed by Thrifty Drug Stores as a Vice President and General
Merchandise Manager. From 1988 to 1992, Mr. Koblensky served Pay'N Save Drug
Stores as its Senior Vice President in charge of merchandising, marketing and
advertising.
Upon consummation of the Offering, the Board of Directors will consist of
five directors. Each director will hold office until the next annual meeting of
stockholders or until his successor is elected and qualified. Officers serve at
the discretion of the Board of Directors. Messrs. Taran and Koblensky have been
nominated by the Board and have agreed to serve as directors of the Company
effective upon the consummation of the Offering.
Effective upon consummation of the Offering, the Company has established an
Audit Committee, which shall consist of Messrs. Miller, Koblensky, and Taran,
and which will review the professional services provided by the Company's
independent auditors, the independence of such auditors from management of the
Company, the annual financial statements of the Company, and the Company's
system of internal accounting controls. The Audit Committee also will review
such other matters with respect to the accounting, auditing, and financial
reporting practices and procedures of the Company as it may find appropriate or
as may be brought to its attention.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Effective upon the consummation of the Offering, the Company has
established a Compensation Committee. The Compensation Committee shall consist
of Messrs. Berger, Taran, and Behrendt, and will
35
<PAGE> 37
review executive salaries and administer any bonus, incentive compensation, and
stock option plans of the Company, including the 1996 Plan. In addition, the
Compensation Committee will consult with management of the Company regarding
pension and other benefit plans, and compensation policies and practices of the
Company. During 1995, all compensation was determined by the Company's Board of
Directors because the Company had not yet established a Compensation Committee.
Richard Berger has historically provided his services pursuant to an
arrangement with Executive Marketing, Inc., an entity controlled by Mr. Berger.
In this regard, the cash compensation for Mr. Berger's services up to and
including the date of this Prospectus has been paid to Executive Marketing, Inc.
During 1995, Mr. Berger made a personal loan to the Company's distribution
agent in Canada, Carr-Tech Distributors. Carr-Tech had certain products for
which it was entitled to invoice the Company during 1995. Carr-Tech reduced the
amount of the invoice by $150,000 and the Company, in turn, is obligated to
discharge the obligation of Carr-Tech to Mr. Berger, repaying in full the
obligation of Carr-Tech and having no net effect on the Company.
Berger Holdings, an affiliated company of Mr. Berger, loaned $265,000 to
the Company on March 28, 1994. This loan was paid in full on January 3, 1995. On
January 11, 1995, Berger Holdings made a subsequent loan to the Company in the
amount of $245,000. Interest on the loan accrues at the same rate of interest
that the Company is charged by its principal lender, BTCC. Interest accrued
through December 31, 1995 on the loan totalled $18,192. The loan was repaid in
full during April 1996.
Mr. Berger has been issued a subordinated note in the amount of $201,163
for his accrued bonus owing for the year ended 1994. This note is a general
unsecured obligation of the Company, maturing four years from the date of this
Prospectus. The note will bear interest at the rate of 10% per year. Semi-annual
interest payments will commence November 1, 1996, and semi-annual fully
amortized principal payments will commence May 1, 1997. This Note is subordinate
to the BTCC Loan, but equal in priority to the subordinated dividend notes.
On the date of this Prospectus, each of Richard Berger, Richard Miller,
Karl Johannsmeier and William Rollnick (or their respective affiliates) will be
issued promissory Notes in lieu of accumulated but unpaid dividends on the
Company's Series A Preferred Stock. See "Dividend Policy."
Richard Miller, a director of the Company, has provided legal services as
counsel to the Company from time to time. During 1995, Mr. Miller was
compensated for legal services in an amount totaling $12,750. The Company does
not anticipate that Mr. Miller's services to the Company will be substantial in
the future.
Peter Behrendt received a monthly fee of $1,000, for a total of $12,000,
during 1995 in exchange for consulting services. Subsequent to this Offering,
Mr. Behrendt will be paid for consulting services on an hourly basis.
James Koblensky, a nominee for Director and President of N. K. Management,
has provided management consulting services through N. K. Management Company.
During 1995, N. K. Management Company was paid a monthly fee of $1,000, for a
total of $12,000 for the year. Subsequent to this Offering, Mr. Koblensky will
be paid for consulting services on an hourly basis.
Bernard Taran, a nominee for Director, has provided certain services to the
Company from time to time as a part-time employee. After this Offering it is
anticipated that Mr. Taran may provide consulting services on an hourly basis.
During 1995, Mr. Taran was paid approximately $12,000 and was provided with
health insurance as a participant in the Company's group insurance plan. Mr.
Taran provides analyses of the Company's insurance needs and coverage.
DIRECTOR COMPENSATION
During 1995, directors other than Mr. Berger, were each paid a total of
$6,000 for all board meetings. Upon consummation of the Offering, non-employee
directors will receive $7,500 per year for all board and committee meetings
attended, together with reimbursements of actual expenses incurred in connection
with the attendance at such meetings of up to $1,000 per year. Directors who are
also officers or employees of the
36
<PAGE> 38
Company will not be compensated for their services as directors. Each of the
non-employee directors is an eligible participant in the Non-Statutory Plan.
Messrs. Berger and Miller also have received options for a total of 365,559
shares at an exercise price of $1.91 per share pursuant to separate option
agreements that are not part of any plan. See "Management -- Other Stock
Options."
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the
compensation paid by the Company to its Chief Executive Officer and to the other
three most highly compensated executive officers (collectively, the "Named
Executive Officers") who received salary and bonuses in excess of $100,000
during 1995 for all services rendered in all capacities to the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
FISCAL 1995
ANNUAL COMPENSATION (1)
---------------------------------
SALARY BONUS OTHER
-------- -------- --------
<S> <C> <C> <C>
Richard Berger, President, Chief Executive Officer,
and Chairman of the Board (2)......................... $311,523 $318,000(3) $ 30,000(4)
Bonnie Metz, Vice President -- Managing Director, Hong
Kong.................................................. 109,500 -0- 68,600(5)
Anthony Mirando, Senior Vice President.................. 132,000 -0- 6,600(6)
Donna Richardson, Secretary, Treasurer, and Chief
Financial Officer..................................... 100,000 -0- -0-
</TABLE>
- ---------------
(1) Except where indicated, other than salary, bonus, and other compensation
described herein, the Company did not pay the Named Executive Officers any
compensation, including perquisites, in excess of 10% of such Named
Executive Officer's salary.
(2) Represents compensation paid by Executive Marketing, Inc., an affiliate of
Mr. Berger which contracted to provide Mr. Berger's services to the
Company.
(3) Pursuant to a prior agreement with an affiliate of Mr. Berger for the
provision of Mr. Berger's services, Mr. Berger was entitled to a bonus
equal to 25 percent of the Company's pre-tax profit. For 1995, this bonus
equaled $318,000. Such agreement will terminate on the effective date of
this Prospectus.
(4) Consists of the value of bookkeeping, tax and financial planning services as
well as a car allowance provided to Mr. Berger which had an estimated
aggregate value of $30,000.
(5) Consists of a personal housing allowance for Ms. Metz' residence in Hong
Kong of $62,000, and a car allowance of $6,600.
(6) Consists of a car allowance of $6,600.
EMPLOYMENT AGREEMENTS
Effective on the date of this Prospectus, Richard Berger has entered into
an employment agreement with the Company for a term of three years,
automatically and continuously renewed for three-year terms. Under the terms of
the employment agreement, Mr. Berger is entitled to salary of $375,000 per year
plus annual cost-of-living adjustments, and is entitled to a bonus of 10% of the
amount by which net pre-tax, pre-bonus income exceeds $2 million, up to a
maximum of 50% of his base salary. Additionally, Mr. Berger is entitled to
receive various other perquisites including a Company vehicle and reimbursement
for expenses incurred on behalf of the Company, and the payment of premiums on a
10 year, $1,000,000 term life insurance policy. Additionally, Mr. Berger is
entitled to receive the key-man life insurance policy (a whole life policy) the
Company maintains on him, to receive the Company vehicle he is using at that
time, and is entitled to a two-year maximum stipend of $60,000 per year for an
office and secretary, if he is dismissed by the Company for any reason other
than his dismissal for cause. Except in the event of termination for cause, the
compensation payable to Mr. Berger under the agreement shall also be payable to
Mr. Berger for the remaining three year term of the Agreement.
37
<PAGE> 39
Effective on the date of this Prospectus, Bonnie Metz, Anthony Mirando, and
Donna Richardson have entered into one year employment agreements with the
Company which are automatically renewable for one year terms if not terminated
prior to the expiration of the initial term or any renewal term. These
agreements provide for annual compensation of $126,600 for Ms. Metz, $156,600
for Mr. Mirando, and $115,000 for Ms. Richardson, with increases to be provided
at the discretion of the Compensation Committee or Board of Directors (in the
absence of a Compensation Committee). Ms. Metz also receives a housing
allowance, as long as she serves in the Hong Kong office, which allowance will
be $78,000 (U.S.) for 1996. Each such person is entitled to payment of
compensation through the remaining term if such person is terminated for other
than cause.
INCENTIVE STOCK OPTION PLAN
In February 1996, the Company adopted an Incentive Stock Option Plan, to
become effective on the effective date of this Prospectus (the "1996 Plan"),
which provides for the issuance of incentive stock options to acquire up to
200,000 shares of the Company's Common Stock. These options are available for
grant under the 1996 Plan to the officers, directors, and certain other
employees of the Company. The 1996 Plan is administered by the Compensation
Committee of the Board of Directors, none of whom is eligible to participate in
the Plan.
Pursuant to the 1996 Plan, the Compensation Committee or the Board of
Directors (in the absence of a Compensation Committee) may grant and issue
options to purchase Common Stock. The purchase price per share shall be set by
the Board of Directors and shall not be less than 100% of the fair market value
of the stock on the date of grant. However, if an option is granted to a person
then owning more than 10% of the voting power of all of the Company's Stock, the
exercise price must be at least equal to 110% of the fair market value of the
Common Stock on the date of grant, and the term of such option will expire no
later than five years after the date of grant. Each option granted pursuant to
the 1996 Plan shall be vested and exercisable one-year after the effective date
of the grant of such option.
Effective on the date of this Prospectus, options under the 1996 Plan have
been granted to three individuals at an exercise price equal to the initial
public offering price, as reflected by the following table:
<TABLE>
<CAPTION>
NAME/POSITION SHARES UNDERLYING
OF OPTIONEE OPTIONS
- ----------------------------------------------------------------------------- -----------------
<S> <C>
Bonnie Metz, Vice President -- Managing Director, Hong Kong.................. 34,000
Anthony Mirando, Senior Vice President....................................... 34,000
Donna Richardson, Treasurer, Chief Financial Officer, and Secretary.......... 34,000
</TABLE>
NON-STATUTORY STOCK OPTION PLAN
The Company has also adopted a Non-Statutory Stock Option Plan (the
"Non-Statutory Plan") pursuant to which certain key executives and directors are
from time to time to be offered options to purchase shares. The Non-Statutory
Plan is also managed by the Compensation Committee or the Board of Directors (in
the absence of a Compensation Committee). Under the Non-Statutory Plan, there
are 325,000 shares reserved for issuance and the exercise price must be at least
equal to 85% of the fair market value of the Common Stock on the date of grant.
Grants of options under the Non-Statutory Plan, if any, to members of the
Compensation Committee will be approved by the disinterested members of the
Board of Directors.
Options granted under the Non-Statutory Plan are vested (and become
immediately exercisable when vested) pursuant to the following schedule: 1) upon
and after the first anniversary of the option, optionee shall have the right to
purchase up to 25% of the aggregate number of shares subject to the option; 2)
upon and after the second anniversary, up to 50% of the aggregate number of
shares subject to the option; and 3) upon and after the third anniversary, up to
100% of the aggregate number of shares subject to the option.
38
<PAGE> 40
Effective on the date of this Prospectus, options under the Non-Statutory
Plan have been granted to approximately 75 persons, at an exercise price equal
to 100% of the initial public offering price, as reflected by the following
table:
<TABLE>
<CAPTION>
NAME/POSITION SHARES UNDERLYING
OF OPTIONEE OPTIONS
- ----------------------------------------------------------------------------- -----------------
<S> <C>
Richard Berger, President, Chief Executive Officer and Chairman of the
Board...................................................................... 150,000
Peter Behrendt, Director..................................................... 10,000
James Koblensky, Director Nominee............................................ 10,000
Richard Miller, Director..................................................... 10,000
Bernard Taran, Director Nominee.............................................. 10,000
Other Non-Executive Employees (70 persons)................................... 110,000
</TABLE>
Under either the 1996 Plan or the Non-Statutory Plan, options granted are
exercisable during the optionee's lifetime only by the recipient and are
non-transferable, except by will under the laws of descent and distribution.
Unexercised options terminate on the date an individual ceases to be an employee
of the Company, or, if exercise rights are vested, for a period of up to three
months following termination if it is voluntary or occurs due to retirement with
the consent of the Board of Directors. Should an optionee become disabled or die
during his or her employment, the option may be exercised by the personal
representative of the optionee for a period of up to 12 months from the date of
his disability or during the stated option period in the event of his death,
provided that the option is otherwise exercisable. The option will in any event
expire on its stated expiration date. Options that expire or become
unexercisable for any reason shall, unless the plan has been terminated, be
available for future grants. The 1996 Plan will terminate in 2006, unless
terminated earlier. The Board of Directors may terminate or amend either plan
without stockholder approval, except (i) amending the 1996 Plan if the amendment
would cause the 1996 Plan to fail to satisfy the Incentive Stock Option
requirements of the Internal Revenue Code of 1986, as amended (the "Code"), and
(ii) as to either plan, if the requirements of Rule 16b-3 under the Securities
Exchange Act of 1934, as amended, require stockholder approval to amend. No
amendment may materially adversely affect a previously granted option without
the consent of the optionee.
Pursuant to the agreements under which options are issued, in the event
that an optionee voluntarily terminates employment with the Company and
thereafter competes, either directly or indirectly, with the Company, the Board
of Directors, in its sole discretion, has the right to cause the Company to
repurchase from the optionee shares of the Common Stock which the optionee has
acquired upon exercise of options. The repurchase price would be equal to the
price at which the options were exercised by the optionee. This repurchase right
extends for a period of five years from the date the options were exercised.
OTHER STOCK OPTIONS
Upon the effectiveness of this Prospectus, Messrs. Berger and Miller hold
options for 326,223 and 39,336 shares of Common Stock, respectively, under
separate agreements which are not part of the 1996 Plan or Non-Statutory Plan.
These options represent the adjusted options available to Messrs. Berger and
Miller resulting from the options held prior to the Recapitalization that were
granted in 1993. These options are exercisable at any time at a price of $1.91
per share. "Cashless" exercise is available pursuant to which shares may be
acquired by reducing the number of shares acquired by applying the excess value
(market value less exercise price) of the appropriate number of shares subject
to the options to satisfy the exercise price obligation.
39
<PAGE> 41
OPTION GRANTS AND EXERCISES
There were no options granted during 1995 or during the first quarter of
1996. The following table sets forth certain information with respect to the
unexercised options to purchase Common Stock (including phantom stock shares and
related appreciation rights) held by the Named Executive Officers as of December
31, 1995.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS/SARS
OPTIONS/SARS AT FY-END(#) AT FY-END($)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Richard I. Berger......................... 326,223 -0- $ 1,171,141(1) $-0-
Anthony Mirando........................... 100,000 -0- 94,000(2) -0-
Bonnie Metz............................... 37,500 -0- 35,250(2) -0-
Donna Richardson.......................... 32,500 -0- 30,550(2) -0-
</TABLE>
- ---------------
(1) Represents the value of the shares underlying stock options at an offering
price of $5.50 per share, less the option exercise price of $1.91 per share.
(2) Fair market value of the shares of "phantom stock" representing appreciation
in value over the $.50 phantom share baseline price, which appreciation is
fixed and the phantom shares eliminated on the effective date of this
Prospectus. See "Certain Transactions."
401(K) BENEFIT PLAN
The Company maintains a deferred compensation plan for its employees under
the Code (the "401(k) Plan"), entitled the "Berel Industries, Inc. Savings and
Investment Plan." The 401(k) Plan was adopted by the Company on January 1, 1993.
The 401(k) Plan covers all of the employees of the Company, including officers,
and the purpose of the 401(k) Plan is to provide retirement, disability, death,
and certain other incidental benefits to participating employees and their
beneficiaries. Employees who have completed one year of service and reached age
21 are eligible to participate in the 401(k) Plan. Under the 401(k) Plan,
eligible employees may elect to defer up to 15 percent of their compensation and
have the Company contribute this deferred amount to the 401(k) Plan on their
behalf, subject to certain maximum dollar limitations. Employees are fully
vested in any salary reduction amounts which are contributed to the 401(k) Plan
on their behalf. The Company may make a matching contribution up to 10 percent
of the amount contributed by the employee up to a maximum of five percent of the
contributing employee's annual earnings. These discretionary contributions are
subject to the profitability of the Company and are subject to certain
limitations under the Code.
Each participant or any beneficiary may elect to invest his or her
voluntary contributions and the matching contributions in one or more investment
funds. Participants are fully vested at all times in a salary reduction
contribution as well as the Company contributions. During 1993, 1994, and 1995,
employee contributions totaled $85,216, $80,746, and $106,738. Matching
contributions by the Company during the same three-year period were $4,578,
$4,690, and $5,976. A participant or his beneficiary may receive his benefits in
the form of an annuity or in the form of a lump sum payment.
40
<PAGE> 42
CERTAIN TRANSACTIONS
Immediately prior to this Offering, the Company terminated its former
phantom stock plan. Bonnie Metz, Anthony Mirando, Donna Richardson, and Peter
Behrendt were participants in that plan. In accordance with such termination,
each such person received a promissory note in consideration for the
cancellation of their phantom shares. The termination of the phantom stock plan
resulted in promissory notes being issued as follows:
<TABLE>
<CAPTION>
NOTE AMOUNT
-----------
<S> <C>
Anthony Mirando............................... $ 94,000
Donna Richardson.............................. $ 30,550
Bonnie Metz................................... $ 35,250
Peter Behrendt................................ $ 47,000
</TABLE>
Each note is a general unsecured obligation of the Company, maturing in
five years. The notes bear interest at the rate of eight percent per year.
Semi-annual interest payments shall commence November 1, 1996 and
fully-amortized, semi-annual principal repayments shall commence May 1, 1997.
Mr. Alan Wishnow is being paid a fee of $50,000, upon consummation of this
offering, in consideration for services rendered. See "Underwriting."
The Company believes that the terms of all transactions between the Company
and its stockholders, or any of their affiliates described above, are no less
favorable to the Company than terms that could have been obtained from third
parties. After the consummation of this Offering, all transactions between the
Company and its officers, directors, principal stockholders, or their affiliates
will be subject to approval by the disinterested members of the Board of
Directors. See "Management."
41
<PAGE> 43
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock of the Company as of May 14, 1996 by
(i) each person known by the Company to own beneficially more than 5% of the
Common Stock, (ii) each director of the Company, (iii) each Named Executive
Officer, and (iv) all directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(2) OFFERING(2)
----------------------- -------------------
NAME AND ADDRESS(1) NUMBER PERCENT (3) NUMBER PERCENT(3)
- ---------------------------------------------------- -------- ----------- -------- -------
<S> <C> <C> <C> <C>
Richard Berger (4)(5)(8)............................ 1,170,295 47.56 1,170,295 31.43
Karl Johannsmeier (5)(6)............................ 720,456 33.75 720,456 21.21
William Rollnick (5)................................ 391,537 18.34 391,537 11.53
Richard Miller (5)(7)(8)............................ 217,712 10.02 217,712 6.34
Peter Behrendt(8)................................... -- -- -- --
Bonnie Metz (8)..................................... -- -- -- --
Anthony Mirando (8)................................. -- -- -- --
Donna Richardson (8)................................ -- -- -- --
--------- ------ --------- ------
All Current Officers and Directors as a Group (six
persons).......................................... 1,388,007 55.52 1,388,007 36.89
========= ====== ========= ======
</TABLE>
- ---------------
(1) The address of each listed stockholder is c/o the Company, 13845 Artesia
Boulevard, Cerritos, California 90703.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes the right to
exercise voting or investment power with respect to securities. Shares of
Common Stock subject to options that are currently exercisable or
exercisable within 60 days of the date hereof, are deemed outstanding for
computing the percentage of the outstanding Common Stock beneficially owned
by the person holding such options, but are not deemed outstanding for
computing the percentage of any other person. Except as indicated by
footnote and subject to community property laws where applicable, the
persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them.
(3) Applicable percentage of ownership is based on 2,134,441 shares of Common
Stock outstanding prior to the Offering and 3,396,941 shares of Common Stock
outstanding subsequent to the Offering.
(4) Consists of 697,220 shares owned by Berger Holdings, a company controlled by
Mr. Berger, 146,852 owned by EMI Employment Pension Plan, of which Mr.
Berger is trustee, and 326,223 shares of Common Stock which may be acquired
by Mr. Berger upon exercise of stock options which are presently exercisable
or will become exercisable within 60 days of the date hereof.
(5) Richard Berger, Karl Johannsmeier, William Rollnick and Richard Miller (or
their respective affiliates) (the "Selling Stockholders") have granted the
Underwriters a 45-day option to purchase up to 150,000 shares of Common
Stock to cover over-allotments, if any. If the option is exercised in full,
Messrs. Berger, Johannsmeier, Rollnick and Miller will beneficially own
1,100,080 (29.55%), 677,226 (19.94%), 368,047 (10.84%) and 204,647 (5.96%),
respectively, of the shares of Common Stock outstanding after completion of
this Offering, and all officers and directors as a group will own
approximately 37% of the shares of Common Stock outstanding after completion
of this Offering.
(6) Consists of 520,456 shares owned by Karl H. Johannsmeier, 100,000 shares by
Trust of Klaus D. Johannsmeier, of which Karl H. Johannsmeier is the
trustee, and 100,000 shares by Trust of Hans J. Johannsmeier, of which Karl
H. Johannsmeier is the trustee.
(7) Consists of 69,109 shares owned by RAM Investment Group, a partnership
controlled by Mr. Miller, 109,267 shares owned by Richard Alan Miller
Employee Pension Plan, of which Mr. Miller is trustee, and 39,336 shares of
Common Stock which may be acquired by Mr. Miller upon exercise of stock
options which are presently exercisable or will become exercisable within 60
days of the date hereof.
(8) Each of Mr. Berger, Mr. Miller, Mr. Behrendt, Ms. Metz, Ms. Richardson, and
Mr. Mirando is expected to be issued options under the 1996 Plan or the
Non-Statutory Plan. See "Management."
42
<PAGE> 44
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 15,000,000 shares
of Common Stock, par value $.01 per share, and 1,000,000 shares of Preferred
Stock, par value $.01 per share. The Company previously had 250,000 shares of
issued and outstanding Series A Preferred Stock, all of which were converted
into Common Stock in connection with the Recapitalization. The following
statements are summaries of certain provisions applicable to the Company's
capital stock.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on each matter submitted to a vote of stockholders. In general and
subject to any voting rights applicable to any shares of Preferred Stock then
outstanding, the approval of proposals submitted to a vote of stockholders
requires a favorable vote of either the majority of the voting power of the
holders of Common Stock or the majority of the voting power of the shares
represented and voting at a duly held meeting at which a quorum is present. The
shares of Common Stock have no conversion rights or redemption provisions and
include no preemptive rights or other rights to subscribe for additional
securities. Subject to preferences that may be applicable to any shares of
Preferred Stock then outstanding, the holders of the shares of Common Stock will
be entitled to receive such dividends, if any, as may be declared by the Board
of Directors out of legally available funds and to share pro rata in any
distribution to the stockholders, including any distribution upon liquidation of
the Company. However, the current policy of the Board of Directors is to retain
earnings for the operation of the Company's business. See "Dividend Policy." All
outstanding shares of Common Stock are, and the shares to be issued in the
Offering will be, upon payment therefor, validly issued, fully paid, and
nonassessable.
PREFERRED STOCK
The Board of Directors may, without further action of the stockholders of
the Company, issue shares of Preferred Stock in one or more series and fix the
rights and preferences thereof, including the dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption (including sinking fund
provisions), redemption price or prices, liquidation preferences, and the number
of shares constituting any series or the designations of such series. The rights
of the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of holders of any Preferred Stock that may be issued in the
future. Issuance of Preferred Stock provides desirable flexibility in connection
with possible acquisitions and other corporate purposes. An issuance could,
however, have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from acquiring, a majority of the
outstanding voting stock of the Company.
ANTI-TAKEOVER LAW AND CHARTER PROVISIONS
The Company is a Delaware corporation. As such, the Company is subject to
the anti-takeover provisions of Section 203 of the Delaware General Corporation
Law ("Section 203"), which restricts transactions and business combinations
between a corporation and an "Interested Stockholder" for a period of three
years from the date the stockholder becomes an Interested Stockholder. An
"Interested Stockholder" is any stockholder owning 15% or more of the Company's
outstanding voting stock. Such a transaction may be effected if the transaction
is approved by the Board of Directors and the holders of at least 66 2/3% of the
outstanding voting stock (excluding shares held by the Interested Stockholder).
Specifically, Section 203 prohibits significant business transactions such as a
merger with, disposition of assets to, or receipt of disproportionate financial
benefits by the Interested Stockholder, or any other transaction that would
increase the Interested Stockholder's proportionate ownership of any class or
series of the corporation's stock. The statutory ban does not apply if, upon
consummation of the transaction in which any person becomes an Interested
Stockholder, the Interested Stockholder owns at least 85% of the outstanding
voting stock of the corporation (excluding shares held by persons who are both
directors and officers or by certain employee stock plans).
Notwithstanding the provisions of Delaware law and the Company's
Certificate of Incorporation and Bylaws, as a Company doing business primarily
in California and with more than 50% of the voting securities held of record by
persons with California addresses, certain of these provisions are not
applicable until the Company has outstanding securities qualified for trading on
Nasdaq National Market and has more than 800 stockholders. See "Description of
Capital Stock -- Other Attributes of the Stock of the Company."
43
<PAGE> 45
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation limits the liability of
directors to the maximum extent permitted by Delaware law. Delaware law provides
that directors of a company will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except for liability for (i)
any breach of their duty of loyalty to the Company or its stockholders, (ii)
acts or omissions not in good faith or involving intentional misconduct or a
knowing violation of law, (iii) unlawful payment of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of the Delaware General
Corporation Law, or (iv) any transaction from which the director derived an
improper personal benefit.
The Company's Bylaws provide that the Company shall indemnify its officers
and directors and may indemnify its employees and other agents to the fullest
extent permitted by Delaware law. The Company's Bylaws also permit it to secure
insurance on behalf of any officer, director, employee, or other agent for any
liability arising out of his or her actions in such capacity, regardless of
whether the Bylaws would permit indemnification.
The Company has entered into agreements to indemnify its officers and
directors. These agreements, among other things, indemnify the Company's
officers and directors for certain expenses (including attorneys' fees),
judgments, fines, and settlement amounts incurred by any such person in any
action or proceeding, including any action by or in the right of the Company,
arising out of such person's services as an officer or director of the Company,
any subsidiary of the Company, or any other company or enterprise to which such
person provides services at the request of the Company. The Company believes
that the provisions in its Certificate of Incorporation and its Bylaws and the
indemnification agreements are necessary to attract and retain qualified persons
as officers and directors.
OTHER ATTRIBUTES OF THE STOCK OF THE COMPANY
The Company is a corporation organized under the laws of Delaware and
generally the laws of the state of incorporation govern the corporate operations
of a corporation and the rights of its stockholders. Certain provisions of the
California Corporations Code become applicable to a corporation incorporated
outside of California if (i) the corporation transacts business in California
and the average of its California property, payroll, and sales factors (as
defined in the California Revenue and Taxation Code) with respect to the
corporation is more than 50% during its latest fiscal year, (ii) more than
one-half of its outstanding voting securities are held of record by persons
having addresses in California, and (iii) the corporation is not otherwise
exempt. An exemption is provided, among other things, if the corporation has
outstanding securities qualified for trading as a Nasdaq National Market
Security and has at least 800 holders of its equity securities as of the record
date of its most recent annual meeting of stockholders.
It is expected that over 50% of the Common Stock will be beneficially owned
upon completion of this Offering by Messrs. Berger, Johannsmeier, and Miller and
other persons who have addresses in California, so that certain provisions of
California corporate law could apply to the Company, as described below, unless
and until the Company becomes a "listed corporation" (as defined below).
Except as discussed herein, provisions of California law which could be
applicable to the Company if the Company meets the tests and is not exempt
include, without limitation, those provisions relating to the number of
directors to be elected each year (all directors must be elected each year under
California law, while the Delaware law permits staggered election of directors),
the stockholders' right to cumulate votes in elections of directors (cumulative
voting is mandatory under California law), the stockholders' right to remove
directors without cause (which under California law is subject to the
stockholders' right to cumulative votes), and the right of stockholders to call
a special meeting (such right is mandatory under California law if the
requesting stockholder(s) own(s) at least 10% of the voting stock).
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is U.S.
Stock Transfer Corporation.
44
<PAGE> 46
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 3,396,941 shares of
Common Stock outstanding. The 1,262,500 shares sold in this offering (1,450,000
shares if the Underwriters' over-allotment option is exercised in full) will be
freely tradable without restriction under the Securities Act, except for any
such shares held at any time by an "affiliate" of the Company, as such term is
defined under Rule 144 adopted under the Securities Act. The remaining shares
were issued and sold by the Company in private transactions, are "restricted
securities" as defined in Rule 144, and may be publicly sold only if registered
under the Securities Act or sold in accordance with an applicable exemption from
registration. See "Underwriting."
In general, under Rule 144, as currently in effect, a person who has
beneficially owned shares for at least two years, including an "affiliate," as
that term is defined in Rule 144, is entitled to sell, within any three-month
period, a number of "restricted" shares that does not exceed the greater of 1%
of the then outstanding shares of Common Stock or the average weekly trading
volume during the four calendar weeks preceding such sale. Sales under Rule 144
are subject to certain manner of sale limitations, notice requirements, and the
availability of current public information about the Company. Rule 144(k)
provides that a person who is not deemed an "affiliate" and who has beneficially
owned shares for at least three years is entitled to sell such shares at any
time under Rule 144 without regard to the limitations described above. Of the
approximately 2,134,441 shares outstanding immediately prior to the Offering,
affiliates will hold substantially all of them, and will be deemed to have owned
such shares for varying times since 1989. Any employee, officer, or director of
or consultant to the Company who purchased his or her shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 under the Securities Act ("Rule 701"), which permits
non-affiliates to sell their Rule 701 shares without having to comply with the
public information, holding period, volume limitation, or notice provisions of
Rule 144 and permits affiliates to sell their Rule 701 shares without having to
comply with Rule 144's holding period restrictions, in each case commencing 90
days after the commencement of this Offering.
The shares underlying the 1996 Plan and Non-Statutory Plan will be
restricted securities and will be sold only in compliance with Rule 144 if and
when any shares of Common Stock are acquired upon the exercise of any such
options. The Company may, in the future, register shares underlying its stock
option plans, in which case shares held by non-affiliates issued upon exercise
of options will be freely tradable.
The Company and all of the Company's stockholders (other than investors
purchasing shares in this Offering) have agreed with the Underwriters not to
sell or otherwise dispose of any shares of Common Stock for a period of 12
months from the date of this Prospectus without the prior written consent of the
Representative. See "Underwriting."
The Company is unable to estimate the number of shares that may be sold in
the future by its existing stockholders or the effect, if any, that sales of
shares by such stockholders will have on the market price of the Common Stock
prevailing from time to time. Sales of substantial amounts of Common Stock by
existing stockholders could adversely affect prevailing market prices.
45
<PAGE> 47
UNDERWRITING
The Underwriters named below, represented by The Boston Group, L.P. (the
"Representative"), have severally agreed, subject to the terms and conditions
contained in the Underwriting Agreement, to purchase from the Company the number
of shares of Common Stock indicated below opposite their respective names at the
initial public offering price less the underwriting discounts and commissions
set forth on the cover page of this Prospectus. The Underwriting Agreement
provides that the obligations of the Underwriters are subject to certain
conditions and that the Underwriters are committed to purchase all of such
shares, if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------------------------------------------------------------------ ---------
<S> <C>
The Boston Group, L.P...................................................
---------
Total.............................................................. 1,262,500
========
</TABLE>
The Representative was organized in California and its principal business
function is to underwrite and sell securities. The Representative has been
recently formed and has underwritten only a limited number of public offerings.
After interviewing various underwriters, the Company has advised the
Representative that it chose the Representative based on various factors,
including, the Company's belief that the Representative has an understanding of
the Company and its business.
Mr. Alan Wishnow is being paid, upon consummation of this offering, a fee
of $50,000 out of the proceeds of this Offering, as compensation for services
rendered to the Company. Mr. Wishnow may be deemed to be a finder with respect
to this Offering. The Company and the Representative have been informed that Mr.
Wishnow is not affiliated with any member of the National Association of
Securities Dealers, Inc.
The Company has been advised by the Representative that the Underwriters
propose to offer shares to the public at the initial public offering price set
forth on the cover page of this Prospectus, and to certain securities dealers at
such price less a concession of not more than $ per share, and that the
Underwriters and such dealers may reallot to other dealers, including the
Underwriters, as a discount not in excess of $ per share. After the
initial public offering, the public offering price and concessions and discounts
may be changed by the Representative. No reduction in such terms shall change
the amount of proceeds to be received by the Company as set forth on the cover
page of this Prospectus.
The Company will bear the expenses of the Selling Stockholders in
connection with the registration of shares subject to the Underwriters'
over-allotment option, other than the underwriting discounts and commissions,
and non-accountable expense allowance with respect to the shares subject to the
over-allotment option.
The Company and the Selling Stockholders (or their affiliates) have granted
the Underwriters an option, exercisable within 45 days after the date of this
Prospectus, to purchase up to an aggregate of an additional 187,500 shares of
Common Stock, all of which will be sold by the Company and such Selling
Stockholders (or their affiliates) to cover over-allotments, at the same price
per share of Common Stock being paid by the Underwriters for the other shares of
Common Stock offered hereby. The Company and Messrs. Berger, Johannsmeier,
Rollnick, and Miller (or their respective affiliates), have agreed to sell
37,500, 70,215, 43,230, 23,490 and 13,065 shares, respectively, upon the
exercise of the over-allotment option in full. In the event that less than the
entire over-allotment is exercised, such share amounts will be reduced
proportionately. None of the proceeds of sales by Selling Shareholders will be
received by the Company.
46
<PAGE> 48
The Representative has informed the Company that it does not expect any
sales of the shares of Common Stock offered hereby to be made by the
Underwriters to any accounts over which they exercise discretionary authority.
The Company's officers, directors and stockholders have agreed not to,
directly or indirectly, offer, offer to sell, sell, grant an option to purchase
or sell, or transfer any shares of Common Stock owned by them for a period of 12
months from the date of this Prospectus without the prior written consent of the
Representative (other than with respect to the over-allotment option).
The officers, directors and stockholders of the Company before this
Offering have granted to the Representative a right of first refusal to effect
any sales made under Rule 144 of the Securities Act by such persons during the
one-year period from the date of this Prospectus.
The Company (and the Selling Stockholders with respect to the proceeds from
the exercise of the portion of the over-allotment option attributable to them)
has agreed to pay the Representative a non-accountable expense allowance of
three percent of the gross proceeds from the sale of all shares of Common Stock
offered hereby. To date, the Company has not paid any of the non-accountable
expense allowance to the Representative. The Representative's expenses in excess
of the non-accountable expense allowance, including its legal expenses, will be
borne by the Representative. To the extent that the expenses of the
Representative are less than the non-accountable expense allowance, the excess
shall be deemed to be compensation to the Representative.
