AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 15, 1997
REGISTRATION NO. 333-7731
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 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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DELAWARE 8711 14-1483460
(STATE OR OTHER JURISDICTION OF (STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION CLASSIFICATION CODE NUMBER IDENTIFICATION NUMBER)
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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)
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COPIES OF COMMUNICATIONS TO:
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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
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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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CALCULATION OF REGISTRATION FEE
==================================================================================================================================
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS TO BE OFFERING PRICE AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share 1,610,000(2) $6.25 $10,062,500 $3,469.55
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Noteholder Warrants to Purchase Common Stock 500,000 (3)
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Common Stock underlying Noteholder Warrants(4) 500,000 $2.97 $ 1,485,000 512.03
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Placement Agent Warrants 33,333 (3)
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Common Stock underlying Placement Agent Warrants 33,333 $6.25 $ 208,332 71.83
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Representative's Warrants to Purchase Common Stock 140,000 (3)
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Common Stock underlying the Representative's
Warrants(4) 140,000 $7.50 $ 1,050,000 362.06
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Total Registration Fee $4,415.47(5)
==================================================================================================================================
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 under the Securities Act.
(2) Includes 210,000 shares of Common Stock that may be issued upon exercise
of a 30-day option granted to the Underwriters solely to cover
over-allotments, if any.
(3) No fee required pursuant to Rule 457(g) under the Securities Act.
(4) Pursuant to Rule 416 under the Securities Act, this Registration
Statement also covers such additional shares as may become issuable as a
result of the anti-dilution provisions contained in the Noteholder
Warrants, the Placement Agent Warrants and Representative's Warrants.
(5) The Company previously paid a registration fee of $7,075.84.
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.
===============================================================================
<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."
2
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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
- ------------------------------------------------------------------------------------------------------
1. Front of Registration Statement and
Outside Front Cover of Prospectus Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Inside Front and Outside Back Cover Pages
Pages of Prospectus of Prospectus
3. Summary Information and Risk Factors Prospectus Summary; Risk Factors
4. Use of Proceeds Use of Proceeds
Outside Front Cover Page of Prospectus;
5. Determination of Offering Price Risk Factors; Underwriting
6. Dilution Dilution
Concurrent Registration of Securities;
Selling Security Holders(1); Plan of
7. Selling Security Holders 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
Management's Discussion and Analysis of
17. Management's Discussion and Analysis or Plan of Financial Condition and Results of
Operation Operations
18. Description of Property Business
19. Certain Relationships and Related Transactions Certain Transactions
Outside Front Cover Page of Prospectus;
Prospectus Summary; Risk Factors;
20. Market for Common Equity and Related Stockholder Dividend Policy; Shares Eligible for
Matters Future Sale
21. Executive Compensation Management
Index to Consolidated Financial
22. Financial Statements Statements
23. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure *
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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.
1
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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 JANUARY 15, 1997
PROSPECTUS
1,400,000 SHARES
ASD Group, Inc.
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.
================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) THE COMPANY(2)
- --------------------------------------------------------------------------------
Per Share $ $ $
- --------------------------------------------------------------------------------
Total(3) $ $ $
================================================================================
(1) Does not include additional compensation payable to H.J. Meyers & Co.,
Inc. the representative of the several Underwriters (the "Representative"),
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.
- -----------------------------------------------------------------------------
THE DATE OF THIS PROSPECTUS IS , 1997
<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.
- -----------------------------------------------------------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE BOSTON STOCK EXCHANGE, THE
PACIFIC STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
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[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>
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 REPRESENTATIVE 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 80,000 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 100,000
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 6,026.52 FOR ONE STOCK
SPLIT EFFECTED AS OF JUNE 10, 1996, INCLUDING THE ISSUANCE TO THE PRESENT
STOCKHOLDERS OF THE COMPANY OF 450,000 SHARES OF COMMON STOCK (THE "CONTINGENT
SHARES"), ALL OR A PORTION OF WHICH WHICH MAY BE RETURNED TO TREASURY IF THE
COMPANY FAILS TO ACHIEVE CERTAIN EARNINGS LEVELS DURING THE FISCAL YEARS ENDING
JUNE 27, 1997 ("FISCAL 1997") AND JUNE 26, 1998 ("FISCAL 1998"). SEE "CERTAIN
TRANSACTIONS--CONTINGENT SHARES." 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 are 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 will be a $50
billion business in 1996 and 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
3
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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.
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
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THE OFFERING
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Common Stock offered by the Company ....... 1,400,000 shares(1)
Common Stock outstanding prior
to the Offering ........................... 662,917 shares
Common Stock to be outstanding
after the Offering ........................ 2,062,917 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
<FN>
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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."
</FN>
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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
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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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YEAR ENDED JUNE 30, THREE MONTHS ENDED
----------------------------- ----------------------------
SEPT. 29, SEPT. 27,
1995 1996 1995 1996
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STATEMENT OF OPERATIONS DATA:
Net sales ............................... $18,655,000 $26,112,000 $5,687,000 $4,482,000
Income (loss) before income taxes ...... 301,000 404,000 134,000 (55,000)
Net income (loss) ....................... 172,000 407,000 250,000 (26,000)
Net income (loss) per common share ..... $.26 $.61 $.38 $(.04)
Weighted average number of common shares
outstanding ........................... 662,917 662,917 662,917 662,917
</TABLE>
SEPTEMBER 27, 1996
------------------------------
ACTUAL AS ADJUSTED(1)
------------- ---------------
BALANCE SHEET DATA:
Working capital ........................ $ 4,249,000 $ 8,879,000
Current assets ......................... 9,409,000 12,926,000
Total assets ........................... 15,953,000 20,507,000
Current liabilities .................... 5,160,000 4,047,000
Long-term debt, net of current portion 9,520,000 8,620,000
Stockholders' equity ................... 969,000 7,536,000
- --------
(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 $155,000, 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 (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
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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 three months ended September 27, 1996, the
Company's five largest customers accounted for approximately 65% of net
sales. Sales to Lockheed Martin Corporation, ENI, S&K, IBM and Gerber
accounted for approximately 20%, 19%, 10%, 8% and 8%, 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 three months ended September 27, 1996, two
of the Company's largest customers temporarily reduced shipment levels due to
their inventory backlog. The Company anticipates the same reduced level of
shipments to adversely affect results for the second quarter of 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 $55,000 for the three
months ended September 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
will result in its incurring a loss in the second quarter of Fiscal 1997.
There can be no assurance that the Company will be profitable in future
periods. As of September 27, 1996, the Company had a net operating loss
carryforward ("NOL") for federal income tax purposes of approximately
$3,600,000 which expires in 2011, and no significant 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 for all amounts that will
7
<PAGE>
not be realized. As of September 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."
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
8
<PAGE>
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. 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
reserved 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
9
<PAGE>
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 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."
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
10
<PAGE>
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 has received a commitment letter from
National Bank of Canada which expires on January 31, 1997. The Company is
currently seeking to negotiate an extension of the commitment. However, no
assurance can be given that the Company will be able to negotiate an extension
to the commitment or 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 investors (the "Bridge Investors"). The
Bridge Notes are due at the earlier of 150 days for the date of issuance, the
closing date of an initial public offering or upon the sale of the Company. 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. Although the default has been waived by the Bridge
Investors, such default may have an adverse impact on the Company's ability to
refinance its credit facility. See "Management's Discussion and Anaylsis of
Financial Condition and Results of Operations."
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 24.5% of the outstanding shares of Common Stock (approximately
22.2% if the Underwriters' over-allotment option is exercised in full). As a
result, the Company's current management will continue to exert substantial
influence over the Company's affairs after the Offering and will 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 $2.46 (or 41.1%) 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 Representative 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."
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
2,062,917 shares of Common Stock. The 1,400,000 shares of Common Stock offered
hereby (1,610,000 shares if the
11
<PAGE>
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 662,917 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, all of the Company's current
stockholders 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
the Representative. The Representative 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 80,000 shares of Common Stock. In addition, upon consummation of
this Offering the Company will sell to the Representative and/or its
designees, warrants (the "Representative's Warrants") to purchase up to
140,000 shares of Common Stock at an exercise price equal to 120% of the
public offering price of the shares of Common Stock sold in this Offering. As
long as the warrants, options and Representative's 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 Representative's 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
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 the Representative. Additionally, following this Offering, the
Company will become subject to the anti-takeover provisions 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."
REPRESENTATIVE'S POTENTIAL INFLUENCE ON THE MARKET
A significant number of the shares of Common Stock offered hereby may be
sold to customers of the Representative. Such customers may engage in
transactions for the sale or purchase of such shares through or with the
Representative. Although it has no obligation to do so, the Representative
12
<PAGE>
intends to make a market in the shares of Common Stock and may
otherwise effect transactions in such shares. If it participates in such
market, the Representative may influence the market, if one develops, for
the shares of Common Stock.
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."
13
<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 ISO9002, 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.
14
<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 $7,818,200 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.
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (a) as of
September 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 $155,000, 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>
SEPTEMBER 27, 1996
------------------------------
ACTUAL(1) AS ADJUSTED
-------------- --------------
<S> <C> <C>
Current portion of long-term debt(1) ......................... $ 1,983,000 $ 949,000
============== ==============
Long-term debt(1) ............................................ 9,520,000 8,620,000
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized;
none issued ............................................... -- --
Common stock, $.01 par value; 25,000,000 shares authorized;
662,917 shares issued and outstanding, actual; 2,062,917
shares issued and outstanding, as adjusted ................ 7,000 21,000
Additional paid-in capital .................................. 82,000 6,790,000
Retained earnings ........................................... 880,000 725,000
-------------- --------------
Total stockholders' equity ................................... 969,000 7,536,000
-------------- --------------
Total capitalization ......................................... $10,489,000 $16,156,000
============== ==============
<FN>
- --------
(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.
</FN>
</TABLE>
16
<PAGE>
DILUTION
At September 27, 1996, the net tangible book value of the Company was
$246,000 or $.37 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 September 27, 1996 would have been $7,293,000, or $3.54 per
share. This represents an immediate increase in net tangible book value of
$3.17 per share to the existing stockholders and an immediate dilution in net
tangible book value to new investors of $2.46 per share. The following table
illustrates this per share dilution.
Assumed initial public offering price per share ............. $6.00
Net tangible book value per share before the Offering ..... $ .37
Increase attributable to new investors ..................... 3.17
------
Pro forma net tangible book value per share after the Offering 3.54
-----
Dilution to new investors ................................... $2.46
=====
If the Underwriter's over-allotment option is exercised in full, the pro
forma net tangible book value per share of Common Stock after this Offering
would be $3.69 per share, which would result in dilution to new investors in
this Offering of $2.31 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 662,917 32.1% $ 3,833 0.05% $0.006
New investors ......... 1,400,000 67.9% 8,400,000 99.95% $ 6.00
------------ ---------- ------------- ----------
Total ............... 2,062,917 100.0% $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.
17
<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 the Representative. 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."
18
<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 three months ended September 29, 1995 and September 27, 1996 and the
balance sheet data as of September 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 three months
ended September 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, THREE MONTHS ENDED
------------------------------ ----------------------------
SEPT. 29, SEPT. 27,
1995 1996 1995 1996
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales .............................. $18,655,000 $26,112,000 $5,687,000 $4,482,000
Cost of goods sold ..................... 14,834,000 20,438,000 4,633,000 3,318,000
-------------- -------------- ------------- -------------
Gross profit ........................... 3,821,000 5,674,000 1,054,000 1,164,000
Selling, general and
administrative expense ............... 2,757,000 4,492,000 912,000 894,000
-------------- -------------- ------------- -------------
Income from operations ................. 1,064,000 1,182,000 142,000 270,000
Other income (expense) ................. (1,000) 199,000 176,000 31,000
Interest expense ....................... 762,000 977,000 184,000 356,000
-------------- -------------- ------------- -------------
Income (loss) before income taxes ..... 301,000 404,000 134,000 (55,000)
Provision (benefit) for income taxes .. 129,000 (3,000) (116,000) (29,000)
-------------- -------------- ------------- -------------
Net income (loss) ...................... $ 172,000 407,000 250,000 (26,000)
-------------- -------------- ------------- -------------
Net income (loss) per common share .... $ .26 $ .61 $ .38 $ (.04)
============== ============== ============= =============
Weighted average number of common
shares outstanding ................... 662,917 662,917 662,917 662,917
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
--------------------------- SEPT. 27,
1995 1996 1996
----------- ------------- -------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital ....................... $ 1,617,000 $ 4,482,000 $ 4,249,000
Current assets ........................ 8,502,000 9,520,000 9,409,000
Total assets .......................... 14,583,000 15,854,000 15,953,000
Current liabilities ................... 6,885,000 5,038,000 5,160,000
Long-term debt, net of current portion 6,897,000 9,602,000 9,520,000
Stockholders' equity .................. 505,000 913,000 969,000
</TABLE>
19
<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 ISO9002, an international quality standard.
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 three
months ended September 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 same reduced level of shipments to
adversely affect results for the second 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 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
20
<PAGE>
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
THREE MONTHS ENDED SEPTEMBER 27, 1996 AS COMPARED TO THREE MONTHS ENDED
SEPTEMBER 29, 1995
For the three months ended September 27, 1996, the Company's net sales
decreased by $1,205,000 or 21.2% to $4,482,000 from $5,687,000 for the three
months ended September 29, 1995. The decrease in sales was, in part, a result
of a temporary reduction in shipments required by two of the Company's
largest customers due to their inventory backlog.
Costs of goods sold for the three months ended September 27, 1996
decreased by $1,315,000 or 28.4% to $3,318,000 from $4,633,000 for the three
months ended September 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 7.4%. 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 three
months ended September 27, 1996 by $18,000 or 2.0% to $894,000 from $912,000
for the three months ended September 29, 1995.
Other income decreased for the three months ended September 27, 1996 by
$145,000 or 82.4% to $31,000 from $176,000 for the three months ended
September 29, 1995. Other income in the three months ended September 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 three months ended September 27, 1996
by $172,000 or 93.5% to $356,000 from $184,000 for the three months ended
September 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").
Benefit for income tax decreased for the three months ended September 27,
1996 by $87,000 or 75.0% to $29,000 from $116,000 for the three months ended
September 29, 1995. The tax benefit provided during the period ended
September 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.
21
<PAGE>
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 $763,000 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 used in operations was $210,000 for the three months ended
September 27, 1996 as compared to $605,000 for the three months ended
September 29, 1995. The primary cause for the improvement in cash used in
operations was the result, in part, of a significant inventory reduction
during the three months ended September 27, 1996. 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." Financing activities during the three months
ended September 27, 1996 provided $589,000, $1,100,000 of which was provided
from the issuance of the Bridge Notes. During this period, the Company repaid
$217,000 of long-term debt and incurred $288,000 of financing costs.
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.
Working capital increased to $4,249,000 at September 27, 1996 from $2,577,000 at
September 29, 1995. The increase in working capital resulted primarily from
financing activities, improvements in the collection of accounts receivable and
an increase in net income. Financing activities during Fiscal 1996 included
$2,000,000 from the issuance of the Notes as described
22
<PAGE>
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 September 27, 1996, $3,644,000 was outstanding under the
Line of Credit and the Company had $86,000 available for additional
borrowings.
The Line of Credit currently bears interest at the rate of 9.75% (prime
plus 1 1/2%). 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 $3,364,000 as
of September 27, 1996. The Bank has extended to the Company a machinery and
equipment loan with an outstanding principal balance as of September 27, 1996
of $467,000.
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
has received a letter of commitment from National Bank of Canada with respect to
a refinancing of the Company's indebtedness to the Bank. The letter agreement
expires January 31, 1997; however, the Company is currently seeking to negotiate
an extension of the commitment. There can be no assurance that the Company will
be able to obtain an extension.
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 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
23
<PAGE>
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 the Representative. 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 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." 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 from 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 the Company and the
Representative. 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 $155,000, 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 all 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 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
24
<PAGE>
costs that will combine 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 structured reduction of inventory, management of the
Company has expanded the features of the POM manufacturing software to allow
management to break 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 amend each Kit in the same way as it treats the entire job.
Any amendments 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 September 27, 1996, the Company had an NOL for federal income tax
purposes of approximately $3,600,000 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, "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 September 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.
25
<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 are
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 will be a $50 billion business in 1996 and 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.
26
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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
27
<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.
28
<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 intends to have the existing 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
29
<PAGE>
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. 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>
<CAPTION>
INDUSTRY SPECIFIC PRODUCT OR PRODUCT COMPONENT
- -------- -------------------------------------
<S> <C>
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>
30
<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.
31
<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 three months ended
September 27, 1996, the Company's five largest customers accounted for
approximately 65% of net sales. Sales to Lockheed Martin Corporation, ENI, S&K,
IBM and Gerber accounted for approximately 20%, 19%, 10%, 8% and 8%,
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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<PAGE>
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 September 27, 1996 was approximately $14,300,000,
compared to backlog at September 29, 1995 of approximately $14,000,000.
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
33
<PAGE>
any aged or obsolete inventory, it is reserved 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 29, 1996, the Company employed 173 full-time employees. The
Company employs approximately 40 people in finance, sales and administration,
127 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
$1,921,000 mortgage as of September 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 $1,442,000 as of September 27, 1996. During Fiscal
1997, 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 ....... 49 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.
Following the consummation of this Offering, the Company will seek to
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.
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<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 $138,450 $0 $0
Chairman and Chief Executive Officer 1995 $111,250 $0 $0
Stanley F. Zuk, 1996 $128,050 $0 $0
President and Chief Operating Officer 1995 $106,050 $0 $0
<FN>
- ----------
(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.
</FN>
</TABLE>
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 employemnt 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
36
<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 other than for Cause or by
reason of the Executive Officer's death or disability, 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"), 180,000
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 or not 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.
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 or approval by stockholders of the Company of a merger,
reorganization, liquidation, dissolution or disposition of all or
substantially all of the assets of the Company. 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 80,000 shares of Common Stock to five persons,
including options to purchase 25,000 shares of Common Stock to Gary D. Horne,
options to purchase 20,000 shares of Common Stock to Stanley F. Zuk, and
options to purchase 10,000 shares of Common Stock to each of Robert Lettieri
and 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
37
<PAGE>
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.
