AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 13, 1997
REGISTRATION NO. 333-7731
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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ASD GROUP, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 8711 14-1483460
(STATE OR OTHER JURISDICTION OF (STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
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<TABLE>
<S> <C>
GARY D. HORNE, CHAIRMAN
1 INDUSTRY STREET, POUGHKEEPSIE, NEW YORK 12603 1 INDUSTRY STREET, POUGHKEEPSIE, NEW YORK 12603
(914) 452-3000 (914) 452-3000
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE (NAME, ADDRESS AND TELEPHONE NUMBER
OFFICES AND PRINCIPAL PLACE OF BUSINESS) OF AGENT FOR SERVICE)
</TABLE>
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COPIES OF COMMUNICATIONS TO:
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<S> <C>
A. JEFFRY ROBINSON, P.A. LAWRENCE B. FISHER, ESQ.
DALE S. BERGMAN, P.A. ORRICK, HERRINGTON & SUTCLIFFE LLP
BROAD AND CASSEL 666 FIFTH AVENUE
201 SOUTH BISCAYNE BLVD., SUITE 3000 NEW YORK, NEW YORK 10103
MIAMI, FLORIDA 33131 TELEPHONE: (212) 506-5000
TELEPHONE: (305) 373-9400 TELECOPIER: (212) 506-5151
TELECOPIER: (305) 373-9443
</TABLE>
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable on or after the effective date of this Registration
Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
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<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one
prospectus to be used in connection with an offering of 1,400,000 shares of
Common Stock (the "Prospectus") and another prospectus to be used in
connection with the sale of shares of Common Stock by certain Selling Security
Holders (the "Selling Security Holders' Prospectus"). The Prospectus and
the Selling Security Holders' Prospectus will be identical in all respects
except for the alternate pages for the Selling Security Holders' Prospectus
included herein, which are labeled "Alternate Page for Selling Security
Holders' Prospectus."
<PAGE>
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<CAPTION>
ASD GROUP, INC.
CROSS REFERENCE SHEET SHOWING LOCATION
IN PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS OF FORM SB-2
REGISTRATION STATEMENT CAPTION OR
ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
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1. Front of Registration Statement and
Outside Front Cover of Prospectus.................... Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus.................................. Inside Front and Outside Back Cover Pages
of Prospectus
3. Summary Information and Risk Factors................. Prospectus Summary; Risk Factors
4. Use of Proceeds...................................... Use of Proceeds
5. Determination of Offering Price...................... Outside Front Cover Page of Prospectus;
Risk Factors; Underwriting
6. Dilution ............................................ Dilution
7. Selling Security Holders............................. Concurrent Registration of Securities;
Selling Security Holders(1); Plan of
Distribution(1)
8. Plan of Distribution................................. Underwriting; Plan of Distribution(1)
9. Legal Proceedings.................................... *
10. Directors, Executive Officers, Promoters and Control
Persons .......................................... Management
11. Security Ownership of Certain Beneficial Owners and
Management........................................ Principal Stockholders
12. Description of Securities .......................... Description of Securities
13. Interests of Named Experts and Counsel.............. *
14. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities ................... Description of Securities; Underwriting
15. Organization Within Last Five Years................. *
16. Description of Business............................. Prospectus Summary; Business
17. Management's Discussion and Analysis or Plan of
Operation ........................................ Management's Discussion and
Analysis of Financial Condition
and Results of Operations
18. Description of Property............................. Business
19. Certain Relationships and Related Transactions...... Certain Transactions
20. Market for Common Equity and Related Stockholder
Matters .......................................... Outside Front Cover Page of Prospectus;
Prospectus Summary; Risk Factors;
Dividend Policy; Shares Eligible for
Future Sale
21. Executive Compensation.............................. Management
22. Financial Statements................................ Index to Consolidated Financial
Statements
23. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............... *
</TABLE>
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* Not applicable or the answer thereto is negative.
(1) Set forth on the alternate pages for the Selling Security Holders'
Prospectus included herewith.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED MARCH 13, 1997
PROSPECTUS
1,400,000 SHARES
[ASD GROUP INC. LOGO]
COMMON STOCK
----------------
ASD Group, Inc. (the "Company") hereby offers (the "Offering") 1,400,000
shares of common stock, par value $.01 per share (the "Common Stock"). Prior to
this Offering, there has been no public market for the Common Stock and no
assurance can be given that such a market will develop upon completion of this
Offering, or if developed, that it will be sustained. It is currently
anticipated that the initial public offering price of the Common Stock will be
between $5.75 and $6.25 per share of Common Stock. See "Underwriting" for a
discussion of the factors considered in determining the initial public offering
price. The Company has applied for quotation of the Common Stock on The Nasdaq
SmallCap Market under the symbol "ASDG," as well as on the Boston Stock Exchange
and the Pacific Stock Exchange under the symbol "ASD."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS"
COMMENCING ON PAGE 7 AND "DILUTION."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) THE COMPANY(2)
<S> <C> <C> <C>
Per Share ...... $ $ $
Total(3) ...... $ $ $
</TABLE>
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(1) Does not include additional compensation payable to H.J. Meyers & Co., Inc.,
and Keane Securities Co., Inc., the representatives of the several
Underwriters (the "Representatives"), in the form of a non-accountable
expense allowance. In addition, see "Underwriting" for information
concerning indemnification and contribution arrangements with the
Underwriters and other compensation payable to the Representatives.
(2) Before deducting estimated expenses of $514,000 payable by the Company,
excluding the non-accountable expense allowance payable to the
Representatives.
(3) The Company has granted to the Underwriters an option exercisable within 30
days of this Prospectus to purchase up to an aggregate of 210,000 additional
shares of Common Stock upon the same terms and conditions as set forth above,
solely to cover over-allotments, if any. If such over-allotment option is
exercised in full, the total Price to Public, Underwriting Discount and
Proceeds to the Company will be $ , $ and $ ,
respectively. See "Underwriting."
----------------
The shares of Common Stock are being offered by the Underwriters, subject
to prior sale, when, as and if delivered to and accepted by the Underwriters,
and subject to approval of certain legal matters by their counsel and subject to
certain other conditions. The Underwriters reserve the right to withdraw, cancel
or modify this Offering and to reject any order in whole or in part. It is
expected that the delivery of the shares of Common Stock offered hereby will be
made against payment therefor at the offices of H.J. Meyers & Co., Inc., 1895
Mt. Hope Avenue, Rochester, New York 14620, on or about , 1997.
----------------
H.J. MEYERS & CO., INC. KEANE SECURITIES CO., INC.
----------------
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
[INSIDE FRONT COVER]
ASD GROUP, INC. [LOGO]
An automatic over-labeling system which the Company engineered and manufactured
to address the production and quality needs of a medical products manufacturer.
DESIGN ENGINEERING SERVICES
<PAGE>
[INSIDE FRONT COVER]
A cleaning and drying system the Company helped re-design.
<PAGE>
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and quarterly reports for the first
three quarters of each fiscal year containing unaudited interim financial
information.
----------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES
OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDEWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, FINANCIAL INFORMATION,
NUMBER OF SHARES AND PER SHARE DATA SET FORTH IN THIS PROSPECTUS (I) ASSUMES NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION TO PURCHASE UP TO AN
ADDITIONAL 210,000 SHARES OF COMMON STOCK, (II) ASSUMES NO EXERCISE OF THE
WARRANTS TO BE ISSUED BY THE COMPANY TO THE REPRESENTATIVES TO PURCHASE UP TO
140,000 SHARES OF COMMON STOCK (THE "REPRESENTATIVE'S WARRANTS"), (III)
DOES NOT GIVE EFFECT TO 657,083 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF
CERTAIN OUTSTANDING WARRANTS (ASSUMING AN INITIAL PUBLIC OFFERING PRICE OF $6.00
PER SHARE) AND (IV) DOES NOT GIVE EFFECT TO 30,000 SHARES OF COMMON STOCK
ISSUABLE UPON THE EXERCISE OF OPTIONS TO BE GRANTED AS OF THE DATE OF THIS
PROSPECTUS PURSUANT TO THE COMPANY'S 1996 STOCK OPTION PLAN (THE "1996
PLAN") AND 30,000 ADDITIONAL SHARES OF COMMON STOCK RESERVED FOR FUTURE
ISSUANCE UNDER THE 1996 PLAN. SEE "MANAGEMENT," "CERTAIN
TRANSACTIONS" AND "UNDERWRITING." UNLESS OTHERWISE INDICATED, THIS
PROSPECTUS GIVES EFFECT TO THE 5,753.79 FOR ONE STOCK SPLIT EFFECTED AS OF JUNE
10, 1996. UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES HEREIN TO THE
"COMPANY" ARE TO ASD GROUP, INC. AND ITS SUBSIDIARIES AND PREDECESSORS.
THE COMPANY
ASD Group, Inc. (the "Company") provides comprehensive contract
manufacturing and engineering services to original equipment manufacturers
("OEMs"). The Company specializes in the fabrication, assembly and testing
of complex industrial products and non-invasive medical equipment. The Company
manufactures complete systems, as well as assemblies, including printed circuit
boards, cable and wire harnesses and other electro-mechanical assemblies. The
Company complements its basic manufacturing services by providing its customers
with a broad range of sophisticated product engineering and design services.
Products manufactured by the Company range from highly sophisticated atomic
force microscopes (which measure the electrical field of an atom) to less
complex products such as sign plotting devices. Representative customers of the
Company include ENI (a division of Astec America, Inc.), General Electric Co.,
Gerber Scientific Co., International Business Machines Corporation
("IBM"), Lockheed Martin Corporation (formerly Loral Federal Systems
Company), Materials Research Corporation (a division of Sony Corporation),
Motorola Corporation, and the United States Postal Service.
Downsizing by American industry, combined with rapid change, strong
competition and increasingly shorter product life cycles in various industries,
have made it considerably less attractive for OEMs to manufacture in-house,
particularly low unit volume products or short cycle electronic products. As a
result, many OEMs have adopted and are becoming increasingly reliant upon
manufacturing outsourcing strategies and on contract manufacturers to satisfy
their mainstream manufacturing requirements. Management of the Company believes
that this trend will continue. According to reports by Technology Forecasters,
Inc., a Berkeley, California research firm, contract manufacturers were expected
to do nearly $25 billion of business in the United States and Canada in 1996. In
addition, growth in this industry is forecasted at 26% a year through 1999.
Moreover, according to these reports, electronics contract manufacturing
worldwide was expected to be a $50 billion business in 1996 and will nearly
double in 1999.
The Company believes that its ability to produce high quality products and
deliver them on a timely basis combined with sophisticated engineering and
manufacturing capabilities has resulted in an expansion of its relationships
with existing customers and the addition of new customers. In addition, the
Company's proprietary Production Operation Management ("POM")
manufacturing software is an integral part of the Company's services as it
assists the Company in controlling its manufacturing operations from estimating
to shipping to billing. The POM manufacturing software is a real time system
which allows the Company to track specific projects as they move through the
production cycle and to make adjustments as necessary in order to control costs
and achieve higher levels of quality control and efficiencies.
3
<PAGE>
The Company focuses on servicing OEMs who produce complex, high dollar
value industrial products where high quality manufacturing is extremely
important. Management of the Company believes that profits for such products
tend to generate higher gross profit margins. The Company's objective is to
increase revenues and improve profitability through utilizing its POM
manufacturing software and sophisticated manufacturing, engineering and design
services to offer customers comprehensive manufacturing solutions. The Company
intends to realize its objective by implementing the following strategies:
INCREASE SALES FROM EXISTING CUSTOMERS AND ADD NEW CUSTOMERS. The Company
plans to expand existing relationships and seek new customers in the markets it
currently serves and in additional markets. The Company plans to increase the
amount of sales to existing customers by devoting more time to these customers
through an increased sales force and by offering improved and expanded services
such as faster metal cutting machining centers, faster sheet metal punching
equipment, expanded painting facilities and more rapid and less expensive
testing procedures and equipment. The Company also plans to add new customers by
increasing its marketing efforts, including attending more trade shows,
expanding the number of advertisements in trade journals, increasing the number
of sales personnel, expanding the number of customers who receive direct
mailings, providing new sales literature and conducting CD-ROM based interactive
electronic presentations. The Company also plans to use a portion of the net
proceeds of this Offering to refurbish a currently idle second plant owned by
the Company which will enable the Company to handle the requirements of
additional customers. The Company's objective is to obtain multiple customers
in the markets it currently serves and in additional markets.
INCREASE PROFITS BY REDUCING COSTS. The Company plans to reduce costs by
enhancing the POM manufacturing software to augment its real time productivity
and quality measurement system using bar codes and adding a feature to the POM
manufacturing software which will allow each customer a window into the POM
manufacturing software to monitor via the Internet the status of purchase orders
relating to their jobs. Management of the Company believes that the utilization
of bar codes will reduce the labor costs associated with the present manual
entry method of reporting. Although customers will not have the ability to
modify existing jobs or place new orders through the Internet, management
believes that allowing customers to access information themselves will also
enable the Company to reduce overhead.
FACILITATE GROWTH OF THE COMPANY THROUGH ACQUISITIONS. The contract
manufacturing industry is now going through consolidation. The Company may
acquire other contract manufacturers if management determines that such
acquisitions will enable the Company to improve net sales and profits. These
acquisitions may allow the Company to expand to other regions of the country and
possibly abroad. Management of the Company believes that the Company's
proprietary POM manufacturing software will enable the Company to realize
greater efficiencies with respect to any such acquisitions. The Company has no
current commitment or understanding with, and has not entered into negotiations
with, any acquisition candidates.
4
<PAGE>
THE OFFERING
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Common Stock offered by the Company......... 1,400,000 shares(1)
Common Stock outstanding prior
to the Offering............................ 632,917 shares
Common Stock to be outstanding
after the Offering......................... 2,032,917 shares
Use of Proceeds............................. For repayment of indebtedness, increase in
staffing and purchase of materials to fill
backlog requirements, capital expenditures,
sales and marketing activities, working capital
and other general corporate purposes. See
"Use of Proceeds."
Dilution.................................... An investment in the Common Stock involves
immediate and substantial dilution to the
purchasers in this Offering. See "Dilution."
Proposed Symbols
Nasdaq SmallCap Market..................... ASDG
Boston Stock Exchange...................... ASD
Pacific Stock Exchange..................... ASD
</TABLE>
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(1) An additional 533,333 shares of Common Stock issuable by the Company
(assuming an initial public offering price of $6.00 per share) upon exercise
of the Noteholder Warrants and Placement Agent Warrants (as defined herein)
are being registered by certain selling security holders (the "Selling
Security Holders") in a concurrent offering (the "Concurrent
Offering"). See "Concurrent Offering."
RISK FACTORS
An investment in the shares of Common Stock offered hereby is speculative
and involves a high degree of risk. Investors should consider carefully the
risks discussed elsewhere in this Prospectus under the caption "Risk
Factors." These risks include, but are not limited to: (i) the Company's
dependence on a limited number of customers; (ii) the Company's limited history
of profitability; (iii) the Company's dependence on key personnel; (iv) the
potential for fluctuation in the Company's annual and quarterly operating
results as a result of a number of factors; (v) the Company's dependence upon
the continued growth, viability and financial stability of its customers which
are in turn substantially dependent upon certain industries; (vi) the
variability of the requirements of the Company's customers and financing
available to the Company's customers; and (vii) the Company's dependence on
its ability to use and exploit its proprietary POM manufacturing software and,
thus, the Company's need to adquately protect its intellectual property rights.
See "Risk Factors."
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following summary financial information has been derived from the
consolidated financial statements of the Company. This information should be
read in conjunction with the consolidated financial statements, related notes
and other financial information included elsewhere in this Prospectus.
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<CAPTION>
YEAR ENDED JUNE 30, SIX MONTHS ENDED
------------------------------ ---------------------------------
DECEMBER 29, DECEMBER 27,
1995 1996 1995 1996
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<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales .............................. $18,655,000 $26,112,000 $13,326,000 $8,210,000
Income (loss) before income taxes ...... 301,000 404,000 266,000 (281,000)
Net income (loss) ........................ 172,000 407,000 327,000 (163,000)
Net income (loss) per common share ...... $.27 $.64 $.52 $(.26)
Weighted average number of common shares
outstanding ........................... 632,917 632,917 632,917 632,917
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 27, 1996
-------------------------------
ACTUAL AS ADJUSTED(1)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital .............................. $3,238,000 $7,909,000
Current assets .............................. 7,844,000 11,406,000
Total assets ................................. 14,768,000 19,388,000
Current liabilities ........................ 4,606,000 3,497,000
Long-term debt, net of current portion ...... 8,783,000 7,883,000
Stockholders' equity ......................... 1,077,000 7,706,000
</TABLE>
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(1) Adjusted to give effect to (i) the sale by the Company of 1,400,000 shares
of Common Stock offered hereby at an assumed initial public offering price of
$6.00 per share after deducting the underwriting discount and estimated
expenses of this Offering, (ii) the initial application of the estimated net
proceeds therefrom, and (iii) a non-cash charge of $93,000, net of income
tax, for the unamortized portion of the debt costs relating to the repayment
of a portion of the Notes (as defined herein) and all of the Bridge Notes (as
defined herein) from a portion of the net proceeds of this Offering. See
"Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources," and
Notes to Consolidated Financial Statements.
6
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK AND IMMEDIATE AND SUBSTANTIAL DILUTION. IN ADDITION TO THE OTHER
INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED
CAREFULLY IN EVALUATING AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED
HEREBY. THIS PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY. FACTORS THAT COULD CAUSE OR CONTRIBUTE
TO SUCH DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW, AS
WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
DEPENDENCE ON A LIMITED NUMBER OF CUSTOMERS
For the fiscal year ended June 30, 1995 ("Fiscal 1995"), the
Company's four largest customers accounted for approximately 71% of net sales.
Sales to Gerber Scientific Products ("Gerber"); ENI, a division of Astec
America, Inc. ("ENI"); IBM; and S&K Products International, Inc.
("S&K") accounted for approximately 20%, 19%, 19% and 13%, respectively,
of the Company's net sales during Fiscal 1995. For the fiscal year ended June
30, 1996 ("Fiscal 1996"), the Company's five largest customers accounted
for approximately 73% of net sales. Sales to ENI, Gerber, S&K, Loral Federal
Systems Company, Inc. ("Loral") and Bruce Technologies International
("Bruce") accounted for approximately 20%, 16%, 14%, 13% and 10%,
respectively, of the Company's net sales during Fiscal 1996. For the six months
ended December 27, 1996, the Company's four largest customers accounted for
approximately 57% of net sales. Sales to Lockheed Martin Corporation, ENI,
Gerber and S&K accounted for approximately 18%, 18%, 11% and 10%, respectively,
of the Company's net sales for such period. While the Company is pursuing a
strategy of diversifying its customer base, the Company expects to continue to
depend upon a relatively small number of customers for a significant percentage
of its revenues for the foreseeable future. Significant reductions in sales to
any of the Company's large customers would have a material adverse effect on
the Company. There can be no assurance that present or future customers will not
terminate their manufacturing arrangements with the Company or significantly
change, reduce or delay the amount of manufacturing services ordered from the
Company. Any such termination of a manufacturing relationship or change,
reduction or delay in orders could have an adverse effect on the Company. During
the six months ended December 27, 1996, two of the Company's largest customers
temporarily reduced shipment levels due to their inventory backlog. The Company
anticipates that the reduced level of shipments combined with delays in raising
additional capital will adversely affect results for the third quarter of the
fiscal year ending June 30, 1997 ("Fiscal 1997"). See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business-Customers, Sales and Marketing."
LIMITED HISTORY OF PROFITABILITY
Although the Company had income before income taxes of $301,000 and
$404,000 for Fiscal 1995, and Fiscal 1996, respectively, the Company had losses
before income taxes of $1,251,000 and $2,481,000 for the fiscal years ended June
30, 1994 and June 30, 1993 ("Fiscal 1993"), respectively. In addition, the
Company had a loss before income taxes of $281,000 for the six months ended
December 27, 1996 as a result in part of two large customers temporarily
reducing the level of shipments on outstanding orders due to their inventory
backlog. The Company anticipates the reduced shipment levels combined with
delays in raising additional capital will result in its incurring a loss in the
third quarter of Fiscal 1997. There can be no assurance that the Company will be
profitable in future periods. As of December 27, 1996, the Company had a net
operating loss carryforward ("NOL") for federal income tax purposes of
approximately $4,200,000 which expires in 2011, and no NOL for state income tax
purposes. Although the Offering is expected to result in a "change of
control" for federal tax purposes, the limitation on the Company's ability
to utilize such NOL will not be significant. Statement of Financial Accounting
Standards No. 109 requires that deferred tax assets be reduced by a valuation
allowance if, based on the weight of available evidence, it is more likely than
not that some portion or all of such assets will not be realized. The Company
monitors the realizability of such assets and establishes a valuation allowance
7
<PAGE>
for all amounts that will not be realized. As of December 27, 1996, the total
valuation allowance was $228,000. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
DEPENDENCE ON KEY PERSONNEL
The success of the Company's present and future operations will depend to
a great extent on the collective experience, abilities and continued services of
certain executive officers including Gary D. Horne, the Company's Chief
Executive Officer; Stanley F. Zuk, the Company's Chief Operating Officer; and
Robert Lettieri, the Company's Chief Financial Officer. Although the Company is
party to employment agreements with Messrs. Horne and Zuk, the loss of the
services of either of such persons could have a material adverse effect on the
Company. The Company has agreed with the Representatives to obtain, prior to
consummation of this Offering, key man insurance in the amount of $1,000,000 on
the lives of each of Messrs. Horne and Zuk. The Company's ongoing business
activities are dependent on highly skilled and experienced individuals. The
Company has devoted, and will continue to devote, considerable efforts to
recruiting skilled individuals. Competition for highly skilled personnel is
intense and the Company may have to provide qualified personnel with competitive
compensation packages, equity participation and other benefits, which may limit
the working capital available for the Company's operations. No assurance can be
given that the Company will be able to obtain such employees when needed or on
terms acceptable to the Company. See "Business-
Employees" and "Management."
POSSIBLE ADDITIONAL FINANCING REQUIREMENTS
The Company believes that its existing and anticipated capital resources,
including the estimated net proceeds of this Offering, will enable it to fund
its planned operations for a period of at least 12 months from the date of this
Prospectus. There can be no assurance that the Company will realize cash
flow from operations or that such cash flow will be sufficient, in which case
the Company may require additional financing and may seek to raise funds through
subsequent equity or debt financings, or through other sources. Moreover, the
Company's existing credit facility places restrictions on the Company's
ability to obtain financing either through the offering of equity or incurrence
of additional debt. No assurance can be given that additional funds will be
available to the Company on acceptable terms, if at all. Additional financings
may result in dilution to existing stockholders. If funds are needed but are not
available in adequate amounts from additional financing sources or from
operations, the Company may be materially and adversely affected. As of the date
of this Prospectus, the Company is negotiating with a number of financial
institutions to refinance its existing credit facility. However, no assurance
can be given that the Company will be able to successfully refinance this credit
facility. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
On August 29, 1996, the Company issued $1,100,000 10% Original Issue
Discount Promissory Notes (the "Bridge Notes") to several investors (the "Bridge
Investors"). The Bridge Notes were due at the earliest of January 29, 1997, the
closing date of an initial public offering or upon the sale of the Company. The
Bridge Investors have advised the Company that they do not intend to take any
action with respect to the Bridge Notes until the earlier of consummation of
this Offering at which time the Bridge Notes will be repaid or April 28, 1997.
The Bridge Notes also contain requirements as to the Company maintaining a
specified amount of stockholders' equity. At September 27, 1996, the Company was
in default of this requirement and subsequently obtained a waiver thereof. In
connection with the waiver, the interest rate on the Bridge Notes increased to
12.5% retroactively as of the date of issuance. However, notwithstanding the
foregoing, such defaults may have an adverse impact on the Company's ability to
refinance its credit facility. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company currently has an equipment line of credit (the "Equipment
Line"). As of December 27, 1996, $455,000 was outstanding under the Equipment
Line. The Equipment Line is due March 31, 1997. The company is currently seeking
an extension of the Equipment Line and intends to refinance such indebtedness
with its proposed new credit facility. There can be no assurance that the
Company will be able to obtain an extension of the Equipment Line and, if
obtained, whether the Company will be able to refinance the Equipment Line. See
"Management's Discussion and Analysis of Finance Condition and Results of
Operations."
8
<PAGE>
In addition to the foregoing, $1,100,000 in principal amount of Notes
together with accrued interest thereon will be due and payable on the 13 month
anniversary of the consummation of this Offering and commencing July 1, 1998,
the Company may be required to repay $755,000 in advances to Gary D. Horne, the
Company's Chairman of the Board and Chief Executive Officer. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Certain Transactions-Advances from Stockholder."
POTENTIAL FLUCTUATIONS IN FINANCIAL RESULTS
The Company's annual and quarterly operating results may be affected by a
number of factors, including the Company's ability to manage inventories,
shortages of components or labor, the degree of automation used in the assembly
process, fluctuations in material costs and the mix of material costs versus
labor. Manufacturing and overhead costs are also significant factors affecting
the annual and quarterly operating results of the Company. Other factors include
price competition, the ability to pass on excess costs to customers, the timing
of expenditures in anticipation of increased sales and customer product delivery
requirements. The Company's primary pricing method is fixed price; however,
costs resulting from customer changes are typically passed on to the customer.
Any one of the foregoing factors, or a combination thereof, could adversely
affect the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DEPENDENCE ON CERTAIN INDUSTRIES
The Company is dependent upon the continued growth, viability and financial
stability of its customers, which are in turn substantially dependent upon the
growth of the computer, computer peripherals, telecommunications, postal
equipment, semiconductor, environmental, test equipment, process equipment,
industrial equipment and other industries in which they operate. These
industries have been characterized by rapid technological change, short product
life cycles and have recently experienced pricing and margin pressures. In
addition, many of the Company's customers in these industries are affected by
general economic conditions. The factors affecting the industries in which the
Company's customers operate, and/or the Company's customers in particular,
could have a material adverse effect on the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business-Customers, Sales and Marketing."
VARIABILITY OF CUSTOMER REQUIREMENTS AND CUSTOMER FINANCING
The level and timing of orders placed by the Company's customers vary due
to the customers' attempts to balance their inventory, changes in customers'
manufacturing strategies and variations in demand for their products resulting
from, among other things, product life cycles, competitive conditions or general
economic conditions. Should the Company increase its expenditures in
anticipation of a future level of sales which does not materialize, its
profitability could be adversely affected. While a majority of the Company's
net sales are derived from several of the Company's customers who provide
production requirements for one year in the form of yearly purchase orders, the
remaining net sales are derived from others who do not commit to firm production
schedules for more than one quarter in advance. The Company does not assess any
additional fee or charge interest in connection with the financing of any
customer orders. Such financing is funded from and is limited in amount by
available cash generated from operations. The Company's inability to forecast
the level of customer orders with certainty makes it difficult to schedule
production and maximize utilization of manufacturing capacity. See
"Business-Backlog."
In the past, the Company has been required to increase staffing and other
expenses in order to meet the demands of firm purchase orders of its customers.
In addition, the total quantity requirements of purchase orders from some of the
Company's customers have been decreased and/or delivery schedules have been
deferred as a result of changes in the customer's business needs, thereby
adversely affecting the Company. On other occasions, customers have required
rapid increases in production which have placed excessive burdens on the
Company's resources. If a customer cancels an order, the customer is required
to pay for all materials purchased and labor expended to the date of
cancellation.
9
<PAGE>
The Company does not assess any additional fees or penalties. Such
customers' order fluctuations and deferrals have from time to time had an
adverse effect on the Company's results of operations in the past, and there
can be no assurance that the Company will not experience such effects in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
INTELLECTUAL PROPERTY RIGHTS
The Company's ability to compete successfully depends, in part, on its
ability to use and exploit its proprietary POM manufacturing software. To
maintain the secrecy of its proprietary POM manufacturing software, the Company
relies largely upon a combination of trade secret laws, copyright laws, internal
security systems and confidentiality procedures. Third parties may attempt to
exercise alleged rights in any of the copyrights or other intellectual property
rights or appropriate any copyrights or other intellectual property rights
established by the Company. The Company's failure or inability to establish
appropriate copyrights or to adequately protect any of its intellectual property
rights, may have a material adverse effect on the Company. See
"Business-Intellectual Property Rights."
LIMITED AVAILABILITY OF COMPONENTS; AGED INVENTORY
A substantial part of the Company's revenues is derived from turnkey
manufacturing in which the Company provides materials sourcing, procurement,
assembly and testing. In turnkey manufacturing, the Company could be exposed to
the risk of component price increases, which could adversely affect the
Company's gross profit margins. Some of the products and assemblies
manufactured by the Company require one or more components that are ordered
from, or which may be available from, only one source. Some of these components
are allocated in response to supply shortages. In some cases, supply shortages
could substantially curtail production of all assemblies using a particular
component. While the Company has not experienced material shortages of
components in the recent past, there can be no assurance that such shortages
will not occur in the future. Any such shortages could have a material adverse
effect on the Company. See "Business-Suppliers."
The Company does not maintain a large inventory of supplies and does not
place orders for supplies unless required for a specific customer purchase
order. If the Company does have any aged or obsolete inventory, it is
written-off immediately. Historically, aged or obsolete inventory has not had a
material adverse effect on the Company. See "Business-Suppliers".
MANAGEMENT OF GROWTH
One of the Company's strategies is to expand its relationships with its
existing customers and increase its customer base. In order to do this, the
Company will be required to continue to increase staffing as well as its
expenditures on capital equipment. The Company must continue to manage its staff
and capital properly to ensure that the increased costs of staffing and capital
expenditures do not increase at a faster rate than sales. In addition, as the
Company's business and customer base grows, the Company's accounts receivable
may increase. While the Company maintains accounts receivable insurance on
certain of its customers, if one or more of the Company's principal customers
were to become insolvent, or otherwise were unable to pay for the services
provided by the Company, the Company's operating results and financial
condition could be adversely affected. Moreover, increased levels of accounts
receivable may negatively impact the Company's cash flow. See
"Business-Business Strategy."
COMPETITION
The Company operates in a highly competitive environment and competes
against numerous domestic and foreign manufacturers. The Company also faces
competition from current and prospective customers which evaluate the Company's
capabilities against the merits of manufacturing products internally versus the
merits of contract manufacturing. Certain of the Company's competitors,
including
10
<PAGE>
SCI Systems, Inc., Solectron Corporation, Jabil Circuit, Inc., and
Avex Electronics, have substantially greater geographic breadth, and financial,
research and development and marketing resources than the Company. To remain
competitive, the Company must continue to provide and develop technologically
advanced manufacturing services, maintain quality levels, offer flexible
delivery schedules, deliver finished products on a reliable basis and compete
favorably on the basis of price. There can be no assurance that the Company will
be able to compete favorably with respect to these factors in the future. See
"Business-Competition."
TECHNOLOGICAL CHANGE AND PROCESS DEVELOPMENT
The market for the Company's manufacturing services is characterized by
rapidly changing technology and continuing process development. The Company
believes that its future success will depend in large part upon its ability to
develop and market manufacturing services which meet changing customer needs,
maintain technological leadership and successfully anticipate or respond to
technological changes in manufacturing processes on a cost-effective and timely
basis. There can be no assurance that the Company's process development efforts
will be successful. See "Business-Business Strategy."
ENVIRONMENTAL COMPLIANCE
The Company is subject to a variety of environmental regulations relating
to the use, storage, discharge and disposal of hazardous chemicals used during
its manufacturing process. While the Company believes it is in compliance with
all environmental regulations, any failure by the Company to comply with present
and future regulations could subject it to future liabilities or the suspension
of production. In addition, such regulations could restrict the Company's
ability to expand its facilities or could require the Company to acquire costly
equipment or to incur other significant expenses to comply with governmental
regulations. Historically, the Company's costs of compliance with environmental
regulations have not been material. See "Business-Government Regulation."
CONTROL OF THE COMPANY BY MANAGEMENT
After giving effect to the sale of the shares of Common Stock offered
hereby, the Company's directors and executive officers will beneficially own
approximately 23.5% of the outstanding shares of Common Stock (approximately
21.3% if the Underwriters' over-allotment option is exercised in full). As a
result, the Company's current management may continue to exert substantial
influence over the Company's affairs after the Offering and may have the
ability to substantially influence all matters requiring approval by the
stockholders, including the election of directors. See "Principal
Stockholders" and "Description of Securities."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the shares of Common Stock offered hereby will incur an
immediate dilution in net tangible book value of $2.45 (or 40.9%) per share of
Common Stock. See "Dilution."
NO ASSURANCE OF PUBLIC MARKET; ARBITRARY DETERMINATION OF PUBLIC OFFERING PRICE;
POSSIBLE VOLATILITY OF COMMON STOCK PRICES
Prior to this Offering, there has been no public market for the Common
Stock and no assurance can be given that such a market will develop upon
completion of this Offering or if developed, that it will be sustained. The
initial public offering price of the Common Stock has been arbitrarily
determined by negotiations between the Company and the Representatives and does
not necessarily bear any relationship to the Company's assets, book value,
results of operations or any other generally accepted criteria of value.
See "Underwriting."
11
<PAGE>
The stock market has from time to time experienced significant price and
volume fluctuations that may be unrelated to the operating performances of
specific companies. Announcements of new technologies and changing policies and
regulations of the federal government and state governments and other external
factors, as well as potential fluctuations in the Company's financial results,
may have a significant impact on the price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this Offering, the Company will have outstanding
2,032,917 shares of Common Stock. The 1,400,000 shares of Common Stock offered
hereby (1,610,000 shares if the Underwriters' over-allotment option is exercised
in full) will be freely transferable without restriction or further registration
under the Securities Act of 1933, as amended (the "Securities Act"). The
remaining 632,917 outstanding shares of Common Stock, which are owned by the
existing stockholders, will be "restricted securities," as that term is defined
in Rule 144 promulgated under the Securities Act ("Rule 144") and may only be
sold pursuant to a registration statement under the Securities Act or an
applicable exemption from registration thereunder, including exemptions provided
by Rule 144. Notwithstanding the foregoing, directors and executive officers of
the Company have agreed not to sell 250,000 of their shares for a period of five
years from the date of this Prospectus without the prior written consent of H.J.
Meyers & Co., Inc. ("Meyers"). Holders of the remaining 382,917 outstanding
shares of Common Stock have agreed not to sell their shares for a period of two
years from the date of this Prospectus without the prior written consent of
Meyers. Meyers does not have any general policy with respect to the release of
shares prior to the expiration of the lock-up period. No prediction can be made
as to the effect that future sales of Common Stock, or the availability of
shares of Common Stock for future sale, will have on the market price of the
Common Stock prevailing from time to time. See "Certain Transactions-Contingent
Shares," "Description of Securities" and "Shares Eligible for Future Sale."
EFFECT OF OUTSTANDING WARRANTS AND OPTIONS
As of the date of this Prospectus, the Company has outstanding warrants to
purchase 657,083 shares of Common Stock and options under the 1996 Plan to
purchase 30,000 shares of Common Stock. In addition, upon consummation of this
Offering the Company will sell to the Representatives and/or their designees,
warrants (the "Representatives' Warrants") to purchase up to 140,000
shares of Common Stock at an exercise price equal to 145% of the public offering
price of the shares of Common Stock sold in this Offering. As long as the
warrants, options and Representatives' Warrants remain unexercised, the terms
under which the Company could obtain additional capital may be adversely
affected. Moreover, the holders of the warrants, options and Representatives'
Warrants may be expected to exercise them at a time when the Company would, in
all likelihood, be able to obtain any needed capital by a new offering of its
securities on terms more favorable than those provided by such securities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Management-Stock Option Plan" and "Underwriting."
ANTI-TAKEOVER PROVISIONS; PREFERRED STOCK
The Company's Board of Directors has the authority to issue up to 1,000,000
shares of Preferred Stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the
stockholders. The rights of holders of Common Stock will be subject to, and may
be adversely affected by, the rights of holders of any Preferred Stock that may
be issued in the future. Although the Company has no present intention to issue
shares of Preferred Stock, any issuance of Preferred Stock, while potentially
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of the outstanding voting stock of the
Company. Any issuance of the Preferred Stock within two years from the date of
this Prospectus will require written consent of Meyers. Additionally, following
this Offering, the Company will become subject to the anti-takeover provisions
12
<PAGE>
of Section 203 of the Delaware General Corporation Law (the "DGCL"), which
will prohibit the Company from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. Section 203 could have
the effect of delaying or preventing a change of control of the Company. See
"Description of Securities."
REPRESENTATIVES' POTENTIAL INFLUENCE ON THE MARKET
A significant number of the shares of Common Stock offered hereby may be
sold to customers of the Representatives. Such customers may engage in
transactions for the sale or purchase of such shares through or with the
Representatives. Although they have no obligation to do so, the Representatives
intend to make a market in the shares of Common Stock and may otherwise effect
transactions in such shares. If they participate in such market, the
Representatives may influence the market, if one develops, for the shares of
Common Stock.
NO ASSURANCE OF NASDAQ SMALLCAP MARKET LISTING; RISK OF LOW-PRICED SECURITIES;
RISK OF APPLICATION OF PENNY STOCK RULES
The Board of Governors of the National Association of Securities Dealers,
Inc. has established certain standards for the initial listing and continued
listing of a security on The Nasdaq SmallCap Market ("Nasdaq"). The
standards for initial listing require, among other things, that an issuer have
total assets of $4,000,000 and capital and surplus of at least $2,000,000; that
the minimum bid price for the listed securities be $3.00 per share; that the
minimum market value of the public float (the shares held by non-insiders) be at
least $2,000,000, and that there be at least two market makers for the issuer's
securities. The maintenance standards require, among other things, that an
issuer have total assets of at least $2,000,000 and capital and surplus of at
least $1,000,000; that the minimum bid price for the listed securities be $1.00
per share; that the minimum market value of the "public float" be at least
$1,000,000 and that there be at least two market makers for the issuer's
securities. A deficiency in either the market value of the public float or the
bid price maintenance standard will be deemed to exist if the issuer fails the
individual stated requirement for ten consecutive trading days. If an issuer
falls below the bid price maintenance standard, it may remain on Nasdaq if the
market value of the public float is at least $1,000,000 and the issuer has
$2,000,000 in equity. Nasdaq has recently proposed new maintenance criteria
which, if implemented, would eliminate the exception to the $1.00 per share
minimum bid price and require, among other things, $2,000,000 in net tangible
assets, $1,000,000 market value of the public float and adherence to certain
corporate governance provisions. There can be no assurance that the Company will
continue to satisfy the requirements for maintaining a Nasdaq listing. If the
Company's Common Stock was to be excluded from Nasdaq, it would adversely
affect the prices of such securities and the ability of holders to sell them,
and the Company would be required to comply with the initial listing
requirements to be relisted on Nasdaq.
If the Company is unable to satisfy Nasdaq's maintenance requirements and
the price per share were to drop below $5.00, then unless the Company satisfied
certain net asset tests, the Company's Common Stock would become subject to
certain penny stock rules promulgated by the Securities and Exchange Commission
(the "Commission"). The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document prepared by the Commission that provides
information about penny stocks and the nature and level of risks in the penny
stock market. The broker-dealer also must provide the customer with current bid
and offer quotations for the penny stock, the compensation of the broker-dealer
and its salesperson in the transaction and monthly account statements showing
the market value of each penny stock held in the customer's account. In
addition, the penny stock rules require that prior to a transaction in a penny
stock not otherwise exempt from such rules, the broker-dealer must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written agreement to the transaction.
These disclosure requirements may have the effect of reducing the level of
trading activity in the secondary market for a stock that becomes subject to the
13
<PAGE>
penny stock rules. If the Common Stock becomes subject to the penny stock rules,
investors in the Offering may find it more difficult to sell their shares.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS
This Prospectus contains certain forward-looking statements regarding the
plans and objectives of management for future operations, including plans and
objectives relating to the development of the Company's business. The
forward-looking statements included herein are based on current expectations
that involve numerous risks and uncertainties. The Company's plans and
objectives are based on a successful execution of the Company's business
strategy and assumptions that the Company will be profitable, that the contract
manufacturing industry will not change materially or adversely, and that there
will be no unanticipated material adverse change in the Company's operations or
business. Assumptions relating to the foregoing involve judgments with respect
to, among other things, future economic, competitive and market conditions and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that its assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could prove inaccurate and, therefore,
there can be no assuance that the forward-looking statements included in this
Prospectus will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included herein, the inclusion of
such information should not be regarded as a representation by the Company or
any other person that the objectives and plans of the Company will be achieved.
ABSENCE OF DIVIDENDS
The Company has never paid any cash dividends on the Common Stock and does
not expect to pay any cash dividends on the Common Stock in the foreseeable
future. See "Dividend Policy."
14
<PAGE>
THE COMPANY
The Company provides comprehensive contract manufacturing and engineering
services to original equipment manufacturers ("OEMs"). The Company
initially provided design and engineering services to IBM's main frame computer
development and manufacturing operations in New York's Hudson Valley
("IBM-Hudson Valley"). Over a 25-year period, the Company's relationship
with IBM-Hudson Valley evolved to the point where by the mid-1980's the Company
assembled, wired and tested a significant portion of the IBM-Hudson Valley main
frame computers that were produced. IBM-Hudson Valley became the Company's
principal customer, providing for over 90% of its revenues. Commencing in 1990,
IBM-Hudson Valley's main frame sales began to decline due to the recession and
the shift in technology to personal computer-based systems. In December 1992,
IBM-Hudson Valley eliminated the use of substantially all main frame assembly
vendors, including the Company. As a result, the Company had significant
reductions in revenues and incurred substantial losses. Accordingly, during 1993
and 1994 the Company undertook a restructuring of its operations wherein it
implemented a significant downsizing, re-engineered its operations and commenced
intensive efforts to market its contract manufacturing services to other OEMs.
While the IBM-Hudson Valley down-sizing greatly affected the Company,
management believes that its relationship with IBM-Hudson Valley permitted the
Company to evolve into a vertically integrated, contract manufacturer with a
well disciplined quality control program. In May 1996, the Company's quality
control program was certified as conforming to ISO 9002, an international
quality standard.
The Company was incorporated in New York in May 1965 under the name
Dutchess Design & Development, Inc. In July 1996, the Company was reincorporated
in Delaware under its present name. The Company maintains its executive offices
at 1 Industry Street, Poughkeepsie, New York 12603. The Company's telephone
number is (914) 452-3000.
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,400,000 shares of
Common Stock offered hereby at an assumed initial public offering price of $6.00
per share are estimated to be approximately $6,722,000 (or approximately
$7,818,000 if the Underwriters' over-allotment option is exercised in full),
after deducting the underwriting discount, the non-accountable expense allowance
and other estimated Offering expenses payable by the Company.
The Company intends to use the estimated net proceeds of the Offering as
follows: (i) approximately $2,000,000 for repayment of certain indebtedness,
consisting of $900,000 in principal amount of the Company's 10% Senior Secured
Notes due June 30, 1999 (the "Notes") and $1,100,000 in principal amount
of the Bridge Notes; (ii) approximately $2,000,000 to increase staffing and
purchase materials to fill backlog requirements during the next 12 months; (iii)
approximately $1,400,000 for the purchase of new capital equipment and making
other improvements to the Company's manufacturing facilities, including
approximately $300,000 which will be used to refurnish a currently inactive
plant; (iv) approximately $350,000 for sales and marketing activities, including
hiring additional personnel for sales, purchasing multimedia laptop computers
for sales presentations, updating and printing new sales literature, increasing
the amount of advertisements, increasing the number of trade shows at which the
Company can make presentations and other related sales expenses; (v)
approximately $350,000 for refining the Company's POM manufacturing software
(for the Company's own internal use as well as for marketing the product to
others) by hiring additional engineering and marketing personnel; and (vi) the
balance, approximately $622,000 (plus any proceeds received from the exercise of
the Underwriters' over-allotment option), for working capital and other general
corporate purposes. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources."
The amounts and timing of the above expenditures may vary and will depend
on numerous factors, including, but not limited to, timing of orders from major
customers and timing of expenditures in response to such orders. Management of
the Company believes that the Company's existing and anticipated capital
resources, including the estimated net proceeds of this Offering, will enable it
to fund its planned operations for a period of at least 12 months from the date
of this Prospectus. There can be no assurance, however, that the Company will
realize cash flow from operations or that such cash flow will be sufficient to
satisfy the Company's requirements for any particular period of time.
Pending the aforementioned uses, the net proceeds from this Offering will
be invested in short-term, investment grade interest bearing obligations.
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (a) as of
December 27, 1996 and (b) on an as adjusted basis giving effect to (i) the sale
of shares of Common Stock offered hereby at an assumed initial public offering
price of $6.00 per share, less the underwriting discount, the non-
accountable expense allowance and the offering expenses payable by the Company,
(ii) the initial application of the estimated net proceeds therefrom, and (iii)
a non-cash charge of $93,000, net of income tax, for the unamortized portion of
the debt costs relating to the repayment of a portion of the Notes and all of
the Bridge Notes from a portion of the net proceeds of this Offering. See
"Use of Proceeds."
<TABLE>
<CAPTION>
DECEMBER 27, 1996
----------------------------
ACTUAL(1) AS ADJUSTED
------------- ------------
<S> <C> <C>
Current portion of long-term debt(1) ........................... $1,938,000 $ 873,000
========== ==========
Long-term debt(1) ............................................. 8,783,000 7,883,000
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized;
none issued ................................................... - -
Common stock, $.01 par value; 10,000,000 shares authorized;
632,917 shares issued and outstanding, actual; 2,032,917 shares
issued and outstanding, as adjusted ........................... 6,000 20,000
Additional paid-in capital .................................... 327,000 7,035,000
Retained earnings ............................................. 744,000 651,000
---------- ----------
Total stockholders' equity .................................... 1,077,000 7,706,000
---------- ----------
Total capitalization .......................................... $9,860,000 $15,589,000
========== ==========
</TABLE>
- ----------------
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Notes to Consolidated Financial Statements for
information regarding the Company's long-term debt.
17
<PAGE>
DILUTION
At December 27, 1996, the net tangible book value of the Company was
$173,000 or $.27 per share. Net tangible book value per share represents the
Company's total tangible assets, less total liabilities, divided by the number
of shares of Common Stock outstanding. After giving effect to the sale of the
1,400,000 shares of Common Stock offered hereby at an assumed initial public
offering price of $6.00 per share and the initial application of the estimated
net proceeds therefrom, the pro forma net tangible book value of the Company at
December 27, 1996 would have been $7,213,000, or $3.55 per share. This
represents an immediate increase in net tangible book value of $3.28 per share
to the existing stockholders and an immediate dilution in net tangible book
value to new investors of $2.45 per share. The following table illustrates this
per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share ..................... $6.00
Net tangible book value per share before the Offering ............... $ .27
Increase attributable to new investors .............................. 3.28
------
Pro forma net tangible book value per share after the Offering ...... 3.55
------
Dilution to new investors ............................................. $2.45
======
</TABLE>
If the Underwriters' over-allotment option is exercised in full, the pro
forma net tangible book value per share of Common Stock after this Offering
would be $3.70 per share, which would result in dilution to new investors in
this Offering of $2.30 per share of Common Stock.