The Company has also agreed to give notice to the Representative of
meetings of the Board of Directors for a period of two years and to provide
copies of all written consents of the Board of Directors to the Representative.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities under the Securities Act or will
contribute to payments the Underwriters may be required to make in respect
thereof. The Company has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
Prior to this Offering, there has not been an established public market for
the Common Stock. The initial public offering price has been determined by
negotiations between the Company and the Representative. Among the major factors
considered in determining the public offering price of the Common Stock were the
prevailing market conditions, the market prices relative to earnings, cash flow
and assets for publicly traded common stocks of comparable companies, the sales
and earnings of the Company and comparable companies in recent periods, the
Company's earning potential, the experience of its management, and the position
of the Company in the industry. The initial public offering price set forth on
the cover page of this Prospectus should not be considered an indication of the
actual value of the Common Stock. Such price is subject to change as a result of
market conditions and other factors and no assurance can be given that the
Common Stock can be resold at the initial public offering price.
The foregoing sets forth the material terms and conditions of the
Underwriting Agreement, but does not purport to be a complete statement of the
terms and conditions thereof, copies of which are on file at the offices of the
Representative, the Company, and the Securities and Exchange Commission. See
"Additional Information."
The Company has agreed to sell to the Representative, for $50,
Representative's Warrants to purchase up to 125,000 shares of Common Stock at an
exercise price per share equal to 120% of the initial public offering price per
share. The Representative's Warrants are exercisable for a period of four years
beginning one year from the date of this Prospectus, and are not transferable
for a period of one year except to the officers or partners of the
Representative or any successor to the Representative or any other member of the
National Association of Securities Dealers, Inc. who participated in the
offering. The Representative's Warrants include a net exercise provision
permitting the holder(s) to pay the exercise price by cancellation of a number
of shares with a fair market value equal to the exercise price of the
Representative's Warrants.
47
<PAGE> 49
The Representative's Warrants provide certain rights with respect to the
registration under the Securities Act of up to 125,000 shares of Common Stock
issuable upon exercise thereof. The holders of the shares issuable upon exercise
of the Representative's Warrants may require the Company to file a registration
statement under the Securities Act with respect to such shares. In addition, if
the Company registers any of its Common Stock for its own account, the holders
of the shares issuable upon exercise of the Representative's Warrants are
entitled to include their shares of Common Stock in the registration.
LEGAL MATTERS
The legality of the Common Stock being offered hereby will be passed upon
for the Company by Keesal, Young & Logan, P.C., Long Beach, California. Certain
legal matters will be passed upon for the Underwriters by Jeffer, Mangels,
Butler and Marmaro LLP, Los Angeles, California.
EXPERTS
The financial statements and schedules included in this Prospectus and
elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C., a Registration Statement, including any
amendments thereto, on Form S-1 under the Securities Act with respect to the
shares of Common Stock offered hereby. This Prospectus, which constitutes a part
of the Registration Statement, omits certain information contained in said
Registration Statement and the exhibits and schedules thereto on file with the
Commission pursuant to the Securities Act and the rules and regulations of the
Commission thereunder. For further information with respect to the Company and
the Common Stock, reference is made to the registration statement, including the
exhibits thereto. Statements contained in this Prospectus concerning the
contents of any contract or other document filed with the Commission as an
exhibit to the Registration Statement, or otherwise, are not necessarily
complete and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. The registration
statement, including exhibits and schedules thereto, may be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549; at the Chicago
Regional Office, Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511; and at the New York Regional Office, Seven
World Trade Center, Suite 1300, New York, New York 10048. Copies of such
materials can be obtained at prescribed rates from the Public Reference Section
of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and its
public reference facilities for New York, New York and Chicago, Illinois.
48
<PAGE> 50
CRAIG CONSUMER ELECTRONICS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Balance Sheets as of December 31, 1994 and 1995....................................... F-3
Statements of Income for the years ended December 31, 1993, 1994 and 1995............. F-4
Statements of Shareholders' Equity for the years ended
December 31, 1993, 1994 and 1995.................................................... F-5
Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995......... F-6
Notes to Financial Statements......................................................... F-7
Index to Quarterly Financial Statements............................................... F-14
</TABLE>
F-1
<PAGE> 51
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
of Craig Consumer Electronics, Inc.:
We have audited the accompanying balance sheets of CRAIG CONSUMER
ELECTRONICS, INC. (a Delaware corporation) as of December 31, 1995 and 1994, and
the related statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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 Craig Consumer Electronics,
Inc. as of December 31, 1995 and 1994, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. The schedule has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Orange County, California
February 15, 1996
F-2
<PAGE> 52
CRAIG CONSUMER ELECTRONICS, INC.
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1995
---------------------------
1994 ACTUAL PRO-FORMA(1)
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS:
Current Assets:
Cash.............................................. $ 455,494 $ 220,756 $ 220,756
Accounts receivable, net.......................... 17,792,721 13,189,981 13,189,981
Inventory, net.................................... 18,663,358 14,557,239 14,557,239
Supplies and prepaid expenses..................... 660,391 220,981 220,981
Other current assets.............................. 1,886,183 2,063,014 2,063,014
----------- ----------- -----------
Total current assets...................... 39,458,147 30,251,971 30,251,971
----------- ----------- -----------
Property and Equipment, net......................... 717,740 555,716 555,716
----------- ----------- -----------
Other Assets........................................ 969,132 1,722,042 1,722,042
----------- ----------- -----------
$41,145,019 $32,529,729 $32,529,729
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Note payable under revolving line of credit....... $20,914,038 $15,530,076 $15,530,076
Accounts payable.................................. 14,256,882 9,773,820 9,773,820
Accrued liabilities............................... 700,697 1,102,028 1,102,028
Income taxes payable.............................. 38,020 118,569 118,569
Current maturities of capital lease obligations... 20,868 22,768 22,768
----------- ----------- -----------
Total current liabilities................. 35,930,505 26,547,261 26,547,261
----------- ----------- -----------
Capital Lease Obligations........................... 89,493 66,220 66,220
----------- ----------- -----------
Subordinated Debt................................... 544,461 981,961 981,961
----------- ----------- -----------
Commitments and Contingencies
Shareholders' Equity:
Preferred stock................................... 2,500,000 2,500,000 --
Common stock; $.01 par value --
Authorized -- 15,000,000 shares
Issued and outstanding -- 6,405,995 shares at
December 31, 1995 and 1994, respectively;
proforma par value $.01 per share and 2,134,441
shares issued and outstanding.................. 64,060 64,060 21,344
Additional paid-in capital........................ 815,300 815,300 3,358,016
Retained earnings................................. 1,201,200 1,554,927 1,554,927
----------- ----------- -----------
4,580,560 4,934,287 4,934,287
----------- ----------- -----------
$41,145,019 $32,529,729 $32,529,729
=========== =========== ===========
</TABLE>
- ---------------
(1) Not covered by report of independent public accountants.
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE> 53
CRAIG CONSUMER ELECTRONICS, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
------------ ------------ -----------
<S> <C> <C> <C>
Net sales............................................. $101,214,755 $105,638,910 $88,675,516
Cost of sales......................................... 89,359,140 91,333,942 74,323,771
--------- --------- ---------
Gross profit................................ 11,855,615 14,304,968 14,351,745
--------- --------- ---------
Operating expenses:
Selling............................................. 4,809,178 5,164,872 4,663,642
General and administrative.......................... 4,611,278 6,681,030 6,336,398
Product development................................. 104,206 163,562 200,199
--------- --------- ---------
Operating expenses.......................... 9,524,662 12,009,464 11,200,239
--------- --------- ---------
Income from operations...................... 2,330,953 2,295,504 3,151,506
--------- --------- ---------
Other income (expense):
Interest expense.................................... (1,236,724) (1,701,118) (2,193,414)
Other............................................... 15,226 9,104 (5,955)
--------- --------- ---------
Other expense, net.......................... (1,221,498) (1,692,014) (2,199,369)
--------- --------- ---------
Income before provision for income taxes.... 1,109,455 603,490 952,137
Provision for income taxes............................ 36,601 70,960 160,910
--------- --------- ---------
Net income.................................. $ 1,072,854 $ 532,530 $ 791,227
========= ========= =========
Pro-forma net income per share (not covered by report
of independent public accountants).................. $ 0.33
=========
Weighted average shares outstanding................... 2,373,051
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 54
CRAIG CONSUMER ELECTRONICS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
SERIES A CUMULATIVE
PREFERRED STOCK COMMON STOCK
-------------------- -------------------
NUMBER NUMBER ADDITIONAL
OF OF PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
------- ---------- --------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992....... 250,000 $2,500,000 6,362,082 $63,620 $ 793,783 $ 470,816
Issuance of common stock....... -- -- 43,913 440 21,517 --
Declaration of dividends on
preferred stock............. -- -- -- -- -- (437,500)
Net income..................... -- -- -- -- -- 1,072,854
------- ---------- --------- ------- -------- ----------
Balance, December 31, 1993....... 250,000 2,500,000 6,405,995 64,060 815,300 1,106,170
Declaration of dividends on
preferred stock............. -- -- -- -- -- (437,500)
Net income..................... -- -- -- -- -- 532,530
------- ---------- --------- ------- -------- ----------
Balance, December 31, 1994....... 250,000 2,500,000 6,405,995 64,060 815,300 1,201,200
------- ---------- --------- ------- -------- ----------
Declaration of dividends on
preferred stock............. -- -- -- -- -- (437,500)
Net income..................... -- -- -- -- -- 791,227
------- ---------- --------- ------- -------- ----------
Balance, December 31, 1995....... 250,000 $2,500,000 6,405,995 $64,060 $ 815,300 $1,554,927
======= ========== ========= ======= ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 55
CRAIG CONSUMER ELECTRONICS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 1,072,854 $ 532,530 $ 791,227
Adjustments to reconcile net income to net cash
provided by (used in) operating activities --
Depreciation and amortization...................... 102,080 214,533 283,331
(Increase) decrease in accounts receivable, net.... (3,807,180) (356,517) 4,602,740
(Increase) decrease in inventory, net.............. (6,359,587) (5,539,231) 4,106,119
(Increase) decrease in supplies and prepaid
expenses and other current assets................ (376,284) (744,190) 262,579
(Increase) decrease in other assets................ 25,000 (969,132) (752,910)
Increase (decrease) in accounts payable and accrued
liabilities...................................... 5,043,529 787,401 (4,081,731)
Increase (decrease) in income taxes payable........ (117,758) 420 80,549
Decrease in note payable to related party.......... (125,165) -- --
----------- ----------- -----------
Total adjustments to net income.................. (5,615,365) (6,606,716) 4,500,677
----------- ----------- -----------
Net cash provided by (used in) operating
activities.................................... (4,542,511) (6,074,186) 5,291,904
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment................... (234,687) (636,809) (149,951)
Proceeds from sale of property and equipment.......... -- -- 22,689
Loss on disposal of property and equipment............ -- -- 5,955
----------- ----------- -----------
Net cash used in investing activities............ (234,687) (636,809) (121,307)
----------- ----------- -----------
Cash flows from financing activities:
Net borrowings (repayments) on notes payable under
revolving line of credit........................... 6,160,922 6,436,163 (5,383,962)
Preferred stock dividends paid........................ (582,427) (437,500) --
Proceeds received from stock issuance................. 21,957 -- --
Increase (decrease) in capital lease obligation....... -- 110,361 (21,373)
----------- ----------- -----------
Net cash provided by (used in) by financing
activities.................................... 5,600,452 6,109,024 (5,405,335)
----------- ----------- -----------
Net increase (decrease) in cash......................... 823,254 (601,971) (234,738)
Cash, beginning of year................................. 234,211 1,057,465 455,494
----------- ----------- -----------
Cash, end of year....................................... $ 1,057,465 $ 455,494 $ 220,756
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for --
Interest........................................... $ 1,241,091 $ 1,537,849 $ 2,193,414
=========== =========== ===========
Income taxes....................................... $ 154,359 $ 70,540 $ 71,660
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 56
CRAIG CONSUMER ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Background and Organization
Craig Consumer Electronics, Inc. (the Company), a Delaware corporation
since September 1, 1989, is a designer and marketer of consumer electronic
products under its trademark, "Craig." The Company's principal product lines are
audio electronic and peripheral products sold to wholesale and retail
distributors worldwide. The domestic market is the primary source of sales.
b. Current Vulnerability Due to Certain Concentrations
The Company currently acquires the majority of its products from three
manufacturers located in the People's Republic of China. The Company limits the
number of suppliers producing its goods in order to maintain the quality and
exclusivity of its products. A change in suppliers, however, could disrupt and
adversely affect the business due to the time it would take to contract with a
new vendor. In order to mitigate this risk, the Company has a full-time
operations manager located in Hong Kong to facilitate relationships with
prospective vendors.
Sales to five domestic customers represented 44, 47, and 59 percent of net
sales for the years ended December 31, 1993, 1994, and 1995, respectively. Of
that amount, sales to one customer represented 25 percent, 24 percent, and 35
percent of net sales for the years ending December 31, 1993, 1994, and 1995,
respectively. The loss of any one of the top five customers could have an
adverse affect on the Company's business.
c. Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
d. Accounts Receivable
Accounts receivable at December 31, 1994 and 1995, consist of the
following:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Accounts receivable....................................... $18,736,077 $14,260,307
Less -- Allowance for doubtful accounts................... 203,760 387,147
Less -- Allowance for sales returns....................... 739,596 683,179
----------- -----------
$17,792,721 $13,189,981
=========== ===========
</TABLE>
The allowances for doubtful accounts and sales returns include management's
estimate of the amount expected to be lost on specific accounts and for losses
on other as yet unidentified accounts included in accounts receivable at
December 31, 1995. In estimating the potential losses and returns on specific
accounts, management relies on a combination of in-house prepared analysis and
review of available public documents. In estimating the allowance component for
unidentified losses and returns within the portfolio, management relies on
historical experience. The amounts the Company will ultimately realize could
differ materially in the near term from the amounts assumed in arriving at the
allowance for doubtful accounts and sales returns reported in the financial
statements at December 31, 1995.
F-7
<PAGE> 57
CRAIG CONSUMER ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
e. Inventory
Inventory is stated at the lower of cost or market. Cost is determined
using an average cost method, which approximates first-in, first-out.
Inventory consists of the following at December 31, 1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Inventory................................................. $18,801,892 $14,899,697
Less -- Allowance for obsolescence........................ 138,534 342,458
---------- ----------
$18,663,358 $14,557,239
========== ==========
</TABLE>
The allowance for obsolescence is based on management's estimate of the
amount considered obsolete based upon specific reviews of inventory items. In
estimating the allowance, management relies on its knowledge of the industry
(including technological and design changes) as well as its current inventory
levels. The amounts the Company will ultimately realize could differ materially
in the near term from amounts assumed in arriving at the allowance for
obsolescence reported in the financial statements at December 31, 1995.
f. Property and Equipment
Property and Equipment is recorded at depreciated cost and consists of the
following at December 31, 1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Machinery and Equipment..................................... $ 741,852 $ 886,188
Furniture and Fixtures...................................... 493,352 498,965
Leasehold Improvements...................................... 50,847 50,847
Automobile.................................................. 42,160 3,100
Capital Leases.............................................. 118,717 118,717
--------- ---------
1,446,928 1,557,817
Less -- Accumulated depreciation and amortization........... 729,188 1,002,101
--------- ---------
$ 717,740 $ 555,716
========= =========
</TABLE>
Maintenance, repairs and minor renewals are charged to expense as incurred.
Additions, major renewals and betterments are capitalized. When assets are
disposed of, the related cost and accumulated depreciation are removed from the
accounts, and any resulting gain or loss is included in operations.
Depreciation and amortization are computed using the straight-line method
over the following estimated useful lives:
<TABLE>
<S> <C>
Machinery and Equipment............................................... 3-5 years
Furniture and Fixtures................................................ 3-7 years
Leasehold Improvements................................................ Term of lease
Automobile............................................................ 5 years
</TABLE>
g. Income Taxes
The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
F-8
<PAGE> 58
CRAIG CONSUMER ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Tax credits are treated as reductions of the federal income tax provision
in the periods in which the credits are realized.
h. Revenue Recognition
Sales and related costs are recorded by the Company upon shipment of
products. The Company records an allowance for estimated returns of products,
using a historical percentage of sales.
i. Long-lived Assets
The Company does not own significant assets which are considered long lived
assets. Accordingly, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
be Disposed of" is expected to have any or a material impact on the Company's
financial statements.
j. Stock-based Compensation
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation." Under SFAS No. 123, companies have the option to implement a fair
value-based accounting method or continue to account for employee stock options
and stock purchase plans as prescribed by Accounting Principles Board Opinion
No. 25 "Accounting for Stock Issued to Employees." SFAS No. 123 is effective for
financial statements for fiscal years beginning after December 31, 1995. The
Company has not made a determination as to whether it will adopt the new fair
value accounting rules. The Company has not assessed the impact on net income
and earnings per share of adopting the new fair value accounting rules.
k. Post-employment and Post-retirement Benefits
The Company does not provide post-employment or post-retirement benefits to
employees. Accordingly, Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Post-Employment Benefits" and Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Post-Retirement
Benefits" have no impact on the Company's financial statements.
2. NOTE PAYABLE UNDER REVOLVING LINE OF CREDIT
On June 1, 1995, the Company amended its existing credit agreement (the
Agreement) with a syndicate consisting of four major financial institutions, one
of which acts as Agent or lead bank. Under the amended credit facility, the
Company can borrow up to a total of $40,000,000 (borrowing capacity was
$50,000,000 in 1994), subject to certain limitations. Borrowings are limited to
the lesser of $40,000,000, or 85 percent of eligible accounts receivable, as
defined, and the lesser of $20,000,000 or the amount of eligible inventory, less
the aggregate amount of reserves, if any, established by the Agent, as defined
in the Agreement. In addition, any amounts outstanding on open letters of credit
reduce the available funds under the Agreement. The Company has borrowing
options available under the line of credit, a variable interest rate or prime
rate option, and a fixed rate or Eurodollar rate option. Borrowings under the
prime rate option bear interest at the Agent's prime rate (eight and one half
percent at December 31, 1995) plus one and one quarter percent. Borrowings under
the Eurodollar rate option bear interest at a fixed Eurodollar interest rate
(five and five-sixths percent at December 31, 1995) plus two and three quarters
percent. By giving adequate notice to the Agent, the Company is permitted to
make up to two conversions to the Eurodollar loan advances, each of which is
limited to a minimum of $5,000,000 aggregate balance with integral multiples of
$1,000,000 in excess thereof. The line of credit expires on August 4, 1997, but
may be extended for two (2) additional one-year periods and contains certain
restrictive covenants.
F-9
<PAGE> 59
CRAIG CONSUMER ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1995, the Company was out of compliance on certain of
its debt covenants. A waiver has been obtained related to these areas of
non-compliance.
The Company purchases certain inventory from overseas vendors on a letter
of credit basis. At December 31, 1994 and 1995, there were $986,500 and
$302,400, respectively, in open letters of credit.
3. SUBORDINATED DEBT
The subordinated debt represents unpaid dividends and bonuses to the
Company's preferred shareholders and an officer. The debt bears interest at ten
percent per year. It is the Company's intention to pay these amounts over the
next three to five years. However, no payments will be made in the event such
payments would result in the violation of a covenant on the Company's note
payable to financial institution (see Note 2).
4. COMMITMENTS AND CONTINGENCIES
a. Operating Leases and Capital Lease Obligations
The Company is committed under noncancelable operating and capital lease
obligations for its facilities and equipment. The equipment related to the
capital leases has an original cost of approximately $119,000 and accumulated
depreciation of approximately $59,500 at December 31, 1995. Rent expense was
$265,368, $334,692, and $332,157 at December 31, 1993, 1994, and 1995,
respectively. Minimum annual payments under noncancelable operating and capital
leases are as follows as of December 31, 1995:
<TABLE>
<CAPTION>
YEAR ENDING: CAPITAL OPERATING
-------------------------------------------------------- ------- ---------
<S> <C> <C>
1996............................................... $29,656 $ 101,205
1997............................................... 29,656 19,434
1998............................................... 28,589 16,195
1999............................................... 15,805 --
------- ---------
103,706 $ 136,834
========
Less -- Amount representing interest.................... 14,718
-------
88,988
Less -- Current portion................................. 22,768
-------
$66,220
=======
</TABLE>
b. Warranty
The Company offers warranties on its products which range from three to
twelve months. The Company has not experienced significant warranty charges and
has established an allowance for these costs based on its historical experience.
5. INCOME TAXES
The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" which
requires the asset-and-liability method of accounting for income taxes.
The Company has recorded a provision for Alternative Minimum Tax and state
income taxes of $36,601, $70,960, and $160,910 for the years ending December 31,
1993, 1994, and 1995, respectively. The Company has not recorded a federal
income tax provision for 1993, 1994, and 1995, as the Company believes that
sufficient net operating loss carryforwards exist to offset any income in those
years. The Company has determined that at December 31, 1995, it had net
operating loss carryforwards of approximately $5,101,000,
F-10
<PAGE> 60
CRAIG CONSUMER ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
for financial reporting and federal income tax purposes. These net operating
loss carryforwards expire at various dates through the year 2005.
The components of the Company's deferred tax asset at December 31, 1994 and
1995 were:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Inventory reserves........................................ $ 415,635 $ 420,582
Allowance for returns and doubtful accounts............... 408,473 463,451
NOL carryforwards......................................... 2,082,979 1,693,717
Depreciation.............................................. 98,070 140,562
Miscellaneous............................................. 20,075 69,697
Other..................................................... 124,768 161,991
--------- ---------
3,150,000 2,950,000
Less -- Valuation allowance............................... (3,150,000) (2,950,000)
--------- ---------
Net deferred tax asset.......................... $ -- $ --
========= =========
</TABLE>
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- --------
<S> <C> <C> <C>
Current provision:
Federal............................................ $27,778 $41,222 $ 14,833
State.............................................. 8,823 29,738 146,077
------- ------- --------
Total current provision.................... $36,601 $70,960 $160,910
======= ======= ========
</TABLE>
The components of changes to the Company's deferred income tax provision,
which arise from tax credits and timing differences between financial and tax
reporting, are presented below:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Inventory Reserves.............................. $ 179,270 $ 34,117 $ 4,947
Allowance for returns and doubtful accounts..... (74,961) 101,851 54,978
NOL carryforward................................ (577,670) (329,232) (389,262)
Depreciation.................................... 7,911 29,368 42,492
Miscellaneous................................... (18,037) (4,750) 49,622
Other........................................... (166,513) (31,354) 37,223
Valuation allowance............................. 650,000 200,000 200,000
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
</TABLE>
Variations from the federal statutory rate are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Federal income tax rate......................... 34% 34% 34%
Computed taxes @ statutory...................... $ 377,215 $ 205,187 $ 323,727
State income tax, net of federal deductions..... 67,677 36,813 58,080
Utilization of NOL.............................. (577,670) (329,232) (389,262)
Other........................................... 169,379 158,192 168,365
-------- -------- --------
Income tax provision.................. $ 36,601 $ 70,960 $ 160,910
======== ======== ========
3.3% 11.8% 16.9%
======== ======== ========
</TABLE>
F-11
<PAGE> 61
CRAIG CONSUMER ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. SERIES A CUMULATIVE PREFERRED STOCK
The Company has outstanding 250,000 shares of Series A Preferred Stock (the
Preferred Stock). Holders of the Preferred Stock are entitled to receive
cumulative dividends at a rate of 17.5 percent of the original issuance price.
Any dividends not paid when due shall continue to accumulate and accrue interest
at a rate equal to the interest rate of the Company's line of credit. In 1994
and 1995, the Company declared but did not pay dividends.
Dividends may be paid in cash or, at the Company's option, in Common Stock
or Series A Cumulative Preferred Stock. Additionally, the provisions of the
Preferred Stock agreement prohibit the declaration or payment of any dividends
on the Company's Common Stock as long as there are any Preferred Stock dividends
in arrears.
In the event of a voluntary or involuntary liquidation of the Company, the
Preferred Stock has a liquidating preference of $10 per share plus accrued
unpaid dividends.
The Company is in the process of an initial public offering of Common
Stock. In the event of the successful completion of the Offering, all of the
outstanding Series A Preferred Stock and existing Common Stock will be converted
into a total 2,134,441 shares of Common Stock (see Note 10).
7. STOCK OPTIONS
In May 1993, the Company's board of directors approved the issuance of
1,394,000 stock options at an exercise price of $.50 (which was determined to
approximate the fair value of the shares at that time) which expire in April
2003. In December 1994, the Company's board of directors approved the issuance
of 220,000 "shares" of phantom stock to certain key employees. The basis for
determining appreciation in phantom stock (subject to several contingencies to
the realization of that appreciation) was fixed at $.50 per phantom share. The
phantom stock results in additional compensation to the key employees in the
event the Company's book value per share exceeds the phantom stock price. There
were no amounts due under this plan in 1994 and 1995.
The Company is in the process of an initial public offering of its Common
Stock. In the event of the successful completion of the Offering, the phantom
stock option plan will be terminated (see Note 10).
8. DEFINED CONTRIBUTION PLAN
Effective January 1, 1993, the Company established a defined contribution
plan (the Plan) under Section 401(k) of the Internal Revenue Code in which all
eligible employees can elect to participate. The employees can elect to have
certain percentages of their pay withheld for contribution to the Plan on a
tax-free basis. The Company will match the first 10 percent of employee
contributions.
9. RECONDITIONING FACILITY
In January 1996, the Company and a Chinese entity opened a facility in the
People's Republic of China which will be used to recondition the Company's
returned products. The Company will pay a fixed fee for each item reconditioned,
which may be reduced subject to the number of items processed in any given year.
There is no contractually agreed upon minimum number of units which the Company
must supply to be reconditioned.
10. CONVERSION OF PREFERRED AND COMMON STOCK (UNAUDITED)
In connection with the initial public offering, the holders of Series A
Preferred Stock have executed agreements under which their shares will
automatically be converted into 1,733,330 shares of Common Stock. In addition, a
3.81-to-one reverse stock split of the Common Stock will be completed upon the
effectiveness
F-12
<PAGE> 62
CRAIG CONSUMER ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of the Offering. The Company will have $.01 par value Common Stock and will
account for paid in capital in excess of par. The Offering, if successful, is
expected to become effective sometime in May 1996.
The pro-forma balance sheet reflects the conversion of Series A Preferred
Stock and Common Stock. The pro-forma earnings per common share equal net
income, divided by the weighted average number of common shares outstanding,
after giving effect to dilutive stock options.
In addition, in the event of the successful completion of the Offering, the
phantom stock option plan will be terminated, and each participant in the plan
will receive a promissory note in consideration for the cancellation of their
shares. The total of all promissory notes issued will be $206,800, which
represents the book value of the Company assuming a value of $5.50 per share
less the phantom stock strike price of $.50. In addition, in the event the
offering is successful, the Company plans to adopt an Incentive Stock Option
Plan and a Non-Statutory Stock Option Plan which will provide for the issuance
of options to individuals designated by the Compensation Committee of the Board
of Directors.
F-13
<PAGE> 63
CRAIG CONSUMER ELECTRONICS, INC.
INDEX TO QUARTERLY FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Balance Sheets as of March 31, 1995 and 1996.......................................... F-15
Statements of Income for the Quarters ended March 31, 1995 and 1996................... F-16
Statements of Cash Flows for the Quarters ended March 31, 1995 and 1996............... F-17
Notes to Financial Statements......................................................... F-18
</TABLE>
F-14
<PAGE> 64
CRAIG CONSUMER ELECTRONICS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ACTUAL
DECEMBER 31,
1995
------------ ACTUAL PROFORMA
MARCH 31, MARCH 31,
1996 1996
----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash.............................................. $ 220,756 $ 144,504 $ 144,504
Accounts Receivable, net.......................... 13,189,981 11,298,408 11,298,408
Inventory, net.................................... 14,557,239 11,856,993 11,856,993
Supplies and prepaid expenses..................... 220,981 678,590 678,590
Other current assets.............................. 2,063,014 2,052,838 2,052,838
----------- ----------- ------------
Total current assets...................... 30,251,971 26,031,333 26,031,333
----------- ----------- ------------
Property and Equipment, net......................... 555,716 607,495 607,495
----------- ----------- ------------
Investment in Chinese Joint Venture................. -- 350,000 350,000
Other Assets........................................ 1,722,042 1,249,796 1,249,796
----------- ----------- ------------
$ 32,529,729 $28,238,623 $ 28,238,624
=========== =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Note payable under revolving line of credit....... $ 15,530,076 $11,335,883 $ 11,335,883
Accounts payable.................................. 9,773,820 10,766,212 10,766,212
Accrued liabilities............................... 1,102,028 684,624 684,624
Income taxes payable.............................. 118,569 -- --
Current maturities of capital lease obligations... 22,768 22,768 22,768
----------- ----------- ------------
Total current liabilities................. 26,547,261 22,809,487 22,809,487
----------- ----------- ------------
Capital Lease Obligation............................ 66,220 60,883 60,883
----------- ----------- ------------
Subordinated Debt................................... 981,961 981,961 981,961
----------- ----------- ------------
Commitments and Contingencies.......................
Shareholders' Equity................................
Preferred stock................................... 2,500,000 2,500,000 --
Common stock: $.01 par value -- Authorized --
15,000,000 shares
Issued and outstanding -- 6,405,995 at December
31, 1995 and March 31, 1996; pro-forma par
value $.01 per share and 3,396,941 shares
issued and outstanding......................... 64,060 64,060 33,969
Additional paid-in capital.......................... 815,300 815,300 3,345,391
Retained earnings................................... 1,554,927 1,006,933 1,006,933
----------- ----------- ------------
4,934,287 4,386,293 4,386,293
----------- ----------- ------------
$ 32,529,729 $28,238,624 $ 28,238,624
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-15
<PAGE> 65
CRAIG CONSUMER ELECTRONICS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1995 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
Net Sales....................................................... $17,732,421 $13,389,858
Cost of sales................................................... 15,626,251 11,458,767
----------- -----------
Gross Profit.......................................... 2,106,170 1,931,091
----------- -----------
Operating Expenses:
Selling....................................................... 985,814 750,037
General and administrative.................................... 1,370,799 1,420,835
Product development........................................... 36,113 37,091
----------- -----------
Operating expenses.................................... 2,392,726 2,207,963
Loss from operations.................................. (286,556) (276,872)
Other expense:
Interest expense.............................................. (536,549) (382,567)
----------- -----------
Other expense, net.................................... (536,548) (382,567)
----------- -----------
Loss before income tax benefit........................ (823,105) (659,439)
Income tax benefit.............................................. 139,104 111,444
----------- -----------
Net loss.............................................. $ (684,001) $ (547,994)
----------- -----------
Pro-forma net loss per share (not covered by report of
independent public accountants)............................... $ (.26)
==========
Weighted average shares outstanding............................. 2,134,441
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE> 66
CRAIG CONSUMER ELECTRONICS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31,
---------------------------
1995 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................ $ (684,001) $ (547,994)
Adjustments to reconcile net income to net cash provided by
operating activities--
Depreciation and amortization................................ 68,527 77,952
(Increase) decrease in accounts receivable, net.............. 4,921,609 1,891,573
(Increase) decrease in inventory, net........................ 1,222,139 2,700,246
(Increase) decrease in supplies and prepaid expenses and
other current assets........................................ (298,917) (447,434)
(Increase) decrease in other assets.......................... 969,132 472,246
Increase (decrease) in accounts payable and accrued
liabilities................................................. (2,218,221) 574,988
Increase (decrease) in income taxes payable.................. (38,020) (118,569)
Decrease in note payable to related party....................
----------- -----------
Total adjustments to net income............................ 4,626,249 5,151,002
----------- -----------
Net cash provided by operating activities.................. 3,942,248 4,603,008
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment............................. (28,493) (129,731)
Proceeds from sale of property and equipment.................... -- --
Loss on disposal of property and equipment......................
Investment in Chinese joint venture............................. -- (350,000)
----------- -----------
Net cash used in investing activities...................... (28,493) (479,731)
----------- -----------
Cash flows from financing activities:
Net borrowings (repayments) on notes payable under revolving
line of credit............................................... (4,290,694) (4,194,193)
Preferred stock dividends paid.................................. -- --
Proceeds received from stock issuance........................... -- --
Increase (decrease) in capital lease obligation................. (5,555) (5,336)
----------- -----------
Net cash used in financing activities...................... (4,296,249) (4,199,529)
----------- -----------
Net increase (decrease) in cash................................. (382,494) (76,252)
Cash, beginning of period....................................... 455,494 220,756
----------- -----------
Cash, end of period............................................. $ 73,000 $ 144,504
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for--
Interest................................................... $ 486,315 $ 341,320
=========== ===========
Income taxes............................................... $ 51,000 $ 130,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE> 67
CRAIG CONSUMER ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of Craig Consumer
Electronics, Inc. (referred to herein as the "Company") reflect all adjustments
(which include only normal recurring adjustments) considered necessary to
present fairly the financial position, results of operations and cash flows of
the Company for the periods presented. It is suggested that the accompanying
unaudited financial statements and footnotes thereto be read in conjunction with
the December 31, 1995 financial statements and footnotes included in this
document at pages F-1 through F-13.
The results of operations for the periods presented are not necessarily
indicative of the operating results that may be expected for the year ending
December 31, 1996.
2. INVESTMENT IN CHINESE JOINT VENTURE
The Company has entered into a joint venture with an entity in China to
establish and operate a product reconditioning and manufacturing facility
located in China. The amount of the Company's joint venture investment was
$350,000 at March 31, 1996.
F-18
<PAGE> 68
====================================== ===================================
NO DEALER, SALES REPRESENTATIVE, OR
OTHER INDIVIDUAL HAS BEEN AUTHORIZED
TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH
THIS OFFERING OTHER THAN THOSE 1,262,500 SHARES
CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES BY ANY LOGO
PERSON IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR COMMON STOCK
ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Prospectus Summary.......................... 3
Risk Factors................................ 6
The Company................................. 13
Use of Proceeds............................. 13
Dividend Policy............................. 14
Capitalization.............................. 15
Dilution.................................... 16
Selected Financial Data..................... 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 18
Business.................................... 25 ----------
Management.................................. 34 PROSPECTUS
Certain Transactions........................ 41 ----------
Principal and Selling Stockholders.......... 42
Description of Capital Stock................ 43
Shares Eligible for Future Sale............. 45
Underwriting................................ 46
Legal Matters............................... 48
Experts..................................... 48
Additional Information...................... 48
Index to Financial Statements............... F-1
</TABLE>
UNTIL , 1996 (25 DAYS AFTER
THE DATE OF THIS PROSPECTUS), ALL DEALERS THE BOSTON GROUP, L.P.
EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS. , 1996
====================================== ===================================
<PAGE> 69
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sales of Common Stock described in the Registration Statement.
<TABLE>
<S> <C>
SEC registration fee................................................... $ 2,977.61
NASD filing fee........................................................ 1,461.88
Nasdaq National Market application and registration fees............... 20,647.00
Representative's non-accountable expense allowance*.................... 208,312.50
Legal fees and expenses*............................................... 180,000.00
Accounting fees and expenses*.......................................... 55,000.00
Printing and engraving expenses*....................................... 70,000.00
Blue Sky fees and expenses*............................................ 10,000.00
Transfer Agent's fees*................................................. 10,000.00
Miscellaneous (including fee to Alan Wishnow)*......................... 91,601.01
-----------
TOTAL................................................................ $650,000.00
==========
</TABLE>
- ---------------
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Seven of the Company's Certificate of Incorporation limits, to the
fullest extent permitted by Delaware law, directors' personal liability to the
Company or its stockholders for monetary damages or breach of fiduciary duty.
