U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[ X ] Annual Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
OR
[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required]
For the fiscal year ended December 31, 1996 Commission file number: 333-4686-A
For the transition period from to
HIREL HOLDINGS, INC.
(Name of Small Business Issuer in its Charter)
Delaware 65-0666239
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
650 S. W. 16th Terrace Pompano Beach, Florida 33069
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including are code: 954-942-5390
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
Common Stock, par value
$.001 per share None
Securities register pursuant to Section 12(g) of the Act
Common Stock, par value $.001 per share
(Title of Class)
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), or (2) has been subject to such filing requirements for the past 90
days. Yes X No_____
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment. [ ]
State issuer's revenues for its most recent fiscal year: $22,836,088
The aggregate market value of the voting stock held by the non-affiliates
of the Registrant was $15,658,700 based on the average bid and asked price
reported March 31, 1997.
State the number of shares outstanding of each of the registrant's classes
of common stock, as of March 31, 1997.
Class Outstanding
Common Stock, $.001 5,208,750
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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PART I
Item 1. Business
Overview
Hirel Holdings, Inc. (the "Company") was incorporated in the State of
Delaware on May 1, 1996 for the purpose of acquiring the business of Hirel
Marketing, Inc., a Florida corporation ("HMI") and Hirel Technologies, Inc., a
Florida corporation which is a successor to Hirel Technologies, Ltd., a limited
partnership (collectively "HTI"). Hirel Technologies, Ltd. was organized in
October 1995 to acquire from its sole general partner substantially all of the
operating assets and intellectual property rights of Cutler Induction Systems,
Inc., which through October 23, 1995 was engaged in the development and sale of
fuel injection systems for marine engines. In describing HTI herein and
financial results of the operations of HTI, the term "HTI" shall include Cutler
Induction Systems, Inc.
On July 22, 1996 the Company successfully completed its initial public
offering of 1,063,750 shares of its common stock at $6.00 per share and
completed Share Exchange Agreements and the related acquisitions of HMI and HTI
which became wholly-owned subsidiaries of the Company on that date.
HMI is a distributor of microcomputer hardware, peripherals and related
communication products to value-added resellers ("VARS") and dealers in the
United States, Europe, and the Pacific Rim countries. HTI develops and sells
products designed to enhance the performance of fuel injection systems.
On January 24, 1997, the Company completed its acquisition of substantially
all of the assets of Marine Power, Inc. ("MPI") effective December 31, 1996.
MPI, which is operated as a division of HTI, is engaged in manufacturing and
marketing engines for the marine after market and original equipment
manufacturers.
The Company's executive offices are located at 650 SW 16th Terrace, Pompano
Beach, FL 33069, and its telephone number is (954)942-5390.
HIREL MARKETING, INC.
General
HMI is a distributor of microcomputer hardware, peripherals and related
communication products to (i) resellers, commonly known in the industry as
value-added resellers ("VARS"), who are able to offer additional value to the
products by offering to the reseller's purchasers complimentary products and
services to the products sold by HMI, and (ii) dealers in the United states,
Europe and the Pacific Rim countries. HMI purchases its products directly from
manufacturers, distributors and dealers in large quantities and sells to an
active base of over 2,000 established customers. HMI emphasizes immediate
turnover of products thereby creating available funds for constant purchasing
and reducing warehouse, labor and other expenses. The Company offers
manufacturers, distributors, VARS and dealers the ability to reach consumers on
a cost efficient basis. HMI has historically concentrated on purchasing large
quantities of low-end to middle-range type products which generally sell at
low-margin returns.
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HMI provides its customers with microcomputers, disk drives, printers,
monitors, terminals, plug-in-boards and related products. HMI also distributes
certain software packages which support and are included in selected computer
sales. To compliment its distribution activities, HMI provides technical
assistance to its customers by telephone at no charge.
Industry
HMI believes that the microcomputer products industry is well-suited for
wholesale distribution. The large number and diversity of resellers make it
cost-efficient for manufacturers to rely on wholesale distributors for at least
some portion of their distribution. Similarly, due to the large number of
manufacturers, resellers often cannot efficiently establish direct purchasing
relationships and instead rely on wholesale distributors, such as HMI, to
satisfy a portion of their product needs.
As a result of the use of open systems and the off-the-shelf components,
computer hardware and software products are increasingly viewed as commodities.
The resulting price competition has prompted manufacturers and vendors to rely
on more cost-efficient methods of distribution. This, coupled with shorter life
cycles, has benefited distributors like HMI which offer vendors an efficient
mechanism for distributing their products.
Vendor Relations and Sources of Supply
Generally, a manufacturer will require their authorized distributors, and
in turn, these authorized distributors will require their VARS and dealers,
contractually to purchase and sell a specified quantity of product. HMI does not
maintain exclusive supplier agreements with its suppliers requiring it to
purchase or sell a specified quantity of product or restricting it from selling
similar products manufactured or distributed by competitors and therefore, is
not an authorized distributor or dealer. As a result, HMI has the flexibility to
terminate or curtail purchases of one product or product line in favor of
another product or product line due to over production of products by
manufacturers, rapid technological changes in the industry, pricing
considerations and customer demand. HMI's market presence enables it to purchase
from manufacturers, VARS and dealers large quantities of products at competitive
prices that it can resell to other VARS and dealers at competitive prices.
Historically, a substantial amount of the merchandise purchased by HMI has
included trademarked products manufactured in the United States and Pacific Rim
countries, which products are sold through authorized distributors. Agreements
between the manufacturer and the authorized distributor generally provide that
the products may only be distributed to authorized dealers or VAR for all of the
products it sells, who in turn may only resell such products to end users. In
addition, the manufacturers may also require their authorized distributors, and
in turn these authorized distributors will require their VARS and dealers to
purchase and sell a specified quantity of product. HMI, which is not an
authorized dealer, authorized distributor or VAR, purchases its products for
resale directly from manufacturers, authorized distributors and authorized
dealers. While the Company does not believe that purchasing directly from the
manufacturers would violate any restrictive agreement, the Company believes
purchasing from or selling to authorized distributors, dealers and VARs' could
cause such authorized distributor, dealer or VAR to breach their respective
restrictive agreement for the year ended December 31, 1996. Approximately 85% of
HMI's purchases of Apple Computer, Inc. products were from authorized
distributors, dealers and VAR's that are not authorized to sell to HMI. Legal
causes of actions which may be brought against HMI and/or the Company in
connection with the enforcement of restrictive agreements may include breach of
contract, contractual and/or tortuous interference, violation of trademarks and
violation of copyrights.
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Although the Company does not believe any legal cause of action will be
brought against it, in the event a claim is filed against HMI and/or the Company
and the plaintiff therein is successful, HMI and/or the Company may be subject
to compensatory and/or punitive damages, and/or equitable relief including
injunctive relief . While manufacturers, distributors or dealers have not sought
enforcement of the restrictive provision in the agreements, there can be no
assurances that HMI's business will not become the subject of legal actions
involving manufacturers, distributors or others.
HMI believes that authorized distributors, dealers and VARs choose to
purchase from and sell to HMI in violation of their respective authorization
agreements primarily as a result of their inability to dispose of all of their
excess inventory or obtain enough desirable products cost effectively through
authorized distribution channels. Authorization agreements require the
distributors, dealers and VARs to purchase and/or sell, as the case may be, a
specific quantity of product at specified prices. HMI provides authorized
distributors, dealers and VARs with the ability to dispose of excess products or
obtain desired products cost effectively.
Subsequent to the effective date of the Initial Public Offering, HMI has
become an authorized dealer for IBM, Motorola and Adobe software.
HMI finances its inventory from its working capital or from a line of
credit which secures letters of credit to acquire inventory. HMI has the option
to pay the letters of credit upon presentation or to finance them for up to
ninety (90) days.
Products
Through December 31, 1996, substantially all of the products distributed by
HMI were manufactured by Apple Computer, Inc. or are peripherals for Apple
Computer, Inc. As noted above, however, HMI has recently become an authorized
dealer for IBM, Motorola and Adobe software products. No determination has been
made as to how much of such products will be distributed.
HMI distributes its products on a non-exclusive basis without geographic
restriction and without entering into the industry manufacturer-distributor
agreements for authorization to purchase and sell the products. The following
products are distributed by HMI:
Microcomputers: HMI distributes desk top and lap top personal computers.
Local Area Networks and other Communication Products: Local area networks
("LANS") allow communications among microcomputers.
Disk Drives: As computer users seek to store and manage increasing volumes
of data, their demand for such data storage devices rise accordingly. HMI
markets hard disk drives and optical disk storage sub-systems.
Printers: HMI markets non-impact technologies such as laser printers and
ink jet printers, and to a lesser extent, dot matrix and daisy wheel
printers.
Monitors and Terminals: HMI distributes monitors, including high resolution
colored monitors, and terminals.
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Plug-in Boards: Many manufacturers build their computers with an
architecture featuring open slots that accept the plug-in boards or add on
modules of their manufacturers. Among other functions, these enhancement
products may provide additional memory and monochrome or color graphics to
the personal computer, as well as communications with mini-computers, main
frame computers, or other micro-computers.
HMI distributes certain software which support and are included in selected
computer sales.
HMI intends to seek sources other than Apple Computer, Inc. for its
products. No assurances are made, however, that alternate sources for its
products will be available.
Product Warranties
Purchasers of HMI products that are not purchased directly from
manufacturers, authorized distributors or VAR's do not receive the
manufacturer's warranty on the products they purchase from HMI. The
manufacturer's warranty does not extend to HMI purchasers since HMI is not an
authorized distributor, dealer or VAR. HMI provides, however, the identical
warranty to its purchasers as that warranty which would be given by the
manufacturer. HMI provides a one year warranty to its purchasers on parts and
labor on all the products it sells. Although HMI has had no substantial warranty
claims to date, no assurance can be given that it will not be requested to honor
the warranties in the future in certain circumstances could have materially
adverse affect on HMI.
Customers
HMI sells micro-computer hardware, peripherals and related communication
products purchased directly from manufacturers, distributors and dealers in
large quantities for sale to an active customer base of more than 2,000 VARS and
dealers. HMI pursues a strategy of expanding its product line and quantity of
purchases to broaden its customer base and offer its customers a broader
assortment. Revenues from HMI customers by geographic areas was as follows:
1996 1995
---- ----
United States $16,241,227 $12,934,688
Europe 3,737,649 7,514,527
Other 1,527,004 1,189,374
---------- ----------
$21,505,880 $21,638,589
The decline in sales to customers in Europe is in the opinion of Management
attributable to the weakness of European currency as compared to the US dollar
(See Management's Discussion and Analysis of Financial Condition and Results of
Operation).
HMI's VARS and dealer customers typically do not have the resources to
establish a large number of direct purchasing relationships or stock significant
product inventory. Larger resellers, on the other hand, often establish direct
relationships with manufacturers for their more popular products, but utilize
distributors for slower moving products and for fill-in orders of fast moving
products. HMI's backlog of orders is not considered material to understanding of
its business. No single customer accounted for more than 5% of HMI's net sales
during fiscal 1996 or 12% in 1995.
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Management believes that, although alternative sources of products are
available, VARS and dealers prefer to work with only a limited number of
suppliers who can provide products on a timely and competitive basis.
Accordingly, management believes that well managed inventory, rapid delivery,
efficient order pricing, competitive pricing and expeditious replacement or
repair of defective merchandise contribute greatly to HMI's competitive
position. Most of HMI's sales are done on a C.O.D. basis.
Sales and Marketing
HMI conducts business under the name "Mac-in-Stock. Product is sold by
sales representatives who rely generally on telephone and advertising
communications by facsimile. Customers rely upon the Company's weekly facsimile
mailings of product specials as a source for product information, including
prices.
Customers typically call their sales representative to place orders for
same day or next day shipment. Assuming availability of product, an order
received by 5:00 p.m. local time will generally be shipped the same day or next
day from HMI's warehouse in Pompano Beach, Florida. HMI's domestic customer
receives the goods by next day overnight shipment.
HMI provides comprehensive training to its sales representative regarding
technical characteristics of products and its policies and procedures. In this
regard, to compliment its distribution activities, HMI provides technical
assistance to its customers. HMI has used limited advertising as part of its
marketing program. Marketing for the most part is handled directly by HMI sales
representatives.
Competition
HMI operates in a market characterized by intense competition. Competition
within the industry is based on product availability, price, delivery and
various types of support provided by the distributor to the reseller.
Competitors of HMI include authorized distributors, VARS, dealers and other
wholesale distributors like HMI such as Tech Data Corporation, Merisel, Inc. and
Inacom. Some of HMI's competitors are larger and have greater resources than
HMI.
HMI believes that it is capable of competing with other distributors
because of its ability to obtain products at the best available prices and to
immediately resell such products to its established customers. By having a large
and established customer base, HMI is often able to pre-sell products purchased
from its various sources.
HIREL TECHNOLOGIES, INC.
GENERAL
HTI designs, manufactures and markets fuel injection systems designed to
enhance the performance of gasoline powered engines. The initial products
designed and developed by HTI focus on two areas of technical innovation and
market advantage. The first are fuel intake systems, which through patented
devices improve efficiency, thus developing more torque and horsepower than most
other OEM or aftermarket products presently available in the market.
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The second are control systems which, through patent pending advances in
computerized engine management, should serve to eliminate the barriers to
providing complex computerized fuel management. Through December 31, 1996,
component parts of the HTI products were manufactured by third parties
(including Fenco Tool & Die, Ltd., in which Vincent Montelione and Gregory S.
Fenech, directors of the Company, owned an interest on a contract basis and the
products are assembled at the HTI facilities. HTI's products are currently
designed and implemented for marine use only. Marine customers use the HTI
products to improve engine performance and reduce gas consumption and emissions.
It is believed that ultimately automotive and other customers will use the
products for the same reason.
Subsequent to December 31, 1996 the Company acquired the assets of Fenco
Tool and Die, LTD. (See "Certain Transactions"). In addition, on January 24,
1997, the Company completed its acquisition of substantially all of the assets
of Marine Power, Inc. ("MPI") effective December 31, 1996. MPI, which is
operated as a division of HTI, is engaged in manufacturing and marketing engines
for the marine after market and original equipment manufacturers.
Management, which is seeking additional acquisitions for HTI, believes that
the market for its products will initially be for engines used in the marine
market. According to the National Marine Association, there are 16.5 million
(11.1 million registered) recreational boats in the U.S., accounting for over
$13 billion in retail spending for craft, engines and accessories. Of the total
registered boats, about 3 million are stern drive boats powered by
automotive-type gasoline engines, which type are able to use HTI's existing
products.
Product Description and Overview
The fuel injection system for a gasoline powered engine is that part of the
engine where air and spark are combined with fuel to create the combustion that
drives the pistons in the engine. The "throttle body" is the mechanical device
that regulates the introduction of air to the fuel injection system. The air
passes through the throttle body into the manifold. It is within the manifold
that the air is mixed with fuel , which is introduced through the fuel rails.
The contour of the manifold will affect the volume and velocity with which the
air is mixed with the fuel. The volume and timing of fuel being introduced into
the system is governed by fuel injectors and the electronic control module.
In order for an engine to run on an optimum basis, the fuel injection
system must properly mix the fuel and air, and the spark plugs must ignite at
the proper time. Too much air relative to the volume of fuel, or too much fuel
relative to the volume of air, may cause the engine to run lean or rich, as the
case may be. Either situation is inefficient, both in terms of the performance
of the engine and consumption of fuel. HTI's fuel intake systems have been
designed with its proprietary manifold that provides with patented airflow
design innovations to HTI's self-tuning computerized engine management systems.
Multiport fuel injection is also known as multipoint fuel injection.
An electronic control module, or "ECM", is the electronic device used in
the fuel injection system that coordinates the proper mixture of fuel and air.
An ECM can also control the introduction of spark into the fuel and air. If an
ECM does not control spark, then spark must be controlled by a separate ignition
system. As the driver moves the throttle forward, in a marine setting, or
presses down on the gas pedal, in an automotive setting, the mixture of fuel and
air and the introduction of spark must be carefully coordinated to achieve
optimal performance and fuel economy. Electronic control modules currently on
the market control this coordination of fuel, air and spark pursuant to factory
program specifications, which are known in the industry as a "fuel map".
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HTI's patented ECM is believed to be the industry's first self-tuning fuel
injection control module. With the ECM, an engine builder or an aftermarket
engine service provider, can configure the engine to suit its application and
let the ECM automatically provide the right fuel mixtures, at the right
injection times, for the unique demands of the engine and applications. Using
advanced microprocessor components and control software techniques (which
techniques are the subject of a pending patent application) the ECM continuously
adjusts fueling to the optimum power point for all engine speeds and loads.
The throttle body, manifold and ECM developed by HTI are intended to
improve the performance of gasoline powered engines by achieving the optimal
mixture of fuel and air. Users of this system should also achieve enhanced fuel
conservation. HTI's electronic control module should be particularly useful to
two main groups. First, are those owners of gasoline powered engines that have
either carbureted or electronic throttle engines. The use of carburetors and
electronic throttle body fuel injection to mix fuel and air within the engine is
less exacting than is a true multi-point fuel injection system. HTI's products
are designed, at the present time, for only certain specific marine engines, to
allow the customer to convert their carburetor or throttle body injected engine
to a true multi-point fuel injection system.
In addition, in the event that HTI is successful in developing its products
for use in automobiles, recreational vehicles and industrial vehicles, HTI
intends to market its products to users of those vehicles. HTI's products would
be appropriate for users that are no longer achieving optimal engine performance
and fuel efficiency because the fuel map contained within the electronic control
module is no longer viable as a result of changes in the mixture of fuel and air
within the fuel injection system. This would occur, for example, as a result of
normal wear and tear in the engine, the introduction of alternate fuels into the
engine, or extreme changes in the air pressure at which the vehicle is being
operated. Because of the self programming feature of HTI's electronic control
module, these changes from the assumptions made in the factory installed fuel
map can be detected and appropriate compensating changes can be made (whether in
the mixture of fuel and air, or the introduction of spark).
At the present time, HTI's ECM does not control the introduction of spark,
and spark is controlled by a separate ignition system, but HTI intends to seek
to modify its electronic control module to regulate the timing of spark within
the engine. The need to use a separate ECM control spark ignition system is not
anticipated to adversely affect the sales of HTI's ECM and other related
products.
Presently complete EFI systems, which includes the manifold, throttle body
and HTI's ECM together with related components produced by unrelated third
parties, are being marketed in the marine aftermarket through a nationwide
network of dealers. HTI also supplies manifolds, throttle bodies and fuel rails
to several OEM marine customers. It is anticipated that the manifolds, throttle
bodies and fuel rails will be included on the MPI engines. It should be noted
that the current version of the ECM is for marine application only. Versions
currently under development will address a variety of automotive and specialty
engine markets.
EFI Products
HTI's EFI products presently are available for marine application only and
include those described below. Because HTI branded systems are designed to
replace carburetor systems on new engines as well as older models, HTI throttle
bodies utilize "carb-standard" dimensions which are designed to accept standard
air cleaners, marine flame arrestors and forced induction (turbo or super
charged) systems. In addition these systems are designed with integration
capabilities with other
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standard aftermarket accessory components, and as such provide a highly flexible
product line that meets numerous consumer requirements, as well as all industry
and regulatory specifications.
Manfold for Big-Block GM V8's. This manifold is designed to be used with
large-displacement (i.e."big-block") General Motors high performance engines
having from 454 to 600 cubic inches. The manifold or the complete intake system
is available in the following configurations: standard deck height with 1000
cubic feet per minute ("CFM") throttle body, standard deck height with 2000 cfm
throttle body, tall deck racing engine block with 1000 cfm throttle body. The
manifold can have brass water passages for salt water applications.
The fuel intake system incorporates many design features that are the
subject of several patents pending and awarded. Design techniques, such as
raised radius polonium floor, contoured airfoil shapes inside the manifold, and
specially positioned injectors give the manifold the capability of producing
superior low-RPM power while retaining high-RPM power.
Manifold for Small-Block GM V8's. This intake manifold known as the
"GenOne" is designed for smaller-displacement (i.e. small-block") General Motors
engines having from 305 to 409 cubic inches. The design has the same patented
features which apply to the big-block model and is available in two versions.
One model is for "early" cylinder heads that fit engines which, although new,
use a configuration which is standard prior to 1987. The second version is a
model for "late" cylinder head engines (meaning those produced in 1987 and
thereafter). Like the big-block manifolds, these manifolds are capable of
producing high power levels at low engine speeds without losing efficiency at
high engine speeds.
Enhanced Manifold for Small-Block GM V8's. This intake manifold is known as
the "Gen One Plus Enhanced." Beginning in mid 1995, GM began to supply its
marine, industrial and other specialty OEM customers with a newly designed small
block V8 (meaning that it has 8 cylinders), capable of producing greater power
than their current models in a cost package that meets market needs.
Throttle Bodies. EFI throttle bodies are used to control air intake. HTI
offers two throttle body models: (i) a 1000 cfm model for applications from 250
to 650 horsepower; and (ii) a 2000 cfm model for engines producing 650 to 1000
horsepower. Like HTI's intake manifolds, HTI's brand throttle bodies are
designed to provide superior volumetric efficiency through advanced laminar air
flow techniques.
Research and Development
Management has devoted significant resources to research and development.
The patented intake elements of HTI's products have been developed utilizing a
combination of several advanced design prototyping systems and engine test
systems that are advantageous to the engineers. Designs developed at HTI are
brought to life using a Computer Aid Device ("CAD") environment application
known as ProEngineer ("ProE"), an advanced visual design tool in mechanical
engineering. Using the ProE software, the designers can render, prove and
experiment in three dimensions with full capability to apply engineering
calculations to the functional limits of the design at engineering workstations
or computers rather that doing manual drafting.
When the design is ready for real time testing, it can be turned into
output as a conventional blueprint, color image, an instruction file for the
computerized machining and manufacturing systems, or an instruction file for the
state of the art "rapid prototyping" system. HTI has the in-house capability to
employ the most advanced rapid prototyping system available, a three dimensional
laser
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rendering system known as stereolithography ("SL"). Simply stated, SL technology
allows the Company to down load the output from the ProE software and quickly
develop a working prototype which can be bolted to the engine and tested.
SL engineers take a three dimensional drawing from the design engineer's
computer file and convert the drawing to a computer data base within the SL
system. This conversion causes the file to be "sliced" into thousands of very
thin cross sections. Once converted the file is then passed to the SL equipment
which primarily consists of a laser aimed at the surface of a tank of resin. The
file then instructs the laser to travel along the pool resin in the pattern set
forth by the first cross section or slice of the three dimensional drawing, and
the laser literally "draws" the pattern on the surface of the resin. The effect
of the laser on the resin is that where the laser touches the resin, the resin
turns into solid and where it does not touch the resin, it remains in a liquid
form. When the first cross section has been drawn, the thin section of recently
hardened resin is lowered just a few thousandths of an inch below the surface,
after which this process is repeated layer after layer until the system "builds"
the entire object in three dimensions replicating to exact detail the original
design. The resulting rapidly built prototype is extremely accurate to the
design, even in the smallest detail, and because of the nature of the resin is a
functional part that can be tested in real applications and to endure high
levels of resistance and tolerance.
Management takes full advantage of this technology in a variety of ways.
First, SL prototypes are rendered of individual elements of a product for quick
real world testing of form, fit and function. The SL prototype can show, for
example, how a manifold runner will fit into a given space or how the air
actually flows when a runner shape is put on a conventional flow bench. These
items can be ascertained within hours after rendering a new design. The SL
prototypes or models are also used in actual engine testing. The partial SL or
complete SL element that has been rendered into a model can be assembled on an
engine and tested.
In the case of HTI, management has chosen to perform such test on a
dynamometer ("dyno"). The dyno is a laboratory piece of equipment that allows
the engineers to hook up an engine to it and retrieve critical data such as
horsepower, torque, fuel consumption, exhaust gas temperatures and air fuel
ratios.
When a design is complete and fully tested, the engineers can return to the
ProE environment and let the system help render a new foundry pattern for
casting a manifold. Since the file has the net "positive" shape of the new
intake system, a simple instruction can render the "negative" shapes, those
spaces around or inside the system . Because the objective is a foundry pattern,
HTI engineers have "taught" or built in a method within the ProE environment
that calculates that shrink factor for aluminum casting to exact measure.
The resulting molds are believed to be far more accurate than tooling built
by the most skilled pattern-maker. More important, such tooling is ready in a
few weeks versus the nine to twelve months which conventional pattern making
processes generally require. Each of the ProE and SL technologies as well as the
dynamometer have been (as described above) important tools in the development
and testing of the HTI technologies.
HTI is presently engaged in two specific research and development projects.
The first project is the adaptation of the ECM control for self-tuning
automobiles and other street vehicles including recreation vehicles and trucks,
as well as adding the ability of the ECM to control spark. The software
presently being used for the marine industry needs to be modified for the use in
automobiles.
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The second project involves a concept for the development of a fuel
condensor (also referred to as the "Fuel Chiller") that allows for vaporized
fuel to be condensed back into liquid form to be used in fueling the engine. No
application for a patent has been filed, and there is no assurance that if
filed, that a patent will be granted, or that the concept can be developed for
commercial application.
Customers
HTI's sales to date have been made to the marine industry consisting of
manufacturers as well as aftermarket users such as marinas and boat repair
facilities for OEM resale to other customers made on open account to credit
worthy customers and on a COD cash basis. In addition, MPI also sells its
products to distributors for subsequent resale to dealers.
Sales and Marketing
HTI's initial sales have been made based in large part on limited
advertising and by word of mouth. HTI has in the past, and will in the future,
continue attending trade shows and other marine industry expos and conventions.
With the acquisition of MPI, the Company has increased its advertising in trade
journals.
Competition
HTI operates in a market characterized by intense competition. Competition
within the industry is based on acceptance of and changes in technology as well
as cost and availability of product. It is believed that many of HTI's
competitors are larger and have greater resources than HTI. HTI believes,
however, that it can effectively compete with such competitors because of its
technology and continuing improvements to such technology.
Government Regulations
HMI and HTI are presently not subject to federal, state and local laws,
regulations or recommendations relating to its businesses. The extent of
government regulations which may result from any legislation or administrative
action in the future and cannot be accurately predicted.