The following table summarizes on a pro forma basis, as of the date of this
Prospectus, the difference between the existing stockholders and new investors
with respect to the number of shares of Common Stock purchased from the Company,
the total consideration paid and the average price per share paid, assuming an
initial public offering price of $6.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------------- --------------------------
AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- --------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders ...... 632,917 31.1% $ 3,833 0.05% $ 0.006
New investors ............... 1,400,000 68.9% 8,400,000 99.95% $ 6.00
--------- ------ --------- ------- --------
Total ..................... 2,032,917 100.0% $8,403,833 100.00%
========= ====== ========= =======
</TABLE>
DIVIDEND POLICY
The Company has not paid any cash dividends since its inception and does
not intend to pay any cash dividends on its Common Stock in the foreseeable
future. The payment of any dividends in the future will depend on the evaluation
by the Company's Board of Directors of such factors as it deems relevant at the
time. Currently, the Board of Directors believes that all of the Company's
earnings, if any, should be retained for the development of the Company's
business.
18
<PAGE>
CONCURRENT OFFERING
Concurrently with this Offering, the Company is registering, (a) for the
account of holders of the Notes (the "Noteholders") (i) warrants to purchase
500,000 shares of Common Stock exercisable at a price of $ per share [47.5% of
the initial public offering price] for a ten-year period from consummation of
this Offering (the "Noteholder Warrants"), and (ii) 500,000 shares of Common
Stock issuable upon exercise of the Noteholder Warrants (the "Underlying
Shares"), and (b) for the account of the Company's placement agent in connection
with the offer and sale of the Notes, and its assigns, (i) warrants to purchase
33,333 shares of Common Stock exercisable at a price of $ per share [the initial
public offering price] for a five-year period from consummation of this Offering
(the "Placement Agent Warrants"), and (ii) 33,333 shares of Common Stock
issuable upon exercise of the Placement Agent Warrants (the "Placement Agent
Shares"). These securities are not being underwritten in the Offering and the
Company will not receive any proceeds from the sale of these securities. The
Noteholder Warrants and Placement Warrants will not be exercisable and may not
be sold for a period of two years from consummation of this Offering without the
prior written consent of the Company and Meyers. The Company will not receive
any proceeds from the sale of such shares. Expenses of the Concurrent Offering,
other than fees and expenses of counsel to the Selling Security Holders and
selling commissions, will be paid by the Company. Sales of such shares by the
Selling Security Holders or the potential of such sales may have an adverse
effect on the market price of the Shares offered hereby. See "Risk
Factors-Shares Eligible for Future Sale."
19
<PAGE>
SELECTED FINANCIAL DATA
The statement of operations data set forth below for the years ended June
30, 1995 and 1996, and the balance sheet data set forth below as of June 30,
1996 have been derived from the Company's financial statements, which have been
audited by Deloitte & Touche LLP, independent auditors, whose report with
respect thereto is included elsewhere in this Prospectus. The balance sheet data
as of June 30, 1995 have been derived from the Company's audited balance sheet,
which is not included herein. The statement of operations data for the six
months ended December 29, 1995 and December 27, 1996 and the balance sheet data
as of December 27, 1996 are derived from the unaudited financial statements of
the Company included elsewhere in this Prospectus. In the opinion of management,
the unaudited financial statements have been prepared on the same basis as the
audited financial statements and include all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the
Company's financial condition and results of operations for such periods. The
results of operations for the six months ended December 27, 1996 are not
necessarily indicative of the results to be expected for any other interim
period or the entire year. This data should be read in conjunction with the
consolidated financial statements and the notes thereto and other financial
information appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, SIX MONTHS ENDED
----------------------------- -------------------------------
DECEMBER 29, DECEMBER 27,
1995 1996 1995 1996
-------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ................................. $18,655,000 $26,112,000 $13,326,000 $8,210,000
Cost of goods sold ........................ 14,834,000 20,438,000 10,662,000 6,034,000
----------- ----------- ----------- ----------
Gross profit .............................. 3,821,000 5,674,000 2,664,000 2,176,000
Selling, general and
administrative expense .................. 2,757,000 4,492,000 2,240,000 1,742,000
----------- ----------- ----------- ----------
Income from operations ..................... 1,064,000 1,182,000 424,000 434,000
Other income (expense) ..................... (1,000) 199,000 216,000 51,000
Interest expense ........................... 762,000 977,000 374,000 766,000
----------- ----------- ----------- ----------
Income (loss) before income taxes ......... 301,000 404,000 266,000 (281,000)
Provision (benefit) for income taxes ...... 129,000 (3,000) (61,000) (118,000)
----------- ----------- ----------- ----------
Net income (loss) ........................... $ 172,000 407,000 327,000 (163,000)
----------- ----------- ----------- ----------
Net income (loss) per common share ......... $ .27 $ .64 $ .52 $ (.26)
=========== =========== =========== ==========
Weighted average number of common
shares outstanding ........................ 632,917 632,917 632,917 632,917
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
DECEMBER 27,
1995 1996 1996
------------- ----------- ------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital .............................. $1,617,000 $4,482,000 $3,238,000
Current assets .............................. 8,502,000 9,520,000 7,844,000
Total assets ................................. 14,583,000 15,854,000 14,768,000
Current liabilities ........................ 6,885,000 5,038,000 4,606,000
Long-term debt, net of current portion ...... 6,897,000 9,602,000 8,783,000
Stockholders' equity ........................ 505,000 913,000 1,077,000
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company provides comprehensive contract manufacturing and engineering
services to OEMs. The Company was formed in 1965 to provide design and
engineering services to IBM-Hudson Valley. Over a 25-year period, the Company's
relationship with IBM-Hudson Valley evolved to the point where by the
mid-1980's the Company assembled, wired and tested a significant portion of
IBM-Hudson Valley's main frame computers. IBM-Hudson Valley became the
Company's principal customer, providing over 90% of its revenues. Commencing in
1990, IBM-Hudson Valley's main frame sales began to decline due to the
recession and the shift in technology to personal computer-based systems. In
December 1992, IBM-Hudson Valley eliminated the use of substantially all main
frame assembly vendors, including the Company. As a result, the Company had
significant reductions in revenues and incurred substantial losses. Accordingly,
during 1993 and 1994 the Company undertook a restructuring of its operations
wherein it implemented a significant downsizing, re-engineered its operations
and commenced intensive efforts to market its contract manufacturing services to
other OEMs. While the IBM-Hudson Valley down-sizing greatly affected the
Company, management believes that its relationship with IBM-Hudson Valley
permitted the Company to evolve into a vertically integrated, contract
manufacturer with a well disciplined quality control program. In May 1996, the
Company's quality control program was certified as conforming to the
International Standards Organization 9002 ("ISO 9002"), a recognized
international standard for quality management systems for companies that
manufacture, inspect and test products. Conformance to ISO 9002 is determined by
third party agencies.
According to reports by Technology Forecasters, Inc., a Berkeley,
California research firm, contract manufacturers are expected to do nearly $25
billion of business in the United States and Canada in 1996. Moreover, according
to these reports, growth in this industry is forecasted at 26% a year through
1999. The overall market for the Company's services is diffuse with numerous
concerns engaged in various aspects thereof. However, management believes the
technological know-how and capital investment required to engage in contract
manufacturing and the development of software designed for this industry pose
relatively high barriers to entry into these markets. To date, foreign
competition has not played a significant role in the contract manufacturing
market. The Company believes that its ability to produce high quality products
and deliver them on a timely basis combined with sophisticated engineering and
manufacturing capabilities allows the Company to compete effectively. The
Company plans to market its POM manufacturing software to contract manufacturers
and, ultimately, to other concerns engaged in manufacturing operations.
Accordingly, the Company believes that the potential market for the POM
manufacturing software is large and varied.
The Company is currently dependent upon a small number of large customers.
For Fiscal 1995, the Company's four largest customers accounted for
approximately 71% of net sales and for Fiscal 1996, the Company's five largest
customers accounted for approximately 73% of net sales. While the Company is
pursuing a strategy of diversifying its customer base, the Company expects to
continue to depend upon a relatively small number of customers for a significant
percentage of its revenues for the foreseeable future. Significant reductions in
sale to any of the Company's large customers would have a material adverse
effect on the Company. There can be no assurance that present or future
customers will not terminate their manufacturing arrangements with the Company
or significantly change, reduce or delay the amount of manufacturing services
ordered from the Company. Any such termination of the manufacturing relationship
or change, reduction or delay in orders could have an adverse effect on the
Company. During the six months ended December 27, 1996, two of the Company's
largest customers temporarily reduced shipment levels due to their inventory
backlog. As a result, the Company's results of operations for the period were
adversely affected. The Company anticipates the reduced level of shipments
combined with delays in raising additional capital to adversely affect results
for the third quarter of Fiscal 1997.
While a majority of the Company's net sales are derived from several of
the Company's customers who provide production requirements for one year in the
form of yearly purchase orders, the remaining
21
<PAGE>
net sales are derived from others who do not commit to firm production schedules
for more than one quarter in advance. As a result, such customers' order
fluctuations and deferrals have from time to time in the past, had an adverse
effect on the Company's results of operations, and there can be no assurance
that the Company will not experience such effects in the future.
The Company typically provides services to customers which focus on the
computer, computer peripherals, telecommunications, postal equipment,
semiconductor, environmental, test equipment, process equipment and industrial
equipment industries. These industries are characterized by rapidly changing
technology, short product life cycles and continuing process development.
Accordingly, the Company must maintain technological leadership and successfully
anticipate or respond to technological changes in manufacturing processes. In
order to accomplish this, a portion of the proceeds from this Offering will be
utilized for purchasing new equipment and making capital improvements. Although
a portion of the proceeds from this Offering will be used to refine the
Company's POM manufacturing software, the Company has not yet finalized its
plans for licensing this software. The Company expects to focus on increasing
sales from existing customers and by adding new customers and increasing profits
by reducing costs. The Company may also grow by acquiring other contract
manufacturers. These acquisitions may allow the Company to expand into other
regions of the country and possibly abroad although management of the Company
has not identified any other regions or countries. The Company has no current
commitment or understanding with, and has not entered into negotiations with,
any acquisition candidates.
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 27, 1996 AS COMPARED TO SIX MONTHS ENDED DECEMBER 29,
1995
For the six months ended December 27, 1996, the Company's net sales
decreased by $5,116,000 or 38.4% to $8,210,000 from $13,326,000 for the six
months ended December 29, 1995. The decrease in sales was, in part, a result of
a temporary reduction in shipments by two of the Company's largest customers
due to their inventory backlog and a delay in raising additional capital, which
resulted in an adverse effect on the Company's ability to obtain and fund new
orders.
Costs of goods sold for the six months ended December 27, 1996 decreased by
$4,629,000 or 43.4% to $6,033,000 from $10,662,000 for the six months ended
December 29, 1995. The decrease in cost of goods sold is primarily the result of
the reduction of sales. Gross profit as a percentage of net sales increased by
6.5% from 20% for the six months ended December 29, 1995. The improvement in
gross profit percentage reflects the efficiencies achieved by management through
cost reduction and selected price increases.
Selling, general and administrative expenses decreased for the six months
ended December 27, 1996 by $498,000 or 22.2% to $1,742,000 from $2,240,000 for
the six months ended December 29, 1995. The decrease in selling, general and
administrative expenses is primarily the result of reductions to support staff.
In addition, these expenses decreased in part as a result of a recovery of bad
debts of $90,000.
Other income decreased for the six months ended December 27, 1996 by
$165,000 or 76.6% to $51,000 from $216,000 for the six months ended December 29,
1995. Other income in the six months ended December 29, 1995 included a gain of
$167,000 on the August 1995 sale of a North Carolina facility owned by the
Company.
Interest expense increased for the six months ended December 27, 1996 by
$392,000 or 104.9% to $766,000 from $374,000 for the six months ended December
29, 1995. The increase in interest expense reflects both an increase in interest
rates and in amounts borrowed, including the $2,000,000 of the Notes, $1,100,000
raised from the issuance of the Bridge Notes and a $1,000,000 increase in the
Company's revolving bank line of credit (the "Line of Credit") with
Banker's Trust Company (the "Bank").
22
<PAGE>
Benefit for income tax increased for the six months ended December 27, 1996
by $57,000 or 93.4% to $118,000 from $61,000 for the six months ended December
29, 1995. The tax benefit provided during the period ended December 29, 1995
included a reduction of the previously established deferred tax asset valuation
allowance relating to the utilization of a capital loss carryforward of
$172,000, resulting from the sale of the Company's North Carolina facility in
August 1995. The Company realized a tax benefit from the loss during the period
ended December 27, 1996.
FISCAL 1996 AS COMPARED TO FISCAL 1995
During Fiscal 1996, the Company's net sales increased by $7,457,000 or
40.0% to $26,112,000 from $18,655,000 for Fiscal 1995. Sales growth was
primarily a result of the Company's broadening of its customer base and
expansion of its relationships with existing customers.
Cost of goods sold for Fiscal 1996 increased by $5,604,000 to $20,438,000
from $14,834,000 for Fiscal 1995, an increase of 37.8%. The increase in the cost
of goods sold was primarily related to an increase in sales and a corresponding
increase in variable costs, primarily material and direct labor. Gross profit as
a percentage of net sales increased by 1.2% to 21.7% in Fiscal 1996 from 20.5%
in Fiscal 1995. The improvement in gross profit reflects the efficiencies
achieved by management through cost reduction and the use of the Company's POM
manufacturing software and selected price increases in the fourth quarter of
Fiscal 1996.
Selling, general and administrative expenses increased by $1,735,000 or
62.9% to $4,492,000 for Fiscal 1996 from $2,757,000 for Fiscal 1995. The
increase in expenses was primarily due to increased staffing requirements and
related expenses resulting from increased demand for the Company's products.
The expenses for Fiscal 1995 were favorably impacted by recovery of bad debts
which reduced expenses by $205,000.
Other income (expense) for Fiscal 1996 consisted of income of $199,000 as
compared to expense of $1,000 for Fiscal 1995. The other income was primarily
the result of a gain in the amount of $167,000 on the sale of the Company's
North Carolina facility in August 1995.
Interest expense increased to $977,000 for Fiscal 1996 from $762,000 for
Fiscal 1995. The increase in interest expense reflects both an increase in
interest rates and amounts borrowed, including the $2,000,000 raised from the
sale of the Notes and a $1,000,000 increase in Line of Credit. Interest expense
was also affected by an agreement with the Bank to pay an additional interest
fee to the Bank, based upon the Company's obtaining the Note financing. Of the
$200,000 additional interest fee, $100,000 was expensed in Fiscal 1995 and
$60,000 was expensed in Fiscal 1996.
Net income increased by $235,000 or 137% to $407,000 for Fiscal 1996 from
$172,000 for Fiscal 1995. Contributing to the improvement in net income was a
lower income tax provision. This decrease resulted from a reduction of the
previously established deferred tax asset valuation allowance relating to the
utilization of a capital loss carryforward of $172,000 in August 1995.
LIQUIDITY AND CAPITAL RESOURCES
STATEMENTS OF CASH FLOWS
Net cash provided by operations was $274,000 for the six months ended
December 27, 1996 as compared to $168,000 used in operations for the six months
ended December 29, 1995. The increase in cash provided by operations was the
result of a significant decrease in accounts receivable and inventory offset by
decreases in accounts payable and accrued expenses. The inventory reduction was
primarily a result of the implementation of a new feature in the POM
manufacturing software and a change of policy in the Company's purchasing
department. See "-Liquidity." Net cash used in financing activities during the
six months ended December 27, 1996 was $274,000. During this period $1,100,000
was provided from the issuance of the Bridge Notes, $1,043,000 of long-term debt
was repaid, $316,000 of
23
<PAGE>
financing costs were incurred and payments of deferred compensation of $15,000
were made. Working capital decreased to $3,238,000 at December 27, 1996 from
$3,324,000 at December 29, 1995.
Net cash used in operations was $1,944,000 for Fiscal 1996 as compared to
$637,000 for Fiscal 1995. The increase in cash used in operations was primarily
the result of an increase in inventory and a reduction in current liabilities.
Financing activities during Fiscal 1996 included $2,000,000 from the issuance of
the Notes as described below and $1,000,000 from an increase in borrowing under
the Line of Credit. During Fiscal 1996, the Company repaid $1,312,000 of
long-term debt and incurred $503,000 of financing costs.
LINE OF CREDIT
The Line of Credit currently permits borrowings of up to $3,730,000. The
amount available for borrowings under the Line of Credit is determined pursuant
to a formula based upon the Company's eligible accounts receivable and
inventory. As of December 27, 1996, $2,926,000 was outstanding under the Line of
Credit and the Company had $804,000 available for additional borrowings.
The Line of Credit currently bears interest at the rate of 9.75% (prime
plus 11|M/2%). The Line of Credit is secured by a first lien on substantially
all of the Company's assets other than a second lien on inventory. In addition,
the Bank holds mortgages on two of the Company's properties, which mortgages had
an aggregate principal balance of approximately $3,347,000 as of December 27,
1996. The Bank has extended to the Company the Equipment Line with an
outstanding principal balance as of December 27, 1996 of $455,000. The Equipment
Line is due March 31, 1997. The Company is currently seeking an extension of the
Equipment Line and intends to refinance such indebtedness with a new credit
facility to be negotiated. There can be no assurance that the Company will be
able to obtain an extension of the Equipment Line and, if obtained, whether the
Company will be able to refinance the Equipment Line.
The Line of Credit contains certain financial operating covenants,
including requirements that the Company maintain minimum net worth levels,
prohibitions on the ability of the Company to incur certain additional
indebtedness and restrictions on the ability of the Company to make capital
expenditures, to incur or suffer to exist certain liens and to take certain
other actions, including restricting the payment of dividends by certain
subsidiaries to the Company. The Company is currently in compliance with all
covenants under the Line of Credit.
Following consummation of this Offering, the Company intends to refinance
its indebtedness to the Bank and secure a new credit facility with an increased
borrowing limit. On May 31, 1996, the Company entered into an agreement with the
Bank which will permit the Company to repay its existing indebtedness to the
Bank at a discount of approximately $460,000, provided such option is exercised
on or before March 31, 1997. Management of the Company believes that the Bank
agreed to accept repayment of the Line of Credit at a discount in order to
encourage the Company to find another source for its financial needs as the Bank
no longer provides commercial lending on a short-term basis. There are no
continuing obligations or conditions imposed upon the Company in connection with
the repayment of the Line of Credit. As of the date of Prospectus, the Company
is negotiating with a number of financial institutions to refinance its existing
credit facility. There can be no assurance that the Company will be able to
successfully do so.
PRIVATE DEBT OFFERINGS
In December 1995 and February 1996, the Company sold an aggregate of
$2,000,000 in principal amount of Notes to the Noteholders in a private
placement. Interest on the Notes accrues at the rate of 10% per annum and is
payable quarterly. A portion of the Notes, which are secured by a first lien on
the Company's inventory, will be due and payable upon consummation of this
Offering and a portion of the net proceeds of this Offering will be used to
effect such repayment. See "Use of Proceeds." The Agreement under which
the Notes were issued (the "Note Purchase Agreement") provided that the
Noteholders would receive, upon consummation of an initial public offering by
the Company, such number of shares of Common Stock of the Company determined by
dividing the aggregate public offering price of the securities sold in such
initial public offering by the public offering price per share (the
"Noteholder Shares") and Noteholder Warrants to purchase an equal number
of shares of
24
<PAGE>
Common Stock at an exercise price equal to such public offering price per share.
In December 1996, the Company and the Noteholders amended the Note Purchase
Agreement to, among other matters, (i) provide that $900,000 in principal amount
of the Notes will be paid upon consummation of this Offering and the remaining
$1,100,000 in principal amount of the Notes shall be due and payable on the
thirteen month anniversary of the consummation of this Offering, (ii) release
the Noteholders' security interest in the Company's inventory upon
consummation of this Offering, although the Notes will continue to be senior to
all indebtedness of the Company other than bank or similar debt, (iii) eliminate
the Noteholders' rights to receive the Noteholder Shares and (iv) issue to the
Noteholders 500,000 Noteholder Warrants. Moreover, the Company and the
Noteholders agreed that the Noteholder Warrants will be exercisable at a price
equal to 47.5% of the initial public offering price of the shares of Common
Stock offered hereby ($2.85 per share assuming an initial public offering price
of $6.00 per share) for a ten year period from consummation of this Offering. In
addition to the foregoing, the investment banking firm that assisted the Company
in connection with the placement of the Notes, and its assignees (which include
the Noteholders), will be entitled to receive the Placement Agent Warrants to
purchase 33,333 Placement Agent Shares at a price equal to the initial public
offering price of the Common Stock offered hereby, exercisable for a five-year
period from consummation of this Offering. Notwithstanding the foregoing, the
Noteholder Warrants and Placement Agent Warrants will not be exercisable and may
not be sold for a period of two years from consummation of this Offering without
the prior written consent of the Company and Meyers. The Noteholder Warrants,
the Underlying Shares, the Placement Agent Warrants and the Placement Agent
Shares are registered in the Registration Statement of which this Prospectus
forms a part. See "Concurrent Offering."
In August 1996, the Company sold an aggregate of $1,100,000 in aggregate
principal amount of Bridge Notes to several investors in a private placement.
Interest on the Bridge Notes accrues at the rate of 10% per annum, subject to
certain events described in the Bridge Notes which would result in interest
accruing at a higher rate. The Bridge Notes were due at the earliest of January
31, 1997, the closing date of an initial public offering or upon the sale of the
Company. The Bridge Investors have advised the Company that they do not intend
to take any action with respect to the Bridge Notes until the earlier of
consummation of this Offering at which time the Bridge Notes will be repaid or
April 28, 1997. See "Use of Proceeds." Holders of the Bridge Notes received
warrants to purchase an aggregate of 112,500 shares of Common Stock (the "Bridge
Warrants"). In addition, the investment banking firm which assisted in the
placement of the Bridge Notes received Bridge Warrants to purchase 11,250 shares
of Common Stock. The Bridge Warrants are exercisable at a price equal to 51.5%
of the initial public offering price of the shares of Common Stock offered
hereby ($3.09 per share assuming an initial public offering price of $6.00 per
share) for a five-year period commencing six months after consummation of this
Offering. Notwithstanding the foregoing, the Bridge Warrants will not be
exercisable and may not be sold for a period of 18 months from consummation of
this Offering without the prior written consent of Meyers. The holders of the
Bridge Warrants have been accorded registration rights under the Securities Act
with respect to the Bridge Warrants and the shares of Common Stock underlying
the Bridge Warrants. At September 27, 1996, the Company was in default under a
covenant contained in the Bridge Notes requiring the Company to maintain a
specified level of stockholders' equity. Such default has been waived by the
holders of the Bridge Notes, who have also agreed to lower the level of
stockholders' equity the Company is required to meet. In connection with the
waiver, the interest rate on the Bridge Notes increased to 12.5% retroactively
as of the date of issuance.
Upon consummation of this Offering, the Company will record a non-cash
charge of $93,000, net of income tax, for the unamortized portion of the debt
costs relating to the repayment of a portion of the Notes and all of the Bridge
Notes from a portion of the net proceeds of this Offering.
LIQUIDITY
The Company's annual and quarterly operating results may be affected by a
number of factors, including the Company's ability to manage inventories,
shortages of components or labor, the degree of automation used in the assembly
process, fluctuations in material costs and the mix of material costs
25
<PAGE>
versus labor. Manufacturing and overhead costs are also significant factors
affecting the annual and quarterly operating results of the Company. Other
factors include price competition, the ability to pass on excess costs to
customers, the timing of expenditures in anticipation of increased sales and
customer product delivery requirements. Any one of these factors, or a
combination thereof, could adversely affect the Company. The Company's primary
pricing method is a fixed price; however, any costs in excess of the original
quotation or resulting from customer changes are typically passed on to the
customer.
For Fiscal 1995 and Fiscal 1996, the Company's growth in revenues and
corresponding increases in inventory were in excess of the increase in accounts
payable and decreases in accounts receivable. This has resulted in negative
operating cash flows for the Company. In order to remedy the negative operating
cash flows, management of the Company plans a reduction of inventory and a
reduction of costs combined with reduced spending in direct labor related areas
and parts purchased for inventory. Also impacting the growth in inventory was a
shift in scheduled shipments for a major customer. Once normal scheduling
resumes, the Company intends to liquidate the excess inventory related to this
customer. To accomplish a reduction of inventory, management of the Company has
enhanced the features of the POM manufacturing software to allow management to
parcel a large job into small production runs called manufacturing kits
("Kits"). The POM manufacturing software tracks the status of each Kit and
allows management to modify each Kit in the same manner as it is able to modify
the entire job. Any modifications to Kits are sent to the Company's purchasing
agents, expediters and suppliers. In addition, the Company's policies with its
suppliers have been modified to require that purchase orders are not to be
considered firm until 10 days within the date the materials are required to be
delivered to the Company. The Company plans to achieve a labor cost reduction
through improved efficiencies expected to result from improvements to the POM
manufacturing software and new equipment to be purchased from the proceeds of
this Offering. See "Use of Proceeds."
Management believes that consummation of this Offering, combined with the
measures described above, will remedy the Company's history of negative
operating cash flows. However, no assurance can be given that the Offering will
be consummated or, if it is consummated, that the Company will be able to
reverse its history of negative operating cash flows. Moreover, if this Offering
is not consummated, management believes that the negative operating cash flows
will have a material adverse effect on the Company's liquidity.
The Company anticipates that it will incur capital expenditures of
approximately $1,400,000 through the fiscal year ending June 30, 1998. Such
expenditures will be primarily for the acquisition of additional assembly and
manufacturing equipment and for refurbishment of the Company's currently idle
second plant. See "Use of Proceeds."
Management of the Company believes that the Company's existing and
anticipated capital resources, including the estimated net proceeds of this
Offering, will enable it to fund its planned operations for a period of at least
12 months from the date of this Prospectus. There can be no assurance that the
Company will realize cash flow from operations or that such cash flow will be
sufficient, in which case the Company may require additional financing, and may
seek to raise funds through subsequent equity or debt financings, or through
other sources. Moreover, the Line of Credit places restrictions on the
Company's ability to obtain financing either through the offering of equity or
incurrence of additional debt. No assurance can be given that additional funds
will be available to the Company to finance its development on acceptable terms,
if at all. Additional financings may result in dilution to existing
stockholders. If funds are needed but are not available in adequate amounts from
additional financing sources or from operations, the Company's business may be
materially and adversely affected.
NET OPERATING LOSS CARRYFORWARDS
As of December 27, 1996, the Company had an NOL for federal income tax
purposes of approximately $4,200,000 which expires in 2011, and no NOL for state
income tax purposes. Although
26
<PAGE>
the Offering is expected to result in a "change of control" for federal
tax purposes, the limitation on the Company's ability to utilize such NOL will
not be significant. Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," requires that deferred tax assets be
reduced by a valuation allowance if, based on the weight of available evidence,
it is more likely than not that some portion or all of such assets will not be
realized. The Company monitors the realizability of such assets and establishes
a valuation allowance for all amounts that will not be realized. As of December
27, 1996, the total valuation allowance was $228,000.
IMPACT OF NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" and SFAS No. 123, "Accounting for Stock-Based
Compensation." The Company has adopted SFAS Nos. 121 and 123 during Fiscal
1997 and does not believe that their adoption will have a material effect on the
Company.
27
<PAGE>
BUSINESS
GENERAL
The Company provides comprehensive contract manufacturing and engineering
services to OEMs. The Company specializes in the fabrication, assembly and
testing of complex industrial products and non-invasive medical equipment. The
Company manufactures complete systems, as well as assemblies, including printed
circuit boards, cable and wire harnesses and other electro-mechanical
assemblies. The Company complements its basic manufacturing services by
providing its customers with a broad range of sophisticated product engineering
and design services. Products manufactured by the Company range from highly
sophisticated atomic force microscopes (which measure the electrical field of an
atom) to less complex products such as sign plotting devices. Representative
customers of the Company include ENI (a division of Astec America, Inc.),
General Electric Co., Gerber Scientific Co., IBM, Lockheed Martin Corporation
(formerly Loral Federal Systems Company), Materials Research Corporation (a
division of Sony Corporation), Motorola Corporation and the United States Postal
Service.
Downsizing by American industry, combined with rapid change, strong
competition and increasingly shorter product life cycles in various industries,
have made it considerably less attractive for OEMs to manufacture in-house,
particularly low unit volume products or short cycle electronic products. As a
result, many OEMs have adopted and are becoming increasingly reliant upon
manufacturing outsourcing strategies and on contract manufacturers to satisfy
their mainstream manufacturing requirements. Management of the Company believes
that this trend will continue. According to reports by Technology Forecasters,
Inc., contract manufacturers were expected to do nearly $25 billion of business
in the United States and Canada in 1996. In addition, growth in this industry is
forecasted at 26% a year through 1999. Moreover, according to these reports,
electronics contract manufacturing worldwide was expected to be a $50 billion
business in 1996 and will nearly double in 1999.
The Company believes that its ability to produce high quality products and
deliver them on a timely basis combined with sophisticated engineering and
manufacturing capabilities has resulted in an expansion of its relationships
with existing customers and the addition of new customers. In addition, the
Company's proprietary POM manufacturing software is an integral part of the
Company's services as it assists the Company in controlling its manufacturing
operations from estimating to shipping to billing. The POM manufacturing
software is a real time system which allows the Company to track specific
projects as they move through the production cycle and to make adjustments as
necessary in order to control costs and achieve higher levels of quality control
and efficiencies.
INDUSTRY OVERVIEW
OEMs originally utilized contract manufacturing sources primarily to reduce
labor costs in the production of electronic assemblies and to provide for
additional manufacturing capacity in times of peak demand. These early contract
manufacturers typically were employed on a consignment basis in which the OEM
provided the circuit and production designs, procured all components and
performed the final product listing.
During the early 1980's, the commercialization of the personal computer
began to fuel substantial growth in the electronics and other industries and,
with it, the growth of contract manufacturers. Despite rapid growth in the
electronics industry, the market soon became characterized by intense price
competition and demands for more frequent product introductions. In an effort to
survive and meet the requirements of the marketplace, OEMs were forced to
restructure and focus their resources on core strategic strengths, such as
product development, software design and marketing, and to outsource capital
intensive manufacturing operations to specialists. As contract manufacturers
began to perform more turnkey services, the relationship between OEMs and
contract manufacturers became more strategic in nature, with the two now linked
in a close relationship to deliver cost-effective, high quality products quickly
to the marketplace.
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OEMs utilize contract manufacturers for the following reasons:
REDUCE TIME TO MARKET. Due to intense competitive pressures in the
electronics, industrial products and medical equipment industries, OEMs are
faced with increasingly shorter product life-
cycles and therefore have a growing need to reduce the time required to bring a
product to market. OEMs can generally reduce their time to market by using the
established manufacturing expertise and infrastructure of contract
manufacturers.
REDUCE CAPITAL INVESTMENT. As electronics, industrial products and medical
equipment have become more technologically advanced, the manufacturing process
has become increasingly automated requiring a greater level of investment in
capital equipment. Contract manufacturers enable OEMs to gain access to advanced
manufacturing facilities, thereby reducing the OEMs' overall capital equipment
requirements.
FOCUS RESOURCES. Because the electronics, industrial products and medical
equipment industries are experiencing greater levels of competition and more
rapid technological change, many OEMs increasingly are seeking to focus their
resources on activities and technologies in which they add the greatest value.
By offering comprehensive design, assembly and turnkey manufacturing services,
contract manufacturers allow OEMs to focus on core technologies and activities
such as product development, marketing and distribution.
ACCESS LEADING MANUFACTURING TECHNOLOGY. Products and manufacturing
technology have become increasingly sophisticated and complex, making it
difficult for OEMs to maintain the necessary technological expertise in process
development and control. OEMs are motivated to work with a contract manufacturer
in order to gain access to the contract manufacturer's process expertise and
manufacturing know-how.
IMPROVE INVENTORY MANAGEMENT AND PURCHASING POWER. OEMs are faced with
increasing difficulties in planning, procuring and managing their inventories
efficiently due to frequent design changes, short product life-cycles, large
investments in electronic components, component price fluctuations and the need
to achieve economies of scale in materials procurement. OEMs can generally
reduce production costs by using the procurement capabilities of the contract
manufacturer. By utilizing a contract manufacturer's expertise in inventory
management, OEMs can generally better manage inventory costs and increase their
return on assets.
BUSINESS STRATEGY
The Company focuses on servicing OEMs who produce complex, high dollar
value industrial products where high quality manufacturing is extremely
important. Management of the Company believes that profits for such products
tend to generate higher gross profit margins. The Company's objective is to
increase revenues and improve profitability by utilizing its POM manufacturing
software and sophisticated manufacturing, engineering and design services to
offer customers comprehensive manufacturing solutions. The Company intends to
realize its objective by implementing the following strategies:
INCREASE SALES FROM EXISTING CUSTOMERS AND ADD NEW CUSTOMERS. The Company
plans to expand existing relationships and seek new customers in the markets it
currently serves and in additional markets. The Company plans to increase the
amount of sales to existing customers by devoting more time to these customers
through an increased sales force and by offering improved and expanded services
such as faster metal cutting machining centers, faster sheet metal punching
equipment, expanded painting facilities and more rapid and less expensive
testing procedures and equipment. While the Company has an on-going quality
improvement program, the Company will intensify its efforts in educating its
employees on the Company's quality requirements and in measuring its employees
conformance to these requirements. Additionally, the Company will improve on its
monthly quality assurance technical audits in conformance with the international
quality process specification and have
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<PAGE>
an outside certified auditor audit the quality management system every six
months. The Company also intends to increase the frequency of its customer
satisfaction surveys from quarterly to monthly. The Company is also planning to
publish a news letter quarterly to be mailed to customers. The Company plans to
diversify its customer base by increasing its marketing efforts. The Company
intends to do this by attending more trade shows, expanding the number of
advertisements in trade journals, expanding the number of sales personnel,
expanding the number of customers who receive direct mailings, and providing new
sales literature, conducting CD-ROM based interactive electronic presentations
and enhancing its presentation on the Internet world wide web. The Company also
plans to use a portion of the net proceeds of this Offering to refurbish a
currently idle second plant owned by the Company which will enable the Company
to handle the requirements of additional customers. The Company's objective is
to obtain multiple customers in the markets it currently serves and in
additional markets.
INCREASE PROFITS BY REDUCING COSTS. The Company plans to reduce costs by
enhancing the POM manufacturing software to augment its real time productivity
and quality measurement system using bar codes and adding a feature to the POM
manufacturing software which will allow each customer a window into the POM
manufacturing software to monitor via the Internet the status of purchase orders
relating to their jobs. Management of the Company believes that the utilization
of bar codes will reduce the labor costs associated with the present manual
entry method of reporting. Although customers will not have the ability to
modify existing jobs or place new orders through the Internet, management
believes that allowing customers to access information themselves will also
enable the Company to reduce overhead.
MARKETING OF POM MANUFACTURING SOFTWARE. Once the POM manufacturing
software has been upgraded, management of the Company plans to generate revenues
through the licensing of the POM manufacturing software initially, to contract
manufacturers and ultimately, to other concerns engaged in manufacturing
operations, in return for monthly usage fees. Management believes that its
knowledge of the needs of contract manufacturers, its historical experience in
marketing software and its experience developing the POM manufacturing software
will enable it to market and license the POM manufacturing software. However, no
assurance can be given that the Company will be able to successfully market and
license the POM manufacturing software.
FACILITATE GROWTH OF THE COMPANY THROUGH ACQUISITIONS. The contract
manufacturing industry is now going through consolidation. The Company may
acquire other contract manufacturers if management determines that such
acquisitions will enable the Company to improve net sales and profits. These
acquisitions may allow the Company to expand to other regions of the country and
possibly abroad. Management of the Company believes that the Company's
proprietary POM manufacturing software will enable the Company to realize
greater efficiencies with respect to any such acquisitions. The Company has no
current commitment or understanding with, and has not entered into any
negotiations with, any acquisition candidates.
POM MANUFACTURING SOFTWARE
The Company's proprietary POM manufacturing software is integral to the
Company's operations. The POM manufacturing software tracks all of the
Company's operations on a real time basis. As a result, the POM manufacturing
software assists the Company in controlling costs and achieving higher levels of
quality control and efficiencies.
Specifically, after an order is placed, the POM manufacturing software
allows the Company's industrial engineers and estimators to create a
hierarchical data base of the components of a customer's product in order to
estimate the total cost of the product and to produce a priced bill of materials
("BOM") which includes purchased items and labor broken down into
sequenced tasks. Thereafter, the POM manufacturing software automatically
produces printed requests for quotations to the appropriate supplier. As a
result, the Company can provide the customer with a printed BOM broken down by
each assembly and fabricated part which breakdown includes price of labor, raw
materials and purchased components.
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<PAGE>
When the Company releases the product for manufacturing, the software
provides the Company's purchasing department with electronic purchase
requisitions automatically generated from the BOM. Once the purchasing
department negotiates final prices and selects the suppliers, the POM
manufacturing software automatically prints and sends purchase orders to the
suppliers and automatically prints lists of raw materials and components
("Kits") for each work center so that the Company's materials management
department can supply these items to the manufacturing department when
scheduled. The POM manufacturing software provides the purchasing department
lists of purchased items that must be expedited in order to satisfy the delivery
dates. If necessary, the POM manufacturing software will also provide the
purchasing department printed amendments to purchase orders to change the
quantity and delivery dates of Kits that have had delivery dates or quantities
to be manufactured which are altered by the Company's production management
department in response to customer demand. The POM manufacturing software
automatically prints bar-coded work orders listing sequenced labor tasks to be
performed for each work center in response to a production lot defined by the
Kit. As purchased items are received and entered into the POM manufacturing
software, the POM manufacturing software updates the appropriate Kit, updates
work-in-process values and electronically compares quantities to the POM
purchase orders. As labor is expended on each work order and recorded each day,
the POM manufacturing software updates the work-in-process values and compares
the actual labor hours per task to the estimated labor hours and then produces
reports to management of estimated compared to actual results to date for each
job showing purchasing efficiency and labor efficiency compared to the
estimating standard.
If requested, for a specified job, the POM manufacturing software can
produce a detailed report showing each purchase order received, each invoice
sent to the customer, each labor transaction and each receiving transaction. On
demand from production administration as verified by its shipping department,
the POM manufacturing software prints an invoice for services rendered or
product shipped. When an invoice is printed, the POM manufacturing software
updates the accounts receivable in the financial system and deducts the dollar
amount of parts and labor from the work-in-process system. On demand, the POM
manufacturing software prints a work-in-process report showing dollars in labor
and dollars in purchased parts for each active job, prints a statement for each
customer showing the invoices that are projected to become due through the next
week, prints projected accounts receivable collections by customer by week,
prints a rating letter to each supplier informing the supplier of its quality
rating based on comparison of purchase order quantity and delivery date
requirements compared to receiving transactions, and prints the productivity
performance measurement of each employee involved in this process.
There are numerous advantages to the Company and its customers through
utilization of the POM manufacturing software. First, the priced bill of
materials sent to the customer insures customer confidence in the Company as the
customer realizes the Company understands the customer's product and the
customer can evaluate the Company's pricing strategy in detail. In addition,
because POM manufacturing software automatically produces requests for
quotations, purchase requisitions and purchase orders, overhead costs are
reduced. Since the POM manufacturing software provides timely comparison of
actual costs to estimated costs as each job progresses, the Company's
production management team is more likely to spot inefficiencies early in the
production cycle and then take corrective action thereby maximizing profit.
Moreover, because POM manufacturing software evaluates, on a daily basis, the
productivity levels of all direct employees, management believes that greater
productivity is achieved. Finally, because the POM manufacturing software is
used to provide weekly statements to its customers, management believes that
accounts receivable collection is faster thereby enhancing cash flow.
The Company is developing upgrades for its POM manufacturing software on an
ongoing basis. Most recently, the Company enhanced the features of the POM
manufacturing software to allow management to parcel a large job into small
production runs called Kits. The POM manufacturing software tracks the status of
each Kit and allows management to modify each Kit in the same way as it is able
to modify the entire job. Any modifications to Kits are sent to the Company's
purchasing agents, expediters and suppliers.
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<PAGE>
Following consummation of this Offering, the Company intends to have the
POM manufacturing software upgraded to provide for the use of bar code tracking,
which will enhance the Company's ability to provide real time productivity
analysis of each direct worker and to provide the status of each order being
processed in the plant. The Company also plans to upgrade the POM manufacturing
software to add a feature which will allow each customer a window into the POM
manufacturing software to monitor via the Internet the status of each purchase
order relating to such customer's job and a cost breakdown of each of the
customer's products including a cost breakdown of each sub-assembly. As a
result, the Company's customers will have immediate access to information
regarding each purchase order relating to such customer's job. Management of
the Company believes that none of the Company's competitors have similar
capabilities.
The Company initially plans to market its POM manufacturing software to
other contract manufacturers and ultimately, to other concerns engaged in
manufacturing operations. From 1979 to 1989, the Company's management was
involved in the development of a major software system. At the peak of these
development efforts, approximately 30 programmers were employed by the Company
for this project. The system was ultimately marketed and sold to large
publishing companies. The Company has since focused its energies on the
development of the POM manufacturing software. The Company intends to use a
portion of the proceeds of this Offering to hire an additional two programmers
and two marketing persons. See "Use of Proceeds." The Company believes
that its software development staff will be able to provide sufficient customer
support during the initial phases of marketing the POM manufacturing software.
The Company also intends to enter into a joint venture with a partner for the
marketing and licensing of the POM manufacturing software. There are currently
no ongoing discussions with respect to establishment of any such joint venture.
Management of the Company believes it will take approximately two years from the
date of this Offering to achieve revenues from the marketing of the POM
manufacturing software. However, there can be no assurance that the Company will
be able to successfully enter into a joint venture or otherwise market and
license the POM manufacturing software.
INDUSTRIES AND PRODUCTS
The following table lists the industries in which the Company expects to
continue to conduct significant business and the products for which the Company
expects to provide manufacturing services (based on net sales for Fiscal 1996).
<TABLE>
<S> <C>
INDUSTRY SPECIFIC PRODUCT OR PRODUCT COMPONENT
- ------------------------- ------------------------------------------------------------------
Communications ................ Cellular telephone automated assembly components; printed circuit
cards for automated telephone attendants
Computer ...................... Chassis, frames, panels, wire harness and cables, jumpers, test
equipment, process equipment
Environmental ................. Cleaning equipment using environmentally friendly chemicals
Information Processing ........ Test equipment for copiers
Instrumentation ............... Printed circuit cards for laser measurement instruments
Medical ....................... Components for blood analyzers; power components for medical
equipment; automated process equipment
Semiconductor ................. Sputtering equipment components; loaders and elevator components
for ovens; power components for semiconductor equipment; atomic
force microscope inspection equipment; test equipment
Sign-Making ................... Sub-systems for plotters; sub-systems for four color process sign
making
Transportation ................ Electronic traffic display signs; airport control components
Other ......................... Letter sorting and handling components, parcel drop system,
electronic voting machine components; control systems for power
distribution; printed circuit boards for elevator control systems
</TABLE>
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<PAGE>
SERVICES
The Company provides comprehensive contract manufacturing and engineering
services to OEMs. Such services include:
PRODUCT ENGINEERING AND DESIGN SERVICES. The Company assists its customers
in designing or evaluating designs of products. The Company designs or evaluates
designs for ease and quality of manufacture and, when appropriate, recommends
changes to reduce manufacturing costs or lead times or to increase the quality
of finished assemblies. The Company supports its customers with sophisticated
product engineering and design services using computer aided design equipment
with computer aided machinery software. Product engineering and design include
electrical design, electronic circuit design, mechanism design,
electro-mechanical design, printed circuit board design and software
engineering. The Company also assists its customers with overall product
redesign with the objective of reducing manufacturing costs. The goal of the
Company's engineering and product design services is to create a more stable
volume of turnkey manufacturing and an elevated level of strategic partnering
with principal customers.
MANUFACTURING. The Company custom manufactures complete systems, printed
circuit board assemblies, cable and wire harnesses and other electro-mechanical
assemblies. Manufacturing services offered by the Company include sourcing and
procurement of raw materials and parts, precision metal fabrication, welding,
precision machine parts, painting, silk screening, assembly and testing.
In order to achieve high levels of performance in its manufacturing
operations, the Company combines advanced manufacturing technology, such as
computer-aided manufacturing and testing, with state-of-the-art manufacturing
techniques. The Company's management is committed to quality control and seeks
to impart high levels of quality in every operation of the Company. This is
accomplished by setting the quality and labor efficiency objectives for every
operation, tracking performance against those objectives, identifying work flow
and policy changes required to deliver higher quality. The Company's quality
management system is certified as conforming to ISO 9002, the international
standard for quality.
In implementing its manufacturing approach, the Company emphasizes timely
delivery and accurate and up-to-date documentation for each product. The Company
develops an appropriate production process and a complete set of manufacturing
process instructions, inspection plans and a quality assurance plan for each
product. An analysis of each customer's materials specification is performed to
identify component suppliers. The Company then plans and executes purchase
orders, receives, inspects and warehouses components, expedites critical
components and delivers a complete set of components to the production floor for
assembly. The Company uses its POM manufacturing software to monitor and control
all aspects of the manufacturing process, including material resource planning,
shop floor control, work-in-process tracking, statistical process control and
activity based product costing.
Responsiveness to customers, particularly as to engineering changes once
manufacturing has commenced, is an important component of the Company's
manufacturing approach. Many products manufactured by the Company are in the
early stages of their product life cycle and therefore may have ongoing design
or engineering changes. Upon receiving an engineering change notice, the Company
identifies the impact of such changes in the production process, current
inventory and open purchase orders. To support continuous production flow while
minimizing excess and obsolete inventory costs for the customer, the Company
restructures bills of material and expedites orders for new components, as
authorized. The Company also identifies and implements changes to manufacturing
instructions and test plans. In order to assure prompt customer service, the
Company assigns each project a product manager, quality assurance engineer,
product engineer, test engineer and customer service representative. The Company
maintains regular contact with its customers to assure adequate information
exchange, document control and activities coordination necessary to support a
high level of quality and on-time delivery.
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<PAGE>
SYSTEM ASSEMBLY. The Company's assembly activities range from assembly of
higher level sub- systems and systems to printed circuit board assembly and
assembly of complex electro-mechanical components. The Company specializes in
printed circuit board assembly, cable and wire harness assembly and
electro-mechanical assembly, all utilizing specialized tools and techniques.
QUALITY ASSURANCE. The Company's quality assurance procedures are an
integral part of providing customers with turnkey manufacturing solutions. The
Company provides computer-aided in-circuit and functional testing, which
contributes significantly to the Company's ability to deliver high quality
products on a consistent basis. The Company has developed specific strategies
and routines to test printed circuit board's and other assemblies. In-circuit
tests verify that all components have been properly inserted and that electrical
circuits are complete. Functional tests determine if the assembly is performing
to customer specifications. The Company either designs and procures test
fixtures and develops its own test software or utilizes the customer's existing
test fixtures and test software. In addition, the Company provides environmental
stress tests of the printed circuit board or system assemblies, when required by
its customers.
The Company's quality management system has recently been certified under
ISO 9002, an international quality standard. The Company's cable and wire
harnesses and assemblies are manufactured to Underwriters Laboratories and
Canadian Standards Association specifications and the Company has been certified
by both organizations. The Company's printed circuit board manufacturing
process has been certified by BBAC (a British communications equipment
manufacturing quality specification).
