<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 25, 1996
REGISTRATION STATEMENT NO. 333-06223
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
PRE-EFFECTIVE AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
ENSEC INTERNATIONAL, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
FLORIDA 1731 65-0654330
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
---------------
751 PARK OF COMMERCE DRIVE, SUITE 104
BOCA RATON, FLORIDA 33487
(561) 997-2511
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL
PLACE OF BUSINESS)
---------------
CHARLES N. FINKEL, PRESIDENT
ENSEC INTERNATIONAL, INC.
751 PARK OF COMMERCE DRIVE, SUITE 104
BOCA RATON, FLORIDA 33487
(561) 997-2511
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
---------------
<TABLE>
<CAPTION>
COPIES TO:
<S> <C>
JEFFREY A. STOOPS, ESQ. CHARLES P. GREENMAN, ESQ.
GUNSTER, YOAKLEY, VALDES-FAULI & STEWART, P.A. TIMOTHY I. KAHLER, ESQ.
777 SOUTH FLAGLER DRIVE, SUITE 500 EAST TOWER PARKER CHAPIN FLATTAU & KLIMPL, LLP
WEST PALM BEACH, FLORIDA 33401 1211 AVENUE OF THE AMERICAS
(561) 655-1980 NEW YORK, NEW YORK 10036
FACSIMILE (561) 655-5677 (212) 704-6000
FACSIMILE (212) 704-6288
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective. If any of the
securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, 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, check the following box and
list the Securities Act registration statement number of 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. [_]
---------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
AMOUNT MAXIMUM PROPOSED
TITLE OF EACH CLASS TO BE OFFERING PRICE MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.01(2)............... 2,185,000 $6.00 $13,110,000 $ 4,520.69
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Common Stock, par value
$.01(3)............... 2,185,000 7.00 15,295,000 5,274.14
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Common Stock, par value
$.01(4)............... 231,250 .10 23,125 7.97
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Redeemable Common Stock
Purchase Warrants(5).. 2,185,000 .10 218,500 75.34
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Underwriters' Warrants,
each to purchase one
share of
Common Stock(6)....... 190,000 .000053 10.00 (7)
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Underwriters' Warrants,
each to purchase one
Redeemable Warrant.... 190,000 .000053 10.00 (7)
- --------------------------------------------------------------------------------------------
Common Stock, par value
$.01 per share(8)..... 190,000 9.90 1,881,000 648.62
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Redeemable Warrants,
each to purchase one
share of
Common Stock(8)....... 190,000 .165 31,350 10.81
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Common Stock, par value
$.01 per share(9)..... 190,000 7.00 1,330,000 458.62
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Total:................................................................... $10,996.19
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) Includes an aggregate 285,000 shares of Common Stock to cover over-
allotments, if any, pursuant to an over-allotment option granted to the
Underwriters.
(3) Shares of Common Stock issuable upon exercise of the Redeemable Warrants
to be sold to the public.
(4) Shares of Common Stock to be issued by the Company concurrently with the
closing of this Offering pursuant to a bridge financing completed on May
14, 1996.
(5) Includes an aggregate 285,000 Redeemable Warrants to cover over-
allotments, if any, pursuant to an over-allotment option granted to the
Underwriters.
(6) To be issued to the Underwriters at the time of delivery and acceptance of
the securities to be sold to the public hereunder.
(7) No fee due pursuant to Rule 457(g) under the Securities Act of 1933, as
amended (the "Securities Act").
(8) Issuable upon exercise of the Underwriters' Warrants.
(9) Issuable upon exercise of the Redeemable Warrants underlying the
Underwriters' Warrants.
---------------
Also registered hereunder pursuant to Rule 416 are an indeterminate number
of shares of Common Stock which may be issued pursuant to the anti-dilution
provisions applicable to the Redeemable Warrants.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
ENSEC INTERNATIONAL, INC.
CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY
ITEMS REQUIRED BY PART 1 OF FORM SB-2
<TABLE>
<CAPTION>
ITEM TITLE OF ITEM CAPTION IN PROSPECTUS
---- ------------- ---------------------
<C> <S> <C>
1. Forepart of the Registration
Statement and Outside Front Cover
Page of Prospectus.................. Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus................. Inside Front Cover Page
3. Summary Information and Risk
Factors............................. Prospectus Summary; Risk Factors
4. Use of Proceeds...................... Use of Proceeds
5. Determination of Offering Price...... Underwriting
6. Dilution............................. Dilution
7. Selling Security Holders............. Principal and Selling
Stockholders
8. Plan of Distribution................. Front Cover Page; Underwriting
9. Legal Proceedings.................... Business
10. Directors, Executive Officers,
Promoters and Control Persons....... Management
11. Security Ownership of Certain Principal and Selling
Beneficial Owners and Management.... Stockholders
12. Description of Securities............ Description of Securities;
Dividend Policy
13. Interest of Named Experts and
Counsel............................. Legal Matters; Experts
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities......................... Description of Securities
15. Organization Within Last Five Years.. Certain Relationships and Related
Transactions
16. Description of Business.............. Business
17. Management's Discussion and Analysis
or Plan of Operation................ Management's Discussion and
Analysis of Financial Condition
and Results of Operations
18. Description of Property.............. Business
19. Certain Relationships and Related Certain Relationships and Related
Transactions........................ Transactions
20. Market for Common Equity and Related
Stockholder Matters................. Description of Securities; Shares
Eligible for Future Sale
21. Executive Compensation............... Management
22. Financial Statements................. Consolidated Financial Statements
23. Changes in and Disagreements With
Accountants on Accounting and
Financial Disclosure................ Not Applicable
</TABLE>
<PAGE>
EXPLANATORY NOTE
Two forms of Prospectus are included in this Registration Statement. The
first Prospectus will be used in connection with an underwritten Offering of
Common Stock and Warrants by the Company (the "Company Prospectus"). The
second Prospectus will be used in connection with the sale of Common Stock by
certain persons from time to time in open market transactions (the "Bridge
Investors Prospectus"). The Company Prospectus and the Bridge Investors
Prospectus are substantially identical, except for the alternate pages for the
Bridge Investors Prospectus included herein which are labeled "Alternate Page
for Bridge Investors Prospectus." In addition, what is referred to as "the
Offering" in the Company Prospectus will be changed to "the Company Offering"
throughout the Bridge Investors Prospectus.
After this Registration Statement becomes effective, both Prospectuses will
be used in their entirety in connection with the offer and sale of the
respective securities referenced therein.
<PAGE>
[LOGO OF ENSEC(R) SECURITY SYSTEMS APPEARS HERE]
1,900,000 SHARES OF COMMON STOCK AND
1,900,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
This Prospectus relates to an offering (the "Offering") by Ensec
International, Inc. (the "Company") of 1,900,000 shares of common stock, par
value $.01 per share (the "Common Stock"), and 1,900,000 redeemable Common
Stock purchase warrants (the "Redeemable Warrants") (the Common Stock and
Redeemable Warrants are sometimes hereinafter referred to as the "Securities")
through Rickel & Associates, Inc. (the "Representative") and Janssen-Meyers
Associates, L.P. ("JMA") (each an "Underwriter" and, collectively, the
"Underwriters"). The shares of Common Stock and the Redeemable Warrants
offered hereby may be purchased separately and will be transferable separately
immediately after issuance. The Common Stock is being offered at $6.00 per
share and the Redeemable Warrants at $.10 per Warrant.
Each Redeemable Warrant entitles the registered holder thereof to purchase
one share of Common Stock at an exercise price of $7.00 per share, subject to
adjustment in certain events, at any time commencing 12 months after the date
of this Prospectus (or earlier with the prior written consent of the
Representative) and expiring on the fifth anniversary of the date of this
Prospectus. The Redeemable Warrants are subject to redemption by the Company
at $.10 per Redeemable Warrant at any time commencing 12 months after the date
of this Prospectus (or earlier with the prior written consent of the
Representative), on not less than 30 days prior written notice to the holders
of the Redeemable Warrants, provided the average closing bid quotation of the
Common Stock as reported on the NASDAQ SmallCap Market ("Nasdaq-SCM"), if
traded thereon, or if not traded thereon, the average closing bid quotation of
the Common Stock if listed on a national securities exchange (or other
reporting system that provides last sale prices), has been at least 150% of
the then current exercise price of the Redeemable Warrants (initially, $10.50
per share), for a period of 20 consecutive trading days ending on the third
day prior to the date on which the Company gives notice of redemption. The
Redeemable Warrants will be exercisable until the close of business on the day
immediately preceding the date fixed for redemption. See "Description of
Securities--Redeemable Warrants." The Common Stock and the Redeemable Warrants
have been approved for initial inclusion on Nasdaq-SCM under the trading
symbols "ENSC" and "ENSCW," respectively.
Concurrently with this Offering, the Company has registered the offering of
231,250 shares of Common Stock under the Securities Act of 1933, as amended
(the "Securities Act"), on behalf of certain persons (the "Bridge Investors")
pursuant to a Bridge Investors Prospectus included within the Registration
Statement of which this Prospectus forms a part. The Bridge Investors' shares
are not part of this Offering, however, and may not be sold prior to the
expiration of 12 months after the date of this Prospectus. The Company will
not receive any of the proceeds from the sale of the shares by the Bridge
Investors. See "Concurrent Registration of Common Stock."
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK. ONLY INVESTORS WHO CAN BEAR THE RISK OF LOSS OF THEIR ENTIRE INVESTMENT
SHOULD INVEST. FOR A DESCRIPTION OF CERTAIN RISKS REGARDING AN INVESTMENT IN
THE COMPANY AND IMMEDIATE SUBSTANTIAL DILUTION, SEE "RISK FACTORS" (PAGE 8)
AND "DILUTION" (PAGE 19).
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share....................... $6.00 $.48 $5.52
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Per Redeemable Warrant.......... $.10 $.008 $.092
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Total(3)........................ $11,590,000 $927,200 $10,662,800
</TABLE>
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- -------------------------------------------------------------------------------
(cover page continues on page iii)
RICKEL & ASSOCIATES, INC. JANSSEN-MEYERS ASSOCIATES, L.P.
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 25, 1996.
<PAGE>
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OR THE REDEEMABLE WARRANTS AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER
MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT
ANY TIME.
<PAGE>
NO UNDERWRITER, DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THIS OFFERING, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME
DOES NOT IMPLY THAT THERE HAS NOT BEEN ANY CHANGE IN THE INFORMATION SET FORTH
HEREIN OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY, OR AN OFFER TO SELL OR
SOLICITATION OF AN OFFER TO BUY ANY SUCH SECURITIES 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 SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL.
UNTIL OCTOBER 20, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WITH
RESPECT TO THEIR SOLICITATIONS TO PURCHASE THE SECURITIES OFFERED HEREBY.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 8
Use of Proceeds.......................................................... 17
Dilution................................................................. 19
Capitalization........................................................... 20
Dividend Policy.......................................................... 20
Selected Consolidated Financial Data..................................... 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 29
Management............................................................... 37
Principal and Selling Stockholders....................................... 42
Certain Relationships and Related Transactions........................... 43
Description of Securities................................................ 43
Shares Eligible for Future Sale.......................................... 46
Concurrent Registration of Common Stock.................................. 48
Underwriting............................................................. 49
Legal Matters............................................................ 51
Experts.................................................................. 51
Available Information.................................................... 51
Index to Consolidated Financial Statements............................... F-1
</TABLE>
----------------
TO INVEST IN THESE SECURITIES, A CALIFORNIA RESIDENT MUST HAVE, AS A
MINIMUM, EITHER (i) A LIQUID NET WORTH OF $250,000, EXCLUSIVE OF HOME, HOME
FURNISHINGS AND AUTOMOBILES, AND $65,000 OF GROSS INCOME DURING THE LAST TAX
YEAR AND ESTIMATED GROSS INCOME OF $65,000 FOR THE CURRENT TAX YEAR OR (ii) A
LIQUID NET WORTH OF $500,000, EXCLUSIVE OF HOME, HOME FURNISHINGS AND
AUTOMOBILES.
i
<PAGE>
As of the date of this Prospectus, the Company will become subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and, in accordance therewith, will file reports, proxy and
information statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy and information statements
and other information can be inspected and copied at the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the following regional offices: New York
Regional Office, Suite 1300, 7 World Trade Center, New York, New York 10048,
and Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511, and copies of such material may also be obtained from the
Public Reference Section of the Commission at prescribed rates. The Commission
maintains a World Wide Web site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding registrants
that file such information electronically. The Company intends to furnish its
stockholders with annual reports containing audited consolidated financial
statements and such other reports as the Company deems appropriate or as may
be required by law.
ii
<PAGE>
- --------
(1) Does not include as additional compensation (i) to the Representative, a
non-accountable expense allowance equal to 3% of the gross proceeds of the
Offering, and (ii) to the Underwriters, warrants (the "Underwriters'
Warrants") entitling the Representative to purchase up to 150,000 shares
of the Common Stock and 150,000 Redeemable Warrants and entitling JMA to
purchase up to 40,000 shares of Common Stock and 40,000 Redeemable
Warrants. The Company has agreed to pay to the Representative, under
certain circumstances, a Redeemable Warrant solicitation fee of 5% of the
exercise price for each Redeemable Warrant exercised. The Company has also
agreed to indemnify the Underwriters against certain civil liabilities,
including those arising under the Securities Act. See "Underwriting."
(2) After deducting discounts and commissions payable to the Underwriters, but
before payment of the Representative's non-accountable expense allowance
($347,700, or $386,355 if the Underwriters' Over- allotment Option (as
defined below) is exercised in full) and the other expenses of the
Offering payable by the Company (estimated at $475,000, or $458,963 if the
Underwriters' Over-allotment Option is exercised in full). See
"Underwriting."
(3) The Company and the Selling Stockholder (as defined herein) have granted
the Underwriters an option, exercisable for a period of 45 days after the
closing of the Offering, to purchase up to an additional 15% of the amount
of shares of the Common Stock offered hereunder (the first 75,000 of which
will be sold by the Selling Stockholder) and/or 15% of the amount of
Redeemable Warrants offered hereunder, upon the same terms and conditions
solely for the purpose of covering over-allotments, if any (the
"Underwriters' Over- allotment Option"). If the Underwriters' Over-
allotment Option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions, Proceeds to Company and Proceeds
to Selling Stockholder will be $13,328,500, $1,066,280, $11,848,220 and
$414,000, respectively. See "Principal and Selling Stockholders" and
"Underwriting."
Prior to the Offering, there has been no public market for the Common Stock
or the Redeemable Warrants, and there can be no assurance that any such market
for the Common Stock or the Redeemable Warrants will develop after the closing
of the Offering or that, if developed, it will be sustained. The offering
price of the Common Stock and the Redeemable Warrants and the initial exercise
price and other terms of the Redeemable Warrants were established by
negotiation between the Company and the Underwriters and do not necessarily
bear any direct relationship to the Company's assets, earnings, book value per
share or other generally accepted criteria of value. See "Underwriting."
The Common Stock and the Redeemable Warrants are being offered by the
Underwriters on a firm commitment basis, subject to prior sale, when, as and
if delivered to the Underwriters and subject to certain conditions. Subject to
the provisions of the underwriting agreement between the Underwriters and the
Company, the Underwriters reserve the right to withdraw, cancel or modify the
Offering and to reject any order in whole or in part. It is expected that
delivery of certificates will be made against payment therefor at the office
of the Representative, 875 Third Avenue, New York, New York 10022, on or about
September 30, 1996.
iii
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Each prospective investor is urged to
read this Prospectus in its entirety. Unless otherwise indicated, the
information in this Prospectus (i) reflects the formation of the Company and
its organization as the holding company for Ensec, S.A. and Ensec Inc. as if
such formation and organization had occurred as of the earliest date presented,
(ii) does not reflect the issuance of securities in connection with the Bridge
Financing (described below) and (iii) does not give effect to the exercise of
(a) the Underwriters' Over-allotment Option, (b) the Redeemable Warrants, (c)
the Underwriters' Warrants and (d) other outstanding options and warrants to
purchase an aggregate of 355,000 shares of Common Stock.
THE COMPANY
The Company designs, develops, assembles, sells, installs and services
security systems for large commercial or governmental facilities, ranging from
single function installations to high-end integrated security systems. The
Company's high-end integrated systems are based on its proprietary software and
related hardware which permit multiple devices or systems to be combined into a
unified system covering multiple sites. Since its inception, the Company has
installed approximately 400 systems, nearly all of which have been in Brazil,
including systems for large corporations (such as Bosch, Caterpillar, Eastman
Kodak, General Motors, IBM, Microsoft and Texaco) and government agencies (such
as the Brazilian Bureau of Mint & Engraving and the Central Bank of Brazil).
In 1995, the Company completed the development of its second-generation
system, the EnWorks(TM) product family, consisting of state-of-the-art, real-
time, integrated security systems. The Company spent four years and over $5
million in the development of the flagship product in the EnWorks(TM) family:
the En2000(TM) system. The Company's high-end integrated security systems are
based on distributive intelligence architecture and proprietary software that
permit the integration of various security devices or systems into a unified
system operating through the use of graphical user interfaces. Distributive
intelligence architecture permits individual components of an integrated
security system to process information independently so that such components
may continue to operate even when the central processor or another component in
the system malfunctions or is rendered inoperative. In addition, an integrated
security system that uses distributive intelligence architecture can operate
more efficiently because individual components are able to complete independent
tasks simultaneously.
The Company believes that the worldwide integrated security systems market is
currently $1.5 billion and has grown at a rate of approximately 15% per annum
from 1992 to 1995. The Company began marketing its En2000 system in 1995 at
which time the Company was selected by the Port Authority of New York and New
Jersey through a competitive bid process to provide the new integrated access
control system for the parking facilities located in the World Trade Center. In
1995, the Company entered into contracts to install eight additional En2000(TM)
systems, including a contract from Electronic Data Systems, Inc. ("EDS") to
install the En2000(TM) in EDS's corporate headquarters in Plano, Texas. During
the first six months of 1996, the Company entered into contracts to install
seven En2000(TM) systems. In addition, the Company currently has 36 service and
maintenance contracts with customers who have purchased Company products,
covering 68 installations. Other examples of the Company's completed projects
involving prior versions of the Company's systems include: (i) an integrated
security system for the Brazilian Bureau of Mint & Engraving; (ii) an access
control, time and attendance, closed-circuit television ("CCTV") and fleet
management system for Companhia Vale do Rio Doce, a large Brazilian iron ore
mining company with over 15,500 employees; and (iii) a postal tracking and
tracing system for the Brazilian Postal Service.
1
<PAGE>
The Company's systems have the ability to integrate and enable communication
between disparate subsystems including the following functions based on a
customer's specific needs:
. Access Control . Time and Attendance . Facilities Management
. Alarm Monitoring . Guard Tours . Parking Facility Control
. Data Security . Restaurant Revenue Reporting . CCTV
. Vehicle Tracking . Elevator Control . Video Badging
The Company's business strategy is based on three objectives which the
Company believes will allow it to better serve each of its geographic markets:
(i) Expand the Company's focus from operations and a customer base located
primarily in Brazil to a Company with an international scope and an
emphasis on the marketing in the United States of high-end integrated
security systems, which the Company believes enjoy the greatest
opportunities in the U.S. The Company recently relocated certain key
executives to the United States and is currently relocating its
research and development and finance personnel from Brazil to the
United States.
(ii) Focus Brazilian marketing efforts primarily on the sale and service of
less complex security systems such as single component installations
and alarm monitoring. The Company believes the developing economy of
Brazil will provide a greater number of potential customers for these
types of systems rather than for its high-end integrated security
systems, due to the finite number of commercial, governmental and
similar facilities suited for high-end integrated systems and the
number of prior installations by the Company of its security systems
in such facilities. Pursuant to this strategy, the Company is
implementing a downsizing plan in Brazil that includes the following
steps:
. Sale of the Company's Brazilian currency sorting equipment division
in 1995, which was not related to the Company's security system
business.
. Establishment of relationships with value-added resellers to market
the Company's products to the mid- and low-end market segments in
Brazil.
. Cumulative reduction of the Brazilian workforce by approximately 78%
and a proposed sale of some or all of the Company's facilities as a
result of such workforce reduction and the sale of the currency
sorting equipment division, all of which are consistent with the
Company's reliance on value-added resellers as opposed to in-house
sales personnel.
(iii) Enter into alliances with strategic partners for marketing the
Company's products in the U.S. and internationally. To facilitate
this expansion into the U.S. market, the Company has entered into the
following strategic alliances:
. Agreement with EDS whereby EDS will promote and sell the Company's
products for a term of three years (subject to renewals).
. Agreement with Lockheed Martin IMS ("Lockheed Martin") whereby the
Company and Lockheed Martin will seek (for a term of five years,
subject to renewal) to identify specific projects for integrated
security systems to be pursued through a teaming arrangement between
the parties.
2
<PAGE>
Mr. Charles N. Finkel, the Company's President, Chief Executive Officer and
beneficial owner of all shares of Common Stock outstanding immediately prior to
the Offering, has agreed with the Representative not to offer, sell, contract
to sell or otherwise dispose of all shares of Common Stock beneficially owned
by him for a period of 24 months after the date of this Prospectus, without the
Representative's consent. In addition, pursuant to a Share Deposit Agreement
between the Representative and Mr. Finkel, Mr. Finkel has agreed with the
Representative not to offer, sell, contract to sell or otherwise dispose of
800,000 shares of Common Stock beneficially owned by him for a period of ten
years after the date of this Prospectus, without the Representative's consent;
provided, however, that such restrictions will be released with respect to
500,000 of such shares if the Company reports income before income taxes in
excess of $4,000,000 in fiscal 1997 and with respect to the remaining 300,000
shares if the Company reports income before income taxes in excess of
$7,000,000 in fiscal 1998. The Representative may, in its sole discretion, and
at any time without notice, release all or any portion of the shares owned by
Mr. Finkel from such restrictions. See "Shares Eligible for Future Sale."
In May 1996, the Company concluded a private placement to certain persons
("Bridge Investors") of an aggregate of (i) $2,500,000 of 10% senior
subordinated notes (the "Bridge Financing"), and (ii) warrants to purchase
250,000 shares of Common Stock with an exercise price of $.10 per share, of
which warrants to purchase 18,750 shares of Common Stock were relinquished by
certain of the Bridge Investors in September 1996 (the "Bridge Warrants"). The
Bridge Warrants are mandatorily exercisable upon the consummation of the sale
of the securities in this Offering. The Company received net cash proceeds from
the Bridge Financing of approximately $2,216,000 after giving effect to
commissions and expenses, which proceeds were used primarily for debt repayment
in Brazil and general working capital purposes.
The Company, a Florida corporation, was formed in April 1996 as a holding
company for Ensec Inc., a Florida corporation ("Ensec Inc."), and Ensec
Engenharia e Sistemas de Seguranca, S.A., a Brazilian corporation ("Ensec,
S.A."). Ensec, S.A. was founded in 1983 by Charles N. Finkel, the Company's
President and Chief Executive Officer. In 1991, Ensec, S.A. established its
U.S. operations with the formation of Ensec Inc. The Company's principal
administrative offices are located in Boca Raton, Florida and Sao Paulo,
Brazil. The Company maintains a regional sales office in New York City. The
Company's principal executive offices are located at 751 Park of Commerce
Drive, Suite 104, Boca Raton, Florida 33487, telephone number (561) 997-2511.
Unless otherwise indicated or the context otherwise requires, references to the
"Company" shall include the Company, Ensec Inc. and Ensec, S.A.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities offered................ 1,900,000 shares of Common Stock and
Redeemable Warrants to purchase 1,900,000
shares of Common Stock. See "Description of
Securities" and "Underwriting."
Offering price.................... $6.00 per share of Common Stock and $.10
per Redeemable Warrant.
Common Stock outstanding:
Prior to the Offering(1)......... 3,500,000 shares of Common Stock
After the Offering(2)............ 5,631,250 shares of Common Stock
Redeemable Warrants outstanding
after the Offering(3)............ 1,900,000 Redeemable Warrants.
Exercise price of Redeemable
Warrants offered hereby.......... $7.00 per share, subject to adjustment in
certain circumstances. See "Description of
Securities--Redeemable Warrants."
Exercise period of Redeemable
Warrants offered hereby.......... The four-year period commencing one year
after the date of this Prospectus (or
earlier with the prior written consent of
Redemption of Redeemable the Representative).
Warrants......................... Redeemable by the Company at any time
commencing 12 months after the date of this
Prospectus (or earlier with the prior
written consent of the Representative) on
not less than 30 days prior written notice
to the holders of the Redeemable Warrants,
provided the average closing bid quotation
of the Common Stock as reported on the
Nasdaq-SCM, if traded thereon, or if not
traded thereon, the average closing sale
price of the Common Stock if listed on a
national securities exchange (or other
reporting system that provides last sale
prices), has been at least 150% of the then
current exercise price of the Redeemable
Warrants (initially, $10.50 per share), for
a period of 20 consecutive trading days
ending on the third day prior to the date
on which the Company gives notice of
redemption. The Redeemable Warrants will be
exercisable until the close of business on
the day immediately preceding the date
fixed for redemption. See "Description of
Securities--Redeemable Warrants."
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
Use of Proceeds..................... The net proceeds to the Company,
aggregating approximately $9,863,200, will
be applied to repay approximately
$5,664,000 of short-term indebtedness
including that incurred in the Bridge
Financing and borrowed from the Company's
Chief Executive Officer, for research and
development activities, and the balance for
working capital and general corporate
purposes. See "Use of Proceeds."
Risk Factors........................ The securities offered hereby involve a
high degree of risk and substantial
immediate dilution to new investors. Only
investors who can bear the loss of their
entire investment should invest. See "Risk
Factors" and "Dilution."
Proposed NASDAQ symbols............. Common Stock--"ENSC"
Redeemable Warrants--"ENSCW"
</TABLE>
- --------
(1) All of such shares of Common Stock are held indirectly by Charles N.
Finkel, the President and Chief Executive Officer of the Company.
(2) Includes 1,900,000 shares of Common Stock offered hereby and 231,250 shares
of Common Stock issuable upon the consummation of this Offering upon
exercise of the Bridge Warrants. Excludes (i) 210,000 shares of Common
Stock issuable by the Company and 75,000 shares of Common Stock to be sold
by the Selling Stockholder upon exercise of the Underwriters' Over-
allotment Option in full; (ii) 2,185,000 shares of Common Stock reserved
for issuance upon exercise of the Redeemable Warrants, including those
issuable upon exercise of the Underwriters' Over-allotment Option; (iii)
380,000 shares of Common Stock reserved for issuance upon exercise of the
Underwriters' Warrants and the Redeemable Warrants included therein; and
(iv) 450,000 shares issuable upon the exercise of stock options which may
be granted pursuant to the Company's 1996 Stock Option Plan (the "Plan").
See "Management--1996 Stock Option Plan," "Certain Relationships and
Related Transactions" and "Underwriting."
(3) Includes 1,900,000 Redeemable Warrants offered hereby. Excludes (i) 190,000
Underwriters' Warrants, (ii) 190,000 Redeemable Warrants issuable upon
exercise of the Underwriters' Warrants and (iii) 285,000 Redeemable
Warrants issuable upon exercise of the Underwriters' Over-allotment Option.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE DATA)
The summary financial data set forth below is derived from and should be read
in conjunction with the audited financial statements, including the notes
thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------- -----------------------
1994 1995 1995 1996
------ ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CONSOLIDATED OPERATING DATA:
Sales........................... $8,540 $ 8,561 $ 4,380 $ 4,729
Gross profit.................... 5,964 2,727 938 2,022
Selling, general and
administrative expenses........ 4,153 5,288 3,378 2,646
Research and development
expenses....................... 276 600 171 432
Translation loss (gain)......... 1,979 1,230 (800) 219
Loss from operations............ (444) (4,391) (1,812) (1,275)
Interest income................. (1,614) (648) (576) (24)
Interest expense................ 508 2,520 1,015 1,175
Net, other (income) expense..... 593 395 532 (16)
Earnings from operation of
discontinued division.......... 534 436 342 --
Gain on disposal of discontinued
division....................... -- 1,008 -- --
------ ------- ------- -------
Net earnings (loss)............. $ 234 $(3,818) $(2,221) $(2,095)
====== ======= ======= =======
Net earnings (loss) per
share(1):
Continuing operations......... $ (.08) $ (1.35) $ (.66) $ (.54)
Discontinued operations....... .14 .37 .09 --
------ ------- ------- -------
Net earnings (loss) per share... $ .06 $ (.98) $ (.57) $ (.54)
====== ======= ======= =======
Supplemental pro forma net
loss........................... $(2,805)(2) $(1,305)(3)
======= =======
Supplemental pro forma net loss
per share...................... $ (.67)(2) $ (.28)(3)
======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1996 (UNAUDITED)
---------------- ----------------------------------------------
1994 1995 ACTUAL PRO FORMA(4) AS ADJUSTED(5)(6)(7)(8)
------- -------- -------- ------------ -----------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Working capital
(deficit).............. $ 1,489 $ (1,505) $ (4,754) $ (4,754) $ 4,608
Total assets............ 11,769 10,954 11,520 12,370 16,143
Current liabilities..... 3,645 5,839 9,261 10,111 4,809
Long-term debt, less
current portion........ 1,696 3,209 2,124 2,124 2,124
Stockholders' equity.... 5,405 1,587 135 135 9,210
</TABLE>
- --------
(1) Net loss per share is computed based on the weighted average number of
shares of Common Stock outstanding for each period. For purposes of
computing net loss per share, options, warrants and Common Stock granted or
issued by the Company during the 12-month period preceding the date of the
Offering at a price below the Offering Price to Public of $6.00 per share
have been included in the determination of the weighted average number of
shares outstanding using the treasury stock method.
(2) The supplemental pro forma net loss and net loss per share reflect the
issuance of shares necessary to retire the estimated average notes payable
outstanding during 1995 and the resulting decrease in net loss in the
amount of $1,013,000 for the year ended 1995, as of the beginning of the
period presented. The calculation is based on the weighted average shares
outstanding used in the calculation of earnings per share, adjusted for the
estimated number of shares that would be issued by the Company (i.e.,
300,500 shares at $6.00 per share) to retire these obligations. See Note A
in Notes to Consolidated Financial Statements.
6
<PAGE>
(3) The supplemental pro forma net loss and net loss per share reflect the
issuance of shares necessary to retire the estimated average notes payable
outstanding during the six months ended June 30, 1996 and the senior
subordinated notes issued in the Bridge Financing and the resulting
decrease in net loss in the amount of $790,000 for the six months ended
June 30, 1996, as of the beginning of the period presented. The calculation
is based on the weighted average shares outstanding used in the calculation
of earnings per share, adjusted for the estimated number of shares that
would be issued by the Company (i.e., 790,000 shares at $6.00 per share) to
retire these obligations. See Note A in Notes to Consolidated Financial
Statements.
(4) Pro forma financial information gives effect to loans aggregating
$1,000,000 from the Company's Chief Executive Officer, a Brazilian bank and
a third party (through Mr. Finkel) in July and August 1996, of which
$150,000 was used to repay outstanding principal and accrued interest on
the Company's short-term notes payable to Brazilian banks. These loans are
expected to be repaid from the proceeds of this Offering. See "Use of
Proceeds."
(5) Adjusted to reflect the sale of 1,900,000 shares of Common Stock and
1,900,000 Redeemable Warrants offered hereby and the exercise of the Bridge
Warrants. See "Use of Proceeds" and "Capitalization."
(6) Does not include up to (i) 210,000 shares of Common Stock issuable by the
Company and 75,000 shares of Common Stock to be sold by the Selling
Stockholder upon exercise of the Underwriters' Over-allotment Option in
full; (ii) 2,185,000 shares of Common Stock reserved for issuance upon
exercise of the Redeemable Warrants, including those issuable upon exercise
of the Underwriters' Over-allotment Option in full; (iii) 380,000 shares of
Common Stock reserved for issuance upon exercise of the Underwriters'
Warrants and the Redeemable Warrants included therein; and (iv) 450,000
shares issuable upon the exercise of stock options granted pursuant to the
Plan. See "Management--1996 Stock Option Plan," "Certain Relationships and
Related Transactions," and "Underwriting."
(7) After giving effect to (i) the Underwriters' discount ($927,200); (ii) the
Representative's non-accountable expense allowance ($347,700); and (iii) an
estimated $475,000 of other fees and expenses incurred in connection with
this Offering, including printing, professional and other miscellaneous
fees.
(8) Adjusted for the unamortized portion of deferred financing costs and
discount on the Bridge Financing of $167,902 and $620,700, respectively,
which will be recognized as interest expense upon the repayment thereof.
7
<PAGE>
RISK FACTORS
The purchase of Common Stock and/or Redeemable Warrants offered hereby is
speculative and involves a high degree of risk including, but not necessarily
limited to, the risk factors described below. Common Stock or Redeemable
Warrants should not be purchased by investors who cannot afford the loss of
their entire investment. Prospective investors should carefully review and
consider the following risks as well as the other information contained in
this Prospectus.
1. ACCUMULATED DEFICIT; ANTICIPATED FUTURE LOSSES. For the fiscal year ended
December 31, 1995, the Company experienced a net loss of $3,818,000, and as of
June 30, 1996 had an accumulated deficit of $3,977,000. The Company
anticipates continued losses for the foreseeable future. The Company's
operating results for future periods are subject to numerous uncertainties.
The Company anticipates significant expenses in its foreseeable future,
including research and development expenses, marketing costs and general
administrative expenses. As part of the Company's efforts to move its
executive, financial and research and development activities to the U.S. and
to limit activities in Brazil to sales and service of less complex security
systems, the Company anticipates reducing its work force in Brazil by
approximately one-third over the next six months. Under the terms of a
collective bargaining agreement and Brazilian law, such reduction will cause
the Company to incur approximately $350,000 of severance and related expenses
during such period, of which approximately $250,000 will be recognized in the
third and fourth quarters of 1996. Because the Company anticipates incurring
significant expenses in connection with the continued development and
marketing of its products, there can be no assurance that the Company will
achieve sufficient additional revenues to offset anticipated operating costs.
Inasmuch as the Company will continue to have high levels of operating
expenses and will be required to make significant expenditures in connection
with its continued research and development activities, the Company may
experience significant operating losses that could continue until such time,
if ever, that the Company is able to generate sufficient additional revenues
to support its operations. There can be no assurance that the Company's
technology and products will be able to compete successfully in the
marketplace and/or generate significant revenue. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
2. WORKING CAPITAL DEFICIT; BANKING RELATIONSHIPS. The Company's capital
requirements in connection with its development and marketing activities will
continue to be significant. As of June 30, 1996, the Company had a working
capital deficit of $4,754,000. While the application of the anticipated net
proceeds from this Offering will eliminate such working capital deficit, the
Company has no current arrangements with respect to sources of additional
financing. The Company maintains various credit facilities with a number of
Brazilian banks, and relies in large part on those credit facilities for its
current working capital. All of the Company's borrowings with respect to its
working capital credit facilities are of a short term nature. Most, but not
all, of the Company's lenders have in the past renewed the credit facilities
on a regular basis on substantially similar terms and conditions as existing
credit facilities. There can be no assurance that the Company's lenders will
renew the Company's credit facilities under any conditions. To the extent
certain existing lenders may determine not to renew or may determine to reduce
any line of credit extended to the Company, management believes that
subsequent to consummation of the Offering lines of credit with other banks
can be negotiated to replace any lost credit availability. However, there can
be no assurance that additional financing will be available to the Company on
commercially reasonable terms, or at all. The inability to obtain additional
financing, when needed, could have a material adverse effect on the Company.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
3. DEPENDENCE ON SIGNIFICANT CUSTOMERS AND SUPPLIERS. Although the
composition of the Company's largest customers has changed from year to year,
historically the Company's revenues have been materially dependent on a
limited number of customers. The number of customers accounting for five
percent or more of the Company's revenues was 17 in 1994 and 15 in 1995. See
Note A in Notes to Consolidated Financial Statements. While management expects
the Company's customer base to continue to expand, a limited number of large
orders may continue to account for a significant portion of the Company's
sales during any given period for the foreseeable future. As such, the
Company's financial condition and results of operations may be adversely
affected by a delay, reduction or cancellation of orders from one or more of
its significant customers or the loss of one or more of such customers.
8
<PAGE>
The Company currently relies on a limited number of suppliers of components
and other parts for its security systems. Failure or delay by the Company's
suppliers in fulfilling its anticipated needs would adversely affect the
Company's ability to deliver and market its products. The Company may have
difficulty in obtaining alternative contractual agreements with the suppliers
of such materials due to, among other things, possible material shortages or
possible lack of adequate purchasing power. However, management believes that
the Company's component and parts needs are available from multiple sources.
4. PRODUCT CONCENTRATION. Sales and service of the EnWorks(TM) family of
products and enhancements represented 84.6% of Company revenues from
continuing operations in 1995 and are expected to continue to account for a
substantial portion of the Company's revenues for the foreseeable future. The
remaining revenues were generated from sales of other products and service.
Any factors materially adversely affecting the Company's EnWorks(TM) family of
products, such as the introduction of superior competitive products or shifts
in the needs of the marketplace, would have a material adverse effect on the
Company's financial condition and results of operations. See "Business--
Products and Services."
5. EVOLVING MARKET; NEW PRODUCT DEVELOPMENT; TECHNOLOGICAL OBSOLESCENCE. The
markets for the Company's products are characterized by evolving industry
requirements which may result in product or technology obsolescence. As a
result, certain companies may be developing technologies or products of which
the Company is unaware which may be functionally similar, or superior, to some
or all of those offered by the Company. As a result of all of the above, the
ability of the Company to compete will depend on its ability to adapt, enhance
and improve its existing products and technology and, if necessary, to develop
and introduce to the marketplace in a timely and cost-competitive manner new
products and technology. There can be no assurance that the Company will be
able to compete successfully, that its competitors or future competitors will
not develop technologies or products that render the Company's products and
technology obsolete or less marketable or that the Company will be able to
successfully enhance its products or technology or adapt them satisfactorily.
See "Business--Integrated Security Systems."
New product development efforts are subject to all of the risks inherent in
the development of new technology and products (including unanticipated
delays, expenses, technical problems or difficulties, as well as the possible
insufficiency of funding to complete development). There can be no assurance
as to when, or whether, new products will be successfully developed. No
assurance can be given that additional technologies and prototypes can be
developed within a reasonable development schedule, if at all. There can be no
assurance that the Company would have sufficient economic or human resources
to complete such development in a timely manner, or at all, or that it could
enter into economically reasonable arrangements for the completion of such
products by third parties.
Following the completion of additional products, the Company must
successfully complete a testing program for the products before they can be
marketed. Although management believes that its testing program is highly
sophisticated, unforeseen technical problems arising out of such testing could
significantly and adversely affect the Company's ability to manufacture and
market a commercially acceptable version. In addition, the Company's success
will depend upon its current and proposed technologies and products meeting
acceptable cost and performance criteria in the marketplace. There can be no
assurance the technologies and products will meet applicable price or
performance objectives or that unanticipated technical or other problems will
not occur which would result in increased costs or material delays. Also,
there can be no assurance that new technologies will not be developed in the
near future by the Company or its competitors which would render the Company's
present software obsolete, and thus would negatively impact capitalized
software costs.
6. PRODUCT PROTECTION AND INFRINGEMENT. The Company relies on a combination
of patent, trade secret, copyright and trademark laws, together with non-
disclosure agreements, to establish and protect proprietary rights in its
EnWorks(TM) products. These measures afford limited protection, and there can
be no assurance that the steps taken by the Company to protect these
proprietary rights will be adequate to prevent misappropriation of its
technology or the independent development by others of similar technology. In
addition, the laws of Brazil, where the Company maintains its patents and
copyrights, and has pending patent applications, do not protect the
9
<PAGE>
Company's proprietary rights to the same extent as do the laws of the United
States. The Company intends to seek copyright protection under United States
law with respect to some of its technology. While the Company believes that it
would be impractical and not cost-effective for anyone to attempt to copy
complex software and controlling hardware such as that used in the EnWorks(TM)
products, unauthorized parties, nevertheless, might attempt to copy aspects of
the Company's products or to obtain and use information that the Company
regards as proprietary. The cost of enforcement by the Company of its
information rights could be significant, regardless of the outcome of such
enforcement proceedings. In addition, although the Company believes that there
are no infringement claims against the company and no grounds for the
assertion of such claims, the cost of responding to any such assertion, should
be it made, could be significant. See "Business--Intellectual Property
Rights."
7. COMPETITION. The Company's products compete with those of numerous well-
established companies, such as Sensormatic, Casi-Rusco, The Pittston Brinks
Group, ADT, Diebold, Pittway, Inc., Johnson Controls and Honeywell, among
others, which design, manufacture or market integrated security systems or
other security products. Many of these companies have substantially greater
financial, technical, personnel and other resources than the Company and have
established reputations for success in the development, licensing, sale and
service of their products and technology. Certain of these competitors have
the financial resources necessary to enable them to withstand substantial
price competition or downturns in the market for integrated security systems
and related products. In addition, many of the Company's sales of its products
are anticipated to be through the competitive bid process. There can be no
assurance that the Company will be awarded contracts or purchase orders for
its products as a result of such bid process. See "Business--Products and
Services" and "Business--Competition."
8. REPAYMENT OF DEBT. Approximately $5,664,000 (57.4%) of the proceeds of
this Offering will be used to repay indebtedness and related interest,
including indebtedness incurred in connection with the Bridge Financing and
$600,000 of which was borrowed from Mr. Charles N. Finkel, the President,
Chief Executive Officer and sole beneficial owner of all of the issued and
outstanding Common Stock of the Company, and an individual (through Mr.
Finkel) and accordingly such funds will not be available to fund future
growth. See "Use of Proceeds" and "Certain Relationships and Related
Transactions."
9. NEW MANAGEMENT; DEPENDENCE ON CHARLES N. FINKEL; RETENTION OF KEY
PERSONNEL. The Company's executive management team has worked together for
only a brief period, with three of the Company's executive officers joining
the Company since late 1995. The Company's operations are materially dependent
upon the services of Charles N. Finkel, its founder, President and Chief
Executive Officer. The loss of the services of Mr. Finkel would materially and
adversely affect the Company's business. The Company has obtained term
insurance on the life of Mr. Finkel which provides for a death benefit to the
Company of $2,000,000. The Company has entered into an employment agreement
with Mr. Finkel, which includes non-competition provisions. The success of the
Company is also dependent upon its ability to hire and retain additional
qualified executive, technical and marketing personnel. There can be no
assurance that the Company will retain the members of its current management
or that it will successfully attract and retain qualified management,
engineering and sales personnel in the future. See "Management."
10. CHALLENGES OF GROWTH. The Company anticipates a period of rapid growth
that is expected to place a strain on the Company's administrative, financial
and operational resources. The Company's ability to manage any staff and
facilities growth effectively will require it to continue to improve its
operational, financial and management controls, reporting systems and
procedures, to install new management information and control systems and to
train, motivate and manage its employees. There can be no assurance that the
Company will install such management information and control systems in an
efficient and timely manner or that the new systems will be adequate to
support the Company's operations. Because of the complexity of its products,
the Company has in the past experienced and expects in the future to
experience a time lag between the date on which technical and sales personnel
are hired and the time at which such persons become fully productive. In
addition, the success of a customer's project could be substantially affected
by the quality of the Company's post-sales implementation process and, in many
cases, its maintenance and service capabilities. If the Company is unable to
hire, train and retain qualified systems engineers and consultants to
implement these services or is unable to manage the post-sales process
effectively, its ability to attract repeat sales or provide references could
be adversely affected, which could limit the Company's growth opportunities.
If the Company's management is
10
<PAGE>
unable to manage growth effectively, such as if the Company's sales and
marketing efforts exceed its capacity to install, maintain and service its
products or if new employees are unable to achieve performance levels, the
Company's business, operating results and financial condition could be
adversely affected. In addition, the Company could experience significant
delays or unforeseen costs in the transition of its technology and research
and development activities from Brazil to the U.S. which delays or costs could
have a material adverse impact on the Company's prospects or results of
operations.
11. INTERNATIONAL EXPANSION. The Company intends to expand its operations
into additional international markets which will require significant
management attention and financial resources. There can be no assurance that
the Company's efforts to develop international sales and support channels will
be successful. International sales are subject to a number of risks, including
potentially longer payment cycles, unexpected changes in regulatory
requirements, import and export restrictions and tariffs, difficulties in
staffing and managing foreign operations, the burden of complying with a
variety of foreign laws, greater difficulty in accounts receivable collection,
potentially adverse tax consequences, currency fluctuations and potential
political and economic instability. Additionally, the protection of
intellectual property may be more difficult to enforce outside of the United
States. In the event that the Company is successful in expanding its
international operations, the imposition of exchange or price controls or
other restrictions on foreign currencies could materially affect the Company's
business, operating results and financial condition.
12. CONTROL OF THE COMPANY. Immediately following the Offering, Charles N.
Finkel will control the vote of approximately 62.2% of the outstanding shares
of Common Stock (without giving effect to the possible exercise of the
Underwriters' Over-allotment Option, the Underwriters' Warrants, the
Redeemable Warrants or options granted under the Plan), which, among other
things, will allow Mr. Finkel to elect the entire class of directors to be
elected from time to time. Such concentration of ownership could limit the
price that certain investors might be willing to pay in the future for shares
of the Company's Common Stock, and could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire control of the Company. See "Principal and Selling
Stockholders."
13. BROAD DISCRETION IN APPLICATION OF PROCEEDS. Approximately $2,907,200
(29.5%) of the estimated net proceeds of this Offering have been allocated to
working capital and general corporate purposes. Accordingly, the Company will
have broad discretion as to the application of such proceeds. See "Use of
Proceeds."
14. LENGTHY SALES CYCLE. The sale of the Company's high-end integrated
security systems typically involves a significant technical evaluation and
commitment of capital and other resources, with the attendant delays
frequently associated with customers' internal procedures to approve large
capital expenditures and to test and accept new technologies that affect key
operations. For these and other reasons, the sales cycle associated with the
Company's products is typically lengthy and subject to a number of significant
risks, including customers' budgetary constraints and internal acceptance
reviews, that are beyond the Company's control. Because of the lengthy sales
cycle and the large size of customer orders, if revenues forecasted from a
specific customer for a particular quarter are not realized in that quarter,
the Company's operating results for that quarter could be materially adversely
affected.
15. DILUTION. This Offering involves immediate dilution of $4.36 per share
(72.7% of the public offering price) between the adjusted net tangible book
value per share after the Offering and the per share public offering price of
$6.00 attributable to the Common Stock. The 3,500,000 shares of Common Stock
issued and outstanding as of the date of this Prospectus (the "Restricted
Shares") were acquired by the holders thereof at an average cost of $1.01 per
share. The consideration paid by such stockholders is significantly less than
the per share public offering price. Accordingly, new investors will bear a
disproportionate share of the risk of loss in the event of a material adverse
change in the financial results of the Company. See "Dilution."
16. POLITICAL, ECONOMIC AND SOCIAL CONDITIONS IN BRAZIL. While the Company
intends to shift more of its operations and sales to the United States, a
significant amount of its business will continue to be based in Brazil for the
foreseeable future. The Brazilian market in which the Company operates is
characterized by volatile and frequently unfavorable economic, political and
social conditions. See Notes A and B in Notes to Consolidated Financial
Statements. High inflation and, with it, high interest rates are common.
Inflation has
11
<PAGE>
declined but continues to be high in Brazil. In 1995, the per annum inflation
rate was approximately 22% in Brazil (compared to in excess of 900% in 1994).
Brazil has also experienced significant currency fluctuations. See "--Currency
Fluctuations."
Inflation adversely impacts the Company's contract revenues which are fixed
and rise more slowly than costs or are otherwise not adjusted for inflation.
Further, inflation can erode purchasing power and thereby adversely affect
sales; consequently, margins diminish if product prices fail to keep pace with
increases in supply and material costs. While the Company has been able in
most recent years to increase prices in local currency terms overall at least
as much as inflation, net sales in local currency terms may nevertheless
remain flat or decrease if, among other things, inflation diminishes
purchasing power. Although the Company expects that prices will generally keep
pace with inflation in the immediate future, there is no assurance that sales
volume will not decline or that supply and material costs will not rise more
rapidly than prices. See "--Currency Fluctuations" regarding the impact of
depreciation on net sales in dollars.
The government of Brazil has historically exercised substantial influence
over many aspects of its economy. In recent years, the government of Brazil
has implemented important measures to improve its economy, although the
current climate in Brazil may create significant uncertainty as to future
economic, fiscal and tax policies. In implementing these measures, the
Brazilian government may in the future decide to effectuate a devaluation of
the Brazilian currency, the real, which could have a material adverse impact
on the Company and its operations in Brazil.
The Brazilian government has had some success in controlling inflation,
although there can be no assurance that this will continue. In addition, in
recent years there have been allegations of government improprieties which may
have adversely affected its ability to implement a successful economic
program. Midway through 1994, the Government of Brazil launched an economic
stabilization program, the Real Plan, which improved economic conditions in
Brazil and created a new currency, the real. Inflation, which had been at
double-digit monthly rates, began to decrease, purchasing power improved and
the consumption of goods and services began to increase. Since December 1994,
however, the Brazilian real has depreciated slightly. See "--Currency
Fluctuations." The Company is not able to predict the long-term effects that
the Real Plan and related economic measures may have upon the Brazilian
economy and financial markets and the real/U.S. dollar exchange rate in
general, or upon the Company. In addition, although the inflation rate in
Brazil has declined significantly since the adoption of the Real Plan, there
can be no assurance that the Company's operations in Brazil will not be
adversely affected by renewed hyperinflation.
In view of the foregoing, potential investors should recognize that the
Company's business, earnings, asset values and prospects may be materially and
adversely affected by developments with respect to inflation, interest rates,
currency fluctuations, government policies, price and wage controls, exchange
control regulations, taxation, expropriation, social instability, and other
political, economic or diplomatic developments in or affecting Brazil.
Although the Company has been able to operate successfully in Brazil for over
12 years, it has no control over such conditions and developments, and can
provide no assurance that such conditions and developments will not adversely
affect the Company's operations or the price of or market for the offered
Securities.
17. CURRENCY FLUCTUATIONS. Because the Company's consolidated cash flow from
operations is generated in material part in the currency of Brazil, the
Company is subject to the effects of fluctuations in the value of the real.
Brazil has historically experienced significant currency fluctuations relative
to the U.S. dollar. The magnitude of the recent fluctuations has diminished,
and the exchange rate of the Brazilian real was 0.85 reais (plural of real)
per U.S. dollar at December 31, 1994, compared to 0.97 reais per U.S. dollar
at December 31, 1995. Such fluctuations have generally not adversely affected
the profitability of the Company, as Brazilian revenues and substantially all
related costs of sales and expenses are incurred in the real. However, in some
cases, such fluctuations, particularly depreciations which are accompanied by
high inflation and declining purchasing power, can adversely affect sales as
well as income to the Company and its stockholders. Because the Company's
financial statements are prepared in dollars, net sales (and other financial
statement accounts, including net income) tend to increase when the rate of
inflation in each country has exceeded the rate of depreciation against the
U.S. dollar. Alternatively, net sales and other financial statement accounts
generally are adversely affected if and to the extent that the rate of
depreciation exceeds the rate of inflation in any period. In addition, when
and if dividends are distributed to the Company by Ensec, S.A., the payments
are converted from reais to U.S. dollars,
12
<PAGE>
and any future fluctuations of local currencies relative to the U.S. dollar
could result in a loss of dividend income to the Company and ultimately to the
Company's stockholders.
In periods of high inflation and interest rates, borrowings denominated in
the real are more costly, while borrowings indexed to the U.S. dollar or other
foreign currencies place the risk of depreciation on the borrower. In periods
of fluctuation, dollar-denominated borrowings can generate income statement
losses or charges against stockholders' equity. The Company could be further
adversely affected by a depreciation in the real if it becomes necessary to
increase dollar-denominated indebtedness in order to provide working capital,
finance capital expenditures or for other purposes. Currency translation gains
and losses may contribute to fluctuations in the Company's results of
operations. The Company has engaged in currency hedging transactions on a
limited basis and in the future may undertake currency hedging to reduce
currency exposure, although there can be no assurance that hedging
transactions, if entered into, would materially reduce the effects of
fluctuations in foreign currency exchange rates on the Company's results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
18. NO ANTICIPATED DIVIDENDS; RELIANCE ON SUBSIDIARIES. Payment of dividends
on the Common Stock is within the discretion of the Board of Directors and
will depend upon the Company's earnings, its capital requirements and
financial condition, and other relevant factors. The Company does not
currently intend to declare any dividends on its Common Stock in the
foreseeable future. See "Dividend Policy."
As a holding company, the Company's ability to pay operating expenses, any
debt service obligations and dividends materially depends upon receipt of
sufficient funds from its subsidiaries. Brazil does not currently restrict the
remittance of dividends paid by Ensec, S.A. to the Company, although Brazil
has laws in effect which provide limitations on the exchange of local currency
for foreign currency at official rates of exchange. Brazil has imposed more
restrictive exchange controls in the past, and no assurance can be given that
more restrictive exchange control policies, which could adversely affect the
ability of Ensec, S.A. to pay dividends to the Company, will not be imposed in
the future. The payment of dividends by Ensec, S.A. is also in certain
instances subject to statutory restrictions or restrictive covenants in debt
instruments and is contingent upon the earnings and cash flow of and permitted
borrowings by Ensec, S.A.
19. PRODUCT LIABILITY. The Company's products contain software that may
contain software errors or defects, especially when first introduced or when
new versions or enhancements are released. Although to date such defects and
errors have not materially adversely affected the Company's operating results,
there can be no assurance that, despite testing by the Company and by current
and potential customers, defects and errors will not be found in new products
or in new versions or enhancements of existing products. Such discovery could
result in adverse customer reaction, negative publicity regarding the Company
or its products or delay in or failure to achieve market acceptance, any of
which could have a material adverse effect upon the Company's business,
operating results and financial condition. While neither Ensec, S.A. nor Ensec
Inc. has experienced any product liability claims to date, there can be no
assurance that such claims will not be made in the future. Ensec Inc.
maintains product liability insurance in the aggregate amount of $1,000,000
per year and has additional excess liability insurance in the amount of
$5,000,000 for liability in excess of its initial $1,000,000 of coverage.
Ensec, S.A. maintains no product liability insurance coverage. A successful
claim against Ensec Inc. in excess of such coverage or against Ensec, S.A.
could have a material adverse effect on the Company. See "Business."
20. NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to
this Offering, there has been no public market for the Company's Common Stock
or Redeemable Warrants. Accordingly, there can be no assurance that an active
trading market will develop or be sustained subsequent to this Offering. The
initial public offering price of the Common Stock will be determined by
negotiations among the Company and the Underwriters and may not be indicative
of the prices that may prevail in the public market. While the Common Stock
and Redeemable Warrants have been approved for initial inclusion on the
Nasdaq-SCM, no assurance can be given that the Company will continue to be
able to satisfy certain specified financial tests and market-related criteria
required for continued quotation on the Nasdaq-SCM following the Offering. If
the Company is unable
13
<PAGE>
to satisfy such maintenance criteria in the future, the Common Stock and the
Redeemable Warrants may be delisted from trading on the Nasdaq-SCM and
consequently an investor could find it more difficult to dispose of, or to
obtain accurate quotations as to the price of, the Company's Securities and
the Redeemable Warrants would no longer be redeemable. This stock market
generally, and the technology sector in particular, have experienced and are
likely in the future to experience significant price and volume fluctuations
which could adversely affect the market price of the Common Stock without
regard to the significant fluctuations in response to variations in quarterly
operating results, shortfalls in sales or earnings below analyst estimates,
developments in the electronics and security industries, stock market
conditions and other factors. There can be no assurance that the market price
of the Common Stock will not experience significant fluctuations or decline
below the initial public offering price. In addition, the Representative has
agreed to serve as the Company's agent for the solicitation of future
exercises of the Redeemable Warrants. If such a solicitation is viewed as
aiding a distribution of Common Stock, the Representative will be prohibited
by applicable securities laws from making a market in the Common Stock for the
period from nine days prior to the commencement of the future exercise
solicitation activity until completion of the Representative's participation
in that distribution effort. Such an abstention from making a market in the
Company's Common Stock could adversely affect its market price. See
"Underwriting."
21. SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of this Offering, the
Company will have outstanding 5,631,250 shares of Common Stock, after giving
effect to the 231,250 shares of Common Stock issuable upon exercise of the
Bridge Warrants but without giving effect to shares of Common Stock issuable
upon exercise of (i) the Redeemable Warrants, (ii) the Underwriters' Warrants,
(iii) the Underwriters' Over-allotment Option, or (iv) options granted under
the Plan. Of such 5,631,250 shares of Common Stock, 2,131,250 shares,
consisting of 1,900,000 shares to be sold by the Company in this Offering plus
231,250 shares to be issued upon exercise of the Bridge Warrants (plus any
additional shares sold upon the exercise of the Underwriters' Over-allotment
Option), will be freely tradeable without restriction or further registration
under the Act, except for any shares held by "affiliates" of the Company
within the meaning of the Act which shares will be subject to the resale
limitations of Rule 144 promulgated under the Act. The Bridge Investors have
agreed not to sell or otherwise dispose of any of the shares of Common Stock
issuable upon exercise of the Bridge Warrants for a period of 12 months after
the date of the consummation of the Offering and exercise of the Bridge
Warrants.