Patents, Trademarks, Copyrights and Proprietary Rights
HTI seeks to protect its proprietary technology by means of patents and
contractual arrangements. The Company's policy is to file patent applications to
protect technology, inventions and improvements that are important to the
development of its business. HTI also relies upon trade secrets, know how,
continuing technological innovation and licensing opportunities to develop and
maintain its competitive position.
Immediately prior to its initial public offering acquired by means of an
assignment from the former partners of the predecessor of HTI, all United States
patent rights relating to the following technology: (1) single point fuel
injection systems (patent issued on November 7, 1995), (2) air intake manifolds
for fuel injected, internal combustion engines (patent issued on April 19,
1996), (3) air valves for the intake manifolds of internal combustion engines
(patent issued on March 26, 1996), (4) an electronic control unit for
controlling an electronic injector fuel delivery system and a method of
controlling an electronic injector delivery system (application pending). There
can be no assurance that the patents that are pending with the United States
Patent and Trademark Officer will be issued,
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or that issued patents will not be challenged successfully or will commercially
benefit or adequately protect the Company.
The former partners of the predecessor of HTI, in the aggregate, will
receive the following royalties on the gross revenues of four (4) devices that
may be sold by HTI (I) Manifold/Throttle Body (5%), (ii) Electronic Control
Module (ECM) (10%), (iii) Single Point Metering (71/2%) and (iv) Fuel Chiller
(condenser) (71/2%). HTI is currently selling manifolds, throttle bodies and
ECM's. Single Point Metering and the Fuel Chiller are under development and not
available for sale.
HTI relies heavily on patent rights, trade secrets, unpatented know how and
nondisclosure agreements to establish and protect its proprietary rights. HTI's
policy is to require all employees and consultants to sign confidentiality
agreements under which they agree not to use or disclose HTI's proprietary or
other confidential information. HTI's policy is also to require technical
employees to enter into a non-competition agreements with HTI and agreements
specifying that inventions and improvements made by an employee during the term
of employment related to HTI's business become the sole property of HTI.
Despite these precautions, it may be possible for others to independently
develop the same or similar technologies, or for unauthorized third parties to
obtain and use information that HTI regards as proprietary. No assurance can be
given that any patents under pending patent applications or any future patent
applications will be issued, or when and if issued, that such patents or issued
patents currently assigned to HTI will afford patent protection of a scope which
will exclude competitors or that any of HTI's patents will be held valid if
challenged.
Employees
As of March, 1996, the Company and its subsidiaries, HMI and HTI, employ an
aggregate of twenty-five (25) persons, including Vincent Montelione, all of whom
are full time employees and none of whom are subject to collective bargaining
agreements. Of these full time employees, seven (7) are engaged in
administration and finance, nine (9) in manufacturing and production, six (6) in
marketing and sales, and three (3) in engineering, research and development.
Many employees have overlapping responsibilities within these job descriptions.
The Company believes that its combined future success will depend in large
measure upon its continued ability to recruit and retain technical personnel.
HMI and HTI have never experienced a work stoppage. The Company believes that
its relationship with employees is good.
Recent Developments
On January 24, 1997, the Company completed its acquisition of substantially
all the assets of Marine Power, Inc. ("MPI") effective December 31, 1996. The
Company acquired assets of $4,674,526 and assumed liabilities of $5,323,278 in
exchange for 390,000 shares of the Company's Common Stock valued at $1,950,000.
The acquisition will be accounted for utilizing the purchase method and the
operations of MPI will be included with the Company's from December 31, 1996
onward. Goodwill of $2,638,752 (including $40,000 of legal and accounting fees
charged to the acquisition) arose from the transaction which will be amortized
utilizing the straight-line method over 15 years. In addition, the Company
entered into agreements whereby, based on the attainment of certain earning
levels, the sellers can earn registration rights on specified portions of their
shares as well as up to an additional 50,000 shares of the Company's Common
Stock.
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On January 10, 1997, the Company acquired the assets and assumed the
liabilities of Fenco Tool and Die, Ltd., a company owned by certain stockholders
of the Company. The company acquired assets of approximately $90,000 and assumed
liabilities of approximately $30,000 for a $60,000 cash payment. The acquisition
will be accounted for as a purchase and no goodwill will be recorded.
Item 2. Properties
HMI and HTI sublease from Cutler Induction Systems, Inc. (and predecessor
to HTI), an affiliate company of Vincent Montelione, approximately 5,000 square
feet of office space in two adjacent buildings and 11,000 square feet of
warehouse space in North Miami Beach, Florida.
The Company pays rent of approximately $3,100 per month on the office and
warehouse lease for HMI, which lease expires in April 1997. The Company pays
rent of approximately $6,000 per month on the office lease for HTI which also
expires in April 1997. Cutler Induction Systems, Inc. leases the foregoing
described office and warehouse space from an unaffiliated landlord which lease
was determined by arms length negotiations.
On September 4, 1996, the Company entered into a Sublease Agreement with
Parlux Fragrances, Inc. for a 38,458 square foot office and warehouse building
located at 650 S.W. 16th Terrace in Pompano Beach, Fl Rent under the Sublease
commenced on October 1, 1996 and will terminate October 31, 2000 unless earlier
terminated as provided in the Sublease. The Sublease provides for payment of
base rent ranging from $13,300 per month commencing November 1, 1996 to $15,063
commencing November 1, 1999. In addition to the base rent, the Company must pay
operating costs of which are presently $5,512 per month.
Item 3. Legal Proceedings
The Company is not involved in any pending litigation.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders in the fourth
quarter of 1996.
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PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
(a) Market Information. The Company's Common Stock has been quoted on the
on the OTC Bulletin Board (from July 22 to August 28, 1996) and
thereafter on the NASDAQ Small Cap Market ("NASDAQ") under the symbol
"HIRL".
The following table sets forth the high and low bid price for the Company's
Common Stock as reported by NASDAQ since August 28, 1996, for the periods
indicated.
Bid Price
High Low
Quarter Ended:
September 30, 1996
(Since August 28, 1996) $ 10.00 $ 5.50
December 31, 1996 $ 7.63 $ 4.25
(b) Holders. As of March 1, 1997, there were 5,208,750 shares outstanding
and approximately 16 holders of record as determined by an examination
of the Company's stock transfer records.
(c) Dividends. The Company has never paid any dividends on its Common
Stock. The Company currently intends to retain earnings for use in its
businesses and therefore does not anticipate paying cash dividends in
the foreseeable future.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the
consolidated financial statements of the Company and the Notes thereto appearing
on Pages F-1 through F-20 of this Report.
Hirel Holdings, Inc. ("HHI") and its wholly-owned subsidiaries, Hirel
Marketing, Inc. ("HMI") and Hirel Technologies, Inc. ("HTI"), are collectively
referred to as "the Company". The financial statements of the Company as of
December 31, 1996 and for the year then ended include the results of operations
of HHI, formed on May 1, 1996 to acquire HMI and HTI (including Hirel
Technologies, Ltd. ["HTL"] as predecessor from inception on October 24, 1995),
and are presented on a consolidated basis commencing July 22, 1996. Prior to
that date the separate results of HMI and HTI (including HTL as predecessor from
inception on October 24, 1995) have been combined on a basis consistent with
that of consolidated financial statements giving retroactive effect to the
issuance of 2,750,000 shares of HHI's Common Stock to the stockholders of HMI,
and 1,000,000 shares of HHI's Common Stock to the stockholders of HTI.
The Company operates in two business segments through its operating
subsidiaries. HMI is a wholesale seller to retailers and end users throughout
the United States and internationally of personal computers, primarily
manufactured by Apple Computer, Inc., and related peripherals. During 1996 HMI's
operations constituted the predominant business segment. HTI develops,
manufactures and
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sells fuel injection systems for marine engines to customer throughout the
United States. Both segments operate out of the Company's single location in
Pompano Beach, FL. Effective December 31, 1996 Marine Power, Inc. ("MPI") was
acquired as a division of HTI. MPI manufactures engines for marine applications
for sale throughout the United States at its location in Ponchatoula, LA.
The financial statements as of December 31, 1995 and for the year then
ended include the separate results of HMI and HTI including HTL as predecessor
from inception on October 24, 1995 to December 31, 1995, combined on a basis
consistent with that of consolidated financial statements giving retroactive
effect to the issuance of 2,750,000 shares of HHI's Common Stock to the
stockholders of HMI, and 1,000,000 shares of HHI's Common Stock to the
stockholders of HTI. The predecessor to HTL was Cutler Induction Systems
("CIS"). Had CIS operations from January 1, 1995 to October 24, 1995 been
included in the combined financial statements of HMI and HTI for the year ended
December 31, 1995, net sales would have been $22,453,195 versus $21,716,344, an
increase of $736,851, and the net loss would have been $1,607,000 versus
$130,043, an increase of $1,476,957.
Total net sales for the year ended December 31, 1996, increased $1,119,744
over the year ended December 31, 1995, from $21,716,344 to $22,836,088, an
increase of 5.2%. Net sales of computer equipment decreased $132,709 over the
year ended December 31, 1995, from $21,638,589 to $21,505,880, a decrease of
.6%. This decrease is primarily attributable to weak sales of computer equipment
in the fourth quarter of 1996. Most of the products sold by HMI are manufactured
by Apple Computer, Inc. or are peripherals for Apple computers. Apple products
which were in demand and competitively priced were not as readily available in
the latter part of 1996. In addition, international sales of computer products
have weakened as the dollar has strengthened against foreign currencies. HMI is
submitting applications to other computer manufacturers to broaden its base of
available products, and in fact, has been approved as a distributor for
Motorola, IBM, and Adobe hardware and software products. In addition, HMI has
increased its advertising and is actively contacting its domestic customer base
in an attempt to offset the loss of some of its international business. Net
sales of fuel injection systems increased $1,252,453 over the year ended
December 31, 1995, from $77,755 to $1,330,208, an increase of 1,710.8%. This
increase is primarily attributable to the fact that for the year ended December
31, 1995, HTI's results include only the period from October 24, 1995 to
December 31, 1995, which period includes HTL as predecessor to HTI. The
predecessor to HTL was CIS, and had its operations from January 1, 1995 to
October 24, 1995 been included in the financial statements of HTI for the year
ended December 31, 1995, HTI's sales would have been approximately $736,000
higher. In addition HTI sold more fuel injection systems in 1996 as a result of
establishing a new distributor/dealer network across the United States to sell
its fuel injection systems to end users and the sale of systems and components
to a marine engine manufacturer.
Cost of goods sold was $21,428,135 and $20,713,089 for the years ended
December 31, 1996 and 1995, respectively, and increase of $715046 or 3.5%. Cost
of computer equipment sold decreased $165,771 over the year ended December 31,
1995 from $20,660,204 to $20,494,433, a decrease of .8% This decrease is
primarily attributable to the decrease in computer sales discussed above. Cost
of fuel injection systems sold increased $$880,817 over the year ended December
31, 1995 from $52,885 to $933,702, an increase of 1665.5%. This increase is
primarily attributable to the HTI structure in 1995 versus 1996, and the
increased sales discussed above.
Gross profit was $1,407,953 and $1,003,255 for the years ended
December 31, 1996 and 1995, an increase of $404,698 or 40.3%. This increase is
primarily attributable to gross profit earned on the increased number of fuel
injection systems sold in 1996 versus 1995 as discussed above. Gross
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profit on computer sales as a percentage of sales was 4.7% and 4.5% for the
years ended December 31, 1996 and 1995, respectively. Gross profit on fuel
injection systems sales as a percentage of sales was 29.8% and 32.0% for the
years ended December 31, 1996 and 1995, respectively. In 1996 more systems were
sold to original equipment manufacturers at a lower gross profit margin than in
1995, thereby reducing the overall gross profit margin on fuel injection systems
sold.
General and administrative expenses for the year ended December 31, 1996,
increased $1,406,744 over the year ended December 31, 1995 from $691,724 to
$2,098,468, an increase of 203.4%. Had CIS operations from January 1, 1995 to
October 24, 1995 been included in the financial statements of HTI for the year
ended December 31, 1995, HTI's general and administrative expenses would have
been approximately $940,000 higher. In addition, HHI incurred approximately
$532,000 in general and administrative expenses subsequent to its initial public
offering in July, 1996. These expenses consisted primarily of payroll, legal,
accounting and consulting fees incurred as a result of being a public company
and rent, travel and automobile expenses.
Research and development expense for the year ended December 31, 1996
decreased $117,487 over the year ended December 31, 1995, from $326,728 to
$209,241, a decrease of 36.0%. Had CIS operations from January 1, 1995 to
October 24, 1995 been included in the financial statements of HTI for the year
ended December 31, 1995, research and development expense would have been
$488,492. The primary component of research and development is payroll. In 1996,
HTI had fewer people involved in research and development and in some instances
the percentage of their time spent in research and development was less than it
had been in 1995, when HTI was still developing its patented fuel injection
system.
Depreciation and amortization expense for the year ended December 31, 1996
increased $208,694 over the year ended December 31, 1995, from $65,806 to
$274,500, an increase of 317.1%. Had CIS operations from January 1, 1995 to
October 24, 1995 been included in the financial statements of HTI for the year
ended December 31, 1995, depreciation and amortization expense would have been
$275,865. However, in 1996, depreciation is approximately $56,000 less than it
would have been in 1995, primarily due to the fact that HTI had less machinery
in 1996, and amortization is approximately $55,000 higher in 1996 than 1995, due
to amortization of loan fees related to HMI's line of credit.
The provision for doubtful accounts for the year ended December 31, 1996
increased $82,333 over the year ended December 31, 1995, from $24,667 to
$107,000, an increase of 333.8%. This increase is primarily attributable to an
increase in the provision for doubtful accounts applicable to HMI's accounts
receivable.
As a result of the discussion above, the operating loss for the year ended
December 31, 1996 increased $1,175,586 over the year ended December 31, 1995
from $105,670 to $1,281,256, an increase of 1112.5% However, had the operations
of CIS from January 1, 1995 to October 24, 1995 been included in the financial
statements of HTI for the year ended December 31, 1995, the combined operating
loss for the year ended December 31, 1995 would have been $1,164,098 compared to
a consolidated operating loss of $1,281,256 for the year ended December 31,
1996.
Interest expense for the year ended December 31, 1996 increased $106,436
over the year ended December 31, 1995 from $27,637 to $134,073, an increase of
385.1%. This increase is attributable to increased utilization of HMI's line of
credit in 1996. In June, 1995, HMI obtained a $1,000,000 line of credit which it
utilizes to finance letters of credit used to purchase inventory. The line of
credit was increased to $2,000,000 in December, 1995.
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Interest income for the year ended December 31, 1996 increased $81,169 over
the year ended December 31, 1995, from $0 to $81,169. This increase is primarily
attributable to HHI's temporary investment of a substantial portion of the
proceeds of the initial public offering which occurred in July, 1996.
Interest income from related parties for the year ended December 31, 1996
increased $27,678 over the year ended December 31, 1995, from $3,264 to $30,942,
an increase of 848.0%. This increase is attributable to interest income accrued
by HMI on a receivable from SCV, Ltd., a related party.
The loss on the sale of asset of $36,244 for the year ended December 31,
1996 is attributable to the sale of a piece of machinery for $85,000 by HTI in
1996.
As a result of the discussion above, the net loss for the year ended
December 31, 1996 increased $1,207,343 over the year ended December 31, 1995,
from $130,043 to $1,337,386, an increase of 928.4%. However, had the operations
of CIS from January 1, 1995 to October 24, 1995 been included in the financial
statements of HTI for the year ended December 31, 1995, the combined net loss
for the year ended December 31, 1995 would have been $1,607,000 compared to a
consolidated net loss of $1,337,386 for the year ended December 31, 1996.
Liquidity and Capital Resources
Cash at December 31, 1996 was $3,426,450 compared to $588,242 at December
31, 1995.
Net cash used for operating activities was $1,595,963 for the year ended
December 31, 1996 compared to net cash generated by operating activities of
$594,830 for the year ended December 31, 1995. In 1996, the net loss adjusted
for non-cash charges was $919,642 which along with increases in inventory of
$389,845, other current assets of $91,447, deposits of $48,714 and a decrease in
other current liabilities of $140,378 were the primary reasons for the net cash
used in operating activities. In 1995, the net loss adjusted for non-cash
charges provided operating cash of $246,418 which along with increases in
accounts receivable of $112,787, inventory of $150,159, accounts payable and
accrued expenses of $543,882 and other current liabilities of $72,274 were the
primary reasons for net cash generated by operating activities.
Net cash used in investing activities was $758,168 for the year ended
December 31, 1996 compared to $228,696 for the year ended December 31, 1995. In
1996, cash used to purchase property and equipment of $168,588, advances to
related parties of $139,669, and transfers of cash due to restrictions of
$788,000 was offset by proceeds from the sale of equipment of $85,000 and cash
acquired as a result of the MPI acquisition (discussed below) of $253,089. In
1995, the primary use of cash for investing activities was for advances to
related parties of $223,104.
The restricted cash of $788,000 at December 31, 1996, is comprised of an
escrow account of $580,000 established from the proceeds of HHI's initial public
offering to be held until March 23, 1997(remitted to the Company in full on
April 10, 1997) in conjunction with any liability HHI or HTI may incur in
connection with CIS's prior ownership of HTI assets, and an HHI certificate of
deposit of $208,000 pledged as collateral for HMI's line of credit.
Net cash provided by financing activities was $5,222,339 for the year ended
December 31, 1996 compared to $103,527 for the year ended December 31, 1995. In
1996, the primary source of cash provided by financing activities came from
three equity sales which generated proceeds of $5,486,325 offset by
distributions shareholders and partners of $384,317 prior to HHI's initial
public offering in
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July, 1996. This initial public offering of 1,063,750 shares of Common Stock was
the primary equity sale and generated net proceeds of $4,837,325. In 1995, the
primary source of cash provided by financing activities was net advances on
HMI's line of credit of $660,806 offset by distributions to shareholders of
$466,083 and payment of loan origination fees on the line of credit of $121,085.
On January 10, 1997, HHI through its wholly-owned subsidiary, HTI, acquired
the assets and assumed the liabilities of Fenco Tool & Die, Ltd., a Florida
limited partnership controlled by Vincent Montelione and Gregory S. Fenech
through their ownership of the stock in the corporate general partner. HTI
acquired assets of approximately $90,000 and assumed liabilities of
approximately $30,000 for a $60,000 cash payment. No goodwill arose in the
transaction.
On January 24, 1997, HHI through its wholly-owned subsidiary, HTI, acquired
substantially all of the assets and certain liabilities of Marine Power, Inc.
("MPI") pursuant to a Plan of Reorganization dated January 22, 1997, and
effective December 31, 1996. The Company acquired assets of $4,674,526 and
assumed liabilities of $5,323,278 in exchange for 390,000 shares of the
Company's Common Stock valued at $1,950,000. The acquisition was accounted for
using the purchase method of accounting and the operations of MPI are included
with the Company's from December 31, 1996. Goodwill of $2,638,752 was recognized
at December 31, 1996 as a result of the purchase.
With the exception of commitments to provide its MPI division with
additional working capital or as otherwise provided herein, the Company has no
additional commitments for capital resources and believes its available capital
is adequate.
Item 7. Financial Statements
The financial statements that the Company is required to file under Item 7
of this Form 10-KSB are presented on Pages F-1 through F-21 of this Report.
Item 8. Changes in and Disagreements with Accountants
Not applicable
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PART III
Item 9. Directors and Executive Officers of the Company
The current directors and executive officers of the Company are as follows:
Name Age Position
Vincent Montelione 40 President, Chief Executive Officer, and
Chairman
Gregory S. Fenech 42 President, HTI, and Director
Vincent P. Fagnani, Jr. 31 Vice President, Sales and Marketing, HMI, and
Director
William H. Aden 50 Vice President and Chief Financial Officer
Vincent Montelione has been President, Chief Executive Officer and Chairman
of the Board of the Company since May, 1996. Prior to that time he held the same
positions with HMI and HTI (including CIS) since August, 1989, and February,
1992, respectively. Mr. Montelione maintains a business interest in F&M
Investment Group, Inc., the general partner of Fenco Tool & Die, Ltd., a machine
tool manufacturing company as a director and SCV Holdings, Inc., the general
partner of SCV, Ltd. (the general partner of HTL, predecessor to HTI) as
president and director.
Gregory S. Fenech has been President of HTI since July, 1996 and a Director
of the Company since May, 1996 and has held similar positions with CIS
(predecessor to HTI) since July, 1994. Prior to joining HTI, Mr. Fenech was Vice
President and General Manager for Spectrum Engineering and Technologies, Inc.,
an engineering firm which designs tools and dies, since 1989.
Vincent P. Fagnani, Jr. has been Vice President of Sales and Marketing of
HMI since July, 1991, and a Director of the Company since May, 1996. Prior
thereto, Mr. Fagnani was Assistant Sales Manager of Graham Companies, Miami,
Florida, a 400 single family home community. Mr.Fagnani has a B.S. in economics
and finance from Barry University, Miami Shores, Florida. Mr.Fagnani is the
brother-in-law of Vincent Montelione.
William H. Aden has been Vice President and Chief Financial Officer of the
Company since September, 1996. From June, 1994 to September, 1996, Mr. Aden, who
is a certified public accountant, held the same position with Prime Management
Group, Inc., Boca Raton, Florida, a full service property management company,
and from January, 1993 to May, 1994, served as Chief Operating Officer of 21st
Century Power and Light Corporation, Lantana, Florida, a research and
development company. From January, 1980 to December, 1992, Mr. Aden served as
Chief Financial and Administrative Officer for Gator Culver Company, Lanatan,
Florida, a manufacturer of metal storm drainage piping.
Each director is elected at the Company's annual meeting of shareholders
and holds office until the next annual meeting of stockholders, or until their
successors are elected and qualified. The Company's bylaws provide for not less
than one director. Currently, the Company has three directors. The bylaws permit
the Board of Directors to fill any vacancy and such director may serve until the
next annual meeting of shareholders or until his successor is elected and
qualified. Officer are elected by the Board of Directors and their terms of
office are, except to the extent governed by employment contracts, at the
discretion of the Board. Other than as indicated above, there are no
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family relations among any directors or officers of the Company. All of the
Company's officers are full-time employees of the Company.
The Board of Directors has audit, compensation and option committees. The
audit committee consists of Messrs. Montelione and Fenech. The compensation
committee consists of Messrs. Montelione and Fagnani. The option committee
consists of Mr. Montelione.
Compliance with Section 16 (a) of the Securities Exchange Act of 1934
For the year ended December 31, 1996, Mr. Montelione has not filed Form 4
covering certain transactions.
Item 10. Executive Compensation
The following table sets forth, for the years ended December 31, 1996 and
1995, the remuneration paid by the Company to executive officers of the Company
whose compensation exceeds $100,000.
Name and Principal Position Year Salary(1) Other Compensation
Vincent Montelione 1996 $ 117,900 $ - 0 -
President, Chief Executive Officer
and Chairman 1995 $ 16,200 $ - 0 -
Gregory S. Fenech 1996 $ 75,000 $ 60,000(2)
President, HTI, and Director 1995 $ 70,000 $ - 0 -
(1) Does not include Subchapter S distributions from HMI made to Vincent
Montelione during 1996 and 1995 in the amount of $260,857 and $543,123,
respectively. The table does not include any amounts for certain personal
benefits extended to Messrs. Montelione and Fenech such as the cost of
automobiles used by them. The Company believes that the value of such
non-cash benefits and compensation provided to Messrs. Montelione and
Fenech did not exceed the lessor of $50,000 or 10% of the total annual
salary and bonus they received in either year.
(2) Consulting fees paid to Mr. Fenech in 1996.
On May 2, 1996, the Company entered into an Employment Agreement (the
"Agreement") with Vincent Montelione which commenced on July 22, 1996, the
effective date of the Company's initial public offering, and expires on the
fifth anniversary thereof. The annual salary under the Agreement is $150,000
which amount will be increased by 10% each. The term of employment provides for
two three-year renewals at the mutual agreement of the parties. Mr. Montelione
is also eligible to receive an annual bonus equal to 5% of the Company's
consolidated pre-tax earnings in excess of $1,000,000, payable within 30 days
after the determination of such pre-tax earnings. The Agreement also provides
for the issuance of options to purchase up to an aggregate amount of 2,050,000
shares of the Company's Common Stock at $6.00 per share which options shall be
earned as follows: (i) 500,000 options if HMI has earnings before income taxes,
depreciation and amortization ("EBITDA") in excess of $1,000,0000 in any fiscal
year, (ii) an additional 250,000 options if HMI has EBITDA in excess of
$1,500,000 in any fiscal year, (iii) an additional 250,000 options if HMI has
EBITDA of at least $2,000,000 in any fiscal year, (iv) an additional 250,000
options if HMI has
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EBITDA of at least $2,500,000 in any fiscal year, (v) an additional 500,000
options if HMI has EBITDA of at least $3,000,000 in any fiscal year, and (vi) an
additional 300,000 options if HMI has EBITDA of at least $4,000,000 in any
fiscal year. Options issued in any given year pursuant to the Agreement will be
deducted from the aggregate amount available for issuance pursuant to the
Agreement until an aggregate amount not to exceed 2,050,000 options have been
issued.
The Agreement provides, among other things, for participation in an
equitable manner in any profit-sharing or retirement plan for employees or
executives and for participation in other employee benefits applicable to
employees and executive of the Company, except for the 1996 Stock Option Plan.
The Agreement further provides for the use of an automobile and other fringe
benefits commensurate with his duties and responsibilities. The Agreement also
provides for benefits in the event of disability.
Pursuant to the Agreement, employment may be terminated by the Company with
cause or by the executive with or without good reason. Termination by the
Company without cause, or by the executive for good reason, would subject the
Company to liability for liquidated damages in an amount equal to the terminated
executive's current salary and an amount equal to his prior year's bonus
annually, for the remaining term of the Agreement, payable in equal monthly
installments, without any set-off for compensation received from any new
employment. In addition, the terminated executive would be entitled to receive
all options entitled to be earned under the Agreement and continue to
participate in and accrue benefits under all employee benefit plans and to
receive supplemental retirement benefits to replace benefits under any qualified
plan for the remaining term of the Agreement to the extent permitted by law.
On May 2, 1996 the Board of Directors and shareholders approved a stock
option plan called the "1996 Stock Option Plan" (the "Plan"). Under the Plan,
the Company has reserved an aggregate of 500,000 shares of Common Stock for
issuance pursuant to options granted under the Plan ("Plan Options"). The Option
Committee of the Board of Directors (the Committee") of the Company administers
the Plan including, without limitation, the selection of the persons who will be
granted Plan Options under the Plan, the type of Plan Options to be granted, the
number of shares subject to each Plan Option and the Plan Option price.
