SCHEDULE 14A
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act
of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, For Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to /Section/240.14a-11(c) or
/Section/240.14a-12
ASD GROUP, INC.
------------------------------------------------
(Name of Registrant as Specified In Its Charter)
N/A
------------------------------------------------------------------------
(Name of Persons(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on the table below per Exchange Act Rules
14a-6(i)(1) and 0-11.
(1) Title of each class of Securities to which
transaction applies:
(2) Aggregate number of Securities to which transaction
applies:
(3) Per unit price or other underlying value of
transaction computed pursuant to Exchange Act Rule
0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the form or
schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
ASD GROUP, INC.
1 INDUSTRY STREET
POUGHKEEPSIE, NEW YORK 12603
February 12, 1999
Dear Stockholder:
You are cordially invited to attend the annual meeting of the
stockholders of ASD Group, Inc., a Delaware corporation (the "Company"), to be
held at the Company's offices located at 1 Industry Street, Paughkeepsie, New
York 12603, on March 12, 1999, at 9:30 a.m., Eastern Time.
At the meeting, you will be asked to consider and ratify the terms of a
financial restructuring (the "Restructuring") pursuant to which the Company
restructured certain of its indebtedness and obtained a capital infusion
pursuant to (i) the Securities Purchase Agreement ("Purchase Agreement") dated
June 26, 1998 by and among the Company, the parties listed on Schedule 1 to the
Purchase Agreement, and Gary D. Horne, and (ii) Subscription Agreements entered
into with three investors in November 1998. You will also be asked to consider
and vote upon an amendment to the Company's Certificate of Incorporation to
increase the number of authorized shares of the Company's common stock, par
value $.01 per share (the "Common Stock"), from an aggregate of 10,000,000
shares to an aggregate of 50,000,000 shares (the "Capital Amendment"), the
election of five directors for the coming year and the appointment of Deloitte &
Touche LLP as the Company's auditors. The attached Proxy Statement describes the
proposed Restructuring in detail and provides additional pertinent information
about the Purchase Agreement, the Subscription Agreements and the other
Restructuring documents. YOU ARE URGED TO CAREFULLY READ THE FULL TEXT OF THE
PROXY STATEMENT AND ITS EXHIBITS.
Pursuant to the Purchase Agreement, the investors agreed to purchase
shares of the Company's Common Stock, Series A Stock, Series B Stock and
Warrants (as defined below). On July 1, 1998, the investors purchased 392,017
shares of Common Stock (the "Shares"), 215,909 shares of Series A Convertible
Preferred Stock ("Series A Stock"), 330,799 shares of Series B Convertible
Preferred Stock ("Series B Stock") and five-year warrants to purchase an
additional 4,000,000 shares of Common Stock at an exercise price of $.75 per
share (the "Warrants") for $1,500,000. Thereafter, the Company consummated the
sale of an additional 137,000 shares of Series A Stock for $548,000.
Additionally, pursuant to the Subscription Agreements, the Company sold 825
shares of Series D Convertible Preferred Stock ("Series D Stock") to additional
investors for $825,000. Upon approval of the Restructuring and the Capital
Amendment, the Series A Stock, Series B Stock and Series D Stock will
automatically convert into approximately 8,185,116 shares of Common Stock.
Moreover, the investors will have the right to purchase an additional 4,000,000
shares of Common Stock for a period of five years commencing the date the
Restructuring and Capital Amendment are approved by the Company's stockholders.
As part of the Restructuring, the Company reached agreement with PNC
Bank, National Association ("PNC Bank"), Bankers Trust Company ("Bankers Trust")
and a group of private noteholders (the "Noteholder Group"), its three primary
lenders, to restructure the Company's outstanding indebtedness. As part of the
agreement with the Noteholder Group, $880,000 in debt
<PAGE>
was converted into shares of Series C Convertible Preferred Stock (the "Series C
Stock"). Upon approval of the Restructuring and Capital Amendment, the Series C
Stock will automatically convert into approximately 734,610 shares of Common
Stock.
In addition to the foregoing, holders of outstanding warrants to
purchase an aggregate of 118,126 shares of Common Stock exercisable at $2.69 per
share agreed to exchange these warrants for new warrants for the purchase of
381,818 shares at $1.50 per share. The Restructuring would have triggered
anti-dilution provisions of the outstanding warrants resulting in such warrants
representing the right to purchase at least 478,198 shares at an exercise price
of less than $.75 per share.
As previously disclosed, commencing the third quarter of the fiscal
year ended June 26, 1998 ("Fiscal 1998"), the Company's sales have been
adversely affected by a reduction in orders by several customers, principally
those in the Asian market. As a result, the Company has been experiencing cash
flow problems and did not have sufficient capital to meet its current operating
obligations. As a result of the Company's financial situation, the Company has
experienced difficulties maintaining existing and obtaining new credit
relationships with its vendors and difficulties with existing and prospective
customers. Prior to the Restructuring, the Company was in default of certain
covenants governing its debt agreements.
In addition to the foregoing, the Company received notice from the
Nasdaq Stock Market that the Company's Common Stock has failed to maintain a
closing bid price of greater than or equal to $1.00 and has failed to maintain
the minimum market float of $1,000,000. Both of these items are requirements for
continued listing on the Nasdaq SmallCap Market. Although no assurance can be
given that the Company's Common Stock will not be delisted from the Nasdaq
SmallCap Market, without the Restructuring, it is more likely that the Common
Stock will be delisted, which will have had a material adverse effect on the
liquidity of the market for the Common Stock.
The Company expects operating losses to continue at least through June
25, 1999. For the quarter ended December 25, 1998, the Company expects to report
net losses of approximately $3,000,000. These losses result from, among other
things, an inventory write-off of $1,500,000 taken for the quarter ended
December 25, 1998. In addition, during December 1998, the Company made a
decision to sell the Grand Avenue facility which is currently idle, as part of
its financial plan to reduce debt and increase equity. However, the Company does
not have any written contract for a sale of the property at this time. The
amount of the impairment in the carrying value of the Grand Avenue facility will
be charged to operations in the second quarter of the fiscal year ended June 25,
1999.
Accordingly, the Company will continue to require additional capital
notwithstanding the money raised as part of the Restructuring. However,
management believes the Company will be in a better position to raise additional
capital after the consummation of the Restructuring, although there can be no
assurance that this will be the case. If the Proposals 1 and 2 (the
Restructuring and Capital Amendment) are not approved, the Company will be
forced to repurchase the shares of Convertible Preferred Stock. Should this
occur, the Company will probably not have the resources to repurchase these
shares. Moreover, even if the Company did have the capital to repurchase such
shares, the Company would probably once again be in default of covenants under
its debt agreements, would be unable to meet its current operating obligations
and might be required to seek bankruptcy protection.
In addition, the Board believes that the Company will benefit from the
new management to be provided by the newly-appointed directors. Notwithstanding
the dilutive effect of the Restructuring and the investors' ability to exercise
a controlling influence on the Company, the Restructuring will still permit
current stockholders to participate in any future growth and profitability of
the Company and in its efforts to realize long-term value for stockholders.
THE BOARD OF DIRECTORS UNANIMOUSLY APPROVED THE RESTRUCTURING AND
RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE RESTRUCTURING AND EACH OF THE OTHER
PROPOSALS TO BE CONSIDERED AND VOTED UPON AT THE SPECIAL MEETING.
2
<PAGE>
In proposing the Restructuring to the Company's stockholders, the Board
considered, among other factors, the fairness opinion requested by the Company
of H.J. Meyers & Co., Inc. ("H.J. Meyers"), the underwriter of the Company's
initial public offering, which rendered its opinion that the Restructuring is a
reasonable alternative when considered with other likely alternatives available
to the Company. In consideration for preparing the fairness opinion, the Company
paid H.J. Meyers a $25,000 fee and agreed to amend the terms of the 94,500
underwriters' warrants currently held by H.J. Meyers to lower the exercise price
from $8.3375 per share to $1.50 per share. In addition, the Company agreed to
issue to H.J. Meyers 10,000 shares of the Company's Common Stock. A copy of the
opinion of H.J. Meyers is annexed to the Proxy Statement as Exhibit C. The Board
also considered that despite significant efforts to access additional capital,
no alternative source of financing was available to the Company other than the
Purchasers.
The enclosed Proxy Statement contains a great deal of detailed
information regarding the Restructuring, the Purchase Agreement and Subscription
Agreements, the parties involved and the process leading to the Purchase
Agreement and Subscription Agreement. We urge you to carefully consider all of
the material in the Proxy Statement and the exhibits thereto and to execute and
return the enclosed form of proxy as soon as possible, whether or not you expect
to attend the meeting. A failure to vote, either by not returning the enclosed
proxy card or by checking the "Abstain" box on the proxy card, will have the
same effect as a vote against approval of the Restructuring.
Very truly yours,
/s/ JAY H. SOLOMONT
--------------------------
Jay H. Solomont
Chairman of the Board
3
<PAGE>
ASD GROUP, INC.
1 INDUSTRY STREET
POUGHKEEPSIE, NEW YORK 12603
----------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
ON MARCH 12, 1999
----------------------------
To the Stockholders of ASD Group, Inc.:
NOTICE IS HEREBY GIVEN that an Annual Meeting of Stockholders of ASD
Group, Inc., a Delaware corporation (the "Company"), will be held at the
Company's offices located at 1 Industry Street, Poughkeepsie, New York 12603, on
Friday, March 12, 1999, at 10:00 a.m., Eastern Time, for the following purposes:
(1) To consider and vote upon approval of the terms of a financial
restructuring (the "Restructuring") pursuant to which the
Company restructured certain of its indebtedness and obtained
a capital infusion pursuant to (i) the Securities Purchase
Agreement ("Purchase Agreement") dated June 26, 1998 by and
among the Company, the parties listed on Schedule 1 to the
Purchase Agreement and Gary D. Horne; and (ii) Subscription
Agreements entered into with three investors in November 1998
(the "Subscription Agreements"), as described in the
accompanying Proxy;
(2) To consider and vote upon a proposal to approve an amendment
to the Company's Certificate of Incorporation to increase the
number of authorized shares of the Company's common stock, par
value $.01 per share (the "Common Stock"), from 10,000,000
shares to 50,000,000 shares (the "Capital Amendment");
(3) To elect five directors to the Company's Board of Directors
for the ensuing year;
(4) To consider and vote upon an amendment to the Company's 1996
Stock Option Plan to increase the number of shares of the
Company's Common Stock reserved for issuance thereunder from
60,000 shares to 350,000 shares;
(5) To consider and vote upon a proposal to ratify the appointment
of Deloitte & Touche LLP as the Company's auditors for the
fiscal year ended June 25, 1999; and
(6) To transact such other business as may properly come before
the Annual Meeting and any adjournment or postponement
thereof.
<PAGE>
Pursuant to the Bylaws of the Company, the Board of Directors has fixed
the close of business on February 5, 1999 as the record date for the
determination of the stockholders entitled to notice of and to vote at the
Annual Meeting.
By Order of the Board of Directors
Kevin Homon
SECRETARY
Poughkeepsie, New York
February 12, 1999
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. EACH
STOCKHOLDER, WHETHER OR NOT HE OR SHE PLANS TO ATTEND THE ANNUAL MEETING, IS
REQUESTED TO SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED
POSTAGE-PAID ENVELOPE WITHOUT DELAY. ANY PROXY GIVEN BY A STOCKHOLDER MAY BE
REVOKED AT ANY TIME BEFORE IT IS EXERCISED. ANY STOCKHOLDER PRESENT AT THE
ANNUAL MEETING MAY REVOKE HIS OR HER PROXY AND VOTE PERSONALLY ON EACH MATTER
BROUGHT BEFORE THE ANNUAL MEETING. HOWEVER, IF YOU ARE A STOCKHOLDER WHOSE
SHARES ARE NOT REGISTERED IN YOUR OWN NAME, YOU WILL NEED ADDITIONAL
DOCUMENTATION FROM YOUR RECORD HOLDER TO VOTE PERSONALLY AT THE ANNUAL MEETING.
<PAGE>
ASD GROUP, INC.
----------------------------
PROXY STATEMENT
FOR THE MARCH 12, 1999 ANNUAL MEETING OF STOCKHOLDERS
----------------------------
INTRODUCTION
This Proxy Statement is being furnished by ASD Group, Inc., a Delaware
corporation (the "Company"), to the holders of the Company's outstanding common
stock, par value $.01 per share (the "Common Stock"), in connection with the
solicitation of proxies by the Company's Board of Directors for use at an Annual
Meeting of Stockholders of the Company to be held at 10:00 a.m., Eastern Time,
on Friday, March 12, 1999, at the Company's offices located at 1 Industry
Street, Poughkeepsie, New York 12603 (the "Meeting"), and at any adjournment or
postponement thereof.
The approximate date this Proxy Statement and the enclosed form of
proxy are first being sent to stockholders is February 12, 1999. The Company's
principal executive offices are located at 1 Industry Street, Poughkeepsie, New
York 12603, and its telephone number is (914) 452-3000.
INFORMATION CONCERNING PROXY
The enclosed Proxy is solicited on behalf of the Company's Board of
Directors (the "Board"). The giving of a proxy does not preclude the right to
vote in person should any stockholder giving the proxy so desire. Stockholders
have an unconditional right to revoke their proxy at any time prior to the
exercise thereof, either in person at the Meeting or by filing with the
Company's Secretary at the Company's headquarters a written revocation or duly
executed Proxy bearing a later date; however, no such revocation will be
effective until written notice of the revocation is received by the Company at
or prior to the Meeting.
The cost of preparing, assembling and mailing this Proxy Statement, the
Notice of Annual Meeting and the enclosed Proxy is to be borne by the Company.
In addition to the use of mail, employees of the Company may solicit proxies
personally and by telephone. The Company's employees will receive no
compensation for soliciting proxies other than their regular salaries. The
Company may request banks, brokers and other custodians, nominees and
fiduciaries to forward copies of the proxy material to their principals and to
request authority for the execution of proxies. The Company may reimburse such
persons for their expense in so doing.
IT IS IMPORTANT THAT YOUR PROXY CARD BE RETURNED PROMPTLY. THEREFORE,
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND
RETURN THE PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
<PAGE>
PURPOSES OF THE MEETING
At the Meeting, the Company's stockholders will consider and vote upon
the following matters:
(1) To consider and vote upon approval of the terms of a financial
restructuring (the "Restructuring") pursuant to which the
Company restructured certain of indebtedness and obtained a
capital infusion pursuant to (i) the Securities Purchase
Agreement (the "Purchase Agreement") dated June 26, 1998 by
and among the Company, the parties listed on Schedule 1 to the
Purchase Agreement and Gary D. Horne; and (ii) Subscription
Agreements entered into with three investors in November 1998
(the "Subscription Agreements"), as described in this Proxy
Statement;
(2) To consider and vote upon a proposal to approve an amendment
to the Company's Certificate of Incorporation to increase the
number of authorized shares of the Company's Common Stock,
from 10,000,000 shares to 50,000,000 shares (the "Capital
Amendment");
(3) To elect five directors to the Company's Board of Directors
for the ensuing year;
(4) To consider and vote upon an amendment to the Company's 1996
Stock Option Plan to increase the number of shares of the
Company's Common Stock reserved for issuance thereunder from
60,000 shares to 350,000 shares;
(5) To consider and vote upon a proposal to ratify the appointment
of Deloitte & Touche LLP as the Company's auditors for the
fiscal year ended June 25, 1999; and
(6) To transact such other business as may properly come before
the Meeting and any adjournment or postponement thereof.
Upon approval of Proposals 1 and 2, each outstanding share of the
Company's Series A Convertible Preferred Stock (the "Series A Stock") and Series
B Convertible Preferred Stock (the "Series B Stock") purchased pursuant to the
Purchase Agreement, each outstanding share of Series C Convertible Preferred
Stock (the "Series C Stock") issued in connection with the Restructuring,and
each outstanding share of Series D Convertible Preferred Stock ("Series D
Stock") issued pursuant to the Subscription Agreements will automatically
convert into an aggregate of approximately 9,311,743 shares of Common Stock.
Assuming conversion of the preferred stock, the stockholders who currently own
100% of the issued and outstanding common stock will own 21.26% of the issued
and outstanding common stock. If stockholder approval is not obtained for
Proposals 1 and 2 by June 26, 1999, the holders of the Series A Stock and Series
B Stock will have the option to require the Company to repurchase the shares of
Series A and Series B Stock purchased by them at a price equivalent to the
purchase price plus 12% per annum (prorated over the period such shares are
outstanding). If stockholder approval is not obtained for Proposals 1 and 2 by
June 26, 1999, the holders of the Series C Stock will have the option to require
the Company to repurchase the shares of Series C Preferred Stock at a purchase
price equivalent to their stated value of $10 per share. If stockholder approval
of Proposals 1 and 2 is not obtained by November 1999, the holders of the Series
D Stock will have the option to require the Company to repurchase the Series D
Stock at a price equivalent to the stated value of $1,000 per share (subject to
adjustment).
Unless contrary instructions are indicated on the enclosed Proxy, all
shares of Common Stock represented by valid proxies received pursuant to this
solicitation (and which have not been revoked in accordance with the procedures
set forth herein) will be voted FOR Proposals 1, 2, 3, 4 and 5. If a stockholder
specifies a different choice by means of the enclosed Proxy, his shares will be
voted in accordance with the specification so made. The Board does not know of
any other matters that may be brought before the Meeting. If any other matter
should come before the Meeting, the persons named in the enclosed Proxy will
have discretionary authority to vote all proxies not marked to the contrary with
respect to such matters in accordance with their best judgment.
2
<PAGE>
OUTSTANDING VOTING SECURITIES AND VOTING RIGHTS
The Board has set the close of business on February 5, 1999, as the
record date (the "Record Date") for determining stockholders of the Company
entitled to notice of and to vote at the meeting. As of the Record Date, there
were 1,979,934 shares of Common Stock issued and outstanding, all of which are
entitled to be voted at the Meeting. The Common Stock is the only class of
securities of the Company entitled to vote, each share of Common Stock being
entitled to one noncumulative vote.
A majority of the shares of Common Stock outstanding and entitled to
vote as of the Record Date, or 989,968 shares, must be present at the Meeting in
person or by proxy in order to constitute a quorum for the transaction of
business. The affirmative vote of a majority of the shares of Common Stock
present and entitled to vote at the Meeting is required to pass upon the
proposal to approve the Restructuring. The affirmative vote of a majority of the
Company's issued and outstanding shares of Common Stock is required to pass upon
the proposal to approve the Capital Amendment. Pursuant to Delaware law,
abstentions and broker non-votes are counted as present for purposes of
determining the presence of a quorum. However, abstentions are treated as
present and entitled to vote, and thus have the effect of a vote against a
matter. A broker non-vote on a matter is considered not entitled to vote on that
matter, and thus is not considered when counting votes cast on the matter.
In connection with the Restructuring, certain executive officers and
principal stockholders of the Company, who hold an aggregate of 563,782 shares
of Common Stock, have agreed to vote their respective shares of Common Stock for
each of the proposals presented at the Meeting and for the named nominees for
election as directors. In addition, Peter Zachariou, an investor pursuant to the
Purchase Agreement, purchased 392,017 shares of Common Stock as part of the
Restructuring and has indicated that he will vote his shares of Common Stock in
favor of each of the proposals presented at the Meeting (other than Proposal 1,
on which he will not vote in accordance with the interpretation by the National
Association of Securities Dealers, Inc. of the rules of The Nasdaq Stock Market,
Inc. ("Nasdaq")). Such persons hold an aggregate of 955,799 shares of Common
Stock as of the Record Date, or approximately 48.3% of the Company's issued and
outstanding Common Stock.
A list of stockholders entitled to vote at the Meeting will be
available at the Company's offices, 1 Industry Street, Poughkeepsie, New York
12603, for a period of ten days prior to the Meeting and at the Meeting itself
for examination by any stockholder.
3
<PAGE>
BENEFICIAL SECURITY OWNERSHIP
The following table sets forth, as of the Record Date, information with
respect to the beneficial ownership of the Company's Common Stock by (i) each
person who is known by the Company to beneficially own 5% or more of the
Company's outstanding Common Stock, (ii) the Company's Chief Executive Officer
and each of the other "Named Executive Officers" (as defined in "Executive
Compensation-Summary Compensation Table"), (iii) each director of the Company,
and (iv) all directors and executive officers of the Company as a group. The
Company is not aware of any beneficial owner of more than 5% of the outstanding
Common Stock other than as set forth in the following table.
<TABLE>
<CAPTION>
PERCENTAGE
NAME AND ADDRESS NUMBER OF SHARES OF CLASS
OF BENEFICIAL OWNER (1) BENEFICIALLY OWNED (2) OUTSTANDING
- ----------------------- ---------------------- -----------
<S> <C> <C>
Peter C. Zachariou(3) 3,200,002 26.9%
Jay Solomont (4) 2,500,000 21.0
Robert W. Lichtman 0 0
Stanley F. Zuk 109,322 5.3
Thomas H. Lenagh 0 0
Jan M. Winston 0 0
Mark Karasick 0 0
All directors and executive officers as a 5,700,002 44.2
group (7 persons) (5)
5% OR GREATER HOLDERS
Gary D. Horne (6) 197,407 9.5
220 South Riverside Road
Highland, New York 12528
Regina Miler(7) 881,818 9.4
Lubin 17/5 B
Hodera, Israel 38401
Lemsford Limited (8)(9) 700,000 6.0
16 Rue de le Felisserie
Casa Postale #3501
1211 Geneva 3, Switzerland
Corommandel Limited (8)(10) 700,000 6.0
16 Rue de le Felisserie
Casa Postale #3501
1211 Geneva 3, Switzerland
</TABLE>
- ------------------------
(1) The business address of all directors and executive officers of the
Company 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. For purposes of calculating beneficial
ownership and voting power, shares of Common Stock underlying options,
warrants and other rights to acquire Common Stock exercisable within 60
days are included.
(3) Includes (i) shares of Common Stock issuable upon exercise of warrants
owned by Mr. Zachariou and (ii) shares of Common Stock issuable upon
conversion of shares of Convertible Preferred Stock (as hereinafter
defined) owned by Mr. Zachariou. Moreover, with respect to the total
number of shares issued and outstanding, assumes that all of the
Company's shares of Series A Stock, Series B Stock, Series C Stock and
Series D Stock (collectively, the "Convertible Preferred Stock"), which
are automatically convertible upon receipt of stockholder approval of
Proposals 1 and 2, are converted.
(4) Includes (i) shares of Common Stock issuable upon exercise of warrants
owned by Cameron Worldwide Ltd. ("Cameron") and (ii) shares of Common
Stock issuable upon conversion of shares of Convertible Preferred Stock
owned by Cameron. Moreover, with respect to the total number of shares
issued and outstanding, assumes that all of the Company's shares of
Convertible Preferred Stock, which are automatically convertible upon
receipt of stockholder approval of Proposals 1 and 2, are converted.
(5) Includes shares of Common Stock issuable upon exercise of warrants and
conversion of Convertible Preferred Stock described in Notes (3) and
(4).
4
<PAGE>
(6) Does not include shares of Common Stock beneficially owned by Gregory
Horne, his adult son, and Marion L. Horne Turcot, his adult daughter.
(7) Includes shares of Common Stock issuable upon conversion of shares of
Convertible Preferred Stock owned by Ms. Miler. Moreover, with respect
to the total number of shares issued and outstanding, assumes that all
of the Company's shares of Convertible Preferred Stock, which are
automatically convertible upon receipt of stockholder approval of
Proposals 1 and 2, are converted.
(8) Represents shares of Common Stock issuable upon exercise of warrants.
(9) The beneficial owner of Lemsford Limited is Patricia Walsh. NWT
Directors Limited is the director and officer.
(10) The beneficial owner of Corommandel Limited is David Lean. Ian
Williamson and Morris Evans are the directors and officers.
5
<PAGE>
PROPOSAL 1
APPROVAL OF THE RESTRUCTURING
GENERAL
Effective June 26, 1998, the Company consummated the Restructuring
whereby the Company restructured certain of its indebtedness and obtained an
immediate capital infusion of $1,500,000 providing the Company with much needed
working capital. Pursuant to the Purchase Agreement, the investors agreed to
purchase $1,900,000 of the Company's Common Stock, Series A Stock, Series B
Stock and Warrants. Effective June 26, 1998, the Company sold 392,017 shares of
Common Stock (the "Shares"), 215,909 shares of Series A Stock, 330,799 shares of
Series B Stock and five-year warrants to purchase 4,000,000 shares of Common
Stock at an exercise price of $.75 per share (the "Warrants") to the Purchasers
for $1,500,000. Thereafter, the Company consummated the sale of an additional
137,000 shares of the Series A Stock for $548,000. Additionally, the Company
sold 825 shares of Series D Stock to additional investors for $825,000.
As part of the Restructuring, the Company reached agreements with PNC
Business Credit Bank ("PNC Bank"), Bankers Trust Company ("Bankers Trust") and a
group of private noteholders (the "Noteholder Group"), its three primary
lenders, to restructure its outstanding indebtedness. As part of the agreement
with the Noteholder Group, $990,000 in debt was converted into 73,461 shares of
Series C Stock. In addition, two of the Company's existing management directors,
Gregory Horne and Stanley F. Zuk, resigned and three new directors, Peter C.
Zachariou, Mark Karasick and Jay H. Solomont, were appointed to the Board
bringing the total number of directors to six.
Upon approval of Proposals 1 and 2, each share of Series A Stock,
Series B Stock and Series C Stock will automatically convert into Common Stock
at the rate of ten shares of Common Stock for each share of Convertible
Preferred Stock. Upon approval of Proposals 1 and 2, each share of Series D
Stock will automatically convert into Common Stock at the rate of for every
$1.00 in stated value divided by seventy percent (70%) of the average market
price of the Common Stock for the five trading days immediately prior to the
conversion date.
TERMS OF THE RESTRUCTURING
THE CAPITAL INFUSION
INVESTMENT. Pursuant to the Purchase Agreement, effective June 26,
1998, the Company sold to investors the Shares, the Series A Stock, the Series B
Stock and the Warrants for $1,500,000 and, as part of the same transaction, the
Company subsequently consummated the sale of an additional 122,500 shares of the
Series A Stock for $548,000. Pursuant to the Subscription Agreements, the
Company sold to three additional investors the Series D Stock for $825,000. Upon
approval of the Restructuring and the Capital Amendment, the Series A Stock and
Series B Stock will automatically convert into Common Stock at the rate of ten
shares of Common Stock for each share of Series A Stock and Series B Stock
(subject to adjustment under certain circumstances). Upon approval of the
Restructuring and Capital Amendment, the Series D Stock will automatically
convert into Common Stock at the rate of stated value divided by seventy percent
(70%) of the average market price of the Common Stock for the five trading days
immediately prior to the conversion date (subject to adjustment under certain
circumstances). The Company will account for any difference between fair market
value of the underlying Common Stock, as determined by an independent appraisal,
and the issuance price as additional paid in capital. Upon and assuming
conversion of the Series A Stock, Series B Stock, and Series D Stock the
investors will own 8,577,133 shares of Common Stock and the Warrants to purchase
an additional 4,000,000 shares of Common Stock. If stockholder approval of
Proposals 1 and 2 is not obtained by June 26, 1999, the holders of Series A
Stock and Series B Stock will have the option to require the Company to
repurchase the shares purchased by them at a price equivalent to the purchase
price plus 12% per annum (prorated over the period such shares are outstanding).
If stockholder approval of Proposals 1 and 2 is not obtained by November 1999,
the holders of Series D Stock will have the option to require the Company to
purchase the shares purchased by them at a price equivalent to the stated value
of $1,000 per share (subject to adjustment).
Holders of the Series A Stock, Series B Stock and Series D Stock will
be entitled to receive dividends, when, as and if declared by the Company's
Board of Directors, at a rate of 6%, 4% and 3% per annum, respectively. Holders
of the Series A Stock, Series B Stock and Series D Stock have no voting rights.
The Series A Stock and Series B Stock each has a liquidation preference of
$10.00 per share. The Series D Stock has a liquidation preference of $1,000 per
share.
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Copies of the Purchase Agreement and form of Subscription Agreement are
annexed to this Proxy Statement as Exhibit A and Exhibit B, respectively, and
the summaries of the terms thereof are qualified in their entirety by reference
to the specific provisions of the Purchase Agreement and the Subscription
Agreement.
REGISTRATION RIGHTS. The Company agreed to file with the U.S.
Securities and Exchange Commission (the "Commission") a registration statement
registering the re-sale of the Shares and the shares of Common Stock into which
the Convertible Preferred Stock are convertible, and the shares of Common Stock
issuable upon the exercise of the Warrants (collectively, the "Registrable
Securities"), and to use its best efforts to cause such registration statement
to become effective as soon as practicable. It is currently contemplated that
this Registration Statement will file on February 1, 1999. The Company also
agreed to grant the holders of the Registrable Securities piggy-back
registration rights with respect to the Registrable Securities.