The Underwriting Agreement between the Company and the Underwriters
provides that for a period of two years from the date of this Prospectus, the
Company will not, without the consent of the Representative, adopt, propose
to adopt or otherwise permit to exist any employee, officer, director,
consultant or compensation plan or arrangement permitting, granting, issuing
or selling any shares of Common Stock or options, warrants or any other
derivative security of the Company covering in the aggregate more than
180,000 shares of Common Stock. Moreover, any grant, issuance or sale within
said period cannot have an exercise price or sale at a price per share less
than the greater of (i) the fair market value of the Common Stock on the date
of grant, issuance or sale, or (ii) $6.00 per share of Common Stock;
provided, however, options to purchase 75,000 shares of Common Stock may be
granted at market price to any person(s) not an officer, director,
stockholder or employee of the Company as of the date of this Prospectus.
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 162,716 and 42,186 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
$594,000 at September 27, 1996. Such advances are unsecured and repayable on
demand; however, Mr. Horne has agreed with the Company not to make demand until
13 months from the date of this Prospectus. The Company intends to repay such
advances as cash flow permits. Mr Horne has also agreed to provide the Company
with additional loans of up to $150,000 until June 27, 1997 if this Offering is
not consummated. 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.
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<PAGE>
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.
CONTINGENT SHARES
The Company effected a 6,026.52 for one stock split effective as of June
10, 1996. An aggregate of 450,000 shares of Common Stock issued to the
existing stockholders of the Company in connection therewith (323,100 shares
issued to Gary D. Horne, 77,850 shares issued to Stanley F. Zuk and 49,050
shares issued to the Estate of Richard Backofen (the "Estate")), were deemed
by the Company's Board of Directors to be Contingent Shares. Gary D. Horne,
with the consent of the Board of Directors, subsequently transferred 116,316
Contingent Shares to Gregory Horne, his son, and 58,158 Contingent Shares to
Marion L. Horne Turcot, his daughter, and 148,626 Contingent Shares to a
limited liability company controlled by him ("The Horne LLC").
In the event the Company's net income, without giving effect to any
acquisitions, mergers or sales of securities subsequent to the date of this
Prospectus ("After-Tax Income"), is less than $650,000 for Fiscal 1997, then
one Contingent Share (.330 of a Contingent Share held by The Horne LLC, .259
of a Contingent Share held by Gregory Horne, .129 of a Contingent Share held
by Marion L. Horne Turcot, .173 of a Contingent Share held by Stanley F. Zuk
and .109 of a Contingent Share held by the Estate) will be returned to
treasury for each dollar that After Tax Income is below the $650,000
benchmark. In addition, in the event the Company's After Tax Income for
Fiscal 1998 is less than $2,150,000, then one Contingent Share (in the
proportions described above) will be returned to treasury for each dollar
that After Tax Income is below the $2,150,000 benchmark.
In the event the Company's After-Tax Income for Fiscal 1998 shall exceed
$2,150,000, then the existing stockholders of the Company shall be entitled
to receive one Contingent Share previously returned to treasury (in the
proportions described above) for each dollar that After-Tax Income exceeds
the $2,150,000 benchmark.
After-Tax Income for Fiscal 1997 and Fiscal 1998 shall be determined by
the Company's independent auditors based on the Company's audited
consolidated financial statement for those years. Such determination shall be
made and the return to treasury of any Contingent Shares shall take place as
soon as practicable after completion of the audit of the Company's
consolidated financial statements for Fiscal 1998.
The existing stockholders of the Company shall have all rights as
stockholders with respect to their respective Contingent Shares while they
are outstanding, except that the Contingent Shares may not be, directly or
indirectly, sold, transferred or disposed of until it has been determined
that they are not subject to being returned to treasury.
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.
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<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
------------------------
NUMBER OF SHARES
NAME AND ADDRESS BENEFICIALLY PRIOR TO AFTER
OF BENEFICIAL OWNER(1) OWNED(2) OFFERING OFFERING
- ------------------------------------- -------------------- ----------- -----------
<S> <C> <C> <C>
Gary D. Horne(3) .................... 218,952(3) 33.0% 10.6%
Stanley F. Zuk ...................... 114,504 17.3% 5.6%
Gregory Horne(4) .................... 171,437 25.9% 8.3%
Robert Lettieri ..................... 0 0% 0%
William Becker
P.O. Box 170
Convent Station, NJ 07961(5)(6) .... 180,833 21.4% 8.1%
Sanford I. Feld
Box 670, #12 Gumby Lane
Bernardsville, NJ 07095(5)(7) ...... 180,833 21.4% 8.1%
Marion L. Horne Turcot(8) ........... 85,706 12.9% 4.2%
Estate of Richard Backofen
c/o Edith Backofen
43 Mooress Hill Road
New Windsor, NY 12553 ............... 72,318 10.9% 3.5%
Frederic Becker
c/o Wilentz, Goldman & Spitzer
90 Woodbridge Center Drive
Woodbridge, NJ 07095(5) ............. 51,666 7.2% 2.4%
All directors and executive officers
as a group (four persons) .......... 504,893 76.2% 24.5%
</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.
40
<PAGE>
DESCRIPTION OF SECURITIES
GENERAL
The Company is authorized to issue 25,000,000 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 662,917
shares of Common Stock and no shares of Preferred Stock issued and outstanding.
Upon consummation of the Offering, there will be 2,062,917 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 the Representatives.
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).
41
<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
2,062,917 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 662,917 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, as currently in effect, if a period of at
least two years 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 21,629 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 two-year holding
period.
Under Rule 144(k), if a period of at least three years 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. The Commission has proposed
reducing the holding periods under Rule 144 and Rule 144(k) to one year and
two years, respectively. There can be no assurance as to when, if ever, such
proposal will be adopted by the Commission.
Of the currently outstanding 662,917 shares of Common Stock, 72,318 shares
would be eligible for public sale pursuant to Rule 144 as of the date of this
Prospectus, 385,701 shares would become eligible for such public sale commencing
90 days after the date of this Prospectus and the remaining 204,898 shares will
become eligible for public sale pursuant to Rule 144 in June 1998.
Notwithstanding the foregoing, all of the Company's current stockholders 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 the
Representative. The Representative 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 Representative 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 the Company
and the Representative. 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.
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<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters"), for whom H.J. Meyers &
Co., Inc. is acting as representative (in such capacity, the "Representative"),
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. ...
-----------------
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 Representative has 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
Representative.
The Representative has advised the Company that it does 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 Representative 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.
All of the Company's current stockholders 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 the
43
<PAGE>
Representative. 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 the Company and the
Representative. An appropriate legend shall be marked on the face of the
certificates representing all such securities. The Representative 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, the Representative 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 the Representative. 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 the Representative.
In connection with this Offering, the Company has agreed to sell to the
Representative, for nominal consideration, the Representative's Warrants to
purchase from the Company up to 140,000 shares of Common Stock. The
Representative's Warrants are initially exercisable at a price of $ per share
of Common Stock, [120% 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 Representative. The Representative's Warrants provide for adjustment in
the number of shares of Common Stock issuable upon exercise thereof and in the
exercise price of the Representative's Warrants as a result of certain events,
including subdivisions and combinations of the Common Stock. The
Representative's 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
Representative 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 Representative 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 the Representative has
brought to the Company, or for which the Company retains the Representative 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
Representative's 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
Representative has 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 the
Representative.
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<PAGE>
The Company has also agreed to grant to the Representative a right of first
refusal, for a period of two years from the date of this Prospectus, for any
sale of securities to be made by the Company, or any of its present or future
subsidiaries or any of its stockholders beneficially owning 5% or more of the
Company's Common Stock.
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.
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, and at the Commission's regional offices at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661, and at 7 World Trade
Center, 13th Floor, New York, New York 10048. 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.
45
<PAGE>
ASD GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
---------
Independent Auditors' Report ............................................................ F-2
Consolidated Balance Sheets as of June 30, 1996 and September 27, 1996 (Unaudited) ..... F-3
Consolidated Statements of Operations for the Years Ended June 30, 1995 (as restated)
and 1996 and the Three Months Ended September 29, 1995 and September 27, 1996
(Unaudited) ............................................................................ F-4
Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1995
(as restated) and 1996 and the Three Months Ended September 29, 1995 and
September 27, 1996 (Unaudited) ......................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 1995 (as restated)
and 1996 and the Three Months Ended September 29, 1995 and September 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, SEPTEMBER 27,
1996 1996
--------------- ----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash ................................................................. $ 458,911 $ 830,169
Accounts receivable, less allowance for doubtful accounts of $383,000 2,737,163 2,564,232
Inventory ............................................................ 5,954,571 5,541,543
Prepaid expenses and other current assets ............................ 56,372 167,273
Deferred tax asset ................................................... 313,449 305,863
-------------- ---------------
Total current assets ............................................... 9,520,466 9,409,080
Property, plant and equipment, net .................................... 4,736,779 4,682,590
Deferred tax asset .................................................... 959,499 1,001,093
Other assets .......................................................... 637,735 860,089
-------------- ---------------
Total assets .......................................................... $15,854,479 $15,952,852
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .................................... $ 1,072,710 $ 1,983,176
Accounts payable ..................................................... 2,693,452 1,997,268
Accrued expenses ..................................................... 1,202,228 1,109,909
Deferred revenues .................................................... 69,666 69,666
-------------- ---------------
Total current liabilities .......................................... 5,038,056 5,160,019
Long-term debt ........................................................ 9,602,158 9,520,148
Deferred compensation ................................................. 301,085 303,522
-------------- ---------------
Total liabilities .................................................. 14,941,299 14,983,689
-------------- ---------------
Contingencies (Note 10)
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized,
none issued ........................................................ -- --
Common stock, $.01 par value, 25,000,000 shares authorized,
662,917 shares issued and outstanding .............................. 6,629 6,629
Paid-in capital ...................................................... -- 82,000
Retained earnings .................................................... 906,551 880,534
-------------- ---------------
Total stockholders' equity ......................................... 913,180 969,163
-------------- ---------------
Total liabilities and stockholders' equity ............................ $15,854,479 $15,952,852
============== ===============
</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, THREE MONTHS ENDED
------------------------------- ---------------------------------
SEPTEMBER 29, SEPTEMBER 27,
1995 1996 1995 1996
-------------- ------------- -------------- ----------------
(RESTATED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales ..................... $18,655,383 $26,111,896 $5,687,088 $4,481,775
Cost of goods sold ............ 14,834,094 20,437,889 4,632,666 3,317,779
-------------- ------------- -------------- --------------
Gross profit ................ 3,821,289 5,674,007 1,054,422 1,163,996
-------------- ------------- -------------- --------------
Operating expenses:
Sales and marketing .......... 240,398 288,815 44,571 47,536
General and administrative .. 2,516,413 4,203,060 867,959 846,504
-------------- ------------- -------------- --------------
Total operating expenses ... 2,756,811 4,491,875 912,530 894,040
-------------- ------------- -------------- --------------
Income from operations ..... 1,064,478 1,182,132 141,892 269,956
-------------- ------------- -------------- --------------
Other income (expense) ........ (675) 199,118 176,333 31,147
Interest expense .............. 762,891 976,850 184,066 356,120
-------------- ------------- -------------- --------------
Income (loss) before
income taxes .............. 300,912 404,400 134,159 (55,017)
-------------- ------------- -------------- --------------
Provision (benefit) for
income taxes ................ 129,000 (3,000) (116,000) (29,000)
-------------- ------------- -------------- --------------
NET INCOME (LOSS) ........... $ 171,912 $ 407,400 $ 250,159 $ (26,017)
============== ============= ============== ==============
Net income (loss) per
common share ................ $ .26 $ .61 $ .38 $ (.04)
============== ============== =============== ==============
Weighted average common shares
outstanding ................. 662,917 662,917 662,917 662,917
============== ============== ============== ==============
</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 ........... -- $-- 662,917 $6,629 $ -- $327,239 $333,868
Net income (restated) ........... -- -- -- -- -- 171,912 171,912
------- ------- -------- ------- ---------- -------- --------
Balance, June 30, 1995
(restated) .................... -- -- 662,917 6,629 -- 499,151 505,780
------- ------- -------- ------- ---------- -------- --------
Net income ...................... -- -- -- -- -- 407,400 407,400
------- ------- -------- ------- ---------- -------- --------
Balance, June 30, 1996 .......... -- -- 662,917 6,629 -- 906,551 913,180
Net loss (unaudited) ............ -- -- -- -- -- (26,017) (26,017)
Fair value of warrants issued
(unaudited) (Note 12) ......... -- -- -- -- 82,000 -- 82,000
------- ------- -------- ------- ---------- -------- --------
Balance, September 27, 1996
(unaudited) ................... -- $-- 662,917 $6,629 $82,000 $880,534 $969,163
======= ======= ======== ======= ========== ======== ========
</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, THREE MONTHS ENDED
------------------------------ ---------------------------------
SEPTEMBER 29, SEPTEMBER 27,
1995 1996 1995 1996
-------------- -------------- ---------------- -----------------
(RESTATED) (UNAUDITED)
<S> <C> <C> <C> <C>
Operating activities:
Net income (loss) ................... $ 171,912 $ 407,400 $ 250,159 $ (26,017)
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Depreciation and amortization ..... 365,321 383,449 78,611 123,636
Benefit for doubtful accounts .... (204,945) (45,030) -- --
Deferred compensation ............. 27,582 29,790 4,500 8,043
Interest accrued on advances from
stockholder ..................... 35,998 43,117 10,780 11,642
Deferred income taxes ............. 118,642 (26,594) (140,914) (29,000)
Gain on sale of plant ............. -- (166,734) (166,734) --
Changes in assets and liabilities:
Accounts receivable ............... (639,883) 532,293 582,512 172,931
Inventory ........................ (3,269,755) (1,776,803) (1,065,526) 413,028
Prepaid expenses and other
current assets ................. (19,903) 125,309 (9,589) (110,901)
Other assets ..................... (20,090) (112,668) (50,125) 19,817
Accounts payable ................. 2,264,592 (288,111) (403,058) (701,192)
Accrued expenses ................. 729,276 (323,192) 295,654 (92,319)
Deferred revenues ................ (195,677) (725,899) 8,937 --
-------------- -------------- ---------------- ----------------
Net cash used in operating
activities .................... (636,930) (1,943,673) (604,793) (210,332)
-------------- -------------- ---------------- ----------------
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 3,464,355 450,710 1,100,000
Payments of long-term debt .......... (216,591) (1,312,206) (665,284) (217,187)
Financing costs ..................... -- (502,644) -- (287,877)
Payments of deferred compensation .. (22,662) (23,834) (4,500) (5,605)
-------------- -------------- ---------------- ----------------
Net cash provided by (used in)
financing activities .......... 510,747 1,625,671 (219,074) 589,331
-------------- -------------- ---------------- ----------------
Net increase (decrease) in cash ..... (126,183) 101,989 (232,086) 371,258
Cash, beginning of period ............ 483,105 356,922 356,922 458,911
-------------- -------------- ---------------- ----------------
Cash, end of period .................. $ 356,922 $ 458,911 $ 124,836 $ 830,169
============== ============== ================ ==============
Supplemental disclosure:
Cash paid during the period for:
Income taxes ....................... $ 2,521 $ 32,631 $ 24,914 $ 5,008
============== ============== ================ ==============
Interest ........................... $ 392,352 $ 1,268,779 $ 173,286 $ 368,864
============== ============== ================ ==============
Notes exchanged for amounts owed
to vendors ........................ $ 553,389 $ 198,403 $ 17,865 $ --
============== ============== ================ ==============
</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 204,902 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 three months
ended September 27, 1996, the Company incurred $373,851 and $142,933,
respectively, in connection with debt financings (see Notes 4 and 12) and
incurred $128,793 and $144,944, 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
three months ended September 27, 1996 was $22,500 and $45,290, respectively.
All of the above costs are included in other assets at June 30, 1996 and
September 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.
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, THREE MONTHS ENDED
-------------------- --------------------------------------
SEPTEMBER 29, SEPTEMBER 27,
CUSTOMER 1995 1996 1995 1996
- --------------------------------------- --------- --------- ------------------ ---------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Gerber Scientific Products ............ 20% 16% --% --%
ENI ................................... 19 20 19 19
IBM ................................... 19 -- 10 --
S&K Products International, Inc. ..... 13 14 12 10
Lockheed Martin Corporation............ -- 13 18 20
Bruce Technologies International ..... -- 10 11 --
--------- --------- ------------- ---------------
71% 73% 70% 49%
========= ========= ============= ===============
</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 6,026.52 for 1 split
of its common stock resulting in 662,917 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 September 27, 1996 and the statements of operations, stockholders'
equity, and cash flows for the three months ended September 29, 1995 and
September 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:
JUNE 30, SEPTEMBER 27,
1996 1996
-------------- ----------------
(UNAUDITED)
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) (2,586,612)
-------------- ----------------
3,244,640 3,202,951
-------------- ----------------
Idle property:
Land and building .............. 1,923,865 1,923,865
Less: accumulated depreciation (431,726) (444,226)
-------------- ----------------
1,492,139 1,479,639
-------------- ----------------
$ 4,736,779 $ 4,682,590
============== ===============
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 1997.