Plan Options granted under the Plan may either be options qualifying as
incentive stock options ("Incentive Options") under Section 422 of the Internal
Revenue Code of 1996, as amended or options that do not so qualify
("Non-Qualified Options"). In addition, the Plan also allows for the inclusion
of a reload option provision ("Reload Option"), which permits an eligible person
to pay the exercise price of the Plan Option with shares of Common Stock owned
by the eligible person and receive a new Plan Option to purchase shares of
Common Stock equal in number to the tendered shares. Any Incentive Option
granted under the Plan must provide for an exercise price of not less than 100%
of the fair market value of the underlying shares on the date of such grant, but
the exercise price of any Incentive Option granted to an eligible employee
owning more than 10% of the Company's Common Stock must be at least 110% of such
fair market value as determined on the date of the grant. The term of each Plan
Option and the manner in which it may be exercised is determined by the Board of
the Directors or the Committee, provided that no Plan Option may be exercisable
more than 10 years after the date of its grant and, in the case of an Incentive
Option granted to an eligible employee owning more than 10% of the Company's
Common Stock, no more than five years after the day of the grant.
The exercise price of Non-Qualified Options shall be determined by the
Board of Directors or the Committee.
21
<PAGE>
The per share purchase price of the shares subject to Plan Options granted
under the Plan may be adjusted in the event of certain changes in the Company's
capitalization, but any such adjustment may not change the total purchase price
payable upon the exercise in full of Plan Options granted under the Plan.
Officers, directors, key employees and consultants of the Company and its
subsidiaries are eligible to receive Non-Qualified Options under the Plan. Only
officers, directors and employees of the Company who are employed by the Company
or by any subsidiary thereof are eligible to receive Incentive Options.
All Plan Options are nonassignable and nontransferable, except by will or
by the laws of descent and distribution, and during the lifetime of the
optionee, may be exercised only by such optionee. If an optionee's employment is
terminated for any reason, other than his death or disability or termination for
cause, or if an optionee is not an employee of the Company but is a member of
the Company's Board of Directors and his service as a director is terminated for
any reason, other than death or disability, the Plan Option granted to him shall
lapse to the extent unexercised on the earlier of the expiration date or 30 days
following the date of termination. If the optionee dies during the term of his
employment, the Plan Option granted to him shall lapse to the extent unexercised
on the earlier of the expiration date of the Plan Option or the date one year
following the date of the optionee's death. If the optionee is permanently and
totally disabled within the meaning of Section 22(c)(3) of the Internal Revenue
Code of 1986, the Plan Option granted to him lapses to the extent unexercised on
the earlier of the expiration date of the option or one year following the date
of such disability.
The Board of Directors or Committee may amend, suspend or terminate the
Plan at any time, except that no amendment shall be made which (i) increases the
total number of shares subject to the Plan or changes the minimum purchase price
therefor (except in either case in the event of adjustments due to changes in
the Company's capitalization), (ii) affects outstanding Plan Options or any
exercise right thereunder, (iii) extends the term of any Plan Option beyond ten
years, or (iv) extends the termination date of the Plan. Unless the Plan shall
theretofore have been suspended or terminated by the Board of Directors, the
Plan shall terminate in May 2, 2006. Any such termination of the Plan shall not
affect the validity of any Plan Options previously granted thereunder.
On July 22, 1996, options to acquire 116,000 shares at $6.00 per share were
granted to employees of the Company pursuant to the Plan.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the Company's
Common Stock beneficially owned at March 1, 1997, (i) by each person who is
known by the Company to own beneficially 5% or more of the Company's Common
Stock; (ii) by each of the Company's directors; and (iii) by all directors and
executive officers as a group. At March 31, 1997, there were 5,208,750 shares of
Common Stock of the Company outstanding.
22
<PAGE>
Number of Shares of
Common Stock
Name and Address of Beneficial Owner(1)Beneficially OwnedPercent of Class
Vincent Montelione(2) 2,000,000 38.4%
Vincent Montelione, as Trustee(3) 600,000 11.5%
Herbert D. Katz, as Trustee(4) 300,000 5.8%
SCV, Ltd.(5) 100,000 1.9%
Gregory S. Fenech(3) - 0 - --
Vincent P. Fagnani, Jr. - 0 - --
William H. Aden - 0 - --
All directors and officers as a group 2,000,000 38.4%
(1) Unless otherwise noted, c/o Hirel Holdings, Inc., 650 S.W. 16th Tr.,
Pompano Beach, Florida 33069
(2) Includes (i) 600,000 shares of Common Stock held by Vincent Montelione, as
Trustee, under a Trust Agreement, Vincent Montelione (90%) and Gregory S.
Fenech (10%), as beneficiaries and (ii) 100,000 shares of Common Stock held
by SCV, Ltd., a limited partnership beneficially owned by Vincent
Montelione (90%) and Gregory S. Fenech (10%).
(3) Includes 600,000 shares of Common Stock held by Vincent Montelione, as
Trustee, under a Trust Agreement, Vincent Montelione (90%) and Gregory S.
Fenech (10%), as beneficiaries, which shares are also included in the
amount of shares owned by Vincent Montelione, as reflected herein, as
Vincent Montelione is a beneficial owner of these shares.
(4) Represents shares of Common Stock held by Herbert D. Katz, as Trustee,
under a Letter Agreement dated April 23, 1996, with Katz Investment II, a
Florida general partnership, and Thomas O. Katz, as beneficiary.
(5) Vincent Montelione, president of SCV Holdings, Inc., the general partner of
SCV, Ltd., beneficially owns 90% of and has the sole voting rights to the
100,000 shares of Common Stock held by SCV, Ltd. which shares are also
included in the number of shares owned by Vincent Montelione, as reflected
herein, as Vincent Montelione is a beneficial owner of these shares.
Item 12. Certain Relationships and Related Transactions
The Company periodically advances funds to its principal stockholder on a
very short term basis. These loans are non interest bearing with no formal
repayment terms. As of December 31, 1996 and 1995, the balance due on these
loans was $21,025 and $ 0, respectively. Subsequent to year end, $17,950 of the
balance due at December 31, 1996 was repaid. The Company also makes
23
<PAGE>
advances to enterprises controlled by its principal stockholder. As of December
31, 1996 and 1995, the balance due from related parties including interest was
$362,773 and $223,104, respectively. The related party loans are due on December
31, 1997, and bear interest at prime. Interest receivable of $34,063 and $3,264
and interest income of $30,942 and $3,264 on those loans as of December 31, 1996
and 1995, respectively, is reflected in the financial statements of the Company.
The Company also acquired receivables from related parties in the amount of
$162,044 in conjunction with the MPI acquisition.
During the year ended December 31, 1995, HMI had sales of approximately
$2,500,000 to a company in which Vincent Montelione was the sole stockholder.
During the six months ended June 30, 1996 and the year ended December 31,
1995, Vincent Montelione received Subchapter S distributions from HMI of
approximately $260,857 and $543,123, respectively.
During the six months ended June 30, 1996, HTL made distributions of
$123,460 to its general partner, SCV, Ltd., which in turn made a distribution to
Vincent Montelione, a limited partner of SCV, Ltd., in the amount of $80,000.
HMI and HTI sublease from CIS approximately 5,000 square feet of office
space and 11,000 square feet of warehouse space in two adjacent buildings in
North Miami Beach, Florida. While it is believed that the sublease is fair and
reasonable, such lease was not entered into at arms length. CIS leases the
office and warehouse space from an unaffiliated landlord which lease was
determined by arms length negotiations. HMI pays approximately $3,100 per month
for the office and warehouse space it occupies. HTI pays approximately $6,000
per month on the space it occupies. The lease expires in April, 1997.
During the year ended December 31, 1996, HTI paid Fenco Tool & Die, Ltd., a
Florida limited partnership controlled by Vincent Montelione and Gregory S.
Fenech through their ownership of the stock in the corporate general partner,
approximately $160,000 for the machining of certain components of its products.
During the year ended December 31, 1996, HTI paid its president $60,000 in
consulting fees.
During the year ended December 31, 1996, the Company paid royalties of
$14,935 under a royalty agreement on certain patents covering six components of
its products to a company controlled by the Company's principal stockholder.
Under the agreement, royalties are calculated as a percentage, ranging between
5% and 10%, of net selling price as defined in the agreement. Royalty payments
are due quarterly under the agreement which runs for 50 years.
24
<PAGE>
Item 13. Exhibits and Reports on Form 8-K.
(a)(1) Financial Statements
See the Index to Consolidated Financial Statements on Page F-1
hereafter, which is incorporated herein by reference.
(a)(2) Financial Statement Schedules
None.
(a)(3) Exhibits
Exhibit Exhibit
Number Description
1.1 Form of Underwriting Agreement (1)
1.1(a) Revised Form of Underwriting Agreement (1)
1.3 Form of Selected Dealers Agreement (1)
1.3(a) Revised Form of Selected Dealers Agreement (1)
3.1 Articles of Incorporation dated May 1, 1996 (1)
3.2 By-laws of Hirel Holdings, Inc. (1)
3.2(a) Revised By-laws of Hirel Holdings, Inc. (1)
4.1 Specimen Common Stock Certificate (1)
4.2 Specimen Class A Common Stock Purchase Warrant (1)
4.2(a) Revised Specimen Class A Common Stock Purchase Warrant (1)
4.3 Specimen Class B Common Stock Purchase Warrant (1)
4.3(a) Revised Specimen Class B Common Stock Purchase Warrant (1)
4.4 Warrant Agreement (1)
4.4(a) Revised Warrant Agreement (1)
4.5 Underwriter's Unit Purchase Option (1)
4.5(a) Revised Underwriter's Unit Purchase Option (1)
5.1 Opinion of Atlas, Pearlman, Trop & Borkson, P.A. concerning legality of
shares being registered pursuant to the Registration Statement (1)
25
<PAGE>
Exhibit Exhibit
Number Description
10.1 Stock Option Plan (1)
10.2 Executive Employment Agreement between the Company and Vincent
Montelione dated as of May 2, 1996 (1)
10.2(a) Revised Executive Employment Agreement between the Company and Vincent
Montelione dated as of May 2, 1996 (1)
10.3 Share Exchange Agreement between the Company and Hirel Inc. dated as of
May 2, 1996 (1)
10.3(a) Addendum dated May 29, 1996 to the Share Exchange Agreement between the
Company and Hirel Marketing, Inc. dated as of May 2, 1996 (1)
10.4 Share Exchange Agreement between the Company and Hirel Technologies,
Inc. dated as of May 2, 1996 (1)
10.4(a) Addendum dated May 29, 1996 to the Share Exchange Agreement between the
Company and Hirel Technologies, Inc. dated as of May 2, 1996 (1)
10.4(b) Addendum No. 2 dated June 20, 1996 to the Share Exchange Agreement
between the Company and Hirel Technologies, Inc. dated as of
May 2, 1996 (1)
10.5 Sublease Agreement with Hirel Marketing, Inc. and Cutler Induction
Systems, Inc. dated October 23, 1995 (1)
10.6 Sublease Agreement with Hirel Technologies, Inc. and Cutler Induction
Systems, Inc. dated October 23, 1995 (1)
10.7 Ocean Bank Line of Credit Loan Agreement dated 12/26/95 due 6/26/00
re: $2,000,000 (1)
10.8 Ocean Bank Line of Credit Loan Agreement dated 7/5/95 due 6/26/00
re: $1,000,000 (1)
10.9 Technologies Assignment and Royalty Agreement dated May 2, 1996 (1)
10.10 Lease between Hirel Technologies, Inc. and Fenco Tool & Die, Ltd.
dated April 1, 1996 (1)
10.11 Business Valuation Report by Fiske and Company dated
January 31, 1996 (1)
10.12 Plan of Reorganization dated January 22, 1997, by and among Marine
Power, Inc., a Louisiana corporation, W.E. Allbright, Jr., Hirel
Technologies, Inc., a Florida corporation, and Hirel Holdings, Inc.,
a Delaware corporation (2)
10.13 Employment Agreement dated January 22, 1997, between W.E. Allbright, Jr
and Hirel Technologies, Inc. (2)
26
<PAGE>
Exhibit Exhibit
Number Description
10.14 Sublease Agreement between Parlux Fragrances, Inc. and Hirel Holdings,
Inc. dated September 4, 1996.
10.15 Asset Purchase Agreement between Fenco Tool & Die, Ltd. and Hirel
Technologies, Inc. dated January 10, 1997.
10.16 Option Agreement between Hirel Marketing, Inc. and Group 32 dated
March 21, 1997.
21 Subsidiaries of the Company (1)
23.1 Consent of Moore Stephens P.C. (formerly Mortenson &
Associates, P.C.)(1)
23.2 Consent of Atlas, Pearlman, Trop & Borkson, P.A.(included in
Exhibit 5.1)(1)
23.3 Consent of Fiske & Company (1)
(1) Incorporated by reference from the Company's Registration Statement on Form
SB-2, File No.
333-4686-A.
(2) Incorporated by reference from the Company's report on Form 8-K/A,
Amendment No. 1, dated February 6, 1997.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated February 6, 1997,
announcing the acquisition, as of December 31, 1996, of substantially
all of the assets and certain liabilities of Marine Power, Inc., a
Louisiana based manufacturer and marketer of marine engines for the
after market and original equipment manufacturers.
The Company filed a report on Form 8-K/A, Amendment No. 1, dated
February 6, 1996, which contained the Exhibits required by Item 7 of
the report on Form 8-K announcing the acquisition of Marine Power, Inc.
The Company filed a report on Form 8-K/A, Amendment No. 2, dated April
3, 1997, which contained the Financial Statements required by Item 7 of
the report on Form 8-K dated February 6, 1997, announcing the
acquisition of Marine Power, Inc.
27
<PAGE>
INDEX TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Financial Statements of Hirel Holdings, Inc. and Subsidiaries:
Independent Auditor's Report..................................... F-2
Consolidated Balance Sheet as of December 31, 1996............... F-3 - F-4
Statements of Operations for the years ended December 31, 1996 and F-55
Statements of Stockholders' Equity for the years ended December 31, 1996
and 1995......................................................... F-6
Statements of Cash Flows for the years ended December 31, 1996 and F-7 -F-8
Notes to Financial Statements.................................... F-9 -F-20
. . . . . . . . . . .
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors of
Hirel Holdings, Inc.
Pompano Beach, Florida
We have audited the accompanying consolidated balance sheet of Hirel
Holdings, Inc. and its subsidiaries as of December 31, 1996, and the related
statements of operations, stockholders' equity, and cash flows for each of the
two years in the period ended December 31, 1996. 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 Hirel
Holdings, Inc. and its subsidiaries as of December 31, 1996, and the results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
March 6, 1997
F-2
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996.
- ------------------------------------------------------------------------------
Assets:
Current Assets:
Cash $ 3,426,450
Cash Restricted 580,000
Accounts Receivable [Net of Allowance for Doubtful Accounts
of $192,000] 1,004,460
Accounts Receivable - Related Party 237,393
Inventory 3,542,036
Notes Receivable - Related Parties 41,385
Loans Receivable - Related Party 21,025
Other Current Assets 130,369
-----------
Total Current Assets 8,983,118
Property and Equipment:
Machinery and Equipment 1,779,305
Furniture and Fixtures 148,699
Leasehold Improvements 122,981
Office and Computer Equipment 297,388
-----------
Total - At Cost 2,348,373
Less: Accumulated Depreciation 1,091,027
Property and Equipment - Net 1,257,346
-----------
Other Assets:
Cash Restricted 208,000
Goodwill 2,638,752
Security Deposits 56,631
Notes Receivable - Related Parties 483,432
Other Assets 27,783
-----------
Total Other Assets 3,414,598
Total Assets $13,655,062
See Notes to Financial Statements.
F-3
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996.
- ------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Current Liabilities:
Line of Credit $ 1,595,090
Notes Payable - Current Portion 134,651
Accounts Payable 3,336,311
Accrued Expenses 445,548
Other Current Liabilities 66,552
-----------
Total Current Liabilities 5,578,152
Non-Current Liabilities:
Due to Related Parties 13,111
Notes Payable 1,364,898
Total Non-Current Liabilities 1,378,009
Total Liabilities 6,956,161
Commitments and Contingencies --
Stockholders' Equity:
Preferred Stock - $.001 Par Value, 1,000,000 Shares Authorized,
None Issued or Outstanding --
Common Stock, $.001 Par Value, 24,000,000 Shares Authorized,
5,208,750 Shares Issued and Outstanding 5,209
Paid-in Capital 7,908,775
Retained Earnings [Deficit] (1,215,083)
Total Stockholders' Equity 6,698,901
Total Liabilities and Stockholders' Equity $13,655,062
See Notes to Financial Statements.
F-4
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------
Years ended
December 31,
1 9 9 6 1 9 9 5
------- -------
Net Sales:
Computer Equipment $21,505,880 $19,147,478
Computer Equipment - Related Party -- 2,491,111
Fuel Injection Systems 1,330,208 77,755
----------- -----------
Total Net Sales 22,836,088 21,716,344
----------- -----------
Cost of Goods Sold:
Computer Equipment 20,494,433 20,660,204
Fuel Injection Systems 933,702 52,885
----------- -----------
Total Cost of Goods Sold 21,428,135 20,713,089
----------- -----------
Gross Profit 1,407,953 1,003,255
----------- -----------
Expenses:
General and Administrative Expenses 2,098,468 691,724
Research and Development 209,241 326,728
Depreciation and Amortization 274,500 65,806
Provision for Doubtful Accounts 107,000 24,667
----------- -----------
Total Expenses 2,689,209 1,108,925
----------- -----------
Operating [Loss] (1,281,256) (105,670)
----------- -----------
Other Income [Expense]:
Interest Expense (134,073) (27,637)
Interest Income 81,169 --
Interest Income - Related Parties 30,942 3,264
Loss on Sale of Asset (36,244) --
Other Income 2,076 --
----------- -----------
Total Other [Expense] (56,130) (24,373)
----------- -----------
[Loss] Before Income Taxes (1,337,386) (130,043)
Income Taxes -- --
----------- -----------
Net [Loss] $(1,337,386) $ (130,043)
=========== ===========
[Loss] Per Share $ (.32) $ (.05)
=========== ===========
Weighted Average Common Shares Outstanding 4,134,647 2,436,301
=========== ===========
See Notes to Financial Statements.
F-5
<PAGE>
<TABLE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------
Retained Total
Preferred Stock Common Stock Paid in Earnings Stockholders'
Shares Amount Shares Amount Capital [Deficit] Equity
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1994 -- $ 3,750,000 $ 3,750 $2,170,350 $132,345 $2,306,445
Subchapter S Distributions -- -- -- -- -- (543,123) (543,123)
Net Income - 1995 -- -- -- -- -- (130,043) (130,043)
------ ------ --------- -------- ---------- -------- ----------
December 31, 1995 -- -- 3,750,000 3,750 2,170,350 (540,821) 1,633,279
Subchapter S and Partnership
Distributions -- -- -- -- (123,460) (260,857) (384,317)
Transfer of Accumulated
Losses of S Corporation
and Partnership to Paid-in
Capital -- -- -- -- (923,981) 923,981 --
Proceeds from Initial Public
Offering -- -- 1,068,750 1,069 4,836,256 -- 4,837,325
Common Stock Issued in
Exchange for Assets -- -- 390,000 390 1,949,610 -- 1,950,000
Net Income - 1996 -- -- -- -- -- (1,337,386)(1,337,386)
------ ------- -------- ------- ---------- --------- ---------
December 31, 1996 -- $ -- 5,208,750 $ 5,209 $7,908,775 $(1,215,08$) 6,698,901
====== ======= ========= ======= ========== =========== =========
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
Years ended
December 31,
1 9 9 6 1 9 9 5
------- -------
Operating Activities:
Net [Loss] $(1,337,386)$ (130,043)
----------- -----------
Adjustments to Reconcile Net [Loss] to Net Cash [Used for] Provided by
Operating Activities:
Depreciation 185,197 34,024
Amortization 89,303 31,782
Loss on Sale of Asset 36,244 --
Provision for Losses on Accounts Receivable 107,000 4,450
Contributed Research and Development -- 306,205
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (20,681) (112,787)
Inventory (389,845) (150,159)
Other Current Assets (91,447) (4,798)
Deposits (48,714) --
Increase [Decrease] in:
Accounts Payable and Accrued Expenses 14,744 543,882
Other Current Liabilities (140,378) 72,274
----------- -----------
Total Adjustments (258,577) 724,873
----------- -----------
Net Cash - Operating Activities (1,595,963) 594,830
----------- -----------
Investing Activities:
Purchase of Property and Equipment (168,588) (3,892)
Proceeds from Sale of Equipment 85,000 (1,700)
Advances to Related Parties (139,669) (223,104)
Cash Acquired through Acquisition - Net of Payments 253,089 --
Transfers to Cash Restricted (788,000) --
----------- -----------
Net Cash - Investing Activities (758,168) (228,696)
----------- -----------
Financing Activities:
Distributions (384,317) (466,083)
Advances from Line of Credit 6,519,919 2,112,019
Repayments on Line of Credit (6,361,785) (1,451,213)
Advances from Related Parties 287,483 669,839
Repayments to Related Parties (325,286) (639,950)
Proceeds from Equity Sales 5,486,325 --
Loan Origination Fees -- (121,085)
----------- -----------
Net Cash - Financing Activities 5,222,339 103,527
----------- -----------
Net Increase in Cash 2,868,208 469,661
Cash - Beginning of Years 558,242 88,581
----------- -----------
Cash - End of Years $ 3,426,450 $ 558,242
=========== ===========
See Notes to Financial Statements.
F-7
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
Years ended
December 31,
1 9 9 6 1 9 9 5
------- -------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 144,342 $ 19,437
Income Taxes $ -- $ --
Supplemental Disclosures of Non-Cash Financing and Investing Activities:
During 1996, the Company acquired assets of $4,674,526 and assumed liabilities
of $5,298,278 in exchange for 390,000 shares of common stock valued at
$1,950,000.
During 1995, the Company received $1,500,000 of assets consisting of
approximately $63,000 of accounts receivable, approximately $218,000 of
inventory, machinery and equipment with a book value of approximately $913,000
and intangibles valued at approximately $306,000 in exchange for 900,000 shares
of common stock.
During 1995, $77,040 of inventory was distributed as a Subchapter S
distribution.
During 1995, $2,155 of inventory was capitalized to property and equipment.
See Notes to Financial Statements.
F-8
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
[1] Organization and Nature of Operations
The consolidated financial statements are presented on a consolidated basis
commencing July 22, 1996 and include the results of operations of the parent
company, Hirel Holdings, Inc. and its wholly-owned subsidiaries, Hirel
Marketing, Inc. ["HMI"] and Hirel Technologies, Inc. ["HTI"] [collectively
referred to as the "Company"]. The Company operates in two business segments
through its operating subsidiaries. HMI is a wholesale seller of personal
computers and related peripherals, primarily manufactured by Apple Computer,
Inc. and during 1996 was the predominant business segment. HMI sells its
products to retailers and end users throughout the United States and
internationally. HTI develops, manufactures and sells fuel injection systems for
marine engines to customers throughout the United States. Both segments operate
out of the Company's single location in southern Florida. Marine Power, Inc.
["MPI"], a division of HTI, [See Note 4], was acquired effective December 31,
1996, and manufactures engines for marine applications for sale throughout the
United States at its location in southern Louisiana.
[2] Basis of Presentation
The financial statements for the period ended December 31, 1996 and 1995 give
retroactive effect to the acquisition by Hirel Holdings, Inc. of all of the
outstanding common stock of HMI [an S corporation] and HTI on July 22, 1996. HTI
is the successor to Hirel Technologies, Ltd. ["HTL"], a limited partnership. The
financial statements of the Company are presented on a consolidated basis
commencing July 22, 1996. Prior to that date the separate results of HMI and HTI
[including HTL as predecessor from inception on October 24, 1995] have been
combined on a basis consistent with that of consolidated financial statements
giving retroactive effect to the issuance of 2,750,000 shares of the Company's
common stock to the stockholders of HMI, and 1,000,000 shares of the Company's
common stock to the stockholders of HTI. Additionally, the S corporation and
partnership equity sections of HMI and HTL as predecessor to HTI have been
reclassified to additional paid-in capital. No adjustment of assets to "fair
value" have been recorded and all intercompany balances and transactions were
eliminated. The accompanying financial statements will become the historical
financial statements upon issuance of financial statements for the period
subsequent to July 22, 1996.
The accompanying historical financial statements for the year ended December 31,
1995 include the results of HTL as predecessor of HTI from October 24, 1995 to
December 31, 1995. The predecessor of HTL was Cutler Induction Systems ["CIS"].
The following pro forma unaudited information gives effect to the operations of
CIS for the period January 1, 1995 to October 24, 1995 as if they were included
in the statement of operations for the year ended December 31, 1995.
Net Sales - Computer Equipment $21,638,589
Net Sales - Fuel Injection Systems 814,606
-----------
Total Net Sales $22,453,195
Net Loss $(1,607,000)
Net Loss Per Share $ (.43)
------------------ ===========
Weighted Average Common Shares Outstanding 3,750,000
F-9
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #2
- ------------------------------------------------------------------------------
[3] Summary of Significant Accounting Policies
Cash and Cash Equivalents - Cash equivalents are comprised of certain highly
liquid investments with a maturity of three months or less when purchased. The
Company has no cash equivalents at December 31, 1996.
Inventory - Inventory is recorded principally at the lower of average cost
[using the first-in, first-out ["FIFO"] method] or market.
Property and Equipment and Depreciation - Property and equipment is recorded at
cost. Depreciation is computed utilizing the straight-line method based on
estimated useful lives of five to ten years. Amortization of leasehold
improvements is computed utilizing the straight-line method over the lesser of
the remaining lease term or the useful life of the leasehold. Depreciation
expense, which includes amortization of leasehold improvements, was $185,197 and
$34,024 for the years ended December 31, 1996 and 1995, respectively.