With respect to the Registrable Securities held by the purchasers of
Series D Stock, the agreement provides that if the Company does not file a
Registration Statement registering the re-sale of such shares by January 2,
1999), or the Registration Statement is not declared effective within 45 days of
the date such Registration Statement is filed, the conversion rate shall be
adjusted to increase the number of shares issuable upon conversion of the Series
D Stock by 5%. The foregoing adjustments are cumulative and not exclusive of
each other, with the intent that the adjustments may be a total of 10%. Since
the Company did not file the Registration Statement by January 2, 1999, the
Company has incurred a penalty in the form of additional shares of common due
upon conversion of the preferred stock.
CORPORATE GOVERNANCE MATTERS. On June 26, 1998, Stanley F. Zuk and
Gregory Horne resigned from their positions as members of the Board. The
remaining members of the Board appointed to the Board three individuals
designated by the purchasers of the Series A Stock and Series B Stock, Mark
Karasick, Jay Solomont and Peter Zachariou, and agreed to use their best efforts
to cause the election to the Board of such appointees, to serve until the next
annual meeting of the Company's stockholders in accordance with the Bylaws of
the Company. The Board also adopted a corporate resolution fixing the size of
the Board at six members and agreed not to increase the size until after the
annual meeting of stockholders. Peter Zachariou was also elected President of
the Company.
EMPLOYMENT AGREEMENTS. In connection with the Restructuring, the
Company entered into Amendments to the employment agreements of Gary D. Horne,
the Company's Chairman of the Board and Chief Executive Officer, and Stanley F.
Zuk, the Company's President (jointly, the "Executives"). Pursuant to these
Amendments, the Executives agreed to amend the terms of their existing
Employment Agreements from three-year agreements expiring December 1, 1999 to
one-year agreements expiring June 26, 1999. The Executives also agreed to a
reduction in their compensation (one-half of their original salary) until the
earlier of (a) the conversion of the Convertible Preferred Stock or (b) the
Company achieving three consecutive profitable months of operations.
Prior to the Restructuring, Gary D. Horne had advanced to the Company
an aggregate of $82,000 for working capital purposes. Simultaneously with
entering into the Purchase Agreement and Amendments to Employment Agreements,
the Company entered into a promissory note with Mr. Horne in the amount of
$82,000. Principal and interest payments of $10,000 shall be payable monthly
commencing July 15, 1998, and until the month after the Company has three
consecutive quarters of profitability (i.e. has income before income taxes as
opposed to a loss before income taxes). Thereafter, the balance of the principal
sum and interest due under the note shall be payable in equal monthly
installments over a three-year period.
The Company also amended and restated the promissory note payable to
Gary D. Horne in the amount of $658,557 with respect to advances previously made
by Gary D. Horne. Pursuant to the Amended and Restated Promissory Note, interest
is payable monthly commencing January 1, 1998. Principal shall be payable
monthly commencing January 1, 2001 with the entire principal sum being due
January 1, 2003.
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In addition, in connection with the Restructuring, the Company entered
into a one-year Employment Agreement with Gregory Horne, a Department Manager.
The Employment Agreement provides for a base salary of $75,000 per year and
contains confidentiality, non-competition and non-disclosure provisions.
The Purchase Agreement and the Subscription Agreement contain customary
representations and warranties with respect to, among other things, good
standing, due authorization, enforceability, noncontravention, absence of
material litigation, business, capitalization, accuracy of financial statements
and securities filings, real and personal property, accounts receivable,
accounts payable, inventory, intellectual property and material contracts. The
Company also covenanted, among other matters, to (i) maintain and carry on its
business in the ordinary course consistent with past practices, (ii) appoint the
Purchasers' nominees to the Board, (iii) prepare and file a proxy statement with
respect to a meeting of stockholders to approve the Restructuring, (iii) submit
to Peter C. Zachariou, for a period of six months, a schedule for the payment of
accounts payable and (iv) furnish to the Purchasers all reports filed with the
Commission.
INDEMNIFICATION. The Company and Gary D. Horne agreed to jointly and
severally indemnify the Purchasers and their affiliates against losses arising
out of the breach of any of the warranties and representations in the Purchase
Agreement (subject to certain baskets and caps) occurring within one year of the
date of the Purchase Agreement. Mr. Horne agreed to secure his indemnification
agreement through an offset against the promissory notes payable to Mr. Horne
and by escrowing 85,718 shares of his Common Stock.
PNC BANK RESTRUCTURING
Prior to the Restructuring, ASD's sales had been adversely affected by
a reduction in orders by several customers, principally those in the Asian
market. As a result, the Company was no longer in compliance with the covenants
governing its existing credit facility with certain lenders (the "Lenders") and
PNC Bank, as agent for the lenders ("PNC"). Accordingly, as part of the
Restructuring, the Company entered into an agreement with the Lenders with
respect to advances under the revolving credit facility and the defaults (the
"PNC Agreement").
The Lenders agreed to waive any and all rights they may have by virtue
of any defaults arising under the credit facility, including the right to the
payment of a default rate of interest. In addition, the Lenders agreed to
continue to provide financing to the Company notwithstanding these prior
defaults.
The Lenders agreed that, upon review of projections submitted by the
Company, to increase the maximum credit limit from $4,500,000 to $8,750,000. The
Lenders also agreed to negotiate, in good faith, a restructuring of the
Company's credit facility by September 26, 1998. If no new agreement is reached
by September 26, 1998, the Lenders nevertheless agreed that the credit facility
will remain in place at least through June 23, 2000. No formal written agreement
was reached with PNC with respect to a restructuring of the credit facility.
In consideration for the foregoing, PNC Bank received a warrant to
purchase 100,000 shares of Common Stock at an exercise price of $1.75 per share.
The warrants contain anti-dilution provisions providing for adjustments to the
number of shares issuable upon exercise of the warrants and the exercise price
under certain conditions. The warrants also grant to PNC Bank registration
rights.
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A copy of the PNC Agreement is annexed to this Proxy Statement as
Exhibit C and the summary of the terms thereof is qualified in its entirety by
reference to the specific provisions of the PNC Agreement.
BANKERS TRUST RESTRUCTURING
Prior to the Restructuring, the Company was indebted to Bankers Trust
Company ("Bankers Trust") in the amount of $2,751,133 in principal and unpaid
interest and in default under the existing loan agreement. As part of the
Restructuring, the Company and Bankers Trust entered into the Option and
Forbearance Agreement dated June 26, 1998 (the "Option Agreement") whereby the
Company paid Bankers Trust $250,000 in exchange for Bankers Trust agreeing to
defer the balance of the outstanding principal amount owed Bankers Trust until
March 17, 1999. Bankers Trust will either (i) be paid $1,500,000 on or before
March 17, 1999 in satisfaction of all amounts due, or (ii) in exchange for a
payment of $100,000, grant the Company another extension to 15 months from June
26, 1999, at which time the Company will be required to pay Bankers Trust
$1,550,000 in satisfaction for all amounts due. Pursuant to the Option
Agreement, the Company is not required to make payments of principal and
interest to Bankers Trust during this period, although the amounts owing will
continue to accrue interest. If, however, Bankers Trust is not paid in full by
such time, the total outstanding indebtedness will automatically revert back to
the current amount owed, plus any accrued but unpaid interest. Pursuant to the
Option Agreement, upon payment of the option price described above, the
five-year warrant to purchase 100,000 shares of the Company's Common Stock at an
exercise price of $4.50 per share previously issued to Bankers Trust will be
cancelled.
In accordance with Statement of Financial Standards No. 4 "Reporting
Gains and Losses From Extinguishment of Debt," any gain from the extinguishment
of the debt owed to Bankers Trust, as measured by the difference between the
reacquisition price and the net carrying amount of the extinguished debt, will
be classified as an extraordinary item, net of related income tax affect.
A copy of the Option Agreement is annexed to this Proxy Statement as
Exhibit D and the summary of the terms thereof is qualified in its entirety by
reference to the specific provisions of the Option Agreement.
AGREEMENT WITH NOTEHOLDER GROUP
The Noteholder Group was owed $1,210,000 in principal and unpaid
interest pursuant to promissory notes due in June 1998. The Company did not have
the capital resources to make that payment. Accordingly, the Company and the
Noteholder Group entered into an agreement (the "Noteholder Agreement") pursuant
to which, in satisfaction for such indebtedness, the Noteholder Group agreed to
accept $110,000 in cash upon consummation of the Restructuring and $110,000 by
June 24, 1999 with the balance of such debt, $990,000, converted into 73,461
shares of Series C Stock. Upon receipt of the stockholder approval of the
Proposals 1 and 2, the Series C Stock will automatically convert into shares of
Common Stock at the rate of ten shares of Common Stock for each share of Series
C Preferred Stock or an aggregate of 734,610 shares of Common Stock (subject to
adjustment under certain circumstances). If stockholder approval of Proposals 1
and 2 is not obtained by June 26, 1999, the Noteholder Group will have the
option, for a period of 90 days thereafter, to require the Company to repurchase
the shares of Series C Stock held by them at a price equivalent to their stated
value of $10.00 per share.
Holders of the Series C Stock will be entitled to receive dividends,
when, as and if declared by the Company's Board of Directors, at a rate of 4%
per annum, respectively. Holders of the Series C Preferred Stock have no voting
rights. The Series C Stock has a liquidation preference of $10.00 per share. In
addition to the foregoing, the Noteholder Group exchanged their existing
warrants to purchase
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534,783 shares of Common Stock at an exercise price of $2.73 per share for
warrants to purchase 418,711 shares of Common Stock which are exercisable for a
period of three years at an exercise price of $1.50 per share, subject to
adjustment under certain circumstances.
A copy of the Noteholder Agreement is annexed to this Proxy Statement
as Exhibit E and the summary of the terms thereof is qualified in its entirety
by reference to the specific provisions of the Noteholder Agreement.
OTHER AGREEMENTS
In addition to the foregoing, holders of outstanding warrants to
purchase an aggregate of 118,126 shares of Common Stock at an exercise price of
$2.69 per share (the "BlueStone Group") have exchanged these warrants for new
warrants for the purchase of 381,818 shares at an exercise price of $1.50 per
share, subject to adjustment under certain circumstances, exercisable until May
13, 2002. The Restructuring would have triggered anti-dilution provisions of
these outstanding warrants resulting in such warrants representing the right to
purchase at least 478,198 shares at an exercise price of approximately $.75 per
share.
Catalyst Financial Corp., an investment banking firm ("Catalyst"),
advised the Purchasers with respect to the transaction. The Purchasers were
party to a financial advisory agreement with Catalyst in connection with the
financing for the Company, the obligations of which were assumed by the Company.
As a result, the Company paid Catalyst a fee of approximately $118,000 (of which
$100,000 has been paid and $18,000 is owing) and issued to Catalyst's designees
warrants to purchase 141,360 shares of Common Stock at an exercise price of
$.358 per share for a period of three years. In addition, the Company has
entered into a two-year advisory agreement with Catalyst pursuant to which
Catalyst is to be paid $5,000 per month. An affiliate of Catalyst also has a
right of first refusal with respect to future financings by the Company and a
right to receive a finders' fee under certain circumstances. This agreement was
subsequently assigned to Capitalink L.C.
BACKGROUND OF THE RESTRUCTURING
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 operating performance improved, the Company continued to be significantly
leveraged through a credit facility and term loans with Poughkeepsie Savings
Bank, which indebtedness was subsequently acquired by Bankers Trust.
In order to raise additional capital, in December 1995 and February
1996, the Company sold an aggregate of $2,000,000 in principal amount of notes
(the "Notes") to the Noteholder Group in a private placement. The proceeds of
this private offering were used to purchase inventory and repay
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indebtedness. Interest on the Notes accrued at the rate of 10% per annum and was
payable quarterly. The Notes were secured by a first lien on the Company's
inventory and were due and payable upon consummation of the Company's initial
public offering ("IPO"). In connection with the IPO, the Noteholders agreed that
$900,000 of the principal amount of the Notes was to be paid upon consummation
of the IPO and $1,100,000 was to be paid in June 1998. The Noteholder Group also
received warrants to purchase 500,000 shares of the Company's Common Stock at an
exercise price of $2.73 per share (the "Noteholder Warrants"). In addition, the
investment banking firm that assisted the Company with the placement of the
Notes received warrants to purchase 34,783 shares of the Company's Common Stock
at an exercise price of $5.75 per share (subject to adjustment under certain
circumstances).
Although the Company filed a registration statement for the IPO in July
1996, the IPO process took significantly longer than expected. Therefore, in
order to obtain interim financing, in August 1996, the Company sold an aggregate
of $1,100,000 in aggregate principal amount of bridge notes (the "Bridge Notes")
to the BlueStone Group in a private placement. The proceeds of this private
offering were used to purchase inventory and repay indebtedness. The Bridge
Notes were due at the earliest of January 31, 1997, the closing date of the IPO
or upon the sale of the Company. The Bridge Notes were ultimately repaid upon
consummation of the IPO. The BlueStone Group also 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. The warrants issued to the
BlueStone Group and the placement agent were exercisable at a price of $2.96 per
share (subject to adjustment under certain circumstances).
In May 1997, the Company consummated its IPO pursuant to which it
received net proceeds of $3,889,000. From the net proceeds, the Company repaid
the Bridge Notes in full and paid $900,000 in principal on the Notes leaving a
principal balance due under the Notes of $1,100,000. The Company used the
balance of the net proceeds to increase staffing, purchase materials and new
equipment, as well as for sales and marketing, product development and working
capital.
The IPO process was a difficult and long process requiring significant
amounts of time from management. The IPO took significantly longer than
anticipated and generated less proceeds than expected. After the IPO, management
turned its full time and attention back to positioning the Company for further
growth.
On December 19, 1997, the Company completed a refinancing of most of
its indebtedness to Bankers Trust and secured a new credit facility with an
increased borrowing limit with the Lenders. The Company's new revolving line of
credit permitted borrowings of up to $8,750,000 (which amount was subsequently
reduced to $4,500,000) at prime plus 1/2% and was to expire on December 19, 2002
(the "Line of Credit"). The Line of Credit is secured by a first lien on the
Company's assets. The amount available for borrowing under the Line of Credit is
determined pursuant to a formula based upon the Company's eligible accounts
receivable, inventory, machinery and equipment. Approximately $3,800,000 of the
Line of Credit was used to repay the existing revolving credit facility and
machinery and equipment loan with Bankers Trust.
Contemporaneously therewith, the Company entered into a three year term
loan with Bankers Trust for $2,801,000 at an interest rate of 10%. The term loan
is secured by a second lien on the Company's assets. The three year term loan
replaces the existing mortgage payable notes to Bankers Trust.
During the third quarter of the fiscal year ended June 26, 1998
("Fiscal 1998"), the Company's sales began to be adversely affected by a
reduction in orders by several customers, principally customers operating in the
Asian markets. As a result, the Company was no longer in
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compliance with the covenants governing certain of its debt agreements and
announced it was seeking additional financing.
In March 1998, H.J. Meyers & Co., Inc., the underwriter of the
Company's public offering ("H.J. Meyers"), was contacted and asked to attempt to
locate a merger or acquisition candidate for the Company or investors who would
be interested in providing capital to the Company. In March 1998, Friedland
Associates contacted management of the Company and offered to effect a private
placement of $1,000,000 for the Company. Management of the Company subsequently
determined that the terms of proposed financing were not in the best interest of
the Company and its stockholders.
In April 1998, Philip Kamins, President of PMC Global, Inc. ("PMC"),
along with a representative of H.J. Meyers, visited the Company for purposes of
conducting preliminary due diligence and evaluating a potential strategic
alliance. On May 5, 1998, the Company received a letter from PMC expressing an
interest in continuing discussions with the Company. Based on these preliminary
discussions, Gary Horne traveled to California to meet again with
representatives of PMC. PMC continued with its due diligence through May 15,
1998. On May 18, 1998, management received word that PMC did not have the
resources to pursue a strategic alliance with the Company.
On May 4, 1998, a representative of Charter Technologies Group
("Charter") visited the Company. Charter appeared not to have the ability to
move quickly with a proposed transaction and not interested in a transaction of
the size the Company's situation warranted.
Commencing in late March 1998 and through the middle of May 1998, the
Company also had discussions with Carl Marks & Co. and Carl Marks Consulting
Group, an affiliated entity (collectively, "Carl Marks"). This group indicated
it could prepare a report indicating how the Company could improve efficiency
and profitability. However, when the Company was unable to make the final
payment required under an agreement with Carl Marks, Carl Marks terminated its
relationship with the Company.
On April 30, 1998, a representative of Catalyst and Peter C. Zachariou,
a potential investor, visited the Company and met with management of the Company
for purposes of evaluating a potential transaction. Late in May 1998, management
received a proposal from Catalyst, on behalf of a group of private investors led
by Mr. Zachariou and Cameron (the "Cameron Group"), about a potential
investment, subject to the Company reaching certain agreements with PNC, Bankers
Trust, the Noteholder Group and the BlueStone Group. Gary Horne signed the
proposal, subject to Board approval, thereby enabling Catalyst and the Cameron
Group to contact the Company's creditors and negotiate agreements.
During April and May, while the Company explored opportunities with
potential investors, the Company's financial position continued to deteriorate.
The loan agreements with both PNC and Bankers Trust contain certain restrictive
financial covenants. The Company was not in compliance with the covenants of
both the PNC and Bankers Trust loan agreements.
During this time, the Company entered into an agreement with PNC
providing the Company with an additional $200,000 over-advance which was due on
May 22, 1998. Without additional financing it was unlikely that on May 22, 1998
the Company would be able to repay the additional over-advance and meet all its
current operating obligations. Moreover, the Company did not have the resources
to repay the $1,100,000 in Notes held by the Noteholder Group, which were due in
June 1998.
Notwithstanding the discussions with the Cameron Group, on May 21,
1998, management selected bankruptcy counsel. On May 28, 1998, management met
with bankruptcy counsel to discuss the Company's alternatives in the event
bankruptcy protection became the Company's only option. Gary Horne personally
advanced to bankruptcy counsel the required retainer fee on behalf of the
Company. During late May and early June, the Company began to provide its
bankruptcy counsel with the information necessary to file for bankruptcy
protection should that become necessary.
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In early June, management reached a tentative oral agreement with the
Cameron Group, which provided for an infusion of capital of $1,900,000 and
agreements with several of the Company's creditors. However, the agreement with
the Cameron Group was contingent upon the Company negotiating satisfactory
agreements with PNC, Bankers Trust, the Noteholder Group and the BlueStone
Group. On June 7, 1998, a meeting of the Board was conducted to evaluate the
Company's alternatives and the proposal by the Cameron Group. Based on these
discussions, the Board authorized Gary D. Horne to pursue negotiations with the
Cameron Group. The Board also authorized Gary H. Horne to pursue obtaining from
H.J. Meyers a fairness opinion with respect to the transaction.
On June 11, 1998, the Board held another meeting of the Board to
discuss the status of the negotiations. At this meeting, the Board also included
a representative of H.J. Meyers who indicated that, based on a preliminary
review, the proposed transaction with the Cameron Group was fair to the Company
and its stockholders from a financial point of view. The Board considered the
fact that no auction process was conducted with respect to a potential sale of
the Company and that H.J. Meyers was not completely unrelated to the Company.
However, the Board noted that it had received indications of value from other
sources who had discussed possible investments in the Company over the last
several months and that H.J. Meyers was most familiar with the Company and its
situation. Based on such indications, the Board felt that the Restructuring
proposed by the Cameron Group would provide the Company's stockholders with the
opportunity to continue to participate in an entity which would benefit from an
infusion of capital and restructuring of its debt and that the Restructuring was
in the best interest of the Company and its stockholders. On June 22, 1998, the
Board approved the Restructuring.
Over the next several weeks, the Purchase Agreement, PNC Agreement,
Option Agreement, Noteholder Agreement and other agreements in connection with
the Restructuring were negotiated by and among the Company, the Cameron Group
and the other parties thereto. On June 24, 1998, the Board of Directors held a
meeting at which the Restructuring and the various agreements were authorized.
The various agreements in connection with the Restructuring were
executed on June 26, 1998 and the transactions contemplated thereunder were
consummated on July 1, 1998 (other than an additional $548,000 in financing from
the Purchasers which was received by October 31, 1998 and an additional $825,000
which was received by November 30, 1998).
RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS
Commencing the third quarter of Fiscal 1998, the Company's sales were
adversely affected by a reduction in orders by several customers, principally
those in the Asian market. As a result, the Company began experiencing cash flow
problems and did not have sufficient capital to meet its current operating
obligations. As a result of the Company's financial situation, the Company
experienced difficulties maintaining existing and obtaining new credit
relationships with its vendors and difficulties with existing and prospective
customers. Without the Restructuring and the capital infusion it provided, it is
likely that the Company would have sought bankruptcy protection. The
Restructuring represents, in the Board's view, a critical element in providing
the Company with a sufficient level of working capital.
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In addition to the foregoing, on September 25, 1998 and again on
November 9, 1998, the Company received notice from Nasdaq that the Company's
Common Stock failed to maintain a closing bid price of greater than or equal to
$1.00 and failed to maintain the minimum market float of $1,000,000. Both of
these items are requirements for continued listing on the Nasdaq SmallCap
Market. Management believes that the Company be in a better position to meet
these requirements after approval of the Restructuring and conversion of the
Convertible Preferred Stock, provided Proposals 1 and 2 are approved by
stockholders, although no assurance can be given. Although no assurance can be
given that the Company's Common Stock will not be delisted from the Nasdaq
SmallCap Market, without the Restructuring, it is more likely that the Common
Stock will be delisted, which will have had a material adverse effect on the
liquidity of the market for the Common Stock.
A primary consideration of the Board was that the financial condition
of the Company required a significant capital infusion to fund working capital
and finance inventory, thereby increasing sales and restoring profitability. The
Board considered the Company's deteriorating financial position and the need to
seek bankruptcy protection if the Company did not receive a capital infusion.
The Board considered the fact that despite significant efforts to raise capital
through a strategic alliance or acquisition, no alternative source of financing
was available to provide the Company with the capital it needed other than the
Purchasers.
The Company will continue to require additional capital notwithstanding
the money raised as part of the Restructuring. However, management believes the
Company will be in a better position to raise additional capital after the
consummation of the Restructuring, although there can be no assurance that this
will be the case. If the Proposals 1 and 2 (the Restructuring and Capital
Amendment) are not approved, the Company will be forced to repurchase the shares
of Convertible Preferred Stock. Should this occur, the Company will probably not
have the resources to repurchase these shares. Moreover, even if the Company did
have the capital to repurchase such shares, the Company would probably once
again be in default of covenants under the PNC Agreement and the Option
Agreement, would be unable to meet its current operating obligations and might
be required to seek bankruptcy protection.
In addition, the Board believes that the Company will benefit from the
new management to be provided by the newly-appointed directors. Notwithstanding
the dilutive effect of the Restructuring and the investors' ability to exercise
a controlling influence on the Company, the Restructuring will still permit
current stockholders to participate in any future growth and profitability of
the Company and in its efforts to realize long-term value for stockholders.
In arriving at its decision to approve the Restructuring, the Board
considered each of the factors outlined above. On balance, each of the foregoing
factors supported the determination of the Board to approve and to recommend
that the Company's stockholders approve the Restructuring. However, the
Company's Board of Directors found it impractical to, and therefore did not,
quantify or otherwise assign specific or relative weights to the above factors
in its consideration of the Restructuring, but, instead, considered the above
factors in their totality.
The capital infusion received from the issuance of the Series A Stock,
Series B Stock, Series D Stock and Warrants and the additional available working
capital as a result of the restructuring of certain of the Company's
indebtedness enabled the Company to meet its immediate working capital needs.
The Company continues to require additional capital to finance operations and
expects this to continue through Fiscal 1999. Management intends to seek
additional capital and believes the Company will be in a better position to
obtain additional capital after the consummation of the Restructuring. There can
be no assurance, however, that such assumption will prove to be correct or that
additional financing will be available to the Company on favorable terms or
otherwise. Neither the investors nor their affiliates are obligated to provide
the Company with any additional financing.
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COMPLETION OF THE RESTRUCTURING IS CONTINGENT UPON APPROVAL BY
STOCKHOLDER OF PROPOSALS 1 AND 2. ACCORDINGLY, THE BOARD OF DIRECTORS RECOMMENDS
THAT STOCKHOLDERS VOTE FOR THE PROPOSALS TO APPROVE (1) THE RESTRUCTURING AND
(2) THE CAPITAL AMENDMENT.
OPINION OF FINANCIAL ADVISOR
On June 11, 1998, the Board received an oral opinion, which was
followed by a written opinion dated June 12, 1998, from H.J. Meyers that, as of
such dates, the consideration paid to the Company in connection with the
investment by the Purchasers is fair to the Company and its stockholders from a
financial point of view.
THE FULL TEXT OF THE OPINION OF H.J. MEYERS DATED JUNE 11, 1998 IS
ATTACHED AS EXHIBIT E TO THIS PROXY STATEMENT. THE COMPANY'S STOCKHOLDERS ARE
URGED TO READ THIS OPINION IN ITS ENTIRETY. THE H.J. MEYERS OPINION IS DIRECTED
ONLY TO THE FAIRNESS OF THE CONSIDERATION TO BE PAID BY THE PURCHASERS FROM A
FINANCIAL POINT OF VIEW AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY OF THE
COMPANY'S STOCKHOLDERS AS TO HOW SAID STOCKHOLDER SHOULD VOTE AT THE MEETING.
THE SUMMARY OF THE OPINION OF H.J. MEYERS SET FORTH IN THIS PROXY STATEMENT IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In rendering its opinion, H.J. Meyers (i) reviewed the summary
agreement and term sheet dated June 11, 1998 between the Company and the
Purchasers; (ii) reviewed certain other non-public financial information
including financial forecasts for the Company furnished by the Company's
management; (iii) participated in discussions with members of management of the
Company concerning the financial condition, businesses, financial forecasts and
prospects of the Company both with and without the infusion of new capital; (iv)
performed analyses as it deemed appropriate in arriving at its opinion. H.J.
Meyers also considered certain financial and stock market data regarding the
Company. H.J. Meyers participated in discussions with the Company's management
regarding the strategic aspects of the restructuring and considered such other
information, financial studies, analyses and investigations and financial,
economic, and market data as it deemed relevant].
In connection with its review, H.J. Meyers assumed and relied without
independent investigation or verification upon the accuracy, the completeness
and authenticity of all of the financial and other information provided to it by
the Company and relied upon the publicly available information reviewed by it.
H.J. Meyers did not independently verify any of the foregoing information. H.J.
Meyers did not make or obtain any independent evaluation or appraisal of any
such assets, properties or facilities or any of the liabilities of the Company.
With respect to financial forecasts provided to H.J. Meyers by management of the
Company, H.J. Meyers assumed that they were recently prepared on a basis
reflecting the best available estimates and judgments of management of the
Company at the time of preparation as to the future performance of the Company.
H.J. Meyers relied upon management of the Company as to the reasonableness and
achievability of the financial and operating forecasts and projections (and the
assumptions and basis therefore). H.J. Meyers expresses no view as such
financial forecasts or the assumptions on which they are based.
In connection with rendering its opinion, H.J. Meyers considered a
variety of valuation methods. The material evaluations methods used were (i)
market capitalization or "multiple of book" and (ii) discounted cash flow
analysis. These analyses taken together provide the basis for H.J. Meyers
opinion.
MARKET CAPITALIZATION OR "MULTIPLE OF BOOK" ANALYSIS. H.J. Meyers noted
that the Company had a market capitalization of approximately $640,000. H.J.
Meyers felt this extremely depressed value reflected the market's anticipation
that the Company was on the verge of ceasing operations. H.J. Meyers noted that,
without an infusion of capital, the Company would undoubtedly liquidate; in
which case, the stockholders would have little value remaining. H.J. Meyers
calculated that the value of the Company's stockholders securities would be
approximately $700,000 assuming the Reorganization was approved.
DISCOUNTED CASH FLOW ANALYSIS. H.J. Meyers also attempted to analyze
the Company based on a discounted cash flow analysis of the projected financial
performance of the Company. However, since it was clear that if the Company did
not effect the Reorganization, it would liquidate, this analysis was difficult
to do. For purposes of conducting this analysis for the Company, H.J. Meyers
made several assumptions (including using a present value based on an average of
cost of capital between 10% and 15%, the terminal value of the Company equaling
six times operating income and June 1998 as the base year). Using this analysis,
H.J. Meyers calculated a present value, post-Reorganization, for the Company of
$14,000,000 of which the current stockholders will own 23%. Even if this value
is discounted by 40% to remove any benefit from the tax net operating loss, H.J.
Meyers determined that the transaction is still in the best interest of the
existing stockholders.
15
<PAGE>
In preparing its opinion to the Company's Board of Directors, H.J.
Meyers performed a variety of financial and comparative analyses, including
those described above. This summary of such analyses does not purport to be a
complete description of the analyses underlying H.J. Meyers opinion. The
preparation of a fairness opinion is a complex analytical process involving
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of those methods to the particular
circumstances. Therefore, such opinion is not readily susceptible to a summary
description. In arriving at its opinion, H.J. Meyers did not attribute any
particular weight to any analysis or factor considered by it but rather made
qualitative judgments as to the significance and relevance of each analysis and
factor. H.J. Meyers believes that its analysis must be considered as a whole and
that selecting portions of its analyses and other factors considered by it,
without considering all analyses and factors, could create a misleading view of
the process underlying its opinion. H.J. Meyers made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of the Company and H.J.