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 three months ended
September 27, 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, SEPTEMBER 27,
1996 1996
-------------- -----------------
(UNAUDITED)
<S> <C> <C>
Original Issue Discount Promissory Notes--interest at 10%, due
January 26, 1997 (see Note 12) ................................ $ -- $ 1,034,000
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 42,591
Notes Payable--Key Bank, interest at prime plus 1%,
due December 1, 1998, secured by equipment .................... 160,696 146,888
Notes Payable--Bankers Trust Company, interest at prime
plus 1.5%, due December 31, 1996, secured by equipment ....... 504,026 467,426
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 3,643,644
Mortgage Payable--Bankers Trust Company, interest at prime
plus 1.5%, due September 1, 1998, secured by real property ... 1,946,369 1,921,319
Mortgage Payable--Bankers Trust Company, interest at prime
plus 1.5%, due September 1, 1998, secured by real property ... 1,466,013 1,442,313
Advances From Stockholder, plus accrued interest of $132,112
and $143,754--interest at 8%, repayable no earlier than the
year ending June 30, 1998 ..................................... 582,081 593,723
Notes Payable to Vendors--interest at various rates, secured
by certain assets ............................................. 266,158 193,537
Other ......................................................... 18,428 17,883
-------------- ---------------
10,674,868 11,503,324
Less: current portion ......................................... 1,072,710 1,983,176
-------------- ---------------
$ 9,602,158 $ 9,520,148
============== ===============
</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 ($7,474,702 at September 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
SEPTEMBER
- ----------------
1997 .......... $ 1,983,176
1998 .......... 6,736,012
1999 .......... 2,777,499
2000 .......... 4,397
2001 .......... 2,240
-------------
$ 11,503,324
=============
The prime rate at September 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 25,000,000 shares and effected a 6,026.52 for 1
split of its common stock resulting in 662,917 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 180,000
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:
YEAR ENDED JUNE 30, THREE MONTHS ENDED
------------------------ --------------------------------
SEPTEMBER 29, SEPTEMBER 27,
1995 1996 1995 1996
----------- ----------- --------------- ---------------
(UNAUDITED)
Current:
Federal .. $ 8,264 $ 19,111 $ 20,180 $ --
State ..... 2,094 4,483 4,734 --
----------- ----------- --------------- ---------------
10,358 23,594 24,914 --
----------- ----------- --------------- ---------------
Deferred:
Federal .. 96,100 (21,541) (114,140) (23,490)
State ..... 22,542 (5,053) (26,774) (5,510)
----------- ----------- --------------- ---------------
118,642 (26,594) (140,914) (29,000)
----------- ----------- --------------- ---------------
$129,000 $ (3,000) $(116,000) $(29,000)
=========== =========== =============== ===============
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, THREE MONTHS ENDED
------------------------- ----------------------------------
SEPTEMBER 29, SEPTEMBER 27,
1995 1996 1995 1996
----------- ------------ ---------------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Income tax at statutory rate ...... $102,310 $ 137,496 $ 45,614 $(18,705)
State income taxes and other (net
of Federal benefit) .............. 26,690 31,504 10,386 (10,295)
Release of valuation allowance .... -- (172,000) (172,000) --
----------- ------------ ---------------- ----------------
$129,000 $ (3,000) $(116,000) $(29,000)
=========== ============ ================ ================
</TABLE>
The net deferred tax asset consists of the following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 27,
1996 1996
-------------- ---------------
(UNAUDITED)
<S> <C> <C>
Net operating loss carryforward $ 1,490,582 $1,522,741
Capital loss carryforward ...... 228,333 228,333
Allowance for doubtful accounts 160,847 160,847
Deferred compensation ........... 126,456 127,479
Accrued vacation ................ 46,729 46,729
Accrued interest ................ 55,487 52,101
Other ........................... 77,122 78,556
Depreciation .................... (684,275) (681,497)
-------------- ---------------
1,501,281 1,535,289
Valuation allowance ............. (228,333) (228,333)
-------------- ---------------
$1,272,948 $1,306,956
============== ===============
</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 September 27, 1996, the Company has a Federal net operating loss
carryforward of approximately $3,600,000 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 three months ended September 29, 1995
and September 27, 1996 were approximately $48,000, $82,000, $16,000 and
$17,000, 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 three months ended September 29,
1995 and September 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 $.38,
respectively.
12. SUBSEQUENT EVENTS--FINANCINGS
REFINANCING COMMITMENT:
On August 28, 1996, the Company received a commitment letter expiring
January 31, 1997 (the "Commitment") to provide a senior secured financing
facility of up to $7,000,000 from National Bank of Canada ("NBC") that would
replace the Bankers Trust Company notes payable and revolving line of credit
(see Note 4). Under the terms of the Commitment, NBC will advance up to
$6,000,000 in the form of a revolving loan with a borrowing base comprised of
(1) between 75% and 80% of eligible accounts receivable, (2) up to 55% of
eligible inventory subject to an availability sublimit of $3,500,000, and (3)
up to 80% of the forced liquidation value of certain of the Company's
machinery and equipment, subject to an availability sublimit of $1,000,000.
The financing facility will have a two year term and bear interest at prime
plus 3/4 %. The Company will pay an annual fee of 1/2 % of the unused portion
of the revolving loan. The Company paid a commitment issuance fee of $30,000
to NBC and will owe an additional $20,000 fee at the closing of the financing
facility. The initial funding of the financing facility is subject to the
Company's completion of an initial public offering of at least $8,000,000.
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 are
due at the earlier 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
F-14
<PAGE>
ASD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. SUBSEQUENT EVENTS--FINANCINGS--(CONTINUED)
stockholders' equity. At September 27, 1996, the Company was in default of
this requirement. Such default has been waived by the investors and the
interest rate on the OID Notes increased to 12.5% retroactively as of the
date of issuance.
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
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 $16,000 during the three months ended September 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. At maturity, the Company has options to extend the term of the
OID Notes for additional three or two month periods. Such extensions require
an increase to the OID Notes' interest rate and amount of warrants granted
and a decrease in the warrants' exercise price.
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 prinicipal 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 a ten-year period; provided however, the warrantes
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 the
Representative. 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 10
year term of the warrants.
CONTINGENT SHARES:
In connection with the letter of intent dated December 24, 1996 for an
initial public offering, 450,000 of the Company's outstanding common shares will
be designated as "Contingent Shares." A portion or all of such Contingent Shares
may be returned to treasury if the Company fails to achieve net income, as
defined, of $650,000 and $2,150,000 during the years ended June 1997 and 1998,
respectively.
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.
F-15
<PAGE>
ASD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. SUBSEQUENT EVENTS--FINANCINGS--(CONTINUED)
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-16
<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 ........................ 14
USE OF PROCEEDS .................... 15
CAPITALIZATION ..................... 16
DILUTION ........................... 17
DIVIDEND POLICY .................... 17
CONCURRENT OFFERING................. 18
SELECTED FINANCIAL DATA ............ 19
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS .............. 20
BUSINESS ........................... 26
MANAGEMENT ......................... 35
CERTAIN TRANSACTIONS ............... 38
PRINCIPAL STOCKHOLDERS ............. 40
DESCRIPTION OF SECURITIES .......... 41
SHARES ELIGIBLE FOR
FUTURE SALE ...................... 42
UNDERWRITING ....................... 43
LEGAL MATTERS ...................... 45
EXPERTS ............................ 45
ADDITIONAL INFORMATION ............. 45
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.
1,400,000 SHARES
OF
COMMON STOCK
PROSPECTUS
H.J. MEYERS & 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 JANUARY 15, 1997
PROSPECTUS
533,333 SHARES OF COMMON STOCK
ASD GROUP, INC.
--------
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 from the consummation of the Company Offering without the
prior written consent of the Company and H.J. Meyers & Co., Inc. (the
"Representative"), the managing underwriter 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 the 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
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 ........ 662,917 shares
Common Stock to be outstanding
after the Company Offering ..... 2,062,917(2)
shares
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
- -----------
(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-allotments, if any are being offered by the Company in the
concurrent underwritten public offering. See "Company Offering."
Except as otherwise specifically set forth between, 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 SECURITY HOLDERS' 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
PRIOR 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>
- --------
* Less than 1%
(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 from consummation of the Offering
without the prior written consent of the Company and the Representative. The
Representative 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>
(ALTERNATE PAGE FOR SELLING SECURITY HOLDERS' PROSPECTUS)
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
<TABLE>
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PAGE
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<S> <C>
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 .............
</TABLE>
ASD GROUP INC.
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.
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<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 the Representative.
(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
162,712 and 42,186 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 the
Representative.
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.
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EXHIBIT
NO. DESCRIPTION
- ----------- -----------
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1.1 Form of Underwriting Agreement.(1)
3.1 Certificate of Incorporation.(3)
3.2 Bylaws.(3)
4.1 Specimen Certificate of Common Stock.(2)
4.2 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.(3)
4.4 Form of Special Warrant to Purchase Common Stock of Registrant.(3)
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.(3)
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.(3)
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.(3)
10.5 Option Agreement dated as of May 31, 1996 by and among Banker's Trust Company and the Registrant.(3)
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 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.(2)
24.1 Power of Attorney (included in the signature page hereof).(3)
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(1) To be filed by amendment.
(2) Filed herewith.
(3) 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.
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. 1 to the Registration Statement to be signed on its behalf by
the undersigned, in the City of Poughkeepsie, State of New York on this
14th day of January, 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.
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SIGNATURE TITLE DATE
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/s/ GARY D. HORNE Chairman of the Board January 14, 1997
- -------------------- and Chief Executive Officer
Gary D. Horne (Principal Executive Officer)
/s/ ROBERT LETTIERI Chief Financial Officer and Director January 14, 1997
- -------------------- (Principal Financial Officer)
Robert Lettieri
/s/ STANLEY F. ZUK President, Chief Operating Officer January 14, 1997
- -------------------- and Director
Stanley F. Zuk
/s/ GREGORY D. HORNE Vice President--Information Systems January 14, 1997
- --------------------
Gregory D. Horne
II-5
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EXHIBIT 4.1
COMMON STOCK COMMON STOCK
NUMBER ASD GROUP, INC SHARES
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
SEE REVERSE FOR CERTAIN DEFITINITIONS
CUSIP 001988 10 4
THIS CERTIFIES THAT
is the Registered Holder of
FULLY-PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE, OF
ASD GROUP, INC
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney, upon surrender of this Certificate properly
endorsed. This Certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
ASD GROUP, INC
CORPORATE SEAL
1965
DELAWARE
CHAIRMAN OF THE BOARD SECRETARY
[LANDSCAPED]
COUNTERSIGNED AND REGISTERED
AMERICAN STOCK TRANSFER & TRUST COMPANY
TRANSFER AGENT AND REGISTRAR
By
AUTHORIZED SIGNATURE
(SEE REVERSE SIDE)
<PAGE>
ASD GROUP, INC.
THE CORPORATION WILL FURNISH TO ANY STOCKHOLDER UPON REQUEST AND WITHOUT CHARGE
A FULL STATEMENT OF: (A) THE DESIGNATION, RELATIVE RIGHTS, PREFERENCES AND
LIMITATIONS APPLICABLE TO EACH CLASS OF CAPITAL STOCK AUTHORIZED TO BE ISSUED;
(B) THE VARIATIONS RIGHTS, PREFERENCES AND LIMITATIONS DETERMINED FOR EACH
SERIES AUTHORIZED TO BE ISSUED WITHIN EACH SUCH CLASS: AND (C) THE AUTHORITY OF
THE BOARD OF DIRECTORS TO DETERMINE SUCH VARIATIONS FOR SUBSEQUENT SERIES.
The following abbreviations when used in the inscription on the facE of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with rights of survivorship and not as tenants in
common
UNIF GIFT MIN ACT - (Cust) ___________ Custodian (Minor) _____________ under
Uniform Gifts to Minors Act (State)_________________
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _______________HEREBY SELL, ASSIGN AND TRANSFER UNTO
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[ ]
_______________________________________________________________________________
_______________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE, OR ASSIGNEE
_______________________________________________________________________________
_______________________________________________ shares of the cAapital stock
represented by the within Certificate and does hereby irrevocably constitute and
appoint _______________________________________________________________________
_______________________ Attorney to transfer the said stock on the books of the
within-named Corporation with full power of substitution in the premises.
DATED _______________________________ SIGNED __________________________________
SIGNED __________________________________
NOTICE: The signature(s) to this
assignment must conform in all repsects
with the name as written upon the face of
the certificate.
IMPORTANT: SIGNATURE(S) MUST BE GUARANTEED BY A FIRM THAT IS A MEMBER OF A
REGISTERED NATIONAL STOCK EXCHAGNE OR BY A COMMERCIAL BANK OR A TRUST COMPANY.
EXHIBIT 4.5
ASD Group, Inc.
10% Original Issue Discount Promissory Note
THIS PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
(THE "ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER THIS NOTE NOR ANY INTEREST
THEREIN MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE TRANSFERRED UNLESS
(l) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE ACT AND
ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE COMPANY RECEIVES AN OPINION
OF COUNSEL TO THE HOLDER OF THIS NOTE, WHICH COUNSEL AND OPINION ARE REASONABLY
SATISFACTORY TO THE COMPANY, THAT THIS NOTE MAY BE OFFERED, SOLD, PLEDGED,
ASSIGNED OR TRANSFERRED IN THE MANNER CONTEMPLATED WITHOUT AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT OR APPLICABLE STATE SECURITIES LAWS.
FOR RESIDENTS OF GEORGIA: THESE SECURITIES HAVE BEEN ISSUED OR SOLD IN RELIANCE
ON PARAGRAPH (13) OF CODE SECTION 10-5-9 OF THE "GEORGIA SECURITIES ACT OF
1973," AND MAY NOT BE SOLD OR TRANSFERRED EXCEPT IN A TRANSACTION WHICH IS
EXEMPT UNDER SUCH ACT OR PURSUANT TO AN EFFECTIVE REGISTRATION UNDER SUCH ACT.
$____________ August 29, 1996
New York, New York
FOR VALUE RECEIVED, the undersigned, ASD Group, Inc., a Delaware
corporation (the "COMPANY"), hereby promises to pay to________________ with an
address of____________________________________ , or registered assigns (the
"HOLDER"), the principal sum of $____________ , 150 days from the date hereof
(the "MATURITY DATE"). Provided that neither an Event of Default, as defined in
SECTION 6, nor an Event (hereinafter defined) shall have occurred and be
continuing, the Company shall have the option to extend the Maturity Date for a
initial period of three months (the "FIRST EXTENSION") and for an additional two
months (the "SECOND EXTENSION") by giving written notice thereof to the Holder
at least ten days prior to the Maturity Date or any extended Maturity Date as
the case may be, and by satisfying the following conditions: (A) for the First
Extension, (i) prepaying interest on the unpaid principal balance for the term
of the First Extension, at the rate of l5% per annum; (ii) issuing Warrants, as
defined in SECTION 1, to purchase an additional number of Shares, as defined in
SECTION l, per Unit, as defined in SECTION l, equal to 25% of the Shares
that may then be issued pursuant to the Holder's Warrants; and (iii) resetting
the exercise price of the Warrants to 85% of the original Exercise Price, as
defined in the Warrant; and (B) for the Second Extension, (i) prepaying interest
on the unpaid principal balance for the term of the Second Extension at the rate
of 18% per annum; (ii) issuing Warrants to purchase an additional number of
Shares per Unit
<PAGE>
equal to 25% of the Shares that may then be issued pursuant to the Holder's
Warrants; and (iii) resetting the Exercise Price of the Warrants to 85% of the
Exercise Price of the Warrants in effect immediately prior to the Second
Extension. Notwithstanding the foregoing, the principal balance of this Note and
any interest accrued thereon to the extent not previously paid shall become
immediately due and payable upon the earliest of (a) the closing of the
Company's Initial Public Offering (the "IPO"), (b) the sale by the Company of
all or substantially all their assets, (c) the sale by its stockholders of all
or substantially all its stock in the Company, (d) the merger or consolidation
of the Company or the occurrence of any business combination involving the
Company or (e) a change of Management (each, an "EVENT"). For the purposes
hereof, a "CHANGE OF MANAGEMENT" shall mean the removal or resignation of any
two of Gary D. Home, Stanley F. Zuk and Robert Lettieri from their positions
with the Company as described in the preliminary prospectus contained in the
registration statement on Form SB-2 filed with the Securities and Exchange
Commission on July 8, 1996.
1. OFFERING, SUBSCRIPTION AGREEMENT AND SECURITY.
This Note was issued by the Company in an offering (the "OFFERING") of
units (the "UNITS"), each consisting of (i) a 10% Original Issue Discount
Promissory Note in the principal amount of $104,166.67 (all such notes issuable
pursuant to the Offering, the "NOTES") and (ii) Common Stock Purchase Warrants
to purchase 11,250 shares of common stock, par value $.01 per share (the "COMMON
STOCK"), of the Company (all such warrants issuable pursuant to the Offering,
including those issuable hereunder, the "WARRANTS"). In connection with the
Offering, each purchaser of Units (each, a "HOLDER") has executed and delivered
a Subscription Agreement (the "SUBSCRIPTION AGREEMENT") to the Company.
2. PAYMENTS
a. The Company may, at its option, prepay all or any part of the
principal of this Note, without penalty. All payments on this Note shall be
applied first to accrued interest hereon and then to the payment of principal
hereof. Any prepayment shall be made pro rata with the other Notes in proportion
to their respective outstanding principal balance.
b. Payments of principal of and interest on this Note shall be
made by check sent to the Holder's address set forth above or to such other
address as the Holder may designate for such purpose from time to time by
written notice to the Company.
c. The obligations to make the payments provided for in this Note
are absolute and unconditional and not subject to any defense, set-off,
counterclaim, recision, recoupment or adjustment whatsoever. The Company hereby
expressly waives demand and presentment for payment, notice of nonpayment,
notice of dishonor, protest, notice of protest, bringing of suit and diligence
in taking any action to collect any amount called for hereunder, and shall be
directly and primarily liable for the payment of all sums owing and to be owing
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<PAGE>
hereon, regardless of and without any notice, diligence, act or omission with
respect to the collection of any amount called for hereunder.
3. RANKING OF NOTE
a. This Note is one of a series of Notes. The terms and conditions
of all Notes shall be identical in all respects and all Notes of this series
shall rank PARI PASSU. The Company, for itself, its successors and assigns,
covenants and agrees that the payment of the principal of and interest on the
Note is senior in right of payment to the payment of all existing and future
Junior Debt. The Holder understands that this Note is junior in right of payment
to the payment of all Senior Debt.
b. The Company covenants and agrees to cause any current holder of
Junior Debt, and to use its best efforts to cause any future holder of Junior
Debt, to execute such subordination agreements, instruments or waivers as may be
reasonably necessary in the opinion of BlueStone Capital Management LP, a New
York limited partnership ("BLUESTONE"), to reflect the terms set forth herein.
c. Until the payment in full of all amounts of principal of and
interest on the Notes, and all other amounts owing under the Notes, no payment
may be made with respect to the principal of or other amounts owing with respect
to any Junior Debt, or in respect of any redemption, retirement, purchase or
other acquisition thereof.
d. Upon any payment or distribution of the assets of the Company
to creditors upon dissolution, total or partial liquidation or reorganization of
or similar proceeding relating to the Company, the Holders will be entitled to
receive payment in full before any holder of Junior Debt is entitled to receive
any payment.