The Restricted Shares were issued by the Company in private transactions in
reliance upon one or more exemptions contained in the Act. The Restricted
Shares are deemed to be "restricted securities" within the meaning of Rule 144
promulgated pursuant to the Act and may be publicly sold only if registered
under the Act or sold pursuant to exemptions therefrom. As of the date of this
Prospectus, all of the Restricted Shares will have been held for more than two
years and are eligible for public sale in accordance with the requirements of
Rule 144, as described below. Mr. Charles N. Finkel, President and Chief
Executive Officer of the Company and beneficial owner of all shares of Common
Stock outstanding immediately prior to the Offering, however, has agreed with
the Representative not to offer, sell, contract to sell or otherwise dispose
of any of his shares for a period of 24 months after the date of this
Prospectus, without the Representative's consent. In addition, Mr. Finkel has
agreed with the Representative not to offer, sell, contract to sell or
otherwise dispose of 800,000 of the shares of Common Stock beneficially owned
by him for a period of ten years after the date of this Prospectus, without
the Representative's consent; provided, however, that such restrictions will
be released with respect to 500,000 of such shares if the Company reports
income before income taxes in excess of $4,000,000 for fiscal 1997 and with
respect to the remaining 300,000 shares if the Company reports income before
income taxes in excess of $7,000,000 for fiscal 1998. See "Shares Eligible for
Future Sale" and "Underwriting."
22. EFFECT OF ISSUANCE OF COMMON STOCK UPON EXERCISE OF REDEEMABLE
WARRANTS. Immediately after the Offering, assuming full exercise of the
Underwriters' Over-allotment Option, the Company will have outstanding
Redeemable Warrants to purchase an aggregate of up to 2,375,000 shares of
Common Stock, including the Redeemable Warrants and the Redeemable Warrants
issuable upon the exercise of the Underwriters' Warrants. The Company has
agreed to use reasonable efforts to file and maintain, so long as the
Redeemable Warrants offered hereby are exercisable, a current registration
statement with the Commission relating to the Redeemable Warrants offered
hereby and the shares of Common Stock underlying such
14
<PAGE>
Redeemable Warrants. In addition, the Underwriters have certain demand and
"piggyback" registration rights with respect to the shares of Common Stock and
the Redeemable Warrants underlying the Underwriters' Warrants (and the shares
of Common Stock underlying such Redeemable Warrants).
The exercise of such Redeemable Warrants and the sale of the underlying
shares of Common Stock (or even the potential of such exercise or sale) may
have a depressive effect on the market price of the Company's Securities.
Moreover, the terms upon which the Company will be able to obtain additional
equity capital may be adversely affected because the holders of the
outstanding Redeemable Warrants can be expected to exercise them, to the
extent they are able to, at a time when the Company would, in all likelihood,
be able to obtain any needed capital on terms more favorable to the Company
than those provided in the Redeemable Warrants. See "Description of
Securities" and "Underwriting."
23. CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE
REDEEMABLE WARRANTS. Purchasers of the Redeemable Warrants in this Offering
will not be able to exercise them unless at the time of exercise a current
prospectus under the Act, covering the shares of Common Stock issuable upon
exercise of the Redeemable Warrants is effective and such shares have been
qualified or are exempt from qualification under the applicable securities or
"blue sky" laws of the states in which the various holders of the Redeemable
Warrants then reside. Although the Company has undertaken to use reasonable
efforts to maintain the effectiveness of a current prospectus covering the
Common Stock underlying the Redeemable Warrants, no assurance can be given
that the Company will be able to do so. The value of the Redeemable Warrants
may be greatly reduced if a current prospectus covering the Common Stock
issuable upon the exercise of the Redeemable Warrants is not kept effective or
if such Common Stock is not qualified or exempt from qualification in the
states in which the holders of the Redeemable Warrants then reside. See
"Description of Securities--Redeemable Warrants."
24. ADVERSE EFFECT OF POSSIBLE REDEMPTION OF REDEEMABLE WARRANTS. The
Redeemable Warrants are subject to redemption by the Company at a price of
$.10 per Redeemable Warrant, commencing on the date 12 months from the date of
this Prospectus (or earlier with the prior written consent of the
Representative) on at least 30 days written notice, if the average closing
price of the Common Stock equals or exceeds $10.50 for 20 consecutive trading
days ending on the third day prior to the notice of redemption. If the
Redeemable Warrants are redeemed, holders of the Redeemable Warrants will lose
their right to exercise the Redeemable Warrants, except during such 30-day
notice of redemption period. Upon the receipt of a notice of redemption of the
Redeemable Warrants, the holders thereof would be required to (i) exercise the
Redeemable Warrants and pay the exercise price at a time when it may be
disadvantageous for them to do so; (ii) sell the Redeemable Warrants at the
then market price, if any, when they might otherwise wish to hold the
Redeemable Warrants; or (iii) accept the redemption price, which is likely to
be substantially less than the market value of the Redeemable Warrants at the
time of redemption. See "Description of Securities--Redeemable Warrants."
25. TAX LOSS CARRYFORWARDS. At December 31, 1995, the Company had available
unused net operating loss carryforwards ("NOLs") aggregating approximately
$3,617,000 to offset future taxable income under U.S. tax laws. Under Section
382 of the Internal Revenue Code of 1986, as amended (the "Code"), utilization
of prior NOLs is limited after an ownership change, as defined in such Section
382, to an amount equal to the value of the loss corporation's outstanding
stock immediately before the date of the ownership change, multiplied by the
Federal long-term tax-exempt rate in effect during the month that the
ownership change occurred. Upon the consummation of the Offering, the Company
may be subject to limitations on the use of its NOLs as provided under Section
382. Accordingly, there can be no assurance that a significant amount of the
Company's existing NOLs will be available to the Company following the
Offering. In the event that the Company achieves profitability, as to which
there can be no assurance, such limitation would have the effect of increasing
the Company tax liability and reducing the net income and available cash
resources of the Company in the future.
15
<PAGE>
26. LIMITATIONS ON DIRECTOR LIABILITY. Florida law provides that a director
of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
with certain exceptions. These provisions may discourage stockholders from
bringing suit against a director for breach of fiduciary duty and may reduce
the likelihood of derivative litigation brought by stockholders on behalf of
the Company against a director. In addition, the Company's Articles of
Incorporation (the "Articles") provide for mandatory indemnification of
directors and officers to the fullest extent permitted or not prohibited by
Florida law. See "Description of Securities--Limited Liability and
Indemnification."
27. DIFFICULTY OF EFFECTING SERVICE OF PROCESS AND ENFORCEMENT OF JUDGMENTS
ON DIRECTORS AND OFFICERS. Service of process upon certain of the directors
and officers of the Company, some of whom reside outside the United States,
may be difficult to effect within the United States. Furthermore, since a
substantial portion of the Company's assets are located in Brazil, any
judgment obtained in the United States against the Company may not be
enforceable within the United States. Brazilian courts may enforce United
States final executory judgments for liquidated amounts in civil matters
obtained after due trial before a court of competent jurisdiction; however,
there can be no assurance that a Brazilian court will be required to enforce a
final judgment obtained in a court located in the United States.
28. FACTORS INHIBITING TAKEOVER. Certain provisions of the Articles and
Bylaws may be deemed to have anti-takeover effects and may delay, defer or
prevent a takeover attempt that a stockholder might consider in its best
interest. The Company's Articles authorize the Board to determine the rights,
preferences, privileges and restrictions of unissued series of preferred
stock, $.01 par value per share (the "Preferred Stock") and to fix the number
of shares of any series of Preferred Stock and the designation of any such
series, without any vote or action by the Company's stockholders. Thus, the
Board can authorize and issue shares of Preferred Stock with voting or
conversion rights that could adversely affect the voting or other rights of
holders of the Company's Common Stock. In addition, the issuance of Preferred
Stock may have the effect of delaying, deferring or preventing a change of
control of the Company, since the terms of the Preferred Stock that might be
issued could potentially prohibit the Company's consummation of any merger,
reorganization, sale of substantially all of its assets, liquidation or other
extraordinary corporate transaction without the approval of the holders of the
outstanding shares of the Common Stock. Other provisions of the Company's
Articles and Bylaws (i) divide the Company's Board of Directors into three
classes, each of which will serve for different three-year periods; (ii)
provide that the stockholders may not take action by written consent, but only
at duly called annual or special meetings of stockholders; and (iii) establish
certain advance notice procedures for nomination of candidates for election as
directors and for stockholder proposals to be considered at annual
stockholders' meetings. In addition, certain provisions of the Florida
Business Corporation Act (the "FBCA") may have the effect of delaying,
deferring or preventing a change in control of the Company. See "Description
of Securities--Florida Law and Certain Articles of Incorporation and Bylaw
Provisions."
29. PENNY STOCK REGULATION. The Securities Enforcement and Penny Stock
Reform Act of 1990 requires additional disclosure relating to the market for
penny stocks in connection with trades in any stock defined as a penny stock.
Commission regulations generally define a penny stock to be an equity security
that has a market price of less than $5.00 per share, subject to certain
exceptions. Unless an exception is available, the regulations require the
delivery, prior to any transaction involving a penny stock, of a disclosure
schedule explaining the penny stock market and the risks associated therewith.
In addition, if the Company's securities do not meet an exception to the
penny stock regulations cited above, trading in the Company's securities would
be covered by Rule 15g-9 promulgated under the Exchange Act for non-NASDAQ and
non-national securities exchange listed securities. Under such rule,
broker/dealers who recommend such securities to persons other than established
customers and accredited investors must make a special written suitability
determination for the purchaser and receive the purchaser's written agreement
to a transaction prior to sale. Securities are exempt from this rule if the
market price is at least $5.00 per share.
If the Company's securities become subject to the regulations applicable to
penny stocks, the market liquidity for the Company's securities could be
adversely affected. In such event, the regulations on penny stocks could limit
the ability of broker/dealers to sell the Company's securities and thus the
ability of purchasers of the Company's securities to sell their securities in
the secondary market.
16
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock and
Redeemable Warrants offered hereby and from the exercise of the Bridge
Warrants are estimated to be $9,863,200 ($11,026,000 if the Underwriters'
Over-allotment Option is exercised in full), after deducting the underwriting
discount and estimated offering expenses payable by the Company. The Company
will not receive any of the proceeds from any sale of shares by the Bridge
Investors or by the Selling Stockholder if the Underwriters' Over-allotment
Option is exercised. See "Principal and Selling Stockholders" and "Concurrent
Registration of Common Stock."
The Company expects to use the net proceeds (assuming no exercise of the
Underwriters' Over-allotment Option) during the next 12 months as follows:
<TABLE>
<CAPTION>
APPROXIMATE
APPROXIMATE PERCENTAGE
APPLICATION OF PROCEEDS DOLLAR AMOUNT OF NET PROCEEDS
----------------------- ------------- ---------------
<S> <C> <C>
Repayment of Senior Subordinated Notes(1)....... $2,574,000 26.1%
Repayment of short-term notes(2)(3)............. 3,090,000 31.3%
Research and development(4)..................... 1,000,000 10.1%
Dividend payable(5)............................. 292,000 3.0%
Working capital and general corporate purpos-
es(6).......................................... 2,907,200 29.5%
---------- -----
Total......................................... $9,863,200 100.0%
========== =====
</TABLE>
- --------
(1) Represents the repayment of the outstanding principal amount of
$2,500,000, plus estimated accrued interest thereon at the rate of 10% per
annum to the date of consummation of this Offering, on indebtedness
incurred in the Bridge Financing. The Notes require that $23,125 of the
repayment proceeds be used to exercise the Bridge Warrants. The net
proceeds of the Bridge Financing, approximately $2,216,000, were used to
retire approximately $577,000 of principal outstanding under short-term
notes payable by the Company to four Brazilian financial institutions
which bore interest at rates of approximately 4% to 5% per month, and to
retire approximately $160,000 of principal and accrued interest
outstanding under long-term indebtedness owed by the Company to two
Brazilian financial institutions bearing interest at rates 12% per annum.
The remaining net proceeds from the Bridge Financing were used to repay an
$80,000 non-interest bearing loan from Mr. Finkel to the Company and for
working capital and other general corporate purposes.
(2) Represents the repayment of approximately $2,990,000 of outstanding
principal balance and accrued interest on short-term notes anticipated to
be outstanding as of the consummation of the Offering due to five
Brazilian banks and (through Mr. Finkel) an individual. The Company's
Chief Executive Officer has personally guaranteed $500,000 of this
principal indebtedness and has pledged $400,000 as a guarantee for a loan
in the amount of $400,000 included in this outstanding principal balance.
These notes currently bear interest at rates of approximately 4% to 5% per
month.
(3) Represents the repayment of the outstanding principal amount of $100,000
on a short-term loan which bears interest at a rate of 5% per annum from
Charles N. Finkel, the Company's Chief Executive Officer, to the Company
on July 19, 1996.
(4) Includes the anticipated costs of adding research and development
personnel and the costs of continued enhancement to current products and
new product development.
(5) Represents dividends payable by Ensec, S.A. to its former parent company,
Tecpo Comercio E Representacoes Ltda., a Brazilian limited liability
company ("Tecpo"), indirectly wholly-owned by Charles N. Finkel, President
and Chief Executive Officer of the Company, which dividends were
attributable to net income of Ensec, S.A. in fiscal year 1992 and prior
periods.
(6) Includes an estimated amount of $350,000 to satisfy termination benefits
anticipated to be incurred by the Company in connection with the
downsizing of its Brazilian operations.
----------------
If the Underwriters exercise their Over-allotment Option in full, the
Company will realize additional net proceeds of approximately $1,162,800,
which amount will be added to the Company's working capital.
17
<PAGE>
The Company anticipates, based on currently proposed plans and assumptions
relating to its operations, that the proceeds of this Offering will be
sufficient to satisfy the Company's contemplated cash requirements for at
least 12 months following the consummation of the Offering. In the event the
Company's plans change or its assumptions change or prove to be inaccurate or
the proceeds of the Offering prove to be insufficient to fund operations (due
to unanticipated expenses, delays, problems or otherwise), the Company may
find it necessary or advisable to reallocate some of the proceeds within the
above-described categories or to use portion thereof for other purposes and
could be required to seek additional financing sooner than currently
anticipated. Depending on the Company's progress in the development of its
products and technology, their acceptance by third parties, and the state of
the capital markets, the Company may also determine that it is necessary to
raise additional equity capital within the next 12 months, subject to the
prior written consent of the Representative. The Company has no current
arrangements with respect to, or sources of, additional financing and there
can be no assurance that additional financing will be available to the Company
when needed on commercially reasonable terms or at all. Any inability to
obtain additional financing when needed would have a material adverse effect
on the Company, including possibly requiring the Company to significantly
curtail or cease its operations.
Proceeds not immediately required for the purposes described above will be
invested principally in U.S. government securities and/or short-term
certificates of deposit.
18
<PAGE>
DILUTION
As of June 30, 1996, the Company had a net tangible book value equal to
$(151,414), or $(.04) per share. After giving effect to the sale of the
1,900,000 shares of Common Stock and the 1,900,000 Redeemable Warrants offered
by the Company pursuant to this Prospectus at an initial public offering price
of $6.00 per share and $.10 per Redeemable Warrant, the issuance of 231,250
shares of Common Stock pursuant to the exercise of the Bridge Warrants, and
application of the estimated net proceeds as set forth under "Use of
Proceeds," the pro forma net tangible book value at such date would have been
$9,210,046, or $1.64 per share. This represents an immediate increase in net
tangible book value of $1.68 per share to the existing stockholders and
immediate dilution of $4.36 per share (or 72.7% of the public offering price)
to purchasers of the Common Stock offered hereby ("New Investors"). If the
initial public offering price is higher or lower, the dilution to New
Investors will be, respectively, greater or less. The following table
illustrates the dilution per share:
<TABLE>
<S> <C> <C>
Public offering price(1)........................................ $6.00
Net tangible book value per share at June 30, 1996(2)......... $(.04)
Increase per share attributable to New Investors.............. $1.68
Pro forma net tangible book value per share after Offering...... $1.64
-----
Dilution per share to New Investors(3).......................... $4.36
=====
</TABLE>
- --------
(1) Before deduction of underwriting discounts and commissions and estimated
offering expenses payable by the Company.
(2) Net tangible book value per share represents the Company's total tangible
assets less its total liabilities divided by the number of shares of
Common Stock outstanding. The Company's total tangible assets are equal to
total assets less deferred financing costs of $167,902 and $118,960 of
deferred offering costs as of June 30, 1996.
(3) The dilution of net tangible book value per share to New Investors
assuming the Underwriters' Over-allotment Option is exercised in full
would be $4.22 (or 70.3%).
The following table sets forth, with respect to existing stockholders and
New Investors, a comparison of the number of shares of Common Stock acquired
from the Company, the percentage ownership of such shares, the total
consideration paid and the average price per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION PAID
-------------------- ------------------------
AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- --------------- -------------------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders... 3,731,250(1) 66.3% $ 4,112,205(1) 26.5% $1.01
New Investors........... 1,900,000 33.7% $11,400,000 73.5% $6.00
========= ===== =============== ========= =====
Total................. 5,631,250 100.0% $15,512,205 100.0% $2.76
========= ===== =============== ========= =====
</TABLE>
- --------
(1) With respect to the 3,500,000 shares of Common Stock currently issued and
outstanding as of the date of this Prospectus (excluding shares to be
issued upon the exercise of the Bridge Warrants and capital contributed in
exchange therefor of $594,501). Total Consideration Paid is assumed to be
the sum of the Company's Common Stock and Additional Paid-in Capital as of
June 30, 1996. See "Consolidated Financial Statements."
The information contained in the above tables gives effect to the exercise
of the Bridge Warrants and the issuance of 231,250 shares of Common Stock at
$.10 per share but does not give effect to the exercise of options granted
under the Plan to purchase 355,000 shares of Common Stock for $3.00 per share.
Exercise of these options and warrants would result in further dilution to New
Investors in this Offering.
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at June 30,
1996, as adjusted to give effect to the receipt and anticipated use of the
estimated net proceeds of this Offering. This table should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto, "Selected Consolidated Financial Data" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------------
ACTUAL AS ADJUSTED(2)
----------- --------------
<S> <C> <C>
Long-term debt (including current maturities)...... $ 3,950,000 $ 3,950,000
Senior Subordinated Notes payable.................. 1,879,300 -0-
Stockholders' equity
Preferred Stock, $.01 par value per share,
3,000,000 shares authorized, none issued or
outstanding..................................... -- --
Common Stock, $.01 par value per share,
20,000,000 shares authorized, 3,500,000 shares
issued and outstanding; 5,631,250 shares issued
and outstanding, as adjusted(1)................. 35,000 56,313
Additional paid-in capital....................... 4,077,205 13,919,092
Accumulated deficit(3)........................... (3,976,757) (4,765,359)
----------- -----------
Total Stockholders' Equity......................... 135,448 9,210,046
----------- -----------
Total Capitalization........................... $ 5,964,748 $13,160,046
=========== ===========
</TABLE>
- --------
(1) Assumes (i) issuance of 231,250 shares of Common Stock upon the exercise
of the Bridge Warrants; (ii) no exercise of the Underwriters' Over-
allotment Option; (iii) no exercise of the Underwriters' Warrants
including the exercise of Redeemable Warrants contained therein; (iv) no
exercise of the Redeemable Warrants; and (v) no exercise of options
granted under the Plan. See "Management--1996 Stock Option Plan,"
"Description of Securities" and "Underwriting."
(2) Adjusted to reflect the sale of 1,900,000 shares of Common Stock and
1,900,000 Redeemable Warrants offered hereby and the exercise of the
Bridge Warrants. See "Use of Proceeds."
(3) Adjusted for the unamortized portion of deferred financing costs and
discount in connection with the Bridge Financing of $167,902 and $620,700,
respectively, which will be recognized as interest expense upon the
repayment thereof.
DIVIDEND POLICY
The Company currently anticipates that it will retain any future earnings
for use in its business and does not anticipate paying any dividends in the
foreseeable future. The payment of any future dividends will be at the
discretion of the Company's Board of Directors and will depend, among other
things, upon the Company's future earnings, operations, capital requirements
and financial condition, general business conditions and contractual
restrictions on payment of dividends, if any.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the full years shown
have been derived from the Company's audited consolidated financial statements.
The selected statement of income data for the six months ended June 30, 1996
and the selected balance sheet data as of June 30, 1996 have been derived from
unaudited interim consolidated financial statements of the Company, and
reflect, in management's opinion, all adjustments necessary for a fair
presentation of the financial position and results of operations for these
periods. Results of operations for interim periods are not necessarily
indicative of results to be expected for the full year. This data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and with the Company's Consolidated
Financial Statements and the Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------- -----------------------
1994 1995 1995 1996
------ -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CONSOLIDATED OPERATING DATA:
Sales.......................... $8,540 $ 8,561 $ 4,380 $ 4,729
Gross profit................... 5,964 2,727 938 2,022
Selling, general and
administrative expenses....... 4,153 5,288 3,378 2,646
Research and development
expenses...................... 276 600 171 432
Translation loss (gain)........ 1,979 1,230 (800) 219
Loss from operations........... (444) (4,391) (1,812) (1,275)
Interest income................ (1,614) (648) (576) (24)
Interest expense............... 508 2,520 1,015 1,175
Net, other (income) expense.... 593 395 532 (16)
Earnings from operation of
discontinued division......... 534 436 342 --
Gain on disposal of
discontinued division......... -- 1,008 -- --
------ -------- -------- --------
Net earnings (loss)............ $ 234 $ (3,818) $ (2,221) $ (2,095)
====== ======== ======== ========
Net earnings (loss) per
share(1):
Continuing operations......... $ (.08) $ (1.35) $ (.66) $ (.54)
Discontinued operations....... .14 .37 .09 --
------ -------- -------- --------
Net earnings (loss) per share.. $ .06 $ (.98) $ (.57) $ (.54)
====== ======== ======== ========
Supplemental pro forma net
loss.......................... $ (2,805)(2) $ (1,305)(3)
======== ========
Supplemental pro forma net loss
per share..................... $ (.67)(2) $ (.28)(3)
======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1996 (UNAUDITED)
---------------- ----------------------------------------------
1994 1995 ACTUAL PRO FORMA(4) AS ADJUSTED(5)(6)(7)(8)
------- -------- -------- ------------ -----------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Working capital
(deficit).............. $ 1,489 $ (1,505) $ (4,754) $ (4,754) $ 4,608
Total assets............ 11,769 10,954 11,520 12,370 16,143
Current liabilities..... 3,645 5,839 9,261 10,111 4,809
Long-term debt, less
current portion........ 1,696 3,209 2,124 2,124 2,124
Stockholders' equity.... 5,405 1,587 135 135 9,210
</TABLE>
- -------
(1) Net loss per share is computed based on the weighted average number of
shares of Common Stock outstanding for each period. For purposes of
computing net loss per share, options, warrants and Common Stock granted or
issued by the Company during the 12-month period preceding the date of the
Offering at a price below the Offering Price to Public of $6.00 per share
have been included in the determination of the weighted average number of
shares outstanding using the treasury stock method.
21
<PAGE>
(2) The supplemental pro forma net loss and net loss per share reflect the
issuance of shares necessary to retire the estimated average notes payable
outstanding during 1995 and the resulting decrease in net loss in the
amount of $1,013,000 for the year ended 1995, as of the beginning of the
period presented. The calculation is based on the weighted average shares
outstanding used in the calculation of earnings per share, adjusted for
the estimated number of shares that would be issued by the Company (i.e.,
300,500 shares at $6.00 per share) to retire these obligations. See Note A
in Notes to Consolidated Financial Statements.
(3) The supplemental pro forma net loss and net loss per share reflect the
issuance of shares necessary to retire the estimated average notes payable
outstanding during the six months ended June 30, 1996 and the senior
subordinated notes and the resulting decrease in net loss in the amount of
$790,000 for the six months ended June 30, 1996, as of the beginning of
the period presented. The calculation is based on the weighted average
shares outstanding used in the calculation of earnings per share, adjusted
for the estimated number of shares that would be issued by the Company
(i.e., 790,000 shares at $6.00 per share) to retire these obligations. See
Note A in Notes to Consolidated Financial Statements.
(4) Pro forma financial information gives effect to loans aggregating
$1,000,000 from the Company's Chief Executive Officer, a Brazilian bank
and a third party (through Mr. Finkel) in July and August 1996, of which
$150,000 was used to repay outstanding principal and accrued interest on
the Company's short-term notes payable to Brazilian banks. These loans are
expected to be repaid from the proceeds of this Offering. See "Use of
Proceeds."
(5) Adjusted to reflect the sale of 1,900,000 shares of Common Stock and
1,900,000 Redeemable Warrants offered hereby and the exercise of the
Bridge Warrants. See "Use of Proceeds" and "Capitalization."
(6) Does not include up to (i) 210,000 shares of Common Stock issuable by the
Company and 75,000 shares of Common Stock to be sold by the Selling
Stockholder upon exercise of the Underwriters' Over-allotment Option in
full; (ii) 2,185,000 shares of Common Stock reserved for issuance upon
exercise of the Redeemable Warrants, including those issuable upon
exercise of the Underwriters' Over-allotment Option in full; (iii) 380,000
shares of Common Stock reserved for issuance upon exercise of the
Underwriters' Warrants and the Redeemable Warrants included therein; and
(iv) 450,000 shares issuable upon the exercise of stock options granted
pursuant to the Plan. See "Management--1996 Stock Option Plan," "Certain
Relationships and Related Transactions," and "Underwriting."
(7) After giving effect to (i) the Underwriters' discount ($927,200); (ii) the
Representative's non-accountable expense allowance ($347,700); and (iii)
an estimated $475,000 of other fees and expenses incurred in connection
with this Offering, including printing, professional and other
miscellaneous fees.
(8) Adjusted for the unamortized portion of deferred financing costs and
discount on the Bridge Financing of $167,902 and $620,700, respectively,
which will be recognized as interest expense upon the repayment thereof.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Amounts presented herein have generally been rounded to the nearest hundred
thousand dollars and the related dollar and percentage fluctuations are
calculated based on such rounding.
OVERVIEW
The Company derives its revenue primarily from the sales and installation of
its security systems and service of such systems. In 1994 and 1995, the
Company derived a material portion of its revenues from two sources which will
not contribute to the Company's revenues in 1996 and subsequent years: the
leasing of postal tracking and tracing equipment to a single customer pursuant
to a contract which terminated in the second fiscal quarter of 1995, and the
sale, installation, service and maintenance of currency sorting equipment
through a division which was sold in December 1995. The revenue and related
costs from the currency sorting equipment division have been classified as a
discontinued operation and are discussed separately herein. See "--Results of
Operations--First Six Months of 1996 Compared with First Six Months of 1995--
Discontinued Operations," "--Results of Operations--Fiscal Year 1995 Compared
with Fiscal Year 1994--Discontinued Operations" and Note M in Notes to
Consolidated Financial Statements.
Revenue is recognized upon delivery and acceptance for security systems
which are not subject to significant software customization and completed
within relatively short time frames and under the percentage of completion
method for systems that require significant customization. Revenue from the
leasing of equipment and maintenance contracts is recognized as earned over
the life of the related contracts. Maintenance contracts generally provide for
initial non-cancelable terms of one to five years within a specified period of
time and automatically renew on an annual basis thereafter unless terminated
by either party within a specified period of time. "Costs of goods sold"
include costs and expenses related to system sales and to service revenues.
Costs of system sales include equipment, materials, direct installation
charges, engineering and project management, amortization of capitalized
software costs and a corporate overhead allocation. Service costs include
parts, labor and related benefits, and a corporate overhead allocation.
The markets for the Company's products are characterized by evolving
industry requirements which may result in product or technology obsolescence.
There can be no assurance that the Company can successfully identify new
product opportunities and develop and bring new products and services to the
market in a timely manner. The Company's operating results have fluctuated and
will continue to fluctuate from period to period depending upon such factors
as the timing of significant contracts, the pricing and mix of services and
products sold by the Company, the introduction of new products by the Company
and its competitors, market acceptance of new and enhanced versions of the
Company's products and services, changes in pricing policies by its
competitors, the Company's ability to obtain sufficient supplies of sole or
limited source components, and the timing of the expansion of the Company's
infrastructure. See "Risk Factors--Evolving Market; New Product Development;
Technological Obsolescence."
The Company began selling its integrated security systems in 1983. In 1995,
the Company completed over four years of the development of and began
marketing its second generation of integrated security systems: the
EnWorks(TM) family of products, including the Company's flagship En2000(TM)
system. At such time, the Company began the amortization of approximately $3.6
million of capitalized software costs incurred in connection with the
development of the EnWorks(TM) family of products. These and other additional
capitalized costs will be amortized over the product's seven-year estimated
useful life.
In connection with the sale of the Company's currency sorting equipment
division and its business strategy in Brazil, the Company has been
implementing a downsizing plan. Pursuant to these efforts, the Company has
made a number of workforce reductions which, by the end of 1996, are expected
to represent approximately 78% of the 1995 workforce. In addition, the Company
intends to sell some or all of its buildings in Brazil, among taking other
actions. The effects of these efforts have and will continue to have a
material adverse impact on the Company's operating results for 1995 and 1996.
The material costs associated with these efforts include
23
<PAGE>
employee termination expenses of $1.4 million and $.4 million for the years
ended 1995 and 1996, respectively, and the incurring of certain fixed
operating costs that will terminate when the Company's downsizing efforts are
completed. As a result of the effects of the Company's downsizing efforts, the
results of operations of the Company for the 1994 and 1995 periods and the six
months ended June 30, 1995 and 1996 are in certain respects not comparable.
FOREIGN CURRENCY EXCHANGE RATES AND TRANSLATION GAINS AND LOSSES
The Company's functional currency is the U.S. dollar. The Company has a
substantial portion of its operations located in Brazil. Therefore, a
substantial portion of its sales are collected in Brazilian reais and a
substantial portion of the Company's expenses are incurred in Brazilian reais,
in each case rather than U.S. dollars. Although it is impossible to predict
future exchange rate fluctuations between the U.S. dollar and other
currencies, it can be anticipated that, to the extent the U.S. dollar
strengthens or weakens against the Brazilian real or other currencies, a
substantial portion of the Company's reported net sales, cost of goods sold
and operating expenses will be commensurately lower or higher than they would
have been with a stable foreign currency relationship. The Company has engaged
in currency hedging transactions on a limited basis in the past and in the
future may undertake currency hedging to reduce currency exposure, although
there can be no assurance that hedging transactions, if entered into, would
materially reduce the effects of fluctuations in foreign currency exchange
rates on the Company's results of operations. See "Risk Factors--Currency
Fluctuations" and Note B in Notes to Consolidated Financial Statements. The
Company and its subsidiaries translate into their functional currency on a
monthly basis based on a combination of the then current and historical
exchange rates for the currency in which their assets and liabilities are
valued. Gains or losses arising from these monthly translations are reflected
as translation income or expense. As a result of these monthly translations,
the Company recognized a loss of $1.2 million in fiscal 1995 and a loss of $.2
million in the first six months of 1996.
Prior to 1995, Brazil has experienced a highly inflationary economy.
Accordingly, under the required temporal method of currency translation, both
current and historical exchange rates are used depending upon the nature of
the asset or liability being translated. Translation gains and losses result
from fluctuations in the assets or liabilities being translated at current
rates as well as from fluctuations in the dollar/real exchange rate itself.
The Company has experienced translation losses in 1994, 1995 and the first
half of 1996 primarily as a result of the dollar strengthening against the
real. In the first half of 1995, the dollar weakened against the real, thus
causing the translation gain in such period since the Company was in a net
liability position related to the items translated at current rates.
RESULTS OF OPERATIONS
First Six Months of 1996 Compared with First Six Months of 1995
Sales. Total sales for the six months ended June 30, 1996 increased $.3
million, or 6.9%, to $4.7 million from $4.4 million in the comparable 1995
period. Several material changes occurred in the Company's revenue mix from
the first six months of 1995 to the same period in 1996, which reflect the
refocus by the Company to its core business of sales of integrated security
systems. Sales from the leasing of postal tracking and tracing equipment and
related service revenue decreased $1.1 million, or 100%, in 1996 from 1995 as
a result of the termination of a contract with the Brazilian postal authority
in the second quarter of 1995. Security system sales revenue increased $1.4
million, or 42%, from the first six months of 1995 to the same period in 1996.
For the six months ended June 30, 1996 and 1995, sales generated by the
Company in the United States amounted to $1.1 million and $.6 million, or
23.4% and 13.6%, respectively, of the total sales for each of the respective
periods.
Cost of Goods Sold. Cost of goods sold in the first six months of 1996
decreased $.7 million, or 20.6%, to $2.7 million from $3.4 million in the year
earlier period. While the dollar amount of cost of goods sold changed somewhat
from period to period, the mix of the cost of goods sold changed materially
from period to period due to the fact that as of the end of the second quarter
of 1995 the Company no longer received revenues from the leasing of postal
tracking and tracing equipment. In the first six months of 1995, cost of goods
sold related to the
24
<PAGE>
leasing of postal tracking and tracing equipment amounted to $.5 million,
resulting in a $.6 million, or 54.5%, gross profit on such related sales. Cost
of goods sold related to sales and service of the Company's security systems
in the first six months of 1995 was $2.9 million as compared to $2.7 million
in the comparable 1996 period. The resulting gross profit and gross profit
percentages in 1995 and 1996 were $.4 million and 11.8%, and $2.0 million and
42.8%, respectively. This substantial increase in the Company's gross profit
percentage from security system sales in 1995 to 1996 occurred primarily
through improvements in the process by which the Company bids and contracts
for systems sales which the Company believes will reduce or eliminate job
costing errors experienced in the 1995 period. This increase in gross profit
percentage occurred even after taking into account the $.3 million higher
amortization expense of the capitalized software costs in 1996 compared to
1995. No amortization expense occurred in 1995 until July 1995. The Company
believes that the cost of goods sold as a percentage of revenues from sales
and service of security systems will in future periods more closely
approximate those experienced in the first six months of 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the first six months of 1996 decreased $.7 million,
or 20.6%, to $2.7 million in 1996 from $3.4 million in the comparable 1995
period. As described above, in the latter part of 1995 the Company reduced the
number of employees in its Brazilian operations and will continue to do so
pursuant to the Company's downsizing efforts. This resulted in a decrease of
$.6 million of payroll and related costs in the first six months of 1996
compared to the prior period. In addition, in the first six months of 1996 the
Company had temporary reductions in the number of employees at Ensec Inc.
resulting in a $.1 million reduction in payroll and related benefits.
Research and Development. Research and development expenses for the first
six months of 1996 increased $.2 million, or 100%, from $.2 million in 1995 to
$.4 million in 1996. This increase reflected the fact that in 1995 the
Company's development efforts were focused on completing the En2000(TM) family
of products and were thus capitalized, whereas in 1996, the Company's
development efforts focused on other related products whose technological
feasibility had not been established.
Other Income and Expense. Interest income decreased $.6 million, or 96.0%,
to $24,133 in the first six months of 1996 from $.6 million in the comparable
1995 period. This decrease was attributable to a decreased amount of interest-
bearing assets. Interest expense in the first six months of 1996 increased $.2
million, or 20%, to $1.2 million from $1.0 million in the comparable 1995
period, due to increased borrowings in the amount of $3.5 million, of which
$2.5 million was incurred in May 1996 in connection with the Bridge Financing,
and the amortization of deferred financing costs also incurred in connection
therewith. Other, net (income) expense increased by $.6 million to $(15,924),
from $532,374 in the prior period. This increase was substantially
attributable to a write down in 1995 of the remaining book value of certain
postal tracking and tracing equipment in connection with the termination of
leases for such equipment.
Income Tax Benefit. Income tax benefit in the first six months of 1996
increased by $.1 million, or 50%, to $.3 million from $.2 million in the
comparable 1995 period. This increase was primarily attributable to a decrease
in the Company's net deferred tax liability caused by increases in foreign
NOLs which were generated in fiscal year 1996.
Discontinued Operations. Because the currency sorting equipment division was
sold in December 1995, there was no discontinued operation during the six
month period ended June 30, 1996. The six month period ended June 30, 1995,
resulted in $1.4 million in sales for such period. The cost of goods sold and
selling, general and administrative expenses as a percentage of sales were
consistent as with the year ended 1995.
Fiscal Year 1995 Compared with Fiscal Year 1994
Sales. Total sales for 1995 and 1994 were approximately $8.5 million. During
1995, the Company's revenue from the sales of the Company's security systems
increased $3.3 million, or 82.5%, to $7.3 million from $4.0 million in 1994.
The Company's revenue from postal tracking and tracing equipment leases and
related service contracts in 1995 decreased $3.2 million, or 71.1%, to $1.3
million from $4.5 million in 1994. These variations result from a change in
the Company's revenue mix reflecting the focus in 1995 on sales of integrated
25
<PAGE>
security systems and the termination of the postal tracking and tracing
equipment lease in the second fiscal quarter of 1995. For the years ended
December 31, 1995 and 1994, sales generated by the Company's U.S. operations
totaled $2.4 million and $.9 million, or 28.2% and 10.6%, respectively, of the
consolidated sales for each of such years.
Cost of Goods Sold. For 1995, the cost of goods sold increased $3.2 million,
or 123.1%, to $5.8 million from $2.6 million in 1994. The increase resulted
primarily from (i) a shift in the mix of revenues from postal tracking and
tracing equipment leases, which had higher gross profit percentages in 1994,
to sales of integrated security systems; (ii) $.4 million in 1995 expenses
incurred in connection with the termination of certain employees in connection
with the Company's downsizing efforts; and (iii) a reduced gross profit
percentage in 1995 from postal tracking and tracing equipment leases. The
gross profit and gross profit percentage (exclusive of the 1995 employee
termination costs) for 1994 and 1995, respectively, in each revenue category
were as follows: (i) leasing of postal tracking and tracing equipment (and
related maintenance revenues) was $3.3 million (73.3%) versus $.4 million
(32.2%); and (ii) sales of integrated security systems was $2.7 million
(67.1%) versus $2.7 million (37.1%). The reduced gross profit percentages from
integrated security system sales in 1995 resulted in part from two contracts
on which the Company experienced a combined gross loss of $.7 million. Such
loss was incurred because of job costing and estimating errors which the
Company believes have been reduced or eliminated through the implementation of
new bidding and contracting procedures.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in 1995 increased $1.1 million, or 26.2%, to $5.3
million from $4.2 million in 1994. This increase resulted from $.6 million in
expenses attributable to administrative employee terminations in connection
with the Company's downsizing efforts, $.3 million in selling expenses, $.2
million in expenses attributable to payroll and related benefits, $.1 million
in occupancy costs, $.1 million in travel and related costs, $.4 million in
professional fees and costs associated with former employee-related disputes
and a decrease in depreciation of $.6 million. The increase in expenses
attributable to payroll and related benefits occurred because the average
number of personnel employed by Ensec Inc. increased from 12 in 1994 to 17 in
1995. Occupancy costs increased due to the Company's occupancy of its New York
City sales office for the full 1995 fiscal year, as compared to occupancy for
only a portion of 1994, as well as occupancy in 1995 by the Company of a
Dallas office. Selling and professional expenses and fees increased because of
the increase in system sales and depreciation decreased substantially because
of a reduction in the Company's postal tracking and tracing equipment.
Research and Development. Research and development expenses for 1995
increased $.3 million, or 100%, from $.3 million in 1994 to $.6 million in
1995. This increase occurred due to changes in development efforts from basic
En2000(TM) work in 1994 for which the costs were capitalized compared to the
expenditures associated with development of various enhancements in 1995 which
were expensed because technological feasibility had not been established and
$.2 million of termination costs incurred in 1995 pursuant to the Company's
downsizing efforts.
Other Income and Expense. Interest income decreased $.9 million, or 56.3%,
to $.7 million in 1995 from $1.6 million in 1994. This decrease resulted from
a reduction in interest-bearing assets. Interest expense in 1995 increased
$2.0 million, or 400%, to $2.5 million in 1995 from $.5 million in 1994. This
increase resulted from a increase of $3.7 million in the Company's long-term
and short-term debt to several Brazilian financial institutions, of which $2.1
million bore compound interest at rates in excess of 5% per month.
Income Tax Expense. In 1995, income tax expense decreased $1.8 million to a
benefit of $1.4 million in 1995 from an expense of $.4 million in 1994. This
decrease in income tax expense was primarily attributable to a decrease in the
Company's net deferred tax liability caused by increases in the federal and
foreign NOLs allowed for 1995.
Discontinued Operations. On December 7, 1995, the Company sold its currency
sorting equipment division to De La Rue Investimentos Ltda., a Brazilian
limited liability company ("De La Rue"), a minority stockholder. In exchange,
De La Rue transferred to Ensec, S.A. all of De La Rue's capital stock in
Ensec, S.A., $1.8 million in cash, and a 10% interest in a corporation owned
by De La Rue, to which the Company attributes nominal value. This transaction
resulted in the recognition by the Company of a gain of $1.0 million.
26
<PAGE>
The Company's revenue from its currency sorting equipment division increased
$.3 million, or 11.5%, to $2.9 million in 1995 from $2.6 million in 1994. Cost
of goods sold and selling, general and administrative expenses remained
relatively constant as a percentage of sales for both years except for a $.2
million charge incurred in 1995 related to employee termination costs
associated with the Company's downsizing efforts.
CERTAIN FACTORS AFFECTING FUTURE PERFORMANCE
Although the Company has experienced increases in revenues from sales of its
integrated security systems, including sales of the En2000(TM) system, the
Company does not believe that prior growth rates are necessarily indicative of
future operating results. In addition, the Company intends to invest
significantly in research and development of its products. As a result, there
can be no assurance that the Company will be profitable on a quarterly or
annual basis. Due to the Company's limited operating history with respect to
the EnWorks(TM) family of integrated security systems and products,
predictions as to future operating results are difficult. Future operating
results may fluctuate due to many factors, including, but not limited to:
general economic conditions, specific economic conditions relating to the
production of integrated security systems (including software); the demand for
the Company's products; the size and timing of future orders and new
contracts; specific feature requests by customers; production delays or
manufacturing inefficiencies; management decisions to commence or discontinue
product lines; the Company's ability to design, introduce and manufacture new
products on a cost-effective and timely basis; the amount and timing of
research and development expenditures; the maintenance of present and the
availability of future strategic alliances and joint marketing or servicing
agreements; the introduction of new products and product enhancements by the
Company or its competitors; the budgeting cycle of customers; changes in the
proportion of revenues attributable to license fees and maintenance and
support services; changes in the level of operating expenses; and the present
and future level of competition in the industry.
The Company expects to incur additional losses in the foreseeable future,
including net losses at least through the end of 1996. The anticipated net
loss in the third quarter of 1996 will include the recognition of the deferred
interest expenses of approximately $.9 million anticipated to be recognized in
such quarter in connection with the repayment of the Bridge Financing from the
proceeds of this Offering.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the six months ended June 30, 1996
amounted to $2.3 million, which resulted primarily from the Company's net loss
from operations. See "--Results of Operations--First Six Months of 1996
Compared with First Six Months of 1995." Net cash used in investing activities
for the first six months of 1996 was $.4 million, which resulted primarily
from continued investment in the development of the Company's software and
hardware products. Net cash provided by financing activities in the first six
months of 1996 was $2.7 million, which primarily resulted from the proceeds
received by the Company in connection with the Bridge Financing and increases
in borrowings under credit line agreements.
Net cash used in operating activities for the year ended December 31, 1995
amounted to $6.3 million, due primarily to losses from continuing operations
and a reduction of accounts payable. See "--Results of Operations--Fiscal Year
1995 Compared with Fiscal Year 1994." Cash flow from investing activities was
$1 million, which was due primarily to proceeds from the sale of the Company's
currency sorting equipment division and the sale of fixed assets, reduced by
the continued investment in the Company's software and hardware products.
The Company had a negative working capital of $1.5 million as of December
31, 1995 and $4.8 million as of June 30, 1996. While the negative working
capital resulted in part from continued losses, it has also resulted from the
Company's substantial investment since 1992 in the development of software for
the EnWorks(TM) family of products. The capitalized software costs incurred by
the Company amounted to $1.7 million, $1.2 million, $.7 million and $.4
million for the years ended 1994 and 1995 and the six months ended June 30,
1995 and 1996,
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respectively. The Company anticipates that it will incur approximately $1.0
million of research and development expenditures in the next 12 months in
order to enhance existing products and to develop new products.
The Company has a $.3 million line of credit agreement with a commercial
bank, which line of credit will expire in September 1996. The Company has no
additional borrowings available under this line of credit. Borrowings under
the line of credit are evidenced by notes payable which bear interest at a
rate of such bank's prime rate plus 2% per annum and are secured by certain
Ensec Inc. accounts receivable. The Company obtained its long-term debt
financing from two Brazilian banks. These loans bear interest at a rate of 12%
per annum, require monthly payments of principal and interest and mature in
1998. As of June 30, 1996, the Company has $4.0 million outstanding under its
long-term notes. Short-term borrowings from several Brazilian banks as of June
30, 1996 amounted to $2.2 million, which bear interest at rates of
approximately 4% to 5% per month. The repayment of the short-term debt from
the proceeds of this Offering will result in a substantial reduction in
interest expense. In July 1996, Charles N. Finkel, the Company's Chief
Executive Officer, loaned $.1 million to the Company and pledged $.4 million
in collateral as a guarantee for a short-term loan to the Company in the
amount of $.4 million. In August 1996, the Company borrowed an additional $.5
million, approximately $150,000 of the proceeds from which were used to retire
other short-term debt. Mr. Finkel personally guaranteed the repayment of this
indebtedness. All of this short-term debt is to be repaid from the proceeds of
the Offering. In addition, the Company presently intends to sell or enter into
a sale/leaseback or similar arrangement with respect to certain buildings
owned by the Company located in Sao Paulo, Brazil, the proceeds of which would
be used to reduce the Company's long-term debt.
The Company believes that the financing provided by the Offering should
provide funds that, together with cash flow from operations, if any, will be
sufficient to repay its short-term debt and meet its presently anticipated
working capital, including marketing expenditures, and research and
development expenditure requirements for at least the next 12 months. However,
there can be no assurance that the Company will achieve profitability in the
next 12 months, and the Company may need to raise additional capital in the
future, subject to the prior written consent of the Representative. As a
result of entering into employment agreements with seven of the Company's
executives in May or June 1996, the Company will incur increases in salary
expenses of $.3 million for 1996. See "Management."
As of December 31, 1995, the Company had NOL carryforwards for U.S. federal
income tax purposes of approximately $3.6 million, which begin to expire in
2006. These carryforwards result from cumulative operating losses of Ensec
Inc. since its inception in 1991. The consummation of this Offering and the
sale of the Securities may limit the Company's ability to offset such
carryforwards against U.S. taxable income in future years. The Company's NOL
carryforwards for Brazilian corporate and social contribution tax purposes
totaled $5.5 million as of December 31, 1995. There are no limitations which
affect the ability of the Company to offset these losses against future
Brazilian taxable income. See Note K in Notes to Consolidated Financial
Statements.
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BUSINESS
GENERAL
The Company designs, develops, assembles, sells, installs and services
security systems for large commercial or governmental facilities, ranging from
single function installations to high-end integrated security systems. The
Company's high-end integrated systems are based on its proprietary software
and related hardware which permit multiple devices or systems to be combined
into a unified system covering multiple sites. Since its inception, the
Company has installed approximately 400 systems, nearly all of which have been
in Brazil, including systems for large corporations (such as Bosch,
Caterpillar, Eastman Kodak, General Motors, IBM, Microsoft and Texaco) and
government agencies (such as the Brazilian Bureau of Mint & Engraving and the
Central Bank of Brazil).
In 1995, the Company completed the development of its second-generation
system, the EnWorks(TM) product family, consisting of state-of-the-art, real-
time, integrated security systems. The Company spent four years and over $5
million in the development of the flagship product in the EnWorks(TM) family:
the En2000(TM) system. The Company's high-end integrated security systems are
based on distributive intelligence architecture and proprietary software that
permit the integration of various security devices or systems into a unified
system operating through the use of graphical user interfaces. Distributive
intelligence architecture permits individual components of an integrated
security system to process information independently so that such components
may continue to operate even when the central processor or another component
in the system malfunctions or is rendered inoperative. In addition, an
integrated security system that uses distributive intelligence architecture
can operate more efficiently because individual components are able to
complete independent tasks simultaneously.
The Company believes that the worldwide integrated security systems market
is currently $1.5 billion and has grown at a rate of approximately 15% per
annum from 1992 to 1995. The Company began marketing its En2000 system in 1995
at which time the Company was selected by the Port Authority of New York and
New Jersey through a competitive bid process to provide the new integrated
access control system for the parking facilities located in the World Trade
Center. In 1995, the Company entered into contracts to install eight
additional En2000(TM) systems, including a contract from EDS to install the
En2000(TM) in EDS's corporate headquarters in Plano, Texas. During the first
six months of 1996, the Company entered into contracts to install seven
En2000(TM) systems. In addition, the Company currently has 36 service and
maintenance contracts with customers who have purchased Company products,
covering 68 installations. Other examples of the Company's completed projects
involving prior versions of the Company's systems include: (i) an integrated
security system for the Brazilian Bureau of Mint & Engraving; (ii) an access
control, time and attendance, closed-circuit television ("CCTV") and fleet
management system for Companhia Vale do Rio Doce, a large Brazilian iron ore
mining company with over 15,500 employees; and (iii) a postal tracking and
tracing system for the Brazilian Postal Service.
The Company's systems have the ability to integrate and enable communication
between disparate subsystems including the following functions based on a
customer's specific needs:
. Access Control . Time and Attendance . Facilities
. Alarm Monitoring . Guard Tours Management
. Data Security . Parking Facility
Control
. Restaurant Revenue Reporting
. Vehicle Tracking . Elevator Control
. CCTV
. Video Badging
The Company's business strategy is based on three objectives which the
Company believes will allow it to better serve each of its geographic markets:
(i) Expand the Company's focus from operations and a customer base located
primarily in Brazil to a Company with an international scope and an
emphasis on the marketing in the United States of high-end integrated
security systems, which the Company believes enjoy the greatest
opportunities in the
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U.S. The Company recently relocated certain key executives to the United
States and is currently relocating its research and development and
finance personnel from Brazil to the United States.
(ii) Focus Brazilian marketing efforts primarily on the sale and service of
less complex security systems such as single component installations
and alarm monitoring. The Company believes the developing economy of
Brazil will provide a greater number of potential customers for these
types of systems rather than for its high-end integrated security
systems, due to the finite number of commercial, governmental and
similar facilities suited for high-end integrated systems and the
number of prior installations by the Company of its security systems
in such facilities. Pursuant to this strategy, the Company is
implementing a downsizing plan in Brazil that includes the following
steps:
. Sale of the Company's Brazilian currency sorting division in 1995,
which was not related to the Company's security system business.
. Establishment of relationships with value-added resellers to market
the Company's products to the mid- and low-end market segments in
Brazil.
. Cumulative reduction of the Brazilian workforce by approximately
78% and a proposed sale of some or all of the Company's facilities
as a result of such workforce reductions and the sale of the
currency sorting equipment division, all of which are consistent
with the Company's reliance on value-added resellers as opposed to
in-house sales personnel.
(iii) Enter into alliances with strategic partners for marketing the
Company's products in the U.S. and internationally. To facilitate
this expansion into the U.S. market, the Company has entered into the
following strategic alliances:
. Agreement with EDS whereby EDS will promote and sell the Company's
products for a term of three years (subject to renewals).
. Agreement with Lockheed Martin whereby the Company and Lockheed
Martin will seek (for a term of five years, subject to renewal) to
identify specific projects for integrated security systems to be
pursued through a teaming arrangement between the parties.
INTEGRATED SECURITY SYSTEMS
Integrated security systems perform functions such as access control,
facilities management and alarm monitoring through combined subsystems and
components such as card readers, CCTV, paging devices, intercoms and
identification badges. An integrated security system generally includes a
central command and control feature that uses a single user interface and
shares data among subsystems to form a system that performs in a uniform and
cohesive fashion. Systems integration allows various subsystems to communicate
with each other so that one system, rather than many subsystems, controls a
company's or a location's security. The Company believes that, by integrating
disparate subsystems into a single system, functions are enhanced by
establishing uniform responses for certain conditions. The Company believes
that integrated systems involve fewer steps to process data, therefore
requiring less response time to perform functions.
In an integrated security system, a central processor is necessary to
integrate components and subsystems. The degrees of systems integration can
vary, ranging from subsystems interconnected through electrical wiring to
subsystems that communicate with each other via separate databases and that
are monitored through a central processor and finally to the most advanced
integrations which share the same database. For example, an integrated system
can be as simple as connecting a CCTV system to an alarm system for a small
bank branch or casino room. An integrated system can also be extremely
advanced, being built around a common database and combining identification
cards and graphical screen monitoring of access control with monitored alarms
and HVAC (heating, ventilating, air conditioning)/lighting management systems
for large corporate or government sites.
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While the initial purchase and installation of an integrated security system
often will cost more than a simple, stand alone alarm monitoring, access
control, CCTV or security guard system, the Company believes that integrated
systems justify their cost because they can result in reduced capital
expenditures and maintenance costs (due to the elimination of redundant
components or circuitry that would result from multiple stand-alone systems)
over time while improving performance. Staffing costs are also generally
reduced by integrated systems, because operators monitor multiple functions,
the complexity of several systems has been simplified into one graphical user
interface and, as a result of the simpler nature of the system, fewer
personnel are required to operate the system.
The primary function of an integrated security system is usually access
control. Conventional access control systems typically involve proprietary
mechanical devices allowing access, such as magnetic stripe card readers on
turnstiles or proximity card readers on doors. These mechanisms were sometimes
connected to a CCTV system, but usually not integrated with a larger premises
control system. Today, such mechanical access control systems are still being
installed, but the Company believes that the future growth in access control
will come from PC-based systems which are integrated with other building
systems. Access control is becoming increasingly important in the protection
of electronic data. Gaining access to a data stream, whether it be a corporate
computer network or an ATM network, involves various forms of identification
and certification. These include traditional forms such as a simple personal
identification number (PIN) or cards with magnetic stripes, but are
increasingly becoming more sophisticated, such as token cards (which allow
remote access to PIN-specific systems), remote detection cards such as ID
badges that emit radio frequencies and identification equipment based on
fingerprint or eye identification.
INTEGRATED SECURITY SYSTEMS MARKET
Most integrated security systems are installed as ready to use systems with
a range of options. The features and functions of integrated security systems
vary from customer to customer. High-end systems are both multi-tasking
(supporting more than one task at a time) and multi-user (supporting multiple
command centers or multiple concurrent operators). The Company believes that
the worldwide integrated security systems market is currently $1.5 billion and
has grown at a rate of approximately 15% per annum from 1992 to 1995. The
Company believes that the principal demand for products in the integrated
security systems industry will come from large companies and governmental
agencies with multiple locations, seeking new functions, greater
standardization, operational simplicity and cost effectiveness.
Historically, customers purchased security systems on a per location basis,
because security products were unable to monitor more than one location and of
the perceived need on the part of customers to take a "hands-on" approach with
respect to security issues. Security matters were often handled internally,
without outside consultants or contractors. Given the current complexities of
systems requirements, however, corporations are increasingly outsourcing some
or all of their security needs to consultants or providers such as the
Company. The Company believes that companies with more than one location in
the past required multiple systems, installations and personnel to handle the
security function, which systems had no ability to centrally monitor or
respond to information. With the advent of on-premises systems that connect
the various subsystems of a security system, coupled with graphical monitoring
equipment that no longer needs to be operated by multiple personnel, security
systems customers are now able to use fewer and more highly trained facilities
management personnel to monitor a greater number of locations. In addition,
security has become a multi-site, multi-functional decision making process
that is now typically beyond the responsibility of the local plant manager.
Large companies have indicated to the Company the need for standardization
across numerous corporate sites. Local security directors, therefore, are no
longer the only persons who make security systems purchasing decisions,
requiring the decision to be made by higher level corporate executives.
PRODUCTS AND SERVICES
The Company has established three distinct yet related sources of revenue:
Products, Service and Distribution and Procurement. As of July 31, 1996, the
Company has a current backlog of orders for systems
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sales and installations and service aggregating in excess of $2.1 million
which the Company anticipates will be filled over the next 18 months.
Products: The Company markets a variety of stand-alone and integrated
products in its EnWorks(TM) family of products, as follows:
En2000(TM) Integrated Security System
Integrated security system providing on-line (i.e., real-time) access
control/alarm monitoring and the integration and/or secondary
monitoring (i.e., monitoring-only without operational capability) of
multiple subsystems. This system, and the En1000(TM) system described
below, consist of a central processing unit running proprietary
software that is connected to a number of devices through distributive
intelligence architecture.
En1000(TM) Integrated Security System
Integrated security system providing on-line access control/alarm
monitoring with a more limited number of readers and no integration or
secondary monitoring of additional application subsystems.
Scape Security System
Offline access control system consisting of software and DC500
terminals.
DC500 Terminal
Stand alone access control/data collector.