Meyers. Any estimates contained in H.J. Meyers' analysis are not necessarily
indicative of actual values, which may be significantly more or less favorable
as set forth therein. Estimates of the financial values of companies do not
purport to be appraisals or necessarily reflect the prices at which companies
actually may be sold. Because such estimates are inherently subject to
uncertainty, H.J. Meyers nor any other person is responsible for their accuracy.
The Company's Board of Directors selected H.J. Meyers as its financial
advisor because H.J. Meyers is a regionally recognized investment banking firm
with experience in transactions similar to the Restructuring. In addition, H.J.
Meyers was the underwriter of the IPO in 1997 and acted as a financial
consultant to the Company from May, 1997 through May, 1998. As part of its
investment banking business, H.J. Meyers was continually engaged in the
evaluation of its business and their securities.
H.J. Meyers received, upon consummation of the Restructuring, total
fees of approximately $25,000 for acting as financial advisor to the Company and
preparing its fairness opinion. In addition, the Company amended the terms of
the 94,500 underwriters warrants currently held by H.J. Meyers to lower the
exercise price thereof from $8.3375 per share to $1.50 per share. Finally, the
Company agreed to provide H.J. Meyers with 10,000 shares of the Company's Common
Stock.
Management of the Company has learned that some time after July 1998
H.J. Meyers ceased operations. Management does not have any additional
information.
VALUATION OF DERIVATIVE SECURITIES ISSUED
The Company recognizes that the conversion rates for the Series A,
Series B and Series D Stock will result in the investors acquiring shares of
Common Stock at less than the price at which the Common Stock is currently
trading. Moreover, in connection with the Restructuring, the Company has issued
warrants to purchase shares of the Company's Common Stock at an exercise price
that is less than the price at which the Company's securities are currently
trading. However, based on the Company's financial situation at the time these
investments in the Company were made and the significant risk involved in the
purchase of these securities, management believes that these securities were
issued at fair value. Subsequent to the restructuring, management obtained an
independent appraisal of the securities that were issued. The appraisal
indicates that the securities were issued at fair value. The Company's
accounting treatment of this transaction reflects that valuation.
FEDERAL INCOME TAX CONSEQUENCES
The Reorganization will not result in any Federal income tax
consequences to either the Company or its stockholders.
DISSENTERS RIGHTS
Under Delaware law, holders of the Company's Common Stock are not
entitled to dissenters' rights in connection with the Restructuring.
SPECIAL CONSIDERATIONS
The following factors, in addition to the information discussed
elsewhere in this Proxy Statement, should be considered by stockholders in
deciding whether to approve the Restructuring and the Purchase Agreement:
16
<PAGE>
RECENT LOSSES AND NEED FOR ADDITIONAL FINANCING
The Company had net losses of $6,692,670 for Fiscal 1998 and net losses
of $800,641 for the three months ended September 25, 1998. Moreover, the Company
expects to report net losses of approximately $3,900,000 for the six months
ended December 25, 1998. The Company continues to require additional capital to
finance operations and expects this to continue through the year ended June 25,
1999 ("Fiscal 1999"). Management intends to seek additional capital. Although
management does not currently have any agreements or committments in place,
management believes the Company will be in a better position to obtain
additional capital after the consummation of the Restructuring. The investors
have committed to fund the Company's working capital requirements through Fiscal
1999. In addition, management is attempting to re-negotiate a further reduction
in the Company's obligations to Bankers Trust Company and an increase in the
Company's revolving credit facility with PNC Bank.
If Proposals 1 and 2 are not approved by the Company's stockholders by
June 26, 1999, with respect to the Series A Stock and Series B Stock and by
November 30, 1999, with respect to the Series D Stock, the investors shall have
the option, for a period of 90 days thereafter, to require the Company to
repurchase the shares of Series A Stock, Series B Stock and Series D Stock
purchased by them. The Series A Stock and Series B Stock must be purchased at a
price equivalent to the purchase price plus 12% per annum (prorated over the
period that the shares are outstanding). The Series D Stock must be purchased at
a price equivalent to the stated value of $1,000 per share (subject to
adjustment). Moreover, the holders of Series C Stock would have a similar option
to require the Company to purchase their shares at a price equivalent to their
stated value of $10.00 per share if Proposals 1 and 2 are not approved by June
26, 1999. Should this occur, the Company will probably be forced to seek
additional financing in order to be able to repurchase the shares of Convertible
Preferred Stock. There can be no assurance that the Company will be able to
obtain additional financing, if required, on favorable terms or otherwise.
Failure to obtain additional financing when, and if, required would have a
material adverse effect on the Company.
CONTROL BY PRINCIPAL STOCKHOLDERS
Assuming the approval of the Restructuring and the Capital Amendment
and conversion of the Convertible Preferred Stock, Peter Zachariou and Cameron
beneficially own approximately 26.9% and 21.0% of the Company's Common Stock,
respectively. Although, there is no agreement between Mr. Zachariou and Cameron
as to the voting of their shares, they will be able to exercise a significant
influence over and voting together, control, decisions that may effect the
Company's stockholders. In addition, Mr. Zachariou and Cameron, voting together
will be able to effect certain transactions, including mergers, acquisition
consolidations and sales of substantially all of the assets of the Company,
without the consent of any of the Company's other stockholders subject to
applicable laws.
POTENTIAL LIMITATION ON USE OF THE COMPANY'S TAX LAWS CARRIED FORWARD
As of June 26, 1998, the Company had a net operating loss carried
forward of approximately $1,731,000 for federal income tax purposes. The
Reorganization will result in a "change of control" for federal income tax
purposes and limit the Company's ability to realize NOL's. The effect of such
limitation could be material, depending on the value of the Company's
outstanding stock immediately preceding the ownership change, the applicable
federally prescribed rate used to determine the amount of the limitation and the
Company's projected future taxable income.
EFFECT OF OUTSTANDING CONVERTIBLE SECURITIES AND WARRANTS
Assuming approval of the Restructuring and the Capital Amendment by the
Company's stockholders, the Convertible Preferred Stock will automatically
convert into 8,919,726 of the Company's common stock. The Company will then have
warrants outstanding to purchase 5,254,571 shares of Common Stock, at exercise
prices ranging from $.358 to $4.50, including the Warrants to purchase 4,000,000
shares of Common Stock at an exercise price of $.75 per share. The holders of
the warrants are given the opportunity to profit from a rise in the market price
of the Company's private stock with a result in dilution in the interest of the
other stockholders. Further,
17
<PAGE>
the terms by which the Company may obtain additional financing while the
warrants are outstanding may be adversely affected by the existence of the
warrants. The holders of the warrants may exercise at a time when the Company
might be able to obtain additional capital through a new offering of Securities
on terms more favorable then those provided in the warrants.
REGISTRATION RIGHTS
Pursuant to the Purchase Agreement and the Subscription Agreements, the
Company has agreed to register the resale of the Registrable Securities. If the
investors were to sell a substantial portion of their Registrable Securities,
such sales could adversely affect the market price of the Common Stock.
POTENTIAL NASDAQ DELISTING.
The Company's shares of Common Stock are currently listed on the Nasdaq
SmallCap Market. On June 3, 1998, the Company received two letters from The
Nasdaq Stock Market ("Nasdaq") regarding the continued listing of the Company's
Common Stock on the Nasdaq SmallCap Market. At that time, the Company failed to
meet two requirements for continued listing on the Nasdaq SmallCap Market. On
September 3, 1998, the Company advised Nasdaq that it believed it now met both
of these requirements. On September 25, 1998, the Company received another
letter from Nasdaq advising the Company that the Company's shares of Common
Stock failed to maintain the closing bid price of greater than or equal to
$1.00. The Company has been provided with 90 calendar days in which to regain
compliance with this minimum bid price requirement. On October 12, 1998, the
Company received another letter from Nasdaq advising the Company that it failed
to meet three requirements for continued listing on the Nasdaq SmallCap Market
and requesting that the Company provide Nasdaq by October 26, 1998 with its
proposal for achieving compliance. In a separate letter, Nasdaq requested
additional information regarding the Restructuring. The Company submitted
responses to these two letters to Nasdaq on October 26, 1998. On December 10,
1998, the Company received another letter from Nasdaq setting the date for an
oral hearing to discuss the delisting action. The hearing was held January 22,
1999 at which time the Company gave its proposal for achieving compliance with
the listing requirements. Nasdaq is considering the Company's proposal and as of
this date, has not issued a response. No assurance can be given that the
Company's position will be acceptable to Nasdaq in which case Nasdaq may delist
the Company's Common Stock from the Nasdaq SmallCap Market. No assurance can be
given that the Company's shares of Common Stock will continue to be listed on
the Nasdaq SmallCap Market. Delisting of the Common Stock from the Nasdaq
SmallCap Market would likely have a material adverse effect on the liquidity of
the market for the Common Stock and the Company.
PACIFIC EXCHANGE DELISTING
The Company's shares of Common Stock were also listed on the Pacific
Exchange. On December 2, 1998, the Company received a letter from the Pacific
Exchange indicating that the Equity Listing Committee had voted unanimously in
favor of delisting the Common Stock. The Common Stock was suspended from trading
on December 2, 1998. On December 7, 1998, the Company responded with a request
for a hearing and an answer to the letter from the Pacific Exchange. On December
10, 1998, the Company received a letter from the Pacific Exchange indicating
that a panel was going to be gathered to consider the Company's situation to
date, the Company has not been advised that a panel was chosen. Until such date,
while the Common Stock has not been delisted, the Common Stock will remain
suspended from trading. The Company's position may not be deemed to warrant
continued listing by the Pacific Exchange in which case the Pacific Exchange may
delist the Company's Common Stock from the Pacific Exchange. No assurance can be
given that the Company's shares of Common Stock will continue to be listed on
the Pacific Exchange. Delisting of the Common Stock from the Pacific Exchange
would likely have a material adverse effect on the liquidity of the market for
the Common Stock and the Company.
VOTE REQUIRED
The approval of the Restructuring is not required under Delaware law,
however, the Restructuring requires stockholder approval under the rules of the
Nasdaq. Thus, the affirmative vote of the holders of the majority of shares of
Common Stock present and entitled to vote at the Meeting is required to approve
the Restructuring. In accordance with Nasdaq rules, the Shares purchased by Mr.
Zachariou will not vote on this matter.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO APPROVE
THE RESTRUCTURING.
18
<PAGE>
PROPOSAL 2
AMENDMENT OF THE CERTIFICATE TO INCREASE
THE AUTHORIZED SHARES OF COMMON STOCK FROM
10,000,000 SHARES TO 50,000,000 SHARES
The Board of Directors of the Company has approved and recommends that
the stockholders of the Company approve an amendment to the Company's
Certificate of Incorporation for the purpose of increasing the number of its
authorized shares of Common Stock from 10,000,000 shares to 50,000,000 shares.
The Capital Amendment will be accomplished by amending the Company's Certificate
of Incorporation.
Upon approval of Proposal 1 and this Proposal, the Company will issue
8,919,726 shares of Common Stock as a result of the automatic conversion of the
Convertible Preferred Stock. The additional authorized but unissued shares of
Common Stock not issued to the investors could be used for any proper corporate
purpose, including acquisitions, raising of additional equity capital, stock
dividends or upon the exercise of stock options. The Company's stockholders do
not have preemptive rights to subscribe for or purchase any of the additional
shares of Common Stock to be authorized. The future issuance of additional
shares of Common Stock on other than a pro rata basis may dilute the ownership
of the current stockholders, as well as their proportionate voting rights.
If the proposed amendment to the Company's Certificate of Incorporation
is adopted, no further approval of the stockholders would be required for the
issuance of shares of Common Stock as authorized by the amendment and, absent
any legal or Nasdaq SmallCap Market requirements, it is not contemplated that
further approval of the stockholders would be sought for issuance of any shares
authorized by the Capital Amendment. Except as set forth herein in connection
with the Restructuring, the Company presently has no other plans to issue any
shares of Common Stock which would be authorized hereby.
The approval of the proposed amendment could make it more difficult to
acquire control of the Company and thereby discourage attempts to do so, even
though the Company's stockholders may deem such an acquisition desirable.
Issuance of the additional shares of Common Stock could dilute the ownership
interest and voting power of the Company's stockholders who may seek control of
the Company. The shares of Common Stock could be issued in a private placement
to one or more organizations sympathetic to the Company and opposed to any
take-over bid, or under other circumstances that could make it more difficult
and thereby discourage attempts to acquire control of the Company. To the extent
that it impedes any such attempts, the amendment may serve to perpetuate the
Company's management.
Although the Company has from time to time considered the issuance of
additional Common Stock in connection with a strategic alliance or acquisition,
except as described herein, the Company has no present plans, agreements or
arrangements for the issuance of the additional shares of Common Stock in excess
of the number of such shares presently authorized in connection with any
particular transaction. The Company does not anticipate soliciting the vote of
its stockholders to authorize the issuance of the additional shares of the
Common Stock unless otherwise required under Delaware law, the Company's
Certificate of Incorporation or its ByLaws or Nasdaq rules.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO APPROVE
THE CAPITAL AMENDMENT.
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<PAGE>
PROPOSAL 3
ELECTION OF DIRECTORS
Five directors are to be elected at the Meeting to serve until the next
Annual Meeting of the Company's stockholders and until their respective
successors shall have been elected and shall have qualified or until their
earlier resignation, removal from office or death.
NOMINEES
The following table sets forth the names, ages and positions held with
respect to the Company's directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION YEAR FIRST ELECTED DIRECTOR
- ---- --- -------- ---------------------------
<S> <C> <C> <C>
Jay H. Solomont (2) 42 Chairman of the Board 1998
and Director
Peter Zachariou (1) 37 President and Director 1998
Robert W. Lichtman 69 Chief Operating Officer
Mark Karasick 49 Director 1998
Thomas J. Lenagh (1)(2) 73 Director 1997
Jan M. Winston (1)(2) 62 Director 1997
Kevin E. Homon 43 Secretary and Controller
<FN>
(1) - Member of Compensation Committee
(2) - Member of the Audit Committee
</FN>
</TABLE>
JAY H. SOLOMONT became a director of the Company in June 1998 upon
consummation of the Restructuring. Mr. Solomont has been a private investor for
at least the past five years. Prior to that, Mr. Solomont held various executive
and general management positions with A/D/S Group, one of the premier nursing
home companies in the northeast region of the United States, until this company
was sold to the multi-care group for approximately US $100,000,000. Mr.
Solomont, along with his brothers, continues to own a group of assisted living
facilities. Mr. Solomont's private investments include, but are not limited to,
part ownership of a decorative art factory in the United States, ownership of
several real estate properties in the United States and, along with his
partners, ownership of the exclusive rights to develop IMAX Theaters in Israel.
PETER C. ZACHARIOU became President and a director of the Company in
June 1998 upon consummation of the Restructuring. Mr. Zachariou has also held
various positions with JR Consulting, Inc., a company with a class of securities
traded on the Nasdaq OTC Electronic Bulletin Board /registered trademark/; most
recently Mr. Zachariou serves as the Chairman of the Board, President and
Treasurer. For at least the preceding five years, Mr. Zachariou has been a
private investor.
ROBERT W. LICHTMAN has been acting as our Chief Operating Officer since
July 1998 pursuant to an agreement with Getzler & Co., Inc., a management
consulting firm ("Getzler"). Mr. Lichtman is also a Senior Vice President of
Getzler, and has been for over five years.
MARK KARASICK became a director of the Company in June 1998 upon
consummation of the Restructuring. Mr. Karasick has been a private investor and
syndicator, primarily in the real estate area, for at least the past five years.
Mr. Karasick was initially involved ten years ago as a developer in Orange and
Dutchess counties in New York. When the market declined, Mr. Karasick
represented a number of individuals and entities on working out their troubled
loans with their lenders and in managing their properties on an interim basis.
During the past four years, Mr. Karasick has entered the real estate market as a
principal and syndicator acquiring properties or mortgages, primarily office
buildings in midtown Manhattan.
THOMAS H. LENAGH has been a director of the Company since September
1997. Mr. Lenagh was the Chairman and Chief Executive Officer of Greiner
Engineering from 1984 to 1986. He also served as the Chairman of the Executive
Committee of SCI Systems, Inc., from 1985 to 1994. Mr. Lenagh, an independent
financial advisor since 1984, has also served in financial management positions
of the Aspen Institute and the Ford Foundation as well as on the Board of
Directors of several corporations.
JAN M. WINSTON has been a director of the Company since September 1997.
Mr. Winston was employed by the IBM Corporation from 1963 to 1997. He has held
executive and general management positions in computer development, marketing
and finance. He has extensive experience in developing
20
<PAGE>
and marketing minicomputers, personal computers and software and frequently
represented IBM in external negotiations. Mr. Winston was one of six senior
managers who launched IBM's personal computer activity in the early 1980's. Most
recently, he lead IBM activities in the development and sales of speech
recognition systems.
KEVIN E. HOMON has been our Controller since July 1997 and our
Secretary since July 1998. Prior to joining us. Mr. Homon was Controller of York
Hunter, Inc., a large construction management firm, from 1986 to 1997.
Peter C. Zachariou became an officer and director of the Company as
part of the Restructuring. Mark Karasick and Jay Solomont were also appointed to
the Board of Directors upon consummation the Restructuring. Robert Lichtman was
hired as Chief Operating Officer shortly after the Restructuring. Stanley Zuk
and Gregory Horne resigned as executives officers and directors of the Company
upon consummation of the Restructuring; however, they continue to be employees
of the Company. After the Restructuring, Mr. Gary Horne continued to serve as
Chairman of the Board and a Chief Executive Officer of the Company; however, Mr.
Horne subsequently resigned on November 5, 1998.
In connection with the IPO, the Company granted H.J. Meyers the right,
for a period of three years from May 13, 1997, to designate an observer to the
Company's Board of Directors, which individual may be a director, officer,
employee or affiliate of H.J. Meyers.
The Company's compensation to non-employee directors consists of a fee
of $1,000 per meeting of the Board of Directors and to provide non-employee
directors with annual grants of stock options under the Company's 1996 Stock
Option Plan (the "1996 Plan") to purchase 7,500 shares of Common Stock that will
be vested at the end of each full year of service.
The following table sets forth the persons nominated as directors:
<TABLE>
<CAPTION>
NAME AGE POSITION YEAR FIRST ELECTED
- ---- --- -------- ------------------
<S> <C> <C> <C>
Jay H. Solomont (2) 42 Chairman of the Board 1998
and Director
Peter Zachariou (1) 37 President and Director 1998
Mark Karasick 49 Director 1998
Thomas J. Lenagh (1)(2) 73 Director 1997
Jan M. Winston (1)(2) 62 Director 1997
<FN>
(1) - Member of Compensation Committee
(2) - Member of the Audit Committee
</FN>
</TABLE>
Our directors hold office until the next annual meeting of stockholders
and until their successors have been duly elected and qualified or their earlier
resignation, removal from office or death. Our officers are elected annually by
the Board of Directors and serve at the direction of the Board.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's executive officers, directors and holders of more than
10% of the Company's Common Stock, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission (the "Commission"). Such
persons are required to furnish the Company with copies of all Section 16(a)
forms they file.
Based solely on its review of the copies of such forms received by it
or oral or written representations from certain reporting persons that no Forms
5 were required for those persons, the Company believes that, with respect to
Fiscal 1998, its executive officers, directors and greater than 10% beneficial
owners complied with all such filing requirements, with three exceptions. Mark
Karasick became a director of the Company in June 1998. Kevin Homon became an
officer of the Company in July 1998. Robert Lichtman became an officer of the
Company in June 1998. The Form 3's for each of these individuals were not filed
timely.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
During Fiscal 1998, the Board of Directors held 11 formal meetings
and took actions by written consent on four occasions. During Fiscal 1998, no
director attended fewer than 75% of the number of meetings of the Board of
Directors held during the period such director served on the Board.
The only standing committees of the Board of Directors are the Audit
Committee and the Compensation Committee. The Board does not have a nominating
or similar committee. Both Committees were formed during the fiscal year ended
June 27, 1997 ("Fiscal 1997") following consummation of the IPO.
The Audit Committee is presently comprised of Jay H. Solomont, Thomas
J. Lenagh and Jan M. Winston. The duties and responsibilities of the Audit
Committee include (a) recommending to the Board of Directors the appointment of
the Company's independent certified public accountants and any termination of
21
<PAGE>
engagement, (b) reviewing the plan and scope of independent audits, (c)
reviewing the Company's significant accounting and reporting policies and
operating controls, (d) having general responsibility for all related auditing
matters, and reporting its recommendations and findings to the full Board of
Directors. During Fiscal 1998, the Audit Committee held two formal meetings
and did not take any actions by written consent.
The Compensation Committee is presently comprised of Peter C.
Zachariou, Thomas J. Lenagh and Jan M. Winston. The Compensation Committee
reviews and approves the compensation of the Company's executive officers and
administers the 1996 Stock Option Plan (the "1996 Plan"). During Fiscal 1998,
the Compensation Committee held no formal meetings and did not take any actions
by written consent.
THE BOARD RECOMMENDS A VOTE FOR APPROVAL OF THE NOMINEES FOR ELECTION
AS DIRECTORS.
22
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table provides information with respect to the
compensation paid or accrued by the Company and all its subsidiaries to the
Company's Chief Executive Officer, Chief Operating Officer and the Chief
Financial Officer (collectively, the "Named Executive Officers") in all their
capacities for the Fiscal 1998 and Fiscal 1997. No other executive officer of
the Company received salary and bonus compensation in Fiscal 1998 and Fiscal
1997 in excess of $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------- --------------------
SHARES
NAME AND OTHER ANNUAL UNDERLYING
PRINCIPLE POSITION YEAR SALARY BONUS COMPENSATION (1) OPTIONS (#)
------------------ ---- ------ ----- ---------------- -----------
<S> <C> <C> <C> <C> <C>
Peter C. Zachariou(2) 1998 $0 $0 $0 0
President 1997 $0 $0 $0 0
Gary D. Horne(3) 1998 $132,534 $0 $0 0
Chairman and Chief Executive 1997 $139,150 $0 $0 0
Officer
Stanley F. Zuk(4) 1998 $119,380 $0 $0 0
President and Chief Operating 1997 $138,400 $0 $0 0
Officer
</TABLE>
- -------------------------
(1) The table does not include amounts for personal benefits extended to
Mr. Horne and 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 1998 and Fiscal 1997 did not exceed the
lesser of $50,000 or 10% of his total annual salary and bonuses.
(2) Mr. Zachariou became President of the Company effective June 26, 1998.
On July 24, 1998, the Board agreed to compensate Mr. Zachariou in the
amount of $7,000 per month. However, to date, compensation to Mr.
Zachariou has not been paid and is accruing. No compensation was paid
or accrued in Fiscal 1998 or Fiscal 1997.
(3) Mr. Horne resigned as Chairman of the Board and Chief Executive Officer
on November 5, 1998. Mr. Horne continues to be employed by the Company
as Vice President of Engineering.
(4) Mr. Zuk resigned from his position as President and Chief Operating
Officer effective June 26, 1998. Mr. Zuk continues to be employed
by the Company as Vice President of Manufacturing.
EXECUTIVE EMPLOYMENT AGREEMENTS
Effective December 1, 1996, the Company entered into three-year
employment agreements with each of Gary D. Horne, the Company's Chairman and
Chief Executive Officer, and Stanley F. Zuk, the Company's President and Chief
Operating Officer. The terms of the employment agreements will automatically be
extended for successive one year terms unless the Company or the executive
officer gives written notices 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. However, in
connection with the Restructuring, the employment agreements for Messrs. Horne
and Zuk were amended to reduce their salaries by 50% until the earlier of (a)
the conversion of the Series A Stock, Series B Stock and Series C Stock have
been converted or (b) the Company has three consecutive profitable months.
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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.
On July 24, 1998, the Board voted (with Mr. Zachariou abstaining) on
and approved a compensation package for Mr. Zachariou, which includes a
compensation payment of $7,000 per month.
The Company has obtained key man insurance in the amount of $1,000,000
on the lives of each of Messrs. Horne and Zuk.
Effective June 29, 1998, the Company entered into an agreement with
Getzler & Co., Inc. ("Getzler") with respect to the services of Robert W
Lichtman to act as Chief Operating Officer of the Company. Pursuant to the
one-year agreement, Getzler will be paid $200,000.00 per annum payable monthly
in advance on the first day of every month. In addition, as additional
compensation for the services to be provided, the Company issued 150,000 shares
of the Company's Common Stock to Getzler and/or its designees. Notwithstanding
the foregoing, Getzler has a right to require Peter Zachariou, individually, to
purchase the shares owned by Getzler at $1.25 per share, and Peter Zachariou has
a call with respect to the shares at $1.50 per share. In addition to the
foregoing, Getzler purchased 100,000 shares of the Company's Common Stock at a
purchase price of $.352 per share. Getzler will also be reimbursed for all
reasonable expenses.
Effective November 5, 1998, Mr. Horne resigned from his positions as
Chairman of the Board and Chief Executive Officer of the Company. Mr. Horne
continues to be an employee of the Company.
OPTIONS GRANTS IN LAST FISCAL YEAR
Under the 1996 Plan, 60,000 shares of Common Stock are reserved for
issuance upon exercise of the options. The 1996 Plan is designed to serve as an
incentive for retaining qualified and competent directors, employees,
consultants and independent contractors of the Company. There were no grants of
stock options made during Fiscal 1998 to the Company's named Executive Officers.
STOCK OPTIONS HELD AT END OF FISCAL 1997
No stock options are held by the Company's Named Executive Officers as
of June 26, 1998.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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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
$659,000 at June 27, 1997 and $82,000 at June 26, 1998. Such advances are
unsecured. The $659,000 in advances are payable as follows: interest only
commencing January 1, 1998; principal plus interest payable monthly commencing
January 1, 2001 with the entire balance due January 1, 2003. The $82,000 in
advances outstanding at June 26, 1998 are repayable as follows: principal and
interest payments of $10,000 are payable monthly commencing July 15, 1998 and
until the month after the Company has three consecutive quarters of
profitability (i.e. has income before income taxes as opposed to a loss before
income taxes); thereafter, the balance of the principle sum and interest due
under the note shall be payable in equal monthly installments over a three year
period.
TRANSACTIONS WITH NETCOMP, INC.
The Company purchases computers, computer supplies and services from
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 $134,000 and $135,000 during Fiscal 1998 and Fiscal
1997, respectively.
APPROVAL OF AFFILIATED TRANSACTIONS
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.
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PROPOSAL 4
AMENDMENT OF 1996 STOCK OPTION PLAN
The Board of Directors of the Company has amended, subject to
Stockholder approval, the 1996 Plan to increase the number of shares of Common
Stock authorized for issuance under the 1996 Plan by 290,000 shares from 60,000
shares to 350,000 shares of Common Stock.
1996 PLAN DESCRIPTION
The statements in this Proxy Statement concerning the terms and
provisions of the 1996 Plan are summaries only and do not purport to be
complete. All such statements are qualified in their entirety by reference to
the full text of the 1996 Plan, which is attached as Exhibit F to this Proxy
Statement
The purpose of the 1996 Plan is to advance the interests of the Company
by providing an additional incentive to attract and retain qualified and
competent persons as employees, upon whose efforts and judgment the success of
the Company is largely dependent, through the encouragement of stock ownership
in the Company by such persons.
The 1996 Plan was effective as of June 25, 1996, and unless sooner
terminated by the Board of Directors of the Company in accordance with the terms
thereof, shall terminate on June 25, 2006. Certain employees, who are selected
by the stock option committee, or if there is no stock option committee by the
Board of Directors, may participate in the 1996 Plan; however, no incentive
stock option, as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code" or "Internal Revenue Code") shall be granted to a consultant
who is not also an employee of the Company.
The 1996 Plan provides for the issuance of incentive stock options
("Incentive Stock Options") and nonqualified stock options ("Nonqualified Stock
Options"). An Incentive Stock Option is an option to purchase Common Stock that
meets the definition of "incentive stock option" set forth in Section 422 of the
Code. A Nonqualified Stock Option is an option to purchase Common Stock that
meets certain requirements in the Plans but does not meet the definition of an
"incentive stock option" set forth in Section 422 of the Code. Nonqualified
Stock Options and Incentive Stock Options are sometimes referred to herein as
"Options."
The number of shares of Common Stock that may be issued pursuant to
Options granted under the 1996 Plan is presently 60,000, and if this proposal is
approved by the Stockholders, will be increased to 350,000. If any Option
granted pursuant to the 1996 Plan terminates, expires, or is canceled or
surrendered, in whole or in part, shares subject to the unexercised portion may
again be issued pursuant to the exercise of Options granted under the 1996 plan.
The shares acquired upon exercise of Options granted under the 1996 Plan will be
authorized and unissued shares of Common Stock. The Company's Stockholders will
not have any preemptive rights to purchase or subscribe for the shares reserved
for issuance under the 1996 Plan.
The 1996 Plan is administered by a committee of two or more directors
(the "Committee") or, if a Committee is not designated by the Board of
Directors, by the Board of Directors as a whole. The Board has authorized the
Compensation Committee to administer the 1996 Plan. The Committee has the right
to determine, among other things, the persons to whom Options are granted, the
number of shares of Common Stock subject to Options, the exercise price of
Options and the term thereof.