4. REPRESENTATIONS AND WARRANTIES.
The Company represents and warrants to the Holder that:
a. DUE INCORPORATION. The Company: (i) is a corporation duly
organized and validly existing under the laws of the jurisdiction of its
incorporation; (ii) has all requisite corporate power, and has all material
governmental licenses, authorizations, consents and approvals necessary to own
its assets and carry on its business as now being or as proposed to be
conducted; and (iii) is qualified to do business in all jurisdictions in which
the nature of the business conducted by it makes such qualification necessary
and where failure so to qualify would have a material adverse effect on the
financial condition, operations or business of the Company taken as a whole (a
"MATERIAL ADVERSE AFFECT").
b. PRELIMINARY PROSPECTUS. On July 8, 1996, the Company filed a
Registration Statement (the "REGISTRATION STATEMENT") on Form SB-2 with the
Securities
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<PAGE>
Exchange Commission to register, among other things, 1,967,424 shares of the
Company's common stock. The preliminary prospectus filed as a part of the
Registration Statement does not contain any untrue statement of material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they are made,
not misleading.
c. LEGAL PROCEEDINGS. There are no legal or arbitral proceedings
or any proceedings by or before any governmental or regulatory authority or
agency, now pending or (to the knowledge of the Company) threatened against the
Company which, if adversely determined, could have a Material Adverse Effect.
d. NO CONFLICTS. None of the execution and delivery of this Note
and the Operative Agreements, the consummation of the transactions herein
contemplated on the compliance with the terms and provisions hereof will
conflict with or result in a breach of, or require any consent under, the
charter or by-laws of the Company, or any applicable law or regulation, or any
order, writ, injunction or decree of any court or governmental authority or
agency, or any agreement or instrument to which the Company is a party or by
which it is bound or to which it is subject, or constitute a default under any
such agreement or instrument, or result in the creation or imposition of any
Lien upon any of the revenues or assets of the Company pursuant to the terms of
any such agreement or instrument.
e. AUTHORITY. The Company has all necessary corporate power and
authority to execute, deliver and perform its obligations under this Note and
each of the Operative Agreements to which it is a party; the execution, delivery
and performance by the Company of each of the Operative Agreements to which it
is a party have been duly authorized by all necessary corporate action on its
part; and this Note has been duly and validly executed and delivered by the
Company and constitutes, each of the other Operative Agreements to which the
Company is a party when executed and delivered will constitute, its legal, valid
and binding obligation, enforceable in acccordance with its terms.
f. CONSENTS. No authorizations, approvals or consents of, and no
filings or registrations with, any governmental or regulatory authority or
agency are necessary for the execution, delivery or performance by the Company
of this Note or any Operative Agreement to which the Company is a party or for
the validity or enforceability thereof.
g. CREDIT AGREEMENTS. The Company is not party to any credit
agreement, loan agreement, indenture, purchase agreement, guarantee or other
arrangement providing for or otherwise relating to any Indebtedness or any
extension of credit (or commitment for any extension of credit) to, or guarantee
by, the Company, other than the Senior Debt.
h. PERMITS. The Company has obtained all permits, licenses and
other authorizations which are required under all Environmental Laws, except to
the extent failure to
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<PAGE>
have any such permit, liaense or authorization would not have a Material Adverse
Effect. To its best knowledge, the Company is in compliance with the terms and
conditions of all such permits, licenses and authorizations, and are also in
compliance with all other limitations, restrictions, conditions, standards,
prohibitions, requirements, obligations, schedules and timetables contained in
any applicable Environmental Law or in any regulation, code, plan, order,
decree, judgment, injunction, notice or demand letter issued, entered,
promulgated or approved thereunder, except to the extent failure to comply would
not have a Material Adverse Effect.
i. SUBSIDIARIES. The Company has the following subsidiaries: High
Technology Computers, Inc., Automatic Systems Developers, Inc., and iNetWare,
Inc., all New York corporations.
j. TITLE TO PROPERTIES; LEASES. The Company owns all the assets
reflected in the balance sheet of the Company as at March 29, 1994 or acquired
since that date (except property and assets sold or otherwise disposed of in the
ordinary course of business since that date), free of all Liens except Permitted
Liens.
k. NO MATERIAL CHANGES, ETC. Since March 29, 1996, there has
occurred no change in the financial condition or business of the Company as
shown on or reflected in the consolidated balance sheet of the Company as at
March 29, 1996 which would have a Material Adverse Effect, except as set forth
in the remainder of this section. For the Company's year ended and fourth
quarter ended June 30, 1996, sales and net income grew compared to the previous
periods. For the first quarter of fiscal 1997, which ends September 27, 1996,
the Company is experiencing a deferral of shipments to three of their major
customers. Although there have been no cancellation of orders, the deferral of
shipments into future periods of 1997 will generate a lower sales level in the
first quarter of 1997, and a modest net loss, as compared to previous quarters.
The Company's operating results may fluctuate as a result of major customers
revising the timing of contract requirements. Due to these factors, the Company
believes comparisons of quarterly results of operations are not necessarily
meaningful and should not be relied upon as an indication of future results of
operations.
l. FRANCHISES, PATENTS, COPYRIGHTS, ETC. The Company possesses all
franchises, patents, copyrights, trademarks, trade names, licenses and permits
("RIGHTS"), and rights in respect of the foregoing, adequate for the conduct of
its business substantially as now conducted without known conflict with any
rights of others. All such Rights are listed on SCHEDULE 4(1).
m. NO MATERIALLY ADVERSE CONTRACTS, ETC. The Company is not
subject to any charter, corporate or other legal restriction, or any judgment,
decree, order, rule or regulation that has or is expected in the future to have
a Material Adverse Effect. The Company is not a party to any contract or
agreement that has or is expected, in the judgment of the Company's officers, to
have any Material Adverse Effect.
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n. TAX STATUS. The Company (i) has made or filed all Federal and
state income and all other tax returns, reports and declarations required by any
jurisdiction to which the Company believes in good faith (and after consultation
with counsel) it is subject, (ii) has paid all taxes and other governmental
assessments and charges shown or determined to be due on such returns, reports
and declarations, except those being contested in good faith and by appropriate
proceedings and (iii) has set aside on its books provisions reasonably adequate
in accordance with generally accepted accounting principles for the payment of
all taxes for periods subsequent to the periods to which such returns, reports
or declarations apply. To the best of the Company's knowledge, except certain
property taxes, payment of which management of the Company is currently
negotiating (the "DISPUTED TAXES"), there are no unpaid taxes claimed to be due
by the taxing authority of any jurisdiction which, if not paid, would have a
Material Adverse Effect, and the officers of the Company know of no basis for
any such claim.
o. NO EVENT OF DEFAULT. No Event or Event of Default has occurred
and is continuing, either hereunder or under any Operative Agreement.
p. ABSENCE OF FINANCING STATEMENTS, ETC. Except as relates to the
Senior Debt, there is no financing statement, security agreement, chattel
mortgage, real estate mortgage or other document filed or recorded with any
filing records, registry or other public office, that purports to cover, affect
or give notice of any present or possible future lien on, or security interest
in, any assets or property of the Company or any rights relating thereto.
q. CERTAIN TRANSACTIONS. Except as disclosed in the Preliminary
Prospectus, none of the officers, directors, or employees of the Company is
presently a party to any transaction with the Company (other than for services
as employees, officers and directors), including any contract, agreement or
other arrangement providing for the furnishing of services to or by, providing
for rental of real or personal property to or from, or otherwise requiring
payments to or from any officer, director or such employee or, to the knowledge
of the Company, any Person in which any officer, director, or any such employee
has a substantial interest or is an officer, director, trustee or partner.
5. COVENANTS.
The Company covenants and agrees with the Holder that, so long as any
amount remains unpaid on the Note, the Company, without the consent of the
Holder:
a. Shall not create, incur, or suffer to exist any Indebtedness
except (i) the Indebtedness represented by the Notes, (ii) Senior Debt and
Junior Debt outstanding on the date hereof, (iii) Capital Lease Obligations
outstanding on the date hereof, and (iv) purchase money Indebtedness.
b. Shall not create, incur or suffer to exist any Lien on its
assets, except (i) Liens for taxes not yet due or contested in good faith with
appropriate reserves
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maintained on the books of the Company, (ii) carriers', warehousemen's,
mechanics', and similar Liens arising in the ordinary course of business which
are not overdue for more than 90 days or are being contested in good faith, or
(iii) easements, rights of way, zoning restrictions, and similar Liens on real
property, which in the aggregate are not material and do not materially detract
from the use of such property, and (iv) Permitted Liens.
c. Shall not pay any dividend or make any distribution on, or
purchase, redeem, or retire, any shares of its capital stock or any warrants,
options, or other rights to reacquire any such shares, except that the Company
may pay dividends solely in shares of its capital stock.
d. Shall not change its primary line of business.
e. Shall not (i) enter into any merger or consolidation other than
the merger of the Company to reincorporate in Delaware, (ii) liquidate, wind up
its affairs or dissolve, or (iii) except in the ordinary course of business,
convey, sell, lease, transfer or otherwise dispose of, or purchase or acquire,
any business, assets, capital stock or other property.
f. Shall not, directly or indirectly, enter into any transaction
with or for the benefit of an affiliate (other than the reasonable compensation)
for services as an officer, director or employee.
g. Shall not in any manner increase the compensation of its
existing officers and directors from the levels in effect on the date of
issuance of this Note.
h. Shall deliver to the Holder:
i. as soon as available, and in any event within 45 days
after the end of each of the first three quarterly fiscal periods of each fiscal
year of the Company, statements of income, retained earnings and cash flow of
the Company, for such period and for the period from the beginning of the
respective fiscal year to the end of such period, and the related balance sheet
of the Company as at the end of such period setting forth in the case of each
such statement in comparative form the corresponding figures for the
corresponding period in the preceding fiscal year, accompanied by a certificate
of the chief financial officer of the Company, which certificate shall state
that (A) such financial statements fairly present in all material respects the
financial position and results of operations of the Company, all in accordance
with generally accepted accounting principles consistently applied, and (B) no
Default (as hereinafter defined) has occurred and is continuing or, if any
Default has occurred or is continuing, a description thereof in reasonable
detail and of the action the Company has taken or proposes to take with respect
thereto.
ii. as soon as available and in any event within 90 days
after the end of each fiscal year of the Company, statements of income, retained
earnings and cash
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flow of the Company for such fiscal year, and the related balance sheet of the
Company as at the end of such fiscal year, setting forth in the case of each
such statement in comparative form the corresponding figures for the preceding
fiscal year, and accompanied by (A) an opinion thereon of independent certified
public accountants of recognized national standing, which opinion shall state
that such financial statements present fairly, in all material respects, the
financial position and results of operations of the Company in conformity with
generally accepted accounting principles consistently applied, and (B) a
certificate of the chief financial officer of the Company stating that no Event
of Default has occurred and is continuing or, if any Event of Default has
occurred and is continuing, a description thereof in reasonable detail and of
the action the Company has taken or purposes to take with respect thereto;
iii. promptly after the Company shall obtain knowledge of
such, written notice of all legal or arbitral proceedings, and of all
proceedings by or before any governmental regulatory authority or agency, and
each material development in respect of such legal or other proceedings,
affecting the Company, except proceedings which, if adversely determined, would
not have a Material Adverse Effect: and
iv. promptly after the Company shall obtain knowledge of the
occurrence of any Event of Default (as hereinafter defined) or any event which
with notice or lapse of time or both would become an Event of Default (an Event
of Default or such other thing being a "DEFAULT"), a notice specifying that such
notice is a "NOTICE OF DEFAULT" and describing such Default in reasonable
detail, and, in such Notice of Default or as soon thereafter as practicable, a
description of the action of the Company has taken or proposes to take with
respect thereto.
i. Will maintain its chief executive office in Poughkeepsie, New
York, or at such other place in the United States of America as the Company
shall designate upon written notice to BlueStone, where notices, presentations
and demands to or upon the Company in respect to this Note or any of the
Operative Agreements to which the Company is a party may be given or made.
j. Will (i) keep true and accurate records and books of account in
which proper entries will be made in accordance with generally accepted
accounting principles and (ii) maintain adequate accounts and reserves for all
taxes (including income taxes), depreciation, depletion, obsolescence and
amortization of its properties, contingencies, and other reserves, in each case
in accordance with generally accepted accounting principles.
k. Will do or cause to be done all things necessary to preserve
and keep in full force and effect its corporate existence, rights and
franchises. It will (i) cause all of its properties used or useful in the
conduct of its business to be maintained and kept in good condition, repair and
working order and supplied with all necessary equipment, (ii) cause to be made
all necessary repairs, renewals, replacements, betterments and improvements
thereof, all as in the judgement of the Company may be necessary so that the
business carried on in connection
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therewith may be properly and advantageously conducted at all times, and (iii)
continue to engage primarily in the businesses now conducted by it and in
related businesses.
1. Will maintain with financially sound and reputable insurers
insurance with respect to its properties and business against such casualties
and contingencies as shall be in accordance with the general practices of
businesses engaged in similar activities in similar geographic areas and in
amounts, containing such terms, in such forms and for such periods as may be
reasonable and prudent.
m. Will duly pay and discharge, or cause to be paid and
discharged, before the same shall become overdue, all taxes, assessments and
other governmental charges imposed on it and its real properties, sales and
activities, or any part thereof, or upon the income or profits therefrom, as
well as all claims for labor, materials, or supplies that if unpaid might by law
become a lien or charge upon any of its property other than the Disputed Taxes.
n. Shall permit BlueStone to visit and inspect any of the
properties of the Company to examine the books of account of the Company (and to
make copies thereof and extracts therefrom), and to discuss the affairs,
finances and accounts of the Company with, and to be advised as to the same by,
its and their officers, at all such reasonable times and intervals as BlueStone
may reasonably request.
o. Will comply in all material respects with (i) the applicable
laws and regulations wherever its business is conducted, including all
Environmental Laws and ERISA, (ii) the provisions of its charter documents and
by-laws, (iii) all agreements and instruments by which it or any of its
properties may be bound and (iv) all applicable decrees, orders and judgements.
p. Will cooperate with the Holder and BlueStone and execute such
further instruments and documents as the Holder or BlueStone shall reasonably
request to carry out to their satisfaction the transactions contemplated by this
Note.
q. Shall not permit stockholders equity to be less than
$1,200,000.
Notwithstanding anything contained herein to the contrary, nothing
herein shall prohibit or interfere with the Company's recent efforts to
consolidate its existing debt facilities. In connection with such consolidation,
the Company may create, incur or suffer to exist additional Indebtedness such as
a mortgage, lien, pledge, security interest or encumbrance of its property or
assets. Any such actions will not be deemed an Event of Default as defined
herein.
6. EVENTS OF DEFAULT.
The occurrence of any of the following events shall constitute an event
of default (an "EVENT OF DEFAULT"):
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<PAGE>
a. A default in the payment of the principal on any Note, when and
as the same shall become due and payable.
b. A default in the payment of any interest on any Note, when as
the same shall become due and payable, which default shall continue for ten
business days after the date fixed for the making of such interest payment.
c. A default in the performance, or a breach of any of the
covenants of the Company contained in SECTIONS 3 and 5 of this Note.
d. A default in the performance, or a breach, of any other
covenant or agreement of the Company in this Note and continuance of such
default or breach for a period of 30 days after receipt of notice from the
Holder as to such breach or after the Company had or should have had knowledge
of such breach.
e. a default in the performance, or a breach, of any covenant or
agreement of the Company in any Operative Agreement, which default or breach
shall have continued beyond any grace or cure period provided therein.
f. A default or event of default which remains uncured following
any applicable cure period shall have occurred with respect to any Junior Debt.
g. Any representation, warranty or certification made by the
Company pursuant to this Note or the Subscription Agreement shall prove to have
been false or misleading as of the date made or thereafter in any material
respect.
h. A final judgment or judgments for the payment of money in
excess of $75,000 in the aggregate shall be rendered by one or more courts,
administrative or arbitral tribunals or other bodies having jurisdiction against
the Company and the same shall not be discharged (or provision shall not be made
for such discharge), or a stay of execution thereof shall not be procured,
within 60 days from the date of entry thereof and the Company shall not, within
such 60-day period, or such longer period during which execution of the same
shall have been stayed, appeal therefrom and cause the execution thereof to be
stayed during such appeal.
i. The entry of a decree or order by a court having jurisdiction
adjudging the Company bankrupt or insolvent, or approving a petition seeking
reorganization, arrangement, adjustment or composition of or in respect of the
Company, under federal bankruptcy law, as now or hereafter constituted, or any
other applicable federal or state bankruptcy, insolvency or other similar law,
and the continuance of any such decree or order unstayed and in effect for a
period of 60 days; or the commencement by the Company of a voluntary case under
federal bankruptcy law, as now or hereafter constituted, or any other applicable
federal or state bankruptcy, insolvency, or other similar law, or the consent by
it to the institution of bankruptcy or insolvency proceedings against it, or the
filing by it of a petition or
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<PAGE>
answer or consent seeking reorganization or relief under federal bankruptcy law
or any other applicable federal or state law, or the consent by it to the filing
of such petition or to the appointment of a receiver, liquidator, assignee,
trustee, sequestrator or similar official of the Company or of any substantial
part of its property, or the making by it of an assignment for the benefit of
creditors, or the admission by it in writing of its inability to pay its debts
generally as they become due, or the taking of corporate action by the Company
in furtherance of any such action.