Intangibles and Amortization - Goodwill is amortized utilizing the straight-line
method over a period of 15 years. When changes in circumstances warrant it, the
Company evaluates the carrying value and the periods of amortization of goodwill
based on the current and expected future non-discounted cash flows of the
entities or assets giving rise to the goodwill. Loan origination costs are
amortized utilizing the straight-line method over the life of the related debt
which matured in 1996 and amortization expense was $89,303 and $31,782 in 1996
and 1995, respectively.
Revenue Recognition and Product Warranty - Revenue is recognized when goods are
shipped to customers. The Company warrants its computer and engine products
against defects for various periods to a maximum of two years. A provision for
estimated future costs relating to warranty expense is recorded when products
are shipped.
Income Taxes - Prior to July 22, 1996, HMI and HTI as separate companies had
elected to have their income taxed under Subchapters S and K of the Internal
Revenue Code, and the related state provisions, which provide that in lieu of
federal and state corporation income taxes, the stockholders and partners are
taxed on their proportionate share of the Company's taxable income. Therefore,
no provision or liability for federal or state income taxes is reflected in the
historical financial statements prior to that date.
Research and Development - The Company expenses research and development as
incurred. In connection with its formation, the Company expensed $306,205 in
1995 as contributed research and development.
Earnings Per Share - Earnings per share of common stock is based on the weighted
average number of common shares outstanding for each period presented, after
giving retroactive effect for the shares issued in the business combination [See
Note 2]. Common stock equivalents are included if dilutive.
Concentration of Credit Risk - Financial instruments that potentially subject
the Company to concentration of credit risk include cash and accounts receivable
arising from its normal business activities. The Company places its cash with
high credit quality financial institutions. The Company currently has
approximately $3,143,434 in financial institutions that is subject to normal
credit risk beyond insured amounts. Regarding accounts receivable, the Company
believes that credit risk is limited due to the large number of entities
comprising the Company's customer base and the diversified industries in which
the Company operates. As a consequence, the Company believes that its accounts
receivable credit risk exposure is limited. The Company does not require
collateral on accounts receivable. The Company is also subject to risk on
amounts loaned to companies owned by its officers and stockholders.
F-10
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #3
- ------------------------------------------------------------------------------
[3] Summary of Significant Accounting Policies [Continued]
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principals requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Advertising - The Company expenses advertising costs as incurred. Total
advertising costs charged to expense amounted to approximately $58,448 and $921
for the years ended December 31, 1996 and 1995, respectively.
Stock Options - The Company accounts for employee stock-based compensation under
the intrinsic value based method as prescribed by Accounting Principles Board
["APB"] Opinion No. 25. The Company applies the provisions of Statement of
Financial Accounting Standards ["SFAS"] No. 123 to non-employee stock-based
compensation and the pro forma disclosure provisions of that statement to
employee stock-based compensation.
[4] Business Combination
On January 24, 1997, the Company completed its acquisition of substantially all
the assets of MPI effective December 31, 1996. The Company acquired assets of
$4,674,526 and assumed liabilities of $5,323,278 in exchange for 390,000 shares
of the Company's common stock valued at $1,950,000. The acquisition will be
accounted for utilizing the purchase method of accounting and the operations of
Marine Power, Inc. will be included with the Company's from December 31, 1996.
Goodwill including transaction expenses of $2,638,752 arose from the transaction
which will be amortized utilizing the straight-line method over a period of 15
years. No amortization expense was recorded at December 31, 1996 as the
transaction was effective on that date. In addition, the Company entered into
agreements whereby based on the attainment of certain earnings levels the
sellers can earn registration rights on specified portions of their shares as
well as earn up to an additional 50,000 shares of the Company's common stock if
certain earnings targets are met. If the targets are met, the Company will
recognize additional goodwill measured by the number of shares earned multiplied
by the fair value of the stock on that date.
The following unaudited pro forma combined results of operations reflects the
acquisition as if it had occurred at the beginning of the periods presented.
These pro forma results may not be indicative of results that actually would
have occurred if the combination had been in effect on the date indicated.
December 31,
1 9 9 6 1 9 9 5
Total Revenues $34,165,384 $33,917,354
=========== ===========
Net [Loss] $(3,330,658) $(1,925,562)
=========== ===========
[Loss] Per Common Share $ (.74) $ (.47)
=========== ===========
Weighted Average Common Shares Outstanding 4,523,579 4,140,000
F-11
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #4
- ------------------------------------------------------------------------------
[5] Cash Restricted
In connection with the Company's formation it received assets once owned by a
predecessor of HTL [See Note 2]. Although the Company believes that no
liabilities or legal claims can be asserted against HTI, as a condition of its
initial public offering [See Note 10], the Company placed in escrow $580,000 of
the offering proceeds until March 23, 1997 to satisfy any claims that may arise
[See Note 20].
In connection with the HMI's line of credit, it was required to assign a
$208,000 certificate of deposit as security to the bank.
[6] Inventory
Inventory consists of the following at December 31, 1996:
Raw Materials $ 2,795,240
Finished Goods 746,796
-----------
Total $ 3,542,036
----- ===========
[7] Lines of Credit
HMI maintains a line of credit in the amount of $2,000,000 at December 31, 1996.
The line of credit is used to finance letters of credit used by HMI to acquire
inventory. HMI has the option to pay the letters of credit upon presentation or
to finance them for up to 90 days. The line of credit carries interest at the
Citibank prime rate [8.25 percent at December 31, 1996] plus 2 percent to a
maximum of 18 percent. The line of credit is subject to renewal annually, is
collateralized by all corporate assets and is guaranteed by the principal
stockholder of the Company. The line of credit also restricts the payment of
dividends to annual net income. Borrowings under the line were $818,940 at
December 31, 1996. Letters of credit, which have not been presented for payment
are included in the caption "accounts payable" on the balance sheet, and totaled
$150,796 at December 31, 1996. The weighted average interest rate on short-term
borrowings at December 31, 1996 was 8.25 percent.
MPI maintains a line of credit in the amount of $850,000 at December 31, 1996.
The line of credit carries interest at the banks prime rate [8.25 percent at
December 31, 1996] plus 2 percent after an initial rate for the first three
months of 12.15 percent. The line of credit is subject to renewal annually, and
is collateralized by accounts receivable. Borrowings under the line were
$776,150 at December 31, 1996.
[8] Notes Payable
Notes payable consisted of the following at December 31, 1996:
December 31,
1 9 9 6
Note payable to bank, interest at prime rate plus 1.5 percent, with monthly
payments of principal and interest through 2$081,400,731
Various notes payable, collateralized by equipment with interest
rates from 5.75 percent to 10.25 percent, maturing through
July 2000. 98,818
Total 1,499,549
Less: Current Maturities 134,651
Total $ 1,364,898
----- ===========
Substantially all of MPI's assets are pledged as security for the above note
payable to bank. The note payable is personally guaranteed by certain related
parties.
F-12
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #5
- ------------------------------------------------------------------------------
[8] Notes Payable [Continued]
Note payable to bank arose through the Company's acquisition of the assets and
liabilities of MPI effective December 31, 1996 [See Note 4]. The loan agreement
contained certain financial statement covenants, and among other restrictions,
limited the payment of dividends. MPI had failed to satisfy certain of the
covenants at June 30, 1996 which had been its fiscal year end and has received a
waiver of the covenants through June 30, 1997. The bank has indicated that the
waiver will remain in effect until the receipt of the Company's December 31,
1997 financial statements.
Current maturities on notes payable at December 31, 1996 are as follows:
December 31,
1997 $ 134,651
1998 105,927
1999 102,771
2000 102,337
2001 109,896
Thereafter 943,967
-----------
Total $ 1,499,549
----- ===========
[9] Related Party Transactions
The Company periodically advances funds to the Company's principal stockholder
on a very short-term basis. These loans are non interest bearing with no formal
repayment terms. The Company also makes advances to enterprises controlled by
the Company's principal stockholder. A summary of the loan activity is as
follows:
Loans to Stockholder:
Beginning Ending
Year End Balance Additions Repayments Balance
December 31, 1996 $ -- $ 281,025 $ 260,000 $ 21,025
========= ========= ========= ==========
December 31, 1995 $ -- $ 639,950 $ 639,950 $ --
========= ========= ========= ==========
Stockholder loans are subordinated to the line of credit.
Loans to Related Parties Including Interest:
Beginning Ending
Year End Balance Additions Repayments Balance
December 31, 1996 $ 223,104 $ 301,713[1] $ -- $ 524,817
========= ========= ======== ==========
December 31, 1995 $ -- $ 223,104 $ -- $ 223,104
========= ========= ======== ==========
[1] Includes $162,044 of related party receivables acquired through the MPI
acquisition.
The related party loans of greater than a short-term nature carry interest at
prime. Interest receivable of $34,063 and $3,264 and interest income of $30,942
and $3,264 on those loans as of December 31, 1996 and 1995, respectively, is
reflected in the accompanying financial statements.
F-13
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #6
- ------------------------------------------------------------------------------
[9] Related Party Transactions [Continued]
During the year ended December 31, 1995, the Company had sales of $2,491,111 to
a company in which the principal stockholder of the Company had an ownership
interest [See Note 14]. The related party sales ceased in June 1995.
During the year ended December 31, 1996, the Company paid $60,000 in consulting
fees to the President of HTI.
During the year ended December 31, 1996, the Company paid Fenco Tool and Die
Ltd. approximately $160,000 for machinery services [See Note 18].
During the years ended December 31, 1996 and 1995, the Company paid rent of
$133,636 and $48,224 to a company controlled by the Company's principal
stockholder. The leases expire in April 1997.
During the year ended December 31, 1996, the Company accrued royalties of
$14,935 to a Company controlled by the Company's principal stockholder under a
royalty agreement on certain patents covering six components of the Company's
products. Under the agreement, royalties are calculated as a percentage ranging
between 5 percent and 10 percent of net selling price as defined in the
agreement. Royalty payments are due quarterly and the agreement is for a fifty
year period.
[10] Stockholders' Equity
On July 22, 1996, the Company completed an initial public offering of 1,063,750
shares of common stock at a price of $6.00 per share. The Company realized net
proceeds of approximately $4,840,000 in connection with the offering. In
addition, the Company issued to its underwriter an option to purchase 92,500
shares of common stock at $8.70 per share. The option is exercisable commencing
July 22, 1997 and expires July 22, 2001. The Company also issued 5,000 shares of
common stock to its attorneys for work performed in connection with the
offering.
[11] Options
The Company has adopted a stock option plan, effective May 2, 1996. Under such
plan, key employees and officers and consultants of the Company will be granted
options to purchase shares of the Company's common stock at their fair market
value on the date of grant. The plan provides for an aggregate of 500,000
options. Plan Options granted under the Plan may either be options qualifying as
incentive stock options ("Incentive Options") under Section 422 of the Internal
Revenue Code of 1996, as amended or options that do not so qualify
("Non-Qualified Options"). In addition, the Plan also allows for the inclusion
of a reload option provision ("Reload Option"), which permits an eligible person
to pay the exercise price of the Plan Option with shares of common stock owned
by the eligible person and receive a new Plan Option to purchase shares of
common stock equal in number to the tendered shares. Any Incentive Option
granted under the Plan must provide for an exercise price of not less than 100%
of the fair market value of the underlying shares on the date of such grant, but
the exercise price of any Incentive Option granted to an eligible employee
owning more than 10% of the company's common stock must be at least 110% of such
fair market value as determined on the date of the grant. The term of each Plan
Option and the manner in which it may be exercised is determined by the Board of
the Directors or the Committee, provided that no Plan Option may be exercisable
more than 10 years after the date of its grant and, in the case of an Incentive
Option granted to an eligible employee owning more than 10% of the Company's
Common Stock, no more than five years after the date of the grant.
A summary of the activity under the plan is as follows:
Exercise Remaining Average
Price Contractual Exercise
Shares Per Share Life Price
Balance - December 31, 1995 -- $ --
Granted 116,000 6.00
Exercised -- --
Forfeited/Expired (3,000) (6.00)
--------- --------
Outstanding - December 31, 1996 113,000 $ 6.00 9.4 Years $ 6.00
------------------------------- ========= ========
Exercisable - December 31, 1996 10,000 $ 6.00 9.4 Years $ 6.00
------------------------------- ========= ========
F-14
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #7
- ------------------------------------------------------------------------------
[11] Options [Continued]
Had compensation cost for the Company's stock options issued to employees been
determined based upon the fair value at the grant date for stock options issued
under these plans pursuant to the methodology prescribed under Statement of
Financial Accounting Standards ["SFAS"] No. 123, Accounting for Stock-Based
Compensation, the Company's net loss and loss per share would have been
increased, on a pro forma basis, by approximately $213,000, or $.05 per share
for the year ended December 31, 1996. The fair value of stock options granted to
employees used in determining the pro forma amounts is estimated at $4.54 during
1996 using the Black-Scholes option-pricing model for the pro forma amounts with
the following weighted average assumptions:
December 31,
1 9 9 6 1 9 9 5
Risk-free Interest Rate 6.62% N/A
Expected Life 6 Years N/A
Expected Volatility 84.8% N/A
Expected Dividends None
Net [loss] and [loss] per share as reported, and on a pro forma basis as if
compensation cost had been determined on the basis of fair value pursuant to
SFAS No. 123 is as follows:
December 31, 1996
Net [Loss]:
As Reported $ (1,337,386)
--------------
Pro Forma $ (1,550,386)
--------------
[Loss] Per Share:
As Reported $ (.32)
--------------
Pro Forma $ (.37)
--------------
[12] Income Taxes
Commencing July 22, 1996, the Company will provide for current and deferred
federal and state income taxes where necessary. Prior to July 22, 1996, taxes
were not provided for as each of the separate entities comprising the
consolidated group were pass-through entities. No pro forma income tax effects
are provided for, as there were losses in all periods presented. At December 31,
1996, the Company has federal net operating loss carryforwards of approximately
$1,300,000 all of which will expire in 2011.
The major components of the Company's net deferred income taxes are as follows:
Deferred Tax Liabilities:
Accelerated Depreciation $(143,951)
Deferred Tax Assets:
Reserves and Allowances 43,290
Net Operating Loss 481,000
Total Deferred Tax Asset 524,290
Net Deferred Tax Asset Before Valuation Allowance 380,339
Valuation Allowance (380,339)
Net Deferred Tax Asset $ --
---------------------- =========
F-15
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #8
- ------------------------------------------------------------------------------
[13] Segment and Geographic Information
In 1996, the Company's operations are classified into two principal segments;
computer equipment sales, and fuel injection systems sales. The following is a
summary of segment and geographic information:
United States Europe Other Consolidated
Revenue From Non-Affiliates:
Computer Equipment $16,241,227 $3,737,649$1,527,004 $21,505,880
Fuel Injection Systems 1,330,208 -- -- 1,330,208
---------- --------- ---------- -----------
Totals $17,571,435 $3,737,649$1,527,004 $22,836,088
------ =========== ==================== ===========
Income [Loss] From Operations:
Computer Equipment $ (32,780)
Fuel Injection Systems (898,859)
Corporate (349,617)
-----------
Total (1,281,256)
Other Expenses (56,130)
[Loss] Before Income Tax Expense $(1,337,386)
Identifiable Assets:
Computer Equipment $ 1,396,970
Fuel Injection Systems 370,727
Marine Engine Manufacturing [See Note 4] 7,272,061
Corporate 4,615,304
-----------
Total $13,655,062
Depreciation and Amortization:
Computer Equipment $ 103,719
Fuel Injection Systems 161,391
Corporate 9,390
-----------
Total $ 274,500
----- ===========
Capital Expenditures:
Computer Equipment $ 8,220
Fuel Injection Systems 22,037
Corporate 138,331
-----------
Total $ 168,588
----- ===========
F-16
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #9
- ------------------------------------------------------------------------------
[13] Segment and Geographic Information [Continued]
In 1995, the Company's operations are classified into two principal segments;
computer equipment sales, and fuel injection systems sales. The following is a
summary of segment and geographic information:
United States Europe Other Consolidated
Revenue From Non-Affiliates:
Computer Equipment $12,934,688 $7,514,527 $1,189,374 $21,638,589
Fuel Injection Systems 77,755 -- -- 77,755
---------- --------- ---------- ----------
Totals $13,012,443 $7,514,527 $1,189,374 $21,716,344
------ ========== ========= ========== ==========
Income [Loss] From Operations:
Computer Equipment $ 360,199
Fuel Injection Systems (465,869)
Corporate --
----------
Total (105,670)
Other Expenses (24,373)
[Loss] Before Income Tax Expense $ (130,043)
-------------------------------- ==========
Identifiable Assets:
Computer Equipment $1,418,915
Fuel Injection Systems 1,142,525
Corporate --
----------
Total $2,561,440
Depreciation and Amortization:
Computer Equipment $ 42,428
Fuel Injection Systems 23,378
----------
Total $ 65,806
----- ==========
Capital Expenditures:
Computer Equipment $ 6,047
Fuel Injection Systems 913,105
----------
Total $ 919,152
----- ==========
[14] Significant Customers
During the year ended December 31, 1995, one customer accounted for
approximately 11.5 percent of the Company's sales. The customer was also a
related party.
F-17
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #10
- ------------------------------------------------------------------------------
[15] Commitments and Contingencies
Leases - The Company leases real property and a vehicle under operating leases
expiring through 2001. The Company also leases its Louisiana facility from a
company controlled by a stockholder of the Company and certain Florida premises
from a company controlled by the Company's principal stockholder. The Louisiana
lease has an initial term of five years with three additional five year options
and the Florida leases expire in April 1997. The Louisiana lease also contains
annual adjustments based on the consumer price index to a maximum increase of
three percent per year. Minimum future rental payments as of December 31, 1996,
for each of the next five years, and in the aggregate are as follows:
Related Party Third Parties Total
1997 $ 48,000 $ 272,234 $ 320,234
1998 48,000 278,688 326,688
1999 48,000 279,242 327,242
2000 48,000 235,798 283,798
2001 48,000 7,200 55,200
Thereafter -- -- --
---------- ----------- ----------
Total $ 240,000 $ 1,073,162 $1,313,162
----- ========== =========== ==========
Rent expense was $212,686 and $48,224 for the years ended December 31, 1996 and
1995, respectively, which includes $133,636 and $48,224, respectively, paid to a
related party [See Note 9].
Employment Agreements -
[A] The Company has entered into an agreement ["Agreement"] dated as of May 2,
1996 with Vincent Montelione. The term of employment will commence upon the
effective date of the proposed public offering and will expire on the fifth
anniversary thereof. The annual salary under the Agreement is $150,000, which
amount will be increased by 10 percent each year. The term of employment
provides for two, three year renewals at the mutual agreement of the parties.
Vincent Montelione is also eligible to receive an annual bonus equal to 5
percent of the Company's consolidated earnings before income tax, depreciation
and amortization in excess of $1,000,000, payable within 30 days after the
determination of such earnings. The Agreement also provides for the issuance of
up to an aggregate of 2,050,000 options to purchase shares of the Company's
common stock at $6.00 per share which options shall be earned as follows: (i)
500,000 options if HMI has earnings before income tax, depreciation and
amortization in excess of $1,000,000 in any fiscal year, (ii) an additional
250,000 options if the HMI has earnings before income tax, depreciation and
amortization of at least $1,500,000 in any fiscal year, (iii) and additional
250,000 options if the HMI has earnings before income tax, depreciation and
amortization of at least $2,000,000 in any fiscal year, (iv) an additional
250,000 options if HMI has earnings before income tax, depreciation and
amortization of at least $2,500,000 in any fiscal year, (v) an additional
500,000 options if HMI has earnings before income tax, depreciation and
amortization of at least $3,000,000 in any fiscal year, and (vi) an additional
300,000 options if HMI has earnings before income tax, depreciation and
amortization of at least $4,000,000 in any fiscal year. These options are
transferable to Mr. Montelione's immediate family which will include spouse,
parents, siblings, and children. The Agreement will also provide for noncompete
provisions and certain registration rights with respect to the common shares
underlying the options. If the aforementioned earnings are achieved, the Company
will recognize compensation expense equal to the difference between the fair
market value of the options when earned and the exercise price of the options of
$6.00 per share. The issuance of the options is likely to result in substantial
compensation expense to the Company in future years.
The Agreement provides, among other things, for participation in an equitable
manner in any profit-sharing or retirement plan for employees or executives and
for participation in other employee benefits applicable to employees and
executives of the Company except for the 1996 Stock Option Plan. The Agreement
further provides for the use of an automobile and other fringe benefits
commensurate with his duties and responsibilities. The Agreement also provides
for benefits in the event of disability.
F-18
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #11
- ------------------------------------------------------------------------------
[15] Commitments and Contingencies [Continued]
Employment Agreements [Continued]
[A] [Continued] Pursuant to the Agreement, employment may be terminated by the
Company with cause or by the executive with or without good reason. Termination
by the Company without cause, or by the executive for good reason, would subject
the Company to liability for liquidated damages in an amount equal to the
terminated executive's current salary and an amount equal to his prior year's
bonus annually, for the remaining term of the Agreement, payable in equal
monthly installments, without any set-off for compensation received from any new
employment. In addition, the terminated executive would be entitled to receive
all options earned on a prorata basis as of the date termination and continue to
participate in and accrue benefits under all employee benefit plans and to
receive supplemental retirement benefits to replace benefits under any qualified
plan for the remaining term of the Agreement to the extent permitted by law.
[B] The Company has entered into employment agreements with various other
officers and employees. The agreements vary in terms and length with some
containing provisions for the granting of options and or cash bonuses based upon
the achievement of certain criteria. Compensation related to those provisions
will be accrued as earned.
Share Exchange Agreement - The share exchange agreement with HTI in connection
with the business combination discussed in Note 2 provides for the issuance of
options to purchase shares of the Company's common stock at $6.00 per share
which options shall be earned as follows: (i) 1,000,000 options if HTI has
pre-tax earnings which equals or exceeds $1,000,000 in any fiscal year, (ii) an
additional 1,000,000 options if pre-tax earnings equals or exceeds $2,000,000 in
any fiscal year, and (iii) an additional 1,000,000 options if pre-tax earnings
equals or exceeds $3,000,000 in any fiscal year. If the aforementioned earnings
are achieved, the Company will recognize compensation expense equal to the
difference between the fair market value of the options when earned and the
exercise price of the options of $6.00 per share. The issuance of the options is
likely to result in substantial compensation expense to the Company in future
years.
[16] Fair Value of Financial Instruments
Effective December 31, 1995, the Company adopted Statement of Financial
Accounting Standards No. 107, "Disclosure About Fair Value of Financial
Instruments," which requires disclosing fair value to the extent practicable for
financial instruments which are recognized or unrecognized in the balance sheet.
The fair value of the financial instruments disclosed herein is not necessarily
representative of the amount that could be realized or settled, nor does the
fair value amount consider the tax consequences of realization or settlement.
In assessing the fair value of these financial instruments, the Company was
required to make assumptions, which were based on estimates of market conditions
and risks existing at that time. For certain instruments, including cash,
accounts receivable, notes receivable, accounts payable, amounts due to and from
related parties and affiliates, and short-term debt, management estimates that
the carrying amount approximated fair value for the majority of these
instruments because of their short maturities. Management estimates that the
carrying amount of its long-term indebtedness approximates fair value since the
interest rates currently offered to the Company for debt of the same remaining
maturities approximates the average interest rates which the Company is
currently paying.
F-19
<PAGE>
HIREL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #12
- ------------------------------------------------------------------------------
[17] Subsequent Event
On January 10, 1997, the Company acquired the assets and assumed the liabilities
of Fenco Tool and Die, Ltd., a company owned by certain stockholders of the
Company. The Company acquired assets of approximately $90,000 and assumed
liabilities of approximately $30,000 for a $60,000 cash payment.
No goodwill arose in the transaction.
[18] New Authoritative Accounting Pronouncements
The Financial Accounting Standards Board ["FASB"] has issued Statement of
Financial Accounting Standards ["SFAS"] No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." SFAS No. 125
is effective for transfers and servicing of financial assets and extinguishment
of liabilities occurring after December 31, 1996. Earlier application is not
allowed. The provisions of SFAS No. 125 must be applied prospectively;
retroactive application is prohibited. Adoption on January 1, 1997 is not
expected to have a material impact on the Company. The FASB deferred some
provisions of SFAS No.125, which are not expected to be relevant to the Company.
The Financial Accounting Standards Board ["FASB"] has issued Statement of
Financial Accounting Standards ["SFAS"] No. 128, "Earnings per Share," and SFAS
No. 129, "Disclosure of Information about Capital Structure," in February 1997.
SFAS No. 128 simplifies the earnings per share ["EPS"] calculations required by
Accounting Principles Board ["APB"] Opinion No. 15, and related interpretations,
by replacing the presentation of primary EPS with a presentation of basic EPS.
SFAS No. 128 requires dual presentation of basic and diluted EPS by entities
with complex capital structures. Basic EPS includes no dilution and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution of securities that could share in the earnings of an entity,
similar to the fully diluted EPS of APB Opinion No. 15. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods; earlier application is not permitted. When
adopted, SFAS No. 128 will require restatement of all prior-period EPS data
presented; however, the Company has not sufficiently analyzed SFAS No. 128 to
determine what effect SFAS No. 128 will have on its historically reported EPS
amounts.
SFAS No. 129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval.
[19] Subsequent Event [Unaudited]
On March 21, 1997, the Company made two $100,000 loans to an unrelated company.
The loans bear interest at prime plus 2 percent and mature on December 31, 1997.
In connection with the loans, the Company's HMI subsidiary was granted an option
to require the reorganization of the unrelated company with and into HMI as
provided in a plan of reorganization between the two companies. The option
expires on June 1, 1998.
On March 24, 1997, the Company received the $580,000 which had been held in
escrow.
. . . . . . . . . . .
F-20
EXHIBIT 10.15
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT ("Agreement") is made as of this 10th day of
January, 1997 by and between FENCO TOOL & DIE, LTD., a Florida limited
partnership ("Seller"), and HIREL TECHNOLOGIES, INC., a Florida corporation
("Buyer").
WI T N E S S E T H:
WHEREAS, Seller is engaged in the business of designing, prototyping,
manufacturing, assembling and marketing components for machined and/or
manufactured parts (the "Business"); and
WHEREAS, subject to the terms and conditions set forth herein, Seller
desires to sell to Buyer, and Buyer desires to purchase from Seller, the
Purchased Assets (as hereinafter defined).