Section 102 of the Delaware General Corporation Law, as amended, enables a
corporation to eliminate or limit personal liability of members of its board of
directors for violations of their fiduciary duty of care. However, Delaware law
does not permit the elimination of a director's liability for breaching his duty
of loyalty, failing to act in good faith, engaging in intentional misconduct,
knowingly violating a law, unlawfully paying a dividend or approving a stock
repurchase, or obtaining an improper personal benefit. The limitation of
liability provided by the statute continues after a director has ceased to
occupy such a position. The statute has no effect on the availability of
equitable remedies, such as an injunction or rescission, for breach of fiduciary
duty. See Exhibits 3A and 3B to this Registration Statement.
Article Eight of the Company's Certificate of Incorporation and Article
Eight of the Company's Bylaws require indemnification of Directors and Officers
of the Company to the full extent permitted by Delaware law for claims against
them in their official capacities, including stockholders' derivative actions.
These provisions require that the Company advance expenses incurred in the
defense of such claims and continue the right of indemnification for persons who
have ceased to be directors or officers and permits the Company to enter into
indemnification agreements with its directors and officers. See Exhibits 3A and
3B to this Registration Statement.
Section 145 of the Delaware General Corporation Law, as amended, applies to
the Company and provides for the indemnification of officers and directors in
specified instances. It permits a corporation, pursuant to a bylaw provision or
an indemnity contract, to pay an officer's or director's litigation expenses in
advance of a proceeding's final disposition, and provides that rights arising
under an indemnity agreement or bylaw provision may continue as to a person who
has ceased to be a director or officer.
II-1
<PAGE> 70
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In connection with the Recapitalization, the Company has recently
undertaken to cancel certain stock options and terminate its phantom stock plan
in consideration for other options and promissory notes payable by the Company.
As an incident to the implementation of the Company's 1996 Plan and
Non-Statutory Plan discussed in this Prospectus, the Company will grant options
for an aggregate of approximately 402,000 shares to various individuals. Neither
the options nor the shares underlying these option plans have been registered
under the Securities Act of 1933. The grant of options, if and when made, will
be in reliance on the exemption made available by Rule 701 adopted under the
Securities Act of 1933, implementing Section 3(b) of such Act. Additionally, as
an incident to this Offering and predicate to the Offering, outstanding shares
of Preferred Stock and Common Stock held by the four stockholders of the Company
were exchanged for shares of Common Stock of the Company in reliance on the
exemption set forth in Sections 3(a)(9) and 4(2) of the Securities Act of 1933.
Other than as described above, there have been no sales of the capital
stock by the Registrant within the past three years.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
A. EXHIBITS:
<TABLE>
<CAPTION>
PAGE OR
EXHIBIT METHOD OF
NUMBER DESCRIPTION FILING
- ------- -------------------------------------------------------------------------- ---------
<S> <C> <C>
1-A Form of Underwriting Agreement Page
3-A Restated Certificate of Incorporation of Berel Industries, Inc. **
3-B Bylaws of Berel Industries, Inc. **
3-C Amendment of Articles of Incorporation of Craig Consumer Electronics, Inc. **
3-D Certificate of Amendment Page
4-A Specimen of Common Stock Certificate **
4-B Form of Representative's Warrant Agreement Page
5 Opinion and Consent of Keesal, Young & Logan Page
10-A Loan Agreement with BTCC **
10-B Cerritos Lease **
10-C Hong Kong Lease **
10-D Chinese Joint Venture Agreement **
10-E Revised Form of Proposed Employment Agreement -- Richard Berger **
10-F Form of Proposed Indemnity Agreement for Directors **
10-G Revised Form of Proposed Subordinated Note **
10-H Revised Incentive Stock Option Plan **
10-I Revised Non-Qualified Stock Option Plan **
10-J Revised Berger Option Agreement **
10-K Revised Miller Option Agreement **
10-L Employment Agreement of Donna Richardson **
10-M Employment Agreement of Bonnie Metz **
10-N Employment Agreement of Anthony Mirando **
10-O Subordinated Note to Richard Berger Page
23-A Consent of Arthur Andersen LLP Page
23-B Consent of Keesal, Young & Logan, P.C. (See Exhibit 5) **
24 Powers of Attorney **
99-A Consent of Bernard Taran **
99-B Consent of James Koblensky **
</TABLE>
- ---------------
* To be filed by amendment
** Previously filed
II-2
<PAGE> 71
B. FINANCIAL STATEMENT SCHEDULES:
<TABLE>
<CAPTION>
PAGE OR
EXHIBIT METHOD OF
NUMBER DESCRIPTION FILING
- ------- ------------------------------------------------------------------------- ---------
<S> <C> <C>
Schedule for years ended December 31, 1993, 1994, and 1995.
V. Valuation and qualifying accounts **
</TABLE>
- ---------------
** Previously filed
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. 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
offered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
The undersigned registrant hereby undertakes that:
(i) For purposes of determining liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
a registration statement filed pursuant to Rule 430A and contained in the
form of a prospectus filed by the registrant pursuant to the Rule 424(b)(1)
or (4) or Rule 497(h) under the Securities Act shall be deemed to be part
of the registration statement as of the time it was declared effective.
(ii) For the purpose of determining liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
II-3
<PAGE> 72
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to Registration Statement No. 333-1868 to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Cerritos, State of California, on May 15, 1996.
CRAIG CONSUMER ELECTRONICS, INC.
/s/ RICHARD I. BERGER
BY:
Richard I. Berger
President
DATED: May 15, 1996
Pursuant to the requirements of the Securities Exchange Act of 1933, this
Amendment No. 3 to Registration Statement No. 333-1868 has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
- ------------------------------------- ----------------------------------------- -------------
<C> <S> <C>
/s/ RICHARD I. BERGER Chairman of the Board and President, May 15, 1996
- ------------------------------------- (Principal Executive Officer), Director
Richard I. Berger
/s/ DONNA RICHARDSON Treasurer and Chief Financial Officer, May 15, 1996
- ------------------------------------- (Principal Financial and Accounting
Donna Richardson Officer), Secretary
/s/ PETER BEHRENDT Director May 15, 1996
- -------------------------------------
Peter Behrendt
/s/ RICHARD MILLER Director May 15, 1996
- -------------------------------------
Richard Miller
</TABLE>
- ---------------
* Executed pursuant to power of attorney by Richard I. Berger.
II-4
<PAGE> 73
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
PAGE OR
EXHIBIT METHOD
NUMBER DESCRIPTION OF FILING
-------------
<S> <C> <C>
1-A Form of Underwriting Agreement....................................... Page
3-A Restated Certificate of Incorporation of Berel Industries, Inc....... **
3-B Bylaws of Berel Industries, Inc...................................... **
3-C Amendment of Articles of Incorporation of Craig Consumer Electronics,
Inc.................................................................. **
3-D Certificate of Amendment............................................. Page
4-A Specimen of Common Stock Certificate................................. **
4-B Form of Representative's Warrant Agreement........................... Page
5 Opinion and Consent of Keesal, Young & Logan......................... Page
10-A Loan Agreement with BTCC............................................. **
10-B Cerritos Lease....................................................... **
10-C Hong Kong Lease...................................................... **
10-D Chinese Joint Venture Agreement...................................... **
10-E Revised Form of Proposed Employment Agreement -- Richard Berger...... **
10-F Form of Proposed Indemnity Agreement for Directors................... **
10-G Revised Form of Proposed Subordinated Note........................... **
10-H Revised Incentive Stock Option Plan.................................. **
10-I Revised Non-Qualified Stock Option Plan.............................. **
10-J Revised Berger Option Agreement...................................... **
10-K Revised Miller Option Agreement...................................... **
10-L Employment Agreement of Donna Richardson............................. **
10-M Employment Agreement of Bonnie Metz.................................. **
10-N Employment Agreement of Anthony Mirando.............................. **
10-O Subordinated Note to Richard Berger.................................. Page
23-A Consent of Arthur Andersen LLP....................................... Page
23-B Consent of Keesal, Young & Logan, P.C. (See Exhibit 5)............... **
24 Powers of Attorney................................................... **
99-A Consent of Bernard Taran............................................. **
99-B Consent of James Koblensky........................................... **
</TABLE>
- ---------------
* To be filed by amendment
** Previously filed
<PAGE> 1
EXHIBIT 1-A
1,262,500 Shares of Common Stock
CRAIG CONSUMER ELECTRONICS, INC.
UNDERWRITING AGREEMENT
Los Angeles, California
May , 1996
THE BOSTON GROUP, L.P.
As Representative of the
Several Underwriters
Named in Schedule I Hereto
1999 Avenue of the Stars, Suite 2550
Los Angeles, California 90067
Ladies and Gentlemen:
Craig Consumer Electronics, Inc., a Delaware corporation (the
"Company"), Richard I. Berger, Berger Holdings and Executive Marketing, Inc.
Employee Pension Plan (collectively, "Berger"), Karl Johannsmeier
("Johannsmeier"), William Rollnick ("Rollnick") and Richard A. Miller, RAM
Investment Group, a California general partnership, and Richard Alan Miller Inc.
Employees' Pension Plan (collectively, "Miller") (Berger, Johannsmeier, Rollnick
and Miller are collectively referred to herein as the "Selling Stockholders" and
individually as a "Selling Stockholder") confirm their agreement with the
several Underwriters named in Schedule I ("Schedule I") attached hereto and
incorporated herein by this reference (the "Underwriters") with respect to the
sale by the Company and the purchase by the Underwriters, severally and not
jointly, of an aggregate of one million two hundred sixty-two thousand five
hundred (1,262,500) shares ("Firm Shares") of the Company's common stock, no par
value (the "Common Stock").
Upon notice by the Representative (as defined below), as provided in
Section 3(b) hereof, the Company, Berger, Johannsmeier, Rollnick, and Miller
shall issue and sell to the Underwriters, severally and not jointly,
thirty-seven thousand five hundred (37,500), seventy thousand two hundred
fifteen (70,215), forty-three thousand two hundred thirty (43,230), twenty-three
thousand four hundred ninety (23,490) and thirteen thousand sixty-five (13,065)
shares of Common Stock, respectively, for the purpose of covering
over-allotments, if any (collectively, the "Option Shares"), such sales to be
made in accordance with Section
<PAGE> 2
3(b) of this Agreement on a pro rata to the foregoing denominations by the
Company and the Selling Stockholders in the event that less than all of the
Option Shares are sold. The Firm Shares and the Option Shares are hereinafter
referred to collectively as the "Securities" and are more fully described in the
Registration Statement and the Prospectus referred to below.
The Company also proposes to issue and sell to The Boston Group, L.P.
(the "Representative") or its designees, individually and not in its capacity as
Representative, warrants (the "Representative's Warrants") pursuant to the
Representative's Warrant Agreement (the "Representative's Warrant Agreement"),
for the purchase of an additional one hundred twenty-five thousand (125,000)
shares of Common Stock (the "Representative's Shares"). The shares of Common
Stock issuable upon exercise of the Representative's Warrants are hereinafter
referred to as the "Warrant Shares."
1. Representations and Warranties of the Company. The Company
represents and warrants to each of the Underwriters as of the date hereof, and
as of the Closing Date and each Option Closing Date (as such terms are defined
below), if any, as follows:
(a) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and amendments
thereto, on Form S-1 (Registration No. 333-1868), including any related
preliminary prospectus (the "Preliminary Prospectus"), for the registration of
the Shares under the Securities Act of 1933, as amended (the "Act"). After the
date hereof, the Company shall not file any other amendment to such Registration
Statement which the Representative shall have reasonably objected to after
having been furnished with a copy thereof unless the Company's outside counsel
reasonably determines in a written opinion that such amendment or supplement is
required to be filed pursuant to applicable law. 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 and including any information omitted therefrom pursuant to
Rule 430A under the Act and included in the Prospectus (as hereinafter defined);
the term "Preliminary Prospectus" means each prospectus subject to completion
filed with such registration statement or any amendments 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); the term
"Prospectus" means: (i) if the Company relies on Rule 434 under the Act, the
Term Sheet relating to the Securities that is first filed pursuant to Rule
424(b)(7) under the Act, together with the Preliminary Prospectus identified
therein that such Term Sheet supplements, (ii) if the Company does not rely on
Rule 434 under the Act, the prospectus first filed with the Commission pursuant
to Rule 424(b) and 430A under the Act, or (iii) if the Company does not rely on
Rule 434 under the Act and if no prospectus is required to be filed pursuant to
Rule 424(b) under the Act, the prospectus included in the Registration
Statement; and the term "Term Sheet" means any term sheet that satisfies the
requirements of Rule 434 under the Act. Any reference hereto to the "date" of a
Prospectus that includes a Term Sheet shall mean the date of such Term Sheet.
For purposes hereof, "Rules and Regulations" means the rules and regulations
adopted by the Commission under the Act or the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), as applicable.
-2-
<PAGE> 3
(b) Neither the Commission nor any state regulatory authority has
issued any order preventing or suspending the use of any Preliminary Prospectus,
the Registration Statement or the Prospectus or any part of any of the
foregoing, and no proceedings for a stop order suspending the effectiveness of
the Registration Statement or any part thereof have been initiated or are
pending, contemplated or threatened. Each Preliminary Prospectus and the
Registration Statement (including each amendment thereto), at the time of filing
thereof, complied with the requirements of the Act and the Rules and
Regulations, and neither any Preliminary Prospectus nor the Registration
Statement, at the time of filing thereof, contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading.
(c) When the Registration Statement becomes effective and at all
times subsequent thereto up to and including the Closing Date and each Option
Closing Date, if any, and during such other periods as a prospectus may be
required to be delivered in connection with sales by any Underwriter or a
dealer, the Registration Statement and the Prospectus will contain all
statements which are required to be stated therein in accordance with the Act
and the Rules and Regulations, and will comply with the requirements of the Act
and the Rules and Regulations, and at and through such dates, neither the
Registration Statement, the Prospectus nor any amendment thereof or supplement
thereto will contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading.
(d) The Company does not own an interest in any corporation,
partnership, trust, joint venture or other entity. The Company has been duly
organized and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation. The Company is duly qualified and
licensed and in good standing as a foreign corporation, in each jurisdiction in
which it owns or leases property or in which the conduct of its business, as
currently being conducted, requires such qualification or licensing. The Company
has all requisite power and authority (corporate, if applicable, and other), and
has obtained any and all authorizations, approvals, orders, licenses,
certificates, franchises and permits of and from all governmental or regulatory
officials, agencies, authorities and bodies (including, without limitation,
those having jurisdiction over environmental, health or similar matters)
necessary to own or lease its properties and conduct its business as described
in the Prospectus other than those authorizations, approvals, orders, licenses,
certificates, franchises and permits of and from all governmental or regulatory
officials, agencies, authorities and bodies (including, without limitation,
those having jurisdiction over environmental, health or similar matters) which,
singularly or in the aggregate, the failure to obtain would not materially and
adversely affect the condition (financial or otherwise), earnings, business
affairs, position, prospects, stockholders' equity, operations, properties,
businesses or results of operations of the Company taken as a whole. The Company
is and has been doing business in substantial compliance with all such
authorizations, approvals, orders, licenses, certificates, franchises and
permits and all federal, state and local laws, rules, regulations and orders;
and the Company has not received any notice of proceedings relating to the
revocation or modification of any such authorizations, approvals, orders,
licenses,
-3-
<PAGE> 4
certificates, franchises or permits which, singularly or in the aggregate, if
the subject of an unfavorable decision, ruling or finding, would materially and
adversely affect the condition (financial or otherwise), earnings, business
affairs, position, prospects, stockholders' equity, operations, properties,
businesses or results of operations of the Company. The disclosure in the
Registration Statement concerning the effects of federal, state and local laws,
rules, regulations and orders on the Company's business as currently conducted
and as contemplated are correct in all material respects and do not omit to
state a material fact required to be stated therein or necessary to make the
statements contained therein, in light of the circumstances in which they were
made, not misleading.
(e) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus, and any amendment or supplement
thereto, under "Capitalization" and "Description of Capital Stock" and will have
the adjusted capitalization set forth therein on the Closing Date and each
Option Closing Date, if any, based upon the assumptions set forth therein. The
Company is not a party to or bound by any instrument, agreement or other
arrangement or understanding providing for or requiring it to issue any capital
stock, rights, warrants, options or other securities, except for this Agreement,
the Representative's Warrant Agreement, the Company's Incentive Stock Option
Plan (the "Incentive Plan"), the Company's Non-Statutory Stock Option Plan (the
"Non-Statutory Plan"), and options to purchase 341,724 and 41,204 shares of
Common Stock at an exercise price of $1.82 per share issued to Richard Berger
and Alan Miller. The Securities and all other securities issued or issuable by
the Company conform or, when issued and paid for, will conform, in all respects
to the description thereof contained in the Registration Statement and the
Prospectus. All issued and outstanding securities of the Company have been duly
authorized and validly issued and are fully paid and non-assessable; the holders
thereof have no rights of rescission with respect thereto, and the holders of
ownership interests in the Company are not subject to personal liability by
reason of being such holders; and none of such securities was issued in
violation of the preemptive rights or other similar rights of any holders of any
security of the Company. The Securities are not and will not be subject to any
preemptive or other similar rights of any stockholder, have been duly authorized
and, when issued, paid for and delivered in accordance with the terms hereof,
will be validly issued, fully paid and non-assessable; the holders thereof will
not be subject to any liability solely as such holders; all corporate action
required to be taken for the authorization, issue and sale of the Securities has
been duly and validly taken; and the certificates representing the Securities,
when delivered by the Company, will be in due and proper form. Upon the issuance
and delivery of the Securities pursuant to the terms hereof and the
Representative's Warrant Agreement and Representative's Warrants and
Representative's Shares to be sold by the Company hereunder and thereunder,
respectively, the Underwriters and the Representative, respectively, will
acquire good and marketable title to such Securities and Representative's
Warrants and Representative's Shares, free and clear of any lien, charge, claim,
encumbrance, pledge, security interest, defect or other restriction of any kind
whatsoever.
(f) The financial statements of the Company and the notes thereto
included in the Registration Statement, each Preliminary Prospectus and the
Prospectus fairly present the financial position, results of operations and cash
flow and changes in financial position and stockholders' equity of the Company
at the respective dates and for the
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<PAGE> 5
respective periods to which they apply, and such financial statements have been
prepared in conformity with generally accepted accounting principles and the
Rules and Regulations, consistently applied throughout the periods involved. The
as adjusted and/or pro forma combined financial information included in each
Preliminary Prospectus, the Registration Statement and the Prospectus present
fairly the information shown therein, have been prepared in conformity with the
Rules and Regulations and have been properly compiled on the basis described
therein consistent with the historical financial statements included in the
Registration Statement, each Preliminary Prospectus and the Prospectus. The
assumptions underlying such as adjusted and/or pro forma financial information
are reasonable, and the adjustments made therein are appropriate to give effect
to the transactions or circumstances referred to therein. There has been no
material adverse change, or development involving a material prospective change,
in the condition (financial or otherwise), earnings, business affairs, position,
prospects, stockholders' equity, operations, obligations, properties, businesses
or results of operations of the Company, whether or not arising in the ordinary
course of business, since the date of the financial statements included in the
Registration Statement and the Prospectus, except as described therein. The
outstanding debt, the property and assets (both tangible and intangible) and the
businesses of the Company conform in all material respects to the descriptions
thereof contained in the Registration Statement and the Prospectus. The
financial information set forth in the Prospectus under the headings "Summary -
Summary Financial Data," "Dilution," "Capitalization," "Selected Financial Data"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" fairly presents the information set forth therein and such financial
information has been derived from or compiled on a basis consistent with that of
the audited financial statements included in the Registration Statement, each
Preliminary Prospectus and the Prospectus as described above.
(g) The Company (i) has paid or made adequate provision for payment
of all federal, state and local taxes for which it is liable, including, but not
limited to, withholding taxes and amounts payable under Chapters 21 through 24
of the Internal Revenue Code of 1986, as amended (the "Code"), and any other
assessments, fines or penalties leveled against it and has furnished all
information returns it is required to furnish pursuant to the Code or otherwise,
(ii) has established adequate reserves for such taxes, assessments, fines or
penalties which are not due and payable and (iii) does not have any tax
deficiency or claims outstanding, proposed or assessed against it.
(h) The Company has filed a Form 8-A with the Commission providing
for the registration under the Exchange Act of its Common Stock, which
registration shall become effective concurrently with the effectiveness of the
Registration Statement
(i) The Company maintains insurance policies, including, without
limitation, general liability, property and personal liability insurance, and
surety bonds which insure the Company, its employees and such other persons to
whom such entities may become liable against such losses and risks generally
insured against by reasonably comparable businesses.
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<PAGE> 6
(j) There is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental or other proceeding (including,
without limitation, those pertaining to environmental, health or similar
matters) pending or, to the best of the Company's knowledge, contemplated or
threatened (or circumstances that may give rise to the same), to which the
Company is subject or to which any property or assets (tangible or intangible)
of the Company is subject (or circumstances that may give rise to the same)
which (i) questions the validity of the capital stock of the Company, of this
Agreement, of the Representative's Warrant Agreement or of any action or
transaction contemplated by this Agreement, the Representative's Warrant
Agreement, the Registration Statement or the Prospectus, (ii) is required to be
disclosed in the Registration Statement which is not so disclosed (and such
proceedings as are summarized in the Registration Statement are accurately
summarized in all respects) or (iii) might, if adversely determined, materially
and adversely affect the condition (financial or otherwise), earnings, business
affairs, position, prospects, stockholders' equity, operations, properties,
businesses or results of operations of the Company.
(k) The Company has full legal right, power and authority to
authorize, issue, deliver and sell the Securities, to enter into this Agreement
and the Representative's Warrant Agreement and to consummate the transactions
contemplated in such agreements, the Registration Statement and the Prospectus;
and this Agreement has been duly and properly authorized, executed and delivered
by the Company. This Agreement constitutes a legal, valid and binding agreement
of the Company enforceable against the Company in accordance with its terms
(except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
relating to or affecting enforcement of creditors, rights and the application of
equitable principles in any action, legal or equitable, and except as rights to
indemnity or contribution may be limited by applicable law).
(l) Neither the issuance, delivery and sale of the Securities, the
execution, delivery or performance of this Agreement, or Representative's
Warrant Agreement, the consummation of the transactions contemplated herein,
therein, in the Registration Statement and in the Prospectus, the consummation
of the Recapitalization (as hereinafter defined), nor the conduct of the
Company's business as described in the Registration Statement, the Prospectus
and any amendments thereof or supplements thereto, conflicts or will conflict
with, or results or will result in any breach or violation of any of the terms,
covenants, conditions or provisions of, or constitutes or will constitute (with
notice, the lapse of time or both) a default under, or results or will result in
the creation or imposition of any lien, charge, claim, encumbrance, pledge,
security interest, defect or other restriction or equity of any kind whatsoever
upon any property or assets (tangible or intangible) of the Company (except as
described in the Prospectus) pursuant to the terms of, (i) the Certificate of
Incorporation or bylaws of the Company, (ii) any license, contract, indenture,
mortgage, installment sale agreement, lease, deed of trust, voting trust
agreement, stockholders, agreement, purchase order, note, loan or credit
agreement or any other material agreement or instrument evidencing an obligation
for borrowed money, or any other material agreement or instrument to which the
Company is a party or by which it is or may be bound or to which any of its
properties or assets (tangible or intangible) is or may be
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<PAGE> 7
subject or (iii) any law, statute, judgment, decree, order, rule or regulation
applicable to the Company of any arbitrator, court, administrative agency or
other governmental or regulatory official, agency authority or body (including,
without limitation, those having jurisdiction over environmental, health or
similar matters) having jurisdiction over the Company or any of its activities
or properties.
(m) No consent, approval, authorization, registration,
qualification, or order of, and no filing with, any court, administrative agency
or other government or regulatory official, agency, authority or body is
required for the issuance, delivery and sale of the Securities pursuant to this
Agreement, the Prospectus and the Registration Statement, the performance of
this Agreement and the Representative's Warrant Agreement and the consummation
of the transactions contemplated hereby, by the Registration Statement and by
the Prospectus, except under the Act, state securities or "blue sky" laws and
the rules of the National Association of Securities Dealers, Inc. (the "NASD")
in connection with the Underwriters' purchase and distribution of the
Securities.
(n) All agreements, contracts or other documents or copies of
executed agreements, contracts or other documents filed or required to be filed
as exhibits to the Registration Statement to which the Company therein is a
party or by which it may be bound are accurately described and fairly present
the information required to be shown with respect thereto by Form S-1 or the
Rules and Regulations; there are no agreements, contracts or other documents
which are required by the Act to be described in the Registration Statement or
filed as exhibits to the Registration Statement which are not described or filed
as required; and the exhibits which have been filed are complete and correct
copies of the agreements, contracts or other documents of which they purport to
be copies.
(o) Subsequent to the respective dates as of which information is
set forth in the Registration Statement and the Prospectus, and except as may
otherwise be indicated or contemplated herein or therein, the Company has not
done, or agreed to do, any of the following, (i) issued any securities or
incurred any liability or obligation, direct, indirect or contingent, for
borrowed money, (ii) entered into any transaction other than in the ordinary
course of business or (iii) except for the payment of accrued dividends in the
form of promissory notes as described in the Prospectus under "Dividend Policy,"
declared or paid any dividend or made any other distribution on or in respect of
any class of its capital stock; and, subsequent to such dates, there has not
been any change in the capital stock or any change in the debt (long- or
short-term) or liabilities or obligations or any material change in the
condition (financial or otherwise), earnings, business affairs, position,
prospects, stockholders' equity, operations, properties, businesses or results
of operations of the Company except for debt, liabilities and obligations
incurred in the normal course of business consistent with past practices.
(p) No material default exists, and no event has occurred which,
with notice, lapse of time or both, would constitute a default in the due
performance and observance of any term, covenant, condition or provision of any
license, contract, indenture, mortgage, installment sale agreement, lease, deed
of trust, voting trust agreement, stockholders' agreement, purchase order, note,
loan or credit agreement or any other
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<PAGE> 8
material agreement or instrument evidencing an obligation for borrowed money, or
any other material agreement or instrument to which the Company is a party or by
which it is or may be bound or its properties or assets (tangible or intangible)
are or may be subject; except where such default would not have a material
adverse effect on the condition (financial or otherwise), earnings, business
affairs, position, prospects, stockholders' equity, operations, properties,
businesses or results of operations of the Company taken as a whole.
(q) The Company believes it has generally enjoyed a satisfactory
employer-employee relationship with its employees and it is in substantial
compliance with all federal, state and local laws, rules, regulations and orders
respecting employment and employment practices, including, without limitation,
terms and conditions of employment and wages and hours. There are no pending
investigations involving the Company by the U.S. Department of Labor, the
Department of Justice - Immigration and Naturalization Service or any other
governmental or regulatory official, agency, authority or body responsible for
the enforcement of such federal, state or local laws, rules, regulations and
orders. There is no unfair labor practice charge or complaint pending,
threatened or contemplated against the Company before the National Labor
Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage
pending, threatened or contemplated against or involving the Company and none
has ever occurred. There are no existing collective bargaining agreements with
the Company. No representation question exists respecting the employees of the
Company and no collective bargaining agreement or modification thereof is
currently being negotiated by or on behalf of the Company. No grievance or
arbitration proceeding is pending, threatened or contemplated under any expired
collective bargaining agreements of the Company. No labor dispute with the
employees of the Company is pending, threatened or contemplated.
(r) The Company does not maintain, sponsor, contribute, have any
obligation to contribute or have any obligation with respect to, or at any time
previously maintained, sponsored, contributed, had any obligation to contribute
or had any obligation with respect to, any program or arrangement that is an
"employee pension benefit plan," an "employee welfare benefit plan" or a
"multi-employer plan" (each an "ERISA Plan"), as such terms are defined in
Sections 3(2), 3(l) and 3(37), respectively, of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"). The Company does not maintain,
sponsor, contribute, have any obligation to contribute or have any obligation
with respect to or has it at any time previously maintained, sponsored,
contributed, had any obligation to contribute or had any obligation with respect
to, a "defined benefit plan," as defined in section 3(35) of ERISA. No ERISA
Plan (or any trust created thereunder) has engaged in a "prohibited transaction"
within the meaning of Section 406 of ERISA or Section 4975 of the Code which
could subject the Company to any tax penalty on prohibited transactions and
which has not adequately been corrected. Each ERISA Plan is in compliance with
all material reporting, disclosure and other requirements of the Code and ERISA
as they relate to any such ERISA Plan. Determination letters have been received
from the Internal Revenue Service with respect to each ERISA Plan which is
intended to comply with Code Section 401(a), stating that such ERISA Plan and
the attendant trust are qualified thereunder. The Company is not in any way
liable in connection with a "multiemployer plan" from which it has ever
completely or partially withdrawn.
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<PAGE> 9
(s) Neither the Company nor any of its employees, directors,
stockholders or affiliates (within the meaning of the Rules and Regulations) of
any of the foregoing, has taken, directly or indirectly, any action designed to
or which has constituted or which might be expected to cause or result in, under
the Exchange Act or otherwise, the illegal stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Securities or otherwise.
(t) The Company owns all trademarks, trade names, service marks,
service names, copyrights, patents and patent applications or any licenses or
rights to the foregoing, which, individually or in the aggregate, are material
to its condition (financial or otherwise), earnings, business affairs, position,
prospects, stockholders' equity, operations, properties, businesses or results
of operations, and, except as specifically disclosed in the Prospectus, no such
trademarks, trade names, service marks, service names, copyrights or patents are
in dispute or are in conflict with any right of any other person or entity.
(u) The Company has the unrestricted right to use all trade secrets,
know-how (including, without limitation, all unpatented and/or unpatentable
proprietary or confidential information, systems or procedures), inventions,
technology, designs, processes, works of authorship, computer programs and
technical data and information that are material to the development,
manufacture, operation and sale of all products and services sold or proposed to
be sold by the Company, free and clear of and without violating any right, lien
or claim of others, including, without limitation, former employers of their
employees.
(v) The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property owned
or leased, by it.
(w) Arthur Andersen LLP, whose report is filed with the Commission
as a part of the Registration Statement, each Preliminary Prospectus and the
Prospectus, is an accounting firm of independent certified public accountants as
required by the Act and the Rules and Regulations.
(x) The Company has caused to be executed agreements pursuant to
which each of the Selling Stockholders (and any affiliated entities of such
Selling Stockholders that own Common Stock), who collectively own all of the
issued and outstanding shares of Common Stock, has agreed, for a period of
twelve (12) months following the effective date of the Registration Statement,
not to, directly or indirectly, offer, offer to sell, sell, grant an option for
the purchase or sale of, transfer, assign, pledge, hypothecate or otherwise
encumber or enter into any agreement to do any of the foregoing with respect to
any securities issued or issuable by the Company, whether or not owned by or
registered in the name of such person, or dispose of any interest therein
(whether pursuant to Rule 144 under the Act or otherwise), without the prior
written consent of the Representative (collectively, the "Lock-Up Agreements").
(y) Other than the payment by the Company of $50,000 to Alan Wishnow
described in the Prospectus, there are no claims, payments, issuances,
agreements,
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<PAGE> 10
arrangements or understandings, whether oral or written, for services in the
nature of a finder's fee, brokerage fee, origination fee or otherwise with
respect to the offerings contemplated by this Agreement, the Representative's
Warrant Agreement, the Registration Statement and the Prospectus or any other
arrangements, agreements, understandings, payments or issuances that may affect
the Underwriters' compensation as determined by the NASD other than as disclosed
in the Registration Statement and Prospectus and other than as the
Representative may itself have agreed to with third parties.
(z) The Securities have been approved for quotation on the Nasdaq
National Market (the "NNM").
(aa) Neither the Company nor any officer, stockholder, employee,
agent nor any other person acting on behalf of the Company has, directly or
indirectly, given or agreed to give any money, gift or similar benefit (other
than legal price concessions to customers in the ordinary course of business) to
any customer, supplier, employee or agent of a customer or supplier, or any
official or employee of any governmental agency or instrumentality of any
government or any political party or candidate for office or any other person
who was, is or may be in a position to help or hinder the business of the
Company (or assist them in connection with any actual or proposed transactions)
which might subject the Company or any other such person to any damage or
penalty in any civil, criminal or governmental action, suit, inquiry,
investigation, litigation or proceeding.
(ab) Except as set forth in the Prospectus under "Certain
Transactions" and "Management - Compensation Committee Interlocks and Insider
Participation," no officer, director or stockholder of the Company, and no
affiliate or associate (as those terms are defined in the Rules and Regulations)
of any of the foregoing persons or entity, has or has had, either directly or
indirectly, (i) an interest in any person or entity which (A) furnishes or sells
services or products which are furnished or sold or are proposed to be furnished
or sold by the Company or (B) purchases from or sells or furnishes to the
Company any products or services or (ii) a beneficial interest in any contract,
arrangement, understanding or agreement to which the Company is a party or by
which the Company or any of its property or assets (tangible or intangible) may
be bound or affected. Except as set forth in the Prospectus under "Certain
Transactions" and "Management Compensation Committee Interlocks and Insider
Participation," there are no existing agreements, arrangements, understandings
or transactions, or proposed agreements, arrangements, understandings or
transactions, between or among the Company and any officer or director of the
Company or any person listed in the "Principal and Selling Stockholders" section
of the Prospectus, or any affiliate or associate of any of the foregoing persons
or entity.
(ac) The minute books of the Company have been made available to the
Representative and contain a complete summary of all meetings and actions of the
directors and stockholders of the Company since the time of its incorporation,
and reflect all material transactions referred to in such minutes accurately in
all material respects.
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<PAGE> 11
(ad) Except as described in the Registration Statement, no person,
corporation, trust, partnership, association or other entity has the right to
include or register any securities of the Company in the Registration Statement
or to require that any registration statement be filed by the Company or, if
filed, to include any security in such registration statement. No person,
corporation, trust, partnership, association or other entity holds any
antidilution rights with respect to any securities of the Company.
(ae) Any certificate signed by any officer of the Company, and
delivered to the Representative or to the Underwriters' Counsel shall be deemed
a representation and warranty by the Company to the Underwriters as to the
matters covered thereby.
(af) The Company has (i) entered into an employment agreement with
each of Richard Berger, Donna Richardson, Bonnie Metz and Anthony Mirando in the
forms filed as Exhibits 10-E, 10-L, 10-M and 10-N to the Registration Statement,
and (ii) purchased key-man life insurance on the life of Richard Berger in the
amount of $1,000,000 which policy names the Company as the sole beneficiary
thereof.
(ag) The Representative's Warrant Agreement has been duly and
validly authorized by the Company and, assuming due execution by the
Representative, constitutes or will constitute a valid and legally binding
agreement of the Company, enforceable against the Company in accordance with its
terms (except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
relating to or affecting enforcement of creditors' rights and the application of
equitable principles in any action, legal or equitable, and except as rights to
indemnity or contribution may be limited by applicable law). The Company has
reserved and available for issuance a sufficient number of shares of Common
Stock to be issued upon exercise of the Representative's Warrants.
(ah) [Intentionally omitted]
(ai) The Company is familiar with the Investment Company Act of
1940, as amended (the "1940 Act"), and the rules and regulations thereunder, and
has in the past conducted, and intends in the future to conduct, its affairs in
such a manner as to ensure that it will not become an "investment company"
within the meaning of the 1940 Act and such rules and regulations.
(aj) The books, records and accounts of the Company accurately and
fairly reflect, in reasonable detail, the transactions and dispositions of the
assets of the Company. The system of internal accounting controls maintained by
the Company and is 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 (A) to permit
preparation of financial statements in accordance with generally accepted
accounting principals and (B) to maintain accountability for assets; (iii)
access to assets is permitted only in accordance with management's general or
specific authorization;
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<PAGE> 12
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 difference.