The EnWorks(TM) family of products is designed to permit upgrades and
improvements allowing lesser- featured systems such as the Scape system to be
expanded to provide the features of the most sophisticated system offered, the
En2000(TM) system. The En2000(TM) system was designed to be expandable from
its current function (i.e., an integrated security system) to meet the new and
changing applications needs of the customer. The foundation for this approach
was established with the selection of the object-oriented analysis and design
methodology, a real time operating system, the Intel platform, and the
graphical user interface. The Company offers a number of components to expand
or enhance the En2000(TM) system including a networked access control/data
collector, a networked alarm monitoring unit, multi-site communications
capabilities and expanded databases.
Service: An important part of any systems sale is the ability of the systems
provider to train, service and maintain the system. The Company, primarily in
Brazil, has developed a service business segment to provide project
management, systems design, training, technical documentation, site surveys
and audits, installation and maintenance services.
Since the Company's installed base of systems is concentrated primarily in
Brazil, service revenues and related personnel resources are also primarily
based in Brazil, where the Company provides nationwide installation, project
management and maintenance services through trained technicians located
throughout Brazil. These services are provided pursuant to contracts which
typically have a duration of five years or more. The Company currently has 36
maintenance and service contracts covering 68 installations in Brazil. The
Company has also in the past provided maintenance services to customers and
multinational product suppliers for products and systems not sold or installed
by the Company. The Company is not currently providing this type of
maintenance service, but may choose to do so again in the future.
The Company's sales and marketing efforts for service and maintenance in the
U.S. have only recently begun. Accordingly, the Company's U.S.-based service
capabilities have not been fully developed. In early 1996, however, the
Company was awarded a three-year maintenance contract on the World Trade
Center's parking access control contract.
Distribution and Procurement: The Company from time to time also distributes
to or procures for customers security products manufactured by others. For
example, to complement its existing products and offer
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to its customers a data security function as part of an integrated security
system or on a stand-alone basis, the Company has entered into a two-year
Software Value Added Reseller Agreement (the "ICL Reseller Agreement") with
ICL Enterprises ("ICL"), pursuant to which the Company has the right to resell
ICL's data security software. The ICL Reseller Agreement provides the Company
with a nonexclusive license to distribute, reproduce, resell and sublicense
ICL software to customers of the Company, except that the Company may not
sublicense ICL software to resellers.
INTELLECTUAL PROPERTY
The Company's ability to compete successfully depends, in part, on its
ability to protect the proprietary technology contained in its products. The
Company relies on a combination of patent, trade secret, copyright and
trademark laws, together with non-disclosure agreements, to establish and
protect proprietary rights in its EnWorks(TM) products. The Company generally
enters into confidentiality and/or license agreements with its employees,
distributors, customers and suppliers, and limits access to and distribution
of its proprietary information. These measures afford limited protection, and
there can be no assurance that the steps taken by the Company to protect these
proprietary rights will be adequate to prevent misappropriation of its
technology or the independent development by others of similar technology. In
addition, the laws of Brazil, where the Company maintains its patents and
copyrights and has pending patent applications, do not protect the Company's
proprietary rights to the same extent as do the laws of the United States. The
Company intends to seek copyright protection under United States law with
respect to some of its technology. While the Company believes that it would be
impractical and not cost-effective for anyone to attempt to copy complex
software such as that used in the EnWorks(TM) products, unauthorized parties,
nevertheless, might attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. The cost
of enforcement by the Company of its information rights could be significant,
regardless of the outcome of such enforcement proceedings. In addition,
although the Company believes that there are no infringement claims against
the Company and no grounds for the assertion of such claims, the cost of
responding to any such assertion, should be it made, could be significant.
RESEARCH AND DEVELOPMENT
The Company has the in-house capability to develop, maintain and enhance its
proprietary technology. As a result, the Company can prioritize its
development efforts and control the scope and quality of its technology. This
research and development staff permits the Company to provide customized
solutions for each customer. Management believes that this ability to provide
customized solutions constitutes a competitive advantage. During fiscal years
1995 and 1994, the Company incurred development costs of approximately $1.8
million and $2.0 million, respectively (including capitalized software costs).
Research and development for the Company will be centered in Boca Raton,
Florida. The research and development group is responsible for the design and
implementation of new products, as well as additions and enhancements to
existing products. The group is currently working on a number of projects,
including a Windows(TM)-based version of the Scape security system. At such
time as the anticipated capabilities of the EnWorks(TM) product line are more
fully developed, particularly with the En2000(TM) system, the research and
development group's resources will become focused to a greater extent on new
systems applications and specific industries. Depending upon the nature of the
systems requirements, some of these new applications may be for other than
security purposes.
SALES & MARKETING
The Company's sales strategy is focused on the following:
. Development of strategic-value added integrator relationships with a
limited number of large, well-known multinational systems integrators
with large established client bases and existing networks (e.g., EDS,
Lockheed Martin, etc.) for sales of all of the Company's products;
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. Calling efforts concentrated on Fortune 1000 companies with
sufficient integration requirements and size to qualify as sales
prospects for En2000(TM) and En1000(TM) security systems;
. Solicitation of consulting companies responsible for specifying
providers of security systems on large, high-end integrated security
systems projects suitable for En2000(TM) and En1000(TM) security
systems;
. Pursuit of selected federal, state and local government requests for
proposals as a prime contractor (e.g., World Trade Center) or in
cooperation with strategic partners; and
. Engagement of manufacturer's representatives and distributors in
Brazil to assist the Company's direct sales efforts of less complex
security systems.
The Company markets its products directly through its sales staff of seven
individuals and, from time to time, through advertising, including print and
direct mail materials, technical seminars, trade shows, technical
publications, public relations and collateral materials.
Prior to 1995, virtually all of the Company's systems sales were made in
Brazil, where the Company believes it had and continues to have a reputation
for delivering reliable, high-quality systems. Although systems sales
throughout Brazil are anticipated to remain important, the Company believes
that the business development opportunities in the U.S. for new systems sales
are significantly greater, particularly for the high-end En2000(TM) and
En1000(TM) security systems. To this end, the Company has begun to actively
pursue large, high-end integrated security systems projects in the U.S. In
early 1995, the New York & New Jersey Port Authority awarded the parking
access control system contract for the World Trade Center to the Company. The
World Trade Center contract procurement process took place over a two-year
period and involved investigations of the Company and its products. In Brazil,
the Company intends to focus its efforts on the sale of less complex systems,
such as the Scape security system, to take advantage of the developing
Brazilian economy. The Company intends to undertake limited international
sales efforts beyond the established Brazilian and U.S. markets, and to focus
in these areas on large, high-end integrated security systems projects.
The Company believes that its value-added integrator relationships will be a
significant source of sales and revenue in the near future. Currently, the
Company's two primary value-added integrator relationships are with EDS and
Lockheed Martin.
The Company and EDS have entered into a Card Access Systems Agreement, as
amended (the "Systems Agreement"), whereby EDS shall purchase the Company's
hardware, software and other products, as well as the Company's installation,
education, support and maintenance services. EDS is entitled to purchase
hardware and software from the Company at prices which are generally
discounted from the Company's list prices. The Company shall perform any
requested system installation, Licensed Software (as defined in the Systems
Agreement) support services and hardware maintenance services from the Company
at prices and rates as set forth in the Systems Agreement. EDS has agreed to
promote and sell the Company's products and services in the marketplace for an
initial term of three years. The parties have agreed to formulate and approve
a joint marketing plan in the third quarter of 1996 for the promotion and sale
of their products. As a part of the joint marketing strategy, the Company has
allowed EDS to market, promote and remarket Licensed Software and any
documentation thereto as an authorized remarketer in accordance with the terms
and conditions of the Systems Agreement.
The Company has entered into a five-year Strategic Alliance Agreement (the
"Alliance Agreement") with Lockheed Martin. The Alliance Agreement permits
Lockheed Martin and the Company to cooperate and complement each other's
efforts in identifying, proposing and marketing integrated security systems to
governmental, corporate and industrial entities. The Alliance Agreement
contemplates that Lockheed Martin and the Company will agree upon a particular
teaming arrangement with each party assuming defined roles and
responsibilities in order to more effectively compete for future business
opportunities and programs. Pursuant to the terms and conditions of the
Alliance Agreement, Lockheed Martin and the Company have agreed, with respect
to mutually agreed projects, to jointly market and support each other's
services without soliciting services
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or products from other sources or offering services and products to other
contractors. After the initial five-year term, the Alliance Agreement may be
extended upon the mutual agreement of the parties for additional one-year
terms. The Alliance Agreement may be terminated by either party upon 12 months
prior written notice.
The Company will also consider entering into project-specific agreements
with other companies for the sale of its products and services. The Company is
currently a party to one such agreement with Bell & Howell Postal Systems,
Inc. ("Bell & Howell"), pursuant to which Bell & Howell intends to bid on a
contract to provide postal automation equipment to Empresa Brasileira de
Correios E Telegrafos ("ECT"), the Brazilian postal authority. The Company has
agreed to assist Bell & Howell in preparing proposals for the sale of postal
automation equipment to ECT and in developing a marketing program for such
sales. The Company has also agreed to provide Bell & Howell with
administrative support and assistance for its operations in Brazil. If Bell &
Howell's proposal is accepted by ECT, Bell & Howell has agreed to name the
Company as a program subcontractor. Bell & Howell has also agreed to pay the
Company a fee of eight percent of the cumulative net sales of Bell & Howell
products to ECT made during the term of the agreement, subject to certain
conditions.
COMPETITION
The U.S. security systems industry is highly competitive and fragmented. The
Company believes that most of its competitors excel in a particular market
niche rather than having broad-based market share. In Brazil, the Company
competes with Sensormatic, Casi-Rusco and Northern Computers Corporation,
among others. In North America, significant competitors include Software
House/Sensormatic, Casi-Rusco, Matrix, Cardkey, ADT, Diebold, Johnson
Controls, Honeywell, Infographic, MDI and The Pittston Brinks Group. Some of
these competitors have greater name recognition, more extensive engineering,
manufacturing, marketing and distribution capabilities and greater financial,
technological and personnel resources than the Company. See "Risk Factors--
Competition." The Company may also face competition from potential new
entrants into the Company's segment of the security systems industry, many of
which have substantially greater resources than the Company. It is possible,
for example, that existing or potential competitors of the Company could
introduce less expensive and/or improved products. However, the Company
believes that competition is based primarily on product performance and
features and, to a lesser extent, on the basis of price. Other critical
competitive factors include product reliability and flexibility of use with a
user's other systems. There can be no assurance that the Company will be able
to compete successfully in the future against existing or potential
competitors or successfully adapt to changes in the market for the Company's
products. An increase in competition could have a material adverse effect on
the Company's business and results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
EMPLOYEES
As of June 30, 1996, the Company employed 80 individuals, of which
approximately 65 were employed in Brazil and 15 were employed in the U.S. None
of the Company's employees in the U.S. are represented by unions or were
covered by any collective bargaining agreement. All of the Company's employees
in Brazil, or approximately 81.3%, are covered by a collective bargaining
agreement. The collective bargaining agreement expires on November 1, 1996 and
is subject to annual renewal. In the event that representatives of management
and employees are unable to agree on the terms of a new collective bargaining
agreement, a court may ultimately determine such terms by rendering a binding
judicial decision which would serve as the renewal agreement.
In addition to the collective bargaining agreement, Brazilian labor laws are
applicable to all of the Company's employees in Brazil. The requirements of
the collective bargaining agreement and the Brazilian labor laws principally
address the length of the work day, minimum daily wages for professional
workers, contributions to a retirement fund, insurance for work-related
accidents, procedures for dismissing employees, determination of severance pay
and other conditions of employment.
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As part of the Company's relocation of its executive, financial and research
and development activities to the U.S. and the downsizing of its operations in
Brazil to limit its activities to sales and service of less complex security
systems, the Company anticipates reducing its workforce in Brazil by
approximately one-third over the next six months. Under the terms of the
collective bargaining agreement and Brazilian law, such reduction will cause
the Company to incur approximately $350,000 of severance and related expenses
during such period, most of which will be recognized in the third and fourth
quarters of 1996.
The Company believes that its future success will depend in large part upon
its ability to continue to attract, retain, train and motivate highly skilled
and dedicated employees. The Company has not experienced a work stoppage, and
the Company believes that its employee relations are good.
FACILITIES
U.S.: The Company is headquartered in Boca Raton, Florida. The Company
presently leases approximately 6,000 square feet of office space at two
locations--Boca Raton, Florida and New York City, New York. The New York
offices are utilized by the Company's regional sales personnel.
Brazil: The Company's Brazilian operations are headquartered in a Company-
owned building located in Cotia, a suburb of Sao Paulo. The building was
constructed in 1990 and is comprised of approximately 140,000 square feet of
office and warehouse space. In addition to the Cotia-based headquarters, the
Company maintains a number of service facilities located throughout Brazil.
These offices, many of which are provided by customers of the Company, are
used principally by the Company's service technicians.
The Company believes that its facilities are adequate to meet the Company's
current business requirements, and that suitable additional space will be
available as needed to accommodate further physical expansion of its U.S.
operations and for additional sales and support offices in the U.S.
LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. As of the date
of this Prospectus, the Company is not a party to any legal proceedings the
adverse outcome of which, in management's opinion, individually or in the
aggregate, would have a material adverse effect on the Company's results of
operations or financial position.
In August 1996, the Company received a written demand from a broker in
Brazil claiming that the Bridge Financing and this Offering wrongfully
precluded such broker's efforts to secure financing for the Company. The
broker is seeking $300,000, on the basis that it would have secured $10
million in financing for the Company but for the Bridge Financing and this
Offering. The Company and its counsel have reviewed the claim and believe it
to be without merit. The Company intends to vigorously defend any litigation,
if commenced, with respect to such claim.
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MANAGEMENT
The directors and executive officers of the Company, and certain officers of
its subsidiaries, their ages, and positions with the Company, Ensec, S.A., and
Ensec Inc. as of the date of this Prospectus are set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Charles N. Finkel 45 Chairman of the Board, Chief Executive Officer and
President of the Company; Chairman of the Board
and Chief Executive Officer of Ensec, S.A. and
Ensec Inc.
James K. Norman 49 Vice President-U.S. and Director of the Company;
President, Chief Operating Officer and Director
of Ensec Inc.; Director of Ensec, S.A.
Flavio R. da Silva 46 Vice President-Brazil and Director of the Company;
President, Chief Operating Officer and Director
of Ensec, S.A.; Director of Ensec Inc.
Steven T. Geffin 38 Vice President-Technology and Engineering of the
Company; Vice President and Director of Ensec,
S.A. and Ensec Inc.
David J. Rottner 40 Vice President, Chief Financial Officer and
Secretary of the Company and Ensec Inc.
Edward Morelli 44 Vice President-Operations of Ensec Inc.
Nuno J. Moura 49 Vice President, Secretary and Controller of Ensec,
S.A.
John De George 49 Vice President-Sales of Ensec Inc.
</TABLE>
Charles N. Finkel founded Ensec, S.A. in 1983 and has been Chairman of the
Board, Chief Executive Officer, President and a director of the Company since
its inception in April 1996. Mr. Finkel has 18 years of experience in the
security industry commencing with Engesa, S.A., an armaments company based in
Sao Paulo, Brazil, where Mr. Finkel was director of export sales. In 1983, Mr.
Finkel left Engesa to found Ensec, S.A. Mr. Finkel received a degree in civil
engineering from Armando Alvares Peteado, Brazil, and a Masters degree in
Marketing from Getulio Vargas, Brazil.
James K. Norman joined the Company in June 1996 as a director, the Company's
Vice-President-U.S and Chief Operating Officer. Prior to joining the Company,
Mr. Norman was employed for 20 years by Racal-Milgo, Inc. and affiliated
companies, serving from 1989 to 1995 as President of Racal-Datacom, Inc., a
data communications company with revenues of approximately $300 million in
1995. Prior to that time, Mr. Norman served as Senior Vice President--Sales,
Service and Marketing of Racal-Milgo, Inc., with worldwide responsibility for
sales and service for all products designed and manufactured in the United
States. Mr. Norman received a Bachelor of Science degree in Business
Administration from Auburn University, in Auburn, Alabama.
Flavio R. da Silva joined the Company in December 1995 and has served as a
director of the Company since April 1996. Prior to joining the Company in
1995, Mr. da Silva held management positions, from 1971 to 1989, for Brasilit
S.A., a manufacturer of building products, and from 1990 to 1995, for Fortilit
S.A. and predecessor companies, a manufacturer of PVC products. Mr. da Silva
received Bachelor of Science and Masters degrees in Business Administration
from Mackenzie University, Brazil, and a Ph.D. in Engineering from the
University of Sao Paulo, Brazil.
Steven T. Geffin joined the Company in 1992. Prior to joining the Company,
Mr. Geffin was employed in the research and development department for two
years at Casi-Rusco, a competitor of the Company engaged in the sales and
installation of security systems. Mr. Geffin is responsible for engineering,
research and development and manufacturing for all Company products. Mr.
Geffin received Bachelor of Science and Masters of Science degrees in
Electrical Engineering from the University of Miami in Miami, Florida.
37
<PAGE>
David J. Rottner joined the Company in May 1996 as its Chief Financial
Officer, Vice President and Secretary. Mr. Rottner has over 17 years of public
accounting experience. From November 1993 to May 1996, Mr. Rottner was a
certified public accountant with Grant Thornton LLP, a national accounting
firm, in Fort Lauderdale, Florida. From April 1990 to November 1993, Mr.
Rottner was a certified public accountant with Paul Scherer & Company, in New
York, New York. Mr. Rottner received a Bachelor of Science degree in
Accounting from the State University of New York, Albany.
Edward Morelli joined the Company in 1994. From 1990 to 1994, Mr. Morelli
was Operations Manager for Datalarm Security Systems, a security and card
access company in Miami, Florida, from 1990 to 1994. Prior to that, he was
Division Administrator for Sentrex Security Systems, also a security and card
access company, in Miami. Mr. Morelli's career in security systems began in
1974 installing fire/burglar alarms. Mr. Morelli studied electronics at PIO IX
in Buenos Aires, Argentina.
Nuno J. Moura joined the Company in 1995. From 1993 to 1995, Mr. Moura
worked for Cadi Ltda. in Brazil as a personnel recruiter and administrator.
From 1990 to 1993, he served as the controller for Brasinca, S.A., a producer,
assembler and supplier of automotive parts. Mr. Moura received a Masters
degree in Finance from Pontificia Universidade Catolica, Brazil.
John De George joined the Company in 1995 as the Company's U.S. Sales
Manager. Prior to that time, Mr. De George was sales manager for Vikonics,
Inc., a manufacturer of large scale computer-based integrated security and
life safety systems in Teterboro, New Jersey from 1992 to 1995. Prior to that,
he was General Manager for Alphamation, Inc., a data/telecommunication and
document/image processing systems integrator located in Hauppauge, New York.
Mr. De George received a Bachelor of Science degree from Hofstra University in
Hempstead, New York.
Executive officers of the Company are elected by the Board of Directors on
an annual basis and serve until the next annual meeting of stockholders and
until their successors have been duly elected and qualified. There are no
family relationships among any of the executive officers or directors of the
Company. The Company is currently seeking two additional individuals not
affiliated with the Company to serve on its Board of Directors. Messrs. da
Silva, Finkel, Morelli and Moura are not citizens of the U.S., although
Messrs. da Silva, Finkel and Morelli are legal U.S. residents.
ELECTION OF DIRECTORS
Pursuant to the Company's Articles, the Board of Directors is divided into
three classes, as nearly equal in number as possible, designated Class I,
Class II and Class III. The term of the initial Class I directors terminates
on the date of the 1997 annual meeting of stockholders; the term of the
initial Class II directors terminates on the date of the 1998 annual meeting
of stockholders and the term of the initial Class III directors terminates on
the date of the 1999 annual meeting of stockholders. At each annual meeting of
stockholders, successors to the class of directors whose term expires at that
annual meeting shall be elected for a three-year term. Mr. Norman is currently
a Class I director, Mr. da Silva is currently a Class II director and Mr.
Finkel is currently a Class III director. For further information, see
"Description of Securities--Florida Law and Certain Articles of Incorporation
and Bylaw Provisions."
Pursuant to the terms of the Underwriting Agreement relating to this
Offering, the Representative has the right, until September 25, 1999 (three
years after the date of this Prospectus), to elect to have a designee attend
all meetings of the Board of Directors of the Company or to cause the Company
to nominate and use its best efforts to obtain election to the Board of
Directors of a person designated by the Representative.
Directors of the Company, Ensec, S.A. and Ensec Inc. do not receive any
additional compensation for serving as a director or committee member, but
directors who are not employees of the Company are reimbursed for their
reasonable out-of-pocket expenses incurred in attending meetings of the Board
of Directors and Board committees.
38
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
Upon the consummation of the Offering and the appointment of two individuals
not otherwise affiliated with the Company as directors, the Company will form
an Audit Committee and a Compensation Committee. The Audit Committee will be
responsible for reviewing audit functions, including accounting and financial
reporting practices of the Company, the adequacy of the Company's system of
internal accounting control, the quality and integrity of the Company's
financial reporting and relations with independent auditors. It is anticipated
that the Audit Committee will consist of Messrs. Finkel, Norman and a new
director. The Compensation Committee will be responsible for establishing the
compensation of the Company's directors, officers and employees (other than
those persons serving on such committee, whose compensation will be determined
by the full Board of Directors), including salaries, bonuses, commission, and
benefit plans, administering the Plan, and other forms of or matters relating
to compensation. It is anticipated that the Compensation Committee will
consist of Messrs. da Silva, Finkel and Norman.
EXECUTIVE COMPENSATION
The following table sets forth as of December 31, 1995, all compensation
paid during the Company's last fiscal year to the Company's Chief Executive
Officer and to executive officers whose total annual compensation exceeded
$100,000 in any of the last three completed fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
-----------------------------------
OTHER ANNUAL ALL OTHER
AME AND PRINCIPAL POSITIONN YEAR SALARY BONUS COMPENSATION(3) COMPENSATION
- --------------------------- ---- -------- ----- --------------- ------------
<S> <C> <C> <C> <C> <C>
Charles N. Finkel, Chief 1995 $116,500 $-0- $ -0- $107,200(4)
Executive Officer of 1994 $ 73,000 $-0- $ -0- $117,900(5)
the Company, Ensec, 1993 $ 67,600 $-0- $ -0- $191,100(6)
S.A. and Ensec Inc.
Frederico Bettancourt, Senior 1995 $102,800 $-0- $34,800 $ -0-
Vice President and Chief 1994 $128,600 $-0- $ -0- $ -0-
Financial Officer of Ensec, S.A.(2) 1993 $ 99,500 $-0- $ -0- $ -0-
</TABLE>
- --------
(1) All compensation or remuneration paid to employees was paid by Ensec, S.A.
and Ensec Inc. In accordance with the rules of the Commission, the
compensation described in this table does not include medical, group life
insurance or other benefits received by the executives which are available
generally to all salaried employees of the Company, and certain
perquisites and other personal benefits, securities or property received
by the executives which do not exceed the lesser of $50,000 or 10% of any
such officer's salary and bonus disclosed in this table.
(2) Mr. Bettancourt, who was an executive officer of Ensec, S.A. as of
December 31, 1995, is no longer employed by the Company or any of its
subsidiaries.
(3) Represents commissions paid by the Company on behalf of the executive.
(4) Represents the following compensation for expenses paid by the Company on
behalf of the executive in fiscal year 1995: (i) $9,648 in property
maintenance expenses; (ii) $17,152 in car expenses; (iii) $18,224 in meal
expenses; (iv) $26,800 in travel expenses; (v) $24,656 in entertainment
expenses; and (vi) $10,720 in miscellaneous expenses.
(5) Represents the following compensation for expenses paid by the Company on
behalf of the executive in fiscal year 1994: (i) $9,432 in property
maintenance expenses; (ii) $15,327 in car expenses; (iii) $21,222 in meal
expenses; (iv) $30,654 in travel expenses; (v) $23,580 in entertainment
expenses; and (vi) $17,685 in miscellaneous expenses.
(6) Represents the following compensation for expenses paid by the Company on
behalf of the executive in fiscal year 1993: (i) $26,754 in property
maintenance expenses; (ii) $24,768 in car expenses; (iii) $30,651
39
<PAGE>
in meal expenses; (iv) $51,597 in travel expenses; (v) $34,398 in
entertainment expenses; and (vi) $22,932 in miscellaneous expenses.
EMPLOYMENT AGREEMENTS
The Company or its subsidiaries are a party to substantially identical
employment agreements with Messrs. Finkel, Norman, da Silva, Geffin, Morelli,
Rottner and De George, pursuant to which each of those individuals serve as an
executive of the Company, Ensec, S.A. or Ensec Inc. Each of the employment
agreements is for an initial three-year term, commencing in May or June 1996
and automatically renews for successive three-year terms unless either party
provides written notice to the other party at least 90 days prior to renewal.
Under the terms of the employment agreements, Messrs. Finkel, Norman, da
Silva, Geffin, Morelli, Rottner and De George receive an initial annual base
salary of $240,000, $127,000, $127,000, $100,000, $80,000, $75,000 and
$85,000, respectively, which may be increased from time to time by the Board
of Directors. Mr. Rottner's employment agreement provides for minimum annual
increases in base salary of 5%. Mr. De George's agreement currently provides
for payment of an additional 2% of sales revenues on sales of Company products
by Mr. De George until December 31, 1996. After such time, such sales
commissions shall terminate and shall be replaced by a sales incentive program
to be established by the Company. The employment agreements for Messrs.
Norman, da Silva and Geffin provide for annual cash bonuses equal to 25% of
the annual base salary then in effect for Messrs. Norman, da Silva and Geffin
in the event certain subsidiary budgets are attained at the end of each fiscal
year. The other executives will be eligible for annual cash bonuses determined
in the discretion of the Board of Directors of the Company based on the
attainment of individual performance targets and the financial performance of
the Company or its subsidiaries.
The agreements provide that upon termination of employment by the Company,
other than for Cause (as defined in the agreements) or retirement, the Company
shall pay (i) in the case of Mr. Finkel, an amount equal to the aggregate
present value of the product of (x) the average aggregate annual compensation
paid to Mr. Finkel by the Company and any of its subsidiaries and includable
in Mr. Finkel's gross income for federal income tax purposes during the five
calendar years preceding the taxable year in which the date of termination
occurs subject to United States income tax, multiplied by (y) 2.99; (ii) in
the case of Mr. Norman, one and one-half times the amount of the executive's
total cash compensation in the 12 months preceding the date of termination;
and (iii) in the case of Messrs. da Silva, De George, Geffin, Morelli and
Rottner, the amount of the executive's total cash compensation in the 12
months preceding the date of termination. The agreements provide for
noncompetition, nonsolicitation and nondisclosure covenants. The agreements
also provide for each executive a grant of options under the Plan which will
vest in one-third equal installments over a two-year period, with the first
vesting to occur on the consummation of the Offering and subsequent vesting to
occur on the first and second anniversary dates of the consummation of the
Offering. The options are Incentive Stock Options and provide for an exercise
price of $3.00 per share, subject to adjustment in accordance with the terms
of the Plan. In order for the options to vest, the executive must be an
employee of the Company or its subsidiaries as of the date of vesting, and
according to the terms of the Plan vesting of the options will accelerate and
the options will become immediately exercisable in the event the executive is
terminated by the Company other than for Cause. The number of options granted
to the executives under the Plan pursuant to the employment agreements is as
follows: Mr. Norman--150,000 shares; Messrs. da Silva and Geffin--50,000
shares; Mr. Rottner--30,000 shares; and Messrs. De George, Finkel and
Morelli--25,000 shares.
1996 STOCK OPTION PLAN
The Company has adopted the 1996 Stock Option Plan (the "Plan"), pursuant to
which stock options (both Nonqualified Stock Options and Incentive Stock
Options, as defined in the Plan), stock appreciation rights and restricted
stock may be granted to directors, key employees and consultants (the
"Participants"). The Plan provides for the automatic grant to directors who
are not employees of the Company or its subsidiaries, at such time as an
individual becomes a director of the Company, of Nonqualified Stock Options to
purchase 15,000 shares of Common Stock at an exercise price per share equal to
the greater of $3.00 or the fair market value of the shares on the date of
grant. The directors' options vest in increments of 5,000 shares per year,
commencing
40
<PAGE>
on the date of the Company's annual meeting of stockholders for the election
of directors next following the date such individual became a director and
continuing with each such successive annual meeting provided such person
remains a director of the Company as of such date. The Plan also provides for
the acceleration of the vesting schedule in certain circumstances.
With respect to the grant of awards under than Plan to persons other than
non-employee directors, the committee which is responsible for administering
the Plan (the "Committee") will determine persons to be granted stock options,
stock appreciation rights and restricted stock, the amount of stock or rights
to be optioned or granted to each such person, and the terms and conditions of
any stock options, stock appreciation rights and restricted stock. Both
Incentive Stock Options and Nonqualified Stock Options may be granted under
the Plan. An Incentive Option is intended to qualify as an incentive stock
option within the meaning of Section 422 of the Code. Any Incentive Stock
Option granted under the Plan will have an exercise price of not less than
100% of the fair market value of the shares on the date on which such option
is granted. With respect to an Incentive Stock Option granted to a Participant
who owns more than 10% of the total combined voting stock of the Company of
any parent or Subsidiary of the Company, the exercise price for such option
must be at least 110% of the fair market value of the shares subject to the
option on the date the option is granted. A Nonqualified Stock Option granted
under the Plan (i.e., an option to purchase the Common Stock that does not
meet the Code's requirements for Incentive Options) must have an exercise
price of at least the par value of the stock.
Stock appreciation rights may be granted in conjunction with the grant of an
Incentive or Nonqualified Stock Option under the Plan or independently of any
such stock option. A stock appreciation right granted in conjunction with a
stock option may be an alternative right. In which event, the exercise of the
stock option terminates the stock appreciation right to the extent of the
shares purchased upon exercise of the stock option and, correspondingly, the
exercise of the stock appreciation right terminates the stock option to the
extent of the shares with respect to which such right is exercised.
Alternatively, a stock appreciation right granted in conjunction with a stock
option may be an additional right, in which case both the stock appreciation
right and the stock option may be exercised. A stock appreciation right may
not, however, be granted in conjunction with an Incentive Stock Option under
circumstances in which the exercise of the stock appreciation right affects
the right to exercise the Incentive Stock Option or vice versa, unless certain
terms and conditions are met. Subject to the terms of the Plan, the Committee
may award shares of restricted stock to the Participants. Generally, a
restricted stock award will not require the payment of any option price by the
Participant but will call for the transfer of shares to the Participant
subject to forfeiture, without payment of any consideration by the Company, if
the Participant's employment terminates during a "restricted" period (which
must be at least six months) specified in the award of the restricted stock.
There are 450,000 shares authorized for possible issuance under the Plan. As
of the date of this Prospectus, options to purchase 355,000 of such reserved
shares of Common Stock have been granted with exercise prices of $3.00 per
share.
41
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The table below sets forth information as of the date of this Prospectus.
The table is based on information obtained from the persons named below with
respect to the beneficial ownership of shares of Common Stock by (i) each
person known by the Company to be the owner of more than 5% of the aggregate
outstanding shares of Common Stock; (ii) each director; (iii) the Chief
Executive Officer of the Company; and (iv) all executive officers and
directors as a group. Charles N. Finkel, President and Chief Executive Officer
of the Company and Ensec Inc., and Chief Executive Officer of Ensec, S.A. (the
"Selling Stockholder"), has agreed to sell up to 75,000 shares of Common Stock
in the event the Underwriters' Over-allotment Option is exercised with respect
to a number of shares equal to or greater than 75,000. The Company will not
receive any proceeds from the sale of shares by the Selling Stockholder,
although the Selling Stockholder will pay his pro rata share of the Company's
expenses of the Offering if the Underwriters' Over-allotment Option is
exercised.
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING
COMMON STOCK
BENEFICIALLY OWNED
------------------------------
NUMBER OF SHARES
NAMES AND ADDRESSES OF OF COMMON STOCK SHARES PRIOR TO AFTER
BENEFICIAL OWNERS(1) BENEFICIALLY OWNED TO BE SOLD OFFERING OFFERING(2)
---------------------- ------------------ ---------- ------------ --------------
<S> <C> <C> <C> <C>
Charles N. Finkel....... 3,508,333 1/3(3) 75,000 97.0% 61.0%(3)
James K. Norman......... 50,000(4) -0- 1.4% *
Flavio R. da Silva...... 16,666 2/3(4) -0- * *
All executive officers
and directors as a
group
(5 persons)............ 3,601,666 2/3(5) 75,000 99.5% 62.6%(5)
</TABLE>
- --------
* Less than 1%
(1) The address of each stockholder is 751 Park of Commerce Drive, Suite 104,
Boca Raton, Florida 33487. Unless otherwise indicated, the Company
believes that all persons named in the table have sole voting and
investment power with respect to all shares of Common Stock beneficially
owned by them. A person is deemed to be the beneficial owner of securities
that can be acquired by such person within 60 days from the date of this
Prospectus upon the exercise of options, warrants or convertible
securities and the table above reflects shares of Common Stock which may
be acquired upon the exercise of options granted under the Plan that vest
upon the consummation of the Offering.
(2) Includes in number of shares of Common Stock outstanding 231,250 shares
issuable upon exercise of the Bridge Warrants and 118,333 1/3 shares of
Common Stock which may be acquired upon the exercise of options granted
under the Plan that vest upon the consummation of the Offering (the
"Option Shares"), and excludes (i) 210,000 shares of Common Stock issuable
by the Company upon exercise of the Underwriters' Over-allotment Option in
full; (ii) 2,185,000 shares of Common Stock reserved for issuance upon
exercise of the Redeemable Warrants, including those issuable upon
exercise of the Underwriters' Over-allotment Option in full; (iii) 380,000
shares of Common Stock reserved for issuance upon exercise of the
Underwriters' Warrants and the Redeemable Warrants included therein; and
(iv) 450,000 shares reserved for issuance under the Plan, pursuant to
which options to purchase 355,000 of such reserved shares of Common Stock
have been granted (less the Option Shares already included).
(3) Includes (i) 8,333 1/3 of the Option Shares and (ii) 3,500,000 shares that
are indirectly owned by Mr. Finkel through wholly-owned entities. See
"Certain Relationships and Related Transactions." Mr. Finkel's percentage
ownership, and that of all executive officers and directors as a group,
will be 57.6% and 59.2%, respectively, in the event the Underwriters'
Over-allotment Option is exercised in full.
(4) Consists of shares which may be acquired pursuant to the exercise of
options that vest upon the consummation of the Offering.
(5) Includes 26,666 2/3 of the Option Shares which may be acquired by
executive officers not named in the table set forth above.
42
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May 1996, the Company concluded the Bridge Financing, whereby the Bridge
Investors received in connection therewith $2,500,000 in 10% senior
subordinated notes and warrants to purchase 250,000 shares of Common Stock, of
which warrants to purchase 18,750 of such shares were relinquished by certain
of the Bridge Investors in September 1996. The 231,250 Bridge Warrants
outstanding as of the date of this Prospectus are mandatorily exercisable upon
the consummation of the sale of the securities in this Offering. The Company
received net cash proceeds from the Bridge Financing of approximately
$2,216,000 after giving effect to commissions and expenses.
In July 1996, Charles N. Finkel, the Company's Chief Executive Officer,
deposited $400,000 in a Brazilian bank to secure the guarantee of a $400,000
loan from such bank to the Company. In addition, Mr. Finkel loaned $100,000 to
the Company, which loan bears interest at a rate of 5% per annum. In August
1996, the Company borrowed $500,000 from an individual, through Mr. Finkel,
which debt is due September 30, 1996, and bears interest at a rate of
approximately 5% per month. Repayment of this indebtedness was personally
guaranteed by Mr. Finkel. Such loans shall be repaid in full from the proceeds
of this Offering, at which time the $400,000 deposited by Mr. Finkel shall be
released by the bank.
Of the 3,500,000 shares of Company Common Stock currently issued and
outstanding, 2,500,000 shares are owned by Tecpo and 1,000,000 shares are
owned by Fugrow Investments Inc., a British Virgin Islands corporation
("Fugrow"). Tecpo and Fugrow are wholly-owned by Mayfair Limited Partnership,
a Delaware limited partnership, the sole general partner of which is Mayfair
Company, a Delaware corporation. Charles N. Finkel, President and Chief
Executive Officer of the Company, is the sole limited partner of Mayfair
Limited Partnership and the sole stockholder of Mayfair Company. To the extent
that any of such shares are sold by Mr. Finkel as the Selling Stockholder,
such shares will be sold by Fugrow.
All related party transactions were on terms no less favorable than those
with unaffiliated third parties. All future transactions will be on terms no
less favorable than the Company could obtain based upon negotiations with
unaffiliated third parties in arms-length transactions.
DESCRIPTION OF SECURITIES
The Company is authorized to issue 20,000,000 shares of Common Stock, par
value $.01 per share, and 3,000,000 shares of Preferred Stock, par value $.01
per share. As of the date of this Prospectus, there are 3,500,000 shares of
Common Stock outstanding, held of record by two stockholders, and no shares of
Preferred Stock outstanding.
The following summary description of the Company's Common Stock and
Preferred Stock is qualified in its entirety by reference to the Company's
Articles and Bylaws, copies of which are included as exhibits to the
Registration Statement of which this Prospectus is a part.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights
of any outstanding Preferred Stock. Upon the liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to receive
ratably the net assets of the Company available after the payment of all debts
and other liabilities and subject to the prior rights of any outstanding
Preferred Stock. Holders of Common Stock have no preemptive, subscription,
redemption or conversion rights. The outstanding shares of Common Stock are,
and the shares offered by the Company in this Offering will be, when issued
and paid for, fully paid and
43
<PAGE>
nonassessable. The rights, preferences and privileges of holders of Common
Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of Preferred Stock which the Company may
designate and issue in the future.
PREFERRED STOCK
The Board of Directors has the authority, without further action of the
stockholders of the Company, to issue up to an aggregate of 3,000,000 shares
of Preferred Stock in one or more series and to fix or alter the designations,
preferences, rights and any qualifications, limitations or restrictions of the
shares of each such series 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 designation of such
series.
The Board of Directors, without stockholder approval, can issue Preferred
Stock with voting and conversion rights that could adversely affect the voting
power of holders of Common Stock. The issuance of Preferred Stock may have the
effect of delaying, deferring or preventing a change in control of the
Company. The Company has no present plans to issue any shares of Preferred
Stock.
REDEEMABLE WARRANTS
The Redeemable Warrants will be issued in registered form pursuant to an
agreement, dated the date of this Prospectus (the "Warrant Agreement"),
between the Company, the Underwriters and American Stock Transfer & Trust
Company (the "Warrant Agent"). The following discussion of certain terms and
provisions of the Redeemable Warrants is qualified in its entirety by
reference to the detailed provisions of the Statement of Rights, Terms, and
Conditions for each Redeemable Warrant which forms a part of the Warrant
Agreement. A form of the certificate representing the Redeemable Warrants and
a form of the Warrant Agreement have been filed as exhibits to the
Registration Statement of which this Prospectus is a part.
One Redeemable Warrant represents the right of the registered holder thereof
to purchase one share of Common Stock at an exercise price of $7.00 per share,
subject to adjustment (the "Purchase Price"). The Redeemable Warrants will be
entitled to the benefit of adjustments in their respective Purchase Prices and
in the number of shares of Common Stock and/or other securities deliverable
upon the exercise thereof in the event of a stock dividend, stock split,
reclassification, reorganization, consolidation or merger.
Unless previously called for repurchase, the Redeemable Warrants may be
exercised immediately, until the close of business on September 25, 2001 (five
years from the date of this Prospectus) (the "Expiration Date"). On or after
the Expiration Date, the Redeemable Warrants automatically become wholly void
and of no value. The Company may at any time extend the Expiration Date of all
outstanding Redeemable Warrants, for such increased period of times as it may
determine. The Redeemable Warrants may be exercised at the office of the
Warrant Agent.
The Company has the right at any time beginning September 25, 1997 (one year
from the date of this Prospectus), or such earlier date as the Representative
may determine, to repurchase the Redeemable Warrants at a price of $.10 each,
by written notice mailed 30 days prior to the repurchase date to each
Redeemable Warrant holder at his address as it appears on the books of the
Warrant Agent. Such notice may only be given within three days following any
period of 20 consecutive trading days during which the high closing bid or
trading price of the shares of Common Stock (if then traded on the Nasdaq-SCM
or on a national securities exchange) equals or exceeds $10.50 per share,
subject to adjustments for stock dividends, stock splits and the like. If
Redeemable Warrants are called for repurchase, they must be exercised prior to
the close of business on the day immediately preceding the date of any such
repurchase or the right to purchase the applicable shares of Common Stock is
forfeited.
44
<PAGE>
No Redeemable Warrant will be exercisable unless at the time of exercise the
Company had filed with the Commission a current prospectus covering the shares
of Common Stock issuable upon exercise of such Redeemable Warrant and such
shares of Common Stock have been registered or qualified or deemed to be
exempt under the securities laws of the state of residence of the holder of
such Redeemable Warrant. The Company will use its best efforts to have all
such shares of Common Stock so registered or qualified on or before the
exercise date and to maintain a current prospectus relating thereto until the
expiration of the Redeemable Warrants, subject to the terms of the Warrant
Agreement. While it is the Company's intention to do so, there is no assurance
that it will be able to do so.
No holder, as such, of Redeemable Warrants shall be entitled to vote or
receive dividends or be deemed the holder of shares of Common Stock for any
purposes whatsoever until such Redeemable Warrants have been duly exercised
and the Purchase Price has been paid in full.
TRANSFER AND WARRANT AGENT
The Company's transfer agent and registrar for the Common Stock and Warrant
Agent for the Redeemable Warrants is American Stock Transfer & Trust Company.
LIMITED LIABILITY AND INDEMNIFICATION
Under the FBCA, a director is not personally liable for monetary damages to
the corporation or any other person for any statement, vote, decision, or
failure to act unless (i) the director breached or failed to perform his
duties as a director and (ii) the director's breach of, or failure to perform,
those duties constitutes: (1) a violation of the criminal law, unless the
director had reasonable cause to believe his conduct was lawful or had no
reasonable cause to believe his conduct was unlawful, (2) a transaction from
which the director derived an improper personal benefit, either directly or
indirectly, (3) a circumstance under which an unlawful distribution is made,
(4) in a proceeding by or in the right of the corporation to procure a
judgment in its favor or by or in the right of a stockholder, conscious
disregard for the best interest of the corporation or willful misconduct, or
(5) in a proceeding by or in the right of someone other than the corporation
or stockholder, recklessness or an act or omission which was committed in bad
faith or with malicious purpose or in a manner exhibiting wanton and willful
disregard of human rights, safety, or property. A corporation may purchase and
maintain insurance on behalf of any director or officer against any liability
asserted against him or her and incurred by him or her in his or her capacity
or arising out of his or her status as such, whether or not the corporation
would have the power to indemnify him or her against such liability under the
FBCA.
The Articles of the Company provide that the Company shall, to the fullest
extent permitted by applicable law, as amended from time to time, indemnify
all officers and directors of the Company.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
FLORIDA LAW AND CERTAIN ARTICLES OF INCORPORATION AND BYLAW PROVISIONS
The Company is subject to (i) Section 607.0901 of the FBCA, which generally
requires supermajority approval by disinterested directors or stockholders of
certain specified transactions between a corporation and holders of more than
10% of the outstanding shares of the corporation (or their affiliates), and
(ii) Section 607.0902 of the FBCA, which generally provides that shares
acquired in excess of certain specified thresholds will not possess any voting
rights unless such voting rights are approved by a majority vote of the
corporation's disinterested stockholders.
In addition, certain provisions of the Company's Articles summarized in the
following paragraphs may be deemed to have an anti-takeover effect and may
delay, defer or prevent a tender offer or takeover attempt that a
45
<PAGE>
stockholder might consider in its best interest, including those attempts that
might result in a premium over the market price for the shares held by
stockholders.
Classified Board of Directors. The Articles provide for the Board of
Directors to be divided into three classes of directors serving staggered
three-year terms. As a result, approximately one-third of the Board of
Directors will be elected each year. These provisions, when coupled with the
provision of the Articles authorizing only the Board of Directors to fill
vacant directorships or increase the size of the Board, may deter a
stockholder from removing incumbent directors and simultaneously gaining
control of the Board of Directors by filling the vacancies created by such
removal with its own nominees.
Stockholder Action. The Articles provide that stockholders may not take
action by written consent, but only at duly called annual or special meetings
or stockholders.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The Articles provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for
election as directors at an annual or special meeting of stockholders, must
provide timely notice thereof in writing. To be timely, a stockholder's notice
must be delivered to or mailed and received at the principal executive offices
of the Company not less than 120 days nor more than 180 days prior to the date
of the Company's notice of annual meeting provided with respect to the
previous year's annual meeting; provided, however, that if no annual meeting
was held in the previous year or the date of the annual meeting has been
changed to be more than 30 calendar days earlier than the date contemplated by
the previous year's proxy statement, notice by the stockholder, to be timely,
must be received no later than the close of business on the 10th day following
the day on which such notice of the date of the meeting was mailed or such
public disclosure was made, whichever is first. The Articles also specify
certain requirements for a stockholder's notice to be in proper written form.
These provisions may preclude stockholders from bringing matters before the
stockholders at an annual or special meeting or from making nominations for
directors at an annual or special meeting.
Authorized But Unissued Shares. The authorized but unissued shares of Common
Stock and Preferred Stock are available for future issuance without
stockholder approval. These additional shares may be utilized for a variety of
corporate purposes, including future public offerings to raise additional
capital, corporate acquisitions and employee benefit plans. The existence of
authorized but unissued and unreserved Common Stock and Preferred Stock may
enable the Board of Directors to issue shares to persons friendly to current
management which could render more difficult or discourage an attempt to
obtain control of the Company by means of a proxy contest, tender, offer,
merger or otherwise, and thereby protect the continuity of the Company's
management.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
5,631,250 shares of Common Stock, after giving effect to the 231,250 shares of
Common Stock issuable upon exercise of the Bridge Warrants but without giving
effect to shares of Common Stock issuable upon exercise of (i) the Redeemable
Warrants, (ii) the Underwriters' Warrants, (iii) the Underwriters' Over-
allotment Option, or (iv) options granted under the Plan. Of such 5,631,250
shares of Common Stock, 2,131,250 shares, consisting of 1,900,000 shares to be
sold by the Company in this Offering plus 231,250 to be issued upon exercise
of the Bridge Warrants (plus any additional shares sold upon the exercise of
the Underwriters' Over-allotment Option), will be freely tradeable without
restriction or further registration under the Act, except for any shares held
by "affiliates" of the Company within the meaning of the Act which shares will
be subject to the resale limitations of Rule 144 promulgated under the Act.
The Bridge Investors have agreed with the Representative not to sell or
otherwise dispose of any of the shares of Common Stock issuable upon exercise
of the Bridge Warrants for a period of 12 months after the date of the
consummation of the Offering and exercise of the Bridge Warrants.
46
<PAGE>
The remaining 3,500,000 Restricted Shares were issued by the Company in
private transactions in reliance upon one or more exemptions contained in the
Act. The Restricted Shares are deemed to be "restricted securities" within the
meaning of Rule 144 promulgated pursuant to the Act and may be publicly sold
only if registered under the Act or sold pursuant to exemptions therefrom. As
of the date of this prospectus, all of the Restricted Shares will have been
held for more than two years and are eligible for public sale in accordance
with the requirements of Rule 144, as described below. Mr. Charles N. Finkel,
President and Chief Executive Officer of the Company and beneficial owner of
all shares of Common Stock outstanding immediately prior to the Offering,
however, has agreed with the Representative not to offer, sell, contract to
sell or otherwise dispose of any of his shares for a period of 24 months after
the date of this Prospectus, without the Representative's consent. In
addition, Mr. Finkel has agreed with the Representative not to offer, sell,
contract to sell or otherwise dispose of 800,000 shares of Common Stock
beneficially owned by him for a period of ten years after the date of this
Prospectus, without the Representative's consent; provided, however, that such
restrictions will be released with respect to 500,000 of such shares if the
Company reports income before income taxes in excess of $4,000,000 for fiscal
1997 and with respect to the remaining 300,000 shares if the Company reports
income before income taxes in excess of $7,000,000 for fiscal 1998. The
Representative may, in its sole discretion, and at any time without notice,
release all or any portion of the shares owned by Mr. Finkel from such
restrictions.
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company (or persons whose shares are aggregated with an affiliate), who
has owned restricted shares of Common Stock beneficially for at least two
years is entitled to sell, within any three-month period, a number of shares
that does not exceed the greater of 1% of the total number of outstanding
shares of the same class or, if the common stock is quoted on Nasdaq-SCM, the
average weekly trading volume during the four calendar weeks preceding the
sale. A person who has not been an affiliate of the Company for at least three
months immediately preceding the sale and who has beneficially owned shares of
the Company for at least three years is entitled to sell such shares under
Rule 144 without regard to any of the limitations described above. The
Commission is currently considering a proposal to reduce the Rule 144 holding
period for restricted securities to one year.
The Company intends to file a registration statement under the Securities
Act to register shares of Common Stock reserved for issuance under the Plan,
thereby permitting the resale of such shares by non-affiliates in the public
market without restriction under the Securities Act. The Company has reserved
up to 450,000 shares of Common Stock for issuance under the Plan. As of the
date of this Prospectus, options to purchase 355,000 of such reserved shares
of Common Stock were outstanding under the Plan. See "Management--1996 Stock
Option Plan."
Prior to this Offering, there has been no public market for the Common Stock
or the Redeemable Warrants, and no predictions can be made as to the effect,
if any, that sales of the Common Stock under Rule 144 will have on the market
price of such securities from time to time. Sales of substantial amounts of
the Company's securities in the public market could have a significant adverse
effect on prevailing market prices and could impair the Company's future
ability to raise capital through the sale of its equity securities. See "Risk
Factors--Shares Eligible for Future Sale."
47
<PAGE>
CONCURRENT REGISTRATION OF COMMON STOCK
The 231,250 shares of Common Stock issuable upon the exercise of the Bridge
Warrants are also being registered in connection with this Offering and are
covered by a Bridge Investors Prospectus included in the Registration
Statement of which this Prospectus forms a part. Warrants to purchase 250,000
shares of Common Stock were issued to the Bridge Investors in connection with
the Company's May 1996 Bridge Financing, of which warrants to purchase 18,750
of such shares were relinquished by certain of the Bridge Investors in
September 1996. According to the terms of the Bridge Financing, the Company
agreed to register the shares underlying the Bridge Warrants concurrently with
this Offering and pay all expenses in connection therewith (other than
brokerage commissions and fees and expenses of counsel). The Company also
agreed to maintain an effective registration statement and current prospectus
covering the issuance and public sale of shares of Common Stock issuable upon
exercise of the Bridge Warrants for a period of 18 months from the
consummation of this Offering. None of the Bridge Investors holds any position
or office with the Company or has any other material relationship with the
Company. The Company will not receive any proceeds from the sale of shares by
the Bridge Investors.
The Common Stock issuable to the Bridge Investors upon exercise of the
Bridge Warrants may, commencing 12 months from the date of this Prospectus, be
offered and sold from time to time as market conditions permit in the over-
the-counter market, or otherwise, at prices and terms then prevailing or at
prices related to the then-current market price, or in negotiated
transactions. Such shares offered hereby may be sold by one or more of the
following methods, without limitation: (a) a block trade in which a broker or
dealer so engaged will attempt to sell the shares as agent but may position
and resell a portion of the block as principal to facilitate the transaction;
(b) purchases by a broker or dealer as principal and resale by such broker or
dealer for its account pursuant to this Prospectus; (c) ordinary brokerage
transactions and transactions in which the broker solicits purchasers; and (d)
face-to-face transactions between sellers and purchasers without a broker-
dealer. In effecting sales, brokers or dealers engaged by the Bridge Investors
may arrange for other brokers or dealers to participate. Such brokers or
dealers may receive commissions or discounts from Bridge Investors in amounts
to be negotiated. Such brokers or dealers and any other participating brokers
or dealers may be deemed to be "underwriters" within the meaning of the
Securities Act, in connection with such sales.
48
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement among the
Company and the Underwriters, the Company has agreed to sell to the
Underwriters named below, for whom Rickel and Associates, Inc. is acting as
representative (in such capacity, the "Representative"), and the Underwriters
have severally, and not jointly, agreed to purchase, the number of Securities
set forth opposite their respective names below.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER
----------- ---------
<S> <C>
Rickel & Associates, Inc. ................... 1,400,000
Janssen-Meyers Associates, L.P. ............. 500,000
---------
Total...................................... 1,900,000
=========
</TABLE>
The underwriting agreement between the Company and the Underwriters (the
"Underwriting Agreement") provides that the obligations of the Underwriters
are subject to certain conditions precedent. The Underwriters are committed to
purchase the above Securities if any are purchased.
The Representative has advised that the Underwriters propose initially to
offer the 1,900,000 shares of Common Stock and 1,900,000 Redeemable Warrants
to the public at the initial public offering prices set forth on the cover
page of this Prospectus and that it may allow to selected dealers who are
members of the NASD concessions not in excess of $.20 per share of Common
Stock and $.00 per Redeemable Warrant, of which not more than $.10 per share
of Common Stock and $.00 per Redeemable Warrant may be re-allowed to certain
other dealers. After the Offering, the offering price and other selling terms
may be changed by the Representative.
The Underwriting Agreement provides further that the Representative will
receive from the Company a non-accountable expense allowance of 3% of the
gross proceeds of the Offering (of which the Selling Stockholder will pay his
pro rata share upon exercise of the Underwriters' Over-allotment Option). The
Company has also agreed to pay all expenses in connection with qualifying the
shares of Common Stock and the Redeemable Warrants offered hereby for sale
under the laws of such states as the Representative may designate, including
expenses of counsel retained for such purpose by the Underwriters.
Pursuant to the Underwriters' Over-allotment Option, which is exercisable
for a period of 45 days after the closing of the Offering, the Underwriters
may purchase up to 15% of the total number of shares of Common Stock (of which
the first 75,000 shares will be purchased from the Selling Stockholder) and
Redeemable Warrants offered hereby, solely to cover over-allotments.
The Company has agreed to sell to the Underwriters, for nominal
consideration, the Underwriters' Warrants to purchase 190,000 shares of Common
Stock and 190,000 Redeemable Warrants. The Underwriters' Warrants will be
nonexercisable for one year after the date of this Prospectus. Thereafter, for
a period of four years, the Underwriters' Warrants will be exercisable at an
amount equal to 165% of the offering price of the Common Stock and Redeemable
Warrants sold in this Offering. The Underwriters' Warrants are not
transferable for a period of one year after the date of this Prospectus,
except to officers of the Underwriters, members of the selling group and their
officers and partners. The Company has also granted certain demand and
"piggyback" registration rights to the holders of the Underwriters' Warrants.
For the life of the Underwriters' Warrants, the holders thereof are given,
at nominal cost, the opportunity to profit from a rise in the market price of
the Common Stock with a resulting dilution in the interest of other
stockholders. Further, such holders may be expected to exercise the
Underwriters' Warrants at a time when the Company would in all likelihood be
able to obtain equity capital on terms more favorable than those provided in
the Underwriters' Warrants.
The Company has agreed, for a period of 24 months after the date of this
Prospectus, not to issue any shares of Common Stock or preferred stock, or any
warrants, options or other rights to purchase Common Stock or
49
<PAGE>
preferred stock, without the prior written consent of the Representative.
Notwithstanding the foregoing, the Company may issue shares of Common Stock
upon exercise of any warrants or convertible securities outstanding on the
date hereof or to be outstanding upon closing of the Offering as described
herein. Subject to certain exceptions, Mr. Charles N. Finkel, the beneficial
owner of all of the Company's capital stock, has agreed not to sell or
otherwise dispose of any shares of Common Stock for a period of up to 24
months following the date of this Prospectus, without the prior written
consent of the Representative. The Bridge Investors have agreed not to sell or
otherwise dispose of any of the shares of Common Stock issuable upon exercise
of the Bridge Warrants for a period of 12 months after the date of the
consummation of the Offering and exercise of the Bridge Warrants. See "Shares
Eligible for Future Sale."
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriters against liabilities in connection with the
Offering, including liabilities under the Securities Act.
The Company has agreed that upon closing of the Offering it will, for a
period of not less than three years, engage a designee of the Representative
as an advisor to the Board. In addition and in lieu of the Representative's
right to designate an advisor, the Company has agreed, if requested by the
Representative during such three-year period, to nominate and use its best
efforts to cause the election of a designee of the Representative as a
director of the Company.
The Underwriters intend to act as market makers for the Common Stock and the
Redeemable Warrants after the closing of the Offering.