CUSTOMERS, SALES AND MARKETING
The Company serves a wide variety of markets, including the computer,
computer peripherals, telecommunications, postal equipment, semiconductor,
environmental, test equipment, process equipment, industrial equipment and other
industries. Representative customers of the Company include ENI, General
Electric Co., Gerber, IBM, Lockheed Martin Corporation (formerly Loral Federal
Systems Company), Materials Research Corporation (a division of Sony
Corporation), Motorola Corporation and the United States Postal Service. A
majority of the Company's customers are located in the Northeast.
For Fiscal 1995 the Company's four largest customers accounted for
approximately 71% of net sales. Sales to Gerber, ENI, IBM and S&K accounted for
approximately 20%, 19%, 19% and 13%, respectively, of the Company's net sales
during Fiscal 1995. For Fiscal 1996, the Company's five largest customers
accounted for approximately 73% of net sales. Sales to ENI, Gerber, S&K, Loral
and Bruce accounted for approximately 20%, 16%, 14%, 13% and 10%, respectively,
of the Company's net sales during Fiscal 1996. For the six months ended
December 27, 1996, the Company's four largest customers accounted for
approximately 57% of net sales. Sales to Lockheed Martin Corporation, ENI,
Gerber and S&K accounted for approximately 18%, 18%, 11% and 10%, respectively,
of the Company's net sales for such period. Accordingly, in addition to
expanding existing relationships, the Company is pursuing a strategy of
diversifying its customer base. Currently, the Company contacts potential
customers through participation at contract manufacturing shows, strategically
placed advertisements, and direct mail campaigns which are then followed by
telephone sales and visits from the Company's sales representatives. The
Company also advertises over the Internet at its own website. Following
consummation of this Offering, the Company plans to expand its marketing efforts
by attending more trade shows, increasing the number of advertisements in trade
journals, increasing the number of sales personnel, increasing the number of
customers who receive direct mailings, and providing new sales literature and
CD-ROM based interactive electronic presentations. The Company's objective is
to obtain multiple customers in the markets it currently serves.
COMPETITION
The Company operates in a highly competitive environment and competes
against numerous domestic and foreign manufacturers. The Company's competitors
include SCI Systems, Inc., Solectron
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Corporation, Jabil Circuit, Inc., Avex Electronics Inc. (a privately-held
company), Plexus Corp., DOVatron International, Inc., IEC Electronics Corp.,
Sanmina Corporation and Benchmark Electronics, Inc. In addition, the Company may
encounter competition in the future from other large electronic manufacturers
which are selling, or may begin to sell, contract manufacturing services. The
Company may also face competition from the manufacturing operations of its
current and prospective customers, which the Company believes continually
evaluate the merits of manufacturing products internally versus the merits of
contract manufacturing.
The Company believes that the primary basis of competition in its targeted
markets are time to market, capability, price, manufacturing quality, advanced
manufacturing technology and reliable delivery. Management believes that it
generally competes favorably with respect to each of these factors. To remain
competitive, the Company must continue to provide technologically advanced
manufacturing services, maintain quality levels, offer flexible delivery
schedules, deliver finished products on a reliable basis and compete favorably
on the basis of price. There can be no assurance that the Company can compete
effectively with respect to these factors in the future.
BACKLOG
The Company's backlog at December 27, 1996 was approximately $14,035,000,
compared to backlog at December 27, 1995 of approximately $14,494,000. Backlog
consists of firm purchase orders and commitments which are to be filled within
the next 12 months. However, since orders and commitments may be rescheduled or
canceled, management of the Company believes that backlog is an inconclusive
indicator of future financial performance.
The level and timing of orders placed by the Company's customers may vary
due to the customers' attempts to balance their inventory, changes in
customers' manufacturing strategies and variations in demand for the
customers' products resulting from, among other things, product life cycles,
competitive conditions or general economic conditions. While a majority of the
Company's total revenues are derived from several of the Company's customers
who provide production requirements in the form of yearly purchase orders, the
Company's remaining revenues are derived from customers who do not commit to
firm production schedules for more than one quarter in advance. The Company does
not assess any additional fee or charge interest in connection with the
financing of any customer orders other than what is included in its firm price.
The Company's inability to forecast the level of customer orders with certainty
makes it difficult to schedule production and maximize utilization of
manufacturing capacity.
SUPPLIERS
The Company procures components from a broad group of suppliers, determined
on an assembly-by-assembly basis. Some of the products and assemblies
manufactured by the Company require one or more components that may be available
from only a single source. Some of these components are allocated in response to
supply shortages. The Company attempts to ensure the continuity of supply of
these components. In cases where unanticipated customer demand or supply
shortages occur, the Company attempts to arrange for alternative sources of
supply, where available, or defers planned production to meet the anticipated
availability of the critical components. In some cases, supply shortages could
substantially curtail production of all assemblies using a particular component.
While the Company has not experienced material shortages in the recent past,
such shortages could produce significant short-term interruptions of the
Company's future operations. Some of the Company's material suppliers are
Madison Cable Corporation, Bishop-Wisecarver, Marshall Industries, Intest
Corporation, Apollo Display Technologies and Dutchess Metal Supply Corporation.
The Company currently has access to a number of alternative suppliers if any
such suppliers were to cease or materially decrease their business dealings with
the Company.
The Company does not maintain a large inventory of materials and does not
place orders for materials unless required in response to a specific customer
purchase order. If the Company does have
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<PAGE>
any aged or obsolete inventory, it is written-off immediately. Historically,
aged or obsolete inventory has not had a material adverse effect on the Company.
INTELLECTUAL PROPERTY RIGHTS
The Company regards its manufacturing processes, proprietary software and
circuit designs as proprietary trade secrets and confidential information. To
maintain the trade secrecy of its proprietary software, the Company relies
largely upon a combination of trade secret laws, copyright laws, internal
security systems and confidentiality procedures. Third parties may attempt to
exercise alleged rights in any of the copyrights or other intellectual property
rights or any appropriate copyrights or other intellectual property rights
established by the Company, and the Company's failure or inability to establish
appropriate copyrights or to adequately protect any of its intellectual property
rights, may have a material adverse effect on the Company.
GOVERNMENT REGULATION
The Company's operations are subject to certain federal, state and local
regulatory requirements relating to environmental, waste management, health and
safety matters. Management believes that the Company's business is operated in
compliance with applicable regulations promulgated by the Occupational Safety
and Health Administration and the Environmental Protection Agency and
corresponding state agencies which, respectively, pertain to health and safety
in the workplace and the use, discharge and storage of chemicals employed in the
manufacturing process. Current costs of compliance are not material to the
Company. However, new or modified requirements, not presently anticipated, could
be adopted creating additional expenses for the Company.
EMPLOYEES
As of December 27, 1996, the Company employed 154 full-time employees. The
Company employs approximately 40 people in finance, sales and administration,
108 people in manufacturing operations and six people in various engineering
functions. Currently none of the Company's employees are members of a union.
Management considers its relationships with its employees to be good.
PROPERTIES
The Company's principal operations are conducted in Poughkeepsie, New
York, in an approximately 75,000 square foot plant situated on a 5.5 acre parcel
of land. The facility, which is owned by the Company, is subject to a $1,913,000
mortgage as of December 27, 1996. In addition, the Company owns a second 65,000
square foot plant in Poughkeepsie, which is subject to a mortgage in the amount
of $1,434,000 as of December 27, 1996. Within 12 months following consummation
of this Offering, the Company intends to refurbish and commence using this
second plant, which is situated on a 4.9 acre parcel of land and which is
currently inactive, for future expansion. See "Use of Proceeds." The
Company also owns approximately 55.76 acres of vacant land zoned for light
industrial use in Poughkeepsie. Management of the Company believes that the
Company's facilities are sufficient for its current and reasonably anticipated
operations.
LEGAL PROCEEDINGS
The Company is involved in pending and threatened legal actions and
proceedings arising in the ordinary course of its business. In the opinion of
management, the outcome of such legal actions and proceedings will not have a
material adverse effect on the Company.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ----------------------- ------ -------------------------------------------------------------
<S> <C> <C>
Gary D. Horne ......... 60 Chairman of the Board, Chief Executive Officer and Director
Stanley F. Zuk ........ 59 President, Chief Operating Officer and Director
Robert Lettieri ....... 50 Chief Financial Officer and Director
Gregory Horne ......... 35 Vice President-Information Systems and Director
</TABLE>
GARY D. HORNE is a co-founder of the Company and has served as Chief
Executive Officer since the inception of the Company in 1965. Prior to joining
the Company, Mr. Horne worked from 1956 through 1957, serving IBM as a design
draftsman and then worked from 1957 through 1960 for Graphics Techniques, Inc.,
an IBM design engineering contractor, as a design engineer. From 1960 to 1965,
Mr. Horne worked for International Design, Inc., an IBM design engineering
contractor, as branch manager.
STANLEY F. ZUK is a co-founder of the Company and has served as Chief
Operating Officer since the inception of the Company in 1965. He is responsible
for all aspects of manufacturing. Prior to joining the Company, Mr. Zuk worked
for two years at General Electric and six years as design/drafting manager at
International Design, Inc.
ROBERT LETTIERI has been with the Company since 1995 as Chief Financial
Officer and has been a director since November 1, 1996. From 1987 to 1995, Mr.
Lettieri served as Chief Financial Officer for two mid-sized companies, Fine
Host Corporation, a concessionaire of food service and souvenirs at stadiums,
race tracks and other sports facilities, and S&S Companies, a distributor and
property manager of tobacco, confectionery and other products typically sold in
vending machines. From 1979 to 1987, Mr. Lettieri was Operations Controller for
the Cosmetic and Fragrance Division of Revlon and Group Director of Analysis and
Control of the Health Care Group of Revlon. Mr. Lettieri began his career at the
accounting firm of Deloitte & Touche LLP.
GREGORY HORNE was employed by the Company from 1979 to 1982 and has been
with the Company from 1991 to the present. He has served as Vice
President-Information Systems since January 1995. Mr. Horne was elected to the
Board of Directors in January 1994. Prior to this position, Mr. Horne served as
a software programmer, systems analyst and Network Administrator for the
Company. From 1982 to 1990, Mr. Horne was employed by Watchtower Bible and Tract
Society of New York, Inc. as a network operating system programmer.
Gregory Horne is Gary D. Horne's son. There are no other family
relationships among the Company's directors and executive officers.
Within 90 days of the consummation of this Offering, the Company will
secure the services of at least two non-employee directors.
Directors of the Company hold their offices until the next annual meeting
of the Company's stockholders and until their successors have been duly elected
and qualified or their earlier resignation, removal from office or death. There
are no committees of the Board of Directors. Upon consummation of this Offering,
the Company intends to establish audit and compensation committees, each
consisting of a majority of non-employee directors.
Officers of the Company serve at the pleasure of the Board of Directors and
until the first meeting of the Board of Directors following the next annual
meeting of the Company's stockholders and until their successors have been
chosen and qualified.
DIRECTOR COMPENSATION
The Company currently has no policy with respect to director compensation.
However, it is anticipated that non-employee directors will receive annual
grants of options under the 1996 Plan.
37
<PAGE>
LIMITATION ON LIABILITY OF DIRECTORS
As permitted by Delaware law, the Company's Certificate of Incorporation
contains an article limiting the personal liability of directors. The
Certificate of Incorporation provides that a director of the Company shall not
be personally liable for monetary damages for a breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the Delaware General Corporation Law, which prohibits the unlawful payment of
dividends or the repurchase or redemption of stock, or (iv) for any transaction
from which the director derived an improper personal benefit. This article is
intended to afford directors additional protection, and limit their potential
liability, from suits alleging a breach of the duty of care by a director.
EXECUTIVE COMPENSATION
The following table provides information with respect to the compensation
paid or accrued by the Company and its subsidiaries to the Company's Chief
Executive Officer and Chief Operating Officer in all their capacities for Fiscal
1996 and Fiscal 1995. No other executive officer of the Company received salary
and bonus compensation in Fiscal 1996 and Fiscal 1995 in excess of $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------------------------------
ANNUAL COMPENSATION
----------------------
OTHER ANNUAL
SALARY BONUS COMPENSATION(1)
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)
- ---------------------------------------- ------- --------- ------ ---------------
<S> <C> <C> <C> <C>
Gary D. Horne, 1996 $144,240 $0 $0
Chairman and Chief Executive Officer 1995 $110,250 $0 $0
Stanley F. Zuk, 1996 $133,820 $0 $0
President and Chief Operating Officer 1995 $106,050 $0 $0
</TABLE>
- ----------------
(1) The table does not include amounts for personal benefits extended to Mr.
Horne or Mr. Zuk by the Company, such as health or life insurance. The
Company believes that the incremental cost of such benefits to Mr. Horne or
Mr. Zuk during Fiscal 1996 and Fiscal 1995 did not exceed the lesser of
$50,000 or 10% of his total annual salary and bonus.
EMPLOYMENT AGREEMENTS
Effective December 1, 1996, the Company entered into three-year employment
agreements with each of Gary D. Horne, the Company's Chairman Chief Executive
Officer and Stanley F. Zuk, the Company's President and Chief Operating
Officer. The terms of the employment agreements will automatically be extended
for successive one year terms unless the Company or the executive officer gives
written notice to the other at least 90 days prior to the then-scheduled
expiration date. The employment agreements provide for annual salaries initially
set at $160,000 and $140,000 (subject to annual cost-of-living adjustments) for
Messrs. Horne and Zuk, respectively.
Each employment agreement provides that the executive officer who is a
party thereto (the "Executive Officer") will continue to receive his
salary for a period of 12 months after termination of employment, if his
employment is terminated by the Company for any reason other than Cause (as
defined in the employment agreement), including death or disability (with such
severance payable in a lump sum in the case of death). The term Cause is defined
in the employment agreement to mean (a) an Executive Officer's act or omission
which constitutes a willful and material breach of the employment agreement
which is not cured within 30 days after the Executive Officer's receipt of
notice of such breach, (b) an Executive Officer's embezzlement or
misappropriation of the Company's assets for property or (c) an Executive
Officer's conviction for a criminal act that is a felony. Each employment
agreement also prohibits the Executive Officer from directly or indirectly
competing with the Company for one year after termination for any reason except
Cause. If a Change of Control (as defined in the employment agreement) occurs,
the employment agreement provides for the continued employment of the Executive
Officer for a period of two years following the Change of Control. The term
Change of Control, as used in the employment agreement, is defined to mean (a)
any person's or group's
38
<PAGE>
acquisition of 15% or more of the combined voting power of the Company's
outstanding securities, or (b) in the event of any cash tender or exchange,
offer, merger or other business combination sale of assets or contested
election, the persons who were directors of the Company prior to such
transaction ceasing to constitute a majority of the Board of Directors following
the transaction. In addition, following the Change of Control, if the Executive
Officer's employment is terminated by the Company, or by the Executive Officer
for certain specified reasons (such as a reduction of compensation or a
diminution of duties), the Executive Officer will receive a lump sum cash
payment equal to the cash compensation received by the Executive Officer during
the 12 calendar months prior to termination.
The Company has agreed with the Representative to obtain, prior to
consummation of this Offering, key man insurance in the amount of $1,000,000 on
the lives of each of Messrs. Horne and Zuk.
STOCK OPTION PLAN
Under the Company's 1996 Stock Option Plan (the "1996 Plan"), 60,000
shares of Common Stock are reserved for issuance upon exercise of the options.
The 1996 Plan is designed to serve as an incentive for retaining qualified and
competent directors, employees, consultants and independent contractors of the
Company.
The Company's Board of Directors, or a committee thereof, administers and
interprets the 1996 Plan and is authorized to grant options thereunder to all
eligible employees of the Company, including directors and executive officers
(whether current or former employees) of the Company, as well as consultants and
independent contractors. The 1996 Plan provides for the granting of both
"incentive stock options" (as defined in Section 422 of the Internal Revenue
Code of 1986, as amended) and nonstatutory stock options. Incentive stock
options may only be granted, however, to employees. Options can be granted under
the 1996 Plan on such terms and at such prices as determined by the Board, or a
committee thereof, except that the per share exercise price of incentive stock
options granted under the 1996 Plan will not be less than the fair market value
of the Common Stock on the date of grant and, in the case of an incentive stock
option granted to a 10% stockholder, the per share exercise price will not be
less than 110% of such fair market value as defined in the 1996 Plan. In any
case, the exercise price of any stock option granted under the 1996 Plan will
not be less than 85% of the fair market value of the Common Stock on the date of
grant.
Options granted under the 1996 Plan that would otherwise qualify as
incentive stock options will not be treated as incentive stock options to the
extent that the aggregate fair market value of the shares covered by the
incentive stock options which are exercisable for the first time by any
individual during any calendar year exceeds $100,000.
Options granted under the 1996 Plan will be exercisable after the period or
periods specified in the option agreement. Options granted under the 1996 Plan
are not exercisable after the expiration of ten years from the date of grant and
are not transferable other than by will or by the laws of descent and
distribution. Adjustments in the number of shares subject to options granted
under the 1996 Plan can be made by the Board of Directors or the appropriate
committee in the event of a stock dividend or recapitalization resulting in a
stock split-up, combination or exchange of shares. Under the 1996 Plan, options
may become immediately exercisable in the event of a change in control. The 1996
Plan also authorizes the Company to make loans to optionees to enable them to
exercise their options.
As of the date of this Prospectus, the Company will grant options under the
1996 Plan to purchase 30,000 shares of Common Stock to three persons, including
options to purchase 10,000 shares of Common Stock to Robert Lettieri and options
to purchase 5,000 shares of Common Stock to Gregory S. Horne. Such options will
vest in three annual installments commencing one year from the date of grant,
will be exercisable at a price equal to the initial public offering price per
share of the shares of Common Stock offered hereby and will expire ten years
from the date of grant. In addition, exercise of the options is contingent on
the optionee's continued employment by the Company.
39
<PAGE>
CERTAIN TRANSACTIONS
ACQUISITION OF AFFILIATED ENTITY
On June 4, 1996, the Company acquired all the outstanding capital stock of
High Technology Computers, Inc. ("HTC") from Gary D. Horne and Stanley F.
Zuk in exchange for 155,352 and 40,277 shares of the Company's Common Stock,
respectively. The aggregate value of the shares of the Company's Common Stock
issued in exchange for all of the outstanding capital stock of HTC was
$2,566,808. HTC has conducted the Company's cable harness and other wire
technology product contract manufacturing operations for non-IBM customers since
1983. Management of the Company believes that this transaction was consummated
on terms no less favorable than could have been obtained from unaffiliated third
parties.
ADVANCES FROM STOCKHOLDER
In order to assist the Company with meeting its working capital needs, Gary
D. Horne has periodically advanced funds to the Company. Such advances,
including interest at the rate of 8% per annum, aggregated approximately
$605,000 at December 27, 1996. On March 4, 1997, Mr. Horne made an additional
advance of $150,000. Such advances are unsecured and repayable on demand;
however, Mr. Horne has agreed with the Company not to make demand until at least
July 1, 1998. The Company intends to repay such advances as cash flow permits.
No further advances from stockholders are contemplated after the consummation of
this Offering.
DEFERRED COMPENSATION AGREEMENTS
In January 1993, the Company entered into deferred compensation agreements
(the "Deferred Compensation Agreements") with John Halik and James
Yessian, two co-founders and former employees of the Company. Pursuant to the
Deferred Compensation Agreements, the Company agreed to pay each of Messrs.
Halik and Yessian $30,000 per year in deferred compensation for a 15-year
period.
TRANSACTIONS WITH NETCOMP, INC.
The Company purchases computers, computer supplies and services from
Netcomp, Inc. ("Netcomp"), which operates the ComputerLand franchise in
Poughkeepsie, New York. Netcomp is owned by Gary D. Horne and Stanley F. Zuk.
Purchases from Netcomp aggregated approximately $48,000 and $82,000 during
Fiscal 1995 and Fiscal 1996, respectively, and approximately $30,000 and $32,000
for the six months ended December 29, 1995 and December 27, 1996, respectively.
TRANSACTION WITH GREGORY HORNE
In December 1995, the Company entered into an agreement with Gregory Horne
to sell 24 shares of the Company's Common Stock to Mr. Horne for $100,000, of
which $30,000 was paid upon execution of the agreement and the balance was
payable at the rate of $10,000 per year, without interest. In June 1996, the
Company and Mr. Horne mutually agreed to rescind the transaction, whereupon Mr.
Horne surrendered his stock certificates to the Company and the Company refunded
the $30,000 payment to Mr. Horne.
APPROVAL OF AFFILIATED TRANSACTIONS
Following completion of this Offering, all transactions between the Company
and its directors, executive officers and principal stockholders will be on
terms no less favorable than could be obtained from unaffiliated third parties
and have been and will be approved by a majority of the independent outside
directors of the Company, when elected.
40
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership
of the Common Stock as of the date of this Prospectus, by (i) each person who
owns beneficially more than 5% of the outstanding Common Stock, (ii) each of the
Company's directors and executive officers, and (iii) all directors and
executive officers as a group.
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY OWNED
--------------------------
NAME AND ADDRESS NUMBER OF SHARES PRIOR TO AFTER
OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED(2) OFFERING OFFERING
- --------------------------------------- ---------------------- ---------- ---------
<S> <C> <C> <C>
Gary D. Horne(3) ...................... 197,407(3) 31.2% 9.7%
Stanley F. Zuk ........................ 109,322 17.3% 5.4%
Gregory Horne(4) ...................... 171,437 27.1% 8.4%
Robert Lettieri ....................... 0 0% 0%
William Becker
P.O. Box 170
Convent Station, NJ 07961(5)(6) ....... 180,833 22.2% 8.2%
Sanford I. Feld
Box 670, #12 Gumby Lane
Bernardsville, NJ 07095(5)(7) ......... 180,833 22.2% 8.2%
Marion L. Horne Turcot(8) ............. 85,706 13.5% 4.2%
Estate of Richard Backofen
c/o Edith Backofen
43 Mooress Hill Road
New Windsor, NY 12553 ................. 69,045 10.9% 3.4%
Frederic Becker
c/o Wilentz, Goldman & Spitzer
90 Woodbridge Center Drive
Woodbridge, NJ 07095(5) ............... 51,666 7.5% 2.5%
All directors and executive officers
as a group (four persons) ............ 478,166 75.5% 23.5%
</TABLE>
- ----------------
* Less than 1%.
(1) The business address of all directors and executive officers of the Company
and Marion L. Horne Turcot is c/o the Company, 1 Industry Street,
Poughkeepsie, New York 12603.
(2) The Company believes that all persons named in the table have sole voting
and investment power with respect to all shares of Common Stock beneficially
owned by them.
(3) Represents shares of Common Stock held by The Horne LLC. Gary D. Horne
disclaims beneficial ownership of the shares of Common Stock benefically
owned by Gregory Horne, his son, and Marion L. Horne Turcot, his daughter.
(4) Gregory Horne disclaims beneficial ownership of the shares of Common Stock
benefically owned by Gary D. Horne, his father, and Marion L. Horne Turcot,
his sister.
(5) Represents shares of Common Stock issuable upon exercise of Noteholder
Warrants and Placement Agent Warrants. Does not give effect to the sale of
such securities upon consummation of this Offering. See "Concurrent
Offering."
(6) Includes securities held by a trust of which Mr. Becker is the trustee.
(7) Includes securities held by Mr. Feld's employee pension plan.
(8) Marion L. Horne Turcot disclaims beneficial ownership of the shares of
Common Stock beneficially owned by Gary D. Horne, her father, and Gregory
Horne, her brother.
41
<PAGE>
DESCRIPTION OF SECURITIES
GENERAL
The Company is authorized to issue 10,000,000 shares of Common Stock, par
value $.01 per share, and 1,000,000 shares of preferred stock, par value $.01
per share (the "Preferred Stock"). Prior to the Offering, there are
632,917 shares of Common Stock and no shares of Preferred Stock issued and
outstanding. Upon consummation of the Offering, there will be 2,032,917 shares
of Common Stock and no shares of Preferred Stock issued and outstanding.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share held of
record and to a pro rata share of any dividends declared on the Common Stock by
the Board of Directors from funds legally available therefor. Upon liquidation
of the Company, each stockholder is entitled to share ratably in any assets
available for distribution after payment of all debts. Stockholders have no
preemptive, conversion or other subscription rights and there are no redemption
rights or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are, and all shares to be issued in
connection with the exercise of the Underwriter's Warrants, when issued against
payment therefor, will be, validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Company is authorized to issue a total of 1,000,000 shares of Preferred
Stock with such designations, rights and preferences as may be determined from
time to time by the Board of Directors. Accordingly, the Board of Directors is
empowered, without stockholder approval, to issue Preferred Stock with dividend,
liquidation, conversion, voting or other rights which could adversely affect the
voting power or other rights of the holders of the Company's Common Stock. In
the event of issuance, the Preferred Stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company. The Company has no present intention to issue any shares
of its Preferred Stock. In addition, the Company has agreed not to issue any
shares of Preferred Stock for a period of two years from the date of this
Prospectus without the prior written consent of Meyers.
ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors has the authority to issue up to
1,000,000 shares of Preferred Stock and to determine the price, rights,
preferences and privileges of those shares without any further vote or action by
the stockholders. The rights of holders of Common Stock will be subject to, and
may be adversely affected by, the rights of holders of any Preferred Stock that
may be issued in the future. Although the Company has no present intention to
issue shares of Preferred Stock, any issuance of Preferred Stock, while
potentially providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. Additionally, following this Offering, the Company will
become subject to the anti-takeover provisions of Section 203 of the DGCL, which
will prohibit the Company from engaging in a "business combination" with
an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. Section 203 could have
the effect of delaying or preventing a change of control of the Company.
REGISTRATION RIGHTS
The Noteholders have one "demand" registration right (subject to
certain limitations) during the period the Noteholders Warrants are outstanding,
as well as unlimited "piggyback" registration rights (subject to certain
limitations) during that period. Moreover, until such time as the shares
issuable upon exercise of the Bridge Warrants may be sold without a registration
statement, Holders of the Bridge Warrants also have one "demand"
registration right (subject to certain limitations) and unlimited
"piggyback" registration rights (subject to certain limitations).
42
<PAGE>
TRANSFER AGENT
American Stock Transfer & Trust Company, New York, New York, has been
appointed as the transfer agent for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this Offering, the Company will have outstanding
2,032,917 shares of Common Stock. The 1,400,000 shares of Common Stock offered
hereby (1,610,000 shares if the Underwriters' over-allotment option is
exercised in full) will be freely transferable without restriction or further
registration under the Securities Act. The remaining 632,917 outstanding shares
of Common Stock, which are owned by the existing stockholders, will be
"restricted securities," as that term is defined in Rule 144 and may only
be sold pursuant to a registration statement under the Securities Act or an
applicable exemption from registration thereunder, including exemptions provided
by Rule 144.
In general, under Rule 144, if a period of at least one year (two years
until April 1997) has elapsed since the later of the date the "restricted
securities" were acquired from the Company or the date they were acquired
from an Affiliate (as that term is defined in Rule 144), then the holder of such
restricted securities is entitled to sell a number of shares within any
three-month period that does not exceed the greater of 1% of the then
outstanding shares of the Common Stock (approximately 20,329 shares immediately
after this Offering) or the average weekly reported volume of trading of the
Common Stock on The Nasdaq SmallCap Market during the four calendar weeks
preceding such sale. The holder may only sell such shares through unsolicited
brokers' transactions or directly to market makers. Sales under Rule 144 are
also subject to certain requirements pertaining to the manner of such sales,
notices of such sales and the availability of current public information
concerning the Company. Affiliates may sell shares not constituting restricted
shares in accordance with the foregoing volume limitations and other
requirements but without regard to the one-year holding period.
Under Rule 144(k), if a period of at least two years (three years until
April 1997) has elapsed between the later of the date restricted shares were
acquired from the Company or the date they were acquired from an Affiliate, as
applicable, a holder of such restricted shares who is not an Affiliate at the
time of the sale and has not been an Affiliate for at least three months prior
to the sale would be entitled to sell the shares immediately without regard to
the volume limitations and other conditions described above.
Of the currently outstanding 632,917 shares of Common Stock, 69,045 shares
would be eligible for public sale pursuant to Rule 144 as of the date of this
Prospectus, and the remaining shares would become eligible for such public sale
commencing 90 days after the date of this Prospectus. Notwithstanding the
foregoing, officers and directors of the Company have agreed not to sell 250,000
of their shares for a period of five years from the date of this Prospectus
without the prior written consent of the Representative. Such period will be
reduced to two years, however, if the Company's cumulative net income, without
giving effect to any acquisitions or mergers subsequent to the date of this
Prospectus, equals or exceeds $2,800,000 for the two fiscal year period ending
June 30, 1998. Holders of the remaining 382,917 outstanding shares of Common
Stock have agreed not to sell their shares for a period of two years from the
date of this Prospectus without the prior written consent of the Company and
Meyers. Meyers does not have any general policy with respect to the release of
shares prior to the expiration of the lock-up period. The Company's directors,
officers and stockholders beneficially owning more than 5% or more of the
Company's Common Stock have granted the Representatives a right of first refusal
for five years from the date of this Prospectus with respect to any sale of
securities by them. In addition, the Noteholder Warrants and Placement Agent
Warrants will not be exercisable and may not be sold for a period of two years
from consummation of this Offering and the Bridge Warrants will not be
exercisable and may not be sold for a period of 18 months from consummation of
this Offering, without the prior written consent of Meyers. No prediction can be
made as to the effect that future sales of Common Stock, or the availability of
shares of Common Stock for future sale, will have on the market price of the
Common Stock prevailing from time to time.
43
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters"), for whom H.J. Meyers &
Co., Inc. and Keane Securities Co., Inc. are acting as representatives (in such
capacity, the "Representatives"), have severally and not jointly agreed, subject
to the terms and conditions of the Underwriting Agreement among the Company and
the Underwriters (the "Underwriting Agreement"), to purchase from the Company
and the Company has agreed to sell to the Underwriters on a firm commitment
basis, the respective number of shares of Common Stock set forth opposite their
names below:
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITER OF COMMON STOCK
- ----------- ------------------
<S> <C>
H.J. Meyers & Co., Inc. .......
Keane Securities Co., Inc. ....
-
---------
Total: ..................... 1,400,000
=========
</TABLE>
The Underwriters are committed to purchase all shares of Common Stock
offered hereby, if any of such shares of Common Stock are purchased. The
Underwriting Agreement provides that the obligations of the several Underwriters
are subject to the approval of certain legal matters by their counsel and
various other conditions specified therein.
The Representatives have advised the Company that the Underwriters propose
initially to offer the Common Stock directly to the public at the initial public
offering price set forth on the cover page of this Prospectus and that the
Underwriters may allow to certain dealers who are members of the National
Association of Securities Dealers, Inc. ("NASD") a selling concession of
not in excess of $ per share of Common Stock. Such dealers may reallow a
concession not in excess of $ per share of Common Stock to certain other
dealers who are NASD members. After the commencement of this Offering, the
public offering price, concession and re-allowance may be changed by the
Representatives.
The Representatives have advised the Company that they do not anticipate
sales to discretionary accounts by the Underwriters to exceed 5% of the total
number of shares of Common Stock offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make. The Company has also
agreed to pay to the Representatives a non-accountable expense allowance equal
to 3% of the gross proceeds derived from the sale of the Common Stock
underwritten, $100,000 of which has been paid to date.
The Company has granted to the Underwriters an over-allotment option,
exercisable during the 30-day period from the date of this Prospectus, to
purchase from the Company up to an additional 210,000 shares of Common Stock at
the initial public offering price per share of Common Stock offered hereby, less
the underwriting discount and the non-accountable expense allowance. The
Underwriters may exercise such option only for the purpose of covering
over-allotments, if any, incurred in the sale of the Common Stock offered
hereby. To the extent the Underwriters exercise such option in whole or in part,
each Underwriter will have a firm commitment, subject to certain conditions, to
purchase the number of the additional shares of Common Stock proportionate to
its initial commitment and the Company will be obligated to sell such shares of
Common Stock to the Underwriters.
Officers and directors of the Company have agreed not to sell 250,000 of
their shares for a period of five years from the date of this Prospectus without
the prior written consent of Meyers.
44
<PAGE>
Holders of the remaining 382,912 outstanding shares of Common Stock have agreed
not to sell their shares for a period of two years from the date of this
Prospectus without the prior written consent of Meyers. In addition, the
Noteholder Warrants and Placement Agent Warrants will not be exercisable and may
not be sold for a period of two years from consummation of this Offering and the
Bridge Warrants will not be exercisable and may not be sold for a period of 18
months from consummation of this Offering, without the prior written consent of
Meyers. An appropriate legend shall be marked on the face of the certificates
representing all such securities. Meyers has no general policy with respect to
the release of shares prior to the expiration of the lock-up period, and no
present intention to waive or modify any of these restrictions on the sale of
Company securities. However, Meyers may in the future consider such waivers or
modifications if, in its opinion, such waiver or modification would not impact
the market for the Company's securities.
The Underwriting Agreement provides that, other than the issuance of
options pursuant to the 1996 Plan, the Company will not offer any shares of
Common Stock, options to purchase Common Stock, warrants or any other equity or
debt security within one year from the date of this Prospectus without the
consent of Meyers. In addition, for a period of two years from the date of this
Prospectus, the Company will not issue or sell any securities pursuant to
Regulation S under the Securities Act without the prior written consent of
Meyers.
In connection with this Offering, the Company has agreed to sell to the
Representatives, for nominal consideration, the Representatives' Warrants to
purchase from the Company up to 140,000 shares of Common Stock. The
Representatives' Warrants are initially exercisable at a price of $ per share of
Common Stock, [145% of the initial public offering price per share of Common
Stock], for a period of four years commencing one year from the effective date
of this Prospectus and are restricted from sale, transfer, assignment or
hypothecation for a period of 12 months from the date hereof, except to officers
of the Representatives. The Representatives' Warrants provide for adjustment in
the number of shares of Common Stock issuable upon exercise thereof and in the
exercise price of the Representatives' Warrants as a result of certain events,
including subdivisions and combinations of the Common Stock. The
Representatives' Warrants grant to the holders thereof certain rights of
registration with regard to the Common Stock issuable upon exercise thereof.
Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price of the Common Stock has
been determined by negotiation between the Company and the Representatives and
does not necessarily bear any relationship to the Company's asset value, net
worth, or other established criteria of value. The factors considered in such
negotiations, in addition to prevailing market conditions, include the history
of and prospects for the industry in which the Company competes, an assessment
of the Company's management, the prospects of the Company, its capital
structure, the market for initial public offerings and certain other factors as
were deemed relevant.
The Company has agreed to pay the Representatives a consulting fee of
$72,000 for financial consulting services to be performed over a one-year period
payable upon consummation of this Offering. The Company has also agreed that,
for a period of two years from consummation of this Offering, if it participates
in any merger, consolidation or other transaction which either of the
Representatives has brought to the Company, or for which the Company retains the
Representatives for consultation or other services in connection therewith
(including an acquisition of assets or stock in which it pays for the
acquisition, in whole or in part, with shares of Common Stock or other
securities), then it will pay for the Representatives' services an amount based
upon a percentage of the consideration paid in the transaction ranging from 7%
of the first $3,000,000 to 3% of any consideration in excess of $5,000,000.
There are no current plans, proposals, arrangements or understandings with the
Representatives with respect to any financing, merger, acquisition or other
transaction. In addition, the Representatives have the right, for a period of
three years from the date of this Prospectus, to designate an observer to the
Company's Board of Directors, which individual may be a director, officer,
employee or affiliate of either of the Representatives.
45
<PAGE>
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering than
they are committed to purchase from the Company, and in such case may purchase
Common Stock in the open market following completion of the Offering to cover
all or a portion of such short position. The Underwriters may also cover all or
a portion of such short position, up to 210,000 shares of Common Stock, by
exercising the over-allotment option referred to above. In addition, the
Representatives may impose "penalty bids" under contractual arrangements with
the Underwriters whereby it may reclaim from an Underwriter (or dealer
participating in the Offering) for the account of other Underwriters, the
selling concession with respect to Common Stock that is distributed in the
Offering but subsequently purchased for the account of the Underwriters in the
open market. Any of the transactions described in this paragraph may result in
the maintenance of the price of the Common Stock at a level above that which
might otherwise prevail in the open market. None of the transactions described
in this paragraph is required, and, if they are undertaken, they may be
discontinued at any time.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a copy
of each such agreement which is filed as an exhibit to the Registration
Statement. See "Additional Information."
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Broad and Cassel, a general partnership including
professional associations, Miami, Florida. Orrick, Herrington & Sutcliffe LLP,
New York, New York, has acted as counsel to the Underwriters in connection with
this Offering.
EXPERTS
The consolidated financial statements as of June 30, 1996 and for the years
ended June 30, 1995 and 1996, included in this Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein (such report includes an explanatory paragraph that refers to the
restatement of the June 30, 1995 consolidated financial statements), and have
been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
SB-2 (collectively with any amendments thereto, the "Registration
Statement") under the Securities Act, with respect to the securities being
offered by this Prospectus. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits thereto,
certain parts of which have been omitted in accordance with the rules and
regulations of the Commission. The statements contained in this Prospectus as to
the contents of any contract or other document identified as exhibits in this
Prospectus are not necessarily complete and, in each instance, reference is made
to a copy of such contract or document filed as an exhibit to the Registration
Statement, each statement being qualified in any and all respects by such
reference. For further information with respect to the Company and the Common
Stock, reference is hereby made to the Registration Statement and to the
exhibits filed as a part hereof.
46
<PAGE>
This Registration Statement and all other information filed by the Company
with the Commission may be inspected without charge at the principal reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549. Copies of all or any part thereof may be obtained upon payment of
fees prescribed by the Commission from the Public Reference Section of the
Commission at its principal office in Washington, D.C. set forth above. Such
material may also be accessed electronically by means of the Commission's home
page on the Internet at http://www.sec.gov.
47
<PAGE>
ASD GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PAGE
------
Independent Auditors' Report ...................................................... F-2
Consolidated Balance Sheets as of June 30, 1996 and December 27, 1996 (Unaudited) ... F-3
Consolidated Statements of Operations for the Years Ended June 30, 1995 (as restated)
and 1996 and the Six Months Ended December 29, 1995 and December 27, 1996
(Unaudited) ........................................................................ F-4
Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1995
(as restated) and 1996 and the Six Months Ended December 29, 1995 and
December 27, 1996 (Unaudited) ...................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 1995 (as restated)
and 1996 and the Six Months Ended December 29, 1995 and December 27, 1996
(Unaudited) ........................................................................ F-6
Notes to Consolidated Financial Statements .......................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
ASD Group, Inc.
Poughkeepsie, New York
We have audited the accompanying consolidated balance sheet of ASD Group,
Inc. and subsidiaries as of June 30, 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
ended June 30, 1995 and 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, such consolidated financial statements present fairly, in
all material respects, the financial position of ASD Group, Inc. and
subsidiaries as of June 30, 1996, and the results of their operations and their
cash flows for the years ended June 30, 1995 and 1996 in conformity with
generally accepted accounting principles.
As discussed in Note 11, the accompanying 1995 consolidated financial
statements have been restated.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
August 15, 1996
(October 21, 1996 as to Note 11 and December 26, 1996 as to Note 12)
F-2
<PAGE>
ASD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 27,
1996 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash ................................................................. $ 458,911 $ 451,783
Accounts receivable, less allowance for doubtful accounts of $383,000
and $63,000 respectively ............................................ 2,737,163 1,892,607
Inventory ............................................................ 5,954,571 5,258,896
Prepaid expenses and other current assets ........................... 56,372 121,224
Deferred tax asset ................................................... 313,449 119,212
----------- ----------
Total current assets ............................................... 9,520,466 7,843,722
Property, plant and equipment, net .................................... 4,736,779 4,613,589
Deferred tax asset .................................................... 959,499 1,271,736
Other assets .......................................................... 637,735 1,038,804
----------- ----------
Total assets .......................................................... $ 15,854,479 $14,767,851
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .................................... $ 1,072,710 $1,937,537
Accounts payable ..................................................... 2,693,452 1,791,198
Accrued expenses ..................................................... 1,202,228 877,079
Deferred revenues .................................................... 69,666 -
----------- ----------
Total current liabilities .......................................... 5,038,056 4,605,814
Long-term debt ........................................................ 9,602,158 8,783,038
Deferred compensation ................................................. 301,085 302,007
----------- ----------
Total liabilities .................................................. 14,941,299 13,690,859
----------- ----------
Contingencies (Note 10)
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized,
none issued ......................................................... - -
Common stock, $.01 par value, 10,000,000 shares authorized,
632,917 shares issued and outstanding ............................... 6,329 6,329
Paid-in capital ...................................................... - 327,000
Retained earnings .................................................... 906,851 743,663
----------- ----------
Total stockholders' equity ......................................... 913,180 1,076,992
----------- ----------
Total liabilities and stockholders' equity ............................ $ 15,854,479 $14,767,851
=========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
ASD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, SIX MONTHS ENDED
------------------------------- -------------------------------
DECEMBER 29, DECEMBER 27,
1995 1996 1995 1996
-------------- -------------- --------------- -------------
(RESTATED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales .......................... $18,655,383 $ 26,111,896 $13,326,327 $8,209,844
Cost of goods sold ................. 14,834,094 20,437,889 10,662,099 6,033,266
----------- ------------ ----------- ----------
Gross profit ..................... 3,821,289 5,674,007 2,664,228 2,176,578
----------- ------------ ----------- ----------
Operating expenses:
Sales and marketing ............... 240,398 288,815 114,749 96,216
General and administrative ........ 2,516,413 4,203,060 2,125,938 1,645,966
----------- ------------ ----------- ----------
Total operating expenses ......... 2,756,811 4,491,875 2,240,687 1,742,182
----------- ------------ ----------- ----------
Income from operations ........... 1,064,478 1,182,132 423,541 434,396
Other income (expense) ............. (675) 199,118 216,110 50,553
Interest expense ................... 762,891 976,850 373,909 766,137
----------- ------------ ----------- ----------
Income (loss) before
income taxes .................... 300,912 404,400 265,742 (281,188)
Provision (benefit) for
income taxes ...................... 129,000 (3,000) (61,000) (118,000)
----------- ------------ ----------- ----------
NET INCOME (LOSS) ................ $ 171,912 $ 407,400 $ 326,742 $ (163,188)
=========== ============ =========== ==========
Net income (loss) per
common share ...................... $ .27 $ .64 $ .52 $ (.26)
=========== ============ =========== ==========
Weighted average common shares
outstanding ....................... 632,917 632,917 632,917 632,917
=========== ============ =========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
ASD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
-------------------- ----------------------
PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- -------- ---------- --------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1994 ......... - $- 632,917 $6,329 $ - $ 327,539 $ 333,868
Net income (restated) ......... - - - - - 171,912 171,912
-- --- --------- ------- -------- --------- ---------
Balance, June 30, 1995
(restated) ................... - - 632,917 6,329 - 499,451 505,780
Net income ................... - - - - - 407,400 407,400
-- --- --------- ------- -------- --------- ---------
Balance, June 30, 1996 ........ - - 632,917 6,329 - 906,851 913,180
Net loss (unaudited) ......... - - - - - (163,188) (163,188)
Fair value of warrants issued
(unaudited) (Note 12) ........ - - - - 327,000 - 327,000
-- --- --------- ------- --------- --------- ---------
Balance, December 27, 1996
(unaudited) .................. - $- 632,917 $6,329 $327,000 $ 743,663 $1,076,992
== === ========= ======= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
ASD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, SIX MONTHS ENDED
----------------------------- --------------------------------
DECEMBER 29, DECEMBER 27,
1995 1996 1995 1996
------------- ------------- --------------- --------------
(RESTATED) (UNAUDITED)
<S> <C> <C> <C> <C>
Operating activities:
Net income (loss) ........................ $ 171,912 $ 407,400 $ 326,742 $ (163,188)
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Depreciation and amortization .......... 365,321 383,449 157,222 315,589
Benefit for doubtful accounts .......... (204,945) (45,030) (45,000) (90,000)
Deferred compensation ................. 27,582 29,790 14,894 16,086
Interest accrued on advances from
stockholder ........................... 35,998 43,117 21,559 23,284
Deferred income taxes .................. 118,642 (26,594) (76,335) (118,000)
Gain on sale of plant .................. - (166,734) (166,734) -
Changes in assets and liabilities:
Accounts receivable ................... (639,883) 532,293 760,788 934,556
Inventory ............................. (3,269,755) (1,776,803) (437,828) 695,675
Prepaid expenses and other
current assets ....................... (19,903) 125,309 43,185 (64,852)
Other assets .......................... (20,090) (112,668) (26,425) 22,219
Accounts payable ...................... 2,264,592 (288,111) (508,876) (902,254)
Accrued expenses ...................... 729,276 (323,192) 392,825 (325,149)
Deferred revenues ..................... (195,677) (725,899) (623,877) (69,666)
----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities ................ (636,930) (1,943,673) (167,860) 274,300
----------- ----------- ----------- -----------
Investing activities:
Net proceeds from sale of plant .......... - 591,781 591,781 -
Capital expenditures ..................... - (171,790) - (7,741)
----------- ----------- ----------- -----------
Net cash provided by (used in)
investing activities ................ - 419,991 591,781 (7,741)
----------- ----------- ----------- -----------
Financing activities:
Borrowings ............................... 750,000 3,464,355 1,400,000 1,100,000
Payments of long-term debt ............... (216,591) (1,312,206) (1,028,517) (1,042,825)
Financing costs .......................... - (502,644) - (315,698)
Payments of deferred compensation ........ (22,662) (23,834) (12,756) (15,164)
----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities ................ 510,747 1,625,671 358,727 (273,687)
----------- ----------- ----------- -----------
Net increase (decrease) in cash ........... (126,183) 101,989 782,648 (7,128)
Cash, beginning of period ................. 483,105 356,922 356,922 458,911
----------- ----------- ----------- -----------
Cash, end of period ....................... $ 356,922 $ 458,911 $ 1,139,570 $ 451,783
=========== =========== =========== ===========
Supplemental disclosure:
Cash paid during the period for:
Income taxes ............................ $ 2,521 $ 32,631 $ 25,335 $ 4,510
=========== =========== =========== ===========
Interest ................................ $ 392,352 $ 1,268,779 $ 317,079 $ 493,048
=========== =========== =========== ===========
Notes exchanged for amounts owed
to vendors ............................ $ 553,389 $ 198,403 $ 90,920 $ -
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
ASD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION
ASD Group, Inc. ("ASD") And Its Wholly-Owned Subsidiaries (The
"Company") operate in one business segment. The Company is a provider of
contract manufacturing and engineering services to domestic original equipment
manufacturers. The Company provides a wide range of services including product
engineering and design, procurement, precision fabrication of sheet metal and
machined parts, printed circuit board assembly, electro-mechanical assembly and
functional testing.
On June 4, 1996, ASD acquired all of the outstanding capital stock of High
Technology Computers, Inc. ("HTC") for 195,629 shares of the Company's
common stock. ASD and HTC were under common ownership. HTC conducts certain
manufacturing operations for ASD. The transaction has been accounted for similar
to a pooling of interests and the accompanying consolidated financial statements
include the historical accounts of HTC for all periods presented.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION-The accompanying consolidated financial
statements include the consolidated accounts of ASD Group, Inc. and its
subsidiaries. All significant intercompany balances and transactions have been
eliminated.