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All employees of the Company, including officers and directors and
consultants to the Company, are eligible to receive grants of Options under the
1996 Plan; however, no Incentive Stock Option may be granted to a consultant who
is not also an employee of the Company or any of its subsidiaries. Upon
receiving grants of Options, each holder of the Options (the "Optionee") shall
enter into an option agreement with the Company which contains the terms and
conditions deemed necessary by the Committee.
TERMS AND CONDITIONS OF OPTIONS
OPTION PRICE
For any Option granted under the 1996 Plan, the option price per share of
Common Stock may be any price not less than par value per share as determined by
the Committee; however, the option price per share of any Incentive Stock Option
may not be less than the Fair Market Value (defined below) of the Common Stock
on the date such Incentive Stock Option is granted. On October 30, 1998, the
closing price of the Company's Common Stock as reported by the Nasdaq SmallCap
Market was $0.688 per share.
Under the 1996 Plan, the "Fair Market Value" is the closing price of
shares on the business day immediately preceding the date of grant; however, if
the shares are not publicly traded, then the Fair Market Value will be as the
Committee shall in its sole and absolute discretion determine in a fair and
uniform manner. The closing price of the share on any business day under the
1996 Plan is (i) if the shares are 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 shares on such exchange or reporting system, as reported in any
newspaper of general circulation, (ii) if the shares are quoted on the National
Association of Securities Dealers Automated Quotations System, 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 shares 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 shares as
reported by the National Quotation Bureau, Incorporated if at least two
securities dealers have inserted both bid and asked quotations for the shares on
at least five of the ten preceding days.
EXERCISE OF OPTIONS
Each Option is exercisable in such amounts, at such intervals and upon
such terms as the Committee may determine; however, Incentive Stock Options must
vest in three annual installments commencing one year from the date of grant. In
no event may an Option be exercisable after ten years from the date of grant.
Unless otherwise provided in an Option, each outstanding Option may, in the sole
discretion of the Committee, become immediately fully exercisable (i) if there
occurs any transaction (which shall include a series of transactions occurring
within 60 days or occurring pursuant to a plan), that has the result that
Stockholders of the Company immediately before such transaction cease to own at
least 51 percent of the voting stock of the Company or of any entity that
results from the participation of the Company in a reorganization,
consolidation, merger, liquidation or any other form of corporate transaction;
(ii) if the Stockholders of the Company shall approve a plan of merger,
consolidation, reorganization, liquidation or dissolution in which the Company
does not survive (unless such plan is subsequently abandoned); or (iii) if the
Stockholders of the Company shall approve a plan for the sale, lease, exchange
or other disposition of all or substantially all the property and assets of the
Company (unless such plan is subsequently abandoned). 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. Options granted to the officers and
directors under the 1996 Plan may not be exercised
27
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unless otherwise expressly provided in any Option, until six months following
the date of grant and if and only if the Optionee is in the employ of the
Company on such date.
Unless further limited by the Committee in any Option, shares of Common
Stock purchased upon the exercise of Options must be paid for in cash, by
certified or official bank check, by money order, with already owned shares of
Common Stock, or a combination of the above. The Committee, in its sole
discretion, may accept a personal check in full or partial payment. If paid in
whole or in part with shares of already owned Common Stock, the value of the
shares surrendered is deemed to be their Fair Market Value on the date the
Option is exercised. Proceeds from the sale of Common Stock pursuant to the
exercise of Options will be added to the general funds of the Company to be used
for general corporate purposes. Under the 1996 Plan, the Company may also lend
money to an Optionee to exercise all or a portion of an Option granted under the
1996 Plan. If the exercise price is paid in whole or in part with Optionee's
promissory note, such note shall (i) provide for full recourse to the maker,
(ii) be collateralized by the pledge of shares purchased by Optionee upon
exercise of such Option, (iii) bears interest at a rate of interest 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.
NONTRANSFERABILITY
Options granted under the 1996 Plan are not transferable by an Optionee
other than by will or the laws of descent and distribution, and Options are
exercisable during an Optionee's lifetime only by the Optionee.
TERMINATION OF OPTIONS
The expiration date of an Option is determined by the Committee at the
time of the grant and is set forth in the applicable stock option agreement. In
no event may an Option be exercisable after ten years from the date it is
granted.
The 1996 P1an provides that if an Optionee's employment is terminated for
any reason other than for cause, an improper termination, mental or physical
disability or death, then the unexercised portion of the Optionee's Options
shall terminate three months after the such termination. If an Optionee's
employment is terminated for cause or if there is an improper termination of
Optionee's employment, the unexercised portion of the Optionee's Options shall
terminate immediately upon such termination. If an Optionee's employment is
terminated by reason of the Optionee's mental or physical disability, the
unexercised portion of the Optionee's Options shall terminate 12 months after
such termination. If an Optionee's employment is terminated by reason of the
Optionee's death, the unexercised portion of the Optionee's Options shall
terminate 12 months after the Optionee's death.
The Committee in its sole discretion may by giving written notice cancel,
effective upon the date of the consummation of certain corporate transactions
that would result in an Option becoming fully exercisable, cancel any Option
that remains unexercised on such date. Such 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 Stockholder approval of such corporate transaction.
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OUTSTANDING OPTIONS
As of the Record Date, Options to purchase a total of 50,000 shares of
Common Stock had been granted pursuant to the 1996 Plan, none of which have been
exercised and 50,000 of which are outstanding (of which none Options are
exercisable). Outstanding Options, which are held by approximately 3 persons,
are exercisable at $.50 per share.
FEDERAL INCOME TAX EFFECTS
The 1996 Plan is not qualified under the provisions of Section 401(a) of
the Code, nor is it subject to any of the provisions of the Employee Retirement
Income Security Act of 1974, as amended.
INCENTIVE STOCK OPTIONS
Incentive Stock Options are "incentive stock options" as defined in
Section 422 of the Internal Revenue Code. Under the Code, an Optionee generally
is not subject to ordinary income tax upon the grant or exercise of an Incentive
Stock Option. However, an employee who exercises an Incentive Stock Option by
delivering shares of Common Stock previously acquired pursuant to the exercise
of an Incentive Stock Option is treated as making a Disqualifying Disposition
(defined below) of such shares if the employee delivers such shares before the
expiration of the holding period applicable to such shares. The applicable
holding period is the longer of two years from the date of grant or one year
from the date of exercise. The effect of this provision is to prevent
"pyramiding" the exercise of an Incentive Stock Option (i.e., the exercise of
the Incentive Stock Option for one share and the use of that share to make
successive exercise of the Incentive Stock Option until it is completely
exercised) without the imposition of current income tax.
The amount by which the fair market value of the shares acquired at the
time of exercise of an Incentive Stock Option exceeds the purchase price of the
shares under such Option will be treated as an item of adjustment included in
the Optionee's alternative minimum taxable income for purposes of the
alternative minimum tax. If, however, there is a Disqualifying Disposition in
the year in which the Option is exercised, the maximum amount of the item of
adjustment for such year is the gain on the disposition of the shares. If there
is Disqualifying Disposition in a year other than the year of exercise, the
dispositions will not result in an item of adjustment for such other year.
If, subsequent to the exercise of an Incentive Stock Option (whether paid
for in cash or in shares), the Optionee holds the shares received upon exercise
for a period that exceeds (a) two years from the date such Incentive Stock
Option was granted or, if later, (b) one year from the date of exercise (the
"Required Holding Period"), the difference (if any) between the amount realized
from the sale of such shares and their tax basis to the holder will be taxed as
long-term capital gain or loss. If the holder is subject to the alternative
minimum tax in the year of disposition, such holder's tax basis in his or her
shares will be increased for purposes of determining his alternative minimum tax
for such year, by the amount of the item of adjustment recognized with respect
to such shares in the year the Option was exercised.
In general, if, after exercising an Incentive Stock Option, an employee
disposes of the shares so acquired before the end of the Required Holding Period
(a "Disqualifying Disposition"), such Optionee would be deemed in receipt of
ordinary income in the year of the Disqualifying Disposition, in an amount equal
to the excess of the fair market value of the shares at the date the Incentive
Stock Option was exercised over the exercise price. If the Disqualifying
Disposition is a sale or exchange which would permit a loss to be recognized
under the Code (were a loss in fact to be sustained), and the sales proceeds are
less than the fair market value of the shares on the date of
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exercise, the Optionee's ordinary income would be limited to the gain (if any)
from the sale. If the amount realized upon disposition exceeds the fair market
value of the shares on the date of exercise, the excess would be treated as
short-term or long-term capital gain, depending on whether the holding period
for such shares exceeded one year.
An income tax deduction is not allowed to the Company with respect to the
grant or exercise of an Incentive Stock Option or the disposition, after the
Required Holding Period, of shares acquired upon exercise. In the event of a
Disqualifying Disposition, a Federal income tax deduction will be allowed to the
Company in an amount equal to the ordinary income to be recognized by the
Optionee, provided that such amount constitutes an ordinary and necessary
business expense to the Company and is reasonable, and the Company satisfies its
withholding obligation with respect to such income.
NONQUALIFIED STOCK OPTIONS
An Optionee granted a Nonqualified Stock Option under the 1996 Plan will
generally recognize, at the date of exercise of such Nonqualified Stock Option,
ordinary income equal to the difference between the exercise price and the fair
market value of the shares of Common Stock subject to the Nonqualified Stock
Option. This taxable ordinary income will be subject to Federal income tax
withholding. A Federal income tax deduction will be allowed to the Company in an
amount equal to the ordinary income to be recognized by the Optionee, provided
that such amount constitutes an ordinary and necessary business expense to the
Company and is reasonable, and the Company satisfies its withholding obligation
with respect to such income.
If an Optionee exercises a Nonqualified Stock Option by delivering other
shares, the Optionee will not recognize gain or loss with respect to the
exchange of such shares, even if their then fair market value is different from
the Optionee's tax basis. The Optionee, however, will be taxed as described
above with respect to the exercise of the Nonqualified Stock Option as if he had
paid the exercise price in cash, and the Company likewise generally will be
entitled to an equivalent tax deduction. Provided a separate identifiable stock
certificate is issued therefor, the Optionee's tax basis in that number of
shares received on such exercise which is equal to the number of shares
surrendered on such exercise will be equal to his tax basis in the shares
surrendered and his holding period for such number of shares received will
include his holding period for the shares surrendered. The Optionee's tax basis
and holding period for the additional shares received on exercise of a
Nonqualified Stock Option paid for, in whole or in part, with shares will be the
same as if the Optionee had exercised the Nonqualified Stock Option solely for
cash.
The discussion set forth above does not purport to be a complete analysis
of the potential tax consequences relevant to the Optionees or to the Company,
or to describe tax consequences based on particular circumstances. It is based
on Federal income tax law and interpretational authorities as of the date of
this Proxy Statement, which are subject to change at any time.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THIS PROPOSAL.
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PROPOSAL 5
RATIFICATION OF SELECTION OF
AUDITORS
The firm of Deloitte & Touche LLP, auditors, served as the Company's
independent certified public accountants for Fiscal 1998. The Board of Directors
has selected Deloitte & Touche LLP as the Company's auditors for the fiscal year
ended June 25, 1999. One or more representatives of Deloitte & Touche LLP are
expected to be present at the Meeting, will have the opportunity to make a
statement if they desire to do so and are expected to be available to respond to
appropriate questions from Stockholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THIS PROPOSAL
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OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors knows of
no additional matters that will be presented for consideration at the Meeting.
Execution of a proxy, however, confers on the designated proxy holders
discretionary authority to vote the shares covered thereby in accordance with
their best judgment on such other business, if any, that may properly come
before the Meeting or any adjournment or postponement thereof.
STOCKHOLDER PROPOSALS
Any proposals of stockholders to be presented at the 1999 Annual
Meeting of Stockholders must be received by the Company no later than
___________, 1999 for inclusion in the Company's proxy statement relating to
such meeting, subject to the rules and regulations of the Commission.
By Order Of The Board Of Directors,
Kevin Homon
SECRETARY
Poughkeepsie, New York
February 12, 1999
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
1. Securities Purchase Agreement dated as of June 26, 1998 by and
among ASD Group, Inc. or; the parties listed on Schedule 1 to
the Agreement and Gary D. Horne
2. Form of Subscription Agreement
3. Agreement dated as of June 26, 1998 by and among Automatic
Systems Developers, Inc.; High Technology Computers, Inc.; ASD
Group, Inc.; the financial institutions which are now or
hereafter become a party to the Credit Agreement; and PNC
Bank, National Association
4. Option and Forbearance Agreement dated as of June 26, 1998 by
and among Bankers Trust Company; Automatic Systems Developers,
Inc. and ASD Group, Inc.
5. Form of Agreement with holders of: (i) 10% senior promissory
notes due June 19, 1998 and/or (ii) warrants to purchase
common stock
6. ASD Group, Inc. 1996 STOCK OPTION PLAN (as amended).
7. Fairness Opinion of H.J. Meyers & Co., Inc.
EXHIBIT A
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT (this "Agreement") dated as of June
26, 1998 is by and among ASD GROUP, INC., a Delaware corporation (the
"Company"); the parties listed on SCHEDULE 1 to this Agreement (individually, a
"Purchaser" and collectively, the "Purchasers"); and GARY D. HORNE ("Horne").
R E C I T A L S:
A. The Company is effecting a financial restructuring (the
"Restructuring"). In connection therewith, the Company desires to sell shares of
the Company's Series A Convertible Preferred Stock, par value $.01 per share
(the "Series A Preferred Stock"), Series B Convertible Preferred Stock, par
value $.01 per share (the "Series B Preferred Stock") and Common Stock, par
value $.01 per share (the "Common Stock," and together with the Series A
Preferred Stock and Series B Preferred Stock, the "Shares"), to the Purchasers
pursuant to this Agreement on the terms and conditions set forth herein.
B. The Purchasers desire to purchase Shares pursuant to this Agreement
on the terms and subject to the conditions set forth herein.
C. Automated Systems Developers, Inc., a New York corporation ("ASD"),
and High Technology Computers, Inc., a New York corporation ("HTC"), are both
wholly owned subsidiaries of the Company. Unless the context otherwise requires,
all references to the Company include the Company, ASD and HTC.
NOW, THEREFORE, in consideration of the foregoing premises and the
covenants contained herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Purchasers hereby agree as follows:
1. PURCHASE OF SHARES. The Company hereby sells, conveys and transfers
to the Purchasers and the Purchasers hereby purchase from the Company the number
of shares of Series A Preferred Stock, Series B Preferred Stock and/or Common
Stock set forth beside their respective names on Schedule I hereto at the prices
described on Schedule 1. The terms of the Series A Preferred Stock and Series B
Preferred Stock are as set forth in the Certificates of Designations,
Preferences, Rights and Limitations (the "Certificates of Designation"), the
forms of Certificates of Designation are attached as Exhibit A hereto. The
purchase price for the Series A Preferred Stock, the Series B Preferred Stock
and the Common Stock (the "Purchase Price") is as set forth on Schedule I
hereof.
2. CLOSING. Subject to the terms of this Agreement, an initial closing
shall occur simultaneously with the execution of this Agreement, at the offices
of Zane & Rudofsky, 152 West 57th Street, New York, New York 10019, at which
time the Purchasers will purchase $1,500,000 in Shares (the "Initial Closing").
A subsequent closing shall occur 30 days after the Initial Closing at such
location as shall be mutually agreed upon between the parties, at which time the
Purchasers will purchase an additional $400,000 in Shares (the "Second
<PAGE>
Closing" and, with the Initial Closing, the "Closings"). Notwithstanding
anything contained herein to the contrary, if the Second Closing does not occur
30 days after the Initial Closing, the purchase price for the additional
$400,000 in Shares shall increase by 10%.
3. DELIVERIES BY THE PARTIES. At the Closing:
(a) DELIVERIES BY THE COMPANY: The Company will deliver the
following documents in form and substance reasonably acceptable to counsel for
the Purchasers;
(i) Certificates evidencing the Shares;
(ii) Good Standing Certificate for the Company and
each of its subsidiaries issued by the Secretary of State of their
respective jurisdictions of incorporation;
(iii) Certified copy of resolutions of the Board of
Directors authorizing, among other things, the execution and delivery
of this Agreement, consummation of the transactions contemplated hereby
and the Restructuring;
(iv) Legal opinion of Broad and Cassel, counsel to
the Company, in form and substance reasonably satisfactory to the
Purchaser and Purchaser's counsel;
(v) Executed copies of the following additional
documents to be entered into in connection with the Restructuring
(collectively, the "Restructuring Documents"):
(A) Option and Forbearance Agreement (the
"Option") between the Company and Bankers Trust Company
("BT");
(B) Amendments to Employment Agreements
between the Company and each of Horne and Stanley F. Zuk
("Zuk");
(C) Agreements of Horne, Zuk, Gregory Horne
and Marion L. Horne Turcot to vote in favor of the
Restructuring;
(D) Financial Consulting Agreement (the
"Catalyst Agreement") between the Company and Catalyst
Financial Corp. ("Catalyst");
(E) Warrant to be issued to Catalyst and/or
its assigns pursuant to the Catalyst Agreement (the Catalyst
Warrant");
(F) Letter Agreement between the Company and
a group of investors restructuring the Company's debt to such
investor group (the "Becker Agreement");
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(G) Certificate of Designation, Preferences,
Rights and Limitations of Series C Convertible Preferred Stock
(the "Series C Preferred Stock") to be issued pursuant to the
Becker Agreement;
(H) Warrants to be issued pursuant to the
Becker Agreement (the "Becker Warrants");
(I) Letter Agreement with a group of
investors modifying the terms of their existing warrants (the
"BlueStone Agreement");
(J) Warrants to be issued pursuant to the
BlueStone Agreement (the "BlueStone Warrants");
(K) Letter Agreement (the "Meyers
Agreement") with H.J. Meyers & Co., Inc. ("Meyers");
(L) Warrant to be issued pursuant to the
Meyers Agreement (the "Meyers Warrant");
(M) Warrant to be issued to Cameron
Worldwide Ltd. (the "Cameron Warrant");
(N) Warrant to be issued to Peter Zachariou
(the "Zachariou Warrant");
(O) Forbearance Agreement (the "PNC
Agreement") with PNC Bank, National Association ("PNC"); and
(P) Warrant to be issued to PNC pursuant to
the PNC Agreement (the "PNC Warrant")
(vi) Disbursement Authorization Letter; and
(vii) Such other documents as shall be reasonably
requested by the Purchasers and their counsel.
(b) DELIVERIES BY THE PURCHASERS: The Purchasers will deliver
to the Company the following:
(i) Payment by wire transfer, of the Purchase Price;
(ii) Disbursement Authorization Letter; and
(iii) Such other documents as shall be reasonably
requested by the Company and its counsel.
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4. USE OF PROCEEDS. The Company agrees that the net proceeds to the
Company from the sale of the Shares hereunder will be used to pay the following:
$110,000.00 to the Becker Group pursuant to the Becker Agreement; $250,000 to BT
pursuant to the Option; $121,282.26 to Catalyst pursuant to the Catalyst
Agreement; $25,000 to Meyers pursuant to the Meyers Agreement; $65,000 to Broad
and Cassel for the Company's legal fees; $35,000.00 to Zane and Rudofsky for the
Purchasers' legal fees; and $7,500 to PNC pursuant to the PNC Agreement. The
balance of such net proceeds will generally be used to pay other expenses of the
Reorganization and as described on SCHEDULE 3 attached hereto, subject to Board
approval and right to modify. However, the attached Schedule represents the
Company's estimate of the allocation of the net proceeds based upon the current
status of its operations and anticipated business needs. It is possible,
however, that the application of funds will differ considerably from the
estimates set forth herein due to changes in the economic climate and/or the
Company's business operations or unanticipated complications, delays and
expenses.
5. REPRESENTATIONS OF THE PURCHASERS. Each Purchaser, severally and not
jointly, acknowledges, represents and warrants as of each Closing Date:
(a) RECEIPT OF CORPORATE INFORMATION. All requested documents,
records and books pertaining to the Company and the offer and sale hereby of the
Shares and the Common Stock into which the Series A Preferred Stock and Series B
Preferred Stock are convertible (the "Conversion Shares" and, together with the
Shares, the "Securities"), including, without limitation, the Restructuring
Documents and the Company's Annual Report on Form 10-KSB for the year ended June
30, 1997, as amended (the "Form 10-KSB"), and Quarterly Reports on Form 10-QSB
for the quarters ended September 30, 1997, December 31, 1997 and March 31, 1998,
as amended (the "Form 10-QSBs"; the Form 10-KSB and the Form 10-QSBs are
collectively referred to herein as the "SEC Documents"), have been delivered to
the Purchaser and/or the Purchaser's advisors, and all of the Purchaser's
questions and requests for information have been answered to the Purchaser's
satisfaction. Moreover, over the course of the several weeks leading up to the
consummation of this transaction, the Purchaser has received additional
information regarding the Company's financial situation and, particularly, the
existing defaults on lines of credit, lack of cash flow to meet current
obligations without infusion of capital which may result in the Company being
characterized as insolvent and the terms of the Restructuring.
(b) RISKS. The Purchaser acknowledges and understands that the
purchase of the Securities involves a high degree of risk and is suitable only
for persons of adequate financial means who have no need for liquidity in this
investment in that (i) the Purchaser may not be able to liquidate the investment
in the event of an emergency; (ii) transferability is extremely limited; and
(iii) in the event of a disposition, the Purchaser could sustain a complete loss
of its entire investment. The Purchaser is sufficiently experienced in financial
and business matters to be capable of evaluating the merits and risks of an
investment in the Company; has evaluated such merits and risks, including risks
particular to the Purchaser's situation; and the Purchaser has determined that
this investment is suitable for the Purchaser.
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The Purchaser has adequate financial resources and can bear a complete loss of
the Purchaser's investment.
(c) ACCREDITED INVESTOR STATUS. The Purchaser is an
"accredited investor" as defined in Rule 501(a) of Regulation D promulgated by
the Securities and Exchange Commission (the "SEC") under the Securities Act of
1933, as amended (the "Securities Act").
(d) INVESTMENT INTENT. The Purchaser hereby represents that
the Securities being purchased hereunder are being acquired for the Purchaser's
own account with no intention of distributing such securities to others. The
Purchaser has no contract, undertaking, agreement or arrangement with any person
to sell, transfer or otherwise distribute to any person or to have any person
sell, transfer or otherwise distribute for the Purchaser the Securities being
purchased hereunder or any interest therein. The Purchaser is presently not
engaged, nor does the Purchaser plan to engage within the presently foreseeable
future, in any discussion with any person regarding such a sale, transfer or
other distribution of the securities being purchased hereunder or any interest
therein.
(e) COMPLIANCE WITH FEDERAL AND STATE SECURITIES LAWS. The
Purchaser understands that the Securities being offered and sold hereunder have
not been registered under the Securities Act. The Purchaser understands that the
Securities being offered and sold hereunder must be held indefinitely unless the
sale or other transfer thereof is subsequently registered under the Securities
Act or an exemption from such registration is available. Moreover, the Purchaser
understands that its right to transfer the Securities being purchased hereunder
will be subject to certain restrictions, which include restrictions against
transfer under the Securities Act and applicable state securities laws. In
addition to such restrictions, the Purchaser realizes that it may not be able to
sell or dispose of the Securities being purchased hereunder, as there may be no
public or other market for them. The Purchaser understands that certificates
evidencing the Securities being purchased hereunder shall bear a legend
substantially as follows:
The shares represented by this certificate have not
been registered under the Securities Act of 1933, as
amended, or any applicable state law. They may not be
offered for sale, sold, transferred or pledged
without (1) registration under the Securities Act of
1933, as amended, and any applicable state law, or
(2) an opinion (reasonably satisfactory to the
Company) of counsel that registration is not
required.
(f) AUTHORITY; ENFORCEABILITY. The Purchaser has the full
right, power, and authority (corporate or otherwise) to execute and deliver this
Agreement and perform its obligations hereunder.
(g) NONCONTRAVENTION. This Agreement constitutes a valid and
legally binding obligation of the Purchaser and neither the execution of this
Agreement, nor the consummation of the transactions contemplated hereby, will
constitute a violation of or default
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under, or conflict with, any judgment, decree, statute or regulation of any
governmental authority applicable to the Purchaser or any contract, commitment,
agreement or restriction of any kind to which the Purchaser is a party or by
which its assets are bound. The execution and delivery of this Agreement does
not, and the consummation of the transactions described herein will not, violate
applicable law, or any mortgage, lien, agreement, indenture, lease or
understanding (whether oral or written) of any kind outstanding relative to the
Purchaser.
(h) APPROVALS. No approval, authorization, consent, order or
other action of, or filing with, any person, firm or corporation or any court,
administrative agency or other governmental authority is required in connection
with the execution and delivery of this Agreement by the Purchaser or the
consummation of the transactions described herein.
(i) CONSULTANT'S COMPENSATION. The Purchaser acknowledges that
Catalyst will receive, as compensation for its having acted as financial advisor
to the Purchasers, (i) a fee of $110,500; (ii) $5,782.26 for reimbursement of
expenses; (iii) $5,000 for financial consulting services for one month; and (iv)
the Catalyst Warrants to purchase 141,360 shares of the Company's Common Stock,
at a price of $.27 per share.
(j) CONCURRENT ISSUANCES OF SECURITIES. The Purchaser
acknowledges that, with the purchase of the Shares contemplated hereby, the
Company will also be issuing the Series C Preferred Stock, the Catalyst
Warrants, the Becker Warrants, the BlueStone Warrants, the Meyers Warrants, the
PNC Warrant, the Cameron Warrant and the Zachariou Warrant in connection with
the Restructuring (collectively, the "Restructuring Securities"). Moreover, the
Company may from time to time raise additional capital, which may include, but
not be limited to, subsequent offers and sales by the Company ("Subsequent
Sales") of additional shares of Preferred Stock with the same or different
terms. Nothing herein shall prohibit the Company from effecting the Subsequent
Sales; provided, however, that such shares shall rank junior to the Series A
Preferred Stock and the Series B Preferred Stock with respect to payment of
dividends and liquidation rights, unless otherwise consented to by the holders
of such shares of Preferred Stock as provided in the Certificates of
Designation. Until the Series A Preferred Stock and the Series B Preferred Stock
become convertible, the Company agrees to afford the Purchasers a right of first
refusal with respect to any future sales of Common Stock or Preferred Stock by
the Company (other than pursuant to outstanding options and warrants or under
the Company's employee benefit plans).
(k) RESTRICTIONS ON CONVERSION. The Purchaser acknowledges
that the Series A Preferred Stock and the Series B Preferred Stock will not be
convertible into Common Stock until such time as the Company obtains stockholder
approval of (a) the Restructuring in accordance with Rule 4310(c)(H) of the
Rules of The National Association of Securities Dealers, Inc., and (b) an
amendment to the Company's Certificate of Incorporation increasing the
authorized number of shares of Common Stock (the "Capital Amendment"), at which
time the Series A Preferred Stock and the Series B Preferred Stock will
automatically convert into shares of Common Stock.
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<PAGE>
6. REPRESENTATIONS OF THE COMPANY. The Company acknowledges, represents
and warrants that except as set forth in the SEC Documents or as disclosed on
the Schedules hereto:
(a) CORPORATE ORGANIZATION. Each of the Company, HTC and ASD
is duly organized, validly existing and in good standing under the laws of the
state of its incorporation, and has full corporate power, authority and legal
right to own its properties and to conduct the businesses in which it is now
engaged. The Company is duly licensed or qualified to transact business as a
foreign corporation and is in good standing in each jurisdiction where the
ownership or lease of its assets or the operation of its business requires such
qualification, except where the failure to be so qualified would not have a
material adverse effect on the business, operations, property or financial or
other condition of the Company (a "Material Adverse Effect"). The Company owns
100% of the issued and outstanding capital stock of each of HTC and ASD.
(b) AUTHORITY. The Company has full corporate power and
authority to execute and deliver this Agreement, all agreements and documents
referred to herein or contemplated hereby, including, without limitation, the
Restructuring Documents (the "Ancillary Documents") and to perform all of its
covenants and agreements hereunder. The execution and delivery of this Agreement
and the Ancillary Documents by the Company, the performance by the Company of
its covenants and agreements hereunder and the consummation by the Company of
the transactions contemplated hereby have been duly authorized by all necessary
corporate action.
(c) ENFORCEABILITY. This Agreement has been duly executed and
delivered and constitutes the valid and legally binding obligation of the
Company, enforceable against the Company in accordance with its terms except as
such enforceability may be limited by (i) bankruptcy, insolvency, moratorium or
similar laws affecting the enforcement of creditors' rights generally or by the
principles governing the availability of specific performance, injunctive relief
and other equitable remedies (regardless of whether such enforceability is
considered in equity or at law), including requirements of reasonableness and
good faith in the exercise of rights and remedies thereunder; (ii) applicable
laws and court decisions which may limit or render unenforceable certain terms
and provisions contained therein, but which in our opinion do not substantially
interfere with the practical realization of the benefits thereof, except for the
economic consequences of any procedural delay which may be imposed by, relate to
or result from such laws and court decisions; and (iii) the limitations on the
enforceability of the securities indemnification provisions set forth herein by
reason of matters of public policy.