NOW, THEREFORE, in consideration of the premises and the mutual covenants
of the parties hereinafter expressed, it is hereby agreed as follows:
ARTICLE I
RECITALS, EXHIBITS
The foregoing recitals are true and correct and, together with the
exhibits referred to hereafter, are hereby incorporated into this Agreement by
this reference. Definitions of terms that are not set forth in text are set
forth in Article V.
ARTICLE II
PURCHASE AND SALE OF ASSETS, ASSUMPTION OF LIABILITIES
2.1 Purchase and Sale. In exchange for the Purchase Price (as hereinafter
defined) and subject to the terms and conditions hereof, Seller hereby sells,
transfers, conveys and delivers to Buyer all Seller's Assets and the Business as
a going concern ("Purchased Assets") and Buyer hereby purchases the Purchased
Assets. Upon the execution hereof, Seller shall execute and deliver to Buyer a
Bill of Sale ("Bill of Sale") in the form of Exhibit A hereto. The Purchased
Assets include the Assets identified on Exhibit 1 to the Bill of Sale.
2.2 Purchase Price. The purchase price for the Purchased Assets shall be
Sixty Thousand Dollars ($60,000) ("Cash Portion"), plus the assumption of those
liabilities set forth on Exhibit B hereto ("Purchase Price"). The Cash Portion
shall be paid on or before January 31, 1997.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby makes the following representations and warranties to Buyer,
each of which is true and correct on the date hereof:
3.1 Corporate Existence and Qualification. Seller is a limited
partnership, duly organized, validly existing and in good standing under the
Laws of the State of Florida. Seller has the power and authority to own and use
its properties and to transact the business in which it is engaged, holds all
franchises, licenses and permits necessary and required therefor and is not
required to be licensed or qualified to do business in any other jurisdiction.
Seller has no subsidiaries.
3.2 Authority and Approval of Agreement by Seller.
(a) The execution and delivery of this Agreement by Seller and the
performance of all Obligations of Seller hereunder have been duly authorized and
approved by the Board of Directors and shareholders of the general partner of
Seller pursuant to all applicable Laws. Seller has full power and authority to
enter into this Agreement and to perform its Obligations hereunder.
(b) This Agreement and each of the other documents, instruments and
agreements executed by Seller in connection herewith constitutes the valid and
legally binding agreements of Seller, enforceable against Seller in accordance
with its terms.
3.3 No Violations. The execution, delivery and performance by Seller of
this Agreement and all other documents, instruments and agreements executed in
connection herewith, and the consummation by Seller of the transactions
contemplated hereby, does not and will not (i) constitute a violation of or
default (either immediately, upon notice or upon lapse of time) under Seller's
Certificate or Agreement of Limited Partnership, the Articles of Incorporation
or Bylaws of Seller's general partner, any provision of any Contract to which
Seller or Seller's Assets may be bound, any Judgment or any Law; or (ii) result
in the creation or imposition of any Encumbrance upon, or give to any third
person any interest in or right to, any of the Purchased Assets.
3.4 Purchased Assets. Seller has good and marketable title to all the
Purchased Assets free and clear of all Encumbrances and there exists no
restriction on the transfer or use of the Purchased Assets. Upon the execution
hereof, legal and beneficial ownership of the Purchased Assets will be
transferred to Buyers free and clear of all Encumbrances.
3.5 Taxes. Except as set forth on Exhibit B, all Taxes due, owing and
payable, or which may be due, owing and payable by the Seller have been fully
paid. No claim for any Tax due from or assessed against the Seller is being
contested. None of the Seller's Tax returns or reports have been audited by the
Internal Revenue Service or any state or local Tax authority, and the Seller has
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not received any notice of deficiency or other adjustment from the Internal
Revenue Service or any state or local Tax authority. There are no agreements,
waivers, or other arrangements providing an extension of time with respect to
the assessment of any Tax against the Seller, nor are there any Tax Proceedings
now pending or threatened against the Seller. The Seller has made all deposits
required by Law, to be made with respect to employees' withholding and other
employment taxes. No state of facts exists or has existed, nor has any event
occurred, which would constitute grounds for the assessment of any further Tax
against the Seller.
3.6 Permits. Seller has obtained and presently hold all Permits which are
required under applicable Law to conduct the Business as and where currently
conducted. All such Permits are presently in effect, are included in the
Purchased Assets and are transferable to the Buyer, and no consent, approval or
authorization of any governmental or regulatory authority or person or entity is
required in connection with the transfer of any such Permit in connection with
the transactions contemplated by this Agreement. Seller is not in default under,
nor has it received any notice of any claim of default or any other notice with
respect to, any such Permit.
3.7 Intangibles. Seller does not infringe upon or unlawfully or wrongfully
uses any Intangible owned or claimed by any other person or entity. No present
or former employee of the Seller or any other person or entity owns or has any
proprietary, financial or other interest, direct or indirect, in whole or in
part, in any Intangible which the Seller owns, possesses or uses in the
Business. Seller is not a party to a noncompetition, confidentiality or
nondisclosure agreement, nor is any employee of the Seller a party to any such
agreement that relates to or could have material adverse effect on the Business.
3.8 Proceedings. Seller is not a party to, the subject of, or threatened
with any Proceeding nor, to the best of the Seller's knowledge, is there any
basis for any Proceeding. Seller is not contemplating the institution of any
Proceeding.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby makes the following representations and warranties to Seller,
each of which is true and correct on the date hereof:
4.1 Existence and Qualification. Buyer is a corporation duly organized,
validly existing and in good standing under the Laws of the State of Florida.
Buyer has the power and authority to own and use its properties and to transact
the business in which it is engaged, holds all franchises, licenses and permits
necessary and required therefor and is not required to be licensed or qualified
to do business in any other jurisdiction.
4.2 Authority and Approval of Agreement by Buyer.
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(a) The execution and delivery of this Agreement by Buyer and the
performance of all Obligations of Buyer hereunder and thereunder have been duly
authorized and approved by Buyer pursuant to all applicable Laws. Buyer has full
power and authority to enter into this Agreement and to perform its Obligations
hereunder and thereunder.
(b) This Agreement and each of the other documents, instruments and
agreements executed by Buyer in connection herewith constitutes the valid and
legally binding agreements of Buyer, enforceable against Buyer in accordance
with its terms.
4.3 No Violations. The execution, delivery and performance by Buyer of
this Agreement, the Note and all other documents, instruments and agreements
executed in connection herewith and therewith, and the consummation by Buyer of
the transactions contemplated hereby or thereby, does not and will not (i)
constitute a violation of or default (either immediately, upon notice or upon
lapse of time) under Buyer's Articles of Incorporation or By-laws, any provision
of any Contract to which Buyer may be bound, any Judgment or any Law; or (ii)
result in the creation or imposition of any Encumbrance upon, or give to any
third person any interest in or right to, any of the Purchased Assets.
ARTICLE V
DEFINED TERMS
All defined terms used in this Agreement and not specifically defined in
context are as defined in this Article V.
5.1 "Asset" means any real, personal, mixed, tangible or intangible
property of any nature whatsoever, including, without limitation, Equipment,
accounts receivable, inventory, permits, intangibles and Contract rights.
5.2 "Contract" means any written or oral contract, agreement, order or
commitment of any nature whatsoever, including, without limitation, any sales
order, purchase order, lease, sublease, license agreement, sublicense agreement,
loan agreement, security agreement, guarantee, management contract, employment
agreement, consulting agreement, partnership agreement, buy-sell agreement,
option, warrant, subscription, call or put.
5.3 "Encumbrance" means any lien, security interest, pledge, mortgage,
easement, leasehold, assessment, covenant, restriction, reservation, conditional
sale, prior assignment, or any other encumbrance, claim, burden or charge of any
nature whatsoever.
5.4 "Equipment" means any equipment, machinery, fixtures, furniture,
leasehold improvements, vehicles, office equipment, office supplies or other
tangible personal property of any nature whatsoever.
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5.5 "Intangible" means any name, corporate name, partnership name,
fictitious name, trademark, trademark application, trade name, brand name,
slogan, trade secret, know-how, patent, patent application, copyright, copyright
application, design, formula, invention, blueprint, product right, software
right, license, franchise, authorization or any other intangible property of any
nature whatsoever.
5.6 "Judgment" means any order, writ, injunction, fine, citation, award,
decree, or any other judgment of any nature whatsoever of any foreign, federal,
state or local court, any governmental, administrative or regulatory authority,
or any arbitration tribunal.
5.7 "Law" means any provision of any law, statute, ordinance,
constitution, charter, treaty, rule or regulation of any foreign, federal, state
or local governmental, administrative or regulatory authority.
5.8 "Obligation" means any debt, liability or obligation of any nature
whatsoever, whether secured, unsecured, recourse, nonrecourse, liquidated,
unliquidated, accrued, absolute, fixed, contingent, ascertained, unascertained,
known, unknown obligations under executory Contracts.
5.9 "Permit" means any license, permit, approval, waiver, order,
authorization, right or privilege of any nature whatsoever, granted, issued,
approved or allowed by any foreign, federal, state or local governmental,
administrative or regulatory authority.
5.10 "Proceeding" means any demand, claim, suit, action, litigation,
investigation, study, arbitration, administrative hearing, or any other
proceeding of any nature whatsoever.
5.11 "Tax" means (a) any foreign, federal, state or local income, profits,
gross receipts, franchise, sales, use, occupancy, general property, real
property, personal property, intangible property, transfer, fuel, excise,
accumulated earnings, personal holding company, unemployment compensation,
social security, withholding taxes, payroll taxes, or any other tax of any
nature whatsoever, (b) any foreign, federal, state or local organization fee,
qualification fee, annual report fee, filing fee, occupation fee, assessment,
rent, or any other fee or charge of any nature whatsoever, or (c) any
deficiency, interest or penalty imposed with respect to any of the foregoing.
ARTICLE VI
MISCELLANEOUS
6.1 Notices. All notices required or allowed by this Agreement shall be
sent by certified or registered mail, return receipt requested, postage prepaid,
or by prepaid overnight courier (e.g., Federal Express) or by personal delivery
with receipt acknowledged in writing addressed to the party or person to whom
such notice is to be given at the following addresses or by fax transmission at
the following fax numbers. Notice given by certified or registered mail as
aforesaid shall be effective on the second business day after mailing of same;
notices given by overnight courier shall be effective on the next business day
following same being deposited with the overnight courier in time for such
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next day delivery; notices given by personal delivery with receipt acknowledged
in writing shall be effective when received; notices given by fax transmission
which is completed later than 4:00 p.m. on a business day shall be given at
10:00 a.m. on the next following business day:
(a) If to Seller:
Fenco Tool & Die, Ltd.
3695 Interstate Parkway #2
Riviera Beach, Florida 33404
Attention: President
(b) If to Buyer:
Hirel Technologies, Inc.
650 S.W. 16th Terrace
Pompano Beach, Florida 33069
Attention: President
All notices sent in any other manner shall be deemed given when actually
received by the party to whom the same is directed. A notice may be given either
by a party or such party's attorney-at-law. Any party may change the address or
fax numbers to which notices are being sent or the person to receive notices by
giving notice of such change in accordance with the foregoing provisions.
6.2 Entire Agreement. This Agreement, including the Exhibits attached
hereto and the documents delivered pursuant hereto, sets forth all the promises,
covenants, agreements, conditions and understandings between the parties hereto,
and supersedes all prior and contemporaneous agreements, understandings,
inducements or conditions, expressed or implied, oral or written, except as
herein contained. No changes of or modifications or additions to this Agreement
shall be valid unless the same shall be in writing and signed by the parties
hereto.
6.3 Binding Effect; Assignment. This Agreement shall be binding upon the
parties hereto, their beneficiaries, heirs and administrators. No party may
assign or transfer its interests herein, or delegate its duties hereunder,
without the written consent of the other party.
6.4 No Waiver. No waiver of any provision of this Agreement shall be
effective, unless it is in writing and signed by the party against whom it is
asserted, and any such written waiver shall only be applicable to the specific
instance to which it relates and shall not be deemed to be a continuing or
future waiver.
6.5 Gender and Use of Singular and Plural. All pronouns shall be deemed to
refer to the masculine, feminine, neuter, singular or plural, as the identity of
the party or parties or their personal representatives, successors and assigns
may require.
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6.6 Counterparts. This Agreement and any amendments may be executed in one
or more counterparts, each of which shall be deemed an original and all of which
together will constitute one and the same instrument.
6.7 Headings. The article and section headings contained in this Agreement
are inserted for convenience only and shall not affect in any way the meaning or
interpretation of the Agreement.
6.8 Governing Law. This Agreement shall be construed in accordance with
the Laws of the State of Florida and any proceeding arising between the parties
in any manner pertaining or related to this Agreement shall, to the extent
permitted by law, be held in Broward County, Florida.
6.9 Further Assurances. The parties hereto will execute and deliver such
further instruments and do such further acts and things as may be reasonably
required to carry out the intent and purposes of this Agreement.
6.10 Litigation. If any party hereto is required to engage in litigation
against any other party hereto, either as plaintiff or as defendant, in order to
enforce or defend any of its or his rights under this Agreement, and such
litigation results in a final judgment in favor of such party ("Prevailing
Party"), then the party or parties against whom said final judgment is obtained
shall reimburse the Prevailing Party for all direct, indirect or incidental
expenses incurred by the Prevailing Party in so enforcing or defending its or
his rights hereunder, including, but not limited to, all attorneys' fees,
paralegals' fees and all sales tax thereon, and all court costs and other
expenses incurred throughout all negotiations, trials or appeals undertaken in
order to enforce the Prevailing Party's rights hereunder.
THIS SPACE INTENTIONALLY BLANK
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date and year set forth above.
WITNESS: SELLER:
FENCO TOOL & DIE, LTD., a Florida limited
partnership
By: F & M INVESTMENTS, INC., its general
partner
By:
Name:
Title:
BUYER:
HIREL TECHNOLOGIES, INC., a Florida
corporation
By:
Name:
Title:
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EXHIBIT A
BILL OF SALE
Know All Men By These Presents,
That, FENCO TOOL & DIE, LTD., a limited partnership organized and existing
under and by virtue of the laws of the State of Florida, having its principal
place of business in the City of Riviera Beach and the County of Palm Beach in
the State of Florida, of the first part, for and in consideration of the sum of
Ten Dollars ($10.00), in lawful money (and other goods and valuable
consideration unto it moving) to it paid by HIREL TECHNOLOGIES, INC., a
corporation organized and existing under and by virtue of the law of the State
of Florida, of the second part, the receipt of which is hereby acknowledged, has
granted, bargained, sold, transferred and delivered, and by these presents does
grant, bargain, sell, transfer, set over and deliver unto the party of the
second part, sells and assigns, all those certain goods and chattels, described
as follows:
All properties and assets of party of the first part and its business as a
going concern, and all Purchased Assets as described in that certain Asset
Purchase Agreement dated as of ___________, 1997 between party of the
first and party of the second part, and further including, but not limited
to, the Assets described on Exhibit 1 hereto
To Have and to Hold, the same unto the parties of the second part, and
assigns forever.
In Witness Whereof, the party of the first part has caused its corporate
name to be hereunto subscribed and its corporate seal to be affixed by its
officers hereunto duly authorized, this ___ day of _________________, 1997.
Signed, sealed and delivered in the presence of:
FENCO TOOL & DIE, LTD., a Florida limited
partnership
By: F & M INVESTMENTS, INC., its general
partner
By:
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STATE OF FLORIDA )
) SS:
COUNTY OF BROWARD )
I HEREBY CERTIFY that on this day, before me, an officer duly authorized
in the State aforesaid and in the County aforesaid to take acknowledgments, the
foregoing instrument was acknowledged before me by
_______________________________________________, _________________ of F & M
INVESTMENTS, INC., the general partner of FENCO TOOL & DIE, LTD., a Florida
limited partnership, who is personally known to me or who has produced
_______________________ as identification.
WITNESS my hand and official seal in the County and State last aforesaid
this ____ day of __________________, 1997.
Notary Public, State of Florida at Large
Typed, printed or stamped name of Notary Public
My Commission Expires:
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EXHIBIT 1
List of Assets
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EXHIBIT B
ASSUMED LIABILITIES
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EXHIBIT 10.16
OPTION AGREEMENT
THIS OPTION AGREEMENT ("Agreement") is made and entered into as of the
21st day of March, 1997, by and between HIREL MARKETING, INC., a Florida
corporation ("HMI") and GROUP 32 CORPORATION, a Florida corporation ("Group
32"), with the joinder of EDWARD T. TOLSON and VINCENT SCHUBERT, shareholders in
Group 32 ("Group 32 Shareholders").
W I T N E S S E T H:
WHEREAS, Hirel Holdings, Inc., the parent corporation of HMI ("HHI"), has
previously loaned to Group 32 the sum of Two Hundred Thousand Dollars ($200,000)
("Loan"); and
WHEREAS, in consideration for HHI making the Loan, Group 32 has agreed
that HMI shall have the option, on the terms and conditions set forth herein, to
cause the conveyance of substantially all of the assets of Group 32 to HMI or a
direct or indirect subsidiary of HHI provided that such subsidiary is the
successor to all of the business operations of the computer distribution
division of HMI currently known as "Mac-In-Stock."
NOW, THEREFORE, in consideration of Ten Dollars ($10.00) and other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto, intending to be legally bound, hereby agree as
follows:
1. Recitals; Defined Terms. The foregoing recitals are true and
correct and are hereby incorporated by this reference. Except as otherwise
defined herein, all defined terms shall have the meaning set forth in the
Agreement and Plan of Reorganization ("Plan").
2. Option. As additional consideration for HHI making the Loan, Group 32
hereby grants HMI the option ("Option") to require the reorganization of Group
32 with and into HMI or a direct or indirect subsidiary of HHI
("Reorganization") on substantially the terms and conditions of the Agreement
and Plan of Reorganization attached hereto and made a part hereof as Exhibit A.
The Option shall be exercised by HMI at any time prior to June 1, 1998, by HMI
delivering written notice of such exercise to Group 32 and the Shareholders;
provided that Group 32 and the Shareholders shall not be obligated to consummate
the Reorganization in the event there has been a material adverse change in the
financial condition of the Mac-In-Stock division of HMI as of such date when
compared to the date of this Agreement. Any loans from Hirel Holdings, Inc. to
Group 32 shall be assumed by HMI in connection with the Reorganization. Upon the
consummation of the Reorganization, Edward Tolson shall enter into an employment
agreement with HMI to become the chief executive officer of HMI at a
compensation rate of $150,000 per annum plus a bonus equal to five percent (5%)
of HMI's audited pre-tax net income for the applicable year.
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3. Adjustment of HMI Shares to Group 32 Shareholders.
(a) The Agreement and Plan of Reorganization contemplates the
issuance to Group 32 of 1,000,000 shares of common stock of HMI in connection
with the Reorganization. The parties agree that the number of shares of HMI
stock to be issued to pursuant to the Reorganization were calculated based upon
the premise that the total number of issued and outstanding shares of HMI Common
Stock immediately prior to the Reorganization would be not greater than 933,000,
and the number of shares of HMI Voting Preferred Stock would be not greater than
the sum of 2,000,000 shares of "Class A Preferred Stock" (as hereinafter
defined), plus an additional number of shares of Class A Preferred Stock equal
to the total amount invested by HHI in HMI from and after this date. For
purposes of calculating the number of shares of Class A Preferred Stock to be
issued to HHI for amounts invested after the date hereof, additional shares
shall be issued at the rate of one share for each dollar invested unless the
source of such funds were from the proceeds of a private placement by HHI of its
common stock at a price discounted from its then current "Fair Market Value" (as
hereinafter defined). In the event the source of such funds was from such a
private placement, then the number of shares of Class A Preferred Stock to be
issued to HHI shall be based upon the product of the number of shares of HHI
common stock sold to fund the investment in HMI, multiplied by the then current
Fair Market Value of the common stock of HHI (notwithstanding that the actual
price at which the HHI common stock was sold may be less than the then Fair
Market Value of such shares as quoted on the NASDAQ Small Cap Market). In the
event that the number of shares of HMI Common Stock issued and outstanding
immediately prior to the Reorganization shall be greater or lesser than 933,000,
the number of shares of HMI stock to be issued to Group 32 shall be adjusted
upward or downward on a pro rata basis.
For purposes of this Agreement, "Fair Market Value" means as to any
security the average of the closing prices of such security's sales on all
domestic securities exchanges on which such security may at the time be listed,
or, if there have been no sales on any such exchange on any day, the average of
the highest bid and lowest asked prices on all such exchanges at the end of such
day, or, if on any day such security is not so listed, the average of the
representative bid and asked prices quoted in the NASDAQ System as of 4:00 P.M.,
New York time, on such day, or, if on any day such security is not quoted in the
NASDAQ System, the average of the highest bid and lowest asked prices on such
day in the domestic over-the-counter market as reported by the National
Quotation Bureau, Incorporated, or any similar successor organization, in each
such case averaged over a period of 21 days consisting of the day as of which
"Fair Market Value" is being determined and the 20 consecutive business days
prior to such day; provided that if such security is listed on any domestic
securities exchange the term "business days" as used in this sentence means
business days on which such exchange is open for trading.
(b) The "Class A Preferred Stock" shall mean voting stock having a
redemption value of one dollar per share bearing a cumulative dividend of 10%
per annum that may be redeemed at any time (in whole but not in part) for its
redemption value plus any accrued and unpaid dividends with respect thereto,
that is convertible into shares of HMI Common Stock, at the option of the
holders thereof, at the conversion rate specified below if (i) the Class A
Preferred Stock is not
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redeemed prior to December 31, 1998, and (ii) the pre-tax net earnings of the
computer software division of HMI that was previously conducted as the business
of Group 32 ("Group 32 Division") for the fiscal year ended December 31, 1998 is
not at least $1,000,000 (after the payment of any amounts owed to Edward Tolson
under his employment agreement with HMI). As a condition precedent for HMI to
redeem the Class A Preferred Stock, (i) Vincent Montelione must be released from
any guarantees of the obligations of HMI and (ii) any loans made by HHI to Group
32 prior to the date of exercise of the Option must have been repaid in full.
The Class A Preferred Stock shall be convertible into shares of HMI Common Stock
based upon the following conversion rate formula: (i) if the pre-tax net
earnings of the Group 32 Division for the fiscal year ended December 31, 1998
are less than $500,000, each share of Class A Preferred Stock shall be
convertible into four shares of HMI Common Stock and (ii) if the pre-tax net
earnings of the Group 32 Division for the fiscal year ended December 31, 1998
are greater than $500,000, for each increment of $100,000 in excess of $500,000
of pre-tax net earnings of the Group 32 Division in such period, the conversion
rate shall decrease by 20% on a dollar for dollar proportionate basis based upon
a conversion rate of two shares of HMI Common Stock for each share of Class A
Preferred Stock if such pre-tax net earnings are exactly $500,000. For example,
if the pre-tax net earnings are $600,000, each share of Class A Preferred Stock
shall be convertible into 1.6 shares of HMI Common Stock if the pre-tax net
earnings are $750,000, each share of Class A Preferred Stock shall be
convertible into 1 share of HMI Common Stock, and if the pre-tax net earnings
are $900,000, each share of Class A Preferred Stock shall be convertible into .4
shares of HMI Common Stock. If the pre-tax earnings are between the foregoing
intervals, the conversion ratio shall be interpolated based upon the foregoing.
In the event that the Class A Preferred Stock is not redeemed by HMI on or
before July 1, 1999, the holders of the Class A Preferred Stock shall have the
right ("Put Right") to require HMI to purchase such shares by providing HMI with
written notice of their exercise of such Put Right at a cash price per share
equal to the redemption value of such shares plus any accrued and unpaid
dividends. HMI shall be obligated to repurchase the shares of Class A Preferred
Stock for which the Put Right is exercised within one hundred twenty (120) days
of the exercise of the Put Right.
4. Approval of Agreement and Plan.
(a) Group 32 hereby makes the following representations and
warranties to HMI, each of which Group 32 represents to be true and correct on
the date hereof and (except as Group 32 may notify the President of HMI in
writing prior to the Closing) shall be deemed made again as of the Closing Date
and represented by Group 32 to be true and correct on the Closing Date:
(i) The execution and delivery of this Agreement and the Plan
by Group 32 and the performance of all Group 32's obligations hereunder and
under the Plan have been duly authorized and approved by all requisite corporate
action on the part of Group 32 pursuant to applicable Law. Group 32 has the
power and authority to execute and deliver this Agreement and to perform all its
obligations hereunder and under the Plan. This Agreement and each of the other
documents, instruments and agreements executed by Group 32 in connection
herewith constitute the valid and legally binding agreements of Group 32,
enforceable against Group 32 in accordance with its terms, except that: (i)
enforceability may be limited by applicable bankruptcy, insolvency,
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reorganization, moratorium or similar laws of general application affecting the
enforcement of the rights and remedies of creditors; and (ii) the availability
of equitable remedies may be limited by equitable principles.
(ii) Neither the execution, delivery nor performance of this
Agreement or any other documents, instruments or agreements executed by Group 32
in connection herewith, nor the consummation of the transactions contemplated
hereby: (i) constitutes a violation of or default under (either immediately,
upon notice or upon lapse of time) the Articles of Incorporation or Bylaws of
Group 32, any provision of any Contract to which Group 32 or its Assets may be
bound, any Judgment or any Law; or (ii) will or could result in the creation or
imposition of any Encumbrance upon, or give to any third person any interest in
or right to, the capital stock of Group 32 or any of the Assets of Group 32; or
(iii) will or could result in the loss or adverse modification of, or the
imposition of any fine or penalty with respect to, any license, permit or
franchise granted or issued to, or otherwise held by or for the use of, Group
32.
(iii) The execution, delivery and performance by Group 32 of
this Agreement and the consummation by Group 32 of the transactions contemplated
hereby, including the adoption of the Plan, do not require any Consent that has
not been received prior to the date hereof.
(b) HMI hereby makes the following representations and warranties to
Group 32, each of which HMI represents to be true and correct on the date hereof
and (except as HMI may notify Group 32 in writing prior to the Closing) shall be
deemed made again as of the Closing Date and represented by HMI to be true and
correct on the Closing Date:
(i) The execution and delivery of this Agreement and the Plan
by HMI and the performance of all HMI's obligations hereunder and under the Plan
have been duly authorized and approved by all requisite corporate action on the
part of HMI pursuant to applicable Law. HMI has the power and authority to
execute and deliver this Agreement and to perform all its obligations hereunder.
