<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 28, 1997.
REGISTRATION NO. 333-14205
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ERGOBILT, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<C> <C> <C>
TEXAS 2590 75-2600529
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
5000 QUORUM DRIVE GERARD SMITH
SUITE 147 5000 QUORUM DRIVE, SUITE 147
DALLAS, TEXAS 75240 DALLAS, TEXAS 75240
(972) 233-8504 (972) 233-8504
(Address, Including Zip Code, and Telephone (Name and Address, Including Zip Code,
Number, Including Area Code, of and Telephone Number, Including Area
Registrant's Principal Executive Offices) Code, of Agent for Service)
</TABLE>
---------------------
Copies to:
<TABLE>
<C> <C>
NORMAN R. MILLER, ESQ. KATHERINE M. SEABORN, ESQ.
WOLIN, FULLER, RIDLEY & MILLER LLP GARDERE & WYNNE, L.L.P.
3100 BANK ONE CENTER 3000 THANKSGIVING TOWER
1717 MAIN STREET 1601 ELM STREET
DALLAS, TEXAS 75201 DALLAS, TEXAS 75201
TELEPHONE (214) 939-4906 TELEPHONE (214) 999-4924
FAX (214) 939-4949 FAX (214) 999-4162
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
CROSS REFERENCE SHEET
(BETWEEN ITEMS OF S-1 AND THE PROSPECTUS)
<TABLE>
<CAPTION>
ITEM
NUMBER CAPTION LOCATION IN PROSPECTUS
- ------ ------- ----------------------
<C> <S> <C>
1. Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus............................. Forepart of Registration Statement and
Outside Front Cover
2. Inside Front and Outside Back Cover Pages
of Prospectus.......................... Inside Front Cover and Outside Back Cover
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges..... Prospectus Summary and Risk Factors
4. Use of Proceeds.......................... Use of Proceeds
5. Determination of Offering Price.......... Underwriting
6. Dilution................................. Dilution
7. Selling Security Holders................. Inapplicable
8. Plan of Distribution..................... Underwriting
9. Description of Securities to be
Registered............................. Description of Capital Stock
10. Interests of Named Experts and Counsel... Inapplicable
11. Information with Respect to the
Registrant............................. The Company, Dividend Policy,
Capitalization, Selected Financial Data,
Selected Pro Forma Financial Data,
Management's Discussion and Analysis of
Financial Condition and Results of
Operations, Business, Management,
Certain Transactions, Principal
Shareholders and Shares Eligible for
Future Sale
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................ Inapplicable
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 28, 1997
1,500,000 Shares
[ERGOBILT LOGO]
Common Stock
------------------
All of the shares of Common Stock offered hereby are being sold by
ErgoBilt, Inc. (the "Company"). Prior to this offering, there has been no public
market for the Common Stock. It is currently estimated that the initial public
offering price will be between $7.00 and $8.00 per share. For information
relating to the factors to be considered in determining the initial public
offering price, see "Underwriting." The Common Stock has been approved for
quotation on the Nasdaq National Market under the symbol "ERGB."
------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS
OF THE COMMON STOCK OFFERED HEREBY.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PRICE TO UNDERWRITING DISCOUNT PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share........................ $ $ $
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Total(3)......................... $ $ $
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</TABLE>
(1) Does not reflect additional compensation to the Underwriters in the form of
warrants granted to the Representatives to purchase 150,000 shares of
Common Stock at a price of 120% of the price to public exercisable over a
period of four years commencing one year from the date of this prospectus
("Representatives' Warrants"). In addition, the Company has agreed to
indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting estimated expenses of $ payable by the Company,
including the Representatives' non-accountable expense allowance.
(3) The Company has granted the Underwriters a 45-day option to purchase up to
an additional 225,000 shares of Common Stock, solely to cover
over-allotments, if any. See "Underwriting." If the Underwriters exercise
this option in full, then the total price to public, underwriting discount
and proceeds to Company will be $ , $ and $ ,
respectively.
------------------
The shares of Common Stock are offered severally by the Underwriters named
herein subject to receipt and acceptance by them, and subject to their right to
reject any order in whole or in part. It is expected that certificates
representing the shares will be ready for delivery at the offices of Cruttenden
Roth Incorporated, Irvine, California, on or about , 1997.
------------------
CRUTTENDEN ROTH PRINCIPAL FINANCIAL SECURITIES, INC.
INCORPORATED
The date of this Prospectus is , 1997.
<PAGE> 4
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 5
ERGOBILT INC
ERGONOMICS
[GRAPHIC IMAGE OF DA VINCIS' DRAWING OF A HUMAN MALE]
"Sitting is blamed for most of the lower back pain that strikes 90% of
Americans sooner or later at an estimated cost of $70 billion a year."
The Wall Street Journal, September 12, 1995
"Almost two thirds of all occupational illnesses are for culminative trauma...
almost 40% of all the workers' compensation dollars go to pay for back and upper
extremity injuries."
Dr. Roger Stephens, Director of Ergonomics, OSHA
"Repetitive stress injuries -- RSIs -- have become the workplace curse of the
'90s...[and] cost companies an estimated $100 billion a year."
USA Today, January 9, 1997
<PAGE> 6
from space to the workplace
ERGOBILT INC
A SAMPLING OF ERGONOMIC PRODUCT APPLICATIONS
-----------------------------------------
PHOTOGRAPH OF ASTRONAUT FLOATING IN SPACE
-----------------------------------------
Gemini Astronaut 6/3/65 Photo Courtesy of NASA
---------------------------------------------------------
DIAGRAM OF HUMAN BODY OUTLINE SEATED IN DIAGRAM OF CHAIR,
SURROUNDED BY SIX EQUATIONS AND 10 DEGREES.
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NASA studies reveal that, in the absence of gravity, the "human body
automatically assumes and indefinitely maintains a singular, characteristic
posture."
This body posture can be mathematically defined through a series of specific
measurements.
"To force other postures on the body..., frequently leads to discomfort,
fatigue, and inefficiency."
NASA Reference Publication 1024
- --------------------------------------------------------------------------------
By adapting NASA findings, seating and work stations have been engineered to
allow each user to emulate the same single characteristic posture.
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"As the body moves toward a more open trunk-to-thigh alignment, muscle tension
in key muscle groups (including the neck, shoulders, and lower back) is reduced
significantly."
- Dr. Steve Brooks,
Neurologist
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Partial listing of the media coverage on the BodyBilt chair. Listing of these
publications is not meant to imply endorsements therefrom of any kind.
ENTERTAINMENT TONIGHT WINDOWS MAGAZINE
WASHINGTON POST GOOD MORNING AMERICA
NEW YORK DAILY NEWS INVESTOR'S BUSINESS DAILY
PEOPLE MAGAZINE LOS ANGELES TIMES
CBS THIS MORNING WIRED MAGAZINE
NEWSWEEK TEXAS BUSINESS MAGAZINE
NEW YORK TIMES CRAIN'S SMALL BUSINESS
CONSUMER REPORTS COMPUTER USER
NBC TODAY SHOW DALLAS MORNING NEWS
USA TODAY CHICAGO SUN TIMES
WALL STREET JOURNAL PC WORLD
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-------------------------------------
PHOTOGRAPH OF SCULPT(TM) CONTOUR SEAT
-------------------------------------
- --------------------------------------------------------------------------------
A study by the Internal Revenue Service Austin Service Center showed an 8%
increase in productivity when using the company's chairs.
A study by the Safety Department of Lockheed Austin Division experienced a 12%
increase in productivity and identified the company's chairs as the highest
ranked contributing factor.
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-----------------------------------
PHOTOGRAPH OF EXECUTIVE SERIES
10 POINT POSTURE CONTROL(TM) CHAIR
-----------------------------------
-------------------------------------
PHOTOGRAPH OF LINEAR TRACKING(TM) ARM
-------------------------------------
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BodyBilt Seating's Linear Tracking(TM) Arms cradle and move with your arms to
provide support when typing, mousing or writing.
- --------------------------------------------------------------------------------
-------------------------------
PHOTOGRAPH OF X-TENSION(TM) ARM
-------------------------------
----------------------------------
PHOTOGRAPH OF *BUTTERFLY(TM) BOARD
----------------------------------
--------------------------------
PHOTOGRAPH OF *POWER STATION(TM)
--------------------------------
* Subject to acquisition pursuant to a letter of intent. See "Recent
Developments."
- --------------------------------------------------------------------------------
"There is no reason to keep work surfaces flat, and they should probably be
tilted to accommodate the visual angles."
NASA Reference Publication 1024
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---------------------------------
PHOTOGRAPH OF AIR LUMBAR(TM) PUMP
---------------------------------
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"Significant reductions in the muscle stresses of the lower back, neck,
shoulders, and forearms will both increase worker comfort and help reduce
susceptibility to chronic back pain and other cumulative trauma disorders."
- Dr. Stewart R. Leavitt,
Ph.D., CIE
Ergonomist
- --------------------------------------------------------------------------------
----
ERGB
----
10 Point Posture Control(TM), Linear Tracking(TM), Air Lumbar(TM),
X-Tension(TM), and Sculpt(TM) Contour are trademarks of Ergobilt, Inc and or
its companies. Butterfly(TM) and Power Station(TM) are trademarks of
Metamorphosis Design & Development Inc.
<PAGE> 7
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this prospectus. Except as otherwise specified, the information in
this prospectus (i) gives effect to a 2,826-for-1 split of Common Stock paid as
a dividend on January 9, 1997; (ii) gives effect to the merger of ErgoBilt, Inc.
("ErgoBilt") with BodyBilt Seating, Inc. ("BodyBilt"), which will occur
contemporaneously with the closing of this offering (the "Merger"), which is
accounted for as a purchase; (iii) gives effect to a change in the par value of
the Common Stock to $.01 per share; and (iv) assumes the Underwriters'
over-allotment option is not exercised. Since its incorporation in 1995,
ErgoBilt's operations have consisted primarily of providing advertising and
marketing services to BodyBilt, and ErgoBilt's assets and results of operations
are not significant to the combined operations on a going forward basis.
Accordingly, the financial information presented in the "Summary Historical and
Pro Forma Financial and Operating Data," "Selected Financial Data," "Selected
Pro Forma Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" relates solely to the historical operations
of BodyBilt. All references in this prospectus to the "Company" include ErgoBilt
and BodyBilt, unless otherwise indicated. See "The Reorganization."
THE COMPANY
The Company is a rapidly-growing developer, manufacturer and marketer of
customized, high-end ergonomic office products that re-engineer the workplace
and the home office by scientifically minimizing physical stress imposed upon
the human body. Its current product line primarily consists of four series of
premium-priced, ergonomic office chairs, marketed under the BodyBilt(R)
tradename, that can be customized through proprietary modular designs to meet
the needs of each customer.
The Company has positioned itself to capitalize on consumer trends,
possible government regulation and recent national publicity, which have
increased the awareness of and desire for ergonomic products in the workplace
and home office. The Company intends to use its current product line as a
platform to develop and acquire complementary ergonomic products. Such products
may include workstations, computer work surfaces, executive office side chairs
and a second line of ergonomic chairs priced to appeal to a broader market
segment. The Company's objective is to become "the primary source" for ergonomic
products for the workplace and the home office.
BodyBilt(R) chairs are based on research conducted by the National
Aeronautics and Space Commission ("NASA") conducted during its SkyLab missions
that identified the least stressful body position for astronauts during extended
missions in space. BodyBilt(R) chairs have a 10-Point Posture Control(TM) system
that allows each individual user to assume a posture similar to the stress-free
posture of astronauts in space. BodyBilt(R) chairs have received national
publicity in newspapers, magazines and television, including the New York Times,
Wall Street Journal, People magazine, Entertainment Tonight, The CBS Morning
Show and The Tonight Show. As a result, the Company believes that BodyBilt(R)
chairs enjoy a relatively high degree of brand recognition and consumer
awareness.
MARKET TRENDS. The Company believes that certain trends in the workplace
have expanded the market opportunity for ergonomic office products. First,
increased reliance on personal computers has resulted in workers spending more
time in a constantly seated position. A result has been a significant increase
in the number of work-related employee injury claims and lost employee time from
(i) back and upper extremity injuries, which account for approximately 40% of
all workers' compensation dollars, and (ii) repetitive stress injuries or "RSI,"
including carpal tunnel syndrome, which affects approximately 22% of seated
workers. Second, the Occupational Safety and Health Administration ("OSHA") has
required employers to provide safe work environments, which may include the
acquisition of ergonomic office products. Third, the emergence of the corporate
"telecommuter" has produced significant growth in the number of home offices,
now estimated at 41.1 million in the United States alone. These trends suggest
an opportunity for the Company to grow by increasing its market penetration of
the corporate community and by expanding its marketing, sales and distribution
directly to end users.
3
<PAGE> 8
COMPETITIVE STRENGTHS. The Company believes that it is well-positioned to
capitalize profitably on the expanding ergonomic office furniture market
segment. The Company's competitive strengths include: (i) the modular design and
interchangeable components of BodyBilt(R) chairs permit customization to each
individual's specifications, and the chairs' mechanisms allow adjustment to fit
changing individual needs; (ii) the Company's manufacturing, marketing, sales,
distribution and customer service operations are equipped to handle efficiently
small customized orders, the traditional mainstay of the ergonomic business;
(iii) orders are generally processed, manufactured and delivered in four weeks
or less, approximately half the time normally required by large companies; (iv)
the use of interchangeable components allows on-site service and repair; and (v)
by targeting its marketing efforts to corporate ergonomists and health, human
services and safety managers, rather than traditional facilities or purchasing
managers, the Company has been able to establish a market niche in which it
believes it is difficult for large office furniture producers to compete
effectively.
GROWTH STRATEGY. The Company believes its growth has been driven by
increasing market acceptance of ergonomics and its success in (i) providing
superior quality products and service; (ii) expanding its direct sales force;
(iii) upgrading the quality of its independent sales representative firms; and
(iv) educating consumers about the benefits of ergonomics and the solutions
provided by the Company's products. The Company has developed a strategy to
continue to grow and to achieve its objective of becoming "the primary source"
for ergonomic products for the workplace and the home office. The key elements
of this strategy include (i) increase market penetration by expanding its direct
sales force; (ii) broaden the product line by developing or acquiring other
ergonomic products; (iii) develop new distribution channels, including
telemarketing, catalog sales and the use of the Internet; and (iv) build
consumer recognition for ergonomic products.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company........................ 1,500,000 shares
Common Stock to be outstanding after the offering.......... 5,756,000 shares(1)
Use of proceeds............................................ To pay the cash portion of the Merger
consideration, borrowings for S
Corporation distribution made in
connection with the Merger and related
expenses, to repay certain indebtedness,
to fund the non-contingent cash portion of
the purchase price for certain
intellectual property described under
"Recent Developments" and for other gen-
eral corporate purposes.
Nasdaq National Market symbol.............................. ERGB
</TABLE>
- ---------------
(1) Includes 678,644 shares of Series A Preferred Stock that are convertible
into shares of Common Stock in the ratio that the Common Stock's initial
public offering price bears to its average closing price for the 30 trading
days immediately preceding the date on which notice of conversion is
delivered to the Company, but not less than one. See "Description of
Capital Stock -- Series A Preferred Stock." Excludes 400,000 shares of
Common Stock reserved for issuance under the Company's stock option plan,
150,000 shares of Common Stock subject to the Representatives' Warrants and
up to 45,000 shares of Common Stock subject to a lender's warrant (the
"Lender's Warrant"). See "Management -- Stock Option Plan," "Shares
Eligible for Future Sale," "Underwriting" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Credit Facilities."
---------------------
The Company was incorporated as the Chafferton Company, Inc. in 1995 to
provide advertising and marketing services to BodyBilt, a manufacturer of
premium-priced, ergonomic office chairs since 1988. Simultaneously with the
closing of this offering, the Company will use a portion of the proceeds to
complete its Merger with BodyBilt. The Company's principal executive offices are
located at 5000 Quorum Drive, Dallas, Texas 75240, and its telephone number is
(972) 233-8504.
4
<PAGE> 9
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The financial information presented below is derived from the financial
statements of BodyBilt. The pro forma data is unaudited and presents financial
information of the Company.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales...................... $2,484 $4,448 $6,535 $ 9,189 $13,672 $ 9,251 $12,553
Cost of sales.............. 1,380 2,053 3,237 4,789 7,218 5,080 6,617
------ ------ ------ ------- ------- ------- -------
Gross profit............... 1,104 2,395 3,298 4,400 6,454 4,171 5,936
Selling, general and
administrative
expenses................ 914 1,353 2,164 3,266 4,555 3,107 4,082
------ ------ ------ ------- ------- ------- -------
Operating income........... 190 1,042 1,134 1,134 1,899 1,064 1,854
Interest expense and other,
net..................... -- 14 24 24 20 50 108
------ ------ ------ ------- ------- ------- -------
Income before income
taxes................... 190 1,028 1,110 1,110 1,879 1,014 1,746
Income tax expense......... -- 46 50 50 85 42 40
------ ------ ------ ------- ------- ------- -------
Net income................. $ 190 $ 982 $1,060 $ 1,060 $ 1,794 $ 972 $ 1,706
====== ====== ====== ======= ======= ======= =======
PRO FORMA DATA:
Pro forma net income(1)........................................ $ 885 $ 698
Pro forma earnings per share................................... $ .16 $ .13
Pro forma shares outstanding(2)................................ 5,400 5,400
OPERATING DATA:
Units sold................. 5,262 8,882 13,549 18,946 25,759 17,401 22,248
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------------
PRO FORMA(3) AS ADJUSTED(4)
------------ --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $(3,781) $ 5,629
Total assets.............................................. 20,810 22,387
Long-term debt, including current portion................. 1,596 1,521
Shareholders' equity...................................... 10,457 19,942
</TABLE>
- ---------------
(1) The unaudited pro forma adjustments reflect the adjustments necessary to (i)
combine the results of operations and financial position of ErgoBilt with
BodyBilt; (ii) recognize goodwill associated with the acquisition of
BodyBilt; and (iii) recognize tax expense related to BodyBilt as if its S
corporation status had terminated at the beginning of the period presented.
See "Selected Pro Forma Financial Data."
(2) The computation of pro forma shares outstanding is based on 4,256,000
weighted average shares of Common Stock outstanding and 1,144,000 shares
assumed to be issued at an initial public offering price of $7.50 per share
(after deducting the estimated underwriting discount) to (i) fund payments
of $6.875 million to BodyBilt Shareholders (as defined herein) and (ii) pay
approximately $850,000 of indebtedness. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Credit Facilities." The computation of pro forma
shares outstanding excludes an additional 356,000 shares to be sold in the
offering, the proceeds of which may be used to fund the non-contingent cash
portion of the purchase price for certain intellectual property and for
other general corporate purposes. See "Use of Proceeds."
(3) Assumes that the Merger was completed on September 30, 1996, and that the
cash consideration to be paid (including an S corporation distribution of
approximately $4.4 million) is reflected as a reduction of working capital.
Approximately $13.2 million of goodwill is recorded as a result of the
Merger.
(4) As adjusted to reflect the sale of 1,500,000 shares of Common Stock by the
Company and the application of the estimated net proceeds therefrom. See
"Use of Proceeds."
5
<PAGE> 10
RISK FACTORS
In addition to the other information contained in this prospectus,
prospective investors should consider the following factors in evaluating the
Company and its business before purchasing any of the shares of Common Stock
offered hereby. This prospectus contains forward looking statements that involve
risks and uncertainties. The Company's actual results may differ materially from
those discussed in the forward looking statements.
NEW MARKET SEGMENT. The application of ergonomic principles to the design
of office furniture and other products is a relatively new concept, and public
awareness of the science and application of ergonomics is in its infancy. As
with any new industry, there is limited data or industry guidelines to validate
the potential market demand or product acceptance. The Company's objective to
become "the primary source" for ergonomic office products in a developing market
segment could pose significant risks to the Company. There can be no assurance
that this market segment will develop or that the Company will be successful in
manufacturing or marketing ergonomic office furniture.
COMPETITION. The Company faces significant competition in the office
furniture market. Existing and future competitors within the office furniture
industry offer or may offer ergonomic products. Many of these competitors have
greater financial and other resources, and offer a broader product line, than
the Company. There is also competition from numerous small ergonomic furniture
companies. BodyBilt(R) chairs compete on the basis of quality, health benefits,
comfort, service, price, design and durability. Competitive pressures could
result in increased price competition or in the introduction of new ergonomic
office furniture by the Company's competitors, which could have a material
adverse effect on the Company's results of operations.
MANAGEMENT OF EXPANDING OPERATIONS. The Company's operations have expanded
significantly in recent years. This expansion has placed, and is expected to
continue to place, significant demands on the Company's administrative,
operational and financial personnel and systems. There can be no assurance that
the Company will be able to manage its growth effectively, including the
improvement and implementation of the Company's financial and management
information systems and the recruitment and retention of key employees. The
Company's failure to do so could have a material adverse effect on the Company's
results of operations, including its ability to expand its operations
successfully or to maintain its present level of profitability.
PRODUCT CONCENTRATION. At the present time, the Company's products
primarily consist of four series of premium-priced, ergonomic office chairs
marketed under the BodyBilt(R) tradename. Until additional products are
developed or acquired, or the Company has entered into joint ventures or
established strategic alliances to market other ergonomic products, the Company
is subject to the risk that demand for its existing products may be diminished
by changing market conditions, consumer preferences or competition, which could
have a material adverse effect on the Company's results of operations. There can
be no assurance that the Company will be able to develop or acquire additional
ergonomic products or enter into joint ventures or establish strategic alliances
to market ergonomic products compatible with its existing products. In addition,
the expansion of the Company's product offerings to include an additional line
of ergonomic chairs, if achieved, could diminish the demand for the Company's
present line of BodyBilt(R) chairs.
MARKET EXPANSION AND NEW DISTRIBUTION CHANNELS. The Company's products are
currently sold in several specific geographic markets in the United States.
Although the Company expects to expand into new markets, the Company's expansion
may meet market resistance or require substantial consumer education for market
acceptance. The Company also intends to expand its direct sales force, further
penetrate the retail sector and open new channels of distribution, such as
telemarketing, catalog sales and the use of the Internet, for which the Company
may incur substantial costs. There can be no assurance that the Company can
attract, train and manage a geographically-diverse, direct sales force,
penetrate new markets or develop new channels of distribution or that these
strategies will result in increased revenues or profitability.
POSSIBLE FUTURE BUSINESS COMBINATIONS. The Company's growth strategy
includes possible future acquisitions, joint ventures and strategic marketing
alliances to broaden its product line. There can be no assurance that the
Company will be able to identify, acquire and integrate, or enter into joint
ventures or strategic marketing alliances with, complementary businesses on a
profitable basis. Furthermore, the
6
<PAGE> 11
Company's ability to make acquisitions or enter into joint ventures or strategic
alliances may depend upon its ability to obtain financing on acceptable terms.
There also may be significant competition from large furniture companies to
acquire smaller ergonomic office furniture companies, and there can be no
assurance that such acquisitions will be available to the Company on acceptable
terms.
LIMITED OPERATING HISTORY. BodyBilt has manufactured and marketed ergonomic
office furniture since 1988. ErgoBilt has only conducted operations since June
1995, consisting primarily of providing advertising and marketing services to
BodyBilt. Although Gerald McMillan, Chairman of the Board of Directors of the
Company, was an affiliate of BodyBilt from 1991 to 1996, and there is continuity
of key personnel of BodyBilt, certain members of the Company's senior management
have only recently become associated with the Company. There can be no assurance
that this management will be able to manage the combined companies after the
Merger or to implement the Company's growth strategy effectively. See "The
Reorganization," "Business -- Growth Strategy" and "Management."
DEPENDENCE ON KEY PERSONNEL. The Company's future success will depend on
the continued efforts of Gerald McMillan, Chairman of the Board of Directors of
the Company, Gerard Smith, President and Chief Executive Officer, Drew
Congleton, Executive Vice President and National Sales Manager of BodyBilt, Bob
Schubert, Controller and Director of Human Resources and Safety of BodyBilt, and
Matt Prochaska, Director of Plant Operations of BodyBilt. Messrs. McMillan,
Smith and Congleton each has a three-year employment agreement with the Company.
In addition, the Company has agreed to enter into a two-year consulting
agreement with Mark McMillan, the President of BodyBilt, who will become a
consultant, director and principal shareholder of the Company. The Company does
not have key employee life insurance on any of its senior management. The loss
of the services of one or more key personnel could have a material adverse
effect on the Company's results of operations. The Company's success also
depends on its ability to retain its key management, marketing and sales
personnel and to attract and retain qualified personnel at a reasonable cost.
There can be no assurance that the Company will be successful in attracting and
retaining such personnel. See "Management."
DEPENDENCE ON SUPPLIERS. While the Company's strategy is to maintain
multiple sources of supply, the Company's largest supplier, Leggett & Platt,
Inc., is currently the only source of a key component for BodyBilt(R) chairs.
While the Company has not had any adverse experience with this supplier, the
Company has no binding supply contract with Leggett & Platt, Inc. Until
alternative supply sources are identified, the Company could be subject to
pricing risks, delivery delays and quality control problems, which could have a
material adverse effect on the Company's results of operations.
DEPENDENCE ON KEY INDEPENDENT SALES REPRESENTATIVES. Independent sales
representatives accounted for 46.6% and 32.8% of sales for the year ended
December 31, 1995, and the nine months ended September 30, 1996, respectively.
One sales representative accounted for 17.9% and 16.4% of sales during these
periods. Although the Company has contracts with independent sales
representatives, these contracts are generally terminable by the representatives
upon 30 days' notice. Although the Company intends to continue expanding its
direct sales force and reducing its dependence on independent sales
representatives, the loss of certain key independent sales representatives could
have a material adverse effect on the Company's results of operations.
DEPENDENCE ON SOLE MANUFACTURING FACILITY. The Company manufactures
BodyBilt(R) chairs at one facility in Navasota, Texas. Although the Company
maintains $2.0 million of business interruption insurance on this facility, a
lengthy interruption of its manufacturing operations would have a material
adverse effect on the Company's results of operations.
PRODUCT LIABILITY. The Company may be subject to product liability claims
as a result of alleged product design or manufacturing defects or failure to
provide appropriate literature warnings or directions with its products. The
Company also could be liable for product liability claims for defective products
as a result of its participation in the distribution of products, even if the
Company did not actually design, manufacture or assemble the products or
components. Although the Company has not experienced any material loss due to
product liability claims to date and currently maintains product liability
insurance coverage that it considers appropriate, there can be no assurance that
the amount or scope of the coverage maintained by the Company will be adequate
to protect it in the event a significant product liability claim is asserted
successfully.
7
<PAGE> 12
WARRANTY LIABILITY. Various components of BodyBilt(R) chairs are warranted
against defects in materials or work quality for up to seven years. The Company
has not experienced any material loss from warranty claims to date and does not
maintain a reserve for such claims. There can be no assurance, however, that
material warranty claims will not be asserted in the future.
VARIABLE RESULTS OF OPERATIONS. The Company's revenues and results of
operations fluctuate substantially from period to period depending on such
factors as the timing of significant customer orders, the timing of revenue and
cost recognition, changes in customer buying patterns and trends in the economy
of the geographic markets in which the Company operates. Any unfavorable changes
in these or other factors could have a material adverse effect on the Company's
quarterly or annual results of operations. The Company's new customers typically
take three months or more from initial inquiry to order, during which time they
may experience competing capital budget considerations, making the timing of
customer orders subject to fluctuation and difficult to predict. There can be no
assurance that the Company will be able to sustain its profitability on either a
quarterly or annual basis.
CONTROL BY INSIDERS. Following completion of this offering, the Company's
directors, executive officers and their affiliates will control approximately
66.9% of the Company's outstanding voting securities and will be in a position
to elect the Company's directors and officers, to control the policies and
operations of the Company and to determine the outcome of corporate transactions
or other matters submitted for shareholder approval. These matters may include
mergers, consolidations, the sale of the Company's assets or a change in control
of the Company. In addition, the Company and its principal shareholders have
entered into a voting agreement pursuant to which the parties have agreed to
vote all shares of ErgoBilt stock that they hold to elect designated individuals
to the Board of Directors commencing immediately after the Merger closes. See
"Management," "Principal Shareholders" and "Description of Capital Stock."
BENEFITS OF OFFERING TO CERTAIN SHAREHOLDERS. Of the net proceeds of this
offering, approximately $2.475 million will be used to pay the cash portion of
the Merger Consideration (as defined herein) and approximately $4.4 million will
be used to repay borrowings for the S corporation distribution made in
connection with the Merger. In addition, the Company intends to use a portion of
the proceeds to repay one-half of the principal (approximately $250,000), plus
all accrued interest on the Convertible Note, for which the Chairman of the
Board of Directors has pledged certain collateral as security, and to repay a
$75,000 loan from another BodyBilt Shareholder. Approximately $225,000 of the
net proceeds of this offering will be used to fund the purchase by the Company
of shares of Common Stock from a principal shareholder of the Company to enable
the Company to deliver shares upon conversion of one-half of the principal
balance of the Convertible Note. Upon the closing of this offering, the
Convertible Note will be repaid in full and the pledged collateral will be
released. Approximately $300,000 of the net proceeds of this offering will be
used to pay certain obligations to a company wholly-owned by Mark McMillan, the
President of BodyBilt, who will become a consultant, director and principal
shareholder of the Company, for consulting services related to the Merger and
this offering. Following the closing of this offering, the Company anticipates
that the existing BodyBilt line of credit will be replaced with a line of credit
established by the Company, the terms of which will be substantially similar to
the existing BodyBilt line of credit, and the personal guarantees of Mark
McMillan on the existing BodyBilt line of credit will be released. The Chairman
of the Board of Directors has secured certain payment obligations of ErgoBilt to
its President and Chief Executive Officer under the President's Consulting
Services Agreement by pledging stock of an unrelated company. Upon completion of
the offering, these payment obligations of ErgoBilt will be fully satisfied and
the pledged collateral released. Accordingly, approximately $7.5 million, or
78.8%, of the net proceeds from this offering will directly or indirectly be
paid to the BodyBilt Shareholders (as defined herein). See "Use of Proceeds,"
"Certain Transactions" and "Principal Shareholders."
SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of this offering and the
Merger, the Company will have outstanding 678,644 shares of Series A Preferred
Stock and 5,077,356 shares of Common Stock, assuming an initial public offering
price of $7.50 per share. The 1,500,000 shares sold in this offering may be
publicly offered and sold without restriction unless they are purchased by
affiliates of the Company. Shares of Common Stock outstanding prior to
completion of this offering and all shares of Series A Preferred Stock and
Common Stock to be issued upon completion of the Merger will be "restricted
securities" under the Securities
8
<PAGE> 13
Act of 1933, as amended (the "Securities Act"). These "restricted securities"
may be sold only if they are registered under the Securities Act or pursuant to
an applicable exemption from the registration requirements of the Securities
Act, including Rule 144 thereunder. The Company, its executive officers,
directors and current and future principal shareholders have agreed that they
will not, directly or indirectly, sell or otherwise dispose of any of such
shares for a period of 180 days after the date of this prospectus, without the
prior written consent of Cruttenden Roth Incorporated, on behalf of itself and
Principal Financial Securities, Inc., as representatives of the Underwriters
(the "Representatives"). These shareholders have certain demand, "piggyback" and
shelf registration rights. There are also (i) 400,000 shares of Common Stock
reserved for issuance under the Company's stock option plan, (ii) 150,000 shares
of Common Stock subject to the Representatives' Warrants and (iii) up to 45,000
shares of Common Stock subject to the Lender's Warrant. The Company intends to
file a registration statement on Form S-8 covering sales of shares issued upon
exercise of any securities issued under its stock option plan. Certain demand
and "piggy-back" registration rights have been granted with respect to the
Representatives' Warrants and the Lender's Warrant. See "Shares Eligible for
Future Sale."
No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sales, will have on the market
price of the Common Stock. The sale of substantial amounts of Common Stock, or
the perception that such sales could occur, could adversely affect the
prevailing market price for the Common Stock. See "Shares Eligible for Future
Sale."
DILUTION. This offering will result in immediate and substantial dilution
in net tangible book value of $6.32 per share to new investors, which amount
represents the difference between the pro forma net tangible book value per
share after this offering and an assumed initial public offering price of $7.50
per share. See "Dilution."
ANTI-TAKEOVER PROVISIONS. The Company's Restated Articles of Incorporation
and Amended and Restated Bylaws contain, among other things, provisions
prohibiting shareholder action by written consent, limiting the removal of
directors except for cause, providing specified notice for shareholders meetings
and limiting the right of shareholders to call special meetings. Additionally,
the Company's Amended and Restated Bylaws require the affirmative vote of
two-thirds of the outstanding voting stock or the Board of Directors to
consummate a business combination with a "related person." The Company's
Restated Articles of Incorporation also authorize shares of undesignated, series
preferred stock with respect to which the Board of Directors has the power to
fix the rights and preferences without any further vote or action by the
shareholders. The Company intends to issue Series A Preferred Stock in
connection with the Merger. Such provisions could have the effect of delaying,
deferring or preventing a change in control of the Company, may discourage bids
for the Common Stock at a premium over the market price of the Common Stock and
may adversely affect the market price of, and the voting and other rights of the
holders of, Common Stock. In addition, ErgoBilt and certain current and future
principal shareholders of ErgoBilt and their affiliates have entered into a
voting agreement pursuant to which the parties have agreed, among other things,
to vote all shares of stock of ErgoBilt held by them to elect designated
individuals to the Board of Directors commencing immediately after the closing
of the Merger (the "Voting Agreement"). See "Principal Shareholders."
ABSENCE OF PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE.