REVENUE RECOGNITION-Sales are recorded as products are shipped or when
services are rendered.
FINANCING COSTS-During the year ended June 30, 1996 and six months ended
December 27, 1996, the Company incurred $373,851 and $160,433, respectively, in
connection with debt financings (see Note 4) and incurred $128,793 and $155,265,
respectively, in connection with an anticipated initial public offering. These
costs have been capitalized. The debt financing costs will be amortized over the
terms of the financings and the costs associated with the initial public
offering will be charged to paid-in capital upon consummation of the initial
public offering. Amortization of the financing costs for the year ended June 30,
1996 and six months ended December 27, 1996 was $22,500 and $136,158,
respectively. All of the above costs are included in other assets at June 30,
1996 and December 27, 1996.
PROPERTY, PLANT, AND EQUIPMENT-Property, plant and equipment are stated at
cost. Depreciation is computed using the straight-line method over the estimated
useful lives of the assets which range from 5 to 40 years. The net realizable
value of the idle property approximates its carrying value.
INVENTORY-Inventory, consisting primarily of work-in-process, is determined
under the lower of cost (first-in, first-out method) or market. The Company does
not maintain a reserve for inventory impairment. Inventory that becomes obsolete
because of customer required changes or residual inventory is written-off at the
time the job is completed or when an engineering change is implemented.
INCOME TAXES-Deferred income taxes are provided for the temporary
differences between the financial reporting basis and the income tax basis of
the Company's assets and liabilities using presently enacted tax rates.
F-7
<PAGE>
ASD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES-(CONTINUED)
CONCENTRATION OF CREDIT RISK-Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of
trade receivables. The Company performs ongoing credit evaluations of its
customers' financial conditions and generally does not require collateral.
Additionally, in November 1994 the Company acquired insurance for bad debts for
certain rated customers. The insurance policy assures a minimum recovery of 80%
of the maximum established by the insurer per customer insured. Customers that
accounted for 10% or more of the Company's consolidated sales are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, SIX MONTHS ENDED
------------------- --------------------------------
DECEMBER 29, DECEMBER 27,
CUSTOMER 1995 1996 1995 1996
- ----------------------------------------- ------- ------- --------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Gerber Scientific Products ............ 20% 16% 17% 11%
ENI .................................... 19 20 18 18
IBM .................................... 19 - - -
S&K Products International, Inc. ...... 13 14 13 10
Lockheed Martin Corporation ............ - 13 17 18
Bruce Technologies International ...... - 10 10 -
--- ---- --- --
71% 73% 75% 57%
=== ==== === ===
</TABLE>
NET INCOME (LOSS) PER COMMON SHARE-Net income (loss) per common share is
computed using the weighted average number of common and common equivalent
shares (when dilutive) outstanding during each period.
STOCK SPLIT-On June 10, 1996 the Company effected a 5,753.79 for 1 split of
its common stock resulting in 632,917 shares outstanding. All references in the
accompanying consolidated financial statements to the number of common shares
and per share amounts have been retroactively restated to reflect the stock
split.
INTERIM FINANCIAL STATEMENTS-The accompanying consolidated balance sheet as
of December 27, 1996 and the statements of operations, stockholders' equity,
and cash flows for the six months ended December 29, 1995 and December 27, 1996
are unaudited but, in the opinion of management, include all adjustments
(consisting of normal, recurring adjustments) necessary for a fair presentation
of results for these interim periods.
MANAGEMENT ESTIMATES-The preparation of financial statements in conformity
with generally accepted accounting principles 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 periods. Actual results could differ from those estimates.
F-8
<PAGE>
ASD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 27,
1996 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
Land ................................. $ 563,937 $ 563,937
Buildings ........................... 1,633,327 1,633,327
Leasehold improvements ............... 866,568 866,568
Machinery and equipment ............... 2,670,034 2,677,775
Automobiles ........................... 47,956 47,956
----------- -----------
5,781,822 5,789,563
Less: accumulated depreciation ...... (2,537,182) (2,651,901)
----------- -----------
3,244,640 3,137,662
----------- -----------
Idle property:
Land and building .................. 1,923,865 1,923,865
Less: accumulated depreciation ...... (431,726) (447,938)
----------- -----------
1,492,139 1,475,927
----------- -----------
$ 4,736,779 $ 4,613,589
=========== ===========
</TABLE>
Idle property represents facilities that are temporarily not being used in
the Company's operations. The Company intends to use these facilities
commencing in fiscal 1998.
On August 1, 1995, the Company sold its North Carolina facility for net
cash proceeds of $591,781, which was used to repay outstanding borrowings. The
sale resulted in a net gain of $166,734 for financial statement purposes which
is included in other income in the accompanying consolidated statements of
operations for the year ended June 30, 1996 and six months ended December 29,
1995.
F-9
<PAGE>
ASD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
4. LONG-TERM DEBT
Long-Term Debt Consists Of The Following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 27,
1996 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
Original Issue Discount Promissory Notes-interest at 10%, due
April 28, 1997 (see Note 12)...................................... $ - $1,065,248
Senior Secured Notes- interest at 10%, interest only through
December 31, 1997, due June 30, 1999, secured by inventory
(see Note 12) .................................................... 2,000,000 2,000,000
Notes Payable-Bank of New York, interest at 60% of prime,
due May 1, 1997, secured by real property ........................ 56,951 33,118
Notes Payable-Key Bank, interest at prime plus 1%,
due December 1, 1998, secured by equipment ....................... 160,696 132,759
Notes Payable-Bankers Trust Company, interest at prime
plus 1.5%, due March 31, 1997, secured by equipment ........... 504,026 455,226
Revolving Line of Credit-Bankers Trust Company, interest at
prime plus 1.5%, due December 31, 1997. Collateralized by
accounts receivable, equipment and inventory ..................... 3,674,146 2,926,480
Mortgage Payable-Bankers Trust Company, interest at prime
plus 1.5%, due September 1, 1998, secured by real property ....... 1,946,369 1,912,969
Mortgage Payable-Bankers Trust Company, interest at prime
plus 1.5%, due September 1, 1998, secured by real property ....... 1,466,013 1,434,413
Advances From Stockholder, plus accrued interest of $132,112
and $155,396-interest at 8%, repayable no earlier than July 1,
1998 ............................................................. 582,081 605,365
Notes Payable to Vendors-interest at various rates, secured by
certain assets ................................................... 266,158 138,231
Other ............................................................. 18,428 16,766
---------- ----------
10,674,868 10,720,575
Less: current portion ............................................. 1,072,710 1,937,537
---------- ----------
$ 9,602,158 $8,783,038
========== ==========
</TABLE>
On August 17, 1995, the Company received a $400,000 increase to the
revolving line of credit (the "Line") with Poughkeepsie Savings Bank (the
"Bank") and the maturity date and interest rates were adjusted on all debt
owed to the Bank. The Company was required to make interest only payments to the
Bank until February 1, 1996, at which time principal payments commenced. The
interest rate on all debt was increased to 9% through December 31, 1995.
On December 28, 1995, the Company reached an agreement with the Bank
increasing the Line by $1,000,000 to $3,730,000 and extending the maturity date
to December 31, 1997. The interest rate is prime plus 1.5%. Additionally, the
interest rate on all other outstanding debt owed to the Bank is prime plus 1.5%.
The Line contains certain financial operating covenants.
The Company is required to pay the Bank as additional interest
("Additional Interest") the lesser of a) $500,000 or b) ten percent (10%)
of the net cash proceeds received by the Company described in (i), (ii), (iii)
or (iv) below: The happening of any one or more of the following events will
trigger the
F-10
<PAGE>
ASD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
4. LONG-TERM DEBT-(CONTINUED)
immediate obligation of the Company, but in no event more than $500,000 from (i)
the sale of all or any of its shares of capital stock, (ii) venture capital
funds raised, (iii) bridge loan financing obtained, or (iv) the successful
completion of an initial public offering. The obligation of the Company to make
such payments will continue until the full amount of Additional Interest is paid
in full.
On December 29, 1995, the Company issued $1,000,000 of senior secured notes
(the "Notes") to a group of investors. Interest at 10% is payable
quarterly commencing March 31, 1996. The Notes are secured by a first lien on
the Company's inventory. Monthly principal payments will commence in January
1998 until paid in full in June 1999. As a result of this financing, the Company
is required to pay 10% of the proceeds, or $100,000, in Additional Interest to
the Bank. This amount was included in accrued expenses at June 30, 1995. On
February 16, 1996, the Company obtained an additional $1,000,000 from notes
issued to the same group of investors. The $100,000 Additional Interest due to
the Bank as a result of this financing is being charged to expense during the
term of the extended Line. The Notes are due and payable upon consummation of an
initial public offering of not less than $5 million. In addition, the investors
will receive upon consummation of an initial public offering, $2 million in
shares of common stock (333,333 shares at an anticipated offering price of $6.00
per share) and warrants to purchase $2 million in shares of common stock
(333,333 shares at an anticipated offering price of $6.00 per share) exercisable
over a five year period. In connection with the issuance of the Notes, the
investment banking firm which assisted in the placement of the Notes received
warrants to purchase $200,000 in shares of common stock (33,333 shares at an
anticipated offering price of $6.00 per share) exercisable over a five year
period. The warrants to be issued to the investors and to the investment banking
firm will be accounted for at the estimated fair value of the warrants at the
date of issuance. See Note 12.
In April 1996, the Bank notified the Company that it had sold the
Company's outstanding loan portfolio ($6,729,088 at December 27, 1996) to
Bankers Trust Company ("BTCo."). On May 31, 1996, the Company purchased an
option for $76,748 from BTCo. that will allow the Company to buy-out the
outstanding loans at a discount of up to $460,487, as well as the exclusion of
any Additional Interest payable at the date of the exercise of the option. The
option expires March 31, 1997 and can be exercised after the completion of an
initial public offering or bank refinancing. If the option is exercised before
March 31, 1997, the cost of the option will reduce the total indebtedness.
Annual principal payments are as follows:
12 MONTHS ENDING
DECEMBER
- -------------------
1997 ......... $ 1,937,537
1998 ......... 8,773,627
1999 ......... 4,142
2000 ......... 4,485
2001 ......... 784
-----------
$10,720,575
===========
The prime rate at December 27, 1996 was 8.25%.
F-11
<PAGE>
ASD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
5. DEFERRED COMPENSATION
The Company has a deferred compensation agreement with two former
employees. The agreement requires the payment of $450,000 to each employee over
a 15 year period. The obligations have been recorded at their net present value
using a discount rate of 8%.
6. STOCKHOLDERS' EQUITY
PREFERRED STOCK:
On June 10, 1996, the Company's Board of Directors authorized 1,000,000
shares of preferred stock, $.01 par value. Designations, rights and preference
of the preferred stock will be determined by the Board of Directors. No shares
of preferred stock have been issued.
COMMON STOCK:
On June 10, 1996, the Company's Board of Directors increased the
authorized common stock to 10,000,000 shares and effected a 5,753.79 for 1 split
of its common stock resulting in 632,917 shares outstanding.
1996 STOCK OPTION PLAN:
On June 25, 1996, the Company adopted the 1996 Stock Option Plan (the
"1996 Plan"). The 1996 Plan provides for the issuance of a maximum of
60,000 shares of common stock pursuant to the future grant to employees and
others of incentive stock options and nonstatutory stock options.
7. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, SIX MONTHS ENDED
---------------------------- ------------------------------
DECEMBER 29, DECEMBER 27,
1995 1996 1995 1996
----------- ------------ --------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current:
Federal ...... $ 8,264 $ 19,111 $ 12,422 $ -
State ......... 2,094 4,483 2,913 -
-------- -------- -------- ---------
10,358 23,594 15,335 -
-------- -------- -------- ---------
Deferred:
Federal ...... 96,100 (21,541) (61,831) (95,580)
State ......... 22,542 (5,053) (14,504) (22,420)
-------- -------- -------- ---------
118,642 (26,594) (76,335) (118,000)
-------- -------- -------- ---------
$129,000 $ (3,000) $(61,000) $(118,000)
======== ======== ======== =========
</TABLE>
F-12
<PAGE>
ASD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
7. INCOME TAXES-(CONTINUED)
A reconciliation of the income tax provision (benefit) to the amount
computed using the Federal statutory rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, SIX MONTHS ENDED
--------------------------- --------------------------------
DECEMBER 29, DECEMBER 27,
1995 1996 1995 1996
----------- ------------- --------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Income tax at statutory rate ......... $102,310 $ 137,496 $ 89,740 $ (95,332)
State income taxes and other (net of
Federal benefit) .................... 26,690 31,504 21,260 (22,668)
Release of valuation allowance ...... - (172,000) (172,000) -
--------- --------- --------- ---------
$129,000 $ (3,000) $ (61,000) $(118,000)
========= ========= ========= =========
</TABLE>
The net deferred tax asset consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 27,
1996 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
Net operating loss carryforward ...... $ 1,490,582 $1,793,544
Capital loss carryforward ............ 228,333 228,333
Allowance for doubtful accounts ...... 160,847 26,499
Deferred compensation ............... 126,456 126,843
Accrued vacation ..................... 46,729 19,209
Accrued interest ..................... 55,487 5,275
Other ................................. 77,122 94,794
Depreciation ........................ (684,275) (675,216)
----------- ----------
1,501,281 1,619,281
Valuation allowance .................. (228,333) (228,333)
----------- ----------
$ 1,272,948 $1,390,948
=========== ==========
</TABLE>
Deferred taxes result from temporary differences in the recognition of
revenues and expenses for income tax and financial statement purposes. Deferred
tax assets are reduced by a valuation allowance relating to the utilization of a
capital loss carryforward which management believes that it is more likely than
not will not be realized. During the year ended June 30, 1996, the Company sold
its North Carolina facility (see Note 3) thereby generating a capital gain for
income tax purposes of $528,000 on the sale. Therefore, the Company reduced the
valuation allowance by approximately $172,000 relating to the tax benefits from
this sale.
As of December 27, 1996, the Company has a Federal net operating loss
carryforward of approximately $4,200,000 which expires in 2011.
8. RELATED PARTY TRANSACTIONS
The Company purchases computers, computer supplies and services from
Netcomp, Inc., A company under common ownership. Purchases during the years
ended June 30, 1995 and 1996 and the six months ended December 29, 1995 and
December 27, 1996 were approximately $48,000, $82,000, $30,000 and $32,000,
respectively.
F-13
<PAGE>
ASD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
9. PENSION PLAN
The Company has a defined contribution plan covering all full time
employees who have worked at least 1,000 hours during the plan year, who have
one year of service, and are age twenty-one or older. The Plan is subject to
provisions of the Employee Retirement Income Security Act of 1974. The Company
may contribute an amount up to 15% of compensation of all plan participants.
There was no pension expense attributed to this plan for the years ended June
30, 1995 and 1996 and the six months ended December 29, 1995 and December 27,
1996.
10. CONTINGENCIES
The Company is a defendant in various lawsuits which arose in the normal
course of business. In the opinion of management, none of the cases are expected
to have a material effect on the consolidated financial statements of the
Company.
11. RESTATEMENT
Subsequent to the original issuance of the accompanying consolidated
financial statements for the year ended June 30, 1995, the Company's management
determined that the inventory balance as of June 30, 1995 was overstated by
$406,000 and that $50,000 of depreciation was not recorded on idle property. As
a result, the accompanying 1995 consolidated financial statements have been
restated from the amounts previously reported to reflect the proper recording of
these assets. The significant effects of these restatements on the 1995
consolidated financial statements was to increase cost of goods sold by
$456,000, and to decrease income before income taxes, net income and net income
per common share by $456,000, $255,000 and $.40, respectively. The need for an
inventory adjustment was caused by a data entry error which occured during the
transition from the Company's old work-in-process accounting software to the
POM manufacturing software currently in use. As the Company has completed the
transition to the POM manufacturing software, which provides for more frequent
operating reports and detailed tracking of work-in-process, the Company believes
that the likelihood of a recurrence has been substantially reduced.
12. SUBSEQUENT EVENTS-FINANCINGS
OID NOTES:
On August 29, 1996, the Company issued $1,100,000 10% Original Issue
Discount Promissory Notes (the "OID Notes") to investors. The OID Notes
were due at the earliest of 150 days from the date of issuance, the closing date
of an initial public offering or upon the sale of the Company. The OID Notes
agreement contains requirements as to the Company maintaining a specified
minimum amount of stockholders' equity. At September 27, 1996, the Company was
in default of this requirement. The interest rate on the OID Notes increased to
12.5% retroactively as of the date of issuance. The Bridge Investors have
advised the Company that they do not intend to take any action with respect to
the OID Notes until the earlier of consummation of an initial public offering at
which time the OID Notes will be repaid or April 28, 1997.
In connection with the issuance of the OID Notes, the Company issued
112,500 and 11,250 warrants to purchase shares of common stock to the investors
and the placement agent, respectively. The warrants have an exercise price of
51.5% of an initial public offering price per share ($3.09 at an anticipated
offering price of $6.00 per share) and are exercisable during the five year
period
F-14
<PAGE>
ASD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
12. SUBSEQUENT EVENTS-FINANCINGS-(CONTINUED)
commencing six months after the closing of an initial public offering; provided,
however, the warrants are not exercisable and may not be sold for 18 months
following consummation of the initial public offering without consent of the
Company and the Representative. In the event that an initial public offering has
not been completed within nine months from the date of issuance of the OID
Notes, the investors and the placement agent have the right to put the warrants
to the Company at $1.00 each. The fair value of the warrants ($82,000) at the
date of issuance was recorded as paid-in-capital with a corresponding reduction
to the OID Notes' balance. The discount on the OID Notes is being amortized as
additional interest expense over the term of the OID Notes. Such amortization
was $47,248 during the six months ended December 27, 1996.
If the principal amount of the OID Notes is not repaid at maturity, the
warrants will convert into common stock representing a 20% equity interest in
the Company.
SENIOR SECURED NOTES:
On December 20, 1996, the terms of the Notes (see Note 4) were amended to
eliminate the issuance of the $2,000,000 in shares of common stock (333,333
shares at an anticipated offering price of $6.00 per share) and warrants to
purchase $2,000,000 in shares of common stock (333,333 shares at an anticipated
offering price of $6.00 per share). The amended agreement provides, among other
things, that $900,000 in principal amount of the Notes is payable upon
consummation of an initial public offering, with the remaining $1,100,000 of the
Notes, plus accrued interest thereon, payable 13 months after consummation of an
initial public offering. In addition, the first lien on the Company's inventory
was released. In connection with the amended agreement, the Company issued
warrants to the investors to purchase 500,000 shares of common stock. The
warrants have an exercise price of 47.5% of the initial public offering price
per share ($2.85 at an anticipated offering price of $6.00 per share). The
warrants are exercisable over the ten-year period; provided however, the
warrants are not exercisable and may not be sold for two years following
consummation of the initial public offering without the consent of the Company
and H.J. Meyers & Co., Inc., one of the Representatives of the several
underwriters of the Company's proposed public offering. The fair value of the
warrants in excess of the underlying common stock ($245,000) at the date of
issuance will be amortized over the term that the underlying debt remains
outstanding.
FINANCING COMMITMENTS:
On December 26, 1996, a stockholder agreed to provide the Company with
additional loans of up to $150,000 until June 27, 1997 on the same terms and
conditions as disclosed in Note 4. In March 1997, the stockholder loaned the
Company $150,000.
On December 26, 1996, the investors in the OID Notes agreed to provide the
Company with additional loans of up to $250,000 at 10% interest rate if the
Company fails to consummate an initial public offering by March 31, 1997. This
loan would also be accompanied by an equity participation to be determined.
F-15
<PAGE>
[INSIDE BACK COVER]
A parcel drop system which the Company's engineers helped design.
An atomic force microscope sub-system.
<PAGE>
[INSIDE BACK COVER]
A printed circuit board assembly.
A high speed transmission ribbon cable assembly (top), a wire harness assembly
(left), a molded cable assembly (right), and power jumper and signal jumper
assemblies (bottom).
<PAGE>
[INSIDE BACK COVER]
A control sub-system for a four-color process sign plotter.
A control sub-system for an automated letter cutting plotter.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO UNDERWRITER, DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUMMARY ......... 3
RISK FACTORS ............... 7
THE COMPANY .................. 15
USE OF PROCEEDS ............ 16
CAPITALIZATION ............... 17
DILUTION ..................... 18
DIVIDEND POLICY ............ 18
CONCURRENT OFFERING ......... 19
SELECTED FINANCIAL DATA ...... 20
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ... 21
BUSINESS ..................... 28
MANAGEMENT .................. 37
CERTAIN TRANSACTIONS ......... 40
PRINCIPAL STOCKHOLDERS ...... 41
DESCRIPTION OF SECURITIES ... 42
SHARES ELIGIBLE FOR
FUTURE SALE ............... 43
UNDERWRITING ............... 44
LEGAL MATTERS ............... 46
EXPERTS ..................... 46
ADDITIONAL INFORMATION ...... 46
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS ...... F-1
UNTIL , 1997 (25 DAYS AFTER COMMENCEMENT OF THIS OFFERING), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
[ASD GROUP INC. LOGO]
1,400,000 SHARES
OF
COMMON STOCK
---------
PROSPECTUS
---------
H.J. MEYERS & CO., INC.
KEANE SECURITIES CO., INC.
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
(ALTERNATE PAGE FOR SELLING SECURITY HOLDERS' PROSPECTUS)
SUBJECT TO COMPLETION, DATED MARCH 13, 1997
PROSPECTUS
533,333 SHARES OF COMMON STOCK
[ASD GROUP, INC. LOGO]
----------------
This Prospectus relates to 533,333 shares of common stock, par value $.01
per share (the "Common Stock"), of ASD Group, Inc. (the "Company"),
which will be held by certain shareholders of the Company upon exercise of (i)
warrants to purchase 500,000 shares of the Company's Common Stock at a price of
$ per share exercisable for a ten-year period from consummation of the
Company Offering, as defined below (the "Noteholder Warrants"), and (ii)
warrants to purchase 33,333 shares of Common Stock at a price of $ per
share exercisable for a five-year period from consummation of the Company
Offering (the "Placement Agent Warrants"). The number of shares issuable
upon exercise of the Noteholder Warrants and Placement Agent Warrants will be
based on the initial public offering price of the Common Stock. It is presently
anticipated that the initial public offering price of the Common Stock will be
between $5.75 and $6.25 per share.
The Noteholders and the Placement Agent and its assignees are hereinafter
referred to as the "Selling Security Holders." The shares issuable upon exercise
of the Noteholder Warrants and Placement Agent Warrants are hereinafter
collectively referred to as the "Selling Security Holders' Securities." The
Selling Security Holders' Securities will not be underwritten in the Company
Offering (as defined below) and the Company will not receive any proceeds from
the sale of the Selling Security Holders' Securities. The Noteholder Warrants
and the Placement Agent Warrants will not be exercisable and may not be sold for
a period of two years and 18 months from the consummation of the Company
Offering, respectively, without the prior written consent of H.J. Meyers & Co.,
Inc. ("Meyers"), one of the representatives (the "Representatives") of an
offering, by separate prospectus of 1,400,000 shares of Common Stock (the
"Company Offering").
Prior to this offering (the "Selling Security Holders' Offering"), the
Company applied for quotation of the Common Stock on The Nasdaq SmallCap Market
under the symbol "ASDG," as well as on the Boston Stock Exchange and Pacific
Stock Exchange under the symbol "ASD." Sales of any Noteholder Warrants,
Placement Agent Warrants or Selling Security Holders' Securities by the Selling
Security Holders, or even the existence of the right to exercise such warrants,
may depress the price of the Common Stock in any market that may develop for the
Common Stock. See "Company Offering," "Selling Security Holders" and "Plan of
Distribution."
(Continued on next page)
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS"
COMMENCING ON PAGE AND "DILUTION."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
(ALTERNATE PAGE FOR SELLING SECURITY HOLDERS' PROSPECTUS)
The sale of the Selling Security Holders' Securities may be effected from
time to time in transactions (which may include block transactions by or for the
account of the Selling Security Holders) in the over-the-counter market or in
negotiated transactions, through the writing of options on the Selling Security
Holders' Securities, through a combination of such methods of sale, or
otherwise. Sales may be made at fixed prices which may be changed, at market
prices prevailing at the time of sale, or at negotiated prices. If any Selling
Security Holder sells his, her or its securities, or options thereon, pursuant
to this Prospectus at a fixed price or at a negotiated price which is, in either
case, other than the prevailing market price or in a block transaction to a
purchaser who resells, or if any Selling Security Holder pays compensation to a
broker-dealer that is other than the usual and customary discounts, concessions
or commissions or if there are any arrangements either individually or in the
aggregate that would constitute a distribution of the Selling Security Holders'
Securities, a post-effective amendment to the Registration Statement of which
this Prospectus is a part, would need to be filed and declared effective by the
Securities and Exchange Commission (the "Commission") before such Selling
Security Holders could make such sale, pay such compensation or make such a
distribution. The Company is under no obligation to file a post-effective
amendment to the Registration Statement of which this Prospectus is a part under
such circumstances.
A-2
<PAGE>
(ALTERNATE PAGE FOR SELLING SECURITY HOLDERS' PROSPECTUS)
THE SELLING SECURITY HOLDERS' OFFERING
<TABLE>
<S> <C>
Securities Offered ................. 533,333 shares of Common Stock issuable upon
exercise of Noteholder Warrants and
Placement Agent Warrants. See
"Management's Discussion and Analysis of
Financial Condition and Results of Operations"
and "Description of Securities."(1)
Common Stock outstanding prior
to the Company Offering ........... 632,917 shares
Common Stock to be outstanding
after the Company Offering ........ 2,032,917 shares(2)
Use of Proceeds .................... None of the proceeds of this offering will go to
the Company. The net proceeds from the
Company Offering will be used by the
Company for repayment of indebtedness,
increase in staffing and purchase of materials to
fill backlog requirements, capital expenditures,
sales and marketing activities, working capital
and other general corporate purposes. See
"Use of Proceeds."
Proposed Symbols
Nasdaq SmallCap Market ............ ASDG
Boston Stock Exchange ............. ASD
Pacific Stock Exchange ............ ASD
</TABLE>
- ----------------
(1) Based on an assumed initial public offering price in the Company Offering of
$6.00 per share. An additional 1,400,000 shares of Common Stock and up to
210,000 additional shares of Common Stock to cover over-allotments, if any,
are being offered by the Company in the concurrent underwritten public
offering. See "Company Offering." Except as otherwise specifically set
forth herein, all references in this Prospectus to "this offering"
refer to the offering of shares of Common Stock by the Company in the
underwritten offering.
(2) Does not include the shares of Common Stock registered hereunder for the
benefit of the Selling Security Holders.
RISK FACTORS
An investment in the shares of Common Stock offered hereby is speculative
and involves a high degree of risk. Investors should consider carefully the
risks discussed elsewhere in this Prospectus under the caption "Risk
Factors." These risks include, but are not limited to: (i) the Company's
dependence on a limited number of customers; (ii) the Company's limited history
of profitability; (iii) the Company's dependence on key personnel; (iv) the
potential for fluctuation in the Company's annual and quarterly operating
results as a result of a number of factors; (v) the Company's dependence upon
the continued growth, viability and financial stability of its customers which
are in turn substantially dependent upon certain industries; (vi) the
variability of the requirements of the Company's customers and financing
available to the Company's customers; and (vii) the Company's dependence on
its ability to use and exploit its proprietary POM manufacturing software and,
thus, the Company's need to adquately protect its intellectual property rights.
See "Risk Factors."
A-3
<PAGE>
(ALTERNATE PAGE FOR SELLING SHAREHOLDER PROSPECTUS)
COMPANY OFFERING
On the date of this Prospectus, a registration statement under the
Securities Act with respect to an underwritten public offering by the Company of
1,400,000 shares of Common Stock and up to an additional 210,000 shares of
Common Stock to cover over-allotments, if any, was declared effective by the
Commission. Sales of Common Stock by the Company and the Selling Security
Holders, or even the potential of such sales, would likely have an adverse
effect on the market price of the Common Stock. See "Risk Factors-Shares
Eligible for Future Sale."
A-4
<PAGE>
(ALTERNATE PAGE FOR SELLING SECURITY HOLDERS' PROSPECTUS)
SELLING SECURITY HOLDERS
The following table sets forth certain information with respect to the
Selling Security Holders for whom the Company is registering the Selling
Security Holders Securities for resale to the public. None of the Selling
Security Holders has had any position with, held any office, or had any other
material relationship with the Company.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
TO SALE(1) AFTER THE SALE(1)(4)
----------------------- SHARES ----------------------
NAME AND ADDRESS SHARES TO BE SOLD SHARES
- ----------------------------------------- ----------------------- ------------- ----------------------
<S> <C> <C> <C>
William Becker(2)
P.O. Box 170
Convent Station, NJ 07961 180,833 180,833 0
Sanford I. Feld(3)
Box 670, #12 Quimby Lane
Bernardsville, NJ 07924 180,833 180,833 0
Frederic Becker
c/o Wilentz, Goldman & Spitzer
90 Woodbridge Center Dr.
Woodbridge, NJ 07095 51,666 51,666 0
Richard Becker
c/o Wilentz, Goldman & Spitzer
90 Woodbridge Center Dr.
Woodbridge, NJ 07095 20,667 20,667 0
Alan Jacobs
4 Hadwell Road
Short Hills, NJ 07078 31,000 31,000 0
Arnold Rifkin
60 Fairfield Drive
Short Hills, NJ 07078 31,000 31,000 0
Jules L. Marx
429 Harding Drive
South Orange, NJ 07079 30,000 30,000 0
William P. Dioguardi
c/o Spencer Trask Holdings Incorporated
535 Madison Avenue, 18th Floor
New York, NY 10022 1,667 1,667 0
Laura McNamara
c/o Spencer Trask Holdings Incorporated
535 Madison Avenue, 18th Floor
New York, NY 10022 667 667 0
Oshkim Limited Partners
c/o Spencer Trask Holdings Incorporated
535 Madison Avenue, 18th Floor
New York, NY 10022 1,000 1,000 0
Spencer Trask Holdings Incorporated
535 Madison Avenue, 18th Floor
New York, NY 10022 4,000 4,000 0
</TABLE>
- ----------------
(1) Represents shares of Common Stock issuable upon exercise of Noteholder
Warrants and Placement Agent Warrants, as the case may be.
(2) Includes securities held by a trust of which Mr. Becker is the trustee.
(3) Includes securities held by Mr. Feld's employee pension plan and trust.
(4) Assumes the sale of all shares of Common Stock registered hereby.
A-5
<PAGE>
(ALTERNATE PAGE FOR SELLING SECURITY HOLDERS' PROSPECTUS)
PLAN OF DISTRIBUTION
The sale of the Selling Security Holders' Securities by the Selling
Security Holders may be effected from time to time in transactions (which may
include block transactions by or for the account of the Selling Security
Holders) in the over-the-counter market or in negotiated transactions, through
the writing of options on the Selling Security Holders' Securities, through a
combination of such methods of sale, or otherwise. Sales may be made at fixed
prices which may be changed, at market prices prevailing at the time of sale, or
at negotiated prices. The Selling Security Holders may effect such transactions
by selling the Selling Security Holders' Securities directly to purchasers,
through broker-dealers acting as agents for the Selling Security Holders or to
broker-dealers who may purchase the Selling Security Holders' Securities as
principals and thereafter sell the Selling Security Holders' Securities from
time to time in the over-the-counter market, in negotiated transactions, or
otherwise. Such broker-dealers, if any, may receive compensation in the form of
discounts, concessions or commissions from the Selling Security Holders and/or
the purchasers for whom such broker-dealers may act as agents or to whom they
may sell as principals or both (which compensation as to a particular
broker-dealer may be in excess of customary commissions).
The Selling Security Holders and broker-dealers, if any, acting in
connection with such sales, may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act and any commission received by
them and any profit on the resale of such securities might be deemed to be
underwriting discounts and commissions under the Securities Act.
The Noteholder Warrants and Placement Agent Warrants are not exercisable
and may not be sold for a period of two years and 18 months from consummation of
the Offering, respectively, without the prior written consent of Meyers. Meyers
does not have any general policy with respect to the release of shares prior to
the expiration of the lock-up period. Sales of the Selling Security Holders
Securities by the Selling Security Holders, or even the existence of the right
to exercise the Noteholder Warrants or Placement Agent Warrants, may, however
depress the price of the Common Stock in any market that may develop for the
Common Stock.
A-6
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO UNDERWRITER, DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUMMARY .........
RISK FACTORS ...............
THE COMPANY ..................
CAPITALIZATION ...............
DILUTION .....................
DIVIDEND POLICY ............
COMPANY OFFERING ............
SELECTED FINANCIAL DATA ......
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ...
BUSINESS .....................
MANAGEMENT ..................
CERTAIN TRANSACTIONS .........
PRINCIPAL STOCKHOLDERS ......
SELLING SECURITY HOLDERS ...
PLAN OF DISTRIBUTION .........
SHARES ELIGIBLE FOR
FUTURE SALE ...............
LEGAL MATTERS ...............
EXPERTS .....................
ADDITIONAL INFORMATION ......
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS ......
[ASD GROUP, INC. LOGO]
533,333 SHARES
OF
COMMON STOCK
---------
PROSPECTUS
---------
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Reference is made to Section 145 of the General Corporation Law of the
State of Delaware, Article VII of the Registrant's Certificate of Incorporation
and Article Seven of the Registrant's By-
Laws. Moreover, the Registrant intends to enter into indemnification agreements
with each of the Company's directors and officers.
As a result of such provisions and the agreements, the Registrant's
security holders may be unable to recover monetary damages against directors and
officers for actions taken by them which constitute negligence or gross
negligence or which are in violation of their fiduciary duties, although it may
be possible to obtain injunctive or other equitable relief with respect to such
actions. If equitable remedies are found not to be available for any particular
case, security holders may not have any effective remedy against the challenged
conduct.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses to be incurred in
connection with the issuance and distribution of the securities offered hereby
(other than underwriting discounts and commissions). The Registrant is
responsible for the payment of all expenses in connection with the Offering.
Securities and Exchange Commission registration fee ...... $ 7,076
NASD filing fee .......................................... 2,552
Nasdaq and stock exchange listing fees .................. 30,000
Printing and engraving expenses ........................ 60,000
Legal fees and expenses ................................. 200,000
Accounting fees and expenses ........................... 150,000
Blue Sky fees .......................................... 50,000
Transfer Agent's fees and expenses ..................... 5,000
Miscellaneous .......................................... 9,372
-------
Total ................................................... $514,000
=======
All amounts except the Securities and Exchange Commission registration fee,
the NASD filing fee and the Nasdaq listing fee are estimated.
ITEM 26. RECENT SALE OF UNREGISTERED SECURITIES.
The following sets forth the Registrant's sale of its securities within
the last three years, which securities were not registered under the Securities
Act:
(a) In December 1995 and February 1996, the Company sold an aggregate of
$2,000,000 in principal amount of the Notes to the Noteholders. The Note
Purchase Agreement under which the Notes were issued provided that the
Noteholders would receive upon consummation of an initial public offering by the
Company, such number of shares of Common Stock of the Company determined by
dividing the aggregate public offering price of the securities sold in such
initial public offering by the public offering price per share and warrants to
purchase an equal number of shares of Common Stock at an exercised price equal
to such public offering price per share. In December 1996, the Company and the
Noteholders amended the Note Purchase Agreement to, among other matters,
eliminate the Noteholders' rights to receive shares upon consummation of an
initial public offering and issue to the Noteholders warrants to purchase
500,000 shares of Common Stock exercisable at an exercise price equal to 47.5%
of the initial public offering price of the shares of Common Stock offered
hereby ($2.85 per share at an anticipated initial public offering price of $6.00
per share) for a ten-year period after consummation of the Offering.
II-1
<PAGE>
The investment banking firm which assisted the Company in the placement of
the Notes will be entitled to receive warrants to purchase such number of shares
of Common Stock as equal to $2,000,000 divided by the per share price of the
shares of Common Stock offered hereby, multiplied by 10%. Such warrants will be
exercisable at a price equal to the initial public offering price of the shares
of Common Stock offered hereby for a five-year period from consummation of this
Offering. The Noteholder Warrants and the Placement Agent Warrants will not be
exercisable and may not be sold for a period of two years from consummation of
the Offering contemplated by this Registration Statement without the prior
written consent of the Company and Meyers.
(b) In December 1995, the Company entered into an agreement with Gregory
Horne, the Company's Vice President, to sell 24 shares of the Company's Common
Stock to Mr. Horne for $100,000, of which $30,000 was paid upon execution of the
agreement and the balance was payable at the rate of $10,000 per year, without
interest. In June 1996, the Company and Mr. Horne mutually agreed to rescind the
transaction, whereupon Mr. Horne surrendered his stock certificates to the
Company and the Company refunded the $30,000 payment to Mr. Horne.
(c) In June 1996, the Company issued to Gary D. Horne and Stanley F. Zuk
155,352 and 40,277 shares of the Company's Common Stock in consideration for
all of the issued and outstanding shares of High Technology Computers, Inc., a
New York corporation.
(d) In August 1996, the Company sold an aggregate of $1,100,000 in
principal amount of Bridge Notes to several investors. Holders of the Bridge
Notes received warrants to purchase an aggregate of 112,500 shares of Common
Stock. In addition, the investment banking firm which assisted in the placement
of the Bridge Notes received warrants to purchase 11,250 shares of Common Stock.
Such warrants will be exercisable at a price equal to 51.5% of the initial
public offering price of the shares of Common Stock offered hereby ($3.09 per
share at an anticipated initial public offering price of $6.00 per share) for a
five-year period. The Bridge Warrants will not be exercisable and may not be
sold for a period of 18 months from consummation of the Offering contemplated by
this Registration Statement without the prior written consent of the Company and
Meyers.
The securities were issued without registration under the Securities by
reason of an exemption from registration afforded by the provisions of Section
4(2) thereof, as transactions by an issuer not involving a public offering, each
recipient of securities having delivered appropriate investment representations
to Registrant with respect thereto and having consented to the imposition of
restrictive legends upon the certificates evidencing such securities.
ITEM 27. EXHIBITS.
EXHIBIT
NO. DESCRIPTION
- -------- ------------
1.1 Form of Underwriting Agreement.(1)
3.1 Certificate of Incorporation.(2)
3.2 Bylaws.(2)
4.1 Specimen Certificate of Common Stock.(2)
4.2 Form of Representatives' Warrant Agreement including Form of
Representatives' Warrants.(1)
4.3 Purchase Agreement dated as of December 29, 1995 regarding 10%
Senior Secured Notes due June 30, 1999 by and between the
Registrant, Automatic Systems Developers, Inc., High Technology
Computers, Inc. and the Purchasers.(2)
4.4 Form of Special Warrant to Purchase Common Stock of Registrant.(2)
4.5 Form of 10% Original Issue Discount Promissory Note Issued to
BlueStone Investors.(2)
4.6 Form of Warrant Certificate Issued to BlueStone Investors.(2)
5.1 Opinion of Broad and Cassel.(2)
II-2
<PAGE>
EXHIBIT
NO. DESCRIPTION
- --------- ------------
10.1 1996 Stock Option Plan.(2)
10.2 Restated Line of Credit Loan and Security Agreement dated as of
December 28, 1995 between Automatic Systems Developers, Inc.; High
Technology Computers, Inc. and Poughkeepsie Savings Bank, FSB.(2)
10.3 Second Amended Modification, Extension, Spreader and Assumption
Agreement dated as of December 28, 1995 between Automatic Systems
Developers, Inc. and Poughkeepsie Savings Bank, FSB.(2)
10.4 Second Amended Modification, Extension, Spreader and Assumption
Agreement dated as of December 28, 1995 between the Registrant;
Automatic Systems Developers, Inc. and Poughkeepsie Savings Bank,
FSB.(2)
10.5 Option Agreement dated as of May 31, 1996 by and among Banker's
Trust Company and the Registrant.(2)
10.6 Amendment to December 29, 1995 Purchase Agreement.(2)
10.7 Employment Agreement between the Company Registrant and Gary D.
Horne.(1)
10.8 Employment Agreement between the Company Registrant and Stanley F.
Zuk.(1)
10.9 Form of Financial Advisory and Consulting Agreement between the
Registrant and the Representatives.(1)
21.1 List of Subsidiaries of the Registrant.(2)
23.1 Consent of Broad and Cassel.(filed as part of Exhibit 5.1)
23.2 Consent of Deloitte & Touche LLP, independent auditors.(1)
24.1 Power of Attorney (included in the signature page hereof).(2)
- ----------------
(1) Filed herewith.
(2) Previously filed.
ITEM 28. UNDERTAKINGS.
The Registrant hereby undertakes:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) include any prospectus required by Section 10(a)(3) of the Securities
Act;
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volumes and price
represent no more than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the
effective registration statement; and
(iii) Include any additional or changed material information on the plan
of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) To file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
II-3
<PAGE>
(4) To provide to the Underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in such
names as required by the underwriter to permit prompt delivery to each
purchaser.
(5) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense or any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(6) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(7) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(8) The Registrant hereby undertakes that if the underwriter(s) in the
offering covered by this Registration Statement enter into transactions with any
of the selling securityholders named herein, or waive lock-ups applicable to
such selling securityholders, then:
(a) if such transaction or waiver of lock-up relates to not less than five
percent nor more than ten percent of the registered selling securityholders
securities, the Registrant will file a "sticker" supplement pursuant to
Rule 424(c) under the Act relating thereto; and
(b) if such transaction or waiver of lock-up relates to more than ten
percent of the registered selling securityholders securities, the Registrant
will file a post-effective amendment to the registration statement relating
thereto.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Company certifies that it has reasonable grounds to believe that it
meets all of the requirements of filing on Form SB-2 and authorized this
Amendment No. 2 to the Registration Statement to be signed on its behalf by the
undersigned, in the City of Poughkeepsie, State of New York on this 13th day of
March, 1997.
ASD GROUP, INC.
By: /s/ GARY D. HORNE
---------------------------------------
Gary D. Horne, Chairman of the Board
and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, as
amended, this registration statement has been signed by the following persons in
the capacities and on the date stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------- ------------------------------------- --------------
<S> <C> <C>
/s/ GARY D. HORNE Chairman of the Board March 13, 1997
- --------------------------- and Chief Executive Officer
Gary D. Horne
/s/ ROBERT LETTIERI Chief Financial Officer and Director March 13, 1997
- --------------------------- (Principal Financial and
Robert Lettieri Accounting Officer)
/s/ STANLEY F. ZUK President, Chief Operating Officer March 13, 1997
- --------------------------- and Director
Stanley F. Zuk
/s/ GREGORY D. HORNE Vice President-Information Systems March 13, 1997
- ---------------------------
Gregory D. Horne
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- --------- ---------------------------------------------------------------------------- -------------
<S> <C> <C>
1.1 Form of Underwriting Agreement.
4.2 Form of Representatives' Warrant Agreement including Form of Representatives'
Warrants.
10.7 Employment Agreement between the Company Registrant and Gary D. Horne.
10.8 Employment Agreement between the Company Registrant and Stanley F. Zuk.
10.9 Form of Financial Advisory and Consulting Agreement between the Registrant
and the Representatives.
23.2 Consent of Deloitte & Touche LLP, independent auditors.
</TABLE>
EXHIBIT 1.1
OH&S DRAFT
3/6/97
[Form of Underwriting Agreement - Subject to Additional Review]
1,400,000 SHARES OF COMMON STOCK
ASD GROUP, INC.
UNDERWRITING AGREEMENT
New York, New York
, 1997
H. J. MEYERS & CO., INC.
KEANE SECURITIES CO., INC.
As Representatives of the
Several Underwriters listed on Schedule A hereto
1895 Mt. Hope Avenue
Rochester, New York 14620
Ladies and Gentlemen:
ASD Group, Inc., a Delaware corporation (the "Company"), confirms its
agreement with H. J. Meyers & Co., Inc. ("H.J.") and Keane Securities Co., Inc.
("Keane") and each of the underwriters named in Schedule A hereto (collectively,
the "Underwriters," which term shall also include any underwriter substituted as
hereinafter provided in SECTION 11), for whom H. J. and Keane are acting as
representatives (in such capacity, H. J. and Keane shall hereinafter be referred
to as "you" or the "Representatives"), with respect to the sale by the Company
and the purchase by the Underwriters, acting severally and not jointly, of the
respective numbers of shares ("Shares") of the Company's common stock, $.01 par
value per share ("Common Stock"), set forth in Schedule A hereto. Such Shares
are hereinafter referred to as the "Firm Securities."
<PAGE>
The Company shall issue and sell to the Underwriters, acting severally
and not jointly, up to an additional 210,000 shares of Common Stock for the
purpose of covering over-allotments, if any (the "Option Securities"). The
Company also proposes to issue and sell to you warrants (the "Representatives'
Warrants") pursuant to the Representatives' Warrant Agreement (the
"Representatives' Warrant Agreement") for the purchase of an additional 140,000
shares of Common Stock. The shares of Common Stock issuable upon exercise of the
Representatives' Warrants are hereinafter referred to as the "Representatives'
Securities." The Firm Securities, the Option Securities, the Representatives'
Warrants and the Representatives' Securities (collectively, hereinafter referred
to as the "Securities") are more fully described in the Registration Statement
and the Prospectus referred to below.