(d) NONCONTRAVENTION. Neither the execution and delivery of
this Agreement by the Company, nor the consummation of the transactions
contemplated hereby, nor the performance by the Company of its covenants and
agreements hereunder (i) violates any provision of the Certificate of
Incorporation or Bylaws of the Company; (ii) violates any existing law, statute,
ordinance, regulation, or any order, judgment or decree of any court or
governmental agency to which the Company is a party or by which the Company or
any of its
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assets is bound; or (iii) conflicts with or will result in any breach of any of
the terms of or constitute a default under or result in the termination of or
the creation of any lien pursuant to the terms of any indenture, mortgage, real
property lease, securities purchase agreement, credit or loan agreement or other
material agreement to which the Company is a party or by which the Company or
any of its assets is bound, to the extent such violation thereof, conflict
therewith, breach thereof, default thereunder or termination thereof has been
waived in writing or would have a Material Adverse Effect.
(e) CAPITALIZATION. The authorized capital stock of the
Company consists of (i) 1,000,000 shares of Preferred Stock, $.01 par value,
none of which are issued and outstanding, and (ii) 10,000,000 shares of Common
Stock, $.01 par value, of which 1,577,917 shares are issued and outstanding.
Such outstanding shares do not give effect to the issuance of the Shares
hereunder or the Restructuring Securities. Attached as SCHEDULE 5(E) is a list
of all outstanding options and warrants. The holders of outstanding capital
stock of the Company have no preemptive rights. The Certificate of Designation
has been approved by the Board of Directors of the Company.
(f) THE SHARES. The Shares being offered and sold pursuant to
this Agreement have been duly and validly authorized and, when issued for the
consideration herein provided, will be duly and validly issued, fully paid and
nonassessable.
(g) CONVERSION SHARES. The Conversion Shares have been duly
authorized and reserved for issuance and, when issued upon conversion of the
Series A Preferred Stock and the Series B Preferred Stock in accordance with the
terms thereof, will be duly and validly authorized and issued, fully paid and
nonassessable. Notwithstanding the foregoing, the Company does not currently
have sufficient shares of authorized but unissued Common Stock to issue all of
the shares of Common Stock required to be delivered upon conversion of the
Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred
Stock and exercise of all outstanding options and warrants and the other
Restructuring Securities.
(h) APPROVALS. Except as may be required under federal and
state securities laws (which have been or, in the case of compliance required on
a post-sale basis, will be complied with) and except for stockholder approval of
the Restructuring and the Capital Amendment as contemplated hereby, the
execution, delivery and performance of this Agreement by the Company does not
require the consent, waiver, approval, license or authorization of or any filing
with any person or any governmental authority. The issuance of the Shares
pursuant to this Agreement is not subject to the registration or prospectus
delivery requirements of Section 5 of the Securities Act.
(i) LEGAL PROCEEDINGS. Except as described on SCHEDULE 5(I),
there are no (i) actions, suits, claims, investigations or legal or
administrative or arbitration proceedings pending or, to the best knowledge of
the Company, threatened against or affecting the Company, whether at law or in
equity, or before or by any governmental authority; nor (ii) judgments, decrees,
injunctions or orders of any governmental authority or arbitrator against the
Company, which, in either case, could have a Material Adverse Effect.
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<PAGE>
(j) ASSETS. To the best of its knowledge, after due diligence,
except as described on SCHEDULE 5(J), the Company has good and marketable title
to its assets, free and clear of any mortgage, pledge, security interest,
encumbrance, charge, or other lien.
(k) SEC FILINGS, ETC. The Company has heretofore delivered to
each Purchaser correct and complete copies of the SEC Documents. The SEC
Documents were true and correct in all material respects at the time filed with
respect to the periods covered thereby; and such reports, as amended,
supplemented, or updated by subsequent filings, are true and correct as of the
date so amended, supplemented or updated in all material respects, do not
contain any misstatement of a material fact and do not omit to state a material
fact or any fact required to be stated therein or necessary to make the
statements contained therein not materially misleading with respect to the
periods covered thereby; and all amendments or supplements thereto required to
be filed under the federal securities laws have been so filed. The consolidated
financial statements of the Company included in the SEC Documents complied, when
filed, with the then-applicable accounting requirements and the published rules
and regulations of the SEC with respect thereto, were prepared in accordance
with generally accepted accounting principles applied on a consistent basis
during the periods involved (except as may have been indicated in the notes
thereto or, in the case of the unaudited statements, as permitted by Form 10-QSB
promulgated by the SEC) and fairly presented (subject in the case of the
unaudited statements, to normal audit adjustments) the financial position of the
Company at the dates thereof and the consolidated results of the operations and
statement of changes in financial position for the periods then ended. The
Company has filed all documents and agreements that were required to be filed as
exhibits to the SEC Documents and all such documents and agreements when filed
were correct and complete in all material respects. Notwithstanding the
foregoing, the Company's financial situation has changed since the Company filed
the SEC Documents.
(l) ABSENCE OF UNDISCLOSED LIABILITIES. Except as disclosed in
the financial statements (the "Financial Statements") included in the SEC
Documents, or on SCHEDULE 5(L), or as incurred in the ordinary course of
business subsequent to March 31, 1998, as of the date hereof (i) the Company has
no liability of any nature (matured or unmatured, fixed or contingent) that was
not provided for or disclosed in the Financial Statements, and (ii) to the best
knowledge of the Company after due diligence, all liability reserves established
by the Company and set forth in the Financial Statements were adequate in all
material respects for the purposes indicated therein.
(m) ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE. The accounts
receivable and accounts payable of the Company as of June 18, 1998, attached
hereto as EXHIBIT 5(M) are (a) bona fide; (b) in accordance with the books and
records of the Company, (c) fairly, completely and accurately present the
accounts receivable and accounts payable of the Company as of such date and (d)
prepared in conformity with generally accepted accounting principals
consistently applied as of the period covered thereby.
(n) INVENTORY. The Company has previously provided or made
available to the Purchasers a list of the Company's inventory, including raw
materials and work in
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progress. The Company's inventory is valued at $3,400,000.00 as of June 19,
1998. The inventories of the Company are in usable and saleable condition and
each item of such inventory is saleable at least at the value at which it is
carried on the books. To the best of the Company's knowledge, once completed and
converted to inventory, the Company's work in progress will be in useable and
saleable condition.
(o) MATERIAL CHANGES. Except as disclosed in or contemplated
by the SEC Documents or described on SCHEDULE 5(O) attached hereto, since March
31, 1998, there has not been any adverse material change in the assets,
liabilities, operations or financial condition of the Company.
(p) CUSTOMERS AND CONTRACTS. Except as disclosed in the SEC
Documents or described on SCHEDULE 5(P) attached hereto, to its knowledge, since
March 31, 1998, the Company has not lost any material customers and no material
contracts have been cancelled.
(q) TAXES. The Company has accurately prepared and timely
filed or has had accurately prepared and timely filed on its behalf all tax
returns which, to the knowledge of the Company, are required to be filed by it,
and has paid all taxes shown to be due and payable on said returns including but
not limited to all employment and payroll taxes or on any assessments made
against it or any of its property and all other taxes, fees or other charges
imposed on it or any of its property by any nation or government, any state or
other political subdivision thereof, and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government (other than those the amount or validity of which is currently
being contested in good faith by appropriate proceedings and with respect to
which reserves in conformity with generally accepted accounting principles have
been provided on the books of the Company) including but not limited to all
employment and payroll taxes; and no tax liens have been filed and, to the
knowledge of the Company, no claims are being asserted with respect to any such
taxes, fees or other charges.
(r) O.S.H.A. AND ENVIRONMENTAL COMPLIANCE. The Company has
duly complied with, and its facilities, business, assets, property, leaseholds
and equipment are in compliance in all material respects with, the provisions of
the Federal Occupational Safety and Health Act, the Environmental Protection
Act, and all other environmental laws; there have been not outstanding
citations, notices or orders of non-compliance issued to the Company or relating
to its business, assets, property, leaseholders or equipment under such laws,
rules or regulations.
The Company has been issued all required federal,
state and local licenses, certificates or permits relating to all applicable
environmental laws. There are no visible signs of releases, spills, discharges,
leaks or disposal (collectively, referred to as "Releases") of hazardous
substances at, upon, under or within the real property owned by the Company.
There are no underground storage tanks or polychlorinated biphenyl on the real
property. To the best of the Company's knowledge, the real property has never
been used as a treatment, storage or disposal facility of hazardous waste. To
the Company's knowledge, no hazardous substances are present on the real
property or any premises leased by the Company,
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excepting such quantities as are handled in accordance with all applicable
manufacturer's instructions and governmental regulations and in proper storage
containers and as are necessary for the operation of the commercial business of
the Company.
(s) RELATED PARTY TRANSACTIONS. Except to the extent described
in the SEC Documents or as described on SCHEDULE 5(S), no current principal
stockholder or current or former director, officer or employee of the Company
nor any "affiliate" (as defined in the rules and regulations promulgated under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")), of any
such person, is currently, or since March 31, 1998 has been, directly or
indirectly through his affiliation with any other person or entity, a party to
any transaction (other than as an employee, consultant or stockholder) with the
Company providing for the furnishing of services by, or rental of real or
personal property from, or otherwise requiring cash payments from or to any such
person.
(t) GUARANTEES. Except with respect to the obligations of its
subsidiaries to PNC and BT, the Company is not a guarantor of any liability or
obligation (including indebtedness) of any other person.
(u) DISCLOSURE. The representations and warranties made by the
Company in this Agreement or, except to the extent modified or amended by
subsequent written disclosure to each of the Purchasers through the date hereof,
in any other document or certificate furnished in connection herewith did not
contain at the time made or, if set forth herein, does not contain any untrue
statement of a material fact or omit to state any material fact necessary to
make the statements herein or therein, in light of the circumstances under which
they are made, not misleading in any material respect. There is no fact known to
the Company that materially adversely affects or, other than general economic
conditions in the industry in which the Company operates, that the Company
reasonably believes will in the future materially adversely affect the business,
operations, affairs or condition, financial or otherwise, of the Company, which
has not been set forth in this Agreement, the Schedules thereto or in the SEC
Documents.
7. COVENANTS OF THE COMPANY. So long as the Purchasers hold Securities
that in the aggregate represent at least 20% of the outstanding capital stock of
the Company, the Company shall:
(a) REPORTS AND INFORMATION. Furnish to the Purchasers and
James B. Zane, promptly after mailing to stockholders, copies of each Annual or
Quarterly Report to the Company's stockholders and proxy or information
statement relating to a meeting of the Company's stockholders.
(b) CORPORATE EXISTENCE. Preserve and keep in full force and
effect its corporate existence, its qualification to do business and its good
standing in every state where it is or is required to be qualified to do
business, except where the failure to be so qualified would not have a Material
Adverse Effect; provided that nothing herein shall prevent the Company or any
subsidiary of the Company from changing their state of incorporation.
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(c) LICENSES, PERMITS AND FRANCHISES. Maintain, preserve and
protect at all times all of its corporate and operational licenses, permits and
franchises, and comply with each and all of the terms, conditions and
requirements of such licenses, permits and franchises, except to the extent
management of the Company determines it is not in the best interest of the
Company to do so.
(d) PROPERTIES. Preserve all of its assets and properties that
are used in the conduct of its business and maintain and keep these assets and
properties in good repair, working order and condition, and from time to time
make or cause to be made all needed and proper repairs, renewals, replacements,
betterments and improvements to these assets and properties to preserve and
maintain their value (including, but not limited to, by further encumbrance of
the assets or properties), normal wear and tear excepted, so that the business
carried on in connection with these assets and properties may be properly
conducted at all times, except to the extent management of the Company
determines it is not in the best interest of the Company to do so.
(e) BOOKS AND RECORDS. Keep at all times complete books of
record and accounts, in conformity with generally accepted accounting principles
as revised from time to time, with full, true and correct entries of all
dealings and transactions in relation to the Company's business and affairs, and
reasonably protect such books and accounts against loss or damage.
(f) STATUTORY COMPLIANCE. At all times, conduct its business
in accordance with, and comply in all material respects with, all applicable
statutes, regulations, judgments, decrees, resolutions and orders of, and all
applicable restrictions imposed by, any and all governmental entities and/or
authorities, federal, state, local and non-U.S., judicial or administrative,
applicable to the conduct of the Company's businesses and activities (including
environmental and other regulatory requirements) or the ownership or operation
of its properties, licenses, permits and/or franchises, particularly those
pertaining to the business it currently operates.
(g) CONDUCT OF BUSINESS. Carry on its business and activities
diligently and consistent with prudent business practice for a company of the
size and character of the Company and will use its best efforts to preserve its
present relationship with suppliers, customers and others having business
relationships with it, except to the extent that management of the Company
determines it is not in the best interest of the Company to do so.
(h) BOARD REPRESENTATION. Simultaneously with the Closing
Date, Stanley F. Zuk and Gregory Horne will resign from their positions as
members of the Board of Directors. The remaining members of the Board of
Directors shall cause three individuals designated by the Purchasers to be
nominated for election to the Board of Directors of the Company, and shall use
their best efforts to cause the election to the Board of Directors of such
nominees, to serve until the conclusion of the next annual general meeting of
stockholders of the Company in accordance with the Bylaws of the Company. The
members of the Board of Directors shall also adopt a corporate resolution fixing
the size of the Board at six members
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and agreeing not to increase the size until after the annual meeting of
stockholders. The Company shall pay the reasonable amount of out-of-pocket
expenses of the Purchasers' designees in attending such board or committee
meetings in accordance with its ordinary and usual policies for the
reimbursement of the expenses of non-employee directors. Notwithstanding
anything to the contrary contained in this section, a director designated by the
Purchasers shall be subject to the approval of the Company's management, which
shall not unreasonably be withheld. Promptly after first proposing a candidate,
the Purchasers shall furnish to the Company such information as may be requested
by the Company about such designee (i) that is required to be included in a
Registration Statement under the Securities Act or a Proxy Statement under the
Exchange Act and (ii) that would be required to be included in a Schedule 13D
under the Exchange Act by Item 2 thereof if filed by the candidate with respect
to ownership of the Company's securities.
(i) STOCKHOLDER APPROVAL. The Company agrees to prepare and
file, within 45 days of the date of this Agreement, a proxy statement with
respect to a meeting of stockholders to approve the terms of the Restructuring,
including, without limitation, this Agreement and the transactions contemplated
hereby and the Capital Amendment, that require stockholder approval, including
but not limited to the conversion of the Preferred Stock. The Board of Directors
will take all reasonable steps necessary to hold this meeting within 120 days of
the date of this Agreement. The Board of Directors of the Company has determined
by unanimous vote that this transaction is advisable and in the best interests
of the Company's stockholders and, to the extent consistent with their fiduciary
obligations, will recommend to the Company's stockholders the approval of this
Agreement and the transactions contemplated hereby and cause the Company to use
its best efforts to solicit from its stockholders proxies in favor of approving
this Agreement.
(j) ACCOUNTS PAYABLE. For a period of six months from the date
of this Agreement, the Company will submit to Peter Zachariou a schedule for the
payment of accounts payable. The schedule of payments of accounts payable must
be approved by Peter Zachariou, provided, however, if Peter Zachariou does not
respond to such schedule within five (5) business days of the date of receipt,
the Company can pay such accounts payable according to the schedule. In
addition, the Company shall not be required to submit for approval payments for
salaries processed through ADP and payments of less than $25,000 in the
aggregate per month.
8. PUT OPTION. Notwithstanding anything contained herein to the
contrary, in the event stockholder approval of the matters set forth in Section
6(i) is not obtained within one year of the date of this Agreement, Purchasers
shall have the option, for a period of 90 days thereafter, to require the
Company to re-purchase their shares of Series A Preferred Stock and/or Series B
Preferred Stock purchased by them at a price equivalent to the Purchase Price
plus 12% per annum (prorated over the period such shares are outstanding) by
tendering a written request thereafter to the Company accompanied by the
certificates evidencing such shares duly endorsed for transfer with medallion
signature guarantees affixed thereon.
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9. REGISTRATION RIGHTS.
(a) REGISTRATION STATEMENT. The Company shall file with the
U.S. Securities and Exchange Commission (the "Commission") a registration
statement registering the re-sale of the Securities within 30 days of the date
of the Company's special or annual meeting of stockholders and use its best
efforts to cause such registration statement to become effective as soon as
practicable. In the event the Company has not filed such registration statement
by March 31, 1999, the Purchasers may, by written notice to the Company, demand
the registration of the resale of such Securities. Upon the written request of
the Purchasers, the Company shall use its best efforts to effect the
registration under the Securities Act of the Securities which is has been so
requested to register.
(b) PIGGY-BACK REGISTRATION RIGHTS. In addition, if at any
time during the two years from the date of this Agreement the Company shall
prepare and file one or more registration statements under the Securities Act
(other than a registration statement in Form S-4 (or with regard to any
transaction contemplated by Rule 145 promulgated under the Securities Act) or
Form S-8 or any successor form of limited purpose and other than a
post-effective amendment to any such registration statement), with respect to a
public offering of equity or debt securities of the Company, or of any such
securities of the Company held by its security holders, the Company will include
in any such registration statement such information as is required, and such
number of shares of Common Stock purchased hereunder and Conversion Shares
(collectively, the "Registrable Securities") held by the Purchasers thereof or
their respective designees or transferees as may be requested by them (the
"Holders"), to permit a public offering of the Registrable Securities so
requested; PROVIDED, HOWEVER, that if, in the written opinion of the Company's
managing underwriter, if any, for such offering, the inclusion of the
Registrable Securities requested to be registered, when added to the securities
being registered by the Company or the selling security holder(s), would exceed
the maximum amount of the Company's securities that can be marketed without
otherwise materially and adversely affecting the entire offering, then the
Company may exclude from such offering all or that portion of the Registrable
Securities requested to be so registered, so that the total number of securities
to be registered is within the maximum number of shares that, in the opinion of
the managing underwriter, may be marketed without otherwise materially and
adversely affecting the offering, provided that at least a pro rata amount of
the securities that otherwise were requested to be registered for other
stockholders is also excluded. In the event of such a requested registration,
the Company shall furnish the then Purchasers of the Registrable Securities with
not less than 20 days' written notice prior to the proposed date of filing of
such registration statement. Further notice shall be given by the Company to
Holders, with respect to subsequent registration statements or post-effective
amendments filed by the Company, at such time as all of the Registrable
Securities have been registered or may be sold without registration under the
Securities Act or applicable state securities laws and regulations pursuant to
Rule 144 of the Securities Act. The holders of the Registrable Securities shall
exercise the rights provided for in this Section 8 by giving written notice to
the Company, within ten days of receipt of the Company's notice of its intention
to file a registration statement. Notwithstanding anything contained herein to
the contrary, the Company may delay the effectiveness of such registration
statement or withdraw such registration statement;
14
<PAGE>
PROVIDED, HOWEVER, the Company will provide the Holders with notice of such
delay or withdrawal.
(c) RULE 144. Notwithstanding anything contained herein to the
contrary, the Holders shall not be permitted to exercise the registration rights
provided for herein with respect to all such portion of the Registrable
Securities as may be sold without registration under the Securities Act or
applicable state securities laws and regulations under Rule 144 of the
Securities Act.
(d) EXPENSES. The Company shall bear all expenses, incurred in
the preparation and filing of such registration statements or post-effective
amendment (and related state registrations, to the extent permitted by
applicable law) and the furnishing of copies of the preliminary and final
prospectus thereof to the Holders, other than expenses of the Holders' counsel,
and other than sales commissions or transfer taxes incurred by the then holders
with respect to the sale of such securities.
(e) DELAY OF REGISTRATION STATEMENT. Notwithstanding the
provisions of this Section 8, if at any time during which the Company is
obligated to maintain the effectiveness of a registration statement pursuant to
such Section, counsel to the Company (which counsel shall be experienced in
securities matters) has determined in good faith that the filing of such
registration statement or the compliance by the Company with its disclosure
obligations thereunder would require the disclosure of material information
which the Company has a bona fide business purpose for preserving as
confidential, then the Company may delay the filing or the effectiveness of such
registration statement (if not then filed or effective, as appropriate) and
shall not be required to maintain the effectiveness thereof (if previously
declared effective) for a period expiring upon the earlier to occur of (i) the
date on which such information is disclosed to the public or ceases to be
material or the Company is so able to comply with its disclosure obligations, or
(i) 30 days after counsel to the Company makes such good faith determination.
There shall not be more than one such delay period with respect to any
registration statement after it has been declared effective pursuant to Section
8. Notice of any such delay period and of the termination thereof will be
promptly delivered by the Company to each Purchaser and shall be maintained in
confidence by each such Purchaser. The Purchasers shall not sell any Conversion
Shares during such period as any such registration statement is not current, as
advised by the Company, unless the sale is exempt from registration. The
Purchasers shall furnish to the Company such information regarding such
Purchaser and a written description of the contribution proposed by such
Purchaser as the Company may reasonably request.
(f) UNDERWRITERS' LOCKUP. Each Holder whose Registrable
Securities are included in a registration statement pursuant to an underwritten
public offering shall, if requested by the managing underwriter of the public
offering, enter into an agreement with the underwriter pursuant to which the
Holder will agree not to sell, transfer or otherwise dispose of the Registrable
Securities for such period after consummation of the public offering as may
reasonably be requested by the underwriter; up to a maximum of 120 days, without
the consent of the underwriter.
15
<PAGE>
10. NOTICES. All notices, reports and other communications to the
Purchasers of the Company hereunder shall be in writing, shall refer
specifically to this Agreement and shall be hand delivered or sent by facsimile
transmission or by registered mail or certified mail, return receipt requested,
postage prepaid, in each case to the respective persons and addresses specified
below (or to such other persons or addresses as may be specified in writing to
the other party):
If to the Purchaser, to: The respective address as set forth on
SCHEDULE 1 hereto
With a copy to: Zane and Rudofsky
152 West 57th Street
New York, New York 10019
Attn: James B. Zane, Esquire
Fax No.: (212) 541-5555
If to the Company, to: ASD Group, Inc.
1 Industrial Street
Poughkeepsie, New York 12603
Attn: Gary Horne, Chief Executive Officer
Fax No.: (914) 691-6070
With a copy to: Broad and Cassel
201 South Biscayne Boulevard, Suite 3000
Miami, Florida 33131
Attn: Dale S. Bergman, P.A.
Fax No.: (305) 373-9443
Any notice or communication given in conformity with this
Section shall be deemed to be effective when received by the addressee if
delivered by hand or overnight courier and three days after mailing, if mailed.
11. MEDIATION AND ARBITRATION OF DISPUTES.
(a) MEDIATION. If a dispute arises under this Agreement and if
the dispute cannot be settled through direct discussions, the parties agree to
endeavor first to settle the dispute in an amicable manner by nonbinding
mediation administered by the American Arbitration Association under its
Commercial Mediation Rules.
(b) ARBITRATION. Any dispute, unresolved through the mediation
process in Section 11(a), arising under this Agreement shall be submitted by the
parties to binding arbitration, with any such arbitration proceeding being
conducted in accordance with the rules of the American Arbitration Association.
Any arbitration panel presiding over any arbitration proceeding hereunder is
hereby empowered to render a decision in respect of such dispute, to award costs
and expenses (including reasonable attorney fees) as it shall deem equitable and
to
16
<PAGE>
enter its award in any court of competent jurisdiction. Each of the parties
submits to the jurisdiction of any state or federal court sitting in New York,
New York for purposes of enforcement of any arbitration award hereunder. Each
party also agrees not to bring any action or proceeding arising out of or
relating to this Agreement in any other court. Each of the parties waives any
defense of inconvenient forum to the maintenance of any action or proceeding so
brought and waives any bond, surety, or other security that might be required of
any other party with respect thereto.
12. NO IMPLIED WAIVERS; RIGHTS CUMULATIVE. No failure on the part of
the Purchasers or the Company to exercise and no delay in exercising any right,
power, remedy or privilege under this Agreement or provided by statute or at law
or in equity or otherwise, including, without limitation, the right or power to
terminate this Agreement, shall impair, prejudice or constitute a waiver of any
such right, power, remedy or privilege or be construed as a waiver of any breach
of this Agreement or as an acquiescence therein, nor shall any single or partial
exercise of any such right, power, remedy or privilege preclude any other or
further exercise thereof or the exercise of any other right, power, remedy or
privilege.
13. AMENDMENTS. No amendment, modification, waiver, termination or
discharge of any provision of this Agreement, nor consent to any departure
therefrom, shall in any event be effective unless the same shall be in writing
specifically identifying this Agreement and the provision(s) intended to be
amended, modified, waived, terminated or discharged and signed by the Purchasers
and the Company, and each amendment, modification, waiver, termination or
discharge shall be effective only in the specific instance and for the specific
purpose for which given. No provision of this Agreement shall be varied,
contradicted or explained by any oral agreement, course of dealing or
performance or any other matter not set forth in an agreement in writing and
signed by the Purchasers and the Company.
14. POWER OF ATTORNEY. Each of the Purchasers set forth on Schedule 1
constitutes and appoints Peter Zachariou as his, her or its true and lawful
attorney in fact and agent with full power of substitution for him, her or it,
and as his, her or its name, place and stead in any capacities to execute in the
name of each such person any and all documents relating to the purchase of the
Shares and grants Peter Zachariou full power and authority to do and perform
each and every act and thing required or necessary to be done as such Purchaser
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact or his substitute or substitutes, may lawfully do or cause to
be done by virtue thereof.
15. INDEMNIFICATION
(a) INDEMNIFICATION BY THE COMPANY AND HORNE. Subject to the
limitations contained in Section 13(d), the Company and Horne, jointly and
severally, hereby agree to indemnify and hold each Purchaser and their
respective affiliates, directors, officers, employees and agents (collectively,
the "Purchaser Indemnitees") harmless from, and to reimburse each of the
Purchaser Indemnitees for, on an after-tax basis, any loss, damage, deficiency,
claim, liability, obligation, suit, action, fee, cost or expense of any nature
whatsoever (including, but not limited to, reasonable attorney's fees and costs)
(COLLECTIVELY,
17
<PAGE>
"LOSSES") arising out of, based upon or resulting from any inaccuracy in or any
breach of any representation or warranty of the Company contained in this
Agreement to the extent such Loss exceeds the Basket (as defined below),
certificate or other written instrument or document delivered by the Company
pursuant hereto.
(b) INDEMNIFICATION BY THE PURCHASER. Each Purchaser,
severally and not jointly, hereby agrees to indemnify and hold the Company and
its subsidiaries, affiliates, directors, officers, employees and agents
(collectively, the "Company Indemnitees") harmless from, and to reimburse each
of the Company Indemnitees for, on an after-tax basis, any Loss from (i) any
inaccuracy in or any breach of any representation or warranty of the Purchaser
contained in this Agreement, certificate or other written instrument or document
delivered by the Purchaser pursuant hereto or (ii) any breach of any of the
covenants, agreements or undertakings of the Purchaser contained in or made
pursuant to this Agreement.
(c) PROCEDURE FOR INDEMNIFICATION. Promptly following the
discovery of any breach of a representation or warranty of the Company or the
Purchasers contained in this Agreement, of any third party claim or of any other
matter which could entitle Purchasers or the Company to indemnification under
this Agreement, the indemnified party shall give notice to the indemnitor. The
indemnitor shall have ten days from receipt of such notice to pay the amount of
damages so specified or challenge the claim. If the indemnitor disputes such
claim for indemnification, the indemnitor shall be given 10 days in which to
meet with the Company's accountants, review the basis for such claim and dispute
the findings, if appropriate.
If any claim for indemnification hereunder results
from any claim or Loss by a person who is not a party to this Agreement ("Third
Party Claim"), such notice shall also specify, if known, the amount or an
estimate of the amount of the liability arising therefrom. The Indemnitee shall
give the other party prompt notice of any such claim and the Indemnitor shall
undertake the defense thereof by representatives of its own choosing, reasonably
satisfactory to the Indemnitee, at the expense of the Indemnitor. The Indemnitee
shall have the right to participate in any such defense of a Third Party Claim
with advisory counsel of its own choosing, at its own expense. If Indemnitor,
within 20 days after notice of any such Third Party Claim, fails to defend, the
Indemnitee shall have the right to undertake the defense, compromise or
settlement of such Third Party Claim on behalf, and for the account of,
Indemnitor, at the expense and risk of Indemnitor.
(d) LIMITS ON INDEMNIFICATION. The Purchasers shall not be
entitled to indemnification pursuant to this Section 13 unless and until the
aggregate amount of the Company Indemnified Losses (generally, the Indemnified
Losses) with respect to losses for specific representations and warranties
exceeds the amounts set forth on SCHEDULE 13(D) with respect to those losses (in
each case, a "Basket"). In no event shall the Company or Horne be liable or
responsible after closing for any Indemnified Losses under this Agreement in
excess of an aggregate amount equal to $1,900,000. Moreover, Horne shall be
liable only to the extent of the principal amount then outstanding under the
Promissory Notes payable by the
18
<PAGE>
Company to Horne (the "Horne Notes"), and the 85,718 shares of the Company's
Common Stock owned by Horne (the "Horne Shares").