Commencing one year after the date of this Prospectus, until the expiration
of the exercise period of the Redeemable Warrants, the Company will pay the
Representative a fee of 5% of the exercise price of each Redeemable Warrant
exercised, provided (i) the market price of the Common Stock on the date the
Redeemable Warrant was exercised was greater than the Redeemable Warrant
exercise price on that date, (ii) the exercise price of the Redeemable Warrant
was solicited by a member of the NASD, (iii) the Redeemable Warrant was not
held in a discretionary account, (iv) the disclosure of compensation
arrangements was made both at the time of the Offering and at the time of
exercise of the Redeemable Warrant, (v) the solicitation of the exercise of
the Redeemable Warrant was not a violation of Rule 10b-6 under the Exchange
Act and (vi) the Representative is designated in writing as the soliciting
NASD member. Unless granted an exemption from Rule 10b-6 under the Exchange
Act by the Commission, the Representative and any other soliciting
broker/dealers will be prohibited from engaging in any market making
activities or solicited brokerage activities with regard to the Company's
securities during the periods prescribed by exemption (xi) to Rule 10b-6
before the solicitation of the exercise of any Redeemable Warrant until the
later of the termination of such solicitation activity or the termination of
any right the Representative and any other soliciting broker/dealer may have
to receive a fee for the solicitation of the exercise of the Redeemable
Warrants.
The Representative acted as placement agent for the Company pursuant to the
Bridge Financing and received a commission of $160,000 for its services and a
non-refundable, non-accountable expense allowance of $40,000.
The initial public offering price of the shares of Common Stock and the
Redeemable Warrants offered hereby and the initial exercise price and the
other terms of the Redeemable Warrants have been determined by negotiation
between the Company and the Underwriters and do not necessarily bear any
direct relationship to the Company's assets, earnings, book value per share or
other generally accepted criteria of value. Factors considered in determining
the offering price of the shares of Common Stock and Redeemable Warrants and
the exercise price of the Redeemable Warrants included the business in which
the Company is engaged, the Company's financial condition, an assessment of
the Company's management, the general condition of the securities markets and
the demand for similar securities of comparable companies. In addition, the
Company and the Underwriters considered the anticipated initial public
offering price for the Common Stock in determining the exercise price of the
Redeemable Warrants.
50
<PAGE>
The foregoing includes a summary of the principal terms of the Underwriting
Agreement and does not purport to be complete. Reference is made to the copy
of the Underwriting Agreement filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
LEGAL MATTERS
The validity of the securities offered by this Prospectus will be passed
upon for the Company by Gunster, Yoakley, Valdes-Fauli & Stewart, P.A., West
Palm Beach, Florida. Parker Chapin Flattau & Klimpl, LLP, New York, New York,
has acted as counsel to the Underwriters with respect to this Offering.
EXPERTS
The consolidated financial statements of the Company for the two years in
the period ended December 31, 1995 are included herein and in this
Registration Statement in reliance upon the report of Grant Thornton LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form SB-2 under the Act
with the Securities and Exchange Commission with respect to the Common Stock
and Redeemable Warrants offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement and the exhibits
thereto: certain portions have been omitted pursuant to rules and regulations
of the Commission. Statements contained in this Prospectus as to the contents
of any contract or other document are not necessarily complete and, in each
instance, reference is made to the copy of such contract or document filed as
an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference. The Registration Statement, including the
exhibits and schedules thereto, may be inspected without charge, at the Public
Reference Facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, 1400 Citicorp Center, 500 West Madison, Chicago,
Illinois 60661; and 7 World Trade Center, New York, New York 10048 and copies
of all or any part thereto may be obtained upon payment of the fees prescribed
by the Commission. Electronic registration statements made through the
Electronic Data Gathering, Analysis and Retrieval System are publicly
available through the Commission's World Wide Web site at http://www.sec.gov.
51
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
-----------
<S> <C>
Report of Independent Certified Public Accountants.................. F-2
Consolidated Balance Sheets......................................... F-3
Consolidated Statements of Operations............................... F-4
Consolidated Statement of Stockholders' Equity...................... F-5
Consolidated Statements of Cash Flows............................... F-6
Notes to Consolidated Financial Statements.......................... F-7 to F-16
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors
Ensec International, Inc.
We have audited the accompanying consolidated balance sheets of Ensec
International, Inc. and Subsidiaries (the "Company") as of December 31, 1994
and 1995, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years then ended. 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 consolidated financial position of Ensec
International, Inc. as of December 31, 1994 and 1995, and the consolidated
results of their operations and their consolidated cash flows for the years
then ended in conformity with generally accepted accounting principles.
Grant Thornton LLP
Fort Lauderdale, Florida
April 12, 1996 (except for Note N,
as to which the date is May 15, 1996)
F-2
<PAGE>
ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1994 1995 1996
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets
Cash and cash equivalents............. $ 1,906,012 $ 239,031 $ 83,929
Short-term investments................ -- 922,775 936,000
Accounts receivable (less allowance
for doubtful accounts of $96,000,
$115,000 and $115,000 in 1994, 1995
and 1996, respectively).............. 2,085,000 1,747,550 1,876,953
Inventory............................. 438,788 856,882 1,169,883
Net current assets of discontinued
operations (Note M).................. 291,000 225,000 --
Other current assets (Note D)......... 412,774 342,652 440,151
----------- ----------- -----------
Total current assets................ 5,133,574 4,333,890 4,506,916
Property and equipment, net (Note E).... 3,557,258 2,649,913 2,510,996
Other assets
Capitalized software costs, net....... 2,917,000 3,825,000 3,903,000
Deferred income taxes (Note K)........ 40,000 -- --
Refundable income taxes............... 70,000 74,000 237,000
Deferred offering costs............... -- -- 118,960
Deferred financing costs.............. -- -- 167,902
Net other assets of discontinued
operations (Note M).................. 6,000 5,000 --
Other assets.......................... 44,957 66,400 75,408
----------- ----------- -----------
Total assets........................ $11,768,789 $10,954,203 $11,520,182
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable (Note G)................ $ 493,000 $ 2,120,000 $ 2,240,000
Senior subordinated notes (Note N).... -- -- 1,879,300
Due to related party.................. 8,227 -- --
Lines of credit (Note H).............. -- 268,774 564,061
Accounts payable...................... 656,486 978,070 1,008,958
Accrued and other liabilities (Note
F)................................... 1,631,782 980,384 1,450,906
Dividends payable..................... 277,043 300,647 291,509
Current portion of long-term debt..... 578,000 1,191,000 1,826,000
----------- ----------- -----------
Total current liabilities........... 3,644,538 5,838,875 9,260,734
----------- ----------- -----------
Long-term debt, less current portion
(Note I)............................... 1,696,000 3,209,000 2,124,000
Deferred income taxes................... 1,023,000 319,000 --
Commitments and contingencies (Note J).. -- -- --
Stockholders' equity
Preferred stock, authorized 3,000,000
shares at $.01
par value; issued and outstanding, 0
shares at
December 31, 1994 and 1995 and at
June 30, 1996........................ -- -- --
Common stock, authorized 20,000,000
shares at $0.01 par value; issued and
outstanding, 3,500,000 shares at
December 31, 1994 and 1995 and at
June 30, 1996, respectively.......... 35,000 35,000 35,000
Additional paid-in capital............ 3,434,501 3,434,501 4,077,205
Retained earnings (accumulated
deficit)............................. 1,935,750 (1,882,173) (3,976,757)
----------- ----------- -----------
Total stockholders' equity.......... 5,405,251 1,587,328 135,448
----------- ----------- -----------
Total liabilities and stockholders'
equity............................. $11,768,789 $10,954,203 $11,520,182
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ------------------------
1994 1995 1995 1996
----------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Sales..................... $ 8,539,633 $ 8,560,815 $ 4,379,730 $ 4,729,065
Cost of goods sold........ 2,575,433 5,833,695 3,442,169 2,707,542
Gross profit.............. 5,964,200 2,727,120 937,561 2,021,523
Selling, general and
administrative expenses.. 4,153,186 5,287,938 3,378,107 2,645,967
Research and development
expenses................. 276,000 600,000 171,000 432,000
Translation loss (gain)... 1,978,482 1,229,960 (799,848) 219,000
----------- ------------ ----------- -----------
Loss from operations.. 443,468 (4,390,778) (1,811,698) (1,275,444)
Other (income) expenses
Interest income......... (1,614,000) (648,341) (575,587) (24,133)
Interest expense........ 508,000 2,519,517 1,015,365 1,175,197
Other, net.............. 592,968 395,329 532,374 (15,924)
----------- ------------ ----------- -----------
(513,032) 2,266,505 972,152 1,135,140
----------- ------------ ----------- -----------
Earnings (loss) from
continuing operations
before income taxes.. 69,564 (6,657,283) (2,783,850) (2,410,584)
Income tax (benefit) ex-
pense (Note K)........... 369,208 (1,395,857) (220,993) (316,000)
----------- ------------ ----------- -----------
Loss from continuing
operations........... (299,644) (5,261,426) (2,562,857) (2,094,584)
----------- ------------ ----------- -----------
Discontinued operations
(Note M):
Earnings from operations
of discontinued
division (less
applicable income taxes
of $255,792, $208,773
and $163,993 in 1994,
1995 and for the six
months ended June 30,
1995, respectively).... 533,690 435,587 342,159 --
Gain on disposal of
discontinued division
(less applicable income
taxes of $483,084)..... -- 1,007,916 -- --
----------- ------------ ----------- -----------
Net earnings (loss)... $ 234,046 $ (3,817,923) $(2,220,698) $(2,094,584)
=========== ============ =========== ===========
Net earnings (loss) per
common share:
Continuing operations... $ (.08) $ (1.35) $ (.66) $ (.54)
Discontinued
operations............. .14 .37 .09 --
----------- ------------ ----------- -----------
Net earnings (loss) per
common share............. $ .06 $ (.98) $ (.57) $ (.54)
=========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
TWO YEARS ENDED DECEMBER 31, 1995
AND SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS
----------------- PAID-IN (ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT) TOTAL
--------- ------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Balance at January 1,
1994................... 3,500,000 $35,000 $3,434,501 $ 1,701,704 $5,171,205
Net earnings............ -- -- -- 234,046 234,046
--------- ------- ---------- ----------- ----------
Balance at December 31,
1994................... 3,500,000 35,000 3,434,501 1,935,750 5,405,251
Net loss................ -- -- -- (3,817,923) (3,817,923)
--------- ------- ---------- ----------- ----------
Balance at December 31,
1995................... 3,500,000 35,000 3,434,501 (1,882,173) 1,587,328
Net loss (unaudited).... -- -- -- (2,094,584) (2,094,584)
Warrants issued (Note
N)..................... -- -- 642,704 -- 642,704
--------- ------- ---------- ----------- ----------
Balance at June 30, 1996
(unaudited)............ 3,500,000 $35,000 $4,077,205 $(3,976,757) $ 135,448
========= ======= ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ ------------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net earnings (loss)....... $ 234,046 $(3,817,923) $(2,220,698) $(2,094,584)
Adjustments to reconcile
net earnings (loss) to
net cash provided by
(used in) operating ac-
tivities:
Depreciation and amorti-
zation expense.......... 935,312 674,832 342,873 525,172
(Gain) on sale of divi-
sion.................... -- (1,491,000) -- --
Changes in assets and
liabilities:
(Increase) in short-term
investments............ -- (922,775) -- (13,225)
Decrease (increase) in
accounts receivable.... (898,773) 337,450 860,065 184,290
Decrease (increase) in
inventories............ 143,617 (418,094) (183,038) (166,001)
Decrease (increase) in
other current assets... (278,835) 70,122 96,000 (160,151)
Decrease in net assets
of discontinued opera-
tions.................. (148,000) 67,000 (22,000) --
Decrease (increase) in
other assets........... (57,432) 15,557 28,467 (497,450)
Increase (decrease) in
accounts payable....... 377,289 321,585 40,148 (138,315)
Increase (decrease) in
accrued and other lia-
bilities............... 1,546,713 (1,144,795) (616,670) 81,388
----------- ----------- ----------- -----------
Net cash provided by
(used in) operating
activities........... 1,853,937 (6,308,041) (1,674,853) (2,278,876)
Cash flows from investing
activities:
Computer software costs... (1,689,000) (1,202,000) (682,000) (372,000)
Proceeds from sale of
fixed assets............. -- 575,000 -- --
Proceeds from sale of
currency sorting equip-
ment..................... -- 1,812,000 -- --
Purchase of fixed as-
sets..................... (284,676) (181,487) (143,680) (16,673)
----------- ----------- ----------- -----------
Net cash (used in)
provided by investing
activities........... (1,973,676) 1,003,513 (825,680) (388,673)
Cash flows from financing
activities:
Net borrowings (repay-
ments) under credit line
agreements............... (147,146) 268,774 50,000 295,287
Net borrowings from af-
filiates................. 771,000 8,228 -- --
Net borrowings (repay-
ments) under loan agree-
ments.................... 1,394,000 3,753,000 1,029,521 (121,840)
Proceeds from issuance of
senior subordinated
notes.................... -- -- -- 2,500,000
----------- ----------- ----------- -----------
Net cash provided by fi-
nancing activities....... 2,017,854 4,030,002 1,079,521 2,673,447
----------- ----------- ----------- -----------
Net increase (decrease) in
cash and cash equiva-
lents..................... 1,898,115 (1,274,526) (1,421,012) 5,898
Translation (loss) gain on
cash and cash equiva-
lents..................... (812,000) (392,455) (459,000) (161,000)
Cash and cash equivalents
at beginning of year...... 819,897 1,906,012 1,906,012 239,031
----------- ----------- ----------- -----------
Cash and cash equivalents
at end of year............ $ 1,906,012 $ 239,031 $ 26,000 $ 83,929
=========== =========== =========== ===========
Supplemental disclosure of
cash flow information:
Cash paid during the period
for:
Interest.................. $ 296,000 $ 1,175,517 $ 101,000 $ 222,000
=========== =========== =========== ===========
Income taxes.............. $ 35,000 $ 48,000 $ 44,000 $ --
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TWO YEARS ENDED DECEMBER 31, 1995
AND SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(INFORMATION RELATING TO THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)
NOTE A--SUMMARY OF ACCOUNTING POLICIES
Ensec International, Inc. and Subsidiaries (the "Company") designs,
develops, assembles and sells integrated security systems. Ensec
International, Inc. has two wholly-owned subsidiaries, Ensec Engenharia e
Sistemas de Seguranca S.A. ("Ensec, S.A."), a Brazilian corporation, and Ensec
Inc., a Florida corporation. All intercompany transactions have been
eliminated in consolidation.
Of the 3,500,000 shares of Company common stock currently issued and
outstanding 2,500,000 are owned by Tecpo Comercio E Representacoes Ltda., a
Brazilian limited liability company ("Tecpo"), and 1,000,000 shares are owned
by Fugrow Investments Inc., a British Virgin Islands corporation ("Fugrow").
Tecpo and Fugrow are wholly-owned by Mayfair Limited Partnership, a Delaware
limited partnership, the sole general partner of which is Mayfair Company, a
Delaware corporation. Charles N. Finkel, President and Chief Executive Officer
of the Company, is the sole limited partner of Mayfair Limited Partnership and
the sole stockholder of Mayfair Company.
A summary of the significant accounting policies applied in the preparation
of the accompanying financial statements follows.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Short-Term Investments
The short-term investment at December 31, 1995, consists of a certificate of
deposit which is restricted because it is pledged as a performance guarantee
under a contract. The Company expects the certificate of deposit to be
partially released in July 1996 when the contract is substantially completed,
and the remainder to be released in September 1996.
Inventories
Inventories are stated at the lower of cost or market based on a first-in,
first-out basis. Inventories are comprised of the following:
<TABLE>
<CAPTION>
JUNE 30,
1994 1995 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Parts and supplies............................ $438,788 $369,028 $ 280,500
Inventory applicable to contracts in progress,
net of billings of $0, $1,002,341 and
$1,823,833 in 1994, 1995 and 1996,
respectively................................. -- 487,854 889,383
-------- -------- ----------
$438,788 $856,882 $1,169,883
======== ======== ==========
</TABLE>
F-7
<PAGE>
ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Depreciation
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives. The
straight-line method of depreciation is followed for financial reporting
purposes. The useful lives are as follows:
<TABLE>
<S> <C>
Equipment................................................. 5 to 10 years
Furniture and fixtures.................................... 5 to 10 years
</TABLE>
Income Taxes
Deferred taxes have been provided on temporary differences in reporting
certain transactions for financial accounting and tax purposes. Under the
liability method, deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases of assets and
liabilities as measured by the current enacted tax rates which will be in
effect when these differences reverse. Deferred tax expense is the result of
changes in deferred tax assets and liabilities.
Use of Estimates
In preparing the Company's financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
The Company's estimates of the percentage of completion on contracts are
based on management's best estimate of total costs to be incurred. However,
the actual results may be different from management's estimates.
Fair Value of Financial Instruments
The financial statements include various estimated fair value information at
December 31, 1994 and 1995 and at June 30, 1996, as required by Statement of
Financial Accounting Standards 107, "Disclosures about Fair Value of Financial
Instruments." Such information, which pertains to the Company's financial
instruments, is based on the requirements set forth in that Statement and does
not purport to represent the aggregate net fair value to the Company.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash, Cash Equivalents and Short-Term Investments: The carrying amount
approximates fair value because of the short-term maturity of those
instruments.
Receivables and Payables: The carrying amounts approximate fair value
because of the short maturity of those instruments.
Debt, Lines of Credit and Notes Payable: The carrying amounts of debt,
lines of credit and notes payable approximate fair value due to the length
of the maturities, the interest rates being tied to market indices and/or
due to the interest rates not being significantly different from the
current market rates available to the Company.
All of the Company's financial instruments are held for purposes other than
trading.
F-8
<PAGE>
ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition
Revenue is recognized upon delivery and acceptance for normal product sales,
which are those systems which do not require significant software
customization and are completed within relatively short time-frames. Revenues
from those turnkey systems that require significant customization are
recognized as contract revenues under the percentage of completion method.
Earned revenue is based on the percentage that incurred costs to date bear to
total estimated costs after giving effect to the most recent estimates of
total cost. The cumulative impact of revisions in total cost estimates during
the progress of work is reflected in the year in which these changes become
known. Earned revenue reflects the original contract price adjusted for agreed
upon claim and change order revenue, if any. Progress billings in accounts
receivable are currently due in accordance with the contract terms. Revenue
received under maintenance contracts is recognized over the term of the
related agreements.
Research and Development
Research and development cost in connection with the development of the
Company's computerized security systems software are expensed as incurred
until technological feasibility has been established at which time these costs
are capitalized.
Capitalized Software Costs
The Company capitalized costs incurred for internally developed software to
be sold, leased, or otherwise marketed where economic and technological
feasibility has been established. Capitalized software costs are amortized
over the estimated economic useful life of the software product (7 years).
Capitalized software costs amounted to $2,917,000 and $4,119,000 at December
31, 1994 and 1995, respectively. Accumulated amortization at December 31, 1994
and 1995, amounted to $0 and $294,000, respectively. Costs of product
enhancements are capitalized and amortized over the remaining life of the
product.
Deferred Financing and Offering Costs
As described in Note N, the Company successfully completed a private
placement of senior subordinated notes in May 1996. In connection with the
private placement, the Company incurred $201,482 of financing costs as of June
30, 1996. These costs are amortized as interest expense over the life of the
senior subordinated notes. The accumulated amortization at June 30, 1996 is
$33,580.
At June 30, 1996, the Company has incurred costs aggregating $167,902 in
connection with the expected public offering of the Company's Common Stock and
Redeemable Warrants as described in Note L. The Company is deferring these
costs until the closing of the public offering at which time these costs will
be charged against paid-in capital.
Impairment of Assets
The Company periodically assesses the realizability of the capitalized
software costs. This assessment includes calculations of the estimated future
gross profits to be realized from product sales as well as consideration of
changes in hardware and software technology.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121). SFAS 121
requires that long-lived assets and certain identifiable intangibles held
F-9
<PAGE>
ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. There was no material impact from the adoption of the provisions
of SFAS 121 in the first quarter of 1996.
Foreign Currency Translation
Ensec, S.A. operates in a highly inflationary country (Brazil). As a result,
the U.S. dollar is considered the functional currency and a combination of
current and historical rates is used in translating assets and liabilities.
The related exchange adjustments are included in operations.
The adjustments to reflect the effects of inflation, which are required by
generally accepted accounting principles in Brazil, have been eliminated in
these translated financial statements to conform them with generally accepted
principles in the United States.
Interim Financial Information
The financial statements at June 30, 1996 and for the six month periods
ended June 30, 1995 and 1996 are unaudited and prepared on the same basis as
the audited consolidated financial statements included herein. In the opinion
of management, such interim financial statements include all adjustments
(consisting of normal recurring adjustments) necessary to present fairly the
results for such periods. The results of operations for the six months ended
June 30, 1996 are not necessarily indicative of the results to be expected for
the full year or any other interim period.
Earnings Per Common Share
Net earnings per share has been computed by dividing net earnings (loss) by
the weighted average number of common and common equivalent shares outstanding
during each period. The weighted average number of shares of common stock and
common stock equivalent shares used for computing net earnings (loss) was
3,904,896 in 1994, 1995 and 1996. Weighted average shares includes the effect
of the options and warrants issued with exercise prices below the IPO price,
as calculated under the treasury stock method.
Subsequent to year end, the Company completed the Bridge Financing,
discussed in Note N. A part of those proceeds, along with a part of the
proceeds from the public offering (see Note L) were and will be used to retire
certain indebtedness. Supplementary earnings per share data, assuming the
issuance of the shares and the retirement of debt at the beginning of the
period, would be $(.67) and $(.28) for the year ended December 31, 1995 and
for the six months ended June 30, 1996, respectively.
Concentration of Credit Risk
The Company's sales are concentrated in the United States and Brazil.
Approximately 90%, 72% and 77% of the Company's sales in 1994, 1995 and 1996,
respectively, are in Brazil, of which one customer represents 52% and 18% and
0% in 1994, 1995 and 1996, respectively. Approximately 62% of the sales in the
United States in 1995 are from the results of one contract. For the six months
ended June 30, 1996, two contracts represented 95% of sales in the United
States.
Stock Options
Options granted under the Company's Stock Option Plan are accounted for
under APB 25, "Accounting for Stock Issued to Employees," and related
interpretations. In November 1995, the Financial Accounting Standards Board
issued Statement 123, "Accounting for Stock-Based Compensation," which will
require
F-10
<PAGE>
ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
additional proforma disclosures for companies that will continue to account
for employee stock options under the intrinsic value method specified in APB
25. The Company plans to continue to apply APB 25 and the only effect of
adopting Statement 123 in 1996 will be the new disclosure requirement.
NOTE B--RISKS AND UNCERTAINTIES
The Company will generate an increasing portion of its revenue from the sale
and service of En2000 integrated security system products. These products are
exposed to the risk that new technology could be introduced resulting in
significantly lowered demand for its products. Also, the estimated useful life
of the Company's capitalized software costs is a significant estimate for
which it is reasonably possible that such a technology change will affect the
estimated useful life.
A significant amount of the Company's operations are based in Brazil. The
Brazilian market in which the Company operates is characterized by volatile
and frequently unfavorable economic, political and social conditions. High
inflation and, with it, high interest rates are common. Inflation has declined
but continues to be high in Brazil. In 1995, the per annum inflation rate was
approximately 22% in Brazil (compared to over 900% in 1994). Historically,
Brazil has also experienced significant currency fluctuations. In view of the
foregoing, the Company's business, earnings, asset values and prospects may be
materially and adversely affected by developments with respect to inflation,
interest rates, currency fluctuations, government policies, price and wage
controls, exchange control regulations, taxation, expropriation, social
instability, and other political, economic or diplomatic developments in or
affecting Brazil. Although the Company has been able to operate successfully
in Brazil for over 12 years, it has no control over such conditions and
developments, and can provide no assurance that such conditions and
developments will not adversely affect the Company's operations.
NOTE C--ORGANIZATION OF HOLDING COMPANY
On April 2, 1996, Ensec International, Inc. was formed as a holding company
and acquired Ensec, S.A. and Ensec Inc. in a stock for stock transaction.
These acquisitions have been accounted for as an exchange between entities
under common control in a manner similar to a pooling of interest.
Accordingly, the consolidated statements include the operations of both
companies for 1994 and 1995.
NOTE D--OTHER CURRENT ASSETS
Other current assets consists of the following:
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Advances to suppliers..................................... $242,000 $ 85,000
Social taxes receivable, net.............................. 59,000 125,000
Compulsory deposits....................................... 40,000 41,385
Other receivables......................................... 70,000 70,000
Other..................................................... 1,774 21,267
-------- --------
$412,774 $342,652
======== ========
</TABLE>
F-11
<PAGE>
ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE E--PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Land............................................... $ 279,000 $ 279,000
Building........................................... 1,337,000 1,337,000
Machinery and equipment............................ 4,547,689 2,346,745
Furniture and fixtures............................. 518,373 532,943
Vehicles........................................... 59,000 60,000
----------- -----------
6,741,062 4,555,688
Less accumulated depreciation...................... (3,183,804) (1,905,775)
----------- -----------
$ 3,557,258 $ 2,649,913
=========== ===========
NOTE F--ACCRUED EXPENSES
Accrued expenses consist of the following:
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Salaries and related taxes......................... $ 783,000 $ 518,000
Taxes other than income taxes...................... 150,000 83,000
Advances from customers............................ 554,000 42,000
Other accruals..................................... 144,782 337,384
----------- -----------
$ 1,631,782 $ 980,384
=========== ===========
</TABLE>
NOTE G--NOTES PAYABLE
Notes payable to banks at December 31, 1994 and 1995 amounted to $493,000
and $2,120,000, respectively. These notes bear interest at rates ranging from
4.06% to 5.30% per month and are guaranteed by the Chief Executive Officer of
the Company. Maturity dates of these notes are within one year.
In July and August 1996, the Company borrowed $100,000 on an unsecured basis
from its Chief Executive Officer, and borrowed $400,000 from a financial
institution collateralized by $400,000 pledged by the Chief Executive Officer.
In August 1996, the Company borrowed $500,000 from an individual, through Mr.
Finkel, due September 30, 1996, which debt bears interest at a rate of
approximately 5% per month. These loans are due to be repaid from the proceeds
of the Offering discussed in Note L.
NOTE H--LINE OF CREDIT
The line of credit balance at December 31, 1994 and 1995, consisted of the
following:
<TABLE>
<CAPTION>
1994 1995
----- --------
<S> <C> <C>
Note payable to bank under a $200,000 line of credit;
interest payable monthly at prime plus 2% (effective rate
of 10.5%); collateralized by accounts receivable. The
note was repaid in 1996.................................. $ -- $185,400
Note payable to bank under a $300,000 line of credit;
interest payable monthly at prime plus 2% (effective rate
of 10.5%); collateralized by accounts receivable;
principal is due on September 17, 1996................... -- 83,374
----- --------
$ -- $268,774
===== ========
</TABLE>
During the six months ended June 30, 1996, the Company obtained funding from
one of its credit lines in excess of the credit limit. This excess was repaid
in July 1996, and the Company does not expect to exceed the credit limit in
the future.
F-12
<PAGE>
ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE I--LONG-TERM DEBT
Long-term debt at December 31, 1994 and 1995, consisted of the following:
<TABLE>
<CAPTION>
1994 1995
---------- -----------
<S> <C> <C>
Note payable to bank; principal and interest at
12% payable monthly; guaranteed by the Chief
Executive Officer of the Company; maturing on
March 15, 1998.................................. $2,274,000 $ 1,729,000
Note payable; principal and interest at 12%
payable monthly; collateralized by a mortgage on
certain real and personal property; maturing on
September 15, 1998.............................. -- 2,671,000
---------- -----------
2,274,000 4,400,000
Less Current portion of long-term debt........... (578,000) (1,191,000)
---------- -----------
$1,696,000 $ 3,209,000
========== ===========
</TABLE>
NOTE J--COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain offices and equipment pursuant to non-cancelable
operating leases which expire in various years through 1999. The following is
a schedule of future minimum lease payments as of December 31, 1995:
<TABLE>
<S> <C>
1996............................................................ $ 78,627
1997............................................................ 66,834
1998............................................................ 30,834
1999............................................................ 26,702
--------
$202,997
========
</TABLE>
Rent expense was approximately $124,600 and $211,900 in 1994 and 1995,
respectively.
Litigation
The Company is engaged in various lawsuits, as defendant, involving alleged
employment law claims. The Company has established reserves, which, in its
opinion, will be sufficient to satisfy its obligations with respect to such
lawsuits.
In August 1996, the Company received a written demand from a broker in
Brazil claiming that the Bridge Financing and the proposed initial public
offering wrongfully precluded such broker's efforts to secure financing for
the Company. The broker is seeking $300,000, on the basis that it would have
secured $10 million in financing for the Company, but for the Bridge Financing
and the initial public offering. The Company and its counsel have reviewed the
claim and believe it to be without merit. The Company intends to vigorously
defend any litigation, if commenced, with respect to such claim.
Employment Agreements
The Company has entered into employment agreements with certain of its
officers for a period of three years commencing May or June 1996. The
agreements provide the employees with severance benefits of 1 or 1 1/2 times
total cash compensation earned in the 12 months preceding the date of
termination in the event the agreements are terminated under certain
conditions, except for the agreement with the Company's President and Chief
Executive Officer, which provides for a severance payment of 2.99 times the
average annual compensation paid by the Company or its subsidiaries and
includable in such executive's gross income for federal tax purposes for the
five years prior to the year of termination. The agreements also provide for
each officer a grant of options under the Company's 1996 Stock Option Plan
(the "Plan") which will vest in one-third equal installments over a two year
period, with the first third to vest on the consummation of the initial public
offering described in Note L.
F-13
<PAGE>
ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE K--INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
1994 1995
----------- ----------
<S> <C> <C>
Current
Federal.......................................... $ -- $ --
Foreign.......................................... -- --
----------- ----------
-- --
Deferred
Federal.......................................... $ -- $ --
Foreign.......................................... 625,000 (704,000)
----------- ----------
$ 625,000 $ (704,000)
=========== ==========
Deferred income taxes and benefits are provided for significant income and
expense items recognized in different years for tax and financial reporting
purposes. Temporary differences which give rise to significant deferred tax
assets or liabilities follow:
<CAPTION>
1994 1995
----------- ----------
<S> <C> <C>
Contributions...................................... $ 544 $ 884
Amortization of organization cost.................. 11,416 4,527
Net operating loss--Federal........................ 779,693 1,229,821
Net operating loss--Foreign........................ 49,000 919,000
Other.............................................. 1,898 9,705
----------- ----------
842,551 2,163,937
Less valuation allowance--Federal.................. 779,693 1,229,821
----------- ----------
62,858 934,116
Computer software costs............................ (1,072,000) (1,238,000)
Depreciation....................................... (13,858) (15,116)
----------- ----------
Net deferred tax liability......................... $(1,023,000) $ (319,000)
=========== ==========
</TABLE>
The change in the valuation allowance amounted to $293,593 and $442,321 in
1994 and 1995, respectively.
At December 31, 1995, the Company has net operating loss ("NOL")
carryforwards for income tax purposes as follows:
<TABLE>
<CAPTION>
1995
----------
<S> <C>
Federal........................................................... $3,617,119
Foreign corporate taxes........................................... $2,896,000
Foreign social contribution taxes................................. $2,629,000
</TABLE>
Expiration of the Federal tax NOL begins in 2006. The foreign NOL's have no
expiration date and therefore can be carried forward indefinitely. Due to
historical losses, a valuation allowance of $779,693 and $1,229,821 has been
established for the entire amount of the tax benefit attributed to the Federal
tax NOL. If certain changes in ownership occur, future utilization of the
Federal tax NOL may be limited.
F-14
<PAGE>
ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE L--PUBLIC OFFERING OF COMMON STOCK
The Board has authorized the filing of a registration statement relating to
an initial public offering of 1,900,000 shares of Common Stock and Redeemable
Warrants to purchase 1,900,000 shares of Common Stock. In addition to the
issuance and sale of 1,900,000 shares of Common Stock, up to 285,000
additional shares and 285,000 additional Redeemable Warrants may be sold by
the underwriters pursuant to an over-allotment option. In connection with the
offering, the Company has agreed to sell to the underwriters, for nominal
consideration, warrants to purchase up to 190,000 shares of Common Stock and
190,000 Redeemable Warrants. The Redeemable Warrants are initially exercisable
at a price of 165% of the initial public offering price per share of Common
Stock and per Redeemable Warrant for a period of four years commencing one
year from the effective date of the Registration Statement and are restricted
from sale, transfer and assignment until the date of first exercisability.
NOTE M--DISCONTINUED OPERATIONS
In 1995, the Company sold its currency sorting machine segment to a minority
shareholder for the shareholder's interest in the Company plus $1,812,000 in
cash, and a 10% interest in the purchaser, valued at zero. Based on the
division's net book value of $133,000, and employee termination costs of
$188,000, a gain of $1,491,000 resulted from this transaction. The gain on
disposition of the segment has been accounted for as discontinued operations
and prior years' financial statements have been restated to reflect the
discontinuation of the currency sorting machine segment. Revenues of this
segment for 1994, 1995 and for the six months ended June 30, 1995 amounted to
$2,579,000, $2,896,000 and $1,394,000, respectively.
The 10% interest in the purchaser acquired upon the sale of the segment was
valued at zero due to lack of significant sales and profitability of the
purchaser as shown in its unaudited financial statements. The Company is
accounting for this investment under the cost method.
NOTE N--SENIOR SUBORDINATED NOTES
In May 1996, the Company completed a $2,500,000 bridge financing to support
its operations until a contemplated initial public offering of the Company's
securities is completed in 1996. The financing was obtained through the
offering of Units of $25,000 each. Each Unit consists of: (i) a senior
subordinated promissory note in the principal amount of $25,000 bearing
interest, payable semi-annually, at the rate of 10% per annum due and payable
on the earliest of: (a) the closing of an initial public offering of the
Company's Common Stock, par value $.01 per share; or (b) 12 months from the
date of the initial sale of the unit; and (ii) warrants to purchase 2,500
shares of the Company's common stock, par value $.01 per share, at an exercise
price of $.10 per share. In September 1996, warrants to purchase 18,750 shares
of Common Stock which were issued in the bridge financing were relinquished by
the holders thereof.
The warrants are detachable warrants and are accounted for separately from
the senior subordinated notes as an addition to paid-in capital. The value
assigned to the warrants was based on their fair value at the time of issuance
and amount to $725,000. Costs associated with the issuance of the bridge
financing allocated to the warrants amounted to $82,296 and has been charged
against paid-in capital.
The value assigned to the senior subordinated notes of $1,775,000 creates a
discount of $725,000 since the amount owed is $2,500,000. This discount is
being amortized on the interest method over a 12 month period and charged to
interest expense. The aggregate amount charged to interest expense for the six
months ended June 30, 1996, amounted to $104,300. Costs associated with the
issuance of the bridge financing allocated to the senior subordinated notes
has been capitalized and is being amortized as interest expense of the life of
the notes (see Note A).
NOTE O--STOCK OPTION PLANS
In June 1996, the Company adopted the Plan, pursuant to which stock options
(both Nonqualified Stock Options and Incentive Stock Options, as defined in
the Plan), stock appreciation rights and restricted stock may be granted to
directors, key employees and consultants (the "Participants"). The Plan
provides for the automatic
F-15
<PAGE>
ENSEC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
grant to directors who are not employees of the Company or its subsidiaries,
at such time as an individual becomes a director of the Company, of
Nonqualified Stock Options to purchase 15,000 shares of Common Stock at an
exercise per share equal to the greater of $3.00 or the fair market value of
the shares on the date of grant. The options vest in increments of 5,000
shares per year, commencing on the date of the Company's annual meeting of
shareholders for the election of directors next following the date such
individual became a director and continuing with each such successive annual
meeting provided such person remains a director of the Company as of such
date. The Plan also provides for the acceleration of the vesting schedule in
certain circumstances.
Stock appreciation rights may be granted in conjunction with the grant of an
Incentive or Nonqualified Stock Option under the Plan or independently of any
such stock option. A stock appreciation right granted in conjunction with a
stock option may be an alternative right. In which event, the exercise of the
stock option terminates the stock appreciation right to the extent of the
shares purchased upon exercise of the stock option, and correspondingly, the
exercise of the stock appreciation right terminates the stock option to the
extent of the shares with respect to which such right is exercised.
Alternatively, a stock appreciation right granted in conjunction with a stock
option may be an additional right, in which case both the stock appreciation
right and the stock option may be exercised. A stock appreciation right may
not, however, be granted in conjunction with an Incentive Stock Option under
circumstances in which the exercise of the stock appreciation right affects
the right to exercise the Incentive Stock Option or vice versa, unless certain
terms and conditions are met. Subject to the terms of the Plan, the Company
may award shares of restricted stock to the Participants. Generally, a
restricted stock award will not require the payment of any option price by the
Participant but will call for the transfer of shares to the Participant
subject to forfeiture, without payment of any consideration by the Company, if
the Participant's employment terminates during a "restricted" period (which
must be at least six months) specified in the award of the restricted stock.
There are 450,000 shares authorized for possible issuance under the Plan, of
which Incentive Stock Options to purchase 355,000 shares were granted in May
and June 1996 with an exercise price of $3.00 per share. These shares were
granted at fair market value and therefore, no compensation expense was
recognized.
NOTE P--SEGMENT INFORMATION
During 1994 and 1995, the Company's operations involved two industry
segments: One that designs, develops, assembles, and maintains integrated
security systems and leases security equipment; and the other that sells and
installs currency sorting equipment. The currency sorting equipment segment
was sold in 1995 and has been classified as a discontinued operation in the
accompanying financial statements. The geographic areas in which the Company
operates are the United States and Brazil. The Company operated in the two
business segments in Brazil and only in the security business segment in the
United States. It is impracticable for the Company to desegregate its foreign
business segments. Therefore, in accordance with FAS No. 14, these segments
are presented on a combined basis. During 1996, the Company only operated in
the security industry segment. Net sales, operating income (before interest
and income taxes) and identifiable assets by geographic area were as follows:
<TABLE>
<CAPTION>
UNITED STATES BRAZIL CONSOLIDATED
------------- ----------- ------------
<S> <C> <C> <C>
1994
Net sales............................ $ 860,633 $ 7,679,000 $ 8,539,633
=========== =========== ===========
Operating income (loss).............. $(1,096,985) $ 653,517 $ (443,468)
=========== =========== ===========
Identifiable assets.................. $ 776,422 $10,992,367 $11,768,789
=========== =========== ===========
1995
Net sales............................ $ 2,406,815 $ 6,154,000 $ 8,560,815
=========== =========== ===========
Operating loss....................... $(1,069,026) $(3,321,752) $(4,390,778)
----------- ----------- -----------
Identifiable assets.................. $ 2,000,598 $ 8,953,605 $10,954,203
=========== =========== ===========
</TABLE>
F-16
<PAGE>
[LOGO OF ENSEC(R) SECURITY SYSTEMS APPEARS HERE]
<PAGE>
[ALTERNATE PAGE FOR BRIDGE INVESTORS PROSPECTUS]
ENSEC INTERNATIONAL, INC.
231,250 SHARES OF COMMON STOCK
This Prospectus relates to an offering (the "Offering") by certain persons
(the "Bridge Investors") of up to 231,250 shares of the common stock, $.01 par
value per share (the "Common Stock") of Ensec International, Inc. (the
"Company"). The Company will not receive any of the proceeds from the sale of
such shares. It is anticipated that the Common Stock offered hereby will be
offered and sold from time to time in the over-the-counter market or
otherwise, at prices and terms then prevailing or at prices related to the
then-current market price, or in negotiated transactions. See "Bridge
Investors and Plan of Distribution."
Prior to the Offering, there has been no public market for the Common Stock
and there can be no assurance that any such market will develop. The Common
Stock has been approved for inclusion on the NASDAQ SmallCap Market (the
"Nasdaq-SCM") under the trading symbol "ENSC."
Concurrently with this Offering, the Company is offering by separate
prospectus (the "Company Prospectus") 1,900,000 shares of Common Stock (the
"Company Offered Shares") and redeemable warrants (the "Company Offered
Redeemable Warrants") to purchase 1,900,000 shares of Common Stock
(collectively, the "Company Offering"). See "Concurrent Registration of Common
Stock and Warrants."
The Company has agreed to pay all of the expenses in connection with the
registration and sale of the shares being offered by the Bridge Investors
(other than brokerage commissions and fees and expenses of counsel). The
Company has also agreed to indemnify the Bridge Investors against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
----------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK. ONLY INVESTORS WHO CAN BEAR THE RISK OF LOSS OF THEIR ENTIRE INVESTMENT
SHOULD INVEST. FOR A DESCRIPTION OF CERTAIN RISKS REGARDING AN INVESTMENT IN
THE COMPANY AND IMMEDIATE SUBSTANTIAL DILUTION, SEE "RISK FACTORS."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 25, 1996.
<PAGE>
[ALTERNATE PAGE FOR BRIDGE INVESTORS PROSPECTUS]
NO UNDERWRITER, DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THIS OFFERING, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME
DOES NOT IMPLY THAT THERE HAS NOT BEEN ANY CHANGE IN THE INFORMATION SET FORTH
HEREIN OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY, OR AN OFFER TO SELL OR
SOLICITATION OF AN OFFER TO BUY ANY SUCH SECURITIES 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 SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL.
UNTIL OCTOBER 20, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WITH
RESPECT TO THEIR SOLICITATIONS TO PURCHASE THE SECURITIES OFFERED HEREBY.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 8
Use of Proceeds.......................................................... 17
Dilution................................................................. 19
Capitalization........................................................... 20
Dividend Policy.......................................................... 20
Selected Consolidated Financial Data..................................... 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 29
Management............................................................... 37
Principal and Selling Stockholders....................................... 42
Certain Relationships and Related Transactions........................... 43
Description of Securities................................................ 43
Shares Eligible for Future Sale.......................................... 46
Bridge Investors and Plan of Distribution................................ 48
Concurrent Registration of Common Stock and Warrants..................... 50
Legal Matters............................................................ 51
Experts.................................................................. 51
Available Information.................................................... 51
Index to Consolidated Financial Statements............................... F-1
</TABLE>
----------------
TO INVEST IN THESE SECURITIES, A CALIFORNIA RESIDENT MUST HAVE, AS A
MINIMUM, EITHER (i) A LIQUID NET WORTH OF $250,000, EXCLUSIVE OF HOME, HOME
FURNISHINGS AND AUTOMOBILES, AND $65,000 OF GROSS INCOME DURING THE LAST TAX
YEAR AND ESTIMATED GROSS INCOME OF $65,000 FOR THE CURRENT YEAR OR (ii) A
LIQUID NET WORTH OF $500,000, EXCLUSIVE OF HOME, HOME FURNISHINGS AND
AUTOMOBILES.
i
<PAGE>
[ALTERNATE PAGE FOR BRIDGE INVESTORS PROSPECTUS]
As of the date of the Company Prospectus, the Company will become subject to
the reporting requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and, in accordance therewith, will file reports, proxy
and information statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy and information
statements and other information can be inspected and copied at the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the following regional offices:
New York Regional Office, Suite 1300, 7 World Trade Center, New York, New York
10048, and Chicago Regional Office, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511, and copies of such material may also be obtained
from the Public Reference Section of the Commission at prescribed rates. The
Commission maintains a World Wide Web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that file such information electronically. The Company intends to
furnish its stockholders with annual reports containing audited consolidated
financial statements and such other reports as the Company deems appropriate
or as may be required by law.
ii
<PAGE>
[ALTERNATE PAGE FOR BRIDGE INVESTORS PROSPECTUS]
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Each prospective investor is urged to
read this Prospectus in its entirety. Unless otherwise indicated, the
information in this Prospectus (i) reflects the formation of the Company and
its organization as the holding company for Ensec, S.A. and Ensec Inc. as if
such formation and organization had occurred as of the earliest date presented,
(ii) does not reflect the issuance of securities in connection with the Bridge
Financing (described below) and (iii) does not give effect to the exercise of
(a) an over-allotment option granted to Rickel & Associates, Inc. (the
"Representative") and Janssen-Meyers Associates, L.P. ("JMA") (each an
"Underwriter" and collectively, the "Underwriters") pursuant to the Company
Offering (the "Underwriters' Over-allotment Option"), (b) the Company Offered
Redeemable Warrants, (c) warrants (the "Underwriters' Warrants") entitling the
Representative to purchase up to 150,000 shares of Common Stock and 150,000
Company Offered Redeemable Warrants and entitling JMA to purchase up to 40,000
shares of Common Stock and 40,000 Company Offered Redeemable Warrants, and
(d) other outstanding options and warrants to purchase an aggregate of 355,000
shares of Common Stock.
THE COMPANY
The Company designs, develops, assembles, sells, installs and services
security systems for large commercial or governmental facilities, ranging from
single function installations to high-end integrated security systems. The
Company's high-end integrated systems are based on its proprietary software and
related hardware which permit multiple devices or systems to be combined into a
unified system covering multiple sites. Since its inception, the Company has
installed approximately 400 systems, nearly all of which have been in Brazil,
including systems for large corporations (such as Bosch, Caterpillar, Eastman
Kodak, General Motors, IBM, Microsoft and Texaco) and government agencies (such
as the Brazilian Bureau of Mint & Engraving and the Central Bank of Brazil).
In 1995, the Company completed the development of its second-generation
system, the EnWorks(TM) product family, consisting of state-of-the-art, real-
time, integrated security systems. The Company spent four years and over $5
million in the development of the flagship product in the EnWorks(TM) family:
the En2000(TM) system. The Company's high-end integrated security systems are
based on distributive intelligence architecture and proprietary software that
permit the integration of various security devices or systems into a unified
system operating through the use of graphical user interfaces. Distributive
intelligence architecture permits individual components of an integrated
security system to process information independently so that such components
may continue to operate even when the central processor or another component in
the system malfunctions or is rendered inoperative. In addition, an integrated
security system that uses distributive intelligence architecture can operate
more efficiently because individual components are able to complete independent
tasks simultaneously.
The Company believes that the worldwide integrated security systems market is
currently $1.5 billion and has grown at a rate of approximately 15% per annum
from 1992 to 1995. The Company began marketing its En2000 system in 1995, at
which time the Company was selected by the Port Authority of New York and New
Jersey through a competitive bid process to provide the new integrated access
control system for the parking facilities located in the World Trade Center. In
1995, the Company entered into contracts to install eight additional En2000(TM)
systems, including a contract from Electronic Data Systems, Inc. ("EDS") to
install the En2000(TM) in EDS's corporate headquarters in Plano, Texas. During
the first six months of 1996, the Company entered into contracts to install
seven En2000(TM) systems. In addition, the Company currently has 36 service and
maintenance contracts with customers who have purchased Company products,
covering 68 installations. Other examples of the Company's completed projects
involving prior versions of the Company's systems include: (i) an integrated
security system for the Brazilian Bureau of Mint & Engraving; (ii) an access
control, time and attendance, closed-circuit television ("CCTV") and fleet
management system for Companhia Vale do Rio Doce, a large Brazilian iron ore
mining company with over 15,500 employees; and (iii) a postal tracking and
tracing system for the Brazilian Postal Service.
1
<PAGE>
[ALTERNATE PAGE FOR BRIDGE INVESTORS PROSPECTUS]
Mr. Charles N. Finkel, the Company's President, Chief Executive Officer and
beneficial owner of all shares of Common Stock outstanding immediately prior to
the Company Offering, has agreed with the Representative not to offer, sell,
contract to sell or otherwise dispose of all shares of Common Stock
beneficially owned by him for a period of 24 months after the date of the
Company Prospectus, without the Representative's consent. In addition, pursuant
to a Share Deposit Agreement between the Representative and Mr. Finkel, Mr.
Finkel has agreed with the Representative not to offer, sell, contract to sell
or otherwise dispose of 800,000 shares of Common Stock beneficially owned by
him for a period of ten years after the date of the Company Prospectus, without
the Representative's consent; provided, however, that such restrictions will be
released with respect to 500,000 of such shares if the Company reports income
before income taxes in excess of $4,000,000 in fiscal 1997 and with respect to
the remaining 300,000 shares if the Company reports income before income taxes
in excess of $7,000,000 in fiscal 1998. The Representative may, in its sole
discretion, and at any time without notice, release all or any portion of the
shares owned by Mr. Finkel from such restrictions. See "Shares Eligible for
Future Sale."
In May 1996, the Company concluded a private placement to the Bridge
Investors of an aggregate of (i) $2,500,000 of 10% senior subordinated notes
(the "Bridge Financing"), and (ii) warrants to purchase 250,000 shares of
Common Stock with an exercise price of $.10 per share, of which warrants to
purchase 18,750 shares of Common Stock were relinquished by certain of the
Bridge Investors in September 1996 (the "Bridge Warrants"). The Bridge Warrants
are mandatorily exercisable upon the consummation of the sale of the securities
in the Company Offering. The Company received net cash proceeds from the Bridge
Financing of approximately $2,216,000 after giving effect to commissions and
expenses, which proceeds were used primarily for debt repayment in Brazil and
general working capital purposes.
The Company, a Florida corporation, was formed in April 1996 as a holding
company for Ensec Inc., a Florida corporation ("Ensec Inc."), and Ensec
Engenharia e Sistemas de Seguranca, S.A., a Brazilian corporation ("Ensec,
S.A."). Ensec, S.A. was founded in 1983 by Charles N. Finkel, the Company's
President and Chief Executive Officer. In 1991, Ensec, S.A. established its
U.S. operations with the formation of Ensec Inc. The Company's principal
administrative offices are located in Boca Raton, Florida and Sao Paulo,
Brazil. The Company maintains a regional sales office in New York City. The
Company's principal executive offices are located at 751 Park of Commerce
Drive, Suite 104, Boca Raton, Florida 33487, telephone number (561) 997-2511.
Unless otherwise indicated or the context otherwise requires, references to the
"Company" shall include the Company, Ensec Inc. and Ensec, S.A.
3
<PAGE>
[ALTERNATE PAGE FOR BRIDGE INVESTORS PROSPECTUS]
THE OFFERING
<TABLE>
<S> <C>
Securities offered.................. 231,250 shares of Common Stock. See
"Description of Securities."
Common Stock outstanding:
After the Offering(1).............. 5,631,250 shares of Common Stock
Risk Factors........................ The securities offered hereby involve a
high degree of risk and substantial
immediate dilution to new investors. Only
investors who can bear the loss of their
entire investment should invest. See "Risk
Factors" and "Dilution."
Proposed NASDAQ symbol.............. "ENSC"
</TABLE>
- --------
(1) Includes 231,250 shares of Common Stock offered hereby and the Company
Offered Shares. Excludes (i) 210,000 shares of Common Stock issuable by the
Company and 75,000 shares of Common Stock to be sold by the Selling
Stockholder (as defined herein) upon exercise of the Underwriters' Over-
allotment Option in full; (ii) 2,185,000 shares of Common Stock reserved
for issuance upon exercise of the Company Offered Redeemable Warrants,
including those issuable upon exercise of the Underwriters' Over-allotment
Option; (iii) 380,000 shares of Common Stock reserved for issuance upon
exercise of the Underwriters' Warrants and the Company Offered Redeemable
Warrants included therein; and (iv) 450,000 shares issuable upon the
exercise of stock options which may be granted pursuant to the Company's
1996 Stock Option Plan (the "Plan"). See "Management--1996 Stock Option
Plan" and "Certain Relationships and Related Transactions."
4
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
5
<PAGE>
[ALTERNATE PAGE FOR BRIDGE INVESTORS PROSPECTUS]
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE DATA)
The summary financial data set forth below is derived from and should be read
in conjunction with the audited financial statements, including the notes
thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------- -----------------------
1994 1995 1995 1996
------ ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CONSOLIDATED OPERATING DATA:
Sales........................... $8,540 $ 8,561 $ 4,380 $ 4,729
Gross profit.................... 5,964 2,727 938 2,022
Selling, general and
administrative expenses........ 4,153 5,288 3,378 2,646
Research and development
expenses....................... 276 600 171 432
Translation loss (gain)......... 1,979 1,230 (800) 219
Loss from operations............ (444) (4,391) (1,812) (1,275)
Interest income................. (1,614) (648) (576) (24)
Interest expense................ 508 2,520 1,015 1,175
Net, other (income) expense..... 593 395 532 (16)
Earnings from operation of
discontinued division.......... 534 436 342 --
Gain on disposal of discontinued
division....................... -- 1,008 -- --
------ ------- ------- -------
Net earnings (loss)............. $ 234 $(3,818) $(2,221) $(2,095)
====== ======= ======= =======
Net earnings (loss) per
share(1):
Continuing operations......... $ (.08) $ (1.35) $ (.66) $ (.54)
Discontinued operations....... .14 .37 .09 --
------ ------- ------- -------
Net earnings (loss) per share... $ .06 $ (.98) $ (.57) $ (.54)
====== ======= ======= =======
Supplemental pro forma net
loss........................... $(2,805)(2) $(1,305)(3)
======= =======
Supplemental pro forma net loss
per share...................... $ (.67)(2) $ (.28)(3)
======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1996 (UNAUDITED)
---------------- ----------------------------------------------
1994 1995 ACTUAL PRO FORMA(4) AS ADJUSTED(5)(6)(7)(8)
------- -------- -------- ------------ -----------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Working capital
(deficit).............. $ 1,489 $ (1,505) $ (4,754) $ (4,754) $ 4,608
Total assets............ 11,769 10,954 11,520 12,370 16,143
Current liabilities..... 3,645 5,839 9,261 10,111 4,809
Long-term debt, less
current portion........ 1,696 3,209 2,124 2,124 2,124
Stockholders' equity.... 5,405 1,587 135 135 9,210
</TABLE>
- --------
(1) Net loss per share is computed based on the weighted average number of
shares of Common Stock outstanding for each period. For purposes of
computing net loss per share, options, warrants and Common Stock granted or
issued by the Company during the 12-month period preceding the date of the
Company Offering at a price below the offering price to the public of $6.00
per share have been included in the determination of the weighted average
number of shares outstanding using the treasury stock method.
(2) The supplemental pro forma net loss and net loss per share reflect the
issuance of shares necessary to retire net estimated average notes payable
outstanding during 1995 and the resulting decrease in net loss in the
amount of $1,013,000 for the year ended 1995, as of the beginning of the
period presented. The calculation is based on the weighted average shares
outstanding used in the calculation of earnings per share, adjusted for the
estimated number of shares that would be issued by the Company (i.e.,
300,500 shares at $6.00 per share) to retire these obligations. See Note A
in Notes to Consolidated Financial Statements.
6
<PAGE>
[ALTERNATE PAGE FOR BRIDGE INVESTORS PROSPECTUS]
(3) The supplemental pro forma net loss and net loss per share reflect the
issuance of shares necessary to retire the estimated average notes payable
outstanding during the six months ended June 30, 1996 and the senior
subordinated notes issued in the Bridge Financing and the resulting
decrease in net loss in the amount of $790,000 for the six months ended
June 30, 1996, as of the beginning of the period presented. The calculation
is based on the weighted average shares outstanding used in the calculation
of earnings per share, adjusted for the estimated number of shares that
would be issued by the Company (i.e., 790,000 shares at $6.00 per share) to
retire these obligations. See Note A in Notes to Consolidated Financial
Statements.
(4) Pro forma financial information gives effect to loans aggregating
$1,000,000 from the Company's Chief Executive Officer, a Brazilian bank and
a third party (through Mr. Finkel) in July and August 1996, of which
$150,000 was used to repay outstanding principal and accrued interest on
the Company's short-term notes payable to Brazilian banks. These loans are
expected to be repaid from the proceeds of the Company Offering. See "Use
of Proceeds."
(5) Adjusted to reflect the sale of 1,900,000 shares of Common Stock and
1,900,000 Company Offered Redeemable Warrants offered in the Company
Offering and the exercise of the Bridge Warrants. See "Use of Proceeds" and
"Capitalization."
(6) Does not include up to (i) 210,000 shares of Common Stock issuable by the
Company and 75,000 shares of Common Stock to be sold by the Selling
Stockholder upon exercise of the Underwriters' Over-allotment Option in
full; (ii) 2,185,000 shares of Common Stock reserved for issuance upon
exercise of the Company Offered Redeemable Warrants, including those
issuable upon exercise of the Underwriters' Over-allotment Option in full;
(iii) 380,000 shares of Common Stock reserved for issuance upon exercise of
the Underwriters' Warrants and the Redeemable Warrants included therein;
and (iv) 450,000 shares issuable upon the exercise of stock options granted
pursuant to the Plan. See "Management--1996 Stock Option Plan" and "Certain
Relationships and Related Transactions."
(7) After giving effect to (i) the Underwriters' discount ($927,200); (ii) the
Representative's non-accountable expense allowance ($347,700); and (iii) an
estimated $475,000 of other fees and expenses incurred in connection with
the Company Offering, including printing, professional and other
miscellaneous fees.
(8) Adjusted for the unamortized portion of deferred financing costs and
discount on the Bridge Financing of $167,902 and $620,700, respectively,
which will be recognized as interest expense upon the repayment thereof.
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RISK FACTORS
The purchase of Common Stock offered hereby is speculative and involves a
high degree of risk including, but not necessarily limited to, the risk
factors described below. Common Stock should not be purchased by investors who
cannot afford the loss of their entire investment. Prospective investors
should carefully review and consider the following risks as well as the other
information contained in this Prospectus.
1. ACCUMULATED DEFICIT; ANTICIPATED FUTURE LOSSES. For the fiscal year ended
December 31, 1995, the Company experienced a net loss of $3,818,000, and as of
June 30, 1996 had an accumulated deficit of $3,977,000. The Company
anticipates continued losses for the foreseeable future. The Company's
operating results for future periods are subject to numerous uncertainties.