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to, and agrees with, each of the Underwriters as of the date
hereof, and as of the Closing Date (hereinafter defined) and the Option Closing
Date (hereinafter defined), if any, as follows:
a. The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and an
amendment or amendments thereto, on Form SB-2 (No. 333-7731), including any
related preliminary prospectus ("Preliminary Prospectus"), for the registration
of the Securities under the Securities Act of 1933, as amended (the "Act"),
which registration statement and amendment or amendments have been prepared by
the Company in conformity with the requirements of the Act, and the rules and
regulations (the "Regulations") of the Commission under the Act. The Company
will promptly file a further amendment to said registration statement in the
form heretofore delivered to the Underwriters and will not file any other
amendment thereto to which the Underwriters shall have objected in writing after
having been furnished with a copy thereof. Except as the context may otherwise
require, such registration statement, as amended, on file with the Commission at
the time the registration statement becomes effective (including the prospectus,
financial statements, schedules, exhibits and all other documents filed as a
part thereof or incorporated therein (including, but not limited to those
documents or information incorporated by reference therein) and all information
deemed to be a part thereof as of such time pursuant to paragraph (b) of Rule
430(A) of the Regulations)), is hereinafter called the "Registration Statement",
and the form of prospectus in the form first filed with the Commission pursuant
to Rule 424(b) of the Regulations is hereinafter called the "Prospectus." For
purposes hereof, "Rules and Regulations" mean the rules and regulations adopted
by the Commission under either the Act or the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), as applicable.
b. Neither the Commission nor any state regulatory authority has
issued any order preventing or suspending the use of any Preliminary Prospectus,
the Registration Statement or Prospectus or any part of any thereof and no
proceedings for a stop order suspending the effectiveness of the Registration
Statement or any of the Company's securities have been instituted or are pending
or threatened. Each of the Preliminary Prospectus, the Registration Statement
and Prospectus at the time of filing thereof conformed with the requirements of
the Act and the Rules and Regulations, and none of the Preliminary Prospectus,
the Registration Statement or Prospectus at the time of filing thereof contained
an untrue statement of a material fact or omitted to state a material fact
required to be stated therein and necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, except
that this representation and warranty does not apply to statements made in
reliance upon
- 2 -
<PAGE>
and in conformity with written information furnished to the Company with respect
to the Underwriters by or on behalf of the Underwriters expressly for use in
such Preliminary Prospectus, Registration Statement or Prospectus.
c. When the Registration Statement becomes effective and at all
times subsequent thereto up to the Closing Date (as defined herein) and each
Option Closing Date (as defined herein), if any, and during such longer period
as the Prospectus may be required to be delivered in connection with sales by
the Underwriters or a dealer, the Registration Statement and the Prospectus will
contain all statements which are required to be stated therein in accordance
with the Act and the Rules and Regulations, and will conform in all material
respects to the requirements of the Act and the Rules and Regulations; neither
the Registration Statement nor the Prospectus, nor any amendment or supplement
thereto, will contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, PROVIDED, HOWEVER, that this representation and warranty does
not apply to statements made or statements omitted in reliance upon and in
strict conformity with information furnished to the Company in writing by or on
behalf of any Underwriter expressly for use in the Preliminary Prospectus,
Registration Statement or Prospectus or any amendment thereof or supplement
thereto.
d. Each of the Company, Automatic Systems Developers, Inc., a New
York corporation ("ASDI"), High Technology Computers, Inc., a New York
corporation ("HTC") and iNetWare, a New York corporation ("iNet") has been duly
organized and is validly existing as a corporation in good standing under the
laws of the state of its incorporation. ASDI, HTC and iNet shall collectively be
referred to herein as the "Subsidiaries." Except as set forth in the Prospectus,
none of the Company nor the Subsidiaries owns an interest in any corporation,
partnership, trust, joint venture or other business entity. Each of the Company
and the Subsidiaries is duly qualified and licensed and in good standing as a
foreign corporation in each jurisdiction in which its ownership or leasing of
any properties or the character of its operations requires such qualification or
licensing. The Company owns, directly or indirectly, one hundred percent (100%)
of the outstanding capital stock of each of the Subsidiaries, and all of such
shares have been validly issued, are fully paid and non-assessable, were not
issued in violation of any preemptive rights, and, except as set forth in the
Prospectus, are owned free and clear of any liens, charges, claims,
encumbrances, pledges, security interests, defects or other restrictions or
equities of any kind whatsoever. Each of the Company and the Subsidiaries has
all requisite power and authority (corporate and other), and has obtained any
and all necessary authorizations, approvals, orders, licenses, certificates,
franchises and permits of and from all governmental or regulatory officials and
bodies (including, without limitation, those having jurisdiction over
environmental or similar matters), to own or lease its properties and conduct
its business as described in the Prospectus; each of the Company and the
Subsidiaries is and has been doing business in compliance with all such
authorizations, approvals, orders, licenses, certificates, franchises and
permits and all applicable federal, state, local and foreign laws, rules and
regulations; and none of the Company nor any of the Subsidiaries has received
any notice of proceedings relating to the revocation or modification of any such
authorization, approval, order, license, certificate, franchise, or permit
which, singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would materially and adversely affect the
- 3 -
<PAGE>
condition, financial or otherwise, or the earnings, position, prospects, value,
operation, properties, business or results of operations of the Company or the
Subsidiaries. The disclosures in the Registration Statement concerning the
effects of federal, state, local, and foreign laws, rules and regulations on the
Company's and the Subsidiaries' businesses as currently conducted and as
contemplated are correct in all material respects and do not omit to state a
material fact necessary to make the statements contained therein not misleading
in light of the circumstances in which they were made.
e. The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus under "Capitalization" and
"Description of Securities" and will have the adjusted capitalization set forth
therein on the Closing Date and each Option Closing Date, if any, based upon the
assumptions set forth therein, and the Company is not a party to or bound by any
instrument, agreement or other arrangement providing for it to issue any capital
stock, rights, warrants, options or other securities, except for this Agreement,
the Representatives' Warrant Agreement and as described in the Prospectus. The
Securities and all other securities issued or issuable by the Company conform
or, when issued and paid for, will conform, in all respects to all statements
with respect thereto contained in the Registration Statement and the Prospectus.
All issued and outstanding securities of the Company have been duly authorized
and validly issued and are fully paid and non-assessable and the holders thereof
have no rights of rescission with respect thereto, and are not subject to
personal liability by reason of being such holders; and none of such securities
were issued in violation of the preemptive rights of any holders of any security
of the Company or similar contractual rights granted by the Company. The
Securities are not and will not be subject to any preemptive or other similar
rights of any stockholder, have been duly authorized and, when issued, paid for
and delivered in accordance with the terms hereof, will be validly issued, fully
paid and non-assessable and will conform to the description thereof contained in
the Prospectus; the holders thereof will not be subject to any liability solely
as such holders; all corporate action required to be taken for the
authorization, issue and sale of the Securities has been duly and validly taken;
and the certificates representing the Securities will be in due and proper form.
Upon the issuance and delivery pursuant to the terms hereof of the Securities to
be sold by the Company hereunder, the Underwriters or the Representatives, as
the case may be, will acquire good and marketable title to such Securities free
and clear of any lien, charge, claim, encumbrance, pledge, security interest,
defect or other restriction or equity of any kind whatsoever.
f. The consolidated financial statements of the Company together
with the related notes and schedules thereto, included in the Registration
Statement, each Preliminary Prospectus and the Prospectus fairly present the
financial position, income, changes in cash flow, changes in stockholders'
equity and the results of operations of the Company and the Subsidiaries at the
respective dates and for the respective periods to which they apply and such
financial statements have been prepared in conformity with generally accepted
accounting principles and the Rules and Regulations, consistently applied
throughout the periods involved and such financial statements as are audited
have been examined by Deloitte & Touche LLP who are independent public
accountants within the meaning of the Act and the Rules and Regulations, as
indicated in their reports filed therewith. There has been no adverse change or
development involving a material prospective change in the condition, financial
or otherwise, or in the earnings, position, prospects, value, operation,
properties, business, or results of operations of the Company,
- 4 -
<PAGE>
whether or not arising in the ordinary course of business, since the date of the
financial statements included in the Registration Statement and the Prospectus
and the outstanding debt, the property, both tangible and intangible, and the
business of the Company conform in all material respects to the descriptions
thereof contained in the Registration Statement and the Prospectus. Financial
information (including, without limitation, any pro forma financial information)
set forth in the Prospectus under the headings "Summary Financial Information,"
"Capitalization," "Selected Financial Data," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," fairly present, on
the basis stated in the Prospectus, the information set forth therein, and have
been derived from or compiled on a basis consistent with that of the audited
financial statements included in the Prospectus; and, in the case of pro forma
financial information, if any, the assumptions used in the preparation thereof
are reasonable and the adjustments used therein are appropriate to give effect
to the transactions and circumstances referred to therein. The amounts shown as
accrued for current and deferred income and other taxes in such financial
statements are sufficient for the payment of all accrued and unpaid federal,
state, local and foreign income taxes, interest, penalties, assessments or
deficiencies applicable to the Company and the Subsidiaries, whether disputed or
not, for the applicable period then ended and periods prior thereto; adequate
allowance for doubtful accounts has been provided for unindemnified losses due
to the operations of the Company and the Subsidiaries; and the statements of
income do not contain any items of special or nonrecurring income not earned in
the ordinary course of business, except as specified in the notes thereto.
g. Each of the Company and the Subsidiaries (i) has paid all
federal, state, local, and foreign taxes for which it is liable, including, but
not limited to, withholding taxes and amounts payable under Chapters 21 through
24 of the Internal Revenue Code of 1986, as amended (the "Code"), and has
furnished all information returns it is required to furnish pursuant to the
Code, (ii) has established adequate reserves for such taxes which are not due
and payable, and (iii) does not have any tax deficiency or claims outstanding,
proposed or assessed against it.
h. No transfer tax, stamp duty or other similar tax is payable by
or on behalf of the Underwriters in connection with (i) the issuance by the
Company of the Securities, (ii) the purchase by the Underwriters of the Firm
Securities and the Option Securities from the Company and the purchase by the
Representatives of the Representatives' Warrants from the Company, (iii) the
consummation by the Company of any of its obligations under this Agreement, or
(iv) resales of the Firm Securities and the Option Securities in connection with
the distribution contemplated hereby.
i. Each of the Company and the Subsidiaries maintains insurance
policies, including, but not limited to, general liability, product and property
insurance, which insures each of the Company and the Subsidiaries, and their
respective employees, against such losses and risks generally insured against by
comparable businesses. None of the Company nor any of the Subsidiaries (A) has
failed to give notice or present any insurance claim with respect to any matter,
including but not limited to the Company's business, property or employees,
under any insurance policy or surety bond in a due and timely manner, (B) has
any disputes or claims against any underwriter of such insurance policies or
surety bonds or has not failed to pay any premiums due and payable thereunder,
or (C) has failed to comply with all conditions contained in such insurance
policies and surety bonds. There are no facts or circumstances under any such
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<PAGE>
insurance policy or surety bond which would relieve any insurer of its
obligation to satisfy in full any valid claim of the Company or any Subsidiary.
j. There is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding (including, without
limitation, those having jurisdiction over environmental or similar matters),
domestic or foreign, pending or threatened against (or circumstances that may
give rise to the same), or involving the properties or business of, the Company
or any of the Subsidiaries which (i) questions the validity of the capital stock
of the Company, this Agreement, the Consulting Agreement (as defined herein) or
the Representatives' Warrant Agreement, or of any action taken or to be taken by
the Company pursuant to or in connection with this Agreement, the Consulting
Agreement or the Representatives' Warrant Agreement, (ii) is required to be
disclosed in the Registration Statement which is not so disclosed (and such
proceedings as are summarized in the Registration Statement are accurately
summarized in all material respects), or (iii) might materially and adversely
affect the condition, financial or otherwise, or the earnings, position,
prospects, stockholders' equity, value, operation, properties, business or
results of operations of the Company and the Subsidiaries.
k. The Company has full legal right, power and authority to
authorize, issue, deliver and sell the Securities, enter into this Agreement,
the Consulting Agreement and the Representatives' Warrant Agreement and to
consummate the transactions provided for in this Agreement, the Consulting
Agreement and the Representatives' Warrant Agreement; and this Agreement, the
Consulting Agreement and the Representatives' Warrant Agreement have each been
duly and properly authorized, executed and delivered by the Company. Each of
this Agreement, the Consulting Agreement and the Representatives' Warrant
Agreement constitutes a legal, valid and binding agreement of the Company
enforceable against the Company in accordance with its terms, and none of the
Company's issue and sale of the Securities, execution or delivery of this
Agreement, the Consulting Agreement or the Representatives' Warrant Agreement,
its performance hereunder and thereunder, its consummation of the transactions
contemplated herein and therein, or the conduct of its business as described in
the Registration Statement, the Prospectus, and any amendments or supplements
thereto, conflicts with or will conflict with or results or will result in any
breach or violation of any of the terms or provisions of, or constitutes or will
constitute a default under, or result in the creation or imposition of any lien,
charge, claim, encumbrance, pledge, security interest, defect or other
restriction or equity of any kind whatsoever upon, any property or assets
(tangible or intangible) of any of the Company or the Subsidiaries pursuant to
the terms of, (i) the certificate of incorporation or by-laws of any of the
Company or the Subsidiaries, (ii) any license, contract, collective bargaining
agreement, indenture, mortgage, deed of trust, lease, voting trust agreement,
stockholders agreement, note, loan or credit agreement or any other agreement or
instrument to which any of the Company or the Subsidiaries is a party or by
which any of the Company or the Subsidiaries is or may be bound or to which
either of its properties or assets (tangible or intangible) is or may be
subject, or any indebtedness, or (iii) any statute, judgment, decree, order,
rule or regulation applicable to any of the Company or the Subsidiaries of any
arbitrator, court, regulatory body or administrative agency or other
governmental agency or body (including, without limitation, those having
jurisdiction over environmental or similar matters), domestic or foreign, having
jurisdiction over any of the Company or the Subsidiaries or any of their
respective activities or properties.
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<PAGE>
l. No consent, approval, authorization or order of, and no filing
with, any court, regulatory body, government agency or other body, domestic or
foreign, is required for the issuance of the Securities pursuant to the
Prospectus and the Registration Statement, the performance of this Agreement,
the Consulting Agreement and the Representatives' Warrant Agreement and the
transactions contemplated hereby and thereby, including without limitation, any
waiver of any preemptive, first refusal or other rights that any entity or
person may have for the issue and/or sale of any of the Securities, except such
as have been or may be obtained under the Act or may be required under state
securities or Blue Sky laws in connection with the Underwriters' purchase and
distribution of the Firm Securities and the Option Securities, and the
Representatives' Warrants to be sold by the Company hereunder.
m. All executed agreements, contracts or other documents or copies
of executed agreements, contracts or other documents filed as exhibits to the
Registration Statement to which any of the Company or the Subsidiaries is a
party or by which it may be bound or to which its assets, properties or business
may be subject have been duly and validly authorized, executed and delivered by
the Company and constitute the legal, valid and binding agreements of the
Company or the Subsidiaries, as the case may be,, enforceable against each of
them, in accordance with their respective terms. The descriptions in the
Registration Statement of agreements, contracts and other documents are accurate
in all material respects and fairly present the information required to be shown
with respect thereto by Form SB-2, and there are no contracts or other documents
which are required by the Act to be described in the Registration Statement or
filed as exhibits to the Registration Statement which are not described or filed
as required, and the exhibits which have been filed are in all material respects
complete and correct copies of the documents of which they purport to be copies.
n. Subsequent to the respective dates as of which information is
set forth in the Registration Statement and Prospectus, and except as may
otherwise be indicated or contemplated herein or therein, none of the Company
nor any of the Subsidiaries has (i) issued any securities or incurred any
liability or obligation, direct or contingent, for borrowed money, (ii) entered
into any transaction other than in the ordinary course of business, or (iii)
declared or paid any dividend or made any other distribution on or in respect of
its capital stock of any class, and there has not been any change in the capital
stock, or any change in the debt (long or short term) or liabilities or material
adverse change in or affecting the general affairs, management, financial
operations, stockholders' equity or results of operations of the Company or any
of the Subsidiaries.
o. Except as described in the Prospectus, no default exists in the
due performance and observance of any term, covenant or condition of any
license, contract, collective bargaining agreement, indenture, mortgage,
installment sale agreement, lease, deed of trust, voting trust agreement,
stockholders agreement, partnership agreement, note, loan or credit agreement,
purchase order, or any other agreement or instrument evidencing an obligation
for borrowed money, or any other material agreement or instrument to which the
Company or any of the Subsidiaries is a party or by which the Company or any of
the Subsidiaries may be bound or to which the property or assets (tangible or
intangible) of the Company or any of the Subsidiaries is subject or affected.
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<PAGE>
p. Each of the Company and the Subsidiaries has generally enjoyed
a satisfactory employer-employee relationship with its employees and is in
compliance with all federal, state, local, and foreign laws and regulations
respecting employment and employment practices, terms and conditions of
employment and wages and hours. There are no pending investigations involving
the Company or any of the Subsidiaries by the U.S. Department of Labor, or any
other governmental agency responsible for the enforcement of such federal,
state, local, or foreign laws and regulations. There is no unfair labor practice
charge or complaint against the Company or any of the Subsidiaries pending
before the National Labor Relations Board or any lockout, strike, picketing,
boycott, dispute, slowdown or stoppage pending or threatened against or
involving the Company or any of the Subsidiaries, or any predecessor entity, and
none has ever occurred. No representation question exists respecting the
employees of the Company or any of the Subsidiaries, and no collective
bargaining agreement or modification thereof is currently being negotiated by
the Company and the Subsidiaries. No grievance or arbitration proceeding is
pending under any expired or existing collective bargaining agreements of the
Company or any of the Subsidiaries. No labor dispute with the employees of the
Company or any of the Subsidiaries exists, or, is imminent.
q. Except as described in the Prospectus, none of the Company nor
any of the Subsidiaries maintains, sponsors or contributes to any program or
arrangement that is an "employee pension benefit plan," an "employee welfare
benefit plan," or a "multiemployer plan" as such terms are defined in Sections
3(2), 3(1) and 3(37), respectively, of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA") ("ERISA Plans"). None of the Company nor any
of the Subsidiaries maintains or contributes, now or at any time previously, to
a defined benefit plan, as defined in Section 3(35) of ERISA. No ERISA Plan (or
any trust created thereunder) has engaged in a "prohibited transaction" within
the meaning of Section 406 of ERISA or Section 4975 of the Code, which could
subject the Company or any of the Subsidiaries to any tax penalty on prohibited
transactions and which has not adequately been corrected. Each ERISA Plan is in
compliance with all reporting, disclosure and other requirements of the Code and
ERISA as they relate to any such ERISA Plan. Determination letters have been
received from the Internal Revenue Service with respect to each ERISA Plan which
is intended to comply with Code Section 401(a), stating that such ERISA Plan and
the attendant trust are qualified thereunder. None of the Company nor any of the
Subsidiaries has ever completely or partially withdrawn from a "multiemployer
plan."
r. None of the Company, the Subsidiaries nor any of their
respective employees, directors, stockholders, partners, or affiliates (within
the meaning of the Rules and Regulations) of any of the foregoing has taken or
will take, directly or indirectly, any action designed to or which has
constituted or which might be expected to cause or result in, under the Exchange
Act, or otherwise, stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Securities or otherwise.
s. Except as otherwise disclosed in the Prospectus, none of the
patents, patent applications, trademarks, service marks, trade names and
copyrights, and licenses and rights to the foregoing presently owned or held by
the Company or any of the Subsidiaries, are in dispute so far as known by the
Company or are in any conflict with the right of any other person or entity.
Each of the Company and the Subsidiaries (i) owns or has the right to use, free
and clear
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of all liens, charges, claims, encumbrances, pledges, security interests,
defects or other restrictions or equities of any kind whatsoever, all patents,
trademarks, service marks, trade names and copyrights, technology and licenses
and rights with respect to the foregoing, used in the conduct of its business as
now conducted or proposed to be conducted without infringing upon or otherwise
acting adversely to the right or claimed right of any person, corporation or
other entity under or with respect to any of the foregoing and (ii) is not
obligated or under any liability whatsoever to make any payment by way of
royalties, fees or otherwise to any owner or licensee of, or other claimant to,
any patent, trademark, service mark, trade name, copyright, know-how, technology
or other intangible asset, with respect to the use thereof or in connection with
the conduct of its business or otherwise.
t. Each of the Company and the Subsidiaries owns and has the
unrestricted right to use all trade secrets, know-how (including all other
unpatented and/or unpatentable proprietary or confidential information, systems
or procedures), inventions, designs, processes, works of authorship, computer
programs and technical data and information (collectively, herein "intellectual
property") that are material to the development, manufacture, operation and sale
of all products and services sold or proposed to be sold by the Company or any
of the Subsidiaries, free and clear of and without violating any right, lien, or
claim of others, including without limitation, former employers of its
employees; provided, however, that the possibility exists that other persons or
entities, completely independently of the Company or any of the Subsidiaries, or
their respective employees or agents, could have developed trade secrets or
items of technical information similar or identical to those of the Company or
any of the Subsidiaries. None of the Company nor any of the Subsidiaries is
aware of any such development of similar or identical trade secrets or technical
information by others.
u. Each of the Company and the Subsidiaries has taken reasonable
security measures to protect the secrecy, confidentiality and value of its
intellectual property in all material respects.
v. Each of the Company and the Subsidiaries has good and
marketable title to, or valid and enforceable leasehold estates in, all items of
real and personal property stated in the Prospectus, to be owned or leased by it
free and clear of all liens, charges, claims, encumbrances, pledges, security
interests, defects, or other restrictions or equities of any kind whatsoever,
other than those referred to in the Prospectus and liens for taxes not yet due
and payable.
w. Deloitte & Touche LLP, whose report is filed with the
Commission as a part of the Registration Statement, are independent certified
public accountants as required by the Act and the Rules and Regulations.
x. The Company has caused to be duly executed legally binding and
enforceable agreements pursuant to which each of the Company's stockholders and
holders of securities exchangeable or exercisable for or convertible into shares
of Common Stock, except for the holders of the Bridge Warrants (as defined in
the Prospectus) has agreed for a period of not less than 24 months following the
date of the Prospectus (i) not to, directly or indirectly, issue, offer, agree
or offer to sell, sell, grant any option for the purchase or sale of, assign,
transfer, pledge,
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<PAGE>
hypothecate or otherwise encumber or dispose of any shares of Common Stock or
securities convertible into, exercisable or exchangeable for or evidencing any
right to purchase or subscribe for any shares of Common Stock (either pursuant
to Rule 144 of the Rules and Regulations or otherwise) or dispose of any
beneficial interest therein without the prior written consent of the
Representatives and the Company and (ii) to waive all rights to request or
demand the registration pursuant to the Act of any securities of the Company
which are registered in the name of or beneficially owned by any such holder.
The holders of the Bridge Warrants have agreed to such restrictions for a period
of 18 months from the date of the Prospectus. The Company will cause the
Transfer Agent, as defined below, to mark an appropriate legend on the face of
stock certificates representing all of such securities and to place "stop
transfer" orders on the Company's stock ledgers.
y. There are no claims, payments, issuances, arrangements or
understandings, whether oral or written, for services in the nature of a
finder's or origination fee with respect to the sale of the Securities hereunder
or any other arrangements, agreements, understandings, payments or issuance with
respect to the Company, the Subsidiaries or any of their respective officers,
directors, stockholders, partners, employees or affiliates that may affect the
Underwriters' compensation, as determined by the National Association of
Securities Dealers, Inc. ("NASD").
z. The Common Stock has been approved for quotation on The Nasdaq
Small Cap Market ("Nasdaq").
aa. Neither the Company, nor any of the Subsidiaries nor any of
their respective officers, employees, agents or any other person acting on
behalf of the Company or the Subsidiaries has, directly or indirectly, given or
agreed to give any money, gift or similar benefit (other than legal price
concessions to customers in the ordinary course of business) to any customer,
supplier, employee or agent of a customer or supplier, or official or employee
of any governmental agency (domestic or foreign) or instrumentality of any
government (domestic or foreign) or any political party or candidate for office
(domestic or foreign) or other person who was, is, or may be in a position to
help or hinder the business of the Company or the Subsidiaries (or assist the
Company or the Subsidiaries in connection with any actual or proposed
transaction) which (a) might subject the Company or the Subsidiaries, or any
other such person to any damage or penalty in any civil, criminal or
governmental litigation or proceeding (domestic or foreign), (b) if not given in
the past, might have had a materially adverse effect on the assets, business or
operations of the Company or any Subsidiary, or (c) if not continued in the
future, might adversely affect the assets, business, operations or prospects of
the Company or any of the Subsidiaries. The Company's and each Subsidiary's
internal accounting controls are sufficient to cause each of the Company and the
Subsidiaries to comply with the Foreign Corrupt Practices Act of 1977, as
amended.
bb. Except as set forth in the Prospectus, no officer, director,
stockholder or partner of the Company or of any Subsidiary, or any "affiliate"
or "associate" (as these terms are defined in Rule 405 promulgated under the
Rules and Regulations) of any of the foregoing persons or entities has or has
had, either directly or indirectly, (i) an interest in any person or entity
which (A) furnishes or sells services or products which are furnished or sold or
are
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<PAGE>
proposed to be furnished or sold by the Company or any Subsidiary, or (B)
purchases from or sells or furnishes to the Company or any Subsidiary any goods
or services, or (ii) a beneficiary interest in any contract or agreement to
which the Company or any Subsidiary is a party or by which it may be bound or
affected. Except as set forth in the Prospectus under "Certain Transactions,"
there are no existing agreements, arrangements, understandings or transactions,
or proposed agreements, arrangements, understandings or transactions, between or
among the Company, and any officer, director, or 5% or greater securityholder of
the Company or any Subsidiary, or any partner, affiliate or associate of any of
the foregoing persons or entities.
cc. Any certificate signed by any officer of the Company or any
Subsidiary, and delivered to the Underwriters or to Underwriters' Counsel (as
defined herein) shall be deemed a representation and warranty by the Company to
the Underwriters as to the matters covered thereby.
dd. The minute books of each of the Company and the Subsidiaries
have been made available to the Underwriters and contain a complete summary of
all meetings and actions of the directors and stockholders of each of the
Company and the Subsidiaries, since the time of its incorporation, and reflect
all transactions referred to in such minutes accurately in all material
respects.
ee. Except and to the extent described in the Prospectus, no
holders of any securities of the Company or of any options, warrants or other
convertible or exchangeable securities of the Company have the right to include
any securities issued by the Company in the Registration Statement or any
registration statement to be filed by the Company or to require the Company to
file a registration statement under the Act and no person or entity holds any
anti-dilution rights with respect to any securities of the Company.
ff. (A) Each of the Company and the Subsidiaries is in compliance
with all federal, state, local or foreign laws, common law, rules, codes,
administrative orders or regulations relating to pollution or protection of
human health, the environment (including, without limitation, ambient air,
surface water, groundwater, land surface or subsurface strata) or wildlife,
including without limitation, laws, common law, rules, codes, administrative
orders and regulations relating to the release or threatened release of
chemicals, pollutants, contaminants, wastes, toxic substances, hazardous
substances, petroleum or petroleum products (collectively, "Hazardous
Materials") or to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Hazardous Materials (collectively,
"Environmental Laws") and (B) to the best of the Company's knowledge, there are
no events or circumstances that could form the basis of an order for clean-up or
remediation, or an action, suit or proceeding by any private party or
governmental body or agency, against or affecting the Company or any of the
Subsidiaries relating to any Hazardous Materials or the violation of any
Environmental Laws.
gg. In the ordinary course of its business, the Company conducts a
periodic review of the effect of Environmental Laws on the business, operations
and properties of the Company and the Subsidiaries, in the course of which it
identifies and evaluates associated costs and liabilities (including, without
limitation, any capital or operating expenditures required for clean-up, closure
of properties or compliance with Environmental Laws or any permit, license or
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<PAGE>
approval, any related constraints on operating activities and any potential
liabilities to third parties). On the basis of such review, the Company has
reasonably concluded that such associated costs and liabilities would not,
singly or in the aggregate, have a material adverse effect on the Company and
the Subsidiaries.
hh. Each of the Company and the Subsidiaries confirms as of the
date hereof that it is in compliance with all provisions of Section 1 of Laws of
Florida, Chapter 92-198, AN ACT RELATING TO DISCLOSURE OF DOING BUSINESS WITH
CUBA, and each of the Company and the Subsidiaries further agree that if it or
any affiliate commences engaging in business with the government of Cuba or with
any person or affiliate located in Cuba after the date the Registration
Statement becomes or has become effective with the Commission or with the
Florida Department of Banking and Finance (the "Department"), whichever date is
later, or if the information reported or incorporated by reference in the
Prospectus, if any, concerning the Company's, any Subsidiary's or any
affiliate's business with Cuba or with any person or affiliate located in Cuba
changes in any material way, the Company will provide the Department notice of
such business or change, as appropriate, in a form acceptable to the Department.
ii. The Company is not, and upon the issuance and sale of the
Securities as herein contemplated and the application of the net proceeds
therefrom as described in the Prospectus under the caption "Use of Proceeds"
will not be, an "investment company" or an entity "controlled" by an "investment
company" as such terms are defined in the Investment Company Act of 1940, as
amended (the "1940 Act").
jj. Each of the Company and the Subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general and specific
authorizations; (ii) transactions are recorded as necessary to permit
preparations of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or specific
authorizations; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
kk. The Company has entered into a financial advisory and
consulting agreement, substantially in the form filed as Exhibit ___ to the
Registration Statement (the "Consulting Agreement") with the Representatives.
The Consulting Agreement has been duly and validly authorized by the Company
and, assuming due execution by the parties thereto other than the Company,
constitutes a valid and legally binding agreement of the Company, enforceable
against the Company in accordance with its terms (except as such enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other laws of general application relating to or affecting the enforcement of
creditors' rights and the application of equitable principles in any action,
legal or equitable, and except as obligations to indemnify or contribute to
losses may be limited by applicable law).
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2. PURCHASE, SALE AND DELIVERY OF THE SECURITIES.
a. On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to each Underwriter, and each Underwriter,
severally and not jointly, agrees to purchase from the Company at a price of
$__________ [90% of the public offering price] per Share, that number of Firm
Securities set forth in Schedule A opposite the name of such Underwriter,
subject to such adjustment as the Representatives in their sole discretion shall
make to eliminate any sales or purchases of fractional shares, plus any
additional number of Firm Securities which such Underwriter may become obligated
to purchase pursuant to the provisions of SECTION 11 hereof.
b. In addition, on the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
Underwriters, severally and not jointly, to purchase all or any part of an
additional 210,000 shares of Common Stock at a price of $ ____ [90% of the
public offering price] per Share. The option granted hereby will expire 30 days
after (i) the date the Registration Statement becomes effective, if the Company
has elected not to rely on Rule 430A under the Rules and Regulations, or (ii)
the date of this Agreement if the Company has elected to rely upon Rule 430A
under the Rules and Regulations, and may be exercised in whole or in part from
time to time only for the purpose of covering over-allotments which may be made
in connection with the offering and distribution of the Firm Securities upon
notice by the Representatives to the Company setting forth the number of Option
Securities as to which the several Underwriters are then exercising the option
and the time and date of payment and delivery for any such Option Securities.
Any such time and date of delivery (an "Option Closing Date") shall be
determined by the Representatives, but shall not be later than five (5) full
business days after the exercise of said option, nor in any event prior to the
Closing Date, as hereinafter defined, unless otherwise agreed upon by the
Representatives and the Company. Nothing herein contained shall obligate the
Underwriters to make any over-allotments. No Option Securities shall be
delivered unless the Firm Securities shall be simultaneously delivered or shall
theretofore have been delivered as herein provided.
c. Payment of the purchase price for, and delivery of certificates
for, the Firm Securities shall be made at the offices of H. J. at 1895 Mt. Hope
Avenue, Rochester, New York 14620, or at such other place as shall be agreed
upon by the Representatives and the Company. Such delivery and payment shall be
made at 10:00 a.m. (New York City time) on ___, 1997 or at such other time and
date as shall be agreed upon by the Representatives and the Company, but not
less than three (3) nor more than five (5) full business days after the
effective date of the Registration Statement (such time and date of payment and
delivery being herein called the "Closing Date"). In addition, in the event that
any or all of the Option Securities are purchased by the Underwriters, payment
of the purchase price for, and delivery of certificates for, such Option
Securities shall be made at the above mentioned office of H.J. or at such other
place as shall be agreed upon by the Representatives and the Company on each
Option Closing Date as specified in the notice from the Representatives to the
Company. Delivery of the certificates for the Firm Securities and the Option
Securities, if any, shall be made to the Underwriters against payment by the
Underwriters, severally and not jointly, of the purchase
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price for the Firm Securities and the Option Securities, if any, to the order of
the Company for the Firm Securities and the Option Securities, if any, by New
York Clearing House funds. In the event such option is exercised, each of the
Underwriters, acting severally and not jointly, shall purchase that proportion
of the total number of Option Securities then being purchased which the number
of Firm Securities set forth in Schedule A hereto opposite the name of such
Underwriter bears to the total number of Firm Securities, subject in each case
to such adjustments as the Representatives in their discretion shall make to
eliminate any sales or purchases of fractional shares. Certificates for the Firm
Securities and the Option Securities, if any, shall be in definitive, fully
registered form, shall bear no restrictive legends and shall be in such
denominations and registered in such names as the Underwriters may request in
writing at least two (2) business days prior to the Closing Date or the relevant
Option Closing Date, as the case may be. The certificates for the Firm
Securities and the Option Securities, if any, shall be made available to the
Representatives at such office or such other place as the Representatives may
designate for inspection, checking and packaging no later than 9:30 a.m. on the
last business day prior to the Closing Date or the relevant Option Closing Date,
as the case may be.
d. On the Closing Date, the Company shall issue and sell to the
Representative Representatives' Warrants at a purchase price of $1.00, which
warrants shall entitle the holders thereof to purchase an aggregate of 140,000
shares of Common Stock. The Representatives' Warrants shall be exercisable for a
period of four (4) years commencing one (1) year from the effective date of the
Registration Statement at a price equaling one hundred forty five percent (145%)
of the initial public offering price of the Shares. The Representatives' Warrant
Agreement and form of Warrant Certificate shall be substantially in the form
filed as Exhibit [___] to the Registration Statement. Payment for the
Representatives' Warrants shall be made on the Closing Date.
3. PUBLIC OFFERING OF THE SHARES. As soon after the Registration
Statement becomes effective as the Representatives deem advisable, the
Underwriters shall make a public offering of the Shares (other than to residents
of or in any jurisdiction in which qualification of the Shares is required and
has not become effective) at the price and upon the other terms set forth in the
Prospectus. The Representatives may from time to time increase or decrease the
public offering price after distribution of the Shares has been completed to
such extent as the Representatives, in their sole discretion deems advisable.
The Underwriters may enter into one of more agreements as the Underwriters, in
each of their sole discretion, deem advisable with one or more broker-dealers
who shall act as dealers in connection with such public offering.
4. COVENANTS AND AGREEMENTS OF THE COMPANY. The Company covenants and
agrees with each of the Underwriters as follows:
a. The Company shall use its best efforts to cause the
Registration Statement and any amendments thereto to become effective as
promptly as practicable and will not at any time, whether before or after the
effective date of the Registration Statement, file any amendment to the
Registration Statement or supplement to the Prospectus or file any document
under the Act or Exchange Act before termination of the offering of the Shares
by the Underwriters of which the Representatives shall not previously have been
advised and furnished with a copy, or to
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<PAGE>
which the Representatives shall have objected or which is not in compliance with
the Act, the Exchange Act or the Rules and Regulations.
b. As soon as the Company is advised or obtains knowledge thereof,
the Company will advise the Representatives and confirm the notice in writing,
(i) when the Registration Statement, as amended, becomes effective, if the
provisions of Rule 430A promulgated under the Act will be relied upon, when the
Prospectus has been filed in accordance with said Rule 430A and when any
post-effective amendment to the Registration Statement becomes effective, (ii)
of the issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceeding, suspending the effectiveness of the Registration
Statement or any order preventing or suspending the use of the Preliminary
Prospectus or the Prospectus, or any amendment or supplement thereto, or the
institution of proceedings for that purpose, (iii) of the issuance by the
Commission or by any state securities commission of any proceedings for the
suspension of the qualification of any of the Securities for offering or sale in
any jurisdiction or of the initiation, or the threatening, of any proceeding for
that purpose, (iv) of the receipt of any comments from the Commission, and (v)
of any request by the Commission for any amendment to the Registration Statement
or any amendment or supplement to the Prospectus or for additional information.
If the Commission or any state securities commission authority shall enter a
stop order or suspend such qualification at any time, the Company will make
every effort to obtain promptly the lifting of such order.
c. The Company shall file the Prospectus (in form and substance
satisfactory to the Representatives) or transmit the Prospectus by a means
reasonably calculated to result in filing with the Commission pursuant to Rule
424(b)(1) (or, if applicable and if consented to by the Representatives,
pursuant to Rule 424(b)(4)) not later than the Commission's close of business on
the earlier of (i) the second business day following the execution and delivery
of this Agreement and (ii) the fifth business day after the effective date of
the Registration Statement.
d. The Company will give the Representatives notice of its
intention to file or prepare any amendment to the Registration Statement
(including any post-effective amendment) or any amendment or supplement to the
Prospectus (including any revised prospectus which the Company proposes for use
by the Underwriters in connection with the offering of the Securities which
differs from the corresponding prospectus on file at the Commission at the time
the Registration Statement becomes effective, whether or not such revised
prospectus is required to be filed pursuant to Rule 424(b) of the Rules and
Regulations), and will furnish the Representatives with copies of any such
amendment or supplement a reasonable amount of time prior to such proposed
filing or use, as the case may be, and will not file any such prospectus to
which the Representatives or Orrick, Herrington & Sutcliffe LLP ("Underwriters'
Counsel") shall object.
e. The Company shall endeavor in good faith, in cooperation with
the Representative, at or prior to the time the Registration Statement becomes
effective, to qualify the Securities for offering and sale under the securities
laws of such jurisdictions as the Representatives may designate to permit the
continuance of sales and dealings therein for as long as may be necessary to
complete the distribution, and shall make such applications, file such documents
and furnish such information as may be required for such purpose; PROVIDED,
HOWEVER, the Company shall
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not be required to qualify as a foreign corporation or file a general or limited
consent to service of process in any such jurisdiction. In each jurisdiction
where such qualification shall be effected, the Company will, unless the
Representatives agree that such action is not at the time necessary or
advisable, use all reasonable efforts to file and make such statements or
reports at such times as are or may reasonably be required by the laws of such
jurisdiction to continue such qualification.
f. During the time when a prospectus is required to be delivered
under the Act, the Company shall use all reasonable efforts to comply with all
requirements imposed upon it by the Act and the Exchange Act, as now and
hereafter amended and by the Rules and Regulations, as from time to time in
force, so far as necessary to permit the continuance of sales of or dealings in
the Securities in accordance with the provisions hereof and the Prospectus, or
any amendments or supplements thereto. If at any time when a prospectus relating
to the Securities is required to be delivered under the Act, any event shall
have occurred as a result of which, in the opinion of counsel for the Company or
Underwriters' Counsel, the Prospectus, as then amended or supplemented, includes
an untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading, or if
it is necessary at any time to amend the Prospectus to comply with the Act, the
Company will notify the Representatives promptly and prepare and file with the
Commission an appropriate amendment or supplement in accordance with Section 10
of the Act, each such amendment or supplement to be satisfactory to
Underwriters' Counsel, and the Company will furnish to the Underwriters copies
of such amendment or supplement as soon as available and in such quantities as
the Underwriters may request.
g. As soon as practicable, but in any event not later than 45 days
after the end of the 12-month period beginning on the day after the end of the
fiscal quarter of the Company during which the effective date of the
Registration Statement occurs (90 days in the event that the end of such fiscal
quarter is the end of the Company's fiscal year), the Company shall make
generally available to its security holders, in the manner specified in Rule
158(b) of the Rules and Regulations, and to the Representatives, an earnings
statement which will be in the detail required by, and will otherwise comply
with, the provisions of Section 11(a) of the Act and Rule 158(a) of the Rules
and Regulations, which statement need not be audited unless required by the Act,
covering a period of at least 12 consecutive months after the effective date of
the Registration Statement.
h. During a period of five years after the date hereof, the
Company will furnish to its stockholders, as soon as practicable, annual reports
(including financial statements audited by independent public accountants) and
unaudited quarterly reports of earnings, and will deliver to the
Representatives:
i. concurrently with furnishing such quarterly reports to its
stockholders, statements of income of the Company for each quarter in
the form furnished to the Company's stockholders and certified by the
Company's principal financial or accounting officer;
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ii. concurrently with furnishing such annual reports to its
stockholders, a balance sheet of the Company as at the end of the
preceding fiscal year, together with statements of operations,
stockholders' equity, and cash flows of the Company for such fiscal
year, accompanied by a copy of the certificate thereon of independent
certified public accountants;
iii. as soon as they are available, copies of all reports
(financial or other) mailed to stockholders;
iv. as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, the NASD
or any securities exchange;
v. every press release and every material news item or article of
interest to the financial community in respect of the Company, or its
affairs which was released or prepared by or on behalf of the Company;
and
vi. any additional information of a public nature concerning the
Company (and any future subsidiary) or its businesses which the
Representatives may request.
During such five-year period, if the Company has an active subsidiary,
the foregoing financial statements will be on a consolidated basis to the extent
that the accounts of the Company and its subsidiary are consolidated, and will
be accompanied by similar financial statements for any significant subsidiary
which is not so consolidated.
i. The Company will maintain a Transfer Agent and, if necessary
under the jurisdiction of incorporation of the Company, a Registrar (which may
be the same entity as the Transfer Agent) for its Common Stock.
j. The Company will furnish to the Representatives or on the
Representatives' order, without charge, at such place as the Representatives may
designate, copies of each Preliminary Prospectus, the Registration Statement and
any pre-effective or post-effective amendments thereto (two of which copies will
be signed and will include all financial statements and exhibits), the
Prospectus, and all amendments and supplements thereto, including any prospectus
prepared after the effective date of the Registration Statement, in each case as
soon as available and in such quantities as the Representatives may request.
k. On or before the effective date of the Registration Statement,
the Company shall provide the Representatives with true copies of duly executed,
legally binding and enforceable agreements pursuant to which for a period of 24
months from the date of the Prospectus, each of the Company's stockholders and
holders of securities exchangeable or exercisable for or convertible into shares
of Common Stock, except for the holders of the Bridge Warrants, agrees that it
or he or she (i) will not directly or indirectly, issue, offer, offer to sell,
sell, grant an option for the purchase or sale of, assign, transfer, pledge,
hypothecate or otherwise encumber or dispose of any shares of Common Stock or
securities convertible into, exercisable or exchangeable for or evidencing any
right to purchase or subscribe for any shares of Common Stock (either pursuant
to Rule 144 of the Rules and Regulations or otherwise) or dispose of any
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beneficial interest therein without the prior consent of H.J. and the Company
(collectively, the "Lock-up Agreements") and (ii) waives, during such 24 month
period, any and all rights to request or demand the registration pursuant to the
Act, of any securities of the Company which are registered in the name of or
beneficially owned by it or he or she, respectively. The holders of the Bridge
Warrants have agreed to such restrictions for a period of 18 months from the
date of the Prospectus. During the 12 month period commencing with the effective
date of the Registration Statement, the Company shall not, without the prior
written consent of H.J., sell, contract or offer to sell, issue, transfer,
assign, pledge, distribute, or otherwise dispose of, directly or indirectly, any
shares of Common Stock or any options, rights or warrants with respect to any
shares of Common Stock, except for (i) any shares issued pursuant to the
exercise of options, warrants or other convertible securities outstanding prior
to the effective date of the Registration Statement or (ii) the grant of options
under the Company's 1996 Stock Option Plan. During the 24 month period
commencing with the effective date of the Registration Statement, the Company
shall not, without the prior written consent of H.J., sell or issue any
securities pursuant to Regulation S under the Act. On or before the Closing
Date, the Company shall deliver instructions to the Transfer Agent authorizing
it to place appropriate legends on the certificates representing the securities
subject to the Lock-up Agreements and to place appropriate stop transfer orders
on the Company's ledgers.
l. Neither the Company nor any of the Subsidiaries, nor any of
their respective officers, directors, stockholders, nor any of its affiliates
(within the meaning of the Rules and Regulations) will take, directly or
indirectly, any action designed to, or which might in the future reasonably be
expected to cause or result in, stabilization or manipulation of the price of
any securities of the Company.
m. The Company shall apply the net proceeds from the sale of the
Securities in the manner, and subject to the conditions, set forth under "Use of
Proceeds" in the Prospectus. No portion of the net proceeds will be used,
directly or indirectly, to acquire any securities issued by the Company.
n. The Company shall timely file all such reports, forms or other
documents as may be required (including, but not limited to, a Form SR as may be
required pursuant to Rule 463 under the Act) from time to time, under the Act,
the Exchange Act, and the Rules and Regulations, and all such reports, forms and
documents filed will comply as to form and substance with the applicable
requirements under the Act, the Exchange Act, and the Rules and Regulations.
o. The Company shall furnish to the Representatives as early as
practicable prior to each of the date hereof, the Closing Date and each Option
Closing Date, if any, but no later than two (2) full business days prior
thereto, a copy of the latest available unaudited interim financial statements
of the Company (which in no event shall be as of a date more than thirty (30)
days prior to the date of the Registration Statement) which have been read by
the Company's independent public accountants, as stated in their letters to be
furnished pursuant to SECTIONS 6(j) and 6(k) hereof.
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<PAGE>
p. The Company shall cause the Common Stock to be quoted on Nasdaq
and for a period of five (5) years from the date hereof, use its best efforts to
maintain Nasdaq quotation of the Common Stock to the extent outstanding.
q. For a period of five (5) years from the Closing Date, the
Company shall furnish to the Representatives at the Representatives' request and
at the Company's sole expense, (i) daily consolidated transfer sheets relating
to the Common Stock (ii) the list of holders of all of the Company's securities
and (iii) a Blue Sky "Trading Survey" for secondary sales of the Company's
securities prepared by counsel to the Company.
r. As soon as practicable, (i) but in no event more than 5
business days before the effective date of the Registration Statement, file a
Form 8-A with the Commission providing for the registration under the Exchange
Act of the Securities and (ii) but in no event more than 10 days from the
effective date of the Registration Statement, take all necessary and appropriate
actions to be included in Standard and Poor's Corporation Descriptions or
Moody's OTC Manual and to continue such inclusion for a period of not less than
five (5) years from the effective date of the Registration Statement.
s. The Company hereby agrees that it will not, for a period of
twelve (12) months from the effective date of the Registration Statement, adopt,
propose to adopt or otherwise permit to exist any employee, officer, director,
consultant or compensation plan or similar arrangement permitting (i) the grant,
issue, sale or entry into any agreement to grant, issue or sell any option,
warrant or other contract right covering more than 60,000 (less the number of
options previously granted to employees) shares of Common Stock at an exercise
price that is less than the greater of the market price on the date of grant or
sale or $6.00 per share; (ii) the maximum number of shares of Common Stock or
other securities of the company purchasable at any time pursuant to options or
warrants issued by the Company to exceed the aggregate of 60,000 shares reserved
for future issuance under the Company's 1996 Stock Option Plan; (iii) the
payment for such securities with any form of consideration other than cash; and
(iv) the existence of stock appreciation rights, phantom options or similar
arrangements.
t. Until the completion of the distribution of the Securities, the
Company shall not without the prior written consent of the Representatives and
Underwriters' Counsel, issue, directly or indirectly, any press release or other
communication or hold any press conference with respect to the Company or its
activities or the offering contemplated hereby, other than trade releases issued
in the ordinary course of the Company's business consistent with past practices
with respect to the Company's operations.
u. For a period equal to the lesser of (i) five (5) years from the
date hereof, and (ii) the sale to the public of the Representatives' Securities,
the Company will not take any action or actions which may prevent or disqualify
the Company's use of Form S-1 (or other appropriate form) for the registration
under the Act of the Representatives' Securities.
v. For a period of three (3) years after the effective date of the
Registration Statement, H.J. shall have the right to designate one (1)
individual to attend meetings of the Company's Board of Directors (the "Board").
The Company shall notify H.J. of each meeting
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<PAGE>
of the Board and the Company shall send to such individual all notices and other
correspondence and communications sent by the Company to members of the Board.
Such individual shall be reimbursed for all out-of-pocket expenses incurred in
connection with his attendance of meetings of the Board.
w. On or before the effective date of the Registration Statement,
the Company shall provide the Representatives with true copies of duly executed,
legally binding and enforceable agreements pursuant to which for a period of
five (5) years from the date of the Prospectus, each of the Company's directors,
officers and stockholders who own more than 5% of the Company's outstanding
voting securities agree that he, she or it will allow the Representatives to
purchase for its own account or sell for the account of such stockholder any
securities sold pursuant to Rule 144 under the Act.
x. For a period of twenty-four (24) months after the effective
date of the Registration Statement, the Company shall not issue any shares of
Preferred Stock without the prior written consent of H.J.
y. On or before the effective date of the Registration Statement,
the Company shall engage a public relations firm acceptable to the
Representatives and the Company and shall maintain a relationship with such
public relations firm for a minimum period of twenty-four (24) months from the
effective date of the Registration Statement.
z. Within 90 days after the Closing Date, the Company shall use
its best efforts to elect two independent outside directors to its Board of
Directors.