(e) SET-OFF AND ESCROW. Without limiting any other rights of
the Purchasers pursuant to this Agreement or otherwise, the Purchasers may, upon
written notice to Horne and subject to the provisions of Section 13(c), offset
against the amounts due Horne under the Horne Notes any and all Indemnified
Loses incurred or sustained by it and subject to indemnification under Section
13. To the extent of any offset, the principal amount outstanding under the
Horne Notes shall be reduced, and interest as stated therein shall accrue from
the date of such offset only on the principal balance as so reduced. In
addition, Horne shall enter into an agreement with the Company's transfer agent
in form and substance reasonable acceptable to the Purchasers pursuant to which
Horne shall place into escrow, for a period of one year commencing from the date
of this Agreement, the Horne Shares. Notwithstanding anything contained herein
to the contrary, Purchasers must first exercise their rights to set-off first
with respect to the Horne Notes.
16. SURVIVAL OF REPRESENTATIONS AND WARRANTS. Each of the
representations and warranties made by the Company shall survive for a period of
one year after the date of this Agreement. No claim for the recovery of
Indemnified Losses may be asserted after such representations and warranties
shall thus expire; PROVIDED, however, that claims for Indemnified Losses first
asserted within such period shall not thereafter be barred.
17. INTEGRATION. This Agreement, including the Schedules hereto and the
agreements referred to herein, represents the entire understanding and agreement
of the parties with respect to the subject matter hereof. No other
representations, statements or warranties have been made, other than what is
written herein.
18. ATTORNEYS' FEES. Except as otherwise set forth herein, all costs
and expenses, including reasonable attorneys' fees, incurred in the enforcement
of this Agreement, shall be paid to the prevailing party by the non-prevailing
party, upon demand.
19. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which may be considered one and the same agreement and each
of which shall be deemed an original.
20. GOVERNING LAW. This Agreement shall be enforced, governed and
construed in all respects in accordance with the internal laws, and not the laws
pertaining to conflicts or choice of laws, of the State of Delaware. The parties
agree to be subject to the personal jurisdiction of the federal and state courts
in the State of New York, and that any disputes arising from or in relation to
this Agreement may be commenced in Federal or State Court of competent
jurisdiction within the State of New York. The parties consent to service of
process by Certified Mail, Return Receipt Requested, at the addresses set forth
hereinabove.
19
<PAGE>
IN WITNESS WHEREOF, the parties hereto, through their duly authorized
officers, have executed this Agreement as of the date first written above.
THE COMPANY:
ASD GROUP, INC.
By: /S/ GARY D. HORNE
--------------------------------------
Gary Horne, Chairman of the Board
and Chief Executive Officer
MATTHEW HOLSTEIN PENSION PLAN PURCHASERS:
By: /S/ MATTHEW HOLSTEIN /S/ JONATHON LAURIE
- --------------------------------- ------------------------------------------
MATTHEW HOLSTEIN, TRUSTEE JONATHON LAURIE
/S/ RUSSEL C. KRAUS /S/ JACOB BENJAMIN
- --------------------------------- ------------------------------------------
RUSSEL C. KRAUS JACOB BENJAMIN
/S/ HENRY ORLINSKY
------------------------------------------
TAURUS ENTERPRISES, LLC. HENRY ORLINSKY
By: /S/ MATTHEW HOLSTEIN /S/ MARN RABINOVICI
- --------------------------------- ------------------------------------------
MATTHEW HOLSTEIN, MANAGER MARN RABINOVICI
/S/ PHILIP M. HOLSTEIN, JR. /S/ MARLENE MORDOWITZ
- --------------------------------- ------------------------------------------
PHILIP M. HOLSTEIN, JR. MARLENE MORDOWITZ
/S/ ALBERT KULA CONRAD CONSULTING
- --------------------------------
ALBERT KULA
By: /S/ ILLEGIBLE
---------------------------------------
Name: Illegible
Title: Signatory
ACCESSIBLE DEVELOPMENT CORP. GILLETTE INTERNATIONAL, LTD.
By: /S/ LAZAR LEYBOVICH By: /S/ VONICE PARKER
- ---------------------------------- ------------------------------------------
LAZAR LEYVOVICH, PRESIDENT VONICE PARKER, DIRECTOR/SECRETARY
20
<PAGE>
/S/ REGINA MILLER
------------------------------------------
REGINA MILER
/S/ PETER ZACHARIOU
------------------------------------------
PETER ZACHARIOU
CAMERON WORLDWIDE LTD.
By: /S/ JAY H. SOLOMONT
---------------------------------------
Name: Jay H. Solomont
Title: Director
With respect to Section 5 only:
HIGH TECHNOLOGY COMPUTERS,
INC.
By: /S/ GARY D. HORNE
---------------------------------------
Gary D. Horne, Chief Executive Officer
AUTOMATED SYSTEMS
DEVELOPERS, INC.
By: /S/ GARY D. HORNE
---------------------------------------
Gary D. Horne
With respect to the Section 12 only:
/S/ GARY D. HORNE
------------------------------------------
GARY D. HORNE
21
<PAGE>
ASD GROUP, INC.
SCHEDULE 1
<TABLE>
<CAPTION>
NO. OF SHARES AGGREGATE
PURCHASER PURCHASED PURCHASE PRICE
- --------- ------------- --------------
<S> <C> <C> <C>
Common Stock, $.20 per share 392,017 $ 78,403.40
Peter C. Zachariou
Series A Preferred Stock, $3.52 per share
Jonathon Laurie 24,431.818 $ 86,000.00
Jacob Benjamin 28,409.091 $ 100,000.00
Henry Orlinsky 17,045.455 $ 60,000.00
Benjamin Rabinovki 28,409.091 $ 100,000.00
Marlene Mordowitz 21,022.727 $ 74,000.00
Regina Miller 68,181.818 $ 240,000.00
Conrad Consulting Limited 28,409.091 $ 100,000.00
------------ --------------
Subtotal 215,909.091 $ 760,000.00
Series B Preferred Stock, $2.00 per share
Peter C. Zachariou 180,798.500 $ 361,597.00
Cameron Worldwide Ltd. 150,000.000 $ 300,000.00
------------ --------------
Subtotal 330,798.500 661,597.000
Series A Preferred Stock, $4.00 per share
Mathew Holstein Pension Plan 9/22/98 5,750.000 $ 23,000.00
Russell C. Kraus 9/22/98 7,500.000 $ 30,000.00
Taurus Enterprises, L.L.C. 9/22/98 3,000.000 $ 12,000.00
Philip M. Holstein, Jr. 9/22/98 6,250.000 $ 25,000.00
Albert Kula 8/13/98 37,000.000 $ 148,000.00
Regina Miller 10/22/98 8,750.000 $ 35,000.00
Regina Miller 10/22/98 3,750.000 $ 15,000.00
Regina Miller 10/29/98 7,500.000 $ 30,000.00
Accessible Development Corp. 10/29/98 20,000.000 $ 80,000.00
Gillette International Ltd. 9/10/98 37,500.000 $ 150,000.00(1)
------------ --------------
Subtotal 137,000.000 $ 548,000.00
TOTAL FOR SERIES A AND B PS 683,707.591 1,969,597.000
============ ==============
TOTAL SHARES OF CS AND PROCEEDS 7,229,092.91 $ 2,048,000.40
============ ==============
</TABLE>
(1) Company actually received $149,982 after bank charges.
<PAGE>
EXHIBITS
--------
Exhibit A Certificates of Designations, Preferences,
Rights and Limitations for Series A and
Series B Preferred Stock
Exhibit 5(m) Accounts Receivable and Accounts Payable
SCHEDULES
---------
Schedule 1 Purchasers
Schedule 3 Use of Proceeds
Schedule 5(e) List of Outstanding Options and Warrants
Schedule 5(i) Legal Proceedings
Schedule 5(j) Litigation, Outstanding Orders, Judgments, Etc.
Schedule 5(l) Undisclosed Liabilities
Schedule 5(o) Material Changes
Schedule 5(p) Customers and Contracts
Schedule 5(s) Related Party Transactions
Schedule 12(c) Indemnification Limits
EXHIBIT B
FORM OF SUBSCRIPTION AGREEMENT
TO: ASD Group, Inc.
1 Industry Street
Poughkeepsie, New York 12603
1. SUBSCRIPTION.
(a) The undersigned ("Purchaser"), intending to be legally bound,
hereby irrevocably subscribes for the number of shares of Series D Convertible
Preferred Stock, $.01 par value per share (the "Series D Stock"), of ASD Group,
Inc., a Delaware corporation (the "Company"), set forth on the signature page
(the "Shares"), for a purchase price of US$1,000.00 per share on the terms and
conditions set forth in this Subscription Agreement (this "Agreement"). In
addition to such other terms as are set forth in this Agreement, the terms upon
which the Series D Stock may be converted into shares of the Company's common
stock, $.01 par value per share (the "Common Stock"), are set forth in the
Certificate of Designations, Preferences, Rights and Limitations attached hereto
as Exhibit A. The Series D Stock and Common Stock are collectively referred to
herein as the "Securities".
(b) Subscription payments shall be made by wire transfer of funds to
the Company directly pursuant to the wire transfer instructions attached hereto
as Exhibit B. If the subscription is accepted by the Company, in whole or in
party, and subject to the conditions set forth herein, the Company shall deliver
to the undersigned certificates representing the Shares subscribed for hereby
and a fully executed copy of this Agreement.
(c) The undersigned hereby acknowledges that the Securities being sold
hereunder have not been registered under the Securities Act of 1933, as amended
(the "Securities Act"), and are being offered and sold in accordance with the
exemption from the registration requirements under the Securities Act afforded
by Regulation D ("Regulation D"), promulgated thereunder.
2. REPRESENTATIONS AND WARRANTIES OF PURCHASER. The Purchaser hereby
represents, warrants and agrees with the Company as follows:
(a) RECEIPT OF CORPORATE INFORMATION; INDEPENDENT
INVESTIGATION; ACCESS. All requested publicly-available documents, records and
books pertaining to the Company and the offer and sale hereby of the Securities,
including, without limitation, the Company's Annual Report on Form 10-KSB for
the year ended June 26, 1998 (the "Form 10-KSB"), have been delivered to the
Purchaser and/or its advisors, and all of the Purchaser's questions and requests
for information have been answered to the Purchaser's satisfaction. Purchaser
acknowledges that Purchaser, in making the decision to purchase the Securities
subscribed for, has relied upon independent investigations made by it and its
purchaser representatives, if any, and Purchaser and such representatives, if
any, have, prior to any sale to it, been given access and the opportunity to
examine all material contracts and documents relating to this offering and an
opportunity to ask questions of, and to receive information from, the Company or
any person acting on its behalf concerning the terms and conditions of this
offering. Purchaser and its advisors, if any, have been furnished with access to
all publicly available materials relating to the
<PAGE>
business, finances and operation of the Company and materials relating to the
offer and sale of the Securities which have been requested. Purchaser and its
advisors, if any, have received complete and satisfactory answers to any such
inquiries.
(b) RISKS. The Purchaser acknowledges and understands that the purchase
of the Securities involves a high degree of risk and is suitable only for
persons of adequate financial means who have no need for liquidity in this
investment in that (i) the Purchaser may not be able to liquidate the investment
in the event of an emergency; (ii) transferability is extremely limited; and
(iii) in the event of a disposition, the Purchaser could sustain a complete loss
of its entire investment. The Purchaser is sufficiently experienced in financial
and business matters to be capable of evaluating the merits and risks of an
investment in the Company; has evaluated such merits and risks, including risks
particular to the Purchaser's situation; and the Purchaser has determined that
this investment is suitable for the Purchaser. The Purchaser has adequate
financial resources and can bear a complete loss of the Purchaser's investment.
(c) ACCREDITED INVESTOR STATUS. The Purchaser is an "accredited
investor" as defined in Rule 501(a) of Regulation D promulgated by the
Securities and Exchange Commission (the "SEC") under the Securities Act.
(d) INVESTMENT INTENT. The Purchaser hereby represents that the
Securities are being acquired for the Purchaser's own account with no intention
of distributing such securities to others. The Purchaser has no contract,
undertaking, agreement or arrangement with any person to sell, transfer or
otherwise distribute to any person or to have any person sell, transfer or
otherwise distribute the Securities for the Purchaser. The Purchaser is
presently not engaged, nor does the Purchaser plan to engage within the
presently foreseeable future, in any discussion with any person regarding such a
sale, transfer or other distribution of the Securities or any interest therein.
(e) COMPLIANCE WITH FEDERAL AND STATE SECURITIES LAWS. The Purchaser
understands that the Securities Shares have not been registered under the
Securities Act. The Purchaser understands that the Securities must be held
indefinitely unless the sale or other transfer thereof is subsequently
registered under the Securities Act or an exemption from such registration is
available. Moreover, the Purchaser understands that its right to transfer the
Securities will be subject to certain restrictions, which include restrictions
against transfer under the Securities Act and applicable state securities laws.
In addition to such restrictions, the Purchaser realizes that it may not be able
to sell or dispose of the Securities as there may be no public or other market
for them. The Purchaser understands that certificates evidencing the Securities
shall bear a legend substantially as follows:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY APPLICABLE STATE LAW. THEY MAY NOT BE OFFERED
FOR SALE, SOLD, TRANSFERRED OR PLEDGED UNLESS REGISTERED UNDER THE
SECURITIES ACT AND ANY APPLICABLE STATE LAW OR PURSUANT
2
<PAGE>
TO AN EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS.
(f) AUTHORITY; ENFORCEABILITY. The Purchaser has the full right, power,
and authority to execute and deliver this Agreement and perform its obligations
hereunder.
(g) NONCONTRAVENTION. This Agreement constitutes a valid and legally
binding obligation of the Purchaser and neither the execution of this Agreement,
nor the consummation of the transactions contemplated hereby, will constitute a
violation of or default under, or conflict with, any judgment, decree, statute
or regulation of any governmental authority applicable to the Purchaser or any
contract, commitment, agreement or restriction of any kind to which the
Purchaser is a party or by which its assets are bound. The execution and
delivery of this Agreement does not, and the consummation of the transactions
described herein will not, violate applicable law, or any mortgage, lien,
agreement, indenture, lease or understanding (whether oral or written) of any
kind outstanding relative to the Purchaser.
(h) APPROVALS. No approval, authorization, consent, order or other
action of, or filing with, any person, firm or corporation or any court,
administrative agency or other governmental authority is required in connection
with the execution and delivery of this Agreement by the Purchaser or the
consummation of the transactions described herein.
(i) RELIANCE ON REPRESENTATIONS. Purchaser understands that the
Securities are being offered and sold to it in reliance on an exemption from the
registration requirements of the Securities Act, and that the Company is relying
upon the truth and accuracy of the representations, warranties, agreements,
acknowledgments and understandings of Purchaser set forth herein in order to
determine the applicability of such safe harbor and the suitability of Purchaser
to acquire the Securities.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents,
warrants and agrees with the Purchaser as follows:
(a) CORPORATE ORGANIZATION. The Company is a validly existing
corporation organized in accordance with the laws of the State of Delaware, with
all legal and corporate authority and power to conduct its business and to own
its properties and possesses all necessary permits and licenses required in
connection with the conduct of its business.
(b) REPORTING STATUS. The Company has a class of securities registered
pursuant to Section 12(b) and 12(g) of the Securities Exchange Act of 1934 (the
"Exchange Act"), and, except as otherwise provided in this Agreement, the
Company has filed all the materials required to be filed pursuant to Section
13(a) of the Exchange Act for a period of at least twelve months immediately
preceding the offer and/or sale of the Securities hereunder (or for such shorter
period that the Company was required to file such material). All of such filings
made under and pursuant to the Exchange Act are correct and accurate and do not
contain any untrue statement of a material fact or omit any material fact
necessary to make the statements therein not misleading.
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(c) TERMS OF SERIES D STOCK AND VALIDITY OF SHARES. The terms of the
Series D Stock shall be as set forth in the form of Certificate of Designations
attached hereto as Exhibit A. The Securities, when issued against proper payment
therefor in accordance with the terms of this Agreement and the Certificate of
Designations, will be validly issued, fully paid, non-assessable and will not
subject the holders thereof to any personal liability by reason of being such
holders of said Securities, or by reason of participating in this offering.
(d) NASDAQ LISTING. The Company's shares of Common Stock are currently
listed on the Nasdaq SmallCap Market. On June 3, 1998, the Company received two
letters from The Nasdaq Stock Market ("Nasdaq") regarding the continued listing
of the Company's Common Stock on the Nasdaq SmallCap Market. At that time, the
Company failed to meet two requirements for continued listing on the Nasdaq
SmallCap Market. On September 3, 1998, the Company advised Nasdaq that it
believed it now met both of these requirements. On September 25, 1998, the
Company received another letter from Nasdaq advising the Company that the
Company's shares of Common Stock failed to maintain the closing bid price of
greater than or equal to $1.00. The Company has been provided with 90 calendar
days in which to regain compliance with this minimum bid price requirement. On
October 12, 1998, the Company received another letter from Nasdaq advising the
Company that it failed to meet three requirements for continued listing on the
Nasdaq SmallCap Market and requesting that the Company provide Nasdaq by October
26, 1998 with its proposal for achieving compliance. In a separate letter,
Nasdaq requested additional information regarding the Restructuring described in
the Company's Current Report on Form 8-K dated July 9, 1998 and Form 10-KSB. The
Company submitted responses to these two letters to Nasdaq on October 26, 1998.
No assurance can be given that such responses will be acceptable to Nasdaq. The
Company's responses may not be deemed to warrant continued listing by Nasdaq in
which case Nasdaq may issue a formal notice of deficiency and may initiate steps
to delist the Company's Common Stock from the Nasdaq SmallCap Market. No
assurance can be given that the Company's shares of Common Stock will continue
to be listed on the Nasdaq SmallCap Market.
(e) AUTHORITY AND ENFORCEABILITY. This Agreement and the transactions
contemplated hereby have been duly and validly authorized by all requisite
corporate action. The Company has full rights, power and capacity to execute,
deliver and perform its obligations under this Agreement. No governmental
license, permit or authorization and no registration or filings with any court,
governmental authority or regulatory agency is required in connection with the
Company's execution, delivery and/or performance of this Agreement. The
execution, delivery and performance of this Agreement, the consummation of the
transactions herein contemplated and the compliance with the terms of this
Agreement by the Company will not violate or conflict with any provision of the
Certificate of Incorporation or By-laws of the Company, or any agreement,
instrument, law or regulation to which the Company is a party or by which the
Company may be bound. This Agreement, upon execution and delivery of this
Agreement by the Company, will represent the valid and binding obligation of the
Company enforceable in accordance with its terms.
(f) ACCURACY OF INFORMATION. All information provided and/or supplied
to the Purchaser, directly or indirectly, by the Company in accordance with and
in compliance with the provisions of this Agreement or otherwise is accurate and
complete and does not contain any
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untrue statements of a material fact or omit any material fact necessary to make
the statements therein not misleading.
(g) CAPITALIZATION. The authorized capital stock of the
Company consists of (i) 1,000,000 shares of Preferred Stock, $.01 par value,
742,708 of which are issued and outstanding; and (ii) 10,000,000 shares of
Common Stock, $.01 par value, of which 1,979,934 shares are issued and
outstanding. The shares of Preferred Stock issued and outstanding are
convertible into an additional 7,427,080 shares of Common Stock. In addition,
the Company currently has outstanding certain stock options which are
exerciseable. The number of shares issued and outstanding periodically changes
to reflect the exercise of such options. The holders of outstanding capital
stock of the Company have no preemptive rights. The Shares have been duly
authorized and when issued and paid for as contemplated in this Agreement will
be validly issued, fully paid and non-assessable.
4. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations,
warranties, acknowledgements and agreements of the Company and the Purchaser
shall survive the offering and purchase of the Shares.
5. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL THE SHARES. The
obligations of the Company under this Agreement are subject in the discretion of
the Company, to the satisfaction, at or prior to the date the Company accepts
this subscription (the "Closing Date") of the following conditions.
(a) PURCHASE PRICE. The Company's receipt of the purchase
price for the Shares, as described above.
(b) REPRESENTATIONS AND WARRANTIES. The representations and
warranties made by the Purchaser in this Agreement were true when made and shall
be true as at the Closing Date with the same force and effect as if such
representations and warranties were made at and as of the Closing Date.
(c) PERFORMANCE OF CONDITIONS. All of the terms, covenants and
conditions of this Agreement to be complied with and performed by Purchaser on
or prior to the Closing Date shall have been fully complied with and performed.
6. CONDITIONS TO THE PURCHASER'S OBLIGATION TO PURCHASE THE SHARES. The
obligations of the Purchaser under this Agreement are subject in the discretion
of the Purchaser, to the satisfaction at or prior to the Closing Date of the
following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties made by Company in this Agreement were true when made and shall be
true as at the Closing Date with the same force and effect as if such
representations and warranties were made at and as of the Closing Date.
(b) PERFORMANCE OF CONDITIONS. All of the terms, covenants and
conditions of this Agreement to be complied with and performed by the Company on
or prior to the Closing Date shall have been fully complied with and performed.
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<PAGE>
(c) NO VIOLATIONS. At the Closing Date, there shall exist no
violations of any Federal, state or local law, ordinance or regulation
materially affecting the Company or the Shares.
(d) NO LITIGATION. At the Closing Date, no litigation,
proceeding, investigation or inquiry shall be pending or threatened against the
Company and no proceeding, investigation or inquiry shall be pending or
threatened against the Company which might result in an action to enjoin or
prevent the consummation of the transactions contemplated by this Agreement or
involving the Shares and/or which might result in any material adverse change in
the Company's business, operations or assets and properties.
(e) NO ACTIONS. All actions, proceedings, instruments and
documents required to carry out the transactions contemplated by this Agreement
or incidental thereto and all related legal matters shall have been satisfactory
to and approved by De Diego, Benalal & Asociados, counsel for Purchaser, the
Purchaser or the Board of Directors of Purchaser and such counsel shall have
been furnished with such certified copies of actions and proceedings and such
other instruments and documents as they shall have reasonably requested.
7. REGISTRATION RIGHTS.
(a) REGISTRATION OF THE SECURITIES. Within 45 days after the
Closing, the Company shall file a Registration Statement registering, under the
Securities Act, the re-sale of the shares of Common Stock issuable upon
conversion of the Series D Stock (the "Registrable Shares"). The Company will
use its best efforts to have such registration statement declared effective
within 45 days from the date such Registration Statement is filed.
(b) OBLIGATIONS OF THE COMPANY. In connection with the filing
of a registration statement pursuant to this Section 7, the Company shall:
(i) Prepare and file with the SEC a registration
statement covering the Registrable Shares (the "Registration Statement") and any
necessary amendments (including post-effective amendments) and supplements to
the Registration Statement and the prospectus used in connection with the
Registration Statement and take such other reasonable action as may be necessary
to have the Registration Statement be declared effective by the SEC and keep the
Registration Statement effective until the earlier of the (A) public sale of all
the Registrable Shares or (B) the Registrable Shares becoming capable of full
and complete public sale without registration under the Securities Act and to
comply with the provisions of the Securities Act and the Exchange Act, and the
rules and regulations thereunder, with respect to the disposition of the
Registrable Shares;
(ii) Notify the Purchaser, after becoming aware
thereof, (A) when the Registration Statement or the prospectus included therein
or any prospectus amendment or supplement or post-effective amendment has been
filed and, with respect to the Registration Statement or any post-effective
amendment, when the same has become effective or (B) of any request by the SEC
for amendment of or supplement to the Registration Statement or related
prospectus or for additional information;
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(iii) Furnish promptly to the Purchaser such
reasonable number of copies of a prospectus, and all amendments and supplements
thereto, in conformity with the requirements of the Securities Act, and such
other documents as the Purchaser may reasonably request in order to facilitate
their disposition of the Registrable Shares;
(iv) Use its best efforts to register and qualify the
Registrable Shares under the securities or Blue Sky laws of such states as shall
be reasonably requested by the Purchaser, and prepare and file in those states
such amendments (including post-effective amendments) and supplements and to
take such other actions as may be necessary to maintain such registration and
qualification in effect at all times during the period the Company is required
to maintain the Registration Statement effective, and to take all other actions
necessary or advisable to enable the disposition of such securities in such
states, provided that the Company shall not be required in connection therewith
or as a condition thereto to subject itself to taxation, to qualify to do
business or to file a general consent to service of process in any such states;
and
(v) Notify the Purchaser, at any time when a
prospectus relating to the Registrable Shares is required to be delivered under
the Securities Act, of the happening of any event as a result of which the
prospectus included in the Registration Statement, as then in effect, includes
an untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading. The
Company shall promptly amend or supplement the Registration Statement to correct
any such untrue statement or omission, and provide the Purchaser with an amended
or supplemented prospectus with respect to the Registrable Shares that corrects
such untrue statement or omission.
(c) PURCHASER'S OBLIGATIONS. It shall be a condition precedent
to the obligations of the Company to the Purchaser to take any action pursuant
to this Section that the Purchaser shall furnish to the Company such information
regarding the Purchaser, the Registrable Shares and other shares of Common Stock
held by the Purchaser and the intended method of disposition of such securities
as shall be reasonably required to effect the registration of the Registrable
Shares and shall execute such documents in connection with such registration as
the Company may reasonably request.
(d) EXPENSES OF PURCHASEr. All expenses incurred by the
Company in complying with this section, including, without limitation,
registration and filing fees, fees and expenses of complying with state
securities and Blue Sky laws, printing expenses, and fees and disbursements of
the Company's counsel and accountants, shall be paid by the Company; provided,
however, that all fees and expenses of counsel to the Purchaser and all selling
commissions applicable to the disposition of the Shares shall not be borne by
the Company but shall be borne by the Purchaser.
8. INDEMNIFICATION.
(a) OBLIGATION OF THE COMPANY TO INDEMNIFY. The Company hereby
agrees to indemnify, defend and hold harmless the Purchaser, its officers,
directors, principals, employees, affiliates, and shareholders, and their
successors and assigns from and against any and all claims,
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damages, losses, liability, deficiencies, actions, suits, proceedings, costs or
legal expenses (collectively the "Losses") arising out of or resulting from: (i)
any breach of a covenant, agreement, representation, or warranty by the Company
contained in this Agreement; or (ii) events occurring in the course of or
relating to the sale of the Shares contemplated herein which are not disclosed
in this Agreement prior to the Closing Date; or (iii) any and all costs and
expenses (including reasonable attorneys fees) related to the foregoing.
(b) NOTICE OF CLAIM. If the Purchaser receives written notice
of the commencement of any legal action, suit or proceeding with respect to
which the Company is or may be obligated to provide indemnification pursuant to
Section 8(a) above, the Purchaser shall, within 30 days of the receipt of such
written notice, give the Company written notice thereof (a "Claim Notice").
Failure to give such Claim Notice within such 30-day period shall not constitute
a waiver by the Purchaser of its right to indemnity hereunder with respect to
such action, suit or proceeding.
(c) DEFENSE OF CLAIMS. Upon receipt by the Company of a Claim
Notice from the Purchaser with respect to any claim for indemnification which is
based upon a claim made by a third party ("Third Party Claim"), the Purchaser
may assume the defense of the third party claim with counsel of its own
choosing. The Company shall cooperate in the defense of the Third Party Claim
and shall furnish such records, information and testimony and attend all such
conferences, discovery proceedings, hearings, trial and appeals as may be
reasonably required in connection therewith. The Purchaser shall have the right
to employ its own counsel in any such action, but the fees and expenses of such
counsel shall be at the expense of the Purchaser unless the Company shall not
have promptly employed counsel to assume the defense of the Third Party Claim,
in which event such fees and expenses shall be borne solely by the Company. The
Company shall not satisfy or settle any Third Party Claim for which
indemnification has been sought and is available hereunder, without the prior
written consent of the Purchaser. If the Company shall fail with reasonable
promptness either to defend such Third Party Claim or to satisfy or settle the
same, the Company may defend, satisfy or settle the Third Party Claim at the
expense of the Company and the Company shall pay to the Purchaser the amount of
any such Loss within ten days after written demand therefor.
9. MISCELLANEOUS.
(a) AMENDMENT. No modification, waiver, amendment, discharge
or change of this Agreement shall be valid unless the same is evidenced by a
written instrument, executed by the party against which such modification,
waiver, amendment, discharge, or change is sought.
(b) NOTICE. All notices, demands or other communications given
hereunder shall be in writing and shall be deemed to have been duly given on the
fifth calendar day after mailing by United States registered or certified mail,
return receipt requested, postage prepaid, addressed to the Company at ASD
Group, Inc., 1 Industry Street, Poughkeepsie, NY 12603, and to the Purchaser at
the address shown on the Subscription Agreement signature page, or such other
address or to such other person as any party shall designate to the other for
such purpose in the manner hereinafter set forth.
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(c) ENTIRE AGREEMENT. This Agreement, together with the
agreements referred to herein, contains all of the understandings and agreements
of the parties with respect to the subject matter discussed herein. All prior
agreements, whether written or oral, are merged herein and shall be of no force
or effect.
(d) SEVERABILITY. The invalidity, illegality or
unenforceability of any provision or provisions of this Agreement will not
affect any other provision of this Agreement, which will remain in full force
and effect, nor will the invalidity, illegality or unenforceability of a portion
of any provision of this Agreement affect the balance of such provision. In the
event that any one or more of the provisions contained in this Agreement or any
portion thereof shall for any reason be held to be invalid, illegal or
unenforceable in any respect, this Agreement shall be reformed, construed and
enforced as if such invalid, illegal or unenforceable provision had never been
contained herein.