(ak) All transactions necessary to complete the conversion of
250,000 shares of outstanding Series A Preferred Stock into [1,300,052] shares
of Common Stock and the subsequent 3.64-to-one reverse stock split on the then
outstanding shares of Common Stock (collectively, the "Recapitalization") have
been consummated and the Recapitalization was effectuated as described in the
Prospectus on or prior to the date of this Agreement. All necessary corporate
proceedings of the Board of Directors and stockholders of the Company had been
duly taken to authorize the Recapitalization. The Company's phantom stock option
is terminated and promissory notes in the amounts and on the terms indicated in
the portion of the Prospectus entitled "Certain Transactions" shall have been
issued to the individuals named therein. No consent, authorization, approval,
order, license, certificate or permit of or from, or declaration or filing with,
any federal, state, local or other governmental authority or any court of other
tribunal which is required by the Company for the completion of the
Recapitalization has not been obtained. No consent, approval or authorization of
any party to any license, contract, indenture, mortgage, installment sale
agreement, lease, deed of trust, voting trust agreement, stockholders,
agreement, purchase order, note, loan or credit agreement or any other material
agreement or instrument evidencing an obligation for borrowed money, or any
other material agreement or instrument to which the Company is a party or by
which it is or may be bound or to which its properties or assets (tangible or
intangible) are or may be subject, was required for the completion of the
Recapitalization that was not obtained. The implementation of the
Recapitalization does not conflict or will not conflict with, does not result
and will not result in any breach or violation of any of the terms, covenants,
conditions or provisions of, does not constitute or will not constitute (with
notice, the lapse of time or both) a default under, results or will result in
the creation or imposition of any lien, charge, claim, encumbrance, pledge,
security interest, defect or other restriction or equity of any kind whatsoever
upon any property or assets (tangible or intangible) of the Company pursuant to
the terms of, (i) the certificate of incorporation or bylaws of the Company,
(ii) any license, contract, indenture, mortgage, installment sale agreement,
lease, deed of trust, voting trust agreement, stockholders' agreement, purchase
order, note, loan or credit agreement or any other material agreement or
instrument evidencing an obligation for borrowed money, or any other material
agreement or instrument to which the Company is a party or by which it is or may
be bound or to which any of its properties or assets (tangible or intangible)
are or may be subject or (iii) any law, statute, judgment, decree, order, rule
or regulation applicable to the Company of any arbitrator, court, administrative
agency or other governmental or regulatory official, agency authority or body
(including, without limitation, those having jurisdiction over environmental,
health or similar matters) having jurisdiction over the Company or its
activities or properties.
2. Representations and Warranties of the Selling Stockholders. Each of
the Selling Stockholders, severally but not jointly represents and warrants to,
and covenants and agrees with, each of the Underwriters as of the date hereof,
as of the Closing Date and as of each Option Closing Date, as follows:
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<PAGE> 13
(a) All authorizations, orders, consents and other approvals
necessary for the execution and delivery of this Agreement and the sale and
delivery of the portion of the Option Shares to be sold by the Selling
Stockholders have been duly and validly given, and the Selling Stockholders have
full legal right, power and authority to enter into this Agreement and to sell
and deliver such portion of the Option Shares to the Underwriters. This
Agreement constitutes a legal, valid and binding agreement of the Selling
Stockholders enforceable against each of the Selling Stockholders in accordance
with its terms (except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of general
application relating to or affecting enforcement of creditors' rights and the
application of equitable principles in any action legal or equitable, and except
as rights to indemnity or contribution may be limited by applicable law).
(b) Each Selling Stockholder has, and on the Closing Date and each
Option Closing Date will have, good, valid and marketable title to the Option
Shares being sold by him or it. Such Option Shares, at each such date, have not
previously been sold except pursuant to and as contemplated by this Agreement;
and upon the delivery of and payment for the Option Shares, good, valid and
marketable title thereto, free and clear of all liens, charges, claims,
encumbrances, pledges, security interests, defects or other restrictions or
equities of any kind whatsoever, will pass to the Underwriters;
(c) Neither the execution, delivery or performance of this
Agreement, any Power of Attorney and Custody Agreement to be executed by the
Selling Stockholders in connection with the transactions contemplated by this
Agreement (the "Power-of-Attorney" and the "Custody Agreement," respectively),
the delivery and sale of the Option Shares nor the consummation of the
transactions contemplated by this Agreement, the Registration Statement and the
Prospectus conflicts or will conflict with or results or will result in any
breach or violation of any of the terms, covenants, conditions or provisions of,
or constitutes or will constitute (with notice, the lapse of time or both) a
default under, or results or will result in the creation or imposition of any
lien, charge, claim, encumbrance, pledge, security interest, defect or other
restriction or equity of any kind whatsoever upon any property or assets
(tangible or intangible) of any Selling Stockholder pursuant to the terms of,
(i) any license, contract, indenture, mortgage, installment sale agreement,
lease, deed of trust, voting trust agreement, purchase order, note, loan or
credit agreement or any other material agreement or instrument evidencing an
obligation for borrowed money, or any other material agreement or instrument to
which any Selling Stockholder is a party or by which he or it is or may be bound
or to which any of his or its properties or assets (tangible or intangible) is
or may be subject or (ii) any law, statute, judgment, decree, order, rule or
regulation applicable to any Selling Stockholder of any arbitrator, court,
administrative agency or other governmental official, agency, authority or body
(including, without limitation, those having jurisdiction over environmental,
health or similar matters) having jurisdiction over such Selling Stockholder or
any of his activities or properties.
(d) No Selling Stockholder has taken, and no Selling Stockholder
will take, directly or indirectly, any action designed to or which has
constituted or which might be expected to cause or result in, under the Exchange
Act or otherwise, the
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<PAGE> 14
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities or otherwise.
(e) Each Selling Stockholder has duly delivered to the Company, as
its attorney-in-fact, certificates evidencing such Selling Stockholders portion
of the Option Shares, duly executed blank stock powers with respect thereto and
a duly executed power of attorney authorizing the Company to deliver such
certificates as part of, and in accordance with, the transactions contemplated
hereby. Such stock powers and powers of attorney are in form and substance
satisfactory to the Representative.
(f) There is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental or other proceeding pending,
contemplated or threatened (or circumstances that may give rise to the same), to
which any Selling Stockholder is subject or to which any property or assets
(tangible or intangible) of any Selling Stockholder is subject (or circumstances
that may give rise to the same) which questions the validity of this Agreement
or of any action or transaction contemplated by this Agreement, the Registration
Statement or the Prospectus.
(g) Each Selling Stockholder represents and warrants to, and agrees
with, the Underwriters to the same effect as the representation and warranties
of the Company set forth in Section 1 of this Agreement; provided, however, each
Selling Stockholder shall be liable for breach of the representations and
warranties in this Section 2(g) only for an amount not exceeding the proceeds
received by such Selling Stockholder from the sale of the Option Shares
hereunder; provided, however, that such limitation on liability for a breach of
the representations and warranties in this Section 2(g) shall not apply to
Berger.
(h) Each Selling Stockholder has reviewed the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) and the
Registration Statement, and the information regarding such Selling Stockholder
set forth therein under the caption "Principal and Selling Stockholders" is
complete and accurate.
(i) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Internal Revenue Code of 1986, as
amended, with respect to the transactions herein contemplated, each Selling
Stockholder shall deliver to the Representative prior to or on the Closing Date,
a properly completed and executed United States Treasury Department Form W-8 or
W-9 (or other applicable form of statement specified by Treasury Department
regulations in lieu thereof).
(j) Each Preliminary Prospectus, to the best knowledge of such
Selling Stockholders and, with respect to Selling Stockholders other than
Berger, without inquiry, as of its date, has conformed in all material respects
with the requirements of the Act and, as of its date, has not included any
untrue statement of a material fact or omitted to state a material fact
necessary to make the statements therein not misleading; and at the time of
effectiveness of the Registration Statement and at all times subsequent thereto,
up to the Closing Date or each Option Closing Date, as the case may be (1) the
Registration Statement
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<PAGE> 15
and the Prospectus and any amendments or supplements thereto, to the knowledge
of such Selling Stockholder, contained or will contain all statements that are
required to be stated therein in accordance with the Act and in all material
respects conformed or will in all material respects conform to the requirements
of the Act, and (2) neither the Registration Statement nor the Prospectus, nor
any amendment or supplement thereto, to the knowledge of such Selling
Stockholder, included or will include any untrue statement of a material fact or
omitted or will omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading.
(k) At any time during the period described in Section 5(f) hereof,
any such Selling Stockholder becomes aware of any change in the information
referred to in Section 2(a)(i) above, such Selling Stockholder will immediately
notify the Representative of such change.
3. Purchase, Sale and Delivery of the Securities.
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to the Underwriters the Firm Shares, and each
of the Underwriters agrees, severally and not jointly, to purchase from the
Company that number of the Firm Shares set forth opposite such Underwriter's
name, in Schedule I at a price equal to $_______ per Share.
(b) In addition, on the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company and the Selling Stockholders, severally
but not jointly, hereby grant an option to the Underwriters to purchase all or
any part of the Option Shares at a price equal to $____ per share. The Option
Shares shall be purchased, if the option is exercised as provided herein, from
the Company and the Selling Stockholders for the accounts of the several
Underwriters, severally and not jointly, in proportion to the aggregate number
of Firm Shares set forth opposite such Underwriter's name in Schedule I, except
that the respective purchase obligations of each Underwriter may be adjusted by
the Representative so that no Underwriter shall be obligated to purchase
fractional Option Shares. The option granted hereby will expire, to the extent
unexercised, forty-five (45) days after the date hereof, and may be exercised,
in the Representative's sole discretion, in whole or in part from time to time,
only for the purpose of covering over-allotments which may be made in connection
with the offering and distribution of the Firm Shares, upon notice by the
Representative to the Company setting forth the number of Option Shares as to
which the Underwriters are then exercising the option and the time and date of
payment for and delivery of any such Option Shares. Any such time and date of
delivery (an "Option Closing Date") shall be determined by the Representative,
but shall not be later than five (5) full business days after the exercise of
said option, or in any event prior to the Closing Date, unless otherwise agreed
upon by the Representative and the Company. Each time the Underwriters exercise
the option for less than all of the Option Shares, the number of Option Shares
then to be sold shall be allocated pro rata (in accordance with the allocation
set forth in the second paragraph of this Agreement) among the Company and the
Selling
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<PAGE> 16
Stockholders. Nothing herein contained shall in any way obligate the
Underwriters to exercise the option granted hereby. No Option Shares shall be
delivered unless the Firm Shares shall be simultaneously delivered or shall
theretofore have been delivered as herein provided.
(c) Payment of the purchase price for, and delivery of certificates
evidencing, the Firm Shares shall be made at the offices of the Representative
at 1999 Avenue of the Stars, Suite 2550, Los Angeles, California, or at such
other place as shall be agreed upon by the Representative and the Company. Such
delivery and payment shall be made at 10:00 a.m. (Los Angeles time) on May ___,
1996 (such time and date of payment and delivery being herein called the
"Closing Date"). In addition, in the event that any or all of the Option Shares
are purchased by the Underwriters, payment of the purchase price for, and
delivery of certificates for, such Option Shares shall be made at the
above-mentioned office of the Representative or at such other place as shall be
agreed upon by the Representative and the Company with respect to each
applicable Option Closing Date as specified in the relevant notice from the
Representative to the Company. Delivery of the certificates representing the
Firm Shares and the Option Shares, if any, shall be made to the Representative
against payment by the Underwriters of the purchase price for the Firm Shares
and the Option Shares, if any, respectively, to the order of the Company by wire
transfer or certified or official bank checks payable in Los Angeles Clearing
House funds. Certificates representing the Firm Shares and the Option Shares, if
any, respectively, shall be in definitive, fully registered form, shall bear no
restrictive legends and shall be in such denominations and registered in such
names as the Representative may request in writing at least two (2) business
days prior to the Closing Date or the relevant Option Closing Date, as the case
may be. The certificates representing the Firm Shares and the Option Shares, if
any, shall be made available to the Representative at such offices or such other
place as the Representative may designate for inspection, checking and packaging
no later than 9:30 a.m. Los Angeles time on the last business day prior to the
Closing Date or the relevant Option Closing Date, as the case may be.
(d) On the Closing Date, the Company shall issue and sell to you,
individually and not in your capacity as the Representative, or to your
designees, the Representative's Warrants for an aggregate purchase price of
fifty dollars ($50), which warrant shall entitle the holders thereof to purchase
an aggregate of an additional one hundred twenty-five thousand (125,000) shares
of Common Stock. The Representative's Warrants shall be issued pursuant to the
Representative's Warrant Agreement, substantially in the form filed as Exhibit
4-B to the Registration Statement. Payment for the Representative's Warrants
shall be made on the Closing Date. The Representative's Warrants and the
Representative's Shares underlying them shall be registered in the Registration
Statement and such Registration Statement shall be kept effective as required by
the Representative's Warrant Agreement.
4. Public Offering of the Securities. Upon the effectiveness of the
Registration Statement, the Underwriters shall make a public offering of the
Firm Shares and such of the Option Shares as the Representative may determine at
the initial price and upon the other terms set forth in the Prospectus. The
Underwriters may from time to time
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<PAGE> 17
thereafter increase or decrease the public offering price of the Securities to
such extent as the Representative, in its sole discretion, deems advisable. The
Underwriters may enter into one or more agreements as they, in their sole
discretion, deem advisable with one or more broker-dealers who shall act as
dealers in connection with such public offering.
5. Covenants and Agreements of the Company. The Company covenants and
agrees with each of the Underwriters as follows:
(a) The Company shall use its best efforts to cause the Registration
Statement and any amendments thereto to become effective simultaneously with or
as promptly as practicable after the date of this Agreement and will not at any
time after the earlier of the date of this Agreement or the effective date of
the Registration Statement, file any amendment to the Registration Statement or
Term Sheet or supplement to the Prospectus or file any document under the Act or
the Exchange Act before termination of the offering of the Securities to the
public by the Underwriters of which the Representative shall not previously have
been advised and furnished with a copy or to which the Representative shall have
reasonably objected (unless the Company's outside counsel reasonably determines
in a written opinion that such amendment or supplement is required to be filed
pursuant to applicable law) or which is not in compliance with the Act, the
Exchange Act or the Rules and Regulations. The Company shall use its best
efforts to maintain the effectiveness of the Registration Statement (by filing
supplements or post-effective amendments or as otherwise may be required under
the Act and the Rules and Regulations) until the earlier of the time that all
Representative's Shares have been sold pursuant to such registration statement
or the date which is five (5) years from the date the Representative's Warrants
are initially issued.
(b) As soon as the Company is advised or obtains knowledge thereof,
the Company will advise the Representative and confirm the same in writing (i)
when the Registration Statement, as amended, becomes effective, when any
post-effective amendment to the Registration Statement becomes effective and, if
the provisions of Rule 430A promulgated under the Act will be relied upon, when
the Prospectus has been filed in accordance with said Rule 430A, (ii) of the
issuance by the Commission or any State or other regulatory body of any stop
order or other order, or of the initiation or the threat or contemplation of any
proceeding, the outcome of which may result in the suspension of the
effectiveness of the Registration Statement or any order preventing or
suspending the use of the Preliminary Prospectus or the Prospectus, or any
amendment or supplement or Term Sheet thereto, or the institution of any
proceedings for that purpose, (iii) of the issuance by the Commission or any
State or other regulatory body of any proceedings for the suspension of the
qualification of any of the Securities for offering or sale in any jurisdiction
or of the initiation or the threat or contemplation of any proceeding for that
purpose, (iv) of the receipt of any comments from the Commission and (v) of any
request by the Commission for any amendment to the Registration Statement or any
amendment or supplement to the Prospectus or for additional information. If the
Commission or any state or other regulatory body shall enter a stop order or
other order suspending the effectiveness of the Registration Statement or
preventing or suspending the use of the Preliminary Prospectus or the
Prospectus, or any amendment or supplement thereto, or suspend such
qualification at any time, the Company will make every effort to obtain promptly
the lifting of such order or suspension.
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<PAGE> 18
(c) The Company shall file the Prospectus (in form and substance
satisfactory to the Representative) with the Commission, or transmit the
Prospectus by a means reasonably calculated to result in filing the same with
the Commission, pursuant to Rule 424(b)(1) under the Act (or, if applicable and
if consented to by the Representative, pursuant to Rule 424(b)(4)) within the
time period specified in Rule 424(b)(1) (or if applicable, Rule 424(b)(4)) or
shall deliver and shall file with the Commission a Term Sheet (in form and
substance satisfactory to the Representative) in accordance with Rule 434 under
the Act.
(d) The Company will give the Representative notice of its intention
to file or prepare any amendment to the Registration Statement (including any
post-effective amendments) or any amendment or supplement or Term Sheet to the
Prospectus (including any revised prospectus which the Company proposes for use
in connection with the offering of any of the Securities which differs from the
corresponding prospectus on file at the Commission at the time the Registration
Statement becomes effective, whether or not such revised prospectus is required
to be filed pursuant to Rule 424(b) under the Act), and will furnish the
Representative with copies of any such amendment or supplement or Term Sheet a
reasonable amount of time prior to such proposed filing or use, as the case may
be, and will not file any such amendment or supplement to which the
Representative or Jeffer, Mangels, Butler & Marmaro LLP, the Underwriters'
counsel (the "Underwriters' Counsel"), shall reasonably object unless the
Company's outside counsel reasonably determines in a written opinion that such
amendment or supplement or Term Sheet is required to be filed pursuant to
applicable law.
(e) The Company shall use its best efforts, at or prior to the time
the Registration Statement becomes effective, to qualify the Securities for the
initial public offering and sale under the securities or "blue sky" laws of such
jurisdictions as the Representative may reasonably designate to permit the
continuance of sales and dealings therein for as long as may be necessary to
complete the distribution, and shall make such applications, file such documents
and furnish such information as may be required for such purpose; provided,
however, the Company shall not be required to qualify as a foreign corporation
or to execute a general consent to service of process in any such jurisdiction.
In each jurisdiction where such qualification shall be effected, the Company
will use its best efforts to file and make such statements or reports at such
times as are or may be required by the laws of such jurisdiction to continue
such qualification.
(f) During the time when a prospectus is required to be delivered
under the Act, the Company shall comply with all requirements imposed upon it by
the Act and the Exchange Act, as now and hereafter amended, and by the Rules and
Regulations, as from time to time in force, so far as necessary to permit the
continuance of sales of or dealings in the Securities in accordance with the
provisions hereof and the Prospectus, or any amendments or supplements thereto.
If at any time when a prospectus relating to the Securities is required to be
delivered under the Act, any event shall have occurred as a result of which, in
the opinion of the Company or counsel for the Company or the Representative or
the Underwriters' Counsel, the Prospectus, as then amended or supplemented,
would include an untrue statement of a material fact or omit to state any
material fact required to be
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<PAGE> 19
stated therein or necessary to make the statements therein, in the light of the
circumstances in which they were made, not misleading, or if it is necessary at
any time to amend or supplement the Prospectus to comply with the Act, the
Company will promptly notify the Representative and prepare and file, at the
Company's expense, with the Commission an appropriate amendment or supplement to
the Registration Statement or an amendment or supplement to the Prospectus which
will correct such statement or omission, or effect such compliance, each such
amendment or supplement to be reasonably satisfactory to the Representative and
the Underwriters' Counsel, and the Company will furnish to the Underwriters
copies of such amendment or supplement as soon as available and in such
quantities as the Underwriters may request.
(g) As soon as practicable, but in any event not later than
forty-five (45) days after the end of the twelve (12) month period beginning
after the effective date of the Registration Statement, the Company shall make
generally available to its security holders, in the manner specified in Rule
158(b) under the Act, and to the Representative, an earnings statement which
will comply with the provisions of Section 11(a) of the Act and Rule 158(a)
promulgated under the Act.
(h) During the five (5) year period commencing on the date hereof,
so long as the Company has securities which are registered under the Act or the
Exchange Act or otherwise publicly tradeable and Common Stock continues to be
outstanding, the Company, at its expense, will furnish to its stockholders, as
soon as practicable, annual reports (including financial statements audited by
independent certified public accountants) and unaudited quarterly reports for
each of the first three (3) fiscal quarters of the Company (such reports,
whether or not the Company is then subject to the periodic reporting
requirements of the Exchange Act, are to be in conformity with the requirements
of the Exchange Act) and will deliver to the Representative:
(i) concurrently with furnishing such quarterly reports to its
stockholders, balance sheets, statements of operations and cash flow of the
Company for such quarter and any year to date period in the form furnished to
the Company's stockholders and certified by the Company's principal financial or
accounting officer;
(ii) concurrently with furnishing such annual reports to its
stockholders, a balance sheet of the Company as at the end of the preceding
fiscal year, together with statements of operations, stockholders' equity and
cash flows of the Company for such fiscal year, accompanied by a copy of the
report thereon of independent certified public accountants;
(iii) as soon as they are available, copies of all reports
(financial or other) mailed to stockholders;
(iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, the NASD, Nasdaq
or any securities exchange; and
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<PAGE> 20
(v) any additional information of a public nature concerning the
Company or its businesses which the Representative may reasonably request.
(i) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar (which may
be the same entity as the transfer agent) for the Common Stock.
(j) The Company will furnish to the Representative and the
Underwriters, without charge and at such place as the Representative may
designate, copies of each Preliminary Prospectus, the Registration Statement and
any pre-effective or post-effective amendments thereto (two of which will be
signed and will include all financial statements and exhibits, one for the
Representative and one for the Underwriters' Counsel), the Prospectus, and all
amendments and supplements thereto, including any prospectus prepared after the
effective date of the Registration Statement and any Term Sheet, in each case as
soon as available and in such quantities as the Representative may reasonably
request.
(k) The Company agrees that, for a period of twelve (12) months
commencing with the effective date of the Registration Statement, except as
contemplated hereby, it shall not, without the prior written consent of the
Representative, issue, sell, grant an option for the sale of, assign, transfer,
pledge, distribute or otherwise dispose of, directly or indirectly, or agree or
offer to do any of the foregoing, any shares of Common Stock or any option,
warrant or other contract right or security convertible, directly or indirectly,
into shares of Common Stock, other than issuances pursuant to the Incentive Plan
or grants of options under the Non-Statutory Plan as described (including,
without limitation, as to the maximum number of shares of Common Stock issuable
thereunder), in the Registration Statement and the issuance of shares of Common
Stock upon the exercise of options granted under the Non-Statutory Plan.
(l) Neither the Company nor any of its officers, directors,
stockholders or affiliates (within the meaning of the Rules and Regulations)
will take, directly or indirectly, any action designed to illegally stabilize or
manipulate the price of any securities of the Company or which might be expected
to cause or result in, under the Exchange Act or otherwise, the illegal
stabilization or manipulation of the price of any security of the Company.
(m) The Company shall apply the net proceeds from the sale of the
Securities offered to the public in the manner set forth under the caption "Use
of Proceeds" in the Prospectus. No portion of the net proceeds will be used,
directly or indirectly, to acquire any securities issued by the Company. The
Company shall, on or promptly after the Closing Date, pay Alan Wishnow the sum
of $50,000 as a finder's fee.
(n) The Company shall timely file all registrations, reports, forms
or other documents as may be required (including, without limitation, any Form
SR required by Rule 463 under the Act) from time to time under the Act, the
Exchange Act and the Rules and Regulations, all such registrations, reports,
forms and other documents shall comply as to form and substance with the
applicable requirements under the Act, the Exchange Act and
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<PAGE> 21
the Rules and Regulations. The Company shall promptly provide to the
Representative and, upon request, the Underwriters copies of such registrations,
regulations, reports, forms or other documents.
(o) The Company shall furnish to the Representative as early as
practicable prior to the date hereof, the Closing Date and each Option Closing
Date, if any, but no later than two (2) full business days prior thereto, a copy
of the latest available unaudited interim financial statements of the Company
(which in no event shall be as of a date more than forty-five (45) days prior to
the date hereof, the Closing Date or the relevant Option Closing Date, as the
case may be) which have been read by the Company's independent certified public
accountants, as stated in their letters to be furnished pursuant to Sections
7(i) and 7(j) hereof.
(p) Subject to applicable eligibility requirements, the Company
shall use its best efforts to cause the Securities to be quoted on the NNM or
some other nationally recognized stock exchange and for a period of five (5)
years from the date hereof, the Company shall maintain the appropriate NNM or
stock exchange listing of the Securities so long as the Company continues to
have securities registered under the Act or the Exchange Act or otherwise
publicly tradeable and Securities continue to be outstanding and shall comply
with all registration, filing, reporting and other requirements of the NNM or
such stock exchange, which may from time to time be applicable to the Company.
(q) For a period of five (5) years from the Closing Date, the
Company shall furnish or cause to be furnished to the Representative, upon any
and all reasonable requests of the Representative and at the Company's sole
expense, (i) daily consolidated transfer sheets relating to the Common Stock and
(ii) a list of holders of all of the Company's securities.
(r) For a period of five (5) years from the Closing Date, so long as
the Company continues to have securities registered under the Act or the
Exchange Act or otherwise publicly tradeable and Common Stock continues to be
outstanding, the Company shall, at the Company's sole expense, (i) provide the
Representative, upon any and all reasonable requests of the Representative, with
a "blue sky trading survey" for secondary sales of the Company's securities
prepared by counsel to the Company, and (ii) take all necessary and appropriate
actions to further qualify the Company's securities in all jurisdictions of the
United States in order to permit secondary sales of such securities pursuant to
the securities or "blue sky" laws of those jurisdictions, provided, however,
that the Company shall not be required to qualify as a foreign corporation or to
execute a general consent to service of process in any jurisdiction. In the
event that the Company does not comply with the provisions of this Section 5(r),
the Company authorizes the Underwriters' Counsel to take all necessary and
appropriate actions to comply with the provisions of this Section 5(r), at the
Company's sole expense payable in advance, provided that in no event shall the
Company be obligated for expenses in excess of five thousand dollars ($5,000)
per year.
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<PAGE> 22
(s) As soon as practicable, (i) but in no event more than five (5)
business days before the effective date of the Registration Statement, the
Company shall file a Form 8-A with the Commission providing for the registration
under the Exchange Act of its Common Stock, which registration shall become
effective concurrently on such effective date, and (ii) but in no event more
than one hundred twenty (120) days after the effective date of the Registration
Statement. Subject to applicable eligibility requirements, the Company shall use
its best reasonable efforts to take all necessary and appropriate actions to be
included in Standard & Poor's Corporation Manual and Moody's Investors Services,
Inc. Manual and to continue such inclusion for a period of not less than seven
(7) years or so long as the Company has securities which are registered under
the Act or the Exchange Act or otherwise publicly tradeable and Common Stock
continues to be outstanding.
(t) The Company hereby agrees that it will not, for a period of
thirty six (36) months commencing with the effective date of the Registration
Statement, without the Representative's written approval and except as provided
in the Incentive Plan, (i) adopt, propose to adopt or otherwise permit to exist
any employee, officer, director, consultant or compensation plan, agreement,
understanding or arrangement permitting the grant, issue, sale or entry into any
agreement, understanding or arrangement to grant, issue or sell any option,
warrant or other contract right (x) except as permitted by the Incentive Plan,
at an exercise price that is less than the fair market value per share of Common
Stock on the date of grant or sale or (y) to any of its executive officers or
directors or to any holder of five percent (5%) or more of the Common Stock or
any holder of five percent (5%) or more of the Common Stock as the result of the
exercise or conversion of equivalent securities, including, without limitation,
options, warrants or other contract rights or securities convertible, directly
or indirectly, into shares of Common Stock; (ii) permit the maximum number of
shares of Common Stock or other securities of the Company purchasable at any
time pursuant to options, warrants or other contract rights or securities
convertible, directly or indirectly, into shares of Common Stock to exceed
fifteen percent (15%) of the outstanding shares of Common Stock unless such
action is approved by at least two independent directors of the Company; (iii)
permit the payment for such securities, including, without limitation, upon the
exercise of any option, warrant or other contract right upon the conversion of
any security convertible, directly or indirectly, into shares of Common Stock,
with any form of consideration other than cash (other than payments made
pursuant to, and in accordance with, the Non-Statutory Plan or the Incentive
Plan); or (iv) permit the existence of stock appreciation rights, phantom
options or similar arrangements. The provisions of this Section 5(t) shall not
apply to grants, issuances or sales to, or agreements with, the Underwriters or
you, individually and not in your capacity as the Representative..
(u) Until the completion of the distribution (as such term would be
applied under Rule 10b-6 promulgated under the Exchange Act) of the Firm Shares
and, if applicable, the Option Shares, to the public, the Company shall not,
without the prior written consent of the Representative, issue, directly or
indirectly, any press release or other communication or hold any press
conference with respect to the Company or its activities or the offering
contemplated hereby, other than trade releases issued in the ordinary course of
the Company's business consistent with past practices with respect to the
Company's
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<PAGE> 23
operations or except as specifically required by law as advised to the Company
by its outside counsel.
(v) Prior to the earlier of (i) the date which is seven (7) years
from the date hereof and (ii) the date of the completion of the sale to the
public of all of the Representative's Shares, the Company will not take any
action or actions which may prevent or disqualify the Company's use of Form S-1
or, commencing one year from the date hereof, Form S-3 (or other appropriate
form) for the registration under the Act of the Representative's Shares.
(w) For a period of thirty-six (36) months after the effective date
of the Registration Statement, the Company shall not, without the written
consent of the Representative (which shall not be unreasonably withheld),
restate, amend, modify or otherwise alter any term of any written employment,
consulting or similar agreement entered into between the Company and its Chief
Executive Officer, President, any director or key employee as of the effective
date of the Registration Statement in a manner which is more favorable to such
officer, director or key employee. For a period of thirty-six (36) months from
the effective date of the Registration Statement, the Company shall not enter
into a written employment, consulting or similar agreement with any officer,
director or key employee with whom the Company has entered into a written
employment, consulting or similar agreement as of the effective date of the
Registration Statement other than the renewal of such agreement on terms which
are no more favorable to such officer, director or key employee unless agreed
upon in writing by the Representative.
(x) [Intentionally omitted]
(y) For a period of five (5) years from the date hereof, the Company
will retain Arthur Andersen LLP (or such other nationally-recognized accounting
firm qualified to practice in front of the Commission as is reasonably
acceptable to the Representative) as its independent certified public
accountants.
(z) For a period of two (2) years after the effective date of the
Registration Statement, the Company shall provide you with reasonable
notification of each meeting of its board of directors along with any other
formal correspondence and communications sent by the Company to members of its
board of directors.
(aa) The Company will cause its transfer agent to mark an
appropriate legend on the face of the stock certificates representing all of the
securities subject to Lock-Up Agreements and to place "stop transfer" orders on
the Company's stock ledgers.
(ab) The Company shall at all times following the Closing Date have
reserved and available for issuance a sufficient number of shares of Common
Stock to be issued upon exercise of the Representative's Warrants.
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<PAGE> 24
(ac) When the Registration Statement becomes effective and at all
times subsequent thereto up to and including the Closing Date and each Option
Closing Date, if any, and during such other periods as a prospectus may be
required to be delivered in connection with sales by any Underwriter or a
dealer, the Registration Statement and the Prospectus will contain all
statements which are required to be stated therein in accordance with the Act
and the Rules and Regulations, and will comply with the requirements of the Act
and the Rules and Regulations, and at and through such dates, neither the
Registration Statement, the Prospectus nor any amendment thereof or supplement
thereto will contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading.
6. Payment of Expenses.
(a) The Company hereby agrees to pay (such payment to be made on the
Closing Date as part of the closing on such date and on each Option Closing Date
as part of the closing on such date (to the extent not paid on the Closing Date
or a previous Option Closing Date)) all expenses and fees (other than fees of
the Underwriters' Counsel not specifically provided for in this Section 6)
incident to the issuance, offer, sale and delivery of the Securities and the
performance of the obligations of the Company under this Agreement and the
Representative's Warrant Agreement, including, without limitation, (i) the fees
and expenses of accountants and counsel for the Company, (ii) all costs and
expenses incurred in connection with the preparation, duplication, printing
(including mailing and handling charges), filing, delivery and mailing
(including the payment of postage with respect thereto) of each Preliminary
Prospectus, the Registration Statement and the Prospectus and any amendments and
supplements or Term Sheets thereto and the printing, mailing (including the
payment of postage with respect thereto) and delivery of this Agreement, all
other underwriting documents (including Agreements Among Underwriters,
Underwriter's Questionnaires, Underwriter's Powers of Attorneys and Selected
Dealer Agreements), the Representative's Warrant Agreement and agreements with
selected dealers, and related documents, including the cost of all copies
thereof and of each Preliminary Prospectus and of the Prospectus and any
amendments thereof or supplements thereto supplied to each of the Underwriters
and such dealers as the Underwriters may request, in such quantities as the
Underwriters may reasonably request, (iii) all costs and expenses (including
issue and transfer taxes) incurred in connection with the printing, engraving,
issuance, sale and delivery of the Securities, including (x) the purchase by
each of the Underwriters, severally and not jointly, of the number of the
Securities from the Company set forth opposite its name on Schedule I, (y) the
consummation by the Company of any of its obligations under this Agreement and
the Representative's Warrant Agreement and (z) the resale of the Securities by
each of the Underwriters in connection with the distribution contemplated
hereby, (iv) all costs and expenses incurred in connection with the
qualification of the Securities under state securities or "blue sky" laws and
the determination of the status of such securities under legal investment laws,
including the costs of printing and mailing the "Preliminary Blue Sky
Memorandum," the "Supplemental Blue Sky Memorandum" and the "Legal Investments
Survey," if any, (v) the fees, costs and expenses incurred in connection with
any required filing with the NASD and obtaining a determination from the NASD
with respect to the
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<PAGE> 25
fairness and reasonableness of the underwriting terms and arrangements and
disbursements and fees of Jeffer, Mangels, Butler & Marmaro, LLP in connection
with such determinations, filings, documents and qualifications of the
Securities, (vi) all advertising costs and expenses, including costs and
expenses in connection with "road shows," information meetings and
presentations, bound volumes and prospectus memorabilia and "tombstone"
advertisements, (vii) all costs and expenses incurred in connection with due
diligence investigations by an independent third party, subject to the Company's
prior approval which shall not be unreasonably withheld, including the fees of
any independent counsel (other than Jeffer, Mangels, Butler & Marmaro, LLP) or
consultants, (viii) the fees and expenses of a transfer agent and registrar for
the Securities, (ix) the fees payable to the Commission and (x) the fees and
expenses incurred in connection with the listing of the Securities on the NNM
and any other exchange.
(b) If this Agreement is terminated by the Underwriters in
accordance with the provisions of Section 7 or 12 hereof, by the Underwriters in
accordance with a reasonable application of Section 11(a) hereof or if the
transactions contemplated hereby are not consummated by the Company for any
reason, the Company shall reimburse and indemnify the Underwriters for all of
their actual out-of-pocket expenses, including, without limitation, all of the
fees and disbursements of Underwriters' Counsel (including, without limitation,
the fees of the Underwriters' Counsel specifically provided for herein).
(c) The Company further agrees that, in addition to the expenses
payable pursuant to Section 6(a) hereof, it will pay to you, individually and
not in your capacity as the Representative, on the Closing Date by certified or
bank cashier's check, or, at your election, by deduction from the proceeds of
the offering of the Firm Shares, a non-accountable expense allowance equal to
three percent (3%) of the aggregate offering proceeds from the sale of the Firm
Shares. In the event the Underwriters elect to exercise all or any part of the
over-allotment option described in Section 3(b) hereof, the Company and each
Selling Stockholder agrees to pay to you, individually and not in your capacity
as the Representative, on each Option Closing Date, by certified or bank
cashier's check, or, at your election, by deduction from the proceeds of the
Option Shares purchased from the Company or such Selling Stockholder on such
Option Closing Date, a non-accountable expense allowance equal to three percent
(3%) of the aggregate offering proceeds from the sale of such Option Shares by
the Company or such Selling Stockholder.