5. PAYMENT OF EXPENSES.
a. The Company hereby agrees to pay on each of the Closing Date and the
Option Closing Date (to the extent not paid at the Closing Date) all expenses
and fees (other than fees of Underwriters' Counsel, except as provided in (iv)
below) incident to the performance of the obligations of the Company under this
Agreement, the Consulting Agreement and the Representatives' Warrant Agreement,
including, without limitation, (i) the fees and expenses of accountants and
counsel for the Company, (ii) all costs and expenses incurred in connection with
the preparation, duplication, printing (including mailing and handling charges),
filing, delivery and mailing (including the payment of postage with respect
thereto) of the Registration Statement and the Prospectus and any amendments and
supplements thereto and the printing, mailing (including the payment of postage
with respect thereto) and delivery of this Agreement, the Agreement Among
Underwriters, the Selected Dealer Agreements, and related documents, including
the cost of all copies thereof and of the Preliminary Prospectuses and of the
Prospectus and any amendments thereof or supplements thereto supplied to the
Underwriters and such dealers as the Underwriters may request, in quantities as
hereinabove stated, (iii) the printing, engraving, issuance and delivery of the
Securities including, but not limited to, (x) the purchase by the Underwriters
of the Firm Securities and the Option Securities and the purchase by the
Representatives of the Representatives' Warrants from the Company, (y) the
consummation by the Company of any of its obligations under this Agreement, the
Consulting Agreement and the Representatives' Warrant Agreement, and (z) resale
of the Firm Securities and the Option
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<PAGE>
Securities by the Underwriters in connection with the distribution contemplated
hereby, (iv) the qualification of the Securities under state or foreign
securities or "Blue Sky" laws and determination of the status of such securities
under legal investment laws, including the costs of printing and mailing the
"Preliminary Blue Sky Memorandum," the "Supplemental Blue Sky Memorandum" and
"Legal Investments Survey," if any, and disbursements and fees of counsel in
connection therewith (such counsel fees not to exceed $35,0000), (v) advertising
costs and expenses, including but not limited to costs and expenses in
connection with the "road show" (excluding solely the travel and lodging
expenses of personnel of the Representative), information meetings and
presentations, bound volumes and prospectus memorabilia and "tombstone"
advertisement expenses (such tomb-stone advertisement expenses not to exceed
$10,000), (vi) fees and expenses of the transfer agent and registrar, (vii)
applications for assignments of a rating of the Securities by qualified rating
agencies, (viii) the fees payable to the Commission and the NASD, and (ix) the
fees and expenses incurred in connection with the quotation of the Securities on
Nasdaq, the Boston Stock Exchange, the Pacific Stock Exchange and any other
exchange.
b. If this Agreement is terminated by the Underwriters in
accordance with the provisions of SECTION 6 or SECTION 12, the Company shall
reimburse and indemnify the Representatives for all of their actual
out-of-pocket expenses, including the fees and disbursements of Underwriters'
Counsel, less any amounts already paid pursuant to SECTION 5(c) hereof.
c. The Company further agrees that, in addition to the expenses
payable pursuant to subsection (a) of this SECTION 5, it will pay to the
Representatives on the Closing Date by certified or bank cashier's check or, at
the election of the Representatives, by deduction from the proceeds of the
offering contemplated herein a non-accountable expense allowance equal to three
percent (3%) of the gross proceeds received by the Company from the sale of the
Firm Securities, $100,000 of which has been paid to date. In the event the
Representatives elect to exercise the over-allotment option described in SECTION
2(b) hereof, the Company agrees to pay to the Representatives on the Option
Closing Date (by certified or bank cashier's check or, at the Representatives'
election, by deduction from the proceeds of the offering) a non-accountable
expense allowance equal to three percent (3%) of the gross proceeds received by
the Company from the sale of the Option Securities.
6. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of the
Underwriters hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the Closing Date with respect to the Company and each Option Closing Date,
if any, with respect to the Company as if it had been made on and as of the
Closing Date or each Option Closing Date, as the case may be; the accuracy on
and as of the Closing Date or Option Closing Date, if any, of the statements of
the officers of the Company made pursuant to the provisions hereof; and the
performance by the Company on and as of the Closing Date and each Option Closing
Date, if any, of its covenants and obligations hereunder and to the following
further conditions:
a. The Registration Statement shall have become effective not
later than 12:00 P.M., New York time, on the date of this Agreement or such
later date and time as shall be consented
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<PAGE>
to in writing by the Representatives, and, at the Closing Date and each Option
Closing Date, if any, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or shall be pending or contemplated by the
Commission and any request on the part of the Commission for additional
information shall have been complied with to the reasonable satisfaction of
Underwriters' Counsel. If the Company has elected to rely upon Rule 430A of the
Rules and Regulations, the price of the Shares and any price-related information
previously omitted from the effective Registration Statement pursuant to such
Rule 430A shall have been transmitted to the Commission for filing pursuant to
Rule 424(b) of the Rules and Regulations within the prescribed time period, and
prior to the Closing Date the Company shall have provided evidence satisfactory
to the Representatives of such timely filing, or a post-effective amendment
providing such information shall have been promptly filed and declared effective
in accordance with the requirements of Rule 430A of the Rules and Regulations.
b. The Representatives shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Representatives' opinion, is material, or omits to state a
fact which, in the Representatives' opinion, is material and is required to be
stated therein or is necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or that the
Prospectus, or any supplement thereto, contains an untrue statement of fact
which, in the Representatives' opinion, is material, or omits to state a fact
which, in the Representatives' opinion, is material and is required to be stated
therein or is necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
c. On or prior to each of the Closing Date and the Option Closing
Date, if any, the Representatives shall have received from Underwriters' Counsel
such opinion or opinions with respect to the organization of the Company, the
validity of the Securities, the Registration Statement, the Prospectus and other
related matters as the Representatives may request and Underwriters' Counsel
shall have received such papers and information as they request to enable them
to pass upon such matters.
d. At the Closing Date, the Underwriters shall have received the
favorable opinion of Broad and Cassel, counsel to the Company and the
Subsidiaries, dated the Closing Date, addressed to the Underwriters and in form
and substance satisfactory to Underwriters' Counsel, to the effect that:
i. Each of the Company and the Subsidiaries (A) has been duly
organized and is validly existing as a corporation in good standing
under the laws of its jurisdiction, (B) is duly qualified and licensed
and in good standing as a foreign corporation in each jurisdiction in
which its ownership or leasing of any properties or the character of its
operations requires such qualification or licensing, and (C) has all
requisite corporate power and authority, and has obtained any and all
necessary authorizations, approvals, orders, licenses, certificates,
franchises and permits of and from all governmental or regulatory
officials and bodies (including, without limitation, those having
jurisdiction over environmental or similar matters), domestic or
foreign, to own or lease its properties and conduct its business as
described in the Prospectus; each of the Company and the
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Subsidiaries is and has been doing business in compliance with all such
authorizations, approvals, orders, licenses, certificates, franchises
and permits and all federal, state, local and foreign laws, rules and
regulations; and, none of the Company nor the Subsidiaries has received
any notice of proceedings relating to the revocation or modification of
any such authorization, approval, order, license, certificate,
franchise, or permit which, singly or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would materially
adversely affect the business, operations, condition, financial or
otherwise, or the earnings, business affairs, position, prospects,
value, operation, properties, business or results of operations of the
Company or the Subsidiaries. The disclosures in the Registration
Statement concerning the effects of federal, state, local and foreign
laws, rules and regulations on the Company's and the Subsidiaries'
businesses as currently conducted and as contemplated are correct in all
material respects and do not omit to state a fact necessary to make the
statements contained therein not misleading in light of the
circumstances in which they were made;
ii. the Company owns, directly or indirectly, one hundred percent
(100%) of the outstanding capital stock of each of the Subsidiaries and
all such shares have been validly issued, are fully paid and
non-assessable, were not in violation of any preemptive rights and are
owned free and clear of any liens, charges, claims, encumbrances,
pledges, security interest, defaults or other restrictions or equities
of any kind whatsoever; except as described in the Prospectus, none of
the Company nor any of the Subsidiaries owns an interest in any other
corporation, partnership, joint venture, trust or other business entity;
iii. the Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus, and any amendment or
supplement thereto, under "CAPITALIZATION", and the Company is not a
party to or bound by any instrument, agreement or other arrangement
providing for it to issue any capital stock, rights, warrants, options
or other securities, except for this Agreement and the Representatives'
Warrant Agreement and as described in the Prospectus. The Securities and
all other securities issued or issuable by the Company conform in all
material respects to all statements with respect thereto contained in
the Registration Statement and the Prospectus. All issued and
outstanding securities of the Company have been duly authorized and
validly issued and are fully paid and non-assessable; the holders
thereof have no rights of rescission with respect thereto, and are not
subject to personal liability by reason of being such holders; and none
of such securities were issued in violation of the preemptive rights of
any holders of any security of the Company. The Securities to be sold by
the Company hereunder and under the Representatives' Warrant Agreement
are not and will not be subject to any preemptive or other similar
rights of any stockholder, have been duly authorized and, when issued,
paid for and delivered in accordance with the terms hereof, will be
validly issued, fully paid and non-assessable and conform to the
description thereof contained in the Prospectus; the holders thereof
will not be subject to any liability solely as such holders; all
corporate action required to be taken for the authorization, issue and
sale of the Securities has been duly and validly taken; and the
certificates representing the Securities are in due and proper form. The
Representatives' Warrants constitute valid and binding obligations of
the Company to issue and sell, upon exercise thereof and payment
therefor, the number and type of securities of the Company called for
thereby. Upon the
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issuance and delivery pursuant to this Agreement of the Firm Securities
and the Option Securities and the Representatives' Warrants to be sold
by the Company, the Underwriters and the Representatives, respectively,
will acquire good and marketable title to the Firm Securities and the
Option Securities and the Representatives' Warrants free and clear of
any pledge, lien, charge, claim, encumbrance, pledge, security interest,
or other restriction or equity of any kind whatsoever. No transfer tax
is payable by or on behalf of the Underwriters in connection with (A)
the issuance by the Company of the Securities, (B) the purchase by the
Underwriters and the Representatives of the Firm Securities and the
Option Securities and the Representatives' Securities, respectively,
from the Company, (C) the consummation by the Company of any of its
obligations under this Agreement, the Consulting Agreement or the
Representatives' Warrant Agreement, or (D) resales of the Firm
Securities and the Option Securities in connection with the distribution
contemplated hereby;
iv. the Registration Statement is effective under the Act, and, if
applicable, filing of all pricing information has been timely made in
the appropriate form under Rule 430A, and no stop order suspending the
use of the Preliminary Prospectus, the Registration Statement or
Prospectus or any part of any thereof or suspending the effectiveness of
the Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or, to the best of such
counsel's knowledge, threatened or contemplated under the Act;
v. each of the Preliminary Prospectus, the Registration Statement,
and the Prospectus and any amendments or supplements thereto (other than
the financial statements and other financial and statistical data
included therein, as to which no opinion need be rendered) comply as to
form in all material respects with the requirements of the Act and the
Rules and Regulations;
vi. to the best of such counsel's knowledge, (A) there are no
agreements, contracts or other documents required by the Act to be
described in the Registration Statement and the Prospectus and filed as
exhibits to the Registration Statement other than those described in the
Registration Statement (or required to be filed under the Exchange Act
if upon such filing they would be incorporated, in whole or in part, by
reference therein) and the Prospectus and filed as exhibits thereto, and
the exhibits which have been filed are correct copies of the documents
of which they purport to be copies; (B) the descriptions in the
Registration Statement and the Prospectus and any supplement or
amendment thereto of contracts and other documents to which the Company
or any Subsidiary is a party or by which it is bound, including any
document to which the Company or any Subsidiary is a party or by which
it is bound, incorporated by reference into the Prospectus and any
supplement or amendment thereto, are accurate in all material respects
and fairly represent the information required to be shown by Form SB-2;
(C) there is not pending or threatened against the Company or any
Subsidiary any action, arbitration, suit, proceeding, inquiry,
investigation, litigation, governmental or other proceeding (including,
without limitation, those having jurisdiction over environmental or
similar matters), domestic or foreign, pending or threatened against (or
circumstances that may give rise to the same), or involving the
properties or business of the Company or any Subsidiary which (x) is
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required to be disclosed in the Registration Statement which is not so
disclosed (and such proceedings as are summarized in the Registration
Statement are accurately summarized in all material respects) or (y)
questions the validity of the capital stock of the Company or this
Agreement, the Consulting Agreement or the Representatives' Warrant
Agreement, or of any action taken or to be taken by the Company pursuant
to or in connection with any of the foregoing; (D) no statute or
regulation or legal or governmental proceeding required to be described
in the Prospectus is not described as required; and (E) there is no
action, suit or proceeding pending, or threatened, against or affecting
the Company or any Subsidiary before any court or arbitrator or
governmental body, agency or official (or any basis thereof known to
such counsel) in which there is a reasonable possibility of an adverse
decision which may result in a material adverse change in the condition,
financial or otherwise, or the earnings, position, prospects,
stockholders' equity, value, operation, properties, business or results
of operations of the Company or any Subsidiary, which could adversely
affect the present or prospective ability of the Company to perform its
obligations under this Agreement, the Consulting Agreement or the
Representatives' Warrant Agreement or which in any manner draws into
question the validity or enforceability of this Agreement, the
Consulting Agreement or the Representatives' Warrant Agreement;
vii. the Company has full legal right, power and authority to
enter into each of this Agreement, the Consulting Agreement and the
Representatives' Warrant Agreement, and to consummate the transactions
provided for therein; and each of this Agreement, the Consulting
Agreement and the Representatives' Warrant Agreement has been duly
authorized, executed and delivered by the Company. Each of this
Agreement, the Consulting Agreement and the Representatives' Warrant
Agreement, assuming due authorization, execution and delivery by each
other party thereto constitutes a legal, valid and binding agreement of
the Company enforceable against the Company in accordance with its terms
(except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general
application relating to or affecting enforcement of creditors' rights
and the application of equitable principles in any action, legal or
equitable, and except as rights to indemnity or contribution may be
limited by applicable law), and none of the Company's execution or
delivery of this Agreement, the Consulting Agreement and the
Representatives' Warrant Agreement, its performance hereunder or
thereunder, its consummation of the transactions contemplated herein or
therein, or the conduct of its business as described in the Registration
Statement, the Prospectus, and any amendments or supplements thereto,
conflicts with or will conflict with or results or will result in any
breach or violation of any of the terms or provisions of, or constitutes
or will constitute a default under, or result in the creation or
imposition of any lien, charge, claim, encumbrance, pledge, security
interest, defect or other restriction or equity of any kind whatsoever
upon, any property or assets (tangible or intangible) of the Company or
any Subsidiary pursuant to the terms of, (A) the certificate of
incorporation or by-laws of the Company or any Subsidiary, (B) any
license, contract, collective bargaining agreement, indenture, mortgage,
deed of trust, lease, voting trust agreement, stockholders agreement,
note, loan or credit agreement or any other agreement or instrument to
which the Company or any Subsidiary is a party or by which it is or may
be bound or to which any of its properties or assets (tangible or
intangible) is or may be
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subject, or any indebtedness, or (C) any statute, judgment, decree,
order, rule or regulation applicable to the Company or any Subsidiary of
any arbitrator, court, regulatory body or administrative agency or other
governmental agency or body (including, without limitation, those having
jurisdiction over environmental or similar matters), domestic or
foreign, having jurisdiction over the Company or any Subsidiary or any
of their respective activities or properties;
viii. no consent, approval, authorization or order, and no filing
with, any court, regulatory body, government agency or other body (other
than such as may be required under Blue Sky laws, as to which no opinion
need be rendered) is required in connection with the issuance of the
Firm Securities and the Option Securities pursuant to the Prospectus,
the issuance of the Representatives' Warrants, and the Registration
Statement, the performance of this Agreement, the Consulting Agreement
and the Representatives' Warrant Agreement, and the transactions
contemplated hereby and thereby;
ix. the properties and business of each of the Company and the
Subsidiaries conform in all material respects to the description thereof
contained in the Registration Statement and the Prospectus; and each of
the Company and the Subsidiaries has good and marketable title to, or
valid and enforceable leasehold estates in, all items of real and
personal property stated in the Prospectus to be owned or leased by it,
in each case free and clear of all liens, charges, claims, encumbrances,
pledges, security interests, defects or other restrictions or equities
of any kind whatsoever, other than those referred to in the Prospectus
and liens for taxes not yet due and payable;
x. neither the Company nor any of the Subsidiaries is in breach
of, or in default under, any term or provision of any license, contract,
collective bargaining agreement, indenture, mortgage, installment sale
agreement, deed of trust, lease, voting trust agreement, stockholders'
agreement, partnership agreement, note, loan or credit agreement or any
other agreement or instrument evidencing an obligation for borrowed
money, or any other agreement or instrument to which the Company or any
Subsidiary is a party or by which the Company or any Subsidiary may be
bound or to which the property or assets (tangible or intangible) of the
Company or any Subsidiary is subject or affected; and neither the
Company nor any of the Subsidiaries is in violation of any term or
provision of its Articles of Incorporation or By-Laws or in violation of
any franchise, license, permit, judgment, decree, order, statute, rule
or regulation;
xi. the statements in the Prospectus under "THE COMPANY,"
"BUSINESS," "MANAGEMENT," "PRINCIPAL STOCKHOLDERS," "CERTAIN
TRANSACTIONS," "DESCRIPTION OF SECURITIES," and "SHARES ELIGIBLE FOR
FUTURE SALE" have been reviewed by such counsel, and insofar as they
refer to statements of law, descriptions of statutes, licenses, rules or
regulations or legal conclusions, are correct in all material respects;
xii. the Securities have been accepted for quotation on Nasdaq;
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xiii. the persons listed under the caption "PRINCIPAL
STOCKHOLDERS" in the Prospectus are the respective "beneficial owners"
(as such phrase is defined in regulation 13d-3 under the Exchange Act)
of the securities set forth opposite their respective names thereunder
as and to the extent set forth therein;
xiv. except as described in the Prospectus, no person,
corporation, trust, partnership, association or other entity has the
right to include and/or register any securities of the Company in the
Registration Statement, require the Company to file any registration
statement or, if filed, to include any security in such registration
statement;
xv. except as described in the Prospectus, there are no claims,
payments, issuances, arrangements or understandings for services in the
nature of a finder's or origination fee with respect to the sale of the
Securities hereunder or financial consulting arrangement or any other
arrangements, agreements, understandings, payments or issuances that may
affect the Underwriters' compensation, as determined by the NASD;
xvi. assuming due execution by the parties thereto other than the
Company, the Lockup Agreements are legal, valid and binding obligations
of the parties thereto, enforceable against the party and any subsequent
holder of the securities subject thereto in accordance with its terms
(except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general
application relating to or affecting enforcement of creditors' rights
and the application of equitable principles in any action, legal or
equitable, and except as rights to indemnity or contribution may be
limited by applicable law);
xvii. except as described in the Prospectus, neither the Company
nor any of the Subsidiaries (A) maintains, sponsors or contributes to
any ERISA Plans, (B) maintains or contributes, now or at any time
previously, to a defined benefit plan, as defined in Section 3(35) of
ERISA, and (C) has ever completely or partially withdrawn from a
"multiemployer plan";
xviii. the minute books of each of the Company and the
Subsidiaries have been made available to the Underwriters and contain a
complete summary of all meetings and actions of the directors and
stockholders of the Company and the Subsidiaries since the time of its
incorporation and reflect all transactions referred to in such minutes
accurately in all material respects; and
xix. except as set forth in the Prospectus and to the best
knowledge of such counsel, no officer, director or stockholder of the
Company or any Subsidiary, or any "affiliate" or "associate" (as these
terms are defined in Rule 405 promulgated under the Rules and
Regulations) of any of the foregoing persons or entities has or has had,
either directly or indirectly, (A) an interest in any person or entity
which (x) furnishes or sells services or products which are furnished or
sold or are proposed to be furnished or sold by the Company or any
Subsidiary, or (y) purchases from or sells or furnishes to the Company
or any Subsidiary any goods or services, or (B) a beneficial interest in
any contract or agreement to which the Company or any Subsidiary is a
party or by which it may be
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<PAGE>
bound or affected. Except as set forth in the Prospectus under "CERTAIN
TRANSACTIONS," there are no existing agreements, arrangements,
understandings or transactions, or proposed agreements, arrangements,
understandings or transactions, between or among the Company, or any
Subsidiary and any officer, director, or 5% or greater securityholder of
the Company or any Subsidiary, or any affiliate or associate of any such
person or entity;
xx. each of the Company and the Subsidiaries is in compliance with
all provisions of Section 1 of Laws of Florida, Chapter 92-198, AN ACT
RELATING TO DISCLOSURE OF DOING BUSINESS WITH CUBA;
xxi. to the best of such counsel's knowledge, there is no action,
suit, proceeding, inquiry, investigation, litigation or governmental
proceeding, domestic or foreign, pending or threatened (or circumstances
that may give rise to the same) involving the Company's or any
Subsidiary's production, use, testing, manufacturing or marketing of any
products or services, which (i) questions the authority of the Company
or any Subsidiary to produce, use, test, manufacture or market any
products or services as described in the Prospectus, (ii) questions the
completeness or accuracy of data generated by any trials, tests or
studies being conducted by or on behalf of the Company or any of its
Subsidiaries, (iii) is required to be disclosed in the Prospectus which
is not so disclosed, or (iv) might materially and adversely affect the
condition, financial or otherwise, or the earnings, prospects, value,
operations or business of the Company and the Subsidiaries, taken as a
whole.
xxii. none of the Company or any of the Subsidiaries shall be
subject to the requirements of or shall be deemed an "Investment
Company," pursuant to and as defined under the Investment Company Act.
Such counsel shall state that such counsel has participated in
conferences with officers and other representatives of the Company and the
Subsidiaries, and representatives of the independent public accountants for the
Company and the Subsidiaries, at which conferences such counsel made inquiries
of such officers, representatives and accountants and discussed the contents of
the Preliminary Prospectus, the Registration Statement, the Prospectus, and
related matters and, although such counsel is not passing upon and does not
assume any responsibility for the accuracy, completeness or fairness of the
statements contained in the Preliminary Prospectus, the Registration Statement
and Prospectus, on the basis of the foregoing, no facts have come to the
attention of such counsel which lead them to believe that either the
Registration Statement or any amendment thereto, at the time such Registration
Statement or amendment became effective or the Preliminary Prospectus or
Prospectus or amendment or supplement thereto as of the date of such opinion
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading (it being understood that such counsel need express no opinion
with respect to the financial statements and schedules and other financial and
statistical data included in the Preliminary Prospectus, the Registration
Statement or the Prospectus).
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<PAGE>
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance satisfactory to Underwriters' Counsel) of
other counsel acceptable to Underwriters' Counsel, familiar with the applicable
laws; (B) as to matters of fact, to the extent they deem proper, on certificates
and written statements of responsible officers of the Company and the
Subsidiaries and certificates or other written statements of officers of
departments of various jurisdictions having custody of documents respecting the
corporate existence or good standing of the Company and the Subsidiaries,
provided that copies of any such statements or certificates shall be delivered
to Underwriters' Counsel if requested. The opinion of such counsel for the
Company and the Subsidiaries shall state that the opinion of any such other
counsel is in form satisfactory to such counsel and that the Representatives and
they are justified in relying thereon. Any opinion of counsel for the Company
and the Subsidiaries shall not state that it is to be governed or qualified by,
or that it is otherwise subject to, any treatise, written policy or other
document relating to legal opinions, including, without limitation, the Legal
Opinion Accord of the ABA Section of Business Law (1991) or any comparable state
accord.
e. At each Option Closing Date, if any, the Underwriters shall
have received the favorable opinion of Broad and Cassel, counsel to the Company
and the Subsidiaries, dated the Option Closing Date, addressed to the
Underwriters and in form and substance satisfactory to Underwriters' Counsel
confirming as of Option Closing Date the statements made by Broad and Cassel in
their opinion delivered on the Closing Date.
f. On or prior to each of the Closing Date and the Option Closing
Date, if any, Underwriters' Counsel shall have been furnished such documents,
certificates and opinions as they may reasonably require for the purpose of
enabling them to review or pass upon the matters referred to in subsection (c)
of this SECTION 6, or in order to evidence the accuracy, completeness or
satisfaction of any of the representations, warranties or conditions of the
Company, or herein contained.
g. Prior to each of the Closing Date and each Option Closing Date,
if any, (i) there shall have been no adverse change nor development involving a
prospective change in the condition, financial or otherwise, prospects,
stockholders' equity or the business activities of the Company or any of the
Subsidiaries, whether or not in the ordinary course of business, from the latest
dates as of which such condition is set forth in the Registration Statement and
Prospectus; (ii) there shall have been no transaction, not in the ordinary
course of business, entered into by the Company or any of the Subsidiaries, from
the latest date as of which the financial condition of the Company and the
Subsidiaries is set forth in the Registration Statement and Prospectus which is
adverse to the Company or any of the Subsidiaries; (iii) neither the Company nor
any of the Subsidiaries shall be in default under any provision of any
instrument relating to any outstanding indebtedness, except as disclosed in the
Prospectus; (iv) neither the Company nor any of the Subsidiaries shall have
issued any securities (other than the Securities) or declared or paid any
dividend or made any distribution in respect of its capital stock of any class
and there has not been any change in the capital stock or any change in the debt
(long or short term) or liabilities or obligations of the Company or any of the
Subsidiaries (contingent or otherwise);
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<PAGE>
(v) no material amount of the assets of the Company or any of the Subsidiaries
shall have been pledged or mortgaged, except as set forth in the Registration
Statement and Prospectus; (vi) no action, suit or proceeding, at law or in
equity, shall have been pending or threatened (or circumstances giving rise to
same) against the Company, or any of the Subsidiaries, or affecting any of its
properties or business before or by any court or federal, state or foreign
commission, board or other administrative agency wherein an unfavorable
decision, ruling or finding may adversely affect the business, operations,
prospects or financial condition or income of the Company, or any of the
Subsidiaries, except as set forth in the Registration Statement and Prospectus;
and (vii) no stop order shall have been issued under the Act and no proceedings
therefor shall have been initiated, threatened or contemplated by the
Commission.
h. At each of the Closing Date and each Option Closing Date, if
any, the Underwriters shall have received a certificate of the Company signed by
the principal executive officer and by the chief financial or chief accounting
officer of the Company, dated the Closing Date or Option Closing Date, as the
case may be, to the effect that each of such persons has carefully examined the
Registration Statement, the Prospectus and this Agreement, and that:
i. The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing Date
or the Option Closing Date, as the case may be, and the Company has
complied with all agreements and covenants and satisfied all conditions
contained in this Agreement on its part to be performed or satisfied at
or prior to such Closing Date or Option Closing Date, as the case may
be;
ii. No stop order suspending the effectiveness of the Registration
Statement or any part thereof has been issued, and no proceedings for
that purpose have been instituted or are pending or, to the best of each
of such person's knowledge, after due inquiry, are contemplated or
threatened under the Act;
iii. The Registration Statement and the Prospectus and, if any,
each amendment and each supplement thereto, contain all statements and
information required to be included therein, and none of the
Registration Statement, the Prospectus nor any amendment or supplement
thereto includes any untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which
they were made, not misleading and neither the Preliminary Prospectus or
any supplement thereto included any untrue statement of a material fact
or omitted to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading; and
iv. Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (a) neither the
Company nor any of the Subsidiaries has incurred up to and including the
Closing Date or the Option Closing Date, as the case may be, other than
in the ordinary course of its business, any material liabilities or
obligations, direct or contingent; (b) neither the Company nor any of
the Subsidiaries has paid or declared any dividends or other
distributions on its capital stock; (c) neither the Company nor any of
the Subsidiaries has entered into any transactions not
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<PAGE>
in the ordinary course of business; (d) there has not been any change in
the capital stock or long-term debt or any increase in the short-term
borrowings (other than any increase in the short-term borrowings in the
ordinary course of business) of the Company or any of the Subsidiaries;
(e) neither the Company nor any of the Subsidiaries has sustained any
loss or damage to its property or assets, whether or not insured; (f)
there is no litigation which is pending or threatened (or circumstances
giving rise to same) against the Company or any affiliated party of any
of the foregoing which is required to be set forth in an amended or
supplemented Prospectus which has not been set forth; and (g) there has
occurred no event required to be set forth in an amended or supplemented
Prospectus which has not been set forth.
References to the Registration Statement and the Prospectus in this subsection
(j) are to such documents as amended and supplemented at the date of such
certificate.
i. By the Closing Date, the Underwriters will have received
clearance from the NASD as to the amount of compensation allowable or payable to
the Underwriters, as described in the Registration Statement.
j. At the time this Agreement is executed, the Underwriters shall
have received a letter, dated such date, addressed to the Underwriters in form
and substance satisfactory (including the non-material nature of the changes or
decreases, if any, referred to in clause (iii) below) in all respects to the
Underwriters and Underwriters' Counsel, from Deloitte & Touche LLP:
i. confirming that they are independent certified public
accountants with respect to the Company within the meaning of the Act
and the applicable Rules and Regulations;
ii. stating that it is their opinion that the financial statements
and supporting schedules of the Company included in the Registration
Statement comply as to form in all material respects with the applicable
accounting requirements of the Act and the Rules and Regulations
thereunder and that the Representatives may rely upon their opinion with
respect to the financial statements and supporting schedules included in
the Registration Statement;
iii. stating that, on the basis of a limited review which included
a reading of the latest available unaudited consolidated interim
financial statements of the Company and the Subsidiaries, a reading of
the latest available minutes of the stockholders and board of directors
and the various committees of the boards of directors of the Company,
consultations with officers and other employees of the Company and the
Subsidiaries, responsible for financial and accounting matters and other
specified procedures and inquiries, nothing has come to their attention
which would lead them to believe that (A) the unaudited consolidated
financial statements and supporting schedules of the Company and the
Subsidiaries included in the Registration Statement do not comply as to
form in all material respects with the applicable accounting
requirements of the Act and the Rules and Regulations or are not fairly
presented in conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the audited
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<PAGE>
consolidated financial statements of the Company and the Subsidiaries
included in the Registration Statement, or (B) at a specified date not
more than five (5) days prior to the effective date of the Registration
Statement, there has been any change in the capital stock or long-term
debt of the Company or any of the Subsidiaries or any decrease in the
stockholders' equity or net current assets or net assets of the Company
or any of the Subsidiaries as compared with amounts shown in the
December 27, 1996 balance sheet included in the Registration Statement,
other than as set forth in or contemplated by the Registration
Statement, or, if there was any change or decrease, setting forth the
amount of such change or decrease, and (C) during the period from
December 27, 1996 to a specified date not more than five (5) days prior
to the effective date of the Registration Statement, there was any
decrease in net revenues, net earnings or increase in net earnings per
common share of the Company or any of the Subsidiaries, in each case as
compared with the corresponding period beginning December 30, 1995,
other than as set forth in or contemplated by the Registration
Statement, or, if there was any such decrease, setting forth the amount
of such decrease;
iv. setting forth, at a date not later than five (5) days prior to
the date of the Registration Statement, the amount of liabilities of the
Company and the Subsidiaries (including a break-down of commercial paper
and notes payable to banks);
v. stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, statements and
other financial information pertaining to the Company and the
Subsidiaries set forth in the Prospectus in each case to the extent that
such amounts, numbers, percentages, statements and information may be
derived from the general accounting records, including work sheets, of
the Company and the Subsidiaries and excluding any questions requiring
an interpretation by legal counsel, with the results obtained from the
application of specified readings, inquiries and other appropriate
procedures (which procedures do not constitute an examination in
accordance with generally accepted auditing standards) set forth in the
letter and found them to be in agreement; and
vi. statements as to such other matters incident to the
transaction contemplated hereby as the Representatives may request.
k. At the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received from Deloitte & Touche LLP a letter, dated as
of the Closing Date or the Option Closing Date, as the case may be, to the
effect that they reaffirm that statements made in the letter furnished pursuant
to SUBSECTION (j) of this Section, except that the specified date referred to
shall be a date not more than five days prior to the Closing Date or the Option
Closing Date, as the case may be, and, if the Company has elected to rely on
Rule 430A of the Rules and Regulations, to the further effect that they have
carried out procedures as specified in clause (v) of SUBSECTION (j) of this
Section with respect to certain amounts, percentages and financial information
as specified by the Representatives and deemed to be a part of the Registration
Statement pursuant to Rule 430A(b) and have found such amounts, percentages and
financial information to be in agreement with the records specified in such
clause (v).
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<PAGE>
l. On each of the Closing Date and each Option Closing Date, if
any, there shall have been duly tendered to the Representatives for the several
Underwriters' accounts the appropriate number of Firm Securities and Option
Securities.
m. No order suspending the sale of the Firm Securities and Option
Securities in any jurisdiction designated by the Representatives pursuant to
subsection (e) of SECTION 4 hereof shall have been issued on either the Closing
Date or the Option Closing Date, if any, and no proceedings for that purpose
shall have been instituted or shall be contemplated.
n. On or before the Closing Date, the Company shall have executed
and delivered to the Representatives, (i) the Representatives' Warrant Agreement
substantially in the form filed as Exhibit [___] to the Registration Statement
in final form and substance satisfactory to the Representatives, and (ii) the
Representatives' Warrants in such denominations and to such designees as shall
have been provided to the Company.
o. On or before the Closing Date, the Firm Securities and Option
Securities shall have been duly approved for quotation on Nasdaq, subject to
official notice of issuance.
p. On or before the Closing Date, there shall have been delivered
to the Representatives all of the Lock-up Agreements, in form and substance
satisfactory to Underwriters' Counsel.
If any condition to the Underwriters' obligations hereunder to be
fulfilled prior to or at the Closing Date or the relevant Option Closing Date,
as the case may be, is not so fulfilled, the Representatives may terminate this
Agreement or, if the Representatives so elect, they may waive any such
conditions which have not been fulfilled or extend the time for their
fulfillment.
7. INDEMNIFICATION.
a. The Company agrees to indemnify and hold harmless each of the
Underwriters (for purposes of this SECTION 7 "Underwriter" shall include the
officers, directors, partners, employees, agents and counsel of the Underwriter,
including specifically each person who may be substituted for an Underwriter as
provided in SECTION 11 hereof), and each person, if any, who controls the
Underwriter ("controlling person") within the meaning of Section 15 of the Act
or Section 20(a) of the Exchange Act, from and against any and all losses,
claims, damages, expenses or liabilities, joint or several (and actions in
respect thereof), whatsoever (including but not limited to any and all expenses
whatsoever reasonably incurred in investigating, preparing or defending against
any litigation, commenced or threatened, or any claim whatsoever), as such are
incurred, to which the Underwriter or such controlling person may become subject
under the Act, the Exchange Act or any other statute or at common law or
otherwise or under the laws of foreign countries, arising out of or based upon
(A) any untrue statement or alleged untrue statement of a material fact
contained (i) in any Preliminary Prospectus, the Registration Statement or the
Prospectus (as from time to time amended and supplemented); (ii) in any
post-effective amendment or amendments or any new registration statement and
prospectus in which is included securities of the Company issued or issuable
upon exercise of the Securities; or (iii) in any application or other document
or written communication
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<PAGE>
(in this SECTION 7 collectively called "application") executed by the Company or
based upon written information furnished by the Company in any jurisdiction in
order to qualify the Securities under the securities laws thereof or filed with
the Commission, any state securities commission or agency, Nasdaq or any other
securities exchange; (B) the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the statements
therein not misleading (in the case of the Prospectus, in the light of the
circumstances under which they were made) or (C) any breach of any
representation, warranty, covenant or agreement of the Company contained herein
or in any certificate by or on behalf of the Company and/or any of its officers
delivered pursuant hereto, unless, in the case of clause (A) or (B) above, such
statement or omission was made in reliance upon and in strict conformity with
written information furnished to the Company with respect to any Underwriter by
or on behalf of such Underwriter expressly for use in any Preliminary
Prospectus, the Registration Statement or Prospectus, or any amendment thereof
or supplement thereto, or in any application, as the case may be.
The indemnity agreement in this subsection (a) shall be in addition to
any liability which the Company may have at common law or otherwise.
b. Each of the Underwriters agrees severally, but not jointly, to
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the Registration Statement, and each other person, if
any, who controls the Company within the meaning of the Act, to the same extent
as the foregoing indemnity from the Company to the Underwriters but only with
respect to statements or omissions, if any, made in any Preliminary Prospectus,
the Registration Statement or Prospectus or any amendment thereof or supplement
thereto or in any application made in reliance upon, and in strict conformity
with, written information furnished to the Company with respect to any
Underwriter by such Underwriter expressly for use in such Preliminary
Prospectus, the Registration Statement or Prospectus or any amendment thereof or
supplement thereto or in any such application, provided that such written
information or omissions only pertain to disclosures in the Preliminary
Prospectus, the Registration Statement or Prospectus directly relating to the
transactions effected by the Underwriters in connection with this Offering. The
Company acknowledges that the statements with respect to the public offering of
the Firm Securities and the Option Securities set forth under the heading
"Underwriting" and the stabilization legend in the Prospectus have been
furnished by the Underwriters expressly for use therein and constitute the only
information furnished in writing by or on behalf of the Underwriters for
inclusion in the Prospectus.
c. Promptly after receipt by an indemnified party under this
SECTION 7 of notice of the commencement of any action, suit or proceeding, such
indemnified party shall, if a claim in respect thereof is to be made against one
or more indemnifying parties under this SECTION 7, notify each party against
whom indemnification is to be sought in writing of the commencement thereof (but
the failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this SECTION 7 except to the extent that it
has been prejudiced in any material respect by such failure or from any
liability which it may have otherwise). In case any such action is brought
against any indemnified party, and it notifies an indemnifying party or parties
of the commencement thereof, the indemnifying party or parties will be entitled
to participate therein, and to the extent it may elect by written notice
delivered to the indemnified
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<PAGE>
party promptly after receiving the aforesaid notice from such indemnified party,
to assume the defense thereof with counsel reasonably satisfactory to such
indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such case
but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by the indemnifying parties in connection with
the defense of such action at the expense of the indemnifying party, (ii) the
indemnifying parties shall not have employed counsel reasonably satisfactory to
such indemnified party to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses of one additional counsel shall be borne by the
indemnifying parties. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances.
Anything in this SECTION 7 to the contrary notwithstanding, an indemnifying
party shall not be liable for any settlement of any claim or action effected
without its written consent; PROVIDED, HOWEVER, that such consent was not
unreasonably withheld. An indemnifying party will not, without the prior written
consent of the indemnified parties, settle, compromise or consent to the entry
of any judgment with respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action), unless such settlement, compromise or consent
(i) includes an unconditional release of each indemnified party from all
liability arising out of such claim, action, suit or proceeding and (ii) does
not include a statement as to or an admission of fault, culpability or a failure
to act by or on behalf of any indemnified party.
d. In order to provide for just and equitable contribution in any
case in which (i) an indemnified party makes claim for indemnification pursuant
to this SECTION 7, but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this SECTION 7 provide for indemnification in such
case, or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or liabilities (or
actions in respect thereof) (A) in such proportion as is appropriate to reflect
the relative benefits received by each of the contributing parties, on the one
hand, and the party to be indemnified on the other hand, from the offering of
the Firm Securities and the Option Securities or (B) if the allocation provided
by clause (A) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of each of the contributing parties, on the
one hand, and the party to be indemnified on the other hand in connection with
the statements or omissions that resulted in such losses, claims, damages,
expenses or liabilities, as well as any other relevant equitable
- 35 -
<PAGE>
considerations. In any case where the Company is the contributing party and the
Underwriters are the indemnified party, the relative benefits received by the
Company on the one hand, and the Underwriters, on the other, shall be deemed to
be in the same proportion as the total net proceeds from the offering of the
Firm Securities and the Option Securities (before deducting expenses) bear to
the total underwriting discounts received by the Underwriters hereunder, in each
case as set forth in the table on the Cover Page of the Prospectus. Relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company, or by the Underwriters, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, expenses or liabilities (or actions in
respect thereof) referred to above in this subdivision (d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subdivision (d) the Underwriters shall
not be required to contribute any amount in excess of the underwriting discount
applicable to the Firm Securities and the Option Securities purchased by the
Underwriters hereunder. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. For purposes
of this SECTION 7, each person, if any, who controls the Company within the
meaning of the Act, each officer of the Company who has signed the Registration
Statement, and each director of the Company shall have the same rights to
contribution as the Company, subject in each case to this subparagraph (d). Any
party entitled to contribution will, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in respect to
which a claim for contribution may be made against another party or parties
under this subparagraph (d), notify such party or parties from whom contribution
may be sought, but the omission so to notify such party or parties shall not
relieve the party or parties from whom contribution may be sought from any
obligation it or they may have hereunder or otherwise than under this
subparagraph (d), or to the extent that such party or parties were not adversely
affected by such omission. The contribution agreement set forth above shall be
in addition to any liabilities which any indemnifying party may have at common
law or otherwise.
8. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. All
representations, warranties and agreements contained in this Agreement or
contained in certificates of officers of the Company submitted pursuant hereto,
shall be deemed to be representations, warranties and agreements at the Closing
Date and the Option Closing Date, as the case may be, and such representations,
warranties and agreements of the Company and the indemnity agreements contained
in SECTION 7 hereof, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any Underwriter, the
Company, any controlling person of any Underwriter or the Company, and shall
survive termination of this Agreement or the issuance and delivery of the
Securities to the Underwriters and the Representatives, as the case may be.
- 36 -
<PAGE>
9. EFFECTIVE DATE.
a. This Agreement shall become effective at 10:00 a.m., New York
City time, on the next full business day following the date hereof, or at such
earlier time after the Registration Statement becomes effective as the
Representatives in their discretion, shall release the Securities for sale to
the public; PROVIDED, HOWEVER, that the provisions of SECTIONS 5, 7 and 10 of
this Agreement shall at all times be effective. For purposes of this SECTION 9,
the Firm Securities and the Option Securities to be purchased hereunder shall be
deemed to have been so released upon the earlier of dispatch by the
Representatives of telegrams to securities dealers releasing such shares for
offering or the release by the Representatives for publication of the first
newspaper advertisement which is subsequently published relating to the Firm
Securities and the Option Securities.
10. TERMINATION.
a. Subject to SUBSECTION (b) of this SECTION 10, the
Representatives shall have the right to terminate this Agreement, (i) if any
domestic or international event or act or occurrence has materially adversely
disrupted, or in the Representatives' opinion will in the immediate future
materially adversely disrupt, the financial markets; or (ii) if any material
adverse change in the financial markets shall have occurred; or (iii) if trading
generally shall have been suspended or materially limited on or by, as the case
may be, any of the New York Stock Exchange, the American Stock Exchange, the
NASD, the Boston Stock Exchange, the Commission or any other governmental
authority having jurisdiction over such matters; or (iv) if trading of any of
the securities of the Company shall have been suspended, or any of the
securities of the Company shall have been delisted, on any exchange or in any
over-the-counter market; or (v) if the United States shall have become involved
in a war or major hostilities, or if there shall have been an escalation in an
existing war or major hostilities or a national emergency shall have been
declared in the United States; or (vi) if a banking moratorium has been declared
by a state or federal authority; or (vii) if a moratorium in foreign exchange
trading has been declared; or (viii) if the Company shall have sustained a loss
material or substantial to the Company by fire, flood, accident, hurricane,
earthquake, theft, sabotage or other calamity or malicious act which, whether or
not such loss shall have been insured, will, in the Representatives' opinion,
make it inadvisable to proceed with the offering, sale and/or delivery of the
Securities; or (ix) if there shall have been such a material adverse change in
the conditions or prospects of the Company, or such material adverse change in
the general market, political or economic conditions, in the United States or
elsewhere, that, in each case, in the Representatives' judgment, would make it
inadvisable to proceed with the offering, sale and/or delivery of the Securities
or (x) if any of Gary D. Horne or Stanley F. Zuk shall no longer serve the
Company in their present capacity.
b. If this Agreement is terminated by the Representatives in
accordance with the provisions of SECTION 10(a) the Company shall promptly
reimburse and indemnify the Representatives for all of their actual
out-of-pocket expenses, including the fees and disbursements of counsel for the
Underwriters (less amounts previously paid pursuant to SECTION 5(c) above).
Notwithstanding any contrary provision contained in this Agreement, if this
Agreement shall not be carried out within the time specified herein, or any
extension thereof
- 37 -
<PAGE>
granted to the Representatives, by reason of any failure on the part of the
Company to perform any undertaking or satisfy any condition of this Agreement by
it to be performed or satisfied (including, without limitation, pursuant to
SECTION 6 or SECTION 12) then, the Company shall promptly reimburse and
indemnify the Representatives for all of their actual out-of-pocket expenses,
including the fees and disbursements of counsel for the Underwriters (less
amounts previously paid pursuant to SECTION 5(c) above). In addition, the
Company shall remain liable for all Blue Sky counsel fees and disbursements,
expenses and filing fees (such Blue Sky counsel fees not to exceed $35,000).
Notwithstanding any contrary provision contained in this Agreement, any election
hereunder or any termination of this Agreement (including, without limitation,
pursuant to SECTIONS 6, 10, 11 and 12 hereof), and whether or not this Agreement
is otherwise carried out, the provisions of SECTION 5 and SECTION 7 shall not be
in any way affected by such election or termination or failure to carry out the
terms of this Agreement or any part hereof.
11. SUBSTITUTION OF THE UNDERWRITERS. If one or more of the Underwriters
shall fail (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of SECTION 6, SECTION 10 or SECTION 12
hereof) to purchase the Securities which it or they are obligated to purchase on
such date under this Agreement (the "Defaulted Securities"), the Representatives
shall have the right, within 24 hours thereafter, to make arrangement for one or
more of the non-defaulting Underwriters, or any other underwriters, to purchase
all, but not less than all, of the Defaulted Securities in such amounts as may
be agreed upon and upon the terms herein set forth; if, however, the
Representatives shall not have completed such arrangements within such 24-hour
period, then:
(a) if the number of Defaulted Securities does not exceed 10% of
the total number of Firm Securities to be purchased on such date, the
non-defaulting Underwriters shall be obligated to purchase the full
amount thereof in the proportions that their respective underwriting
obligations hereunder bear to the underwriting obligations of all
non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the total
number of Firm Securities, this Agreement shall terminate without
liability on the part of any non-defaulting Underwriters (or, if such
default shall occur with respect to any Option Securities to be
purchased on an Option Closing Date, the Underwriters may at the
Representatives' option, by notice from the Representatives to the
Company, terminate the Underwriters' obligation to purchase Option
Securities from the Company on such date).
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of any default by such Underwriter under
this Agreement.
In the event of any such default which does not result in a termination
of this Agreement, the Representatives shall have the right to postpone the
Closing Date for a period not exceeding seven days in order to effect any
required changes in the Registration Statement or Prospectus or in any other
documents or arrangements.