7. REMEDIES UPON DEFAULT.
a. Upon the occurrence of an Event of Default referred to in
SECTION 6, the principal amount then outstanding of, and the accrued interest
on, this Note shall automatically become immediately due and payable without
presentment, demand, protest or other formalities of any kind, all of which are
hereby expressly waived by the Company. Upon the occurrence of an Event of
Default referred to in SECTION 6(A) or (B), the Holder, by notice in writing
given to the Company, may declare the entire principal amount then outstanding
of, and the accrued interest on, this Note to be due and payable immediately,
and upon any such declaration the same shall become and be due and payable
immediately, without presentation, demand, protest or other formalities of any
kind, all of which are expressly waived by the Company. Upon the occurrence of
an Event of Default other than one referred to in SECTIONS 6(A), (B) or (I),
BlueStone or the Holders of not less than 50% in principal amount of then
outstanding Notes (excluding any Notes held by or for the account of the Company
or any affiliate of the Company) may, upon thirty days prior written notice,
declare the principal amount then outstanding of, and the accrued interest on,
the Notes to be due and payable immediately, and upon such declaration the same
shall become due and payable immediately, without presentation, demand, protest
or other formalities of any kind, all of which are expressly waived by the
Company.
b. The Holder may institute such actions or proceedings in law or
equity as it shall deem expedient for the protection of its rights and may
prosecute and enforce its claims against all assets of the Company, and in
connection with any such action or proceeding shall be entitled to receive from
the Company payment of the principal amount of this Note plus accrued interest
to the date of payment plus reasonable expenses of collection, including,
without limitation, attorneys' fees and expenses.
c. In addition to the remedies set forth above, if the Company
fails to pay the principal amount and accrued interest on the Maturity Date (as
extended), (i) BlueStone shall have the right, while any sum amount remains
outstanding to designate one person to the Company's board of directors, and the
Company shall take all action necessary, to appoint that person to the Company's
board of directors, and (ii) each Warrant shall, at the option of the Holder, be
automatically converted into such number of shares of common stock, PRO RATA to
the number of Warrants issued to Subscribers and BlueStone pursuant to the
Offering so that all Holders (including BlueStone with respect to the Warrants
being issued to it) of Warrants shall,
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in the aggregate, become owners of 20% of the issued and outstanding common
stock of the Company on a fully diluted basis.
8. TRANSFER.
a. Any Notes issued upon the transfer of this Note shall be
numbered and shall be registered in a Note Register as they are issued. The
Company shall be entitled to treat the registered holder of any Note on the Note
Register as the owner in fact thereof for all purposes and shall not be bound to
recognize any equitable or other claim to or interest in such Note on the part
of any other person, and shall not be liable for any registration or transfer of
Notes which are registered or to be registered in the name of a fiduciary or the
nominee of a fiduciary unless made with the actual knowledge that a fiduciary or
nominee is committing a breach of trust in requesting such registration or
transfer, or with the knowledge of such facts that its participation therein
amounts to bad faith. This Note shall be transferable only on the books of the
Company upon delivery thereof duly endorsed by the Holder or by his duly
authorized attorney or representative, or accompanied by proper evidence of
succession, assignment, or authority to transfer. In all cases of transfer by an
attorney, executor, administrator, guardian, or other legal representative, duly
authenticated evidence of his or its authority shall be produced. Upon any
registration of transfer, the Company shall deliver a new Note or Notes to the
person entitled thereto. This Note may be exchanged, at the option of the Holder
thereof, for another Note, or other Notes of different denominations, of like
tenor and representing in the aggregate a like principal amount, upon surrender
to the Company or to its duly authorized agent. Notwithstanding the foregoing,
the Company shall have no obligation to cause Notes to be transferred on its
books to any person if, in the opinion of counsel to the Company, such transfer
does not comply with the provisions of the Act and the rules and regulations
thereunder.
b. The Holder acknowledges that he has been advised by the Company
that this Note has not been registered under the Act, that the Note is being or
has been issued on the basis of the statutory exemption provided by Section 4(2)
of the Act or Regulation D promulgated thereunder, or both, relating to
transactions by an issuer not involving any public offering, and that the
Company's reliance thereon is based in part upon the representations made by the
original Holder in the original Holder's Subscription Agreement executed and
delivered in accordance with the terms of the Offering. The Holder acknowledges
that he has been informed by the Company of, or is otherwise familiar with, the
nature of the limitations imposed by the Act and the rules and regulations
thereunder on the transfer of securities. In particular, the Holder agrees that
no sale, assignment or transfer of the Note or conversion shares shall be valid
or effective, and the Company shall not be required to give any effect to any
such sale, assignment or transfer, unless (i) the sale, assignment or transfer
of the Note is registered under the Act, it being understood that the Note is
not currently registered for sale and that the Company has no obligation or
intention to so register the Note, or (ii) the Note is sold, assigned or
transferred in accordance with all the requirements and limitations of Rule 144
under the Act, it being understood that Rule 144 is not available at the time of
the original issuance of this Note for the sale of the Note and that there can
be no assurance that Rule 144 sales will be available at
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<PAGE>
any subsequent time, or (iii) such sale, assignment, or transfer is otherwise
exempt from registration under the Act.
9. DEFINITIONS. (a) As used herein, the following terms shall have the
following meanings.
"BUSINESS DAY" means any day which is not a Saturday or Sunday or a day
on which banking institutions are authorized or obliged to close in the City of
New York.
"CAPITAL LEASE OBLIGATIONS" shall mean, as to any Person, the
obligations of such Person to pay rent or other amounts under a lease of (or
other agreement conveying the right to use) real or personal property which
obligations are required to be classified and accounted for as a capital lease
on a balance sheet of such Person under GAAP (including Statement of Financial
Accounting Standards No. 13 of the Financial Accounting Standards Board) and for
purposes of this Note, the amount of such obligations shall be the capitalized
amount thereof, determined in accordance with GAAP (including such Statement No.
13).
"CODE" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
"ENVIRONMENTAL LAWS" shall mean any and all federal, state, local and
foreign statutes, laws, regulations, ordinances, rules, judgments, orders,
decrees, permits, concessions, grants, franchises, licenses, agreements or other
governmental restrictions relating to the environment or to emissions,
discharges, releases or threatened releases of pollutants, contaminants,
chemicals, or industrial, toxic or hazardous substances or wastes into the
environment including, without limitation, ambient air, surface water, ground
water, or land, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport, or handling of
pollutants, contaminants, chemicals, or industrial, toxic or hazardous
substances or wastes.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time.
"GAAP" means generally accepted accounting principles applied on a
basis consistent with past practice.
"GUARANTEE" means a guarantee, an endorsement, a contingent agreement
to purchase or to furnish funds for the payment or maintenance of, or otherwise
to be or become contingently liable under or with respect to, the Indebtedness,
other obligations, net worth, working capital or earnings of any Person, or a
guarantee of the payment of dividends or other distributions upon the stock of
any corporation, or an agreement to purchase, sell or lease (as lessee or
lessor) property, products, materials, supplies or services primarily for the
purpose of
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<PAGE>
enabling a debtor to make payment of his, her or its obligations or an agreement
to assure a creditor against loss, and including without limitation, causing a
bank to open a letter of credit for the benefit of another Person, but excluding
endorsements for collection or deposit in the ordinary course of business. The
terms "GUARANTEE" and "GUARANTEED" used as a verb shall have a correlative
meaning.
"INDEBTEDNESS" means, as to any Person: (a) indebtedness created,
issued or incurred by such Person for borrowed money (whether by loan or the
issuance and sale of debt securities); (b) obligations of such Person to pay the
deferred purchase or acquisition price of property or services, other than trade
accounts payable (other than for borrowed money) arising, and accrued expenses
incurred, in the ordinary course of business; (c) Indebtedness of others secured
by a Lien on the property of such Person, whether or not the respective
Indebtedness so secured has been assumed by such Person; (d) obligations of such
Person in respect of letters of credit or similar instruments issued or accepted
by banks and other financial institutions for the account of such Person; (e)
Capital Lease Obligations of such Person; (f) Indebtedness of others Guaranteed
by such Person; and (g) obligations of such Person in respect of Interest Rate
Protection Agreements.
"JUNIOR DEBT" means all existing and future Indebtedness of the
Company, other than the Indebtedness represented by the Notes and the Senior
Debt.
"LIEN" means, with respect to any asset, mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset.
For purposes of this Agreement, the Company shall be deemed to own subject to a
Lien any asset which it has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, capital lease or other
title retention agreement relating to such asset.
"OPERATIVE AGREEMENTS" means the Subscription Agreement, the Collateral
Assignment of Rights, the Collateral Assignment of License Rights, and all other
documents and instruments contemplated hereby necessary to effect the
transaction contemplated hereby.
"PERMITTED LIENS" means Liens securing the Company's obligations to
holders of the Senior Debt.
"PERSON" shall mean any individual, corporation, company, voluntary
association, partnership, joint venture, trust, unincorporated organization or
government (or any agency, instrumentality or political subdivision thereof).
"SENIOR DEBT" means all obligations to (i) Bankers Trust Company, (ii)
Key Bank, (iii) Bank of New York, (iv) various vendors for obligations incurred
in the ordinary course of business and (v) holders of its 10% Senior Secured
Notes due June 30, 1999.
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<PAGE>
(b) Any accounting terms used in this Agreement, unless otherwise
specifically provided, shall have the meanings customarily given them in
accordance with GAAP, and all financial computations, statements and reports
hereunder, unless otherwise specifically provided, shall be in accordance with
GAAP. An "AUDITED" financial statement means one with an independent auditor's
report of audit thereon containing no qualification or exception.
(c) Unless the context of this Note requires otherwise (a) references
in this Note to sections, paragraphs and clauses of, or schedules and exhibits
to, are references to sections, paragraphs and clauses of, and schedules and
exhibits to, this Note; (b) words in the singular include the plural and in the
plural include the singular: (c) the word "OR" connotes both the disjunative and
conjunctive of the terms affected, unless otherwise expressly stated; (d) the
terms "HEREOF," "HEREIN," "HEREBY" and derivative or similar words refer to this
entire Note; (e) the terms "INCLUDE," "INCLUDES," "INCLUDING" and derivative or
similar words shall be deemed to include the phrase "WITHOUT LIMITATION"; (f)
the phrase "ORDINARY COURSE OF BUSINESS" and "ORDINARY COURSE OF BUSINESS
CONSISTENT WITH PAST PRACTICE" refer to the business and practice of the
Company; (g) in the context of measuring periods of time, "FROM" means
"beginning on and including" and "TO" means "ending on but excluding"; and (h)
words of any gender including each other gender. Whenever this Agreement refers
to a number of days, such number shall refer to calendar days unless Business
Days are specified.
10. MISCELLANEOUS.
a. Any notice or other communication required or permitted to be
given hereunder shall be in writing and shall be mailed by certified mail,
return receipt requested, or by Federal Express, Express Mail or similar
overnight delivery or courier service or delivered (in person or by telecopy,
telex or similar telecommunications equipment) against receipt to the party to
whom it is to be given (i) if to the Company, at its address at One Industry
Street, Poughkeepsie, New York 12603, Attention: President, (ii) if to the
Holder at its address set forth on the first page hereof, or (iii) in either
case, to such other address as the party shall have furnished in writing in
accordance with the provisions of this SECTION 10(A). Notice to the estate of
any party shall be sufficient if addressed to the party as provided in this
SECTION 10(A). Any notice or other communication given by certified mail shall
be deemed given at the time of certification thereof, except for a notice
changing a party's address which shall be deemed given at the time of receipt
thereof. Any notice given by other means permitted by this SECTION 10(A) shall
be deemed given at the time of receipt thereof.
b. Upon receipt of evidence satisfactory to the Company of the
loss, theft, destruction or mutilation of this Note (and upon surrender of this
Note if mutilated and reasonably satisfactory indemnification), the Company
shall execute and deliver to the Holder a new Note of like date, tenor and
denomination.
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<PAGE>
c. No course of dealing and no delay or omission on the part of
the Holder in exercising any right or remedy shall operate as a waiver thereof
or otherwise prejudice the Holder's rights, powers or remedies. No right, power
or remedy conferred by this Note upon the Holder shall be exclusive of any other
right, power or remedy referred to herein or now or hereafter available at law,
in equity, by statute or otherwise and all such remedies may be exercised singly
or concurrently.
d. This Note may be amended only by a written instrument executed
by the Company and the Holder hereof. Any amendment shall be endorsed upon this
Note, and all future Holders shall be bound thereby.
e. This Note has been negotiated and consummated in the State of
New York and shall be governed by and construed in accordance with the laws of
the State of New York, without giving effect to principles governing conflicts
of law.
f. The Company irrevocably consents to the jurisdiction of the
courts of the State of New York and of any federal court located in such State
in connection with any action or proceeding arising out of or relating to this
Note, any document or instrument delivered pursuant to, in connection with or
simultaneously with this Note, or a breach of this Note or any such document or
instrument. In any such action or proceeding, the Company waives personal
service of any summons, complaint or other process and agrees that service
thereof may be made in accordance with SECTION 10(A). Within 30 days after such
service, or such other time as may be mutually agreed upon in writing by the
attorneys for the parties to such action or proceeding, the Company shall appear
or answer such summons, complaint, or other process. Should the Company so
served fail to appear or answer within such 30-day period or such extended
period, as the case may be, the Company shall be deemed in default and judgment
may be entered against the Company for the amount as demanded in any summons,
complaint or other process so served.
IN WITNESS WHEREOF, the Company has caused this Note to be executed and
dated the day and year first above written.
ASD GROUP, INC.
By:
------------------------
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EXHIBIT 4.6
ASD Group, Inc.
Warrant Certificate
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
PURPOSES ONLY. NEITHER THIS WARRANT UOR THE COMMON SHARES ISSUABLE UPON EXERCISE
OF THIS WARRANT HAVE BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE
OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED, DIRECTLY OR INDIRECTLY, OR
DELIVERED, UNLESS REGISTERED OR QUALIFIED UNDER THE ACT AND OTHER APP1ICABLE
LAWS OF ANY SUCH STATE UNLESS THE COMPANY SHALL HAVE RECEIVED AN OPINION OF
COUNSEL SATISFACTORY TO IT OR OTHER EVIDENCE SATISFACTORY TO IT THAT AN
EXEMPTION FROM SUCH REGISTRATION OR QUALIFICATION IS AVAILABLE.
FOR RESIDENTS OF GEORGIA: THESE SECURITIES HAVE BEEN ISSUED OR SOLD IN RELIANCE
ON PARAGRAPH (13) OF CODE SECTION 10-5-9 OF THE 'GEORGIA SECURITIES ACT OF
1973,' AND MAY NOT BE SOLD OR TRANSFERRED EXCEPT IN A TRANSACTION WHICH IS
EXEMPT UNDER SUCH ACT OR PURSUANT TO AN EFFECTIVE REGISTRATION UNDER SUCH ACT.
Date: August 29, 1996
Warrant No. ________ Warrants
This certifies that, FOR VALUE RECEIVED, ______________________________
(the "HOLDER"), whose address is ________________________, is the owner of the
number of Warrants (the "Initial Warrants") set forth above, each of which
entitles the registered Holder hereof, subject to the terms and conditions
contained herein, to purchase one fully paid and nonassessable share of common
stock, $.01 par value per share (the "COMMON STOCK"), of ASD Group, Inc. a
Delaware corporation (the "COMPANY"), upon the presentation and surrender of
this Warrant Certificate at any time during the Exercise Term (hereinafter
defined), and upon payment therefor, by cash or by certified check payable to
the Company, of the Exercise Price (hereinafter defined), subject to
modification and adjustment as set forth herein.
This Warrant is one of a series of Warrants issued in connection with a
private offering (the "OFFERING") by the Company of Units, each Unit consisting
of (i) an original issue discount secured promissory note in the principal
amount of $104,166.67 (each, a "NOTE"), and (ii) warrants to purchase 11,250
shares (the "SHARES") of Common Stock.
1. EXERCISE TERM. The Holder may exercise this Warrant, in whole or part, for a
period (the "EXERCISE TERM") six months following the date on which the Company
consummates its initial
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public offering (the "IPO DATE") and ending on the fifth anniversary hereof (the
"FIFTH ANNIVERSARY"), except that if the Company engages in an extraordinary
corporate transaction such as a merger, consolidation, sale of assets or
reorganization (each an "EVENT") prior to consummating an IPO, the Warrants
evidenced hereby shall become exercisable immediately prior to the consummation
of such Event.
2. EXERCISE PRICE. (a) Upon exercise of the Warrants granted hereby, as well as
any Additional Warrants (hereinafter defined), the Holder may purchase Shares at
a price per share (the "EXERCISE PRICE") equal to the LESSER of (x) 5l.5% of the
per share price for the Common Stock offered in the Company's initial public
offering (the "IPO"), if any, and (y) $4.25 per share.
(b) In the event the Market Price (hereinafter defined) for the Common
Stock for the twenty trading days immediately prior to the expiration of the
Lockup Period (as hereinafter defined) is less than the Exercise Price (as the
same may be adjusted from time to time in accordance with Section 7 hereof), the
Exercise Price shall be reset to such Market Price. For the purposes hereof,
"Market Price" shall mean the average of the daily closing prices per share of
such Common Stock for the twenty (20) consecutive trading days immediately prior
to such date. The closing price for each day shall be the last quoted price or,
if not so quoted, the average of the last bid and asked prices in the
over-the-counter market, as reported by the Nasdaq National Market ("NASDAQ") or
such other system then in use, or if on any such date the Common Stock is not
quoted by any such organization, the average of the closing bid and asked prices
as furnished by a professional market maker making a market in the Common Stock
selected by the Board of Directors of the Company.
3. ADDITIONAL WARRANTS.
(a) In the event that the Company elects to extend the Maturity Date under
the Holder's Notes by an initial three month period, the Company will deliver to
the Holder additional warrants (the "FIRST ADDITIONAL WARRANTS"), to purchase an
additional number of shares equal to 25% of the shares that may then be issued
pursuant to this Warrant. Each First Additional Warrant shall represent the
right to acquire one share of Common Stock at an exercise price equal to 85% of
the Initial Exercise Price (the "FIRST ADDITIONAL EXERCISE PRICE"), subject to
adjustment as hereinafter provided. In addition, the Exercise Price of the
Initial Warrants shall be reduced to the First Additional Exercise Price.