The Company anticipates significant expenses in its foreseeable future,
including research and development expenses, marketing costs and general
administrative expenses. As part of the Company's efforts to move its
executive, financial and research and development activities to the U.S. and
to limit activities in Brazil to sales and service of less complex security
systems, the Company anticipates reducing its work force in Brazil by
approximately one-third over the next six months. Under the terms of a
collective bargaining agreement and Brazilian law, such reduction will cause
the Company to incur approximately $350,000 of severance and related expenses
during such period, of which approximately $250,000 will be recognized in the
third and fourth quarters of 1996. Because the Company anticipates incurring
significant expenses in connection with the continued development and
marketing of its products, there can be no assurance that the Company will
achieve sufficient additional revenues to offset anticipated operating costs.
Inasmuch as the Company will continue to have high levels of operating
expenses and will be required to make significant expenditures in connection
with its continued research and development activities, the Company may
experience significant operating losses that could continue until such time,
if ever, that the Company is able to generate sufficient additional revenues
to support its operations. There can be no assurance that the Company's
technology and products will be able to compete successfully in the
marketplace and/or generate significant revenue. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
2. WORKING CAPITAL DEFICIT; BANKING RELATIONSHIPS. The Company's capital
requirements in connection with its development and marketing activities will
continue to be significant. As of June 30, 1996, the Company had a working
capital deficit of $4,754,000. While the application of the anticipated net
proceeds from the Company Offering will eliminate such working capital
deficit, the Company has no current arrangements with respect to sources of
additional financing. The Company maintains various credit facilities with a
number of Brazilian banks, and relies in large part on those credit facilities
for its current working capital. All of the Company's borrowings with respect
to its working capital credit facilities are of a short term nature. Most, but
not all, of the Company's lenders have in the past renewed the credit
facilities on a regular basis on substantially similar terms and conditions as
existing credit facilities. There can be no assurance that the Company's
lenders will renew the Company's credit facilities under any conditions. To
the extent certain existing lenders may determine not to renew or may
determine to reduce any line of credit extended to the Company, management
believes that subsequent to consummation of the Offering lines of credit with
other banks can be negotiated to replace any lost credit availability.
However, there can be no assurance that additional financing will be available
to the Company on commercially reasonable terms, or at all. The inability to
obtain additional financing, when needed, could have a material adverse effect
on the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
3. DEPENDENCE ON SIGNIFICANT CUSTOMERS AND SUPPLIERS. Although the
composition of the Company's largest customers has changed from year to year,
historically the Company's revenues have been materially dependent on a
limited number of customers. The number of customers accounting for five
percent or more of the Company's revenues was 17 in 1994 and 15 in 1995. See
Note A in Notes to Consolidated Financial Statements. While management expects
the Company's customer base to continue to expand, a limited number of large
orders may continue to account for a significant portion of the Company's
sales during any given period for the foreseeable future. As such, the
Company's financial condition and results of operations may be adversely
affected by a delay, reduction or cancellation of orders from one or more of
its significant customers or the loss of one or more of such customers.
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seek copyright protection under United States law with respect to some of its
technology. While the Company believes that it would be impractical and not
cost-effective for anyone to attempt to copy complex software and controlling
hardware such as that used in the EnWorks(TM) products, unauthorized parties,
nevertheless, might attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. The cost
of enforcement by the Company of its information rights could be significant,
regardless of the outcome of such enforcement proceedings. In addition,
although the Company believes that there are no infringement claims against
the company and no grounds for the assertion of such claims, the cost of
responding to any such assertion, should be it made, could be significant. See
"Business--Intellectual Property Rights."
7. COMPETITION. The Company's products compete with those of numerous well-
established companies, such as Sensormatic, Casi-Rusco, The Pittston Brinks
Group, ADT, Diebold, Pittway, Inc., Johnson Controls and Honeywell, among
others, which design, manufacture or market integrated security systems or
other security products. Many of these companies have substantially greater
financial, technical, personnel and other resources than the Company and have
established reputations for success in the development, licensing, sale and
service of their products and technology. Certain of these competitors have
the financial resources necessary to enable them to withstand substantial
price competition or downturns in the market for integrated security systems
and related products. In addition, many of the Company's sales of its products
are anticipated to be through the competitive bid process. There can be no
assurance that the Company will be awarded contracts or purchase orders for
its products as a result of such bid process. See "Business--Products and
Services" and "Business--Competition."
8. REPAYMENT OF DEBT. Approximately $5,664,000 (57.4%) of the proceeds of
the Company Offering will be used to repay indebtedness and related interest,
including indebtedness incurred in connection with the Bridge Financing and
$600,000 of which was borrowed from Mr. Charles N. Finkel, the President,
Chief Executive Officer and sole beneficial owner of all of the issued and
outstanding Common Stock of the Company, and an individual (through Mr.
Finkel) and accordingly such funds will not be available to fund future
growth. See "Use of Proceeds" and "Certain Relationships and Related
Transactions."
9. NEW MANAGEMENT; DEPENDENCE ON CHARLES N. FINKEL; RETENTION OF KEY
PERSONNEL. The Company's executive management team has worked together for
only a brief period, with three of the Company's executive officers joining
the Company since late 1995. The Company's operations are materially dependent
upon the services of Charles N. Finkel, its founder, President and Chief
Executive Officer. The loss of the services of Mr. Finkel would materially and
adversely affect the Company's business. The Company has obtained term
insurance on the life of Mr. Finkel which provides for a death benefit to the
Company of $2,000,000. The Company has entered into an employment agreement
with Mr. Finkel, which includes non-competition provisions. The success of the
Company is also dependent upon its ability to hire and retain additional
qualified executive, technical and marketing personnel. There can be no
assurance that the Company will retain the members of its current management
or that it will successfully attract and retain qualified management,
engineering and sales personnel in the future. See "Management."
10. CHALLENGES OF GROWTH. The Company anticipates a period of rapid growth
that is expected to place a strain on the Company's administrative, financial
and operational resources. The Company's ability to manage any staff and
facilities growth effectively will require it to continue to improve its
operational, financial and management controls, reporting systems and
procedures, to install new management information and control systems and to
train, motivate and manage its employees. There can be no assurance that the
Company will install such management information and control systems in an
efficient and timely manner or that the new systems will be adequate to
support the Company's operations. Because of the complexity of its products,
the Company has in the past experienced and expects in the future to
experience a time lag between the date on which technical and sales personnel
are hired and the time at which such persons become fully productive. In
addition, the success of a customer's project could be substantially affected
by the quality of the Company's post-sales implementation process and, in many
cases, its maintenance and service capabilities. If the Company is unable to
hire, train and retain qualified systems engineers and consultants to
implement these services or is unable to manage the post-sales process
effectively, its ability to attract repeat sales or provide references could
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be adversely affected, which could limit the Company's growth opportunities.
If the Company's management is unable to manage growth effectively, such as if
the Company's sales and marketing efforts exceed its capacity to install,
maintain and service its products or if new employees are unable to achieve
performance levels, the Company's business, operating results and financial
condition could be adversely affected. In addition, the Company could
experience significant delays or unforeseen costs in the transition of its
technology and research and development activities from Brazil to the U.S.
which delays or costs could have a material adverse impact on the Company's
prospects or results of operations.
11. INTERNATIONAL EXPANSION. The Company intends to expand its operations
into additional international markets which will require significant
management attention and financial resources. There can be no assurance that
the Company's efforts to develop international sales and support channels will
be successful. International sales are subject to a number of risks, including
potentially longer payment cycles, unexpected changes in regulatory
requirements, import and export restrictions and tariffs, difficulties in
staffing and managing foreign operations, the burden of complying with a
variety of foreign laws, greater difficulty in accounts receivable collection,
potentially adverse tax consequences, currency fluctuations and potential
political and economic instability. Additionally, the protection of
intellectual property may be more difficult to enforce outside of the United
States. In the event that the Company is successful in expanding its
international operations, the imposition of exchange or price controls or
other restrictions on foreign currencies could materially affect the Company's
business, operating results and financial condition.
12. CONTROL OF THE COMPANY. Immediately following the Company Offering,
Charles N. Finkel will control the vote of approximately 62.2% of the
outstanding shares of Common Stock (without giving effect to the possible
exercise of the Underwriters' Over-allotment Option, the Underwriters'
Warrants, the Company Offered Redeemable Warrants or options granted under the
Plan), which, among other things, will allow Mr. Finkel to elect the entire
class of directors to be elected from time to time. Such concentration of
ownership could limit the price that certain investors might be willing to pay
in the future for shares of the Company's Common Stock, and could have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire control of the Company.
See "Principal and Selling Stockholders."
13. BROAD DISCRETION IN APPLICATION OF PROCEEDS. Approximately $2,907,200
(29.5%) of the estimated net proceeds of the Company Offering have been
allocated to working capital and general corporate purposes. Accordingly, the
Company will have broad discretion as to the application of such proceeds. See
"Use of Proceeds."
14. LENGTHY SALES CYCLE. The sale of the Company's high-end integrated
security systems typically involves a significant technical evaluation and
commitment of capital and other resources, with the attendant delays
frequently associated with customers' internal procedures to approve large
capital expenditures and to test and accept new technologies that affect key
operations. For these and other reasons, the sales cycle associated with the
Company's products is typically lengthy and subject to a number of significant
risks, including customers' budgetary constraints and internal acceptance
reviews, that are beyond the Company's control. Because of the lengthy sales
cycle and the large size of customer orders, if revenues forecasted from a
specific customer for a particular quarter are not realized in that quarter,
the Company's operating results for that quarter could be materially adversely
affected.
15. POLITICAL, ECONOMIC AND SOCIAL CONDITIONS IN BRAZIL. While the Company
intends to shift more of its operations and sales to the United States, a
significant amount of its business will continue to be based in Brazil for the
foreseeable future. The Brazilian market in which the Company operates is
characterized by volatile and frequently unfavorable economic, political and
social conditions. See Notes A and B in Notes to Consolidated Financial
Statements. High inflation and, with it, high interest rates are common.
Inflation has declined but continues to be high in Brazil. In 1995, the per
annum inflation rate was approximately 22% in Brazil (compared to in excess of
900% in 1994). Brazil has also experienced significant currency fluctuations.
See "--Currency Fluctuations."
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Inflation adversely impacts the Company's contract revenues which are fixed
and rise more slowly than costs or are otherwise not adjusted for inflation.
Further, inflation can erode purchasing power and thereby adversely affect
sales; consequently, margins diminish if product prices fail to keep pace with
increases in supply and material costs. While the Company has been able in
most recent years to increase prices in local currency terms overall at least
as much as inflation, net sales in local currency terms may nevertheless
remain flat or decrease if, among other things, inflation diminishes
purchasing power. Although the Company expects that prices will generally keep
pace with inflation in the immediate future, there is no assurance that sales
volume will not decline or that supply and material costs will not rise more
rapidly than prices. See "--Currency Fluctuations" regarding the impact of
depreciation on net sales in dollars.
The government of Brazil has historically exercised substantial influence
over many aspects of its economy. In recent years, the government of Brazil
has implemented important measures to improve its economy, although the
current climate in Brazil may create significant uncertainty as to future
economic, fiscal and tax policies. In implementing these measures, the
Brazilian government may in the future decide to effectuate a devaluation of
the Brazilian currency, the real, which could have a material adverse impact
on the Company and its operations in Brazil.
The Brazilian government has had some success in controlling inflation,
although there can be no assurance that this will continue. In addition, in
recent years there have been allegations of government improprieties which may
have adversely affected its ability to implement a successful economic
program. Midway through 1994, the Government of Brazil launched an economic
stabilization program, the Real Plan, which improved economic conditions in
Brazil and created a new currency, the real. Inflation, which had been at
double-digit monthly rates, began to decrease, purchasing power improved and
the consumption of goods and services began to increase. Since December 1994,
however, the Brazilian real has depreciated slightly. See "--Currency
Fluctuations." The Company is not able to predict the long-term effects that
the Real Plan and related economic measures may have upon the Brazilian
economy and financial markets and the real/U.S. dollar exchange rate in
general, or upon the Company. In addition, although the inflation rate in
Brazil has declined significantly since the adoption of the Real Plan, there
can be no assurance that the Company's operations in Brazil will not be
adversely affected by renewed hyperinflation.
In view of the foregoing, potential investors should recognize that the
Company's business, earnings, asset values and prospects may be materially and
adversely affected by developments with respect to inflation, interest rates,
currency fluctuations, government policies, price and wage controls, exchange
control regulations, taxation, expropriation, social instability, and other
political, economic or diplomatic developments in or affecting Brazil.
Although the Company has been able to operate successfully in Brazil for over
12 years, it has no control over such conditions and developments, and can
provide no assurance that such conditions and developments will not adversely
affect the Company's operations or the price of or market for the offered
Securities.
16. CURRENCY FLUCTUATIONS. Because the Company's consolidated cash flow from
operations is generated in material part in the currency of Brazil, the
Company is subject to the effects of fluctuations in the value of the real.
Brazil has historically experienced significant currency fluctuations relative
to the U.S. dollar. The magnitude of the recent fluctuations has diminished,
and the exchange rate of the Brazilian real was 0.85 reais (plural of real)
per U.S. dollar at December 31, 1994, compared to 0.97 reais per U.S. dollar
at December 31, 1995. Such fluctuations have generally not adversely affected
the profitability of the Company, as Brazilian revenues and substantially all
related costs of sales and expenses are incurred in the real. However, in some
cases, such fluctuations, particularly depreciations which are accompanied by
high inflation and declining purchasing power, can adversely affect sales as
well as income to the Company and its stockholders. Because the Company's
financial statements are prepared in dollars, net sales (and other financial
statement accounts, including net income) tend to increase when the rate of
inflation in each country has exceeded the rate of depreciation against the
U.S. dollar. Alternatively, net sales and other financial statement accounts
generally are adversely affected if and to the extent that the rate of
depreciation exceeds the rate of inflation in any period. In addition, when
and if
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dividends are distributed to the Company by Ensec, S.A., the payments are
converted from reais to U.S. dollars, and any future fluctuations of local
currencies relative to the U.S. dollar could result in a loss of dividend
income to the Company and ultimately to the Company's stockholders.
In periods of high inflation and interest rates, borrowings denominated in
the real are more costly, while borrowings indexed to the U.S. dollar or other
foreign currencies place the risk of depreciation on the borrower. In periods
of fluctuation, dollar-denominated borrowings can generate income statement
losses or charges against stockholders' equity. The Company could be further
adversely affected by a depreciation in the real if it becomes necessary to
increase dollar-denominated indebtedness in order to provide working capital,
finance capital expenditures or for other purposes. Currency translation gains
and losses may contribute to fluctuations in the Company's results of
operations. The Company has engaged in currency hedging transactions on a
limited basis and in the future may undertake currency hedging to reduce
currency exposure, although there can be no assurance that hedging
transactions, if entered into, would materially reduce the effects of
fluctuations in foreign currency exchange rates on the Company's results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
17. NO ANTICIPATED DIVIDENDS; RELIANCE ON SUBSIDIARIES. Payment of dividends
on the Common Stock is within the discretion of the Board of Directors and
will depend upon the Company's earnings, its capital requirements and
financial condition, and other relevant factors. The Company does not
currently intend to declare any dividends on its Common Stock in the
foreseeable future. See "Dividend Policy."
As a holding company, the Company's ability to pay operating expenses, any
debt service obligations and dividends materially depends upon receipt of
sufficient funds from its subsidiaries. Brazil does not currently restrict the
remittance of dividends paid by Ensec, S.A. to the Company, although Brazil
has laws in effect which provide limitations on the exchange of local currency
for foreign currency at official rates of exchange. Brazil has imposed more
restrictive exchange controls in the past, and no assurance can be given that
more restrictive exchange control policies, which could adversely affect the
ability of Ensec, S.A. to pay dividends to the Company, will not be imposed in
the future. The payment of dividends by Ensec, S.A. is also in certain
instances subject to statutory restrictions or restrictive covenants in debt
instruments and is contingent upon the earnings and cash flow of and permitted
borrowings by Ensec, S.A.
18. PRODUCT LIABILITY. The Company's products contain software that may
contain software errors or defects, especially when first introduced or when
new versions or enhancements are released. Although to date such defects and
errors have not materially adversely affected the Company's operating results,
there can be no assurance that, despite testing by the Company and by current
and potential customers, defects and errors will not be found in new products
or in new versions or enhancements of existing products. Such discovery could
result in adverse customer reaction, negative publicity regarding the Company
or its products or delay in or failure to achieve market acceptance, any of
which could have a material adverse effect upon the Company's business,
operating results and financial condition. While neither Ensec, S.A. nor Ensec
Inc. has experienced any product liability claims to date, there can be no
assurance that such claims will not be made in the future. Ensec Inc.
maintains product liability insurance in the aggregate amount of $1,000,000
per year and has additional excess liability insurance in the amount of
$5,000,000 for liability in excess of its initial $1,000,000 of coverage.
Ensec, S.A. maintains no product liability insurance coverage. A successful
claim against Ensec Inc. in excess of such coverage or against Ensec, S.A.
could have a material adverse effect on the Company. See "Business."
19. NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to the
Company Offering, there has been no public market for the Company's Common
Stock. Accordingly, there can be no assurance that an active trading market
will develop or be sustained subsequent to the Company Offering. The initial
public offering price of the Company Offered Shares will be determined by
negotiations among the Company and the Underwriters and may not be indicative
of the prices that may prevail in the public market. While the Common Stock
has been approved for inclusion on the Nasdaq-SCM, no assurance can be given
that the Company will continue to be able to satisfy certain specified
financial tests and market-related criteria required for continued
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quotation on the Nasdaq-SCM following the Offering. If the Company is unable
to satisfy such maintenance criteria in the future, the Common Stock may be
delisted from trading on the Nasdaq-SCM and consequently an investor could
find it more difficult to dispose of, or to obtain accurate quotations as to
the price of, the Common Stock would no longer be redeemable. This stock
market generally, and the technology sector in particular, have experienced
and are likely in the future to experience significant price and volume
fluctuations which could adversely affect the market price of the Common Stock
without regard to the significant fluctuations in response to variations in
quarterly operating results, shortfalls in sales or earnings below analyst
estimates, developments in the electronics and security industries, stock
market conditions and other factors. There can be no assurance that the market
price of the Common Stock will not experience significant fluctuations or
decline below the initial public offering price. In addition, the
Representative has agreed to serve as the Company's agent for the solicitation
of future exercises of the Company Offered Redeemable Warrants. If such a
solicitation is viewed as aiding a distribution of Common Stock, the
Representative will be prohibited by applicable securities laws from making a
market in the Common Stock for the period from nine days prior to the
commencement of the future exercise solicitation activity until completion of
the Representative's participation in that distribution effort. Such an
abstention from making a market in the Company's Common Stock could adversely
affect its market price.
20. SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of the Company
Offering, the Company will have outstanding 5,631,250 shares of Common Stock,
after giving effect to the 231,250 shares of Common Stock issuable upon
exercise of the Bridge Warrants but without giving effect to shares of Common
Stock issuable upon exercise of (i) the Company Offered Redeemable Warrants,
(ii) the Underwriters' Warrants, (iii) the Underwriters' Over-allotment
Option, or (iv) options granted under the Plan. Of such 5,631,250 shares of
Common Stock, 2,131,250 shares, consisting of the Company Offered Shares plus
231,250 shares of Common Stock offered pursuant to this Offering (plus any
additional shares sold upon the exercise of the Underwriters' Over-allotment
Option), will be freely tradeable without restriction or further registration
under the Act, except for any shares held by "affiliates" of the Company
within the meaning of the Act which shares will be subject to the resale
limitations of Rule 144 promulgated under the Act. The Bridge Investors have
agreed not to sell or otherwise dispose of any of the shares of Common Stock
issuable upon exercise of the Bridge Warrants for a period of 12 months after
the date of the consummation of the Company Offering and exercise of the
Bridge Warrants.
The remaining 3,500,000 shares (the "Restricted Shares") were issued by the
Company in private transactions in reliance upon one or more exemptions
contained in the Act. The Restricted Shares are deemed to be "restricted
securities" within the meaning of Rule 144 promulgated pursuant to the Act and
may be publicly sold only if registered under the Act or sold pursuant to
exemptions therefrom. As of the date of this Prospectus, all of the Restricted
Shares will have been held for more than two years and are eligible for public
sale in accordance with the requirements of Rule 144, as described below. Mr.
Charles N. Finkel, President and Chief Executive Officer of the Company and
beneficial owner of all shares of Common Stock outstanding immediately prior
to the Company Offering, however, has agreed with the Representative not to
offer, sell, contract to sell or otherwise dispose of any of his shares for a
period of 24 months after the date of the Company Prospectus, without the
Representative's consent. In addition, Mr. Finkel has agreed with the
Representative not to offer, sell, contract to sell or otherwise dispose of
800,000 of the shares of Common Stock beneficially owned by him for a period
of ten years after the date of the Company Prospectus, without the
Representative's consent; provided, however, that such restrictions will be
released with respect to 500,000 of such shares if the Company reports income
before income taxes in excess of $4,000,000 for fiscal 1997 and with respect
to the remaining 300,000 shares if the Company reports income before income
taxes in excess of $7,000,000 for fiscal 1998. See "Shares Eligible for Future
Sale."
21. TAX LOSS CARRYFORWARDS. At December 31, 1995, the Company had available
unused net operating loss carryforwards ("NOLs") aggregating approximately
$3,617,000 to offset future taxable income under U.S. tax laws. Under Section
382 of the Internal Revenue Code of 1986, as amended (the "Code"),
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utilization of prior NOLs is limited after an ownership change, as defined in
such Section 382, to an amount equal to the value of the loss corporation's
outstanding stock immediately before the date of the ownership change,
multiplied by the Federal long-term tax-exempt rate in effect during the month
that the ownership change occurred. Upon the consummation of the Company
Offering, the Company may be subject to limitations on the use of its NOLs as
provided under Section 382. Accordingly, there can be no assurance that a
significant amount of the Company's existing NOLs will be available to the
Company following the Company Offering. In the event that the Company achieves
profitability, as to which there can be no assurance, such limitation would
have the effect of increasing the Company tax liability and reducing the net
income and available cash resources of the Company in the future.
22. LIMITATIONS ON DIRECTOR LIABILITY. Florida law provides that a director
of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
with certain exceptions. These provisions may discourage stockholders from
bringing suit against a director for breach of fiduciary duty and may reduce
the likelihood of derivative litigation brought by stockholders on behalf of
the Company against a director. In addition, the Company's Articles of
Incorporation (the "Articles") provide for mandatory indemnification of
directors and officers to the fullest extent permitted or not prohibited by
Florida law. See "Description of Securities--Limited Liability and
Indemnification."
23. DIFFICULTY OF EFFECTING SERVICE OF PROCESS AND ENFORCEMENT OF JUDGMENTS
ON DIRECTORS AND OFFICERS. Service of process upon certain of the directors
and officers of the Company, some of whom reside outside the United States,
may be difficult to effect within the United States. Furthermore, since a
substantial portion of the Company's assets are located in Brazil, any
judgment obtained in the United States against the Company may not be
enforceable within the United States. Brazilian courts may enforce United
States final executory judgments for liquidated amounts in civil matters
obtained after due trial before a court of competent jurisdiction; however,
there can be no assurance that a Brazilian court will be required to enforce a
final judgment obtained in a court located in the United States.
24. FACTORS INHIBITING TAKEOVER. Certain provisions of the Articles and
Bylaws may be deemed to have anti-takeover effects and may delay, defer or
prevent a takeover attempt that a stockholder might consider in its best
interest. The Company's Articles authorize the Board to determine the rights,
preferences, privileges and restrictions of unissued series of preferred
stock, $.01 par value per share (the "Preferred Stock") and to fix the number
of shares of any series of Preferred Stock and the designation of any such
series, without any vote or action by the Company's stockholders. Thus, the
Board can authorize and issue shares of Preferred Stock with voting or
conversion rights that could adversely affect the voting or other rights of
holders of the Company's Common Stock. In addition, the issuance of Preferred
Stock may have the effect of delaying, deferring or preventing a change of
control of the Company, since the terms of the Preferred Stock that might be
issued could potentially prohibit the Company's consummation of any merger,
reorganization, sale of substantially all of its assets, liquidation or other
extraordinary corporate transaction without the approval of the holders of the
outstanding shares of the Common Stock. Other provisions of the Company's
Articles and Bylaws (i) divide the Company's Board of Directors into three
classes, each of which will serve for different three-year periods; (ii)
provide that the stockholders may not take action by written consent, but only
at duly called annual or special meetings of stockholders; and (iii) establish
certain advance notice procedures for nomination of candidates for election as
directors and for stockholder proposals to be considered at annual
stockholders' meetings. In addition, certain provisions of the Florida
Business Corporation Act (the "FBCA") may have the effect of delaying,
deferring or preventing a change in control of the Company. See "Description
of Securities--Florida Law and Certain Articles of Incorporation and Bylaw
Provisions."
25. PENNY STOCK REGULATION. The Securities Enforcement and Penny Stock
Reform Act of 1990 requires additional disclosure relating to the market for
penny stocks in connection with trades in any stock defined as a penny stock.
Commission regulations generally define a penny stock to be an equity security
that has a market price of less than $5.00 per share, subject to certain
exceptions. Unless an exception is available, the regulations require the
delivery, prior to any transaction involving a penny stock, of a disclosure
schedule explaining the penny stock market and the risks associated therewith.
15
<PAGE>
[ALTERNATE PAGE FOR BRIDGE INVESTORS PROSPECTUS]
In addition, if the Company's securities do not meet an exception to the
penny stock regulations cited above, trading in the Company's securities would
be covered by Rule 15g-9 promulgated under the Exchange Act for non-NASDAQ and
non-national securities exchange listed securities. Under such rule,
broker/dealers who recommend such securities to persons other than established
customers and accredited investors must make a special written suitability
determination for the purchaser and receive the purchaser's written agreement
to a transaction prior to sale. Securities are exempt from this rule if the
market price is at least $5.00 per share.
If the Company's securities become subject to the regulations applicable to
penny stocks, the market liquidity for the Company's securities could be
adversely affected. In such event, the regulations on penny stocks could limit
the ability of broker/dealers to sell the Company's securities and thus the
ability of purchasers of the Company's securities to sell their securities in
the secondary market.
16
<PAGE>
[ALTERNATE PAGE FOR BRIDGE INVESTORS PROSPECTUS]
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the Common
Stock offered hereby. The net proceeds to the Company from the sale of the
Company Offered Shares and Company Offered Redeemable Warrants and from the
exercise of the Bridge Warrants are estimated to be $9,863,200 ($11,026,000 if
the Underwriters' Over-allotment Option is exercised in full), after deducting
the underwriting discount and estimated offering expenses payable by the
Company. The Company will not receive any of the proceeds from any sale of
shares by the Selling Stockholder if the Underwriters' Over-allotment Option
is exercised. See "Principal and Selling Stockholders" and "Concurrent
Registration of Common Stock and Warrants."
The Company expects to use the net proceeds (assuming no exercise of the
Underwriters' Over-allotment Option) during the next 12 months as follows:
<TABLE>
<CAPTION>
APPROXIMATE
APPROXIMATE PERCENTAGE
APPLICATION OF PROCEEDS DOLLAR AMOUNT OF NET PROCEEDS
----------------------- ------------- ---------------
<S> <C> <C>
Repayment of Senior Subordinated Notes(1)....... $2,574,000 26.1%
Repayment of short-term notes(2)(3)............. 3,090,000 31.3%
Research and development(4)..................... 1,000,000 10.1%
Dividend payable(5)............................. 292,000 3.0%
Working capital and general corporate purpos-
es(6).......................................... $2,907,200 29.5%
---------- -----
Total......................................... $9,863,200 100.0%
========== =====
</TABLE>
- --------
(1) Represents the repayment of the outstanding principal amount of
$2,500,000, plus estimated accrued interest thereon at the rate of 10% per
annum to the date of consummation of the Company Offering, on indebtedness
incurred in the Bridge Financing. The Notes require that $23,125 of the
repayment proceeds be used to exercise the Bridge Warrants. The net
proceeds of the Bridge Financing, approximately $2,216,000, were used to
retire approximately $577,000 of principal outstanding under short-term
notes payable by the Company to four Brazilian financial institutions
which bore interest at rates of approximately 4% to 5% per month, and to
retire approximately $160,000 of principal and accrued interest
outstanding under long-term indebtedness owed by the Company to two
Brazilian financial institutions bearing interest at rates 12% per annum.
The remaining net proceeds from the Bridge Financing were used to repay an
$80,000 non-interest bearing loan from Mr. Finkel to the Company and for
working capital and other general corporate purposes.
(2) Represents the repayment of approximately $2,990,000 of outstanding
principal balance and accrued interest on short-term notes anticipated to
be outstanding as of the consummation of the Company Offering due to five
Brazilian banks and (through Mr. Finkel) an individual. The Company's
Chief Executive Officer has personally guaranteed $500,000 of this
principal indebtedness and has pledged $400,000 as a guarantee for a loan
in the amount of $400,000 included in this outstanding principal balance.
These notes currently bear interest at rates of approximately 4% to 5% per
month.
(3) Represents the repayment of the outstanding principal amount of $100,000
on a short-term loan which bears interest at a rate of 5% per annum from
Charles N. Finkel, the Company's Chief Executive Officer, to the Company
on July 19, 1996.
(4) Includes the anticipated costs of adding research and development
personnel and the costs of continued enhancement to current products and
new product development.
(5) Represents dividends payable by Ensec, S.A. to its former parent company,
Tecpo Comercio E Representacoes Ltda., a Brazilian limited liability
company ("Tecpo"), indirectly wholly-owned by Charles N. Finkel, President
and Chief Executive Officer of the Company, which dividends were
attributable to net income of Ensec, S.A. in fiscal year 1992 and prior
periods.
(6) Includes an estimated amount of $350,000 to satisfy termination benefits
anticipated to be incurred by the Company in connection with the
downsizing of its Brazilian operations.
----------------
If the Underwriters exercise their Over-allotment Option in full, the
Company will realize additional net proceeds of approximately $1,162,800,
which amount will be added to the Company's working capital.
17
<PAGE>
[ALTERNATE PAGE FOR BRIDGE INVESTORS PROSPECTUS]
The Company anticipates, based on currently proposed plans and assumptions
relating to its operations, that the proceeds of the Company Offering will be
sufficient to satisfy the Company's contemplated cash requirements for at
least 12 months following the consummation of the Company Offering. In the
event the Company's plans change or its assumptions change or prove to be
inaccurate or the proceeds of the Company Offering prove to be insufficient to
fund operations (due to unanticipated expenses, delays, problems or
otherwise), the Company may find it necessary or advisable to reallocate some
of the proceeds within the above-described categories or to use portion
thereof for other purposes and could be required to seek additional financing
sooner than currently anticipated. Depending on the Company's progress in the
development of its products and technology, their acceptance by third parties,
and the state of the capital markets, the Company may also determine that it
is necessary to raise additional equity capital within the next 12 months,
subject to the prior written consent of the Representative. The Company has no
current arrangements with respect to, or sources of, additional financing and
there can be no assurance that additional financing will be available to the
Company when needed on commercially reasonable terms or at all. Any inability
to obtain additional financing when needed would have a material adverse
effect on the Company, including possibly requiring the Company to
significantly curtail or cease its operations.
Proceeds not immediately required for the purposes described above will be
invested principally in U.S. government securities and/or short-term
certificates of deposit.
18
<PAGE>
[ALTERNATE PAGE FOR BRIDGE INVESTORS PROSPECTUS]
DILUTION
As of June 30, 1996, the Company had a net tangible book value equal to
$(151,414), or $(.04) per share. After giving effect to the sale of the
Company Offered Shares and the Company Offered Redeemable Warrants, the
issuance of 231,250 shares of Common Stock pursuant to the exercise of the
Bridge Warrants, and application of the estimated net proceeds as set forth
under "Use of Proceeds," the pro forma net tangible book value at such date
would have been $9,210,046, or $1.64 per share. This represents an immediate
increase in net tangible book value of $1.68 per share to the existing
stockholders and immediate dilution of $4.36 per share (or 72.7% of the public
offering price) to purchasers of the Common Stock offered hereby ("New
Investors"). If the initial public offering price is higher or lower, the
dilution to New Investors will be, respectively, greater or less. The
following table illustrates the dilution per share:
<TABLE>
<S> <C> <C>
Public offering price(1)........................................ $6.00
Net tangible book value per share at June 30, 1996(2)......... $(.04)
Increase per share attributable to New Investors.............. $1.68
Pro forma net tangible book value per share after Offering...... $1.64
-----
Dilution per share to New Investors(3).......................... $4.36
=====
</TABLE>
- --------
(1) Before deduction of underwriting discounts and commissions and estimated
offering expenses payable by the Company.
(2) Net tangible book value per share represents the Company's total tangible
assets less its total liabilities divided by the number of shares of
Common Stock outstanding. The Company's total tangible assets are equal to
total assets less deferred financing costs of $167,902 and $118,960 of
deferred offering costs as of June 30, 1996.
(3) The dilution of net tangible book value per share to New Investors
assuming the Underwriters' Over-allotment Option is exercised in full
would be $4.22 (or 70.3%).
The following table sets forth, with respect to existing stockholders and
New Investors, a comparison of the number of shares of Common Stock acquired
from the Company, the percentage ownership of such shares, the total
consideration paid and the average price per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION PAID
-------------------- ------------------------
AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- --------------- -------------------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders... 3,731,250(1) 66.3% $ 4,112,205(1) 26.5% $1.01
New Investors........... 1,900,000 33.7% $11,400,000 73.5% $6.00
========= ===== =============== ========= =====
Total................. 5,631,250 100.0% $15,512,205 100.0% $2.76
========= ===== =============== ========= =====
</TABLE>
- --------
(1) With respect to the 3,500,000 shares of Common Stock currently issued and
outstanding as of the date of this Prospectus (excluding shares to be
issued upon the exercise of the Bridge Warrants and capital contributed in
exchange therefor of $594,501). Total Consideration Paid is assumed to be
the sum of the Company's Common Stock and Additional Paid-in Capital as of
June 30, 1996. See "Consolidated Financial Statements."
The information contained in the above tables gives effect to the exercise
of the Bridge Warrants and the issuance of 231,250 shares of Common Stock at
$.10 per share but does not give effect to the exercise of options granted
under the Plan to purchase 355,000 shares of Common Stock for $3.00 per share.
Exercise of these options and warrants would result in further dilution to New
Investors in the Company Offering.
19
<PAGE>
[ALTERNATE PAGE FOR BRIDGE INVESTORS PROSPECTUS]
CAPITALIZATION
The following table sets forth the capitalization of the Company at June 30,
1996, as adjusted to give effect to the receipt and anticipated use of the
estimated net proceeds of the Company Offering. This table should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto, "Selected Consolidated Financial Data" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------------
ACTUAL AS ADJUSTED(2)
----------- --------------
<S> <C> <C>
Long-term debt (including current maturities)...... $ 3,950,000 $ 3,950,000
Senior Subordinated Notes payable.................. 1,879,300 -0-
Stockholders' equity
Preferred Stock, $.01 par value per share,
3,000,000 shares authorized, none issued or
outstanding..................................... -- --
Common Stock, $.01 par value per share,
20,000,000 shares authorized, 3,500,000 shares
issued and outstanding; 5,631,250 shares issued
and outstanding, as adjusted(1)................. 35,000 56,313
Additional paid-in capital....................... 4,077,205 13,919,092
Accumulated deficit(3)........................... (3,976,757) (4,765,359)
----------- -----------
Total Stockholders' Equity......................... 135,448 9,210,046
----------- -----------
Total Capitalization........................... $ 5,964,748 $13,160,046
=========== ===========
</TABLE>
- --------
(1) Assumes (i) issuance of 231,250 shares of Common Stock upon the exercise
of the Bridge Warrants; (ii) no exercise of the Underwriters' Over-
allotment Option; (iii) no exercise of the Underwriters' Warrants
including the exercise of the Company Offered Redeemable Warrants
contained therein; (iv) no exercise of the Company Offered Redeemable
Warrants; and (v) no exercise of options granted under the Plan. See
"Management--1996 Stock Option Plan" and "Description of Securities."
(2) Adjusted to reflect the sale of 1,900,000 Company Offered Shares and
1,900,000 Company Offered Redeemable Warrants offered pursuant to the
Company Offering and the exercise of the Bridge Warrants. See "Use of
Proceeds."
(3) Adjusted for the unamortized portion of deferred financing costs and
discount in connection with the Bridge Financing of $167,902 and $620,700,
respectively, which will be recognized as interest expense upon the
repayment thereof.
DIVIDEND POLICY
The Company currently anticipates that it will retain any future earnings
for use in its business and does not anticipate paying any dividends in the
foreseeable future. The payment of any future dividends will be at the
discretion of the Company's Board of Directors and will depend, among other
things, upon the Company's future earnings, operations, capital requirements
and financial condition, general business conditions and contractual
restrictions on payment of dividends, if any.
20
<PAGE>
[ALTERNATE PAGE FOR BRIDGE INVESTORS PROSPECTUS]
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the full years shown
have been derived from the Company's audited consolidated financial
statements. The selected statement of income data for the six months ended
June 30, 1996 and the selected balance sheet data as of June 30, 1996 have
been derived from unaudited interim consolidated financial statements of the
Company, and reflect, in management's opinion, all adjustments necessary for a
fair presentation of the financial position and results of operations for
these periods. Results of operations for interim periods are not necessarily
indicative of results to be expected for the full year. This data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and with the Company's Consolidated
Financial Statements and the Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------- -----------------------
1994 1995 1995 1996
------ -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CONSOLIDATED OPERATING DATA:
Sales.......................... $8,540 $ 8,561 $ 4,380 $ 4,729
Gross profit................... 5,964 2,727 938 2,022
Selling, general and
administrative expenses....... 4,153 5,288 3,378 2,646
Research and development
expenses...................... 276 600 171 432
Translation loss (gain)........ 1,979 1,230 (800) 219
Loss from operations........... (444) (4,391) (1,812) (1,275)
Interest income................ (1,614) (648) (576) (24)
Interest expense............... 508 2,520 1,015 1,175
Net, other (income) expense.... 593 395 532 (16)
Earnings from operation of
discontinued division......... 534 436 342 --
Gain on disposal of
discontinued division......... -- 1,008 -- --
------ -------- -------- --------
Net earnings (loss)............ $ 234 $ (3,818) $ (2,221) $ (2,095)
====== ======== ======== ========
Net earnings (loss) per
share(1):
Continuing operations......... $ (.08) $ (1.35) $ (.66) $ (.54)
Discontinued operations....... .14 .37 .09 --
------ -------- -------- --------
Net earnings (loss) per share.. $ .06 $ (.98) $ (.57) $ (.54)
====== ======== ======== ========
Supplemental pro forma net
loss.......................... $ (2,805)(2) $ (1,305)(3)
======== ========
Supplemental pro forma net loss
per share..................... $ (.67)(2) $ (.28)(3)
======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1996 (UNAUDITED)
---------------- ----------------------------------------------
1994 1995 ACTUAL PRO FORMA(4) AS ADJUSTED(5)(6)(7)(8)
------- -------- -------- ------------ -----------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Working capital
(deficit).............. $ 1,489 $ (1,505) $ (4,754) $ (4,754) $ 4,608
Total assets............ 11,769 10,954 11,520 12,370 16,143
Current liabilities..... 3,645 5,839 9,261 10,111 4,809
Long-term debt, less
current portion........ 1,696 3,209 2,124 2,124 2,124
Stockholders' equity.... 5,405 1,587 135 135 9,210
</TABLE>
- --------
(1) Net loss per share is computed based on the weighted average number of
shares of Common Stock outstanding for each period. For purposes of
computing net loss per share, options, warrants and Common Stock granted
or issued by the Company during the 12-month period preceding the date of
the Company Offering at a price below the offering price to the public of
$6.00 per share have been included in the determination of the weighted
average number of shares outstanding using the treasury stock method.
21
<PAGE>
[ALTERNATE PAGE FOR BRIDGE INVESTORS PROSPECTUS]
(2) The supplemental pro forma net loss and net loss per share reflect the
issuance of shares necessary to retire the estimated average notes payable
outstanding during 1995 and the resulting decrease in net loss in the
amount of $1,013,000 for the year ended 1995, as of the beginning of the
period presented. The calculation is based on the weighted average shares
outstanding used in the calculation of earnings per share, adjusted for
the estimated number of shares that would be issued by the Company (i.e.,
300,500 shares at $6.00 per share) to retire these obligations. See Note A
in Notes to Consolidated Financial Statements.
(3) The supplemental pro forma net loss and net loss per share reflect the
issuance of shares necessary to retire the estimated average notes payable
outstanding during the six months ended June 30, 1996 and the senior
subordinated notes and the resulting decrease in net loss in the amount of
$790,000 for the six months ended June 30, 1996, as of the beginning of
the period presented. The calculation is based on the weighted average
shares outstanding used in the calculation of earnings per share, adjusted
for the estimated number of shares that would be issued by the Company
(i.e., 790,000 shares at $6.00 per share) to retire these obligations. See
Note A in Notes to Consolidated Financial Statements.
(4) Pro forma financial information gives effect to loans aggregating
$1,000,000 from the Company's Chief Executive Officer, a Brazilian bank
and a third party (through Mr. Finkel) in July and August 1996, of which
approximately $150,000 was used to repay outstanding principal and accrued
interest on the Company's short-term notes payable to Brazilian banks.
These loans are expected to be repaid from the proceeds of the Company
Offering. See "Use of Proceeds."
(5) Adjusted to reflect the sale of 1,900,000 Company Offered Shares and
1,900,000 Company Offered Redeemable Warrants offered in the Company
Offering and the exercise of the Bridge Warrants. See "Use of Proceeds"
and "Capitalization."
(6) Does not include up to (i) 210,000 shares of Common Stock issuable by the
Company and 75,000 shares of Common Stock to be sold by the Selling
Stockholder upon exercise of the Underwriters' Over-allotment Option in
full; (ii) 2,185,000 shares of Common Stock reserved for issuance upon
exercise of the Company Offered Redeemable Warrants, including those
issuable upon exercise of the Underwriters' Over-allotment Option in full;
(iii) 380,000 shares of Common Stock reserved for issuance upon exercise
of the Underwriters' Warrants and the Company Offered Redeemable Warrants
included therein; and (iv) 450,000 shares issuable upon the exercise of
stock options granted pursuant to the Plan. See "Management--1996 Stock
Option Plan," "Certain Relationships and Related Transactions," and
"Underwriting."
(7) After giving effect to (i) the Underwriters' discount ($927,200); (ii) the
Representative's non-accountable expense allowance ($347,700); and (iii)
an estimated $475,000 of other fees and expenses incurred in connection
with the Company Offering, including printing, professional and other
miscellaneous fees.
(8) Adjusted for the unamortized portion of deferred financing costs and
discount on the Bridge Financing of $167,902 and $620,700, respectively,
which will be recognized as interest expense upon the repayment thereof.
22
<PAGE>
[ALTERNATE PAGE FOR BRIDGE INVESTORS PROSPECTUS]
in cash, and a 10% interest in a corporation owned by De La Rue, to which the
Company attributes nominal value. This transaction resulted in the recognition
by the Company of a gain of $1.0 million.
The Company's revenue from its currency sorting equipment division increased
$.3 million, or 11.5%, to $2.9 million in 1995 from $2.6 million in 1994. Cost
of goods sold and selling, general and administrative expenses remained
relatively constant as a percentage of sales for both years except for a $.2
million charge incurred in 1995 related to employee termination costs
associated with the Company's downsizing efforts.
CERTAIN FACTORS AFFECTING FUTURE PERFORMANCE
Although the Company has experienced increases in revenues from sales of its
integrated security systems, including sales of the En2000(TM) system, the
Company does not believe that prior growth rates are necessarily indicative of
future operating results. In addition, the Company intends to invest
significantly in research and development of its products. As a result, there
can be no assurance that the Company will be profitable on a quarterly or
annual basis. Due to the Company's limited operating history with respect to
the EnWorks(TM) family of integrated security systems and products,
predictions as to future operating results are difficult. Future operating
results may fluctuate due to many factors, including, but not limited to:
general economic conditions, specific economic conditions relating to the
production of integrated security systems (including software); the demand for
the Company's products; the size and timing of future orders and new
contracts; specific feature requests by customers; production delays or
manufacturing inefficiencies; management decisions to commence or discontinue
product lines; the Company's ability to design, introduce and manufacture new
products on a cost-effective and timely basis; the amount and timing of
research and development expenditures; the maintenance of present and the
availability of future strategic alliances and joint marketing or servicing
agreements; the introduction of new products and product enhancements by the
Company or its competitors; the budgeting cycle of customers; changes in the
proportion of revenues attributable to license fees and maintenance and
support services; changes in the level of operating expenses; and the present
and future level of competition in the industry.
The Company expects to incur additional losses in the foreseeable future,
including net losses at least through the end of 1996. The anticipated net
loss in the third quarter of 1996 will include the recognition of the deferred
interest expenses of approximately $.9 million anticipated to be recognized in
such quarter in connection with the repayment of the Bridge Financing from the
proceeds of the Company Offering.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the six months ended June 30, 1996
amounted to $2.3 million, which resulted primarily from the Company's net loss
from operations. See "--Results of Operations--First Six Months of 1996
Compared with First Six Months of 1995." Net cash used in investing activities
for the first six months of 1996 was $.4 million, which resulted primarily
from continued investment in the development of the Company's software and
hardware products. Net cash provided by financing activities in the first six
months of 1996 was $2.7 million, which primarily resulted from the proceeds
received by the Company in connection with the Bridge Financing and increases
in borrowings under credit line agreements.
Net cash used in operating activities for the year ended December 31, 1995
amounted to $6.3 million, due primarily to losses from continuing operations
and a reduction of accounts payable. See "--Results of Operations--Fiscal Year
1995 Compared with Fiscal Year 1994." Cash flow from investing activities was
$1 million, which was due primarily to proceeds from the sale of the Company's
currency sorting equipment division and the sale of fixed assets, reduced by
the continued investment in the Company's software and hardware products.
The Company had a negative working capital of $1.5 million as of December
31, 1995 and $4.8 million as of June 30, 1996. While the negative working
capital resulted in part from continued losses, it has also resulted from the
Company's substantial investment since 1992 in the development of software for
the EnWorks(TM) family of products. The capitalized software costs incurred by
the Company amounted to $1.7 million, $1.2 million, $.7 million and $.4
million for the years ended 1994 and 1995 and the six months ended June 30,
1995 and 1996,
27
<PAGE>
[ALTERNATE PAGE FOR BRIDGE INVESTORS PROSPECTUS]
respectively. The Company anticipates that it will incur approximately $1.0
million of research and development expenditures in the next 12 months in
order to enhance existing products and to develop new products.
The Company has a $.3 million line of credit agreement with a commercial
bank, which line of credit will expire in September 1996. The Company has no
additional borrowings available under this line of credit. Borrowings under
the line of credit are evidenced by notes payable which bear interest at a
rate of such bank's prime rate plus 2% per annum and are secured by certain
Ensec Inc. accounts receivable. The Company obtained its long-term debt
financing from two Brazilian banks. These loans bear interest at a rate of 12%
per annum, require monthly payments of principal and interest and mature in
1998. As of June 30, 1996, the Company has $4.0 million outstanding under its
long-term notes. Short-term borrowings from several Brazilian banks as of June
30, 1996 amounted to $2.2 million, which bear interest at rates of
approximately 4% to 5% per month. The repayment of the short-term debt from
the proceeds of this Offering will result in a substantial reduction in
interest expense. In July 1996, Charles N. Finkel, the Company's Chief
Executive Officer, loaned $.1 million to the Company and pledged $.4 million
in collateral as a guarantee for a short-term loan to the Company in the
amount of $.4 million. In August 1996, the Company borrowed an additional $.5
million, approximately $150,000 of the proceeds from which were used to retire
other short-term debt. Mr. Finkel personally guaranteed the repayment of this
indebtedness. All of this short-term debt is to be repaid from the proceeds of
the Company Offering. In addition, the Company presently intends to sell or
enter into a sale/leaseback or similar arrangement with respect to certain
buildings owned by the Company located in Sao Paulo, Brazil, the proceeds of
which would be used to reduce the Company's long-term debt.
The Company believes that the financing provided by the Company Offering
should provide funds that, together with cash flow from operations, if any,
will be sufficient to repay its short-term debt and meet its presently
anticipated working capital, including marketing expenditures, and research
and development expenditure requirements for at least the next 12 months.
However, there can be no assurance that the Company will achieve profitability
in the next 12 months, and the Company may need to raise additional capital in
the future, subject to the prior written consent of the Representative. As a
result of entering into employment agreements with seven of the Company's
executives in May or June 1996, the Company will incur increases in salary
expenses of $.3 million for 1996. See "Management."
As of December 31, 1995, the Company had NOL carryforwards for U.S. federal
income tax purposes of approximately $3.6 million, which begin to expire in
2006. These carryforwards result from cumulative operating losses of Ensec
Inc. since its inception in 1991. The consummation of the Company Offering and
the sale of the Company Offered Shares and the Company Offered Redeemable
Warrants may limit the Company's ability to offset such carryforwards against
U.S. taxable income in future years. The Company's NOL carryforwards for
Brazilian corporate and social contribution tax purposes totaled $5.5 million
as of December 31, 1995. There are no limitations which affect the ability of
the Company to offset these losses against future Brazilian taxable income.
See Note K in Notes to Consolidated Financial Statements.
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The Company believes that its future success will depend in large part upon
its ability to continue to attract, retain, train and motivate highly skilled
and dedicated employees. The Company has not experienced a work stoppage, and
the Company believes that its employee relations are good.
FACILITIES
U.S.: The Company is headquartered in Boca Raton, Florida. The Company
presently leases approximately 6,000 square feet of office space at two
locations--Boca Raton, Florida and New York City, New York. The New York
offices are utilized by the Company's regional sales personnel.
Brazil: The Company's Brazilian operations are headquartered in a Company-
owned building located in Cotia, a suburb of Sao Paulo. The building was
constructed in 1990 and is comprised of approximately 140,000 square feet of
office and warehouse space. In addition to the Cotia-based headquarters, the
Company maintains a number of service facilities located throughout Brazil.
These offices, many of which are provided by customers of the Company, are
used principally by the Company's service technicians.
The Company believes that its facilities are adequate to meet the Company's
current business requirements, and that suitable additional space will be
available as needed to accommodate further physical expansion of its U.S.
operations and for additional sales and support offices in the U.S.
LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. As of the date
of this Prospectus, the Company is not a party to any legal proceedings the
adverse outcome of which, in management's opinion, individually or in the
aggregate, would have a material adverse effect on the Company's results of
operations or financial position.
In August 1996, the Company received a written demand from a broker in
Brazil claiming that the Bridge Financing and the Company Offering wrongfully
precluded such broker's efforts to secure financing for the Company. The
broker is seeking $300,000, on the basis that it would have secured $10
million in financing for the Company but for the Bridge Financing and the
Company Offering. The Company and its counsel have reviewed the claim and
believe it to be without merit. The Company intends to vigorously defend any
litigation, if commenced, with respect to such claim.
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Directors of the Company, Ensec, S.A. and Ensec Inc. do not receive any
additional compensation for serving as a director or committee member, but
directors who are not employees of the Company are reimbursed for their
reasonable out-of-pocket expenses incurred in attending meetings of the Board
of Directors and Board committees.
COMMITTEES OF THE BOARD OF DIRECTORS
Upon the consummation of the Company Offering and the appointment of two
individuals not otherwise affiliated with the Company as directors, the
Company will form an Audit Committee and a Compensation Committee. The Audit
Committee will be responsible for reviewing audit functions, including
accounting and financial reporting practices of the Company, the adequacy of
the Company's system of internal accounting control, the quality and integrity
of the Company's financial reporting and relations with independent auditors.
It is anticipated that the Audit Committee will consist of Messrs. Finkel,
Norman and a new director. The Compensation Committee will be responsible for
establishing the compensation of the Company's directors, officers and
employees (other than those persons serving on such committee, whose
compensation will be determined by the full Board of Directors), including
salaries, bonuses, commission, and benefit plans, administering the Plan, and
other forms of or matters relating to compensation. It is anticipated that the
Compensation Committee will consist of Messrs. da Silva, Finkel and Norman.
EXECUTIVE COMPENSATION
The following table sets forth as of December 31, 1995, all compensation
paid during the Company's last fiscal year to the Company's Chief Executive
Officer and to executive officers whose total annual compensation exceeded
$100,000 in any of the last three completed fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
-----------------------------------
OTHER ANNUAL ALL OTHER
AME AND PRINCIPAL POSITIONN YEAR SALARY BONUS COMPENSATION(3) COMPENSATION
- --------------------------- ---- -------- ----- --------------- ------------
<S> <C> <C> <C> <C> <C>
Charles N. Finkel, Chief 1995 $116,500 $-0- $ -0- $107,200(4)
Executive Officer of the 1994 $ 73,000 $-0- $ -0- $117,900(5)
Company, Ensec, 1993 $ 67,600 $-0- $ -0- $191,100(6)
S.A. and Ensec Inc.
Frederico Bettancourt, Senior 1995 $102,800 $-0- $34,800 $ -0-
Vice President and Chief 1994 $128,600 $-0- $ -0- $ -0-
Financial Officer of 1993 $ 99,500 $-0- $ -0- $ -0-
Ensec, S.A.(2)
</TABLE>
- --------
(1) All compensation or remuneration paid to employees was paid by Ensec, S.A.
and Ensec Inc. In accordance with the rules of the Commission, the
compensation described in this table does not include medical, group life
insurance or other benefits received by the executives which are available
generally to all salaried employees of the Company, and certain
perquisites and other personal benefits, securities or property received
by the executives which do not exceed the lesser of $50,000 or 10% of any
such officer's salary and bonus disclosed in this table.
(2) Mr. Bettancourt, who was an executive officer of Ensec, S.A. as of
December 31, 1995, is no longer employed by the Company or any of its
subsidiaries.
(3) Represents commissions paid by the Company on behalf of the executive.
(4) Represents the following compensation for expenses paid by the Company on
behalf of the executive in fiscal year 1995: (i) $9,648 in property
maintenance expenses; (ii) $17,152 in car expenses; (iii) $18,224 in meal
expenses; (iv) $26,800 in travel expenses; (v) $24,656 in entertainment
expenses; and (vi) $10,720 in miscellaneous expenses.
(5) Represents the following compensation for expenses paid by the Company on
behalf of the executive in fiscal year 1994: (i) $9,432 in property
maintenance expenses; (ii) $15,327 in car expenses; (iii) $21,222 in
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meal expenses; (iv) $30,654 in travel expenses; (v) $23,580 in
entertainment expenses; and (vi) $17,685 in miscellaneous expenses.
(6) Represents the following compensation for expenses paid by the Company on
behalf of the executive in fiscal year 1993: (i) $26,754 in property
maintenance expenses; (ii) $24,768 in car expenses; (iii) $30,651 in meal
expenses; (iv) $51,597 in travel expenses; (v) $34,398 in entertainment
expenses; and (vi) $22,932 in miscellaneous expenses.
EMPLOYMENT AGREEMENTS
The Company or its subsidiaries are a party to substantially identical
employment agreements with Messrs. Finkel, Norman, da Silva, Geffin, Morelli,
Rottner and De George, pursuant to which each of those individuals serve as an
executive of the Company, Ensec, S.A. or Ensec Inc. Each of the employment
agreements is for an initial three-year term, commencing in May or June 1996
and automatically renews for successive three-year terms unless either party
provides written notice to the other party at least 90 days prior to renewal.
Under the terms of the employment agreements, Messrs. Finkel, Norman, da
Silva, Geffin, Morelli, Rottner and De George receive an initial annual base
salary of $240,000, $127,000, $127,000, $100,000, $80,000, $75,000 and
$85,000, respectively, which may be increased from time to time by the Board
of Directors. Mr. Rottner's employment agreement provides for minimum annual
increases in base salary of 5%. Mr. De George's agreement currently provides
for payment of an additional 2% of sales revenues on sales of Company products
by Mr. De George until December 31, 1996. After such time, such sales
commissions shall terminate and shall be replaced by a sales incentive program
to be established by the Company. The employment agreements for Messrs.
Norman, da Silva and Geffin provide for annual cash bonuses equal to 25% of
the annual base salary then in effect for Messrs. Norman, da Silva and Geffin
in the event certain subsidiary budgets are attained at the end of each fiscal
year. The other executives will be eligible for annual cash bonuses determined
in the discretion of the Board of Directors of the Company based on the
attainment of individual performance targets and the financial performance of
the Company or its subsidiaries.