7. Conditions of the Underwriters' Obligations. The obligations of each
of the Underwriters hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company and the Selling Stockholders
herein as of the date hereof and as of the Closing Date and each Option Closing
Date, if any, as if they had been made on and as of the Closing Date or each
Option Closing Date, as the case may be; the accuracy on and as of the Closing
Date and each Option Closing Date, if any, of the statements of officers of the
Company made and certificates of officers of the Company and/or the Selling
Stockholders delivered pursuant to the provisions hereof; and the performance by
the Company and the Selling Stockholders on and as of the Closing Date and each
Option Closing Date, if any, of all of its covenants and obligations hereunder
which are possible to perform on and as of such date and to the following
further conditions:
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(a) The Registration Statement shall have become effective not later
than 6:30 a.m., New York time, on the date of this Agreement or such later date
and time as shall be consented to in writing by the Representative, and, at the
Closing Date and each Option Closing Date, if any, no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have been
issued and no proceedings for that purpose shall have been initiated or shall be
pending, threatened or contemplated by the Commission or any State or other
regulatory body and any request on the part of the Commission or any State or
other regulatory body for additional information shall have been complied with
to the reasonable satisfaction of the Representative and the Underwriters'
Counsel. If the Company has elected to rely upon Rule 430A under the Act, the
price of the Securities and any price-related information previously omitted
from the effective Registration Statement pursuant to such Rule 430A shall have
been transmitted to the Commission for filing pursuant to Rule 424(b) under the
Act within the prescribed time period or shall have been delivered and shall
have been filed with the Commission as required by Rule 434 under the Act, as
applicable, and, prior to the Closing Date, the Company shall have provided
evidence satisfactory to the Representative of such timely filing, or a
post-effective amendment providing such information shall have been promptly
filed and declared effective in accordance with the requirements of Rule 430A
under the Act. Neither the Registration Statement nor the Prospectus nor any
amendment thereto or supplement thereof (including a Term Sheet) shall have been
filed to which the Representative shall have reasonably objected after it shall
have had the chance to review such amendment or supplement unless the Company's
outside counsel reasonably determines in a written opinion that such amendment
or supplement is required to be filed pursuant to applicable law.
(b) No Underwriter shall have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Representative's opinion, is material, or omits to state a
fact which, in the Representative's opinion, is material and is required to be
stated therein or is necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, or that the Prospectus,
or any amendment or supplement (including any Term Sheet) thereto, contains an
untrue statement of fact which, in the Representative's opinion, is material, or
omits to state a fact which, in the Representative's opinion, is material and is
required to be stated therein or is necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading.
(c) On or prior to the Closing Date, the Representative shall have
received from the Underwriters' Counsel such opinion or opinions with respect to
the organization of the Company, the validity of the Securities, the
Registration Statement, the Prospectus and such other related matters as the
Representative may request and the Underwriters' Counsel shall have received
such papers and information as it may request in order to enable it to pass upon
such matters.
(d) At the Closing Date, the Representative shall have received the
favorable opinion of Keesal, Young & Logan, counsel to the Company, dated the
Closing Date, addressed to the Representative, in form and substance
satisfactory to the Underwriters' Counsel and subject to customary
qualifications and conditions, to the effect
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that, with respect to the matters set forth in Schedule II attached hereto and
incorporated herein by this reference.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which it is admitted, to the extent such counsel deems proper
and to the extent specified in such opinion, if at all, upon an opinion or
opinions (in form and substance satisfactory to the Underwriters' Counsel) of
other counsel, acceptable to the Underwriters' Counsel, familiar with the
applicable laws; and (B) as to matters of fact, to the extent it deems proper,
on certificates and written statements of responsible officers of the Company
and certificates or other written statement of officers of departments of
various jurisdictions having custody of documents respecting the corporate
existence or good standing of the Company, provided that copies of any such
opinions, statements or certificates shall be delivered to the Representative
and the Underwriters' Counsel. The opinion of such counsel for the Company shall
state that the opinion of any such other counsel is in form satisfactory to such
counsel and that the Underwriters and the Underwriters' Counsel are justified in
relying thereon.
At each Option Closing Date, if any, the Representative shall have
received the favorable opinion of Keesal, Young & Logan, counsel to the Company,
dated such Option Closing Date, addressed to the Representative and in form and
substance satisfactory to Underwriters' Counsel confirming as of such Option
Closing Date the statements made by Keesal, Young & Logan in its opinion
delivered on the Closing Date.
(e) on or prior to the Closing Date and each Option Closing Date, if
any, the Underwriters' Counsel shall have been furnished with such documents,
certificates and opinions as it may reasonably require for the purpose of
enabling it to review or pass upon the matters referred to in Section 7(c)
hereof, or in order to evidence the accuracy, completeness or satisfaction of
any of the representations, warranties or conditions of the Company herein
contained.
(f) Prior to the Closing Date and each Option Closing Date, if any,
(i) there shall have been no adverse change or development involving a
prospective adverse change in the condition (financial or otherwise), earnings,
business affairs, position, prospects, stockholders' equity, operations,
properties, businesses or results of operations of the Company from the latest
dates as of which such matters are set forth in the Registration Statement and
the Prospectus; (ii) there shall have been no transaction, not in the ordinary
course of business and consistent with past practices, entered into by the
Company, from the latest date as of which the financial condition of the Company
is set forth in the Registration Statement and the Prospectus, which may in any
way be adverse to the Company; (iii) the Company shall not be in default, and no
event shall have occurred which, with notice, lapse of time or both, would
constitute a default, under any provision of any agreement, instrument or other
document relating to any outstanding indebtedness; (iv) except as described in
the Prospectus under "Dividend Policy," the Company shall not have issued any
securities (other than the Securities) or declared or paid any dividend or made
any distribution in respect of its capital stock of any class, and there shall
not have been any change in the capital stock, or any change in the debt (long-
or short-term) or liabilities or obligations (contingent or
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otherwise), of the Company; (v) no material amount of the property or assets
(tangible or intangible) of the Company shall have been pledged, mortgaged or
otherwise encumbered; and (vi) no action, suit, proceeding, inquiry,
arbitration, investigation, litigation or governmental or other proceeding
(including, without limitation, those pertaining to environmental, health or
similar matters) shall be pending, contemplated or threatened (or circumstances
giving rise to same) to which the Company is subject or to which any property or
assets (tangible or intangible) of the Company are subject wherein an
unfavorable decision, ruling or finding may materially adversely affect the
condition (financial or otherwise), earnings, business affairs, position,
prospects, stockholders' equity, operations, properties, businesses or results
of operations of the Company taken as a whole, except as set forth in the
Registration Statement and Prospectus and except for debts, liabilities and
obligations incurred in the normal course of business consistent with past
practices.
(g) At the Closing Date and each Option Closing Date, if any, the
Representative shall have received a certificate of the Company and each Selling
Stockholder signed by the principal executive officer, the chief financial or
chief accounting officer of the Company and the Selling Stockholders, dated the
Closing Date or such Option Closing Date, as the case may be, to the effect that
each of such persons has carefully examined the Registration Statement, the
Prospectus and this Agreement, and that:
(i) the representations and warranties of the Company and the
Selling Stockholders in this Agreement are true and correct, as if made on and
as of the Closing Date or such Option Closing Date, as the case may be, and the
Company has complied with all agreements and covenants and satisfied all
conditions contained in this Agreement on their part to be performed or
satisfied at or prior to the Closing Date or such Option Closing Date, as the
case may be;
(ii) no stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued, and no proceedings
for that purpose have been initiated or are pending, contemplated or threatened;
(iii) the Registration Statement, the Prospectus and each
amendment and supplement thereto, if any, contain all statements and information
required to be included therein, and neither the Registration Statement nor any
amendment thereto, at the time such Registration Statement or amendment became
effective and as of the date of such certificate included any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading and neither
any Prospectus nor any supplement thereto, at the date of such Prospectus or
supplement thereto and at the date of such certificate, included any untrue
statement of a material fact or omitted to state any material fact necessary to
make the statements therein, in light of the circumstances in which they were
made, not misleading; and
(iv) subsequent to the latest respective dates as of which
information is given in the Registration Statement and the Prospectus, (A) the
Company has not incurred any liabilities or obligations, direct, indirect or
contingent, other than in the ordinary course of business; (B) the Company has
not paid or declared any dividends or
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other distributions on its capital stock or other ownership interests; (C) the
Company has not entered into any transactions not in the ordinary course of
business; (D) there has not been any change in the capital stock, long-term debt
or short-term debt (other than any increase in short-term debt in the ordinary
course of business) of the Company; (E) other than ordinary wear and tear, the
Company has not sustained any material loss or damage to its property or assets
(tangible and intangible), whether or not insured; (F) there is no litigation
which is pending, threatened or contemplated (or circumstances giving rise to
same) against the Company which is required to be set forth in an amended or
supplemented Prospectus which has not been so set forth; and (G) there has
occurred no event required to be set forth in an amended or supplemented
Prospectus which has not been so set forth.
References to the Registration Statement and the Prospectus in this Section 7(g)
are to such documents as amended and supplemented at the date of such
certificate.
(h) By the Closing Date, the Representative shall have received
clearance from the NASD as to the amount of compensation allowable or payable to
the Underwriters, in the amount as described in the Registration Statement.
(i) At or prior to the time this Agreement is executed, the
Representative shall have received a letter, dated such date, addressed to the
Representative and in form and substance satisfactory in all respects to the
Representative from Arthur Andersen, LLP:
(i) confirming that it is an accounting firm of independent
certified public accountants with respect to the Company within the meaning of
the Act and the Rules and Regulations;
(ii) stating its opinion that the financial statements and
schedules of the Company included in the Registration Statement comply as to
form in all material respects with the applicable accounting requirements of the
Act and the Rules and Regulations and that each of the Underwriters may rely
upon the opinion of Arthur Andersen LLP with respect to such financial
statements and schedules included in the Registration Statement;
(iii) stating that, on the basis of a limited review which
included a reading of the latest available unaudited interim financial
statements of the Company (with an indication of the date of the latest
available unaudited interim financial statements), a reading of the latest
available minutes of the stockholders and the board of directors, including any
committees of the board of directors, of the Company, consultations with
officers and other employees of the Company responsible for financial and
accounting matters and other specified procedures and inquiries, nothing has
come to its attention which would lead it to believe that (A) the unaudited
financial statements and schedules of the Company included in the Registration
Statement do not comply as to form in all material respects with the applicable
accounting requirements of the Act and the Rules and Regulations or are not
fairly presented in conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the audited financial
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<PAGE> 30
statements of the Company included in the Registration Statement or (B) at a
specified date not more than five (5) days prior to the effective date of the
Registration Statement, there has been any change in the capital stock,
short-term debt or long-term debt of the Company, or any decrease in the
stockholders' equity or net current assets or net assets of the Company as
compared with amounts shown in the December 31, 1995 balance sheet included in
the Registration Statement or, if there was any change or decrease, setting
forth the amount of such change or decrease, or (C) during the period from
January 1, 1996 to a specified date not more than five (5) days prior to the
effective date of the Registration Statement, there was any decrease in
revenues, net income or net earnings per share of Common Stock, in each case as
compared with the corresponding period beginning January 1, 1995, or, if there
was any such decrease, setting forth the amount of such decrease;
(iv) stating that it has compared specific dollar amounts,
numbers of shares, percentages, statements and other financial information
pertaining to the Company set forth in the Registration Statement, in each case
to the extent that such amounts, numbers, percentages, statements and
information may be derived from the general accounting records, including work
sheets or analysis, of the Company with the results obtained from the
application of specific readings, inquiries and other appropriate procedures
(which procedures do not constitute an examination in accordance with generally
accepted auditing standards) set forth in the letter and found them to be in
agreement;
(v) stating it has read the unaudited financial statements
referred to in Section 5(o) hereof; and
(vi) statements as to such other matters as the Representative
may reasonably request.
(j) At the Closing Date and each Option Closing Date, if any, the
Representative shall have received from Arthur Andersen LLP a letter, dated as
of the Closing Date or such Option Closing Date, as the case may be, to the
effect that (i) it reaffirms that statements made in the letter furnished
pursuant to Section 6(i) hereof, (ii) if the Company has elected to rely on Rule
430A under the Act or a Term Sheet under Rule 434, to the further effect that it
has carried out procedures as specified in clause (iv) of such Section 6(i) with
respect to certain amounts, numbers, percentages, statements and other financial
information as specified by the Representative and deemed to be a part of the
Registration Statement pursuant to Rule 430A(b) or 434 and has found such
amounts, numbers, percentages, statements and other financial information to be
in agreement with the documents specified in such clause (iv); and (iii) it has
read the unaudited financial statements referred to in Section 5(o) hereof.
(k) On the Closing Date and each Option Closing Date, if any, there
shall have been duly tendered to the Representative the appropriate number of
Securities.
(l) No order suspending the sale of the shares in any jurisdiction
designated by the Representative pursuant to Section 5(e) hereof shall have been
issued on
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either the Closing Date or any Option Closing Date, and no proceedings for that
purpose shall have been initiated or shall be pending, contemplated or
threatened.
(m) On or before the Closing Date, the Company shall have executed
and delivered to you, individually and not in your capacity as the
Representative, the Representative's Warrant Agreement, substantially in the
form filed as Exhibit 4-B to the Registration Statement. The executed version of
the Representative's Warrant Agreement shall be satisfactory to you.
(n) On or before the effective date of the Registration Statement,
the Securities shall have been duly approved for quotation on the NNM.
(o) On or before the effective date of the Registration Statement,
the Company shall provide the Representative with true copies of valid, duly
executed, legally binding and enforceable Lock-Up Agreements. On or before the
Closing Date, the Company shall deliver instructions to its transfer agent
authorizing such transfer agent to place appropriate legends on the certificates
representing the securities subject to the Lock-Up Agreements, and to place
appropriate stop transfer orders on the Company's ledgers. On or before the
effective date of the Registration Statement, there shall have been delivered to
the Representative all of the Lock-Up Agreements, in form and substance
satisfactory to the Underwriters' Counsel.
(p) The Company shall provide the Representative with such
additional documents and certificates as the Representative may reasonably
request.
(q) (i) the Recapitalization shall have been effected, (ii) the
Company's phantom stock plan shall have terminated and promissory notes shall
have been issued in consideration for the cancellation of certain phantom stock
options in the amounts and on the terms described in the Prospectus under
"Certain Transactions," and (iii) the Subordinated Notes described in the
Prospectus under "Dividend Policy" shall have been issued and any claims for
accrued dividends on the Company's Preferred Stock shall be waived and released
by the persons having the rights to such dividends.
If any condition to the Underwriters' obligations hereunder to be
fulfilled prior to or at the Closing Date or at any Option Closing Date, as the
case may be, is not so fulfilled, the Underwriters may terminate this Agreement,
without liability to any of the Underwriters, or, if the Representative so
elects in its sole discretion, it may waive any such conditions which have not
been fulfilled or extend the time for their fulfillment.
8. Indemnification and Contribution.
(a) The Company and the Selling Stockholders jointly and severally
agree to indemnify and hold harmless each Underwriter (for purposes of this
Section 8, "Underwriters" shall include the officers, directors, partners,
employees, agents and counsel of each Underwriter), and each person, if any, who
controls any of the Underwriters, as applicable ("controlling person"), within
the meaning of Section 15 of the Act or Section
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<PAGE> 32
20(a) of the Exchange Act, from and against any and all losses, claims, damages,
expenses (including, without limitation, reasonable attorneys, fees and
expenses) or liabilities and all actions, suits, proceedings, inquiries,
arbitrations, investigations, litigation or governmental or other proceedings
(in this Section 8, collectively, "actions") in respect thereof, whatsoever
(including, without limitation, any and all expenses whatsoever reasonably
incurred in investigating, preparing or defending against any action, commenced
or threatened, or any claim whatsoever), as such are incurred, to which any
Underwriter or such controlling person may become subject under the Act, the
Exchange Act or any other statute or at common law or otherwise, arising out of
or based upon any untrue statement or alleged untrue statement of a material
fact contained (i) in any Preliminary Prospectus, the Registration Statement or
the Prospectus (as from time to time amended and supplemented); (ii) in any
post-effective amendment or amendments or any new registration statement and
prospectus in which is included securities of the Company issued or issuable
upon exercise of the Securities; (iii) in any application or other document or
written communication (in this Section 8, collectively, "application") executed
by the Company or based upon written information furnished by the Company in any
jurisdiction in order to qualify the Securities under the securities or "blue
sky" laws thereof or filed with the Commission, any state securities commission
or agency, the NASD or the NNM or any other securities exchange; or the omission
or alleged omission therefrom of a material fact required to be stated therein
or necessary to make the statements therein not misleading (in the case of the
Prospectus, in light of the circumstances in which they were made), unless such
statement or omission was made in reliance upon and in conformity with written
information furnished to the Company by the Representative with respect to an
Underwriter expressly for use in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment thereof or supplement (including
any Term Sheet) thereto, or in any application, as the case may be. In addition
to its other obligations under this Section 8(a), the Company agrees that, as an
interim measure during the pendency of any action arising out of or based upon
any untrue statement or omission, or alleged untrue statement or alleged
omission as described in this Section 8(a), it will reimburse each Underwriter
(and, to the extent applicable, each controlling person), on a monthly basis for
all reasonable legal or other expenses incurred in connection with investigating
or defending any such action, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of the Company's
obligations to reimburse each Underwriter and (and, to the extent applicable,
each controlling person), for such expenses and the possibility that such
payments might later be held to have been improper by a court of competent
jurisdiction. To the extent that any such interim reimbursement is so held to
have been improper as to the Company, each Underwriter (and, to the extent
applicable, each controlling person), shall promptly return it to the Company
together with interest compounded daily, based on the "reference rate" announced
from time to time by Bank of America NTSA (the "Prime Rate"), but in no case
more than is allowed by applicable law. Any such interim reimbursement payments
which are not made to an Underwriter, or a controlling person, as applicable,
within thirty (30) days of a request for reimbursement shall bear interest at
the Prime Rate from the date of such request. In no event, however, shall the
liability of the Selling Stockholders other than Berger for indemnification
under this Section 8(a), when added to any amounts paid by the Selling
Stockholders under Section 8(d), exceed the lesser of (i) that proportion of the
total of such losses, claims, damages or liabilities indemnified against equal
to the proportion of the total
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Securities sold hereunder which is being sold by the Selling Stockholders, or
(ii) the proceeds received by the Selling Stockholders from the Underwriters in
the offering.
The indemnity agreement in this Section 8(a) shall be in addition to
any liability which the Company may have at common law or otherwise.
(b) Each Underwriter severally, but not jointly, agrees to indemnity
and hold harmless the Company (for purposes of this Section 8, "Company" shall
include the officers, directors, partners, employees, agents and counsel of the
Company), the Selling Stockholders and each other person, if any, who control
the Company or the Selling Stockholders ("controlling person") within the
meaning of the Act, to the same extent as the foregoing indemnity from the
Company to each Underwriter, but only with respect to statements or omissions,
if any, made in any Preliminary Prospectus, the Registration Statement or the
Prospectus or any amendment thereof or supplement (including any Term Sheet)
thereto or in any application made in reliance upon, and in strict conformity
with, written information furnished to the Company by the Representative with
respect to such Underwriter expressly for use in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any amendment thereof or supplement
(including any Term Sheet) thereto or in any application, provided that such
written information or omissions only pertain to disclosures in any Preliminary
Prospectus, the Registration Statement or the Prospectus directly relating to
the transactions effected by such Underwriter or the Underwriters as a group in
connection with the offering contemplated hereby. The Company acknowledges that
the statements with respect to the Underwriters and the public offering of the
Securities set forth under the heading "Underwriting," the risks factors
entitled "Recently Formed Representative May Be Unable to Complete Offering or
Make a Market" and "Representative's Potential Influence on the Market," and the
stabilization legend in the Prospectus have been furnished by the Representative
with respect to the Underwriters expressly for use therein and constitute the
only information furnished in writing by the Representative with respect to the
Underwriters for inclusion in any Preliminary Prospectus, the Registration
Statement or the Prospectus. In addition to its other obligations under this
Section 8(b), each Underwriter severally, but not jointly, agrees that, as an
interim measure during the pendency of any action arising out of or based upon
any untrue statement or omission, or alleged untrue statement or alleged
omission as described in this Section 8(b), it will reimburse Company and (and,
to the extent applicable, each controlling person) on a monthly basis for all
reasonable legal or other expenses incurred in connection with investigating or
defending any such action, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of such Underwriter's
obligations to reimburse the Company (and, to the extent applicable, each
controlling person) for such expenses and the possibility that such payments
might later be held to have been improper by a court of competent jurisdiction.
To the extent that any such interim reimbursement is so held to have been
improper as to such Underwriter, such Underwriter (and, to the extent
applicable, each controlling person) shall promptly return it to the Company,
together with interest compounded daily, based on the "prime rate" announced
from time to time by Bank of American NTSA (the "Prime Rate"), but in no case
more than is allowed by applicable law. Any such interim reimbursement payments
which are not made to the Company within thirty (30) days of a request for
reimbursement shall bear interest at the Prime Rate from the
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date of such request. Notwithstanding the provisions of this Section 8(b), no
Underwriter shall be required to indemnify or hold harmless the Company, or any
controlling person for, in the aggregate, any amounts in excess of the
underwriting discount applicable to the Securities purchased by such Underwriter
hereunder.
The indemnity agreement in this Section 8(b) shall be in addition to
any liability which each Underwriter severally, but not jointly, may have at
common law or otherwise.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
shall notify each party against whom indemnification is to be sought in writing
of the commencement thereof (but the failure to so notify an indemnifying party
shall not relieve it from any liability which it may have under this Section 8
except to the extent that it has been materially prejudiced by such failure). In
case any such action is brought against any indemnified party, and it notifies
an indemnifying party or parties of the commencement thereof, the indemnifying
party or parties shall be entitled to participate therein, and to the extent it
or they may elect by written notice delivered to the indemnified party or
parties promptly after receiving the aforesaid notice from such indemnified
party or parties, to assume the defense thereof with counsel reasonably
satisfactory to such indemnified party. Notwithstanding the foregoing, an
indemnified party shall have the right to employ its own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense of such
indemnified party unless (i) the employment of such counsel shall have been
authorized in writing by the indemnifying party or parties in connection with
the defense of such action at the expense of the indemnifying party or parties,
(ii) the indemnifying party or parties shall not have employed counsel
reasonably satisfactory to such indemnified party to have charge of the defense
of such action within a reasonable time after notice of commencement of the
action or (iii) such indemnified party shall have reasonably concluded that
there may be one or more defenses available to it which are different from or
additional to those available to one or all of the indemnifying parties (in
which case the indemnifying parties shall not have the right to direct the
defense of such action on behalf of the indemnified party or parties), in any of
which events such fees and expenses of one additional counsel (in addition to
appropriate local counsel) shall be borne by the indemnifying parties. In no
event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to appropriate local counsel) separate from their
own counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances. Anything in this Section 8 to the
contrary notwithstanding, an indemnifying party shall not be liable for any
settlement of any claim or action effected without its written consent;
provided, however, that such consent may not be unreasonably withheld.
(d) In order to provide for just and equitable contribution in any
case in which (i) an indemnified party makes a claim for indemnification
pursuant to this Section 8, but it 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 of appeal) that such
indemnification may not be enforced in such case notwithstanding
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the fact that the express provisions of this Section 8 provide for
indemnification in such case or (ii) contribution under the Act may be required
on the part of any indemnified party, then each indemnifying party shall
contribute to the amount paid as a result of such losses, claims, damages,
expenses or liabilities (or actions in respect thereof) (A) in such proportion
as is appropriate to reflect the relative benefits received by each of the
contributing parties, on the one hand, and the party to be indemnified, on the
other hand, from the offering of the Securities or (B) if the allocation
provided by clause (A) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (A) above but also the relative fault of each of the contributing
parties, on the one hand, and the party to be indemnified, on the other hand, in
connection with the statements or omissions that resulted in such losses,
claims, damages, expenses or liabilities (or actions in respect thereof), as
well as any other relevant equitable considerations. The relative benefits
received by the Company and the Selling Stockholders, on the one hand, and the
Underwriters, on the other hand, shall be deemed to be in the same proportion as
the total net proceeds from the offering of the Securities (before deducting
expenses) bear to the total underwriting discounts received by the Underwriters
hereunder, in each case as set forth in the table on the cover page of the
Prospectus. 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 the Company, the Selling Stockholders or by the Representative with
respect to an Underwriter, and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such untrue statement or
omission. The amount paid by an indemnified party as a result of the losses,
claims, damages, expenses or liabilities (or actions in respect thereof)
referred to in the first sentence of this Section 8(d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 8(d), no Underwriter shall be
required to contribute any amount in excess of the underwriting discount
applicable to the Securities purchased by such Underwriter hereunder. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act and the cases and promulgations thereunder) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 8(d), each person, if any, who
controls the Company, the Selling Stockholders or an Underwriter within the
meaning of the Act, each officer of the Company who has signed the Registration
Statement and each director of the Company shall have the same rights to
contribution as the Underwriters, or the Company, as the case may be, subject in
each case to the provisions of this Section 8(d). Any party entitled to
contribution will, promptly after receipt of notice of commencement of any
action against such party in respect to which a claim for contribution may be
made against another party or parties under this Section 8(d), notify such party
or parties from whom contribution may be sought, but the omission to so notify
such party or parties shall not relieve the party or parties from whom
contribution may be sought from any obligation it or they may have hereunder or
otherwise than under this Section 8(d) except to the extent it has been
materially prejudiced by such failure. The contribution agreement set forth
above shall be in addition to any liabilities which any indemnifying party may
have at common law or otherwise. Notwithstanding anything to the contrary
contained in this Agreement, the Selling Stockholders shall not be required to
contribute any amount which when added to any
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<PAGE> 36
amounts paid by the Selling Stockholders under Section 8(a), would be in excess
of the lesser of (i) that proportion of the total of such losses, claims,
damages or liabilities indemnified or contributed against equal to the
proportion of the total Securities sold hereunder which is being sold by it, or
(ii) the proceeds received by it from the Underwriters in the offering. The
Underwriters' obligations in this Section 8(d) to contribute are several in
proportion to their respective underwriting obligations and not joint.
(e) The indemnity and contribution agreements contained in this
Section 8 and the representations and warranties of the Company and the Selling
Stockholders set forth in this Agreement shall remain operative and in full
force and effect, regardless of (i) any investigation made by or on behalf of
any Underwriter or any person controlling any Underwriter, the Company, its
directors or officers or the Selling Stockholders or any person controlling the
Company, (ii) acceptance of any Securities and payment therefor hereunder, and
(iii) any termination of this Agreement. A successor to any Underwriter or any
person controlling any Underwriter, or to the Company, its directors or
officers, or any person controlling the Company, shall be entitled to the
benefits of the indemnity, contribution and reimbursement agreements contained
in this Section 8.
(f) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement (including
any Term Sheet) thereto, each party against whom contribution may be sought
under this Section 8 hereby consents to the jurisdiction of any court having
jurisdiction over any other contributing party, agrees that process issuing from
such court may be served upon him or it by any other contributing party and
consents to the service of such process and agrees that any other contributing
party may join him or it as an additional defendant in any such proceeding in
which such other contributing party is a party.
9. Representations, Warranties and Agreements to Survive Delivery. All
representations, warranties, covenants and agreements contained in this
Agreement, or contained in certificates of officers of the Company or the
Selling Stockholders delivered pursuant hereto, shall be deemed to be
representations, warranties, covenants and agreements at the Closing Date and at
each Option Closing Date, as the case may be, and such representations,
warranties, covenants and agreements of the Company and the Selling Stockholders
and the respective indemnity and contribution agreements contained in Section 8
hereof, shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of the Representative, any of the
Underwriters or the Company or the Selling Stockholders, and shall survive the
termination of this Agreement and the issuance, sale and delivery of the
Securities to the Underwriters.
10. Effective Date. This Agreement shall become effective at 10:00
a.m., New York City time, on the date hereof, or at such earlier time after the
Registration Statement becomes effective as the Representative, in its sole
discretion, shall release the Securities for sale to the public; provided,
however, that the provisions of Sections 6, 8 and 11 hereof shall at all times
be effective. For purposes of this Section 10, the Securities to be purchased
hereunder shall be deemed to have been so released upon the earlier of dispatch
by the Representative of telegrams or facsimile transmissions to securities
dealers releasing such
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<PAGE> 37
Securities for offering or the release by the Representative for publication of
the first newspaper advertisement which is subsequently published relating to
the Securities.
11. Termination.
(a) The Representative shall have the right to terminate this
Agreement after it becomes effective, the exercise of which shall be determined
in the Representative's sole discretion, if: (i) any domestic or international
event or act or occurrence has, as determined in the Representative's sole
judgment, disrupted, or in the Representative's sole judgment will in the
immediate future materially disrupt, the financial markets; or (ii) any material
adverse change, as determined in the Representative's sole judgment, in the
financial markets shall have occurred; or (iii) trading on the New York Stock
Exchange, the American Stock Exchange, the NNM or the over-the-counter market
shall have been suspended, or minimum or maximum prices for trading shall have
been fixed, or maximum ranges for prices for securities shall have been required
on the over-the-counter market by the NASD or the Commission or any other
governmental authority having jurisdiction; or (iv) the United States shall have
become involved in a war or in hostilities, or there shall have been an
escalation in an existing war or hostilities or a national emergency shall have
been declared in the United States; or (v) a banking moratorium shall have been
declared by any state or federal authority or body; or (vi) a moratorium in
foreign exchange trading shall have been declared; or (vii) the Company shall
have sustained a material or substantial loss by fire, flood, accident,
hurricane, earthquake, theft, sabotage or other calamity or malicious act which,
whether or not such loss shall have been insured, will, in the Representative's
sole judgment, make it inadvisable to proceed with the offering, sale or
delivery of the Securities; or (viii) there shall have been a material adverse
change or development involving a material prospective change, in the condition
(financial or otherwise), earnings, business affairs, position, prospects,
stockholders' equity, operations, obligations, properties, businesses,
management or results of operations of the Company taken as a whole, whether or
not arising in the ordinary course of business, or (ix) if there shall have been
a material adverse change in the general market, political or economic
conditions, whether in the United States or elsewhere, as in the
Representative's sole judgment would make it inadvisable to proceed with the
offering, sale or delivery of the Securities.
(b) Notwithstanding any contrary provision contained in this
Agreement, in the event of any termination of this Agreement (including, without
limitation, pursuant to Sections 7, 11(a) or 12 hereof), and whether or not this
Agreement is otherwise carried out, the provisions of Sections 6 and 8 hereof
shall remain effective and shall not in any way be affected by such termination
or failure to carry out the terms of this Agreement or any part hereof.
12. Default by the Company. If the Company or the Selling Stockholders
shall fail at the Closing Date or any Option Closing Date, as applicable, to
sell and deliver the number of Securities which it or he is obligated to sell
and deliver hereunder on such date, then this Agreement shall terminate (or, if
such default shall occur with respect to any Option Shares to be purchased on an
Option Closing Date, the Underwriters may, in the
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<PAGE> 38
Representative's sole discretion, by notice from the Representative to the
Company and Selling Stockholders, terminate the Underwriters' obligation to
purchase such Option Shares from the Company and the Selling Stockholders on
such date) with no liability whatsoever on the part of any non-defaulting party
other than pursuant to Sections 6, 8 and 11 hereof. No action taken pursuant to
this Section 12 shall relieve the Company or the Selling Stockholders from
liability, if any, in respect of such default.
13. Substitution of Underwriters. If any Underwriter defaults in its
obligation to purchase the number of Securities which it has agreed to purchase
under this Agreement, the non-defaulting Underwriters shall be obligated to
purchase (in the respective proportions which the number of Securities set forth
opposite the name of each non-defaulting Underwriter in Schedule I bears to the
total number of Securities set forth opposite the names of all the
non-defaulting Underwriters in Schedule I) the Securities which the defaulting
Underwriter agreed but failed to purchase; except that the non-defaulting
Underwriters shall not be obligated to purchase any of the Securities if the
total number of Securities which the defaulting Underwriter or Underwriters
agreed but failed to purchase exceeds 10% of the total number of Securities, and
any non-defaulting Underwriter shall not be obligated to purchase more than 110%
of the number of Securities set forth opposite its name in Schedule I plus the
total number of Option Shares purchasable by it pursuant to the terms of Section
3(b) hereof. If the foregoing maximums are exceeded, the non-defaulting
Underwriters, and any other underwriters satisfactory to you who so agree, shall
have the right, but shall not be obligated, to purchase (in such proportions as
may be agreed upon among them) all the Securities. If the non-defaulting
Underwriters or the other underwriters satisfactory to you do not elect to
purchase the Securities which the defaulting Underwriter or Underwriters agreed
but failed to purchase, this Agreement shall terminate without liability on the
part of any non-defaulting Underwriter, the Company except for the payment of
expenses to be borne by the Company as provided in Section 6(a) hereof and the
indemnify and contribution agreements of the Company and the Underwriters
contained in Section 8 hereof; provided, however, that this provision shall not
affect any Closing which at the time of such termination already shall have
taken place.
Nothing contained herein shall relieve a defaulting Underwriter of
any liability it may have for damages caused by its default. If the other
underwriters satisfactory to you are obligated or agreed to purchase the
Securities of a defaulting Underwriter, either you or the Company may postpone
the Closing Date for up to seven full Business Days in order to effect any
changes that may be necessary in the Registration Statement, the Prospectus or
in any other document or agreement, and to file promptly any amendments or any
supplements to the Registration Statement or the Prospectus which in your
opinion may thereby be made necessary.
14. Notices. All notices and communications hereunder, except as herein
otherwise specifically provided, shall be in writing and shall be deemed to have
been duly given if mailed, delivered by hand or transmitted by any standard form
of telecommunication. Notices to the Underwriters shall be directed to the
Representative at 1999 Avenue of the Stars, Suite 2800, Los Angeles, California
90067, Attention: Mr. Anthony Soich, with a copy to Jeffer, Mangels, Butler &
Marmaro, LLP, 2121 Avenue of
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<PAGE> 39
the Stars, 10th Floor, Los Angeles, California 90067, Attention: Steven J.
Insel, Esq. Notices to the Company and the Selling Stockholders shall be
directed to the Company at 13845 Artesia Boulevard, Cerritos, California
90703-9000, Attention: Richard Berger, with a copy to Keesal, Young & Logan, 400
Oceangate, Long Beach, California 90802, Attention: Jeffrey D. Warren, Esq.
15. Parties. This Agreement shall inure solely to the benefit of and
shall be binding upon, the Underwriters, the Company and the Selling
Stockholders and the controlling persons, officers, directors and others
referred to in Section 8 hereof, and their respective successors, legal
representatives and assigns, and no other person shall have or be construed to
have any legal or equitable right, remedy or claim under or in respect of or by
virtue of this Agreement or any provisions herein contained. No purchaser of
Securities from an Underwriter shall be deemed to be a successor merely by
reason of such purchase.
16. Construction. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of California, without giving
effect to conflict of laws principles thereof.
17. Counterparts; Facsimile Signatures. This Agreement may be executed
in any number of counterparts, each of which shall be deemed to be an original,
and all of which taken together shall be deemed to he one and the same
instrument. Delivery of executed copies of this Agreement by facsimile
transmission shall be deemed to be delivery of an original, executed copy of
this Agreement by the transmitting party.
18. Entire Agreement; Amendments. This Agreement and the
Representative's Warrant Agreement constitute the entire agreement of the
parties hereto concerning the subject matter hereof and supersede all prior
written or oral agreements, understandings and negotiations with respect to the
subject matter hereof. This Agreement may not be amended, modified or altered
except in a writing signed by the Representative and the Company.
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<PAGE> 40
If the foregoing correctly sets forth the understanding among the
parties hereto, please so indicate in the space provided below for that purpose,
whereupon this letter shall constitute a binding agreement among us.
Very truly yours,
CRAIG CONSUMER ELECTRONICS, INC.