(e) GOVERNING LAW. This Agreement shall be construed in
accordance with the laws of the State of New York, without applications to the
principles of conflicts of laws.
(f) ENFORCEMENT; INJUNCTIVE RELIEF. If it becomes necessary
for any party to institute legal action to enforce the terms and conditions of
this Agreement, the successful party will be awarded reasonable attorneys' fees
at all trial and appellate levels, expenses and costs. Any suit, action or
proceeding with respect to this Agreement shall be brought in the courts in the
State of New York. The parties hereto hereby accepts the exclusive jurisdiction
of those courts for the purpose of any such suit, action or proceeding.
The parties hereto acknowledge and agree that any party's remedy at law
for a breach or threatened breach of any of the provisions of this Agreement
would be inadequate and such breach or threatened breach shall be per se deemed
as causing irreparable harm to such party. Therefore, in the event of such
breach or threatened breach, the parties hereto agree that, in addition to any
available remedy at law, including but not limited to monetary damages, an
aggrieved party, without posting any bond, shall be entitled to obtain, and the
offended party agrees not to oppose the aggrieved party's request for, equitable
relief in the form of specific enforcement, temporary restraining order,
temporary or permanent injunction, or any other equitable remedy that may then
be available to the aggrieved party.
(g) BENEFIT OF AGREEMENT. The terms and provisions of this
Agreement shall be binding upon and inure to the benefit of the parties, their
successors, assigns, personal representatives, estate, heirs, and legatees.
(h) CAPTIONS. The captions in this Agreement are for
convenience and reference purposes only and in no way define, describe, extend
or limit the scope of this Agreement or the intent of any provisions hereof.
(i) NUMBER AND GENDER. All pronouns and any variation thereof
shall be deemed to refer to the masculine, feminine, neuter, singular or plural,
as the identity of the party or parties, or their personal representatives,
successors and assigns may require.
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(j) FURTHER ASSURANCES. The parties agree to execute,
acknowledge, and deliver any and all documentation as may be reasonably required
from time to time to effect the intent and purpose of this Agreement.
(k) COUNTERPARTS. This Agreement may be executed in any number
of counterparts, including facsimile signatures which shall be deemed as
original signatures. All executed counterparts shall constitute one Agreement,
notwithstanding that all signatories are not signatories to the original or the
same counterpart.
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SUBSCRIPTION AGREEMENT SIGNATURE PAGE FOR INDIVIDUALS
Number of Shares Subscribed for: _________ Shares at $__________ per Share.
- ------------------------- -----------------------------------------------
(Signature of Subscriber) (Signature of Spouse or Joint Tenant, If Any)
- ------------------------- -----------------------------------------------
(Print Name of Subscriber) (Print Name of Spouse or Joint Tenant, If Any)
- ------------------------- -----------------------------------------------
- ------------------------- -----------------------------------------------
(Address) (Address)
- ------------------------- -----------------------------------------------
(Telephone) (Telephone)
Note: If two investors are signing, please check the manner in which the
ownership is to be legally held (the indicated manner shall be construed as if
written out in full accordance with applicable laws or regulations):
- -------- JT TEN: As joint tenants with right of survivorship and not as
tenants in common.
- -------- TEN COM: As tenants in common.
- -------- TEN ENT: As tenants by the entireties.
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SUBSCRIPTION AGREEMENT SIGNATURE PAGE
FOR CORPORATIONS, TRUSTS AND PARTNERSHIPS
Number of Shares Subscribed for: _________ Shares at $_________ per Share.
- --------------------------------
(Print Name of Subscriber)
By: ----------------------------
(Signature of Authorized Person)
- --------------------------------
(Print Name of Authorized Person)
- --------------------------------
(Title of Authorized Person)
- --------------------------------
- --------------------------------
(Address)
- -------------------------------- -----------------------------------------
(Telephone Number) (Federal Employer Identification Number
or Other Tax Identification Number)
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APPROVED AND ACCEPTED in accordance with the terms of this Subscription
Agreement on this ________ day of ____________________, 1998.
THE COMPANY:
ASD Group, Inc., a Delaware corporation
By:------------------------------------------
Name: ---------------------------------------
Title: --------------------------------------
13
EXHIBIT C
AGREEMENT
This Agreement is made and entered into as of the 24th day of June,
1998, by and among Automatic Systems Developers, Inc., a New York corporation
("ASD"); High Technology Computers, Inc., a New York corporation ("HTC") (ASD
and HTC are each a "Borrower" and collectively, the "Borrowers"), ASD Group,
Inc., a Delaware corporation ("Holdings"); the financial institutions which are
now or hereafter become a party to the Credit Agreement (as defined below)(the
"Lenders") and PNC Bank, National Association (the "Agent"), as agent for the
Lenders.
RECITALS
A. The Borrowers, Lenders, and PNC are parties to a Revolving
Credit, Term Loan and Security Agreement dated December 18,
1997 (the "Credit Agreement") pursuant to which the Lenders
have made certain Advances to the Borrowers in the form of
Revolving Advances and a Term Loan.
B. Holdings is the parent of the Borrowers and has guaranteed the
obligations of the Borrowers under such Credit Agreement.
C. Certain Events of Default have occurred under the Credit
Agreement, namely the failure of Borrower and Holdings to meet
certain financial and non-financial covenants and failure to
make certain payments of principal and interest to
subordinated creditors of the Borrowers.
D. The maximum credit facility provided by the Credit Agreement
is a revolving loan of up to $4,500,000.00.
E. The parties wish to come to some agreement with respect to the
Advances, defaults and the Credit Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the undersigned agree as follows:
1. RECITALS. The foregoing recitals are true and correct.
2. ACKNOWLEDGEMENTS. The Borrowers and Guarantors hereby
acknowledge and ratify that there currently are existing the
following Defaults under the Credit Agreement, namely Defaults
arising due to breaches of Sections 6.5 and 6.6 of the Credit
Agreement and Defaults arising under Section 6.9 due to
failure to pay amounts due under the Subordination Note
(collectively, the "Specified Defaults").
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3. CONDITIONS TO EFFECTIVENESS. This Agreement shall become
effective only upon the satisfaction or waiver of all of the
following conditions precedent:
(a) The Borrowers, the Guarantors and the Lenders shall
have duly executed and delivered this Agreement
(whether the same or different copies) and the Agent
shall have received a copy signed by each of the
Borrowers and the Guarantors;
(b) The Agent shall have received the fees and expense
reimbursements referred to in Section 16 hereof, a
fee in the amount of $7,500 to Agent and warrants
with a term of three years to purchase 100,000 shares
of Holdings Common Stock at a purchase price of $1.50
per share (in the form attached hereto as Exhibit A);
(c) The Agent shall have received resolutions executed by
the Board of Directors of the Borrowers approving
this Agreement;
(d) The Borrowers shall have received $1,500,000.00 in
immediately available funds as proceeds from the
investment by a group of investors led by Cameron
Worldwide Corp. (the "Cameron Transaction"), of which
not less than $865,000 shall be available to tbe
Borrowers as working capital;
(e) The Agent shall have received ratification of the
existing intercreditor and subordination agreement;
(f) Agent shall have received a pro forma balance sheet
and a statement of sources and uses of funds; and
(g) The Bank shall have received such other documents,
opinions, approvals or appraisals as the Bank may
reasonably request.
4. REPRESENTATIONS AND WARRANTIES. In order to induce the Lenders
to enter into this Agreement, each of the Borrowers and the
Guarantors hereby, jointly and severally, represent and
warrant to the Lenders that (i) each has the full power,
capacity, right and legal authority to execute, deliver and
perform its respective obligations under this Agreement, and
the other documents to which it is a party, and each of the
Borrowers have taken all appropriate action necessary to
authorize the execution and delivery of, this Agreement and
the documents to which it is a party, (ii) this Agreement, the
Credit Agreement and the other documents constitute legal,
valid and binding obligations of each of the Borrowers and the
Guarantors enforceable against such Borrower or Guarantor in
accordance with its terms, subject to the effect of any
applicable bankruptcy, insolvency, reorganization, moratorium
or similar laws effecting the rights of creditors generally,
(iii) the representations and warranties contained in the
Credit Agreement and in each of the other documents to which
it is a party are true and correct on and as of the date
hereof as though made on and as of such date, except for
changes which have occurred and which were not prohibited by
the terms of the Credit Agreement or as stated in this
Agreement, (iv) no Default or Event of Default would result
from the execution, delivery and
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performance by any Borrower and any Guarantor of this
Agreement, or any of the other documents to which it is a
party, (v) except as described above or except with respect to
the Subordinated Loan and the Becker Group Loan, none of the
Borrowers or the Guarantors are in default in the payment of
any of their respective obligations under any mortgage,
indenture, security agreement, contract, undertaking or other
agreement or instrument to which they are a party or which
purports to be binding upon them or any of their respective
properties or assets, which default would have a material
adverse effect on the management, business, operations,
properties, assets or condition (financial or otherwise) of
any Guarantor, (vi) each of the Borrowers and the Guarantors
is in compliance with all applicable statutes, laws, rules,
regulations, orders and judgments, the contravention or
violation of which would have a material adverse effect on the
management, business, operations, properties, assets or
condition (financial or otherwise) of any Borrower or on the
properties, assets or condition (financial or otherwise) of
any Guarantor, and (vii) no litigation or administrative
proceeding of or before any court or governmental body or
agency is now pending nor, to the best knowledge of any
Borrower or any Guarantor upon reasonable inquiry, is any such
litigation or proceeding now threatened against any Borrower
or any Guarantor upon reasonable inquiry, is there a valid
basis for the initiation of any such litigation or proceeding,
which if adversely determined (after giving effect to all
applicable insurance coverage then in existence) would have a
material adverse effect on the business, assets or condition
(financial or otherwise) of any Borrower or on the properties,
asset or condition (financial or otherwise) of any Guarantor.
5. WAIVER. Effective as of the date hereof, subject to the
condition that this Agreement not be in default, Lenders agree
to waive any and all rights they may have by virtue of the
occurrence of any Event of Default arising due to the
Specified Defaults whether such Event of Default is now
existing or arising in the future, including but not limited
to the right to declare the Obligations immediately due and
payable.
6. INTEREST AND FEES. The Lenders acknowledge that Borrowers and
Holdings have not to date been charged the Default Rate of
interest due to the Specified Defaults. Moreover, Lenders
agree not to charge the Borrowers and Holdings any Default
Rate of interest to which it may be entitled by virtue of
Specified Defaults (whether now existing or subsequently
occurring) from the original date of the Credit Agreement
through June 23, 2000 (or June 23, 2001 if extended pursuant
to Section 8) subject to the condition that this Agreement not
be in default.
7. FORBEARANCE. Effective as of the date hereof through August
24, 1998 (the "Forbearance Period"), and subject to the
satisfaction of the conditions set forth in Section 3 hereof,
the Lenders shall not seek to exercise any of their rights or
remedies under the Credit Agreement based on any Specified
Defaults including
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<PAGE>
but not limited to statutory common law rights to offset.
Lenders will continue to provide financing to Borrowers
pursuant to the terms of this Agreement on the terms described
herein notwithstanding any Specified Default during the
Forbearance Period subject to the condition that this
Agreement not be in default.
8. FUTURE MODIFICATION OF CREDIT AGREEMENT.
(a) The Lenders will, upon review of projections
submitted from time to time by the Borrowers and
reasonably satisfactory to the Lenders, increase the
maximum credit limit from $4,500,000 to up to
$8,750,000, provided that such projections evidence
the reasonable use of such increase and the
Borrowers' reasonable ability to repay the same.
(b) During the Forbearance Period, the parties agree that
Lenders will continue to advance sums pursuant to the
Credit Agreement and not to exercise any of their
rights to declare a Default or terminate the Credit
Agreement so long as (I) Borrowers maintain Undrawn
Availability (as defined in the Credit Agreement)
equal to not less than $250,000, (II) there exist no
Defaults except the Specified Defaults, and (III)
there are no defaults under this Agreement. During
the Forbearance Period, the parties will negotiate in
good faith the restructure of the Credit Agreement to
reflect the recapitalization of the Company in light
of the Cameron Transaction and Agreements to the
covenants contained therein. If after the expiration
of the Forbearance Period, no agreement is reached as
to the restructure of the Credit Agreement, the
parties agree that the Credit Agreement will remain
in place until June 23, 2000 (provided that if no
Default or Event of Default has occurred under the
Credit Agreement or this Agreement, the Borrowers may
by written notice given between April 15, 2000 and
June 1, 2000 extend such date to June 23, 2001), and
Lenders agree not to exercise any of their rights to
declare a Default due to a Specified Default whether
now existing or arising in the future or terminate
the Credit Agreement so long as (I) Borrowers
maintain an Undrawn Availability equal to not less
than $250,000 through October 31, 1998 and $400,000
thereafter (which amount will reduce to $300,000 at
such time as the Company has two profitable
quarters), (II) there exist no Defaults except for
Specified Defaults, and (III) this Agreement is not
in default. If and when the Credit Agreement expires
on June 23, 2000 and the parties were unable to reach
agreement as to the restructure of the Credit
Agreement during the Forbearance Period, Borrowers
shall not be obligated to pay Agent the early
termination fee described in Section 13.1 of the
Credit Agreement. If the Credit Agreement is
terminated prior to such date, Section 13.1 shall
apply and a termination fee will be due and payable.
4
<PAGE>
9. OVER-ADVANCE. For purposes of this Agreement, the parties
agree that the over-advance shall be $900,000. The parties
agree that said over-advance will be added to the Formula
Amount during the Forbearance Period. Following the
Forbearance Period, if no amendment to the Credit Agreement
has been negotiated and executed by the parties thereto, this
over-advance amount shall remain in place for six months
following the Forbearance Period. Thereafter, $600,000 of the
over-advance will be reduced to zero on a straight line
amortized basis in 12 equal monthly installments, with the
remaining balance, if any, on the over-advance payable on June
23, 2000.
10. OFFSET AND NEW CAPITAL.
(a) The parties hereto agree that unless there exists an
Event of Default (other than a Specified Default),
the Lenders will not exercise their contractual,
statutory or common law rights of offset against the
proceeds of the Cameron Transaction.
(b) On or before July 23, 1998, the Borrowers shall
receive not less than $385,000 from equity
investments, as working capital for the Borrowers. If
such $385,000 is not received on or before August 2,
1998, the Lenders may declare an Event of Default to
exist, provided that an Event of Default shall not be
deemed to exist for failure to receive such amount
prior to August 2, 1998.
11. PAYMENT OF INDEBTEDNESS. Notwithstanding the language
contained in Sections 6.9, 7.16 and 7.17 of the Credit
Agreement, the Lenders agree to the payment by Holdings of
$220,000 in satisfaction of the Becker Group Loans ($110,000
of which will be paid on the date hereof and $110,000 of which
will be paid one year from the date of this Agreement).
Moreover, notwithstanding anything contained in the
Intercreditor and Subordination Agreement dated December 18,
1997 between Bankers Trust Company and the Agent (the
"Intercreditor Agreement"), the Lenders agree and consent to
the payment on the date hereof by Borrowers of $250,000 to
Bankers Trust Company. Following the date hereof, the
remaining indebtedness to Bankers Trust Company will be
subject to the Intercreditor and Subordination Agreement;
provided, however, if no default other than Specified Defaults
are than existing or would be caused thereby, Agent agrees and
consents to the repayment of the indebtedness to Bankers Trust
Company as provided for in the Option and Forebearance
Agreement among the Company, Bankers Trust Company and
Automatic System Developers, Inc. dated the date hereof and
attached as EXHIBIT A.
12. INDEBTEDNESS TO AFFILIATE. Lenders acknowledge that Holdings
has received a loan from Gary D. Horne, Chairman and Executive
Officer of Holdings.
5
<PAGE>
Notwithstanding the provisions contained in Section 7.8 of the
Credit Agreement, the Lenders consent to such indebtedness and
to the repayment of such indebtedness, if no Defaults other
than Specified Defaults are then existing or would be caused
thereby; provided, however, Mr. Horne's payments will be
limited to $10,000 per month until the month after Holdings
has three consecutive quarters in which it reports income
before income taxes (as opposed to a loss before income
taxes). Thereafter, the balance of Mr. Horne's indebtedness
will be repaid in equal monthly installments over a three year
period, if no Defaults other than Specified Defaults are then
existing or would be caused thereby.
13. CHANGE OF CONTROL. Lenders acknowledge that the Cameron
Transaction will result in a Change of Control. Lenders agree
that such Change of Control will not result in an Event of
Default or accelerate repayment of the Obligations; provided
that any further Change in Control shall constitute an Event
of Default.
14. AGREEMENT TO CERTIFICATE OF INCORPORATION AND BYLAWS. The
undersigned hereby consents to the proposal by the Board of
Directors to amend the Company's Certificate of Incorporation
and Bylaws to provide for (i) the issuance of shares of
Preferred Stock of Holdings to the Investors and (ii) the
increase in the authorized capital. Copies of the Amendment
are attached.
15. REFERENCE TO AND EFFECT ON THE DOCUMENTS.
(a) Except as specifically agreed herein, the Credit
Agreement and all other Documents, and all other
documents, agreements, instruments or writings
entered into in connection therewith, shall remain in
full force and effect and are hereby ratified,
confirmed and acknowledged by each of the Borrowers
and Guarantors. The agreements set forth above are
limited precisely as written and shall not be deemed
to (i) be a consent to any waiver or modification of
any other term or condition of the Agreement or any
documents delivered pursuant thereto or (ii)
prejudice any right or rights which the Agent or
Lender may now or in future have in connection with
the Agreement or the other Documents.
(b) The execution, delivery and effectiveness of this
Agreement shall not operate as a waiver of any right,
power or remedy of the Bank under any of the
Documents, nor constitute a waiver or modification of
any provision of any of the Documents, not a waiver
of any now existing or hereafter arising Defaults or
Events of Default, except as expressly stated in
Sections 5, 8 and 9.
6
<PAGE>
16. FEES AND EXPENSES.
(a) Each of the Borrowers hereby agrees, jointly and
severally, pay, or cause to be paid to, the Agent on
demand all legal fees incurred by the Agent in
connection with the negotiation, preparation,
reproduction, execution and delivery of this
Agreement and other Documents to be delivered
hereunder such amounts not to exceed $20,000.00, and
hereby instructs the Bank to pay by wire such legal
fees upon the execution and delivery hereof.
(b) Each of the Borrowers hereby agrees to, jointly and
severally, pay the Agent on demand for all costs,
expenses, charges and taxes (other than any income
taxes relating to income of the Bank), including,
without limitation, all reasonable fees and
disbursements of counsel, incurred by the Bank in
connection with the administration and enforcement of
this Agreement and the other Documents to be
delivered hereunder.
17. THIRD PARTY RELIANCE. No party to the Cameron Transaction or
any other person other than a direct party thereto, shall be a
third-party beneficiary of this Agreement, or shall be
entitled to rely thereon.
18. OTHER AGREEMENTS. Attached hereto are true and complete copies
of all agreements and understandings entered into in
connection with this Cameron Transaction, including without
limitation between or among any of any Borrower, Holdings, the
investors in the Cameron Transaction, Cameron, BT, the Becker
Group, BlueStone and H.J. Meyers & Co., Inc.
19. GOVERNING LAW. This Agreement and the rights and obligations
of the parties hereunder shall be governed by and construed
and interpreted in accordance with the substantive laws of the
State of New York, without regard for its conflicts of laws
principles.
20. HEADINGS. Section headings in this Agreement are included
herein for convenience of reference only and shall not
constitute a part of Agreement for any other purpose.
21. SUCCESSORS. This Agreement shall be binding upon the
successors, assigns, heirs, executors and administrators of
the parties hereto.
7
<PAGE>
22. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one
and the same instrument, and any party hereto may execute this
Agreement by signing any such counterpart.
[SIGNATURES ON FOLLOWING PAGE]
8
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
AUTOMATIC SYSTEMS DEVELOPERS,
INC.
By: /S/ STANLEY F. ZUK
------------------------------------
Name: Stanley F. Zuk
Title: Chief Operating Officer
HIGH TECHNOLOGY COMPUTERS, INC.
By: /S/ STANLEY F. ZUK
------------------------------------
Name: Stanley F. Zuk
Title: Chief Operating Officer
ASD GROUP, INC.
By: /S/ STANLEY F. ZUK
------------------------------------
Name: Stanley F. Zuk
Title: Chief Operating Officer
PNC BANK, NATIONAL
ASSOCIATION, as Sole lender and agent
By: /S/ LASZLO HADJU-NEMETH
------------------------------------
Name: Laszlo Hadju-Nemeth
Title: Sr. Vice President
EXHIBIT D
EXECUTION COPY
OPTION AND FORBEARANCE AGREEMENT
THIS OPTION AND FORBEARANCE AGREEMENT (this "Agreement") is made and
entered into as of the 17th day of June, 1998, by and among Bankers Trust
Company ("BTCo"), Automatic Systems Developers, Inc. (the "Company") and ASD
Group, Inc., formerly known as Dutchess Design and Development, Inc. ("DDD").
RECITALS
A. The Company and BTCo are parties to a Restructuring Agreement dated
as of December 19, 1997 (the "Restructuring Agreement") under which the parties
agreed to restructure the Company's and DDD's obligations to BTCo under the
Existing Credit Agreements, the Notes (as such terms are defined in the
Restructuring Agreement) and the documents executed and delivered in connection
therewith. In connection with the Restructuring Agreement, the Company and DDD,
jointly and severally, executed an Amended and Restated Secured Consolidated
Term Note, dated December 19, 1997 (as amended, supplemented or otherwise
modified from time to time, the "1997 Note"), in favor of BTCo in the original
principal amount of $2,801,133.
B. The Note is secured by, among other things, (1) certain property of
the Company, High Technology Computers, Inc. ("Computers"), and Netcomp, Inc.,
formerly known as ASD Office Systems, Inc. ("Netcomp") referenced in an Amended
and Restated Security Agreement dated as of December 19, 1997 (the "Security
Agreement") among the Company, Computers, Netcomp and BTCo; (2) a certain
mortgage dated September 17, 1991 on DDD's real property and improvements
thereon located in the Town of LaGrange, County of Dutchess, State of New York
(the "DDD Property"), as heretofore modified, extended, spread and assumed, from
DDD to Poughkeepsie Savings Bank ("PSB"), as predecessor in interest to the
Lender (the "DDD Mortgage"); (3) certain mortgages each dated July 24, 1987 on
the Company's real property and improvements thereon located in the Town of
Poughkeepsie, County of Dutchess, State of New York (the "ASD Property"), as
heretofore modified, extended, spread and assumed, from the Company to PSB, as
predecessor in interest to the Lender (the "ASD Mortgage"). The DDD Mortgage and
the ASD Mortgage, as modified, extended, spread and assumed, are hereinafter
referred to as the "Mortgages"). The Security Agreement and the Mortgages as
they may be amended, modified, or supplemented from time to time are hereinafter
referred to as the "Security Documents."
C. The indebtedness of the Company and DDD to BTCo is guarantied by
Computers and Netcomp (together, the "Guarantors") pursuant to separate
guaranties, each dated October 22, 1993 (the "Guaranties"), in favor of PSB, and
assigned to BTCo and reaffirmed and ratified by the Guarantors in the
Restructuring Agreement. All of the foregoing documents described in paragraphs
A through C hereof and all documents executed and delivered in connection
therewith are referred to as the "Loan Documents."
D. There is due and owing to BTCo as of the date hereof $2,751,133
under the 1997 Note, plus accrued interest (including interest at the default
rate provided in the 1997 Note), fees and expenses, all without defense, offset,
claim or counterclaim of any kind. The total amount
<PAGE>
owed from time to time to BTCo under the Loan Documents, including all
principal, interest, fees and expenses is referred to as the "Obligations."
E. The Security Documents evidence valid, enforceable liens, security
interests and mortgages, as the case may be.
F. The Company and DDD acknowledge and agree that Events of Default
have occurred under the Loan Documents by reason of, among other things, the
Company's and DDD's failure to make full payment of principal and interest
installments due on March 1, 1998, April 1, 1998, May 1, 1998 and June 1, 1998
(the "Existing Defaults").
G. The Company and DDD have requested that BTCo forbear temporarily
from exercising its rights and remedies under the Loan Documents by reason of
the existing defaults and grant the Company and DDD the option to pay off the
Obligations on the terms and conditions set forth in this Agreement.
AGREEMENT
In consideration of the Recitals and of the mutual promises and
covenants contained herein, BTCo, the Company and DDD agree as follows:
SECTION 1. OPTION. BTCo, in consideration of the payment of the Option
Price (as defined in subsection (a) below) and the Additional Option Price (as
defined in subsection (b) below), as the case may be, hereby gives the Company
and DDD an option (the "Option") during the Option Period or the Additional
Option Period (as defined in subsection (b) below) to obtain a full release and
discharge of all of the Obligations upon payment of the amount set forth in
subsection (c) below on the following terms and conditions and on the other
terms and conditions set forth in this Agreement:
(a) OPTION PRICE. The Option Price shall be $250,000, which is payable
to BTCo upon the execution of this Agreement.
(b) OPTION PERIOD. The Option Period shall commence on the date all of
the conditions in section 3 have been fulfilled and shall terminate on the
earlier of (x) the occurrence of a Termination Event (as defined in section 5)
and (y) March 17, 1999. On or before the expiration of the Option Period, at the
written request of the Company and DDD and upon payment by the Company and DDD
to BTCo of an additional amount of $100,000 (the "Additional Option Price") on
or before the expiration of the Option Period, the Option Period shall be
extended to the earlier of (xx) the occurrence of a Termination Event and (yy)
September 17, 1999 (the "Additional Option Period").
(c) EXERCISE OF OPTION. The Option may be exercised on any business day
by written notice to BTCo delivered in accordance with section 9(h) by payment
in immediately available funds of $1,500,000 (in addition to the Option Price)
during the Option Period, or by payment in immediately available funds of
$1,550,000 (in addition to the Option Price and the Additional Option Price)
during the Additional Option Period (it being understood that the Company and
DDD shall not be entitled to reduce the amounts payable under this section by
any amounts, including, without limitation, the conditional reduction of
$460,000 provided for in the 1997 Note).
<PAGE>
(d) APPLICATION OF OPTION PRICE. Regardless of whether the Company and
DDD exercise the Option during the Option Period or the Additional Option
Period, as the case may be, the Option Price and the Additional Option Price (if
any) paid to BTCo shall be applied by BTCo to reduce the principal amount of the
1997 Note. If the Company and DDD do not exercise the Option during the Option
Period or the Additional Option Period, as the case may be, the Option Price and
the Additional Option Price (if any) shall be retained by BTCo and applied as
set forth in the preceding sentence, and the Company, DDD and all other persons
and entities shall have no further rights or claims with respect to the Option,
the Option Price or the Additional Option Price.
(e) DELIVERY OF DOCUMENTS AFTER EXERCISE OF OPTION. If the Company and
DDD exercise the Option in accordance with the terms of this Agreement, the
Company, DDD and the Guarantors shall on the ninety-first day following BTCo's
receipt of all payments due under this Agreement, deliver to BTCo a release, in
the form annexed as Exhibit A, and BTCo shall, on the ninety-first day following
its receipt of all payments due under this Agreement, dispose of the Warrant (as
defined in the Restructuring Agreement) in a manner reasonably acceptable to
BTCo and DDD, and, at the Company's and DDD's option: (i) return to the Company
and DDD (or to the Company's and DDD's designee) the other Loan Documents and
execute and deliver to the Company and DDD UCC termination statements,
satisfactions of the Mortgages and a release, in the form annexed as Exhibit B;
or (ii) assign the other Loan Documents to the Company and DDD (or to the
Company's and DDD's designee) without representation or warranty, express or
implied, and without recourse to BTCo.
SECTION 2. FORBEARANCE. Effective as of the date hereof through the
earlier of (a) the expiration of the Option Period or the Additional Option
Period, if in effect, or (b) the date that any Termination Event occurs (the
"Forbearance Period"), and subject to the satisfaction of the conditions
precedent set forth in section 3, BTCo shall not seek to exercise any of its
rights or remedies under the Loan Documents based on (i) the Existing Defaults
or (ii) the Company's and DDD's failure to make any regularly scheduled payment
of principal or interest due pursuant to the Loan Documents after the date of
this Agreement through the expiration of the Option Period or the Additional
Option Period, if in effect (the "Subsequent Payments").
SECTION 3. CONDITIONS PRECEDENT TO EFFECTIVENESS OF AGREEMENT. This
Agreement shall not be effective until it has been executed and delivered by
each of the undersigned, the consent at the end of this Agreement has been
executed by each of the Guarantors (the "Consent"), the Company and DDD have
paid the Option Price and BTCo has received PNC Bank's written consent to this
Agreement, in form annexed as Exhibit C.
SECTION 4. REPRESENTATIONS AND WARRANTIES. Each of the Company and DDD
hereby represents and warrants to BTCo as follows:
(a) RECITALS. The Recitals in this Agreement are true and correct in
all respects.
(b) DUE EXECUTION OF AGREEMENT. This Agreement has been duly executed
and delivered by the Company and DDD.
(c) ENFORCEABILITY. This Agreement is the legal, valid and binding
obligation of the Company and DDD, enforceable against the Company and DDD in
accordance with its terms.