The agreements provide that upon termination of employment by the Company,
other than for Cause (as defined in the agreements) or retirement, the Company
shall pay (i) in the case of Mr. Finkel, an amount equal to the aggregate
present value of the product of (x) the average aggregate annual compensation
paid to Mr. Finkel by the Company and any of its subsidiaries and includable
in Mr. Finkel's gross income for federal income tax purposes during the five
calendar years preceding the taxable year in which the date of termination
occurs subject to United States income tax, multiplied by (y) 2.99; (ii) in
the case of Mr. Norman, one and one-half times the amount of the executive's
total cash compensation in the 12 months preceding the date of termination;
and (iii) in the case of Messrs. da Silva, De George, Geffin, Morelli and
Rottner, the amount of the executive's total cash compensation in the 12
months preceding the date of termination. The agreements provide for
noncompetition, nonsolicitation and nondisclosure covenants. The agreements
also provide for each executive a grant of options under the Plan which will
vest in one-third equal installments over a two-year period, with the first
vesting to occur on the consummation of the Company Offering and subsequent
vesting to occur on the first and second anniversary dates of the consummation
of the Company Offering. The options are Incentive Stock Options and provide
for an exercise price of $3.00 per share, subject to adjustment in accordance
with the terms of the Plan. In order for the options to vest, the executive
must be an employee of the Company or its subsidiaries as of the date of
vesting, and according to the terms of the Plan vesting of the options will
accelerate and the options will become immediately exercisable in the event
the executive is terminated by the Company other than for Cause. The number of
options granted to the executives under the Plan pursuant to the employment
agreements is as follows: Mr. Norman--150,000 shares; Messrs. da Silva and
Geffin--50,000 shares; Mr. Rottner--30,000 shares; and Messrs. De George,
Finkel and Morelli--25,000 shares.
1996 STOCK OPTION PLAN
The Company has adopted the 1996 Stock Option Plan (the "Plan"), pursuant to
which stock options (both Nonqualified Stock Options and Incentive Stock
Options, as defined in the Plan), stock appreciation rights and
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PRINCIPAL AND SELLING STOCKHOLDERS
The table below sets forth information as of the date of this Prospectus.
The table is based on information obtained from the persons named below with
respect to the beneficial ownership of shares of Common Stock by (i) each
person known by the Company to be the owner of more than 5% of the aggregate
outstanding shares of Common Stock; (ii) each director; (iii) the Chief
Executive Officer of the Company; and (iv) all executive officers and
directors as a group. Charles N. Finkel, President and Chief Executive Officer
of the Company and Ensec Inc., and Chief Executive Officer of Ensec, S.A. (the
"Selling Stockholder"), has agreed to sell up to 75,000 shares of Common Stock
in the event the Underwriters' Over-allotment Option is exercised with respect
to a number of shares equal to or greater than 75,000. The Company will not
receive any proceeds from the sale of shares by the Selling Stockholder,
although the Selling Stockholder will pay his pro rata share of the Company's
expenses of the Offering if the Over-allotment Option is exercised.
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING
COMMON STOCK
BENEFICIALLY OWNED
------------------------------
NUMBER OF SHARES
NAMES AND ADDRESSES OF OF COMMON STOCK SHARES PRIOR TO AFTER
BENEFICIAL OWNERS(1) BENEFICIALLY OWNED TO BE SOLD OFFERING OFFERING(2)
---------------------- ------------------ ---------- ------------ --------------
<S> <C> <C> <C> <C>
Charles N. Finkel....... 3,508,333 1/3(3) 75,000 97.0% 61.0%(3)
James K. Norman......... 50,000 (4) -0- 1.4% *
Flavio R. da Silva...... 16,666 2/3(4) -0- * *
All executive officers
and directors as a
group
(5 persons)............ 3,601,666 2/3(5) 75,000 99.5% 62.6%(5)
</TABLE>
- --------
* Less than 1%
(1) The address of each stockholder is 751 Park of Commerce Drive, Suite 104,
Boca Raton, Florida 33487. Unless otherwise indicated, the Company
believes that all persons named in the table have sole voting and
investment power with respect to all shares of Common Stock beneficially
owned by them. A person is deemed to be the beneficial owner of securities
that can be acquired by such person within 60 days from the date of this
Prospectus upon the exercise of options, warrants or convertible
securities and the table above reflects shares of Common Stock which may
be acquired upon the exercise of options granted under the Plan that vest
upon the consummation of the Company Offering.
(2) Includes in number of shares of Common Stock outstanding 231,250 shares of
Common Stock offered hereby and 118,333 1/3 shares of Common Stock which
may be acquired upon the exercise of options granted under the Plan that
vest upon the consummation of the Company Offering (the "Option Shares"),
and excludes (i) 210,000 shares of Common Stock issuable by the Company
upon exercise of the Underwriters' Over-allotment Option in full; (ii)
2,185,000 shares of Common Stock reserved for issuance upon exercise of
the Company Offered Redeemable Warrants, including those issuable upon
exercise of the Underwriters' Over-allotment Option in full; (iii) 380,000
shares of Common Stock reserved for issuance upon exercise of the
Underwriters' Warrants and the Company Offered Redeemable Warrants
included therein; and (iv) 450,000 shares reserved for issuance under the
Plan, pursuant to which options to purchase 355,000 of such reserved
shares of Common Stock have been granted (less the Option Shares already
included).
(3) Includes (i) 8,333 1/3 shares which may be acquired by Mr. Finkel upon the
exercise of options that vest upon the consummation of the Company
Offering and (ii) 3,500,000 shares that are indirectly owned by Mr. Finkel
through wholly-owned entities. See "Certain Relationships and Related
Transactions." Mr. Finkel's percentage ownership, and that of all
executive officers and directors as a group, will be 57.6% and 59.2%,
respectively, in the event the Underwriters' Over-allotment Option is
exercised in full.
(4) Consists of shares which may be acquired pursuant to the exercise of
options that vest upon the consummation of the Company Offering.
(5) Includes 26,666 2/3 of the Option Shares which may be acquired by
executive officers not named in the table set forth above.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May 1996, the Company concluded the Bridge Financing, whereby the Bridge
Investors received in connection therewith $2,500,000 in 10% senior
subordinated notes and warrants to purchase 250,000 shares of Common Stock, of
which warrants to purchase 18,750 of such shares were relinquished by certain
of the Bridge Investors in September 1996. The 231,250 Bridge Warrants
outstanding as of the date of the Company Prospectus are mandatorily
exercisable upon the consummation of the sale of the securities in the Company
Offering. The Company received net cash proceeds from the Bridge Financing of
approximately $2,216,000 after giving effect to commissions and expenses.
In July 1996, Charles N. Finkel, the Company's Chief Executive Officer,
deposited $400,000 in a Brazilian bank to secure the guarantee of a $400,000
loan from such bank to the Company. In addition, Mr. Finkel loaned $100,000 to
the Company, which loan bears interest at a rate of 5% per annum. In August
1996, the Company borrowed $500,000 from an individual, through Mr. Finkel,
which debt is due September 30, 1996, and bears interest at a rate of
approximately 5% per month. Repayment of this indebtedness was personally
guaranteed by Mr. Finkel. Such loans shall be repaid in full from the proceeds
of the Company Offering, at which time the $400,000 deposited by Mr. Finkel
shall be released by the bank.
Of the 3,500,000 shares of Company Common Stock currently issued and
outstanding, 2,500,000 shares are owned by Tecpo and 1,000,000 shares are
owned by Fugrow Investments Inc., a British Virgin Islands corporation
("Fugrow"). Tecpo and Fugrow are wholly-owned by Mayfair Limited Partnership,
a Delaware limited partnership, the sole general partner of which is Mayfair
Company, a Delaware corporation. Charles N. Finkel, President and Chief
Executive Officer of the Company, is the sole limited partner of Mayfair
Limited Partnership and the sole stockholder of Mayfair Company. To the extent
that any of such shares are sold by Mr. Finkel as the Selling Stockholder,
such shares will be sold by Fugrow.
All related party transactions were on terms no less favorable than those
with unaffiliated third parties. All future transactions will be on terms no
less favorable than the Company could obtain based upon negotiations with
unaffiliated third parties in arms-length transactions.
DESCRIPTION OF SECURITIES
The Company is authorized to issue 20,000,000 shares of Common Stock, par
value $.01 per share, and 3,000,000 shares of Preferred Stock, par value $.01
per share. As of the date of this Prospectus, there are 3,500,000 shares of
Common Stock outstanding, held of record by two stockholders, and no shares of
Preferred Stock outstanding.
The following summary description of the Company's Common Stock and
Preferred Stock is qualified in its entirety by reference to the Company's
Articles and Bylaws, copies of which are included as exhibits to the
Registration Statement of which this Prospectus is a part.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights
of any outstanding Preferred Stock. Upon the liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to receive
ratably the net assets of the Company available after the payment of all debts
and other liabilities and subject to the prior rights of any outstanding
Preferred Stock. Holders of Common Stock have no preemptive, subscription,
redemption or conversion rights. The outstanding shares of Common Stock are,
and the shares offered by the Company in the Company Offering and this
Offering will be, when issued and paid for, fully paid and nonassessable. The
rights, preferences and privileges of holders of Common Stock are subject to,
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and may be adversely affected by, the rights of the holders of shares of any
series of Preferred Stock which the Company may designate and issue in the
future.
PREFERRED STOCK
The Board of Directors has the authority, without further action of the
stockholders of the Company, to issue up to an aggregate of 3,000,000 shares
of Preferred Stock in one or more series and to fix or alter the designations,
preferences, rights and any qualifications, limitations or restrictions of the
shares of each such series 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 designation of such
series.
The Board of Directors, without stockholder approval, can issue Preferred
Stock with voting and conversion rights that could adversely affect the voting
power of holders of Common Stock. The issuance of Preferred Stock may have the
effect of delaying, deferring or preventing a change in control of the
Company. The Company has no present plans to issue any shares of Preferred
Stock.
COMPANY OFFERED REDEEMABLE WARRANTS
The Company Offered Redeemable Warrants will be issued in registered form
pursuant to an agreement, dated the date of the Company Prospectus (the
"Warrant Agreement"), between the Company, the Underwriters and American Stock
Transfer & Trust Company (the "Warrant Agent"). The following discussion of
certain terms and provisions of the Company Offered Redeemable Warrants is
qualified in its entirety by reference to the detailed provisions of the
Statement of Rights, Terms, and Conditions for each Company Offered Redeemable
Warrant which forms a part of the Warrant Agreement. A form of the certificate
representing the Company Offered Redeemable Warrants and a form of the Warrant
Agreement have been filed as exhibits to the Registration Statement of which
this Prospectus is a part.
One Company Offered Redeemable Warrant represents the right of the
registered holder thereof to purchase one share of Common Stock at an exercise
price of $7.00 per share, subject to adjustment (the "Purchase Price"). The
Company Offered Redeemable Warrants will be entitled to the benefit of
adjustments in their respective Purchase Prices and in the number of shares of
Common Stock and/or other securities deliverable upon the exercise thereof in
the event of a stock dividend, stock split, reclassification, reorganization,
consolidation or merger.
Unless previously called for repurchase, the Company Offered Redeemable
Warrants may be exercised immediately, until the close of business on
September 25, 2001 (five years from the date of the Company Prospectus) (the
"Expiration Date"). On or after the Expiration Date, the Company Offered
Redeemable Warrants automatically become wholly void and of no value. The
Company may at any time extend the Expiration Date of all outstanding Company
Offered Redeemable Warrants, for such increased period of times as it may
determine. The Company Offered Redeemable Warrants may be exercised at the
office of the Warrant Agent.
The Company has the right at any time beginning September 25, 1997 (one year
from the date of the Company Prospectus), or such earlier date as the
Representative may determine, to repurchase the Company Offered Redeemable
Warrants at a price of $.10 each, by written notice mailed 30 days prior to
the repurchase date to each Company Offered Redeemable Warrant holder at his
address as it appears on the books of the Warrant Agent. Such notice may only
be given within three days following any period of 20 consecutive trading days
during which the high closing bid or trading price of the shares of Common
Stock (if then traded on the Nasdaq-SCM or on a national securities exchange)
equals or exceeds $10.50 per share, subject to adjustments for stock
dividends, stock splits and the like. If Company Offered Redeemable Warrants
are called for repurchase, they must be exercised prior to the close of
business on the day immediately preceding the date of any such repurchase or
the right to purchase the applicable shares of Common Stock is forfeited.
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No Company Offered Redeemable Warrant will be exercisable unless at the time
of exercise the Company had filed with the Commission a current prospectus
covering the shares of Common Stock issuable upon exercise of such Company
Offered Redeemable Warrant and such shares of Common Stock have been
registered or qualified or deemed to be exempt under the securities laws of
the state of residence of the holder of such Company Offered Redeemable
Warrant. The Company will use its best efforts to have all such shares of
Common Stock so registered or qualified on or before the exercise date and to
maintain a current prospectus relating thereto until the expiration of the
Company Offered Redeemable Warrants, subject to the terms of the Warrant
Agreement. While it is the Company's intention to do so, there is no assurance
that it will be able to do so.
No holder, as such, of the Company Offered Redeemable Warrants shall be
entitled to vote or receive dividends or be deemed the holder of shares of
Common Stock for any purposes whatsoever until such Company Offered Redeemable
Warrants have been duly exercised and the Purchase Price has been paid in
full.
TRANSFER AND WARRANT AGENT
The Company's transfer agent and registrar for the Common Stock and Warrant
Agent for the Company Offered Redeemable Warrants is American Stock Transfer &
Trust Company.
LIMITED LIABILITY AND INDEMNIFICATION
Under the FBCA, a director is not personally liable for monetary damages to
the corporation or any other person for any statement, vote, decision, or
failure to act unless (i) the director breached or failed to perform his
duties as a director and (ii) the director's breach of, or failure to perform,
those duties constitutes: (1) a violation of the criminal law, unless the
director had reasonable cause to believe his conduct was lawful or had no
reasonable cause to believe his conduct was unlawful, (2) a transaction from
which the director derived an improper personal benefit, either directly or
indirectly, (3) a circumstance under which an unlawful distribution is made,
(4) in a proceeding by or in the right of the corporation to procure a
judgment in its favor or by or in the right of a stockholder, conscious
disregard for the best interest of the corporation or willful misconduct, or
(5) in a proceeding by or in the right of someone other than the corporation
or stockholder, recklessness or an act or omission which was committed in bad
faith or with malicious purpose or in a manner exhibiting wanton and willful
disregard of human rights, safety, or property. A corporation may purchase and
maintain insurance on behalf of any director or officer against any liability
asserted against him or her and incurred by him or her in his or her capacity
or arising out of his or her status as such, whether or not the corporation
would have the power to indemnify him or her against such liability under the
FBCA.
The Articles of the Company provide that the Company shall, to the fullest
extent permitted by applicable law, as amended from time to time, indemnify
all officers and directors of the Company.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
FLORIDA LAW AND CERTAIN ARTICLES OF INCORPORATION AND BYLAW PROVISIONS
The Company is subject to (i) Section 607.0901 of the FBCA, which generally
requires supermajority approval by disinterested directors or stockholders of
certain specified transactions between a corporation and holders of more than
10% of the outstanding shares of the corporation (or their affiliates), and
(ii) Section 607.0902 of the FBCA, which generally provides that shares
acquired in excess of certain specified thresholds will not possess any voting
rights unless such voting rights are approved by a majority vote of the
corporation's disinterested stockholders.
In addition, certain provisions of the Company's Articles summarized in the
following paragraphs may be deemed to have an anti-takeover effect and may
delay, defer or prevent a tender offer or takeover attempt that a
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stockholder might consider in its best interest, including those attempts that
might result in a premium over the market price for the shares held by
stockholders.
Classified Board of Directors. The Articles provide for the Board of
Directors to be divided into three classes of directors serving staggered
three-year terms. As a result, approximately one-third of the Board of
Directors will be elected each year. These provisions, when coupled with the
provision of the Articles authorizing only the Board of Directors to fill
vacant directorships or increase the size of the Board, may deter a
stockholder from removing incumbent directors and simultaneously gaining
control of the Board of Directors by filling the vacancies created by such
removal with its own nominees.
Stockholder Action. The Articles provide that stockholders may not take
action by written consent, but only at duly called annual or special meetings
or stockholders.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The Articles provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for
election as directors at an annual or special meeting of stockholders, must
provide timely notice thereof in writing. To be timely, a stockholder's notice
must be delivered to or mailed and received at the principal executive offices
of the Company not less than 120 days nor more than 180 days prior to the date
of the Company's notice of annual meeting provided with respect to the
previous year's annual meeting; provided, however, that if no annual meeting
was held in the previous year or the date of the annual meeting has been
changed to be more than 30 calendar days earlier than the date contemplated by
the previous year's proxy statement, notice by the stockholder, to be timely,
must be received no later than the close of business on the 10th day following
the day on which such notice of the date of the meeting was mailed or such
public disclosure was made, whichever is first. The Articles also specify
certain requirements for a stockholder's notice to be in proper written form.
These provisions may preclude stockholders from bringing matters before the
stockholders at an annual or special meeting or from making nominations for
directors at an annual or special meeting.
Authorized But Unissued Shares. The authorized but unissued shares of Common
Stock and Preferred Stock are available for future issuance without
stockholder approval. These additional shares may be utilized for a variety of
corporate purposes, including future public offerings to raise additional
capital, corporate acquisitions and employee benefit plans. The existence of
authorized but unissued and unreserved Common Stock and Preferred Stock may
enable the Board of Directors to issue shares to persons friendly to current
management which could render more difficult or discourage an attempt to
obtain control of the Company by means of a proxy contest, tender, offer,
merger or otherwise, and thereby protect the continuity of the Company's
management.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Company Offering, the Company will have outstanding
5,631,250 shares of Common Stock, after giving effect to the 231,250 shares of
Common Stock issuable upon exercise of the Bridge Warrants but without giving
effect to shares of Common Stock issuable upon exercise of (i) the Company
Offered Redeemable Warrants, (ii) the Underwriters' Warrants, (iii) the
Underwriters' Over-allotment Option, or (iv) options granted under the Plan.
Of such 5,631,250 shares of Common Stock, 2,131,250 shares, consisting of the
Company Offered Shares plus 231,250 shares to be issued upon exercise of the
Bridge Warrants (plus any additional shares sold upon the exercise of the
Underwriters' Over-allotment Option), will be freely tradeable without
restriction or further registration under the Act, except for any shares held
by "affiliates" of the Company within the meaning of the Act which shares will
be subject to the resale limitations of Rule 144 promulgated under the Act.
The Bridge Investors have agreed with the Representative not to sell or
otherwise dispose of any of the shares of Common Stock issuable upon exercise
of the Bridge Warrants for a period of 12 months after the date of the
consummation of the Company Offering and exercise of the Bridge Warrants.
46
<PAGE>
[ALTERNATE PAGE FOR BRIDGE INVESTORS PROSPECTUS]
The remaining 3,500,000 Restricted Shares were issued by the Company in
private transactions in reliance upon one or more exemptions contained in the
Act. The Restricted Shares are deemed to be "restricted securities" within the
meaning of Rule 144 promulgated pursuant to the Act and may be publicly sold
only if registered under the Act or sold pursuant to exemptions therefrom. As
of the date of this prospectus, all of the Restricted Shares will have been
held for more than two years and are eligible for public sale in accordance
with the requirements of Rule 144, as described below. Mr. Charles N. Finkel,
President and Chief Executive Officer of the Company and beneficial owner of
all shares of Common Stock outstanding immediately prior to the Company
Offering, however, has agreed with the Representative not to offer, sell,
contract to sell or otherwise dispose of any of his shares for a period of 24
months after the date of the Company Prospectus, without the Representative's
consent. In addition, Mr. Finkel has agreed with the Representative not to
offer, sell, contract to sell or otherwise dispose of 800,000 shares of Common
Stock beneficially owned by him for a period of ten years after the date of
the Company Prospectus, without the Representative's consent; provided,
however, that such restrictions will be released with respect to 500,000 of
such shares if the Company reports income before income taxes in excess of
$4,000,000 for fiscal 1997 and with respect to the remaining 300,000 shares if
the Company reports income before income taxes in excess of $7,000,000 for
fiscal 1998. The Representative may, in its sole discretion, and at any time
without notice, release all or any portion of the shares owned by Mr. Finkel
from such restrictions.
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company (or persons whose shares are aggregated with an affiliate), who
has owned restricted shares of Common Stock beneficially for at least two
years is entitled to sell, within any three-month period, a number of shares
that does not exceed the greater of 1% of the total number of outstanding
shares of the same class or, if the common stock is quoted on Nasdaq-SCM, the
average weekly trading volume during the four calendar weeks preceding the
sale. A person who has not been an affiliate of the Company for at least three
months immediately preceding the sale and who has beneficially owned shares of
the Company for at least three years is entitled to sell such shares under
Rule 144 without regard to any of the limitations described above. The
Commission is currently considering a proposal to reduce the Rule 144 holding
period for restricted securities to one year.
The Company intends to file a registration statement under the Securities
Act to register shares of Common Stock reserved for issuance under the Plan,
thereby permitting the resale of such shares by non-affiliates in the public
market without restriction under the Securities Act. The Company has reserved
up to 450,000 shares of Common Stock for issuance under the Plan. As of the
date of this Prospectus, options to purchase 355,000 of such reserved shares
of Common Stock were outstanding under the Plan. See "Management--1996 Stock
Option Plan."
Prior to the Company Offering, there has been no public market for the
Common Stock or the Company Offered Redeemable Warrants, and no predictions
can be made as to the effect, if any, that sales of the Common Stock under
Rule 144 will have on the market price of such securities from time to time.
Sales of substantial amounts of the Company's securities in the public market
could have a significant adverse effect on prevailing market prices and could
impair the Company's future ability to raise capital through the sale of its
equity securities. See "Risk Factors--Shares Eligible for Future Sale."
47
<PAGE>
[ALTERNATE PAGE FOR BRIDGE INVESTORS PROSPECTUS]
BRIDGE INVESTORS AND PLAN OF DISTRIBUTION
An aggregate of up to 231,250 shares of Common Stock may be offered and sole
pursuant to this Prospectus by the Bridge Investors. Warrants to purchase
250,000 shares of Common Stock were issued to the Bridge Investors in
connection with the Company's May 1996 Bridge Financing, of which warrants to
purchase 18,750 shares of Common Stock were relinquished by certain of the
Bridge Investors in September 1996. According to the terms of the Bridge
Financing, the Company agreed to register the shares underlying the Bridge
Warrants concurrently with the Company Offering and pay all expenses in
connection therewith (other than brokerage commissions and fees and expenses
of counsel). The Company also agreed to maintain an effective registration
statement and current prospectus covering the issuance and public sale of
shares of Common Stock issuable upon exercise of the Bridge Warrants for a
period of 18 months from the consummation of the Company Offering. Such shares
have been included in the Registration Statement of which this Prospectus
forms a part. None of the Bridge Investors holds any position or office with
the Company or has any other material relationship with the Company.
The following table sets forth certain information with respect to the
number of shares of Common Stock which will be beneficially owned by each
Bridge Investor upon the consummation of this Offering pursuant to the
exercise of the Bridge Warrants. The Company will not receive any proceeds
from the sale of shares by the Bridge Investors.
<TABLE>
<CAPTION>
BENEFICIAL
BENEFICIAL OWNERSHIP OWNERSHIP
BRIDGE INVESTOR PRIOR TO SALE (1) AFTER SALE(1)(2)
- --------------- -------------------- ----------------
<S> <C> <C>
John Albanese & Anna M. Albanese,
JTWROS.................................. 2,500 -0-
Raymond J. Anton......................... 2,500 -0-
Jessica R. Baron......................... 2,500 -0-
Dale A. Bearden.......................... 5,000 -0-
Marc H. Bell............................. 2,500 -0-
Morris Bickoff & Delores Bickoff,
JTWROS.................................. 2,500 -0-
Glenn Bierman............................ 2,500 -0-
Howard J. Blatt, Trustee, under the Ram-
part Brokerage Corporation Pension Plan
dated January 1, 1981................... 2,500 -0-
Helene R. Burgess........................ 10,000 -0-
Manfred Calmanowitz...................... 50,000 -0-
Andrew P. Carter, Jr., & Susan B. Carter,
JTWROS.................................. 2,500 -0-
Paul T. Cohen............................ 2,500 -0-
Priscilla M. Cooney...................... 2,500 -0-
Keith H. Cooper.......................... 2,500 -0-
David Cornstein.......................... 5,000 -0-
Roger Davidoff & Patrina Davidoff,
JTWROS.................................. 2,500 -0-
Stuart Eisenberger....................... 2,500 -0-
Brian Ellis.............................. 2,500 -0-
Bruce C. Flaim........................... 2,500 -0-
Robert A. Foisie......................... 5,000 -0-
John H. Francisco & Mildred J. Francisco,
JTWROS.................................. 2,500 -0-
Eugene J. Friedman....................... 1,250 -0-
Richard Friedman......................... 2,500 -0-
Theodore H. Friedman & Eva Friedman,
JTWROS.................................. 5,000 -0-
Lawrence S. Goldman...................... 2,500 -0-
HST Partners............................. 2,500 -0-
Richard Hofmann & Birte Hofmann, JTWROS.. 1,250 -0-
Ann Hu................................... 2,500 -0-
Inter Swiss Trading Co., Ltd............. 2,500 -0-
</TABLE>
48
<PAGE>
[ALTERNATE PAGE FOR BRIDGE INVESTORS PROSPECTUS]
<TABLE>
<CAPTION>
BENEFICIAL
BENEFICIAL OWNERSHIP OWNERSHIP
BRIDGE INVESTOR PRIOR TO SALE (1) AFTER SALE(1)(2)
- --------------- -------------------- ----------------
<S> <C> <C>
Martin C. Kass & Elaine R. Kass,
JTWROS................................. 1,250 -0-
Mitchell Knapp.......................... 2,500 -0-
Ray Kralovic............................ 1,250 -0-
Lawrence Kupferberg..................... 2,500 -0-
Howard M. Lefkowitz..................... 2,500 -0-
Harvey R. Manes......................... 2,500 -0-
William A. Marconi...................... 1,250 -0-
Jeffrey Markowitz....................... 2,500 -0-
Michael Matwey, Jr...................... 2,500 -0-
Michael Miller.......................... 5,000 -0-
Azriel Nagar............................ 2,500 -0-
David Z. Nisnewitz...................... 2,500 -0-
Richard A. Pizitz....................... 2,500 -0-
Renstone Limited........................ 2,500 -0-
Renwick Special Situations, L.P......... 2,500 -0-
Jayne E. Ricciardelli & Victor A.
Ricciardelli, JTWROS................... 2,500 -0-
Ralph L. Rossi, Jr. & Maria L. Rossi,
JTWROS................................. 2,500 -0-
Richard Sage & Carol Sage............... 2,500 -0-
Mahendra K. Sanghavi & Rita M. Sanghavi,
JTWROS................................. 1,250 -0-
Burton Satzberg & Judy Satzberg,
JTWROS................................. 1,250 -0-
Joseph Scibetta & Carmen Scibetta....... 2,500 -0-
Steven A. Seiden........................ 2,500 -0-
David R. Semmel......................... 2,500 -0-
Jeffrey Silverman....................... 5,000 -0-
Mark I. Silverman....................... 7,500 -0-
H. Diehl Sluss.......................... 2,500 -0-
Alison Snow............................. 7,500 -0-
Vincent Sperduto & Angela Sperduto...... 2,500 -0-
Joseph L. Stanley....................... 2,500 -0-
Barry Sun & Janet Sun, JTWROS........... 1,250 -0-
Anne C. Thurman......................... 2,500 -0-
Terry S. Trabich........................ 1,250 -0-
John Ventura............................ 1,250 -0-
Steve M. Wallitt........................ 1,250 -0-
Harold L. Warren........................ 2,500 -0-
Michael J. Weiss........................ 2,500 -0-
Yetev Lev D'Jerusalem, B.F.............. 2,500 -0-
------- ---
TOTAL............................... 231,250 -0-
</TABLE>
- --------
(1) Assumes no additional shares are acquired.
(2) Assumes all of the shares are sold by each Bridge Investor.
The Common Stock issuable to the Bridge Investors upon exercise of the
Bridge Warrants may, commencing 12 months from the date of the Company
Prospectus, be offered and sold from time to time as market conditions permit
in the over-the-counter market, or otherwise, at prices and terms then
prevailing or at prices related to the then-current market price, or in
negotiated transactions. Such shares offered hereby may be sold by one or more
of the following methods, without limitation: (a) a block trade in which a
broker or dealer so engaged will attempt to sell the shares as agent but may
position and resell a portion of the block as principal to facilitate the
transaction; (b) purchases by a broker or dealer as principal and resale by
such broker or dealer
49
<PAGE>
[ALTERNATE PAGE FOR BRIDGE INVESTORS PROSPECTUS]
for its account pursuant to the Company Prospectus; (c) ordinary brokerage
transactions and transactions in which the broker solicits purchasers; and (d)
face-to-face transactions between end users and purchasers without a broker-
dealer. In effecting sales, brokers or dealers engaged by the Bridge Investors
may arrange for other brokers or dealers to participate. Such brokers or
dealers may receive commissions or discounts from Bridge Investors in amounts
to be negotiated. Such brokers or dealers and any other participating brokers
or dealers may be deemed to be "underwriters" within the meaning of the
Securities Act, in connection with such sales.
CONCURRENT REGISTRATION OF COMMON STOCK AND WARRANTS
Concurrently with this Offering, the Company has registered the offering of
1,900,000 Company Offered Shares and 1,900,000 Company Offered Redeemable
Warrants in connection with the Company Offering underwritten by the
Underwriter. The Company Offered Shares and the Company Offered Redeemable
Warrants have been registered by the Company pursuant to the Company
Prospectus within the Registration Statement of which this Prospectus forms a
part.
50
<PAGE>
[ALTERNATE PAGE FOR BRIDGE INVESTORS PROSPECTUS]
LEGAL MATTERS
The validity of the securities offered by this Prospectus will be passed
upon for the Company by Gunster, Yoakley, Valdes-Fauli & Stewart, P.A., West
Palm Beach, Florida. Parker Chapin Flattau & Klimpl, LLP, New York, New York,
has acted as counsel to the Underwriters with respect to this Offering and the
Company Offering.
EXPERTS
The consolidated financial statements of the Company for the two years in
the period ended December 31, 1995 are included herein and in this
Registration Statement in reliance upon the report of Grant Thornton LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form SB-2 under the Act
with the Securities and Exchange Commission with respect to the Common Stock
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits thereto: certain portions
have been omitted pursuant to rules and regulations of the Commission.
Statements contained in this Prospectus as to the contents of any contract or
other document are not necessarily complete and, in each instance, reference
is made to the copy of such contract or document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. The Registration Statement, including the exhibits and
schedules thereto, may be inspected without charge, at the Public Reference
Facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, 1400 Citicorp Center, 500 West Madison, Chicago, Illinois 60661;
and 7 World Trade Center, New York, New York 10048 and copies of all or any
part thereto may be obtained upon payment of the fees prescribed by the
Commission. Electronic registration statements made through the Electronic
Data Gathering, Analysis and Retrieval System are publicly available through
the Commission's World Wide Web site at http://www.sec.gov.
51
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 607.0850(1) of the FBCA permits a Florida corporation to indemnify
any person who may be a party to any third party proceeding by reason of the
fact that such person is or was a director, officer, employee or agent of the
corporation, against liability incurred in connection with such proceeding
(including any appeal thereof) if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Section 607.0850(2) of the FBCA permits a Florida corporation to indemnify
any person who may be a party to a derivative action if such person acted in
any of the capacities set forth in the preceding paragraph, against expenses
and amounts paid in settlement not exceeding, in the judgement of the board of
directors, the estimated expenses of litigating the proceeding to conclusion,
actually and reasonably incurred in connection with the defense or settlement
of such proceeding including appeals, provided that the person acted under the
standards set forth in the preceding paragraph. However, no indemnification
shall be made for any claim, issue or matter for which such person is found to
be liable unless, and only to the extent that, the court determines that,
despite the adjudication of liability, but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnification for
such expenses which the court deems proper.
Section 607.0850(4) of the FBCA provides that any indemnification made under
the above provisions, unless pursuant to a court determination, may be made
only after a determination that the person to be indemnified has met the
standard of conduct described above. This determination is to be made by a
majority vote of a quorum consisting of the disinterested directors of the
board of directors, by independent legal counsel, or by a majority vote of the
disinterested stockholders. The board of directors also may designate a
special committee of disinterested directors to make this determination.
Section 607.0850(3), however, provides that a Florida corporation must
indemnify any director or officer of a corporation who has been successful in
the defense of any proceeding referred to in Section 607.0850(1) or (2), or in
the defense of any claim, issue or matter therein, against expenses actually
and reasonably incurred by him in connection therewith.
Expenses incurred by a director or officer in defending a civil or criminal
proceeding may be paid by the corporation in advance of the final disposition
thereof upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it is ultimately determined that such director
or officer is not entitled to indemnification under Section 607.0850.
Section 607.0850 of the FBCA further provides that the indemnification
provisions contained therein are not exclusive and it specifically empowers a
corporation to make any other further indemnification or advancement of
expenses under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise, for actions in an official capacity and in other
capacities while holding an office. However, a corporation cannot indemnify or
advance expenses if a judgment or other final adjudication establishes that
the actions of the director or officer were material to the adjudicated cause
of action and the director or officer (a) violated criminal law, unless the
director or officer had reasonable cause to believe his conduct was not
unlawful, (b) derived an improper personal benefit from a transaction, (c) was
or is a director in a circumstance where the liability under Section 607.0834
(relating to unlawful distributions) applies, or (d) engages in willful
misconduct or conscious disregard for the best interests of the corporation in
a proceeding by or in right of the corporation to procure a judgment in its
favor or in a proceeding by or in right of a stockholder.
The Company's Articles provide for the obligatory indemnification of
directors and officers and the discretionary indemnification of employees and
agents. The general effect of the Articles provisions is to require
II-1
<PAGE>
indemnification of any director or officer against any liability arising from
any action or suit to the fullest extent provided, authorized, allowed or not
prohibited by the FBCA. Advances against expenses are required to be made
under the Articles to any officer or director of the Company and may be made
to any employee or agent of the Company, and the indemnity coverage provided
thereunder includes liabilities under the federal securities laws as well as
in other contexts.
Pursuant to the Underwriting Agreement, the Company and the Underwriters
have agreed to indemnify each other under certain circumstances and conditions
against and from certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
Reference is made to Section 10 of the Underwriting Agreement filed as
Exhibit 1.1 hereto and Article X of the Company's Articles filed as Exhibit
3.1 hereto.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
SEC Registration Fee............................................ $ 10,996
Nasdaq-SCM Listing Fees......................................... $ 10,000
NASD Filing Fee................................................. $ 3,500
Accounting Fees and Expenses*................................... $ 60,000
Printing and Engraving*......................................... $125,000
Legal Fees and Expenses*........................................ $160,000
Blue Sky Fees and Expenses...................................... $ 50,000
Transfer Agent and Registrar Fees*.............................. $ 3,500
Miscellaneous Expenses*......................................... $ 52,004
--------
Total......................................................... $475,000
========
</TABLE>
--------
* Estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following chart summarizes all securities that the Company sold within
the past three years without registering such securities under the Securities
Act of 1933.
<TABLE>
<CAPTION>
EXEMPTION FROM
DATE OF TYPE OF AMOUNT OF TOTAL OFFERING REGISTRATION
OFFERING SECURITIES(1) SECURITIES SOLD PRICE(1) RELIED UPON(2)
- -------- ------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
4/2/96--5/14/96 Units consisting of a 250,000 Units $2,500,000 SEC Rule 506
$25,000 Senior
Subordinated
Promissory Note and
warrants to purchase
2,500 shares of
Common Stock, par
value $.01
----------
$2,500,000
==========
</TABLE>
- --------
(1) Rickel & Associates, Inc. served as placement agent for $2,000,000 of the
securities sold and in connection therewith received commissions of 8% and
a non-accountable expense allowance of 2% of the gross proceeds from the
$2,000,000 of securities sales, and received certain other itemized
expense reimbursements.
(2) All sales were made to persons whom the Company knew, or who the Company
had reasonable grounds to believe were "Accredited Investors" as such term
is defined under SEC Regulation D, Rule 501(a). No
II-2
<PAGE>
general solicitation or advertising was employed in the offer or sale of any
of the securities. The Company disclosed to each investor, in the Company's
private placement memorandum, that the securities were "restricted" and
could not be resold unless registered or pursuant to an exemption from
registration. The Company placed a legend on all certificates evidencing the
restricted nature of such securities.
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement
1.2 Form of Underwriters' Warrant
Form of Share Deposit Agreement between the Representative and
1.3 Charles N. Finkel
1.4 Form of Warrant Agreement between the Company, the Underwriters and
American Stock Transfer & Trust Company
1.5 Form of Agreement Among Underwriters, between the Representative and
JMA
1.6 Form of Selected Dealer Agreement
3.1 Articles of Incorporation of the Company, as amended, in effect as
of the date hereof
3.2 Bylaws of the Company, as amended, in effect as of the date hereof
4.1 Form of Common Stock Certificate
4.2 Form of Bridge Warrant
4.3 Form of 10% Senior Subordinated Note
4.4 Form of Redeemable Warrant Certificate
5.1 Opinion of Gunster, Yoakley, Valdes-Fauli & Stewart, P.A.
10.1 1996 Stock Option Plan, as amended, in effect as of the date hereof
10.2 Strategic Alliance Agreement between Lockheed Martin IMS and Ensec
Inc.
10.3 Teaming Agreement between Bell & Howell Postal Systems, Inc. and
Ensec Inc.
10.4 Card Access Systems Agreement between Ensec Inc. and Electronic Data
Systems Corporation, as amended to the date hereof
10.5 Software Value Added Reseller Agreement between Ensec Inc. and ICL
Enterprises
10.6 Agreement between Ensec Inc. and The Port Authority of New York and
New Jersey
10.7 Agreement for Purchase and Sale of the Bank Automation Division of
Ensec Engenharia E Sistemas de Seguranca, S.A. between De La Rue
Investimentos Ltda. and Ensec, S.A.
10.8 Form of Employment Agreement between the Company and Charles N.
Finkel, James K. Norman, Flavio R. da Silva, Steven T. Geffin,
Edward Morelli, David J. Rottner and John De George
11.1 Statement Regarding Computation of Per Share Earnings
21.1 Subsidiaries of the Registrant
23.1 Consent of Grant Thornton LLP
24.1 Power of Attorney (included on signature page to Registration
Statement)
27.1 Financial Data Schedule
</TABLE>
ITEM 28. UNDERTAKINGS.
--The undersigned Registrant in all instances will 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 underwriter to permit prompt delivery to each purchaser.
--Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
small business issuer pursuant to the foregoing provisions, or otherwise, the
undersigned 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 undersigned Registrant of expenses incurred or paid by a director, officer
or controlling person of the undersigned Registrant in the successful defense
of any action, suit or proceeding) is asserted by such
II-3
<PAGE>
director, officer or controlling person in connection with the securities
being registered, the undersigned Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
--The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
a registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the undersigned Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed
to be part of the registration statement as of the time it was declared
effective; and
(2) For the purpose of determining any 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 that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each post-
effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
II-4
<PAGE>
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
UNDERSIGNED REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE
THAT IT MEETS ALL OF THE REQUIREMENTS FOR FILING ON FORM SB-2 AND AUTHORIZED
THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE CITY AND STATE OF NEW YORK, ON THE 25TH DAY
OF SEPTEMBER, 1996.
Ensec International, Inc.
By: /s/ Charles N. Finkel
---------------------------------
CHARLES N. FINKEL PRESIDENT
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS
AMENDED, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Charles N. Finkel Chief Executive
- ------------------------------------- Officer, President September 25,
CHARLES N. FINKEL and Director 1996
(Principal
Executive Officer)
/s/ David J. Rottner* Vice President,
- ------------------------------------- Chief Financial September 25,
DAVID J. ROTTNER Officer and 1996
Secretary
(Principal
Accounting Officer)
/s/ James K. Norman* Vice President and
- ------------------------------------- Director September 25,
JAMES K. NORMAN 1996
/s/ Flavio R. da Silva* Vice President and
- ------------------------------------- Director September 25,
FLAVIO R. DA SILVA 1996
*By: /s/ Charles N. Finkel
---------------------------------- September 25,
CHARLES N. FINKEL ATTORNEY-IN-FACT 1996
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S> <C>
1.1+ Form of Underwriting Agreement
1.2+ Form of Underwriters' Warrant
1.3*** Form of Share Deposit Agreement between the Representative and
Charles N. Finkel
1.4*** Form of Warrant Agreement between the Company, the Underwriters
and American Stock Transfer & Trust Company
1.5*** Form of Agreement Among Underwriters between the Representative
and JMA
1.6*** Form of Selected Dealer Agreement
3.1** Articles of Incorporation of the Company, as amended, in effect
as of the date hereof
3.2*** Bylaws of the Company, as amended, in effect as of the date
hereof
4.1*** Form of Common Stock Certificate
4.2* Form of Bridge Warrant
4.3* Form of 10% Senior Subordinated Note
4.4*** Form of Redeemable Warrant Certificate
5.1*** Opinion of Gunster, Yoakley, Valdes-Fauli & Stewart, P.A.
10.1*** 1996 Stock Option Plan, as amended, in effect as of the date
hereof
10.2* Strategic Alliance Agreement between Lockheed Martin IMS and
Ensec Inc.
10.3* Teaming Agreement between Bell & Howell Postal Systems, Inc. and
Ensec Inc.
10.4* Card Access Systems Agreement between Ensec Inc. and Electronic
Data Systems Corporation, as amended to the date hereof
10.5* Software Value Added Reseller Agreement between Ensec Inc. and
ICL Enterprises
10.6* Agreement between Ensec Inc. and The Port Authority of New York
and New Jersey
10.7* Agreement for Purchase and Sale of the Bank Automation Division
of Ensec Engenharia E Sistemas de Seguranca, S.A. between De La
Rue Investimentos Ltda. and Ensec, S.A.
10.8** Form of Employment Agreement between the Company and Charles N.
Finkel, James K. Norman, Flavio R. da Silva, Steven T. Geffin,
Edward Morelli, David J. Rottner and John De George
11.1+ Statement Regarding Computation of Per Share Earnings
21.1* Subsidiaries of the Registrant
23.1+ Consent of Grant Thornton LLP
24.1* Power of Attorney (included on signature page to Registration
Statement)
27.1** Financial Data Schedule
</TABLE>
- --------
* Filed as an exhibit to the Company's Preliminary Registration Statement on
Form SB-2 (File No. 333-06223), as filed with the Commission on June 18,
1996.
** Filed as an exhibit to Amendment No. 1 to the Company's Registration
Statement on Form SB-2 (File No. 333-06223), as filed with the Commission
on August 9, 1996.
*** Filed as an exhibit to Amendment No. 2 to the Company's Registration
Statement on Form SB-2 (File No.-333-06223), as filed with the Commission
on September 13, 1996.
+ Filed as an exhibit hereto.
<PAGE>
ENSEC INTERNATIONAL, INC.
1,900,000 Shares of Common Stock
and
1,900,000 Redeemable Common Stock Purchase Warrants
UNDERWRITING AGREEMENT
----------------------
September __, 1996
Rickel & Associates, Inc.
as Representative of the Underwriters
and Co-manager
875 Third Avenue
New York, New York 10022
Janssen-Meyers Associates, L.P.
as Underwriter and Co-manager
17 State Street
New York, New York 10004
Ladies and Gentlemen:
Ensec International, Inc., a Florida corporation (the "Company"), and
Charles N. Finkel (the "Selling Shareholder") hereby confirm their agreement
with Rickel & Associates, Inc. ("Rickel") and Janssen-Meyers, L.P. ("JM" and,
collectively with Rickel, the "Underwriters") as set forth below.
The Company proposes to issue and sell to the Underwriters, for whom
Rickel is acting as representative (the "Representative"), an aggregate of (i)
1,900,000 shares (the "Firm Shares") of the Company's common stock, par value
$.01 per share (the "Common Stock") and (ii) 1,900,000 redeemable warrants to
purchase Common Stock (the "Firm Warrants") in the amounts set forth on Schedule
A attached hereto. The Company and the Selling Shareholders also propose to
grant to the Representative an option to purchase (i) up to an additional
285,000 shares of Common Stock (of which the Selling Shareholder may sell the
first 75,000 of such shares, as provided below, to the extent up to such number
of such shares are purchased) and (ii) up to an additional 285,000 redeemable
warrants to purchase Common Stock (all of which are to be issued by the
Company), as provided in section 3(c) of this agreement. Any and all
<PAGE>
shares of Common Stock to be purchased pursuant to such option are referred to
herein as the "Option Shares," and the Firm Shares and any Option Shares are
collectively referred to herein as the "Shares." Any and all redeemable warrants
to purchase Common Stock to be purchased pursuant to such option are referred to
herein as the "Option Warrants," and the Firm Warrants and any Option Warrants
are collectively referred to herein as the "Warrants." Any shares of Common
Stock issuable upon the exercise of any Warrants are referred to herein as
"Warrant Shares." The Firm Shares and the Firm Warrants are collectively
referred to herein as the "Firm Securities"; the Option Shares and the Option
Warrants are collectively referred to herein as the "Option Securities;" and the
Firm Securities, the Option Securities and the Warrant Shares are collectively
referred to herein as the "Securities."
Pursuant to an agreement to be entered into among the Company, the
Underwriters and American Stock Transfer & Trust Company ("Warrant Agreement"),
each Warrant will be exercisable during the period commencing on the first
anniversary of the effective date of the Registration Statement (as hereinafter
defined) (the "Effective Date") and expiring on the fifth anniversary thereof,
subject to prior redemption by the Company (as described below), at an initial
exercise price (subject to adjustment as set forth in the Warrant Agreement)
equal to $7.00 per share. The Warrants will be redeemable at a price of $.10
per Warrant, commencing on the first anniversary of the Effective Date (or
earlier with the prior written consent of the Representative) and prior to their
expiration, upon not less than 30 days prior written notice to the holders of
the Warrants, provided the average closing bid quotations of Common Stock as
reported on The NASDAQ Stock Market if traded thereon, or if not traded thereon,
the average closing sale price if listed on a national or regional securities
exchange (or other reporting system that provides last sales prices), shall have
been at least 150% of the then current Warrant exercise price (initially $10.50
per share, subject to adjustment), for a period of 20 consecutive trading days
ending on the third day prior to the date on which the Company gives notice of
redemption, subject to the right of the holder to exercise such Warrants prior
to redemption.
1. Representations and Warranties of the Company. The Company and the
---------------------------------------------
Selling Shareholder, jointly and severally, represent and warrant to, and agree
with, the Underwriters that:
(a) A registration statement on Form SB-2 (File No. 333-06223) with
respect to the Securities and the Underwriters' Warrant Securities (as
hereinafter defined), including a prospectus subject to completion, has been
filed by the Company with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933 (the "Act"), and one or more
amendments to that registration statement may have been so filed. Copies of such
registration statement and of each amendment heretofore filed by the Company
with the Commission have been delivered to each of the Underwriters. After the
execution of this agreement, the Company will file with the Commission either
(i) if the registration statement, as it may have been amended, has been
declared by the
-2-
<PAGE>
Commission to be effective under the Act, a prospectus in the form most recently
included in that registration statement (or, if an amendment thereto shall have
been filed, in such amendment), with such changes or insertions as are required
by Rule 430A under the Act or permitted by Rule 424(b) under the Act and as have
been provided to and approved by the Underwriters prior to the execution of this
agreement, or (ii) if that registration statement, as it may have been amended,
has not been declared by the Commission to be effective under the Act, an
amendment to that registration statement, including a form of prospectus, a copy
of which amendment has been furnished to and approved by the Underwriters prior
to the execution of this agreement. As used in this agreement, the term
"Registration Statement" means that registration statement, as amended at the
time it was or is declared effective, and any amendment thereto that was or is
thereafter declared effective, including all financial schedules and exhibits
thereto and any information omitted therefrom pursuant to Rule 430A under the
Act and included in the Prospectus (as hereinafter defined); the term
"Preliminary Prospectus" means each prospectus subject to completion filed with
that registration statement or any amendment thereto (including the prospectus
subject to completion, if any, included in the Registration Statement at the
time it was or is declared effective); and the term "Prospectus" means the
prospectus first filed with the Commission pursuant to Rule 424(b) under the Act
or, if no prospectus is so filed pursuant to Rule 424(b), the prospectus
included in the Registration Statement. The Company has caused to be delivered
to each of the Underwriters copies of each Preliminary Prospectus and has
consented to the use of those copies for the purposes permitted by the Act.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus. When each Preliminary Prospectus and
each amendment and each supplement thereto was filed with the Commission it (i)
contained all statements required to be stated therein, in accordance with, and
complied with the requirements of, the Act and the rules and regulations of the
Commission thereunder and (ii) did not include any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. When the Registration Statement was or is declared
effective, it (i) contained or will contain all statements required to be stated
therein in accordance with, and complied or will comply with the requirements
of, the Act and the rules and regulations of the Commission thereunder and (ii)
did not or will not include any untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein not misleading.
When the Prospectus and each amendment or supplement thereto is filed with the
Commission pursuant to Rule 424(b) (or, if the Prospectus or such amendment or
supplement is not required so to be filed, when the Registration Statement
containing such Prospectus or amendment or supplement thereto was or is declared
effective) and on the Firm Closing Date and any Option Closing Date (as each
such term is hereinafter defined), the Prospectus, as amended or supplemented at
any such time, (i) contained or will contain all statements required to be
stated therein in accordance with, and complied or will comply with the
requirements of, the Act and the rules and regulations of the Commission
thereunder and (ii) did not or will not include any
-3-
<PAGE>
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. The foregoing provisions of this paragraph
(b) do not apply to statements or omissions made in any Preliminary Prospectus,
the Registration Statement or the Prospectus or any amendment or supplement
thereto in reliance upon and in conformity with written information furnished to
the Company by the Underwriters specifically for use therein.
(c) Each of the Company, Ensec Inc., Ensec Engenharia Sistemas de
Seguranca, S.A. ("Ensec S.A.") and Enservice Ltda.: has been duly incorporated
and is validly existing as a corporation in good standing under the laws of its
state of incorporation and is duly qualified or authorized (or, in the state of
New York, application for qualification has been filed) to transact business as
a foreign corporation and is in good standing in each jurisdiction where the
ownership or leasing of its property or the conduct of its business requires
such qualification or authorization.
(d) Each of the Company, Ensec Inc., Ensec S.A. and Enservice Ltda.
has full corporate power and authority to own or lease its property and conduct
its business as now being conducted and as proposed to be conducted as described
in the Registration Statement and the Prospectus (and, if the Prospectus is not
in existence, the most recent Preliminary Prospectus).
(e) Each of the Company, Ensec Inc., Ensec S.A. and Enservice Ltda.
does not own, directly or indirectly, any capital stock of any corporation, any
interest in any partnership or limited liability company or any other equity
interest or participation in any other person except as described in the
Prospectus.
(f) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus and the audited consolidated
financial statements as of December 31, 1995 (the "Financial Statements"). The
Company directly owns 99.999% of the outstanding common stock of Ensec S.A. and
directly owns 100% of the outstanding common stock of Ensec, Inc. (each, an
"Operating Company," and together, the "Operating Companies"). All of the
issued shares of capital stock of the Company have been duly authorized and
validly issued and are fully paid, nonassessable and free of preemptive rights.
There are no outstanding options, warrants or other rights granted by the
Company or the Operating Companies to purchase shares of its Common Stock or
other securities, other than as described in the Prospectus (and, if the
Prospectus is not in existence, the most recent Preliminary Prospectus). The
Shares and the Warrant Shares have been duly authorized, and the Warrant Shares
have been duly reserved for issuance, by all necessary corporate action on the
part of the Company and, when the Shares are issued and delivered to and paid
for by the Underwriters pursuant to this agreement and the Warrant Shares are
issued
-4-
<PAGE>
and delivered to and paid for by the holders of Warrants upon exercise of the
Warrants in accordance with the terms thereof, the Shares and the Warrant Shares
will be validly issued, fully paid, nonassessable and free of preemptive rights
and will conform to the description thereof in the Prospectus (and, if the
Prospectus is not in existence, the most recent Preliminary Prospectus). No
holder of outstanding securities of the Company is entitled as such to any
preemptive or other right to subscribe for any of the Securities, and no person
is entitled to have securities registered by the Company under the Registration
Statement or otherwise under the Act other than as described in the Prospectus
(and, if the Prospectus is not in existence, the most recent Preliminary
Prospectus).
(g) The capital stock of the Company conforms to the description
thereof contained in the Prospectus (and, if the Prospectus is not in existence,
the most recent Preliminary Prospectus).
(h) Since the inception of the Company in April 1996 all issuances of
securities of the Company were effected pursuant to valid private offerings
exempt from registration pursuant to section 4(2) of the Act or Regulation D
promulgated thereunder. Since the inception of the Company, no compensation was
paid to or on behalf of any member of the National Association of Securities
Dealers, Inc. ("NASD"), or any affiliate or employee thereof, in connection with
any such private offering, except as previously disclosed in writing to the
Underwriter.
(i) The consolidated financial statements of the Company and the
Operating Companies included in the Registration Statement and the Prospectus
(and, if the Prospectus is not in existence, the most recent Preliminary
Prospectus) fairly present the financial position of the Company and the
Operating Companies as of the dates indicated and the results of operations of
the Company and the Operating Companies for the periods specified. Such
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles, consistently applied. The financial
data set forth under the caption "Summary Consolidated Financial Information" in
the Prospectus (and, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) fairly present, on the basis stated in the Prospectus
(or such Preliminary Prospectus), the information included therein.
(j) Grant Thornton, L.L.P., who have certified certain consolidated
financial statements of the Company and the Operating Companies and delivered
their report with respect to the financial statements and schedules included in
the Registration Statement and the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), are independent public
accountants with respect to the Company as required by the Act and the
applicable rules and regulations thereunder.
(k) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus (and, if the Prospectus is not in
existence, the
-5-
<PAGE>
most recent Preliminary Prospectus), (i) except as otherwise contemplated
therein, there has been no material adverse change in the business, operations,
condition (financial or otherwise), earnings or prospects of the Company or the
Operating Companies, whether or not arising in the ordinary course of business,
(ii) except as otherwise stated therein, there have been no transactions entered
into by the Company or the Operating Companies and no commitments made by the
Company or the Operating Companies that, individually or in the aggregate, are
material with respect to the Company or the Operating Companies, (iii) except as
otherwise stated therein, there has not been any change in the capital stock or
indebtedness of the Company or the Operating Companies, and (iv) there has been
no dividend or distribution of any kind declared, paid or made by the Company in
respect of any class of its capital stock.
(l) The Company has full corporate power and authority to enter into
and perform its obligations under this agreement and the Underwriters' Warrant
Agreement (as hereinafter defined). The execution and delivery of this
agreement and the Underwriters' Warrant Agreement have been duly authorized by
all necessary corporate action on the part of the Company and this agreement and
the Underwriters' Warrant Agreement have each been duly executed and delivered
by the Company and each is a valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms, except as the
enforceability thereof may be limited by bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium and other similar laws affecting creditors'
rights generally and by general principles of equity (regardless of whether
enforcement is considered in a proceeding in equity or at law), and except as
rights to indemnity and contribution under this agreement may be limited by
applicable law. The issuance, offering and sale by the Company to the
Underwriter of the Securities pursuant to this agreement or the Underwriters'
Securities pursuant to the Underwriters' Warrant Agreement, the compliance by
the Company with the provisions of this agreement and the Underwriters' Warrant
Agreement, and the consummation of the other transactions contemplated in this
agreement and the Underwriters' Warrant Agreement do not (i) require the
consent, approval, authorization, registration or qualification of or with any
court or governmental or regulatory authority, except such as have been
obtained, such as may be required under state securities or blue sky laws and,
if the registration statement filed with respect to the Securities (as amended)
is not effective under the Act as of the time of execution hereof, such as may
be required (and shall be obtained as provided in this agreement) under the Act,
or (ii) conflict with or result in a breach or violation of, or constitute a
default under, any contract, indenture, mortgage, deed of trust, loan agreement,
note, lease or other agreement or instrument to which the Company or any
Operating Company is a party or by which the Company or any Operating Company or
any of its property is bound or subject, or the certificate of incorporation or
by-laws of the Company or any Operating Company, or any statute or any rule,
regulation, judgment, decree, or order of any court or other governmental or
regulatory authority or any arbitrator applicable to the Company or any
Operating Company.
-6-
<PAGE>
(m) No legal or governmental proceedings are pending to which the
Company or any Operating Company is a party or to which the property of the
Company is subject and no such proceedings have been threatened against the
Company or with respect to any of its property, except such as are described in
the Prospectus (and, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), except to the extent such proceedings are not material
to the Company and the Operating Companies taken as a whole. No contract or
other document is required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement that is
not described therein (and, if the Prospectus is not in existence, in the most
recent Preliminary Prospectus) or filed as required.
(n) The Company is not in (i) violation of its certificate of
incorporation or by-laws, (ii) violation in any material respect of any law,
statute, regulation, ordinance, rule, order, judgment or decree of any court or
any governmental or regulatory authority applicable to the Company, or (iii)
default in any material respect in the performance or observance of any
obligation, agreement, covenant or condition contained in any contract,
indenture, mortgage, deed of trust, loan agreement, note, lease or other
agreement or instrument to which the Company is a party or by which it or any of
its property may be bound or subject.