By:____________________________________
Richard I. Berger
President and CEO
BERGER HOLDINGS
By:____________________________________
Richard I. Berger
EXECUTIVE MARKETING, INC.
EMPLOYEE PENSION PLAN
By:____________________________________
Richard I. Berger, Trustee
_______________________________________
RICHARD I. BERGER
[Signatures Continued on Next Page]
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<PAGE> 41
[Signatures Continued from Previous Page]
RAM INVESTMENT GROUP, A CALIFORNIA
GENERAL PARTNERSHIP
By:____________________________________
Richard A. Miller
RICHARD ALAN MILLER INC.
EMPLOYEES' PENSION PLAN
By:____________________________________
Richard A. Miller, Trustee
_______________________________________
RICHARD A. MILLER
_______________________________________
WILLIAM ROLLNICK
_______________________________________
KARL JOHANNSMEIER
Confirmed and accepted as of
the date first above written.
THE BOSTON GROUP, L.P.
AS REPRESENTATIVE FOR THE
SEVERAL UNDERWRITERS NAMED
IN SCHEDULE I ATTACHED HERETO
By:_____________________________________
Anthony Soich
Director of Corporate Finance
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<PAGE> 42
SCHEDULE I
Underwriter Number of Shares
- ----------- ----------------
<PAGE> 43
SCHEDULE II
Opinion to Underwriters
(i) the Company (A) has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the jurisdiction of its
incorporation, (B) is duly qualified to do business as a foreign corporation and
is in good standing in each jurisdiction where, to the best knowledge of such
counsel, the ownership or lease of property or in which the conduct of its
business requires such qualification or licensing, except for those
jurisdictions in which the failure to so qualify would not, individually or in
the aggregate, have a material adverse effect on the Company's condition
(financial or otherwise) or results of operations, and (C) has all requisite
corporate power and authority to own or lease its properties and conduct its
business as described in the Prospectus;
(ii) the statements in the Registration Statement and the Prospectus
summarizing the effects of federal, state and local laws, rules, regulations and
orders on the Company's business are accurate and fairly and correctly present
the information required to be presented by the Act or the Rules and
Regulations, in all material respects, and to the best of our knowledge, there
are no statutes, rules or regulations required to be described or referred to in
the Registration Statement and Prospectus that are not described or referred to
therein;
(iii) to the best of such counsel's knowledge and except as described
in the Prospectus, the Company does not own any interest in any corporation,
partnership, joint venture, limited liability company, trust or other business
entity;
(iv) the authorized, issued and outstanding capital stock of the
Company is as set forth in the Registration Statement and Prospectus under the
heading "Capitalization" and there have been no changes in the authorized,
issued and outstanding capital stock of the Company since such date. The Common
Stock of the Company conforms to the description thereof contained in the
Prospectus. The outstanding shares of Common Stock have been and are, and the
Securities to be issued and sold by the Company, upon issuance and delivery and
payment therefor in the manner described herein will be, duly authorized,
validly issued, fully paid and nonassessable. The certificates for the Firm
Shares to be delivered on the Closing Date are in due and proper form. To the
best of such counsel's knowledge and except as described in the Prospectus, (i)
the issued and outstanding shares of Common Stock are not subject to any
preemptive or similar rights or any restrictions upon the voting or transfer
thereof, (ii) the holders of the issued and outstanding shares of Common Stock
have no rights of rescission with respect thereto and are not subject to
personal liability by reason of being such holders, and (iii) none of the issued
and outstanding shares of Common Stock was issued in violation of the preemptive
or other similar rights of any holders of any security of the Company;
(v) to the best of such counsel's knowledge and except as described in
the Prospectus, the Company is not a party to or bound by any instrument,
agreement or other arrangement or understanding providing for or requiring it to
issue any capital stock, rights, warrants, options or other securities, except
for securities issued pursuant to this Agreement, the Representative's Warrant
Agreement, the Purchase Plan, the Incentive Plan and ad hoc options to purchase
an aggregate of 382,928 shares, all as described in the Prospectus;
<PAGE> 44
(vi) the Registration Statement has become effective under the Act,
and, if applicable; any required filing of pricing information has been timely
made in the appropriate form under Rule 430A under the Act or under Rule 434
under the Act, and, to the best of such counsel's knowledge, no stop order
suspending the use of the Prospectus or suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose have
been instituted or are pending, threatened or contemplated under the Act;
(vii) the Prospectus and the Registration Statement, including the
information deemed to be part of the Registration Statement at the time of
effectiveness pursuant to Rule 430A(b) of the Act, if applicable, (other than
the financial statements and schedules and other financial and statistical data
included therein or omitted therefrom, as to which no opinion need be rendered)
comply as to form in all material respects with the requirements of the Act and
the Rules and Regulations;
(viii) to the best of such counsel's knowledge (A) there are no
agreements, contracts or other documents required by the Act to be described in
the Registration Statement and the Prospectus and filed as exhibits to the
Registration Statement which are not described in the Registration Statement and
the Prospectus and filed as exhibits to the Registration Statement, and (B)
there is no action, suit, proceeding, inquiry, arbitration, investigation,
litigation or governmental or other proceeding pending, contemplated or
threatened, to which the Company is subject or to which any property or assets
(tangible or intangible) of the Company is subject, which is required to be
disclosed in the Registration Statement and Prospectus which is not so disclosed
(and such proceedings as are summarized in the Registration Statement and
Prospectus are accurately summarized in all respects);
(ix) the Company has full corporate power and authority to authorize,
issue, deliver and sell the Securities, to enter into each of this Agreement and
the Representative's Warrant Agreement and to consummate the transactions
contemplated herein and therein; and each of this Agreement and the
Representative's Warrant Agreement has been duly authorized, executed and
delivered by the Company. Each of this Agreement and the Representative's
Warrant Agreement, assuming due authorization, execution and delivery by the
parties thereto other than the Company, constitutes a legal, valid and binding
agreement of the Company enforceable against the Company in accordance with its
terms (except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
relating to or affecting enforcement of creditors, rights and the application of
equitable principles in any action, legal or equitable, and except as rights to
indemnity or contribution may be limited by applicable law);
(x) the execution, delivery and performance of this Agreement and the
Representative's Warrant Agreement will not conflict with or result in any
breach or violation of any of the terms or provisions of, or constitute (with
notice, the lapse of time or both) a default under, or result in the creation or
imposition of any lien, charge, claim, encumbrance, pledge, security interest,
defect or other restriction or equity of any kind whatsoever upon any property
or assets (tangible or intangible) of the Company pursuant to the terms of (A)
the Certificate of Incorporation or bylaws of the Company, (B) to the best of
such counsel's knowledge and except as disclosed in the Prospectus, any material
license, contract, indenture, mortgage, installment sale agreement, lease, deed
of trust, voting trust agreement, stockholders agreement, purchase order, note,
loan or credit agreement or any other material agreement or instrument
evidencing an obligation for borrowed money, or any
<PAGE> 45
other material agreement or instrument (a "Material Agreement") to which the
Company is a party or by which it is or may be bound or to which any of its
properties or assets (tangible or intangible) are or may be subject or (C) to
the best of such counsel's knowledge, any law, statute, judgment, decree, order,
rule or regulation applicable to the Company of any arbitrator, court,
regulatory body or administrative agency or other governmental agency or body
having jurisdiction over the Company or its activities or properties;
(xi) no consent, approval, authorization, registration, qualification
or order of, and no filing with, any court, administrative agency or other
government or regulatory official, agency, authority or body is required in
connection with the issuance, delivery and sale of the Securities or the
Representative's Warrants, the performance of this Agreement and the
Representative's Warrant Agreement or the consummation of the transactions
contemplated hereby and thereby, other than such as may be required under the
securities or "blue sky" laws of any State and the rules and regulations of the
NASD and the Commission, as to which no opinion need be rendered;
(xii) To the best of such counsel's knowledge or as described in the
Prospectus, (A) the Company is not in breach of, or in default under, and no
event has occurred which, with notice, lapse of time or both, would constitute a
material default of, any term, covenant, condition or provision of any Material
Agreement to which the Company is a party or by which it is or may be bound or
to which its properties or assets (tangible or intangible) are or may be
subject, except where such breach or default would not, individually or in the
aggregate, materially adversely affect the Company's condition (financial or
otherwise) or results of operations; and (B) the Company is not in violation of
any term, covenant, condition or provision of its Certificate of Incorporation
or bylaws;
(xiii) The statements under the captions "Business," "Management,"
"Certain Transactions," "Description of Capital Stock," "Shares Eligible for
Future Sale" and, insofar as such section relates to this Agreement,
"Underwriting," in the Prospectus, insofar as such statements constitute a
summary of documents referred to therein or matters of law, are accurate
summaries and fairly and correctly present, in all material respects, the
information called for with respect to such documents and matters;
(xiv) to such counsel's knowledge, no person, corporation, trust,
partnership, association, limited liability company or other entity has the
right to include or register any securities of the Company in the Registration
Statement, require the Company to file any registration statement or, if filed,
to include any security in such registration statement;
(xv) to the best of such counsel's knowledge and except as described in
the Registration Statement and the Prospectus, there are no claims, payments,
arrangements or understandings, whether oral or written, for services in the
nature of a finder's fee, brokerage fee, origination fee or otherwise with
respect to the offerings contemplated by the Agreement, the Representative's
Warrant Agreement, the Registration Statement and the Prospectus or any other
arrangements, agreements, understandings, payments or issuances that may affect
the Representative's or Underwriters' compensation, as determined by the NASD
other than as the Representative itself may have agreed to with third parties;
(xvi) assuming due execution and capacity by the parties thereto other
than the Company, the Lock-Up Agreements are legal, valid and binding
obligations of the parties
<PAGE> 46
thereto, enforceable against the parties thereto and any subsequent holder of
the securities subject thereto in accordance with its terms;
(xvii) the Company had all requisite corporate power and authority and
had received all stockholder and director approvals necessary to effectuate the
Recapitalization and all corporate and stockholder proceedings necessary to
authorize the Recapitalization were duly taken and effected prior to the
effective time of the Recapitalization, (B) the Recapitalization has been
consummated and effected as described in the Prospectus, (C) the Company
obtained every material consent, authorization, approval, order, license,
certificate or permit of or from, or declaration or filing with, any federal,
state, local or other governmental authority or any court of other tribunal
required by the Company for the consummation of the Recapitalization, ;
(xviii) to the best of such counsel's knowledge (A) no consent,
approval or authorization of any party to any Material Agreement of the Company
was required in order to effect the Recapitalization that was not obtained,
except where the failure to do so would not, individually or in the aggregate,
have a material adverse effect on the Company's condition (financial or
otherwise) or results of operations, and (B) the consummation of the
Recapitalization, the issuance of promissory notes in connection with the
termination of the Company's phantom stock plan and the issuance of promissory
notes in lieu of accrued but unpaid dividends on Preferred Stock (all as
described in the Prospectus) did not conflict with or result in any breach or
violation of any of the terms, covenants, conditions or provisions of, or
constitute (with notice, the lapse of time or both) a default under, result in
the creation or imposition of any lien, charge, claim, encumbrance, pledge,
security interest, defect or other restriction or equity of any kind whatsoever
upon any property or assets (tangible or intangible) of the Company pursuant to
the terms of, (x) the Certificate of Incorporation or bylaws of the Company, (y)
any Material Agreement of the Company, or (z) any law, statute, judgment,
decree, order, rule or regulation applicable to the Company of any arbitrator,
court, administrative agency or other governmental or regulatory official,
agency authority or body having jurisdiction over the Company or either of their
activities or properties;
(xix) with respect to the Selling Stockholders and the Company (only in
the event of the purchase by the Underwriters of Option Shares on any Option
Closing Date):
(1) this Agreement, the Custody Agreement and the Power-of-Attorney
have been duly executed and delivered by the Selling Stockholders;
assuming due authorization, execution and delivery by the Custodian,
the Custody Agreement and the Power-of-Attorney are the legal, valid,
binding and enforceable instruments of such Selling Stockholders
(except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general
application relating to or affecting enforcement of creditors' rights
and the application of equitable principles in any action, legal or
equitable principles in any action, legal or equitable, and except as
rights to indemnity or contribution may be limited by applicable law),
(2) assuming that (i) the Underwriters have no notice of any adverse
claims with respect to the Option Shares being sold hereunder by the
Selling Stockholders, and (ii) the certificates representing the Option
Shares being sold by such Selling Stockholders are delivered to the
Underwriters in good faith and duly endorsed or accompanied by a duly
executed assignment separate from certificate in the State of
California, the
<PAGE> 47
delivery by such Selling Stockholders to the several Underwriters of
certificates for the Option Shares being sold hereunder by such Selling
Stockholders against payment therefor as provided herein, will convey
good and valid title to such Option Shares to the several Underwriters,
free and clear of all "adverse claims" (as that term is defined in
Section 8302 of the Commercial Code of the State of California);
(3) the sale of the Option Shares to the Underwriters by the Selling
Stockholders and the Company pursuant to this Agreement, the compliance
by such Selling Stockholders with the other provisions of this
Agreement and the Custody Agreement, the Lock-Up Agreement executed by
Selling Stockholders, and each of the other contracts and agreements
described in this Agreement to which any Selling Stockholders is a
party, do not (i) require the consent, approval, authorization,
registration or qualification of or with any governmental authority,
except such as have been obtained and such as may be required under
state securities or blue sky laws, or (ii) to the best of such
counsel's knowledge, conflict with or result in a breach or violation
of any of the terms and provisions of, or constitute a default under,
any statute or, to the knowledge of such counsel, any indenture,
mortgage, deed of trust, lease or other agreement or instrument to
which such Selling Stockholders are a party or by which such Selling
Stockholders or any of such Selling Stockholders' properties are bound
or any judgment, decree, order, rule or regulation of any court or
other governmental authority or any arbitrator applicable to the
Selling Stockholders.
Such counsel shall state that such counsel has participated in conferences with
officers and other representatives of the Company, representatives of the
independent certified public accountants for the Company, representatives of the
Representative and representatives of the Underwriters' Counsel, at which
conferences such counsel made inquires of such officers, such other
representatives of the Company and representatives of such accountants and
discussed the contents of each Preliminary Prospectus, the Registration
Statement, the Prospectus and related matters and, although such counsel is not
passing upon and does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus (except as and to the
extent stated in (xii) above), on the basis of the foregoing and such counsel's
participation in the preparation of each Preliminary Prospectus, the
Registration Statement and the Prospectus, no facts have come to the attention
of such counsel which leads it to believe that either the Registration Statement
or any amendment thereto, at the time such Registration Statement or amendment
became effective or as of the Closing Date (or the Option Closing Date, as the
case may be) 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 that the Prospectus or any amendments or
supplements (including any Term Sheet) thereto, at the date of each such
Prospectus or amendment or supplement (including any Term Sheet) and at the
Closing Date (or the Option Closing Date, as the case may be) contained or
contains any untrue statement of a material fact or omitted or omits to state a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading (it being understood
that such counsel need express no opinion with respect to the financial
statements and schedules and other financial and statistical data included in or
omitted therefrom in any Preliminary Prospectus, the Registration Statement or
the Prospectus, or any amendments or supplements (including any Term Sheet)
thereto).
<PAGE> 48
(xx) the Company owns or possesses, free and clear of all liens or
encumbrances and rights thereto or therein, the requisite licenses or other
rights to use all trademarks, trade names, service marks, service names,
copyright or patents which, individually or in the aggregate, are material to
its condition (financial or otherwise), earnings, business affairs, position,
prospects, stockholders' equity, operations, properties, businesses or results
of operations, and, except as specifically disclosed in the Prospectus under
"Business -- Legal Proceedings," there is no claim or action by any person
pertaining to, or proceeding, pending, or threatened, which challenges the
rights of the Company with respect to any trademarks, service marks, copyrights,
service names, trade names, patents, patent applications and licenses used in
the conduct of the Company's business (including, without limitation, any such
licenses or rights described in the Prospectus as being owned or possessed by
the Company), and the Company's current products, services and processes do not
and will not infringe on the trademarks, service marks, copyrights, service
names, trade names, patents, patent applications or licenses held by any third
party.
<PAGE> 1
EXHIBIT 3D
CORRECTED
AMENDMENT TO THE
CERTIFICATE OF INCORPORATION
OF
CRAIG CONSUMER ELECTRONICS, INC.
(a Delaware Corporation)
[CORRECTED PURSUANT TO SECTION 104(f) OF
THE DELAWARE GENERAL CORPORATION LAW]
This Certificate corrects that certain Amendment to the Certificate of
Incorporation of Craig Consumer Electronics, Inc., filed on May 10, 1996
("Amendment").
The corrections are to the references to the shares of Common Stock
into which shares are converted by means of the Amendment, specifically to make
minor corrections to the number of shares resulting from the conversion
(reverse stock split) effected by the Amendment, thereby amending paragraphs 2
and 4 of the Amendment. The corrected amendment is completely restated as
follows:
Craig Consumer Electronics, Inc., (the "Corporation"), organized and
existing under the laws of the State of Delaware, hereby certifies as follows:
1. That the Corporation was incorporated in Delaware under the
name Berel Industries, Inc. in June 21, 1989.
2. That by unanimous approval of the Board of Directors and
Stockholders of the Corporation, resolutions were duly adopted to amend the
Certificate of Incorporation to reflect the conversion of the issued and
outstanding shares of Common Stock, $.01 par value per share into a lesser
number of Common Shares, immediately following the exchange of 250,000 shares
of Series A Preferred Stock into 1,733,330 shares of Common Stock, declaring
said amendment to be advisable, substantially as follows:
RESOLVED, that, prior to the Effective Date, but immediately subsequent
to the conversion of all of the Company's 250,000 shares of the Series A
Preferred Stock to 1,733,330 shares of Common Stock as provided above, the then
outstanding 8,139,325 shares of Common Stock shall be converted and exchanged in
a "reverse stock split" at the ratio of 3.81333-to-one, thereby resulting in
issued and outstanding shares totalling 2,134,441, after making adjustments for
fractional shares (to eliminate fractional shares upon such conversion) and
other minor adjustments.
<PAGE> 2
3. That thereafter, pursuant to resolution of its Board of
Directors and Stockholders holding all of the outstanding stock of the
Corporation an amendment to the Certificate of Incorporation and authorizing
the President to execute a certificate of amendment and all other documents
necessary to effect such reverse stock split was approved, all by unanimous
written consent in accordance with Section 228 of the General Corporation Law
of the State of Delaware.
4. That pursuant to Section 242 of the General Corporation Law of
the State of Delaware, Article IV of the Restated Certificate of Incorporation,
filed with the Delaware Secretary of State February 1, 1991, is amended to read
as follows:
Four. The Corporation shall be authorized to issue two classes of shares
of stock to be designated, respectively, "Preferred Stock" and "Common
Stock"; the total number of shares which the Corporation shall have
authority to issue is Sixteen Million (16,000,000); the total number of
shares of Preferred Stock shall be One Million (1,000,000) and each such
shares shall have a par value of one cent ($.01), and the total number
of shares of Common Stock shall be Fifteen Million (15,000,000) and each
such shares shall have a par value of one cent ($.01).
The Preferred Stock, par value $.01 per share, (referred to hereinafter
as "Preferred Stock"), may be issued from time to time in one or more
series. Share of Preferred Stock which may be redeemed, purchased or
acquired by the Corporation may be reissued except as otherwise provided
by law. The Board of Directors of the Corporation is hereby authorized
to increase or decrease (but not below the number of share of such
series then outstanding) the number of shares of any series of Preferred
Stock subsequent to the issue of shares of such series. The Board of
Directors is hereby further authorized to fix the dividend rate,
conversion rights, voting rights, the redemption price or prices
(including sinking fund provisions), and the
<PAGE> 3
liquidation preferences of any wholly unissued series of Preferred
Stock, and to fix the number of shares constituting any such series and
the designation of such series. The term "fixed for such Series" and
correlative terms as used in this Articles Four shall mean with respect
to any series of Preferred Stock, as stated in a resolution or
resolutions lawfully adopted by the Board of Directors in exercise of
such authority hereinabove granted.
The Common stock issued and outstanding on the date hereof consisting of
8,139,325 shares shall be exchanged and converted into 2,134,441 shares
of issued and outstanding Common Stock. Upon such conversion, there
shall be 2,134,441 shares of Common Stock issued and outstanding and no
shares of Preferred Stock issued and outstanding. The 6,004,884 shares
returned to the Corporation as a result of the conversion shall be
returned to available capital. After the conversion, the stated capital
attributable to Common Stock is $21,344.41, a reduction of $60,048.86.
In witness whereof, Craig Consumer Electronics, Inc. has caused this
Corrected Amendment of the Certificate of Incorporation to be signed by its
President and Chairman of the Board of Directors, and by the Corporation's
Secretary.
Dated: May 14, 1996
Craig Consumer Electronics, Inc.
-----------------------------------------------
Richard I. Berger
President and
Chairman of the Board of Directors
-----------------------------------------------
Donna Richardson, Secretary
<PAGE> 1
EXHIBIT 4-B
Proof of May 14, 1996
- --------------------------------------------------------------------------------
CRAIG CONSUMER ELECTRONICS, INC.
and
THE BOSTON GROUP, L.P.
--------------------
REPRESENTATIVE'S WARRANT AGREEMENT
Dated as of May , 1996
--------------------
- --------------------------------------------------------------------------------
<PAGE> 2
REPRESENTATIVE'S WARRANT AGREEMENT
THIS REPRESENTATIVE'S WARRANT AGREEMENT (the "Agreement"), dated as
of May __, 1996, is made and entered into by and between CRAIG CONSUMER
ELECTRONICS, INC., a Delaware corporation (the "Company"), and THE BOSTON GROUP,
L.P. ("the Representative").
The Company agrees to issue and sell to the Representative and the
Representative agrees to purchase from the Company, for the price of $50, a
warrant, as hereinafter described (the "Warrant" and together with any warrants
subsequently issued hereunder, the "Warrants"), to purchase up to 125,000
shares, as may be adjusted from time to time as set forth herein, of the
Company's common stock, no par value (the "Common Stock"), in connection with a
public offering (the "Offering") by the Company of 1,262,500 shares of Common
Stock pursuant to an underwriting agreement (the "Underwriting Agreement"),
dated as of May , 1996, by and between the Company and the Representative, as
representative of the several Underwriters named therein. The shares of Common
Stock purchasable upon exercise of the Warrants, as may be adjusted from time to
time as set forth herein, are hereinafter referred to as the "Warrant Stock."
The Warrant shall be issued pursuant to this Agreement on the closing date of
the Offering (the "Closing Date").
In consideration of the foregoing and for the purpose of defining
the terms and provisions of the Warrants, the Warrant Stock and the respective
rights and obligations thereunder, the Company and the Representative, for value
received, hereby agree as follows:
SECTION 1. TRANSFERABILITY AND FORM OF WARRANTS.
1.1 Registration. All Warrants shall be numbered and shall be
registered on the books of the Company when issued.
1.2 Transfer. The Warrants shall be transferable only on the books
of the Company maintained at its principal office, wherever its principal office
may then be located, upon delivery thereof duly endorsed by a Warrant holder (a
"Warrantholder") or by its duly authorized attorney or representative and with
the signatures properly guaranteed, accompanied by proper evidence of
succession, assignment or authority to transfer. Upon any registration of
transfer, the Company shall execute and deliver a new certificate evidencing
each such Warrant to each person entitled thereto.
1.3 Limitations on Transfer of the Warrants. Warrants shall not be
sold, transferred, assigned or hypothecated by the Representative until 6:30
a.m., Pacific time, on ______________, 1997 [ONE YEAR AFTER THE EFFECTIVE DATE],
except that Warrants may be transferred before such date: (i) to one or more
officers or partners of any Warrantholder, and the officers or partners of any
such partner; (ii) to any other member of the National Association of Securities
Dealers, Inc. which participated in the Offering and the officers or partners of
any such member; (iii) to successors to a Warrantholder or the officers or
partners of any such successor; (iv) to a purchaser of all or substantially all
of the assets of a
-1-
<PAGE> 3
Warrantholder; or (v) by will, pursuant to the laws of descent or distribution
or by operation of law. The Warrants may be divided or combined, upon request to
the Company by a Warrantholder, into a certificate or certificates representing
the right to purchase the same aggregate number of Warrant Stock. Unless the
context indicates otherwise, the term "Warrantholder" shall include the
Representative and any transferee or transferees of the Warrants pursuant to
this subsection 1.3 and as otherwise permitted by this Agreement, and the term
"Warrants" shall include any and all Warrants outstanding pursuant to this
Agreement, including those evidenced by a certificate or certificates issued
upon division, exchange, substitution or transfer pursuant to this Agreement.
1.4 Form of Warrants. The text of the Warrants and of the form of
election to purchase Warrant Stock shall be substantially as set forth in
Exhibit A attached hereto. The aggregate number of shares of Common Stock
issuable upon exercise of the Warrants is subject to adjustment upon the
occurrence of certain events, all as hereinafter provided. The Warrants shall be
executed on behalf of the Company by its Chief Executive Officer or its
President and attested to by its Chief Financial Officer or its Secretary. A
Warrant bearing the signature of an individual who was at any time the proper
officer of the Company shall bind the Company, notwithstanding that such
individual shall have ceased to hold such office prior to the delivery of such
Warrant or did not hold such office on the date of this Agreement or at any time
thereafter.
The Warrants shall be dated as of the date of signature thereof
by the Company either upon initial issuance or upon division, exchange,
substitution or transfer.
1.5 Legend on Warrants and Warrant Stock. Each certificate
evidencing a Warrant (or Warrant Stock issued upon exercise of a Warrant)
initially issued upon exercise of a Warrant shall bear the following legend,
unless, at the time of exercise, such Warrant Stock is subject to a currently
effective Registration Statement under the Securities Act of 1933, as amended
(the "Act"):
"'THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD,
EXCHANGED, HYPOTHECATED OR TRANSFERRED IN ANY MANNER EXCEPT IN
COMPLIANCE WITH SECTION 11 OF THE REPRESENTATIVE'S WARRANT AGREEMENT
PURSUANT TO WHICH THEY WERE ISSUED."
Any certificate issued at any time in exchange or substitution for
any certificate bearing such legend (except a new certificate issued upon
completion of a public distribution pursuant to an effective registration
statement under the Act, of the securities represented thereby) shall also bear
the above legend unless, in the opinion of the Company's counsel, the securities
represented thereby need no longer be subject to such restrictions.
-2-
<PAGE> 4
SECTION 2. EXCHANGE OF WARRANT CERTIFICATE. Any Warrant certificate may
be exchanged for another certificate or certificates entitling the Warrantholder
to purchase a like aggregate number of shares of Warrant Stock as the
certificate or certificates surrendered then entitled such Warrantholder to
purchase. Any Warrantholder desiring to exchange a Warrant certificate shall
make such request in writing delivered to the Company, and shall surrender,
properly endorsed, the certificate evidencing the Warrant to be so exchanged.
Thereupon, the Company shall execute and deliver to the person entitled thereto
a new Warrant certificate or certificates as so requested.
SECTION 3. TERM OF WARRANTS; EXERCISE OF WARRANTS.
(a) Subject to the terms of this Agreement, the Warrantholder shall
have the right, at any time during the period commencing at 6:30 a.m., Pacific
Time, on _______________, 1997 [ONE YEAR AFTER THE EFFECTIVE DATE] and ending at
5:00 p.m., Pacific Time, on _____________, 2001 [FIVE YEARS AFTER THE EFFECTIVE
DATE] (the "Termination Date"), to purchase from the Company up to the number of
fully paid and nonassessable shares of Warrant Stock to which the Warrantholder
may at the time be entitled to purchase pursuant to this Agreement, upon
surrender to the Company, at its principal office, of the certificate evidencing
the Warrants to be exercised, together with the purchase form on the reverse
thereof duly completed and executed, and upon payment to the Company of the
Warrant Price (as defined in and determined in accordance with the provisions of
this Section 3 and Sections 7 and 8 hereof) for the number of shares of Warrant
Stock in respect of which such Warrants are then exercised, but in no event for
less than 100 shares of Warrant Stock (unless less than an aggregate of 100
shares of Warrant Stock are then purchasable under all outstanding Warrants held
by such Warrantholder). This Warrant, when exercisable, may be exercised from
time to time in whole or in part.
(b) Payment of the Warrant Price shall be made in cash, by certified
or official bank check in Los Angeles Clearing House funds (next day funds), or
any combination thereof.
(c) In addition to the method of payment set forth in Section 3(b)
above and in lieu of any cash payment required thereunder, unless otherwise
prohibited by law, the Warrantholders shall have the right at any time, when
exercisable, and from time to time to exercise the Warrants in full or in part
(i) by receiving from the Company the number of shares of Warrant Stock equal to
the number of shares of Warrant Stock otherwise issuable upon such exercise less
the number of shares of Warrant Stock having an aggregate value on the date of
exercise equal to the Warrant Price multiplied by the number of shares of
Warrant Stock for which this Warrant is being exercised and/or (ii) by
delivering to the Company the number of shares of Common Stock having an
aggregate value on the date of exercise equal to the Warrant Price multiplied by
the number of shares of Warrant Stock for which this Warrant is being exercised.
For purposes hereof, the "value" of a share of Common Stock on a given date
shall equal to the Current Market Price on such date as defined in Section 9 of
this Agreement.
-3-
<PAGE> 5
(d) Upon surrender of the Warrants and payment of the Warrant Price
as aforesaid, the Company shall issue and cause to be delivered with all
reasonable dispatch to or upon the written order of the Warrantholder, and in
such name or names as the Warrantholder may designate, certificates for the
number of full shares of Warrant Stock so purchased upon such exercise of the
Warrant, together with cash, as provided in Section 9 hereof, in respect of any
fractional shares otherwise issuable upon such surrender. Such certificate or
certificates, to the extent permitted by law, shall be deemed to have been
issued and any person so designated to be named therein shall be defined to have
become a holder of record of such securities as of the date of surrender of the
Warrants and payment of the Warrant Price, as aforesaid, notwithstanding that
the certificate or certificates representing such securities shall not actually
have been delivered or that the stock transfer books of the Company shall then
be closed. The Warrants shall be exercisable, at the election of the
Warrantholder, either in full or from time to time in part and, in the event
that a Warrant is exercised in respect of less than all of the shares of Warrant
Stock specified therein at any time prior to the Termination Date, a new Warrant
evidencing the remaining shares of the Warrant Stock purchasable by such
Warrantholders hereunder shall be issued by the Company to such Warrantholders.
SECTION 4. VALIDITY; PAYMENT OF TAXES. All securities delivered upon
exercise of a Warrant shall be duly and validly issued and non-assessable. The
Company shall pay all documentary stamp taxes, if any, attributable to the
initial issuance of the Warrants and the shares of Warrant Stock issuable upon
the exercise of the Warrants; provided, however, the Company shall not be
required to pay any tax which may be payable in respect of any secondary
transfer of the Warrants or the Warrant Stock.
SECTION 5. MUTILATED OR MISSING WARRANTS. In case the certificate or
certificates evidencing the Warrants shall be mutilated, lost, stolen or
destroyed, the Company shall, at the request of the Warrantholder, issue and
deliver in exchange and substitution for and upon cancellation of the mutilated
certificate or certificates, or in lieu of and substitution for the certificate
or certificates lost, stolen or destroyed, a new Warrant certificate or
certificates of like tenor and representing an equivalent right or interest, but
only upon receipt of evidence reasonably satisfactory to the Company of such
loss, theft or destruction of such Warrant.
SECTION 6. RESERVATION OF SHARES. The Company represents and warrants
to the Warrantholder that there has been reserved, and the Company shall at all
times keep reserved so long as the Warrants remain outstanding, out of its
authorized Common Stock, such number of shares of Common Stock as shall be
subject to purchase under the Warrants. Every transfer agent for the Common
Stock and other securities of the Company issuable upon the exercise of the
Warrants shall be irrevocably authorized and directed at all times to reserve
such number of authorized shares and other securities as shall be requisite for
such purpose. The Company shall keep a copy of this Agreement on file with every
transfer agent for the Common Stock and other securities of the Company issuable
upon the exercise of the Warrants. The Company shall supply every such transfer
agent with duly executed stock and other certificates, as appropriate, for such
purpose and shall provide or otherwise make available any cash which may be
payable in lieu of the issuance of fractional shares, as provided in Section 9
hereof.
-4-
<PAGE> 6
SECTION 7. WARRANT PRICE. The price per share at which shares of
Warrant Stock shall be purchasable upon the exercise of the Warrants shall be
$____ [120% OF THE INITIAL PUBLIC OFFERING PRICE], subject to adjustment
pursuant to Section 8 hereof (as so adjusted from time to time, the "Warrant
Price").
SECTION 8. ADJUSTMENTS OF NUMBER OF SHARES OF WARRANT STOCK AND WARRANT
PRICE. The number and kind of securities purchasable upon the exercise of the
Warrants and the Warrant Price shall be subject to adjustment from time to time
upon the happening of certain events, as follows:
8.1 Adjustments. The number of shares of Warrant Stock purchasable
upon the exercise of each Warrant and the Warrant Price shall be subject to
adjustment as follows:
(a) In case the Company shall (i) pay a dividend or make a
distribution on its Common Stock in shares of its capital stock or other
securities, (ii) subdivide its outstanding shares of Common Stock into a greater
number of shares, (iii) combine its outstanding Common Stock into a smaller
number of shares or (iv) issue, by reclassification of its Common Stock, shares
of its capital stock or other securities of the Company (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing corporation), the number of shares of Warrant Stock
purchasable upon exercise of a Warrant immediately prior thereto shall be
adjusted so that the Warrantholder shall be entitled to receive the kind and
number of shares of Warrant Stock, shares of its capital stock and other
securities of the Company which such holder would have owned or would have been
entitled to receive immediately after the happening of any of the events
described above, had the Warrant been exercised immediately prior to the
happening of such event or any record date with respect thereto. Any adjustment
made pursuant to this subsection 8.1(a) shall become effective immediately after
the effective date of such event retroactive to the record date, if any, for
such event.
(b) In case the Company shall issue rights, options (other than
options issued under, and pursuant to, the Company's Incentive and Non-Statutory
Stock Option Plan (collectively, the "Option Plan")], warrants or convertible
securities to holders of its Common Stock, without any charge to such holders,
containing the right to subscribe for or purchase Common Stock, the number of
shares of Warrant Stock thereafter purchasable upon the exercise of each Warrant
shall be determined by multiplying the number of shares of Warrant Stock
theretofore purchasable upon exercise of a Warrant by a fraction, of which the
numerator shall be the number of shares of Common Stock outstanding immediately
prior to the issuance of such rights, options, warrants or convertible
securities plus the number of additional shares of Common Stock offered for
subscription or purchase, and of which the denominator shall be the number of
shares of Common Stock outstanding immediately prior to the issuance of such
rights, options, warrants or convertible securities. Such adjustment shall be
made whenever such rights, options, warrants or convertible securities are
issued, and shall become effective immediately and retroactive to the record
date for the determination of stockholders entitled to receive such rights,
options, warrants or convertible securities.
-5-
<PAGE> 7
(c) In case the Company shall distribute to holders of its
Common Stock evidences of its indebtedness or assets (excluding cash dividends
or distributions out of current earnings made in the ordinary course of business
consistent with past practices), then in each case the number of shares of
Warrant Stock thereafter purchasable upon the exercise of each Warrant shall be
determined by multiplying the number of shares of Warrant Stock theretofore
purchasable upon exercise of such Warrant by a fraction, of which the numerator
shall be the then Current Market Price (as defined below) on the date of such
distribution, and of which the denominator shall be such Current Market Price on
such date minus the then fair value (determined as provided in subsection 8(f)
below) of the portion of the assets or evidences of indebtedness so distributed
applicable to one share of Common Stock. Such adjustment shall be made whenever
any such distribution is made and shall become effective on the date of
distribution retroactive to the record date for the determination of
stockholders entitled to receive such distribution.