Prior to this offering, there has been no public market for the Common Stock.
Although the Common Stock has been approved for quotation on the Nasdaq National
Market, there can be no assurance that an active market will develop or be
sustained following this offering. The initial public offering price for the
shares of Common Stock sold in this offering was determined through negotiations
between the Company and the Representatives and may not necessarily reflect the
market price for the Common Stock following this offering. Market prices for the
Common Stock following this offering will be influenced by a number of factors,
including the Company's operating results and other factors affecting the
Company specifically and the furniture industry and financial markets generally,
as well as the depth and liquidity of the market for the Common Stock. In recent
years, stock market volatility has had a significant effect on the market prices
of securities issued by some companies for reasons unrelated to their operating
performance. See "Underwriting."
ACTUAL RESULTS MAY DIFFER FROM FORWARD LOOKING STATEMENTS. Statements in
this prospectus that reflect projections or expectations of future financial or
economic performance of the Company, and statements of
9
<PAGE> 14
the Company's plans and objectives for future operations, including those
relating to the Company's products and services, are "forward looking"
statements. No assurance can be given that actual results or events will not
differ materially from those projected, estimated, assumed or anticipated in any
such forward looking statements. Important factors that could result in such
differences, in addition to the risk factors identified above, include: general
economic conditions in the Company's markets, including inflation, recession,
interest rates and other economic factors; casualty to or other disruption of
the Company's production facility and equipment; delays and disruptions in the
shipment of the Company's products and raw materials; disruption of operations
and other factors that generally affect businesses.
THE REORGANIZATION
ErgoBilt has entered into a merger agreement, dated August 19, 1996 (the
"Merger Agreement"), with BodyBilt and its three shareholders, Mark McMillan,
Drew Congleton and Dr. Richard Troutman (collectively, the "BodyBilt
Shareholders"). The Merger Agreement provides for the Merger of BodyBilt into a
wholly owned subsidiary of the Company, to be completed contemporaneously with
the closing of this offering. As consideration for the Merger, the BodyBilt
Shareholders will receive $17.6 million payable in a combination of cash ($6.875
million), 751,356 shares of Common Stock valued at $5.64 million and 678,644
shares of Series A Preferred Stock valued at $5.09 million, assuming an initial
public offering price of $7.50 per share (collectively, the "Merger
Consideration"). The rights and preferences of the Series A Preferred Stock are
described under "Description of Capital Stock -- Series A Preferred Stock." The
Merger is to be accounted for as a purchase. The cash portion of the Merger
Consideration will be reduced by the S corporation distribution of approximately
$4.4 million to be made to the BodyBilt Shareholders prior to the Merger. The
Merger Agreement prohibits the BodyBilt Shareholders and their affiliates from
competing with the Company for three years after the Merger.
The Merger Agreement requires that Messrs. Troutman and Congleton be
elected to the Company's Board of Directors and that Gerald McMillan and Gerard
Smith deliver written agreements not to remove Messrs. Troutman and Congleton as
directors except for cause. The Merger Agreement grants Dr. Troutman the right
to nominate his successor in the event of his resignation, requires that Gerald
McMillan remain a director and requires that all other nominees to the board be
approved by either Mark McMillan or Drew Congleton. Mark McMillan will become a
consultant, director and principal shareholder of the Company. ErgoBilt and
certain current and future principal shareholders of ErgoBilt and their
affiliates have entered into a Voting Agreement pursuant to which the parties
have agreed, among other things, to affirm and clarify these obligations. Mark
McMillan and Gerald McMillan, Chairman of the Board, are brothers. See "Certain
Transactions" and "Principal Shareholders."
The BodyBilt Shareholders' stock certificates, stock transfer powers and
the Articles of Merger have been deposited into escrow and will be delivered to
the Company simultaneously with the closing of this offering when the Merger
Consideration is delivered to the escrow agent.
Tax Consequences. The Merger is intended to qualify as a tax-free
reorganization under sections 368(a)(1)(A) and 368(a)(2)(D) of the Internal
Revenue Code of 1986, as amended (the "Code"). Accordingly, no gain or loss will
be recognized for federal income tax purposes to the BodyBilt Shareholders, the
Company's subsidiary or BodyBilt as a result of the Merger, except for the cash
portion of the Merger consideration received by BodyBilt Shareholders. The
Company's subsidiary's basis for federal income tax purposes in the BodyBilt
assets will be the same as BodyBilt's basis in such assets, and the Company's
basis in its stock in the Company's subsidiary will be the same as the Company's
subsidiary's basis in the transferred assets. If, for any reason, the Merger is
disallowed as a tax-free reorganization, then it would most likely be treated as
a taxable sale of assets between BodyBilt and the Company's subsidiary, followed
by a liquidation of BodyBilt. There is uncertainty as to whether Section 1032 of
the Code applies to the issuance of Company stock in the context of a failed
tax-free reorganization. If Section 1032 of the Code were held not to apply, the
Company's subsidiary would recognize gain on the exchange of Company stock for
BodyBilt assets equal to the fair market value of such assets. In any event, it
is unlikely that the Company's subsidiary would be entitled to amortize the
stepped-up basis of certain intangible assets of BodyBilt resulting from such
deemed
10
<PAGE> 15
sale under Section 197 of the Code, due to the fact that the Company and
BodyBilt may be considered "related parties" under Section 197(f)(9) of the
Code. Such taxation could have a material adverse effect on the Company's
results of operations.
S Corporation Distribution. Historically, BodyBilt has been treated as an S
corporation under the Code. As a result, BodyBilt's earnings have been subject
to taxation at the shareholder level, rather than at the corporate level for
federal income tax purposes. As noted above, BodyBilt will make an S corporation
distribution to BodyBilt Shareholders of approximately $4.4 million prior to the
Merger, and its S corporation status will be terminated. The Company will be
responsible for the payment of federal income taxes on earnings of BodyBilt
subsequent to the Merger. The S corporation distribution will be funded by
borrowings.
RECENT DEVELOPMENTS
The Company has entered into a non-binding letter of intent to purchase
certain intellectual property from Metamorphosis Design & Development, Inc.
("Metamorphosis"), a company that owns the rights to certain design patents,
including patents relating to an ergonomic workcenter, and an assignment of
licensing fees relating to this workcenter of approximately $15,000 per month.
The Company anticipates that this intellectual property will enable the Company
to broaden its product line. The Company will not acquire any manufacturing
facilities, employees or other business assets from Metamorphosis. If this
purchase is consummated, the Company would pay Metamorphosis $500,000 in cash
and issue warrants to purchase 150,000 shares of Common Stock exercisable at the
closing price on the date of the acquisition. The Company has agreed to pay
Metamorphosis additional cash and/or securities aggregating up to $15 million if
after-tax earnings derived from the acquired intellectual property meet certain
targets over a three-year period commencing on the closing date and/or certain
revenue targets are met and certain other events occur within the first five
years immediately following the closing date. The acquisition of this
intellectual property is subject to the completion of satisfactory due diligence
and other conditions. There can be no assurance that a definitive agreement will
be executed or that this acquisition will be consummated.
USE OF PROCEEDS
The net proceeds from the sale of the shares of Common Stock offered by the
Company are estimated to be approximately $9.5 million (approximately $11.0
million if the Underwriters' over-allotment option is exercised in full),
assuming an initial public offering price of $7.50 per share and after deducting
the underwriting discount and other estimated offering expenses.
The Company intends to pay $6.875 million of the net proceeds to the
BodyBilt Shareholders, of which approximately $2.475 million represents the cash
portion of the Merger Consideration and approximately $4.4 million represents
the payment of borrowings for S corporation distribution made in connection with
the Merger.
Approximately $300,000 of the net proceeds of this offering will be used to
pay certain obligations to a company wholly-owned by Mark McMillan, the
President of BodyBilt who will become a consultant, director and principal
shareholder of the Company, for consulting services related to the Merger and
this offering.
The Company has entered into a letter agreement with Mark McMillan pursuant
to which the Company will purchase from him or Dr. Richard Troutman, a BodyBilt
Shareholder who will become a principal shareholder of the Company, the number
of shares sufficient to satisfy the Company's obligation to issue shares to the
holder of the Convertible Note upon conversion. Approximately $225,000 of the
net proceeds of this offering will be used to fund the purchase price of the
acquired shares, assuming a price to public of $7.50 per share. See "Certain
Transactions" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
The Company expects to use the balance of the net proceeds (i) to fund the
$500,000 non-contingent cash portion of the purchase price for certain
intellectual property described under "Recent Developments"; (ii) to repay
approximately $250,000, plus interest, of the Convertible Note issued by
ErgoBilt to fund Merger and offering expenses, which bears interest at 8% per
annum and matures on September 3, 1997; (iii) to fund
11
<PAGE> 16
the acquisition of shares to satisfy the remainder of the Company's obligations
under the Convertible Note; (iv) to repay a $75,000 non-interest bearing demand
loan to BodyBilt for working capital by Dr. Richard Troutman; and (v) for other
general corporate purposes. Pending such uses, the Company intends to invest
such funds in short-term, investment-grade, interest-bearing obligations.
DILUTION
At September 30, 1996, the Company had a pro forma net tangible book value
of approximately $(2.7) million or approximately $(.64) per share of Common
Stock and Series A Preferred Stock (assuming the Merger with BodyBilt). Pro
forma net tangible book value per share of Common Stock and Series A Preferred
Stock equals the tangible assets of the Company, less all liabilities, divided
by the total number of shares of Common Stock and Series A Preferred Stock
outstanding, without giving effect to the possible exercise of outstanding stock
options and warrants. After giving effect to the sale of shares of Common Stock
offered hereby at an assumed initial public offering price of $7.50 per share
and the application of the net proceeds therefrom, the as adjusted net tangible
book value of the Company at September 30, 1996, would have been approximately
$6.8 million, or $1.18 per share. This represents an immediate increase of $1.82
per share to existing shareholders, and an immediate dilution of $6.32 per share
to new investors purchasing shares at the initial public offering price. The
following table illustrates the per share dilution to new investors:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $7.50
Pro forma net tangible book value per share as of
September 30, 1996..................................... $ (.64)
Increase per share attributable to new investors.......... 1.82
------
As adjusted net tangible book value per share after
offering.................................................. 1.18
-----
Dilution per share to new investors......................... $6.32
=====
</TABLE>
The following table sets forth the number of shares of Common Stock and
Series A Preferred Stock purchased or to be purchased from the Company, the
total consideration paid to the Company and the average price paid per share by
existing shareholders, BodyBilt Shareholders and new investors purchasing shares
in this offering:
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION
----------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
--------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders.......... 2,826,000 49.1% $ 1,000 0.0% $0.00
BodyBilt Shareholders.......... 1,430,000 24.8 (6,875,000) NA NA
New investors.................. 1,500,000 26.1 11,250,000 257.1 $7.50
--------- ----- ----------- -----
Total................ 5,756,000 100.0% $ 4,376,000 100.0%
========= ===== =========== =====
</TABLE>
- ---------------
(1) If the Underwriters' over-allotment option is exercised in full, then the
number of shares of Common Stock held by existing shareholders will be
reduced to 47.3% of the total number of shares of Common Stock to be
outstanding after this offering, and the number of shares of Common Stock
held by new investors will be increased to 1,725,000 shares, or 28.9% of the
total number of shares of Common Stock to be outstanding after this
offering. The table gives effect to 678,644 shares of Series A Preferred
Stock which is convertible into Common Stock and does not give effect to
400,000 shares of Common Stock reserved for issuance under the Company's
stock option plan, 150,000 shares of Common Stock subject to the
Representatives' Warrants, up to 45,000 shares of Common Stock subject to
the Lender's Warrant and the purchase by the Company of 33,333 shares of
Common Stock from a BodyBilt Shareholder to enable the Company to deliver
shares upon conversion of one-half of the principal balance of the
Convertible Note. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital
Resources -- Credit Facilities," "Principal Shareholders,"
"Management -- Stock Option Plan," "Certain Transactions" and
"Underwriting."
12
<PAGE> 17
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company at September 30, 1996, (i) on a pro forma basis to give effect to
the Merger and (ii) on a pro forma basis to give effect to the Merger, as
adjusted to reflect the sale of the shares of Common Stock offered hereby and
the application of the estimated net proceeds therefrom. See "Use of Proceeds."
This information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and the notes thereto. See "Selected Pro Forma Financial Data."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------
PRO FORMA AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt............................................. $ 7,563 $ 188
Current portion of long-term debt........................... 192 192
------- -------
$ 7,755 $ 380
======= =======
Long-term debt, less current portion........................ $ 1,404 $ 1,329
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, of which 2,000,000 shares are designated
Series A Preferred Stock; 678,644 shares of Series A
Preferred Stock pro forma and as adjusted.............. 7 7
Common stock, $.01 par value, 20,000,000 shares
authorized; 3,577,356 shares pro forma; 5,077,356
shares as adjusted(1).................................. 36 51
Paid-in capital........................................... 10,643 20,113
Accumulated deficit(2).................................... (229) (229)
------- -------
Total shareholders' equity........................ 10,457 19,942
------- -------
Total capitalization.............................. $19,616 $21,651
======= =======
</TABLE>
- ---------------
(1) Excludes 400,000 shares of Common Stock reserved for issuance under the
Company's stock option plan, 150,000 shares of Common Stock subject to the
Representatives' Warrants and up to 45,000 shares of Common Stock subject to
the Lender's Warrant. Prior to this offering, the par value of the Common
Stock was $.0001 per share. See "Management -- Stock Option Plan" and
"Underwriting."
(2) Represents the Company's accumulated deficit since inception in June 1995.
DIVIDEND POLICY
The Company intends to retain all earnings to provide funds for its
operations and expansion, and therefore does not anticipate paying cash
dividends or making any other distributions on its shares of Common Stock in the
foreseeable future. The Company's future dividend policy will be determined by
its Board of Directors based on various factors, including the Company's results
of operations, financial condition, business opportunities, capital
requirements, credit restrictions and such other factors as the Board of
Directors may deem relevant. See "The Reorganization" for information concerning
S corporation distributions to BodyBilt Shareholders prior to this offering.
13
<PAGE> 18
SELECTED FINANCIAL DATA
The selected financial data presented below for the year ended December 31,
1995, are derived from the financial statements of BodyBilt, audited by KPMG
Peat Marwick LLP, independent certified public accountants. The selected
financial data presented below for the years ended December 31, 1992, 1993 and
1994, have been derived from the financial statements of BodyBilt, audited by
Thompson, Derrig & Slovacek PC, independent certified public accountants. The
financial data for the nine months ended September 30, 1996, and 1995, and the
year ended December 31, 1991, are derived from unaudited financial statements of
BodyBilt which, in the opinion of management, reflect all accruals necessary for
a fair presentation of the financial position and results of operations of
BodyBilt as of and for these periods. The pro forma data is unaudited and
presents financial information of the Company. The selected financial data set
forth below should be read in conjunction with and are qualified by reference to
BodyBilt's financial statements and the notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales............................ $2,484 $4,448 $6,535 $9,189 $13,672 $9,251 $12,553
Cost of sales.................... 1,380 2,053 3,237 4,789 7,218 5,080 6,617
------ ------ ------ ------ ------- ------ -------
Gross profit..................... 1,104 2,395 3,298 4,400 6,454 4,171 5,936
Selling, general and
administrative expenses....... 914 1,353 2,164 3,266 4,555 3,107 4,082
------ ------ ------ ------ ------- ------ -------
Operating income................. 190 1,042 1,134 1,134 1,899 1,064 1,854
Interest expense and other,
net........................... -- 14 24 24 20 50 108
------ ------ ------ ------ ------- ------ -------
Income before income taxes....... 190 1,028 1,110 1,110 1,879 1,014 1,746
Income tax expense............... -- 46 50 50 85 42 40
------ ------ ------ ------ ------- ------ -------
Net income....................... $ 190 $ 982 $1,060 $1,060 $ 1,794 $ 972 $ 1,706
====== ====== ====== ====== ======= ====== =======
PRO FORMA DATA:
Pro forma net income(1).......... $ 885 $ 698
Pro forma earnings per share..... $ .16 $ .13
Pro forma shares
outstanding(2)................ 5,400 5,400
BALANCE SHEET DATA:
Working capital.................. $ 471 $ 891 $1,742 $2,137 $ 2,905 $2,016 $ 3,544
Total assets..................... 704 1,319 2,687 3,606 5,812 4,682 7,036
Long-term debt, including current
portion....................... 325 75 633 877 1,385 1,471 1,596
Shareholders' equity............. 203 1,004 1,481 2,208 3,402 2,580 4,425
</TABLE>
- ---------------
(1) The unaudited pro forma adjustments (i) combine the results of operations
and financial position of ErgoBilt with BodyBilt; (ii) recognize goodwill
associated with the acquisition of BodyBilt; and (iii) recognize tax expense
related to BodyBilt as if its S corporation status had terminated at the
beginning of the period presented. See "Selected Pro Forma Financial Data."
(2) The computation of pro forma shares outstanding is based on 4,256,000
weighted average shares of Common Stock outstanding and 1,144,000 shares
assumed to be issued at an initial public offering price of $7.50 per share
(after deducting the estimated underwriting discount) to (i) fund payments
of $6.875 million to BodyBilt Shareholders and (ii) repay approximately
$850,000 of indebtedness. The computation of pro forma shares outstanding
excludes an additional 356,000 shares to be sold in this offering, the
proceeds of which may be used to fund the non-contingent cash portion of the
purchase price for the acquisition of certain intellectual property and for
other general corporate purposes. See "Use of Proceeds."
14
<PAGE> 19
SELECTED PRO FORMA FINANCIAL DATA
The following unaudited pro forma combined condensed statements of income
for the year ended December 31, 1995 and the nine months ended September 30,
1996 adjust the historical results of BodyBilt (considered the predecessor to
the Company) for each period to give effect to (i) the Merger as if it had been
consummated at January 1, 1995; (ii) the amortization of approximately $13.2
million of goodwill that will be created as a result of the acquisition of
BodyBilt by the Company pursuant to purchase accounting; (iii) the income tax
effect resulting from the conversion of BodyBilt from an S corporation to a C
corporation; and (iv) eliminate transactions between ErgoBilt and BodyBilt. Pro
forma shares outstanding have been calculated in accordance with note (2) in
"Summary Historical and Pro Forma Financial and Operating Data." The Company
believes that a 40-year amortization period is appropriate for goodwill, since
BodyBilt is a manufacturer of office furniture that is expected to have value to
the Company beyond 40 years. The Merger will be accounted for as a purchase with
ErgoBilt as the acquirer. The unaudited pro forma combined condensed statements
of income should be read in conjunction with the historical financial statements
of the Company and BodyBilt and the notes thereto included elsewhere in this
prospectus and are not necessarily indicative of the results of operations that
might have occurred if the Merger had not taken place on the dates indicated or
of the Company's results of operations for any future period.
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRO FORMA
BODYBILT ERGOBILT ADJUSTMENTS PRO FORMA
-------- -------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Sales............................................... $13,672 $404 $(404) $13,672
Cost of sales....................................... 7,218 107 -- 7,325
------- ---- ----- -------
Gross profit........................................ 6,454 297 (404) 6,347
Selling, general and administrative expenses........ 4,555 240 75 4,720
------- ---- ----- -------
Operating income.................................... 1,899 57 (329) 1,627
Interest expense and other, net..................... 20 1 -- 21
------- ---- ----- -------
Income before income taxes.......................... 1,879 56 (329) 1,606
Income tax expense.................................. 85 11 625 721
------- ---- ----- -------
Net income.......................................... $ 1,794 $ 45 $(954) $ 885
======= ==== ===== =======
Pro forma earnings per share........................ $ .16
Pro forma shares outstanding........................ 5,400
</TABLE>
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PRO FORMA
BODYBILT ERGOBILT ADJUSTMENTS PRO FORMA
-------- -------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Sales............................................... $12,553 $ 302 $(291) $12,564
Cost of sales....................................... 6,617 139 -- 6,756
------- ----- ----- -------
Gross profit........................................ 5,936 163 (291) 5,808
Selling, general and administrative expenses........ 4,082 475 44 4,513
------- ----- ----- -------
Operating income.................................... 1,854 (312) (247) 1,295
Interest expenses and other, net.................... 108 3 -- 111
------- ----- ----- -------
Income before income taxes.......................... 1,746 (315) (247) 1,184
Income tax expense (benefit)........................ 40 (41) 487 486
------- ----- ----- -------
Net income (loss)................................... $ 1,706 $(274) $(734) $ 698
======= ===== ===== =======
Pro forma earnings per share........................ $ .13
Pro forma shares outstanding........................ 5,400
</TABLE>
15
<PAGE> 20
The following unaudited pro forma combined balance sheet as of September
30, 1996, gives effect to the Merger as if it had been consummated at September
30, 1996. The unaudited pro forma adjustments reflect goodwill associated with
the acquisition of BodyBilt; cash consideration to be paid to BodyBilt
Shareholders (including an S corporation distribution of approximately $4.4
million); deferred taxes related to temporary differences between tax bases and
amounts recorded and the issuance of 751,356 shares of Common Stock and 678,644
shares of Series A Preferred Stock. The per share value assigned to Common Stock
and Series A Preferred Stock to be issued in the Merger is $7.50. This value was
determined by using the assumed initial public offering price. The following
unaudited pro forma combined balance sheet does not give effect to the sale of
the Common Stock offered by this prospectus.
PRO FORMA COMBINED BALANCE SHEET AT SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PRO FORMA
BODYBILT ERGOBILT ADJUSTMENTS PRO FORMA
-------- -------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents.................... $ 46 $260 $ -- $ 306
Accounts receivable.......................... 2,833 6 -- 2,839
Inventory.................................... 1,690 -- -- 1,690
Prepaid expenses and other assets............ 182 109 -- 291
------ ---- ------- -------
Total current assets....................... 4,751 375 -- 5,126
Property, plant and equipment, net........... 2,285 41 -- 2,326
Other assets................................. -- 183 13,175 13,358
------ ---- ------- -------
Total assets............................... $7,036 $599 $13,175 $20,810
====== ==== ======= =======
Current portion of long-term debt............ $ 192 $ -- $ -- $ 192
Short-term debt.............................. -- 688 6,875 7,563
Accounts payable and accrued liabilities..... 1,015 137 -- 1,152
------ ---- ------- -------
Total current liabilities.................. 1,207 825 6,875 8,907
Notes payable, less current portion.......... 1,404 -- -- 1,404
Deferred income taxes........................ -- 2 40 42
Preferred stock.............................. -- -- 7 7
Common stock................................. 1 -- 35 36
Paid-in capital.............................. -- 1 10,642 10,643
Retained earnings (deficit).................. 4,424 (229) (4,424) (229)
------ ---- ------- -------
Total shareholders' equity................. 4,425 (228) 6,260 10,457
------ ---- ------- -------
Total liabilities and shareholders'
equity.................................. $7,036 $599 $13,175 $20,810
====== ==== ======= =======
</TABLE>
16
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The operations of ErgoBilt are discussed under the heading "ErgoBilt"
below. The remainder of Management's Discussion and Analysis of Financial
Condition and Results of Operations relates to the operations of BodyBilt.
Following the Merger, BodyBilt will be the operating company, and ErgoBilt will
be the parent company. ErgoBilt's assets and results of operations are not
significant to the combined operations on a going-forward basis. The following
discussion and analysis should be read in conjunction with the information set
forth under "Selected Historical and Pro Forma Financial and Operating Data,"
"Selected Financial Data," "Selected Pro Forma Financial Data" and the financial
statements of ErgoBilt and BodyBilt and the accompanying notes thereto included
elsewhere in this prospectus.
ERGOBILT
Since its incorporation in 1995, ErgoBilt's operations have consisted
primarily of providing advertising and marketing activities to BodyBilt,
conducting activities necessary to complete the Merger and the sale of the
shares of Common Stock offered hereby, and conducting other activities necessary
to plan for the operations and activities of ErgoBilt and BodyBilt subsequent to
the Merger. Operating income for the period from June 12, 1995 to December 31,
1995 was $57,000. For the nine-month period ended September 30, 1996, ErgoBilt
had a loss from operations of $312,000. The loss was attributable to increased
compensation related to management employed in contemplation of the Merger,
expenses accrued for consulting services related to the Merger and this offering
rendered by a company wholly-owned by Mark McMillan, the President of BodyBilt,
and other costs of the Merger and this offering. See "Certain Transactions." As
discussed under "Liquidity and Capital Resources" below, ErgoBilt obtained a
$500,000 loan to fund the Merger and offering expenses.
THE COMPANY
GENERAL. The Company generates revenue through sales of its products to
corporate customers and retailers. The majority of the Company's sales are
generated by either the Company's direct sales force or by independent sales
representatives, who are paid a commission for each unit sold. Typically, the
Company's sales are directed through a network of over 550 dealers who acquire
the products at a discount from retail and then resell the products to the
ultimate customer. In certain instances, the Company drop-ships products
directly to the ultimate customer.
The Company's sales increased at a compound annual growth rate of 53.2%
from 1991 through 1995 and increased 35.7% for the first nine months of 1996 as
compared to the nine months ended September 30, 1995. The Company believes that
its growth has been driven by increasing market acceptance of ergonomics and its
success in (i) providing superior quality products and service; (ii) expanding
its direct sales force; (iii) upgrading the quality of its independent sales
representative firms; and (iv) educating consumers about the benefits of
ergonomics and the solutions provided by the Company's products. The Company did
not increase the suggested retail prices of its chairs during this period. From
1991 to September 30, 1996, the Company expanded its direct sales force from
four to 17 individuals while during the same period the number of independent
sales representatives changed from 22 to 21. There can be no assurance that the
Company's growth will continue at the historic rate in the future.
Contemporaneously with the closing of this offering, the Company will
complete the Merger. The historical results of operations through September 30,
1996, do not include the impact of the Merger. The total consideration paid in
connection with the Merger is $17.6 million, consisting of cash, Common Stock
and Series A Preferred Stock. The transaction will be treated as a purchase for
accounting purposes and will result in approximately $13.2 million in goodwill,
which will be amortized over a 40-year period. The amortization of goodwill
associated with the Merger will total approximately $329,000 annually and will
not be deductible for income tax purposes.
17
<PAGE> 22
RESULTS OF OPERATIONS. The following table sets forth certain historical
financial data as a percentage of sales for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, ------------------------------
----------------------- SEPTEMBER 30, SEPTEMBER 30,
1993 1994 1995 1995 1996
----- ----- ----- ------------- -------------
<S> <C> <C> <C> <C> <C>
Sales............................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.................... 49.5 52.2 52.8 54.9 52.7
----- ----- ----- ----- -----
Gross profit..................... 50.5 47.8 47.2 45.1 47.3
Selling, general and
administrative expenses........ 33.1 35.5 33.3 33.6 32.5
----- ----- ----- ----- -----
Operating income................. 17.4% 12.3% 13.9% 11.5% 14.8%
</TABLE>
Comparison of Nine Months Ended September 30, 1995, and 1996. Sales
increased $3.3 million, or 35.7%, from $9.3 million for the nine months ended
September 30, 1995, to $12.6 million for the nine months ended September 30,
1996. Units sold increased by 4,847, or 27.9%, from 17,401 for the nine months
ended September 30, 1995, to 22,248 for the nine months ended September 30,
1996. This increase was attributable to a shift in the mix of products sold to
higher-end, more technologically-equipped chairs, the addition of direct sales
personnel, increased advertising and marketing expenditures and increased
acceptance of the Company's products.
Gross profit increased $1,765,000 or 42.3%, from $4,171,000 in the nine
months ended September 30, 1995, to $5,936,000 for the nine months ended
September 30, 1996. As a percentage of sales, gross profit increased from 45.1%
in the first nine months of 1995 to 47.3% in the first nine months of 1996. The
increase in gross profit as a percentage of sales was attributable to increased
sales of higher-margin chairs, improved manufacturing efficiencies and the
allocation of fixed costs over higher production volumes.
Selling, general and administrative expenses increased by $1.0 million, or
31.4%, from $3.1 million for the nine months ended September 30, 1995, to $4.1
million for the nine months ended September 30, 1996. As a percentage of sales,
selling, general and administrative expenses decreased from 33.6% for the nine
months ended September 30, 1995, to 32.5% in the nine months ended September 30,
1996. This dollar increase was attributable to increases in compensation and
commissions due to the addition of direct sales personnel and to increases in
advertising and promotional expenses.
Operating income increased by $790,000, or 74.2%, from $1.1 million for the
nine months ended September 30, 1995, to $1.9 million for the nine months ended
September 30, 1996.
Comparison of Years Ended December 31, 1994, and 1995. Sales increased $4.5
million, or 48.8%, from $9.2 million for the year ended December 31, 1994, to
$13.7 million for the year ended December 31, 1995. Units sold increased by
6,813, or 36.0%, from 18,946 for the year ended December 31, 1994, to 25,759 for
the year ended December 31, 1995. This increase was the result of the addition
of direct sales personnel, an increase in the number of corporate accounts and
increased acceptance of the Company's products.
Gross profit increased $2,054,000 or 46.7%, from $4,400,000 in the year
ended December 31, 1994 to $6,454,000 for the year ended December 31, 1995. As a
percentage of sales, gross profit declined from 47.8% in the year ended December
31, 1994 to 47.2% in the year ended December 31, 1995. The decline in gross
profit as a percentage in sales was attributable to enhancements in product
quality, resulting in an increase in the cost of certain components. In
addition, sales of lower-margin chairs to certain corporate and government
accounts increased as a percentage of total sales. The effect of these two
factors on the overall gross margin was partially offset by greater plant
utilization.
Selling, general and administrative expenses increased by $1.3 million, or
39.5%, from $3.3 million for the year ended December 31, 1994, to $4.6 million
for the year ended December 31, 1995. As a percentage of sales, selling, general
and administrative expenses decreased from 35.5% in the year ended December 31,
1994, to 33.3% in the year ended December 31, 1995. This dollar increase was
attributable to increases in
18
<PAGE> 23
compensation and commissions as a result of the addition of direct sales and
sales support personnel and increased advertising, literature and other
promotional expenses.
Operating income increased by $765,000, or 67.4%, from $1.1 million for the
year ended December 31, 1994, to $1.9 million for the year ended December 31,
1995.
Comparison of Years Ended December 31, 1993, and 1994. Sales increased $2.7
million or 40.6% from $6.5 million for the year ended December 31, 1993, to $9.2
million for the year ended December 31, 1994. Units sold increased by 5,397, or
39.8%, from 13,549 for the year ended December 31, 1993, to 18,946 for the year
ended December 31, 1994. This increase was attributable to the addition of
direct sales personnel and sales management, a restructuring of sales
territories, increased expenditures in advertising and marketing and increased
acceptance of the Company's products.
Gross profit increased $1,102,000 or 33.4%, from $3,298,000 in the year
ended December 31, 1993 to $4,400,000 in the year ended December 31, 1994. As a
percentage of sales, gross profit declined from 50.5% in the year ended December
31, 1993 to 47.8% in the year ended December 31, 1994. The decrease in gross
profit as a percentage of sales was attributable to a strategic shift in the
sales and distribution system which resulted in a greater reliance on a dealer
network. Additionally, the Company incurred start-up costs and increased
operating expenses associated with its relocation to and renovation of a much
larger manufacturing facility in Navasota, Texas.
Selling, general and administrative expenses increased by $1.1 million, or
50.9%, from $2.2 million for the year ended December 31, 1993, to $3.3 million
for the year ended December 31, 1994. As a percentage of sales, selling, general
and administrative expenses increased from 33.1% in the year ended December 31,
1993, to 35.5% in the year ended December 31, 1994. This increase was primarily
due to increases in compensation and commission expenses, the addition of direct
sales and administrative support personnel and increases in advertising and
promotional materials.
Operating income remained constant at $1.1 million for the year ended
December 31, 1993, and the year ended December 31, 1994.
19
<PAGE> 24
QUARTERLY RESULTS OF OPERATIONS. The Company's quarterly results of
operations may vary significantly depending on factors such as the timing of
large customer orders, the timing of new product introductions, the adequacy of
component parts supply, variations in the Company's product costs, variations in
the Company's product mix, sales promotions by the Company and competitive
pricing pressures. The results of any particular quarter may not be indicative
of results for the full year or any future period. Historically, the Company has
experienced seasonal fluctuations in sales and operating income due to customer
ordering patterns that emphasize purchases in the third and fourth quarters of
each fiscal year. Further, the Company's sales and operating income in the first
quarter of each fiscal year have been lower than the Company's sales and
operating income in the immediately preceding fourth quarter. The following
table sets forth certain unaudited quarterly financial information for the
periods indicated and, in the opinion of management, includes all adjustments
(consisting of only normal recurring adjustments) which the Company considers
necessary for a fair presentation of the information set forth therein.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1995 1995 1995 1995 1996 1996 1996
--------- -------- ------------- ------------ --------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales.................. $2,460 $3,154 $3,637 $4,421 $3,582 $3,850 $5,121
Cost of sales.......... 1,422 1,683 1,975 2,138 1,990 1,995 2,632
------ ------ ------ ------ ------ ------ ------
Gross profit........... 1,038 1,471 1,662 2,283 1,592 1,855 2,489
Selling, general and
administrative
expenses............. 829 1,057 1,221 1,448 1,536 1,219 1,327
------ ------ ------ ------ ------ ------ ------
Operating income....... 209 414 441 835 56 636 1,162
Interest expense and
other, net........... 16 16 18 (30) 38 38 32
------ ------ ------ ------ ------ ------ ------
Income before income
taxes................ 193 398 423 865 18 598 1,130
Income tax expense
(benefit)............ -- 24 18 43 (30) 38 32
------ ------ ------ ------ ------ ------ ------
Net income............. $ 193 $ 374 $ 405 $ 822 $ 48 $ 560 $1,098
====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUE
------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1995 1995 1995 1995 1996 1996 1996
--------- -------- ------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales.................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.......... 57.8 53.4 54.3 48.4 55.6 51.8 51.4
----- ----- ----- ----- ----- ----- ------
Gross profit........... 42.2 46.6 45.7 51.6 44.4 48.2 48.6
Selling, general and
administrative
expenses............. 33.7 33.5 33.6 32.7 42.9 31.7 25.9
----- ----- ----- ----- ----- ----- ------
Operating income....... 8.5 13.1 12.1 18.9 1.6 16.5 22.7
Interest expense and
other, net........... 0.7 0.5 0.5 (0.7) 1.1 1.0 .6
----- ----- ----- ----- ----- ----- ------
Income before income
taxes................ 7.8 12.6 11.6 19.6 .5 15.5 22.1
Income tax expense
(benefit)............ -- 0.8 0.5 1.0 (.8) 1.0 .6
----- ----- ----- ----- ----- ----- ------
Net income............. 7.8% 11.8% 11.1% 18.6% 1.3% 14.5% 21.5%
===== ===== ===== ===== ===== ===== ======
</TABLE>
20
<PAGE> 25
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow. Historically, the Company has satisfied its cash requirements
through profitable operations and borrowings under a bank line of credit
facility. Operating activities provided net cash totaling $253,000, $734,000 and
$1.1 million for 1993, 1994 and 1995, respectively, and $1.2 million for the
nine months ended September 30, 1996. The primary use of cash in operating
activities has been to fund increases in accounts receivable and inventories
resulting from the Company's rapid growth.