This Agreement and each of the other documents, instruments and agreements
executed by HMI in connection herewith constitute the valid and legally binding
agreements of HMI, enforceable against HMI in accordance with their terms,
except that: (i) enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws of general application
affecting the enforcement of the rights and remedies of creditors; and (ii) the
availability of equitable remedies may be limited by equitable principles.
(ii) Neither the execution, delivery nor performance of this
Agreement or any other documents, instruments or agreements executed by HMI
executed in connection herewith, nor the consummation of the transactions
contemplated hereby: (i) constitutes a violation of or default under (either
immediately, upon notice or upon lapse of time) the Articles of Incorporation or
Bylaws of HMI, any provision of any Contract to which HMI or its Assets may be
bound, any Judgment to which HMI is bound or any Law applicable to HMI; or (ii)
result in the creation or imposition of any Encumbrance upon, or give to any
third person any interest in or right to, any other
4
<PAGE>
capital stock of HMI or any of the Assets of HMI; or (iii) result in the loss or
adverse modification of, or the imposition of any fine or penalty with respect
to, any license, permit or franchise granted or issued to, or otherwise held by
or for the use of, HMI.
(iii) The execution, delivery and performance by HMI of this
Agreement and the consummation by HMI of the transactions contemplated hereby do
not require any Consent that has not been received prior to the date hereof.
5. Termination and Remedies.
(a) If, prior to the Closing Date, a party hereto shall materially
breach or default in the full and timely performance and satisfaction of any of
its representations and warranties or obligations under this Agreement, and such
breach or default is not cured on or before the fifth (5th) day after the date
notice is given by the nondefaulting party to the defaulting party specifying
the nature of such breach or default (or on or before the Closing Date if
sooner), then the nondefaulting party may terminate this Agreement immediately
upon notice to the defaulting party.
(b) Group 32's Obligations under this Agreement are unique, and each
party hereby expressly acknowledges that, in the event of a breach or default in
the full and timely performance and satisfaction of any such obligation, it
would be extremely difficult to measure the resulting damages. Accordingly, in
the event of any breach or default by Group 32, then HMI shall be entitled, in
addition to all other rights and remedies which it may have at law or in equity,
to sue for and receive the remedy of specific performance, and Group 32 waives
the defense that a remedy in damages is adequate.
6. Indemnification.
(a) In addition to, and not in lieu of, any right or remedy
available to HMI at law or in equity (which, in the case of Group 32's material
breach of this Agreement shall be deemed to include rescission), Group 32 hereby
indemnifies and holds harmless HMI and its officers and directors from and
against any and all Proceedings, Judgments, Obligations, losses, damages,
deficiencies, settlements, assessments, charges, costs and expenses (including
without limitation reasonable attorneys' fees, paralegals' fees, investigation
expenses, court costs, interest and penalties) arising out of or in connection
with, or caused by, directly or indirectly, any or all of the following
("Indemnified Matter"):
(i) Any misrepresentation, breach or failure of any warranty
or representation made by Group 32 in this Agreement or pursuant hereto;
(ii) Any failure or refusal by Group 32 to satisfy or perform
any covenant or agreement; and
5
<PAGE>
(iii) Any failure by Group 32 to duly and timely file with the
appropriate governmental agencies all Tax and other returns and reports required
by any Law to be filed by it, and Group 32's failure to prepare and properly
complete all such returns and reports.
(b) With respect to each separate matter or series of matters
against which a party ("Indemnitee") is indemnified under this Section 6:
(i) Upon Indemnitee's receipt of written documents pertaining
to the Proceeding or otherwise underlying such matter or series of matters, or,
if such matter or series of matters does not involve a third party claim, after
Indemnitee first learns of such matter or series of matters and the amount
demanded or claimed in connection therewith, Indemnitee shall give written
notice to Group 32 of and copies of such documents and information as it shall
have so received.
(ii) After a final agreement is reached or a final Judgment is
rendered with respect to such matter or series of matters or the amount owing by
Group 32 pursuant to this Article XI as a result of such matter or series of
matters, is otherwise determinable in whole or in part, Indemnitee shall give
notice to Group 32 of the amount owing by Group 32 ("Indemnification Amount")
with respect to such matter or series of matters ("Indemnification Payment
Notice").
(iii) Group 32 shall pay the Indemnification Amount to
Indemnitee (or to such Person as Indemnitee instructs) within ten (10) days
after the Indemnification Payment Notice was given.
7. Additional Loans. Any funds advanced by HMI to Group 32 between the
date of this Agreement and the date on which there is a closing under the Plan
of Reorganization shall be made on the same terms and conditions as the Loans,
including being secured under the terms of that certain Security Agreement dated
February 19, 1997, between Group 32 Corporation and HG32 Incorporated (whose
interest in such Security Agreement has been transferred to HMI).
8. Miscellaneous.
(a) Notices. All notices, requests, demands and other communications
hereunder shall be deemed to have been duly given if the same shall be in
writing and shall be delivered personally or sent by registered or certified
mail, postage prepaid, and addressed as set forth below:
If to Group 32: Group 32 Corporation
6950 Cypress Road, Top Floor
Plantation, Florida 33317
With a copy to:
6
<PAGE>
If to HMI: Hirel Marketing, Inc.
650 S.W. 16th Terrace
Pompano Beach, Florida 33069
Attn: Michael Duggan, President
With a copy to: Ruden, McClosky, Smith, Schuster & Russell, P.A.
200 East Broward Boulevard
15th Floor
Ft. Lauderdale, Florida 33301
Attn: Thomas O. Katz, Esq.
(b) Entire Agreement. This Agreement, including the Exhibits and
Schedules attached hereto and the documents delivered pursuant hereto, sets
forth all the promises, covenants, agreements, conditions and understandings
between the parties hereto with respect to the subject matter hereof, and
supersedes all prior and contemporaneous agreements, understandings, inducements
or conditions, expressed or implied, oral or written, except as herein
contained. No changes of or modifications or additions to this Agreement shall
be valid unless the same shall be in writing and signed by the parties hereto.
(c) Binding Effect; Assignment. This Agreement shall be binding upon
the parties hereto, their beneficiaries, heirs and administrators. No party may
assign or transfer its interests herein, or delegate its duties hereunder,
without the written consent of the other parties.
(d) Amendment. The parties hereby irrevocably agree that no
attempted amendment, modification, or change (collectively, "Amendment") of this
Agreement shall be valid and effective, unless the parties shall unanimously
agree in writing to such Amendment.
(e) No Waiver. No waiver of any provision of this Agreement shall be
effective, unless it is in writing and signed by the party against whom it is
asserted, and any such written waiver shall only be applicable to the specific
instance to which it relates and shall not be deemed to be a continuing or
future waiver.
(f) Gender and Use of Singular and Plural. All pronouns shall be
deemed to refer to the masculine, feminine, neuter, singular or plural, as the
identity of the party or parties or their personal representatives, successors
and assigns may require.
(g) Counterparts. This Agreement and any amendments may be executed
in one or more counterparts, each of which shall be deemed an original and all
of which together will constitute one and the same instrument.
7
<PAGE>
(h) Headings. The article and section headings contained in this
Agreement are inserted for convenience only and shall not affect in any way the
meaning or interpretation of the Agreement.
(i) Governing Law. This Agreement shall be construed in accordance
with the laws of the State of Florida and any proceeding arising between the
parties in any manner pertaining or related to this Agreement shall, to the
extent permitted by law, be held in Broward County, Florida.
(j) Further Assurances. The parties hereto will execute and deliver
such further instruments and do such further acts and things as may be
reasonably required to carry out the intent and purposes of this Agreement.
(k) Arbitration.
(i) The parties hereto agree that the arbitration procedure
set forth below shall be the sole and exclusive method for resolving and
remedying claims hereunder (the "Disputes"). Nothing in this Section 8(k) shall
prohibit a party hereto from instituting litigation to enforce any Final
Determination (as defined below). The parties hereby agree and acknowledge that,
except as otherwise provided in this Section 8(k), the arbitration procedures
and any Final Determination hereunder shall be governed by, and shall be
enforced pursuant to the Florida Arbitration Code.
(ii) In the event that any party asserts that there exists a
Dispute, such party shall deliver a written notice to each other party involved
therein specifying the nature of the asserted Dispute and requesting a meeting
to attempt to resolve the same. If no such resolution is reached within ten
business days after delivery of such notice, the party delivering such notice
(the "Disputing Person") may, within 45 business days after delivery of such
notice, commence arbitration hereunder by commencing arbitration proceedings
under the Commercial Arbitration Rules of the American Arbitration Association
and delivering to each other party involved therein a notice of arbitration (a
"Notice of Arbitration"). Such Notice of Arbitration shall specify the matters
as to which arbitration is sought, the nature of any Dispute, the claims of each
party to the arbitration and shall specify the amount and nature of damages, if
any, sought to be recovered as a result of any alleged claim, and any other
matters required by the Commercial Arbitration Rules of the American Arbitration
Association as in effect from time to time to be included therein.
(iii) The arbitrator(s) will be selected in accordance with
the Commercial Arbitration Rules of the American Arbitration Association. Each
party shall submit a proposed arbitration award (including proposed findings of
fact) within fifteen (15) days of the conclusion of the arbitration hearing. The
arbitrator shall select one of the proposed arbitration awards (including
proposed findings of fact) in its entirety and both parties shall be bound by
its terms. The cost of the arbitration will be divided equally between each
party.
8
<PAGE>
(iv) The arbitration shall be conducted under the Commercial
Arbitration Rules of the American Arbitration Association as in effect from time
to time, except as modified by the agreement of all of the parties to this
Agreement. The arbitrator(s) shall use their best efforts to conduct the
arbitration so that a final result, determination, finding, judgment and/or
award (the "Final Determination") is made or rendered no later than ninety (90)
business days after the delivery of the Notice of Arbitration nor later than
twenty (20) days following conclusion of the arbitration hearing. The Final
Determination must be signed by the arbitrator. The Final Determination shall be
final and binding on all parties and there shall be no appeal from or
reexamination of the Final Determination, except for fraud, perjury, evident
partiality or misconduct by an arbitrator prejudicing the rights of any party
and to correct manifest clerical errors.
(v) The parties to such arbitration may enforce any Final
Determination in any state or federal court having jurisdiction over the
dispute.
(l) Litigation. If any party hereto is required to engage in
litigation or arbitration against any other party hereto, either as plaintiff or
as defendant, in order to enforce or defend any of its or his rights under this
Agreement, and such litigation results in a final judgment in favor of such
party ("Prevailing Party"), then the party or parties against whom said final
judgment is obtained shall reimburse the Prevailing Party for all direct,
indirect or incidental expenses incurred by the Prevailing Party in so enforcing
or defending its or his rights hereunder, including, but not limited to, all
attorneys' fees, paralegals' fees and all sales tax thereon, and all court costs
and other expenses incurred throughout all negotiations, trials or appeals
undertaken in order to enforce the Prevailing Party's rights hereunder.
(m) Remedies. Each of the parties acknowledges and agrees that in
the event that a party hereto shall violate any of the restrictions or fail to
perform any of the obligations hereunder, the other parties will be without
adequate remedy at law and will therefore be entitled to enforce such
restrictions or obligations by temporary or permanent injunctive or mandatory
relief obtained in an action or proceeding instituted in any court of competent
jurisdiction without the necessity of proving damages and without prejudice to
any other remedies it may have at law or in equity.
(n) Confidentiality. Except for discussions of the transactions
contemplated by this Agreement among the parties hereto and their respective
representatives and counsel participating in this transaction, each party hereto
shall, unless all other parties hereto shall otherwise agree, keep confidential
and not, directly or indirectly, disclose to any person the existence of this
Agreement, the transaction contemplated by this Agreement or any of the terms
thereof, or the fact that HMI and Group 32 have entered into discussions or
negotiations for any purpose whatsoever, and each party hereto shall use its
good faith efforts to cause its employees, agents, officers, directors and
representatives to abide by the foregoing restrictions on disclosure.
THIS SPACE INTENTIONALLY BLANK
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date and year set forth above.
GROUP 32 CORPORATION
____________________________ By:________________________________
- ----------------------------
HIREL MARKETING, INC.
____________________________ By:________________________________
- ----------------------------
10
<PAGE>
JOINDER
The undersigned, as shareholders of Group 32, hereby join in the foregoing
Agreement for the purpose of representing and warrantying to HMI the following:
(a) Each of the Shareholders has reviewed the Plan, and by the
execution of this Joinder to the Agreement each of the Shareholders hereby
approves the Plan, and waives any of the procedural requirements set forth in
Section 607.1202, Florida Statutes;
(b) The Shareholders agree to execute and deliver such further
instruments and do such further acts and things as may be reasonably required to
carry out the intent and purposes of this Agreement in their capacity as
directors, officers and shareholders of Group 32, including, but not limited to,
executing any consents in lieu of a directors' and/or shareholders' meeting. The
Shareholders each hereby appoint HMI, with full power of substitution, each of
their true and lawful proxy, in the name, place and stead of each such
Shareholder, with the power from time to time to execute, acknowledge, make,
swear to, verify, deliver, record, publish and/or file any shareholder consents
required of the Shareholders pursuant to applicable law to carry out the intent
of this Agreement or the Plan, including, but not limited to, Section 607.1202,
Florida Statutes. The foregoing grant of authority is an Irrevocable Proxy
coupled with an interest in favor of HMI and shall be irrevocable unless and
until this Agreement or the Plan is terminated.
(c) Tolson agrees that upon the consummation of the Reorganization
he will enter into an employment agreement with HMI on the compensation terms
described in Section 2 of this Agreement and in accordance with the form of
Employment Agreement attached as an exhibit to the Plan of Reorganization.
EDWARD T. TOLSON
VINCENT SCHUBERT
11
PLAN OF REORGANIZATION
by and between
GROUP 32 CORPORATION
and
HIREL MARKETING, INC.
______________, 1997
<PAGE>
TABLE OF CONTENTS
ARTICLE I
RECITALS, EXHIBITS, SCHEDULES, SUBSCRIBERS.............................1
ARTICLE II
TRANSFER OF ASSETS.....................................................1
2.1 Transfer...................................................1
2.2 Excluded Assets............................................2
2.3 Assumption of Liabilities..................................2
2.4 Issuance of Stock; Transfer of Stock by Transferor. .......2
2.5 Qualification as Reorganization............................3
ARTICLE III
TRANSFEROR'S REPRESENTATIONS AND WARRANTIES............................3
3.1 Organization...............................................3
3.2 Stock Ownership............................................3
3.3 Authority and Approval of Agreement........................4
3.4 No Violations..............................................4
3.5 Names and Addresses........................................4
3.6 Financial Statements.......................................4
3.7 Conduct Since Date of Financial Statements.................5
3.8 Title to Assets............................................6
3.9 Lease of Real Property.....................................6
3.10 Contracts..................................................6
3.11 Offers.....................................................7
3.12 Officers, Employees, Agents, etc...........................7
3.13 Labor Matters..............................................7
3.14 Environmental Matters......................................7
3.15 Obligations................................................7
3.16 Books and Records..........................................7
3.17 Taxes......................................................8
3.18 Proceedings................................................8
3.19 Other Liabilities..........................................8
3.20 Consents...................................................8
3.21 Judgments..................................................8
3.22 Minute Books...............................................8
3.23 Brokerage Fees.............................................9
3.24 Compliance with Laws.......................................9
3.25 ...........................................................9
Improper Payments................................................9
3.26 Full Disclosure............................................9
3.40 No Advertising or Representations.........................10
3.28 Investment Intent.........................................10
3.29 Reliance on Representations...............................10
ARTICLE IV
ACQUIROR'S REPRESENTATIONS AND WARRANTIES.............................10
<PAGE>
4.1 Organization..............................................10
------------
4.2 Stock Ownership...........................................11
---------------
4.3 Authority and Approval of Agreement.......................11
-----------------------------------
4.4 No Violations.............................................11
-------------
4.5 Consents..................................................11
--------
4.6 Brokerage Fees............................................12
--------------
4.7 Obligations...............................................12
-----------
ARTICLE V
INTERPRETATION AND SURVIVAL OF
REPRESENTATIONS AND WARRANTIES..................................12
5.1 Interpretation............................................12
5.2 Reliance by Acquiror......................................12
5.3 Survival..................................................12
ARTICLE VI
OBLIGATIONS PRIOR TO CLOSING..........................................12
6.1 Conduct of Transferor Pending Closing.....................12
6.2 Conduct of Acquiror Pending Closing.......................13
6.3 Investigation.............................................13
6.7 Cooperation...............................................13
ARTICLE VII
CONDITIONS PRECEDENT TO ACQUIROR'S OBLIGATIONS........................14
7.1 Representations and Warranties of the Transferor..........14
7.2 Performance of this Agreement.............................14
7.3 Absence of Proceedings....................................14
7.4 Consents..................................................14
7.5 Good Standing Certificate.................................14
7.6 Material Adverse Change...................................14
7.7 Opinion of Counsel........................................15
7.8 Failure of Conditions.....................................15
7.9 Employment Agreement......................................15
ARTICLE VII
CONDITIONS PRECEDENT TO TRANSFEROR'S OBLIGATIONS......................15
8.1 Representations and Warranties of Acquiror................15
8.2 Performance of this Agreement.............................15
8.3 Absence of Proceedings....................................15
8.4 Deliveries at Closing.....................................16
ARTICLE IX
OBLIGATIONS AT CLOSING................................................16
9.1 Obligations of Transferor to Acquiror at Closing..........16
9.2 Acquiror's Obligations to Transferor at Closing...........16
ARTICLE X
TERMINATION AND REMEDIES..............................................17
<PAGE>
10.1 Termination on Default....................................17
----------------------
10.2 Termination at Closing....................................17
----------------------
10.3 Specific Performance......................................17
--------------------
ARTICLE XI
INDEMNIFICATION.......................................................17
11.1 Obligation to Indemnify...................................17
11.2 Notices and Payments......................................18
ARTICLE XII
MISCELLANEOUS.........................................................18
12.1 Notices...................................................18
12.2 Entire Agreement..........................................19
12.3 Binding Effect; Assignment................................19
12.4 Amendment.................................................19
12.5 No Waiver.................................................19
12.6 Gender and Use of Singular and Plural.....................19
12.7 Counterparts..............................................19
12.8 Headings..................................................19
12.9 Governing Law.............................................20
12.10 Further Assurances.......................................20
12.11 Arbitration..............................................20
12.12 Litigation...............................................21
12.14 Confidentiality..........................................21
EXHIBITS
Exhibit Description
A Definitions
B Notice
C Employment Agreements
G Form of Opinion of Corporation's Counsel
<PAGE>
SCHEDULES
Schedule Description
2.1 Shareholders and Shares Held
3.1 Articles of Incorporation, Bylaws and Fictitious Name Registrations
of Corporation
3.2 List of Corporation's record shareholders and number of shares of
common stock owned by each
3.5 Names and addresses of the Corporation and each predecessor to the
business
3.6 Corporation financial statements
3.7 Conduct since date of balance sheet
3.10 List of contracts and copy of each contract
3.12 List of all officers, directors, contractors and agents of the
Corporation and compensation and all vacation and other benefits
3.17 Tax returns of the past three years
3.24 Brokerage Fees
3.26 Copies of Securities Filings
4.2 Certificate of Designations, Rights and Preferences for the
FJ Preferred Stock
8.2 Shareholders of Corporation entering into "Lock-Up" Agreements
<PAGE>
PLAN OF REORGANIZATION
THIS PLAN OF REORGANIZATION (the "Agreement") is made and entered into as
of the ____ day of ________, 1997, by and between HIREL MARKETING, INC., a
Florida corporation ("Acquiror") and GROUP 32 CORPORATION, a Florida corporation
("Transferor").
W I T N E S S E T H:
WHEREAS, the respective Boards of Directors of Acquiror and Transferor
have determined that, subject to the terms, conditions, representations and
warranties set forth herein, the transaction contemplated herein will facilitate
the obtaining of necessary financing and will serve the general welfare and
advantage of their respective businesses;
WHEREAS, subject to the terms and conditions hereinafter set forth,
Acquiror desires to acquire from Transferor and Transferor desires to transfer
to Acquiror, all the Acquired Assets (as hereinafter defined), which constitute
substantially all of the assets of Transferor, in exchange for the issuance of
the Stock (as hereinafter defined).; and
WHEREAS, the above described merger is intended to comply with the
requirements of Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as
amended, the Code Sections related thereto, the Treasury Regulations promulgated
thereunder and the interpretive rulings issued pursuant thereto.
NOW, THEREFORE, in consideration of the premises, as well as the mutual
covenants hereinafter set forth, the parties hereto, intending to be legally
bound, hereby agree as follows:
ARTICLE I
RECITALS, EXHIBITS, SCHEDULES, SUBSCRIBERS
The foregoing recitals are true and correct and, together with the
schedules and exhibits referred to hereinafter, are hereby incorporated into
this Agreement by this reference. Capitalized words used herein and not
otherwise defined in the text hereof shall have the meanings set forth in
Exhibit A hereof.
ARTICLE II
TRANSFER OF ASSETS
2.1 Transfer. In exchange for the issuance of the Stock, and the
assumption of the Assumed Liabilities, and subject to the terms and conditions
hereof, at Closing, the Transferor shall contribute, transfer, convey and
deliver to Acquiror, all the Acquired Assets, free and clear of all
Encumbrances, other than the Assumed Liabilities. The term "Acquired Assets"
shall mean all Assets
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<PAGE>
that are owned by the Transferor or used in connection with the Business,
including but not limited to the Assets identified in Schedule 2.1, excluding
only the Excluded Assets. Without limiting the generality of the foregoing, the
Acquired Assets shall include, but are not limited to, the following: (a) all
software copyrights and source code; (b) Equipment identified on Schedule 2.1;
(c) the Business as a going concern, including all Inventory on hand (wherever
located); (d) all Contracts with the Transferor's customers, agents,
contractors, and employees; (e) all Leases of Equipment identified on Schedule
2.1; (f) all Transferor's cash on hand or in bank accounts; (g) all Accounts
Receivable of the Transferor or arising from the Business; (h) all prepaid and
deferred items of Transferor including, but not limited to, prepaid rentals,
insurance, unbilled charges, and deposits relating to the operations of
Transferor; (i) all general business records of Transferor; (j) the Lease of
Real Property consisting of the premises located at _____________________,
Florida ("Premises") as described in Schedule 2.1; and (k) all of Transferor's
Intangibles identified in Schedule 2.1.
2.2 Excluded Assets. The Acquired Assets exclude, and the Acquiror
shall not purchase, the Assets of the Transferor identified on Schedule 2.2
hereof.
2.3 Assumption of Liabilities. At Closing, Acquiror shall assume the
Transferor's Obligations only to the extent expressly identified on Schedule 2.3
hereof as being assumed by Acquiror hereunder (collectively, the "Assumed
Liabilities"). Acquiror does not and will not assume, nor shall Acquiror be
responsible for, any other Obligations of the Transferor, nor, as to any Assumed
Liability, shall Acquiror be deemed to have any Obligation for, to cure, or to
otherwise remedy, any breach, default or nonpayment of any Contract or Lease
arising as a result of events occurring prior to the date hereof, or as to which
any representation or warranty made pursuant to this Agreement is untrue,
inaccurate or misleading in any respect.
2.4 Issuance of Stock; Transfer of Stock by Transferor.
(a) In exchange for the transfer of the Acquired Assets to Acquiror,
at Closing, Acquiror shall issue to the Transferor ________________
(___________) shares of Common Stock ("Stock") of Acquiror. All shares of the
Stock shall be subject to the lock-up provisions of Section 2.6 hereof. The
certificates evidencing the Stock shall bear the following legends:
The shares of common stock represented by this certificate are
subject to a lock-up agreement between the holder of this
certificate and the Company which restricts the transfer of the
common stock represented by this certificate. The lock-up agreement
is incorporated herein by reference. A copy of the lockup agreement
is available for inspection at the principal executive office of the
Company.
These shares have not been registered under the Securities Act
of 1933 or under any applicable state law. They may not be offered
for sale,
2
<PAGE>
sold, transferred or pledged without (1) registration under the
Securities Act of 1933 and any applicable state law, or (2) an
opinion of counsel (satisfactory to the Company) that such
registration is not required.
(b) Transferor hereby represents to Acquiror that the Transferor
intends, at some point following the Closing, to distribute the Stock to its
Shareholders. Notwithstanding anything contained herein to the contrary,
Acquiror shall not have any obligation to the Transferor Shareholders with
respect to the manner or timing of distributions of the Stock to such
shareholders. The Transferor Shareholders and the Group B Shareholders shall
enter into the Joinder attached hereto agreeing to be bound by the provisions of
Sections ___________ of this Agreement.
2.5 Qualification as Reorganization. The parties hereto hereby agree that
this transaction is intended to qualify as a reorganization within the meaning
of Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended ("A
Reorganization"). Each of the parties agrees that it shall report the
transaction as an A Reorganization on its respective federal income tax return,
and shall cooperate to the extent reasonably necessary to complete all
information reporting necessary in connection therewith.
ARTICLE III
TRANSFEROR'S REPRESENTATIONS AND WARRANTIES
Transferor hereby makes the following representations and warranties to
Acquiror, each of which Transferor represents to be true and correct on the date
hereof and (except as Transferor may notify the President of Acquiror in writing
prior to the Closing) shall be deemed made again as of the Closing Date and
represented by Transferor to be true and correct on the Closing Date.
3.1 Organization. Transferor is a corporation duly organized, validly
existing and in good standing under the Laws of the State of Florida and is not
required to be qualified or licensed as a foreign corporation in any other
jurisdiction. Transferor has the full power and authority to own all its Assets
and to conduct the business in which it will engage upon completion of the
transaction contemplated herein. Transferor does not have any subsidiary or
equity interest in any Person. Accurate, current and complete copies of the
Articles of Incorporation and Bylaws of Transferor, and, if any, all fictitious
name registrations of Transferor are attached hereto as Schedule 3.1.
3.2 Stock Ownership. The authorized capital stock of Transferor consists
of_________________ shares of Common Stock, _________________ shares of which
are issued and outstanding. An accurate and complete list of all Transferor's
record shareholders and the number of shares of Common Stock owned by each is
attached as part of Schedule 3.2. Transferor has provided Acquiror with a copy
of its stock transfer records ("Stock Records"). The Stock Records completely
and accurately reflect the issuance of Transferor's capital stock from the date
of its incorporation through the date as of which this representation is made.