(b) In the event that the Company elects to extend the Maturity Date under
Holder's Note by an additional two month period, the Company will deliver to the
Holder additional warrants (the "SECOND ADDITIONAL WARRANTS"), to purchase an
additional number of shares equal to 25% of the shares that may then be issued
pursuant to this Warrant Certificate. Each Second Additional Warrant shall
represent the right to acquire one share of Common Stock at an exercise price
equal to 85% of the Exercise Price in effect immediately prior to the issuance
of the Second Additional Warrants (the "SECOND ADDITIONAL EXERCISE PRICE"),
subject to adjustment as
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hereinafter provided. In addition, the Exercise Price of the Initial Warrants
and the First Additional Warrants shall be reduced to the Second Additional
Exercise Price. The Initial Warrants, the First Additional Warrants, and the
Second Additional Warrants are hereinafter collectively referred to as the
"WARRANTS."
4. EXERCISE OF WARRANTS. Upon surrender of this Warrant Certificate with the
annexed Form of Election to Purchase duly executed and payment at the Company's
principal offices of the appropriate Exercise Price, the Company shall issue
certificates for the Shares so purchased to the Holder. The Holder may exercise
the purchase rights represented by this Warrant Certificate in whole or in part,
but not as to fractional Shares. If the Holder exercises this Warrant in part,
the Company shall cancel this Warrant Certificate upon its surrender, and shall
execute and deliver a new Warrant Certificate of like tenor for the balance of
the Shares purchasable hereunder.
5. ISSUANCE OF CERTIFICATES. The Company shall issue certificates for Shares
issuable upon the exercise of this Warrant promptly upon such exercise. Such
certificates shall bear the following legend until counsel to the Company
determines that the legend is not required:
THE COMMON SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT PURPOSES ONLY AND HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER
THE SECURITIES LAWS OF THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE OFFERED FOR
SALE, SOLD OR OTHERWISE TRANSFERRED, DIRECTLY OR INDIRECTLY, OR DELIVERED,
UNLESS REGISTERED OR QUALIFIED UNDER THE ACT AND OTHER APPLICABLE LAWS OF
ANY SUCH STATE UNLESS THE COMPANY SHALL HAVE RECEIVED AN OPINION OF COUNSEL
SATISFACTORY TO IT OR OTHER EVIDENCE SATISFACTORY TO IT THAT AN EXEMPTION
FROM SUCH REGISTRATION OR QUALIFICATION IS AVAILABLE.
If the number of Warrants represented hereby or the Exercise Price is adjusted
under SECTION 7, the Holder may surrender this Warrant Certificate to the
Company for cancellation. Upon such cancellation, the Company shall issue a new
Warrant Certificate reflecting the appropriate adjustment. Until such new
Warrant Certificate is issued, this Warrant Certificate shall be deemed to
reflect the appropriate adjustments.
6. COVENANTS OF HOLDER.
6.1 INVESTMENT INTENT. By its acceptance of this Warrant Certificate and
certificates for Shares (if not registered), the Holder covenants and agrees
that the Warrants are being acquired for its own account as an investment and
not with a view to the distribution thereof.
6.2 RESTRICTIONS ON SALE OR TRANSFER. The Holder acknowledges that:
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(a) it has been advised by the Company that neither this Warrant nor
the Shares issuable upon its exercise have been registered under the Act;
(b) this Warrant is being, or has been, issued and the Shares may be
issued on the basis of the statutory exemption provided by Section 4(2) of the
Act or Regulation D promulgated thereunder, or both, relating to transactions by
an issuer not involving any public offering; and
(c) the Company's relianae thereon is based in part upon the
representations made by the original Holder in the original Holder's
Subscription Agreement.
7. ADJUSTMENTS.
7.1. COMPUTATION OF ADJUSTED PRICE. Subject to the last sentence of this
SECTION 7.1, the Exercise Price shall be adjusted from time to time by
multiplying it by the Dilution Fraction, as defined below, if the Company issues
or sells any Shares after the date hereof without consideration or solely for
cash consideration less than the Exercise Price (the "Exercise Price")
immediately prior to such issuance or sale (such consideration, collectively
"DILUTED CONSIDERATION"). With respect to each such issuance or sale, the
"DILUTION FRACTION" shall be, a fraction (a) the numerator of which is the SUM
of (i) the number of Shares outstanding before such issuance or sale, and (ii)
the number of Shares which the aggregate cash consideration received by the
Company for such issuance or sale would have purchased at the Exercise Price in
effect immediately before giving effect to the adjustment required by this
SECTION 7.1, and (b) the denominator of which is the actual number of Shares
outstanding immediately following such issuance or sale. All adjustments to the
Exercise Price required by this SECTION 7.1 shall be effected (in proper
sequential order) with respect to each exercise of rights hereunder on the date
of (and immediately prior to) such exercise.
7.2. OPTIONS, RIGHTS, WARRANTS AND CONVERTIBLE AND EXCHANGEABLE SECURITIES.
Subject to SECTION 7.7, the Exercise Price shall be adjusted from time to time
by multiplying it by the Dilution Fraction if the Company issues or sells
options, rights or warrants to subscribe for Shares, or any securities
convertible into or exchangeable for Shares (collectively, "CONVERTIBLE
SECURITIES"), after the date hereof for no consideration or solely for cash
consideration less than the Exercise Price immediately before the issuance of
such Convertible Securities: PROVIDED, HOWEVER, that (a) that the Exercise Price
shall not be adjusted upon the exercise or conversion of any Convertible
Securities if it was adjusted upon the issuance of such Convertible Securities;
and (b) the Exercise Price shall be appropriately readjusted upon the expiration
of Convertible Securities with respect to which an adjustment was made
hereunder. For the purposes of determining the amount consideration received by
the Company with respect to Convertible Securities:
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(a) all cash consideration to which the Company would be entitled upon
exercise of such Convertible Securities shall be deemed to have been received
upon issuance of such Convertible Securities; and
(b) the maximum number of Shares issuable upon full exercise of
Convertible Securities (without regard to anti-dilution adjustments) shall be
deemed outstanding for all purposes after the issuance of such Convertible
Securities.
7.3. 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.
7.4 ADJUSTMENT IN NUMBER OF SHARES. Upon each adjustment of the Exercise
Price pursuant to the provisions of this Section 7, the number of Shares
issuable upon the exercise of this Warrant and any Additional Warrants, shall be
adjusted to the nearest full share by multiplying a number equal to the Exercise
Price in effect immediately prior to such adjustment by the number of Shares
issuable upon exercise of this Warrant and any Additional Warrants, immediately
prior to such adjustment and dividing the product so obtained by the adjusted
Exercise Price.
7.5 RECLASSIFICATION, CONSOLIDATION, MERGER, ETC. In case of any
reclassification or change of the outstanding shares of Common Stock (other than
a change in par value to no par value, or from no par value to par value, or as
a result of a subdivision or combination), or in the case of any consolidation
of the Company with, or merger of the Company into, another corporation (other
than a consolidation or merger in which the Company is the surviving corporation
and which does not result in any reclassification or change of the outstanding
shares of Common Stock, except a change as a result of a subdivision or
combination of such shares or a change in par value, as aforesaid), or in the
case of a sale or conveyance to another corporation of the property of the
Company as an entirety, the Holder shall thereafter have the right to purchase
the kind and number of shares of stock and other securities and property
receivable upon such reclassification, change, consolidation, merger, sale or
conveyance as if the Holder was the owner of the Shares of Common Stock
underlying this Warrant and any Additional Warrants, immediately prior to any
such events at a price equal to the product of (x) the number of Shares issuable
upon exercise of this Warrant and any Additional Warrants and (y) the Exercise
Price in effect immediately prior to the record date for such reclassification,
change, consolidation, merger, sale or conveyance as if the Holder had exercised
the Warrant(s).
7.6 DIVIDENDS AND OTHER DISTRIBUTIONS WITH RESPECT TO OUTSTANDING SECURITIES. In
the event that the Company shall, except as set forth in SECTION 7.5, at any
time prior to the exercise of this Warrant and any additional Warrants declare a
dividend (other than a dividend consisting solely of shares of Common Stock) or
otherwise distribute without consideration payable by the Company's shareholders
to its shareholders any monies, assets, property, rights, evidences of
indebtedness, securities (other than shares of Common Stock), whether issued by
the Company
Warrant - 5
<PAGE>
or by another person or entity, or any other thing of value, the Holder shall
thereafter be entitled, in addition to the Shares of Common Stock or other
securities receivable upon the exercise thereof, to receive, upon the exercise
of such Warrants, the same monies, property, assets, rights, evidences of
indebtedness, securities or any other thing of value that they would have been
entitled to receive at the time of such dividend or distribution. At the time of
any such dividend or distribution, the Company shall make appropriate reserves
to ensure the timely performance of the provisions of this SECTION 7.6.
7.7 SUBSCRIPTION RIGHTS FOR SHARES OF COMMON STOCK OR OTHER SECURITIES. If
the Company or an affiliate of the Company shall at any time after the date
hereof and prior to the exercise of this Warrant and any Additional Warrants,
issue without consideration payable by the Company's shareholders any rights to
subscribe for shares of Common Stock or any other securities of the Company or
of such affiliate to all the shareholders of the Company, the Holder shall be
entitled, in addition to the Shares of Common Stock or other securities
receivable upon the exercise of this Warrant and any Additional Warrants, to
receive such rights at the time such rights are distributed to the other
shareholders of the Company.
7.8 CONSIDERATION; EXPENSES, ETC. For the purposes hereof, the
consideration received by the Company in any transaction shall be deemed to be
the gross amount received therefor, before deducting underwriters' discounts,
legal fees, finders fees and other costs and expenses incurred in connection
with such issuance or sale determined as of the date not later than 45 days
after the date of the close of the offering with respect to such issuance or
sale.
7.9 EXCEPTIONS TO ADJUSTMENTS. Notwithstanding anything to the contrary
herein set forth, no adjustment shall be required to be made: upon the exercise
of any option heretofore granted to employees, outside directors or consultants
to the Company pursuant to any existing benefit plan of the Company or any
option or warrant currently outstanding.
8. REGISTRATION RIGHTS.
8.1 REGISTRATION UNDER THE SECURITIES ACT OF 1933. The Warrants and the
Shares have not been registered for purposes of public distribution under the
Act.
8.2 REGISTRABLE SECURITIES. As used herein the term "Registrable Security"
means the Shares issuable upon exercise of the Warrants; PROVIDED, HOWEVER, that
with respect to any particular Registrable Security, such security shall cease
to be a Registrable Security when, as of the date of determination, (i) it has
been effectively registered under the Act and disposed of pursuant thereto, (ii)
registration under the Act is no longer required for the immediate public
distribution of such security or (iii) it has ceased to be outstanding. In the
event of any merger, reorganization, consolidation, recapitalization or other
change in corporate structure affecting the Common Stock, such adjustment shall
be made in the definition of "Registrable Security" as is appropriate in order
to prevent any dilution or enlargement of the rights granted pursuant to this
Section 8.
Warrant - 6
<PAGE>
8.3 AUTOMATIC REGISTRATION. Subject only to the consent of the
underwriters, if any, which consent the Company shall use its best efforts to
obtain, the Company hereby agrees that it will include the Registrable
Securities in a Registration Statement relating to the Company's IPO, at its
sole cost and expense, and shall keep such registration statement effective in
order to permit a public offering and sale of the Registrable Securities during
a period of one year from the effective date of such registration statement;
provided that the Company shall not be required to maintain such effectiveness
after the earlier of the date that all of the Registrable Securities are sold
pursuant to the registration statement. If the Company at any time fails to keep
the registration statement continuously effective, then the Holder may elect to
have the Company repurchase, within thirty 30 days of the Holder's election, the
Registrable Securities at a repurchase price per share equal to the market price
of the Common Stock on the date the election is made.
8.4 PIGGYBACK REGISTRATION. If the Company proposes to prepare and file one
or more registration statements or post-effective amendments thereto covering
equity or debt securities of the Company, or any such securities of the Company
held by its shareholders (in any such case, other than in connection with a
merger, acquisition or pursuant to Form S-8 or successor form), (for purposes of
this SECTION 8, collectively, a "REGISTRATION STATEMENT"), it will give written
notice of its intention to do so by registered mail ("NOTICE"), at least 30
business days prior to the filing of each such Registration Statement, to the
Holder. Upon the written request of the Holder, made within 20 business days
after receipt of the Notice, that the Ccmpany include any of the Holder's
Registrable Securities in the proposed Registration Statement, the Company
shall, use its best efforts to effect the registration under the Act of the
Registrable Securities which it has been so requested to register ("PIGGYBACK
REGISTRATION"), at the Company's sole cost and expense and at no cost or expense
to the Holder, except for underwriting commissions and discounts, if any,
payable by the Holder.
8.5 DEMAND REGISTRATION. Upon notice of Holders representing a majority of
the Warrants, at any time after the IPO, the Holder shall have the right (which
right is in addition to the registration rights provided for under Sections 8.3
and 8.4 hereof), exercisable by written notice to the Company (the "Demand
Registration Request"), to have the Company prepare and file with the Securities
and Exchange Commission (the "Commission"), on one occasion, at the sole expense
of the Company, 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 Holder), in order to comply with the provisions of the Act,
so as to permit a public offering and sale of the Registrable Securities by the
Holder, for 12 consecutive months; provided, however, that if subsequent to a
Demand Registration Request and prior to the filing of a Registration Statement
pursuant to such request, the Company enters into a letter of intent with an
underwriter to publicly offer the Company's securities on a "firm commitment"
basis and a registration statement is filed within sixty (60) days following the
Demand Registration Request, then Section 8.4 shall be applicable to the
registration of the Registrable Securities; and provided, further, that this
Section 8.5 shall remain in effect with respect to a subsequent Demand
Registration Request.
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<PAGE>
8.6 MISCELLANEOUS REGISTRATION PROVISIONS. The Company and the Holder agree
as follows:
(a) In connection with any registration under SECTION 8.5, the Company
shall file the Registration Statement as expeditiously as possible, but in no
event later than sixty (60) days following receipt of a Demand Registration
Request, shall use its best efforts to have any such Registration Statements
declared effective at the earliest possible time, and shall furnish the Holder
with such number of prospectuses as shall reasonably be requested.
{b) The Company shall pay all costs, fees and expenses in connection
with all Registration Statements filed pursuant to Sections 8.3, 8.4 and 8.5(a)
hereof including, without limitation, the Company's legal and accounting fees,
printing expenses, and blue sky fees and expenses, except for underwriting
commissions and discounts, if any, payable by the Holder.
(c) The Company will take all necessary action which may be required in
qualifying or registering the Registrable Securities included in a Registration
Statement for offering and sale under the securities or blue sky laws of such
states as are requested by the Holder, except that the Company shall not, for
any such purpose, be required to qualify to do business as a foreign corporation
in any jurisdiction wherein it is not so qualified or to file therein any
general consent to service of process.
(d) The Company will indemnify and hold harmless the Holder and any
underwriter (as defined in the Act) for such the Holder and each person, if any,
who controls the Holder or underwriter within the meaning of the Act against any
losses, claims, damages or liabilities (or actions in respect thereof), joint or
several, to which the Holder or underwriter or such controlling person may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) are caused by any untrue
statement or alleged untrue statement of any material fact contained, on the
effective date thereof, in any Registration Statement under which the securities
were registered under the Act, any prospectus contained therein, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading: and will
reimburse the Holder, underwriter and each such controlling person for any Iegal
or other expenses reasonably incurred by the Holder, underwriter or such
controlling person in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the Company will not
be liable in any such case to the extent that any such loss, damage, expense or
liability arises out of or is based upon an untrue statement, alleged untrue
statement, omission or alleged omission so made in conformity with written
information furnished by the Holder or underwriter specifically for inclusion in
the Registration Statement.
(e) The Holder will indemnify and hold harmless the Company, each of
its directors, each of its officers who have signed the Registration Statement,
and each person, if any, who controls the Company, within the meaning of the
Act, against any losses, claims,
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<PAGE>
damages or liabilities to which the Company, or any such director, officer or
controlling person may become subject under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof) are
caused by any untrue or alleged untrue statement of any material fact contained
in said Registration Statement, said prospectus, or amendment or amendments or
supplement thereto, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading; and will reimburse
any legal or other expenses, reasonably incurred by the Company or any such
director, officer or controlling person in connection with investigating or
defending any such loss, claim, damage, liability or action; in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was so made in reliance upon and in
conformity with written information furnished by the Holder specifically for
inclusion in the Registration Statement.
(f) Promptly after receipt by an indemnified party pursuant hereto of
notice of any claim to which indemnity would apply or the commencement of any
action, such indemnified party will, if a claim thereof is made against the
indemnifying party pursuant hereto, notify the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than hereunder. In case such action is brought against any indemnified
party, and it notified the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, with counsel satisfactory to such indemnified party.
(g) Nothing contained in this Agreement shall be construed as requiring
the Holder to exercise its Warrants prior to the initial filing of any
Registration Statement or the effectiveness thereof.
(h) The Holder agrees to use its reasonable best efforts to cooperate
with the Company in connection with any registration effected pursuant to this
Section 8 and any listing on a national securities exchange (including NASDAQ),
including furnishing the Company with such information concerning the Holder and
executing and delivering such documents as may be required by applicable
securities laws or any national securities exchange.
(i) In connection with any registration pursuant to SECTIONS 8.3 and
8.4, if securities are proposed to be offered for sale pursuant to a
Registration Statement by other security holders of the Company and the total
number of securities to be offered by the Holder and such other selling security
holders is required to be reduced pursuant to a written opinion from the
Company's managing underwriter, if any, for such offering, to the effect that
the inclusion of all or a portion of the Registrable Securities requested to be
registered, when added to the securities being registered by the Company or the
selling shareholders, will exceed the maximum amount of the Company's securities
which can be marketed (i) at a price reasonably related to their fair market
value, or (ii) without otherwise materially adversely affecting the
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<PAGE>
entire offering, then the aggregate number of Registrable Securities to be
offered by the Holder shall equal the number which bears the same ratio to the
maximum number of securities that the underwriter believes may be included for
all the selling security holders (including the Holder) as the original number
of Registrable Securities proposed to be sold by the Holder bears to the total
original number of securities proposed to be offered by the Holder and the other
selling security holders.