(o) The Company currently owns or possesses adequate rights to use all
intellectual property, including all U.S. and foreign patents, trademarks,
service marks, trade names, copyrights, inventions, know-how, trade secrets,
proprietary technologies, processes and substances, or applications or licenses
therefor, that are described in the Prospectus (and if the Prospectus is not in
existence, the most recent Preliminary Prospectus), and any other rights or
interests in items of intellectual property as are necessary for the conduct of
the business now conducted or proposed to be conducted by it as described in the
Prospectus (or, such Preliminary Prospectus); and, except as disclosed in the
Prospectus (and such Preliminary Prospectus), the Company is not aware of the
granting of any patent rights to, or the filing of applications therefor by,
others, nor is the Company aware of, nor has the Company received notice of,
infringement of or conflict with asserted rights of others with respect to any
of the foregoing. All such intellectual property rights and interests are (i)
valid and enforceable and (ii) to the best knowledge of the Company, not being
infringed by any third parties.
(p) The Company possesses (or with respect to the state of New York,
has applied for) adequate licenses, orders, authorizations, approvals,
certificates or permits issued by the appropriate federal, state or foreign
regulatory agencies or bodies necessary to conduct its business as described in
the Registration Statement and the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), and, except as disclosed in
the Prospectus (and, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), there are no pending or, to the best
-7-
<PAGE>
knowledge of the Company, threatened, proceedings relating to the revocation or
modification of any such license, order, authorization, approval, certificate or
permit.
(q) The Company has good and marketable title to all of the properties
and assets reflected in the Company's financial statements or as described in
the Registration Statement and the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), subject to no lien,
mortgage, pledge, charge or encumbrance of any kind, except those reflected in
such financial statements or as described in the Registration Statement and the
Prospectus (and such Preliminary Prospectus). The Company occupies its leased
properties under valid and enforceable leases conforming to the description
thereof set forth in the Registration Statement and the Prospectus (and such
Preliminary Prospectus).
(r) The Company is not subject to registration as an "investment
company" under the Investment Company Act of 1940.
(s) The Company has obtained and delivered to the Representative the
agreements (the "Lock-up Agreements") with respect to all outstanding shares of
Common Stock, preferred stock, notes or warrants to the effect that, among other
things, each such person will not, commencing on the Effective Date and
continuing for periods of 12 or 24 months (as applicable) thereafter, directly
or indirectly, sell, offer or contract to sell or grant any option to purchase,
transfer, assign or pledge, or otherwise encumber, or dispose of any shares of
Common Stock or preferred stock or any securities convertible into or
exercisable for Common Stock or preferred stock now or hereafter owned by such
person without the prior written consent of the Representative (except no such
discretion to release the provisions of the Lock-up Agreements shall be
exercised by the Representative as to the investors in connection with the
Company's bridge financing in May 1996).
(t) No labor dispute with the employees of the Company exists, is
threatened or, to the best of the Company's knowledge, is imminent that could
result in a material adverse change in the condition (financial or otherwise),
business, prospects, net worth or results of operations of the Company, except
as described in or contemplated by the Prospectus (and, if the Prospectus is not
in existence, the most recent Preliminary Prospectus).
(u) Except as described in or contemplated by the Prospectus (and, if
the Prospectus is not in existence, the most recent Preliminary Prospectus), the
Company is insured by insurers of recognized financial responsibility against
such losses and risks and in such amounts as are prudent and customary in the
businesses in which it is engaged; the Company has not been refused any
insurance coverage sought or applied for;
-8-
<PAGE>
and the Company has no reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition
(financial or otherwise), business, prospects, net worth or results of
operations of the Company.
(v) The Underwriters' Warrants will conform to the description thereof
in the Registration Statement and in the Prospectus (and, if the Prospectus is
not in existence, the most recent Preliminary Prospectus) and, when sold to and
paid for by the Underwriter in accordance with the Underwriters' Warrant
Agreement, will have been duly authorized and validly issued and will constitute
valid and binding obligations of the Company entitled to the benefits of the
Underwriters' Warrant Agreement. The Underwriters' Warrant Shares (as
hereinafter defined) and the Underwriters' Warrant Warrant Shares (as
hereinafter defined) have been duly authorized and reserved for issuance upon
exercise of the Underwriters' Warrants and the Underwriters' Warrant Warrants
(as hereinafter defined), respectively, by all necessary corporate action on the
part of the Company and, when issued and delivered and paid for upon such
exercise in accordance with the terms of the Underwriters' Warrant Agreement and
the Underwriters' Warrant Warrants, respectively, will be validly issued, fully
paid, nonassessable and free of preemptive rights and will conform to the
description thereof in the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(w) No person has acted as a finder in connection with, or is entitled
to any commission, fee or other compensation or payment for services as a finder
for or for originating, or introducing the parties to, the transactions
contemplated herein and the Company will indemnify the Underwriters with respect
to any claim for finder's fees in connection herewith. Except as set forth in
the Registration Statement and the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), the Company has no
management or financial consulting agreement with anyone. No promoter, officer,
director or stockholder of the Company is, directly or indirectly, affiliated or
associated with an NASD member, no securities of the Company have been acquired
by an NASD member except as has been previously disclosed in writing to the
Representative.
2. Representations and Warranties of the Selling Shareholder. The Selling
---------------------------------------------------------
Shareholder, represents and warrants to the Underwriters that:
(a) The Selling Shareholder (1) has the power and authority to execute
and deliver this agreement and the Power of Attorney Agreement (hereinafter
defined) on the terms and conditions set forth herein and therein, (2) is, and
when the Registration Statement shall become effective and at the closing time
will be, the owner of the Shares to be sold by such Selling Shareholder to the
Underwriters pursuant to the terms
-9-
<PAGE>
hereof, in each case free and clear of all liens, charges, encumbrances and
restrictions, (3) has paid to the Company the full purchase price required to be
paid for such Shares and (4) has, and when the Registration Statement shall
become effective and at the closing time will have, the power and authority to
convey good and valid title to such Shares, in each case free and clear of all
liens, charges, encumbrances and restrictions.
(b) The Selling Shareholder has executed an agreement and power of
attorney (the "Power of Attorney Agreement") with Jeffrey Stoops, Esq., as
attorney-in-fact, and has delivered to such attorney-in-fact, pursuant to the
Power of Attorney Agreement, certificates in negotiable form for the Shares to
be sold by such Selling Shareholder. Copies of each Power of Attorney Agreement
have been delivered to each of the Underwriters. Such certificates and the
Shares represented thereby are subject to the rights of the Underwriters
hereunder and, to such extent, the Power of Attorney granted by such Selling
Shareholder to such attorney-in-fact is irrevocable and shall not be terminated
by law or upon the occurrence of any event. If any such event shall occur, with
or without notice to such attorney-in-fact, such attorney-in-fact shall deliver
such certificates in accordance with the terms and provisions of this Agreement
as if such event had not occurred.
(c) The Power of Attorney Agreement has been duly authorized, executed
and delivered by the Selling Shareholder, and this agreement has been duly
authorized, executed and delivered by the Selling Shareholder or by his
attorney-in-fact pursuant to the Power of Attorney Agreement. The Power of
Attorney Agreement and this agreement each constitute valid and binding
agreements of the Selling Shareholder enforceable in accordance with their
respective terms.
(d) Neither the execution and delivery or performance of this
agreement or the Power of Attorney Agreement, or the consummation of the
transactions herein and therein contemplated nor the compliance with the terms
hereof and thereof by the Selling Shareholder will conflict with, or result in a
breach of any of the terms or provisions of, or constitute a default under, any
material indenture, mortgage, deed of trust, purchase agreement or other
agreement or instrument to which the Selling Shareholder is a party or by which
the Selling Shareholder or any of his or its property is bound or, under any
statute or under any order, rule or regulation applicable to the Selling
Shareholder or his or its property of any court or other governmental agency;
and no consent, approval, authorization or order of any court or governmental
agency or body is required for the consummation by the Selling Shareholder of
the transactions on the Selling Shareholder's part herein and therein
contemplated, except such as may be required under the Act or under state
securities or blue sky laws.
(e) The Selling Shareholder has not, and at the closing time and at
each option exercise time will not have, taken, directly or indirectly, any
action to cause or result in, or which has constituted, or might reasonably be
expected to constitute, the
-10-
<PAGE>
stabilization or manipulation of the price of the shares of the Common Stock to
facilitate the sale or the resale of any of the Shares.
3. Purchase, Sale and Delivery of the Securities and the Warrant
-------------------------------------------------------------
Securities.
- ----------
(a) On the basis of the representations, warranties, agreements and
covenants herein contained and subject to the terms and conditions herein set
forth, the Company agrees to issue and sell to the Underwriters, and the
Underwriters agree to purchase from the Company, the Firm Shares at a purchase
price of $5.52 per share and the Firm Warrants at a purchase price of $.092 per
warrant. The obligations of the Underwriters under this agreement are several
and not joint.
(b) Certificates in definitive form for the Firm Securities that
the Underwriters have agreed to purchase hereunder, and in such denomination or
denominations and registered in such name or names as the Underwriters request
upon notice to the Company at least 48 hours prior to the Firm Closing Date,
shall be delivered by or on behalf of the Company to the Representative, against
payment by or on behalf of the Underwriter of the purchase price therefor by
wire transfer payable in immediately available funds to the order of the
Company. Such delivery of and payment for the Firm Securities shall be made at
the offices of the Representative, 875 Third Avenue, New York, New York (the
"Representative's Office") at 9:30 A.M., New York time, on _______________,
1996, or at such other place, time or date as the Underwriters and the Company
may agree upon, such time and date of delivery against payment being herein
referred to as the "Firm Closing Date." The Company will make such certificates
for the Firm Securities available for checking and packaging by the
Underwriters, at the Representative's option, at the offices in New York, New
York of the Company's transfer agent and registrar or the Representative's
Office at least 24 hours prior to the Firm Closing Date.
(c) For the purpose of covering any over-allotments in connection
with the distribution and sale of the Firm Securities as contemplated by the
Prospectus, the Company and the Selling Shareholder hereby grant to the
Representative an option to purchase any or all of the Option Securities. The
purchase price to be paid for any of the Option Securities shall be the same
price per share or warrant as the price per share or warrant for the Firm
Securities set forth above in paragraph (a) of this section 3. The option
granted hereby may be exercised as to all or any part of the Option Securities
from time to time within 45 calendar days after the Firm Closing Date. The
Representative shall not be under any obligation to purchase any of the Option
Securities prior to the exercise of such option. The Representative may from
time to time exercise the option granted hereby by giving notice in writing or
by telephone (confirmed in writing) to the Company setting forth the aggregate
number of Option Securities as to which the Representatives is then exercising
the option and the date and time for delivery of and payment for such Option
Securities. Any such date of delivery shall be determined by the Underwriter but
shall not be earlier than two business days or later than three business days
after such exercise of the option and, in any event, shall not be earlier than
the Firm Closing Date. The time and date set forth in such notice, or such other
time on such other date as the Representative and the Company may agree upon, is
herein called the "Option Closing Date" with respect to such Option Securities.
Upon exercise of the option as provided herein, the Company shall become
obligated to sell to the Representative, and, subject to the terms and
conditions herein set forth, the Underwriters shall become obligated to purchase
from the Company, the Option Securities as to which the Representative is then
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exercising its option. The Selling Shareholder shall sell the first 75,000
shares of the Option Shares, to the extent the option is exercised. If the
option is exercised as to all or any portion of the Option Securities,
certificates in definitive form for such Option Securities, and payment
therefor, shall be delivered on the related Option Closing Date in the manner,
and upon the terms and conditions, set forth in paragraph (b) of this section 3,
except that reference therein to the Firm Securities and the Firm Closing Date
shall be deemed, for purposes of this paragraph (c), to refer to such Option
Securities and Option Closing Date, respectively.
(d) On the Firm Closing Date, the Company will further issue and sell
to the Underwriters or, at the direction of an Underwriters, to bona fide
officers of the Underwriters, for an aggregate purchase price of $10.00,
warrants (the "Underwriters' Warrants") entitling the holders thereof to
purchase an aggregate of 190,000 shares of Common Stock and 190,000 redeemable
warrants to purchase Common Stock for a period of four years, such period to
commence on the first anniversary of the Effective Date. Of such Underwriter's
Warrants, the Company shall issue such warrants to purchase 40,000 shares of
Common Stock and 40,000 redeemable warrants to JM and its designees subject to
JM's fulfillment of its obligations as underwriter and co-manager under this
agreement. The Underwriters' Warrants shall be exercisable at a price equal to
165% of the initial public offering price per share and warrant, respectively
and shall contain terms and provisions more fully described herein below and as
set forth more particularly in the warrant agreement relating to the
Underwriters' Warrants to be executed by the Company on the Effective Date (the
"Underwriters' Warrant Agreement"), including, but not limited to, (i) customary
anti-dilution provisions in the event of stock dividends, split mergers, sales
of all or substantially all of the Company's assets, sales of stock below then
prevailing market or exercise prices and other events, and (ii) prohibitions of
mergers, consolidations or other reorganizations of or by the Company or the
taking by the Company of other action during the five-year period following the
Effective Date unless adequate provision is made to preserve, in substance, the
rights and powers incidental to the Underwriters' Warrants. As provided in the
Underwriters' Warrant Agreement, the Underwriters may designate that the
Underwriters' Warrants be issued in varying amounts directly to bona fide
officers of the Underwriters. As further provided, no sale, transfer,
assignment, pledge or hypothecation of the Underwriters' Warrants shall be made
for a period of 12 months from the Effective Date, except (i) by operation of
law or
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reorganization of the Company, or (ii) to the Underwriter and bona fide
partners, and officers of the Underwriter and selling group members. The shares
of Common Stock issuable upon exercise of the Underwriters' Warrants are
referred to herein as the "Underwriters' Warrant Shares"; the warrants issuable
upon exercise of the Underwriters' Warrants are referred to herein as the
"Underwriters' Warrant Warrants"; the shares of Common Stock issuable upon
exercise of the Underwriters' Warrant Warrants are referred to herein as the
"Underwriters' Warrant Warrant Shares"; and the Underwriters' Warrant Shares,
the Underwriters' Warrant Warrants and the Underwriters' Warrant Warrant Shares
are collectively referred to herein as the "Underwriters' Securities."
4. Offering by the Underwriter. The Underwriters propose to offer the
---------------------------
Firm Shares for sale to the public upon the terms set forth in the Prospectus.
5. Covenants of the Company. The Company and the Selling Shareholder
------------------------
covenant and agree with the Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement, if not effective at the time of execution of this agreement, to
become effective as promptly as possible. If required, the Company will file
the Prospectus and any amendment or supplement thereto with the Commission in
the manner and within the time period required by Rule 424(b) under the Act.
During any time when a prospectus relating to the Securities is required to be
delivered under the Act, the Company (i) will comply with all requirements
imposed upon it by the Act and the rules and regulations of the Commission
thereunder to the extent necessary to permit the continuance of sales of or
dealings in the Securities in accordance with the provisions hereof and of the
Prospectus, as then amended or supplemented, and (ii) will not file with the
Commission any prospectus or amendment referred to in the first sentence of
section 1(a) hereof, any amendment or supplement to such prospectus or any
amendment to the Registration Statement as to which the Underwriters shall not
previously have been advised and furnished with a copy for a reasonable period
of time prior to the proposed filing and as to which filing the Representative
shall not have given its consent. The Company will prepare and file with the
Commission, in accordance with the rules and regulations of the Commission,
promptly upon request by the Underwriters or counsel to the Underwriters, any
amendments to the Registration Statement or amendments or supplements to the
Prospectus that may be necessary or advisable in connection with the
distribution of the Shares by the Underwriters, and will use its best efforts to
cause any such amendment to the Registration Statement to be declared effective
by the Commission as promptly as possible. The Company will advise the
Underwriters, promptly after receiving notice thereof, of the time when the
Registration Statement or any amendment thereto has been filed or declared
effective or the Prospectus or any amendment or supplement thereto has been
filed and will provide evidence satisfactory to the Underwriters of each such
filing or effectiveness.
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<PAGE>
(b) The Company will advise the Underwriters, promptly after receiving
notice or obtaining knowledge thereof, of (i) the issuance by the Commission of
any stop order suspending the effectiveness of the Registration Statement or any
order preventing or suspending the use of any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, (ii) the suspension of the
qualification of any Securities for offering or sale in any jurisdiction, (iii)
the institution, threat or contemplation of any proceeding for any such purpose
or (iv) any request made by the Commission for amending the Registration
Statement, for amending or supplementing the Prospectus or for additional
information. The Company will use its best efforts to prevent the issuance of
any such stop order and, if any such stop order is issued, to obtain the
withdrawal thereof as promptly as possible.
(c) The Company will, in cooperation with counsel to the Underwriters,
arrange for the qualification of the Securities for offering and sale under the
blue sky or securities laws of such jurisdictions as the Underwriters may
designate and will continue such qualifications in effect for as long as may be
necessary to complete the distribution of the Securities.
(d) If, at any time when a prospectus relating to the Securities is
required to be delivered under the Act, any event occurs as a result of which
the Prospectus, as then amended or supplemented, would include any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, or if for any other reason it is necessary at
any time to amend or supplement the Prospectus to comply with the Act or the
rules or regulations of the Commission thereunder, the Company will promptly
notify the Underwriters thereof and, subject to section 4(a) hereof, will
prepare and file with the Commission, at the Company's expense, an amendment to
the Registration Statement or an amendment or supplement to the Prospectus that
corrects such statement or omission or effects such compliance.
(e) So long as any warrants are outstanding, the Company shall use its
best efforts to cause post-effective amendments to the Registration Statement to
become effective in compliance with the Act and without any lapse of time
between the effectiveness of any such post-effective amendments and cause a copy
of each Prospectus, as then amended, to be delivered to each holder of record of
a Warrant and to furnish to the Underwriters and any dealer as many copies of
each such Prospectus as the Underwriters or dealer may reasonably request. The
Company shall not call for redemption of the Warrants unless a registration
statement covering the securities underlying the Warrants has been declared
effective by the Commission and remains current at least until the date fixed
for redemption. In addition, for so long as any Warrant is outstanding, the
Company will promptly notify the Underwriter of any material change in the
business, financial condition or prospects of the Company. So long as any of the
Warrants remain outstanding, the Company will timely deliver and supply to its
Warrant agent sufficient copies of the
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<PAGE>
Company's current Prospectus, as will enable such Warrant agent to deliver a
copy of such Prospectus to any Warrant or other holder where such Prospectus
delivery is by law required to be made.
(f) The Company will, without charge, provide to the Underwriters and
to counsel for the Underwriters (i) as many signed copies of the registration
statement originally filed with respect to the Securities and each amendment
thereto (in each case including exhibits thereto) as the Underwriters may
reasonably request, (ii) as many conformed copies of such registration statement
and each amendment thereto (in each case without exhibits thereto) as the
Underwriters may reasonably request and (iii) so long as a prospectus relating
to the Securities is required to be delivered under the Act, as many copies of
each Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto as the Underwriters may reasonably request. The Company will timely
file, and will provide or cause to be provided to the Underwriters and counsel
to the Underwriters a copy of the report on Form SR required to be filed by the
Company pursuant to Rule 463 under the Act.
(g) The Company, as soon as practicable, will make generally available
to its security holders and to the Underwriters an earnings statement of the
Company that satisfies the provisions of section 11(a) of the Act and Rule 158
thereunder.
(h) The Company will reserve and keep available for issuance that
maximum number of its authorized but unissued shares of Common Stock which are
issuable upon exercise of the Warrants and issuable upon exercise of the
Underwriters' Warrants (including the underlying securities) outstanding from
time to time.
(i) The Company will apply the net proceeds from the sale of the
Securities as set forth under "Use of Proceeds" in the Prospectus.
(j) The Company will not, without the prior written consent of the
Representative, directly or indirectly offer, agree to sell, sell, grant any
option to purchase or otherwise dispose (or announce any offer, agreement to
sell, sale, grant of any option to purchase or other disposition) of any shares
of Common Stock, preferred stock or any securities convertible into, or
exchangeable or exercisable for, shares of Common Stock or preferred stock for a
period of 24 months after the Effective Date, except (i) the Shares and Warrants
issued pursuant to this agreement, (ii) the Warrant Shares issuable upon
exercise of the Warrants, (iii) the Underwriters' Warrant, (iv) the
Underwriters' Warrant Shares and Underwriters' Warrant Warrants issuable upon
the exercise of the Underwriters' Warrants, (v) the Underwriters' Warrant
Warrant Shares issuable upon exercise of the Underwriters' Warrant Warrants,
(vi) the Warrants issued pursuant to the Company's bridge financing in May 1996
and (vii) up to a maximum of 450,000 shares of Common Stock issuable upon the
exercise of options granted under the Company's Stock Option Plan.
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<PAGE>
(k) Prior to the Closing Date or the Option Closing Date (if any), the
Company will not, directly or indirectly, without the prior written consent of
the Representative, which shall not be unreasonably withheld or delayed, issue
any press release or other public announcement or hold any press conference with
respect to the Company or its activities with respect to the Offering (other
than trade releases issued in the ordinary course of the Company's business
consistent with past practices with respect to the Company's operations).
(l) If, at the time that the Registration Statement becomes effective,
any information shall have been omitted therefrom in reliance upon Rule 430A
under the Act, then immediately following the execution of this agreement, the
Company will prepare, and file or transmit for filing with the Commission in
accordance with Rule 430A and Rule 424(b) under the Act, copies of the
Prospectus including the information omitted in reliance on Rule 430A, or, if
required by such Rule 430A, a post-effective amendment to the Registration
Statement (including an amended Prospectus), containing all information so
omitted.
(m) The Company will use its best efforts to cause the Securities to
be included in The Nasdaq Stock Market, Inc. ("Nasdaq") SmallCap Market on the
Effective Date and to maintain such listings thereafter. The Company will file
with Nasdaq all documents and notices that are required by Nasdaq of companies
with securities that are traded on the Nasdaq SmallCap Market.
(n) During the period of five years from the Firm Closing Date, the
Company will, as promptly as possible, (i) not to exceed 90 days, after each
annual fiscal period render and distribute reports to its stockholders which
will include audited statements of its operations and changes of financial
position during such period and its audited balance sheet as of the end of such
period, as to which statements the Company's independent certified public
accountants shall have rendered an opinion.
(o) During a period of three years commencing with the Firm Closing
Date, the Company will furnish to the Underwriters, at the Company's expense,
copies of all periodic and special reports furnished to stockholders of the
Company and of all information, documents and reports filed with the Commission.
(p) The Company has appointed American Stock Transfer & Trust Company
as transfer agent for the Common Stock and warrant agent for the Warrants,
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<PAGE>
subject to the Closing. The Company will not change or terminate such
appointment for a period of three years from the Firm Closing Date without first
obtaining the written consent of the Representative. For a period of three
years after the Effective Date, the Company shall cause the transfer agent and
warrant agent to deliver promptly to the Underwriters a duplicate copy of the
daily transfer sheets relating to trading of the Securities. The Company shall
also provide to the Underwriters, promptly upon their request, up to four times
in any calendar year, copies of DTC or equivalent transfer sheets.
(q) During the period of 180 days after the date of this agreement,
the Company will not at any time, directly or indirectly, take any action
designed to or that will constitute, or that might reasonably be expected to
cause or result in, the stabilization of the price of the Common Stock to
facilitate the sale or resale of any of the Shares.
(r) The Company will not take any action to facilitate the sale of any
shares of Common Stock pursuant to Rule 144 under the Act if any such sale would
violate any of the terms of the Lock-up Agreements.
(s) Prior to the 90th day after the Firm Closing Date, the Company
will provide the Representative and its designees with six bound volumes of the
transaction documents relating to the Registration Statement and the closing(s)
hereunder, in form and substance reasonably satisfactory to the Underwriters.
(t) The Company shall consult with the Underwriters prior to the
distribution to third parties of any financial information news releases or
other publicity regarding the Company, its business, or any terms of this
offering and the Underwriters will consult with the Company prior to the
issuance of any research report or recommendation concerning the Company's
securities. Copies of all documents that the Company or its public relations
firm intend to distribute will be provided to the Underwriters for review prior
to such distribution.
(u) The Company and the Underwriters will advise each other
immediately in writing as to any investigation, proceeding, order, event or
other circumstance, or any threat thereof, by or relating to the Commission or
any other governmental authority, that could impair or prevent this offering.
Except as required by law or as otherwise mutually agreed in writing, neither
the Company nor the Underwriters will acquiesce in such circumstances and each
will actively defend any proceedings or orders in that connection.
(v) The Company will, for a period of no less than three years
commencing immediately after the Effective Date, engage a designee by the
Representative as advisor (the "Advisor") to the Company's Board of Directors,
who shall attend meetings of the Board, receive all notices and other
correspondence and communications sent by the Company to its Board of Directors
and receive compensation equal to that of other non-
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<PAGE>
officer directors; provided, that in lieu of the Representative's right to
designate an Advisor, the Representative shall have the right during such three-
year period, in its sole discretion, to designate one person for election as a
director of the Company and the Company will utilize its best efforts to obtain
the election of such person who shall be entitled to receive the same
compensation, expense reimbursements and other benefits as set forth above. In
addition, such Advisor shall be entitled to receive reimbursement for all costs
incurred in attending such meetings including, but not limited to, food, lodging
and transportation. The Company, during said three-year period, shall schedule
no less than four formal meetings (at least one of which shall be "in person"
and the others may be held telephonically) of its Board of Directors in each
such year at which meetings such Advisor shall be permitted to attend (in
person, for each meeting held "in person") as set forth herein; said meetings
shall be held quarterly each year and advance notice of such meetings identical
to the notice given to directors shall be given to the Advisor. The Company and
its principal stockholders shall, during such three year period, give the
Representative timely prior written notice of any proposed acquisitions,
mergers, reorganizations or other similar transactions. The Company shall
indemnify and hold the Underwriters and such Advisor or director harmless
against any and all claims, actions, damages, costs and expenses, and judgments
arising solely out of the attendance and participation of such Advisor or
director at any such meeting described herein, and, if the Company maintains a
liability insurance policy affording coverage for the acts of its officers and
directors, it shall, if possible, include such Advisor or director as an insured
under such policy.
(w) The Company shall first submit to the Underwriters certificates
representing the Securities for approval prior to printing, and shall, as
promptly as possible, after filing the Registration Statement with the
Commission, obtain CUSIP numbers for the Securities.
(x) The Company shall engage the Underwriters' counsel to provide the
Underwriters, at the closing of any sale of Securities hereunder and quarterly
thereafter, with an opinion, setting forth those states in which the Common
Stock and Warrants may be traded in non-issuer transactions under the blue sky
or securities laws of the 50 states. The Company shall pay such counsel a one-
time fee of $7,500 for such opinion at the closing of the sale of the Firm
Securities
(y) The Company will prepare and file a registration statement with
the Commission pursuant to section 12(g) of the Securities Exchange Act of 1934
(the "1934 Act"), and will use its best efforts to have such registration
statement declared effective by the Commission on an accelerated basis on the
day after the Effective Date. For this purpose the Company shall prepare and
file with the Commission a General Form of Registration of Securities (Form 8-A
or Form 10).
(z) For so long as the Securities are registered under the 1934 Act,
the Company will hold an annual meeting of stockholders for the election of
directors within
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180 days after the end of each of the Company's fiscal years and within 150 days
after the end of each of the Company's fiscal years will provide the Company's
stockholders with the audited financial statements of the Company as of the end
of the fiscal year just completed prior thereto. Such financial statements shall
be those required by Rule 14a-3 under the 1934 Act and shall be included in an
annual report pursuant to the requirements of such Rule.
(aa) Prior to the Effective Date, the Company shall enter into an
employment contract (acceptable to the Representative) with such key officers as
may be selected by the Representative on terms and conditions reasonably
satisfactory to the Representative and shall obtain key-person life insurance in
the minimum amount of $2,000,000 on Charles N. Finkel on such terms and
conditions as are reasonably satisfactory to the Representative, assuming such
coverage is available on commercially reasonable terms.
(bb) Charles N. Finkel shall be President and Chief Executive Officer
of the Company on the Closing Dates.
6. Covenants of the Selling Shareholder. The Selling Shareholder,
------------------------------------
covenants and agrees with the Underwriters that:
(a) During the period of 180 days commencing on the date hereof, the
Selling Shareholder will not at any time, directly and indirectly, take any
action designed to or which will constitute or which might reasonably be
expected to cause or result in the stabilization of the price of the Shares to
facilitate the sale or the resale of any of the Shares.
(b) If, subsequent to the date hereof, the Selling Shareholder shall
believe or have any reasonable grounds to believe that the Prospectus (as
amended or as supplemented if the Company shall have filed with the Commission
any amendment thereof or supplement thereto) contains any untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or that any of the
representations and warranties of the Company or the Selling Shareholder
contained herein or in any certificate or document contemplated under this
agreement to be delivered to either of the Underwriters are false, the Selling
Shareholder will immediately notify the Underwriter to such effect.
(c) The Selling Shareholder will not, without the prior written
consent of the Representative, sell, contract to sell or otherwise dispose of
any shares of Common Stock owned by or held of record in the name of the Selling
Shareholder, except the sale of the Option Shares to the Underwriters, for a
period of 24 months after the Effective Date.
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7. Expenses.
--------
(a) The Company and the Selling Shareholder (if Option Shares are
purchased by the Underwriters) shall pay (in the proportion of the respective
gross proceeds of Securities sold by them) all costs and expenses incident to
the performance of the obligations of the Company and the Selling Shareholder,
respectively, under this agreement, whether or not the transactions contemplated
hereby are consummated or this agreement is terminated pursuant to section 10
hereof, including all costs and expenses incident to (i) the preparation,
printing and filing or other production of documents with respect to the
transactions, including any costs of printing the registration statement
originally filed with respect to the Securities and any amendment thereto, any
Preliminary Prospectus and the Prospectus and any amendment or supplement
thereto, this agreement, the selected dealer agreement and the other agreements
and documents governing the underwriting arrangements and any blue sky
memoranda, (ii) all reasonable and necessary arrangements relating to the
delivery to the Underwriter of copies of the foregoing documents, (iii) the fees
and disbursements of the counsel, the accountants and any other experts or
advisors retained by the Company, (iv) the preparation, issuance and delivery to
the Underwriters of any certificates evidencing the Securities, including
transfer agent's, warrant agent's and registrar's fees or any transfer or other
taxes payable thereon, (v) the qualification of the Securities under state blue
sky or securities laws, including filing fees and fees and disbursements of
counsel for the Underwriter relating thereto (such counsel fees not to exceed
$20,000, $10,000 of which shall be due and payable upon the commencement of blue
sky filing, together with the related filing fees) and any fees and
disbursements of local counsel, if any, retained for such purpose, (vi) the
filing fees of the Commission and the NASD relating to the Securities, (vii) the
inclusion of the Securities on the Nasdaq SmallCap Market and in the Standard
and Poor's Corporation Descriptions Manual, (viii) any "road shows" or other
meetings with prospective investors in the Securities, including transportation,
accommodation, meal, conference room, audio-visual presentation and similar
expenses of the Underwriters or its representatives or designees (other than as
shall have been specifically approved by the Underwriter to be paid for by the
Underwriters) and (ix) the placing of "tombstone advertisements" in publications
selected by the Underwriter and the manufacture of prospectus memorabilia. In
addition to the foregoing, the Company and the Selling Shareholder shall
reimburse the Underwriters for its expenses on the basis of a non-accountable
expense allowance in the amount of 3% of the gross offering proceeds to be
received by the Company and the Selling Shareholder. If Option Shares are
purchased by the Underwriters, and the Selling Shareholder sells up to 75,000
shares, the Selling Shareholder must pay his pro rata share of expenses incurred
in the offering. The Company and the Selling Shareholder warrant, represent and
agree that all payments and reimbursements will be promptly and fully made.
(b) Notwithstanding any other provision of this agreement, if the
offering of the Securities contemplated hereby is terminated for any reason, the
Company
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and the Selling Shareholder agree that, in addition to the Company and the
Selling Shareholder paying each of their expenses as described in subparagraph
(a) above, (i) the Company and the Selling Shareholder shall reimburse the
Underwriters only for their actual accountable out-of-pocket expenses (in
addition to blue sky legal fees and expenses referred to in subparagraph (a)
above), and (ii) the Underwriters shall be entitled to retain the non-
accountable expense allowance paid by the Company and the Selling Shareholder
pursuant to subparagraph (a) above; provided, however, that the amount retained
pursuant to this clause (ii) shall not exceed the Underwriters' expenses on an
accountable basis to the date of such cancellation and that all unaccounted for
amounts shall be refunded to the Company and the Selling Shareholder. Such
expenses shall include, but are not to be limited to, fees for the services and
time of counsel for the Underwriters to the extent not covered by clause (i)
above, plus any additional expenses and fees, including, but not limited to,
travel expenses, postage expenses, duplication expenses, long-distance telephone
expenses, and other expenses incurred by the Underwriters in connection with the
proposed offering.
8. Warrant Solicitation Fee. The Company agrees to pay the
------------------------
Representative a fee of five percent (5%) of the aggregate exercise price of the
Warrants if (i) the market price of the Common stock is greater than the
exercise price of the Warrants on the date of exercise; (ii) the exercise of the
Warrants is solicited by a member of the NASD; (iii) the Warrants are not held
in a discretionary account; (iv) the disclosure of compensation arrangements is
made both at the time of this offering and at the time of the exercise of the
Warrant; and (v) the solicitation of the Warrant exercise is not in violation of
Rule 10b-6 under the 1934 Act. The Company agrees not to solicit the exercise of
any Warrant other than through the Representative and will not authorize any
other dealer to engage in such solicitation without the prior written consent of
the Representative which will not be unreasonably withheld. The Warrant
solicitation fee will not be paid in a non-solicited transaction. Any request
for exercise will be presumed to be unsolicited unless the customer states in
writing that the transaction was solicited and designates in writing the
broker/dealer to receive compensation for the exercise. No Warrant solicitation
by the Representative will occur for a period of 12 months after the Effective
Date.
9. Conditions of the Underwriter' Obligations. The obligations of the
------------------------------------------
Underwriters to purchase and pay for the Firm Shares shall be subject, in the
Representative's sole discretion, to the accuracy of the representations and
warranties of the Company contained herein as of the date hereof and as of the
Firm Closing Date as if made on and as of the Firm Closing Date, to the accuracy
of the statements of the Company's officers made pursuant to the provisions
hereof, to the performance by the Company of its covenants and agreements
hereunder and to the following additional conditions:
(a) If the registration statement, as heretofore amended, has not
been declared effective as of the time of execution hereof, the registration
statement, as heretofore amended or as amended by an amendment thereto to be
filed prior to the Firm Closing Date, shall have been declared effective not
later than 11 A.M., New York time, on
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the date on which the amendment to such registration statement containing
information regarding the initial public offering price of the Shares has been
filed with the Commission, or such later time and date as shall have been
consented to by the Representative; if required, the Prospectus and any
amendment or supplement thereto shall have been filed with the Commission in the
manner and within the time period required by Rule 424(b) under the Act; no stop
order suspending the effectiveness of the Registration Statement shall have been
issued, and no proceedings for that purpose shall have been instituted or
threatened or, to the knowledge of the Company or the Underwriters, shall be
contemplated by the Commission; and the Company shall have complied with any
request of the Commission for additional information (to be included in the
Registration Statement or the Prospectus or otherwise).
(b) The Underwriters shall have received opinions, dated the Firm
Closing Date, of Gunster, Yoakley, Valdes-Fauli & Stewart, P.A. and Duarte
Garcia e Caselli Guimaraes Advocacia S/C ("Duarte"), counsel to the Company, to
the effect that:
(1) Each of the Company, Ensec Inc. and Ensec Engenharia e
Sistemas de Seguranca, S.A. ("Ensec S.A.") has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the state
of its incorporation and, except as otherwise contemplated in this agreement, is
duly qualified to transact business as a foreign corporation and is in good
standing under the laws of each other jurisdiction in which its ownership or
leasing of any properties or the conduct of its business requires such
qualification;
(2) Each of the Company, Ensec Inc. and Ensec S.A. has full
corporate power and authority to own or lease its property and conduct its
business as now being conducted and as proposed to be conducted, in each case as
described in the Registration Statement and the Prospectus, and the Company has
full corporate power and authority to enter into this agreement and the
Underwriters' Warrant Agreement and to carry out all the terms and provisions
hereof and thereof to be carried out by it;
(3) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus and the audited consolidated
financial statements as of December 31, 1995 (the "Financial Statements"). The
Company directly owns 99.999% of the outstanding common stock of Ensec S.A. and
directly owns 100% of the outstanding common stock of Ensec, Inc. (each, an
"Operating Company," and together, the "Operating Companies"). There are no
outstanding options, warrants or other rights granted by the Company to purchase
shares of its Common Stock, preferred stock or other securities other than as
described in the Prospectus; the Shares have been duly authorized and the
Warrant Shares, the Underwriters' Warrant Shares and the Underwriters' Warrant
Warrant Shares have been duly reserved for issuance by all necessary corporate
action on the part of the Company
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and, when issued and delivered to and paid for by the Underwriter pursuant to
this agreement, as to the Shares, the holders of the Warrants pursuant to the
terms thereof, as to the Warrant Shares, the Underwriter pursuant to the
Underwriters' Warrant, as to the Underwriters' Warrant Shares, pursuant to the
Underwriters' Warrant Warrants, as to the Underwriters' Warrant Warrant Shares,
will be validly issued, fully paid, nonassessable and free of preemptive rights
and will conform to the description thereof in the Prospectus; no holder of
outstanding securities of the Company is entitled as such to any preemptive or
other right to subscribe for any of the Shares, the Warrant Shares, the
Underwriters' Warrant Shares or the Underwriters' Warrant Warrant Shares; and no
person is entitled to have securities registered by the Company under the
Registration Statement or otherwise under the Act other than as described in the
Prospectus;
(4) the Shares have been approved for inclusion in the Nasdaq
SmallCap Market;
(5) the execution and delivery of this agreement by the Company
and the Selling Shareholder, or his duly authorized attorney-in-fact, and the
Underwriters' Warrant Agreement by the Company have been duly authorized by all
necessary corporate action on the part of the Company and this agreement and the
Underwriters' Warrant Agreement have been duly executed and delivered by the
Company and the Selling Shareholder, and each is a valid and binding agreement
of the Company and the Selling Shareholder, enforceable against the Company and
the Selling Shareholder in accordance with its terms, except as enforceability
may be limited by bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium and other similar laws affecting creditors' rights generally and to
general principles of equity (regardless of whether enforcement is considered in
a proceeding in equity or at law) and except as rights to indemnity and
contribution under this agreement and the Underwriters' Warrant Agreement may be
limited by applicable law;
(6) the Underwriters' Warrants conform to the description
thereof in the Registration Statement and in the Prospectus and are duly
authorized and validly issued and constitute valid and binding obligations of
the Company entitled to the benefits of the Underwriters' Warrant Agreement;
(7) the statements set forth under the heading "Description of
Capital Stock," "Shares Eligible for Future Sale," and "Certain Relationships
and Related Transactions" in the Prospectus, insofar as those statements purport
to summarize the terms of the capital stock and warrants of the Company, provide
a fair summary of such terms; the statements in the Prospectus, insofar as those
statements constitute matters of law or legal conclusions, or summaries of the
contracts and agreements referred to therein, constitute a fair summary of those
matters, legal conclusions, contracts and agreements and include all material
terms thereof, as applicable;
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<PAGE>
(8) none of (A) the execution and delivery of this agreement and
the Underwriters' Warrant Agreement, (B) the issuance, offering and sale by the
Company or the Selling Shareholder to the Underwriters of the Securities
pursuant to this agreement and the Underwriters' Warrant Securities pursuant to
the Underwriters' Warrant Agreement, nor (C) the compliance by the Company with
the other provisions of this agreement and the Underwriters' Warrant Agreement
and the consummation of the transactions contemplated hereby and thereby, (1)
requires the consent, approval, authorization, registration or qualification of
or with any court or governmental authority, except such as have been obtained
and such as may be required under state blue sky or securities laws, or (2)
conflicts with or results in a breach or violation of, or constitutes a default
under, any contract, indenture, mortgage, deed of trust, loan agreement, note,
lease or other agreement or instrument to which the Company or any Operating
Company is a party or by which the Company or any Operating Company or any of
its property is bound or subject, of which such counsel is aware after
reasonable inquiry, or the certificate of incorporation or by-laws of the
Company or any Operating Company, or any material statute or any judgment,
decree, order, rule or regulation of any court or other governmental or
regulatory authority, of which such counsel is aware after reasonable inquiry,
applicable to the Company or any Operating Company;
(9) to the best of such counsel's knowledge, no contract or
other document is required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement that is
not described therein or filed as required;
(10) the Company and each Operating Company possesses adequate
licenses, orders, authorizations, approvals, certificates or permits (except
with respect to the state of New York for which application has been made)
issued by the appropriate federal, state or foreign regulatory agencies or
bodies necessary to conduct its business as described in the Registration
Statement and the Prospectus, and, to the best of such counsel's knowledge after
due inquiry, there are no pending or threatened proceedings relating to the
revocation or modification of any such license, order, authorization, approval,
certificate or permit, except as disclosed in the Registration Statement and the
Prospectus.
(11) the Registration Statement is effective under the Act; any
required filing of the Prospectus pursuant to Rule 424(b) has been made in the
manner and within the time period required by Rule 424(b); and no stop order
suspending the effectiveness of the Registration Statement or any amendment
thereto has been issued, and no proceedings for that purpose have been
instituted or threatened or, to the best knowledge of such counsel, are
contemplated by the Commission;
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<PAGE>
(12) the registration statement originally filed with respect to
the Shares and each amendment thereto and the Prospectus (in each case, other
than the financial statements and schedules and other financial and statistical
information contained therein, as to which such counsel need express no opinion)
comply as to form in all material respects with the applicable requirements of
the Act and the rules and regulations of the Commission thereunder; and
(13) the Company is not subject to registration as an "investment
company" under the Investment Company Act of 1940.
Such counsel shall also state that such counsel has participated in the
preparation of the Registration Statement and the Prospectus and that nothing
has come to such counsel's attention that has caused them to believe that the
Registration Statement, at the time it became effective (including the
information deemed to be a part of the Registration Statement at the time of
effectiveness pursuant to Rule 430A(b), if applicable), contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading or
that the Prospectus, as of its date or as of the Firm Closing Date, contained an
untrue statement of material fact or omitted to state a material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading (it being understood that such counsel need
express no view with respect to the consolidated financial statements and
related notes and other financial, accounting and statistical data included in
the Registration Statement or the Prospectus).
Duarte shall opine only as to the matters set forth above in (b) (1), (2),
(3), (8) and (10) only to the extent such matters relate to Ensec, S.A.
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials, copies of which certificates will
be provided to the Underwriters, and, as to matters of the laws of certain
jurisdictions, on the opinions of other counsel to the Company, which opinions
shall also be delivered to the Underwriters, in form and substance acceptable to
the Representative, if such other counsel expressly authorize such reliance and
counsel to the Company expressly states in their opinion that such counsel's and
the Underwriters' reliance upon such opinion is justified.
References to the Registration Statement and the Prospectus in this
paragraph (b) shall include any amendment or supplement thereto at the date of
such opinion.
(c) The Underwriters shall have received from Grant Thornton, L.L.P.
a letter dated the Effective Date and a letter dated the Firm Closing Date, in
form and substance satisfactory to the Underwriters, to the effect that (i) they
are independent public accountants with respect to the Company within the
meaning of the Act and the
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<PAGE>
applicable rules and regulations thereunder; (ii) in their opinion, the
financial statements examined by them and included in the Registration Statement
and the Prospectus comply as to form in all material respects with the
applicable accounting requirements of the Act and the applicable rules and
regulations thereunder; (iii) based upon procedures set forth in detail in such
letter, nothing has come to their attention which causes them to believe that
(A) the financial information set forth under "Summary Financial Information" in
the Prospectus was not determined on a basis substantially consistent with that
used in determining the corresponding amounts in the financial statements
included in the Registration Statement or (B) at a specified date not more than
five days prior to the date of this agreement, there has been any change in the
capital stock of the Company or any increase in the long-term debt of the
Company or any decrease in working capital or net assets as compared with the
amounts shown in the December 31, 1995 balance sheet included in the
Registration Statement or, during the period from January 1, 1994 to a specified
date not more than five days prior to the date of this agreement, there were any
decreases, as compared with the corresponding period in the preceding quarter,
in revenues, or any increase in certain specified expense items of the Company,
except in all instances for changes, increases or decreases which the
Registration Statement and the Prospectus disclose have occurred or may occur;
and (iv) in addition to the examination referred to in their opinions and the
limited procedures referred to in clause (iii) above, they have carried out
certain specified procedures, not constituting an audit, with respect to certain
amounts, percentages and financial information which are included in the
Registration Statement and Prospectus and which are specified by the
Underwriters, and have found such amounts, percentages and financial information
to be in agreement with the relevant accounting, financial and other records of
the Company identified in such letter. References to the Registration Statement
and the Prospectus in this paragraph (c) with respect to the letter referred to
above shall include any amendment or supplement thereto at the date of such
letter.
(d) The representations and warranties of the Company contained in
this agreement shall be true and correct as if made on and as of the Firm
Closing Date; the Registration Statement shall not include any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, and the
Prospectus, as amended or supplemented as of the Firm Closing Date, shall not
include any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and the Company shall
have performed all covenants and agreements and satisfied all conditions on its
part to be performed or satisfied at or prior to the Firm Closing Date.
(e) No stop order suspending the effectiveness of the Registration
Statement or any amendment thereto shall have been issued, and no proceedings
for that purpose shall have been instituted or threatened or contemplated by the
Commission.
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<PAGE>
(f) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, there shall not have
been any material adverse change, or any development involving a prospective
material adverse change, in the business, operations, condition (financial or
otherwise), earnings or prospects of the Company, except in each case as
described in or contemplated by the Prospectus (exclusive of any amendment or
supplement thereto).
(g) The Underwriters shall have received a certificate, dated the
Firm Closing Date, of the Chief Executive Officer and the Secretary of the
Company to the effect set forth in subparagraphs (d) through (f) above.
(h) The Common Stock shall be qualified in such jurisdictions as the
Underwriters may reasonably request pursuant to section 5(c), and each such
qualification shall be in effect and not subject to any stop order or other
proceeding on the Firm Closing Date.
(i) The Company shall have executed and delivered to the Underwriters
the Underwriters' Warrant Agreement and a certificate or certificates evidencing
the Underwriters' Warrants, in each case in a form acceptable to the
Underwriters.
(j) On or before the Firm Closing Date, the Underwriters and counsel
for the Underwriters shall have received such further certificates, documents,
letters or other information as they may have reasonably requested from the
Company.
All opinions, certificates, letters and documents delivered pursuant to
this agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Underwriters and counsel
for the Underwriters. The Company shall furnish to the Underwriters such
conformed copies of such opinions, certificates, letters and documents in such
quantities as the Underwriters and counsel for the Underwriters shall reasonably
request.
The respective obligations of the Underwriters to purchase and pay for any
Option Securities shall be subject, in its discretion, to each of the foregoing
conditions to purchase the Firm Securities, except that all references to the
Firm Securities and the Firm Closing Date shall be deemed to refer to such
Option Securities and the related Option Closing Date, respectively.
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10. Indemnification and Contribution.
--------------------------------
(a) The Company and the Selling Shareholder agree to indemnify
and hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of section 15 of the Act or section 20 of the
1934 Act against any losses, claims, damages, amounts paid in settlement or
liabilities, joint or several, to which such Underwriter or such controlling
person may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon:
(1) any breach of any representation or warranty of the
Company or the Selling Shareholder contained in section 1 of this agreement,
(2) any untrue statement or alleged untrue statement of any
material fact contained in (A) the Registration Statement originally filed with
respect to the Securities or any amendment thereto, any Preliminary Prospectus
or the Prospectus or any amendment or supplement thereto or (B) any application
or other document, or any amendment or supplement thereto, executed by the
Company or based upon written information furnished by or on behalf of the
Company filed in any jurisdiction in order to qualify the Securities under the
Blue Sky or securities laws thereof or filed with the Commission or any
securities association or securities exchange (each an "Application"), or
(3) the omission or alleged omission to state in such
Registration Statement or any amendment thereto, any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or any Application a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse, as incurred, the Underwriters and
such controlling person for any legal or other expenses reasonably incurred by
the Underwriters or such controlling person in connection with investigating,
defending against or appearing as a third-party witness in connection with any
loss, claim, damage, liability, action, investigation, litigation or proceeding;
provided, however, that the Company and the Selling Shareholder will not be
- -------- -------
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon any untrue statement or alleged untrue
statement or omission or alleged omission made in such registration statement or
any amendment thereto, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or any Application in reliance upon and in
conformity with written information furnished to the Company and the Selling
Shareholder by any Underwriter specifically for use therein. This indemnity
agreement will be in addition to any liability which the Company may otherwise
have. The Company and the Selling Shareholder will not, without the prior
written consent of the Underwriter, settle or compromise or consent to the entry
of any judgment in any pending or threatened claim, action, suit or proceeding
in respect of which indemnification may be sought hereunder (whether or not any
Underwriter or any person who controls any Underwriter within the meaning of
section 15 of the Act or section 20 of the 1934 Act is a
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<PAGE>
party to such claim, action, suit or proceeding), unless such settlement,
compromise or consent includes an unconditional release of the Underwriters and
each such controlling person from all liability arising out of such claim,
action, suit or proceeding.
(b) Each Underwriter will indemnify and hold harmless the Company,
the Selling Shareholder, each of its directors, each of its officers who signed
the Registration Statement and each person, if any, who controls the Company
within the meaning of section 15 of the Act or section 20 of the Exchange Act
against, any losses, claims, damages or liabilities to which the Company or any
such director, officer or controlling person may become subject under the Act or
otherwise, but only insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement or any amendment thereto, any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or any Application, or
(ii) the omission or the alleged omission to state therein a material fact
required to be stated in the Registration Statement or any amendment thereto,
any Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, or any Application, or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company and the Selling Shareholder by Underwriter specifically for use therein;
and, subject to the limitation set forth immediately preceding this clause, will
reimburse, as incurred, any legal or other expenses reasonably incurred by the
Company, the Selling Shareholder or any such director, officer or controlling
person in connection with investigating or defending any such loss, claim,
damage, liability or any action in respect thereof. This indemnity agreement
will be in addition to any liability which the Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this section
10 of notice of the commencement of any action, such indemnified party will, if
a claim in respect thereof is to be made against the indemnifying party under
this section 10, notify the indemnifying party of the commencement thereof; but
the omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
section 10. In case any such action is brought against any indemnified party,
and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein and, to the extent
that it may wish, jointly with any other indemnifying party similarly notified,
to assume the defense thereof, with counsel satisfactory to such indemnified
party, and after notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof, the indemnifying party will not
be liable to such indemnified party under this section for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation. The indemnified
party shall have the right to employ separate counsel in any such action and to
participate in the
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defense thereof, but the fees and expenses of such counsel shall not be at the
expense of the indemnifying party if the indemnifying party has assumed the
defense of the action with counsel reasonably satisfactory to the indemnified
party; provided that if the indemnified party is an Underwriter or a person who
controls an Underwriter within the meaning of the Act, the fees and expenses of
such counsel shall be at the expense of the indemnifying party if (i) the
employment of such counsel has been specifically authorized in writing by the
indemnifying party or (ii) the named parties to any such action (including any
impleaded parties) include both the Underwriter or such controlling person and
the indemnifying party and, in the judgment of the Representative, it is
advisable for such Underwriter or such controlling persons to be represented by
separate counsel (in which case the indemnifying party shall not have the right
to assume the defense of such action on behalf of the Underwriter or such
controlling person, it being understood, however, that the indemnifying party
shall not, in connection with any one such action or separate but substantially
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the reasonable fees and
expenses of more than one separate firm of attorneys for all such Underwriters
and controlling persons, which firm shall be designated in writing by the
Underwriters). No settlement of any action against an indemnified party shall be
made without the consent of the indemnifying party, which shall not be
unreasonably withheld in light of all factors of importance to such indemnifying
party.
11. Contribution.
------------
In order to provide for just and equitable contribution under the Act
in any case in which (i) any Underwriter makes claim for indemnification
pursuant to Section 10 hereof 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 Section 10 provide for indemnification in such case,
or (ii) contribution under the Act may be required on the part of any
Underwriter, then the Company and each person who controls the Company, in the
aggregate, and any such Underwriter shall contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (which shall, for
all purposes of this Agreement, include, but not be limited to, all reasonable
costs of defense and investigation and all reasonable attorneys' fees) in either
such case (after contribution from others) in which proportions that all such
Underwriters are responsible in the aggregate for that portion of such losses,
claims, damages or liabilities represented by the percentage that the
underwriting discount per share of Common Stock and/or Redeemable Warrant
appearing on the cover page of the Prospectus bears to the public offering price
appearing thereon, and the Company shall be responsible for the remaining
portion, provided, however, that if such allocation is not permitted by
applicable law then the relative fault of the Company and the Underwriters and
controlling persons, in the aggregate, in connection with the statements or
omissions which resulted in such damages and other relevant equitable
considerations shall also be
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considered. The relative fault shall be determined by reference to, among other
things, whether in the case of an untrue statement of a material fact or the
omission to state a material fact, such statement or omission relates to
information supplied by the Company, or the Underwriters and the parties'
relative intent, knowledge, access ot information and opportunity to correct or
prevent such untrue statement or omission. The Company and the Underwriters
agree that it would not be just and equitable if the respective obligations of
the Company and the Underwriters to contribute pursuant to this Section 11 were
to be determined by pro rata or per capita allocation of the aggregate damages
(even if the Underwriters in the aggregate were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in the first sentence of this Section 11
and the contribution of each contributing Underwriter shall not be in excess of
its proportionate share (based on the ratio of the number of Securities
purchased by such Underwriter to the number of Securities purchased by all
contributing Underwriters) of the portion of such losses, claims, damages or
liabilities for which the Underwriters are responsible. No person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. As used in this paragraph, the work "Company"
includes any officer, director, or person who controls the Company within the
meaning of Section 15 of the Act. If the full amount of the contribution
specified in this paragraph is not permitted by law, then each Underwriter and
each person who controls each Underwriter shall be entitled to contribution from
the Company, its officers, directors and controlling persons to the full extent
permitted by law. The foregoing contribution agreement shall in no way affect
the contribution liabilities of any persons having liability under Section 11 of
the Act other than the Company and the Underwriters. No contribution shall be
requested with regard to the settlement of any matter from any party who did not
consent to the settlement; provided, however, that such consent shall not be
unreasonably withheld in light of all factors of importance to such party.
12. Substitution of Underwriters.
----------------------------
If any Underwriter shall for any reason not permitted hereunder cancel
its obligations to purchase the Firm Securities hereunder, or shall fail to take
up and pay for the number of Firm Securities set forth opposite names in
Schedule A hereto upon tender of such Firm Securities in accordance with the
terms hereof, then:
(a) If the aggregate number of Firm Securities which such
Underwriter or Underwriters agreed but failed to purchase does not exceed 10% of
the total number of Firm Securities, the other Underwriter shall be obligated to
purchase the Firm Securities which such defaulting Underwriter agreed but failed
to purchase.
(b) If any Underwriter so defaults and the agreed number of Firm
Securities with respect to which such default or defaults occurs is more than
10% of the total number of Firm Securities, the remaining Underwriter shall have
the right to take up
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<PAGE>
and pay for the Firm Securities which the defaulting Underwriter agreed but
failed to purchase. If such remaining Underwriter does not, at the Firm Closing
Date, take up and pay for the Firm Securities which the defaulting Underwriter
agreed but failed to purchase, the time for delivery of the Firm Securities
shall be extended to the next business day to allow the remaining Underwriter
the privilege of substituting within twenty-four hours (including nonbusiness
hours) another underwriter or underwriters satisfactory to the Company. If no
such underwriter or underwriters shall have been substituted as aforesaid,
within such twenty-four hour period, the time of delivery of the Firm Securities
may, at the option of the Company, be again extended to the next following
business day, if necessary, to allow the Company the privilege of finding within
twenty-four hours (including nonbusiness hours) another underwriter or
underwriters to purchase the Firm Securities which the defaulting Underwriter or
Underwriters agreed but failed to purchase. If it shall be arranged for the
remaining Underwriter or substituted Underwriters to take up the Firm Securities
of the defaulting Underwriter as provided in this section, (i) the Company or
the Representative shall have the right to postpone the time of delivery for a
period of not more than seven business days, in order to effect whatever changes
may thereby be made necessary in the Registration Statement or the Prospectus,
or in any other document or arrangements, and the Company agrees promptly to
file any amendments to the Registration Statement or supplements to the
Prospectus which may thereby be made necessary, and (ii) the respective numbers
of Firm Securities to be purchased by the remaining Underwriters or substituted
Underwriters shall be taken as the basis of the underwriting obligation for all
purposes of this agreement.
If in the event of a default by any Underwriter and the remaining
Underwriter shall not take up and pay for all the Firm Securities agreed to be
purchased by the defaulting Underwriter or substitute another underwriter or
underwriters as aforesaid, and the Company shall not find or shall not elect to
seek another underwriter or underwriters for such Firm Securities as aforesaid,
then this Agreement shall terminate.