3
<PAGE>
All the issued and outstanding shares of capital stock of Transferor are
duly authorized, validly issued, fully paid and nonassessable, and all Taxes
related to the issuance or transfer of such shares have been timely paid.
There are no Stock Issuance Agreements (other than subscription agreements
accepted in the Private Offering) to which Transferor is a party or by which it
may be bound. There have been no violations of the preemptive rights, if any, of
any shareholders of Transferor. No shares of capital stock are held in treasury
by Transferor. Transferor has never been a party to any Stock Issuance
Agreements.
3.3 Authority and Approval of Agreement.
(a) The execution and delivery of this Agreement by Transferor and
the performance of all Transferor's obligations hereunder have been duly
authorized and approved by all requisite corporate action on the part of
Transferor pursuant to applicable Law. Transferor has the power and authority to
execute and deliver this Agreement and to perform all its obligations hereunder.
(b) This Agreement and each of the other documents, instruments and
agreements executed by Transferor in connection herewith constitute the valid
and legally binding agreements of Transferor, enforceable against Transferor in
accordance with its terms, except that: (i) enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws of
general application affecting the enforcement of the rights and remedies of
creditors; and (ii) the availability of equitable remedies may be limited by
equitable principles.
3.4 No Violations. Neither the execution, delivery nor performance of this
Agreement or any other documents, instruments or agreements executed by
Transferor in connection herewith, nor the consummation of the transactions
contemplated hereby: (i) constitutes a violation of or default under (either
immediately, upon notice or upon lapse of time) the Articles of Incorporation or
Bylaws of Transferor, any provision of any Contract to which Transferor or its
Assets may be bound, any Judgment or any Law; or (ii) will or could result in
the creation or imposition of any Encumbrance upon, or give to any third person
any interest in or right to, the Exchanged Corporation Stock or any other
capital stock of Transferor or any of the Assets of Transferor; or (iii) will or
could result in the loss or adverse modification of, or the imposition of any
fine or penalty with respect to, any license, permit or franchise granted or
issued to, or otherwise held by or for the use of, Transferor.
3.5 Names and Addresses. The names under which, and the addresses at
which, Transferor and each predecessor to Transferor has done business are
accurately stated on Schedule 3.5 hereto.
3.6 Financial Statements. Attached hereto as Schedule 3.6 are financial
statements of Transferor ("Financial Statements"), including audited balance
sheets and statements of operations
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for the fiscal years ended June 30, 1996 ("Audited Statements"), and an
unaudited balance sheet and year-to-date statements of operations as of December
31, 1996 ("Unaudited Statements"). The Financial Statements are true, correct
and complete, were prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods indicated, and accurately
reflect Transferor's financial condition and the results of Transferor's
operations for the periods and as of the dates which they purport to cover.
Transferor does not have any Obligation except for those Obligations set forth
on the face of the Unaudited Statements.
3.7 Conduct Since Date of Financial Statements. Except as disclosed in
Schedule 3.7 hereto, none of the following have occurred since the date of the
Unaudited Statements:
(a) Any material adverse change in the financial condition, Assets,
Obligations, capitalization, business or operations of Transferor, nor are there
any circumstances known to Transferor which might result in such a change or
such an effect.
(b) Any damage, destruction or loss, whether or not covered by
insurance, adversely affecting the Assets or Business of Transferor.
(c) Any disposition, lease or Encumbrance of the Assets of
Transferor, or increase of indebtedness of or guaranteed by Transferor, other
than in the ordinary course of business consistent with past practices;
provided, however, that no such disposition, lease or Encumbrance, regardless of
the consideration therefor, has been made between Transferor and any of its
shareholders, directors, officers, agents, contractors, or employees (or any
member of their respective families);
(d) Any settlement of any dispute involving a payment by Transferor
of an amount in excess of Five Thousand Dollars ($5,000); provided, however,
that no such settlement, regardless of the payment involved, has been made
between Transferor, and any shareholders, directors, officers, agents,
contractors, or employees (or any member of their respective families);
(e) Any grant of an increase in compensation or any authorization or
payment of any bonus or other extraordinary benefit or the making of any advance
(excluding advances for ordinary and necessary business expenses) or loan to any
of Transferor's employees or any increase in, or any addition to, other benefits
to which any of Transferor's employees may be entitled, except in the ordinary
course of business consistent with past practices;
(f) Any transaction entered into by Transferor other than in the
ordinary course of business consistent with past practices;
(g) Any merger or consolidation involving Transferor, the
acquisition by Transferor of any stock, business or assets of any other Person,
the issuance of any membership interests or other equity interests by Transferor
or the entry into any Stock Issuance Agreements by Transferor;
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(h) Any notice received by Transferor of any actual or threatened
labor dispute or any event or condition of any character which has had or can be
reasonably expected to have a material adverse effect on the Assets or the
operations or prospects of Transferor;
(i) Any cancellation by Transferor, without payment in full, of
any Obligation to Transferor;
(j) Any Obligation incurred by Transferor, except Obligations
incurred, or under Contracts entered into, in the ordinary course of business
consistent with past practices;
(k) Any payment, discharge or satisfaction of any Obligation,
other than the payment, discharge or satisfaction in the ordinary course of
business;
(l) Any commitments or agreements entered into by Transferor for
capital expenditures or capital additions exceeding, in the aggregate, Five
Thousand Dollars ($5,000);
(m) Any amendment or termination of any Contract, commitment or plan
to which Transferor is a party or by which it is bound, except in the ordinary
course of business;
(n) Any repeated, recurring or prolonged shortage, cessation or
interruption of supplies or utility or other services required to conduct the
business and operations of Transferor;
(o) Any dividend or distribution of cash or other property by
Transferor to its shareholders or any redemption by Transferor of Transferor
Shareholders; or
(p) Any Contract binding Transferor to do or take any of the actions
referred to in this Section 3.6.
3.8 Title to Assets. Transferor is the sole owner of all Assets identified
on the Balance Sheet, all of which Assets are free and clear of all
Encumbrances. No Person has any right, claim or interest in or to any Assets now
owned or that may be acquired by Transferor, except the interest of the
shareholders of Transferor arising from the ownership of their shares.
3.9 Lease of Real Property. Transferor does not own and has never owned
any Real Property. Schedule 3.9 hereto is an accurate, complete, current, and
complete list of each lease or sublease of Real Property to which Transferor is
a party or by which Transferor may be bound and a description of the Real
Property leased thereunder. With respect to each lease or sublease described on
Schedule 3.9 hereto: (i)Transferor has been in peaceful possession of the
property leased thereunder and neither Transferor nor the landlord (to the
knowledge of Transferor) is in default thereunder; (ii) no waiver, indulgence or
postponement of any of the Obligations thereunder has been granted by the lessee
or lessor thereunder; and (iii) there exists no event, occurrence, condition, or
act known to Transferor which upon notice or lapse of time would be or become a
default thereunder. Transferor has not violated or breached any provision of any
such lease or sublease, and all
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Obligations required to be performed by Transferor under any such lease or
sublease have been fully and properly performed. Except as set forth on Schedule
3.9 hereto, no Consent of any Person is required under any such lease or
sublease in order for such lease or sublease to continue to be valid and
subsisting and entitle Transferor to remain in possession of the premises
demised thereunder after the consummation of the transactions contemplated by
this Agreement.
3.10 Contracts. Schedule 3.10 hereto is an accurate, current and complete
list and description of each Contract (other than this Agreement) to which
Transferor is a party or by which Transferor or any of its Assets are bound. An
accurate, current and complete copy of each Contract described on Schedule 3.10
hereto has been furnished to Acquiror.
3.11 Offers. There are no outstanding offers, bids, proposals or
quotations made by Transferor which, if accepted, would create a Contract with
Transferor.
3.12 Officers, Employees, Agents, etc. Set forth on Schedule 3.12 annexed
hereto is a complete list of all officers (with office held), directors,
contractors and agents of Transferor, and the compensation and all vacation and
other benefits they are entitled to receive from Transferor. Other than the
above described officers, Transferor has no employees.
3.13 Labor Matters. Transferor is not and has never been a party to: (i)
any profit sharing, pension, retirement, deferred compensation, bonus, stock
option, stock purchase, retainer, consulting, health, welfare or incentive plan
or agreement or other Employee Benefit Plan, whether legally binding or not; or
(ii) any plan providing for "fringe benefits" to its employees, including, but
not limited to, vacation, disability, sick leave, medical, hospitalization and
life insurance and other insurance plans, or related benefits; or (iii) any
employment agreement. No former employee of Transferor has any claim against
Transferor (whether under federal or state law, any employment agreement or
otherwise) on account of or for: (i) overtime pay; (ii) wages or salary for any
period; (iii) vacation, time off or pay in lieu of vacation or time off; or (iv)
any violation of any statute, ordinance or regulation relating to minimum wages
or maximum hours of work. No person or party (including, but not limited to,
governmental agencies of any kind) has any claim or basis for any action or
proceeding against Transferor arising out of any statute, ordinance or
regulation relating to discrimination in employment or to employment practices
or occupational safety and health standards.
3.14 Environmental Matters. Transferor has not generated any hazardous
wastes or engaged in activities which are or could be interpreted to be
potential violations of Laws or judicial decrees in any manner regulating the
generation or disposal of hazardous waste. There are no on-site or off-site
locations where Transferor has stored, disposed or arranged for the disposal of
chemicals, pollutants, contaminants, wastes, toxic substances, petroleum or
petroleum products; there are no underground storage tanks located on property
owned or leased by Transferor, and no polychlorinated biphenyls are used or
stored at any property owned or leased by Transferor.
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3.15 Obligations. Transferor has no Obligation to any Person, except
pursuant to this Agreement and the other Contracts executed by Transferor in
connection with this transaction as contemplated herein. Transferor is not
directly or indirectly liable, by guaranty or otherwise, upon or with respect
to, or obligated to guaranty or assume, any Obligation of any Person.
3.16 Books and Records. Transferor's books and records are and have been
properly prepared and maintained in form and substance adequate for preparing
audited financial statements in accordance with generally accepted accounting
principles, and fairly and accurately reflect all of Transferor's Assets,
Obligations and accruals, and all transactions (normally reflected in books and
records in accordance with generally accepted accounting principles) to which
Transferor is or was a party or by which Transferor or any of its Assets are or
were affected.
3.17 Taxes. All Taxes due, owing and payable, or which may be due, owing
and payable, by Transferor have been fully paid. The amounts set up as provision
for Taxes on the Balance Sheet are sufficient for the payment of all accrued and
unpaid Taxes of Transferor, whether or not disputed. The amount set up as
provision for Taxes on Transferor's books and records for the current fiscal
year through the Closing Date shall be sufficient for the payment of all accrued
and unpaid Taxes of Transferor, whether or not disputed, for such period. No
claim for any Tax due from or assessed against Transferor is being contested by
Transferor. None of Transferor's Tax returns or reports have been audited by the
Internal Revenue Service or any state or local Tax authority, and Transferor has
not received any notice of deficiency or other adjustment from the Internal
Revenue Service or any state or local Tax authority. There are no agreements,
waivers, or other arrangements providing an extension of time with respect to
the assessment of any Tax against Transferor, nor are there any Tax Proceedings
now pending or threatened against Transferor. No state of facts exists or has
existed, nor has any event occurred, which would constitute grounds for the
assessment of any further Tax against Transferor. Transferor has never consented
to the application of Section 341(f) of the Internal Revenue Code of 1986, as
amended.
3.18 Proceedings. Transferor is not a party to, the subject of, or
threatened with any Proceeding nor, to the best of Transferor's knowledge, is
there any basis for any Proceeding. Transferor is not contemplating the
institution of any Proceeding.
3.19 Other Liabilities. No claim of breach of contract, tort, product
liability or other claim (whether arising from Transferor's businesses
operations or otherwise), contingent or otherwise, has been asserted or
threatened against Transferor nor, to the best of Transferor's knowledge, is
capable of being asserted by any employee, creditor, claimant or other Person
against Transferor. No state of facts exists or has existed, nor has any event
occurred, which could give rise to the assertion of any such claim by any
Person.
3.20 Consents. The execution, delivery and performance by Transferor of
this Agreement and the consummation by Transferor of the transactions
contemplated hereby do not require any Consent that has not been received prior
to the date hereof.
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3.21 Judgments. There is no outstanding Judgment against Transferor or
against or affecting any of its Assets, business or prospects. There is no
health or safety problem involving or affecting Transferor or its Assets. There
are no open workmen's compensation claims against Transferor, or any contingent
liability of Transferor, or any other Obligation, fact or circumstance which
would give rise to any right of indemnification on the part of any current or
former shareholder, partner, director, officer, employee or agent of Transferor,
or any heir or personal representative thereof, against Transferor or any
successor to the businesses of Transferor.
3.22 Minute Books. Transferor's minute book contains true and complete
minutes and records of all meetings, proceedings, and other actions of its
stockholders and directors from the date of its organization to the date hereof.
The stock certificate books and stock transfer ledgers of Transferor are true
and complete, and all of the signatures which purport to be signatures of
Transferor's officers which appear on certificates representing shares of stock
of Transferor (including all certificates which are now outstanding and all
certificates which have heretofore been cancelled) are the true signatures which
they purport to be and were actually affixed to the respective documents by the
persons whose names they represent. All stamp and other taxes levied on or
relating to the original issuance or transfer of shares of Transferor have been
duly affixed and cancelled.
3.23 Brokerage Fees. Except as set forth on Schedule 3.24, there is no
Person acting on behalf of Transferor who is entitled to or has any claim for
any brokerage or finder's fee or commission in connection with the execution of
this Agreement or the consummation of the transactions contemplated hereby.
3.24 Compliance with Laws. Transferor and its business are in full
compliance with all Laws including, but not limited to, the Securities Laws.
3.25 Improper Payments. Neither Transferor, nor any of its current or
former shareholders, partners, directors, officers, or employees or agents, nor
any Person acting on behalf of Transferor, has directly or indirectly, made any
bribe, kickback or other payment of a similar or comparable nature, whether
lawful or not, to any person, public or private, regardless of form, whether in
money, property or services, to obtain favorable treatment for business secured
or special concessions already obtained. No funds or Assets of Transferor were
donated, loaned or made available directly or indirectly for the benefit of, or
for the purpose of supporting or opposing, any government or subdivision
thereof, political party, candidate or committee, either domestic or foreign.
Transferor has not maintained and does not maintain a bank account, or any other
account of any kind, whether domestic or foreign, which account was not or is
not reflected in Transferor's corporate books and records, or which account was
not listed, titled or identified in the name of Transferor.
3.26 Full Disclosure. All the representations and warranties made by
Transferor herein or in any Schedule, and all of the statements, documents or
other information pertaining to the transaction contemplated herein made or
given by Transferor, its agents or representatives are complete and accurate,
and do not omit any information required to make the statements and
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information provided, in light of the transaction contemplated herein,
non-misleading, accurate and meaningful.
3.27 Suitability.
(a) Sophistication. The Transferor hereby represents and warrants
that it and its shareholders are capable of evaluating the merits and risks of
the Stock, because they are sophisticated investors by virtue of their numerous
prior investments and have experience in investments similar in nature to the
Stock, including investments in unlisted and unregistered securities, and have
knowledge and experience in financial and business matters in general.
(b) Direct Negotiations. The Transferor hereby acknowledges that the
terms and conditions of the transfer of the Stock were determined through
substantial negotiations between the Transferor and its shareholders and the
Acquiror, and their respective officers, in the course of which the Transferor
and its shareholders exercised sufficient economic leverage to assert and
protect their respective interests.
3.40 No Advertising or Representations. The Transferor and Allbright each
hereby represent and warrant that they are not acquiring the Stock as a result
of any advertisement, article, notice or other communication published in any
newspaper, magazine or similar media, any seminar or any solicitation by a
person not previously known to the Transferor or the Transferor's Shareholders.
The Transferor and the Transferor's Shareholders each acknowledge and agree that
no representations or warranties have been made to them by the Acquiror or the
Parent, or any agent, employee or affiliate of the Acquiror or the Parent as to
the Acquiror or the Parent, the Stock or its or their future financial
performance, and in acquiring the Stock, the Transferor and the Transferor's
Shareholders are not relying upon any representation or warranty that is not
contained in the Acquiror Disclosure Documents.
3.28 Investment Intent. The Transferor represents and warrants that it is
acquiring the Stock solely for its own account for investment purposes only and
not for distribution or resale to others, other than to its shareholders in
accordance with the terms of this Agreement. Neither the Transferor nor its
shareholders shall resell or offer to resell the Stock except in strict
accordance with the applicable terms of the lock-up provisions of Section 2.6,
and in compliance with all applicable Securities Laws.
3.29 Reliance on Representations. The Transferor understands that the
Acquiror and its shareholders, officers and directors will be relying on the
accuracy and completeness of all matters set forth in this Article III, and the
Transferor represents and warrants to the Acquiror and its respective
shareholders, officers and directors that:
(a) The information, representations, warranties, acknowledgments
and all other matters set forth herein are complete, true and correct and may be
relied upon by them in determining
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whether the sale of the Stock to the Transferor is exempt from registration
under the Securities Laws; and
(b) The Transferor will notify Acquiror immediately of any change in
any statement made herein that occurs prior to the closing of the purchase of
the Stock.
ARTICLE IV
ACQUIROR'S REPRESENTATIONS AND WARRANTIES
Acquiror hereby makes the following representations and warranties to
Transferor, each of which Acquiror represents to be true and correct on the date
hereof and (except as Acquiror may notify Transferor in writing prior to the
Closing) shall be deemed made again as of the Closing Date and represented by
Acquiror to be true and correct on the Closing Date.
4.1 Organization. Acquiror is a corporation duly organized, validly
existing and in good standing under the Laws of the State of Florida and is not
required to be qualified or licensed as a foreign corporation in any other
jurisdiction. Acquiror has the full power and authority to own all its Assets
and to conduct its business as and where its business is presently conducted.
Acquiror does not have any subsidiary or equity interest in any Person.
4.2 Stock Ownership. The authorized capital stock of Acquiror consists of
______________ Million (___,000,000) shares of Acquiror Common Stock,
___________________ (__________) of which will be outstanding at Closing. All
the issued and outstanding capital stock of Acquiror is duly authorized, validly
issued, fully paid and nonassessable, and all Taxes related to the issuance or
transfer of such shares have been timely paid. There are no Stock Issuance
Agreements to which Acquiror is a party or by which any may be bound. There have
been no violations of the preemptive rights, if any, of any shareholders of
Acquiror. No shares of capital stock are held in treasury by Acquiror.
4.3 Authority and Approval of Agreement.
(a) The execution and delivery of this Agreement by Acquiror and the
performance of all Acquiror's obligations hereunder have been duly authorized
and approved by all requisite corporate action on the part of Acquiror pursuant
to applicable Law. Acquiror has the power and authority to execute and deliver
this Agreement and to perform all its obligations hereunder.
(b) This Agreement and each of the other documents, instruments and
agreements executed by Acquiror in connection herewith constitute the valid and
legally binding agreements of Transferor, enforceable against Acquiror in
accordance with their terms, except that: (i) enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or
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similar laws of general application affecting the enforcement of the rights and
remedies of creditors; and (ii) the availability of equitable remedies may be
limited by equitable principles.
4.4 No Violations. Neither the execution, delivery nor performance of this
Agreement or any other documents, instruments or agreements executed by Acquiror
executed in connection herewith, nor the consummation of the transactions
contemplated hereby: (i) constitutes a violation of or default under (either
immediately, upon notice or upon lapse of time) the Articles of Incorporation or
Bylaws of Acquiror, any provision of any Contract to which Acquiror or its
Assets may be bound, any Judgment to which Acquiror is bound or any Law
applicable to Acquiror; or (ii) result in the creation or imposition of any
Encumbrance upon, or give to any third person any interest in or right to, any
other capital stock of Acquiror or any of the Assets of Acquiror; or (iii)
result in the loss or adverse modification of, or the imposition of any fine or
penalty with respect to, any license, permit or franchise granted or issued to,
or otherwise held by or for the use of, Acquiror.
4.5 Consents. The execution, delivery and performance by Acquiror of this
Agreement and the consummation by Acquiror of the transactions contemplated
hereby do not require any Consent that has not been received prior to the date
hereof.
4.6 Brokerage Fees. There is no Person acting on behalf of Acquiror who is
entitled to or has any claim for any brokerage or finder's fee or commission in
connection with the execution of this Agreement or the consummation of the
transactions contemplated hereby.
4.7 Obligations. Acquiror has no obligation existing on the date hereof
for which Transferor could be held liable after the consummation of the
transactions contemplated hereby.
ARTICLE V
INTERPRETATION AND SURVIVAL OF
REPRESENTATIONS AND WARRANTIES
5.1 Interpretation. Each warranty and representation made by a party in
this Agreement or pursuant hereto is independent of all other warranties and
representations made by the same party in this Agreement or pursuant hereto
(whether or not covering identical, related or similar matters) and must be
independently and separately satisfied. Exceptions or qualifications to any such
warranty or representation shall not be construed as exceptions or
qualifications to any other warranty or representation.
5.2 Reliance by Acquiror. Notwithstanding the right of Acquiror to
investigate Transferor, its business and Assets, and notwithstanding any
knowledge of facts determined or determinable by them as a result of such
investigation or right of investigation, Acquiror has the unqualified right to
rely upon the representations and warranties made by Transferor in this
Agreement and in the Schedules attached hereto or pursuant hereto. Each and
every representation
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and warranty of Transferor made herein is material to the decision of the other
parties hereto to enter into this Agreement and to consummate the transaction
contemplated herein.
5.3 Survival. All representations and warranties of Transferor made in
this Agreement or pursuant hereto shall survive the date hereof, the Closing
Date, the consummation of the transactions contemplated hereby, and any
investigation.
ARTICLE VI
OBLIGATIONS PRIOR TO CLOSING
6.1 Conduct of Transferor Pending Closing. During the period from the date
hereof until the Closing Date, except with the express prior written consent of
Acquiror, Transferor hereby covenants and agrees that:
(a) Transferor shall maintain its existence in good standing in the
state of Florida and each other jurisdiction where it is required to be licensed
or qualified as a foreign corporation, and shall not alter or amend its Articles
of Incorporation or Bylaws.
(b) Transferor shall duly and timely file all returns and reports
required by any law to be filed by Transferor, shall promptly pay when due all
Taxes assessed against Transferor or any of its Assets, and shall conform to and
fully comply with all the laws pertaining to its Assets or the conduct of its
business.
(c) Except for the actions required by the covenants set forth in
this Article VI, Transferor shall not take or do any act or thing without the
express prior written consent of the President of Acquiror.
(d) Transferor shall not take any action, or enter into any contract
which requires or permits Transferor to take any action, which would be
inconsistent with any of the foregoing provisions of this Section 6.1.
6.2 Conduct of Acquiror Pending Closing. During the period from the date
hereof until the Closing Date, except with the express prior written consent of
Transferor, Acquiror hereby covenants and agrees with Transferor that:
(a) It shall maintain its existence and good standing in the State
of Florida and each other jurisdiction where it is licensed or qualified as a
foreign corporation, and shall not alter or amend its Articles of Incorporation
or Bylaws.
(b) It shall duly and timely file all returns and reports required
by any Law to be filed by it, shall promptly pay when due all Taxes assessed
against it or any of its Assets, and shall
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conform to and fully comply with all other Laws pertaining to its Assets or the
conduct of its business.
(c) It shall not take any action, or enter into any Contract which
requires or commits it to take any action, which would be inconsistent with any
of the foregoing provisions of this Section 6.2.
6.3 Investigation. During the period from the date hereof until the
Closing Date, Transferor shall permit Acquiror and its authorized
representatives and agents full access to Transferor and its business and
properties during normal business hours to observe and investigate Transferor,
its business, Assets and Obligations, to meet with Transferor's officers, agents
and contractors, and to audit, examine and copy all of Transferor's files, books
and records, and other documents and papers. Transferor shall furnish Acquiror
and its authorized representatives and agents with all information concerning
Transferor's business, Assets and Obligations, which they reasonably request.
6.7 Cooperation. During the period from the date hereof until the Closing
Date, Transferor shall fully cooperate with Acquiror and its authorized
representatives and agents, and shall promptly execute and deliver all
agreements, certificates, instruments and documents and take such other actions
as are reasonably requested by Acquiror or its authorized representatives and
agents.
ARTICLE VII
CONDITIONS PRECEDENT TO
ACQUIROR'S OBLIGATIONS
Notwithstanding the execution and delivery of this Agreement or the
performance of any part hereof, Acquiror's obligations to consummate the
transactions contemplated by this Agreement shall be subject to the satisfaction
of each of the conditions set forth in this Article VII, except to the extent
that such satisfaction is waived in writing by Acquiror.
7.1 Representations and Warranties of the Transferor. All representations
and warranties made by the Transferor or Tolson in this Agreement and the
Schedules hereto shall have been true and correct in all respects on the date of
this Agreement, and shall be true and correct in all respects on the Closing
Date as though such representations and warranties were again made, without
exception or deviation, on the Closing Date.
7.2 Performance of this Agreement. Transferor and Tolson shall have duly
performed or complied with all of their covenants and obligations under this
Agreement that are to be performed or complied with by the Transferor and/or
Tolson on or prior to the Closing Date.
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7.3 Absence of Proceedings. No Proceeding shall have been instituted or
threatened on or before the Closing Date by any Person, the result of which did
or could prevent or make illegal the consummation of all or any of the
transactions contemplated by this Agreement, or which had or could have a
material adverse effect on the Business or the Acquired Assets.
7.4 Consents. Transferor shall deliver to Acquiror, all Consents, in form
and substance reasonably acceptable to Acquiror, as the Acquiror reasonably
deems required under any of the Transferor's Contracts or Permits as a result of
the sale of the Acquired Assets to Acquiror and the other transactions
contemplated under this Agreement. Included specifically in the foregoing shall
be consents from all lessors of Real Property to Transferor, if any, together
with estoppel letters from such lessors, in form reasonably acceptable to
Acquiror, acknowledging that each applicable lease is in full force and effect,
all rent and other payments due thereunder have been paid and no event of
default has occurred.
7.5 Good Standing Certificate. Transferor shall deliver to Acquiror a Good
Standing Certificate , certifying that the Transferor is duly qualified and is
currently in good standing under the laws of the State of Florida, dated no
earlier than five (5) days before the Closing Date.