Investing activities used cash totaling $224,000, $629,000 and $918,000,
during 1993, 1994 and 1995, respectively, and $709,000 for the nine months ended
September 30, 1996. Substantially all of the cash used for investing activities
during these periods related to capital expenditures. The Company anticipates
continuing to make capital expenditures in connection with plant, equipment,
software and computer equipment improvements.
Financing activities used cash totaling $26,000, $89,000 and $80,000,
respectively, during 1993, 1994 and 1995, and $522,000 for the nine months ended
September 30, 1996. The primary uses of cash for financing activities were
distributions to the BodyBilt Shareholders of $583,000, $333,000 and $600,000 in
1993, 1994 and 1995, respectively, and $683,000 for the nine months ended
September 30, 1996. The distributions in 1993, 1994 and 1995 were made primarily
to provide the BodyBilt Shareholders with cash to pay individual tax liabilities
related to the net income of BodyBilt attributed to them as shareholders of an S
corporation, and in 1996 were made based on projected earnings of BodyBilt for
the nine months ended September 30, 1996. The primary source of cash for the
financing activities during each period was borrowings under BodyBilt's line of
credit.
Asset Management. The Company typically sells its products and services on
net 30 day terms and seeks to minimize its credit risk by performing credit
checks and conducting its own collection efforts. The Company had trade accounts
receivable of $1.7 million and $2.5 million at December 31, 1994, and 1995,
respectively, and $2.8 million at September 30, 1996. The number of days' sales
outstanding in trade accounts receivable were 66 days, 66 days and 61 days
respectively, for the same periods. Bad debt expense as a percentage of total
revenue for the same periods was negligible. BodyBilt maintains no allowance for
doubtful accounts.
The Company attempts to keep its raw materials inventory low to minimize
the risk of obsolescence. The Company also attempts to maintain the minimum
level of such inventory necessary to meet its near term manufacturing
requirements by relying on just-in-time delivery of products from its principal
suppliers. Inventory turnover was 4.9 times and 6.0 times for 1994, 1995
respectively and 5.6 times on an annualized basis the first nine months of 1996.
Credit Facilities. BodyBilt maintains a revolving line of credit facility
with The First National Bank of Bryan (the "Line of Credit"). Borrowings under
the Line of Credit are utilized primarily for working capital to finance
inventory and receivables and for distributions to the BodyBilt Shareholders.
Borrowings under the Line of Credit bear interest at the Bank's prime rate plus
0.75% per annum. The Line of Credit is secured by a first lien on the accounts
receivable and inventory of BodyBilt and the proceeds of a life insurance policy
insuring the life of BodyBilt's President, Mark McMillan. The Line of Credit is
personally guaranteed by Mark McMillan. At September 30, 1996, the interest rate
on the Line of Credit was 8.25% and total borrowings under the Line of Credit
were $825,000. The remaining available credit under the Line of Credit, subject
to borrowing base limitations which are generally computed as a percentage of
various classes of eligible accounts receivable and qualifying inventory, was
$1,175,000 at September 30, 1996. Following the closing of this offering, the
Company expects that the Line of Credit will be replaced with a line of credit
facility to be established by the Company shortly after this offering, based on
assurances from two banks. The terms of the new line of credit will be
substantially similar to the Line of Credit. The total borrowings under the Line
of Credit will be refinanced under this new line of credit.
In May 1994, the Company purchased a building and land that was formerly a
large retail facility, in Navasota, Texas. During the summer of 1994, BodyBilt
moved its manufacturing and administrative operations from leased facilities to
the Navasota facility. Since June 1994, this facility has undergone
21
<PAGE> 26
significant renovations, improvements and equipment additions. The acquisition
and improvement of this facility was financed through an amortizing bank loan
from The First National Bank of Bryan in the principal amount of $571,000,
currently bearing interest at the bank's prime rate plus 0.75% per annum and
maturing in the year 2000. At September 30, 1996, the interest rate on this loan
was 9.5% and the outstanding principal balance was $446,000. The loan is secured
by a lien on the facility and by a life insurance policy insuring the life of
Mark McMillan. This loan is personally guaranteed by Mark McMillan.
At September 30, 1996, the Company also had other term note obligations to
the First National Bank of Bryan aggregating approximately $249,000, the
proceeds of which were used to fund working capital and equipment and vehicle
purchases.
On September 6, 1996, ErgoBilt obtained a $500,000 loan from Summit
Partners Management Co. ("Summit") to fund the Merger and offering expenses. The
convertible note evidencing this loan (the "Convertible Note") will be repaid in
part from the proceeds of this offering and by conversion into shares of Common
Stock at the initial offering price per share (one-half of the principal balance
of the loan). This loan bears interest at 8.0% per annum and matures on
September 6, 1997. The Convertible Note is secured by a pledge of certain assets
of Gerald McMillan. In connection with the issuance of the Convertible Note, Dr.
McMillan sold 34,000 shares of Common Stock to Summit, and the Company agreed to
issue to Summit at the closing of this offering a warrant to acquire up to
45,000 shares of Common Stock (the "Lender's Warrant"). The terms and conditions
of the Lender's Warrant are identical to those of the Representatives' Warrants.
The shares of Common Stock sold to Summit and the Common Stock issuable upon
exercise of the Lender's Warrant are subject to certain registration rights. See
"Certain Transactions," "Shares Eligible for Future Sale" and "Underwriting."
The Company believes that the net proceeds of this offering, net cash
provided by operating activities and borrowings made available to the Company
will be sufficient to meet the Company's cash requirements for the next twelve
months.
INFLATION. During the nine months ended September 30, 1996 and the years
ended December 31, 1995 and 1994, the cost of raw materials and component parts,
salaries and manufacturing wages increased modestly. The increases have not had
a significant effect on the Company's results of operations because of
substantially increasing sales volumes and relatively stable product prices.
NEW ACCOUNTING PRONOUNCEMENTS. Effective January 1, 1996, the Company
adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." Accordingly, in the event that facts
and circumstances indicate that property and equipment, and intangible or other
assets, may be impaired, an evaluation of recoverability would be performed. If
an evaluation is required, the estimated future cash flows associated with the
asset is compared to the asset's carrying amount to determine if a write-down to
market value or discounted cash flow value was necessary. Adoption of this
standard did not have a material effect on the financial position or results of
operations of the Company.
As of January 1, 1996, SFAS No. 123, "Accounting for Stock-Based
Compensation," will be effective for the Company. SFAS No. 123 permits, but does
not require a fair value-based method of accounting for employee stock option
plans which results in compensation expense recognition when stock options are
granted. As permitted by SFAS no. 123, the Company will provide pro forma
disclosure of net income and earnings per share, as applicable, in the notes to
future annual consolidated financial statements.
22
<PAGE> 27
BUSINESS
The Company is a rapidly-growing developer, manufacturer and marketer of
customized, high-end ergonomic products that re-engineer the workplace and the
home office by scientifically minimizing the physical stress imposed upon the
human body. Its current product line primarily consists of four series of
premium-priced, ergonomic office chairs, marketed under the BodyBilt(R)
tradename, which can be customized through proprietary modular designs to meet
the needs of each customer.
The Company has positioned itself to capitalize on consumer trends,
possible government regulation and recent national publicity, which have
increased the awareness of and desire for ergonomic products in the workplace
and home office. The Company intends to use its current product line as a
platform to develop and acquire complementary ergonomic products, enter into
joint ventures and establish strategic alliances to manufacture or market such
products. These products may include workstations, computer work surfaces,
executive office side chairs and a second line of ergonomic chairs priced to
appeal to a broader market segment. The Company's objective is to become "the
primary source" for ergonomic products for the workplace and the home office.
BodyBilt has manufactured ergonomic office chairs since 1988. BodyBilt(R)
chairs are based on NASA research conducted during its SkyLab missions that
identified the least stressful body position for astronauts during extended
missions in space. BodyBilt(R) chairs have a 10-Point Posture Control(TM) system
that allows each individual user to assume a posture similar to the stress-free
posture of astronauts in space.
INDUSTRY OVERVIEW. Ergonomics addresses the interaction of people and their
environment, integrating engineering, bio-mechanics and other disciplines to
improve worker safety, productivity and product quality. The Company's ergonomic
office chairs compete in the seating segment of the office furniture market.
This segment represents approximately 25.1% of industry sales or $2.3 billion in
1995 and is the second largest industry segment. The Company's share of the
seating market segment was less than 1% on a dollar basis in 1995. According to
Business Trend Analysts, Inc., the office furniture market had estimated sales
of $9.4 billion in 1995, representing an increase of 7.8% over the prior year.
This is an improvement over the 1994 and 1993 growth rates of 7.1% and 6.5%,
respectively. The growth in the office furniture market can be attributed to,
among other factors, the expanding home office market, growth in the number of
small businesses and a growing market for exports. During these same periods,
the Company believes that growth in the ergonomic portion of the office
furniture market accelerated at a faster rate than the overall office furniture
market as a result of an increasing awareness of the importance of ergonomics.
MARKET TRENDS. The Company believes that certain trends in the work
environment have expanded the market opportunity for ergonomic office products.
First, increased reliance on the personal computer has resulted in more workers
spending more time in a constantly seated position. A result has been a
significant increase in the number of work-related employee injury claims and
lost employee time from (i) back and upper extremity injuries, which account for
approximately 40% of all workers' compensation dollars, and (ii) repetitive
stress injuries or "RSI," including carpal tunnel syndrome, which affect
approximately 22% of seated workers, according to the Bureau of Labor and
Statistics. Second, OSHA, has required employers to provide safe work
environments, which may include the acquisition of ergonomic office products. As
a result, the Company believes that employers are seeking ways to alleviate
injuries related to body stress in the workplace. Third, the emergence of the
corporate "telecommuter" has produced significant growth in the number of home
offices, now estimated at 41.1 million in the United States alone.
GROWTH STRATEGY. As the importance and acceptance of ergonomics has
penetrated the workplace and the home office, the Company has experienced
significant growth. The Company has developed a strategy to continue to grow and
to achieve its objective of becoming "the primary source" for ergonomic products
for the workplace and the home office. The key elements of this strategy include
the following:
- INCREASE MARKET PENETRATION
The Company intends to increase its market penetration by expanding its
direct sales force and concentrating on geographic markets exhibiting
economic growth and industry segments with growth potential. The Company's
products are marketed by its direct sales force of 17 persons and 21
independent sales representatives. The Company believes that its direct
sales force, which sells
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BodyBilt(R) chairs exclusively, is more productive and cost-efficient than
independent sales representatives, who sell other manufacturers' office
furniture lines. Despite a higher number of independent sales
representatives, for the nine months ended September 30, 1996, the
Company's direct sales force accounted for 67.2% of revenues. The Company
believes that the employment of additional direct sales personnel will
permit it to better establish long-term relationships with a broader base
of corporate customers to strengthen the Company's marketing, sales and
distribution. The Company also intends to expand its geographical coverage
to additional markets that offer growth potential, such as New York,
Chicago and Washington, DC. In addition, the Company plans to focus on
other geographical markets, such as Boston and Austin, Texas, where there
exists a concentration of high-tech companies that have tended to be more
receptive to the Company's ergonomic products.
- BROADEN PRODUCT LINE
The Company intends to broaden its product line by developing or
acquiring other ergonomic products, or entering into joint ventures or
establishing strategic alliances to market other ergonomic products. These
products may include workstations, computer work surfaces, executive
office side chairs and a second line of ergonomic chairs priced to appeal
to a broader market segment. Given the fragmented nature of the ergonomic
industry, attractive acquisition targets most likely will be small,
developing companies with innovative ergonomic products that offer growth
and profit potential. These companies may be constrained by the lack of
capital, distribution channels, manufacturing capability and/or management
expertise needed to bring their products to market. By providing
additional ergonomic products to complement its existing product line, the
Company believes it will be able to leverage its marketing, sales and
distribution systems and improve the efficiency of its direct sales force.
The Company intends to acquire or develop an additional line of
ergonomic chairs marketed under a different brand name that will be priced
to appeal to a broader market segment. Such a line of chairs, if
successfully acquired or developed, may enable the Company to compete more
effectively for larger, price-sensitive orders and position itself to
capitalize on the growing acceptance of ergonomic products by corporate
facilities managers who have not been the Company's primary target
customers to date.
The Company expects to begin shipments of a side chair in early 1997 to
complement its executive chairs. This product will enable the Company to
market a suite of ergonomically-designed chairs for the executive office.
The Company has executed a non-binding letter of intent to purchase
certain intellectual property from a company that owns the rights to
certain design patents, including patents relating to an ergonomic
workcenter. See "Recent Developments."
- DEVELOP NEW DISTRIBUTION CHANNELS
The Company intends to expand its retail distribution and explore new
distribution channels, including catalog sales, telemarketing and the use
of the Internet. The Company believes that the growth of the personal
computer market and the increase in the number of home offices create an
opportunity for the Company to market its ergonomic products directly to
the end user.
During 1997, the Company plans to explore the feasibility of expanding
into international markets. The Company believes that exports to foreign
markets have become a significant factor in the office furniture industry.
To date, substantially all of the Company's sales have been made within
the United States. In October 1996, the Company exhibited its products
internationally for the first time at ORGATEC -- International Trade Fair
for Office Furnishings in Cologne, Germany.
- BUILD CONSUMER RECOGNITION
The Company intends to become a source of ergonomic information and
data for the workplace and home office. Currently, two initiatives are in
the formative stages of development. The Company intends to form an
Ergonomic Advisory Council (the "Advisory Council"), which will likely be
comprised of six to eight experts in the fields of ergonomics, orthopedics
and neurology. In addition to
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advising the management of the Company on the latest ergonomic
developments, the Company intends for the Advisory Council to assist it in
preparing educational literature, reviewing new product developments and
conducting Company-sponsored research in areas such as repetitive stress
injuries, back problems and the relationship between ergonomics and
productivity in the workplace.
The Company also plans to expand its web site to provide ergonomic
information to consumers worldwide, offering access to research, product
descriptions, purchasing information and practical tips on how to avoid
repetitive stress injuries and back problems in the workplace.
PRODUCTS. In the mid-1970s, NASA collected detailed anthropometric data
during successive SkyLab missions, including in-depth studies on posture.
According to data published in NASA's Anthropometric Source Book, NASA
discovered that when the body is placed in the weightless, or zero-gravity,
environment of space, it assumes a specific posture that is substantially
different from a traditional upright or seated posture. The body assumes a
trunk-to-thigh angle of 128 degrees, placing the musculoskeletal system in its
most relaxed state. This discovery led to the design of the BodyBilt(R) chair
with the 10-Point Posture Control(TM) system. This system allows each individual
user to emulate a similar relaxed, stress-free posture while at work, providing
a high degree of personal comfort and helping to alleviate problems associated
with back and repetitive stress injuries. Corporate comparative tests based on
comfort conducted by the Safety Department of Lockheed Austin Division ("LAD")
and the Austin, Texas Service Center of the Internal Revenue Service
("IRS-Austin") have documented the effectiveness of the BodyBilt(R) chair in
alleviating worker discomfort and increasing productivity. In its 1991 study,
LAD concluded that the use of ergonomic equipment (chairs and workstations)
resulted in a 12% increase in productivity and improved employee morale. The LAD
study noted that the highest ranked piece of equipment for improving comfort and
job performance was the ergonomic chair. This study confirmed the findings of an
earlier study conducted by the IRS-Austin that demonstrated an 8% increase in
productivity from using an ergonomic chair alone. The ergonomic chairs used in
both studies were BodyBilt(R) chairs.
BodyBilt(R) chairs' contoured seats are made with multi-densities of foam
strategically placed to distribute the user's body weight over a greater surface
area. Additionally, the angle between the back rest and the seat structure can
be adjusted to approximate the posture that the body assumes naturally in the
gravity-free environment of space. Five different seat designs provide
additional comfort for customers of various sizes and shapes. The back rests
also contain multi-densities of strategically placed foam and are shaped to
provide maximum support in the lumbar area. The personal Air Lumbar(TM) pump
inflates the lumbar area, allowing the back rest to conform even more closely to
the unique curvature of each person's back. The eight different arms available
with all BodyBilt(R) chairs are designed for different workplace tasks and offer
customers more choices to reduce neck and shoulder strain. Available armrests
include the Linear Tracking Arm(TM) and Pivot Arm(TM) for specialized
applications, including medical, micro-surgical and desk-top needs. The 3-Way
Arm mechanism allows for proper arm support which can help the user avoid
repetitive stress injuries.
The Company manufactures BodyBilt(R) chairs designed for non-managerial
task workers (J Task Series), managerial task workers (J-Manager Series),
managers and executives (K Series) and "Big & Tall" workers (S Series). The S
Series chairs feature a reinforced seat which is 23.5% larger than the average
seat. These chairs are capable of supporting persons weighing up to 350 pounds.
The Company's collection of BodyBilt(R) chairs meets and often exceeds the
current ergonomic standards in seating design, from American National Standards
Institute -- Human Factors Society 100-88 to those proposed by OSHA.
The modular design of the BodyBilt(R) chairs allows each customer to create
a custom chair, selecting from more than 1,600 possible combinations of arms,
backrests, headrests, seats and bases, in addition to style and fabric choices.
The Company has been able to provide this myriad of choices to the customer
without maintaining excessive inventory levels as a result of its use of
interchangeable parts. The Company generally can deliver a customized
BodyBilt(R) chair to the customer in less than four weeks, about one-half the
time required by large manufacturers. The chairs require minimal assembly by the
customer and are delivered with a computer diskette that provides each customer
with a visual explanation of how to adjust the chair for maximum comfort.
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BodyBilt(R) chairs are warranted against defects in materials or work
quality as follows: seven years on the base, the steel structure of the
mechanism and the backrest post; five years on the casters, clutch plates,
torsion springs, handles, seat and backrest plastic structure, backrest height
adjuster, foam, polyurethane arm pads, pneumatic height cylinder, armrest
structure and all welds; and two years on the Air Lumbar(TM) pillow.
Although the Company does not have a stated return policy, the Company
endeavors to minimize product returns by offering prompt, on-site customer
service and repair. BodyBilt(R) chairs' interchangeable components permit easy
replacement of worn or defective components. Currently, the Company utilizes its
direct sales force, independent sales representatives and dealers to perform
on-site service and warranty repairs. Product returns to date have been
negligible.
MARKETING, SALES AND DISTRIBUTION. The Company primarily markets and sells
its chairs to corporate ergonomists and health, human services and safety
managers in Fortune 1000 companies. The chairs are sold mostly for "special use"
applications, where employees have requested a non-standard chair to reduce or
alleviate existing back problems or repetitive stress injuries. The sales
process usually involves a detailed technical explanation of how the chairs
function and documentation of the chairs' effectiveness in alleviating and/or
preventing back problems and repetitive stress injuries. This process may also
involve a comparative test of several ergonomic chairs conducted by the customer
where employees complaining of work-related discomfort are asked to evaluate the
chairs on a wide range of factors. Termed "sit-offs" by the trade, these tests
provide a practical and useful means of measuring the chair's effectiveness in
relieving individual discomfort. The typical BodyBilt(R) chair order is one to
three chairs because BodyBilt(R) chairs are purchased for "special-use"
purposes. The Company believes that it has an advantage over larger competitors
whose culture and structure are not adapted to accommodate the unique approach
required to sell "special-use" ergonomic chairs effectively. Historically, the
vast majority of the Company's sales have been to corporate customers, but a
growing percentage of the Company's sales have been made through retail
distribution directly to end users.
The Company had a diversified customer base of 1,628 accounts during the
nine-month period ending September 30, 1996. No single customer accounted for
more than 10% of the Company's sales for the 12-month period ended September 30,
1996. The Company's largest customers include Relax the Back(TM) retail stores,
Boeing Commercial Aircraft Company and Texas Instruments, Inc., whose individual
sales for the nine-month period ended September 30, 1996, represented 7.7%, 1.7%
and 1.6%, respectively, of the Company's total sales.
The Company believes it has achieved a high level of brand identity and
consumer awareness not typically found in the office furniture industry.
BodyBilt(R) chairs have received national publicity in newspapers, magazines and
television, including the New York Times, Wall Street Journal, People magazine,
Entertainment Tonight, The CBS Morning Show and The Tonight Show. The Company
also exhibits its products at numerous ergonomic, computer and office furniture
industry trade shows. In 1995, the Company spent approximately $1.0 million on
advertising, promotional materials and trade shows.
The Company's products are marketed by its direct sales force of 17 persons
and 21 independent sales representatives and its sales are channeled through a
network of over 550 dealers. Dealers typically purchase the product at a
discount from retail and resell the product at a higher price. The Company's
direct sales force is compensated on a salary plus commission basis. Independent
sales representatives are compensated solely on a commission basis. Independent
sales representatives accounted for 46.6% and 32.8% of sales for the year ended
December 31, 1995, and the nine months ended September 30, 1996, respectively.
One sales representative accounted for 17.1% and 16.4% of sales during these
periods. See "Risk Factors -- Dependence on Key Independent Sales
Representatives." The Company also has three employees to support marketing and
distribution personnel, eight employees providing customer service and a
computer graphics department consisting of three employees that creates sales
promotional literature, training films and specialized instructional videos for
customers upon request.
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The map set forth below indicates the locations of the Company's showrooms
and sales offices. In addition, the map illustrates the geographic location of
the Company's sales for the nine months ended September 30, 1996.
[MAP]
MANUFACTURING AND ASSEMBLY. The Company normally operates one shift, five
days per week, at its manufacturing and assembly facility located in Navasota,
Texas. A second shift is added to meet demand in peak periods, generally in the
fourth quarter when customers spend the remainder of their annual capital
budgets. Approximately 30,000 chairs have been manufactured and assembled for
the 12-month period ended September 30, 1996, representing an increase of 33.1%
over the previous 12-month period. The Company believes that the maximum
capacity of this facility is approximately 100,000 chairs per year and that its
future production requirements can therefore be satisfied with routine
additional capital investment, which is not expected to be substantial.
At its Navasota facility, the Company vacuum-forms seats and backs and cuts
and punches holes in various steel supports for the back rests, front wings,
arms-capable brackets and vertical/horizontal braces. The Company then assembles
the chairs and applies coverings. The Company manufactures BodyBilt(R) chairs
primarily to meet specific customer orders. A significant portion of finished
chairs are shipped within 24 hours after the manufacturing process is complete.
The Company's manufacturing goals are to: (i) strive to improve quality;
(ii) seek the best values in purchasing; (iii) uphold stringent zero defect
quality controls; and (iv) deliver orders promptly. The Company believes its
production standards are exceptional, with approximately 95% production
acceptance for the year ended December 31, 1995. Customer request dates were met
consistently at the 99% level during this period. The number of work hours
required to produce each chair has been reduced to 3.4 work hours per chair in
September 1996, down from 5.1 work hours per chair in September 1995. Largely as
a result of this improvement in manufacturing efficiency, the Company has
reduced its order backlog. As of September 30, 1996, backlog was $749,755,
compared to $1,096,515 as of September 30, 1995. The Company expects all orders
outstanding as of September 30, 1996 to be filled by year end.
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To further enhance its performance and maintain a high standard of customer
service, the Company has recently purchased a fully-integrated PC network-based
management information and control system designed specifically for mid-sized
custom manufacturers. This system should enhance the Company's ability to track
orders, costs, scheduling and inventories coupled with financial/accounting
requirements on a real-time basis.
SUPPLIERS. The Company uses a variety of materials in its manufacturing,
including plastic, foam, steel and various coverings. Certain components of
BodyBilt(R) chairs, principally the base mechanism, are made by other
manufacturers to the Company's specifications. The Company is dependent upon its
suppliers for timely delivery and product quality. While the Company's strategy
is to maintain multiple sources of supply, the Company's largest supplier,
Leggett & Platt, Inc., is currently the only source of a key component for
BodyBilt(R) chairs. While the Company has not had any adverse experience with
this supplier, the Company does not have binding supply contract with Leggett &
Platt, Inc. Until alternative supply sources are identified, the Company could
be subject to pricing risks, delivery delays and quality control problems, which
could have a material adverse effect on its results of operations.
PATENTS AND TRADEMARKS. The Company has applied to register the "ErgoBilt"
trademark and has registered "BodyBilt" in the United States. The Company
believes that protection of this trademark is important because of customer
association of the trademark with BodyBilt(R) chairs. The Company also has a
patent pending which relates to its current arm design. The Company's success
and its ability to compete are dependent in part upon its proprietary
technology. While the Company relies on patent, trademark, trade secret and
copyright laws to protect its technology, the Company believes that factors such
as the technological and creative skills of its personnel, new product
developments, frequent product enhancements, name recognition and reliable
product maintenance are more essential to establishing and maintaining a
technology leadership position. There can be no assurance that others will not
develop technologies that are similar or superior to the Company's technology.
The seat design used in certain BodyBilt(R) chairs, which accounted for
sales of approximately $1.2 million and $1.8 million for the years ended
December 31, 1995 and 1996, respectively, is derived from a design patented by
Dr. Jerome Congleton (the "Congleton Patent"). Dr. Congleton granted a license
to manufacture seats using the Congleton Patent to both BodyBilt and Ergonomic
Chairs, Inc., predecessor in interest to Neutral Posture Ergonomics, Inc.
("NPE"). Under the terms of this license agreement and related agreements, if
more than 50% of the outstanding capital stock of BodyBilt is transferred, its
license to manufacture chairs under the Congleton Patent will terminate.
Accordingly, upon consummation of the Merger, the Company will no longer hold a
license of the Congleton Patent. However, an agreement executed in connection
with a 1991 settlement of litigation between BodyBilt, NPE and Dr. Congleton
provides that a successor to BodyBilt has the right to manufacture, market,
distribute and sell commercial, industrial and laboratory chairs using the
Congleton Patent, although such successor may not advertise its use of the
Congleton Patent. Accordingly, the Company believes that termination of its
license of the Congleton Patent upon consummation of the Merger will have no
material impact on the Company's business. NPE is owned and controlled in part
by Drew Congleton's mother and sister. Dr. Congleton is the father of Drew
Congleton, who will become a director of the Company and is an officer of
BodyBilt. See "Management." Dr. Congleton is a consultant to NPE and has no
association with the Company.
PROPERTIES. The Company's manufacturing and assembly operations are
conducted in its 65,000 square-foot Navasota facility. The Company leases
approximately 2,000 square feet in Dallas for its principal executive offices.
The Company also leases a showroom in Denver, a showroom in the Chicago
Merchandise Mart and a small sales office in Dallas. The Company's other sales
offices are located in the homes of its direct sales representatives.
COMPETITION. The Company faces significant competition in the office
furniture market. BodyBilt(R) chairs compete on the basis of quality, health
benefits, comfort, service, price, design and durability. Existing and future
competitors within the office furniture industry, including Herman Miller, Inc.,
Steelcase Design Partnership and Haworth Group, Inc., offer or will offer
ergonomic products. Many of these competitors have
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much greater financial and other resources, and offer a broader product line,
than the Company. By targeting its marketing efforts to corporate ergonomists
and health, human services and safety managers rather than traditional
facilities or purchasing managers, the Company has been able to establish a
market niche in which the Company believes it is difficult for large office
furniture producers to compete effectively. There is also competition from
numerous smaller ergonomic furniture companies. The Company believes, however,
that smaller competitors are often constrained by a lack of capital, access to
distribution channels, manufacturing capabilities and/or management expertise.
The Company believes that the following aspects of its marketing, sales,
distribution and customer service are its competitive strengths: (i) the modular
design and interchangeable components of BodyBilt(R) chairs permit customization
to each worker's specifications, and the chairs can be adjusted to accommodate
changing individual needs; (ii) manufacturing, sales and customer service are
equipped to handle small orders, the traditional mainstay of the ergonomic
business; (iii) orders generally are processed, manufactured and delivered in
four weeks, approximately half the time normally required by large companies;
and (iv) using interchangeable components facilitates on-site service and
repair.
EMPLOYEES. As of September 30, 1996, the Company employed 138 full-time and
two part-time employees, of whom 14 were in management and administrative
positions, 29 were in marketing, sales and distribution, and 97 were in
manufacturing and assembly. None of the Company's employees is subject to any
collective bargaining agreements, and management considers its relations with
its employees to be good.
GOVERNMENT REGULATION. The Company's operations must meet federal, state
and local regulatory standards in the areas of safety, health and environmental
pollution controls. Historically, those standards have not had any material
adverse effect on the Company's sales or operations. The Company believes that
its Navasota facility is in compliance in all material respects with applicable
federal, state and local laws and regulations relating to safety, health and the
environment. The Company cannot at this time estimate the impact of any new
standards which may be applicable to the Company's operations or the costs of
compliance with such standards.
LEGAL PROCEEDINGS. The Company is involved from time to time in various
legal proceedings and claims incident to the normal conduct of its business. The
Company believes that such legal proceedings and claims, individually and in the
aggregate, are not likely to have a material adverse effect on the Company's
results of operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS. The Company's directors and executive
officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Gerald McMillan, PhD................... 45 Chairman of the Board and Director
Gerard Smith........................... 54 President and Chief Executive Officer
of the Company and Director
P. Michael Sullivan.................... 43 Senior Vice President and Chief
Financial Officer
Drew Congleton(1)...................... 34 Executive Vice President and National
Sales Director of BodyBilt and Director
Robert E. Faust(1)(2).................. 57 Director
William Brown Glenn Jr.(1)............. 43 Director
Mark McMillan(1)....................... 42 Director
W. Barton Munro(1)(2)(3)............... 54 Director
William Weed(1)(3)..................... 66 Director
</TABLE>
- ---------------
(1) To be appointed immediately after the completion of this offering
(2) Member of the Audit Committee
(3) Member of the Compensation Committee
Gerald McMillan, PhD, has been Chairman of the Board of Directors of
ErgoBilt since its inception on June 12, 1995, and was President from inception
to August 15, 1996. Dr. McMillan currently serves as Chairman of the Board of
Directors of ErgoBilt pursuant to the terms of that certain Executive Employment
Agreement dated October 1, 1996, between ErgoBilt and Dr. McMillan (the
"McMillan Employment Agreement"). He was employed as BodyBilt's Director of
Marketing from January 1, 1993 to July 31, 1994 and served as a consultant to
BodyBilt from August 1, 1994, until the creation of ErgoBilt. He also served as
a consultant, directly and indirectly, to BodyBilt during 1991 and 1992. Dr.
McMillan taught economics at the University of Dallas Graduate School of
Management. He holds a PhD, an MS and a BS in economics from Texas A&M
University. Dr. McMillan is the brother of Mark McMillan, the President of
BodyBilt and a consultant of the Company, who will become a director and a
principal shareholder of the Company upon the closing of this offering and the
completion of the Merger.
Gerard Smith became President and Chief Executive Officer of the Company
and a director of ErgoBilt as of August 15, 1996 pursuant to the terms of that
certain First Amended and Restated Executive Employment Agreement dated as of
October 15, 1996, among ErgoBilt, BodyBilt and Mr. Smith (the "Smith Employment
Agreement"). See "Management -- Employment and Consulting Agreements." Mr. Smith
will become President and Chief Executive Officer of BodyBilt upon completion of
the Merger. In August 1994, Mr. Smith formed Smith & Associates, a marketing
consulting firm, where he served as President from 1994 to 1996. He also served
as Chief Executive Officer of WTA TOUR Players Association, the organization
responsible for managing the worldwide women's professional tennis tour, from
1989 to 1994. Mr. Smith previously served as Publisher and Vice Chairman of
Newsweek from 1984 to 1989. Mr. Smith was Managing Director of the Los Angeles
office of Ogilvy & Mather Advertising from 1978 to 1984. He holds a BA in
psychology from Seton Hall University.
P. Michael Sullivan joined ErgoBilt as a consultant in September 1996. He
will become Senior Vice President and Chief Financial Officer of ErgoBilt upon
the date of closing of this offering pursuant to the terms of that certain
Executive Employment Agreement dated as of September 16, 1996, among ErgoBilt,
BodyBilt and Mr. Sullivan (the "Sullivan Employment Agreement"). See
"Management -- Employment and Consulting Agreements." Mr. Sullivan was Vice
President, Chief Financial Officer, Secretary and Treasurer for USDATA
Corporation from 1978 until he joined the Company. Mr. Sullivan is a certified
public accountant and a member of the Texas Society of Certified Public
Accountants. He holds a BS in Finance and Accounting from the University of
Texas.