<PAGE>
(d) NO VIOLATION. The execution, delivery and performance of this
Agreement by the Company and DDD do not and will not (i) violate any law, rule,
regulation or court order to which the Company or DDD is subject; or (ii) result
in the creation or imposition of any lien, security interest or encumbrance on
any property of the Company or DDD, whether now owned or hereafter acquired.
(e) OBLIGATIONS ABSOLUTE. The obligation of the Company and DDD to
repay the Obligations, together with all interest accrued thereon, is absolute
and unconditional, and there exists no right of setoff or recoupment,
counterclaim or defense of any nature whatsoever to payment of the Obligations.
(f) LOAN DOCUMENTS. Except as specifically modified hereby, all of the
terms and conditions of the Loan Documents shall remain in full force and
effect.
SECTION 5. TERMINATION EVENT. Each of the following shall constitute a
"Termination Event" hereunder:
(a) the Company and DDD shall fail to pay any amounts due
under the terms of this Agreement; or
(b) the existence of any default as a result of the occurrence
of any of the following: (i) any of the Company, DDD or any of the Guarantors
shall be adjudicated insolvent or bankrupt, or shall generally fail to pay or
admit in writing their respective inability to pay their respective debts as
they become due, (ii) any of the Company, DDD or any of the Guarantors shall
seek dissolution or reorganization or the appointment of a receiver, trustee,
custodian or liquidator or a substantial portion of their respective property,
assets or business or to effect a plan or other arrangement with their
respective creditors, (iii) any of the Company, DDD or any of the Guarantors
shall make a general assignment for the benefit of their respective creditors,
or consent to or acquiesce in the appointment of a receiver, trustee, custodian
or liquidator for a substantial portion of their respective property, assets or
business, (iv) any of the Company, DDD or any of the Guarantors shall file a
voluntary petition under any bankruptcy, insolvency or similar law, or (v) any
of the Company, DDD or any of the Guarantors or a substantial portion of their
respective property, assets or business shall become the subject of an
involuntary proceeding or petition for dissolution, reorganization, or the
appointment of a receiver, trustee, custodian or liquidator or shall become
subject to any writ, judgment, warrant of attachment, execution or similar
process which is not dismissed within 60 days; or
(c) Except as otherwise set forth in subsections (a), (b) and
(c) above, the Company or DDD shall fail to keep or perform any of the covenants
or agreements contained herein within fifteen days after having been served by
registered mail with notice of such failure; or
(d) any material representation or warranty of the Company or
DDD shall be false, misleading or incorrect in any material respect.
SECTION 6. EFFECT AND CONSTRUCTION OF AGREEMENT. Except as expressly
provided herein, the Loan Documents shall remain in full force and effect in
accordance with their respective terms, and this Agreement shall not be
construed to impair the validity, perfection or
<PAGE>
priority of any lien or security interest securing the Obligations or waive or
impair any rights, powers or remedies of BTCo under the Loan Documents. In the
event of any inconsistency between the terms of this Agreement and any of the
Loan Documents, this Agreement shall govern. Each of the Company and DDD
acknowledges that it has consulted with counsel and with such other experts and
advisors as it has deemed necessary in connection with the negotiation,
execution and delivery of this Agreement. This Agreement shall be construed
without regard to any presumption or rule requiring that it be construed against
the party causing this Agreement or any part hereof to be drafted.
SECTION 7. EXPENSES. Each of the Company and DDD agrees to pay all
reasonable costs, fees and expenses of BTCo (including the fees of BTCo's
counsel) incurred by BTCo in connection with the negotiation, preparation and
enforcement of this Agreement and the Loan Documents. Such fees and expenses
shall constitute part of the Obligations.
SECTION 8. RELEASE. In consideration of the foregoing, each of the
Company and DDD (and by their execution of the Consent, each of the Guarantors)
hereby releases, remises, acquits and forever discharges BTCo and BTCo's
employees, agents, representatives, consultants, attorneys, fiduciaries,
servants, officers, directors, partners, predecessors (including, without
limitation, PSB), successors and assigns, subsidiary corporations, parent
corporations and related corporate divisions (all of the foregoing hereinafter
called the "Released Parties"), from any and all actions and causes of action,
judgments, executions, suits, debts, claims, demands, liabilities, obligations,
damages and expenses of any and every character, known or unknown, direct and/or
indirect, at law or in equity, of whatsoever kind or nature, whether heretofore
or hereafter arising, for or because of any matter or things done, omitted or
suffered to be done by any of the Released Parties prior to and including the
date of execution hereof, and in any way directly or indirectly arising out of
or in any way connected to this Agreement or the Loan Documents, (all of the
foregoing hereinafter called the "Released Matters"). Each of the Company and
DDD (and by their execution of the Consent, each of the Guarantors) acknowledges
that the agreements in this paragraph are intended to be in full satisfaction of
all or any alleged injuries or damages arising in connection with the Released
Matters. Each of the Company and DDD (and by their execution of the Consent,
each of the Guarantors) represents and warrants to BTCo that it has not
purported to transfer, assign, pledge or otherwise convey any of its right,
title or interest in any Released Matter to any other person or entity and that
the foregoing constitutes a full and complete release of all Released Matters.
SECTION 9. MISCELLANEOUS.
(a) FURTHER ASSURANCE. Each of the Company and DDD agrees to execute
such other and further documents and instruments as BTCo may reasonably request
to implement the provisions of this Agreement and to perfect and protect the
liens and security interests created by the Loan Documents.
(b) BENEFIT OF AGREEMENT. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the parties hereto, their
respective successors and assigns. No other person or entity shall be entitled
to claim any right or benefit hereunder, including, without limitation, the
status of a third-party beneficiary of this Agreement.
(c) INTEGRATION. This Agreement, together with the Loan Documents,
constitutes the entire agreement and understanding among the parties relating to
the subject matter hereof, and
<PAGE>
supersedes all prior proposals, negotiations, agreements and understandings
relating to such subject matter. In entering into this Agreement, each of the
Company and DDD acknowledges that it is relying on no statement, representation,
warranty, covenant or agreement of any kind made by BTCo or any employee or
agent of either of BTCo, except for the agreements of BTCo set forth herein.
(d) SEVERABILITY. The provisions of this Agreement are intended to be
severable. If any provision of this Agreement shall be held invalid or
unenforceable in whole or in part in any jurisdiction, such provision shall, as
to such jurisdiction, be ineffective to the extent of such invalidity or
enforceability without in any manner affecting the validity or enforceability of
such provision in any other jurisdiction or the remaining provisions of this
Agreement in any jurisdiction.
(e) GOVERNING LAW; SERVICE OF PROCESS. This Agreement shall be governed
by and construed in accordance with the internal substantive laws of the State
of New York, without regard to its choice of law principles (other than Section
5-1401 of the New York General Obligations Law). Any legal action or proceeding
with respect to this Agreement and any document delivered in connection herewith
may be brought in the courts of the State of New York or of the United States of
America for the Southern District of New York, and, by execution and delivery of
this Agreement, the parties hereby accept the jurisdiction of the aforesaid
courts. The parties hereto each irrevocably waive any objection, including,
without limitation, any objection to the laying of venue or based on the grounds
of FORUM NON CONVENIENS, which they may now or hereafter have to the bringing of
any such action or proceeding in such jurisdiction. Each of the Company and DDD
agrees to submit to personal jurisdiction in the State of New York in any action
or proceeding arising out of this Agreement and any documents delivered in
connection herewith and, in furtherance of such agreement, each of the Company
and DDD hereby agrees and consents that without limiting other methods of
obtaining jurisdiction, personal jurisdiction over the Company or DDD in any
such action or proceeding may be obtained within or without the jurisdiction of
any court located in New York and that any process or notice of motion or other
application to any such court in connection with any such action or proceeding
may be served upon the Company or DDD by registered mail to or by personal
service, unless otherwise designated in writing in accordance with the notice
requirements set forth below.
(f) JURY TRIAL WAIVER. THE COMPANY, DDD AND BTCO EACH HEREBY WAIVE
THEIR RIGHT TO TRIAL BY JURY IN ANY CONTROVERSY ARISING OUT OF OR RELATING TO
THIS AGREEMENT OR ANY OF THE FINANCING DOCUMENTS.
(g) COUNTERPARTS; TELECOPIED SIGNATURES. This Agreement may be executed
in any number of counterparts and by different parties to this Agreement on
separate counterparts, each of which, when so executed, shall be deemed an
original, but all such counterparts shall constitute one and the same agreement.
Any signature delivered by a party by facsimile transmission shall be deemed to
be an original signature hereto.
(h) NOTICES. Any notices with respect to this Agreement shall be given
by first class mail, return receipt requested, overnight mail or telecopier as
follows:
If to the Company or DDD:
<PAGE>
Automatic Systems Developers, Inc.
1 Industry Street
Poughkeepsie, New York 12603
Attn: Stanley F. Zuk
Telecopier No.: 914-452-3071
with a copy to:
Broad and Cassel
Miami Center
201 South Biscayne Boulevard
Suite 3000
Miami, Florida 33131
Attn: Linda Frazier, Esq.
Telecopier No.: 305-373-9443
If to BTCo:
Bankers Trust Company
One Bankers Trust Plaza
130 Liberty Street
New York, New York 10006
Attn: Mr. Thomas J. O'Brien
Telecopier No.: 212-669-0743
with a copy to:
Luskin, Stern & Eisler LLP
330 Madison Avenue
34th Floor
New York, New York 10017
Attn: Richard Stern, Esq.
Telecopier No.: 212-293-2705
(i) SURVIVAL. All representations, warranties, waivers and releases of
the Company and DDD (and the Guarantors) contained herein shall survive the
termination of the Agreement and the indefeasible payment in full in cash of the
Obligations under the Loan Documents.
(j) AMENDMENT. No amendment, modification, rescission, waiver or
release of any provision of this Agreement shall be effective unless the same
shall be in writing and signed by the parties hereto.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
BANKERS TRUST COMPANY
By: /S/ THOMAS J. O'BRIEN
-------------------------------
Name: Thomas J. O'Brien
Title: Principal
AUTOMATIC SYSTEMS DEVELOPERS, INC.
By: /S/ STANLEY F. ZUK
-------------------------------
Name: Stanley F. Zuk
Title: Chief Operating Officer
ASD GROUP, INC.,
formerly known as Dutchess Design
and Development, Inc.
By: /S/ STANLEY F. ZUK
-------------------------------
Name: Stanley F. Zuk
Title: Chief Operating Officer
<PAGE>
CONSENT OF GUARANTORS
The undersigned are the guarantors under the Guaranties referred to in
the preceding Agreement. Each of the undersigned hereby consents to the terms of
the Agreement and hereby ratifies and confirms its respective guaranty in all
respects. Each of the undersigned further acknowledges, represents, warrants and
confirms that there are no defenses, offsets or claims of any nature whatsoever
to the undersigned's obligations and liabilities under its respective guaranty.
Dated: As of June 17, 1998
HIGH TECHNOLOGY COMPUTERS, INC.
By: /S/ STANLEY F. ZUK
-------------------------------
Name: Stanley F. Zuk
Title: Chief Operating Officer
Dated: As of June 17, 1998
NETCOMP, INC.
By: /S/ STANLEY F. ZUK
-------------------------------
Name: Stanley F. Zuk
Title: Chief Operating Officer
EXHIBIT E
As of June 24, 1998
ASD Group, Inc.
1 Industry Street
Poughkeepsie, New York 12603
Re: ASD Group, Inc. (the "Company")
Warrants to Purchase Shares of Common Stock
Gentlemen:
The undersigned (collectively, the "Lenders") are the holders of (i)
10% Senior Promissory Notes due June 19, 1998 (collectively, the "Original
Notes") and (ii) Warrants to Purchase Common Stock (collectively, the "Original
Warrants"), both in the amounts set forth on Schedule A attached. The
undersigned has been advised by the Company that the Company is currently in the
process of effecting a restructuring of some of its debt and a financing to
raise additional capital for the Company (the "Restructuring"). The investor
financing the Restructuring is unwilling to proceed with the Restructuring
unless and until the undersigned agree to the modifications set forth below. In
connection with such Restructuring, the undersigned agree as follows:
1. The Lenders are currently owed $1,100,000 in principal plus a
portion of unpaid interest due under the Original Notes (the
"Indebtedness"). In satisfaction for such Indebtedness, the
Lenders agree to accept $220,000 in cash ($110,000 of which
will be paid within five business days of the date of this
Agreement (the "Initial Cash Payment") and $110,000 of which
will be paid one year from the date of this Agreement). The
remaining $880,000 in principal amount of Indebtedness will be
converted into shares of Series C Convertible Preferred Stock
of the Company ("Series C Preferred Stock"), which are
convertible into shares of the Company's common stock, $.01
par value per share (the "Common Stock"), at the following
rates: (i) 50% of the Indebtedness at $1.15 per share of
Common Stock, and (ii) 50% of the Indebtedness at $1.25 per
share of Common Stock. Thus, the Lenders will receive shares
of Series C Preferred Stock convertible into an aggregate of
734,607 shares of Common Stock, subject to certain adjustments
if the Company issues or sells shares of Common Stock at a
price of less than $1.00 per share. Set forth on Schedule A
and opposite the name of each Lender is the amount of the cash
payment allocable to them and the number of shares of Common
Stock into which the shares of Series A Preferred Stock are
convertible. Attached as EXHIBIT A is
<PAGE>
ASD Group, Inc.
June 24, 1998
Page 2
the Statement of Designations, Preferences, Rights and
Limitations with respect to the Series C Preferred Stock.
Attached as EXHIBIT B is the form of promissory note to be
given to the Lenders with respect to the $110,000 to be paid
one year from the date of this Agreement (the "New Notes").
2. The Lenders agree to forego any rights to interest currently
due on the Original Notes or that may accrue with respect to
the New Notes from the date hereof through the date the final
payment is made.
3. In addition, with respect to the Original Warrants, the
Lenders agree that immediately and automatically upon approval
of the Restructuring by the Company's stockholders, the
Original Warrants will be cancelled and replaced with Warrants
to Purchase Shares of Common Stock equivalent to 418,711
shares of the Company's Common Stock which represents 3% of
the issued and outstanding Common Stock of the Company on a
fully diluted basis as of the date hereof (the "New
Warrants"), subject to certain adjustments if the Company
sells shares of Common Stock at a price of less than $1.00 per
share. The New Warrants will be in the form attached as
EXHIBIT C and will entitle the holder to purchase shares of
the Company's Common Stock at a price of $1.50 per share and
will be exercisable for a period of three years from the date
of issuance.
4. Upon receipt of the initial cash payment and the New Notes,
the Indebtedness will be deemed satisfied in full without
further action on the part of either the Company or the
Lenders and the Original Notes and Original Warrants will
automatically be cancelled and null and void for all business
purposes. You agree to return the Original Notes and Original
Warrants to the Company within two business days of the date
of receipt of the initial cash payment and New Notes.
5. Notwithstanding anything contained herein to the contrary, the
Lenders agree that, for a period commencing the date hereof
until the later of (i) nine months from the date the
Restructuring is approved by the Company's stockholders, and
(ii) the date the option described in the Option and
Forebearance Agreement among Bankers Trust Company, the
Company and Automatic Systems Developers, Inc. dated the date
hereof, is exercised or expires, Cameron Worldwide Ltd.
("Cameron") has the right to require the Lenders, jointly and
not severally, to sell 50% of the shares of Series C Preferred
Stock and/or the underlying Common Stock to Cameron at the
stated value of the Series C Preferred Stock. Notice of any
such purchase of the Series C Preferred Stock or underlying
shares of Common Stock, specifying the date fixed for the
purchase and the place of purchase shall be given by first
class mail to each holder of record of the shares to be
purchased at his address of record. Lenders acknowledge and
agree that the certificates representing the Series C
Preferred Stock and/or the underlying shares of Common Stock
will be held in escrow by the Company's attorneys until this
period for mandatory sale has expired.
<PAGE>
ASD Group, Inc.
June 24, 1998
Page 3
Moreover, certificates representing the shares will be affixed
with a legend describing this restriction, and the Company's
transfer agent will be given stop transfer instructions.
6. Each Lender recognizes that the acquisition of his, her or its
Series C Preferred Stock, New Warrants and shares of Common
Stock into which the Series C Convertible Preferred Stock are
convertible and New Warrants are exercisable (collectively,
the "Securities"), if any, is speculative and involves a high
degree of risk. Each Lender represents and warrants that he,
she or it is an "accredited investor" as defined under Rule
501(a) of the Securities Act of 1933, as amended (the
"Securities Act").
7. Each Lender hereby acknowledges that (a) the Lender has been
furnished by the Company with a copy of the Company's Form
10-KSB for the year ended June 30, 1997 and copies of the
Company's Form 10-QSB's for the quarters ended September 30,
1997, December 31, 1997 and March 31, 1998, as amended (the
"SEC Documents"), as well all other information regarding the
Company which has been reasonably requested; (b) all documents
which could be reasonably provided have been made available
for the Lender's inspection and review; (c) the Lender has
been afforded the opportunity to ask questions of and receive
answers from duly authorized officers or other representatives
of the Company. Moreover, over the course of the several weeks
leading up to the consummation of this transaction, the
Lenders have received additional information regarding the
Company's financial situation and, particularly the existing
defaults on lines of credit, lack of cash flow to meet current
obligations without infusion of capital which may result in
the Company being characterized as insolvent and the terms of
the Restructuring.
8. Each Lender hereby acknowledges that his, her or its Series C
Preferred Stock and New Warrants, are being acquired for the
Lender's own account for investment and not for distribution
or resale to the public. Each Lender further acknowledges and
understands that the Securities are being or will be issued
without registration under the Securities Act pursuant to the
exemption from registration afforded by Section 4(2) of the
Securities Act and the rules and regulations promulgated
thereunder. Each Lender further acknowledges that the
Securities may only be sold, transferred or otherwise disposed
of unless registered under the Securities Act unless an
exemption from such registration is available and that
appropriate restrictive legends will be placed upon the
certificates evidencing the Securities. Each Lender further
acknowledges and understands that the shares of Series C
Preferred Stock may not be converted into shares of Common
Stock until such time as the Company's stockholders approve
(a) the Restructuring in accordance with Rule 4310(c)(H) of
the Rules of The National Association of Securities Dealers,
Inc., and (b) an amendment to the Company's Certificate of
Incorporation increasing the authorized
<PAGE>
ASD Group, Inc.
June 24, 1998
Page 4
number of shares of Common Stock (the "Capital Amendment"). If
the Series C Preferred Stock cannot be converted, other than
by reasons, solely within the control of the holder, by March
31, 1999, the Company is required to purchase the Series A
Preferred Shares at a price equivalent to the stated value.
9. Each Lender agrees that effective upon the issuance of the
Series C Preferred Stock and Warrants to the Lenders, without
any further action on the part of either Company or the
Lenders, the Lenders, their officers and directors (in the
case of corporate Lenders) and their respective heirs,
executors, administrators, legal representatives and
successors and assigns, hereby release and absolutely forever
discharge the Company, its subsidiaries, officers, directors,
employees and agents, and their respective heirs, executors,
administrators, legal representatives and successors and
assigns (collectively, the "Company") from any and all claims,
demands, damages, liabilities, accounts, reckonings,
obligations, costs, expenses, liens, actions, and causes of
action of any kind and nature whatsoever, which each Lender
has, owns or holds or at any time ever had, owned or held
against the Company arising from or related to the
Indebtedness.
10. This Agreement (a) constitutes the entire agreement between
the parties with respect to the subject matter hereof; (b) may
be amended only in writing; (c) shall be governed by the laws
of the State of New York; and (d) shall be binding upon the
parties hereto and their respective legal representatives,
executors, successors and assigns.
11. This Agreement may be executed in one or more counterparts,
all of which may be considered one and the same agreement and
each of which shall be deemed an original.
<PAGE>
ASD Group, Inc.
June 24, 1998
Page 5
12. The undersigned acknowledges that this Agreement constitutes
an accord and satisfaction and not an executory accord.
Sincerely yours,
/S/ WILLIAM BECKER
-------------------------------------
William Becker, Individually
/S/ WILLIAM BECKER
-------------------------------------
William Becker, IRA
/S/ MARJORIE BECKER
-------------------------------------
Marjorie Becker, Individually
/S/ SANFORD I. FELD
-------------------------------------
Sanford I. Feld
/S/ FREDERICK K. BECKER
-------------------------------------
Frederick K. Becker
/S/ RICHARD BECKER
-------------------------------------
Richard Becker
/S/ ARNOLD G. RIFKIN
-------------------------------------
Arnold G. Rifkin
/S/ ALAN JACOBS
-------------------------------------
Alan Jacobs
<PAGE>
ASD Group, Inc.
June 24, 1998
Page 6
LEAFLAND ASSOCIATES, INC.
By: /S/ SANFORD I. FELD
----------------------------------
Name: Sanford I. Feld
Title: President
/S/ JULES L. MARX
-------------------------------------
Jules L. Marx
/S/ WILLIAM P. DIOGUARDIA
-------------------------------------
William P. Dioguardia
NEW OSHKIM LIMITED PARTNERS
By: /S/ KEVIN KIMBERLIN
----------------------------------
Name: Kevin Kimberlin
Title: General Partner
/S/ LAURA MCNAMARA
-------------------------------------
Laura McNamara
SPENCER TRASK HOLDINGS, INC.
By: /S/ WILLIAM P. DIOGUARDI
----------------------------------
Name: William P. Dioguardi
Title: Secretary
<PAGE>
ASD Group, Inc.
June 24, 1998
Page 7
Acknowledged and Agreed to this
26th day of June, 1998.
ASD GROUP, INC.
By: /S/ GARY D. HORNE
--------------------------------
Name: GARY D. HORNE
Title: CHIEF EXECUTIVE OFFICER
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE A
NOTES - ORIGINAL AMOUNT PAID AMOUNT PAID SERIES C
NAME AND ADDRESS BALANCE DUE WARRANTS (1ST PAYMENT) (2ND PAYMENT) PREFERRED STOCK(1) NEW WARRANTS
---------------- ----------- -------- ------------ ----------- ----------------- ------------
1
<S> <C> <C> <C> <C> <C> <C>
1. Feld, Sanford I. 0 175,000 0 0 0 137,017
Box 670, #12
Quimby Lane
Bernardsville, NJ 07924
2. Becker, Frederic K. $110,000 51,738 $11,000 $11,000 73,461 40,509
90 Woodbridge Center Dr.
Suite 900, Box 10
Woodbridge, NJ 07095-0958
3. Becker, Richard $44,000 20,696 $4,400 $4,400 29,384 16,204
287 York Street
Jersey City, NJ 07302
4. Rifkin, Arnold G. $66,000 31,044 $6,600 $6,600 44,076 24,306
9 Dearburn Court
Florham Park, NJ 07932
5. Jacobs, Alan $66,000 31,044 $6,600 $6,600 44,076 24,306
4 Hadwell Road
Short Hills, NJ 07078
6. Marx, Jules L. $44,000 30,435 $4,400 $4,400 29,384 23,829
429 Harding Drive
South Orange, NJ 07079
- ----------
1 Number set forth below represents the number of shares of Common Stock into which the shares of Series A Convertible Preferred
Stock are convertible.
</TABLE>
A-1
<PAGE>
<TABLE>
<CAPTION>
NOTES - ORIGINAL AMOUNT PAID AMOUNT PAID SERIES C
NAME AND ADDRESS BALANCE DUE WARRANTS (1ST PAYMENT) (2ND PAYMENT) PREFERRED STOCK(1) NEW WARRANTS
---------------- ----------- -------- ------------ ----------- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C>
7. Leafland Associates, Inc. $385,000 6,086 $38,500 $38,500 257,113 4,765
Employee Pension Plan and
Trust
c/o Sanford Feld
Box 670, #12 Quimby Lane
Bernardsville, NJ 07924
8. Marjorie Becker IRA $115,000 8,000 $11,500 $11,500 76,800 6,264
c/o William J. Becker
P.O. Box 170
Convent Station, NJ 07961
9. William J. Becker IRA $270,000 17,000 $27,000 $27,000 180,313 13,310
P.O. Box 170
Convent Station, NJ 07961
10. William P. Dioguardi 1,740 0 0 0 1,362
Spencer Trask Securities, Inc.
535 Madison Avenue
New York, NY 10022
11. Laura McNamara 696 0 0 0 546
Spencer Trask Securities, Inc.
535 Madison Avenue
New York, NY 10022
12. New Oshkim Limited Partners 1,044 0 0 0 817
Spencer Trask Securities, Inc.
535 Madison Avenue
New York, NY 10022
</TABLE>
A-2
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
13. Spencer Trask Holdings 4,174 0 0 0 3,268
Incorporated
c/o Spencer Trask Securities,
Inc.
535 Madison Avenue
New York, NY 10022
14. William J. Becker 0 150,000 0 0 0 122,208
P. O. Box 170 6.086
Convent Station, NJ 07961
---------- -------- -------- -------- -------- --------
GRAND TOTAL $1,100,000 534,783 $110,000 $110,000 734,607 418,711
</TABLE>
A-3
EXHIBIT F
----------------------------------------
ASD GROUP, INC.
1996 STOCK OPTION PLAN
(as amended)
----------------------------------------
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.
-2-
<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)
-3-
<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 Three Hundred Fifty Thousand (350,000) 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
-4-
<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
-5-
<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
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<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
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<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 G
H. J. MEYERS & CO., INC.
INVESTMENT BANKERS
10880 Wilshire Boulevard, Suite 1700, Los Angeles, California 90024-4118
310-234-2000, Fax 310-234-2008, 800-350-7880
Member NASD SiPC
June 12, 1998
Board of Directors
ASD Group, Inc.
1 Industry Street
P.O. Box 3210
Poughkeepse, NY 12603
Gentlemen:
You have requested our opinion as investment bankers as to the fairness
from a financial point of view of the consideration to be invested by the "New
Investor Group" led by Peter Zachariou into ASD Group, Inc. ("ASDG") pursuant to
the summary agreement and term sheet dated June 11, 1998 (the "Agreement")
between ASDG and the New Investor Group involving a recapitalization of the
Company (the "Transaction"). The terms of this Agreement, among other items,
provides for the initial investment of $1.9 million by the New Investor Group in
exchange for newly issued ASDG common stock or common stock equivalents
representing approximately 73% of ASDG upon the closing of this Transaction. In
addition, the New Investor Group has the right to extinguish certain debt
obligations of ASDG with an additional investment of $1.5 million in common
stock or common stock equivalents, thus increasing the New Investor Group's
equity position in ASDG to approximately 77%.
H.J. Meyers & Co., Inc., as part of its investment banking business is
customarily engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of securities, private placements and other purposes.
In connection with rendering our opinion set forth herein, we have:
(i) Reviewed certain other non-public financial information including
financial forecasts for ASDG furnished by the Company's management.
(ii) Participated in discussions with members of management of ASDG
concerning the financial condition, businesses, financial forecasts and
prospects of ASDG both with and without an infusion of new capital.
<PAGE>
ASD Group, Inc.
June 12, 1998
Page 2
(iii) Performed such other analysis, as we have deemed appropriate in
arriving at our opinion.
In our review and analysis and in arriving at our opinion, we have
assumed and relied without independent investigation or verification, upon the
accuracy, completeness and authenticity of all of the financial and other
information provided to us by ASDG and have relied upon the publicly available
information reviewed by us. We have not been engaged to independently verify
this information. Furthermore, we have not conducted physical inspection of any
of the assets, properties or facilities of ASDG, nor have we made or obtained
any independent evaluation or appraisal of any such assets, properties or
facilities or any of the liabilities of ASDG. With respect to financial
forecasts provided to us by management of ASDG, we have assumed that they were
reasonably prepared on a basis reflecting the best available estimates and
judgements of management of ASDG at the time of preparation as to the future
performance of ASDG. We have relied upon the management of ASDG as to the
reasonableness and achievability of the financial and operating forecasts and
projections (and the assumptions and basis therefor). We express no view as to
such financial forecasts or the assumptions on which they are based. We have
also assumed the conditions and terms of the New Investor Group and their
investment set forth in the Agreement would be satisfied.
This opinion is based upon, and limited in its entirety to,
circumstances existing and disclosed to us as of the date hereof. In addition,
our opinion is, in any event, limited to the fairness, as of the date hereof,
from a financial point of view, of the consideration and does not address ASDG's
underlying requirements or business decision to effect transactions or any other
terms of the Agreement, including any matter contemplated by the Agreement after
the date hereof.
This opinion has been prepared solely for the confidential use of the
Board of Directors and senior management of ASDG and will not be reproduced,
summarized, described or referred to or given to any other person without our
prior written consent and may not be relied upon by any other persons.
We have acted as a limited financial advisor to the Company in
connection with the Transaction and will receive from the Company a fee for
providing this service that is to include cash, stock and a reduction in the
exercise price of warrants previously granted. The Company has also agreed to
indemnify us under certain circumstances. In the ordinary course of our business
we may actively trade securities of the Company for our own account or for the
accounts of customers, and, accordingly may hold at any time a long or short
position.
Based upon and subject to the foregoing and such other matters as we
consider relevant, it is our opinion that, as of the date hereof, the
consideration paid to ASDG in connection with the New Investor Group is fair
from a financial point of view.
Very truly yours,
H.J. Meyers & Co., Inc.