If, following exercise of the option provided in Section 3(c) hereof,
any Underwriter or Underwriters shall for any reason not permitted hereunder
cancel their obligations to purchase Option Securities at the Option Closing
Date, or shall fail to take up and pay for the number of Option Securities,
which it became obligated to purchase at the Option Closing Date upon tender of
such Option Securities in accordance with the terms hereof, then the remaining
Underwriters or substituted Underwriters may take up and pay for the Option
Units of the defaulting Underwriters in the manner provided in Section 12(b)
hereof. If the remaining Underwriters or substituted Underwriters shall not
take up and pay for all such Option Securities, the Underwriters shall be
entitled to purchase the number of Option Securities for which there is no
default or, at their election, the option shall terminate, the exercise thereof
shall be of no effect.
As used in this Agreement, the term "Underwriter" includes any person
substituted for an Underwriter under this Section. In the event of termination,
there shall be
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no liability on the part of any nondefaulting Underwriter to the Company,
provided that the provisions of this Section 12 shall not in any event affect
the liability of any defaulting Underwriter to the Company arising out of such
default.
13. Survival. The respective representations, warranties,
--------
agreements, covenants, indemnities and other statements of the Company, any of
its officers or directors, or the Selling Shareholder and the Underwriters set
forth in this agreement or made by or on behalf of them, respectively, pursuant
to this agreement shall remain in full force and effect, regardless of (i) any
investigation made by or on behalf of the Company or the Selling Shareholder,
any of its officers or directors, any Underwriter or any controlling person
referred to in section 10 hereof and (ii) delivery of and payment for the
Securities. The respective agreements, covenants, indemnities and other
statements set forth in sections 7 and 10 hereof shall remain in full force and
effect, regardless of any termination or cancellation of this agreement.
14. Termination.
-----------
(a) This agreement may be terminated with respect to the Firm
Securities or any Option Shares in the sole discretion of the Representative by
notice to the Company and the Selling Shareholder given prior to the Firm
Closing Date or the related Option Closing Date, respectively, in the event that
the Company or the Selling Shareholder shall have failed, refused or been unable
to perform all obligations and satisfy all conditions on its part to be
performed or satisfied hereunder at or prior thereto or if at or prior to the
Firm Closing Date or such Option Closing Date, respectively,
(1) the Company or the Selling Shareholder sustains a loss
by reason of explosion, fire, flood, accident or other calamity, which, in the
opinion of the Underwriters, substantially affects the value of the properties
of the Company or the Selling Shareholder or which materially interferes with
the operation of the business of the Company regardless of whether such loss
shall have been insured; there shall have been any material adverse change, or
any development involving a prospective material adverse change (including,
without limitation, a change in management or control of the Company), in the
business, operations, condition (financial or otherwise), earnings or prospects
of the Company, except in each case as described in or contemplated by the
Prospectus (exclusive of any amendment or supplement thereto);
(2) any action, suit or proceeding not known to the
Representative as of the date of this agreement shall be threatened, instituted
or pending, at law or in equity, against the Company or the Selling Shareholder,
by any person or by any federal, state, foreign or other governmental or
regulatory commission, board or agency wherein any unfavorable result or
decision could materially adversely affect the business, operations, condition
(financial or otherwise), earnings or prospects of the Company;
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(3) trading in the Common Stock or Warrants shall have been
suspended by the Commission, the NASD, or trading in securities generally on the
New York Stock Exchange shall have been suspended or minimum or maximum prices
shall have been established on either such exchange or quotation system;
(4) a banking moratorium shall have been declared by New
York or United States authorities; or
(5) there shall have been (A) an outbreak of hostilities
between the United States and any foreign power (or, in the case of any ongoing
hostilities, a material escalation thereof), (B) an outbreak of any other
insurrection or armed conflict involving the United States or (C) any other
calamity or crisis or material change in financial, political or economic
conditions, having an effect on the financial markets that, in any case referred
to in this clause (5), in the sole judgment of the Representative makes it
impracticable or inadvisable to proceed with the public offering or the delivery
of the Securities as contemplated by the Registration Statement; or
(6) the Company's and Selling Shareholders' counsel or
independent public accountants are unable to deliver any opinion, report or
certificate relating to this offering which is qualified in any material respect
(other than, in the case of this accountant's audit report, qualification with
respect to the viability of the Company as a going concern).
(b) Termination of this agreement pursuant to this section 14
shall be without liability of any party to any other party except as provided in
section 6(b) and section 10 hereof.
15. Information Supplied by the Underwriters. The statements set
----------------------------------------
forth in the last paragraph on the front cover page and in the third paragraph
under the heading "Underwriting" in any Preliminary Prospectus or the Prospectus
(to the extent such statements relate to the Underwriter) constitute the only
information furnished by the Underwriter to the Company for the purposes of
sections 1(b) and 10(b) hereof. The Underwriter confirms that such statements
(to such extent) are correct.
16. Notices. All notice hereunder to or upon either party hereto
-------
shall be deemed to have been duly given for all purposes if in writing and (i)
delivered in person or by messenger or an overnight courier service against
receipt, or (ii) send by certified or registered mail, postage paid, return
receipt requested, or (iii) sent by telegram, facsimile, telex or similar means,
provided that a written copy thereof is sent on the same day by postage paid
first-class mail, to such party at the following address:
-34-
<PAGE>
To the Company: 751 Park of Commerce Drive, Suite 104
Boca Raton, Florida 33487
Attn: President
Fax: (561) 997-2511
To the Underwriter: 875 Third Avenue
New York, New York 10022
Attn: Corporate Finance Department
Fax: (212) 754-9646
To the Selling Shareholder: 751 Park of Commerce Drive, Suite 104
Boca Raton, Florida 33487
Fax: (561) 997-2511
or such other address as either party hereto may at any time, or from time to
time, direct by notice given to the other party in accordance with this section.
The date of giving of any such notice shall be, in the case of clause (i), the
date of the receipt; in the case of clause (ii), five business days after such
notice or demand is sent; and, in the cas of clause (iii), the business day next
following the date such notice is sent.
17. Amendment. Except as otherwise provided herein, no amendment of
---------
this agreement shall be valid or effective, unless in writing and signed by or
on behalf of the parties hereto.
18. Waiver. No course of dealing or omission or delay on the part of
------
either party hereto in asserting or exercising any right hereunder shall
constitute or operate as a waiver of any such right. No waiver of any provision
hereof shall be effective, unless in writing and signed by or on behalf of the
party to be charged therewith. No waiver shall be deemed a continuing waiver or
waiver in respect of any other or subsequent breach or default, unless expressly
so stated in writing.
19. Applicable Law. This agreement shall be governed by, and
--------------
interpreted and enforced in accordance with, the laws of the State of New York
without regard to principles of choice of law or conflict of laws.
20. Jurisdiction. Each of the parties hereto hereby irrevocably
------------
consents and submits to the exclusive jurisdiction of the Supreme Court of the
State of New York and the United States District Court for the Southern District
of New York in connection with any suit, action or other proceeding arising out
of or relating to this agreement or the transactions contemplated hereby, waives
any objection to venue in the County of New York, State of New York, or such
District and agrees that service of any summons, complaint, notice or other
process relating to such suit, action or other proceeding may be effected in the
manner provided by clause (ii) of Section 13.
-35-
<PAGE>
21. Remedies. In the event of any actual or prospective breach or
--------
default by either party hereto, the other party shall be entitled to equitable
relief, including remedies in the nature of rescission, injunction and specific
performance. All remedies hereunder are cumulative and not exclusive, and
nothing herein shall be deemed to prohibit or limit either party from pursuing
any other remedy or relief available at law or in equity for such actual or
prospective breach or default, including the recovery of damages.
22. Attorneys' Fees. The prevailing party in any suit, action or
---------------
other proceeding arising out of or relating to this agreement or the
transactions contemplated hereby, shall be entitled to recover its costs and
reasonable attorneys' fees.
23. Severability. The provisions hereof are severable and in the
------------
event that any provision of this Agreement shall be determined to be invalid or
unenforceable in any respect by a court of competent jurisdiction, the remaining
provisions hereof shall not be affected, but shall, subject to the discretion of
such court, remain in full force and effect, and any invalid or unenforceable
provision shall be deemed, without further action on the part of the parties
hereto, amended and limited to the extent necessary to render the same valid and
enforceable.
24. Counterparts. This agreement may be executed in counterparts,
------------
each of which shall be deemed an original and which together shall constitute
one and the same agreement.
25. Successors. This agreement shall inure to the benefit of and be
----------
binding upon the Underwriters, the Company, the Selling Shareholder and their
respective successors and assigns. Nothing expressed or mentioned in this
agreement is intended or shall be construed to give any other person any legal
or equitable right, remedy or claim under or in respect of this agreement, or
any provisions herein contained, this agreement and all conditions and
provisions hereof being intended to be and being for the sole and exclusive
benefit of such persons and for the benefit of no other person except that (i)
the indemnities of the Company and the Selling Shareholder contained in section
10 of this agreement shall also be for the benefit of any person or persons who
control any Underwriter within the meaning of section 15 of the Act or section
20 of the Exchange Act and (ii) the indemnities of the Underwriters contained in
section 10 of this agreement shall also be for the benefit of the directors of
the Company, the officers of the Company and the Selling Shareholder who have
signed the Registration Statement and any person or persons who control the
Company within the meaning of section 15 of the Act or section 20 of the
Exchange Act. No purchaser of Securities from the Underwriters shall be deemed
a successor because of such purchase.
26. Titles and Captions. The titles and captions of the articles and
-------------------
sections of this agreement are for convenience of reference only and do not in
any way define or interpret the intent of the parties or modify or otherwise
affect any of the provisions hereof.
-36-
<PAGE>
27. Grammatical Conventions. Whenever the context so requires, each
-----------------------
pronoun or verb used herein shall be construed in the singular or the plural
sense and each capitalized term defined herein and each pronoun used herein
shall be construed in the masculine, feminine or neuter sense.
28. References. The terms "herein," "hereto," "hereof," "hereby,"
----------
and "hereafter," and other terms of similar import, refer to this Agreement as a
whole, and not to any Article, Section or other part hereof.
29. Entire Agreement. This Agreement embodies the entire agreement
----------------
of the parties hereto with respect to the subject matter hereof and supersedes
any prior agreement, commitment or arrangement relating thereto.
-37-
<PAGE>
If the foregoing correctly sets forth our understanding, please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter shall constitute an agreement binding the Company, the
Selling Shareholder and the Underwriters.
Very truly yours,
ENSEC INTERNATIONAL, INC.
By:
-----------------------------------------
Name: Charles N. Finkel
Title: President and Chief Executive Officer
CHARLES N. FINKEL
By:
-----------------------------------------
Name: Charles N. Finkel
The foregoing agreement is hereby confirmed and accepted as of the date first
above written.
RICKEL & ASSOCIATES, INC.
By:
----------------------------
Name: Gregg Smith
Title: Managing Director
JANSSEN-MEYERS ASSOCIATES, L.P.
By: MEYERS-JANSSEN SECURITIES CORP.
(General Partner)
By:
----------------------------
Name: Bruce Meyers
Title: Vice President
-38-
<PAGE>
Schedule A
<TABLE>
<CAPTION>
Number of
Underwriter Number of Shares Redeemable Warrants
----------- ---------------- -------------------
<S> <C> <C>
Rickel & Associates, Inc. 1,400,000 1,400,000
Janssen-Meyers Associates, L.P. 500,000 500,000
--------- ---------
Total 1,900,000 1,900,000
</TABLE>
-39-
<PAGE>
NO SALE OR TRANSFER OF THIS WARRANT OR THE SECURITIES UNDERLYING THIS
WARRANT MAY BE MADE UNTIL THE EFFECTIVENESS OF A REGISTRATION
STATEMENT OR OF A POST-EFFECTIVE AMENDMENT THERETO UNDER THE
SECURITIES ACT OF 1933 (THE "ACT"), COVERING THIS WARRANT OR THE
SECURITIES UNDERLYING THIS WARRANT, OR UNTIL THE COMPANY RECEIVES AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY TO THE EFFECT THAT SUCH
SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE
ACT. TRANSFER OF THIS WARRANT IS RESTRICTED UNDER PARAGRAPH 2 BELOW.
UNDERWRITERS' WARRANT TO PURCHASE
COMMON STOCK AND REDEEMABLE WARRANTS
ENSEC INTERNATIONAL, INC.
(a Florida corporation)
Dated: September __, 1996
THIS CERTIFIES THAT, for value received, Rickel & Associates, Inc.
(the "Representative") and Janssen-Meyers Associates, L.P. ("JM") (collectively,
the "Underwriters") or their registered assigns ( the Underwriters and any such
registered assign, a "Holder") are the owners of this warrant (the
"Underwriters' Warrant") to purchase from Ensec International, Inc., a Florida
corporation (the "Company"), during the period and at the prices hereinafter
specified, up to 190,000 shares of the Company's common stock, par value $.01
per
<PAGE>
share (the "Common Stock"), and up to 190,000 redeemable common stock
purchase warrants (the "Warrants" and, together with the Common Stock, the
"Securities"). JM may purchase up to a maximum of 40,000 Securities.
This Underwriters' Warrant is issued pursuant to an Underwriting
Agreement dated September __, 1996 between the Company and the Underwriters in
connection with a public offering through the Underwriters (the "Public
Offering") of (i) 1,900,000 shares of Common Stock and 1,900,000 warrants, and
(ii) pursuant to the Underwriters' over-allotment option (the "Over-allotment
Option"), an additional 285,000 shares of Common Stock (of which Charles N.
Finkel may sell 75,000 shares) and 285,000 warrants (collectively, the warrants
to purchase such 2,185,000 shares and the warrants issuable upon exercisable
upon exercise of this Warrant are called the "Warrants"). The Warrants will be
issued pursuant to, and subject to the terms and conditions set forth in, an
agreement between the Company, the Underwriters and American Stock Transfer &
Trust Company (the "Warrant Agreement").
1. Exercise of the Underwriters' Warrant.
-------------------------------------
(a) The rights represented by this Underwriters' Warrant shall be
exercisable at the prices and during the period specified below, upon the terms
and subject to the conditions as set forth herein:
(i) During the period from September __, 1996 to September __,
1997, inclusive, the Holder shall have no right to purchase any Securities
hereunder.
(ii) Between September __, 1997 and September , 2001, inclusive,
the Holder shall have the option to purchase 190,000 shares of Common Stock
and
2
<PAGE>
190,000 Warrants hereunder at a price of $9.90 per share and $.165 per Warrant,
respectively, the purchase price of the Common Stock and the Warrants being 165%
of the public offering prices for the Securities set forth in the Prospectus
forming a part of the registration statement on Form SB-2 (File No. 333-06223)
of the Company, as amended (the "Registration Statement").
(iii) After September __, 2001, the Holder shall have no right to
purchase any Securities hereunder and this Underwriters' Warrant shall expire
effective at 5:00 p.m., New York time on such date.
(b) The rights represented by this Underwriters' Warrant may be
exercised at any time within the period above specified, in whole or in part, by
(i) the surrender of this Underwriters' Warrant (with the purchase form at the
end hereof properly executed) at the principal executive office of the Company
(or such other office or agency of the Company as it may designate by notice in
writing to the Holder at the address of the Holder appearing on the books of the
Company); (ii) payment to the Company of the exercise price then in effect for
the number of shares of Common Stock and Warrants specified in the above-
mentioned purchase form together with applicable stock transfer taxes, if any;
and (iii) delivery to the Company of a duly executed agreement signed by the
person(s) designated in the purchase form to the effect that such person(s)
agree(s) to be bound by the provisions of Paragraph 5 and subparagraphs (b), (c)
and (d) of Paragraph 6 hereof. This Underwriters' Warrant shall be deemed to
have been exercised, in whole or in part to the extent specified, immediately
prior to the close of business on the date this Underwriters' Warrant is
surrendered and payment is made in accordance with the foregoing provisions of
this Paragraph 1, and the person or persons in whose name or names the
3
<PAGE>
certificates for the Securities shall be issuable upon such exercise shall
become the holder or holders of record of such Common Stock and Warrants at that
time and date. The Common Stock and Warrants so purchased shall be delivered to
the Holder within a reasonable time, not exceeding ten business days, after the
rights represented by this Underwriters' Warrant shall have been so exercised.
2. Restrictions on Transfer. This Underwriters' Warrant shall not
------------------------
be sold, transferred, assigned, pledged or hypothecated for a period of one year
commencing on , 1996, except that it may be transferred to successors
of the Holder, and may be assigned in whole or in part to any person who is an
officer of the Underwriters or a partner, officer of any other member of the
selling group during such period. Any such assignment shall be effected by the
Holder by (i) completing and executing the transfer form at the end hereof and
(ii) surrendering this Underwriters' Warrant with such duly completed and
executed transfer form for cancellation, accompanied by funds sufficient to pay
any transfer tax, at the office or agency of the Company referred to in
Paragraph 1 hereof, accompanied by a certificate (signed by a duly authorized
representative of the Holder), stating that each transferee is a permitted
transferee under this Paragraph 2; whereupon the Company shall issue, in the
name or names specified by the Holder, a new Underwriters' Warrant or
Underwriters' Warrants of like tenor and representing in the aggregate rights to
purchase the same number of Securities as are then purchasable hereunder. The
Holder acknowledges that this Underwriters' Warrant may not be offered or sold
except pursuant to an effective registration statement under the Act or an
opinion of counsel satisfactory to the Company that an exemption from
registration under the Act is available.
3. Covenants of the Company.
------------------------
4
<PAGE>
(a) The Company covenants and agrees that all Common Stock issuable
upon the exercise of this Underwriters' Warrant will, upon issuance thereof and
payment therefor in accordance with the terms hereof, and all Common Stock
issuable upon exercise of the Warrants underlying this Underwriters' Warrant
will, upon the issuance thereof and payment therefor in accordance with the
terms of the Warrant Agreement, be duly and validly issued, fully paid and
nonassessable and no personal liability will attach to the Holder thereof by
reason of being such a Holder, other than as set forth herein.
(b) The Company covenants and agrees that during the period within
which this Underwriters' Warrant may be exercised, the Company will at all times
have authorized and reserved a sufficient number of shares of Common Stock to
provide for the exercise of this Underwriters' Warrant and the Warrants included
therein.
(c) The Company covenants and agrees that for so long as the
Securities shall be outstanding (unless the Securities shall no longer be
registered under Paragraph 12(b) or 12(g) of the Securities Exchange Act of
1934) the Company shall use its best efforts to cause all shares of Common Stock
issuable upon the exercise of the Underwriters' Warrant and the Warrants
included therein, to be included on the Nasdaq Stock Market or listed on a
national securities exchange.
4. No Rights as Stockholder. This Underwriters' Warrant shall not
------------------------
entitle the Holder to any voting rights or other rights as a stockholder of the
Company, either at law or in equity, and the rights of the Holder are limited to
those expressed in this Underwriters' Warrant and are not enforceable against
the Company except to the extent set forth herein.
5. Registration Rights.
-------------------
5
<PAGE>
(a) During the period of four years from September __, 1997, the
Company shall advise the Holder, whether the Holder holds this Underwriters'
Warrant or has exercised this Underwriters' Warrant and holds Common Stock and
Warrants, or Common Stock underlying the Warrants (the "Warrant Shares") , by
written notice at least 30 days prior to the filing of any post-effective
amendment to the Registration Statement or of any new registration statement or
post-effective amendment thereto under the Act, covering any securities of the
Company, for its own account or for the account of others, and upon the request
of the Holder made during such four-year period, include in any such post-
effective amendment or registration statement such information as may be
required to permit a public offering of any of the Common Stock or Warrants
issuable hereunder, and/or the Warrant Shares (the "Registrable Securities");
provided, that this Paragraph 5(a) shall not apply to any registration statement
filed pursuant to Paragraph 5 (b) hereof or to registrations of shares in
connection with an employee benefit plan or a merger, consolidation or other
comparable acquisition or solely for registration of non-convertible debt or
preferred equity securities of the Company; and provided, further, that,
notwithstanding the foregoing, the Holder shall have no right to include any
Registrable Securities in any new registration statement or post-effective
amendment thereto unless as of the effective date thereof the Registration
Statement (as it may hereafter be amended or supplemented) or any new
registration statement under which the Registrable Securities are registered
shall have ceased to be effective or the prospectus contained in such
Registration Statement shall have ceased to be current. The Company shall
supply prospectuses in order to facilitate the public sale or other disposition
of the Registrable Securities, use its best efforts to register and qualify any
of the Registrable Securities for sale in such states in which the Common Stock
and Warrants are
6
<PAGE>
offered and sold in the Public Offering as such Holder reasonably designates,
furnish indemnification in the manner provided in Paragraph 6 hereof, and do any
and all other acts and things which may be necessary to enable such Holder to
consummate the public sale of the Registrable Securities; provided, that,
without limiting the foregoing, the Company shall not be obligated to execute or
file any general consent to service of process or to qualify as a foreign
corporation to do business under the laws of any such jurisdiction. The Holder
shall furnish information reasonably requested by the Company in accordance with
such post-effective amendments or registration statements, including its
intentions with respect thereto, and shall furnish indemnification as set forth
in Paragraph 6. The Company shall continue to advise the Holders of the
Registrable Securities of its intention to file a registration statement or
amendment pursuant to this Paragraph 5(a) until the earliest of (i) September
__, 2001; or (ii) such time as all of the Registrable Securities have been
registered and sold under the Act; or (iii) such time as all of the Registrable
Securities have been otherwise transferred, new certificates for them not
bearing a legend restricting further transfer shall have been delivered by the
Company and subsequent public distribution of them shall not require
registration or qualification of them under the Act; or (iv) such time as in the
opinion of legal counsel for the Company, the Registrable Securities may be
offered and sold by the holders thereof without being registered under the Act
and such securities, upon receipt by the purchasers thereof pursuant to such
sale, will not constitute "restricted securities" as such term is defined in
Rule 144 under the Act.
(b) If any 51% holder (as defined below) shall give notice to the
Company at any time during the four-year period beginning one year from
September __, 1996 to the effect that such Holder desires to register under the
Act any Registrable Securities, under such
7
<PAGE>
circumstances that a public distribution (within the meaning of the Act) of any
such Registrable Securities will be involved (and the Registration Statement or
any new registration statement under which such Registrable Securities are
registered shall have ceased to be effective or the Prospectus contained therein
shall have ceased to be current), then the Company will as promptly as
practicable after receipt of such notice, but not later than 30 days after
receipt of such notice, at the Company's option, file a post effective amendment
to the current Registration Statement or a new registration statement pursuant
to the Act to the end that the Registrable Securities may be publicly sold under
the Act as promptly as practicable thereafter and the Company will use its best
efforts to cause such registration to become and remain effective as provided
herein (including the taking of such steps as are reasonably necessary to obtain
the removal of any stop order); provided, that such 51% holder shall furnish the
Company with appropriate information in connection therewith as the Company may
reasonably request; and provided, further, that the Company shall not be
required to file such a post-effective amendment or registration statement
pursuant to this Paragraph 5(b) on more than two occasions; and provided,
further, that the registration rights of the 51% holder under this Paragraph
5(b) shall be subject to the "piggyback" registration rights of other holders of
securities of the Company to include such securities in any registration
statement or post-effective amendment filed pursuant to this Paragraph 5(b).
The Company will maintain such registration statement or post-effective
amendment current under the Act for a period of at least nine months from the
effective date thereof. The Company shall supply prospectuses in order to
facilitate the public sale of the Registrable Securities, use its best efforts
to register and qualify any of the Registrable Securities for sale in such
states in which the Common Stock and Warrants are offered and sold in the Public
Offering as such holder
8
<PAGE>
reasonably designates and furnish indemnification in the manner provided in
Paragraph 6 hereof, provided that, without limiting the foregoing, the Company
shall not be obligated to execute or file any general consent to service of
process or to qualify as a foreign corporation to do business under the laws of
any such jurisdiction.
(c) The Holder may, in accordance with Paragraphs 5(a) or (b), at his
or its option, and subject to the limitations set forth in Paragraph 1(a)
hereof, request the registration of any of the Registrable Securities in a
filing made by the Company prior to the acquisition of the Securities upon
exercise of this Underwriters' Warrant. The Holder may thereafter exercise this
Underwriters' Warrant at any time or from time to time subsequent to the
effectiveness under the Act of the registration statement which relates to the
Common Stock underlying the Underwriters' Warrants and Warrants included
therein.
(d) The term "51% holder," as used in this Paragraph 5, shall include
any owner or combination of owners of Underwriters' Warrants or Registrable
Securities if the aggregate number of shares of Common Stock and Warrant Shares
included in and underlying the Underwriters' Warrants and Registrable Securities
held of record by it or them, would constitute a majority of the aggregate of
such shares of Common Stock and Warrant Shares underlying the Underwriters'
Warrant and Registrable Securities as of the date of the initial issuance of the
Underwriters' Warrant.
(e) The following provisions of this Paragraph 5 shall also be
applicable:
(i) Within ten (10) days after receiving any notice pursuant to
Paragraph 5(b), the Company shall give notice to the other Holders of
Underwriters' Warrants or Registrable Securities, advising that the Company is
proceeding with such post-effective
9
<PAGE>
amendment or registration and offering to include therein the Registrable
Securities of such other Holders, provided that they shall furnish the Company
with all information in connection therewith as shall be necessary or
appropriate and as the Company shall reasonably request in writing. Following
the effective date of such post-effective amendment or registration statement,
the Company shall, upon the request of any Holder of Registrable Securities,
forthwith supply such number of prospectuses meeting the requirements of the
Act, as shall be reasonably requested by such Holder. The Company shall use its
best efforts to qualify the Registrable Securities for sale in such states in
which the Common Stock and Warrants are offered and sold in the Public Offering
as the 51% holder shall reasonably designate at such times as the registration
statement is effective under the Act; provided, that, without limiting the
foregoing, the Company shall not be obligated to execute or file any general
consent to service of process or to qualify as a foreign corporation to do
business under the laws of any such jurisdiction.
(ii) The Company shall bear the entire cost and expense of any
registration of securities initiated by it under Paragraph 5(a) hereof
notwithstanding that the Registrable Securities subject to this Underwriters'
Warrant may be included in any such registration. The Company shall also comply
with the one request for registration made by the 51% holder pursuant to
Paragraph 5(b) hereof at the Company's own expense and without charge to any
holder of the Registrable Securities, but the expenses of registration pursuant
to the second request, if any, for registration pursuant to Paragraph 5(b) shall
be borne by the Company and the Holders of Registrable Securities included
therein in proportion to the aggregate offering prices of the securities being
offered by the Company included therein and the aggregate offering price of the
Registrable Securities included therein. Notwithstanding the foregoing, any
Holder
10
<PAGE>
whose Registrable Securities are included in any such registration statement
pursuant to this Paragraph 5 shall, however, bear the fees of any counsel
retained by him and any transfer taxes or underwriting discounts or commissions
applicable to the Registrable Securities sold by him pursuant thereto and, in
the case of a registration pursuant to Paragraph 5(a) hereof, any additional
registration or "blue sky" or state securities fees attributable to the
registration or qualification of such Holder's Registrable Securities.
(iii) If the underwriter or managing underwriter in any
underwritten offering made pursuant to Paragraph 5(a) hereof shall advise the
Company that it declines to include a portion or all of the Registrable
Securities requested by the Holders to be included in the registration
statement, then distribution of all or a specified portion of the Registrable
Securities shall be excluded from such registration statement (in case of an
exclusion as to a portion of such Registrable Securities, such portion to be
allocated among such Holders in proportion to the respective numbers of
Registrable Securities requested to be registered by each such Holder). In such
event the Company shall give the Holder prompt notice of the number of
Registrable Securities excluded. Further, in such event the Company shall,
commencing six months after the completion of such underwritten offering, file
and use its best efforts to have declared effective, at its sole expense
(subject to the last sentence of Paragraph 5(a)(ii)), a registration statement
relating to such excluded securities.
(iv) Notwithstanding anything to the contrary contained herein,
the Company shall have the right at any time after it shall have given written
notice pursuant to Paragraph 5(a) or 5(b) (irrespective of whether a written
request for inclusion of any Registrable Securities shall have been made) to
elect not to file or to delay any such proposed registration
11
<PAGE>
statement or post effective amendment thereto, or to withdraw the same after the
filing but prior to the effective date thereof. In addition, the Company may
delay the filing of any registration statement or post effective amendment
requested pursuant to Paragraph 5(b) hereof by not more than 120 days if the
Company, prior to the time it would otherwise have been required to file such
registration statement or post-effective amendment thereto, determines in good
faith that the filing of the registration statement would require the disclosure
of non-public material information that, in its judgment, would be detrimental
to the Company if so disclosed or would otherwise adversely affect a financing,
acquisition, disposition, merger or other material transaction.
(v) If a registration pursuant to Paragraph 5(a) hereof involves
an underwritten offering, the Company shall have the right to select the
investment banker or investment bankers and manager or managers that will serve
as underwriters with respect to the underwritten offering. No Holder of
Registrable Securities may participate in any underwritten offering under this
Agreement unless such Holder completes and executes all questionnaires, powers
of attorney, indemnities, underwriting agreements and other documents required
under the terms of such underwritten offering, in each case, in the form and
upon terms reasonably acceptable to the Company and the underwriters. The
requested registration pursuant to Paragraph 5 (b) hereof shall not involve an
underwritten offering unless the Company shall first give its written approval
of each underwriter that participates in the offering, such approval not to be
unreasonably withheld.
6. Indemnification.
---------------
(a) Whenever pursuant to Paragraph 5, a registration statement
relating to any Registrable Securities is filed under the Act, amended or
supplemented, the Company will
12
<PAGE>
indemnify and hold harmless each Holder of the Registrable Securities covered by
such registration statement, amendment or supplement (such holder hereinafter
referred to as the "Distributing Holder"), each person, if any, who controls
(within the meaning of the Act) the Distributing Holder, and each officer,
employee, partner or agent of the Distributing Holder, if the Distributing
Holder is a broker or dealer, and each underwriter (within the meaning of the
Act) of such securities and each person, if any, who controls (within the
meaning of the Act) any such underwriter and each officer, employee, agent or
partner of such underwriter against any losses, claims, damages or liabilities,
joint or several, to which the Distributing Holder, any such underwriter or any
other person may become subject under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in any such registration statement or any preliminary
prospectus or final prospectus constituting a part thereof or any amendment or
supplement thereto, or arise out of or are based upon the omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which such
statements were made, not misleading; and will reimburse the Distributing Holder
and each such underwriter or such other person for any legal or other expenses
reasonably incurred by the Distributing Holder, or Underwriters or such other
person, in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the Company will not be
liable in any such case (i) to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in such registration statement,
such preliminary prospectus, such final prospectus or such amendment or
supplement in reliance
13
<PAGE>
upon and in conformity with written information furnished by such Distributing
Holder, any other Distributing Holder or any such underwriter for use in the
preparation thereof, or (ii) such losses, claims, damages or liabilities arise
out of or are based upon any actual or alleged untrue statement or omission made
in or from any preliminary prospectus, but corrected in the final prospectus, as
amended or supplemented.
(b) Whenever pursuant to Paragraph 5 a registration statement relating
to the Registrable Securities is filed under the Act, or is amended or
supplemented, the Distributing Holder will indemnify and hold harmless the
Company, each of its directors, each of its officers who have signed such
registration statement and such amendments and supplements thereto, and each
person, if any, who controls the Company (within the meaning of the Act) against
any losses, claims, damages or liabilities to which the Company or any such
director, officer or controlling person may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue or alleged untrue
statement of any material fact contained in any such registration statement or
any preliminary prospectus or final prospectus constituting a part thereof, or
any amendment or supplement thereto, or arise out of or are based upon the
omission or the alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, in
each case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in such
registration statement, such preliminary prospectus, such final prospectus or
such amendment or supplement in reliance upon and in conformity with written
information furnished by such Distributing Holder for use in the preparation
thereof; and will reimburse the Company or any such director, officer or
14
<PAGE>
controlling person for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability or action.
(c) Promptly after receipt by an indemnified party under this
Paragraph 6 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against any indemnifying
party, give the indemnifying party notice of the commencement thereof; but the
omission to so notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Paragraph 6.
(d) In case any such action is brought against any indemnified party,
and it notifies an indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Paragraph 6 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation.
7. Adjustments of Warrant Price and Number of
------------------------------------------
Shares of Common Stock.
----------------------
(a) Computation of Adjusted Price. Except as hereinafter provided,
-----------------------------
in case the Company shall, at any time after the date of closing of the sale of
securities pursuant to the Public Offering (the "Closing Date"), issue or sell
any shares of Common Stock (other than the issuances
15
<PAGE>
or sales referred to in Paragraph 7(f) hereof), including shares held in the
Company's treasury and shares of Common Stock issued upon the exercise of any
options, rights or warrants to subscribe for shares of Common Stock (other than
the issuances or sales of Common Stock pursuant to rights to subscribe for such
Common Stock distributed pursuant to Paragraph 7(j) hereof) and shares of Common
Stock issued upon the direct or indirect conversion or exchange of securities
for shares of Common Stock, for a consideration per share less than both the
"Market Price" (as defined in Paragraph 7 (a)(vi) hereof) per share of Common
Stock on the trading day immediately preceding such issuance or sale and the
Underwriters' Warrant Price (as defined below) in effect immediately prior to
such issuance or sale, or without consideration, then forthwith upon such
issuance or sale, the Underwriters' Warrant Price in respect of the Common Stock
issuable upon exercise of this Underwriters' Warrant (but not the exercise price
of the Warrants issuable upon exercise of this Underwriters' Warrant, which
shall be adjusted only in accordance with the Warrant Agreement) shall (until
another such issuance or sale) be reduced to the price (calculated to the
nearest full cent) determined by multiplying the Underwriters' Warrant Price in
effect immediately prior to such issuance or sale by a fraction, the numerator
of which shall be the sum of (1) the number of shares of Common Stock
outstanding immediately prior to such issuance or sale multiplied by the
Underwriters' Warrant Price immediately prior to such issuance or sale plus (2)
the consideration received by the Company upon such issuance or sale, and the
denominator of which shall be the product of (x) the total number of shares of
Common Stock outstanding immediately after such issuance or sale, multiplied by
(y) the Underwriters' Warrant Price immediately prior to such issuance or sale;
provided, however, that in no event shall the Underwriters' Warrant Price be
adjusted pursuant to this computation to an amount in excess of
16
<PAGE>
the Underwriters' Warrant Price in effect immediately prior to such computation,
except in the case of a combination of outstanding shares of Common Stock, as
provided by Paragraph 7(c) hereof. For the purposes of this Paragraph 7, the
term "Underwriters' Warrant Price" shall mean the exercise price per share of
Common Stock issuable upon exercise of the Underwriters' Warrant (initially
$9.90 per share), as adjusted from time to time pursuant to the provisions of
this Paragraph 7.
For the purposes of any computation to be made in accordance with this
Paragraph 7(a), the following provisions shall be applicable:
(i) In case of the issuance or sale of shares of Common Stock
for a consideration part or all of which shall be cash, the amount of the cash
consideration therefor shall be deemed to be the amount of cash received by the
Company for such shares (or, if shares of Common Stock are offered by the
Company for subscription, the subscription price, or, if such securities shall
be sold to underwriters or dealers for public offering without a subscription
offering, the public offering price) before deducting therefrom any compensation
paid or discount allowed in the sale, underwriting or purchase thereof by
underwriters or dealers or others performing similar services, or any expenses
incurred in connection therewith .
(ii) In case of the issuance or sale (otherwise than as a
dividend or other distribution on any stock of the Company) of shares of Common
Stock for a consideration part or all of which shall be other than cash, the
amount of the consideration therefor other than cash shall be deemed to be the
value of such consideration as determined in good faith by the Board of
Directors of the Company.
17
<PAGE>
(iii) Shares of Common Stock issuable by way of dividend or other
distribution on any stock of the Company shall be deemed to have been issued
immediately after the opening of business on the day following the record date
for the determination of stockholders entitled to receive such dividend or other
distribution and shall be deemed to have been issued without consideration.
(iv) The reclassification of securities of the Company other
than shares of Common Stock into securities including shares of Common Stock
shall be deemed to involve the issuance of such shares of Common Stock for a
consideration other than cash immediately prior to the close of
business on the date fixed for the determination of security holders entitled to
receive such shares, and the value of the consideration allocable to such shares
of Common Stock shall be determined as provided in subparagraph (ii) of this
Paragraph 7(a).
(v) The number of shares of Common Stock at any one time
outstanding shall include the aggregate number of shares issued or issuable upon
the exercise of options, rights or warrants and upon the conversion or exchange
of convertible or exchangeable securities.
(vi) As used herein, the phrase "Market Price" at any date shall
be deemed to be the average of the last reported sale price, or, in case no such
reported sale takes place on such day, the average of the last reported sale
prices for the last three trading days, in either case as officially reported by
the principal securities exchange on which the Common Stock is listed or
admitted to trading or as reported in the Nasdaq Stock Market, or, if the Common
Stock is not listed or admitted to trading on any national securities exchange
or quoted on the Nasdaq Stock Market, the closing bid quotation as furnished by
the National Association of
18
<PAGE>
Securities Dealers, Inc. through Nasdaq or a similar organization if Nasdaq is
no longer reporting such information, or if the Common Stock is not quoted on
Nasdaq, as determined in good faith by resolution of the Board of Directors of
the Company, based on the best information available to it for the day
immediately preceding such issuance or sale, the day of such issuance or sale
and the day immediately after such issuance or sale. If the Common Stock is
listed or admitted to trading on a national securities exchange and also quoted
on the Nasdaq Stock Market, the Market Price shall be determined as hereinabove
provided by reference to the prices reported in the Nasdaq Stock Market;
provided that if the Common Stock is listed or admitted to trading on the New
York Stock Exchange, the Market Price shall be determined as hereinabove
provided by reference to the prices reported by such exchange.
(b) Options, Rights, Warrants and Convertible and Exchangeable
----------------------------------------------------------
Securities. Except in the case of the Company issuing rights to subscribe for
- ----------
shares of Common Stock distributed pursuant to Paragraph 7(j) hereof, if the
Company shall at any time after the Closing Date issue options, rights or
warrants to subscribe for shares of Common Stock, or issue any securities
convertible into or exchangeable for shares of Common Stock, in each case other
than the issuances or sales referred to in Paragraph 7(f) hereof, (i) for a
consideration per share less than the lesser of (a) the Underwriters' Warrant
Price in effect immediately prior to the issuance of such options, rights or
warrants, or such convertible or exchangeable securities, or (b) the Market
Price on the trading day immediately preceding such issuance, or (ii) without
consideration, the Underwriters' Warrant Price in effect immediately prior to
the issuance of such options, rights or warrants, or such convertible or
exchangeable securities, as the case may be, shall be reduced to a
19
<PAGE>
price determined by making a computation in accordance with the provisions of
Paragraph 7(a) hereof, provided that:
(i) The aggregate maximum number of shares of Common Stock, as the
case may be, issuable under all the outstanding options, rights or warrants
shall be deemed to be issued and outstanding at the time all the outstanding
options, rights or warrants were issued, and for a consideration equal to the
minimum purchase price per share provided for in the options, rights or warrants
at the time of issuance, plus the consideration (determined in the same manner
as consideration received on the issue or sale of shares in accordance with the
terms of Paragraph 7(a) hereof), if any, received by the Company for the
options, rights or warrants, and if no minimum purchase price is provided in the
options, rights or warrants, then the minimum purchase price shall be equal to
zero; provided, however, that upon the expiration or other termination of the
options, rights or warrants, if any thereof shall not have been exercised, the
number of shares of Common Stock deemed to be issued and outstanding pursuant to
this subparagraph (b) (and for the purposes of subparagraph (v) of Paragraph
7(a) hereof) shall be reduced by such number of shares as to which options,
warrants and/or rights shall have expired or terminated unexercised, and such
number of shares shall no longer be deemed to be issued and outstanding, and the
Warrant Price then in effect shall forthwith be readjusted and thereafter be the
price which it would have been had adjustment been made on the basis of the
issuance only of shares actually issued or issuable upon the exercise of those
options, rights or warrants as to which the exercise rights shall not have
expired or terminated unexercised.
(ii) The aggregate maximum number of shares of Common Stock
issuable upon conversion or exchange of any convertible or exchangeable
securities shall be
20
<PAGE>
deemed to be issued and outstanding at the time of issuance of such securities,
and for a consideration equal to the consideration (determined in the same
manner as consideration received on the issue or sale of shares of Common Stock
in accordance with the terms of Paragraph 7 (a) hereof) received by the Company
for such securities, plus the minimum consideration, if any, receivable by the
Company upon the conversion or exchange thereof; provided, however, that upon
the expiration or other termination of the right to convert or exchange such
convertible or exchangeable securities (whether by reason of redemption or
otherwise), the number of shares deemed to be issued and outstanding pursuant to
this subparagraph (ii) (and for the purpose of subparagraph (v) of Paragraph
7(a) hereof) shall be reduced by such number of shares as to which the
conversion or exchange rights shall have expired or terminated unexercised, and
such number of shares shall no longer be deemed to be issued and outstanding,
and the Warrant Price then in effect shall forthwith be readjusted and
thereafter be the price which it would have been had adjustment been made on the
basis of the issuance only of the shares actually issued or issuable upon the
conversion or exchange of those convertible or exchangeable securities as to
which the conversion or exchange rights shall not have expired or terminated
unexercised. No adjustment will be made pursuant to this subparagraph (ii) upon
the issuance by the Company of any convertible or exchangeable securities
pursuant to the exercise of any option, right or warrant exercisable therefor,
to the extent that adjustments in respect of such options, rights or warrants
were previously made pursuant to the provisions of subparagraph (i) of this
subparagraph 7(b).
(iii) If any change shall occur in the price per share provided
for in any of the options, rights or warrants referred to in subparagraph (i) of
this Paragraph 7 (b) , or in the price per share at which the securities
referred to in subparagraph (ii) of this Paragraph 7 (b) are
21
<PAGE>
convertible or exchangeable, or if any such options, rights or warrants are
exercised at a price greater than the minimum purchase price provided for in
such options, rights or warrants, or any such securities are converted or
exercised for more than the minimum consideration receivable by the Company upon
such conversion or exchange, the options, rights or warrants or conversion or
exchange rights, as the case may be, shall be deemed to have expired or
terminated on the date when such price change became effective in respect of
shares not theretofore issued pursuant to the exercise or conversion or exchange
thereof, and the Company shall be deemed to have issued upon such date new
options, rights or warrants or convertible or exchangeable securities at the new
price with respect of the number of shares issuable upon the exercise of such
options, rights or warrants or the conversion or exchange of such convertible or
exchangeable securities; provided, however, that no adjustment shall be made
pursuant to this subparagraph (iii) with respect to any change in the price per
share provided for in any of the options, rights or warrants referred to in
subparagraph (i) of this Paragraph 7, or in the price per share at which the
securities referred to in subparagraph (ii) of this Paragraph 7(b) are
convertible or exchangeable, which change results from the application of the
anti-dilution provisions thereof in connection with an event for which, subject
to subparagraph (iv) of Paragraph 7(f), an adjustment to the Warrant Price and
the number of securities issuable upon exercise of the Warrants will be required
to be made pursuant to this Paragraph 7 and the Warrant Agreement, respectively.
(c) Subdivision and Combination. In case the Company shall at any
---------------------------
time after the Closing Date subdivide or combine the outstanding shares of
Common Stock, the Warrant Price shall forthwith be proportionately decreased in
the case of subdivision or increased in the case of combination.
22
<PAGE>
(d) Adjustment in Number of Shares. Upon each adjustment of the
------------------------------
Warrant Price pursuant to the provisions of this Paragraph 7, the number of
shares of Common Stock (but not the number of Warrants, which are subject to
adjustment as set forth in the Warrant Agreement) issuable upon the exercise of
the Underwriters' Warrant shall be adjusted to the nearest full whole number by
multiplying a number equal to the Underwriters' Warrant Price in effect
immediately prior to such adjustment by the number of shares of Common Stock
issuable upon exercise of the Underwriters' Warrant immediately prior to such
adjustment and dividing the product so obtained by the adjusted Underwriters'
Warrant Price.
(e) Reclassification, Consolidation, Merger, etc. In case of any
--------------------------------------------
reclassification or change of the outstanding shares of Common Stock (other than
a change in par value to no par value, or from no par value to par value, or as
a result of a subdivision or combination), or in the case of any consolidation
of the Company with, or merger of the Company into, another corporation (other
than a consolidation or merger which does not result in any reclassification or
change of the outstanding shares of Common Stock, except a change as a result of
a subdivision or combination of such shares or a change in par value, as
aforesaid), or in the case of a sale or conveyance to another corporation of the
property of the Company as an entirety, the Holder shall thereafter have the
right to purchase the kind and number of shares of stock and other securities
and property receivable upon such reclassification, change, consolidation,
merger, sale or conveyance as if the Holder were the owner of the shares of
Common Stock underlying the Underwriters' Warrant immediately prior to any such
events (but not the shares of Common Stock issuable upon exercise of any
Warrants underlying the Underwriters' Warrant) at a price equal to the product
of (x) the number of shares issuable upon exercise of the Underwriters' Warrant
(but
23
<PAGE>
not the shares of Common Stock issuable upon exercise of any Warrants underlying
the Underwriters' Warrant) and (y) the Warrant Price in effect immediately prior
to the record date for such reclassification, change, consolidation, merger,
sale or conveyance as if such Holder had exercised the Underwriters' Warrant.
(f) No Adjustment of Warrant Price in Certain Cases. Notwithstanding
-----------------------------------------------
anything herein to the contrary, no adjustment of the Warrant Price shall be
made:
(i) Upon the issuance or sale of the Underwriters' Warrant, the
shares of Common Stock or Warrants issuable upon the exercise of the
Underwriters' Warrant or the shares of Common Stock issuable upon exercise of
the Warrants underlying the Underwriters' Warrant; or
(ii) Upon the issuance or sale of (A) the shares of Common Stock
or Warrants issued by the Company in the Public Offering (including pursuant to
the Over-allotment Option) or other shares of Common Stock or warrants issued by
the Company upon consummation of the Public Offering, or (B) the shares of
Common Stock (or other securities) issuable upon exercise of Warrants; or
(iii) Upon (i) the issuance of options pursuant to the Company's
stock option plan in effect on the date hereof or as hereafter amended in
accordance with the terms thereof or any other employee or executive stock
option plan approved by stockholders of the Company or the sale by the Company
of any shares of Common Stock pursuant to the exercise of any such options, or
(ii) the sale by the Company of any shares of Common Stock pursuant to the
exercise of any options or warrants issued and outstanding on the date of
closing of the sale of Common Stock and Warrants pursuant to the Public Offering
or (iii)
24
<PAGE>
the issuance or sale by the Company of any shares of Common Stock pursuant to
the Company's restricted stock plan in effect on the date hereof; or
(iv) If the amount of said adjustment shall be less than two
cents (2c) per share of Common Stock.
(g) Adjustment of Warrants Underlying Underwriters' Warrant. With
-------------------------------------------------------
respect to the Warrants underlying the Underwriters' Warrant, the exercise price
of such Warrants and the number of shares of Common Stock purchasable pursuant
to such Warrants shall be automatically adjusted in accordance with the
applicable provisions of the Warrant Agreement, upon the occurrence, at any time
after the date hereof, of any of the events described in the Warrant Agreement
requiring such adjustment, with the same force and effect as if such Warrants
had been issued as of this date, whether or not such Warrants shall have been
exercised (or are exercisable) at the time of the occurrence of such event and
whether or not such Warrants shall be issued and outstanding at the time of the
occurrence of such event. Thereafter, such Warrants shall be exercisable at
such Warrant's adjusted exercise price for such adjusted number of shares of
Common Stock or other securities, properties or rights as provided for in the
Warrant Agreement.
(h) Redemption of Underwriters' Warrant. Notwithstanding anything to
-----------------------------------
the contrary contained in this Agreement or elsewhere, the Underwriters Warrant
cannot be redeemed by the Company under any circumstances.
(i) Dividends and Other Distributions with Respect to Outstanding
-------------------------------------------------------------
Securities. In the event that the Company shall at any time after the Closing
- ----------
Date and prior to the exercise and expiration of the Underwriters' Warrant
declare a dividend (other than a dividend consisting solely of shares of Common
Stock or a cash dividend or distribution payable out of current or
25
<PAGE>
retained earnings) or otherwise distribute to the holders of Common Stock any
monies, assets, property, rights, evidences of indebtedness, securities (other
than such a cash dividend or distribution or dividend consisting solely of
shares of Common Stock), whether issued by the Company or by another person or
entity, or any other thing of value, the Holders of the unexercised
Underwriters' Warrant shall thereafter be entitled, in addition to the shares of
Common Stock or other securities receivable upon the exercise thereof, to
receive, upon the exercise of such Underwriters' Warrant, the same monies,
property, assets, rights, evidences of indebtedness, securities or any other
thing of value that they would have been entitled to receive at the time of such
dividend or distribution as if the Holders were the owners of the shares of
Common Stock underlying the Underwriters' Warrant (but not the shares of Common
Stock issuable upon exercise of any Warrants underlying the Underwriters'
Warrant). At the time of any such dividend or distribution, the Company shall
make appropriate reserves to ensure the timely performance of the provisions of
this Paragraph 7(i).
(j) Subscription Rights for Shares of Common Stock or Other
-------------------------------------------------------
Securities. In case the Company or an affiliate of the Company shall at any
- ----------
time after the date hereof and prior to the exercise of the Underwriters'
Warrant in full issue any rights to subscribe for shares of Common Stock or any
other securities of the Company or of such affiliate to all the holders of
Common Stock, the Holders of the unexercised Underwriters' Warrant shall be
entitled, in addition to the shares of Common Stock or other securities
receivable upon the exercise of the Underwriters' Warrant, to receive such
rights at the time such rights are distributed to the other stockholders of the
Company but only to the extent of the number of shares of Common Stock, if
26
<PAGE>
any, for which the Underwriters' Warrant remains exercisable other than shares
of Common Stock issuable upon exercise of the Warrants underlying Underwriters'
Warrant.
(k) Notice in Event of Dissolution. In case of the dissolution,
------------------------------
liquidation or winding-up of the Company, all rights under the Underwriters'
Warrant shall terminate on a date fixed by the Company, such date to be no
earlier than ten (10) days prior to the effectiveness of such dissolution,
liquidation or winding-up and not later than five (5) days prior to such
effectiveness. Notice of such termination of purchase rights shall be given to
the registered Holders of the Underwriters' Warrant, as the same shall appear on
the books and records of the Company, by registered mail at least thirty (30)
days prior to such termination date.
(l) Computations. The Company may retain a firm of independent public
------------
accountants (who may be any such firm regularly employed by the Company) to make
any computation required under this Paragraph, and any certificate setting forth
such computation signed by such firm shall be conclusive evidence of the
correctness of any computation made under this Paragraph 7.
8. Fractional Shares.
-----------------
(a) The Company shall not be required to issue fractions of shares of
Common Stock or fractional Warrants on the exercise of this Underwriters'
Warrant; provided, however, that if the Holder exercises the Underwriters'
Warrant in full, any fractional shares of Common Stock shall be eliminated by
rounding any fraction up to the nearest whole number of shares of Common Stock.
27
<PAGE>
(b) The Holder of this Underwriters' Warrant, by acceptance hereof,
expressly waives his right to receive any fractional share of Common Stock or
fractional Warrant upon exercise of this Underwriters' Warrant.
9. Redemption of Warrants Underlying the Underwriters' Warrant. The
-----------------------------------------------------------
Warrants underlying the Underwriters' Warrant are redeemable by the Company at a
redemption price of $.10 per Warrant, in whole or in part, commencing on the
first anniversary of the date hereof (or earlier with the consent of the
Representative) and prior to their expiration upon not less than thirty (30)
days' prior written notice to the holders of the Warrants; provided, that the
average closing bid quotation of the Common Stock as reported on The Nasdaq
Stock Market, if traded thereon, or if not traded thereon, the average closing
sale price if listed on a national securities exchange (or other reporting
system that provides last sales prices), has been at least 150% of the then
current Exercise Price for a period of 20 consecutive trading days ending on the
third day prior to the date on which the Company gives notice of redemption.
Any redemption in part shall be made pro rata to all Warrant holders. The
redemption notice shall be mailed to the holders of the Warrants at their
respective addresses appearing in the Warrant register. Holders of the Warrants
will have exercise rights until the close of business on the day immediately
preceding the date fixed for redemption (at which time this Underwriters'
Warrant shall no longer be exercisable for Warrants).
10. Miscellaneous.
-------------
(a) This Underwriters' Warrant shall be governed by and in accordance
with the laws of the State of New York without regard to the conflicts of law
principles thereof.
28
<PAGE>
(b) All notices, requests, consents and other communications hereunder
shall be made in writing and shall be deemed to have been duly made when
delivered, or mailed by registered or certified mail, return receipt requested:
(i) if to a Holder, to the address of such Holder as shown on the books of the
Company, or (ii) if to the Company, 751 Park of Commerce Drive, Suite 104, Boca
Raton, Florida 33487.
(c) The Company and the Representative may from time to time
supplement or amend this Underwriters' Warrant without the approval of any other
Holders in order to cure any ambiguity, to correct or supplement any provision
contained herein which may be defective or inconsistent with any provisions
herein, or to make any other provisions in regard to matters or questions
arising hereunder which the Company and the Underwriters may deem necessary or
desirable and which the Company and the Underwriters deem not to materially
adversely affect the interest of the Holders.
(d) All the covenants and provisions of this Underwriters' Warrant by
or for the benefit of the Company and the Holders shall bind and inure to the
benefit of their respective successors and assigns hereunder.
(e) Nothing in this Underwriters' Warrant shall be construed to give
to any person or corporation other than the Company and the Underwriters and any
other registered Holder or Holders, any legal or equitable right, and this
Underwriters' Warrant shall be for the sole and exclusive benefit of the Company
and the Underwriters and any other Holder or Holders.
(f) This Underwriters' Warrant may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
29
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Underwriters' Warrant
to be signed by its duly authorized officer and to be dated __ , 1996 September
__, 1996.
ENSEC INTERNATIONAL, INC.
By:
-----------------------------------
Name: Charles N. Finkel
Title: President and Chief Executive Officer
30
<PAGE>
PURCHASE FORM
-------------
(To be signed only upon exercise of the Underwriters' Warrant)
The undersigned, the Holder of the foregoing Underwriters' Warrant,
hereby irrevocably elects to exercise the purchase rights represented by such
Underwriters' Warrant for, and to purchase thereunder, _______ shares of Common
Stock and/or _______ Warrants of Ensec International, Inc. and herewith makes
payment of $_______________ therefor, and requests that the certificates for
Common Stock and/or Warrants be issued in the name(s) of, and delivered to
______________________________________________ whose addresses is (are)
______________________________________________________ and whose social security
or taxpayer identification number(s) is (are) _________________________.
Dated:
----------------------
- ----------------------------
- ----------------------------
Address
- ----------------------------
Telephone
- ----------------------------
. Signature must conform in all respects to name of registered Holder.
31
<PAGE>
TRANSFER FORM
-------------
(To be signed only upon transfer of the Underwriters' Warrant)
For value received, the undersigned hereby sells, assigns, and
transfers unto _____________________________ the right to purchase shares of
Common Stock and/or Warrants of Ensec International, Inc. represented by the
foregoing Underwriters' Warrant to the extent of ______________________________
shares of Common Stock and/or ___________ Warrants, and appoints
__________________________, attorney to transfer such rights on the books of
Ensec International, Inc., with full power of substitution in the premises.
Dated:
-------------------------
- ---------------------------------
(name of holder)
- ---------------------------------
Address
- ---------------------------------
In the presence of:
- ---------------------------------
- ---------------------------------
32
<PAGE>
- ------------------ COMPARISON OF FOOTERS ------------------
- -FOOTER 1-
108322-4 9/24/96
33
<PAGE>
Exhibit 11.1
Ensec International, Inc.
Statement Regarding Computation of Per Share Earnings
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
----------------------- ----------------------------
1994 1995 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Loss from continuing operations $ (299,644) $(5,261,526) $(2,562,857) $ (2,094,584)
Income from discontinued operations 533,690 1,443,403 342,159 --
----------- ----------- ----------- ------------
Net earnings (loss) applicable to common stock $ 234,046 $(3,817,923) $(2,220,698) $ (2,094,584)
=========== =========== =========== ============
Weighted average shares outstanding 3,500,000 3,500,000 3,500,000 3,500,000
Weighted average common stock equivalents (1) 404,896 404,896 404,896 404,896
----------- ----------- ----------- ------------
Total weighted average common stock and common
stock equivalents outstanding 3,904,896 3,904,896 3,904,896 3,904,896
=========== =========== =========== ============
Earnings (loss) per common share:
Continuing operations $ (.08) $ (1.35) $ (.66) $ (.54)
Discontinued operations .14 .37 .09 --
Earnings (loss) per common share $ .06 $ (.98) $ (.57) $ (.54)
=========== =========== =========== ============
</TABLE>
(1) In accordance with SAB Topic 4(D), the weighted average common stock
equivalents include options and warrants issued within one year of the
Offering with exercise prices below the Price to Public for all periods
presented as calculated under the treasury stock method.
<PAGE>
EXHIBIT 23.1
We have issued our report dated April 12, 1996, accompanying the financial
statements of Ensec International, Inc. contained in the Registration
Statement on Form SB-2. We consent to the use of the aforementioned report in
the Registration Statement and to the use of our name as it appears under the
caption "Experts."
/s/ Grant Thornton LLP
Fort Lauderdale, Florida
September 24, 1996