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Drew Congleton has consented to become Executive Vice President and
National Sales Director of BodyBilt and has consented to become a director of
the Company immediately after the closing of the offering and the Merger. He has
served as BodyBilt's Vice President since 1994, and its National Sales Manager
and Director of Research and Development since 1988. He is a member of the Human
Factors and Ergonomic Society and represents BodyBilt on the National Science
Foundation Industry/University Cooperative Research Center for Ergonomics at
Texas A&M University. Mr. Congleton holds a BS in Organizational Communication
from the University of Texas.
Robert E. Faust has consented to become a director of the Company
immediately after the closing of the offering. From 1965 to 1996, Mr. Faust
served Westinghouse Electric Corporation in various executive and management
capacities, including Executive Vice President of Westinghouse Communications,
Vice President and Controller of Westinghouse Electric, and Vice President and
Controller of Westinghouse Broadcasting. Mr. Faust has served as a director of
Duquesne University, Mercy Hospital Foundation, Civic Light Opera of Pittsburgh,
and Pittsburgh Hearing, Speech and Deaf Services, Inc., and as Chairman of
Information Systems Management Council Manufacturers' Alliance for Productivity
and Innovation. He holds a BS and an MBA in Finance from Duquesne University. He
is a graduate of the Harvard University Advanced Management Program.
William Brown Glenn, Jr. has consented to become a director of the Company
immediately after the closing of the offering. Mr. Glenn is principally engaged
in private investments. Since 1994, Mr. Glenn has been a Vice President of Air
Age Services, Inc., a privately-held commercial aircraft maintenance and
modification facility. Mr. Glenn was a Senior Vice President of Eastbridge
Capital Inc./Eastbridge Asset Management from 1988 to 1994. Eastbridge is a
primary dealer to the Federal Reserve and also provides hedge fund management,
proprietary trading and investment banking services. Prior to November 1996, Mr.
Glenn was a registered representative of APEX Securities, Inc. Mr. Glenn also
has held capital markets and corporate finance positions with Merrill Lynch and
Smith Barney, Harris Upham, Co. He holds a BA in Business Administration from
the University of North Carolina.
Mark McMillan has consented to become a director of, and has entered into
an agreement to serve as a consultant for a two-year period to, the Company
immediately after the closing of the offering. From 1994 to the closing of the
offering Mr. McMillan has served as President of BodyBilt. Prior to that, he
served as Vice-President of BodyBilt from 1988 to 1994. He holds a BA in
Agricultural Economics from Texas A&M University. See "Certain Transactions."
W. Barton Munro has consented to become a director of the Company
immediately after the closing of the offering. He has served as a management
consultant to BodyBilt for the past two years and has provided tax, legal and
financial consulting services to various other clients. Mr. Munro has been Vice
President, Smith Dairy Queen, Bryan, Texas, since 1991. Mr. Munro served as a
tax partner in the Houston office of Peat, Marwick, Mitchell & Co. from 1972 to
1980 and was a Tax Manager in the Dallas office of Price Waterhouse & Co. from
1963 to 1972. Mr. Munro is a certified public accountant and is a member of the
Texas Society of Certified Public Accountants. He holds a BBA and a JD from
Southern Methodist University.
William Weed has consented to become a director of the Company immediately
after the closing of the offering. Mr. Weed has been managing partner of Paul
Ray Berndtson, a New York executive search firm, since 1987. Prior to that, he
was a Director of The Ogilvy Group, Director of Worldwide Accounts and member of
the Personnel Committee for Ogilvy & Mather Worldwide and Chairman of Ogilvy &
Mather/Europe, all engaged in advertising and marketing. Mr. Weed also serves
the American Red Cross of Greater New York as Vice Chairman of the Board and is
a member of the Board's executive and nominating committees. He is a trustee
emeritus and a former member of the executive committee of the American Academy
in Rome, Italy. He holds a BS from Carleton College and an MBA from Harvard
University.
TERMS OF OFFICE. Members of the Company's Board of Directors will be
elected at each annual meeting of shareholders, to serve one-year terms or until
their successors are elected and qualified or their earlier resignation or
removal. ErgoBilt and certain current and future principal shareholders of
ErgoBilt and their affiliates have entered into a voting agreement pursuant to
which the parties thereto have agreed, among other things, to vote all shares of
stock of ErgoBilt held by them to elect designated individuals to the Board of
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<PAGE> 36
Directors commencing immediately after the closing of the Merger. Vacancies in
unexpired terms and any additional positions created are filled by action of the
Board of Directors, subject to the Voting Agreement. See "Principal
Shareholders." The executive officers of the Company are elected annually by the
Board of Directors and serve at the discretion of the Board of Directors until
their successors are elected and qualified or their earlier resignation or
removal.
AUDIT COMMITTEE. The Company's Board of Directors has established an Audit
Committee comprised entirely of independent directors. The functions of the
Audit Committee are to make recommendations to the Board of Directors regarding
the engagement of the Company's independent accountants and to review with
management and the independent accountants the Company's financial statements,
basic accounting and financial policies and practices, audit scope and
competency of accounting personnel. Members of the Audit Committee are appointed
annually by the Board of Directors and serve at the discretion of the Board of
Directors until their successors are appointed or their earlier resignation or
removal.
COMPENSATION COMMITTEE. The Company's Board of Directors has established a
Compensation Committee. The Compensation Committee is responsible for reviewing
and making recommendations to the Board of Directors with respect to
compensation of executive officers, other compensation matters and awards under
the Company's stock option plan. Members of the Compensation Committee are
appointed annually by the Board of Directors and serve at the discretion of the
Board until their successors are appointed or their earlier resignation or
removal.
COMPENSATION OF DIRECTORS. Directors who are not also employees of the
Company receive $500 per board meeting attended and $200 per board committee
meeting attended and are reimbursed for out-of-pocket expenses incurred for
attendance at meetings. Under the Company's stock option plan, they will each
receive an annual formula grant of nonqualified options to purchase 2,000 shares
of Common Stock exercisable at the fair market value on the date of grant. See
"Management -- Stock Option Plan."
KEY EMPLOYEES. In addition to its executive officers, the Company believes
that the following persons are key employees:
Bob Schubert, 42, has served as the Controller and Director of Human
Resources and Safety of BodyBilt since 1993. He joined BodyBilt as General
Manager in 1990. Mr. Schubert holds a BA from Texas A&M University.
Matthew L. Prochaska, 32, is BodyBilt's Director of Plant Operations. Mr.
Prochaska joined BodyBilt as Special Projects Manager in January 1993 and served
as Assistant Plant Manager, Plant Manager or International Sales Manager from
July 1993 to September 1996. From 1986 to 1993, he worked for Campus Crusade for
Christ, International in film production and distribution and in translating and
publishing related playbills. Mr. Prochaska spent 1991 to 1993 as a campus
director in Capetown, South Africa. He holds a BA from Texas A&M University.
EXECUTIVE COMPENSATION
Gerald McMillan received $72,377 for services rendered to ErgoBilt for the
year ended December 31, 1995. Mark McMillan, in his capacity as President and
Chief Executive Officer of BodyBilt, received no compensation from BodyBilt in
the form of salary or bonus for the year ended December 31, 1995. However,
certain entities for which Mark McMillan is the sole shareholder received
aggregate cash consideration of $403,488 for services rendered to and products
acquired by BodyBilt during the year ended December 31, 1995. See "Certain
Transactions." Drew Congleton, who has served as BodyBilt's Vice President and
National Sales Manager and Director of Research and Development, received
$122,392 in the form of salary and bonus for services rendered to BodyBilt for
the year ended December 31, 1995. No other executive officer of ErgoBilt or
BodyBilt received more than $100,000 for services rendered to the respective
companies for the year ended December 31, 1995.
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<PAGE> 37
STOCK OPTION PLAN
Scope. The Board of Directors and shareholders of the Company have approved
the ErgoBilt, Inc. 1996 Stock Option Plan (the "Stock Option Plan"). The Stock
Option Plan authorizes the Company to award incentive stock options and
nonqualified stock options to purchase Common Stock to officers, employees,
consultants and directors of the Company. The purpose of the Stock Option Plan
is to attract, retain and motivate such persons.
The Stock Option Plan authorizes the award of 400,000 shares of Common
Stock to be used for incentive stock options or nonqualified stock options or
restricted stock grants, of which no options have been granted as of the date of
this prospectus. If an award made under the Stock Option Plan expires, is
canceled or is otherwise terminated, those shares will be available for future
awards under the Stock Option Plan. The Stock Option Plan will terminate
December 31, 2006.
Administration. The Stock Option Plan will be administered by the
Compensation Committee. Subject to the provisions of the Stock Option Plan, the
Compensation Committee will have authority to select those officers, directors,
employees and consultants of the Company to receive awards, to determine the
time or times of receipt, to determine the types of awards and the number of
shares awarded and to establish the terms, conditions and provisions of such
awards. In making such award determinations, the Compensation Committee may take
into account the nature of services rendered by the recipient, his or her
present and potential contribution to the Company's growth and success and such
other factors as the Compensation Committee deems relevant. The Compensation
Committee is authorized to interpret the Stock Option Plan, to establish, amend
and revoke any rules and regulations relating to the Stock Option Plan, to
determine the terms and provisions of any agreements made pursuant to the Stock
Option Plan and to make all other determinations that may be necessary or
advisable for the administration of the Stock Option Plan.
Stock Options. Both incentive stock options and nonqualified stock options
(collectively referred to as "Stock Options") may be granted pursuant to the
Stock Option Plan. All Stock Options granted under the Stock Option Plan will
have an exercise price per share to be determined by the Board of Directors,
provided that the exercise price per share under each Stock Option shall not be
less than the fair market value of a share of Common Stock at the time the Stock
Option is granted (110% of such fair market value in the case of incentive stock
options granted to a shareholder who owns 10% or more of the Company's
outstanding Common Stock). The maximum term for all Stock Options granted under
the Stock Option Plan is ten years (five years in the case of an incentive stock
option granted to a shareholder who owns 10% or more of the Company's
outstanding Common Stock). Moreover, no Stock Options may be granted under the
Stock Option Plan more than ten years after the date of its adoption. All Stock
Options are nontransferable other than by will or the laws of descent and
distribution or a qualified domestic relations order, and during an optionee's
lifetime may be exercised only by the optionee or the optionee's guardian or
legal representative. Stock Options are exercisable at such time and in such
installments as the Board of Directors may provide at the time the Stock Option
is granted. The Compensation Committee may accelerate the exercisability of any
Stock Option at any time. The purchase price for shares acquired pursuant to the
exercise of a Stock Option must be paid in the manner determined by the Board of
Directors. The terms and conditions of Stock Options relating to their treatment
upon termination of the optionee's employment or association with the Company
will be determined at the time the Stock Options are granted. The Company
anticipates that Stock Options will vest over a period of four years with the
initial 20% becoming exercisable on the six-month anniversary of the grant date
and an additional 20% becoming exercisable on each of the first four
anniversaries of the grant date. In the event of a change in control of the
Company, as defined, awards under the Stock Option Plan become exercisable
within 60 days. In addition, outside directors of the Company receive an annual
formula grant of nonqualified options with a five-year term to purchase 2,000
shares of Common Stock exercisable at the fair market value on the date of
grant.
EMPLOYMENT AND CONSULTING AGREEMENTS
Gerald McMillan. The Company has entered into the McMillan Employment
Agreement with Gerald McMillan to serve as Chairman of the Board of Directors of
the Company for a term commencing as of
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<PAGE> 38
October 1, 1996, and continuing for three years after the closing of the Merger.
Dr. McMillan will receive an annual base salary of $1, be eligible to
participate in all Company bonus/incentive programs and stock option plans and
be eligible to receive benefits under all other Company employee benefit plans.
The McMillan Employment Agreement contains a non-competition covenant for the
term of his employment and for a period of two years thereafter.
Gerard Smith. ErgoBilt has entered into the Smith Employment Agreement with
Gerard Smith to serve as a director and President and Chief Executive Officer of
ErgoBilt and BodyBilt, for a term commencing as of August 15, 1996, and
continuing for three years after the closing of this offering. Mr. Smith will
receive an annual base salary of $125,000 following the closing of this offering
and will be eligible to participate in all Company bonus/incentive programs and
stock option plans and to receive benefits under all other Company employee
benefit plans. The Smith Employment Agreement also sets forth certain terms
under which Mr. Smith is granted registration rights for shares of Common Stock
owned by him. Pursuant to the terms of the Smith Employment Agreement, upon Mr.
Smith's voluntary termination of employment with the Company, Gerald McMillan
has the right to purchase varying amounts of Mr. Smith's shares of Common Stock
based upon Mr. Smith's length of service, less that number of shares having a
value equal to $500,000, based on the price per share of Common Stock in this
offering. Upon the termination of Mr. Smith's employment with the Company for
due cause or the breach of the Smith Employment Agreement by the Company, Dr.
McMillan has the right to purchase varying amounts of Mr. Smith's shares of
Common Stock, less that number of shares having a value equal to $1,750,000,
based on the price per share of Common Stock in this offering. Upon the
occurrence of any triggering event, if Dr. McMillan does not purchase all of the
shares he is entitled to purchase, any unpurchased shares may be redeemed by the
Company. Mr. Smith has also agreed to a non-competition covenant with ErgoBilt
during the term of his employment and for a period of two years thereafter.
Mr. Smith also renders services to the Company under a Consulting Services
Agreement entered into with the Company in July 1996. Pursuant to this
agreement, Mr. Smith provides certain management services to the Company. This
agreement terminates on the earlier of the closing of this offering or March 20,
1997. Mr. Smith has been compensated in the amount of $71,700 to date under this
agreement. The Company's payment obligation to Mr. Smith is secured by the
pledge of unrelated securities by Gerald McMillan. See "Certain Transactions."
P. Michael Sullivan. ErgoBilt has entered into the Sullivan Employment
Agreement with P. Michael Sullivan to serve as Senior Vice President and Chief
Financial Officer of the Company for a three-year term commencing as of the
closing of this offering. Mr. Sullivan will receive an annual base salary of
$85,000 and be eligible to participate in all Company bonus/incentive programs
and stock option plans and to receive benefits under all other Company employee
benefit plans. Mr. Sullivan has also agreed to a non-competition covenant with
the Company during the term of his employment and for a period of two years
thereafter.
Mr. Sullivan renders services to the Company pursuant to a Consulting
Services Agreement entered into with ErgoBilt in September 1996. Pursuant to
this agreement, Mr. Sullivan provides certain financial management services
related to this offering during the period commencing on the date of the
Consulting Services Agreement and terminating on the earlier of the closing of
this offering or March 20, 1997. Mr. Sullivan receives a consulting fee of
$7,000 per month for his services and has been paid $21,000 to date under the
agreement.
Drew Congleton. Upon the closing of this offering and the Merger, BodyBilt
will enter into an Executive Employment Agreement with Drew Congleton, who will
become a director and principal shareholder of the Company upon completion of
this offering, pursuant to which Mr. Congleton will serve as Executive Vice
President and National Sales Director of BodyBilt for an initial three-year
term. The term shall be automatically renewed for successive one year terms
until either party gives written notice of termination 60 days prior to the
expiration of a then current term. Mr. Congleton will receive an annual base
salary of $80,000 and be eligible to participate in all Company bonus/incentive
programs and stock option plans and to receive benefits under all other Company
employee benefit plans. The Executive Employment Agreement will include a
non-competition covenant for the term of his employment and for a period of
three years thereafter.
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<PAGE> 39
For information regarding a consulting services agreement between the
Company and Mark McMillan, see "Certain Transactions."
All compensation decisions concerning executive officers have been made by
the Board of Directors. See "Management -- Executive Compensation."
CERTAIN TRANSACTIONS
Gerald McMillan, the Chairman of the Board and a principal shareholder of
the Company, served either as a consultant or an employee of BodyBilt from
January 1993 to February 1995. Dr. McMillan, or other entities controlled by
him, received $132,660, $204,516 and $9,240 in 1993, 1994 and 1995,
respectively, as consulting fees or employee salary for services provided to
BodyBilt. BodyBilt paid or accrued $403,917 to the Company, then wholly-owned by
Dr. McMillan, during the period from June 12, 1995, through December 31, 1995,
and $291,173 for the nine-month period ended September 30, 1996, for promotional
literature and marketing development.
Approximately $300,000 of the net proceeds of this offering will be used to
pay certain obligations to Agrivest, Inc., a corporation owned by Mark McMillan
("Agrivest"), for consulting services related to the Merger and this offering.
Pursuant to a March 1993 agreement, in each of 1993, 1994 and 1995,
BodyBilt paid Agrivest $36,000 for accounting, payroll, and other administrative
services. During 1993, 1994 and 1995, BodyBilt also paid Agrivest $12,000,
$109,275 and $192,900, respectively, for management services, and $6,000, $6,000
and $2,000, respectively, for equipment rental.
In January 1996, BodyBilt entered into a revised Business Management
Contract with Agrivest, pursuant to which Agrivest provides accounting and other
administrative services. Agrivest receives $5,000 a month for bookkeeping and
general administrative services and $150 an hour for chief executive officer and
chief financial officer services. During the nine-month period ended September
30, 1996, BodyBilt paid Agrivest an aggregate of $98,750 pursuant to this
contract. This contract, which has a three-year term, may be terminated on 30
days' written notice by either party.
During 1995 and the nine-month period ended September 30, 1996, BodyBilt
purchased $172,588 and $10,000, respectively, of furniture and fixtures and
building and leasehold improvements from Genemco, Inc., a corporation owned by
Mark McMillan.
All of BodyBilt's loans from The First National Bank of Bryan are
guaranteed by Mark McMillan. The total amount of these loans was approximately
$1.5 million at September 30, 1996. The Company intends to replace BodyBilt's
existing line of credit with a new line of credit to be established by the
Company after completion of the offering, at which time all of Mr. McMillan's
personal guarantees of the existing BodyBilt line of credit will be released.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Use of Proceeds" and Note 3 to BodyBilt's financial statements.
Mr. McMillan has also guaranteed the Company's obligations to Leggett & Platt,
Inc.
In connection with the issuance of the Convertible Note to Summit, Gerald
McMillan sold 34,000 shares of Common Stock to Summit. The Convertible Note is
secured by a pledge of the first $500,000 that Gerald McMillan would be entitled
to receive as a commission upon the sale of BodyBilt (other than in connection
with the Merger) pursuant to certain agreements between Dr. McMillan and
BodyBilt. This pledge will be released upon payment of the Convertible Note. If
the Merger is consummated, Dr. McMillan will not be entitled to any commission.
For further information concerning the issuance of the Convertible Note, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The Company has entered into a letter agreement with Mark McMillan pursuant
to which the Company will purchase from Mr. McMillan or Dr. Troutman, at a
purchase price equal to 90% of the price to public of the shares offered in this
offering, that number of shares required to be delivered to the holder of the
Convertible Note upon conversion. Approximately $225,000 of the net proceeds of
this offering will be used to
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<PAGE> 40
fund the purchase price of the acquired shares, assuming a price to public of
$7.50 per share. Mr. McMillan may assign a portion of his obligation to Dr.
Troutman. See "Use of Proceeds."
In October 1996, the Company entered into a Consulting Services Agreement
with Mark McMillan, who will become a director and a principal shareholder of
the Company, for a two-year term commencing on the closing of this offering. Mr.
McMillan will serve as a consultant to the Company with respect to the Company's
operations, particularly during the transition period. Mr. McMillan will be
compensated at the rate of $150 per hour. Mr. McMillan will be eligible to
participate in all Company bonus/incentive programs and stock option plans and
to receive benefits under all other Company employee benefit plans. The
Consulting Services Agreement includes a non-competition covenant by Mr.
McMillan during the term of the agreement and for three years thereafter.
Gerald McMillan has secured the payment obligations of ErgoBilt to Mr.
Smith under Mr. Smith's Consulting Services Agreement by pledging 80,000 shares
of common stock of SA TeleCom, Inc. Upon completion of this offering, these
payment obligations of ErgoBilt will be fully satisfied and the pledged stock
released.
In connection with the execution and delivery of Mr. Smith's Consulting
Services Agreement, Gerald McMillan, Chairman of the Board of Directors of the
Company, sold and transferred 678,240 shares of Common Stock to Mr. Smith in
exchange for $31,040 in the form of a promissory note bearing interest at 7.5%.
Principal and interest accrued are payable on June 27, 1999. Mr. Smith's payment
obligation is secured by a lien on the transferred shares. The Smith Employment
Agreement gives Dr. McMillan and/or the Company the right to purchase varying
amounts of such shares upon the termination of his employment with the Company,
based upon his length of service. See "Management -- Employment and Consulting
Agreements" and "Principal Shareholders."
In 1989, BodyBilt borrowed $75,000 for working capital from Dr. Richard
Troutman, a BodyBilt Shareholder and a principal shareholder of the Company. The
Company intends to use a portion of the proceeds of this offering to repay the
loan from Dr. Troutman. See "Use of Proceeds."
The foregoing transactions were among affiliated parties and necessarily
involved conflicts of interest. The Company believes that these transactions
were on no less favorable terms than were reasonably available from unaffiliated
third parties. Except as described above, all agreements pursuant to which the
transactions described above in "Certain Transactions" were conducted will
terminate no later than the effective date of the Merger.
Although the Company has no present intention to do so, it may in the
future enter into other transactions incident to its business with its
directors, officers, prior shareholders and other affiliates. The Company's
policy is that any transaction in the future with an affiliated entity,
executive officer or director will be subject to review and approval by a
majority of the Company's directors who have no interest in the transaction and
will be on no less favorable terms than the Company could obtain from
unaffiliated parties.
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<PAGE> 41
PRINCIPAL SHAREHOLDERS
The following table sets forth as of January 9, 1997, and as adjusted to
reflect the issuance of Common Stock and Series A Preferred Stock in the Merger,
the sale of the shares of Common Stock offered hereby and the addition of six
members to the Board of Directors immediately after this offering, certain
information with respect to the beneficial ownership of Common Stock and Series
A Preferred Stock by (i) each person who is or will be the beneficial owner of
more than 5% of the outstanding Common Stock or Series A Preferred Stock, (ii)
each of the Company's directors and executive officers and (iii) all directors
and executive officers of the Company as a group. Unless otherwise indicated,
each person listed in the table has or will have sole voting and investment
power over the Common Stock or Series A Preferred Stock that the person
beneficially owns. All of the persons included in the table have agreed not to
dispose of their shares for 180 days after the date of this prospectus. See
"Shares Eligible For Future Sale."
<TABLE>
<CAPTION>
AS ADJUSTED(2)
--------------------------------------------
SHARES OF COMMON SHARES OF COMMON SHARES OF SERIES A
STOCK STOCK PREFERRED STOCK
BENEFICIALLY OWNED(2) BENEFICIALLY OWNED BENEFICIALLY OWNED
--------------------- --------------------- -------------------
NAME AND ADDRESS OF PERCENT PERCENT PERCENT
BENEFICIAL OWNER(1) NUMBER OF CLASS NUMBER OF CLASS NUMBER OF CLASS
------------------- --------- -------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Gerald McMillan(3)(5)......... 2,096,804 74.2% 2,096,904 36.4% -- 0.0%
Gerard Smith(4)(5)............ 678,240 24.0% 678,240 11.8% -- 0.0%
Drew Congleton(6)............. -- 0.0% 357,500(7) 6.2% 169,660 25.0%
Robert E. Faust(6)............ -- 0.0% -- 0.0% -- 0.0%
William Brown Glenn, Jr.(6)... -- 0.0% -- 0.0% -- 0.0%
Mark McMillan(6)(8)........... -- 0.0% 536,250(7) 9.3% 254,492 37.5%
W. Barton Munro(6)............ -- 0.0% -- 0.0% -- 0.0%
Dr. Richard Troutman.......... -- 0.0% 536,250(7) 9.3% 254,492 37.5%
William Weed(6)............... -- 0.0% -- 0.0% -- 0.0%
All directors and executive
officers as a group (2
persons; 9 persons after
this offering).............. 2,775,044 98.2% 3,668,894(7) 63.7% 424,152 62.5%
</TABLE>
- ---------------
(1) The address for Gerald McMillan and Gerard Smith is 5000 Quorum Drive, Suite
147, Dallas, Texas 75240. The address for Drew Congleton is 2815 Manzano
Court, College Station, Texas 77845. The address for Mark McMillan is 2506
River Forest, Bryan, Texas 77802. The address for Dr. Richard Troutman is
10225 Collins Avenue, Bal Harbour, Florida 33157.
(2) Applicable percentage of ownership assumes 2,826,000 shares of Common Stock
outstanding on January 9, 1997, and 5,756,000 shares of Common Stock,
assuming conversion of all 678,644 shares of Series A Preferred Stock
outstanding after the completion of this offering. Assumes completion of
this offering and the Merger and an initial offering price of $7.50 per
share. See "The Reorganization."
(3) Includes 296,230 shares held by a trust for the benefit of Gerald McMillan's
three minor children, as to which Gerald McMillan disclaims beneficial
ownership.
(4) Includes 25,434 shares held by the Ashleigh Lynch Smith 1996 Irrevocable
Trust for which Mr. Smith is trustee and 25,434 shares held by the Alyssa
Kay Smith 1996 Irrevocable Trust for which Mr. Smith is trustee. Mr. Smith
disclaims beneficial ownership of all shares held by such trusts.
(5) The Smith Employment Agreement gives Gerald McMillan and/or the Company the
right to purchase varying amounts of the shares of Common Stock beneficially
owned by Mr. Smith upon the termination of Mr. Smith's employment with the
Company during the three-year term of the Smith Employment Agreement. See
"Management -- Employment and Consulting Agreements."
(6) To become a director of the Company immediately after the closing of this
offering. All of the shares of common stock and Series A Preferred Stock are
held of record by Carter Creek Investments, Ltd., a Texas limited
partnership, the general partner of which is River Forest Investments, Inc.,
a Texas corporation wholly-owned by Mark McMillan.
(7) Includes shares of Common Stock that the person or group has the right to
acquire at any time upon conversion of the Series A Preferred Stock included
in the table. See "Description of Capital Stock -- Series A Preferred
Stock."
(8) Does not give effect to the Company's purchase of 33,333 shares of Common
Stock from Mr. McMillan to enable the Company to deliver shares upon
conversion of one-half of the principal balance of the Convertible Note. See
"Use of Proceeds" and "Certain Transactions."
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<PAGE> 42
VOTING AGREEMENT. ErgoBilt, the BodyBilt Shareholders, Gerard Smith,
Gerald McMillan and certain of these shareholders' affiliates have entered into
a voting agreement pursuant to which, among other agreements, the parties have
agreed to vote any and all shares of voting stock of ErgoBilt held by them
(collectively, the "Voting Shares") to elect Gerald McMillan, Gerard Smith, Drew
Congleton and William Brown Glenn, Jr. members of the Board of Directors
commencing immediately following the closing of the Merger and continuing for
three consecutive one-year terms thereafter at each of ErgoBilt's 1997, 1998 and
1999 annual shareholders' meetings. In addition, the parties have agreed to vote
the Voting Shares to elect W. Barton Munro, William Weed and Robert Faust
members of the Board of Directors commencing immediately following the closing
of the Merger and continuing for a one-year term thereafter at the 1997 annual
meeting of shareholders of ErgoBilt. The Voting Agreement also provides that if
William Brown Glenn, Jr. is unable to fulfill any term of service as a director
as contemplated, Dr. Troutman retains the right to nominate a successor to fill
the seat vacated by Mr. Glenn, and the parties agree to vote their Voting Shares
for such nominee. See "Management."
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20 million shares
of Common Stock, $.01 par value, of which 2,826,000 shares were issued and
outstanding as of September 30, 1996, and 10 million shares of preferred stock,
$.01 par value (the "Preferred Stock"), of which 2.0 million shares will be
designated Series A Preferred Stock prior to the completion of the Merger, and
none of which are issued and outstanding. Upon completion of the Merger
simultaneously with the closing of this offering, the Company expects to issue
678,644 shares of Series A Preferred Stock and 751,356 shares of Common Stock to
BodyBilt Shareholders, assuming an initial public offering price of $7.50 per
share. See "The Reorganization."
COMMON STOCK. Holders of Common Stock are entitled to one vote for each
share held in the election of directors and on all other matters submitted to a
vote of shareholders. Cumulative voting of shares of Common Stock is prohibited.
Accordingly, holders of a majority of the shares of Common Stock entitled to
vote in any election of directors may elect all of the directors standing for
election.
Subject to the prior rights of the holders of any outstanding Preferred
Stock, holders of Common Stock are entitled to receive dividends when, as and if
declared by the Board of Directors out of funds legally available therefor. See
"Dividend Policy." Upon the liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to receive ratably the assets
of the Company remaining after payment of all liabilities and payment to holders
of any outstanding Preferred Stock having an involuntary liquidation preference.
Holders of Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
offered by the Company in this offering will be, when issued and paid for,
validly issued, fully paid and nonassessable.
PREFERRED STOCK. Pursuant to the Company's Restated Articles of
Incorporation, the Board of Directors is authorized, without any further notice
or action of the shareholders, to issue 10.0 million shares of Preferred Stock
in one or more series and to determine the relative rights, preferences and
privileges of the shares of any such series. Except with respect to the Series A
Preferred Stock to be issued upon completion of the Merger, there are no shares
of Preferred Stock outstanding, and the Company has no present plans to issue
any shares of Preferred Stock.
SERIES A PREFERRED STOCK. No dividends are payable upon shares of Series A
Preferred Stock. Series A Preferred Stock is entitled to an involuntary
liquidation preference of $3.00 per share in the event of any involuntary
liquidation, dissolution or winding up of the affairs of the Company, before any
distribution or payment is made to holders of Common Stock. Series A Preferred
Stock holders are entitled to one vote per share and, except as otherwise
provided by applicable law, vote together with the holders of shares of Common
Stock as a single class upon all matters upon which shareholders are entitled to
vote.
At any time within four years immediately following the Merger, each share
of Series A Preferred Stock may be converted into that number of shares of
Common Stock equal to the greater of either: (i) the quotient of (1) the average
closing price of the Common Stock as quoted on a national securities exchange or
on the Nasdaq National Market for the 30 trading days immediately preceding the
date on which notice of conversion is delivered by a holder of Series A
Preferred Stock to the Company, divided by (2) the initial
38
<PAGE> 43
public offering price; or (ii) one. No fractional shares of Common Stock will be
issued upon conversion of shares of Series A Preferred Stock and no cash payment
will be made in place of any fraction of a share which would otherwise be
issuable.
Any Series A Preferred Stock not converted by the conclusion of the
four-year period following the Merger shall be converted automatically into that
number of shares of Common Stock equal to the greater of either: (i) the
quotient of (1) the average closing price of the Common Stock as quoted on a
national securities exchange or on the Nasdaq National Market for the 30 trading
days immediately preceding the date which is four years and one day after
closing, divided by (2) the initial public offering price; or (ii) one (1).
CERTAIN ANTI-TAKEOVER PROVISIONS. Certain provisions of the Company's
Restated Articles of Incorporation and Amended and Restated Bylaws, including
the provisions limiting the right of shareholders to call special meetings and
eliminating the right to take action without a meeting, and the advance notice
provision, could make more difficult the acquisition of the Company by means of
a tender or exchange offer, a proxy contest or otherwise. The provisions are
summarized below. The Company and the principal shareholders have also entered
into the Voting Agreement to re-elect certain members of the Board of Directors
of the Company for three successive one-year terms. See "Management" and
"Principal Shareholders."
Size of Board of Directors. The Company's Restated Articles of
Incorporation provide that the Board of Directors will consist of not less than
five nor more than nine members, with the exact number to be determined from
time to time by the affirmative vote of a majority of directors then in office.
The exact number of board members is presently set at eight. The Board of
Directors, and not the shareholders, has the authority to determine the number
of directors and could prevent any shareholder from obtaining majority
representation on the Company's Board of Directors by enlarging the Board of
Directors and by filling the new directorships with the shareholder's own
nominees.
Preferred Stock. The Restated Articles of Incorporation authorize the Board
of Directors to establish and issue one or more series of Preferred Stock
without any action by the shareholders of the Company. Pursuant to this
authority, the Company will issue the Series A Preferred Stock to the BodyBilt
Shareholders in connection with the Merger. Although the Board has no intention
at the present time of doing so, it could issue a series of Preferred Stock that
could, depending on the terms of such series, provide for a liquidation
preference over the Common Stock or impede the completion of a merger, tender
offer or other takeover attempt. The Board of Directors, in so acting, could
issue Preferred Stock having terms that discourage an acquisition attempt
through which an acquiror may be otherwise able to change the composition of the
Board of Directors, including a tender or exchange offer or other transaction
that some, or a majority, of the Company's shareholders might believe to be in
their best interest.
No Shareholder Action By Written Consent; Special Meetings. The Company's
Restated Articles of Incorporation provide that any action required to be taken
or which may be taken by holders of Common Stock must be effected at a duly
called annual or special meeting of such holders and may not be taken by any
written consent of such shareholders. The Company's Restated Articles of
Incorporation provide that special meetings of shareholders of the Company may
be called only by the Chairman of the Board, the President, any two directors or
the holders of at least 50% of all the shares of the Company entitled to vote at
a proposed special meeting. These provisions may have the effect of delaying
consideration of a shareholder proposal until the next annual meeting unless a
special meeting is called. The provisions of the Restated Articles of
Incorporation prohibiting shareholder action by written consent would prevent
the holders of a majority of the voting power of the Company from taking action
by written consent without giving all the shareholders of the Company entitled
to vote on a proposed action the opportunity to participate in determining such
proposed action.