- 38 -
<PAGE>
12. DEFAULT BY THE COMPANY. If the Company shall fail at the Closing
Date or at any Option Closing Date, as applicable, to sell and deliver the
number of Securities which it is obligated to sell hereunder on such date, then
this Agreement shall terminate (or, if such default shall occur with respect to
any Option Securities to be purchased on an Option Closing Date, the
Underwriters may at the Representatives' option, by notice from the
Representatives to the Company, terminate the Underwriters' obligation to
purchase Option Securities from the Company on such date) without any liability
on the part of any non-defaulting party other than pursuant to SECTION 5,
SECTION 7 and SECTION 10 hereof. No action taken pursuant to this Section shall
relieve the Company from liability, if any, in respect of such default.
13. NOTICES. All notices and communications hereunder, except as
herein otherwise specifically provided, shall be in writing and shall be deemed
to have been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriters shall be directed to the
Representatives c/o H. J. Meyers & Co., Inc., 1895 Mt. Hope Avenue, Rochester,
New York 14620, Attention: Michael A. Bresner, with a copy to Orrick, Herrington
& Sutcliffe LLP, 666 Fifth Avenue, New York, New York 10103, Attention: Lawrence
B. Fisher, Esq. Notices to the Company shall be directed to the Company at 1
Industry Street, Poughkeepsie, New York, New York 12603, Attention: Gary D.
Horne, Chairman of the Board and Chief Executive Officer, with a copy to Broad
and Cassel, 201 South Biscayne Boulevard, Suite 3000, Miami, Florida 33131,
Attention: A. Jeffrey Robinson, P.A.
14. PARTIES. This Agreement shall inure solely to the benefit of and
shall be binding upon the Underwriters, the Company and the controlling persons,
directors and officers referred to in SECTION 7 hereof, and their respective
successors, legal representatives and assigns, and no other person shall have or
be construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provisions herein contained. No
purchaser of Securities from any Underwriter shall be deemed to be a successor
by reason merely of such purchase.
15. CONSTRUCTION. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of New York without giving
effect to the choice of law or conflict of laws principles.
16. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
17. ENTIRE AGREEMENT; AMENDMENTS. This Agreement and the
Representatives' Warrant Agreement constitute the entire agreement of the
parties hereto and supersede all prior written or oral agreements,
understandings and negotiations with respect to the subject matter hereof. This
Agreement may not be amended except in a writing, signed by the Representatives
and the Company.
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<PAGE>
If the foregoing correctly sets forth the understanding between the
Underwriters and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
us.
Very truly yours,
ASD GROUP, INC.
By:
--------------------------
Gary D. Horne
Chairman of the Board and
Chief Executive Officer
Confirmed and accepted as of
the date first above written.
H. J. MEYERS & CO., INC.
KEANE SECURITIES CO., INC.
For itself and as Representatives
of the several Underwriters named
in Schedule A hereto.
By: H. J. Meyers & Co., Inc.
By:
------------------------------
Name:
Title:
- 40 -
<PAGE>
SCHEDULE A
NUMBER OF SHARES
NAME OF UNDERWRITERS TO BE PURCHASED
- -------------------- -----------------
H. J. Meyers & Co., Inc. . . . . . . . . . . . . . . . . .
Keane Securities Co., Inc.
---------
Total . . . . . . . . . . . . . . . . . . . . . . . 1,400,000
=========
- 41 -
EXHIBIT 4.2
OH&S DRAFT
3/6/97
[FORM OF REPRESENTATIVES' WARRANT AGREEMENT]
[SUBJECT TO ADDITIONAL REVIEW]
- --------------------------------------------------------------------------------
ASD GROUP, INC.
AND
H. J. MEYERS & CO., INC.
AND
KEANE SECURITIES CO., INC.
REPRESENTATIVES'
WARRANT AGREEMENT
Dated as of ________, 1997
- --------------------------------------------------------------------------------
<PAGE>
REPRESENTATIVES' WARRANT AGREEMENT dated as of _______, 1997 among
ASD GROUP, INC., a Delaware corporation (the "Company"), and H. J. MEYERS &
CO., INC. and KEANE SECURITIES CO., INC. (collectively, hereinafter referred to
as the "Holders" or the "Representatives").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to the Representatives warrants
("Warrants") to purchase up to an aggregate 140,000 shares of Common Stock, $.01
par value, of the Company; and
WHEREAS, the Representatives have agreed pursuant to the underwriting
agreement (the "Underwriting Agreement") dated as of the date hereof between the
Company and the several Underwriters listed therein to act as the
Representatives in connection with the Company's proposed public offering of up
to 1,400,000 shares of Common Stock at a public offering price of $____ per
share of Common Stock (the "Public Offering"); and
WHEREAS, the Warrants to be issued pursuant to this Agreement will be
issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to the Representatives in consideration for, and as
part of the Representatives' compensation in connection with, the
Representatives acting as the Representatives pursuant to the Underwriting
Agreement;
NOW, THEREFORE, in consideration of the premises, the payment by the
Representatives to the Company of one dollar ($1.00), the agreements herein set
forth and other good and valuable consideration, hereby acknowledged, the
parties hereto agree as follows:
<PAGE>
1. GRANT. The Holder is hereby granted the right to purchase, at any
time from _______, 1998 [one year from the effective date of the Registration
Statement], until 5:30 P.M., New York time, on _______, 2002 [five years from
the effective date of the Registration Statement], up to an aggregate of 140,000
shares of Common Stock (the "Shares") at an initial exercise price (subject to
adjustment as provided in SECTION 8 hereof) of $____ per share of Common Stock
[145% of the initial public offering price per share] subject to the terms and
conditions of this Agreement. Except as set forth herein, the Shares issuable
upon exercise of the Warrants are in all respects identical to the shares of
Common Stock being purchased by the Underwriters for resale to the public
pursuant to the terms and provisions of the Underwriting Agreement.
2. WARRANT CERTIFICATES. The warrant certificates (the "Warrant
Certificates") delivered and to be delivered pursuant to this Agreement shall be
in the form set forth in Exhibit A, attached hereto and made a part hereof, with
such appropriate insertions, omissions, substitutions, and other variations as
required or permitted by this Agreement.
3. EXERCISE OF WARRANT.
/section/3.1 METHOD OF EXERCISE. The Warrants initially are exercisable
at an aggregate initial exercise price (subject to adjustment as provided in
SECTION 8 hereof) per share of Common Stock set forth in SECTION 6 hereof
payable by certified or official bank check in New York Clearing House funds,
subject to adjustment as provided in SECTION 8 hereof. Upon surrender of a
Warrant Certificate with the annexed Form of Election to Purchase duly executed,
together with payment of the Exercise Price (as hereinafter defined) for the
shares of Common Stock purchased at the Company's principal executive offices in
New York (presently located at 1 Industry Street, Poughkeepsie, New York, New
York 12603) the registered holder of a Warrant
2
<PAGE>
Certificate ("Holder" or "Holders") shall be entitled to receive a certificate
or certificates for the shares of Common Stock so purchased. The purchase rights
represented by each Warrant Certificate are exercisable at the option of the
Holders thereof, in whole or in part (but not as to fractional shares of the
Common Stock underlying the Warrants). Warrants may be exercised to purchase all
or part of the shares of Common Stock represented thereby. In the case of the
purchase of less than all the shares of Common Stock purchasable under any
Warrant Certificate, the Company shall cancel said Warrant Certificate upon the
surrender thereof and shall execute and deliver a new Warrant Certificate of
like tenor for the balance of the shares of Common Stock purchasable thereunder.
/section/3.2 EXERCISE BY SURRENDER OF WARRANT. In addition to the
method of payment set forth in SECTION 3.1 and in lieu of any cash payment
required thereunder, the Holder(s) of the Warrants shall have the right at any
time and from time to time to exercise the Warrants in full or in part by
surrendering the Warrant Certificate in the manner specified in SECTION 3.1 as
payment of the aggregate Exercise Price. The number of Warrants to be
surrendered in payment of the aggregate Exercise Price for the Warrants to be
exercised shall be determined by multiplying the number of Warrants to be
exercised by an amount equal to the Market Price (as hereafter defined) per
share less the Exercise Price per share of Common Stock, and then dividing the
product thereof by an amount equal to the Market Price per share. Solely for the
purposes of this paragraph, Market Price shall be calculated as the average of
the Market Prices for each of the five trading days preceding the date on which
the form of election attached hereto is deemed to have been sent to the Company
pursuant to SECTION 13 hereof (the "Notice Date").
/section/3.3 DEFINITION OF MARKET PRICE. As used herein, the phrase
"Market Price" at any date shall be deemed to be the last reported sale price,
or, in case no such reported sale takes place
3
<PAGE>
on such day, the average of the last reported sale prices for the last three (3)
trading days, in either case as officially reported by the principal securities
exchange on which the Common Stock is listed or admitted to trading or by the
Nasdaq National Market ("NNM") or the Nasdaq Small Cap Market ("Nasdaq"), or, if
the Common Stock is not listed or admitted to trading on any national securities
exchange or quoted by NNM or Nasdaq, the average closing bid price as furnished
by the NASD through NNM or Nasdaq or similar organization if NNM or Nasdaq is no
longer reporting such information, or if the Common Stock is not quoted on NNM
or Nasdaq, as determined in good faith by resolution of the Board of Directors
of the Company, based on the best information available to it.
4. ISSUANCE OF CERTIFICATES. Upon the exercise of the Warrants, the
issuance of certificates for shares of Common Stock and/or other securities,
properties or rights underlying such Warrants, shall be made forthwith (and in
any event within five (5) business days thereafter) without charge to the
Holders thereof including, without limitation, any tax which may be payable in
respect of the issuance thereof, and such certificates shall (subject to the
provisions of SECTIONS 5 and 7 hereof) be issued in the name of, or in such
names as may be directed by, the Holders thereof; provided, however, that the
Company shall not be required to pay any tax which may be payable in respect of
any transfer involved in the issuance and delivery of any such certificates in a
name other than that of the Holder, and the Company shall not be required to
issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid.
The Warrant Certificates and the certificates representing the Shares
underlying the Warrants (and/or other securities, property or rights issuable
upon the exercise of the Warrants)
4
<PAGE>
shall be executed on behalf of the Company by the manual or facsimile signature
of the then Chairman or Vice Chairman of the Board of Directors or President or
Vice President of the Company. Warrant Certificates shall be dated the date of
execution by the Company upon initial issuance, division, exchange, substitution
or transfer.
5. RESTRICTION ON TRANSFER OF WARRANTS. The Holders of a Warrant
Certificate, by its acceptance thereof, covenants and agrees that the Warrants
are being acquired as an investment and not with a view to the distribution
thereof; that the Warrants may not be sold, transferred, assigned, hypothecated
or otherwise disposed of, in whole or in part, for a period of one (1) year from
the date hereof, except to officers of the Representatives.
6. EXERCISE PRICE.
/section/6.1 INITIAL AND ADJUSTED EXERCISE PRICE. Except as otherwise
provided in SECTION 8 hereof, the initial exercise price of each Warrant shall
be $____ [145% of the initial public offering price] per share of Common Stock.
The adjusted exercise price shall be the price which shall result from time to
time from any and all adjustments of the initial exercise price in accordance
with the provisions of SECTION 8 hereof.
/section/6.2 EXERCISE PRICE. The term "Exercise Price" herein shall
mean the initial exercise price or the adjusted exercise price, depending upon
the context.
7. REGISTRATION RIGHTS.
/section/7.1 REGISTRATION UNDER THE SECURITIES ACT OF 1933. The
Warrants, the Shares, and any of the other securities issuable upon exercise of
the Warrants (collectively, the "Warrant Securities") have been registered under
the Securities Act of 1933, as amended (the "Act"), pursuant to the Company's
Registration Statement on Form SB-2 (Registration No. 333-7731) (the
"Registration Statement"). All of the representations and warranties of the
Company
5
<PAGE>
contained in the Underwriting Agreement relating to the Registration Statement,
the Preliminary Prospectus and Prospectus (as such terms are defined in the
Underwriting Agreement) and made as of the dates provided therein, are
incorporated by reference herein. The Company agrees and covenants promptly to
file post-effective amendments to such Registration Statement as may be
necessary in order to maintain its effectiveness and otherwise to take such
action as may be necessary to maintain the effectiveness of the Registration
Statement as long as any Warrants are outstanding. In the event that, for any
reason, whatsoever, the Company shall fail to maintain the effectiveness of the
Registration Statement, the certificates representing the Warrant Securities
shall bear the following legend:
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended ("Act"), and may not be
offered or sold except pursuant to (i) an effective registration
statement under the Act, (ii) to the extent applicable, Rule 144 under
the Act (or any similar rule under such Act relating to the disposition
of securities), or (iii) an opinion of counsel, if such opinion shall
be reasonably satisfactory to counsel to the issuer, that an exemption
from registration under such Act is available.
/section/7.2 PIGGYBACK REGISTRATION. If, at any time commencing upon
the date of this Agreement and expiring five (5) years thereafter, the Company
proposes to register any of its securities under the Act (other than pursuant to
Form S-4, S-8 or a comparable registration statement) it will give written
notice by registered mail, at least thirty (30) days prior to the filing of each
such registration statement, to the Representatives and to all other Holders of
the Warrants and/or the Warrant Securities of its intention to do so. If the
Representatives or other Holders of the Warrants and/or Warrant Securities
notify the Company within twenty (20) business days after receipt of any such
notice of its or their desire to include any such securities in such proposed
registration statement, the Company shall afford the Representatives
6
<PAGE>
and such Holders of the Warrants and/or Warrant Securities the opportunity to
have any such Warrant Securities registered under such registration statement.
Notwithstanding the provisions of this SECTION 7.2, the Company shall
have the right at any time after it shall have given written notice pursuant to
this SECTION 7.2 (irrespective of whether a written request for inclusion of any
such securities shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof.
/section/7.3 DEMAND REGISTRATION.
(a) At any time commencing one year from the date of this Agreement and
expiring four (4) years thereafter, the Holders of the Warrants and/or Warrant
Securities representing a "Majority" (as hereinafter defined) of such securities
(assuming the exercise of all of the Warrants) shall have the right (which right
is in addition to the registration rights under SECTION 7.2 hereof), exercisable
by written notice to the Company, to have the Company prepare and file with the
Securities and Exchange Commission (the "Commission"), on one occasion, a
registration statement and such other documents, including a prospectus, as may
be necessary in the opinion of both counsel for the Company and counsel for the
Representatives and Holders, in order to comply with the provisions of the Act,
so as to permit a public offering and sale of their respective Warrant
Securities for nine (9) consecutive months by such Holders and any other Holders
of the Warrants and/or Warrant Securities who notify the Company within ten (10)
days after receiving notice from the Company of such request.
(b) The Company covenants and agrees to give written notice of any
registration request under this SECTION 7.3 by any Holders or Holders to all
other registered Holders of the
7
<PAGE>
Warrants and the Warrant Securities within ten (10) days from the date of the
receipt of any such registration request.
(c) Notwithstanding anything to the contrary contained herein, if the
Company shall not have filed a registration statement for the Warrant Securities
within the time period specified in SECTION 7.4(a) hereof pursuant to the
written notice specified in SECTION 7.3(a) of a Majority of the Holders of the
Warrants and/or Warrant Securities, the Company shall have the option, upon the
written notice of election of a Majority of the Holders of the Warrants and/or
Warrant Securities, to repurchase (i) any and all Warrant Securities at the
higher of the Market Price per share of Common Stock on (x) the date of the
notice sent pursuant to SECTION 7.3(a) or (y) the expiration of the period
specified in SECTION 7.4(a) and (ii) any and all Warrants at such Market Price
less the Exercise Price of such Warrant. Such repurchase shall be in immediately
available funds and shall close within two (2) days after the later of (i) the
expiration of the period specified in SECTION 7.4(a) or (ii) the delivery of the
written notice of election specified in this SECTION 7.3(c).
/section/7.4 COVENANTS OF THE COMPANY WITH RESPECT TO REGISTRATION. In
connection with any registration under SECTION 7.2 or 7.3 hereof, the Company
covenants and agrees as follows:
(a) The Company shall use its best efforts to file a registration
statement within thirty (30) days of receipt of any demand therefor, shall use
its best efforts to have any registration statements declared effective at the
earliest possible time, and shall furnish each Holders desiring to sell Warrant
Securities such number of prospectuses as shall reasonably be requested.
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<PAGE>
(b) The Company shall pay all costs (excluding fees and expenses of
Holder(s)' counsel and any underwriting or selling commissions), fees and
expenses in connection with all registration statements filed pursuant to
SECTIONS 7.2 and 7.3(a) hereof including, without limitation, the Company's
legal and accounting fees, printing expenses, blue sky fees and expenses.
(c) The Company will take all necessary action which may be required in
qualifying or registering the Warrant Securities included in a registration
statement for offering and sale under the securities or blue sky laws of such
states as reasonably are requested by the Holder(s), provided that the Company
shall not be obligated to execute or file any general consent to service of
process or to qualify as a foreign corporation to do business under the laws of
any such jurisdiction.
(d) The Company shall indemnify the Holder(s) of the Warrant Securities
to be sold pursuant to any registration statement and each person, if any, who
controls such Holders within the meaning of SECTION 15 of the Act or SECTION
20(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"),
against all loss, claim, damage, expense or liability (including all expenses
reasonably incurred in investigating, preparing or defending against any claim
whatsoever) to which any of them may become subject under the Act, the Exchange
Act or otherwise, arising from such registration statement but only to the same
extent and with the same effect as the provisions pursuant to which the Company
has agreed to indemnify each of the Underwriters contained in SECTION 7 of the
Underwriting Agreement.
(e) The Holder(s) of the Warrant Securities to be sold pursuant to a
registration statement, and their successors and assigns, shall severally, and
not jointly, indemnify the Company, its officers and directors and each person,
if any, who controls the Company within
9
<PAGE>
the meaning of SECTION 15 of the Act or SECTION 20(a) of the Exchange Act,
against all loss, claim, damage or expense or liability (including all expenses
reasonably incurred in investigating, preparing or defending against any claim
whatsoever) to which they may become subject under the Act, the Exchange Act or
otherwise, arising from information furnished by or on behalf of such Holders,
or their successors or assigns, for specific inclusion in such registration
statement to the same extent and with the same effect as the provisions
contained in SECTION 7 of the Underwriting Agreement pursuant to which the
Underwriters have agreed to indemnify the Company.
(f) Nothing contained in this Agreement shall be construed as requiring
the Holder(s) to exercise their Warrants prior to the initial filing of any
registration statement or the effectiveness thereof.
(g) The Company shall not permit the inclusion of any securities other
than the Warrant Securities to be included in any registration statement filed
pursuant to SECTION 7.3 hereof, or permit any other registration statement to be
or remain effective during the effectiveness of a registration statement filed
pursuant to SECTION 7.3 hereof, without the prior written consent of the Holders
of the Warrants and Warrant Securities representing a Majority of such
securities.
(h) The Company shall furnish to each of the Holders participating in
the offering and to each underwriter, if any, a signed counterpart, addressed to
such Holders or underwriter, of (i) an opinion of counsel to the Company, dated
the effective date of such registration statement (and, if such registration
includes an underwritten public offering, an opinion dated the date of the
closing under the underwriting agreement), and (ii) a "cold comfort" letter
dated the effective date of such registration statement (and, if such
registration includes an
10
<PAGE>
underwritten public offering, a letter dated the date of the closing under the
underwriting agreement) signed by the independent public accountants who have
issued a report on the Company's financial statements included in such
registration statement, in each case covering substantially the same matters
with respect to such registration statement (and the prospectus included
therein) and, in the case of such accountants' letter, with respect to events
subsequent to the date of such financial statements, as are customarily covered
in opinions of issuer's counsel and in accountants' letters delivered to
underwriters in underwritten public offerings of securities.
(i) The Company shall as soon as practicable after the effective date
of the registration statement, and in any event within 15 months thereafter,
make "generally available to its security holders" (within the meaning of Rule
158 under the Act) an earnings statement (which need not be audited) complying
with SECTION 11(a) of the Act and covering a period of at least 12 consecutive
months beginning after the effective date of the registration statement.
(j) The Company shall deliver promptly to each Holders participating in
the offering requesting the correspondence and memoranda described below and to
the managing underwriters, copies of all correspondence between the Commission
and the Company, its counsel or auditors and all memoranda relating to
discussions with the Commission or its staff with respect to the registration
statement and permit each Holder and underwriter to do such investigation, upon
reasonable advance notice, with respect to information contained in or omitted
from the registration statement as it deems reasonably necessary to comply with
applicable securities laws or rules of the National Association of Securities
Dealers, Inc. ("NASD"). Such investigation shall include access to books,
records and properties and opportunities to discuss the business of the Company
with its officers and independent auditors,
11
<PAGE>
all to such reasonable extent and at such reasonable times and as often as any
such Holders or underwriter shall reasonably request.
(k) The Company shall enter into an underwriting agreement with the
managing underwriters selected for such underwriting by Holders holding a
Majority of the Warrant Securities requested to be included in such
underwriting, which may be the Representatives. Such agreement shall be
satisfactory in form and substance to the Company, each Holders and such
managing underwriter(s), and shall contain such representations, warranties and
covenants by the Company and such other terms as are customarily contained in
agreements of that type used by the managing underwriter(s). The Holders shall
be parties to any underwriting agreement relating to an underwritten sale of
their Warrant Securities and may, at their option, require that any or all the
representations, warranties and covenants of the Company to or for the benefit
of such underwriter(s) shall also be made to and for the benefit of such
Holders. Such Holders shall not be required to make any representations or
warranties to or agreements with the Company or the underwriter(s) except as
they may relate to such Holders and their intended methods of distribution.
(l) In addition to the Warrant Securities, upon the written request
therefor by any Holder(s), the Company shall include in the registration
statement any other securities of the Company held by such Holder(s) as of the
date of filing of such registration statement, including without limitation
restricted shares of Common Stock, options, warrants or any other securities
convertible into shares of Common Stock.
(m) For purposes of this Agreement, the term "Majority" in reference to
the Holders of Warrants or Warrant Securities, shall mean in excess of fifty
percent (50%) of the then outstanding Warrants or Warrant Securities that (i)
are not held by the Company, an affiliate,
12
<PAGE>
officer, creditor, employee or agent thereof or any of their respective
affiliates, members of their family, persons acting as nominees or in
conjunction therewith and (ii) have not been resold to the public pursuant to a
registration statement filed with the Commission under the Act.
8. ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF SECURITIES.
/section/8.1 SUBDIVISION AND COMBINATION. In case the Company shall at
any time subdivide or combine the outstanding shares of Common Stock, the
Exercise Price shall forthwith be proportionately decreased in the case of
subdivision or increased in the case of combination.
/section/8.2 STOCK DIVIDENDS AND DISTRIBUTIONS. In case the Company
shall pay a dividend in, or make a distribution of, shares of Common Stock or of
the Company's capital stock convertible into Common Stock, the Exercise Price
shall forthwith be proportionately decreased. An adjustment made pursuant to
this SECTION 8.2 shall be made as of the record date for the subject stock
dividend or distribution.
/section/8.3 ADJUSTMENT IN NUMBER OF SECURITIES. Upon each adjustment
of the Exercise Price pursuant to the provisions of this SECTION 8, the number
of Warrant Securities issuable upon the exercise at the adjusted exercise price
of each Warrant shall be adjusted to the nearest full amount by multiplying a
number equal to the Exercise Price in effect immediately prior to such
adjustment by the number of Warrant Securities issuable upon exercise of the
Warrants immediately prior to such adjustment and dividing the product so
obtained by the adjusted Exercise Price.
/section/8.4 DEFINITION OF COMMON STOCK. For the purpose of this
Agreement, the term "Common Stock" shall mean (i) the class of stock designated
as Common Stock in the Certificate of Incorporation of the Company as may be
amended as of the date hereof, or (ii)
13
<PAGE>
any other class of stock resulting from successive changes or reclassifications
of such Common Stock consisting solely of changes in par value, or from par
value to no par value, or from no par value to par value. In the event that the
Company shall after the date hereof issue securities with greater or superior
voting rights than the shares of Common Stock outstanding as of the date hereof,
the Holder, at its option, may receive upon exercise of any Warrant either
shares of Common Stock or a like number of such securities with greater or
superior voting rights.
/section/8.5 MERGER OR CONSOLIDATION. In case of any consolidation of
the Company with, or merger of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger which does not result
in any reclassification or change of the outstanding Common Stock), the
corporation formed by such consolidation or merger shall execute and deliver to
the Holders a supplemental warrant agreement providing that the holder of each
Warrant then outstanding or to be outstanding shall have the right thereafter
(until the expiration of such Warrant) to receive, upon exercise of such
Warrant, the kind and amount of shares of stock and other securities and
property receivable upon such consolidation or merger, by a holder of the number
of shares of Common Stock of the Company for which such Warrant might have been
exercised immediately prior to such consolidation, merger, sale or transfer.
Such supplemental warrant agreement shall provide for adjustments which shall be
identical to the adjustments provided in SECTION 8. The above provision of this
subsection shall similarly apply to successive consolidations or mergers.
/section/8.6 NO ADJUSTMENT OF EXERCISE PRICE IN CERTAIN CASES. No
adjustment of the Exercise Price shall be made:
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<PAGE>
(a) Upon the issuance or sale of the Warrants or the Warrant
Securities issuable upon the exercise of the Warrants;
(b) If the amount of said adjustment shall be less than two
cents (2(cent)) per Warrant Security, provided, however, that in such
case any adjustment that would otherwise be required then to be made
shall be carried forward and shall be made at the time of and together
with the next subsequent adjustment which, together with any adjustment
so carried forward, shall amount to at least two cents (2(cent)) per
Warrant Security.
9. EXCHANGE AND REPLACEMENT OF WARRANT CERTIFICATES. Each Warrant
Certificate is exchangeable without expense, upon the surrender thereof by the
registered Holders at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Securities in such denominations as
shall be designated by the Holders thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of any Warrant Certificate, and,
in case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
10. ELIMINATION OF FRACTIONAL INTERESTS. The Company shall not be
required to issue certificates representing fractions of shares of Common Stock
upon the exercise of the Warrants, nor shall it be required to issue scrip or
pay cash in lieu of fractional interests, it being the intent of the parties
that all fractional interests shall be eliminated by rounding any
15
<PAGE>
fraction up to the nearest whole number of shares of Common Stock or other
securities, properties or rights.
11. RESERVATION AND LISTING OF SECURITIES. The Company shall at all
times reserve and keep available out of its authorized shares of Common Stock,
solely for the purpose of issuance upon the exercise of the Warrants, such
number of shares of Common Stock or other securities, properties or rights as
shall be issuable upon the exercise thereof. The Company covenants and agrees
that, upon exercise of the Warrants and payment of the Exercise Price therefor,
all shares of Common Stock and other securities issuable upon such exercise
shall be duly and validly issued, fully paid, non-assessable and not subject to
the preemptive rights of any stockholder. As long as the Warrants shall be
outstanding, the Company shall use its best efforts to cause all shares of
Common Stock issuable upon the exercise of the Warrants to be listed (subject to
official notice of issuance) on all securities exchanges on which the Common
Stock issued to the public in connection herewith may then be listed and/or
quoted on NNM or Nasdaq.
12. NOTICES TO WARRANT HOLDERS. Nothing contained in this Agreement
shall be construed as conferring upon the Holders the right to vote or to
consent or to receive notice as a stockholder in respect of any meetings of
stockholders for the election of directors or any other matter, or as having any
rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Warrants and their exercise, any of the following
events shall occur:
(a) the Company shall take a record of the holders of its
shares of Common Stock for the purpose of entitling them to receive a
dividend or distribution payable otherwise than in cash, or a cash
dividend or distribution payable otherwise than out
16
<PAGE>
of current or retained earnings, as indicated by the accounting
treatment of such dividend or distribution on the books of the Company;
or
(b) the Company shall offer to all the holders of its Common
Stock any additional shares of capital stock of the Company or
securities convertible into or exchangeable for shares of capital stock
of the Company, or any option, right or warrant to subscribe therefor;
or
(c) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of
all or substantially all of its property, assets and business as an
entirety shall be proposed;
then, in any one or more of said events, the Company shall give written notice
of such event at least fifteen (15) days prior to the date fixed as a record
date or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall specify
such record date or the date of closing the transfer books, as the case may be.
Failure to give such notice or any defect therein shall not affect the validity
of any action taken in connection with the declaration or payment of any such
dividend, or the issuance of any convertible or exchangeable securities, or
subscription rights, options or warrants, or any proposed dissolution,
liquidation, winding up or sale.
13. NOTICES.
All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been duly made and sent when
delivered, or mailed by registered or certified mail, return receipt requested:
17
<PAGE>
(a) If to the registered Holders of the Warrants, to the
address of such Holders as shown on the books of the Company; or
(b) If to the Company, to the address set forth in SECTION 3
hereof or to such other address as the Company may designate by notice
to the Holders.
14. SUPPLEMENTS AND AMENDMENTS. The Company and the Representatives may
from time to time supplement or amend this Agreement without the approval of any
Holders of Warrant Certificates (other than the Representatives) in order to
cure any ambiguity, to correct or supplement any provision contained herein
which may be defective or inconsistent with any provisions herein, or to make
any other provisions in regard to matters or questions arising hereunder which
the Company and the Representatives may deem necessary or desirable and which
the Company and the Representatives deem shall not adversely affect the
interests of the Holders of Warrant Certificates.
15. SUCCESSORS. All the covenants and provisions of this Agreement
shall be binding upon and inure to the benefit of the Company, the Holders and
their respective successors and assigns hereunder.
16. TERMINATION. This Agreement shall terminate at the close of
business on _______, 2002. Notwithstanding the foregoing, the indemnification
provisions of SECTION 7 shall survive such termination until the close of
business on _______, 2008.
17. GOVERNING LAW; SUBMISSION TO JURISDICTION. This Agreement and each
Warrant Certificate issued hereunder shall be deemed to be a contract made under
the laws of the State of New York and for all purposes shall be construed in
accordance with the laws of said State without giving effect to the rules of
said State governing the conflicts of laws.
18
<PAGE>
The Company, the Representatives and the Holders hereby agree that any
action, proceeding or claim against it arising out of, or relating in any way
to, this Agreement shall be brought and enforced in the courts of the State of
New York or of the United States of America for the Southern District of New
York, and irrevocably submits to such jurisdiction, which jurisdiction shall be
exclusive. The Company, the Representatives and the Holders hereby irrevocably
waive any objection to such exclusive jurisdiction or inconvenient forum. Any
such process or summons to be served upon any of the Company, the
Representatives and the Holders (at the option of the party bringing such
action, proceeding or claim) may be served by transmitting a copy thereof, by
registered or certified mail, return receipt requested, postage prepaid,
addressed to it at the address set forth in SECTION 3 hereof. Such mailing shall
be deemed personal service and shall be legal and binding upon the party so
served in any action, proceeding or claim. The Company, the Representatives and
the Holders agree that the prevailing party(ies) in any such action or
proceeding shall be entitled to recover from the other party(ies) all of
its/their reasonable legal costs and expenses relating to such action or
proceeding and/or incurred in connection with the preparation therefor.
18. ENTIRE AGREEMENT; MODIFICATION. This Agreement (including the
Underwriting Agreement to the extent portions thereof are referred to herein)
contains the entire understanding between the parties hereto with respect to the
subject matter hereof and may not be modified or amended except by a writing
duly signed by the party against whom enforcement of the modification or
amendment is sought.
19. SEVERABILITY. If any provision of this Agreement shall be held to
be invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provision of this Agreement.
19
<PAGE>
20. CAPTIONS. The caption headings of the Sections of this Agreement
are for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
21. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
Representatives and any other registered Holder(s) of the Warrant Certificates
or Warrant Securities any legal or equitable right, remedy or claim under this
Agreement; and this Agreement shall be for the sole benefit of the Company and
the Representatives and any other registered Holders of Warrant Certificates or
Warrant Securities.
22. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
20
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
ASD GROUP, INC.
By:
-------------------------------
Name: Gary D. Horne
Title: Chairman of the Board and
Chief Executive Officer
Attest:
H. J. MEYERS & CO., INC.
- -----------------------
Secretary
By:
-------------------------------
Name:
Title:
KEANE SECURITIES CO., INC.
By:
-------------------------------
Name:
Title:
21
<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE
EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT
RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF
SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:30 P.M., NEW YORK TIME, __________, 2002
No. W- Warrants to Purchase
____ Shares of Common Stock
WARRANT CERTIFICATE
This Warrant Certificate certifies that ________, or registered
assigns, is the registered holder of _____ Warrants to purchase initially, at
any time from __________, 1998 [one year from the effective date of the
Registration Statement] until 5:30 p.m. New York time on ___________, 2002 [five
years from the effective date of the Registration Statement] ("Expiration
Date"), up to __________ fully-paid and non-assessable shares of common stock,
$.01 par value ("Common Stock"), of ASD GROUP, INC., a Delaware corporation (the
"Company"), at the initial exercise price, subject to adjustment in certain
events (the "Exercise Price"), of $______ [145% of the initial public offering
price] per share of Common Stock upon surrender of this Warrant Certificate and
payment of the Exercise Price at an office or agency of the Company, but subject
to the conditions set forth herein and in the Representatives' Warrant Agreement
dated as of _______, 1997 among the Company, H. J. MEYERS & CO., INC. and KEANE
SECURITIES CO., INC. (the "Warrant Agreement"). Payment of the Exercise Price
shall be made by certified or official bank check in New York Clearing House
funds payable to the order of the Company or by surrender of this Warrant
Certificate.
A-1
<PAGE>
No Warrant may be exercised after 5:30 p.m., New York time, on
the Expiration Date, at which time all Warrants evidenced hereby, unless
exercised prior thereto, hereby shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a
duly authorized issue of Warrants issued pursuant to the Warrant Agreement,
which Warrant Agreement is hereby incorporated by reference in and made a part
of this instrument and is hereby referred to for a description of the rights,
limitation of rights, obligations, duties and immunities thereunder of the
Company and the holders (the words "holders" or "holder" meaning the registered
holders or registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of
certain events the Exercise Price and the type and/or number of the Company's
securities issuable thereupon may, subject to certain conditions, be adjusted.
In such event, the Company will, at the request of the holder, issue a new
Warrant Certificate evidencing the adjustment in the Exercise Price and the
number and/or type of securities issuable upon the exercise of the Warrants;
provided, however, that the failure of the Company to issue such new Warrant
Certificates shall not in any way change, alter, or otherwise impair the rights
of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Warrant Agreement, without any charge except for any tax or
other governmental charge imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by
this Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof
as the absolute owner(s) of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof, and of any distribution to the holder(s) hereof, and for
all other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in
the Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
A-2
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated as of ___________, 1997
ASD GROUP, INC.
By:
------------------------------------
Name: Gary D. Horne
Title: Chairman of the Board and
Chief Executive Officer
A-3
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.1]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase:
[ ] _______________ shares of Common Stock;
and herewith tenders in payment for such securities a certified or official bank
check payable in New York Clearing House Funds to the order of ASD Group, Inc.
in the amount of $_______________________, all in accordance with the terms of
Section 3.1 of the Representatives' Warrant Agreement dated as of
______________________, 1997 among ASD Group, Inc., H. J. Meyers & Co. and Keane
Securities Co., Inc. The undersigned requests that a certificate for such
securities be registered in the name of _______ whose address is __________ and
that such Certificate be delivered to___________________________________ whose
address is ____________________________________.
Dated:
Signature__________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant Certificate.)
____________________________________________
(Insert Social Security or Other Identifying
Number of Holder)
A-4
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.2]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase:
[ ] ______________________ shares of Common Stock;
and herewith tenders in payment for such securities ________ Warrants all in
accordance with the terms of Section 3.2 of the Representatives' Warrant
Agreement dated as of __________________, 1997 among ASD Group, Inc., H. J.
Meyers & Co., Inc. and Keane Securities Co., Inc. The undersigned requests that
a certificate for such securities be registered in the name of ___________ whose
address is _____________________________and that such Certificate be delivered
to_______________________________whose address
is___________________________________.
Dated:
Signature__________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant Certificate.)
____________________________________________
(Insert Social Security or Other Identifying
Number of Holder)
A-5
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED______________________________________hereby sells,
assigns and transfers unto
________________________________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _____________________
Attorney, to transfer the within Warrant Certificate on the books of the
within-named Company, with full power of substitution.
Dated: _________________
Signature__________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant Certificate.)
____________________________________________
(Insert Social Security or Other Identifying
Number of Assignee)
A-6
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
this 1st day of December, 1996 by and between ASD GROUP, INC., a Delaware
corporation with its principal office at One Industry Street, Poughkeepsie, New
York 12603 (the "Company"), and Gary D. Horne, whose residence address is 220
South Riverside Road, Highland, New York 12528 (the "Executive").
RECITALS
A. The Executive is currently Chairman of the Board and Chief Executive
Officer of the Company.
B. The Executive possesses intimate knowledge of the business and
affairs of the Company, its policies, methods and personnel.
C. The Board of Directors (the "Board") of the Company recognizes that
the Executive's contribution, as Chairman of the Board and Chief Executive
Officer of the Company, to the growth and success of the Company will be
substantial and desires to assure the Company of the Executive's present and
continued employment in an executive capacity and to compensate him therefor.
D. The Board has determined that this Agreement will reinforce and
encourage the Executive's continued attention and dedication to the Company.
E. The Executive is willing to make his services available to the
Company on the terms and conditions hereinafter set forth.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and mutual covenants
set forth herein, the parties hereby agree as follows:
1. EMPLOYMENT.
1.1 EMPLOYMENT AND TERM. The Company shall continue to employ the
Executive and the Executive shall continue to serve the Company, on the terms
and conditions set forth herein, for the period (the "Term") effective as of
December 1, 1996 (the "Commencement Date") and expiring on the third anniversary
of the Commencement Date, unless sooner terminated as hereinafter set forth;
provided, however, that commencing on the third anniversary of the Commencement
Date
<PAGE>
and each anniversary of the Commencement Date and on each anniversary of
the Commencement Date thereafter, the Term of this Agreement shall automatically
be extended for one year unless 90 days prior to such anniversary date, the
Company shall have delivered to the Executive or the Executive shall have
delivered to the Company, written notice that the Term of the Executive's
employment hereunder will not be extended.
1.2 DUTIES OF THE EXECUTIVE. The Executive shall serve as Chairman
of the Board and Chief Executive Officer of the Company and shall perform the
duties of an executive commensurate with such position, shall diligently perform
all services as may be reasonably assigned to him by the Board and shall
exercise such power and authority as may from time to time be delegated to him
by the Board. The Executive shall devote such time as he deems necessary to the
business and affairs of the Company.
1.3 PLACE OF PERFORMANCE. In connection with his employment by the
Company, the Executive shall be based at the Company's principal executive
offices in Poughkeepsie, New York, except for required travel on the Company's
business to an extent substantially consistent with his present travel
obligations.
2. COMPENSATION.
2.1 BASE SALARY (THE "BASE SALARY"). During the Term, the Executive
shall receive a base salary at the annual rate of $160,000. The Base Salary
shall be payable in substantially equal installments consistent with the
Company's normal payroll schedule, subject to applicable withholding and other
taxes. Commencing on the first anniversary of the Commencement Date, and each
anniversary of the Commencement Date thereafter during the Term, the Base Salary
shall be increased, but shall not be decreased, by that percentage by which the
Consumer Price Index (All Items Less Shelter), Urban Wage Earners and Clerical
Workers, for the New York, New York area published by the United States
Government (the "Index") for the immediately preceding calendar year exceeds
such index for the next preceding calendar year. If publication of the Index is
discontinued, the parties hereto shall accept comparable statistics on the cost
of living for the Miami, Florida area as computed and published by an agency of
the United States government or, if no such agency computes and publishes such
statistics, by any regularly published national periodical that does compute and
publish such statistics.
2.2 ADDITIONAL CASH COMPENSATION. The Executive shall also be
entitled to receive such increments and base salary and performance or merit
bonuses (collectively, "Bonus") as shall be determined from time to time during
the term by the Board.
3. EXPENSE REIMBURSEMENT AND OTHER BENEFITS.
3.1 EXPENSE REIMBURSEMENT. During the Term, the Company, upon the
submission of supporting documentation by the Executive, and in accordance with
Company policies for its executives, shall reimburse the Executive for all
expenses actually paid or
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incurred by the Executive in the course of and pursuant to the business
of the Company, including expenses for travel and entertainment.
3.2 OTHER BENEFITS. The Company shall obtain or shall continue in
force comprehensive major medical and hospitalization insurance coverages,
including dental coverages, either group or individual, for the Executive and
his dependents, and shall obtain or shall continue in force disability and life
insurance for the Executive (collectively, the "Policies"), which Policies the
Company shall keep in effect at its sole expense throughout the Term. The
Policies to be provided by the Company shall be on terms as determined by the
Board; provided, however, that such Policies shall in no event provide benefits
to Executive which are less than the benefits to which he is currently entitled.
Within 30 days following any termination of this Agreement, at the Executive's
option, the Company shall assign to the executive all insurance policies of the
life of the Executive then owned by the Company in consideration of the payment
by the Executive of the cash surrender value, ff any, and the Executive's
agreement to assume the Company liability to pay any pre accruing thereon after
the date of such termination.
3.3 AUTOMOBILE ALLOWANCE. Throughout the Term of this Agreement, the
Company will pay Executive an automobile allowance in the amount of $500 per
month. Such automobile allowance shall be for no more than one automobile and
shall include all expenses related thereto, including, without limitation, lease
expenses, maintenance and insurance.
3.4 WORKING FACILITIES. The Company shall furnish the Executive with
an office, a secretary and such other facilities and services suitable to his
position and adequate for the performance of his duties hereunder.
3.5 VACATION. The Executive shall be entitled to reasonable
vacations during each year of the Term, the time and duration thereof to be
determined by mutual agreement between the Executive and the Company.
4. TERMINATION.
4.1 TERMINATION FOR CAUSE. Notwithstanding anything contained in
this Agreement to the contrary, this Agreement may be terminated by the Company
for Cause. As used in this Agreement "Cause" shall only mean (a) subject to the
following sentences, any action or omission of the Executive which constitutes a
willful and material breach of this Agreement (including his resignation without
consent of the Board, including a majority of independent directors), which is
not cured or as to which diligent attempts to cure have not commenced within 30
business days after receipt by the Executive of notice of same, (b) fraud,
embezzlement or misappropriation as against the Company, or (c) the conviction
(from which no appeal can be taken) of the Executive for any criminal act which
is a felony. Upon any determination by the Company's Board of Directors that
Cause exists under clause (a) of the preceding sentence, the Company shall cause
a special meeting of the Board to be called and held at a time mutually
convenient to the Board and the Executive, but in no event later than 10
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business days after the Executive's receipt of the notice contemplated by clause
(a). The Executive shall have the right to appear before such special meeting of
the Board with legal counsel of his choosing to refute any determination of
Cause specified in such notice, and any termination of the Executive's
employment by reason of such Cause determination shall not be effective until
the Executive is afforded such opportunity to appear. Any termination for Cause
pursuant to clause (b) or (c) of this Paragraph 4.1 shall be made in writing to
the Executive, which notice shall set forth in detail all acts or omissions upon
which the Company is relying for such termination. Upon any termination pursuant
to this Paragraph 4.1, the Company shall pay to the Executive any unpaid Base
Salary accrued through the effective date of termination specified in such
notice. In addition, the Company shall continue to pay any benefits, if any,
owed to the Executive under any plan provided for the Executive under Paragraph
3 hereof in accordance with the terms of such plan as in effect on the date of
termination of employment under this Paragraph 4.1 through age 65. Except as
provided above, the Company shall have no further liability hereunder (other
than for reimbursement for reasonable business expenses incurred prior to the
date of termination, subject, however to the provisions of Paragraph 3.1
hereof).
4.2 DISABILITY. Notwithstanding anything to the contrary contained
in this Agreement if, during the term hereof the Executive suffers a disability
(as defined below) the Company shall, subject to the provisions of Paragraph 4.3
hereof continue to pay the Executive the compensation provided in Paragraphs 2.1
and 2.2 hereof during the period of his disability; provided, however, that, in
the event the Executive is disabled for a period of more than 180 days in any 12
month period (the "Disability Period"), the Company may, at its election, by a
vote of 75% of the members of the Board of Directors within 90 days from the end
of the Disability Period, terminate this agreement. In the event of such
termination, payment of the Executive's Base Salary and fringe benefits (to the
extent permissible by applicable law) shall be continued for a period of 12
months after such termination. As used in this Agreement, the term "disability"
shall mean the complete inability of the Executive to perform his duties under
this Agreement as determined by an independent physician selected with the
approval of the Company and the Executive. Except as provided above, the Company
shall have no further liability hereunder (other than for reimbursement for
reasonable business expenses incurred prior to the date of termination subject,
however, to the provisions of Paragraph 3.1 hereof).
4.3 DEATH. In the event of the death of the Executive during the
Term of this Agreement, the Company shall pay to the Executive's legal
representative, any unpaid Base Salary accrued through the date of his death, as
well as a lump sum payment equal to (A) 12 months' Base Salary at the rate
prevailing on the date of the death of the Executive and (B) the share of Bonus
to which he would have been entitled pro rated based on the percentage of the
current fiscal year that had been completed on the date of his death. Except as
provided above, the Company shall have no further liability hereunder (other
than for reimbursement for reasonable business expenses incurred prior to the
date of the Executive's death, subject, however to the provisions of Paragraph
3.1 hereof).
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4.4 WITHOUT CAUSE. In the event the Company shall terminate this
Agreement other than for Cause, Disability or Death as provided hereof, payment
of the of the Executive's Base Salary and fringe benefits (to the extent
permissible by applicable law) shall be continued for a period of 12 months
after such termination.
5. MITIGATION. In no event shall the Executive be obligated to seek
other employment or take any other action by way of mitigation of the amounts
payable to the Executive under any of the provisions of this Agreement.
6. CHANGE OF CONTROL.
(a) For the purposes of this Agreement, a "Change of Control" shall
be deemed to have taken place if: (i) any person, including a "group" as defined
in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, becomes
the owner or beneficial owner of Company securities, after the date of this
Agreement, having 15% or more of the combined voting power of the then
outstanding securities of the Company that may be cast for the election of
directors of the Company (other than as a result of an issuance of securities
initiated by the Company, or open market purchases approved by the Board, as
long as the majority of the Board approving the purchases is the majority at the
time the purchases are made), or (ii) the persons who were directors of the
Company before such transactions shall cease to constitute a majority of the
Board of the Company, or any successor to the Company, as the direct or indirect
result of or in connection with, any cash tender or exchange offer, merger or
other business combination, sale of assets or contested election, or any
combination of the foregoing transactions.
(b) The Company and the Executive hereby agree that, if the
Executive is affiliated with the Company on the date on which a change of
Control occurs (the "Change of Control Date") the Company (or, if the Executive
is affiliated with a subsidiary, the subsidiary) will continue to retain the
Executive and the Executive will remain affiliated with the Company (or
subsidiary), for the period commencing on the Change of Control Date and ending
on the second anniversary of such date, to exercise such authority and perform
such executive duties as are commensurate with the authority being exercised and
duties being performed by the Executive immediately prior to the Change of
Control Date. If after a Change of Control the Executive is requested, and, in
his sole and absolute discretion, consents to change his principal business
location, the Company will reimburse the Executive for his reasonable relocation
expenses, including without limitation, moving expenses, temporary living and
travel expenses for a reasonable time while arranging to move his residence to
the changed location, closing costs, if any, associated with the sale of his
existing residence and the purchase of a replacement residence at the changed
location, plus an additional amount representing a gross-up of any state or
federal taxes payable by the Executive as a result of any such reimbursements.