(j) Notwithstanding the foregoing, the Company shall not be obligated
to effect any such registration, qualification or compliance, pursuant to
Section 8.5: (1) if the Company shall furnish to the Holders a certificate
signed by the President of the Company stating that in the good faith judgment
of the Board of Directors of the Company, it would be seriously detrimental to
the Company and its stockholders for such registration to be effected at such
time in which event the Company shall have the right to defer the filing of the
registration statement for a period of not more than 90 days after receipt of
the request of the Holder or Holders under Section 8.5; provided, however, that
the Company shall not utilize this right more than once in any twelve month
period; (2) if the Company has already effected one registration for the Holders
pursuant to Section 8.5; (3) if SEC rules and regulations require the Company to
conduct a special audit (not including an audit covering the end of the
Company's fiscal year) in order to effect such registration or (4) in any
particular jurisdiction in which the Company would be required to qualify to do
business or to execute a general consent to service of process in effecting such
registration, qualification or compliance.
(k) If the Company completes an IPO, the Holder agrees not to sell any
shares underlying the Warrants for six months after completion of the IPO (the
"LOCKUP PERIOD").
9. REGISTERED HOLDERS' PUT OPTION AND CONVERSION FEATURE. (a) In the event that
the Company has not consummated the IPO within nine months from the date hereof
the Registered Holders shall have the option (the "Put Option") exercisable by
written notice, to sell to the Company all Warrants issuable hereunder, and upon
the exercise of such option, the Company shall purchase all such Warrants, at a
price per Warrant equal to $1.00 per warrant. Payment pursuant to such option
shall be made to the Registered Holders within thirty business days after
surrender of such Holder's Warrant Certificates for cancellation, accompanied by
written notice by the Registered Holder of exercise of its Put Option.
(b) If the Company fails to pay the principal amount and accrued
interest due on the Notes on the Maturity Date (as extended) (as defined in the
Notes), each Warrant shall, at the option of the Holder, be converted into such
number of shares of Common Stock, PRO RATA to the number of Warrants issued to
Holder, so that all Holders (including BlueStone with respect to the Warrants
being issued to it) of Warrants shall, in the aggregate, become owners of 20% of
the issued and outstanding common stock of the Company on a fully diluted basis.
10. EXCHANGE AND REPLACEMENT OF WARRANT CERTIFICATES. This Warrant Certificate
and any Additional Warrant Certificates exchangeable without expense, upon the
surrender thereof by the
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Holder 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 Shares in such denominations as shall be designated
by the Holder 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. The
Holder shall pay all transfer taxes payable in connection with any transfer of a
Warrant.
11. ELIMINATION OF FRACTIONAL INTERESTS. The Company shall not be required to
issue certificates representing fractions of shares of Common Stock and shall
not be required to issue scrip or pay cash in lieu of fractional interest, it
being the intent of the parties that all fractional interests shall be
eliminated by rounding any fraction up to the nearest whole number of shares of
Common Stock.
12. RESERVATION OF SECURITIES. The Company shall at all times authorize, allot,
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 as shall be issuable upon the exercise thereof. The
Company covenants and agrees that, upon exercise of this Warrant and any
Additional Warrants and payment of the Exercise Price therefor, all Shares of
Common Stock issuable upon such exercise shall be duly and validly allotted and
issued as fully paid and non-assessable shares and not subject to the preemptive
rights of any shareholder and free and clear of all liens, claims and
encumbrances of any nature whatsoever.
13. NO RIGHTS UNTIL EXERCISE. The Holder of any Warrant shall not have solely on
account of such status, any rights of a stockholder of the Company, either at
law or in equity, or to any notice of meetings of stockholders or of any other
proceedings of the Company, except as provided in this Warrant.
14. GOVERNING LAW; JURISDICTION. (a) This Warrant has been negotiated and
consummated in the State of New York and shall be construed in accordance with
the laws of the State of New York applicable to contracts made and performed
within such State, without regard to principles governing conflicts of law.
(b) The Company irrevocably consents to the jurisdiction of the courts
of the State of New York and of any federal court located in such State in
connection with any action or proceeding arising out of or relating to this
Warrant, any document or instrument delivered pursuant to, in connection with or
simultaneously with this Warrant, or a breach of this Warrant or any such
document or instrument. In any such action or proceeding, the Company waives
personal service of any summons, complaint or other process and agrees that
service thereof may be made in accordance with Section 6(e) of the Subscription
Agreement. Within 30 days after such service, or such other time as may be
mutually agreed upon in writing by the Attorneys for
Warrant - 11
<PAGE>
the parties to such action or proceeding, the Company shall appear to
answer such summons, complaint or other process. Should the Company so served
fail to appear or answer within such 30-day period or such extended period, as
the case may be, the Company shall be deemed in default and judgment may be
entered against the Company for the amount as demanded in any summons, complaint
or other process so served.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed, manually or in facsimile, by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
ASD GROUP, INC.
Date: August 29, 1996 By:_________________________________
President
By:_________________________________
Secretary
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby elects to exercise the right, represented by the
attached Warrant Certificate, to purchase ______ Shares and herewith tenders in
payment for such number of Shares cash or a certified check payable to the order
of The Company in the amount of $______ , all in accordance with the terms
hereof or other form of payment permitted by the Warrant Agreement or Purchase
Agreement. The undersigned requests that a certificate for such Shares be
registered in the name(s) of ____________________, and delivered to ___________.
Payment of any required transfer tax accompanies this election.
Dated: Signature:_____________________________
Warrant - 13
EXHIBIT 5.1
BROAD AND CASSEL
ATTORNEYS AT LAW
SUITE 3000
MIAMI CENTER
201 South Biscayne Boulevard
MIAMI, FLORIDA 33131
(305) 373-9400
FAX (305) 373-9443
January 14, 1997
ASD Group, Inc.
1 Industry Street
Poughkeepsie, New York 12603
Re: ASD GROUP, INC. (THE "COMPANY")
REGISTRATION STATEMENT ON FORM SB-2
SEC FILE NUMBER 333-7731 (THE "REGISTRATION STATEMENT")
Ladies and Gentlemen:
You have requested our opinion with respect to the shares of the
Company's common stock, $.01 par value per share (the "Common Stock"), the
warrants to purchase one share of Common Stock (the "Warrants"), and the shares
of Common Stock underlying the Warrants (the "Warrant Shares"), included in the
Registration Statement filed with the U.S. Securities and Exchange Commission
pursuant to the Securities Act of 1933, as amended (the "Securities Act").
As counsel to the Company, we have examined the original or certified
copies of such records of the Company, and such agreements, certificates of
public officials, certificates of officers or representatives of the Company and
others, and such other documents as we deem relevant and necessary for the
opinions expressed in this letter. In such examination, we have assumed the
genuineness of all signatures on original documents, and the conformity to
original documents of all copies submitted to us as conformed or photostatic
copies. As to various questions of fact material to such opinions, we have
relied upon statements or certificates of officials and representatives of the
Company and others.
Based on, and subject to the foregoing, we are of the opinion that, when
the shares of Common Stock, the Warrants and the Warrant Shares are issued and
delivered in accordance with the terms of the agreements related thereto, all
filed as exhibits to the Registration Statement, such securities will be duly
and validly issued, and the Common Stock and Warrant Shares will be fully paid
and non- assessable.
<PAGE>
ASD Group, Inc.
January 14, 1997
Page 2
In rendering this opinion, we advise you that members of this Firm are
members of the Bar of the State of Florida, and we express no opinion herein
concerning the applicability or effect of any laws of any other jurisdiction,
except the securities laws of the United States of America referred to herein.
This opinion has been prepared and is to be construed in accordance with
the Report on Standards for Florida Opinions, dated April 8, 1991, issued by the
Business Law Section of The Florida Bar (the "Report"). The Report is
incorporated by reference into this opinion.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the use of our name under the caption
"Legal Matters" in the Prospectus constituting part of the Registration
Statement. In giving such consent, we do not thereby admit that we are included
within the category of persons whose consent is required under Section 7 of the
Securities Act, or the rules and regulations promulgated thereunder.
Very truly yours,
BROAD AND CASSEL
EXHIBIT 10.1
----------------------------------------
ASD GROUP, INC.
1996 STOCK OPTION PLAN
----------------------------------------
1. PURPOSE. The purpose of this Plan is to advance the interests of ASD
GROUP, INC., a Delaware corporation (the "Company"), by providing an additional
incentive to attract, retain and motivate highly qualified and competent persons
who are key to the Company, including key employees, consultants, independent
contractors, Officers and Directors, and upon whose efforts and judgment the
success of the Company and its Subsidiaries is largely dependent, by authorizing
the grant of options to purchase Common Stock of the Company to persons who are
eligible to participate hereunder, thereby encouraging stock ownership in the
Company by such persons, all upon and subject to the terms and conditions of
this Plan.
2. DEFINITIONS. As used herein, the following terms shall have the
meanings indicated:
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Cause" shall mean any of the following:
(i) a determination by the Company that there has been a
willful, reckless or grossly negligent failure by the Optionee to perform his or
her duties as an employee of the Company;
(ii) a determination by the Company that there has been a
willful breach by the Optionee of any of the material terms or provisions of any
employment agreement between such Optionee and the Company;
(iii) any conduct by the Optionee that either results in
his or her conviction of a felony under the laws of the United States of America
or any state thereof, or of an equivalent crime under the laws of any other
jurisdiction;
(iv) a determination by the Company that the Optionee has
committed an act or acts involving fraud, embezzlement, misappropriation, theft,
breach of fiduciary duty or material dishonesty against the Company, its
properties or personnel;
(v) any act by the Optionee that the Company determines
to be in willful or wanton disregard of the Company's best interests, or which
results, or is intended to result, directly or indirectly, in improper gain or
personal enrichment of the Optionee at the expense of the Company;
(vi) a determination by the Company that there has been a
willful, reckless or grossly negligent failure by the Optionee to comply with
any rules, regulations,
<PAGE>
policies or procedures of the Company, or that the Optionee has engaged in any
act, behavior or conduct demonstrating a deliberate and material violation or
disregard of standards of behavior that the Company has a right to expect of
its employees; or
(vii) if the Optionee, while employed by the Company and
for two years thereafter, violates a confidentiality and/or noncompete agreement
with the Company, or fails to safeguard, divulges, communicates, uses to the
detriment of the Company or for the benefit of any person or persons, or misuses
in any way, any Confidential Information;
PROVIDED, HOWEVER, that, if the Optionee has entered into a written employment
agreement with the Company which remains effective and which expressly provides
for a termination of such Optionee's employment for "cause", the term "Cause" as
used herein shall have the meaning as set forth in the Optionee's employment
agreement in lieu of the definition of "Cause" set forth in this Section 2(b).
(c) "Change of Control" shall mean the acquisition by any person
or group (as that term is defined in the Securities Exchange Act of 1934 (the
"Exchange Act"), and the rules promulgated pursuant to that act) in a single
transaction or a series of transactions of thirty percent (30%) or more in
voting power of the outstanding stock of the Company and a change of the
composition of the Board of Directors so that, within two years after the
acquisition took place, a majority of the members of the Board of Directors of
the Company, or of any corporation with which the Company may be consolidated or
merged, are persons who were not directors or officers of the Company or one of
its Subsidiaries immediately prior to the acquisition, or to the first of a
series of transactions which resulted in the acquisition of thirty percent (30%)
or more in voting power of the outstanding stock of the Company.
(d) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) "Committee" shall mean the stock option committee appointed
by the Board or, if not appointed, the Board.
(f) "Common Stock" shall mean the Company's Common Stock, par
value $.01 per share.
(g) "Confidential Information" shall mean any and all information
pertaining to the Company's financial condition, clients, customers, prospects,
sources of prospects, customer lists, trademarks, trade names, service marks,
service names, "know-how," trade secrets, products, services, details of client
or consulting contracts, management agreements, pricing policies, operational
methods, site selection, results of operations, costs and methods of doing
business, owners and ownership structure, marketing practices, marketing plans
or strategies, product development techniques or plans, procurement and sales
activities, promotion and pricing techniques, credit and financial data
concerning customers and business acquisition plans, that is not generally
available to the public.
(h) "Director" shall mean a member of the Board.
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<PAGE>
(i) "Employee" shall mean any person, including officers,
directors, consultants and independent contractors employed by the Company or
any parent or Subsidiary of the Company within the meaning of Section 3401(c) of
the regulators promulgated thereunder.
(j) "Fair Market Value" of a Share on any date of reference shall
be the Closing Price of a share of Common Stock on the business day immediately
preceding such date, unless the Committee in its sole discretion shall determine
otherwise in a fair and uniform manner. For this purpose, the "Closing Price" of
the Common Stock on any business day shall be (i) if the Common Stock is listed
or admitted for trading on any United States national securities exchange, or if
actual transactions are otherwise reported on a consolidated transaction
reporting system, the last reported sale price of the Common Stock on such
exchange or reporting system, as reported in any newspaper of general
circulation, (ii) if the Common Stock is quoted on the National Association of
Securities Dealers Automated Quotations System ("NASDAQ"), or any similar system
of automated dissemination of quotations of securities prices in common use, the
mean between the closing high bid and low asked quotations for such day of the
Common Stock on such system, or (iii) if neither clause (i) nor (ii) is
applicable, the mean between the high bid and low asked quotations for the
Common Stock as reported by the National Quotation Bureau, Incorporated if at
least two securities dealers have inserted both bid and asked quotations for the
Common Stock on at least five of the 10 preceding days. If the information set
forth in clauses (i) through (iii) above is unavailable or inapplicable to the
Company (E.G., if the Company's Common Stock is not then publicly traded or
quoted), then the "Fair Market Value" of a Share shall be the fair market value
(I.E., the price at which a willing seller would sell a Share to a willing buyer
when neither is acting under compulsion and when both have reasonable knowledge
of all relevant facts) of a share of the Common Stock on the business day
immediately preceding such date as the Committee in its sole and absolute
discretion shall determine in a fair and uniform manner.
(k) "Incentive Stock Option" shall mean an incentive stock option
as defined in Section 422 of the Code.
(l) "Non-Employee Directors" shall have the meaning set forth in
Rule 16b-3(b)(3)(i) (17 C.F.R. ss.240.16(b)-3(b)(3)(i)) under the Securities
Exchange Act of 1934, as amended.
(m) "Non-Statutory Stock Option" or "Nonqualified Stock Option"
shall mean an Option which is not an Incentive Stock Option.
(n) "Officer" shall mean the Company's chairman, president,
principal financial officer, principal accounting officer (or, if there is no
such accounting officer, the controller), any vice-president of the Company in
charge of a principal business unit, division or function (such as sales,
administration or finance), any other officer who performs a policy- making
function, or any other person who performs similar policy-making functions for
the Company. Officers of Subsidiaries shall be deemed Officers of the Company if
they perform such policy-making functions for the Company. As used in this
paragraph, the phrase "policy- making function" does not include policy-making
functions that are not significant. Unless specified otherwise in a resolution
by the Board, an "executive officer" pursuant to Item 401(b)
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<PAGE>
of Regulation S-K (17 C.F.R. ss.229.401(b)) shall be only such person
designated as an "Officer" pursuant to the foregoing provisions of this
paragraph.
(o) "Option" (when capitalized) shall mean any stock option
granted under this Plan.
(p) "Optionee" shall mean a person to whom an Option is granted
under this Plan or any person who succeeds to the rights of such person under
this Plan by reason of the death of such person.
(q) "Plan" shall mean this 1996 Stock Option Plan of the Company,
which Plan shall be effective upon approval by the Board, subject to approval,
within 12 months of the date thereof by holders of a majority of the Company's
issued and outstanding Common Stock of the Company.
(r) "Securities Exchange Act" shall mean the Securities Exchange
Act of 1934, as amended.
(s) "Share" or "Shares" shall mean a share or shares, as the case
may be, of the Common Stock, as adjusted in accordance with Section 10 of this
Plan.
(t) "Subsidiary" shall mean any corporation (other than the
Company) in any unbroken chain of corporations beginning with the Company if, at
the time of the granting of the Option, each of the corporations other than the
last corporation in the unbroken chain owns stock possessing 50 percent or more
of the total combined voting power of all classes of stock in one of the other
corporations in such chain.
3. SHARES AND OPTIONS. Subject to adjustment in accordance with Section
10 hereof, the Company may grant to Optionees from time to time Options to
purchase an aggregate of up to One Hundred and Eighty Thousand (180,000) Shares
from Shares held in the Company's treasury or from authorized and unissued
Shares. If any Option granted under this Plan shall terminate, expire, or be
canceled, forfeited or surrendered as to any Shares, the Shares relating to such
lapsed Option shall be available for issuance pursuant to new Options
subsequently granted under this Plan. Upon the grant of any Option hereunder,
the authorized and unissued Shares to which such Option relates shall be
reserved for issuance to permit exercise under this Plan. Subject to the
provisions of Section 14 hereof, an Option granted hereunder shall be either an
Incentive Stock Option or a Non-Statutory Stock Option as determined by the
Committee at the time of grant of such Option and shall clearly state whether it
is an Incentive Stock Option or Non-Statutory Stock Option. All Incentive Stock
Options shall be granted within 10 years from the effective date of this Plan.
4. LIMITATIONS. Options otherwise qualifying as Incentive Stock Options
hereunder will not be treated as Incentive Stock Options to the extent that the
aggregate Fair Market Value (determined at the time the Option is granted) of
the Shares, with respect to which Options meeting the requirements of Code
Section 422(b) are exercisable for the first time by any
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<PAGE>
individual during any calendar year (under all stock option or similar plans of
the Company and any Subsidiary), exceeds $100,000.
5. CONDITIONS FOR GRANT OF OPTIONS.
(a) Each Option shall be evidenced by an option agreement that
may contain any term deemed necessary or desirable by the Committee, provided
such terms are not inconsistent with this Plan or any applicable law. Optionees
shall be those persons selected by the Committee from the class of all regular
Employees of the Company or its Subsidiaries, including Employee Directors and
Officers who are regular or former regular employees of the Company, as well as
consultants to the Company. Any person who files with the Committee, in a form
satisfactory to the Committee, a written waiver of eligibility to receive any
Option under this Plan shall not be eligible to receive any Option under this
Plan for the duration of such waiver.