Removal of Directors. The Company's Restated Articles of Incorporation
provide that directors may be removed from office, but only for cause, and that
any action taken by shareholders to remove one or more directors for cause may
only be taken by the affirmative vote of a majority of the directors then in
office (exclusive of the director whose removal is sought) or the holders of at
least a majority of the total outstanding shares entitled to vote at a special
meeting called for such purpose. See "Principal Shareholders -- Voting
Agreement."
39
<PAGE> 44
Amendment of Bylaws. The Company's Amended and Restated Bylaws may be
adopted, amended or repealed by a two-thirds vote of (i) the shares entitled to
vote or (ii) the directors then in office.
Approval of Certain Transactions. The Company's Amended and Restated Bylaws
require, in addition to any vote required by law or agreement, the affirmative
vote by at least two-thirds of either (i) the outstanding shares of "voting
stock," or (ii) the Board of Directors, to approve, authorize, adopt or
consummate by the Company and any of its subsidiaries any "business combination"
with a "related person." A "business combination" includes (i) any merger or
consolidation of the Company with or into a "related person," (ii) any merger or
consolidation of a "related person" with or into the Company, (iii) any transfer
of a substantial part (20% or more) of the assets of the Company to a "related
person," (iv) any transfer of a substantial part (20% or more) of the assets of
a "related person" to the Company, (v) the issuance of any securities of the
Company to a "related person," (vi) certain reclassifications and
recapitalizations, (vii) any partial or complete liquidation, spin-off,
split-off, or split-up or similar transaction of the Company involving a
"related person," and (viii) any transaction, event, agreement, contract,
commitment or other arrangement that provides for, is intended to or is likely
to have an effect similar to the above. A "related person" includes, but is not
limited to, any person that owns or is the beneficial owner of five percent or
more of the outstanding shares of the Company's voting stock. "Voting stock"
constitutes shares which are entitled to vote for the election of the Company's
directors. A related person's voting stock is excluded from the calculation of
shareholder votes relating to a "business combination."
Advance Notice Provisions for Certain Shareholder Actions. The Company's
Amended and Restated Bylaws provide that shareholders seeking to bring business
before an annual or special meeting of shareholders must provide timely notice
thereof in writing. To be timely, this notice must be received at the Company's
principal executive offices not less than 90 days nor more than 120 days prior
to the meeting. A shareholder's notice to the Secretary shall set forth as to
each matter the shareholder proposes to bring before the meeting (i) a brief
description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting, and, in the event that such
business includes a proposal to amend either the Restated Articles of
Incorporation or the Amended and Restated Bylaws, the language of the proposed
amendment; (ii) the name and record address of the shareholder proposing such
business; (iii) the class and number of shares of the Company which are
beneficially owned by such shareholder; and (iv) any material interest of such
shareholder in such business. The provisions requiring timely notice of
shareholder business ensures both orderly meetings and an adequate opportunity
for the Board of Directors to review business to be decided at such meetings.
This provision, however, will also preclude some shareholders from bringing
matters before the shareholders and directors at an annual or special meeting.
LIMITATION ON LIABILITY. The Company's Restated Articles of Incorporation
and Amended and Restated Bylaws provide for indemnification of officers,
directors, employees and consultants of the Company. Under existing law,
directors of the Company are not liable to the Company or its shareholders for
monetary damages for an act or omission occurring in their capacity as a
director. However, directors are liable (i) for any breach of the director's
duty of loyalty to the Company or its shareholders, (ii) for acts or omissions
not in good faith that constitute a breach of duty of the director of the
Company or that involve intentional misconduct or a knowing violation of law,
(iii) for transactions from which the director received an improper benefit,
whether or not the benefit resulted from action taken within the scope of the
director's office, or (iv) for acts or omissions for which the liability of a
director is expressly provided by law.
TRANSFER AGENT AND REGISTRAR. The transfer agent and registrar for the
Common Stock is Chase Mellon Shareholder Services.
40
<PAGE> 45
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering and the Merger, the Company will have
outstanding 678,644 shares of Series A Preferred Stock and 5,077,356 shares of
Common Stock, including shares issued to the BodyBilt Shareholders, assuming an
initial public offering price of $7.50 per share. Of these shares of Common
Stock, the 1,500,000 shares sold in this offering may be publicly offered and
sold without restriction, unless they are purchased by affiliates of the
Company. Shares of Common Stock outstanding prior to completion of this offering
(and all of the shares of Series A Preferred Stock and Common Stock to be issued
upon completion of the Merger) will be "restricted securities" under the
Securities Act (the "Restricted Shares"). The Restricted Shares may be sold only
if they are registered under the Securities Act or pursuant to an applicable
exemption from the registration requirements of the Securities Act, including
Rule 144 or Rule 701 thereunder. The Company, its executive officers, directors
and certain current and future principal shareholders have agreed that they will
not, directly or indirectly, offer, sell, contract to sell, grant any option to
sell, or otherwise dispose of shares of Common Stock or other securities which
are substantially similar to the Common Stock, or securities convertible into or
exercisable or exchangeable for or any rights to purchase or acquire Common
Stock or securities which are substantially similar to the Common Stock. See
"Underwriting."
In general, under Rule 144 as currently in effect, affiliates of the
Company or a person (or persons whose shares are aggregated) who has
beneficially owned Restricted Shares for at least two years but less than three
years is entitled to sell within any three-month period a number of shares that
does not exceed the greater of 1% of the then outstanding shares of the Common
Stock (approximately 51,000 shares immediately after the offering and the
completion of the Merger and using an initial public offering price of $7.50 per
share) or the average weekly trading volume in the Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain manner of sale provisions, notice requirements and the availability of
current public information about the Company. No sales are permitted under Rule
144 until the Company has been subject to reporting with the Securities and
Exchange Commission for at least 90 days. Any person (or persons whose shares
are aggregated) who is not deemed to have been an "affiliate" of the Company at
any time during the 90 days preceding a sale, and who has beneficially owned
Restricted Shares for at least three years, would be entitled to sell such
shares under Rule 144 without regard to the volume or manner of sale limitations
referred to above.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its employees,
directors, officers, consultants or advisors before the date the Company becomes
subject to the reporting requirements of the Securities Exchange Act of 1934, as
amended, pursuant to written compensatory benefit plans or written contracts
relating to the compensation of such persons. Securities issued in reliance on
Rule 701 are restricted securities and, beginning 90 days after the date of this
Prospectus, may be sold by persons other than affiliates subject only to the
manner of sale provisions of Rule 144 and by affiliates under Rule 144 without
compliance with its two-year minimum holding period requirements. Such
securities will be subject, however, to any lock-up agreements related to such
securities.
There are also (i) 400,000 shares of Common Stock reserved for issuance
under the Company's Stock Option Plan, (ii) 150,000 shares of Common Stock
subject to the Representatives' Warrants, and (iii) up to 45,000 shares of
Common Stock subject to the Lender's Warrant. The Company intends to file a
registration statement on Form S-8 covering sales of shares issued upon exercise
of any securities issued under the Stock Option Plan. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Underwriting."
BodyBilt Shareholders have certain rights with respect to their shares of
Common Stock issued in connection with the Merger, and their shares of Common
Stock issuable upon the conversion of shares of Series A Preferred Stock
received by them in connection with the Merger. Two years after the closing of
this offering, the Company will undertake on not more than two occasions to
register the BodyBilt Shareholders' shares and to cause each registration to
remain effective for a period of at least 120 days. The BodyBilt Shareholders
also have unlimited "piggy-back" registration rights if the Company files a
registration statement
41
<PAGE> 46
(other than on Form S-4 or S-8) if the BodyBilt Shareholders accept the terms of
the proposed underwriting. The managing underwriter may limit or exclude any
such shares, if it determines that it would be appropriate to limit or exclude
such shares due to market factors. The Company is required to file a "shelf"
registration statement four years after the closing of this offering and to keep
the shelf registration effective for two years. The Merger Agreement specifies
in detail other terms and conditions affecting the BodyBilt Shareholders'
registration rights. The Company has granted identical "piggy-back" registration
rights to Summit with respect to 34,000 shares of Common Stock and up to
approximately 33,333 additional shares which Summit is entitled to receive upon
conversion of up to $250,000 of the principal balance due under the Convertible
Note. The Company has also granted "piggy-back" registration rights to Gerard
Smith with respect to the 678,240 shares of Common Stock beneficially owned by
him, which are exercisable only after the termination of his employment with the
Company. Additionally, the Representatives will receive demand and "piggy-back"
registration rights in connection with the Representatives' Warrants, and Summit
will receive identical registration rights in connection with the Lender's
Warrant to purchase up to 45,000 shares. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Underwriting."
No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sales, will have on the market
price of the Common Stock. The sale of substantial amounts of Common Stock, or
the perception that such sales could occur, could adversely affect the
prevailing market price for the Common Stock.
UNDERWRITING
The Underwriters named below, for whom Cruttenden Roth Incorporated and
Principal Financial Securities, Inc. are acting as the representatives (the
"Representatives"), have severally agreed, subject to the terms and conditions
of the Underwriting Agreement, to purchase from the Company the number of shares
of Common Stock set forth opposite their respective names below. The nature of
the obligations of the Underwriters is such that if any of such shares are
purchased, all must be purchased.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Cruttenden Roth Incorporated................................
Principal Financial Securities, Inc.........................
---------
Total............................................. 1,500,000
=========
</TABLE>
The Underwriters initially propose to offer the shares of Common Stock
offered hereby to the public at the price to public set forth on the cover page
of this prospectus. The Underwriters may allow a concession to selected dealers
who are members of the National Association of Securities Dealers, Inc. ("NASD")
not in excess of $ per share, and the Underwriters may allow, and such
dealers may reallow, to members of the NASD a concession not in excess of
$ per share. After the public offering, the price to public, the
concession and the reallowance may be changed by the Representatives.
The Company has granted an option to the Underwriters, exercisable within
45 days after the date of this prospectus, to purchase up to an additional
225,000 shares of Common Stock at the initial price to public, less the
underwriting discount, set forth on the cover page of this prospectus. The
Underwriters may exercise the option only for the purpose of covering
over-allotments. To the extent that the Underwriters exercise such option, each
Underwriter will be committed, subject to certain conditions, to purchase from
the Company that
42
<PAGE> 47
number of additional shares of Common Stock which is proportionate to such
Underwriter's initial commitment.
The Company has also agreed to sell to the Representatives warrants to
purchase up to 150,000 shares of Common Stock at a price of $.01 per warrant.
The Representatives' Warrants will be exercisable for a period of four years,
commencing one year after the date of this prospectus, at an initial per share
exercise price equal to 120% of the price to public set forth on the cover page
of this prospectus. The Representatives' Warrants are not redeemable by the
Company under any circumstances. Neither the Representatives' Warrants nor the
shares of Common Stock issuable upon exercise thereof may be transferred,
assigned or hypothecated until one year from the date of this prospectus, except
that they may be assigned, in whole or in part, to any successor, officer,
director, member or partner of the Representatives.
The holders of the Representatives' Warrants will have no voting, dividend
or other rights as shareholders of the Company unless and until the exercise of
the Representatives' Warrants. The number of securities deliverable upon any
exercise of the Representatives' Warrants or its underlying securities and the
exercise price of the Representatives' Warrants are subject to adjustment to
protect against any dilution upon the occurrence of certain events, including
issuance of stock dividends, stock splits, subdivision or combination of
outstanding stock and reclassification of stock.
The Company has agreed with the Representatives to register the Lender's
Warrants, the Representatives' Warrants and/or the underlying shares for resale,
on one such occasion at any time during the four-year period commencing one year
following the date of this prospectus upon written demand by either the
Representatives or Summit. Once such demand has been made by either the
Representatives or Summit, the demand registration rights will expire for the
other party. The Company has agreed with the Representatives that if, during the
four-year period commencing one year following the date of this prospectus, the
Company registers any of its Common Stock for sale pursuant to a registration
statement (with the exception of Form S-4, Form S-8 or other inappropriate
form), it will use its best efforts, upon request of any of the holders of the
Representatives' Warrants and/or the underlying shares, to include such
securities as a part of the registration statement. The Company will bear all
the costs, except underwriting discounts and the Representatives' legal fees,
for one "piggy-back" registration.
The Company, its executive officers, directors and principal shareholders
have agreed that for a period of 180 days after the date of this prospectus they
will not, directly or indirectly, offer, sell, contract to sell, grant any
option to sell, or otherwise dispose of shares of Common Stock or other
securities which are substantially similar to the Common Stock or securities
convertible into or exercisable or exchangeable for or any rights to purchase or
acquire Common Stock or securities which are substantially similar to the Common
Stock without the prior written consent of Cruttenden Roth Incorporated, on
behalf of itself and Principal Financial Securities, Inc., as Representatives of
the Underwriters.
Prior to this offering, there has been no market for the Common Stock and
there can be no assurance that a regular trading market will develop upon the
completion of this offering. The initial public offering price was determined by
negotiations between the Company and the Representatives. The primary factors
considered in determining such offering price included the history of and
prospects for the industry in which the Company competes, market valuation of
comparable companies, market conditions for public offerings, the history of and
prospects for the Company's business, the Company's past and present operations
and earnings and the trend of such earnings, the prospects for future earnings
of the Company, the Company's current financial position, an assessment of the
Company's management, the general condition of the securities markets, the
demand for similar securities of comparable companies and other relevant
factors.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act or to contribute to
payments which the Underwriters may be required to make in respect thereof. The
Company has also agreed to pay to the Representatives a non-accountable expense
equal to 2% of the aggregate offering price to the public for due diligence and
other out-of-pocket expenses.
The Representatives have advised the Company that they do not expect any
sales by the Underwriters to accounts over which they exercise discretionary
authority.
43
<PAGE> 48
LEGAL MATTERS
The validity of the Common Stock offered hereby is being passed upon for
the Company by Wolin, Fuller, Ridley & Miller LLP, Dallas, Texas. Certain legal
matters in connection with this offering will be passed upon for the
Underwriters by Gardere & Wynne, L.L.P., Dallas, Texas.
EXPERTS
The balance sheet of the Company as of December 31, 1995, and the related
statements of operations, shareholders' equity and cash flows for the period
from June 12, 1995, to December 31, 1995, and the balance sheet of BodyBilt as
of December 31, 1995, and the related statements of income, shareholders' equity
and cash flows for the year then ended included herein and elsewhere in the
Registration Statement have been included in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of that firm as experts in accounting and
auditing.
The balance sheet of BodyBilt as of December 31, 1994, and the related
statements of income, cash flow and shareholders' equity for the years ended
December 31, 1994, and 1993, included herein and elsewhere in the registration
statement have been included in reliance upon the report of Thompson, Derrig &
Slovacek PC, independent certified public accountants, appearing elsewhere
herein, and upon the authority of that firm as experts in accounting and
auditing. Thompson, Derrig & Slovacek PC continues to perform work for BodyBilt
Seating but was succeeded as BodyBilt's auditors on February 28, 1996 by KPMG
Peat Marwick LLP. Their report on the financial statements did not contain any
adverse opinion or disclaimer of opinion nor was it qualified or modified as to
uncertainty, audit scope or accounting principles. BodyBilt's decision to change
auditors was approved by BodyBilt's board of directors. In connection with their
audits, Thompson, Derrig & Slovacek PC did not identify any reportable
conditions. During BodyBilt's two most recent fiscal years and the interim
period preceding the change in auditors, there were no disagreements between
BodyBilt and Thompson, Derrig & Slovacek PC on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which, if not resolved to the satisfaction of Thompson, Derrig &
Slovacek PC, would have caused it to make reference to the subject matter of the
disagreement in connection with its report.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (as amended and together with
all exhibits thereto, the "Registration Statement") under the Securities Act,
with respect to the shares of Common Stock offered hereby. This prospectus
constitutes a part of the Registration Statement and does not contain all of the
information set forth in the Registration Statement, certain parts of which are
omitted from this prospectus as permitted by the rules and regulations of the
Commission. Statements contained in this prospectus as to the contents of any
contract, agreement or other document referred to herein are not necessarily
complete and, where such agreement or other document is an exhibit to the
Registration Statement, each such statement is qualified in all respects by the
provisions of such exhibit, to which reference is hereby made for a full
statement of the provisions thereof. For further information with respect to the
Company and the Common Stock, reference is hereby made to the Registration
Statement and to the schedules and exhibits thereto.
The Registration Statement and the exhibits may be inspected, without
charge, and copies may be obtained, at prescribed rates, at the public reference
facilities of the Commission maintained at Judiciary Plaza, 450 Fifth Street,
N.W., Room 1024, Washington, DC 20549, or on the Internet at http://www.sec.gov.
Copies of the Registration Statement and the exhibits may also be inspected,
without charge, at the Commission's regional offices at 7 World Trade Center,
Suite 1300, New York, New York 10048, and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. In addition, copies of the Registration Statement and
the exhibits may be obtained by mail, at prescribed rates, from the Public
Reference Branch of the Commission at 450 Fifth Street, N.W., Washington, DC
20549.
As a result of this offering, the Company will become subject to the
information and periodic reporting requirements of the Exchange Act, and, in
accordance therewith, will file periodic reports, proxy statements and other
information with the Commission. Such periodic reports, proxy statements and
other information will be available for inspection and copying at the public
reference facilities and regional offices referred to
44
<PAGE> 49
above. The Company intends to furnish its shareholders with annual reports
containing consolidated financial statements certified by its independent
auditors and with quarterly reports for each of the first three quarters of each
fiscal year containing unaudited consolidated financial information.
The Company intends to furnish to its shareholders annual reports
containing audited consolidated financial statements certified by independent
public accountants for each fiscal year and quarterly reports containing
unaudited consolidated financial statements for the first three quarters of each
fiscal year.
45
<PAGE> 50
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ERGOBILT, INC.
Report of Independent Auditors.............................. F-2
Balance Sheet, December 31, 1995............................ F-3
Statement of Income for the Period Ended December 31,
1995...................................................... F-4
Statement of Shareholder's Equity for the Period Ended
December 31, 1995......................................... F-5
Statement of Cash Flows for the Period Ended December 31,
1995...................................................... F-6
Notes to Financial Statements............................... F-7
Balance Sheet, September 30, 1996 (unaudited)............... F-9
Statements of Income (Loss) for the Nine-Month Period Ended
September 30, 1996 and the Period from June 12, 1995 to
September 30, 1995 (unaudited)............................ F-10
Statements of Shareholders' Equity for the Nine-Month Period
Ended September 30, 1996 and the Period from June 12, 1995
to September 30, 1995 (unaudited)......................... F-11
Statements of Cash Flows for the Nine-Month Period Ended
September 30, 1996 and the Period from June 12, 1995 to
September 30, 1995 (unaudited)............................ F-12
Notes to Financial Statements (unaudited)................... F-13
BODYBILT SEATING, INC.
Reports of Independent Auditors............................. F-14
Balance Sheets, December 31, 1994 and 1995.................. F-16
Statements of Income for the Years Ended December 31, 1993,
1994 and 1995............................................. F-18
Statements of Shareholders' Equity for the Years Ended
December 31, 1993, 1994 and 1995.......................... F-19
Statements of Cash Flows for the Years Ended December 31,
1993, 1994 and 1995....................................... F-20
Notes to Financial Statements............................... F-21
Balance Sheet, September 30, 1996 (unaudited)............... F-25
Statements of Income for the Nine-Month Periods Ended
September 30, 1995 and 1996 (unaudited)................... F-26
Statements of Shareholders' Equity for the Nine-Month
Periods Ended September 30, 1995 and 1996 (unaudited)..... F-27
Statements of Cash Flows for the Nine-Month Periods Ended
September 30, 1995 and 1996
(unaudited)............................................... F-28
Notes to Financial Statements (unaudited)................... F-29
</TABLE>
F-1
<PAGE> 51
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
ErgoBilt, Inc.:
We have audited the accompanying balance sheet of ErgoBilt, Inc., as of
December 31, 1995, and the related statements of operations, shareholder's
equity, and cash flows for the period from June 12, 1995 to December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ErgoBilt, Inc. as of
December 31, 1995, and the results of its operations and its cash flows for the
period from June 12, 1995 to December 31, 1995, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
Houston, Texas
September 9, 1996
F-2
<PAGE> 52
ERGOBILT, INC.
BALANCE SHEET
DECEMBER 31, 1995
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash...................................................... $ 14,150
Accounts receivable....................................... 32,617
Notes receivable -- related party, current portion........ 5,317
Deferred tax assets....................................... 6,728
--------
Total current assets.............................. 58,812
--------
Property and equipment:
Furniture and fixtures.................................... 2,050
Equipment................................................. 9,205
Computer equipment........................................ 17,677
Less: Accumulated depreciation......................... (2,380)
--------
Property and equipment, net....................... 26,552
--------
Other assets:
Notes receivable -- related party, less current portion... 33,996
Organizational cost, net.................................. 274
--------
Total other assets................................ 34,270
--------
Total assets...................................... $119,634
========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable, trade................................... $ 4,217
Accrued liabilities....................................... 51,604
Income taxes.............................................. 9,894
--------
Total current liabilities......................... 65,715
--------
Deferred income taxes....................................... 7,676
Shareholder's equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized.............................................
Common stock; $.0001 par value 20,000,000 shares
authorized; 2,826,000 shares issued and outstanding.... 283
Paid-in capital........................................... 717
Retained earnings......................................... 45,243
--------
Total shareholder's equity................................ 46,243
--------
Commitments and contingencies
Total liabilities and shareholder's equity........ $119,634
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 53
ERGOBILT, INC.
STATEMENT OF INCOME
FOR THE PERIOD JUNE 12, 1995 (INCEPTION) TO DECEMBER 31, 1995
<TABLE>
<S> <C>
Sales....................................................... $403,917
Cost of sales:
Subcontractors and direct labor costs..................... 90,321
Advertising and media costs............................... 16,688
--------
Total cost of sales............................... 107,009
--------
Gross profit...................................... 296,908
Selling, general and administrative expenses
Compensation.............................................. 174,549
Other..................................................... 64,953
--------
Total selling, general and administrative
expenses.......................................... 239,502
--------
Operating income.................................. 57,406
--------
Interest expense............................................ 1,321
--------
Income before income taxes.................................. 56,085
Income tax expense.......................................... 10,842
--------
Net income........................................ $ 45,243
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 54
ERGOBILT, INC.
STATEMENT OF SHAREHOLDER'S EQUITY
FOR THE PERIOD JUNE 12, 1995 (INCEPTION) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
COMMON COMMON PAID-IN RETAINED
SHARES STOCK CAPITAL EARNINGS TOTAL
--------- ------ ------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance at June 12, 1995 (inception)..... 2,826,000 $283 $717 $ -- $ 1,000
Net income............................... -- -- -- 45,243 45,243
--------- ---- ---- ------- -------
Balance at December 31, 1995............. 2,826,000 $283 $717 $45,243 $46,243
========= ==== ==== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 55
ERGOBILT, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD JUNE 12, 1995 (INCEPTION) TO DECEMBER 31, 1995
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income................................................ $ 45,243
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 2,380
Amortization........................................... 36
Deferred income taxes.................................. 948
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable.................................. (32,617)
Other noncurrent assets.............................. (310)
Accounts payable, trade.............................. 4,217
Accrued liabilities.................................. 56,190
Income taxes......................................... 5,308
--------
Net cash provided by operating activities......... 81,395
--------
Cash flows from investing activities:
Purchases of property and equipment....................... (28,932)
Loans to related parties.................................. (43,476)
Repayment of loans to related parties..................... 4,163
--------
Net cash used by investing activities............. (68,245)
--------
Cash flows from financing activities -- issuance of common
stock..................................................... 1,000
--------
Net cash provided by financing activities......... 1,000
--------
Net increase in cash........................................ 14,150
Cash at beginning of period................................. --
--------
Cash at end of period....................................... $ 14,150
========
Supplemental disclosure -- interest paid.................... $ 1,321
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 56
ERGOBILT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(1) GENERAL AND SUMMARY SIGNIFICANT ACCOUNTING PRINCIPLES
Business Activity
ErgoBilt, Inc. (the "Company"), a Texas corporation, was incorporated on
June 12, 1995 pursuant to the laws of the State of Texas as The Chafferton
Company, Inc. The Company is engaged in consulting services regarding design and
advertising trade issues.
Accounts Receivable and Revenue Recognition
The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required. Revenue is
recognized as consulting projects are completed as the projects are of
short-duration.
Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the related equipment
ranging from 5 to 7 years. Maintenance and repairs are charged to operations
when incurred. Replacements and betterments are capitalized.
Organizational Costs
Organizational costs are amortized over five years.
Income Taxes
Deferred income taxes are determined using the asset and liability method,
under which deferred tax assets and liabilities are determined based on
differences between financial accounting and tax basis of assets and
liabilities. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense or
benefit is the payable or refund for the period plus or minus the change during
the period in deferred tax assets and liabilities.
Statement of Cash Flows
For purposes of the statement of cash flows, cash equivalents include time
deposits and all highly liquid debt instruments with original maturities of
three months or less when purchased.
Use of Estimates and Assumptions
Management uses estimates and assumptions in preparing financial statements
in accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses. Actual results could vary from the estimates that were
used.
Fair Market Value of Financial Instruments
The carrying amount for cash and notes receivable is not materially
different than fair market value because of the share maturities of the
instruments and/or their respective interest rates.
New Accounting Pronouncements
Effective January 1, 1996, the Company will adopt SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of. Accordingly, in the event that facts and circumstances indicate that
property and equipment and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future cash flows associated with the asset is compared to the
asset's carrying amount to determine if a write-down to market value or
discounted cash flow value is necessary. Adoption of this standard is not
expected to have a material effect on the financial position or results of
operations of the Company.
F-7
<PAGE> 57
ERGOBILT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of January 1, 1996, SFAS No. 123, Accounting for Stock-Based
Compensation, will be effective for the Company. SFAS No. 123 permits, but does
not require, a fair value-based method of accounting for employee stock option
plans which results in compensation expense recognition when stock options are
granted. As permitted by SFAS No. 123, the Company will provide pro forma
disclosure of net income and earnings per share, as applicable, in the notes to
future consolidated financial statements.
(2) RELATED PARTY TRANSACTIONS
The Company made loans to an employee in the amount of $500 and to another
company owned by the sole shareholder in the amount of $42,976. The loan to the
company owned by the sole shareholder is a long-term advance expected to be
repaid quarterly over a five year period plus 6% interest. The sole shareholder
of the Company is also the shareholder of another corporation which provided
services to the Company as a subcontractor consultant. In 1995, the total
expenses related to these services amounted to $49,034.
The Company has had virtually one customer from inception, BodyBilt
Seating, Inc. (Body Bilt) which is partially owned (37.5%) by the sole
shareholder's brother.
(3) INCOME TAXES
Deferred tax assets and liabilities as of December 31, 1995 are as follows:
<TABLE>
<S> <C>
Current deferred tax asset.................................. $ 6,728
Non-current deferred tax liability.......................... (7,676)
-------
</TABLE>
The non-current deferred tax liability results from the use of statutory
accelerated tax depreciation methods and the current deferred tax asset results
from the use of cash basis reporting for federal income tax reporting purposes.
The components of income tax expense for the year ended December 31, 1995
are as follows:
<TABLE>
<S> <C>
Federal:
Current................................................... $ 7,622
Deferred.................................................. 729
State:
Current................................................... 2,272
Deferred.................................................. 219
-------
$10,842
=======
</TABLE>
The Company's effective tax rate is approximately 19% due to the graduated
tax rates available to the Company.
(4) CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company's business activities are primarily with customers located
within the state of Texas. Financial instruments which potentially expose the
Company to credit loss include trade accounts receivable and cash. During 1995,
one customer accounted for 100% of revenues. At December 31, 1995, one customer
comprised 100% of trade accounts receivable (Body Bilt). All of this receivable
was collected subsequent to February 28, 1996. Management evaluates accounts
receivable balances on an on-going basis and provides allowances as necessary
for amounts estimated to eventually become uncollectible.
(5) SUBSEQUENT EVENTS
In August 1996, the Company formed a subsidiary (EB Subsidiary, Inc.) and
jointly entered into an agreement with BodyBilt Seating, Inc. (BodyBilt), the
terms of which provide for the merger of BodyBilt with and into EB Subsidiary,
Inc.
The Company affected a 2,826-for-1 stock split in January 1997. The effects
of the stock split have been retroactively applied to the financial statements.
F-8
<PAGE> 58
ERGOBILT, INC.
BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
1996
--------
<S> <C>
Current assets
Cash...................................................... $260,301
Accounts receivable....................................... 6,271
Prepaid federal & state income tax........................ 18,480
Deferred tax assets....................................... 42,749
Notes receivable -- related party......................... 47,675
--------
Total current assets.............................. 375,476
--------
Property and equipment
Furniture and fixtures.................................... 4,344
Equipment................................................. 9,455
Computer equipment........................................ 35,411
Less: Accumulated depreciation......................... (8,698)
--------
Property and equipment, net............................... 40,512
--------
Other assets
IPO costs................................................. 182,809
Organizational cost, net.................................. 227
--------
Total other assets................................ 183,036
--------
Total assets...................................... $599,024
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable, trade................................... $ 37,250
Accrued liabilities....................................... 98,941
Payable to related party.................................. 188,250
Notes payable............................................. 500,000
--------
Total current liabilities......................... 824,441
--------
Deferred income taxes....................................... 2,102
Shareholders' equity
Preferred stock, $.01 par value, 10,000,000 shares
authorized.............................................
Common stock; $.0001 par value; 20,000,000 shares
authorized; 2,826,000 shares issued and outstanding.... 283
Paid-in capital........................................... 717
Retained earnings (deficit)............................... (228,519)
--------
Total shareholders' equity........................ (227,519)
--------
Commitments and contingencies
Total liabilities and shareholders' equity........ $599,024
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE> 59
ERGOBILT, INC.
STATEMENTS OF INCOME (LOSS)
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996 AND
THE PERIOD FROM JUNE 12, 1995 (INCEPTION) TO SEPTEMBER 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
-------- ---------
<S> <C> <C>
Sales....................................................... $271,699 $ 301,610
Cost of sales:
Subcontractors and direct labor costs..................... 51,936 122,167
Advertising and media costs............................... 4,647 16,775
-------- ---------
Total cost of sales............................... 56,583 138,942
-------- ---------
Gross profit........................................... 215,116 162,668
Selling, general and administrative expenses
Compensation.............................................. 43,224 146,128
Other (including $188,250 to a related party)............. 48,518 328,566
-------- ---------
Total selling, general and administrative
expenses......................................... 91,742 474,694
-------- ---------
Operating income (loss)................................ 123,374 (312,026)
-------- ---------
Interest income........................................... 1,695 --
Interest expense.......................................... (1,143) 3,333
-------- ---------
Income (loss) before income taxes................. 123,926 (315,359)
Income tax (expense) benefit.............................. (33,262) 41,595
-------- ---------
Net income (loss)...................................... $ 90,664 $(273,764)
======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE> 60
ERGOBILT, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996 AND
THE PERIOD FROM JUNE 12, 1995 (INCEPTION) TO SEPTEMBER 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON COMMON PAID-IN EARNINGS
SHARES STOCK CAPITAL (DEFICIT) TOTAL
--------- ------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at June 12, 1995 (inception)..... 2,826,000 $283 $717 $ -- $ 1,000
Net income (loss)........................ -- -- -- 90,664 90,664
--------- ---- ---- --------- ---------
Balance at September 30, 1995............ 2,826,000 $283 $711 $ 90,664 $ 91,664
========= ==== ==== ========= =========
Balance at December 31, 1995............. 2,826,000 $283 $717 $ 45,245 $ 46,245
Net income (loss)........................ -- -- -- (273,764) (273,764)
--------- ---- ---- --------- ---------
Balance at September 30, 1996............ 2,826,000 $283 $717 $(228,519) $(227,519)
========= ==== ==== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE> 61
ERGOBILT, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996
AND THE PERIOD FROM JUNE 12, 1995 (INCEPTION) TO SEPTEMBER 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 90,664 $(273,764)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation........................................... 1,315 6,319
Amortization........................................... 21 47
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable.................................... (20,137) 26,346
Prepaid federal & state income tax..................... (310) (18,480)
Deferred tax asset..................................... 0 (42,749)
Accounts payable, trade................................ 3,503 33,034
Deferred tax liability................................. 3,429 1,154
Payable to related party............................... -- 188,250
Other current liabilities.............................. 34,339 37,444
--------- ---------
Net cash used by operating activities............. 112,824 (42,399)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment....................... (22,175) (20,279)
Loans to shareholder...................................... (81,667) (8,362)
--------- ---------
Net cash used by investing activities............. (103,842) (28,641)
--------- ---------
Cash flows from financing activities:
Note payable.............................................. -- 500,000
IPO costs................................................. -- (182,809)
Common stock.............................................. 204 --
Additional paid-in capital................................ 796 --
--------- ---------
Net cash provided by financing activities......... 1,000 317,191
--------- ---------
Net increase in cash........................................ 9,982 246,151
Cash at beginning of period................................. 0 14,150
--------- ---------
Cash at end of period....................................... $ 9,982 $ 260,301
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE> 62
ERGOBILT, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1995 AND 1996
(1) GENERAL
Ergobilt, Inc. (the "Company"), was incorporated on June 12, 1995 pursuant
to the laws of the State of Texas as The Chafterton Company, Inc. The Company is
engaged in consulting services regarding design and advertising trade issues.