If the Executive shall not consent to change his business location, the
Executive may continue to provide the services required of him hereunder in
Poughkeepsie, New York and the Company shall continue to maintain an office for
the Executive at that location commensurate with the Company's office prior to
the Change of Control Date.
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(c) During the remaining term hereof after the change of Control
Date, the Company (or subsidiary) will (i) continue to pay the Executive a
salary at not less than the level applicable to the Executive on the Change of
Control Date, (ii) pay the Executive bonuses in amounts not less in amount than
those paid during the twelve month period preceding the Change of Control Date,
and (iii) continue employee benefit programs as to the Executive at levels in
effect n the Change of Control Date (but subject to such reductions as may be
required to maintain such plans in compliance with applicable federal law
regulating employee benefit programs).
(d) If during the remaining term hereof after the Change of Control
Date (i) the Executive's employment is terminated by the Company (or
subsidiary), or (ii) there shall have occurred a material reduction in the
Executive's compensation or employment related benefits, or a material change in
the Executive's status, working conditions, management responsibilities or
titles, and the Executive voluntarily terminates his relationship with the
Company within 60 days of any such occurrence, or the last in a series of
occurrences, then Executive shall be entitled to receive, subject to the
provisions of subparagraphs (e) and (f) below, a lump sum payment equal to 100%
of Executive's "base period income" as determined under (e) below. Such amount
will be paid to the Executive within 15 business days after his termination of
affiliation with the Company.
(e) The Executive's "base period income" shall be his base salary
and annual incentive bonuses paid or payable to him during or with respect to
the 12-month period preceding the date of his termination or affiliation. If the
Executive has not been affiliated for 12 months at the time of his termination
of affiliation, his "base period income" shall be his annualized base salary at
the rate then in effect and any annual incentive bonus paid to the Executive
prior to the date of his termination of affiliation or payable to the Executive
with respect to his period of affiliation.
(f) The amounts payable to the Executive under any other
compensation arrangement maintained by the Company (or a subsidiary) which
became payable after payment of the lump sum provided for in (d), upon or as a
result of the exercise by the Executive of rights which are contingent on a
Change of Control (and would be considered a "parachute payment" under Internal
Revenue Code Section 280G and regulations thereunder), shall be increased by an
additional amount representing a gross-up of any federal income tax liability
arising from an excess parachute payment or otherwise. If the Executive has not
been affiliated with the Company (or a subsidiary of the Company) during one or
more calendar years immediately preceding the Change of Control Date, this
paragraph (f) shall not apply.
(g) In the event of a proposed Change in Control, the Company will
allow the Executive to participate in all meetings and negotiations related
thereto.
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7. RESTRICTIVE COVENANTS.
7.1 NON-COMPETITION. During the Term and for a period of one year
following the termination (other than without Cause, as defined in Paragraph
4.1) of the Executive's employment by the Company, the Executive shall not,
directly or indirectly engage in or have any interest in, directly or
indirectly, any sole proprietorship, partnership, corporation, business or any
other person or entity (whether as an employee, officer, director, partner,
agent, security holder, creditor, consultant or otherwise) that, directly or
indirectly, engages primarily in the contract manufacturing industry in any and
all states in which the Company and/or any subsidiary conducts its business
during the Term or at the time the Executive's employment with the Company is
terminated (the "Territory"); provided, however, that the Executive may continue
to hold Company securities and/or acquire, solely as an investment, shares of
capital stock or other equity securities of any company which are traded on any
national securities exchange or are regularly quoted in the over-the-counter
market, so long as the Executive does not control acquire a controlling interest
in or become a member of a group which exercises direct or indirect control of,
more than five percent of any class of capital stock of such corporation.
7.2. NONDISCLOSURE. During the Term and following termination of the
Executive's employment with the Company, the Executive shall not divulge,
communicate, use to the detriment of the Company or for the benefit of any other
person or persons, or misuse in any way, any Confidential Information (as
hereinafter defined) pertaining to the business of the Company. Any Confidential
Information or data now or hereafter acquired by the Executive with respect to
the business of the Company (which shall include, but not be limited to,
information concerning the Company's financial condition, prospects, technology,
customers, suppliers, methods of doing business and marketing and promotion of
the Company's services) shall be deemed a valuable, special and unique asset of
the Company that is received by the Executive in confidence and as a fiduciary,
and the Executive shall remain a fiduciary to the Company with respect to all of
such information. For purposes of this Agreement "Confidential Information"
means information disclosed to the Executive or known by the Executive as a
consequence of or through his employment by the Company (including information
conceived, originated, discovered or developed by the Executive) prior to or
after the date hereof and not generally known, about the Company or its
business. Notwithstanding the foregoing, nothing herein shall be deemed to
restrict the Executive from disclosing Confidential Information to the extent
required by law.
7.3 NONSOLICITATION OF EMPLOYEES. During the Term and for a period
of one year following termination of the Executive's employment with the
Company, the Executive shall not directly or indirectly, for himself or for any
other person, firm, corporation, partnership, association or other entity,
attempt to employ or enter into any contractual arrangement with any employee or
former employee of the Company, unless such employee or former employee has not
been employed by the Company for a period in excess of six months.
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7.4 BOOKS AND RECORDS. All books, records, accounts and similar
repositories of Confidential Information of the Company, whether prepared by the
Executive or otherwise coming into the Executive's possession, shall be the
exclusive property of the Company and shall be returned immediately to the
Company on termination of this Agreement or on the Board's request at any time.
8. INJUNCTION. It is recognized and hereby acknowledged by the parties
hereto that a breach by the Executive of any of the covenants contained in
Paragraph 7 of this Agreement will cause irreparable harm and damage to the
Company, the monetary amount of which may be virtually impossible to ascertain.
As a result, the Executive recognizes and hereby acknowledges that the Company
shall be entitled to an injunction from any court of competent jurisdiction
enjoining and restraining any violation of any or all of the covenants contained
in Paragraph 9 of this Agreement by the Executive or any of his affiliates,
associates, partners or agents, either directly or indirectly, and that such
right to injunction shall be cumulative and in addition to whatever other
remedies the Company may possess.
9. CONSOLIDATION, MERGER OR SALE OF ASSETS. Nothing in this Agreement
shall preclude the Company from consolidating or merging into or with, or
transferring all or substantially all of its assets to, another corporation
which assumes this Agreement, and all obligations of the Company hereunder, in
writing. Upon such consolidation, merger, or transfer of assets and assumption,
the term "the Company" as used herein, shall mean such other corporation and
this Agreement shall continue in full force and effect, subject to the
provisions of Paragraph 6 hereof.
10. BINDING EFFECT. Except as herein otherwise provided, this Agreement
shall inure to the benefit of and shall be binding upon the parties hereto,
their personal representatives, successors, heirs and assigns.
11. SEVERABILITY. Invalidity or unenforceability of any provision
hereof shall in no way affect the validity or enforceability of any other
provisions.
12. TERMINOLOGY. All personal pronouns used in this Agreement, whether
used in the masculine, feminine or neuter gender, shall include all other
genders; the singular shall include the plural and vice versa. Titles of
Paragraphs are for convenience only, and neither limit nor amplify the
provisions of the Agreement itself.
13. GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of New York.
14. ENTIRE AGREEMENT. This Agreement contains the entire understanding
between the parties and may not be changed or modified except by an Agreement in
writing signed by all the parties.
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15. NOTICE. Any notice required or permitted to be delivered hereunder
shall be deemed to be delivered when deposited in the United States mail,
postage prepaid, registered or certified mail, return receipt requested,
addressed to the parties at the addresses first stated herein, or to such other
address as either party hereto shall from time to time designate to the other
party by notice in writing as provided herein.
16. OTHER INSTRUMENTS. The parties hereby covenant and agree that they
will execute such other and further instruments and documents as are or may
become necessary or convenient to effectuate and carry out the terms of this
Agreement.
17. COUNTERPARTS. This Agreement may be, executed in any number of
counterparts and each such counterpart shall for all purposes be deemed an
original.
18. ASSIGNABILITY. This Agreement shall not be assigned by either
party, except with the written consent of the other and except as provided in
Paragraph 9 hereof.
IN WITNESS WHEREOF, this Agreement has been duly signed by the parties
hereto on the day and year first above written.
ASD GROUP, INC.
By:/S/ROBERT LETTIERI
------------------------------
Name: Robert Lettieri
Title:Chief Financial Officer
/S/GARY D. HORNE
------------------------------
Gary D. Horne
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EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
this 1st day of December, 1996 by and between ASD GROUP, INC., a Delaware
corporation with its principal office at One Industry Street, Poughkeepsie, New
York 12603 (the "Company"), and Stanley F. Zuk, whose residence address is 224
Wheeler Hill Road, Wappingers Falls, New York 12590 (the "Executive").
RECITALS
--------
A. The Executive is currently President and Chief Operating Officer of
the Company.
B. The Executive possesses intimate knowledge of the business and
affairs of the Company, its policies, methods and personnel.
C. The Board of Directors (the "Board") of the Company recognizes that
the Executive's contribution, as President and Chief Operating Officer of the
Company, to the growth and success of the Company will be substantial and
desires to assure the Company of the Executive's present and continued
employment in an executive capacity and to compensate him therefor.
D. The Board has determined that this Agreement will reinforce and
encourage the Executive's continued attention and dedication to the Company.
E. The Executive is willing to make his services available to the
Company on the terms and conditions hereinafter set forth.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the premises and mutual covenants
set forth herein, the parties hereby agree as follows:
1. EMPLOYMENT.
1.1 EMPLOYMENT AND TERM. The Company shall continue to employ
the Executive and the Executive shall continue to serve the Company, on the
terms and conditions set forth herein, for the period (the "Term") effective as
of December 1, 1996 (the "Commencement Date") and expiring on the third
anniversary of the Commencement Date, unless sooner terminated as hereinafter
set forth; provided, however, that commencing on the third anniversary of the
Commencement Date and each anniversary of the Commencement Date thereafter, the
Term of this Agreement shall automatically be extended for one year unless 90
<PAGE>
days prior to such anniversary date, the Company shall have delivered to the
Executive or the Executive shall have delivered to the Company, written notice
that the Term of the Executive's employment hereunder will not be extended.
1.2 DUTIES OF THE EXECUTIVE. The Executive shall serve as
President and Chief Operating Officer of the Company and shall perform the
duties of an executive commensurate with such position, shall diligently perform
all services as may be reasonably assigned to him by the Board and shall
exercise such power and authority as may from time to time be delegated to him
by the Board. The Executive shall devote such time as he deems necessary to the
business and affairs of the Company.
1.3 PLACE OF PERFORMANCE. In connection with his employment by
the Company, the Executive shall be based at the Company's principal executive
offices in Poughkeepsie, New York, except for required travel on the Company's
business to an extent substantially consistent with his present travel
obligations.
2. COMPENSATION.
2.1 BASE SALARY (THE "BASE SALARY"). During the Term, the
Executive shall receive a base salary at the annual rate of $140,000. The Base
Salary shall be payable in substantially equal installments consistent with the
Company's normal payroll schedule, subject to applicable withholding and other
taxes. Commencing on the first anniversary of the Commencement Date, and each
anniversary of the Commencement Date thereafter during the Term, the Base Salary
shall be increased, but shall not be decreased, by that percentage by which the
Consumer Price Index (All Items Less Shelter), Urban Wage Earners and Clerical
Workers, for the New York, New York area published by the United States
Government (the "Index") for the immediately preceding calendar year exceeds
such index for the next preceding calendar year. If publication of the Index is
discontinued, the parties hereto shall accept comparable statistics on the cost
of living for the Miami, Florida area as computed and published by an agency of
the United States government or, if no such agency computes and publishes such
statistics, by any regularly published national periodical that does compute and
publish such statistics.
2.2 ADDITIONAL CASH COMPENSATION. The Executive shall also be
entitled to receive such increments and base salary and performance or merit
bonuses (collectively, "Bonus") as shall be determined from time to time during
the term by the Board.
3. EXPENSE REIMBURSEMENT AND OTHER BENEFITS.
3.1 EXPENSE REIMBURSEMENT. During the Term, the Company, upon
the submission of supporting documentation by the Executive, and in accordance
with Company policies for its executives, shall reimburse the Executive for all
expenses actually paid or incurred by the Executive in the course of and
pursuant to the business of the Company, including expenses for travel and
entertainment.
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3.2 OTHER BENEFITS. The Company shall obtain or shall continue
in force comprehensive major medical and hospitalization insurance coverages,
including dental coverages, either group or individual, for the Executive and
his dependents, and shall obtain or shall continue in force disability and life
insurance for the Executive (collectively, the "Policies"), which Policies the
Company shall keep in effect at its sole expense throughout the Term. The
Policies to be provided by the Company shall be on terms as determined by the
Board; provided, however, that such Policies shall in no event provide benefits
to Executive which are less than the benefits to which he is currently entitled.
Within 30 days following any termination of this Agreement, at the Executive's
option, the Company shall assign to the executive all insurance policies of the
life of the Executive then owned by the Company in consideration of the payment
by the Executive of the cash surrender value, ff any, and the Executive's
agreement to assume the Company liability to pay any pre accruing thereon after
the date of such termination.
3.3 AUTOMOBILE ALLOWANCE. Throughout the Term of this
Agreement, the Company will pay Executive an automobile allowance in the amount
of $500 per month. Such automobile allowance shall be for no more than one
automobile and shall include all expenses related thereto, including, without
limitation, lease expenses, maintenance and insurance.
3.4 WORKING FACILITIES. The Company shall furnish the
Executive with an office, a secretary and such other facilities and services
suitable to his position and adequate for the performance of his duties
hereunder.
3.5 VACATION. The Executive shall be entitled to reasonable
vacations during each year of the Term, the time and duration thereof to be
determined by mutual agreement between the Executive and the Company.
4. TERMINATION.
4.1 TERMINATION FOR CAUSE. Notwithstanding anything contained
in this Agreement to the contrary, this Agreement may be terminated by the
Company for Cause. As used in this Agreement "Cause" shall only mean (a) subject
to the following sentences, any action or omission of the Executive which
constitutes a willful and material breach of this Agreement (including his
resignation without consent of the Board, including a majority of independent
directors), which is not cured or as to which diligent attempts to cure have not
commenced within 30 business days after receipt by the Executive of notice of
same, (b) fraud, embezzlement or misappropriation as against the Company, or (c)
the conviction (from which no appeal can be taken) of the Executive for any
criminal act which is a felony. Upon any determination by the Company's Board of
Directors that Cause exists under clause (a) of the preceding sentence, the
Company shall cause a special meeting of the Board to be called and held at a
time mutually convenient to the Board and the Executive, but in no event later
than 10 business days after the Executive's receipt of the notice contemplated
by clause (a). The Executive shall have the right to appear before such special
meeting of the Board with legal counsel of his choosing to refute any
determination of Cause specified in such notice, and any
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termination of the Executive's employment by reason of such Cause determination
shall not be effective until the Executive is afforded such opportunity to
appear. Any termination for Cause pursuant to clause (b) or (c) of this
Paragraph 4.1 shall be made in writing to the Executive, which notice shall set
forth in detail all acts or omissions upon which the Company is relying for such
termination. Upon any termination pursuant to this Paragraph 4.1, the Company
shall pay to the Executive any unpaid Base Salary accrued through the effective
date of termination specified in such notice. In addition, the Company shall
continue to pay any benefits, if any, owed to the Executive under any plan
provided for the Executive under Paragraph 3 hereof in accordance with the terms
of such plan as in effect on the date of termination of employment under this
Paragraph 4.1 through age 65. Except as provided above, the Company shall have
no further liability hereunder (other than for reimbursement for reasonable
business expenses incurred prior to the date of termination, subject, however to
the provisions of Paragraph 3.1 hereof).
4.2 DISABILITY. Notwithstanding anything to the contrary
contained in this Agreement if, during the term hereof the Executive suffers a
disability (as defined below) the Company shall, subject to the provisions of
Paragraph 4.3 hereof continue to pay the Executive the compensation provided in
Paragraphs 2.1 and 2.2 hereof during the period of his disability; provided,
however, that, in the event the Executive is disabled for a period of more than
180 days in any 12 month period (the "Disability Period"), the Company may, at
its election, by a vote of 75% of the members of the Board of Directors within
90 days from the end of the Disability Period, terminate this agreement. In the
event of such termination, payment of the Executive's Base Salary and fringe
benefits (to the extent permissible by applicable law) shall be continued for a
period of 12 months after such termination. As used in this Agreement, the term
"disability" shall mean the complete inability of the Executive to perform his
duties under this Agreement as determined by an independent physician selected
with the approval of the Company and the Executive. Except as provided above,
the Company shall have no further liability hereunder (other than for
reimbursement for reasonable business expenses incurred prior to the date of
termination subject, however, to the provisions of Paragraph 3.1 hereof).
4.3 DEATH. In the event of the death of the Executive during
the Term of this Agreement, the Company shall pay to the Executive's legal
representative, any unpaid Base Salary accrued through the date of his death, as
well as a lump sum payment equal to (A) 12 months' Base Salary at the rate
prevailing on the date of the death of the Executive and (B) the share of Bonus
to which he would have been entitled pro rated based on the percentage of the
current fiscal year that had been completed on the date of his death. Except as
provided above, the Company shall have no further liability hereunder (other
than for reimbursement for reasonable business expenses incurred prior to the
date of the Executive's death, subject, however to the provisions of Paragraph
3.1 hereof).
4.4 WITHOUT CAUSE. In the event the Company shall terminate
this Agreement other than for Cause, Disability or Death as provided hereof,
payment of the of the Executive's Base Salary and fringe benefits (to the extent
permissible by applicable law) shall be continued for a period of 12 months
after such termination.
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5. MITIGATION. In no event shall the Executive be obligated to
seek other employment or take any other action by way of mitigation of the
amounts payable to the Executive under any of the provisions of this Agreement.
6. CHANGE OF CONTROL.
(a) For the purposes of this Agreement, a "Change of Control"
shall be deemed to have taken place if: (i) any person, including a "group" as
defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended,
becomes the owner or beneficial owner of Company securities, after the date of
this Agreement, having 15% or more of the combined voting power of the then
outstanding securities of the Company that may be cast for the election of
directors of the Company (other than as a result of an issuance of securities
initiated by the Company, or open market purchases approved by the Board, as
long as the majority of the Board approving the purchases is the majority at the
time the purchases are made), or (ii) the persons who were directors of the
Company before such transactions shall cease to constitute a majority of the
Board of the Company, or any successor to the Company, as the direct or indirect
result of or in connection with, any cash tender or exchange offer, merger or
other business combination, sale of assets or contested election, or any
combination of the foregoing transactions.
(b) The Company and the Executive hereby agree that, if the
Executive is affiliated with the Company on the date on which a change of
Control occurs (the "Change of Control Date") the Company (or, if the Executive
is affiliated with a subsidiary, the subsidiary) will continue to retain the
Executive and the Executive will remain affiliated with the Company (or
subsidiary), for the period commencing on the Change of Control Date and ending
on the second anniversary of such date, to exercise such authority and perform
such executive duties as are commensurate with the authority being exercised and
duties being performed by the Executive immediately prior to the Change of
Control Date. If after a Change of Control the Executive is requested, and, in
his sole and absolute discretion, consents to change his principal business
location, the Company will reimburse the Executive for his reasonable relocation
expenses, including without limitation, moving expenses, temporary living and
travel expenses for a reasonable time while arranging to move his residence to
the changed location, closing costs, if any, associated with the sale of his
existing residence and the purchase of a replacement residence at the changed
location, plus an additional amount representing a gross-up of any state or
federal taxes payable by the Executive as a result of any such reimbursements.
If the Executive shall not consent to change his business location, the
Executive may continue to provide the services required of him hereunder in
Poughkeepsie, New York and the Company shall continue to maintain an office for
the Executive at that location commensurate with the Company's office prior to
the Change of Control Date.
(c) During the remaining term hereof after the change of
Control Date, the Company (or subsidiary) will (i) continue to pay the Executive
a salary at not less than the level applicable to the Executive on the Change of
Control Date, (ii) pay the Executive bonuses in amounts not less in amount than
those paid during the twelve month period preceding
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the Change of Control Date, and (iii) continue employee benefit programs as to
the Executive at levels in effect n the Change of Control Date (but subject to
such reductions as may be required to maintain such plans in compliance with
applicable federal law regulating employee benefit programs).
(d) If during the remaining term hereof after the Change of
Control Date (i) the Executive's employment is terminated by the Company (or
subsidiary), or (ii) there shall have occurred a material reduction in the
Executive's compensation or employment related benefits, or a material change in
the Executive's status, working conditions, management responsibilities or
titles, and the Executive voluntarily terminates his relationship with the
Company within 60 days of any such occurrence, or the last in a series of
occurrences, then Executive shall be entitled to receive, subject to the
provisions of subparagraphs (e) and (f) below, a lump sum payment equal to 100%
of Executive's "base period income" as determined under (e) below. Such amount
will be paid to the Executive within 15 business days after his termination of
affiliation with the Company.
(e) The Executive's "base period income" shall be his base
salary and annual incentive bonuses paid or payable to him during or with
respect to the 12-month period preceding the date of his termination or
affiliation. If the Executive has not been affiliated for 12 months at the time
of his termination of affiliation, his "base period income" shall be his
annualized base salary at the rate then in effect and any annual incentive bonus
paid to the Executive prior to the date of his termination of affiliation or
payable to the Executive with respect to his period of affiliation.
(f) The amounts payable to the Executive under any other
compensation arrangement maintained by the Company (or a subsidiary) which
became payable after payment of the lump sum provided for in (d), upon or as a
result of the exercise by the Executive of rights which are contingent on a
Change of Control (and would be considered a "parachute payment" under Internal
Revenue Code ss. 280G and regulations thereunder), shall be increased by an
additional amount representing a gross-up of any federal income tax liability
arising from an excess parachute payment or otherwise. If the Executive has not
been affiliated with the Company (or a subsidiary of the Company) during one or
more calendar years immediately preceding the Change of Control Date, this
paragraph (f) shall not apply.
(g) In the event of a proposed Change in Control, the Company
will allow the Executive to participate in all meetings and negotiations related
thereto.
7. RESTRICTIVE COVENANTS.
7.1 NON-COMPETITION. During the Term and for a period of one
year following the termination (other than without Cause, as defined in
Paragraph 4.1) of the Executive's employment by the Company, the Executive shall
not, directly or indirectly engage in or have any interest in, directly or
indirectly, any sole proprietorship, partnership, corporation, business or any
other person or entity (whether as an employee, officer, director, partner,
agent, security
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holder, creditor, consultant or otherwise) that, directly or indirectly, engages
primarily in the contract manufacturing industry in any and all states in which
the Company and/or any subsidiary conducts its business during the Term or at
the time the Executive's employment with the Company is terminated (the
"Territory"); provided, however, that the Executive may continue to hold Company
securities and/or acquire, solely as an investment, shares of capital stock or
other equity securities of any company which are traded on any national
securities exchange or are regularly quoted in the over-the-counter market, so
long as the Executive does not control acquire a controlling interest in or
become a member of a group which exercises direct or indirect control of, more
than five percent of any class of capital stock of such corporation.
7.2. NONDISCLOSURE. During the Term and following termination
of the Executive's employment with the Company, the Executive shall not divulge,
communicate, use to the detriment of the Company or for the benefit of any other
person or persons, or misuse in any way, any Confidential Information (as
hereinafter defined) pertaining to the business of the Company. Any Confidential
Information or data now or hereafter acquired by the Executive with respect to
the business of the Company (which shall include, but not be limited to,
information concerning the Company's financial condition, prospects, technology,
customers, suppliers, methods of doing business and marketing and promotion of
the Company's services) shall be deemed a valuable, special and unique asset of
the Company that is received by the Executive in confidence and as a fiduciary,
and the Executive shall remain a fiduciary to the Company with respect to all of
such information. For purposes of this Agreement "Confidential Information"
means information disclosed to the Executive or known by the Executive as a
consequence of or through his employment by the Company (including information
conceived, originated, discovered or developed by the Executive) prior to or
after the date hereof and not generally known, about the Company or its
business. Notwithstanding the foregoing, nothing herein shall be deemed to
restrict the Executive from disclosing Confidential Information to the extent
required by law.
7.3 NONSOLICITATION OF EMPLOYEES. During the Term and for a
period of one year following termination of the Executive's employment with the
Company, the Executive shall not directly or indirectly, for himself or for any
other person, firm, corporation, partnership, association or other entity,
attempt to employ or enter into any contractual arrangement with any employee or
former employee of the Company, unless such employee or former employee has not
been employed by the Company for a period in excess of six months.
7.4 BOOKS AND RECORDS. All books, records, accounts and
similar repositories of Confidential Information of the Company, whether
prepared by the Executive or otherwise coming into the Executive's possession,
shall be the exclusive property of the Company and shall be returned immediately
to the Company on termination of this Agreement or on the Board's request at any
time.
8. INJUNCTION. It is recognized and hereby acknowledged by the parties
hereto that a breach by the Executive of any of the covenants contained in
Paragraph 7 of this Agreement
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will cause irreparable harm and damage to the Company, the monetary amount of
which may be virtually impossible to ascertain. As a result, the Executive
recognizes and hereby acknowledges that the Company shall be entitled to an
injunction from any court of competent jurisdiction enjoining and restraining
any violation of any or all of the covenants contained in Paragraph 9 of this
Agreement by the Executive or any of his affiliates, associates, partners or
agents, either directly or indirectly, and that such right to injunction shall
be cumulative and in addition to whatever other remedies the Company may
possess.
9. CONSOLIDATION, MERGER OR SALE OF ASSETS. Nothing in this Agreement
shall preclude the Company from consolidating or merging into or with, or
transferring all or substantially all of its assets to, another corporation
which assumes this Agreement, and all obligations of the Company hereunder, in
writing. Upon such consolidation, merger, or transfer of assets and assumption,
the term "the Company" as used herein, shall mean such other corporation and
this Agreement shall continue in full force and effect, subject to the
provisions of Paragraph 6 hereof.
10. BINDING EFFECT. Except as herein otherwise provided, this Agreement
shall inure to the benefit of and shall be binding upon the parties hereto,
their personal representatives, successors, heirs and assigns.
11. SEVERABILITY. Invalidity or unenforceability of any provision
hereof shall in no way affect the validity or enforceability of any other
provisions.
12. TERMINOLOGY. All personal pronouns used in this Agreement, whether
used in the masculine, feminine or neuter gender, shall include all other
genders; the singular shall include the plural and vice versa. Titles of
Paragraphs are for convenience only, and neither limit nor amplify the
provisions of the Agreement itself.
13. GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of New York.
14. ENTIRE AGREEMENT. This Agreement contains the entire understanding
between the parties and may not be changed or modified except by an Agreement in
writing signed by all the parties.
15. NOTICE. Any notice required or permitted to be delivered hereunder
shall be deemed to be delivered when deposited in the United States mail,
postage prepaid, registered or certified mail, return receipt requested,
addressed to the parties at the addresses first stated herein, or to such other
address as either party hereto shall from time to time designate to the other
party by notice in writing as provided herein.
16. OTHER INSTRUMENTS. The parties hereby covenant and agree that they
will execute such other and further instruments and documents as are or may
become necessary or convenient to effectuate and carry out the terms of this
Agreement.
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17. COUNTERPARTS. This Agreement may be, executed in any number of
counterparts and each such counterpart shall for all purposes be deemed an
original.
18. ASSIGNABILITY. This Agreement shall not be assigned by either
party, except with the written consent of the other and except as provided in
Paragraph 9 hereof.
IN WITNESS WHEREOF, this Agreement has been duly signed by the parties
hereto on the day and year first above written.
ASD GROUP, INC.
By:/S/ ROBERT LETTIERI
-------------------------------
Name: Robert Lettieri
Title:Chief Financial Officer
/S/STANLEY F. ZUK
-------------------------------
Stanley F. Zuk
-9-
EXHIBIT 10.9
OHS Draft
3/6/97
FINANCIAL ADVISORY AND CONSULTING AGREEMENT
This Agreement is made and entered into as of this____day of
___________, 1997 [the effective date of the Registration Statement], by and
between ASD Group, Inc., a Delaware corporation (the "Company"), and H.J. Meyers
& Co., Inc. and Keane Securities Co., Inc. (collectively, the "Consultants").
In consideration of and for the mutual promises and covenants
contained herein, and for other good and valuable consideration, the receipt of
which is hereby acknowledged, the parties hereto hereby agree as follows:
1. PURPOSE. The Company hereby retains the Consultants during
the term specified in SECTION 2 hereof to render consulting advice to the
Company as an investment banker relating to financial and similar matters, upon
the terms and conditions as set forth herein.
2. TERM. Subject to the provisions of SECTION 8, 9 and 10
hereof, this Agreement shall be effective for a period of twelve (12) months
commencing __________, 1997 [the effective date of the Registration Statement].
3. DUTIES OF CONSULTANT. During the term of this Agreement,
the Consultants will provide the Company with such regular and customary
consulting advice as is reasonably requested by the Company, provided that the
Consultants shall not be required to undertake duties not reasonably within the
scope of the consulting advisory service contemplated by this Agreement. In
performance of these duties, the Consultants shall provide the Company with the
benefits of their best judgment and efforts. It is understood and acknowledged
by the parties that the value of the Consultants' advice is not measurable in
any quantitative manner, and that the Consultants shall be obligated to render
advice, upon the request of the Company, in good faith, but shall not be
obligated to spend any specific amount of time in doing so. The Consultants'
duties may include, but will not necessarily be limited to:
A. Providing sponsorship and exposure in connection with the
dissemination of corporate information regarding the Company to the investment
community at large under a systematic planned approach.
B. Rendering advice and assistance in connection with the
preparation of annual and interim reports and press releases.
C. Arranging, on behalf of the Company and its
representatives, at appropriate times, meetings with securities analysts of
major regional investment banking firms.
<PAGE>
D. Assisting in the Company's financial public relations,
including discussions between the Company and the financial community.
E. Rendering advice with regard to internal operations,
including:
(1) advice regarding the formation of corporate goals and
their implementation;
(2) advice regarding the financial structure of the Company
and its future divisions or subsidiaries, if any, or any
programs and projects of such entities;
(3) advice concerning the securing, when necessary and if
possible, of additional financing through banks, insurance
companies and/or other institutions; and
(4) advice regarding corporate organization and personnel.
F. Rendering advice with respect to any acquisition program of
the Company.
G. Rendering advice regarding a future public or private
offering of securities of the Company or of any future subsidiary.
4. RELATIONSHIPS WITH OTHERS. The Company acknowledges that
the Consultants and their respective affiliates are in the business of providing
financial service and consulting advice (of all types contemplated by this
Agreement) to others. Nothing herein contained shall be construed to limit or
restrict the Consultants or their respective affiliates from rendering such
services or advice to others.
5. CONSULTANTS' LIABILITY. In the absence of gross negligence
or willful misconduct on the part of the Consultants or the Consultants' breach
of this Agreement, the Consultants shall not be liable to the Company, or to any
officer, director, employee, shareholder or creditor of the Company, for any act
or omission in the course of or in connection with the rendering or providing of
advice or services hereunder. Except in those cases where the gross negligence
or misconduct of the Consultants or the breach by the Consultants of this
Agreement is alleged and proven, the Company agrees to defend, indemnify and
hold the Consultants harmless from and against any and all reasonable costs,
expenses and liability (including, but not limited to, attorneys' fees paid in
the defense of the Consultants) which may in any way result from services
rendered by the Consultants pursuant to or in any connection with this
Agreement.
6. EXPENSES. The Company, upon receipt of appropriate
supporting documentation, shall reimburse the Consultants for any and all
reasonable out-of-pocket expenses incurred by the Consultants in connection with
services rendered by the Consultants to the Company pursuant to this Agreement,
including, but not limited to, hotel, food and associated expenses, all charges
for travel and long-distance telephone calls and all other expenses incurred by
the Consultants in connection with services rendered by the Consultants
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to the Company pursuant to this Agreement. Expenses payable under this SECTION 6
shall not include allocable overhead expenses of the Consultants, including, but
not limited to, attorneys' fees, secretarial charges and rent.
7. COMPENSATION. As compensation for the services to be
rendered by the Consultants to the Company pursuant to SECTION 3 hereof during
the term set forth in SECTION 2 hereof, the Company shall pay the Consultants a
financial consulting fee of six thousand dollars ($6,000) per month, all of
which (an aggregate of seventy-two thousand dollars ($72,000)) shall be paid by
the Company on _____________, 1997 [the closing date of the initial public
offering].
8. OTHER ADVICE. ln addition to the duties set out in SECTION
3 hereof, the Consultants agree to furnish advice to the Company in connection
with the acquisition of and/or merger with other companies, joint ventures with
any third parties, license and royalty agreements and any other financing (other
than the private or public sale of the Company's securities for cash),
including, but not limited to, the sale of the Company itself (or any
significant percentage, subsidiaries or affiliates thereof).
In the event that any such transactions (the "Transaction")
are directly or indirectly originated by the Consultants for a period of
twenty-four (24) months from the date hereof, the Company shall pay fees to the
Consultants as follows:
LEGAL CONSIDERATION FEE
------------------- ---
$-0- - $3,000,000 7% of legal consideration
$3,000,000 - $5,000,000 5% of excess over $4,000,000
over $5,000,000 3% of excess over $5,000,000
Legal Consideration is defined, for purposes of this
Agreement, as the total of stock (valued at market on the day of closing, or if
there is no public market, valued at fair market value as agreed or, if not, by
an independent appraiser), cash and assets and property or other benefits
exchanged by the Company or received by the Company or its shareholders (all
valued at fair market value as agreed or, if not, by an independent appraiser),
irrespective of period of payment or terms. The value of any such securities
(whether debt or equity) or other property shall be determined as follows: (1)
the value of securities that are freely tradeable in an established public
market shall be the last closing market price of such securities prior to the
public announcement of the Transaction; and (2) the value of securities which
are not freely tradeable or which have no established public market, or if the
consideration consists of property other than securities, the value of such
securities or other property shall be the fair market value thereof as mutually
agreed by the Company and the Consultants. Consideration shall also be deemed to
include any indebtedness, including, without limitation, pension liabilities,
guarantees and other obligations assumed, directly or indirectly, in connection
with, or which survives the closing of, a Transaction. If the consideration to
be paid is computed or payable in any foreign currency, the value of such
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<PAGE>
foreign currency shall, for the purposes hereof, be converted into U.S. dollars
at the prevailing exchange rate on the dates on which such consideration is
payable.
9. SALES OR DISTRIBUTIONS OF SECURITIES. If the Consultants
assist the Company in the sale or distribution of securities to the public or in
a private transaction, the Consultants shall receive fees in the amount and form
to be arranged separately at the time of such transaction.
10. FORM OF PAYMENT. All fees due to the Consultants pursuant
to SECTION 8 hereof are due and payable to the Consultants, in cash or by
certified check, at the closing or closings of any transaction specified in such
SECTION 8 or as otherwise shall mutually be agreed between the parties hereto;
PROVIDED, HOWEVER, that in the case of license and royalty agreements specified
in SECTION 8 hereof, the fees due the Consultants in respect of such license and
royalty agreements shall be paid as and when license and/or royalty payments are
received by the Company. In the event that this Agreement shall not be renewed
for a period of at least twelve (12) months at the end of the twenty-four (24)
month period referred to in SECTION 8 hereof or if terminated for any reason
prior to the end of such twenty-four (24) month period, then, notwithstanding
any such non-renewal or termination, the Consultants shall be entitled to the
full fee for any transaction contemplated under SECTION 8 hereof which closes
within twelve (12) months after such non-renewal or termination.
11. LIMITATION UPON THE USE OF ADVICE AND SERVICES.
(a) No person or entity, other than the Company or any of its
subsidiaries, shall be entitled to make use of or rely upon the advice of the
Consultants to be given hereunder, and the Company shall not transmit such
advice to others, or encourage or facilitate the use or reliance upon such
advice by others, without the prior consent of the Consultants.
(b) It is clearly understood that the Consultants make no
commitments whatsoever to make a market in the securities of the Company or to
recommend or advise their clients to purchase the securities of the Company.
Research reports or corporate finance reports that may be prepared by the
Consultants will, when and if prepared, be done solely on the merits or judgment
of analysts of the Consultants or senior corporate finance personnel of the
Consultants.
(c) The use of the Consultants' name in any annual report or
other report of the Company, or any release or similar document prepared by or
on behalf of the Company, must have the prior approval of the Consultants unless
the Company is required by law to include either of the Consultant's names in
such annual report, other report or release, in which event the Consultants will
be furnished with a copy of such annual report, other report or release using
either of the Consultants' names in advance of publication by or on behalf of
the Company.
(d) Should any purchases of securities be requested to be
effected through the Consultants by the Company, its officers, directors,
employees or other affiliates, or by any person on behalf of any profit sharing,
pension or similar plan of the Company, for the
4
<PAGE>
account of the Company or the individuals or entities involved, such orders
shall be taken by a registered account executive of either of the Consultants,
shall not be subject to the terms of this Agreement, and the normal brokerage
commission as charged by the Consultants will apply in conformity with all rules
and regulations of the New York Stock Exchange, the National Association of
Securities Dealers, Inc. or other regulatory bodies. Where no regulatory body
sets the fee, the normal established fee as used by the Consultants shall apply.
(e) The Consultants shall not disclose confidential
information which it learns about the Company as a result of its engagement
hereunder, except for such disclosure as may be required for the Consultants to
perform their duties hereunder.
12. INDEMNIFICATION. Since the Consultants will be acting on
behalf of the Company in connection with its engagement hereunder, the Company
and Consultants have entered into a separate indemnification agreement
substantially in the form attached hereto as EXHIBIT A and dated the date
hereof, providing for the indemnification of the Consultants by the Company. The
Consultants have entered into this Agreement in reliance on the indemnities set
forth in such indemnification agreement.
13. SEVERABILITY. Every provision of this Agreement is
intended to be severable. If any term or provision hereof is deemed unlawful or
invalid for any reason whatsoever, such unlawfulness or invalidity shall not
affect the validity of the remainder of this Agreement.
14. MISCELLANEOUS.
(a) Any notice or other communication between the parties
hereto shall be sent by certified or registered mail, postage prepaid, if to the
Company, addressed to it at ASD Group, Inc., 1 Industry Street, Poughkeepsie,
New York 12603, Attention: Gary D. Horne, Chairman, with a copy to Broad and
Cassel, 201 South Biscayne Blvd., Suite 3000, Miami, Florida 33131, Attention:
Dale S. Bergman, P.A. or, if to the Consultants, addressed to them c/o H.J.
Meyers & Co., Inc., 1895 Mt. Hope Avenue, Rochester, New York 14620, Attention:
Michael A. Bresner, Managing Director, with a copy to Orrick, Herrington &
Sutcliffe LLP, 666 Fifth Avenue, New York, New York 10103, Attention: Lawrence
B. Fisher, Esq., or to such address as may hereafter be designated in writing by
any of such entities to the others. Such notice or other communication shall be
deemed to be given on the date of receipt.
(b) If, during the term hereof, either of the Consultants
shall cease to do business, the provisions hereof relating to the duties of the
Consultants and the compensation by the Company as it applies to the Consultants
shall thereupon cease to be in effect, except for the Company's obligation of
payment for services rendered prior thereto. This Agreement shall survive any
merger of, acquisition of, or acquisition by the Consultants and, after any such
merger or acquisition, shall be binding upon the Company and the corporation
surviving such merger or acquisition.
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(c) This Agreement embodies the entire agreement and
understanding between the Company and the Consultants and supersedes any and all
negotiations, prior discussions and preliminary and prior agreements and
understandings related to the central subject matter hereof.
(d) This Agreement has been duly authorized, executed and
delivered by and on behalf of the Company and the Consultants.
(e) This Agreement shall be construed and interpreted in
accordance with the laws of the State of New York, without giving effect to
conflicts of laws rules or principals.
(f) This Agreement and the rights hereunder may not be
assigned by either party (except by operation of law) and shall be binding upon
and inure to the benefit of the Parties and their respective successors, assigns
and legal representatives.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date hereof.
ASD GROUP, INC.
By:
--------------------------------
Name:
Title:
H.J. MEYERS & CO., INC.
By:
--------------------------------
Name:
Title:
KEANE SECURITIES CO., INC.
By:
--------------------------------
Name:
Title:
7
<PAGE>
EXHIBIT A
__________________, 1997
H.J. MEYERS & CO., INC.
1895 Mt. Hope Avenue
Rochester, New York 14620
KEANE SECURITIES CO., INC.
50 Broadway
New York, New York 10004
Ladies and Gentlemen:
In connection with our engagement of H.J. Meyers & Co., Inc.
and Keane Securities Co., Inc. (collectively, the "Consultants") as our
financial advisors and investment bankers, we hereby agree to indemnify and hold
the Consultants and their respective affiliates, and the directors, officers,
partners, shareholders, agents and employees of the Consultants (collectively
the "Indemnified Persons"), harmless from and against any and all claims,
actions, suits, proceedings (including those of shareholders), damages,
liabilities and expenses incurred by any of them (including, but not limited to,
fees and expenses of counsel) which are (A) related to or arise out of (i) any
actions taken or omitted to be taken (including any untrue statements made or
any statements omitted to be made) by us, or (ii) any actions taken or omitted
to be taken by any Indemnified Person in connection with our engagement of the
Consultants pursuant to the Financial Advisory and Consulting Agreement, of even
date herewith, between the Consultants and us (the "Consulting Agreement"), or
(B) otherwise related to or arise out of the Consultants' activities on our
behalf pursuant to the Consultants' engagement under the Consulting Agreement,
and we shall reimburse any Indemnified Person for all expenses (including, but
not limited to, fees and expenses of counsel) incurred by such Indemnified
Person in connection with investigating, preparing or defending any such claim,
action, suit or proceeding (collectively a "Claim"), whether or not in
connection with pending or threatened litigation in which any Indemnified Person
is a party. We will not, however, be responsible for any Claim which is finally
judicially determined to have resulted exclusively from the gross negligence or
willful misconduct of any person seeking indemnification hereunder. We further
agree that no Indemnified Person shall have any liability to us for or in
connection with the Consultants' engagement under the Consulting Agreement
except for any Claim incurred by us solely as a direct result of any Indemnified
Person's gross negligence or willful misconduct.
We further agree that we will not, without the prior written consent of
the Consultants, settle, compromise or consent to the entry of any judgment in
any pending or threatened Claim in respect of which indemnification may be
sought hereunder (whether or not any Indemnified Person is an actual or
potential party to such Claim), unless such
A-1
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settlement, compromise or consent includes a legally binding, unconditional, and
irrevocable release of each Indemnified Person hereunder from any and all
liability arising out of such
Promptly upon receipt by an Indemnified Person of notice of any
complaint or the assertion or institution of any Claim with respect to which
indemnification is being sought hereunder, such Indemnified Person shall notify
us in writing of such complaint or of such assertion or institution, but failure
to so notify us shall not relieve us from any obligation we may have hereunder,
unless, and only to the extent that, such failure results in the forfeiture by
us of substantial rights and defenses, and such failure to so notify us will not
in any event relieve us from any other obligation or liability we may have to
any Indemnified Person otherwise than under this Agreement. If we so elect or
are requested by such Indemnified Person, we will assume the defense of such
Claim, including the employment of counsel reasonably satisfactory to such
Indemnified Person and the payment of the fees and expenses of such counsel. In
the event, however, that such Indemnified Person reasonably determines in its
sole judgment that having common counsel would present such counsel with a
conflict of interest or such Indemnified Person concludes that there may be
legal defenses available to it or other Indemnified Persons that are different
from or in addition to those available to us, then such Indemnified Person may
employ its own separate counsel to represent or defend it in any such Claim and
we shall pay the reasonable fees and expenses of such counsel. Notwithstanding
anything herein to the contrary, if we fail timely or diligently to defend,
contest, or otherwise protect against any Claim, the relevant Indemnified Party
shall have the right, but not the obligation, to defend, contest, compromise,
settle, assert crossclaims or counterclaims, or otherwise protect against the
same, and shall be fully indemnified by us therefor, including, but not limited
to, for the fees and expenses of its counsel and all amounts paid as a result of
such Claim or the compromise or settlement thereof. In any Claim in which we
assume the defense, the Indemnified Person shall have the right to participate
in such defense and to retain its own counsel therefor at its own expense.
We agree that if any indemnity sought by an Indemnified Person
hereunder is held by a court to be unavailable for any reason, then (whether or
not either of the Consultants is the Indemnified Person) we and the Consultants
shall contribute to the Claim for which such Indemnity is held unavailable in
such proportion as is appropriate to reflect the relative benefits to us, on the
one hand, and the Consultants, on the other, in connection with the Consultants'
engagement by us under the Consulting Agreement, subject to the limitation that
in no event shall the amount of the Consultants' contribution to such Claim
exceed the amount of fees actually received by the Consultants from us pursuant
to the Consultants' engagement under the Consulting Agreement. We hereby agree
that the relative benefits to us, on the one hand, and the Consultants, on the
other, with respect to the Consultants' engagement under the Consulting
Agreement shall be deemed to be in the same proportion as (a) the total value
paid or proposed to be paid or received by us or our shareholders as the case
may be, pursuant to the transaction (whether or not consummated) for which the
Consultants are engaged to render services bears to (b) the fee paid or proposed
to be paid to the Consultants in connection with such engagement.
Our indemnity, reimbursement and contribution obligations
under this Agreement shall be in addition to, and shall in no way limit or
otherwise adversely affect any rights that any Indemnified Party may have at law
or at equity.
A-2
<PAGE>
Should the Consultants, or any of their respective directors,
officers, partners, shareholders, agents or employees, be required or be
requested by us to provide documentary evidence or testimony in connection with
any proceeding arising from or relating to the Consultants' engagement under the
Consulting Agreement, we agree to pay all reasonable expenses (including, but
not limited to, fees and expenses of counsel) in complying therewith and one
thousand dollars ($1,000) per day for any sworn testimony or preparation
therefor, payable in advance.
We hereby consent to personal jurisdiction and service of
process and venue in any court in which any claim for indemnity is brought by
any Indemnified Person.
A-3
<PAGE>
It is understood that, in connection with the Consultants'
engagement under the Consulting Agreement, the Consultants may be engaged to act
in one or more additional capacities and that the terms of the original
engagement or any such additional engagement may be embodied in one or more
separate written agreements. The provisions of this Agreement shall apply to the
original engagement and any such additional engagement and shall remain in full
force and effect following the completion or termination of the Consultants'
engagement(s).
Very truly yours,
ASD GROUP, INC.
By:
-----------------------------
Name:
Title:
CONFIRMED AND AGREED TO:
H.J. MEYERS & CO., INC.
By:
-----------------------------
Name:
Title:
CONFIRMED AND AGREED TO:
KEANE SECURITIES CO., INC.
By:
-----------------------------
Name:
Title:
A-4
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
Board of Directors
ASD Group, Inc.
Poughkeepsie, New York
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-7731 of ASD Group, Inc. of our report dated August 15, 1996, (October 21,
1996 as to Note 11 and December 26, 1996 as to Note 12), such report includes an
explanatory paragraph that refers to the restatement of the June 30, 1995
consolidated financial statements, appearing in the Prospectus, which is part of
such Registration Statement, and to the references to us under the headings
"Selected Financial Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
March 13, 1997