7.6 Material Adverse Change. There shall have not occurred any material
adverse change, actual or threatened, for whatever reason, in any of the
Acquired Assets, the Business or its financial condition or otherwise, or in the
results of operations of the Transferor, including, but not limited to any
casualty loss, whether or not covered by insurance.
7.7 Opinion of Counsel. At Closing, Transferor shall deliver an opinion of
counsel rendered to Acquiror, in form, substance, and by a law firm reasonably
acceptable to Acquiror, and its counsel, as to the matters set forth in Exhibit
C attached hereto.
7.8 Failure of Conditions. In the event any of the conditions set forth in
this Agreement are not satisfied or waived in writing by the Acquiror on or
before the Closing Date, the Acquiror shall have the right to terminate this
Agreement whereupon the parties shall be relieved of all further obligations to
the other except for remedies provided in this Agreement against Transferor for
breach of its covenants, representations or warranties set forth in this
Agreement. The Transferor hereby represents and warrants to the Acquiror that it
understands that some or all of the conditions may not be satisfied by
Transferor or waived by the Acquiror and the Acquiror shall have the right, in
his sole discretion, to terminate this Agreement as a result thereof and the
Transferor hereby assumes the risk that the Acquiror may elect to terminate this
Agreement and is hereby estopped from objecting to and waives any action against
the Acquiror for the Acquiror's election to terminate this Agreement as a result
of any condition precedent not being satisfied or waived in writing by the
Acquiror, or pursuant to Section 10.3 of this Agreement.
7.9 Employment Agreement. Edward Tolson, President of Transferor, shall
have executed and delivered to Acquiror an Employment Agreement with Acquiror in
the form of Exhibit D ("Employment Agreement").
15
<PAGE>
ARTICLE VII
CONDITIONS PRECEDENT TO TRANSFEROR'S OBLIGATIONS
Notwithstanding the execution and delivery of this Agreement or the
performance of any part hereof, Transferor's obligation to consummate the
transactions contemplated by this Agreement shall be subject to the satisfaction
of each of the conditions set forth in this Article VII, except to the extent
that such satisfaction is waived by Transferor in writing.
8.1 Representations and Warranties of Acquiror. The representations and
warranties of Acquiror contained in this Agreement and the exhibits and
schedules hereto shall be true and correct in all respects on the date hereof,
and shall be true and correct in all respects on the Closing Date as though such
representations and warranties were again made, without exception or deviation,
on the Closing Date.
8.2 Performance of this Agreement. Acquiror shall have duly performed or
complied with all of the covenants and obligations under this Agreement to be
performed or complied with by them on or prior to the Closing Date.
8.3 Absence of Proceedings. No Proceeding shall have been instituted or
threatened on or before the Closing Date by any Person the result of which did
or could prevent or make illegal the consummation of all or any of the
transactions contemplated by this Agreement.
8.4 Deliveries at Closing. At Closing, in addition to all other deliveries
to be made to Transferor hereunder, Transferor shall receive a certificated
signed by the President of Acquiror and dated the Closing Date, certifying that
(a) all of the terms and conditions of this Agreement to be satisfied or
performed by it on or before the Closing Date have been satisfied or performed;
(b) no Proceedings have been instituted or threatened on or before the Closing
Date by any Person, the result of which did or could prevent or make illegal the
consummation of all or any of the transactions contemplated by this Agreement,
or which had or could have a material adverse effect on its business; and (c)
there has not been any material adverse change in or affecting it between the
date of this Agreement and the Closing Date.
ARTICLE IX
OBLIGATIONS AT CLOSING
9.1 Obligations of Transferor to Acquiror at Closing. The Transferor
hereby covenants and agrees to deliver or cause to be delivered to Acquiror, at
Closing, the following:
(a) The Acquired Assets, subject to the Encumbrances set forth on
Schedule 2.3;
16
<PAGE>
(b) A duly executed Bill of Sale in the form of Exhibit F attached
hereto;
(c) All Consents referred to in Section 7.4 of this Agreement;
(d) The Good Standing Certificate referred to in Section 7.5
of this Agreement;
(e) A certificate signed by the President of Transferor, dated the
Closing Date, certifying that (a) all of the terms and conditions of this
Agreement to be satisfied or performed by it on or before the Closing Date have
been satisfied or performed; (b) all the representations and warranties of
Transferor made herein are true, correct and complete in all respects; (c) no
Proceedings have been instituted or, to the best of such President's knowledge,
threatened on or before the Closing Date by any Person, the result of which did
or could prevent or make illegal the consummation of all or any of the
transactions contemplated by this Agreement, or which had or could have a
material adverse effect on its business; and (d) there has not been any material
adverse change in or affecting it between the date of this Agreement and the
Closing Date;
(f) The opinion of counsel referred to in Section 7.7 of this
Agreement; and
(g) Such other documents and instruments as counsel to Acquiror may
reasonably request including, without limitation, such documents as necessary to
convey to Acquiror all rights to the Acquired Assets.
9.2 Acquiror's Obligations to Transferor at Closing. Acquiror agrees to
deliver or cause to be delivered to Transferor, at the Closing, the following:
(a) A good standing certificate for such corporation dated not
earlier than ten (10) days prior to the Closing Date from the State of Florida;
and
(b) A copy of the resolutions adopted by the Board of Directors of
such corporation, certified by its Corporate Secretary, which resolutions
authorize it to execute and deliver and perform this Agreement and consummate
the transactions contemplated hereby.
ARTICLE X
TERMINATION AND REMEDIES
10.1 Termination on Default. If, prior to the Closing Date, a party hereto
shall materially breach or default in the full and timely performance and
satisfaction of any of its representations and warranties or obligations under
this Agreement, and such breach or default is not cured on or before the fifth
(5th) day after the date notice is given by the nondefaulting party to the
defaulting party specifying the nature of such breach or default (or on or
before the Closing Date if sooner), then the nondefaulting party may terminate
this Agreement immediately upon notice to the defaulting party.
17
<PAGE>
10.2 Termination at Closing. If any of the conditions set forth in Article
VII hereof are not satisfied on or before the Closing Date, then Acquiror may
terminate this Agreement by notifying Transferor on the Closing Date. If any of
the conditions set forth in Article VIII hereof are not satisfied on or before
the Closing Date, then Transferor may terminate this Agreement by notifying
Acquiror on the Closing Date.
10.3 Specific Performance. Transferor's Obligations under this Agreement
are unique, and each party hereby expressly acknowledges that, in the event of a
breach or default in the full and timely performance and satisfaction of any
such obligation, it would be extremely difficult to measure the resulting
damages. Accordingly, in the event of any breach or default by Transferor, then
Acquiror shall be entitled, in addition to all other rights and remedies which
it may have at law or in equity, to sue for and receive the remedy of specific
performance, and Transferor waives the defense that a remedy in damages is
adequate.
ARTICLE XI
INDEMNIFICATION
11.1 Obligation to Indemnify. In addition to, and not in lieu of, any
right or remedy available to Acquiror at law or in equity (which, in the case of
Transferor's material breach of this Agreement shall be deemed to include
rescission), Transferor hereby indemnifies and holds harmless Acquiror and the
respective officers and directors from and against any and all Proceedings,
Judgments, Obligations, losses, damages, deficiencies, settlements, assessments,
charges, costs and expenses (including without limitation reasonable attorneys'
fees, paralegals' fees, investigation expenses, court costs, interest and
penalties) arising out of or in connection with, or caused by, directly or
indirectly, any or all of the following ("Indemnified Matter"):
(a) Any misrepresentation, breach or failure of any warranty or
representation made by Transferor in this Agreement or pursuant hereto;
(b) Any failure or refusal by Transferor to satisfy or perform any
covenant or agreement; and
(c) Any failure by Transferor to duly and timely file with the
appropriate governmental agencies all Tax and other returns and reports required
by any Law to be filed by it, and Transferor's failure to prepare and properly
complete all such returns and reports.
11.2 Notices and Payments. With respect to each separate matter or series
of matters against which a party ("Indemnitee") is indemnified under this
Article XI:
(a) Upon Indemnitee's receipt of written documents pertaining to the
Proceeding or otherwise underlying such matter or series of matters, or, if such
matter or series of matters does
18
<PAGE>
not involve a third party claim, after Indemnitee first learns of such matter or
series of matters and the amount demanded or claimed in connection therewith,
Indemnitee shall give written notice to Transferor of and copies of such
documents and information as it shall have so received.
(b) After a final agreement is reached or a final Judgment is
rendered with respect to such matter or series of matters or the amount owing by
Transferor pursuant to this Article XI as a result of such matter or series of
matters, is otherwise determinable in whole or in part, Indemnitee shall give
notice to Transferor of the amount owing by Transferor ("Indemnification
Amount") with respect to such matter or series of matters ("Indemnification
Payment Notice").
(c) Transferor shall pay the Indemnification Amount to Indemnitee
(or to such Person as Indemnitee instructs) within ten (10) days after the
Indemnification Payment Notice was given.
ARTICLE XII
MISCELLANEOUS
12.1 Notices. All notices, requests, demands and other communications
hereunder shall be deemed to have been duly given if the same shall be in
writing and shall be delivered personally or sent by registered or certified
mail, postage prepaid, and addressed as set forth below:
If to Transferor: 6950 Cypress Road, Top Floor
Plantation, Florida 33317
If to Acquiror: Hirel Marketing, Inc.
650 S.W. 16th Terrace
Pompano Beach, Florida 33069
Attn: Michael Duggan, President
With a copy to: Ruden, McClosky, Smith, Schuster & Russell, P.A.
200 East Broward Boulevard
15th Floor
Ft. Lauderdale, Florida 33301
Attn: Thomas O. Katz, Esq.
12.2 Entire Agreement. This Agreement, including the Exhibits and
Schedules attached hereto and the documents delivered pursuant hereto, sets
forth all the promises, covenants, agreements, conditions and understandings
between the parties hereto with respect to the subject matter hereof, and
supersedes all prior and contemporaneous agreements, understandings, inducements
or conditions, expressed or implied, oral or written, except as herein
contained. No
19
<PAGE>
changes of or modifications or additions to this Agreement shall be valid unless
the same shall be in writing and signed by the parties hereto.
12.3 Binding Effect; Assignment. This Agreement shall be binding upon the
parties hereto, their beneficiaries, heirs and administrators. No party may
assign or transfer its interests herein, or delegate its duties hereunder,
without the written consent of the other parties.
12.4 Amendment. The parties hereby irrevocably agree that no attempted
amendment, modification, or change (collectively, "Amendment") of this Agreement
shall be valid and effective, unless the parties shall unanimously agree in
writing to such Amendment.
12.5 No Waiver. No waiver of any provision of this Agreement shall be
effective, unless it is in writing and signed by the party against whom it is
asserted, and any such written waiver shall only be applicable to the specific
instance to which it relates and shall not be deemed to be a continuing or
future waiver.
12.6 Gender and Use of Singular and Plural. All pronouns shall be deemed
to refer to the masculine, feminine, neuter, singular or plural, as the identity
of the party or parties or their personal representatives, successors and
assigns may require.
12.7 Counterparts. This Agreement and any amendments may be executed in
one or more counterparts, each of which shall be deemed an original and all of
which together will constitute one and the same instrument.
12.8 Headings. The article and section headings contained in this
Agreement are inserted for convenience only and shall not affect in any way the
meaning or interpretation of the Agreement.
12.9 Governing Law. This Agreement shall be construed in accordance with
the laws of the State of Florida and any proceeding arising between the parties
in any manner pertaining or related to this Agreement shall, to the extent
permitted by law, be held in Broward County, Florida.
12.10 Further Assurances. The parties hereto will execute and deliver such
further instruments and do such further acts and things as may be reasonably
required to carry out the intent and purposes of this Agreement.
12.11 Arbitration.
(a) The parties hereto agree that the arbitration procedure set
forth below shall be the sole and exclusive method for resolving and remedying
claims hereunder (the "Disputes"). Nothing in this Section 12.11 shall prohibit
a party hereto from instituting litigation to enforce any Final Determination
(as defined below). The parties hereby agree and acknowledge that, except as
otherwise provided in this Section 12.11, the arbitration procedures and any
Final Determination hereunder shall be governed by, and shall be enforced
pursuant to the Florida Arbitration Code.
20
<PAGE>
(b) In the event that any party asserts that there exists a Dispute,
such party shall deliver a written notice to each other party involved therein
specifying the nature of the asserted Dispute and requesting a meeting to
attempt to resolve the same. If no such resolution is reached within ten
business days after delivery of such notice, the party delivering such notice
(the "Disputing Person") may, within 45 business days after delivery of such
notice, commence arbitration hereunder by commencing arbitration proceedings
under the Commercial Arbitration Rules of the American Arbitration Association
and delivering to each other party involved therein a notice of arbitration (a
"Notice of Arbitration"). Such Notice of Arbitration shall specify the matters
as to which arbitration is sought, the nature of any Dispute, the claims of each
party to the arbitration and shall specify the amount and nature of damages, if
any, sought to be recovered as a result of any alleged claim, and any other
matters required by the Commercial Arbitration Rules of the American Arbitration
Association as in effect from time to time to be included therein.
(c) The arbitrator(s) will be selected in accordance with the
Commercial Arbitration Rules of the American Arbitration Association. Each party
shall submit a proposed arbitration award (including proposed findings of fact)
within fifteen (15) days of the conclusion of the arbitration hearing. The
arbitrator shall select one of the proposed arbitration awards (including
proposed findings of fact) in its entirety and both parties shall be bound by
its terms. The cost of the arbitration will be divided equally between each
party.
(d) The arbitration shall be conducted under the Commercial
Arbitration Rules of the American Arbitration Association as in effect from time
to time, except as modified by the agreement of all of the parties to this
Agreement. The arbitrator(s) shall use their best efforts to conduct the
arbitration so that a final result, determination, finding, judgment and/or
award (the "Final Determination") is made or rendered no later than ninety (90)
business days after the delivery of the Notice of Arbitration nor later than
twenty (20) days following conclusion of the arbitration hearing. The Final
Determination must be signed by the arbitrator. The Final Determination shall be
final and binding on all parties and there shall be no appeal from or
reexamination of the Final Determination, except for fraud, perjury, evident
partiality or misconduct by an arbitrator prejudicing the rights of any party
and to correct manifest clerical errors.
(e) The parties to such arbitration may enforce any Final
Determination in any state or federal court having jurisdiction over the
dispute.
12.12 Litigation. If any party hereto is required to engage in litigation
or arbitration against any other party hereto, either as plaintiff or as
defendant, in order to enforce or defend any of its or his rights under this
Agreement, and such litigation results in a final judgment in favor of such
party ("Prevailing Party"), then the party or parties against whom said final
judgment is obtained shall reimburse the Prevailing Party for all direct,
indirect or incidental expenses incurred by the Prevailing Party in so enforcing
or defending its or his rights hereunder, including, but not limited to, all
attorneys' fees, paralegals' fees and all sales tax thereon, and all court costs
and other expenses incurred throughout all negotiations, trials or appeals
undertaken in order to enforce the Prevailing Party's rights hereunder.
21
<PAGE>
12.13 Remedies. Each of the parties acknowledges and agrees that in the
event that a party hereto shall violate any of the restrictions or fail to
perform any of the obligations hereunder, the other parties will be without
adequate remedy at law and will therefore be entitled to enforce such
restrictions or obligations by temporary or permanent injunctive or mandatory
relief obtained in an action or proceeding instituted in any court of competent
jurisdiction without the necessity of proving damages and without prejudice to
any other remedies it may have at law or in equity.
12.14 Confidentiality. Except for discussions of the transactions
contemplated by this Agreement among the parties hereto and their respective
representatives and counsel participating in this transaction, each party hereto
shall, unless all other parties hereto shall otherwise agree, keep confidential
and not, directly or indirectly, disclose to any person the existence of this
Agreement, the transaction contemplated by this Agreement or any of the terms
thereof, or the fact that Acquiror and Transferor have entered into discussions
or negotiations for any purpose whatsoever, and each party hereto shall use its
good faith efforts to cause its employees, agents, officers, directors and
representatives to abide by the foregoing restrictions on disclosure.
THIS SPACE INTENTIONALLY BLANK
22
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date and year set forth above.
GROUP 32 CORPORATION
____________________________ By:________________________________
- ----------------------------
HIREL MARKETING, INC.
____________________________ By:________________________________
- ----------------------------
23
<PAGE>
EXHIBIT A
Defined Terms
All defined terms used in this Agreement and not specifically defined in
context are as defined in this Exhibit A.
"Accounts Receivable" means any right to payment for goods sold, leased or
licensed or for services rendered whether or not it has been earned by
performance, any note receivable, and any other receivable or right to payment
of any nature whatsoever.
"Act" means the Securities Act of 1933, as amended.
"Asset" means any real, personal, mixed, tangible or intangible property
of any nature whatsoever, including, without limitation, Real Property,
Equipment, Accounts Receivable, Inventory, Permits, Intangibles and Contract
Rights.
"Closing" means the consummation of the reorganization contemplated by
this Agreement.
"Closing Date" means the date of the Closing.
"Consent" means any consent, approval, order or authorization of, or any
declaration, filing or registration with, or any application or report to, or
any waiver by, or any other action (whether similar or dissimilar to any of the
foregoing) of, by or with, any person, which is necessary in order to take a
specified action or actions, in a specified manner and/or to achieve a specific
result.
"Contract" means any written or oral contract, agreement, order or
commitment of any nature whatsoever, including, without limitation, any sales
order, purchase order, lease, sublease, license agreement, sublicense agreement,
loan agreement, security agreement, guarantee, management contract, employment
agreement, consulting agreement, partnership agreement, buy-sell agreement,
option, warrant, subscription, call or put.
"Contract Right" means any right, power or remedy under any Contract,
including, without limitation, any right to receive goods or services or
otherwise derive benefit from the payment, satisfaction or performance of
another party's Obligations, and right to demand that another party accept goods
or services or take any other action, and any right to pursue or exercise any
remedy or option.
"Employee Benefit Plan" means any bonus, severance, hospitalization,
vacation, deferred compensation, pension, profit sharing, retirement, payroll
savings, stock option, group insurance, death benefit or welfare plan, or any
other employee benefit plan or fringe benefit arrangement of any nature
whatsoever.
A-1
<PAGE>
"Encumbrance" means any lien, security interest, pledge, mortgage,
easement, leasehold, assessment, covenant, restriction, reservation, conditional
sale, prior assignment, or any other encumbrance, claim, burden or charge of any
nature whatsoever.
"Equipment" means any equipment, machinery, fixtures, furniture, leasehold
improvements, vehicles, vessels, office equipment, office supplies or other
tangible personal property of any nature whatsoever, but not any such item which
constitutes Inventory.
"Transferor Shareholders" means the shareholders of record of Transferor.
"Transferor Stock" means the common stock of Transferor, $.001 par value.
"Acquiror Stock" means the common stock of Acquiror, par value $.00__, to
be issued to the Transferor Shareholders pursuant to Article II hereof.
"Intangible" means any name, corporate name, partnership name, fictitious
name, trademark, trademark application, trade name, brand name, slogan, trade
secret, know-how, patent, patent application, copyright, copyright application,
design, formula, invention, blueprint, product right, software right, license,
franchise, authorization or any other intangible property of any nature
whatsoever.
"Inventory" means any raw materials, supplies, work in process, finished
goods, or any other inventory of any nature whatsoever, and other items held for
sale or lease in the ordinary course of business and all computer software and
data systems held for sale or license in the ordinary course of business.
"Judgment" means any order, writ, injunction, fine, citation, award,
decree, or any other judgment of any nature whatsoever of any foreign, federal,
state or local court, any governmental, administrative or regulatory authority,
or any arbitration tribunal.
"Law" means any provision of any law, statute, ordinance, constitution,
charter, treaty, rule or regulation of any foreign, federal, state or local
governmental, administrative or regulatory authority.
"Obligation" means any debt, liability or obligation of any nature
whatsoever, whether secured, unsecured, recourse, nonrecourse, liquidated,
unliquidated, accrued, absolute, fixed, contingent, ascertained, unascertained,
known, unknown or obligations under executory Contracts.
"Option" means the right to purchase one share of Acquiror Stock at an
exercise price equal to the Market Price as of the Vesting Date with respect to
such Option.
A-2
<PAGE>
"Permit" means any license, permit, approval, waiver, order,
authorization, right or privilege of any nature whatsoever, granted, issued,
approved or allowed by any foreign, federal, state or local governmental,
administrative or regulatory authority.
"Person" means any individual, sole proprietorship, joint venture,
partnership, corporation, association, cooperation, trust, estate, government
(or any branch, subdivision or agency thereof), governmental, administrative or
regulatory authority, or any other entity of any nature whatsoever.
"Proceeding" means any demand, claim, suit, action, litigation,
investigation, arbitration, administrative hearing, or any other proceeding of
any nature whatsoever.
"Real Property" means any real estate, land, building, structure,
improvement, fixture or other real property of any nature whatsoever, including,
but not limited to boat slips, docks and other marine realty and improvements.
"SEC" means the U.S. Securities and Exchange Commission.
"Securities Laws" means the Act, the Securities Exchange Act of 1934, as
amended, the Investment Company Act of 1940, as amended, and all State or other
applicable securities laws, collectively.
"Stock Issuance Agreements" means any contracts which relate to the
issuance, sale, right to purchase, redemption, pledge or other disposition of
any capital stock of Corporation or any other securities or Obligations of
Corporation.
"Tax" means (a) any foreign, federal, state or local income, profits,
gross receipts, franchise, sales, use, occupancy, general property, real
property, personal property, intangible property, transfer, fuel, excise,
accumulated earnings, personal holding company, unemployment compensation,
social security, withholding taxes, payroll taxes, or any other tax of any
nature whatsoever, (b) any foreign, federal, state or local organization fee,
qualification fee, annual report fee, filing fee, occupation fee, assessment,
rent, or any other fee or charge of any nature whatsoever, or (c) any
deficiency, interest or penalty imposed with respect to any of the foregoing.
A-3
<PAGE>
EXHIBIT C
FORM OF OPINION OF CORPORATION'S COUNSEL
1. Transferor is a corporation duly organized, validly existing and in
good standing under the Laws of the State of Florida and is not required to be
qualified or licensed as a foreign corporation in any other jurisdiction.
Transferor has the full power and authority to own all its Assets and to conduct
the business in which it will engage upon completion of the transaction
contemplated herein.
2. The authorized capital stock of Transferor consists of _______________
shares of Common Stock, ________________shares of which are issued and. All the
issued and outstanding shares of capital stock of Transferor are duly
authorized, validly issued, fully paid and nonassessable. To our knowledge after
reasonable investigation, there are no Stock Issuance Agreements to which
Transferor is a party or by which it may be bound. There have been no violations
of the preemptive rights, if any, of any shareholders of Transferor. No shares
of capital stock are held in treasury by Transferor.
3. (a) The execution and delivery of the Agreement and Plan of Merger by
Transferor and the performance of all Transferor's obligations thereunder have
been duly authorized and approved by all requisite corporate action on the part
of Transferor pursuant to applicable Law. Transferor has the power and authority
to execute and deliver the Agreement and Plan of Merger and to perform all its
obligations hereunder.
(b) Each of the Agreement and Plan of Merger and the other
documents, instruments and agreements executed by Transferor in connection
therewith constitute the valid and legally binding agreements of Transferor,
enforceable against Transferor in accordance with its terms, except that: (i)
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws of general application affecting the
enforcement of the rights and remedies of creditors; and (ii) the availability
of equitable remedies may be limited by equitable principles.
4. Neither the execution, delivery nor performance of the Agreement and
Plan of Merger or any other documents, instruments or agreements executed by
Transferor in connection therewith, nor the consummation of the transactions
contemplated thereby: (i) constitutes a violation of or default under (either
immediately, upon notice or upon lapse of time) the Articles of Incorporation or
Bylaws of Transferor, any provision of any Contract to which Transferor or its
Assets may be bound, any Judgment or any Law; or (ii) will or could result in
the creation or imposition of any Encumbrance upon, or give to any third person
any interest in or right to, the Transferor Stock or any other capital stock of
Transferor or any of the Assets of Transferor; or (iii) will or could result in
the loss or adverse modification of, or the imposition of any fine or penalty
with respect to, any license, permit or franchise granted or issued to, or
otherwise held by or for the use of, Transferor.
F-1
<PAGE>
5. To our knowledge and belief, all the representations and warranties
made by Transferor in the Agreement and Plan of Merger or in any Schedule made
or given by Transferor, its agents or representatives are complete and accurate,
and do not omit any information required to make the statements and information
provided, in light of the transaction contemplated therein, nonmisleading,
accurate and meaningful.
6. Such other opinions as Acquiror's transfer agent may require to
issue the Acquiror Stock.
F-2
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Hirel Holdings, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
HIREL HOLDINGS, INC., a
Delaware corporation
Date: ,1997 By:
Vincent Montelione, President, Chief
Executive Officer and Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
President, Chief Executive , 1997
Vincent Montelione Officer and Chairman
President, HTI, and Director , 1997
Gregory S. Fenech
Vice President, Sales and Marketing, , 1997
- ------------------ ------------
Vincent P. Fagnani, Jr. HMI, and Director
Vice President and Chief Financial , 1997
- ------------------ ------------
William H. Aden Officer (Principal Financial and
Accounting Officer)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENTS OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> year
<FISCAL-YEAR-END> dec-31-1996
<PERIOD-END> dec-31-1996
<CASH> 4,006,450
<SECURITIES> 0
<RECEIVABLES> 1,004,460
<ALLOWANCES> 0
<INVENTORY> 3,542,036
<CURRENT-ASSETS> 8,983,118
<PP&E> 2,348,373
<DEPRECIATION> 1,091,027
<TOTAL-ASSETS> 13,655,062
<CURRENT-LIABILITIES> 5,578,152
<BONDS> 0
0
0
<COMMON> 5,209
<OTHER-SE> 6,693,692
<TOTAL-LIABILITY-AND-EQUITY> 13,655,062
<SALES> 22,836,088
<TOTAL-REVENUES> 22,836,088
<CGS> 21,428,135
<TOTAL-COSTS> 2,689,209
<OTHER-EXPENSES> (77,943)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 134,073
<INCOME-PRETAX> (1,337,386)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,337,386)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,337,386)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> (0.32)
</TABLE>