The interim financial statements included herein have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosure normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information present not misleading. It is suggested that these
financial statements be read in conjunction with the financial statements and
notes for the year ended December 31, 1995.
In the opinion of management, the unaudited interim financial information
of the Company contains all adjustments, consisting only of those of a normal
recurring nature, necessary to present fairly the Company's financial position
and the results of it operations and cash flows for the periods presented. The
results of operations for the periods presented are not necessarily indicative
of the results to be expected for a full year.
(2) STOCK SPLIT
The Company affected a 2,826-for-1 stock split in January 1997. The effects
of the stock split have been retroactively applied to the financial statements.
(3) NOTE PAYABLE
In September 1996, the Company obtained a $500,000 loan at an interest rate
of 8% per annum which is due to mature on September 30, 1997. In connection with
the establishment of this borrowing, the Company's chairman sold and transferred
34,000 shares of Common Stock to the lender for an aggregate consideration of
$34,000 and the Company issued a warrant to the lender to acquire up to 45,000
shares of Common Stock at an initial per share exercise price equal to 120% of
the price to public in the initial public offering of the Company. The warrant
is exercisable for a period of four years, commencing one year after the initial
public offering of the Company. This note is secured by a personal guarantee of
the Company's chairman. The Company intends to repay the note partly from the
proceeds of this initial public offering of the Company's Common Stock and also
by shares of Common Stock at the initial offering price per share.
(4) SUBSEQUENT EVENTS
The Company has entered into a merger agreement (the "Merger Agreement")
with BodyBilt Seating, Inc. ("BodyBilt") for the merger (the "Merger") of
BodyBilt into a wholly-owned subsidiary of the Company to be completed
simultaneously with the closing of an offering of shares of common stock by the
Company. As consideration for the Merger, the shareholders of BodyBilt will
receive $17.6 million payable in a combination of cash ($6.875 million), 751,356
shares of common stock of the Company valued at $5.64 million, and 678,644
shares of Series A Preferred Stock of the Company valued at $5.09 million,
assuming an initial public offering price of $7.50 per share. The cash portion
of the Merger Consideration will be reduced by the anticipated distribution of
approximately $4.4 million related to S corporation earnings to be made to the
shareholders of BodyBilt prior to the Merger.
F-13
<PAGE> 63
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
BodyBilt Seating, Inc.:
We have audited the accompanying balance sheet of BodyBilt Seating, Inc. as
of December 31, 1995, and the related statements of income, shareholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1995 financial statements referred to above present
fairly, in all material respects, the financial position of BodyBilt Seating,
Inc. as of December 31, 1995, and the results of its operations and its cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Houston, Texas
April 26, 1996
F-14
<PAGE> 64
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
BodyBilt Seating, Inc.:
We have audited the accompanying balance sheet of BodyBilt Seating, Inc. as
of December 31, 1994, and the related statements of income, shareholders'
equity, and cash flows for each of the years in the two-year period then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of BodyBilt Seating, Inc. as of
December 31, 1994, and the results of its operations and its cash flows for each
of the years in the two-year period then ended, in conformity with generally
accepted accounting principles.
Thompson, Derrig & Slovacek PC
Bryan, Texas
June 22, 1995
F-15
<PAGE> 65
BODYBILT SEATING, INC.
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
ASSETS
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................. $ 30,073 $ 86,541
Accounts receivable....................................... 1,663,426 2,470,488
Inventory................................................. 961,059 1,456,248
Prepaid expenses.......................................... 39,569 124,694
Employee receivable....................................... 9,769 17,787
Deposits.................................................. 4,800 --
Shareholder receivable.................................... 3,800 --
---------- ----------
Total current assets.............................. 2,712,496 4,155,758
---------- ----------
PROPERTY, PLANT & EQUIPMENT
Land...................................................... 7,450 7,450
Building and improvements................................. 445,224 945,611
Furniture & fixtures...................................... 30,654 65,377
Equipment................................................. 223,399 383,916
Vehicles.................................................. 213,710 288,146
Computer equipment........................................ 97,076 217,517
---------- ----------
1,017,513 1,908,017
Less: Accumulated depreciation............................ 129,541 254,804
---------- ----------
887,972 1,653,213
---------- ----------
OTHER ASSETS
Deposits.................................................. 1,915 2,573
Employee receivables...................................... 1,595 --
Loans receivable.......................................... 2,000 --
---------- ----------
5,510 2,573
---------- ----------
$3,605,978 $5,811,544
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-16
<PAGE> 66
BODYBILT SEATING, INC.
BALANCE SHEETS -- CONTINUED
DECEMBER 31, 1994 AND 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt......................... $ 54,241 $ 225,935
Accounts payable:
Trade.................................................. 280,757 641,109
Other.................................................. -- 27,181
Taxes payable............................................. 65,669 114,771
Commissions payable....................................... 33,981 139,150
Accrued salaries.......................................... 89,712 102,487
Deferred revenue.......................................... 51,031 --
---------- ----------
Total current liabilities......................... 575,391 1,250,633
---------- ----------
LONG-TERM DEBT
Notes payable, less current portion....................... 747,811 1,083,944
Note payable -- shareholder............................... 75,000 75,000
---------- ----------
Total long-term liabilities....................... 822,811 1,158,944
---------- ----------
SHAREHOLDERS' EQUITY
Common stock, no par value; Authorized 500 shares; issued
and outstanding -- 200 shares.......................... 1,000 1,000
Retained earnings......................................... 2,206,776 3,400,967
---------- ----------
Total shareholders' equity........................ 2,207,776 3,401,967
---------- ----------
COMMITMENTS AND CONTINGENCIES
Total liabilities and shareholders' equity........ $3,605,978 $5,811,544
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-17
<PAGE> 67
BODYBILT SEATING, INC.
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- -----------
<S> <C> <C> <C>
Sales.................................................. $6,534,963 $9,188,830 $13,672,349
---------- ---------- -----------
Cost of sales.......................................... 3,237,210 4,789,293 7,218,561
---------- ---------- -----------
Gross profit......................................... 3,297,753 4,399,537 6,453,788
Selling, general and administrative expenses
Compensation......................................... 645,385 1,240,846 1,418,005
Commissions.......................................... 330,122 518,199 895,471
Advertising.......................................... 153,122 316,402 751,732
Promotional costs.................................... 179,389 217,912 320,109
Other................................................ 855,232 971,951 1,169,481
---------- ---------- -----------
Total selling, general and administrative
expenses................................... 2,163,250 3,265,310 4,554,798
Operating income.................................. 1,134,503 1,134,227 1,898,990
Interest expense..................................... (24,194) (30,155) (56,910)
Other income......................................... 69 6,385 37,111
---------- ---------- -----------
Income before income taxes........................... 1,110,378 1,110,457 1,879,191
Income tax expense..................................... 50,000 50,000 85,000
---------- ---------- -----------
Net income................................... $1,060,378 $1,060,457 $ 1,794,191
========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
F-18
<PAGE> 68
BODYBILT SEATING, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK
$.00 PAR VALUE
--------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------ ---------- ----------
<S> <C> <C> <C> <C>
Balances at December 31, 1992.......................... 200 $1,000 $1,002,607 $1,003,607
Distributions to shareholders.......................... -- -- (583,333) (583,333)
Net income............................................. -- -- 1,060,378 1,060,378
--- ------ ---------- ----------
Balances at December 31, 1993.......................... 200 1,000 1,479,652 1,480,652
Distributions to shareholders.......................... -- -- (333,333) (333,333)
Net income............................................. -- -- 1,060,457 1,060,457
--- ------ ---------- ----------
Balances at December 31, 1994.......................... 200 1,000 2,206,776 2,207,776
Distributions to shareholders.......................... -- -- (600,000) (600,000)
Net income............................................. -- -- 1,794,191 1,794,191
--- ------ ---------- ----------
Balances at December 31, 1995.......................... 200 $1,000 $3,400,967 $3,401,967
=== ====== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-19
<PAGE> 69
BODYBILT SEATING, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................... $1,060,378 $1,060,457 $ 1,794,191
---------- ---------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation...................................... 36,485 75,926 134,098
Bad debts......................................... 5,451 3,619 10,658
Loss (gain) on sale of assets..................... -- (656) 6,178
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable............................... (648,087) (455,052) (817,720)
Inventories....................................... (499,128) 50,580 (495,189)
Prepaids.......................................... (2,754) (11,760) (85,125)
Deposits and loans................................ (26,337) 29,561 6,142
Related party receivables......................... (7,391) 34,173 (2,623)
Accounts payable.................................. 325,842 (124,371) 387,533
Accrued salaries.................................. 26,734 27,586 12,775
Taxes payable..................................... 6,584 13,354 49,102
Commissions payable............................... 5,926 (417) 105,169
Customer deposits................................. (31,197) (19,574) --
Deferred revenue.................................. -- 51,031 (51,031)
---------- ---------- -----------
Net cash provided by operations.............. 252,506 734,457 1,054,158
---------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment............ (223,719) (632,358) (917,577)
Proceeds from sale of property, plant and
equipment......................................... -- 3,397 --
---------- ---------- -----------
Net cash used in investment activities....... (223,719) (628,961) (917,577)
---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings............................. 565,162 1,164,309 2,660,309
Repayment of borrowings.............................. (7,472) (920,447) (2,140,422)
Distributions to shareholders........................ (583,333) (333,333) (600,000)
---------- ---------- -----------
Net cash used in financing activities........ (25,643) (89,471) (80,113)
---------- ---------- -----------
Net increase in cash......................... 3,144 16,025 56,468
Cash and cash equivalents at beginning of year......... 10,904 14,048 30,073
---------- ---------- -----------
Cash and cash equivalents at end of year............... $ 14,048 $ 30,073 $ 86,541
========== ========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Sale of equipment in settlement of note payable...... $ -- $ -- $ 12,060
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest............................................. $ 24,194 $ 30,155 $ 94,738
Federal income taxes................................. $ -- $ -- $ --
</TABLE>
See accompanying notes to financial statements.
F-20
<PAGE> 70
BODYBILT SEATING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Operations
BodyBilt Seating, Inc. (the "Company") (formerly The Chair Works, Inc.,
Congleton Chair Works, Inc., and Lubbock Molasses, Inc.) was incorporated on
November 22, 1982 pursuant to the laws of the State of Texas and elected to be
treated as an S corporation. The Company is engaged in the manufacture and
assembly of custom built ergonomic chairs for commercial, industrial and
residential use.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with an initial maturity of three months or less to be
cash equivalents.
Revenue Recognition
The Company recognizes revenue at the time chairs are shipped to customers.
Accounts Receivable
Accounts receivable are stated net of all known uncollectible accounts. The
Company uses historical experience to determine an allowance for doubtful
accounts. At December 31, 1995 and 1994, it was determined that no allowance was
necessary.
Income Taxes
No provision or benefit for federal income taxes has been included in these
financial statements since taxable income or loss passes through to, and is
reported by, the shareholders, individually.
Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
1994 1995
-------- ----------
<S> <C> <C>
Raw materials............................................... $299,361 $ 371,703
Component parts............................................. 435,698 757,795
Finished goods.............................................. 226,000 326,750
-------- ----------
$961,059 $1,456,248
======== ==========
</TABLE>
Inventory is stated at average cost for purchased parts and average cost
plus allocated labor and overhead for parts manufactured by the Company. All
inventory is stated at the lower of cost or market value.
Property, Plant & Equipment
Property, plant and equipment are stated at cost and depreciated using the
straight line method of depreciation. The assets are depreciated over the
following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Building and improvements................................... 39
Furniture and fixtures...................................... 10
Equipment................................................... 10
Vehicles.................................................... 5
Computer equipment.......................................... 5
</TABLE>
F-21
<PAGE> 71
BODYBILT SEATING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
Fair Value of Financial Instruments
The carrying amounts of cash equivalents, accounts receivable, employee
receivable and accounts payable approximate fair value because of the short
maturity of those instruments. The estimated fair value of notes payable is
equivalent to its carrying value due to the floating interest rate.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
New Accounting Pronouncements
Effective January 1, 1996, the Company will be required to adopt SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." Accordingly, in the event that facts and
circumstances indicate that property and equipment, and intangible or other
assets, may be impaired, an evaluation of recoverability would be performed. If
an evaluation is required, the estimated future cash flows associated with the
asset is compared to the asset's carrying amount to determine if a write-down to
market value or discounted cash flow value was necessary. Adoption of this
standard is not expected to have a material effect on the financial position or
results of operations of the Company.
As of January 1, 1996, SFAS No. 123, "Accounting for Stock-Based
Compensation," will be effective for the Company. SFAS No. 123 permits, but does
not require, a fair value-based method of accounting for employee stock option
plans which results in compensation expense recognition when stock options are
granted. As permitted by SFAS No. 123, the Company will provide pro forma
disclosure of net income and earnings per share, as applicable, in the notes to
future consolidated financial statements.
NOTE 2 -- RELATED PARTY TRANSACTIONS:
The Company paid Agrivest, Inc. ("Agrivest"), a corporation wholly-owned by
the Company's president and director, a management fee of $36,000 in 1993, 1994
and 1995 for accounting, payroll and other administrative services provided. The
Company paid consulting fees to Agrivest for additional management services of
$12,000, $109,275, and $192,900 during 1993, 1994 and 1995, respectively.
Agrivest supplied the Company with certain managers and employees during 1993.
The Company reimbursed those salaries and related employee benefits which
totaled $165,828 in 1993.
The Company leased vehicles from Agrivest and paid rentals of $6,000 during
1993 and 1994 and $2,000 during 1995. The Company leased vehicles from a
shareholder and paid rentals of $7,394 and $4,508, during 1993 and 1994,
respectively.
The brother of the Company's president and director assisted in the
development of the Company's promotional literature during 1993, 1994 and 1995.
During 1993, consulting fees of $15,000 were paid to this individual. During
part of 1993 and 1994, the Company employed this individual. Payments of
$47,054, $119,036, and $413,157 were made during 1993, 1994 and 1995,
respectively, to companies owned by the individual for promotional literature
and marketing development.
During 1994, the Company purchased $100,851 of furniture and fixtures,
computer equipment and building improvements from a company owned by the
Company's secretary/treasurer. During 1995, the Company purchased $172,588 of
furniture and fixtures and building and leasehold improvements from a company
owned by the Company's president and director.
F-22
<PAGE> 72
BODYBILT SEATING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
Accounts payable to related parties were $60,834 and $49,420 at December
31, 1995 and 1994, respectively.
NOTE 3 -- NOTES PAYABLE:
<TABLE>
<CAPTION>
BALANCE BALANCE
INTEREST AT AT
PAYEE RATE MATURITY 12-31-94 12-31-95 COLLATERAL
----- ------------- -------- -------- ---------- --------------------
<S> <C> <C> <C> <C> <C>
The First National Bank Prime + .75%
of (9.75% at
Bryan................. 12/31/95) 1999(1) $200,000 $ 610,000 Accounts receivable,
inventory, and life
insurance policy(2)
The First National Bank
of
Bryan................. Prime + .75% 2000 490,000 473,667 Building and
contents and life
insurance policy(2)
The First National Bank
of
Bryan................. Prime + .75% 2000 -- 76,850 Equipment(2)
The First National Bank
of
Bryan................. 7.5% to 9.5% 1997 99,461 149,362 Vehicles(2)
to 1999
Richard Troutman,
Shareholder........... 0% 2000(3) 75,000 75,000 Company stock
Other................... 12,591 --
-------- ----------
877,052 1,384,879
Less amount due within
one year.............. 54,241 225,935
-------- ----------
$822,811 $1,158,944
======== ==========
</TABLE>
- ---------------
(1) Repayment on the line of credit requires monthly interest payments until
April 30, 1996 when monthly principal installments and interest are required
until April 30, 1999 when the note matures. Maximum credit amount available
under the line of credit is $1,000,000.
(2) Personally guaranteed by Mark McMillan, president and shareholder of the
Company.
(3) As the personal guarantees by Mark McMillan are reduced below $75,000,
repayment in amounts equal to the reduction in personal guarantees will
begin.
The principal portion of long-term debt outstanding at December 31, 1995
and during the five years succeeding 1995 are as follows:
<TABLE>
<S> <C>
1996...................................................... $ 225,935
1997...................................................... 296,221
1998...................................................... 295,354
1999...................................................... 136,120
Thereafter................................................ 431,249
----------
$1,384,879
==========
</TABLE>
F-23
<PAGE> 73
BODYBILT SEATING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
NOTE 4 -- OBLIGATIONS UNDER OPERATING LEASES:
The Company has operating leases for office space and vehicles. Minimum
annual rental commitments at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31:
------------
<S> <C>
1996........................................................ $53,442
1997........................................................ 41,174
1998........................................................ 4,400
-------
$99,016
=======
</TABLE>
Most of the operating leases contain one of the following options: (a) the
Company can, after the initial lease term, purchase the property at the then
fair market value of the property, or in several cases an amount specified in
the lease, or (b) the Company can renew its lease at the then fair rental value.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
NOTE 6 -- SUBSEQUENT EVENT (UNAUDITED)
In August 1996, the Company agreed to merge with ErgoBilt, Inc. The
completion of the merger will not take place unless there is a successful public
offering of ErgoBilt, Inc's shares.
F-24
<PAGE> 74
BODYBILT SEATING, INC.
BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, 1996
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 46,148
Accounts receivable....................................... 2,833,018
Inventory................................................. 1,690,201
Prepaid expenses.......................................... 124,123
Employee receivable....................................... 54,492
Deposits.................................................. 2,702
----------
Total current assets.............................. 4,750,684
----------
PROPERTY, PLANT AND EQUIPMENT:
Land...................................................... 7,450
Building and improvements................................. 1,210,467
Furniture and fixtures.................................... 154,887
Equipment................................................. 555,094
Vehicles.................................................. 398,668
Computer equipment........................................ 417,575
----------
2,744,141
Less accumulated depreciation............................. 459,029
----------
Property, plant and equipment, net................ 2,285,112
----------
Total assets...................................... $7,035,796
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 191,849
Accounts payable and accrued expenses:
Trade.................................................. 670,152
Other.................................................. 153,593
Taxes payable............................................. 93,282
Commissions payable....................................... 98,228
----------
Total current liabilities......................... 1,207,104
----------
LONG-TERM DEBT:
Notes payable, less current portion....................... 1,329,037
Note payable -- shareholder............................... 75,000
----------
Total long-term debt.............................. 1,404,037
----------
SHAREHOLDERS' EQUITY:
Common stock, no par value; Authorized 500 shares; issued
and outstanding
-- 200 shares.......................................... 1,000
Retained earnings......................................... 4,423,655
----------
Total shareholders' equity........................ 4,424,655
COMMITMENTS AND CONTINGENCIES
----------
Total liabilities and shareholders' equity........ $7,035,796
==========
</TABLE>
See accompanying notes to unaudited financial statements.
F-25
<PAGE> 75
BODYBILT SEATING, INC.
STATEMENTS OF INCOME
(UNAUDITED)
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
---------- -----------
<S> <C> <C>
Sales....................................................... $9,250,906 $12,553,265
Cost of sales............................................... 5,080,371 6,617,577
---------- -----------
Gross profit...................................... 4,170,535 5,935,668
Selling, general and administrative expenses................ 3,106,942 4,081,595
---------- -----------
Operating income.................................. 1,063,593 1,854,073
Interest expense............................................ (73,873) (108,541)
Other income (expense)...................................... 24,058 147
---------- -----------
Income before income taxes.................................. 1,013,778 1,745,679
Income tax expense.......................................... 41,614 39,658
---------- -----------
Net income........................................ $ 972,164 $ 1,706,021
========== ===========
</TABLE>
See accompanying notes to unaudited financial statements.
F-26
<PAGE> 76
BODYBILT SEATING, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996
<TABLE>
<CAPTION>
COMMON COMMON RETAINED
SHARES STOCK EARNINGS TOTAL
------ ------ ---------- ----------
<S> <C> <C> <C> <C>
Balance at January 1, 1995..................... 200 $1,000 $2,206,776 $2,207,776
Distributions to shareholders.................. -- -- (600,000) (600,000)
Net income..................................... -- -- 972,164 972,164
--- ------ ---------- ----------
Balance at September 30, 1995.................. 200 1,000 2,578,940 2,579,940
=== ====== ========== ==========
Balance at January 1, 1996..................... 200 1,000 3,400,967 3,401,967
Distributions to shareholders.................. -- -- (683,333) (683,333)
Net income..................................... -- -- 1,706,021 1,706,021
--- ------ ---------- ----------
Balance at September 30, 1996.................. 200 $1,000 $4,423,655 $4,424,655
=== ====== ========== ==========
</TABLE>
See accompanying notes to unaudited financial statements.
F-27
<PAGE> 77
BODYBILT SEATING, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 972,164 $1,706,021
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 76,180 205,923
Bad debts.............................................. 4,438 13,046
Loss on sale of assets................................. 6,178 --
Barter transactions.................................... -- (64,553)
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable.................................... (264,605) (375,576)
Inventories............................................ (371,304) (233,953)
Prepaids............................................... (42,493) (12,390)
Deposits............................................... 4,800 (1,798)
Related party receivables.............................. 2,010 (36,705)
Accounts payable....................................... 232,609 16,883
Accrued salaries....................................... (89,712) 36,085
Taxes payable.......................................... 12,075 (21,489)
Commissions payable.................................... 6,468 (40,922)
Deferred revenue....................................... (51,031) --
--------- ----------
Net cash provided by operations................... 497,777 1,190,572
--------- ----------
Cash flows from investing activities -- purchase of
property, plant and equipment............................. (498,097) (708,714)
Cash flows from financing activities:
Net borrowings under revolving line of credit............. 725,000 771,082
Repayment of notes payable................................ (129,068) (610,000)
Distributions to shareholders............................. (600,000) (683,333)
--------- ----------
Net cash used in financing activities............. (4,068) (522,251)
Net increase in cash........................................ (4,388) (40,393)
Cash and cash equivalents at beginning of the period........ 30,073 86,541
--------- ----------
Cash and cash equivalents at end of the period.............. $ 25,685 $ 46,148
========= ==========
Supplemental disclosure of noncash investing and financing
activities:
Sale of equipment in settlement of note payable........... $ 12,060 $ --
Purchases of equipment in exchange for notes payable...... -- 49,925
========= ==========
Supplemental disclosure of cash flow information:
Interest paid during the period........................... $ 73,873 $ 108,541
========= ==========
</TABLE>
See accompanying notes to unaudited financial statements.
F-28
<PAGE> 78
BODYBILT SEATING, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1995 AND 1996
In the opinion of management, all adjustments considered necessary for a
fair presentation of the results of the interim period have been included.
Operating results for any interim period are not necessarily indicative of the
results that may be expected for the entire fiscal year. These statements should
be read in conjunction with the financial statements and notes thereto for the
year ended December 31, 1995.
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations
BodyBilt Seating, Inc. (the "Company") (formerly the Chair Works, Inc.,
Congleton Chair Works, Inc., and Lubbock Molasses, Inc.) was incorporated on
November 22, 1982 pursuant to the laws of the State of Texas and elected to be
treated as an S Corporation. The Company is engaged in the manufacture and
assembly of custom built ergonomic chairs for commercial, industrial and
residential use. All of the Company's chairs are manufactured in a plant in
Navasota, Texas, and are sold primarily to customers in Texas, California and
Washington.
Revenue Recognition
The Company recognizes revenue at the time chairs are shipped to customers.
Accounts Receivable
Accounts receivable are stated net of all known uncollectible accounts. The
Company uses historical experience to determine an allowance for doubtful
accounts. At September 30, 1996, it was determined that no allowance was
necessary. No single customer accounted for more than ten percent of the
Company's sales during the nine months ended September 30, 1996, and no account
receivable from any customer exceeded ten percent of total accounts receivable
at September 30, 1996.
Income Taxes
No provision or benefit for federal income taxes has been included in these
financial statements since taxable income or loss passes through to and is
reported by the shareholders individually. At September 30, 1996, the net
difference between the tax bases and the amounts recorded of assets and
liabilities was approximately $121,000.
Inventories
Inventories at September 30, 1996 consist of the following:
<TABLE>
<S> <C>
Raw materials............................................... $ 387,129
Component parts............................................. 750,098
Finished goods, including demos............................. 552,974
----------
$1,690,201
==========
</TABLE>
Inventory is stated at average cost for purchased parts and average cost
plus allocated labor and overhead for parts manufactured by the Company. All
inventory is stated at the lower of cost or market value. During the nine months
ended September 30, 1996, the Company purchased approximately 23% of its
inventory from one supplier. This supplier is currently the only source of a key
component of BodyBilt chairs.
F-29
<PAGE> 79
BODYBILT SEATING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1995 AND 1996
Property, Plant, and Equipment
Property, plant and equipment are stated at cost and depreciated using the
straight-line method of depreciation. The assets are depreciated over the
following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings and improvements.................................. 39
Furniture and fixtures...................................... 10
Equipment................................................... 10
Vehicles.................................................... 5
Computer equipment.......................................... 5
</TABLE>
Effective January 1, 1996, the Company adopted SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
Accordingly, in the event that facts and circumstances indicate that property
and equipment, and intangible or other non-current assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future cash flows associated with the asset is compared to the
asset's carrying amount to determine if a write-down to market value or
discounted cash flow value was necessary. Adoption of this standard did not have
a material effect on the financial position or results of operations of the
Company.
Fair Value of Financial Instruments
The carrying amounts of accounts receivable, employee and shareholder
receivables, other current assets, accounts payable and accrued expenses
approximate fair value because of the short maturity of those instruments. The
estimated fair value of notes payable is equivalent to its carrying value due to
the floating interest rate.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
NOTE 2 -- RELATED PARTY TRANSACTIONS
During the nine-month period ended September 30, 1996, the Company paid
Agrivest, Inc. (Agrivest), a corporation wholly-owned by the Company's president
and director, a management fee of $45,000 for accounting and other
administrative services provided. The Company paid consulting fees to Agrivest
for additional management services of $53,750 during the same period.
The Company leased vehicles and equipment from Agrivest and paid rentals of
$3,133 during the nine-month period ended September 30, 1996.
The brother of the Company's president and director assisted in the
development of the Company's promotional literature. During the nine-month
period ended September 30, 1996, payments of $291,173 were made to a company
owned by this individual.
During the nine-month period ended September 30, 1996, the Company
purchased $10,000 of furniture and fixtures from a company owned by the brother
of the Company's president and director.
F-30
<PAGE> 80
BODYBILT SEATING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1995 AND 1996
Accounts payable to related parties at September 30, 1996 totaled $4,774.
NOTE 3 -- BARTER TRANSACTIONS
During the nine-month period ended September 30, 1996, BodyBilt recorded
sales of $487,114 and selling, general and administrative expenses of $422,559
related to agreements with various parties to exchange custom built ergonomic
chairs for advertising and other goods and services. The exchanges are recorded
at the fair value of the chairs (prices to its customers). Prepaid expenses and
property, plant and equipment include $77,271 and $77,485, respectively related
to barter transactions.
NOTE 4 -- NOTES PAYABLE
Notes payable at September 30, 1996 consist of the following:
<TABLE>
<CAPTION>
INTEREST BALANCE AT
PAYEE RATE MATURITY 9/30/96 COLLATERAL
----- -------------- -------- ---------- --------------------------
<S> <C> <C> <C> <C>
The First National Bank of
Bryan........................ Prime rate of 2000(1) $ 825,000 Accounts receivable,
Texas Commerce inventory, property, plant
Bank (8.25%) and equipment, and life
insurance policy(2)
The First National Bank of
Bryan........................ Prime rate of 2000 446,444 Property, plant and
First National equipment and life
Bank of Bryan insurance policy(2)
+ .75% (9.5%)
The First National Bank of
Bryan........................ Prime rate of 2000 64,925 Equipment(2)
First National
Bank of Bryan
+ .75% (9.5%)
The First National Bank of
Bryan........................ 6.75% to 9.5% 1997 to 184,517 Vehicles(2)
2001
Richard Troutman,
Shareholder.................. 0% 2001(3) 75,000 Company stock
----------
$1,595,886
Less amount due within one
year.........................
191,849
----------
$1,404,037
==========
</TABLE>
F-31
<PAGE> 81
BODYBILT SEATING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1995 AND 1996
- ---------------
(1) Repayment of the line of credit requires monthly interest payments beginning
July 30, 1996 until June 30, 1997, at which time equal monthly principal
installments and interest are required until June 30, 2002, the maturity
date. Effective June 30, 1996, the Company renewed its revolving loan
agreement with a bank. Under the terms of the agreement, the Company may
borrow up to $2,000,000, subject to a borrowing base limitation based on a
percentage of eligible accounts receivable and qualified inventory. The
revolving feature expires on June 30, 1997, at which time the revolving note
payable converts to a term note with a final maturity date at June 30, 2002.
Borrowings under the line of credit and any unpaid interest become payable
immediately in the event of a substantial change in ownership or control of
the Company. At September 30, 1996 unused amounts available under the
revolving loan agreement were $1,175,000.
(2) Personally guaranteed by Mark McMillan, president and shareholder of the
Company.
(3) As the personal guarantees by Mark McMillan are reduced below $75,000,
repayment in amounts equal to the reduction in personal guarantees will
begin.
Notes payable are subject to various restrictive and affirmative covenants.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect of the
Company's financial position, results of operations, or liquidity.
NOTE 6 -- SUBSEQUENT EVENTS
The Company has entered into a merger agreement with ErgoBilt, Inc.
(ErgoBilt) for the merger of the Company into a wholly-owned subsidiary of
ErgoBilt, to be completed simultaneously with the closing of an offering of
shares of common stock by ErgoBilt. As consideration for the merger, the
shareholders of the Company will receive $17.6 million payable in a combination
of cash (not to exceed $8.75 million), ErgoBilt common stock and ErgoBilt Series
A Preferred stock. The cash portion of the consideration will be reduced by the
anticipated distribution of approximately $4.4 million related to S corporation
earnings to be made to the shareholders of the Company prior to the merger.
F-32
<PAGE> 82
The Company intends to expand its retail distribution and explore new
distribution channels, including catalog sales, telemarketing and the use of
the Internet. The Company believes that the growth of the personal computer
market and the increase in the number of home offices create an opportunity for
the Company to market its ergonomic products directly to the end user.
-------------------------------------------------------------------
PHOTOGRAPH OF PROPOSED INTERNET WEB SITE DEPICTING NETSCAPE TOOLBAR
AND OPTIONS BUTTONS AND CHAIR WITH 10 POSTURE CONTROL POINTS.
-------------------------------------------------------------------
-------------------------------------------------------------------
PHOTOGRAPH OF PROPOSED INTERNET WEB SITE DEPICTING NETSCAPE TOOLBAR
AND OPTIONS BUTTONS AND ERGOBILT LOGO AND DIAGRAM
OF ERGONOMIC WORKSTATION.
-------------------------------------------------------------------
ERGOBILT INC
<PAGE> 83
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES TO WHICH IT RELATES IN ANY STATE TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH STATE.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................... 3
Risk Factors................................ 6
The Reorganization.......................... 10
Recent Developments......................... 11
Use of Proceeds............................. 11
Dilution.................................... 12
Capitalization.............................. 13
Dividend Policy............................. 13
Selected Financial Data..................... 14
Selected Pro Forma Financial Data........... 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 16
Business.................................... 22
Management.................................. 29
Certain Transactions........................ 34
Principal Shareholders...................... 36
Description of Capital Stock................ 37
Shares Eligible for Future Sale............. 39
Underwriting................................ 41
Legal Matters............................... 42
Experts..................................... 43
Additional Information...................... 43
Index to Financial Statements............... F-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
1,500,000 Shares
Ergobilt Logo
Common Stock
------------------------
PROSPECTUS
------------------------
CRUTTENDEN ROTH
INCORPORATED
PRINCIPAL FINANCIAL
SECURITIES, INC.
, 1997
------------------------------------------------------
------------------------------------------------------
<PAGE> 84
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The registrant will pay the following estimated expenses in connection with
the issuance and distribution of Common Stock pursuant to this registration
statement, in addition to underwriting discounts:
<TABLE>
<S> <C>
SEC Filing Fee.............................................. $ 6,970
NASD Filing Fee............................................. 2,800
Nasdaq National Market Application Fee...................... 31,900
Accounting Fees and Expenses................................ 115,000
Legal Fees and Expenses..................................... 270,000
Printing and Engraving...................................... 180,000
Transfer Agent and Registrar Fees and Expenses.............. 10,000
Blue Sky Fees and Expenses (including fees of counsel)...... 1,000
Underwriters' Nonaccountable Expense Allowance.............. 225,000
Miscellaneous............................................... 50,000
--------
Total............................................. $892,670
========
</TABLE>
- ---------------
* To be furnished by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The registrant's Restated Articles of Incorporation contain provisions that
eliminate the personal liability of its directors for monetary damages resulting
from breaches of their fiduciary duty, other than liability for a breach of the
duty of loyalty, acts or omissions not in good faith that constitute a breach of
the director's duty to the registrant, acts that involve intentional misconduct
or a knowing violation of the law, transactions in which the director receives
an improper benefit and acts or omissions for which liability is expressly
provided by applicable law. The registrant's bylaws contain provisions requiring
the registrant to indemnify its directors, officers, key employees and
consultants, to the fullest extent permitted in the Texas Business Corporation
Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The registrant was incorporated on June 12, 1995. On that date, the
registrant issued 1,000 shares of its common stock to Gerald McMillan for
$1,000. These transactions were exempt from the registration requirements of the
Securities Act of 1933 pursuant to Section 4(2) because they did not involve any
public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The information set forth on the "Index to Exhibits" beginning on page II-4
of this registration statement is incorporated here by reference. No financial
statement schedules are filed as part of this registration statement.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To provide to the underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to
each purchaser.