(b) In granting Options, the Committee shall take into
consideration the contribution the person has made, or is expected to make, to
the success of the Company or its Subsidiaries and such other factors as the
Committee shall determine. The Committee shall also have the authority to
consult with and receive recommendations from Officers and other personnel of
the Company and its Subsidiaries with regard to these matters. The Committee may
from time to time in granting Options under this Plan prescribe such terms and
conditions concerning such Options as it deems appropriate, including, without
limitation, (i) the exercise price or prices of the Option or any installments
thereof, (ii) prescribing the date or dates on which the Option becomes and/or
remains exercisable, (iii) providing that the Option vests or becomes
exercisable in installments over a period of time, and/or upon the attainment of
certain stated standards, specifications or goals, (iv) relating an Option to
the continued employment of the Optionee for a specified period of time, or (v)
conditions or termination events with respect to the exercisability of any
Option, provided that such terms and conditions are not more favorable to an
Optionee than those expressly permitted herein; provided, however, that to the
extent not cancelled pursuant to Section 9(b) hereof, upon a Change in Control,
any Options that have not yet vested, shall vest upon such Change in Control.
(c) The Options granted to employees under this Plan shall be in
addition to regular salaries, pension, life insurance or other benefits related
to their employment with the Company or its Subsidiaries. Neither this Plan nor
any Option granted under this Plan shall confer upon any person any right to
employment or continuance of employment (or related salary and benefits) by the
Company or its Subsidiaries.
6. EXERCISE PRICE. The exercise price per Share of any Option shall be
any price determined by the Committee but shall not be less than the par value
per Share; PROVIDED, HOWEVER, that in no event shall the exercise price per
Share of any Incentive Stock Option be less than the Fair Market Value of the
Shares underlying such Option on the date such Option is granted and, in the
case of an Incentive Stock Option granted to a 10% shareholder, the per Share
exercise price will not be less than 110% of the Fair Market Value in accordance
with Section 14 of this Plan. Re-granted Options, or Options which are canceled
and then re-granted
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<PAGE>
covering such canceled Options, will, for purposes of this Section 6, be deemed
to have been granted on the date of the re-granting.
7. EXERCISE OF OPTIONS.
(a) An Option shall be deemed exercised when (i) the Company has
received written notice of such exercise in accordance with the terms of the
Option, (ii) full payment of the aggregate option price of the Shares as to
which the Option is exercised has been made, (iii) the Optionee has agreed to be
bound by the terms, provisions and conditions of any applicable shareholders'
agreement, and (iv) arrangements that are satisfactory to the Committee in its
sole discretion have been made for the Optionee's payment to the Company of the
amount that is necessary for the Company or the Subsidiary employing the
Optionee to withhold in accordance with applicable Federal or state tax
withholding requirements. Unless further limited by the Committee in any Option,
the exercise price of any Shares purchased pursuant to the exercise of such
Option shall be paid in cash, by certified or official bank check, by money
order, with Shares or by a combination of the above; PROVIDED, HOWEVER, that the
Committee in its sole discretion may accept a personal check in full or partial
payment of any Shares. If the exercise price is paid in whole or in part with
Shares, the value of the Shares surrendered shall be their Fair Market Value on
the date the Option is exercised. The Company in its sole discretion may, on an
individual basis or pursuant to a general program established by the Committee
in connection with this Plan, lend money to an Optionee to exercise all or a
portion of the Option granted hereunder. If the exercise price is paid in whole
or part with the Optionee's promissory note, such note shall (i) provide for
full recourse to the maker, (ii) be collateralized by the pledge of the Shares
that the Optionee purchases upon exercise of such Option, (iii) bear interest at
a rate no less than the rate of interest payable by the Company to its principal
lender, and (iv) contain such other terms as the Committee in its sole
discretion shall require. No Optionee shall be deemed to be a holder of any
shares subject to an Option unless and until a stock certificate or certificates
for such shares are issued to the person(s) under the terms of this Plan. No
adjustments shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or property) or distributions or other rights for which the
record date is prior to the date such stock certificate is issued, except as
expressly provided in Section 10 hereof
(b) No Optionee shall be deemed to be a holder of any Shares
subject to an Option unless and until a stock certificate or certificates for
such Shares are issued to such person(s) under the terms of this Plan. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property) or distributions or other rights for which
the record date is prior to the date such stock certificate is issued, except as
expressly provided in Section 10 hereof
8. EXERCISABILITY OF OPTIONS. Any Option shall become exercisable in
such amounts, at such intervals, upon such events or occurrences and upon such
other terms and conditions as
-6-
<PAGE>
shall be provided in an individual Option agreement evidencing such Option,
except as otherwise provided in Section 5(b) or this Section 8.
(a) The expiration date(s) of an Option shall be determined by
the Committee at the time of grant, but in no event shall an Option be
exercisable after the expiration of 10 years from the date of grant of the
Option.
(b) Unless otherwise expressly provided in any Option as approved
by the Committee, notwithstanding the exercise schedule set forth in any Option,
each outstanding Option, may, in the sole discretion of the Committee, become
fully exercisable upon the date of the occurrence of any Change of Control, but,
unless otherwise expressly provided in any Option, no earlier than six months
after the date of grant, and if and only if Optionee is in the employ of the
Company on such date.
(c) The Committee may in its sole discretion accelerate the date
on which any Option may be exercised and may accelerate the vesting of any
Shares subject to any Option or previously acquired by the exercise of any
Option.
9. TERMINATION OF OPTION PERIOD.
(a) Unless otherwise expressly provided in any Option, the
unexercised portion of any Option shall automatically and without notice
immediately terminate and become forfeited, null and void at the time of the
earliest to occur of the following:
(i) three months after the date on which the Optionee's
employment is terminated for any reason other than by reason of (A) Cause, (B)
the termination of the Optionee's employment with the Company by such Optionee
following less than ninety (90) days' prior written notice to the Company of
such termination (an "Improper Termination"), (C) a mental or physical
disability (within the meaning of Section 22(e) of the Code) as determined by a
medical doctor satisfactory to the Committee, or (D) death;
(ii) immediately upon (A) the termination by the Company
of the Optionee's employment for Cause, or (B) an Improper Termination;
(iii) one year after the date on which the Optionee's
employment is terminated by reason of a mental or physical disability (within
the meaning of Code Section 22(e)) as determined by a medical doctor
satisfactory to the Committee; or
(iv) the later of (A) twelve months after the date of
termination of the Optionee's employment by reason of death of the employee, or
(B) three months after the date on which the Optionee shall die if such death
shall occur during the one year period specified in Subsection 9(a)(iii) hereof
(b) The Committee in its sole discretion may, by giving written
notice ("cancellation notice"), cancel effective upon the date of the
consummation of any corporate transaction described in Subsection 10(d) hereof,
any Option that remains unexercised on such
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<PAGE>
date. Such cancellation notice shall be given a reasonable period of time prior
to the proposed date of such cancellation and may be given either before or
after approval of such corporate transaction.
(c) Upon Optionee's termination of employment as described in
this Section 9, or otherwise, any Option (or portion thereof) not previously
vested or not yet exercisable pursuant to Section 8 of this Plan or the vesting
schedule set forth in such Option shall be immediately canceled.
10. ADJUSTMENT OF SHARES.
(a) If at any time while this Plan is in effect or unexercised
Options are outstanding, there shall be any increase or decrease in the number
of issued and outstanding Shares through the declaration of a stock dividend or
through any recapitalization resulting in a stock split, combination or exchange
of Shares (other than any such exchange or issuance of Shares through which
Shares are issued to effect an acquisition of another business or entity or the
Company's purchase of Shares to exercise a "call" purchase option), then and in
such event:
(i) appropriate adjustment shall be made in the maximum
number of Shares available for grant under this Plan, so that the same
percentage of the Company's issued and outstanding Shares shall continue to be
subject to being so optioned;
(ii) appropriate adjustment shall be made in the number
of Shares and the exercise price per Share thereof then subject to any
outstanding Option, so that the same percentage of the Company's issued and
outstanding Shares shall remain subject to purchase at the same aggregate
exercise price; and
(iii) such adjustments shall be made by the Committee,
whose determination in that respect shall be final, binding and conclusive.
(b) Subject to the specific terms of any Option, the Committee
may change the terms of Options outstanding under this Plan, with respect to the
option price or the number of Shares subject to the Options, or both, when, in
the Committee's sole discretion, such adjustments become appropriate by reason
of a corporate transaction described in Subsection 10(d) hereof, or otherwise.
(c) Except as otherwise expressly provided herein, the issuance
by the Company of shares of its capital stock of any class, or securities
convertible into or exchangeable for shares of its capital stock of any class,
either in connection with a direct or unwritten sale or upon the exercise of
rights or warrants to subscribe therefor or purchase such Shares, or upon
conversion of shares of obligations of the Company convertible into such shares
or other securities, shall not affect, and no adjustment by reason thereof shall
be made with respect to the number of or exercise price of Shares then subject
to outstanding Options granted under this Plan.
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<PAGE>
(d) Without limiting the generality of the foregoing, the
existence of outstanding Options granted under this Plan shall not affect in any
manner the right or power of the Company to make, authorize or consummate (i)
any or all adjustments, reclassifications, recapitalizations, reorganizations or
other changes in the Company's capital structure or its business; (ii) any
merger or consolidation of the Company or to which the Company is a party; (iii)
any issuance by the Company of debt securities, or preferred or preference stock
that would rank senior to or above the Shares subject to outstanding Options;
(iv) any purchase or issuance by the Company of Shares or other classes of
common stock or common equity securities; (v) the dissolution or liquidation of
the Company; (vi) any sale, transfer, encumbrance, pledge or assignment of all
or any part of the assets or business of the Company; or (vii) any other
corporate act or proceeding, whether of a similar character or otherwise.
(e) The Optionee shall receive written notice within a reasonable
time prior to the consummation of such action advising the Optionee of any of
the foregoing. The Committee may, in the exercise of its sole discretion, in
such instances declare that any Option shall terminate as of a date fixed by the
Board and give each Optionee the right to exercise his or her Option.
11. TRANSFERABILITY OF OPTIONS. No Option granted hereunder shall be
sold, pledged, assigned, hypothecated, disposed or otherwise transferred by the
Optionee other than by will or the laws of descent and distribution, unless
otherwise authorized by the Board, and no Option shall be exercisable during the
Optionee's lifetime by any person other than the Optionee.
12. ISSUANCE OF SHARES. As a condition of any sale or issuance of Shares
upon exercise of any Option, the Committee may require such agreements or
undertakings, if any, as the Committee may deem necessary or advisable to assure
compliance with any such law or regulation including, but not limited to, the
following:
(i) a representation and warranty by the Optionee to the
Company, at the time any Option is exercised, that he is acquiring the Shares to
be issued to him for investment and not with a view to, or for sale in
connection with, the distribution of any such Shares; and
(ii) (A) an agreement and undertaking to comply with all
of the terms, restrictions and provisions set forth in any then applicable
shareholders' agreement relating to the Shares, including, without limitation,
any restrictions on transferability, any rights of first refusal and any option
of the Company to "call" or purchase such Shares under then applicable
agreements, and
(B) any restrictive legend or legends, to be
embossed or imprinted on Share certificates, that are, in the discretion of the
Committee, necessary or appropriate to comply with the provisions of any
securities law or other restriction applicable to the issuance of the Shares.
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<PAGE>
13. ADMINISTRATION OF THIS PLAN.
(a) This Plan shall be administered by the Committee, which shall
consist of not less than two Non-Employee Directors. The Committee shall have
all of the powers of the Board with respect to this Plan. Any member of the
Committee may be removed at any time, with or without cause, by resolution of
the Board and any vacancy occurring in the membership of the Committee may be
filled by appointment by the Board.
(b) Subject to the provisions of this Plan, the Committee shall
have the authority, in its sole discretion, to: (i) grant Options, (ii)
determine the exercise price per Share at which Options may be exercised, (iii)
determine the Optionees to whom, and time or times at which, Options shall be
granted, (iv) determine the number of Shares to be represented by each Option,
(v) determine the terms, conditions and provisions of each Option granted (which
need not be identical) and, with the consent of the holder thereof, modify or
amend each Option, (vi) defer (with the consent of the Optionee) or accelerate
the exercise date of any Option, and (vii) make all other determinations deemed
necessary or advisable for the administration of this Plan, including repricing,
canceling and regranting Options.
(c) The Committee, from time to time, may adopt rules and
regulations for carrying out the purposes of this Plan. The Committee's
determinations and its interpretation and construction of any provision of this
Plan shall be final, conclusive and binding upon all Optionees and any holders
of any Options granted under this Plan.
(d) Any and all decisions or determinations of the Committee
shall be made either (i) by a majority vote of the members of the Committee at a
meeting of the Committee or (ii) without a meeting by the unanimous written
approval of the members of the Committee.
(e) No member of the Committee, or any Officer or Director of the
Company or its Subsidiaries, shall be personally liable for any act or omission
made in good faith in connection with this Plan.
14. INCENTIVE OPTIONS FOR 10% SHAREHOLDERS. Notwithstanding any other
provisions of this Plan to the contrary, an Incentive Stock Option shall not be
granted to any person owning directly or indirectly (through attribution under
Section 424(d) of the Code) at the date of grant, stock possessing more than 10%
of the total combined voting power of all classes of stock of the Company (or of
its Subsidiary) at the date of grant unless the exercise price of such Option is
at least 110% of the Fair Market Value of the Shares subject to such Option on
the date the Option is granted, and such Option by its terms is not exercisable
after the expiration of 10 years from the date such Option is granted.
15. INTERPRETATION.
(a) This Plan shall be administered and interpreted so that all
Incentive Stock Options granted under this Plan will qualify as Incentive Stock
Options under Section 422 of the Code. If any provision of this Plan should be
held invalid for the granting of Incentive Stock Options or illegal for any
reason, such determination shall not affect the remaining provisions
-10-
<PAGE>
hereof, and this Plan shall be construed and enforced as if such provision had
never been included in this Plan.
(b) This Plan shall be governed by the laws of the State of
Delaware.
(c) Headings contained in this Plan are for convenience only and
shall in no manner be construed as part of this Plan or affect the meaning or
interpretation of any part of this Plan.
(d) Any reference to the masculine, feminine, or neuter gender
shall be a reference to such other gender as is appropriate.
(e) Time shall be of the essence with respect to all time periods
specified for the giving of notices to the company hereunder, as well as all
time periods for the expiration and termination of Options in accordance with
Section 9 hereof (or as otherwise set forth in an option agreement).
16. AMENDMENT AND DISCONTINUATION OF THIS PLAN. Either the Board or the
Committee may from time to time amend this Plan or any Option without the
consent or approval of the shareholders of the Company; PROVIDED, HOWEVER, that,
except to the extent provided in Section 9, no amendment or suspension of this
Plan or any Option issued hereunder shall substantially impair any Option
previously granted to any Optionee without the consent of such Optionee.
17. TERMINATION DATE. This Plan shall terminate ten years after the date
of adoption by the Board of Directors.
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EXHIBIT 10.6
ASD GROUP, INC.
ONE INDUSTRY STREET
POUGHKEEPSIE, NEW YORK 12603
Dated as of December 20, 1996
Mr. William Becker
P.O. Box 170
Convent Station, New Jersey 07961
Dear Mr. Becker:
Reference is made to that certain Purchase Agreement dated as of
December 29, 1995 (the "Agreement"), by and among ASD Group, Inc. and certain of
its subsidiaries (collectively, "ASD") and an investor group, including William
Becker ("Investor Group"). Becker, on behalf of the Investor Group, hereby
agrees to amend the Agreement as follows:
1. Upon the date of closing (the "Closing Date") by ASD of an IPO
for which H.J. Meyers and Co., Inc. shall serve as one of the managing
underwriters, ASD will repay to the Investor Group $900,000 in principal amount
of the Notes in proportion to the principal amount of Notes purchased by each
member of the Investor Group, together with any accrued interest on the Notes
through the Closing Date. The remaining $1.1 million in principal amount of
Notes shall be due and payable on the 13th month anniversary of the Closing Date
(the "Extended Maturity Date") and interest at the rate of 10% per annum on said
principal amount of Notes shall accrue and be payable on the Extended Maturity
Date. In addition, the security interest in ASD's inventory granted by ASD to
the Investor Group in order to secure repayment of the Notes shall be released
in full on the Closing Date.
2. Section 1(b)(i) of the Agreement is amended to provide that in
lieu of the Shares, Convertible Securities and Warrants which the Investor Group
would be entitled to receive upon consummation of an IPO by ASD pursuant to the
terms of said Section 1(b)(i), ASD shall, contemporaneously with the execution
of this letter, issue to the Investor Group, in proportion to the principal
amount of Notes purchased by them pursuant to the Agreement, Warrants to
purchase 500,000 Shares. The Warrants will be exercisable at a price per Share
equal to 47.5% of the price per Share of Shares sold in the IPO for a ten year
period from the closing; provided, however, that the Warrants shall not be
exercisable for a period of two years from the Closing Date without the prior
written consent of ASD and the managing underwriters of the IPO. The Warrants
shall be in the form of Exhibit "E" to the Agreement.
All terms not otherwise defined herein shall have the meanings as set
forth in the Agreement. This letter supersedes all prior agreements and
understandings between the parties with respect to the subject matter hereof.
<PAGE>
Mr. William Becker
December 20, 1996
Page 2
If the foregoing correctly sets forth our understanding, kindly so
indicate by signing and returning this letter.
Very truly yours,
ASD GROUP, INC.
By: /S/ ROBERT LETTIERI
-----------------------------------------
Robert Lettieri, Chief Financial Officer
Accepted and Agreed to as of Decem-
ber 20, 1996
/S/ WILLIAM BECKER
- ---------------------------------
William Becker, on behalf of the
Investor Group
EXHIBIT 21.1
LIST OF SUBSIDIARIES
Automatic Systems Developers, Inc., a New York corporation
High Technology Computers, Inc., a New York corporation
iNetWare, Inc., a New York corporation
Cabletronics, Inc., a New York corporation
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
Board of Directors
ASD Group, Inc.
Poughkeepsie, New York
We consent to the use in this Amendment No. 1 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
January 14, 1997