(d) No adjustment in the number of shares of Warrant Stock
purchasable pursuant to subsections 8.1(b) or (c) hereof shall be required
v1unless such adjustment would require an increase or decrease of at least one
percent in the number of shares of Warrant Stock then purchasable upon the
exercise of the Warrants or, if the Warrants are not then exercisable, the
number of shares of Warrant Stock purchasable upon the exercise of the Warrants
on the first date thereafter that the Warrants would become exercisable;
provided, however, that any adjustments which by reason of this subsection
8.1(d) are not required to be made immediately shall be carried forward and
taken into account in any subsequent adjustment.
(e) Whenever the number of shares of Warrant Stock purchasable
upon the exercise of a Warrant is adjusted as herein provided, the Warrant Price
payable upon exercise of the Warrant shall be adjusted by multiplying such
Warrant Price immediately prior to such adjustment by a fraction, of which the
numerator shall be the number of shares of Warrant Stock purchasable upon the
exercise of such Warrant immediately prior to such adjustment, and of which the
denominator shall be the number of shares of Warrant Stock purchasable
immediately thereafter.
(f) To the extent not covered by subsections 8.1(b) or (c)
hereof, in case the Company shall sell or issue Common Stock or rights, options
(other than options issued under and pursuant to the Option Plan), warrants or
convertible securities containing the right to subscribe for, purchase or
exchange into shares of Common Stock at a price per share (determined, in the
case of such rights, options, warrants or convertible securities, by dividing
(i) the total amount received or receivable by the Company in consideration of
the sale or issuance of such rights, options, warrants or convertible
securities, plus the total consideration payable to the Company upon exercise,
conversion or exchange thereof, by (ii) the total number of shares covered by
such rights, options, warrants or convertible securities) lower than the then
Current Market Price or the Warrant Price in effect immediately prior to such
sale or issuance, then the Warrant Price shall be reduced to a price (calculated
to the nearest cent) determined by dividing (I) an amount equal to the sum of
(A) the number of shares of Common Stock outstanding immediately prior to such
sale or issuance multiplied by the then existing Warrant Price, plus (B) the
consideration received or receivable by the
-6-
<PAGE> 8
Company upon such sale or issuance, by (II) the total number of shares of Common
Stock outstanding immediately after such sale or issuance. The number of shares
of Warrant Stock purchasable upon the exercise of a Warrant shall thereafter be
that number determined by multiplying the number of shares of Warrant Stock
purchasable upon exercise immediately prior to such adjustment by a fraction, of
which the numerator shall be the Warrant Price in effect immediately prior to
such adjustment and the denominator shall be the Warrant Price as so adjusted.
For the purposes of such adjustments, the Common Stock which the holders of any
such rights, options, warrants or convertible securities shall be entitled to
subscribe for, purchase or exchange into shall be deemed issued and outstanding
as of the date of such sale or issuance and the consideration received by the
Company therefor shall be deemed to be the consideration received by the Company
for such rights, options, warrants or convertible securities, plus the
consideration or premiums stated in such rights, options, warrants or
convertible securities to be payable for the Common Stock covered thereby. In
case the Company shall sell or issue Common Stock or rights, options, warrants
or convertible securities containing the right to subscribe for, purchase or
exchange into Common Stock for a consideration consisting, in whole or in part,
of property other than cash or its equivalent, then, in determining the "price
per share" of Common Stock and the "consideration received by the Company" for
purposes of the first sentence of this subsection 8.1(f), the Board of Directors
shall determine the fair value of said property, and such determination, if
based upon the Board of Directors, good faith business judgment, shall be
binding upon the Warrantholders. In determining the "price per share" of Common
Stock, any underwriting discounts or commissions paid to brokers, dealers or
other selling agents shall not be deducted from the price received by the
Company for sales of securities registered under the Act or issued in a private
placement. There shall be no adjustment of the Warrant Price pursuant to this
subsection 8.1(f) if the amount of such adjustment would be less than $.05 per
share of Common Stock; provided, however, that any adjustment which by reason of
this provision is not required to be made immediately shall be carried forward
and taken into account in any subsequent adjustment.
(g) For the purpose of this Section 8, the term "Common Stock"
shall mean (i) the class of stock designated as the Common Stock of the Company
at the date of this Agreement or (ii) any other class of stock resulting from
successive changes or reclassifications of such Common Stock consisting solely
of changes in par value, or from par value to no par value, or from no par value
to par value. In the event that at any time, as a result of an adjustment made
pursuant to this Section 8, a Warrantholder shall become entitled to purchase
any securities of the Company other than Common Stock, (i) if the
Warrantholder's right to purchase is on any other basis than that available to
all holders of the Company's Common Stock, the Company shall obtain an opinion
of a reputable investment banking firm valuing such other securities and (ii)
thereafter the number of such other securities so purchasable upon exercise of a
Warrant and the Warrant Price of such 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 Common Stock contained in this Section 8.
(h) Upon the expiration of any rights, options, warrants or
conversion privileges, if such shall not have been exercised, the number of
shares of Warrant
-7-
<PAGE> 9
Stock purchasable upon exercise of a Warrant and the Warrant Price, to the
extent a Warrant has not then been exercised, shall, upon such expiration, be
readjusted and shall thereafter be such number and such price as they would have
been had they been originally adjusted (or had the original adjustment not been
required, as the case may be) on the basis of (A) the fact that the only shares
of Common Stock issued in respect of such rights, options, warrants or
conversion privileges were the shares of Common Stock, if any, actually issued
or sold upon the exercise of such rights, options, warrants or conversion
privileges, and (B) the fact that such shares of Common Stock, if any, were
issued or sold for the consideration actually received by the Company upon such
exercise plus the consideration, if any, actually received by the Company for
the issuance, sale or grant of all such rights, options, warrants or conversion
privileges whether or not exercised; provided, however, that no such
readjustment shall have the effect of decreasing the numbers of shares of
Warrant Stock purchasable upon exercise of a Warrant or increasing the Warrant
Price by an amount in excess of the amount of the adjustment made in respect of
the issuance, sale or grant of such rights, options, warrants or conversion
privileges.
(i) Whenever the number of shares of Warrant Stock purchasable
upon the exercise of a Warrant or the Warrant Price is adjusted pursuant to this
Section 8, the Company shall cause to be promptly mailed to each Warrantholder
by first class mail, postage prepaid, notice of such adjustment or adjustments
and a certificate of the chief financial officer of the Company setting forth
the number of shares of Common Stock, capital stock and other securities
purchasable upon the exercise of such Warrantholder's Warrant and the applicable
Warrant Price after such adjustment, a brief statement of the facts requiring
such adjustment and the computation by which such adjustment was made.
8.2 No Adjustment for Dividends, Option Plan. Except as specifically
provided in subsection 8.1, no adjustment in respect of any cash dividends or
distributions on the Company's Common Stock out of current earnings made in the
ordinary course of business consistent with past practices shall be made during
the term of the Warrants or upon the exercise of the Warrants. No adjustment in
respect to options issued under, and pursuant to, the Option Plan shall be made
during the term of the Warrants or upon the exercise of the Warrants.
8.3 Preservation of Purchase Rights upon Reclassification,
Consolidation, etc. In case of any consolidation of the Company with or merger
of the Company into another corporation or other entity or in case of any sale,
lease, conveyance or other transfer to another corporation, person or other
entity of the property, assets or business of the Company as an entirety or
substantially as an entirety, the Company or such successor or purchasing
corporation, person or other entity, as the case may be, shall execute with the
Warrantholder, and the agreements governing such consolidation, merger, sale,
lease, conveyance or other transfer shall require such execution of, an
agreement that the Warrantholder shall have the right thereafter upon payment of
the Warrant Price in effect immediately prior to such event, upon exercise of
the Warrants, to receive the kind and amount of shares and other securities and
property which it would have owned or have been entitled to receive after the
happening of such consolidation, merger, sale, lease, conveyance or other
transfer had the Warrants (and each underlying security) been exercised
immediately
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<PAGE> 10
prior to such action. The Company shall promptly mail to each Warrantholder by
first class mail, postage prepaid, notice of the execution of any such
agreement. In the event of a merger described in Section 368(a)(2)(E) of the
Internal Revenue Code of 1986, in which the Company is the surviving
corporation, the right to purchase shares of Warrant Stock under the Warrants
shall terminate on the date of such merger and thereupon the Warrants shall
become null and void, but only if the controlling corporation shall agree to
substitute for the Warrants its warrant which entitles the holder thereof to
purchase upon its exercise the kind and amount of shares and other securities
and property which it would have owned or been entitled to receive had the
Warrants been exercised immediately prior to such merger. Any such agreements
referred to in this subsection 8.3 shall provide for adjustments, which shall be
as nearly equivalent as may be practicable to the adjustments provided for in
Section 8 hereof, and shall provide for terms and provisions at least as
favorable to the Warrantholder as those contained in this Agreement. The
provisions of this subsection 8.3 shall similarly apply to successive
consolidations, mergers, sales, leases, conveyances or other transfers.
8.4 Par Value of Shares of Common Stock. Before taking any action
which would cause an adjustment effectively reducing the portion of the Warrant
Price allocable to each share of Warrant Stock below the then par value per
share, if any, of the Warrant Stock issuable upon exercise of the Warrants, the
Company shall take any corporate action which may, in the opinion of its
counsel, be necessary in order that the Company may validly and legally issue
fully paid and nonassessable Warrant Stock upon exercise of the Warrants.
8.5 Independent Public Accountants. The Company may retain Arthur
Andersen LLP (or such other accounting firm qualified to practice in front of
the securities and Exchange Commission (the "Commission") as is reasonably
acceptable to the Representative) to make any computation required under this
Section 8, and a certificate signed by such firm shall be conclusive evidence of
the correctness of any computation made under this Section 8.
8.6 Statement on Warrant Certificates. Irrespective of any
adjustments in the number of securities issuable upon exercise of Warrants,
Warrant certificates theretofore or thereafter issued may continue to express
the same number of securities as are stated in the similar Warrant certificates
initially issuable pursuant to this Agreement, provided that such expression
shall in no way affect the number of shares of Warrant Stock actually
purchasable upon the exercise of such Warrants.
SECTION 9. FRACTIONAL SHARES; CURRENT MARKET PRICE. The Company shall
not be required to issue fractional shares of Common Stock on the exercise of a
Warrant. If any fraction of a share of Common Stock would, except for the
provisions of this Section 9, be issuable upon the exercise of a Warrant (or
specified portion thereof), the Company shall in lieu thereof pay an amount in
cash equal to the then Current Market Price multiplied by such fraction. For
purposes of this Agreement, the term "Current Market Price" shall mean (i) if
the Common Stock is traded on the Nasdaq National Market ("NNM") or on a
national securities exchange, the per share closing price of the Common Stock in
the NNM or on the principal stock exchange on which it is listed, as the case
may be, on the date of exercise of
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<PAGE> 11
the Warrant or, with respect to any adjustment pursuant to Section 8.1 hereof,
on the date immediately preceding the announcement of the event causing such
adjustment or (ii) if the Common Stock is traded in the over-the-counter market
and not in the NNM or on any national securities exchange, the average of the
per share closing bid prices of the Common Stock on the thirty (30) consecutive
trading days immediately preceding the date in question, as reported by The
Nasdaq Small Cap Market (or an equivalent generally accepted reporting service
if quotations are not reported on The Nasdaq Small Cap Market). The closing
price referred to in clause (i) above shall be the last reported sale price or,
in the case no such reported sale takes place on such day, the average of the
reported closing bid and asked prices, in either case in the NNM or on the
principal stock exchange on which the Common Stock is then listed. For purposes
of clause (ii) above, if trading in the Common Stock is not reported by The
Nasdaq Small Cap Market, the bid price referred to in said clause shall be the
lowest bid price as reported in the Nasdaq Electronic Bulletin Board or, if not
reported thereon, as reported in the "pink sheets" published by National
Quotation Bureau, Incorporated, and, if such Common Stock is not so reported,
shall be the price of a share of Common Stock determined by the Company's Board
of Directors in good faith.
SECTION 10. NO RIGHTS AS STOCKHOLDER; NOTICES TO WARRANTHOLDER. Except
as expressly provided herein, nothing contained in this Agreement or in the
Warrants shall be construed as conferring upon the Warrantholder or its
transferees any rights as a stockholder of the Company, including the right to
vote, receive dividends, consent or receive notices as a stockholder in respect
of any meeting of stockholders for the election of directors of the Company or
any other matter. If, however, at any time prior to the expiration of the
Warrants and prior to their exercise, any one or more of the following events
shall occur:
(a) any action which would require an adjustment pursuant to
Section 8 hereof;
(b) an issuance by the Company of rights, options, warrants or
convertible securities to all or substantially all holders of its Common Stock,
without any charge to such holders, containing the right to subscribe for or
purchase Common Stock; or
(c) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation, merger or sale of its property,
assets and business as an entirety or substantially as an entirety) shall be
proposed;
then the Company shall give notice in writing of such event to the
Warrantholder, as provided in Section 13 hereof, at least 20 days prior to the
date fixed as a record date or the date of closing the transfer books for the
determination of the stockholders entitled to any relevant dividend,
distribution or other rights or for the determination of stockholders entitled
to vote on such proposed dissolution, liquidation or winding up. Such notice
shall specify such record date or the date of closing the transfer books, as the
case may be.
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<PAGE> 12
SECTION 11. RESTRICTIONS ON TRANSFER; REGISTRATION RIGHTS; OBLIGATION'S
IN REGISTRATION.
(a) The Warrantholder agrees that prior to making any
disposition of the Warrants or the Warrant Stock, other than to persons or
entities identified in the first sentence of Section 1.3, the Warrantholder
shall give written notice to the Company describing briefly the manner in which
any such proposed disposition is to be made; and no such disposition shall be
made unless the Warrantholder has notified, or currently with such disposition
notifies, the Company that in the opinion of counsel reasonably satisfactory to
the Company a registration statement, application or other notification, filing
or post-effective amendment or supplement thereto (hereinafter collectively a
"Registration Statement") under the Act or the state securities or "blue sky"
laws of any applicable jurisdiction is not required with respect to such
disposition and no such Registration Statement has been filed by the Company
with, and declared effective, if necessary, by, the Commission or state
securities commission or agency. The Warrantholder agrees that it shall use its
reasonable best efforts to obtain from any transferee who acquires any Warrants
in a private transaction with the Warrantholder an agreement by such transferee
that it agrees to be bound by any transfer restrictions set forth in this
subsection 11(a) then applicable to such transferees.
(b) The Company shall be obligated to prepare and file a
registration statement, and amendments thereto, with the Commission for the
registration of the Warrants and the Warrant Stock under the Act and shall be
obligated to cause such registration statement, and amendments thereto, to be
declared effective by the Commission on or prior to ______________, 1997 [ONE
YEAR AFTER WARRANT ISSUED]. The Company shall be obligated to the registered
holders of the Warrant and the Warrant Stock to continually maintain, at the
Company's own expense, the currency and effectiveness of such registration
statement of the Company, including the filing of any and all applications and
other notifications, filings and post-effective amendments and supplements
(collectively, the "Current Registration Statement"), as may be necessary, so as
to permit the resale of the Warrants and the Warrant Stock until the earlier of
the time that all shares of Warrant Stock have been sold pursuant to the Current
Registration Statement or the second yearly anniversary of the Termination Date.
(c) If at any time after the date hereof the Current
Registration Statement is no longer in effect other than because all shares of
Warrant Stock have been sold pursuant to the Current Registration Statement or
because the Termination Date has already occurred, the Company shall be
obligated to the registered holders of the Warrants and the Warrant Stock as
follows:
(i) Whenever during the period beginning on ____________,
1997 [ONE YEAR AFTER THE EFFECTIVE DATE] and ending on _____________, 2002 [SIX
YEARS AFTER THE EFFECTIVE DATE], the Company proposes to file with the
Commission a Registration Statement (other than as to securities issued pursuant
to an employee benefit plan or as to a transaction subject to Rule 145
promulgated under the Act), it shall, at least thirty (30) days prior to each
such filing, give written notice of such proposed filing to each Warrantholder
and each holder of the Warrant Stock at their respective addresses as they
appear on the
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<PAGE> 13
records of the Company, and shall offer to include and shall include in such
filing any proposed disposition of the Warrants and Warrant Stock upon receipt
by the Company, not more than twenty (20) days following the receipt of such
notice, of a request therefor setting forth the facts with respect to such
proposed disposition and all other information with respect to such person
reasonably necessary to be included in such Registration Statement. In the event
that such registration statement relates to an underwritten offering on a "firm
commitment" basis and the managing underwriter for said offering advises the
Company in writing that the inclusion of such securities in the offering would
be materially and substantially detrimental to the completion of the offering,
such securities shall nevertheless be included in the Registration Statement,
provided that the Warrantholder and each holder of Warrant Stock desiring to
have such securities included in the Registration Statement agrees in writing
for a period of ninety (90) days following such offering not to sell or
otherwise dispose of such securities pursuant to such Registration Statement,
which Registration Statement the Company shall keep effective for a period of at
least twelve (12) months following the expiration of such ninety (90) day
period.
(ii) In addition to any Registration Statement pursuant to
subparagraph (i) above, during the four-year period beginning on _____________,
1997 [ONE YEAR AFTER THE EFFECTIVE DATE] and ending on the Termination Date, the
Company will, as promptly as practicable (but in any event within sixty (60)
days), after written request (the "Request") by the Representative, or by a
person or persons holding (or having the right to acquire by virtue of holding
the warrants) more than fifty percent (50%) of the shares of Warrant Stock which
have been (or may be) issued upon exercise of the Warrants, prepare and file at
the Company's expense a Registration Statement with the Commission and such
applications or other filings as required under applicable state securities or
blue sky laws sufficient to permit the public offering of the Warrants and the
Warrant Stock, and shall use its reasonable best efforts at its own expense
through its officers, directors, auditors and counsel, in all matters necessary
or advisable, to cause such Registration Statement to become effective as
promptly as practicable and to maintain such effectiveness so as to permit
resale of the securities covered by the Request until the earlier of the time
that all such Warrant Stock has been sold or the expiration of twelve (12)
months from the effective date of the Registration Statement; provided, however,
that the Company shall only be obligated to file one such Registration Statement
under this Section 11(c)(ii). Notwithstanding the foregoing, once and only once
during the period the Company would have an obligation to register the Warrants
and the Warrant Stock pursuant to this Section 11(b)(ii), the Company shall not
be obligated to effect a registration pursuant to this Section 11(c)(ii) during
the three (3) month period starting with the date thirty (30) days prior to the
Company's estimated date of filing of an underwritten public offering of
securities solely for the account of the Company; provided that the Company is
actively employing in good faith all reasonable efforts to cause such
registration statement to become effective and that the Company's estimate of
the date of filing such registration statement is made in good faith; provided
further, that the Company shall furnish to the Warrantholder and each holder of
Warrant Stock a certificate signed by the managing underwriter stating that it
would be seriously detrimental to the Company or its stockholders for the
registration statement to be filed in the near future.
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<PAGE> 14
(d) All fees, disbursements and out-of-pocket expenses (other
than the Warrantholder's brokerage fees and commissions and legal fees of
counsel to the Warrantholder, if any) in connection with the filing of any
Registration Statement or maintaining the currency and effectiveness of the
Current Registration Statement (or obtaining the opinion of counsel and any
no-action position of the commission with respect to sales under Rule 144) and
in complying with applicable federal securities and state securities and blue
sky laws shall be borne by the Company. The Company at its expense shall supply
any Warrantholder and any holder of Warrant Stock with copies of such
Registration Statement and the prospectus included therein and other related
documents and any opinions and no-action letters in such quantities as may be
reasonably requested by such Warrantholder or holder of Warrant Stock.
(e) The Company shall not be required by this Section 11 to file
such Registration Statement if, in the opinion of counsel for the
Representative, which counsel shall be reasonably satisfactory to the Company,
or in the opinion of another counsel experienced in securities law matters
acceptable to counsel for such holders, the proposed public offering or other
transfer as to which such Registration Statement is requested is exempt from
applicable federal securities and state securities and blue sky laws and would
result in all proposed sales being made under Rule 144 under the Act.
(f) The provisions of this Section 11 and of Section 12 hereof
shall apply to the extent provided herein if the Company chooses to file an
Offering Statement under Regulation A promulgated under the Act.
(g) The Company agrees that until all the Warrants and Warrant
stock have been sold under a Registration Statement or pursuant to Rule 144
under the Act, it shall keep current in filing all materials required to be
filed with the Commission in order to permit the holders of such securities to
sell the same under Rule 144.
(h) In the event any Warrantholder timely elects to participate
in an offering by including Warrant Stock in a Registration Statement pursuant
to subsection 11(c) above, the Company shall use its reasonable best efforts to
effect such registration to permit the sale of Warrant Stock in accordance with
the intended method or methods of disposition thereof, and pursuant thereto, the
Company shall, as expeditiously as possible:
(i) Prepare and file with the Commission a Registration
Statement or Registration Statements on a form available for the sale of the
Warrant Stock, and to cause any such Registration Statement filed under the Act
pursuant to subsection 11(c) above to become effective at the earliest possible
date after the filing thereof and remain effective as provided herein and to
comply with all applicable rules and regulations of the Commission (the "Rules
and Regulations") in connection therewith, provided, however, 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 Representative and the
Warrantholders, their respective counsel, and the underwriters, if any, to be
engaged in connection with the offering and sale
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<PAGE> 15
by the Company (for purposes of this subsection 11(h), the "Public
Underwriter"), copies of all such documents proposed to be filed, which
documents will he subject to the review of the Representative and such
Warrantholders, their respective counsel and the Public Underwriter, if any, and
the Company will not file any Registration Statement, amendment thereto, any
prospectus or any supplement thereto (including such documents incorporated or
deemed to be incorporated by reference) to which the Representative or the
Public Underwriter, if any, shall reasonably object;
(ii) Prepare and promptly file with the Commission such
amendments and post-effective amendments to a Registration Statement as may be
necessary to keep such Registration Statement continuously effective for a
period of twelve (12) months; cause the related prospectus to be supplemented,
by any required prospectus supplement, and as so supplemented, to be filed
pursuant to Rule 424 under the Act; and comply with the provisions of the Act
with respect to the disposition of all Warrant Stock 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. The Company shall not be deemed to have used its
reasonable best efforts to keep a Registration Statement effective during the
applicable period if it intentionally or voluntarily takes any action that would
result in the Representative or such Warrantholders not being able to sell such
Warrant Stock;
(iii) As soon as the Company is advised or obtains knowledge
thereof, advise the Representative and confirm the same in writing (A) when the
Registration Statement, as amended, becomes effective and when any
post-effective amendment to the Registration Statement becomes effective, (B) of
the issuance by the Commission or any State or other regulatory body of any stop
order or other order, or of the initiation or the threat or contemplation of any
proceeding, the outcome of which may result in the suspension of the
effectiveness of the Registration Statement or the issuance of any order
preventing or suspending the use of any preliminary prospectus or the
prospectus, or any amendment or supplement thereto, or the institution of any
proceedings for that purpose, (C) of the issuance by the Commission or any State
or other regulatory body of any proceedings for the suspension of the
qualification of any of the Warrant Stock for offering or sale in any
jurisdiction or of the initiation or the threat or contemplation of any
proceeding for that purpose, (D) of the receipt of any comments from the
Commission and (E) of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the prospectus related
thereto or for additional information; if the commission or any State or other
regulatory body shall enter a stop order or other order suspending the
effectiveness of the Registration Statement or preventing or suspending the use
of any preliminary prospectus or the prospectus, or any amendment or supplement
thereto, or suspend such qualification at any time, make every effort to obtain
promptly the lifting of such order or suspension;
(iv) If requested by the Public Underwriter, if any, or the
Representative, or any Warrantholder (1) immediately incorporate in a prospectus
supplement or post-effective amendment such information as the Representative or
such Warrantholder and the Public Underwriter, if any, agree should be included
therein relating to such sale and
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<PAGE> 16
distribution of the Warrant stock, including, without limitation, information
with respect to the number of shares of Warrant Stock being sold to such Public
Underwriter, the purchase price being paid therefor by such Public Underwriter
and with respect to any other terms of the underwritten offering of the Warrant
Stock to be sold in such offering; (2) make all required filings of such
prospectus supplement or post-effective amendment as soon as notified of the
matters to be so incorporated in such prospectus supplement or post-effective
amendment; and (3) supplement or amend any Registration Statement if requested
by the Representative, the Warrantholders or any Public Underwriter;
(v) Furnish to the Representative, each of the
Warrantholders and their respective counsel, without charge and at such place as
the Representative may designate, copies of each preliminary prospectus, the
Registration Statement and any pre-effective or post-effective amendments
thereto (two of which will be signed and will include all financial statements
and exhibits, one for the Representative and one for the Representative's
counsel), the Prospectus, and all amendments and supplements thereto, including
any prospectus prepared after the effective date of the Registration Statement
and any term sheet, in each case as soon as available and in such quantities as
the Representative and each Warrantholder may request;
(vi) During the time when a prospectus is required to be
delivered under the Act, the Company shall comply with all requirements imposed
upon it by the Act and the Securities Exchange Act, 1934, as amended (the
"Exchange Act"), as now and hereafter amended, and by the Rules and Regulations,
as from time to time in force, so far as necessary to permit the continuance of
sales of or dealings in the Warrant Stock in accordance with the provisions
hereof and the prospectus, or any amendments or supplements thereto; if at any
time when a prospectus relating to the Warrant Stock is required to be delivered
under the Act, any event shall have occurred as a result of which, in the
opinion of the Company or counsel for the Company or the Representative or
counsel for the Representative, the prospectus, as then amended or supplemented,
would include 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, in the light of the circumstances in which they were made, not
misleading, or if it is necessary at any time to amend or supplement the
Prospectus to comply with the Act, notify the Public Underwriter and prepare and
file, at the Company's expense, with the Commission an appropriate amendment or
supplement to the Registration Statement or an amendment or supplement to the
prospectus which will correct such statement or omission, or effect such
compliance, each such amendment or supplement to be reasonably satisfactory to
the Representative and the counsel for the Representative; and furnish to the
Representative copies of such amendment or supplement as soon as available and
in such quantities as the Representative may request;
(vii) As soon as practicable, but in any event not later
than forty-five (45) days after the end of the twelve (12) month period
beginning after the effective date of the Registration Statement occurs, make
generally available to its security holders, in the manner specified in Rule
158(b) promulgated under the Act, and to the Representative, an earnings
statement which will comply with the provisions of Section 11(a) of the Act and
Rule 158(a) promulgated under the Act;
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<PAGE> 17
(viii) Deliver to the Representative and each of the
Warrantholders, their respective counsel and the Public Underwriter, 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; the Company consents to the use of any such prospectus
or any amendment or supplement thereto by the Representative, the Warrantholders
and the Public Underwriter, if any, in connection with the offering and sale of
the Warrant Stock covered by such prospectus or any amendment or supplement
thereto;
(ix) Prior to any public offering of Warrant Stock, use its
best efforts, at or prior to the time the Registration Statement becomes
effective, to qualify the Shares for offering and sale under the securities or
"blue sky" laws of such jurisdictions as the Representative may reasonably
designate to permit the continuance of sales and dealings therein for as long as
may be necessary to complete the distribution, and make such applications, file
such documents and furnish such information as may be required for such purpose;
provided, however, the Company shall not be required to qualify as a foreign
corporation or to execute a general consent to service of process in any such
jurisdiction; in each jurisdiction where such qualification shall be effected,
use its best efforts to file and make such statements or reports at such times
as are or may be required by the laws of such jurisdiction to continue such
qualification;
(x) Cooperate with the Representative, the Warrantholders
and the Public Underwriter, if any, to facilitate the timely preparation and
delivery of certificates representing Warrant Stock to be sold, which
certificates shall not bear any restrictive legends; and enable such Warrant
Stock to be in such denominations and registered in such names as the Public
Underwriter, if any, may request at least two (2) business days prior to any
sale of Warrant Stock;
(xi) Use its reasonable best efforts to cause the Warrant
Stock covered by the Registration Statement to be registered with or approved by
such other governmental bodies, agencies or authorities as may be necessary to
enable the Representative, the Warrantholders or the Public Underwriter, if any,
to consummate the disposition of such Warrant Stock;
(xii) Make every reasonable effort to cause all Warrant
Stock covered by such Registration Statement to be (1) listed on each securities
exchange, if any, in which equity securities issued by the Company are then
listed or (2) authorized to be quoted on the NNM or Nasdaq Small Cap Market or
any exchange if the Company's Common Stock is then authorized to be quoted on
the NNM or Nasdaq Small Cap Market or any exchange;
(xiii) Enter into such agreements (including, without
limitation, if applicable, an underwriting agreement, in form, scope and
substance as is customary in underwritten offerings) and take all such other
actions in connection therewith in order to expedite or facilitate the
disposition of such Warrant Stock and, in such connection, whether or not an
underwriting agreement is entered into and whether or not the registration is an
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<PAGE> 18
underwritten registration, (1) make such representations and warranties to the
Representative and the Warrantholders with respect to the business of the
Company and its subsidiaries and the Public Underwriter, if any, the
Registration Statement, the prospectus, the prospectus supplement (if any) and
documents, if any, incorporated or deemed to be incorporated by reference in the
Registration Statement, in each case in such form, substance and scope as are
customarily made by issuers to underwriters in underwritten offerings and
confirm the same if and when requested; (2) 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 Representative and the
Warrantholders), addressed to the Representative and the Warrantholders with
respect to the matters referred to in the preceding clause in such form, scope
and substance as are customarily rendered to underwriters in underwritten
offerings and such other matters as may be reasonably requested by counsel to
the Representative, the Warrantholders or the Public Underwriter, if any; (3)
obtain "cold 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 or incorporated by reference into the
Registration Statement) addressed to the Representative, the Warrantholders and
each of the Public Underwriters, if any, such letters to be in customary form
and covering matters of the type customarily covered in "cold comfort" letters
to underwriters in connection with underwritten offerings; (4) if an
underwriting agreement is entered into, the same shall set forth in full the
indemnification and contribution provisions and procedures of Section 12 hereof
(or such other provisions and procedures as shall be acceptable to the
Representative, the Warrantholders and to the Public Underwriter of such
underwritten offering) with respect to all parties to be indemnified pursuant to
said section; and (5) deliver such documents and certificates as may be
reasonably requested by the Representative, the Warrantholders and the Public
Underwriter, if any, to evidence the continued validity of the representations
and warranties made pursuant to clause (1) above and to evidence compliance with
any customary conditions contained in the underwriting agreement or other
agreement entered into by the Company; the above shall be done at each closing
under such underwriting or similar agreement or as and to the extent required
thereunder;
(xiv) Make available for inspection by a representative of
the Representative or the Warrantholders or any Public Underwriter participating
in any disposition pursuant to such Registration Statement, and any attorney or
accountant retained by the Representative or the Warrantholders or such Public
Underwriter, all financial and other records, pertinent corporate documents and
properties and assets of the Company and its subsidiaries and cause the
officers, directors, agents and employees of the Company and its subsidiaries to
supply all information reasonably requested by any such representative, Public
Underwriter, attorney or accountant in connection with any registration of
Warrant Stock; provided, however, that any records, information or documents
that are designated by, the Company in writing at the time of delivery of such
records, information or documents as confidential shall be kept confidential by
such persons unless (1) disclosure of such records, information or documents is
required by court or administrative order or is necessary to respond to
inquiries of governmental or regulatory bodies, agencies or authorities, (2)
disclosure of such records, information or documents is, in the opinion of
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<PAGE> 19
counsel to the Representative or the Warrantholders or to any Public
Underwriter, required by law regulations or legal process, (3) such records,
information or documents are otherwise publicly available or (4) such records,
information or documents become available to such person from a source other
than the Company, and such source is not bound by a confidentiality agreement;
(xv) If the Company, in the exercise of its reasonable
judgment, objects to any change reasonably requested by the Representative, the
Warrantholders or the Public Underwriter, if any, to any Registration Statement
or prospectus or any amendments or supplements thereto (including documents
incorporated or deemed to be incorporated therein by reference) as provided for
in this Subsection 11(h), the Company shall not be obligated to make any such
change and the Representative or the Warrantholders may withdraw the Warrant and
Warrant Stock from such registration, in which event the Company shall pay all
registration expenses (including, without limitations, attorneys' fees and
expenses) incurred by the Representative and the Warrantholders in connection
with such Registration Statement or prospectus or any amendment thereto or
supplement thereof; provided, that if the Company provides the Representative
and the Warrantholders, as applicable, with a written opinion of independent
counsel (which counsel may be the Company's regular outside counsel), upon which
the Representative and such Warrantholders may rely, that the change so
requested is not required in order that the Registration Statement comply with
all applicable securities laws (including any rules and regulations promulgated
thereunder), the Representative and such Warrantholders may withdraw the
Warrants and the Warrant Stock from such registration but the Company shall not
be obligated to pay any registration expenses incurred by the Representative and
the Warrantholders; and
(xvi) Pay all costs and expenses incident to the performance
of or compliance with the Company's obligations under subsection 11(c) above and
under this subsection 11(h) (collectively, "Registration Expenses") whether or
not any Registration Statement is filed or becomes effective, including, without
limitation, the fees and disbursements of the Company's auditors, legal counsel,
special legal counsel, legal counsel responsible for qualifying the Warrants and
the Warrant Stock under blue sky laws and with the NASD, all filing fees
(including, without limitation, the Commission, states, NASD, the Nasdaq Stock
Market or any exchange) and printing expenses, all expenses in connection with
the transfer and delivery of the Warrant Stock, and all expenses in connection
with the qualification of the Warrants and the Warrant Stock under applicable
blue sky laws and with the NASD; provided, however, that the Company shall not
bear the Public Underwriter's discount or commission with respect to, or any
transfer taxes imposed on, the Warrant Stock or the fees and expenses of counsel
to the Representative or the Warrantholders; provided, further, however, that
the Company shall not be responsible in any way for any fees or expenses of
counsel to the Representative, Warrantholders or any Public Underwriter, except,
in each case, as provided in Subsection 11(h)(xv) above.
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<PAGE> 20
SECTION 12. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless the
Representative, the Warrantholders, the underwriter(s) of any public offering by
the Company, and any Holder of Warrant Stock (for purposes of this Section 12,
"Holder" shall include the officers, directors, partners, employees, agents and
counsel of a Warrantholder or a holder of Warrant Stock), and each person, if
any, who controls a Holder ("controlling person") within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act, from and against any and all
losses, claims, damages, expenses (including, without limitation, reasonable
attorneys' fees and expenses) or liabilities and all actions, suits,
proceedings, injuries, arbitrations, investigations, litigation or governmental
or other proceedings (in this Section 12, collectively, "actions") in respect
thereof, whatsoever (including, without limitation, any and all expenses
whatsoever reasonably incurred in investigating preparing or defending against
any action, commenced or threatened, or any claim whatsoever), as such are
incurred, to which a Holder or such controlling person may become subject under
the Act, the Exchange Act or any other statute or at common law or otherwise,
arising out of or based upon any untrue statement or alleged untrue statement of
a material fact contained (i) in any preliminary prospectus, the Current
Registration Statement, the Registration Statement or any prospectus (as from
time to time amended and supplemented); (ii) in any post-effective amendment or
amendments or any new registration statement and prospectus in which is included
securities of the Company issued or issuable upon exercise of the Warrants; or
(iii) in any application or other document or written communication (in this
Section 12, collectively, "application") executed by the Company or based upon
written information furnished by the Company in any jurisdiction in order to
qualify the Warrants or the Warrant Stock under the securities or blue sky laws
thereof or filed with the Commission, any state securities commission or agency,
the National Association of Securities Dealers, Inc. (the "NASD") or the NNM,
Nasdaq Small Cap Market or any other securities exchange; or the omission or
alleged omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading (in the case of any
prospectus, in light of the circumstances in which they were made), unless such
statement or omission was made in reliance upon and in conformity with written
information furnished to the Company with respect to a Holder by or on behalf of
such Holder expressly for use in any preliminary prospectus, the registration
statement or any prospectus, or any amendment thereof or supplement thereto, or
in any application, as the case may be. In addition to its other obligations
under this subsection 12(a), the Company agrees that, as an interim measure
during the pendency of any action arising out of or based upon any untrue
statement or omission, or alleged untrue statement or alleged omission as
described in this subsection 12(a), it shall reimburse the Holders (and, to the
extent applicable, each controlling person) on a monthly basis for all
reasonable legal or other expenses incurred in connection with investigating or
defending any such action notwithstanding the absence of a judicial
determination as to the propriety and enforceability of the Company's
obligations to reimburse the Holders (and, to the extent applicable, each
controlling person) for such expenses and the possibility that such payments
might later be held to have been improper by a court of competent jurisdiction.