(2) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that, in the opinion of the
Securities and
II-1
<PAGE> 85
Exchange Commission, such indemnification is against public policy, as
expressed in the Securities Act of 1933 and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the Common Stock being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will
be governed by the final adjudication of such issue.
(3) For the purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be
deemed to be part of the registration statement as of the time it was
declared effective.
(4) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 86
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused Amendment No. 2 to this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas, on January 27, 1997.
ERGOBILT, INC.
By: /s/ GERARD SMITH
----------------------------------
Gerard Smith,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 1
to this Registration Statement has been signed below by the following persons on
behalf of the registrant in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ GERALD MCMILLAN Chairman of the Board and Director January 27, 1997
- ----------------------------------------------
Gerald McMillan
/s/ GERARD SMITH President, Chief Executive Officer January 27, 1997
- ---------------------------------------------- and Director (Principal
Gerard Smith Executive Officer and Acting
Principal Financial and
Accounting Officer)
</TABLE>
II-3
<PAGE> 87
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
------- ------- ------------
<C> <S> <C>
+1(a) -- Underwriting Agreement
+1(b) -- Warrant Purchase Agreement
2 -- Agreement and Plan of Merger by and among ErgoBilt, Inc.,
EB Subsidiary, Inc., BodyBilt Seating, Inc., Mark A.
McMillan, Dr. Richard Troutman and Drew Congleton dated
August 19, 1996 (without schedules or exhibits)
**3(i) -- Restated Articles of Incorporation
**3(ii) -- Amended and Restated Bylaws
**4(a) -- Text and Description of Graphics and Images Appearing on
Certificate for Common Stock
**4(b) -- Form of Certificate of Designation of Series A Preferred
Stock of ErgoBilt, Inc.
+5 -- Opinion of Wolin, Fuller, Ridley & Miller LLP
**9 -- Voting Agreement among ErgoBilt, Inc. and the
Shareholders named therein dated December 1, 1996
10(a)(1) -- Loan Agreement between The First National Bank of Bryan
and BodyBilt Seating, Inc. dated June 30, 1996, and
schedule of substantially similar agreements
10(a)(2) -- Security Agreement between The First National Bank of
Bryan and BodyBilt Seating, Inc. dated June 30, 1996, and
schedule of substantially similar agreements
10(a)(3) -- Third Party Pledge Agreement between The First National
Bank of Bryan and Mark A. McMillan dated June 30, 1996,
and schedule of substantially similar agreements
10(a)(4) -- Guaranty in favor of The First National Bank of Bryan by
Mark A. McMillan dated June 30, 1996, and schedule of
substantially similar agreements
10(a)(5) -- Promissory Note in the original principal amount of
$2,000,000 executed by BodyBilt Seating, Inc. in favor of
The First National Bank of Bryan dated June 30, 1996, and
schedule of substantially similar agreements
10(b)(1) -- Agreement Among The First National Bank of Bryan,
BodyBilt Seating, Inc. and Mark A. McMillan dated June
15, 1995
10(c)(1) -- Loan Agreement Among The First National Bank of Bryan,
BodyBilt Seating, Inc. and Mark A. McMillan dated May 26,
1994
10(c)(2) -- Promissory Note in the original principal amount of
$571,500 executed by BodyBilt Seating, Inc. in favor of
The First National Bank of Bryan dated May 26, 1994
10(c)(3) -- Specific Guaranty in favor of The First National Bank of
Bryan by Mark A. McMillan dated May 26, 1994
10(c)(4) -- General Security Agreement Among The First National Bank
of Bryan, BodyBilt Seating, Inc. and Mark A. McMillan
dated May 26, 1994
10(c)(5) -- Modification and/or Extension Agreement Among The First
National Bank of Bryan, BodyBilt Seating, Inc. and Mark
A. McMillan dated May 31, 1995
10(c)(6) -- Third Party Pledge Agreement between The First National
Bank of Bryan and Mark A. McMillan dated May 31, 1995
10(d)(1) -- Common Stock and Warrant Purchase Agreement among
ErgoBilt, Inc., Gerald McMillan, and Summit Partners
Management Co. dated September 6, 1996
</TABLE>
II-4
<PAGE> 88
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
------- ------- ------------
<C> <S> <C>
10(d)(2) -- Registration Rights Agreement between ErgoBilt, Inc. and
Summit Partners Management Co. dated September 6, 1996
10(d)(3) -- Convertible Promissory Note in the original principal
amount of $500,000 executed by ErgoBilt, Inc. in favor of
Summit Partners Management Co. dated September 6, 1996
10(d)(4) -- Investment and Security Agreement among Gerald McMillan,
ErgoBilt, Inc. and Summit Partners Management Co. dated
September 6, 1996
10(e)(1) -- Universal Note Among The First National Bank of Bryan,
BodyBilt Seating, Inc. and Mark A. McMillan dated May 27,
1993, and schedule of substantially similar agreements
10(e)(2) -- Security Agreement Among The First National Bank of
Bryan, BodyBilt Seating, Inc. and Mark A. McMillan dated
May 27, 1993, and schedule of substantially similar
agreements
10(e)(3) -- Guaranty Among The First National Bank of Bryan, BodyBilt
Seating, Inc. and Mark A. McMillan dated May 27, 1993,
and schedule of substantially similar agreements
10(f) -- Non-Recourse Promissory Note in the original principal
amount of $75,000 executed by Lubbock Molasses, Inc. in
favor of Dr. Richard Troutman dated May 1, 1989
10(g) -- Patent License Agreement Between Jerome J. Congleton and
The Chair Works dated May 15, 1991
10(h)(1) -- Award/Contract #GS-29F-0119C Between BodyBilt Seating,
Inc. and General Services Administration (GSA)
10(h)(2) -- Amendment of Solicitation/Modification of Contract
#GS-29F-0119C Between BodyBilt Seating, Inc. and General
Services Administration (GSA)
**10(i)(1) -- Settlement Agreement among Jerome J. Congleton, Jaye
Congleton, Rebecca Congleton Boenigk and Congleton
Ergonomic Chairs, Inc., Mark McMillan, Michael McWhorter,
and Congleton Chair Works, Inc. (f/k/a Lubbock Molasses,
Inc., d/b/a Congleton Chair Works, Inc.), entered into
May 1991
10(i)(2) -- Settlement Agreement among BodyBilt Seating, Inc., Mark
A. McMillan, Drew Congleton, Michael Jack, and Galen
Green, and Neutral Posture Ergonomics, Inc., Jerome J.
Congleton, Jay Congleton and Rebecca Congleton Boenigk,
entered into January 1995
**10(j) -- Executive Employment Agreement between Drew Congleton and
a corporation to be known as BodyBilt Seating, Inc. dated
December 19, 1996
10(k) -- Consulting Agreement between Mark A. McMillan and
ErgoBilt, Inc. dated October 15, 1996
10(l) -- Consulting Services Agreement among ErgoBilt, Inc.,
Gerald McMillan and Gerard Smith dated July 2, 1996
**10(m) -- First Amended and Restated Executive Employment Agreement
between ErgoBilt, Inc. and Gerard Smith dated as of
October 15, 1996
10(n) -- IPO Consulting Services Agreement between ErgoBilt, Inc.
and P. Michael Sullivan dated September 16, 1996
10(o) -- Executive Employment Agreement between ErgoBilt, Inc. and
P. Michael Sullivan dated September 16, 1996
</TABLE>
II-5
<PAGE> 89
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
------- ------- ------------
<C> <S> <C>
10(p) -- Business Management Contract Between BodyBilt Seating,
Inc. and Agrivest, Inc., dated January 1, 1996
10(q) -- Consulting Agreement Between The Chafferton Company and
BodyBilt Seating, Inc. dated August 1, 1994
10(r) -- Conditional Release of Commission Between Gerald McMillan
and BodyBilt Seating, Inc. dated May 23, 1996
10(s) -- Memorandum of Understanding Regarding 1984 Pace Arrow
Motor Home between Mark A. McMillan and Drew Congleton
dated December 1992
**10(t) -- Stock Option Plan
**10(u) -- Letter of Intent between Metamorphosis Design &
Development, Inc. and Ergobilt, Inc. dated January 8,
1997
**10(v) -- Executive Employment Agreement between Gerald McMillan
and ErgoBilt, Inc. dated October 1, 1996
**16 -- Letter of Thompson, Derrig & Slovacek PC
21 -- Subsidiaries
+23(a) -- Consent of KPMG Peat Marwick LLP
+23(b) -- Consent of Thompson, Derrig & Slovacek PC
23(c) -- Consent of Wolin, Fuller, Ridley & Miller LLP (included
in Exhibit 5 to this registration statement)
27 -- Financial Data Schedule
99(a) -- Consent of Person About to Become Director (William H.
Weed)
99(b) -- Consent of Person About to Become Director (William Brown
Glenn, Jr.)
99(c) -- Consent of Person About to Become Director (W. Barton
Munro)
99(d) -- Consent of Person About to Become Director (Drew
Congleton)
99(e) -- Consent of Person About to Become Director (Robert E.
Faust)
**99(f) -- Consent of Person About to Become Director (Mark
McMillan)
</TABLE>
- ---------------
* To be filed by amendment.
** Filed with Amendment No. 1 to the registration statement.
+ Filed with Amendment No. 2 to the registration statement.
II-6
<PAGE> 1
EXHIBIT 1(a)
ERGOBILT, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
------------
UNDERWRITING AGREEMENT
------------
January ____, 1997
Cruttenden Roth Incorporated
Principal Financial Securities, Inc.
As Representatives of the several
Underwriters named in Schedule I hereto,
c/o Cruttenden Roth Incorporated
18301 Von Karman
Irvine, CA 92612
Dear Ladies and Gentlemen:
ErgoBilt, Inc., a Texas corporation (the "Company"), proposes, subject
to the terms and conditions stated herein, to issue and sell to the
Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of
1,500,000 shares and, at the election of the Underwriters, up to 225,000
additional shares of Common Stock, par value $.01 per share ("Stock") of the
Company. The aggregate of 1,500,000 shares to be sold by the Company is herein
called the "Firm Shares" and the aggregate of 225,000 additional shares to be
sold by the Company is herein called the "Optional Shares." The Firm Shares and
the Optional Shares which the Underwriters elect to purchase pursuant to
Section 2 hereof are herein collectively called the "Shares."
1. The Company represents and warrants to, and agrees with, each of
the Underwriters that:
(a) A registration statement in respect of the Shares has been
filed with the Securities and Exchange Commission (the "Commission");
such registration statement and any post-effective amendment thereto,
each in the form heretofore delivered to you, and, excluding exhibits
thereto, to you for each of the other Underwriters, have been declared
effective by the Commission in such form; no other document with respect
to such registration statement has heretofore been filed with the
Commission; and no stop order suspending the effectiveness of such
registration statement has been issued and no proceeding for that
purpose has been initiated or to the knowledge of the Company threatened
by the Commission (any preliminary prospectus included in such
registration
<PAGE> 2
statement or filed with the Commission pursuant to Rule 424(a) of the
rules and regulations of the Commission (the "Rules and Regulations")
under the Securities Act of 1933, as amended (the "Securities Act"),
being hereinafter called a "Preliminary Prospectus"; the various parts
of such registration statement, including all exhibits thereto and
including the information contained in the form of final prospectus
filed with the Commission pursuant to Rule 424(b) under the Securities
Act in accordance with Section 5(a) hereof and deemed by virtue of Rule
430A or Rule 434 under the Securities Act to be part of the registration
statement at the time it was declared effective, each as amended at the
time such part of the registration statement became effective, being
hereinafter called the "Registration Statement"; and such final
prospectus, in the form first filed pursuant to Rule 424(b) under the
Securities Act, being hereinafter called the "Prospectus");
(b) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission or the Blue Sky
or securities authority of any jurisdiction, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material
respects to the requirements of the Securities Act and the Rules and
Regulations, and did not contain an untrue statement of a material fact
or omit 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; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter
through you expressly for use therein;
(c) The Registration Statement conforms, and the Prospectus
and any further amendments or supplements to the Registration Statement
or the Prospectus will conform, in all material respects to the
requirements of the Securities Act and the Rules and Regulations and do
not and will not, as of the applicable effective date as to the
Registration Statement and any amendment thereto and as of the
applicable filing date as to the Prospectus and any amendment or
supplement thereto, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading; provided, however, that
this representation and warranty shall not apply to any statements or
omissions made in reliance upon and in conformity with information
furnished in writing to the Company by an Underwriter through you
expressly for use therein;
(d) None of the Company, any of its subsidiaries or BodyBilt
Seating, Inc., a Texas corporation ("BodyBilt"), has sustained since the
date of the latest audited financial statements included in the
Prospectus any loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance,
or from any labor dispute or court or governmental action, order or
decree, that is material to the general affairs, management, financial
position, stockholders' equity or results of operations of the Company
and, since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there has not been any change
in the capital stock, short-term debt or long-term debt of the Company,
any of its subsidiaries or BodyBilt or any material adverse change, or
any development involving
<PAGE> 3
a prospective material adverse change, in or affecting the general
affairs, management, financial position, stockholders' equity or results
of operations of the Company, its subsidiaries or BodyBilt, otherwise
than as set forth or contemplated in the Prospectus;
(e) The Company, its subsidiaries and BodyBilt have good and
marketable title in fee simple or, in jurisdictions outside of the
United States, the substantive equivalent thereto, to all material real
property and good and marketable title to all material personal property
owned by them, in each case free and clear of all liens, encumbrances
and defects except such as are described in the Prospectus or such as do
not materially affect the value of such property and do not interfere
with the use made and proposed to be made of such property by the
Company, its subsidiaries and BodyBilt; and any material real property
and buildings held under lease by the Company, its subsidiaries and
BodyBilt are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the
use made and proposed to be made of such property and buildings by the
Company, its subsidiaries or BodyBilt;
(f) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Texas, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus, and
has been duly qualified as a foreign corporation for the transaction of
business and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties, or conducts any
business, so as to require such qualification, or is subject to no
material liability or disability by reason of failure to be so qualified
in any such jurisdiction; and each subsidiary of the Company has been
duly incorporated and is validly existing as a corporation and is in
good standing under the laws of its jurisdiction of incorporation;
(g) BodyBilt has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Texas, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus, and
has been duly qualified as a foreign corporation for the transaction of
business and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties, or conducts any
business, so as to require such qualification, or is subject to no
material liability or disability by reason of failure to be so qualified
in any such jurisdiction;
(h) The Agreement and Plan of Merger, by and among the
Company, EB Subsidiary, Inc., a Texas corporation and wholly-owned
subsidiary of the Company ("Newco"), BodyBilt and all of BodyBilt's
shareholders (the "Shareholders") entered into as of August 19, 1996
(the "Merger Agreement"), pursuant to which BodyBilt shall merge with
and into Newco (the "Merger"), and the transactions contemplated
therein, have been duly and validly authorized by the Company, Newco,
BodyBilt and the Shareholders, and the Merger Agreement has been duly
and validly executed and delivered by the Company, Newco, BodyBilt and
the Shareholders;
3
<PAGE> 4
(i) The Company has full legal right, corporate power and
authority to enter into this Agreement. This Agreement and the
transactions contemplated herein have been duly and validly authorized
by the Company and this Agreement has been duly and validly executed and
delivered by the Company;
(j) The Company has an authorized capitalization as set forth
in the Prospectus, and all of the issued and outstanding shares of
capital stock of the Company have been duly and validly authorized and
issued, are fully paid and non-assessable, were not issued in violation
of or subject to any preemptive rights or other rights to subscribe for
or purchase securities and conform to the aggregate number and
description thereof, on a pro forma basis to give effect to the Merger
and on an as adjusted basis to give effect to the issue and sale of the
Shares, as set forth and contained in the Prospectus; all of BodyBilt's
outstanding shares of capital stock have been duly and validly
authorized and issued, are fully paid and non-assessable and were not
issued in violation of or subject to any preemptive rights or other
rights to subscribe for or purchase securities; and all of the issued
shares of capital stock of each subsidiary of the Company have been duly
and validly authorized and issued, and are fully paid and
non-assessable, were not issued in violation of or subject to any
preemptive rights or other rights to subscribe for or purchase
securities and are owned directly or indirectly by the Company, free and
clear of all liens, encumbrances, equities or claims;
(k) Except as disclosed in or contemplated by the Prospectus
and the financial statements of the Company and the related notes
thereto included in the Prospectus, neither the Company nor Newco has
outstanding any options to purchase, or any preemptive rights or other
rights to subscribe for or to purchase, any securities or obligations
convertible into, or any contracts or commitments to issue or sell,
shares of its capital stock or any such options, rights, convertible
securities or obligations. The description of the Company's outstanding
stock options and other stock plans or arrangements and the options or
other rights granted and exercised thereunder set forth in the
Prospectus accurately and fairly presents in all material respects the
information required to be shown with respect to such options, plans,
arrangements, and rights;
(l) The unissued Shares to be issued and sold by the Company
to the Underwriters hereunder have been duly and validly authorized and,
when issued and delivered against payment therefor as provided herein,
will be duly and validly issued and fully paid and non-assessable and
will conform to the description of the Stock contained in the
Prospectus;
(m) All offers and sales of (i) the Common Stock by the
Company (other than the Shares); and (ii) the capital stock of BodyBilt
were at all relevant times exempt from the registration requirements of
the Securities Act and were the subject of an available exemption from
the registration requirements of applicable state securities or Blue Sky
laws;
(n) When duly countersigned by the Company's transfer agent
and registrar and delivered to the Underwriters in accordance with the
provisions of this Agreement, good
4
<PAGE> 5
and marketable title to the unissued Shares to be issued and sold by the
Company to the Underwriters hereunder will pass to the Underwriters free
and clear of any liens, security interests, adverse claims, equities or
other encumbrances of any kind or character, except as may be created by
any Underwriter. No preemptive rights or other rights to subscribe for
or purchase exist with respect to the issuance and sale of any of the
Shares by the Company pursuant to this Agreement. No stockholder of the
Company has any right that has not been waived in writing to require the
Company to register the sale of any shares owned by such stockholder
under the Securities Act in the public offering contemplated by this
Agreement;
(o) The issue and sale of the Shares by the Company and the
compliance by the Company with all of the provisions of this Agreement
and the consummation of the transactions herein and therein contemplated
will not (i) conflict with or result in a breach or violation of any of
the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement, sale/leaseback
agreement or other agreement or instrument (collectively, the "Specified
Documents") to which the Company or any of its subsidiaries is a party
or by which the Company or any of its subsidiaries is bound except for
any such conflict, breach, violation or default, either individually or
in the aggregate, which could not reasonably be expected to have a
material adverse effect on the business, prospects, properties,
operations, condition (financial or otherwise) or results of operations
of the Company and its subsidiaries taken as a whole (a "Material
Adverse Effect"), or to which any of the property or assets of the
Company or any of its subsidiaries is subject; nor (ii) result in any
violation of the provisions of the Articles of Incorporation, as
amended, or the Bylaws of the Company or any statute or any order, rule
or regulation of any court or government agency or body having
jurisdiction over the Company or any of its subsidiaries or any of their
properties, except with respect to the violation of any statute, order,
rule or regulation of any court or government agency or body, which
violation, either individually or in the aggregate, could not reasonably
be expected to result in a Material Adverse Effect; and no consent,
approval, authorization, order, registration or qualification of or with
any such court or governmental agency or body is required for the issue
and sale of the Shares or the consummation by the Company of the
transactions contemplated by this Agreement, except the registration
under the Securities Act of the Shares and such consents, approvals,
authorizations, registrations or qualifications as may be required under
state securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters; except with respect to
those failures to so obtain or make which could not reasonably be
expected, either individually or in the aggregate, to have a Material
Adverse Effect;
(p) Other than as set forth or contemplated in the Prospectus,
there are no legal or governmental proceedings pending, or to knowledge
of the Company, threatened to which the Company, any of its subsidiaries
or, to the best of the Company's knowledge, BodyBilt is a party or of
which any property of the Company, any of its subsidiaries or BodyBilt
is the subject, which are required to be disclosed in the Prospectus or
which, if determined adversely to the Company, any of its subsidiaries
or BodyBilt, would individually or in the aggregate have a Material
Adverse Effect (assuming the consummation of the transactions
contemplated by the Merger Agreement); and, to the
5
<PAGE> 6
best of the Company's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others;
(q) Neither the Company nor BodyBilt is in violation of any
law, ordinance, governmental rule or regulation or court decree to which
either of them may be subject, which violation might have a Material
Adverse Effect;
(r) The Company and BodyBilt comply in all material respects
with all Environmental Laws (as defined below), except to the extent
that failure to comply with such Environmental Laws would not have a
Material Adverse Effect. Neither the Company nor BodyBilt (i) is the
subject of any pending or, to the knowledge of the Company, threatened
federal, state or local investigation evaluating whether any remedial
action by the Company or BodyBilt is needed to respond to a release of
any Hazardous Materials (as defined below) into the environment,
resulting from the Company's or BodyBilt's business operations or
ownership or possession of any of the properties or assets, or (ii) is
in contravention of any Environmental Law that could reasonably be
expected to have a Material Adverse Effect. Neither the Company nor
BodyBilt has received any notice or claim, nor are there pending or, to
the knowledge of the Company, threatened lawsuits against them, with
respect to violations of any Environmental Law or in connection with any
release of Hazardous Materials into the environment that, in the
aggregate, if the subject of any unfavorable decision, ruling or
finding, could reasonably be expected to have a Material Adverse Effect.
As used herein, "Environmental Laws" means any federal, state, city or
local law or regulation applicable to the Company's or BodyBilt's
business operations or ownership or possession of any of their
properties or assets relating to environmental matters, and "Hazardous
Materials" means those substances that are regulated by or form the
basis of liability under any Environmental Laws;
(s) The Company and BodyBilt have timely (giving effect to
permitted extensions) filed and properly prepared all necessary federal,
state, local and foreign income, franchise and any other required tax
returns and has paid all taxes shown as due thereon, and the Company has
no knowledge of any tax deficiency which has been or might be asserted
against the Company or BodyBilt which might have a Material Adverse
Effect;
(t) None of the Company, BodyBilt nor any officers, directors,
employees or agents or any other persons associated with or acting on
behalf of the Company or BodyBilt has at any time (i) made any
contributions to any candidate for political office in violation of law,
or failed to disclose fully any contributions to any candidate for
political office in accordance with any applicable statute, rule,
regulation or ordinance requiring such disclosure, (ii) made any payment
to any local, state, federal or foreign governmental officer or
official, or other person charged with similar public or quasi-public
duties, other than payments required or allowed by applicable law, (iii)
violated any provision of the Foreign Corrupt Practices Act of 1977, as
amended (iv) made any payment outside the ordinary course of business to
any purchasing or selling agent or person charged with similar duties of
any entity to which the Company or BodyBilt sells
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<PAGE> 7
or from which the Company or BodyBilt buys products for the purpose of
influencing such agent or person to buy products from or sell products
to the Company or BodyBilt, (v) made any other bribe, rebate, payoff,
influence payment, kickback or other unlawful payment or (vi) engaged in
any transaction, maintained any bank account or used any corporate funds
except for transactions, bank accounts and funds which have been and are
reflected in the normally maintained books and records of the Company or
BodyBilt;
(u) Except for the several Underwriters and the
Representatives, the Company has taken no action that would result in
nor, to the best knowledge of the Company, no claims for services exist
in the nature of and no person has any right to receive a finder's fee,
brokerage fee or similar fee with respect to this offering for which the
Company or any of the several Underwriters may be responsible;
(v) The Company and BodyBilt have their respective properties
adequately insured against loss or damage by fire and maintains such
other insurance as is prudent or customarily maintained by companies in
the same or similar business and in the same or similar locality;
(w) KPMG Peat Marwick LLP and Thompson, Derrig & Slovacek PC
who have certified financial statements of the Company, its subsidiaries
and BodyBilt, are independent public accountants as required by the
Securities Act and the Rules and Regulations;
(x) The historical financial statements, including the notes
thereto, and schedules included in the Registration Statement and the
Prospectus present fairly, on the basis stated therein, the financial
position of the Company and BodyBilt as of the dates of such financial
statements and the results of such operations for the periods specified.
Such financial statements have been prepared in conformity with
generally accepted accounting principles applied on a consistent basis,
except as otherwise disclosed in the Registration Statement; the
schedules included in the Registration Statement present fairly the
information required to be stated therein; and the other historical
financial data of the Company and BodyBilt included in the Registration
Statement and the Prospectus are materially accurate and prepared on a
basis consistent with such financial statements and schedules and the
books and records of the Company and BodyBilt, respectively;
(y) The pro forma financial information included in the
Registration Statement and the Prospectus presents fairly the
information shown therein, has been prepared in accordance with
generally accepted accounting principles and the Rules and Regulations
with respect to pro forma information, has been properly compiled on the
pro forma basis described therein and, in the opinion of the Company,
the assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate under the circumstances;
(z) The Company owns all of the outstanding capital stock of
Newco. The Company does not own or control any corporation, association
or other entity, other than Newco. Newco has been duly organized and is
validly existing as a corporation in good
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<PAGE> 8
standing under the laws of its respective state of incorporation, with
requisite corporate power and authority to own, lease and operate its
properties, and to conduct the business in which it is engaged as
described in the Prospectus. Newco is duly qualified as a foreign
corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason
of the ownership or leasing of property or the conduct of its business
requires such qualification, except for jurisdictions in which the
failure to so qualify would not have a Material Adverse Effect;
(aa) The Company, its subsidiaries and BodyBilt own, or possess
adequate rights to use, all the patents, trademarks, service marks,
trade names and copyrights ("Intellectual Property") necessary for the
conduct of their business as currently conducted by them and has taken
reasonable security measures to protect the secrecy, confidentiality and
value of its trade secrets and know-how that are valid and protectible
and are not part of the public knowledge or literature ("Trade
Secrets"). The Company has not received any written notice of
infringement of or conflict with, and to the best knowledge of the
Company, none of the activities engaged in by the Company and BodyBilt
infringes or conflicts with Intellectual Property rights of others. Any
of the Company's employees and any other person authorized by the
Company, who, either alone or in concert with others, developed,
invented, discovered, derived, programmed or designed the Trade Secrets
of the Company, or who have knowledge of or access to information
relating to them, have been put on notice that the Trade Secrets of the
Company are proprietary to the Company and are not to be divulged or
misused and the Company's employees have entered into written agreements
with the Company requiring the continued confidentiality of the Trade
Secrets;
(bb) Except as set forth in the Prospectus, no person has any
right to require the Company to register any securities under the
Securities Act;
(cc) The Company has not taken, directly or indirectly, any
action designed to cause or result in, or which constitutes or which
might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of Stock to facilitate the sale
or resale of the Shares;
(dd) The Company is not, and upon consummation of the
transactions contemplated hereby will not be, subject to registration as
an "investment company" under the Investment Company Act of 1940;
(ee) There are no Specified Documents of a character required
to be described or referred to in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement by
the Securities Act or by the regulations thereunder that have not been
described or referred to therein or filed as required;
(ff) The Company and BodyBilt each maintains a system of
internal accounting controls that, taken as a whole, are sufficient to
provide reasonable assurance that: (i) transactions are executed in
accordance with management's general or specific authorizations; (ii)
transactions are recorded as necessary to permit preparation of
financial
8
<PAGE> 9
statements in conformity with generally accepted accounting principles
and to maintain asset accountability; (iii) access to assets is
permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences;
(gg) The Company and BodyBilt have each complied with all
provisions of Section 517.075, Florida Statutes (Chapter 92-198, Laws of
Florida), relating to doing business with the Government of Cuba or any
person or affiliate located in Cuba;
(hh) There are no outstanding loans or advances or guarantees
of indebtedness by the Company to or for the benefit of any affiliate of
the Company, any of the officers or directors of the Company, or any of
the members of the families of any of them, or any other business
relationships or related-party transaction of the nature described in
Item 404 of Regulation S-K involving the Company or BodyBilt and any
other persons referred to in said Item 404, which are required by the
Rules and Regulations to be described in the Registration Statement and
the Prospectus, except such that are so described; and
(ii) The Company is eligible to use Form S-1 for the
registration of the Shares.
2. Subject to the terms and conditions herein set forth, (a) the
Company agrees to sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company,
at a purchase price per share of $ , the number of Firm Shares (to be
adjusted by you so as to eliminate fractional shares) determined by multiplying
the aggregate number of Firm Shares to be sold by the Company as set forth in
Schedule II hereto by a fraction, the numerator of which is the aggregate
number of Firm Shares to be purchased by such Underwriter as set forth opposite
the name of such Underwriter in Schedule I hereto and the denominator of which
is the aggregate number of Firm Shares to be purchased by all the Underwriters
from the Company hereunder and (b) in the event and to the extent that the
Underwriters shall exercise the election to purchase Optional Shares as
provided below, the Company agrees to issue and sell to each of the
Underwriters, and each of the Underwriters agrees, severally and not jointly,
to purchase from the Company, at the purchase price per share set forth in
clause (a) of this Section 2, that portion of the number of Optional Shares as
to which such election shall have been exercised (to be adjusted by you so as
to eliminate fractional shares) determined by multiplying such number of
Optional Shares by a fraction, the numerator of which is the maximum number of
Optional Shares which such Underwriter is entitled to purchase as set forth
opposite the name of such Underwriter in Schedule I hereto and the denominator
of which is the maximum number of the Optional Shares which all of the
Underwriters are entitled to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to 225,000 Optional Shares, at the purchase price per share
set forth in the paragraph above, for the sole purpose of covering
overallotments in the sale of the Firm Shares. Any such election to purchase
Optional Shares may be exercised only by written notice from you to the
Company, given within a period of 45 calendar days after the date of this
Agreement, setting forth the aggregate number of Optional Shares to be
purchased and the date on which such Optional Shares
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<PAGE> 10
are to be delivered, as determined by you but in no event earlier than the
First Time of Delivery (as defined in Section 4 hereof) or, unless you and the
Company otherwise agree in writing, earlier than two or later than ten business
days after the date of such notice.
3. Upon the authorization by you of the release of the Firm Shares,
the several Underwriters propose to offer the Firm Shares for sale upon the
terms and conditions set forth in the Prospectus.
4. Certificates in definitive form for the Shares to be purchased by
each Underwriter hereunder, and in such denominations and registered in such
names as Cruttenden Roth Incorporated may request upon at least 48 hours' prior
notice to the Company, shall be delivered by or on behalf of the Company to you
for the account of such Underwriter, against payment by such Underwriter or on
its behalf of the purchase price therefor by certified or official bank check
or checks, payable to the order of the Company in same day funds, or by payment
in such other manner as shall be agreed to in writing by the Company and
Cruttenden Roth Incorporated, all at the offices of Cruttenden Roth
Incorporated, 18301 Von Karman, Irvine, CA 92612, or at such other place as
shall be agreed upon by you and the Company. The time and date of such
delivery and payment shall be, with respect to the Firm Shares, 9:00 a.m.,
Dallas time, on _______________, 1997, or at such other time and date as you
and the Company may agree upon in writing, and, with respect to the Optional
Shares, 9:00 a.m., Dallas time, on the date specified by you in the written
notice given by you of the Underwriters' election to purchase such Optional
Shares, or at such other time and date as you and the Company may agree upon in
writing. Such time and date for delivery of the Firm Shares is herein called
the "First Time of Delivery," such time and date for delivery of the Optional
Shares, if not the First Time of Delivery, is herein called the "Second Time of
Delivery," and each such time and date for delivery is herein called a "Time of
Delivery."