To the extent that any such interim reimbursement is so held to have been
improper as to the Company, the Holders (and, to the extent applicable, each
controlling person) shall promptly return it to the
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<PAGE> 21
Company, together with interest compounded daily, based on the "reference rate"
announced from time to time by Bank of America NTSA (the "Prime Rate"). Any such
interim reimbursement payments which are not made to the applicable Holder
within thirty (30) days of a request for reimbursement shall bear interest at
the Prime Rate from the date of such request. In no case shall any interest be
in excess of that permitted by law.
The indemnity agreement in this subsection 12(a) shall be in
addition to any liability which the Company may have at common law or otherwise.
(b) Each Holder severally agrees to indemnify and hold harmless
the Company (for purposes of this Section 12, "Company" shall include the
officers, directors, partners, employees, agents and counsel of the Company) and
each other person, if any, who controls the Company ("controlling person")
within the meaning of the Act, to the same extent as the foregoing indemnity
from the Company to the Holders, but only with respect to statements or
omissions, if any, made in any preliminary prospectus, the Current Registration
Statement, the Registration Statement or any prospectus or any amendment thereof
or supplement thereto or in any application made in reliance upon, and in strict
conformity with, written information furnished to the Company with respect to
such Holder by or on behalf of such Holder expressly for use in any preliminary
prospectus, the Current Registration Statement, the Registration Statement or
any prospectus or any amendment thereof or supplement thereto or in any
application, provided that such written information or omissions only pertain to
disclosures in any preliminary prospectus, the Current Registration Statement,
the Registration Statement or any prospectus directly relating to the
transactions in connection with the offering contemplated hereby. In addition to
its other obligations under this subsection 12(b), each Holder severally agrees
that, as an interim measure during the pendency of any action arising out of or
based upon any untrue statement or omission, or alleged untrue statement or
alleged omission as described in this subsection 12(b), it shall reimburse the
Company (and, to the extent applicable, each controlling person) on a monthly
basis for all reasonable legal or other expenses incurred in connection with
investigating or defending any action with respect to such Holder
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of such Holder's obligations to reimburse the Company (and, to
the extent applicable, each controlling person) for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement is so held to have been improper as to such Holder, the Company
(and, to the extent applicable, each controlling person) shall promptly return
it to such Holder, together with interest compounded daily, based on the Prime
Rate. Any such interim reimbursement payments which are not made to the company
within thirty (30) days of a request for reimbursement shall bear interest at
the Prime Rate from the date of such request. In no case shall any interest be
in excess of that permitted by law. Notwithstanding the provisions of this
subsection 12(b), in connection with a registration that includes the Warrants
or Warrant Stock pursuant to subsection 11(c)(i) hereof, no such Holder shall be
required to indemnify or hold harmless the Company or any controlling person for
any amounts in excess of the net proceeds (before deducting expenses) applicable
to the Warrants or Warrant Stock sold by such Holder pursuant to the
Registration Statement. Notwithstanding the provisions of this subsection 12(b),
in connection with a registration that includes that Holder's Warrants or
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<PAGE> 22
Warrant Stock pursuant to subsections 11(b) or 11(c)(ii), no such Holder shall
be required to indemnify and hold harmless the Company or any controlling person
for any amounts in excess of that portion of all expenses as to which
indemnification is properly claimed under this Agreement equal to such Holder's
relevant proportion of all net proceeds (before deduction of expenses)
applicable to all securities sold pursuant to the Current Registration Statement
or the Registration Statement, as applicable.
(c) Promptly after receipt by an indemnified party under this
Section 12 of notice of the commencement of any action, such indemnified party
shall notify each party against whom indemnification is to be sought in writing
of the commencement thereof (but the failure to so notify an indemnifying party
shall not relieve it from any liability which it may have under this Section 12
except to the extent that it has been materially prejudiced by such failure). In
case any such action is brought against any indemnified party, and it notifies
an indemnifying party or parties of the commencement thereof, the indemnifying
party or parties shall be entitled to participate therein, and to the extent it
or they may elect by written notice delivered to the indemnified party or
parties promptly after receiving the aforesaid notice from such indemnified
party or parties, to assume the defense thereof with counsel reasonably
satisfactory to such indemnified party. Notwithstanding the foregoing, an
indemnified party shall have the right to employ its own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense of such
indemnified party unless (i) the employment of such counsel shall have been
authorized in writing by the indemnifying party or parties in connection with
the defense of such action at the expense of the indemnifying party or parties,
(ii) the indemnifying party or parties shall not have employed counsel
reasonably satisfactory to such indemnified party to have charge of the defense
of such action within a reasonable time after notice of commencement of the
action or (iii) such indemnified party shall have reasonably concluded that
there may be one or more defenses available to it which are different from or
additional to those available to one or all of the indemnifying parties (in
which case the indemnifying parties shall not have the right to direct the
defense of such action on behalf of the indemnified party or parties), in any of
which events such fees and expenses of one additional counsel (in addition to
appropriate local counsel) shall be borne by the indemnifying parties. In no
event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to appropriate local counsel) separate from their
own counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances. Anything in this Section 12 to
the contrary notwithstanding, an indemnifying party shall not be liable for any
settlement of any claim or action effected without its written consent;
provided, however, that such consent may not be unreasonably withheld.
(d) In order to provide for just and equitable contribution in
any case in which (i) an indemnified party makes a claim for indemnification
pursuant to this Section 12, but it 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 of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this Section 12 provide for indemnification in such
case or (ii) contribution under the Act may be required on the part of any
indemnified party, then
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<PAGE> 23
each indemnifying party shall contribute to the amount paid as a result of such
losses, claims, damages, expenses or liabilities (or actions in respect thereof)
in such proportion as is appropriate to reflect the relative fault of each of
the contributing parties, on the one hand, and the party to be indemnified, on
the other hand, in connection with the statements or omissions that resulted in
such losses, claims, damages, expenses or liabilities (or actions in respect
thereof), as well as any other relevant equitable considerations. 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 the Company or by
such Holder, and the parties' relative intent, knowledge, state of mind and
access to information and opportunity to correct or prevent such untrue
statement or omission. The amount paid by an indemnified party as a result of
the losses, claims, damages, expenses or liabilities (or actions in respect
thereof) referred to in the first sentence of this subsection 12(d) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this subsection 12(d), in a
registration that includes a Holder's Warrants or Warrant Stock pursuant to
subsection 11(c)(i) hereof, no Holder shall be required to contribute any amount
in excess of the net proceeds (before deducting expenses) applicable to the
shares of Warrants and Warrant Stock sold by such Holder pursuant to such
registration statement and prospectus. Notwithstanding the provisions of this
subsection 12(d), in a registration that includes a Holder's Warrant Stock
pursuant to subsections 11(b) or 11(c)(ii), no such Holder shall be required to
contribute any amount in excess of that portion of all expenses as to which
contribution is properly claimed under this Agreement equal to such Holder's
relevant portion of all net proceeds (before deducting expenses) applicable to
all securities sold pursuant to the Current Registration Statement or the
Registration Statement, as applicable. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act and the cases
and promulgations thereunder) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. Any party entitled to
contribution will, promptly after receipt of notice of commencement of any
action against such party in respect to which a claim for contribution may be
made against another party or parties under this subsection 12(d), notify such
party or parties from whom contribution may be sought, but the omission to so
notify such party or parties shall not relieve the party or parties from whom
contribution may be sought from any obligation it or they may have hereunder or
otherwise than under this subsection 12(d) except to the extent it has been
materially prejudiced by such failure. The contribution agreement set forth
above shall be in addition to any liabilities which any indemnifying party may
have at common law or otherwise. Notwithstanding anything to the contrary
contained in this Agreement, no Holder shall be required to contribute any
amount in excess of the lesser of (i) that proportion of the total of such
losses, claims, damages or liabilities indemnified or contributed against equal
to the proportion of the total securities sold pursuant to the Registration
Statement or Current Registration Statement, as the case may be, which is being
sold by it, or (ii) the proceeds received by it in any such offering. The
Holders' obligations in this Section 12(d) to contribute are several in
proportion to the number of Warrants or Warrant Shares registered on their
behalf and not joint.
-22-
<PAGE> 24
(e) The indemnity and contribution agreements contained in this
Section 12 and the representations shall remain operative and in full force and
effect, regardless of (i) any investigation made by or on behalf of any Holder
or any person controlling any Holder, the Company, its directors or officers or
any Public Underwriter or any person controlling such Public Underwriter, (ii)
acceptance of any Warrants or Warrant Shares and payment therefor hereunder, and
(iii) any termination of this Agreement. A successor to any Holder or any person
controlling any Holder, or to the Company, its directors or officers, or any
person controlling the Company, shall be entitled to the benefits of the
indemnity, contribution and reimbursement agreements contained in this Section
12.
(f) In any proceeding relating to the Registration Statement,
the Current Registration Statement or any prospectus or any amendment or
supplement thereto, each party against whom contribution may be sought under
this Section 12 hereby consents to the jurisdiction of any court having
jurisdiction over any other contributing party, agrees that process issuing from
such court may be served upon him or it by any other contributing party and
consents to the service of such process and agrees that any other contributing
party may join him or it as an additional defendant in any such proceeding in
which such other contributing party is a party.
SECTION 13. NOTICES. All notices and communications hereunder, except
as herein otherwise specifically provided, shall be in writing and shall be
deemed to have been duly given if mailed, delivered by hand or transmitted by
any standard form of telecommunication. Notices to the Warrantholders or a
holder of Warrant Stock shall be directed to The Boston Group, L.P. at 1999
Avenue of the Stars, Suite 2550, Los Angeles, California 90067, Attention: Mr.
Robert A. DiMinico, with a copy to Jeffer, Mangels, Butler & Marmaro LLP, 2121
Avenue of the Stars, 10th Floor, Los Angeles, California 90067, Attention:
Steven J. Insel, Esq. Notices to the Company shall be directed to the Company at
13845 Artesia Boulevard, Cerritos, California 90703, Attention: Mr. Richard
Berger, with a copy to Keesal, Young & Logan, 400 Oceangate, Long Beach,
California 90802, Attention: Jeffrey Warren, Esq.
SECTION 14. PARTIES. This Agreement shall inure solely to the benefit
of and shall be binding upon, the Representative, the Company and the
Warrantholders and the holders of Warrant Stock and the controlling persons,
officers, directors and others referred to in Section 12 hereof, and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Agreement or any provisions herein
contained.
SECTION 15. MERGER OR CONSOLIDATION OF THE COMPANY. The Company shall
not merge or consolidate with or into any other corporation or sell all or
substantially all of its property to another corporation, unless the provisions
of Section 8.3 hereof are complied with.
SECTION 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All statements
contained in the Underwriting Agreement, any schedule, exhibit, certificate or
other instrument delivered by or on behalf of the parties hereto, or in
connection with the
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<PAGE> 25
transactions contemplated by this Agreement, shall be deemed to be
representations and warranties hereunder. Notwithstanding any investigations
made by or on behalf of the parties to this Agreement, all representations,
warranties and agreements made by the parties to this Agreement or pursuant
hereto shall survive the termination of this Agreement and the issuance, sale
and delivery of the Warrant and the Warrant Stock.
SECTION 17. CONSTRUCTION. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of California,
without giving effect to conflict of laws principles thereof.
SECTION 18. COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original, and all of
which taken together shall be deemed to be one and the same instrument.
SECTION 19. ENTIRE AGREEMENT, AMENDMENTS. This Agreement and the
Underwriting Agreement constitute the entire agreement of the parties hereto
concerning the subject matter hereof and supersede all prior written or oral
agreements, understandings and negotiations with respect to the subject matter
hereof. This Agreement may not be amended, modified or altered except in a
writing signed by the Representative and the Company.
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<PAGE> 26
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, all as of the day and year first above written.
CRAIG CONSUMER ELECTRONICS, INC.
By: ____________________________
Richard I. Berger
President and CEO
THE BOSTON GROUP, L.P.
By: ____________________________
Name:
Title:
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<PAGE> 27
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD,
EXCHANGED, HYPOTHECATED OR TRANSFERRED IN ANY MANNER EXCEPT IN
COMPLIANCE WITH SECTION 1.3 AND 11(a) OF THE REPRESENTATIVE'S
WARRANT AGREEMENT PURSUANT TO WHICH THEY WERE ISSUED.
WARRANT CERTIFICATE NO. __
WARRANT TO PURCHASE 125,000
SHARES OF COMMON STOCK
VOID AFTER 5:00 P.M.
PACIFIC TIME, ON _________________, 2001
CRAIG CONSUMER ELECTRONICS, INC.
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
This certifies that, for value received, THE BOSTON GROUP, L.P., the
registered holder hereof or assigns (the "Warrantholder"), is entitled to
purchase from CRAIG CONSUMER ELECTRONICS, INC. (the "Company"), at any time
during the period commencing at 6:30 am., Pacific time, on ________________,
1997, and before 5:00 p.m., Pacific time, on ________________, 2001, at the
purchase price per share of Common Stock of $___________ (the "Warrant Price"),
125,000 shares of Common Stock of the Company (the "Warrant Stock "). The number
of shares of Common Stock of the Company purchasable upon exercise of each
Warrant evidenced hereby shall be subject to adjustment from time to time as set
forth in the Representative's Warrant Agreement, dated as of May __, 1996, by
and between the Company and the Representative (the "Representative's Warrant
Agreement").
The Warrants evidenced hereby represent the right to purchase an
aggregate of up to 125,000 shares of Warrant Stock (subject to adjustment as
provided in the Representative's Warrant Agreement) and are issued under and in
accordance with the Representative's Warrant Agreement, and are subject to the
terms and provisions contained in the Representative's Warrant Agreement, to all
of which the Warrantholder by acceptance hereof consents.
The Warrants evidenced hereby may be exercised in whole or in part by
presentation of this Warrant Certificate with the Purchase Form attached hereto
duly executed (with a signature guarantee as provided hereon) and simultaneous
payment of the Warrant Price at the principal office of the Company. Payment of
such price shall be made at the option of the Warrantholder in any manner
allowed in the Representative's Warrant Agreement.
Upon any partial exercise of the Warrants evidenced hereby, there shall
be signed and issued to the Warrantholder a new Warrant Certificate in respect
of the shares of Warrant Stock as to which the Warrants evidenced hereby shall
not have been exercised. These
<PAGE> 28
Warrants may be exchanged at the office of the Company by surrender of this
Warrant Certificate properly endorsed for one or more new Warrants of the same
aggregate number of shares of Warrant Stock as evidenced by the Warrant or
Warrants exchanged. No fractional securities shall be issued upon the exercise
of rights to purchase hereunder, but the Company shall pay the cash value of any
fraction upon the exercise of one or more Warrants. These Warrants are
transferable at the office of the Company in the manner and subject to the
limitations set forth in the Warrant Agreement.
This Warrant Certificate does not entitle any Warrantholder to any of
the rights of a stockholder of the Company.
CRAIG CONSUMER ELECTRONICS, INC.
By: ____________________________
Richard I. Berger
President and CEO
Dated: _____________, 199__
ATTEST: [Seal]
____________________________
Chief Financial Officer
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<PAGE> 29
CRAIG CONSUMER ELECTRONICS, INC.
PURCHASE FORM
CRAIG CONSUMER ELECTRONICS, INC (the "Company")
_______________________________
_______________________________
Attention: President
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant Certificate for, and to purchase
thereunder, _____ shares of common stock of the Company (the "Warrant Stock")
provided for therein, and requests that certificates for the Warrant Stock be
issued in the name of:
_______________________________________________________________
(Please print or Type Name, Address and Social Security Number)
_______________________________________________________________
_______________________________________________________________
and, if said number of shares of Warrant Stock shall not be all the Warrant
Stock purchasable hereunder, that a new Warrant Certificate for the balance of
the Warrant Stock purchasable under the within Warrant Certificate be registered
in the name of the undersigned Warrantholder or his Assignee as below indicated
and delivered to the address stated below.
Dated:_________________
Name of Warrantholder
or Assignee: _________________________
(Please Print)
Address: _________________________
_________________________
Signature: _________________________
Note: The above signature must correspond with the name as it appears upon the
face of this Warrant Certificate in every particular, without alteration or
enlargement or any change whatever, unless these Warrants have been assigned.
Signature Guaranteed:_____________________________
<PAGE> 30
(Signature must be guaranteed by a bank or trust company having an office or
correspondent in the United States or by a member firm of a registered
securities exchange of the National Association of Securities Dealers, Inc.)
<PAGE> 31
ASSIGNMENT
(To be signed only upon assignment of Warrants)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
the right to purchase _____ shares of Warrant Stock represented by the within
Warrant Certificate unto, and requests that a certificate for such Warrant be
issued in the name of:
_____________________________________________________________
(Name and Address of Assignee Must be Printed or Typewritten)
_____________________________________________________________
_____________________________________________________________
hereby irrevocably constituting and appointing _______________ Attorney to
transfer said Warrants on the books of the Company, with full power of
substitution in the premises and, if said number of warrant Stock shall not bear
all of the Warrant Stock purchasable under the within Warrant Certificate, that
a new Warrant Certificate for the balance of the Warrant Stock purchasable under
the within Warrant Certificate be registered in the name of the undersigned
Warrantholder and delivered to such Warrantholder's address as then set forth on
the Company's books.
Dated:_______________ __________________________________
Signature of Registered Holder
Note: The above signature must correspond with the name as it appears upon the
face of this Warrant Certificate in every particular, without alteration or
enlargement or any change whatever.
Signature Guaranteed:_____________________________
(Signature must be guaranteed by a bank or trust company having an office or
correspondent in the United States or by a member firm of a registered
securities exchange or the National Association of Securities Dealers, Inc.
<PAGE> 1
EXHIBIT 5
[KEESAL, YOUNG & LOGAN LETTERHEAD]
May 7, 1996
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549
Re: Craig Consumer Electronics, Inc.
Our File No.: 3764-19
------------------------------------------------------------------------
Ladies and Gentlemen:
This firm is counsel for Craig Consumer Electronics, Inc., a Delaware
corporation (the "Company"). As such, we are familiar with the Certificate of
Incorporation and bylaws of the Company, as well as the resolutions adopted by
its Board of Directors authorizing the issuance and sale of the 1,012,500 shares
of the Company's $.01 per value common stock (the "Shares") which are the
subject of Form S-1 Registration Statement number 333-1868 under the Securities
Act of 1933 (as amended, the "Registration Statement"). We have also acted as
counsel for the Company with respect to certain matters in connection with the
sale of the shares and in preparation of the required filings with the
Securities and Exchange Commission and the various state regulatory agencies
involved. In addition, we have examined such documents and undertaken such
further inquiries we consider necessary for rendering the opinions set forth
below.
<PAGE> 2
Securities and Exchange Commission
May 7, 1996
Page 2
Re: Craig Consumer Electronics, Inc. --
Public Offering
Our File No.: 3764-19
------------------------------------------------------------------
Based upon the foregoing, it is our opinion that:
1. The Company is a corporation duly organized and validly existing under
the laws of the State of Delaware.
2. The Shares, when issued for the consideration indicated in the
Prospectus, will be duly and validly issued, fully paid and non-assessable.
We acknowledge that we are referred to under the heading "Legal Matters" of
the prospectus which is part of the Company's Registration Statement relating to
the Shares, and we hereby consent to such use of our name in such Registration
Statement and to the filing of this opinion with state regulatory agencies in
such states as may require such filing in connection with the registration for
offer and sale in such states.
Very truly yours,
KEESAL, YOUNG & LOGAN, P.C.
/s/ Jeffrey D. Warren
--------------------------------------
By: Jeffrey D. Warren, Director
<PAGE> 1
EXHIBIT 10-O
CRAIG CONSUMER ELECTRONICS, INC.
(f/k/a BEREL INDUSTRIES, INC.)
SUBORDINATED NOTE (BONUS)
- --------------------------------------------------------------------------------
$201,163 May ____, 1996
FOR VALUE RECEIVED in connection with and in exchange for the right to
an unpaid 1994 bonus owed by Berel Industries, Inc., Craig Consumer Electronics,
Inc. (formerly known as Berel Industries, Inc.), a Delaware corporation
("Maker"), promises to pay to Executive Marketing, Inc. Employees Pension Plan,
an entity ("Payee"), in lawful money of the United States of America, the
principal sum of Two Hundred One Thousand One Hundred Sixty-Three Dollars
($201,163) together with all interest as hereinafter set forth.
1. INTEREST RATE: Interest shall accrue on the unpaid principal
balance of this Note, outstanding from time to time, from the date hereof
until paid at a rate of ten percent (10%) per annum computed on a daily basis
on the basis of a 360-day year, from the date such amounts are due until paid.
2. PAYMENTS:
(a) Amount: The principal amount of this Note shall be payable over
four (4) years commencing on the date hereof. Interest payments, of the then
accrued interest, shall be due and payable semi-annually, commencing November 1,
1996 and continuing every six months thereafter until this Note is paid in
full. Principal repayments shall commence May 1, 1997 and shall be due and
payable in eight (8) equal semi-annual installments of principal of Twenty-Five
Thousand One Hundred Forty-Five Dollars and Thirty-Seven Cents ($25,145.37),
together with the payment of all then accrued and unpaid interest, and
continuing semi-annually thereafter until paid in full.
(b) Method of Payment: The payment shall be made at such place as
Payee shall designate in writing. If any payment of principal or interest on
this Note becomes due and payable on a Saturday, Sunday or other day on which
commercial banks in California are authorized or required by law to close, the
due date shall be extended to the next succeeding business day, and interest
thereon shall accrue at the rate of ten percent (10%) per annum.
-1-
<PAGE> 2
3. SUBORDINATED PAYMENTS: To the extent any payment of interest or
principal is not made when due by reason of some event of default existing in
any Senior Indebtedness (as defined below) or would create a violation of any
financial covenant or other breach or default under any Senior Indebtedness,
such payment shall be deferred until permitted hereunder. Deferred payments of
principal shall continue to earn interest at the rate of ten percent (10%) per
annum. However, accrued interest, if deferred by reason of such event, shall
not earn any additional interest. In all events, this Note shall be fully due
and payable on the due date ten (10) years from the date hereof.
4. SUBORDINATION:
(a) Both Maker and Payee agree that the payment of the
principal of and interest on this Note is subordinated, to the extent and in
the manner provided in this Section 4, to the prior payment in full, in cash,
of all Senior Indebtedness.
"Senior Indebtedness" is any present or future Indebtedness (as defined
below) of Maker created, incurred, assumed or guaranteed by Maker (and all
renewals, extensions or refundings thereof) unless the instrument under which
such Indebtedness is created, incurred, assumed or guaranteed expressly
provides that such Indebtedness is not senior or superior in right of payment
to this Note. Notwithstanding anything to the contrary in the foregoing, Senior
Indebtedness shall not include (i) any Indebtedness of Maker to any of its
subsidiaries, or (ii) any Indebtedness hereafter incurred that is subordinate
or junior in right of payment to any Senior Indebtedness. Indebtedness is any
indebtedness, contingent or otherwise, in respect of borrowed money (whether or
not the recourse of the lender is to the whole of the assets of Maker or only
to a portion thereof), including principal and interest (including all interest
accruing, and all interest which, but for the application of the Federal
Bankruptcy Code, would have accrued, after the commencement of any such
bankruptcy or insolvency proceeding), or evidenced by bonds, notes, debentures
or similar instruments or letters of credit, or representing the balance
deferred and unpaid of the purchase price of any property or interest therein;
except any such balance that constitutes a trade payable, if and to the extent
such indebtedness would appear as a liability upon a balance sheet of Maker
prepared on a consolidated basis in accordance with generally accepted
accounting principles. Notwithstanding the foregoing, the Maker is
simultaneously delivering four other "Subordinated Notes" to its principal
stockholders (the total principal amount of the "Subordinated Notes," including
this Note, is $981,961). In addition, the Maker is simultaneously delivering
four "PSP Promissory Notes" (the total principal amount of the "PSP Promissory
Notes" is $312,400). These
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<PAGE> 3
obligations shall not be Senior Indebtedness and shall have equal priority to
this Note.
"Designated Senior Indebtedness" is Senior Indebtedness held by BTCC
group and any refinancing, replacement, or other renegotiations thereof.
This Section 4 shall constitute a continuing offer to all persons who,
in reliance upon such provisions, become holders of, or continue to hold, Senior
Indebtedness, and such provisions are made for the benefit of the holders of
Senior Indebtedness, and such holders and/or each of them may enforce such
provisions.
(b) (i) Upon the maturity of the principal of any Senior
Indebtedness or the due date for any principal or interest payment, by lapse of
time, acceleration, or otherwise, all principal thereof and interest thereon
shall first be paid in full, in cash, before any payment is made on account of
the principal of or interest on this Note or to acquire this Note.
(ii) Upon the happening of an event of default (or if any
event of default would result upon any payment with respect to this Note) with
respect to any Senior Indebtedness, as such event of default is defined therein
or in the instrument under which it is outstanding, permitting the holders to
accelerate the maturity thereof, or, with respect to Designated Senior
Indebtedness, permitting the holder to cease making loan advances, and, if the
default is other than default in payment of the principal of or interest on
such Senior Indebtedness, upon written notice thereof given to Maker by the
holders of such Senior Indebtedness or their representative or representatives,
then, unless and until such event of default shall have been cured or waived or
shall have ceased to exist, no payment shall be made by Maker with respect to
the principal of or interest on this Note or to acquire this Note, and payments
hereunder shall be deferred in the manner provided in Section 3 hereof.
(iii) In the event that, notwithstanding the provisions of
this Section 4(b), Maker shall make any payment to Payee on account of the
Principal of or interest on this Note, after the happening of a default in
payment of the principal of Senior Indebtedness or an event of default in
respect of the payment of interest on Senior Indebtedness, then, unless and
until such default or event of default shall have been cured or waived or shall
have ceased to exist, such payment (subject to the provisions of Section 4(f)
and (g)) shall be held by Payee, in trust for benefit of, and shall be paid
over and delivered to, the holders of the Designated Senior Indebtedness (pro
rata as to each of such holders on the basis of the respective amounts of
Senior Indebtedness held by them) or their representative or representatives or
the trustee
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<PAGE> 4
under the indenture or other agreement (if any) pursuant to which the
Designated Senior Indebtedness may have been issued, as their respective
interests may appear, for application to the payment of all Senior Indebtedness
in full in accordance with its terms, after giving effect to any concurrent
payment or distribution or provision therefore to the holders of the Designated
Senior Indebtedness. After payment in full, in cash, of the Designated Senior
Indebtedness any remaining funds held in trust by the Payee, shall be paid over
and delivered to, the holders of the Senior Indebtedness (pro rata as to each
of such holders on the basis of the respective amounts of Senior Indebtedness
held by them) or their representative or representatives or the trustee under
the indenture or other agreement (if any) pursuant to which the Senior
Indebtedness may have been issued, as their respective interests may appear,
for application to the payment of all Senior Indebtedness in full in accordance
with its terms, after giving effect to any concurrent payment or distribution
or provision therefor to the holders of the Senior Indebtedness. Maker shall
give prompt written notice to Payee of any default under any Senior
Indebtedness or under any agreement pursuant to which Senior Indebtedness may
have been issued.
(c) Upon any distribution of assets of Maker upon any dissolution,
winding up, liquidation or reorganization of Maker (whether in bankruptcy,
insolvency or receivership proceedings or upon an assignment for the benefit of
creditors or otherwise) tending towards liquidation of the business and assets
of Maker:
(i) the holders of all Senior Indebtedness shall first be
entitled to receive payment in full in cash of the principal and interest due
thereon, including interest accruing after the commencement of any insolvency
or bankruptcy proceeding, before Payee is entitled to receive any payment on
account of the principal of or interest on this Note;
(ii) any payment or distribution of assets of Maker of any
kind or character, whether in cash, property or securities, to which Payee
would be entitled except for the provisions of this Section 4, shall be paid
directly to the holders of Senior Indebtedness of Maker or its representative
or representatives, or to the trustee under any indenture under which Senior
Indebtedness may have been issued, to the extent necessary to make payment in
full to all Senior Indebtedness remaining unpaid, after giving effect to any
concurrent payment or distribution or provision therefore to the holders of
such Senior Indebtedness; and
(iii) in the event that, notwithstanding the foregoing
provisions of this Section 4(c), any payment or distribution of assets of Maker
of any kind or character, whether in cash, property or securities, shall be
received by
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<PAGE> 5
Payee on account of principal of or interest on this Note before all Senior
Indebtedness is paid in full, in cash, such payment or distribution (subject to
the provisions of Section 4(f)) shall be received and held in trust for and
shall be paid over to the holders of the Senior Indebtedness remaining unpaid
or unprovided for or their representative or representatives, or to the trustee
under any indenture under which Senior Indebtedness may have been issued, for
application to the payment of such Senior Indebtedness until all such Senior
Indebtedness shall have been paid in full, after giving effect to any
concurrent payment or distribution or provision therefore to the holders of
such Senior Indebtedness; provided, however, that Payee shall not be required
to make any such payment unless and until it receives an officers' certificate
(on which Payee may conclusively rely) identifying all holders of Senior
Indebtedness and the principal amount of an interest on (calculated as of the
date of such officers' certificate and as of any anticipated payment date)
Senior Indebtedness then outstanding held by each and stating the reasons why
such officers' certificate is being delivered to Payee.
Maker shall give prompt written notice to Payee of any dissolution,
winding up, liquidation or reorganization of Maker.
In the event of any dissolution, winding up, liquidation or
reorganization of Maker, any holder of Designated Senior Indebtedness is hereby
irrevocably authorized to prove any and all claims in such proceedings on the
Indebtedness hereunder if Payee shall fail to file a proof of claim within ten
(10) days following written demand by any holder of the Designated Senior
Indebtedness, to vote any and all such claims in such proceedings on the
subordinated Indebtedness and to accept and receive any payment or
distribution, to do any and all things and execute all instruments necessary to
effectuate the foregoing.
Upon any distribution of assets of Maker referred to in this Section 4,
Payee shall be entitled to rely upon any order or decree made by any court of
competent jurisdiction in which such dissolution, winding up, liquidation or
reorganization proceeding is pending, or a certificate of the liquidating
trustee or agent or other person making any distribution to Payee, for the
purpose of ascertaining the persons entitled to participate in such
distribution, the holders of the Senior Indebtedness and other indebtedness of
Maker, the amount thereof or payable thereon, the amount or amounts paid or
distributed thereon and all other facts pertinent thereto or to this Section 4.
(d) Subject to the payment in full, in cash, of all Senior
Indebtedness, Payee shall be subrogated to the rights of the holders of Senior
Indebtedness to receive payments or
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<PAGE> 6
distributions of assets of Maker applicable to the Senior Indebtedness until
all amounts owing on this Note shall be paid in full, and for the purpose of
such subrogation no payments or distributions to the holders of the Senior
Indebtedness by or on behalf of Maker or by or on behalf of Payee by virtue of
this Section 4 which otherwise would have been made to Payee shall, as between
Maker and Payee, be deemed to be payment by Maker to or on account of the
Senior Indebtedness, it being understood that the provisions of this Section 4
are and are intended solely for the purpose of defining the relative rights of
Payee, on the one hand, and the holders of the Senior Indebtedness, on the
other hand.
(e) Other than expressed in this Section 4, nothing contained in
this Section 4 or elsewhere in this Note is intended to or shall impair, as
between Maker and Payee, the obligation of Maker, which is absolute and
unconditional, to pay to Payee the principal of and interest on this Note as
and when the same shall become due and payable in accordance with its terms, or
is intended to or shall affect the relative rights of Payee and creditors of
Maker other than the holders of the Senior Indebtedness, nor shall anything
herein or therein prevent Payee from exercising all remedies otherwise
permitted by applicable law upon an event of default under this Note, subject
to the rights, if any, under this Section 4 of the holders of Senior
Indebtedness in respect to cash, property or securities of Maker received upon
the exercise of any such remedy.
(f) Payee shall not at any time be charged with knowledge of the
existence of any facts which would prohibit the making of any payment to or by
Payee, unless and until Payee shall have received written notice delivered to
such Payee from Maker or from one or more holders of Senior Indebtedness or
from any trustee therefore, and, prior to the receipt of any such written
notice, Payee shall be entitled to assume conclusively that no such facts
exist. Payee shall be entitled to rely on the delivery to it of a written
notice by a person representing himself to be a holder of Senior Indebtedness
(or a trustee on behalf of such holder) to establish that such notice has been
given by a holder of Senior Indebtedness or a trustee on behalf of any such
holder or holders. In the event that Payee determines in good faith that
further evidence is required with respect to the right of any person as a
holder of Senior Indebtedness to participate in any payment or distribution
pursuant to this Section 4, Payee may request such person to furnish evidence
to the reasonable satisfaction of Payee as to the amount of Senior Indebtedness
held by such person, the extent to which such person is entitled to participate
in such payment or distribution and any other facts pertinent to the rights of
such person under this Section 4, and if such evidence is not furnished, Payee
may defer any payment to such
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<PAGE> 7
person pending judicial determination as to the right of such person to receive
such payment.
(g) No right of any present or future holders of any Senior
Indebtedness to enforce subordination as provided herein shall at any time in
any way be prejudiced or impaired by any act or failure to act on the part of
Maker or by any act or failure to act, in good faith, by any such holder, or by
any noncompliance by Maker with the terms of this Note, regardless of any
knowledge thereof which any such holder may have or be otherwise charged with.
(h) The failure to make a payment on account of principal or
interest by reason of any provision in this Section 4 shall not be construed as
a default on this Note.
5. PREPAYMENTS: Upon the prior written consent of the holders of
the Designated Senior Indebtedness (which consent may be withheld for any
reason), Maker may prepay part of or the entire unpaid principal balance then
outstanding together with accrued unpaid interest thereon at any time without
any prepayment penalty.
6. GOVERNING LAW: This Note shall be in all respects governed by
and construed in accordance with the laws of the State of California.
Jurisdiction and venue in any action arising hereunder shall be in a court of
competent subject matter jurisdiction in Los Angeles County, California.
7. NO RECOURSE AGAINST OTHERS: A director, officer, employee or
stockholder, as such, of Maker, shall not have any liability for any
obligations of Maker under this Note or for any claim based on, in respect of,
or by reason of such obligations or their creation. Maker, by accepting this
Note, waives and releases all such liability. The waiver and release are part
of the consideration for the issue of this Note.
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<PAGE> 8
Craig Consumer Electronics,
Inc., a Delaware corporation
("Maker")
By:
--------------------------------
Its:
-------------------------------
Address for Notice:
13845 Artesia Blvd.
Cerritos, CA 90703
-----------------------------------
Richard I. Berger as Trustee for
Executive Marketing, Inc.
Employees Pension Plan ("Payee")
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<PAGE> 1
EXHIBIT 23-A
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated February 15, 1996, and to all references to our firm included in or
made a part of Amendment No. 3 to the Registration Statement on Form S-1 for
Craig Consumer Electronics, Inc.
ARTHUR ANDERSEN LLP
Orange County, California
May 15, 1996