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to
file such Prospectus pursuant to Rule 424(b) or Rule 434 under the
Securities Act not later than the Commission's close of business on the
second business day following the execution and delivery of this
Agreement, or, if applicable, such earlier time as may be required by
Rule 430A(a)(3) under the Securities Act; to make no further amendment
or any supplement to the Registration Statement or Prospectus which
shall be disapproved by you promptly after reasonable notice thereof; to
advise you, promptly after it receives notice thereof, of the time when
the Registration Statement, or any amendment thereto, has been filed or
becomes effective or any supplement to the Prospectus or any amended
Prospectus has been filed and to furnish you with copies thereof; to
advise you, promptly after it receives notice thereof, of the issuance
by the Commission of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or Prospectus, of the
suspension of the qualification of the Shares for offering or sale in
any jurisdiction, of the initiation or threatening of any proceeding for
any such purpose, or of any request by the Commission for the amending
or supplementing of the Registration Statement or Prospectus or for
additional information; and, in the event of the issuance of any stop
order or of any order preventing or suspending the use of any
Preliminary
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<PAGE> 11
Prospectus or Prospectus or suspending any such qualification, to use
promptly its best efforts to obtain its withdrawal;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may request and to
comply with such laws so as to permit the continuance of sales and
dealings therein in such jurisdictions for as long as may be necessary
to complete the distribution of the Shares, provided that in connection
therewith the Company shall not be required to qualify as a foreign
corporation or to file a general consent to service of process in any
jurisdiction;
(c) To furnish the Underwriters with copies of the Prospectus
in such quantities as you may from time to time reasonably request, and,
if the delivery of a Prospectus is required at any time prior to the
expiration of nine months after the time of the issue of the Prospectus
in connection with the offering or sale of the Shares and if at such
time any event shall have occurred as a result of which the Prospectus
as then amended or supplemented would include an untrue statement of a
material fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made when such Prospectus is delivered, not misleading,
or, if for any other reason it shall be necessary during such same
period to amend or supplement the Prospectus in order to comply with the
Securities Act, to notify you and upon your request to prepare and
furnish without charge to each Underwriter and to any dealer in
securities as many copies as you may from time to time reasonably
request of an amended Prospectus or a supplement to the Prospectus which
will correct such statement or omission or effect such compliance, and
in case any Underwriter is required to deliver a prospectus in
connection with sales of any of the Shares at any time nine months or
more after the time of issue of the Prospectus, upon your request but at
the expense of such Underwriter, to prepare and deliver to such
Underwriter as many copies as you may request of an amended or
supplemented Prospectus complying with Section 10(a)(3) of the
Securities Act;
(d) To make generally available to its security holders as
soon as practicable, but in any event not later than 18 months after the
effective date of the Registration Statement (as defined in Rule 158(c)
under the Securities Act), an earnings statement of the Company and its
subsidiaries (which need not be audited) complying with Section 11(a) of
the Securities Act and the Rules and Regulations (including at the
option of the Company Rule 158);
(e) (i) During the period beginning on the date hereof and
continuing to and including the date 180 days after the effective date
of the Registration Statement, not to, directly or indirectly, offer,
sell, contract to sell, grant any option to sell or otherwise dispose of
Stock, or other securities which are substantially similar to the Stock,
or securities which are convertible or exercisable or exchangeable for
any rights to purchase or acquire Stock or other securities which are
substantially similar to the Stock, without your prior written consent
(other than the sale of the Shares pursuant to this Agreement,
securities issued pursuant to the Merger Agreement or upon exercise of
warrants existing
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<PAGE> 12
as of the date of this Agreement, or the grant of options or of
restricted stock awards pursuant to stock option or restricted stock
plans existing on the date of this Agreement provided such options are
not exercisable within the 180 day period); and (ii) that it will use
its reasonable efforts to cause each person who has entered into a
Lock-up Agreement to comply therewith, will not grant any waivers or
consents to non-compliance therewith, and will otherwise enforce its
rights under each such agreement, in each case unless and to the extent
that it shall have obtained your prior written consent;
(f) To furnish to its shareholders as soon as practicable
after the end of each fiscal year an annual report (including a balance
sheet and statements of income, shareholders' equity and cash flow of
the Company and its consolidated subsidiaries certified by independent
public accountants) and, as soon as practicable after the end of each of
the first three quarters of each fiscal year (beginning with the fiscal
quarter ending after the effective date of the Registration Statement),
consolidated summary financial information of the Company and its
subsidiaries for such quarter in reasonable detail;
(g) During a period of five years after the effective date of
the Registration Statement, to furnish to you copies of all reports or
other communications (financial or other) furnished to shareholders, and
deliver to you (i) as soon as they are available, copies of any reports
and financial statements furnished to or filed with the Commission or
any national securities exchange on which any class of securities of the
Company is listed; and (ii) such additional information concerning the
business and financial condition of the Company as you may from time to
time reasonably request (such financial statements to be on a
consolidated basis to the extent the accounts of the Company and its
subsidiaries are consolidated in reports furnished to its shareholders
generally or to the Commission);
(h) To use its best efforts to have the Shares accepted timely
for quotation on the Nasdaq National Market;
(i) To take all actions, necessary or appropriate, to validly
consummate the Merger contemporaneously with the closing of the sale of
the Firm Shares;
(j) To apply the net proceeds from the sale of the Shares in
the manner described in "Use of Proceeds" in the Prospectus; and
(k) To give notice of termination of the Business Management
Contract entered into by and between BodyBilt and Agrivest, Inc., dated
January 1, 1996, immediately upon the closing of the sale of the Firm
Shares;
(l) To file with the Commission such reports on Form SR as may
be required pursuant to Rule 463 under the Securities Act; and
(m) To comply with all provisions of all undertakings
contained in the Registration Statement.
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<PAGE> 13
6. The Company covenants and agrees with the several Underwriters
that the Company will pay or cause to be paid all costs and expenses incident
to the performance of the Company's obligations hereunder including: (i) the
fees, disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Securities Act and all
other expenses in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or producing
any Agreement among Underwriters, this Agreement, the Blue Sky Memorandum, if
any, and any other documents in connection with the offering, purchase, sale
and delivery of the Shares; (iii) all expenses in connection with the
qualification of the Shares for offering and sale under state securities laws
as provided in Section 5(b) hereof, including the fees and disbursements of
counsel for the Underwriters (not to exceed $30,000) in connection with such
qualification and in connection with the Blue Sky survey, if any; (iv) the
filing fees and the fees and disbursements of counsel for the Underwriters
incident to securing any required review by the National Association of
Securities Dealers, Inc. of the terms of the sale of the Shares; (v) the cost
of preparing stock certificates; (vi) the cost and charges of any transfer
agent or registrar; (vii) the costs of preparing, printing and distributing
bound volumes for the Representatives and their counsel; and (viii) a
non-accountable expense allowance equal to 2% of the aggregate offering price
to the public of the Firm Shares (less a $15,000 advance previously paid to
Cruttenden Roth Incorporated) (the "Non-Accountable Expense Allowance"),
subject to Section 9 and 11 hereof. Except as provided in this Section,
Section 8 and Section 11 hereof, the Underwriters will pay all of their own
costs and expenses, including the fees of their counsel, stock transfer taxes
on resale of any of the Shares by them, and any advertising expenses connected
with any offers they may make.
7. The obligations of the Underwriters hereunder, as to the Shares
to be delivered at each Time of Delivery, shall be subject, in their
discretion, to the condition that all representations and warranties and other
statements of the Company herein are, at and as of such Time of Delivery, true
and correct, the condition that the Company shall have performed all of its
obligations hereunder theretofore to be performed, and the following additional
conditions:
(a) The Prospectus shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed for
such filing by the Rules and Regulations and in accordance with Section
5(a) hereof; no stop order suspending the effectiveness of the
Registration Statement or any part thereof shall have been issued and no
proceeding for that purpose shall have been initiated or threatened by
the Commission; and all requests for additional information on the part
of the Commission shall have been complied with to your reasonable
satisfaction;
(b) Gardere & Wynne, L.L.P., counsel for the Underwriters,
shall have furnished to you such opinion or opinions, dated such Time of
Delivery, with respect to the incorporation of the Company, this
Agreement, the validity of the Shares being delivered at such Time of
Delivery, the Registration Statement, the Prospectus, and other related
matters as you may reasonably request, and such counsel shall have
received such papers and information as they may reasonably request to
enable them to pass upon such matters;
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<PAGE> 14
(c) Wolin, Fuller, Ridley & Miller LLP, counsel for the
Company, shall have furnished to you their written opinion, dated such
Time of Delivery, in form and substance satisfactory to you, to the
effect that:
(i) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws
of the State of Texas, with power and authority (corporate and
other) to own its properties and conduct its business as
described in the Prospectus. The Company is not in violation of
its Articles of Incorporation or Bylaws;
(ii) BodyBilt has been incorporated and is validly
existing as a corporation in good standing under the laws of the
State of Texas;
(iii) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued and outstanding
shares of capital stock of the Company (including the Shares
being delivered at such Time of Delivery, but with respect to
such Shares to be issued and delivered by the Company, when
issued and delivered by the Company pursuant to this Agreement
against payment therefor) have been duly and validly authorized
and issued and are fully paid and non-assessable; were not issued
in violation of any statutory preemptive rights or, to such
counsel's knowledge, in violation of any other preemptive rights
or other rights to subscribe for or purchase any securities;
neither the Articles of Incorporation nor Bylaws of the Company
contain any restriction upon the voting or transfer of any of the
shares of capital stock of the Company (including the Shares),
except such restrictions as may be imposed by federal or state
securities laws or as may be expressly described in the
Prospectus; and the Shares conform to the description of the
Stock contained in the Prospectus;
(iv) Except as disclosed or specifically described in
the Prospectus, to their knowledge, there are no outstanding
options, warrants or other rights of the Company calling for the
issuance of, and no commitments or obligations to issue, any
shares of capital stock of the Company or any security
convertible into or exchangeable for capital stock of the
Company;
(v) The Company has been duly qualified as a foreign
corporation for the transaction of business and is in good
standing under the laws of each other jurisdiction in which it
owns or leases properties, or conducts any business, so as to
require such qualification, except for those failures to be
qualified or in good standing which will not in the aggregate
have a Material Adverse Effect on the Company and its
subsidiaries taken as a whole (such counsel being entitled to
rely in respect of the opinion in this clause upon certificates
of Secretaries of State or other appropriate public officials and
in respect of matters of fact upon certificates of officers of
the Company;
(vi) To their knowledge, no holders of securities of the
Company have rights that have not been waived in writing to the
registration of shares of
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<PAGE> 15
Common Stock or other securities which would be required to be
included in the Registration Statement filed by the Company or
included in the offering contemplated hereby;
(vii) Each subsidiary of the Company listed on Exhibit A
has been duly incorporated and is validly existing as a
corporation in good standing under the laws of its jurisdiction
of incorporation; and all of the issued and outstanding shares of
capital stock of each such subsidiary have been duly and validly
authorized and issued, are fully paid and non-assessable, and
such shares (except for directors' qualifying shares and except
as otherwise set forth in the Prospectus) are owned directly or
indirectly by the Company, free and clear of all liens,
encumbrances, equities or claims; (such counsel being entitled to
rely in respect of the opinion in this clause upon certificates
of Secretaries of State or other appropriate public officials and
in respect of matters of fact upon certificates of officers of
the Company or its subsidiaries, provided that such counsel shall
state that they believe that both you and they are justified in
relying upon such officers' certificates); and such subsidiaries
are not in violation of their Articles of Incorporation or
Bylaws;
(viii) To such counsel's knowledge and other than as set
forth in the Prospectus, there are no legal or governmental
proceedings pending to which the Company, any of its subsidiaries
or BodyBilt is a party or of which any property of the Company,
any of its subsidiaries or BodyBilt is the subject which, if
determined adversely to the Company, any of its subsidiaries or
BodyBilt, would individually or in the aggregate have a Material
Adverse Effect on the Company and its subsidiaries (assuming the
consummation of the transactions contemplated by the Merger
Agreement); and, to such counsel's knowledge, no such proceedings
are threatened by governmental authorities or threatened by
others;
(ix) The Company has requisite corporate power and
authority to enter into this Agreement and to sell and deliver
the Shares to be sold by it to the Underwriters; this Agreement
has been duly authorized, executed and delivered by the Company;
(x) The issue and sale to you of the Shares being
delivered at such Time of Delivery by the Company in accordance
with and upon the terms and conditions set forth herein and the
compliance by the Company with all of the provisions of this
Agreement and the consummation of the transactions herein
contemplated will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a
default under, any Specified Document known to such counsel
(based solely on their review of the documents on a list of all
Specified Documents of the Company as certified by the Chief
Executive Officer and the Chief Financial Officer of the Company
and such other Specified Documents, if any, known to members of
such counsel devoting substantive attention to matters as to
which such counsel has been retained by the Company), which
conflict, breach, violation or default, either individually or in
the aggregate,
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<PAGE> 16
would have a Material Adverse Effect, nor will such action result
in any violation of the provisions of the Articles of
Incorporation or Bylaws of the Company or any statute or any
order, rule or regulation of any court or governmental agency or
body having jurisdiction over the Company or any of its
subsidiaries or any of their properties, which violation, either
individually or in the aggregate, would have a Material Adverse
Effect;
(xi) No consent, approval, authorization, order,
registration or qualification of or with any such court or
governmental agency or body is required for the issue and sale of
the Shares or the consummation by the Company of the transactions
contemplated by this Agreement, except the registration under the
Securities Act of the Shares, and such consents, approvals,
authorizations, registrations or qualifications as may be
required under state securities or Blue Sky laws in connection
with the purchase and distribution of the Shares by the
Underwriters; and
(xii) The Registration Statement has become effective
under the Act, and, to such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement or
preventing the use of the Prospectus has been issued and no
proceedings for that purpose have been instituted or are pending
or overtly threatened by the Commission; any required filing of
the Prospectus and any supplement thereto pursuant to Rule 424(b)
of the Rules and Regulations has been, or will be, made in the
manner and within the time period required by such Rule 424(b);
(xiii) The descriptions in the Registration Statement and
the Prospectus of the statutes, regulations, legal or
governmental proceedings, written contracts and other written
documents therein described, to the extent that such descriptions
constitute summaries of matters of law, documents or proceedings,
or legal conclusions, have been reviewed by such counsel and
fairly present the information disclosed therein in all material
respects;
(xiv) To such counsel's knowledge, the following are
accurate in all material respects and comply with all applicable
requirements of the Rules and Regulations: (i) descriptions in
the Prospectus of written contracts and other written documents
filed as exhibits to the Registration Statement, other than the
Underwriting Agreement, and descriptions in the Prospectus of
trademarks; (ii) statements under the captions "Management--Audit
Committee," "--Compensation Committee," "--Stock Option Plan,"
and "-- Employment and Consulting Agreements," and "Description
of Capital Stock--Common Stock," "--Preferred Stock," --Series A
Preferred Stock," "--Certain Anti-Takeover Provisions," and
"--Limitations on Liability;" (iii) statements in "Certain
Transactions" describing written contracts and other written
documents filed as exhibits to the Registration Statement and
transactions in which the Company is or was a party; and (iv)
summaries of law included in "Shares Eligible for Future Sale."
Notwithstanding anything in the previous sentence to the
contrary, such opinion shall not include
16
<PAGE> 17
any matters with respect to any numerical information, including
payments accrued or made or number of shares issued, outstanding,
issuable or eligible for sale, other than the number of
authorized shares of the Company. In addition, such counsel does
not know of any written contracts or other documents of a
character required to be summarized or described in the
Prospectus or required to be filed as exhibits in the
Registration Statement that are not so summarized, described or
filed, as required, nor does such counsel know of any pending or
threatened litigation on any governmental action, suit or
proceeding, statute or regulation required to be described in the
Prospectus that is not so described; and
(xv) The Registration Statement and the Prospectus and
any further amendments and supplements thereto made by the
Company prior to such Time of Delivery (other than the financial
statements and related schedules or financial or statistical data
therein, as to which such counsel need express no opinion) comply
as to form in all material respects with the requirements of the
Securities Act and the Rules and Regulations.
In rendering such opinion, such counsel may state that they
express no opinion as to the laws of any jurisdiction other than the
laws of the State of Texas (excluding conflict of law rules) and the
federal laws of the United States; such counsel may also state that they
have relied upon the opinion of Brantley & Holt, LLP, without
independent check or verification, as to matters relating to BodyBilt
set forth in Section 7(c)(viii);
Such counsel shall also state that such counsel has participated
in conferences with directors, officers and other representatives of the
Company, representatives of the independent public accountants of the
Company and your representatives at which the contents of the
Registration Statement and Prospectus and related matters were
discussed, have participated in the preparation of the Registration
Statement and the Prospectus, have reviewed all documents referred to in
the Prospectus or annexed as an exhibit to the Registration Statement,
as well as certain other corporate documents furnished to such counsel
by the Company and, on the basis of the foregoing and without
independent check or verification, no facts have come to the attention
of such counsel to lead such counsel to believe that, as of its
effective date, the Registration Statement or any further amendment
thereto made by the Company prior to such Time of Delivery (other than
the financial statements and related schedules or financial or
statistical data therein, as to which such counsel need express no
opinion) contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances in which they were
made, not misleading or that, as of its date, the Prospectus or any
further amendment or supplement thereto made by the Company prior to
such Time of Delivery (other than the financial statements and related
schedules or financial or statistical data therein, as to which such
counsel need express no opinion) contained an untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in light of the circumstances in which they were
made, not misleading or that, as of such Time of Delivery, either the
Registration Statement or the Prospectus or any further amendment or
supplement thereto made by the Company prior to such Time of Delivery
(other than
17
<PAGE> 18
the financial statements and related schedules or financial or
statistical data therein, as to which such counsel need express no
opinion) contains an untrue statement of a material fact or omits to
state a material fact necessary to make the statements therein, in light
of the circumstances in which they were made, not misleading; and
although such counsel has not undertaken to determine independently the
accuracy or completeness of the statements contained in the Registration
Statement or Prospectus and takes no responsibility therefor, they do
not know of any amendment to the Registration Statement required to be
filed or of any contracts or other documents of a character required to
be filed as an exhibit to the Registration Statement or required to be
described in the Registration Statement or the Prospectus which are not
filed or described as required;
(d) Brantley & Holt, LLP, counsel for BodyBilt, shall have
furnished to you their written opinion, dated such Time of Delivery, in
form and substance satisfactory to you, to the effect that:
(i) All of the issued shares of capital stock of
BodyBilt have been duly and validly authorized and issued and are
fully paid and non-assessable, were not issued in violation of
any statutory preemptive rights or, to such counsel's knowledge,
in violation of any other preemptive rights or other rights to
subscribe for or purchase any securities; neither the Articles of
Incorporation nor Bylaws of BodyBilt contain any restriction upon
the voting or transfer of any of the shares of capital stock of
BodyBilt, except such restrictions as may be imposed by federal
or state securities laws or as may be expressly described in the
Prospectus;
(ii) BodyBilt has all power and authority (corporate and
other) to own its properties and conduct its business as
currently being conducted;
(iii) BodyBilt has been duly qualified as a foreign
corporation for the transaction of business and is in good
standing under the laws of each other jurisdiction in which it
owns or leases properties, or conducts any business, so as to
require such qualification, or is subject to no material
liability or disability by reason of failure to be so qualified
in any such jurisdiction (such counsel being entitled to rely in
respect of the opinion in this clause upon certificates of
Secretaries of State or other appropriate public officials and in
respect of matters of fact upon certificates of officers of
BodyBilt, provided that such counsel shall state that they
believe that both you and they are justified in relying upon such
officers' certificates); and
(iv) To the best of such counsel's knowledge and other
than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which BodyBilt is a party or
of which any property of BodyBilt is the subject which, if
determined adversely to BodyBilt, would individually or in the
aggregate have a material adverse effect on the business,
prospects, properties, operations, condition (financial or
otherwise) or results of operation of BodyBilt; and, to the best
of such counsel's knowledge, no such proceedings are threatened
by governmental authorities or threatened by others;
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<PAGE> 19
(e) At 9:00 a.m., Dallas time, on the effective date of the
Registration Statement and the effective date of the most recently filed
post-effective amendment to the Registration Statement and also at each
Time of Delivery, KPMG Peat Marwick LLP and Thompson, Derrig & Slovacek
PC shall have furnished to you a letter or letters, dated the respective
date of delivery thereof, in form and substance satisfactory to you, to
the effect set forth in Annex I and Annex II, respectively, hereto;
(f) (i) None of the Company, any of its subsidiaries or, to the
best knowledge of counsel for the Company, BodyBilt shall have sustained
since the date of the latest audited financial statements included in
the Prospectus any loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance,
or from any labor dispute or court or governmental action, order or
decree, otherwise than as set forth or contemplated in the Prospectus
except for those losses, interferences, disputes, actions, orders, or
decrees which, in the aggregate will not have a Material Adverse Effect
on the Company and its subsidiaries taken as a whole, and (ii) since the
respective dates as of which information is given in the Prospectus
there shall not have been any change in the capital stock (other than
issuances of securities pursuant to the Merger Agreement, or upon the
exercise of options or warrants which were outstanding on the date of
the latest balance sheet included in the Prospectus or existing as of
the date of this Agreement), short-term or long-term debt of the
Company, any of its subsidiaries or BodyBilt (other than changes in the
ordinary course of business or as described in the Prospectus) or any
change, or any development involving a prospective change, in or
affecting the general affairs, management, financial position,
shareholders' equity or results of operations of the Company, its
subsidiaries or BodyBilt otherwise than as set forth or contemplated in
the Prospectus, the effect of which, in any such case described in
Clause (i) or (ii), is in your judgment so material and adverse as to
make it impracticable or inadvisable to proceed with the public offering
or the delivery of the Shares being delivered at such Time of Delivery
on the terms and in the manner contemplated in the Prospectus;
(g) On or after the date hereof there shall not have occurred
any of the following: (i) a suspension or material limitation in trading
in securities generally on the New York Stock Exchange; (ii) a general
moratorium on commercial banking activities in New York declared by
either federal or New York authorities; or (iii) the outbreak or
escalation of hostilities involving the United States or the declaration
by the United States of a national emergency or war, if the effect of
any such outbreak or escalation of hostilities specified in this Clause
(iii) in your judgment makes it impracticable or inadvisable to proceed
with the public offering or delivery of the Shares being delivered at
such Time of Delivery on the terms and in the manner contemplated by the
Prospectus;
(h) The Shares to be sold by the Company at such Time of
Delivery shall have been duly accepted, subject to notice of issuance,
for quotation on the Nasdaq National Market;
(i) The Company shall have furnished or caused to be furnished
to you at such Time of Delivery a certificate of officers of the
Company, satisfactory to you as to the
19
<PAGE> 20
accuracy of the representations and warranties of the Company herein, at
and as of such Time of Delivery, as to the performance by the Company of
all of their respective obligations hereunder to be performed at or
prior to such Time of Delivery, and as to such other matters as you may
reasonably request, and the Company shall have furnished or caused to be
furnished certificates as to the matters set forth in subsections (a)
and (f) of this Section and as to such other matters as you may
reasonably request;
(j) On or prior to the First Time of Delivery, Gerald
McMillan, Gerard Smith, Drew Congleton, Mark McMillan and Dr. Richard
Troutman shall have entered into Lock-up Agreements with the
Underwriters, during the period beginning from the date hereof and
continuing to and including the date 180 days after the date of the
Prospectus (the "Lock-Up Period"), not to, directly or indirectly,
offer, sell, contract to sell, grant any option to sell or otherwise
dispose of any Stock, or other securities which are substantially
similar to the Stock, or securities which are convertible into or
exercisable or exchangeable for or any rights to purchase or acquire
Stock or other securities which are substantially similar to the Stock,
without your prior written consent and to, for a period of two years
commencing on the expiration of the Lock-Up Period, grant Cruttenden
Roth Incorporated a right of first refusal to act as the sole
broker/dealer for any sales of stock by such persons made pursuant to
Rule 144 under the Securities Act; and
(k) The Company shall have executed and delivered to
Cruttenden Roth Incorporated the Common Stock Purchase Warrant pursuant
to and in the form of the Warrant Agreement executed and delivered
concurrently herewith.
8. (a) The Company will indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement or
the Prospectus, or any amendment or supplement thereto, or arise out of
or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse each Underwriter
for any legal or other expenses reasonably incurred by such Underwriter
in connection with investigating or defending any such action or claim
as such expenses are incurred; provided, however, that the Company shall
not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement
or alleged untrue statement or omission or alleged omission made in any
Preliminary Prospectus, the Registration Statement or the Prospectus or
any such amendment or supplement in reliance upon and in conformity with
written information furnished to the Company by any Underwriter through
you expressly for use therein; provided further, that with respect to
any untrue statement or omission or alleged untrue statement or omission
made in any Preliminary Prospectus, the indemnity contained in this
Section 7(a) shall not inure to the benefit of any such indemnified
Underwriter, and the Company shall not be liable to any such indemnified
Underwriter on account of any such losses, liabilities, claims, damages
or expenses arising from the sale of the Shares by such Underwriter to
any person if there
20
<PAGE> 21
was not sent or given to such person, at or prior to the written
confirmation of the sale of such Shares to such person, a copy of the
Prospectus, as the same may be amended or supplemented, within the time
required by the Securities Act (if required thereby), and the untrue
statements or the alleged untrue statement of a material fact or
omission or alleged omission to state a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus, unless such
failure to deliver the Prospectus was a result of noncompliance by the
Company with its obligations hereunder.
(b) Each Underwriter will indemnify and hold harmless the
Company against any losses, claims, damages or liabilities to which the
Company may become subject, under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or
alleged untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in any Preliminary Prospectus, the Registration
Statement or the Prospectus or any such amendment or supplement in
reliance upon and in conformity with written information furnished to
the Company by such Underwriter through you expressly for use therein;
and will reimburse the Company for any legal or other expenses
reasonably incurred by the Company in connection with investigating or
defending any such action or claim as such expenses are incurred. The
Company acknowledges that the statements set forth in the last paragraph
of the cover page and in the first and third paragraphs under the
caption "Underwriting" in the Prospectus constitute the only information
furnished in writing by or on behalf of any Underwriter expressly for
use in the Registration Statement relating to the Shares as originally
filed or in any amendment thereof, any related Preliminary Prospectus or
the Prospectus or in any amendment thereof or supplement thereto, as the
case may be.
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any action,
such indemnified party shall, if a claim in respect thereof is to be
made against the indemnifying party under such subsection, notify the
indemnifying party in writing of the commencement thereof; but the
omission so to notify the indemnifying party shall not relieve it from
any liability which it may have to any indemnified party otherwise than
under such subsection except to the extent that the indemnifying party
has been actually materially prejudiced in any material respect by such
omission. In case any such action shall be brought against any
indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with
any other indemnifying party similarly notified, to assume the defense
thereof, with one counsel satisfactory to such indemnified party (who
shall not, except with the consent of the indemnified party, be counsel
to the indemnifying party), and, after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party shall not be liable to such indemnified
party under such subsection for any legal expenses of other counsel or
any other expenses,
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<PAGE> 22
in each case subsequently incurred by such indemnified party, in
connection with the defense thereof other than reasonable costs of
investigation. Anything in this subsection to the contrary
notwithstanding, an indemnifying party shall not be liable for any
settlement of any claim or action effected without its written consent.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party
under subsection (a) or (b) above in respect of any losses, claims,
damages or liabilities (or actions in respect thereof) referred to
therein, then each indemnifying party shall contribute to the amount
paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect the relative benefits received
by the Company on the one hand and the Underwriters on the other from
the offering of the Shares. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law or if
the indemnified party failed to give the notice required under
subsection (d) above, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion
as is appropriate to reflect not only such relative benefits but also
the relative fault of the Company on the one hand and the Underwriters
on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities (or actions in
respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company on the
one hand and the Underwriters on the other shall be deemed to be in the
same proportion as the total net proceeds from the offering of the
Shares purchased under this Agreement (before deducting expenses)
received by the Company bear to the total underwriting discounts and
commissions received by the Underwriters with respect to the Shares
purchased under this Agreement, in each case as set forth in the table
on the cover page of the Prospectus. The relative fault shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company on the one hand or the Underwriters on the other and the
parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The
Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this subsection (d) were
determined by pro rata allocation (even if the Underwriters were treated
as one entity for such purposes) or by any other method of allocation
which does not take account of the equitable considerations referred to
above in this subsection (d). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages or
liabilities (or actions in respect thereof) referred to above in this
subsection (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding
the provisions of this subsection (d), no Underwriter shall be required
to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the
public were offered to the public exceeds the amount of any damages
which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution
from any person
22
<PAGE> 23
who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations in this subsection (d) to contribute are
several in proportion to their respective underwriting obligations and
not joint.
(e) The obligations of the Company under this Section 8 shall
be in addition to any liability which the Company may otherwise have and
shall extend, upon the same terms and conditions, to each person, if
any, who controls any Underwriter within the meaning of the Securities
Act; and the obligations of the Underwriters under this Section 8 shall
be in addition to any liability which the respective Underwriters may
otherwise have and shall extend, upon the same terms and conditions, to
each officer and director of the Company (including any person who, with
his consent, is named in the Registration Statement as about to become
an officer or director of the Company) and to each person, if any, who
controls the Company within the meaning of the Securities Act.
9. (a) If any Underwriter shall default in its obligation to
purchase the Shares which it has agreed to purchase hereunder at the
Time of Delivery, you may in your discretion arrange for you or another
party or other parties to purchase such Shares on the terms contained
herein. If within 36 hours after such default by any Underwriter you do
not arrange for the purchase of such Shares, then the Company shall be
entitled to a further period of 36 hours within which to procure another
party or other parties satisfactory to you to purchase such Shares on
such terms. In the event that, within the respective prescribed
periods, you notify the Company that you have so arranged for the
purchase of such Shares, or the Company notifies you that they have so
arranged for the purchase of such Shares, you or the Company shall have
the right to postpone such Time of Delivery for a period of not more
than seven days, in order to effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus, or in any
other documents or arrangements, and the Company agrees to file promptly
any amendments to the Registration Statement or the Prospectus which in
your opinion may thereby be made necessary. The term "Underwriter" as
used in this Agreement shall include any person substituted under this
Section with like effect as if such person had originally been a party
to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the
purchase of the Shares of a defaulting Underwriter or Underwriters by
you and the Company as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased does not exceed
one-eleventh of the aggregate number of all the Shares to be purchased
at such Time of Delivery, then the Company shall have the right to
require each non-defaulting Underwriter to purchase the number of Shares
which such Underwriter agreed to purchase hereunder at such Time of
Delivery and, in addition, to require each non-defaulting Underwriter to
purchase its pro rata share (based on the number of Shares which such
Underwriter agreed to purchase hereunder) of the Shares of such
defaulting Underwriter or Underwriters for which such arrangements have
not been made; but nothing herein shall relieve a defaulting Underwriter
from liability for its default.
(c) If, after giving effect to any arrangements for the
purchase of the Shares of a defaulting Underwriter or Underwriters by
you and the Company as provided in
23
<PAGE> 24
subsection (a) above, the aggregate number of Shares which remains
unpurchased exceeds one-eleventh of the aggregate number of all the
Shares to be purchased at such Time of Delivery, or if the Company shall
not exercise the right described in subsection (b) above to require
non-defaulting Underwriters to purchase Shares of a defaulting
Underwriter or Underwriters, then this Agreement (or, with respect to
the Second Time of Delivery, the obligations of the Underwriters to
purchase and of the Company to sell the Optional Shares) shall thereupon
terminate, without liability on the part of any nondefaulting
Underwriter or the Company, except for the accountable out-of-pocket
expenses to be borne by the Company and the Underwriters as provided in
Section 6 hereof and the indemnity and contribution agreements in
Section 8 hereof; but nothing herein shall relieve a defaulting
Underwriter from liability for its default.
10. The respective indemnities, agreements, representations,
warranties and other statements of the Company and the several Underwriters, as
set forth in this Agreement or made by or on behalf of them, respectively,
pursuant to this Agreement, shall remain in full force and effect, regardless
of any investigation (or any statement as to the results thereof) made by or on
behalf of any Underwriter or any controlling person of any Underwriter, or the
Company or any officer or director or controlling person of the Company, and
shall survive delivery of and payment for the Shares.
11. (a) If this Agreement shall be terminated pursuant to Section 9
hereof, the Company shall not be under any liability to any Underwriter
except for accountable out-of-pocket expenses, as provided in Section 6,
and any indemnification and contribution obligations arising under
Section 8 hereof; but, if for any other reason any Shares are not
delivered by on behalf of the Company as provided herein, the Company
will reimburse the Underwriters through you for all accountable
out-of-pocket expenses approved in writing by you, including fees and
disbursements of counsel, reasonably incurred by the Underwriters in
making preparations for the purchase, sale and delivery of the Shares
not so delivered (such out-of-pocket expenses not to exceed $50,000),
less any amounts previously paid by the Company pursuant to Section 6
hereof, but the Company shall then be under no further liability to any
Underwriter in respect of the Shares not so delivered except for any
indemnification and contribution obligations arising under Section 8
hereof. Notwithstanding anything to the contrary set forth herein, if
this Agreement is terminated for any reason the Company shall be under
no liability to pay the Non- Accountable Expense Allowance.
(b) If the Underwriters are ready, willing and able to
effectuate the offering of the Shares at a price to the public of not
less than $7.00 per share and the Company defaults in its obligation to
sell the Shares to the Underwriters (an "Aborted Offering"), the Company
covenants and agrees (i) not to sell any of its capital stock to the
public through an underwritten offering at any time on or prior to May
20, 1997 and (ii) if such public sale is consummated, to pay Cruttenden
Roth Incorporated a fee of $75,000, less any amounts previously paid by
the Company pursuant to Sections 6 or 11(a), which amount the Company
covenants and agrees is fair compensation for services performed by
Cruttenden Roth Incorporated in connection with the Aborted Offering.
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<PAGE> 25
(c) If on or prior to May 20, 1997 the Company is acquired,
merges, sells all or substantially all of its assets or otherwise
effects a corporate reorganization with any other entity and, as a
result thereof, the Company defaults in its obligation to sell the
Shares to the Underwriters (a "Terminated Offering"), the Company
covenants and agrees to pay Cruttenden Roth Incorporated a fee of
$150,000, less any amounts previously paid by the Company pursuant to
Sections 6 and 11(a), which amount the Company covenants and agrees is
fair compensation for services performed by Cruttenden Roth Incorporated
in connection with the Terminated Offering.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Cruttenden Roth Incorporated on behalf of you as the
Representatives.
All statements, requests, notices, and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex
or facsimile transmission to you as the Representatives in care of Cruttenden
Roth Incorporated, 18301 Von Karman, Irvine, CA 92612; and if to the Company
shall be delivered or sent by mail, telex or facsimile transmission to the
address of the Company set forth in the Registration Statement, Attention:
Secretary; provided, however, that any notice to an Underwriter pursuant to
Section 8(c) hereof shall be delivered or sent by mail, telex or facsimile
transmission to such Underwriter at its address set forth in its Underwriters'
Questionnaire or telex constituting such Questionnaire, which address will be
supplied to the Company by you on request. Any such statements, requests,
notices or agreements shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the Company and, to the extent provided in
Section 8 and Section 10 hereof, the officers and directors of the Company and
each person who controls the Company or any Underwriter, and their respective
heirs, executors, administrators, successors and assigns, and no other person
shall acquire or have any right by virtue of this Agreement. No purchaser of
any of the Shares from any Underwriter shall be deemed a successor or assign by
reason merely of such purchase.
14. Time shall be of the essence of this Agreement. As used herein,
the term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF CALIFORNIA (OTHER THAN ITS CONFLICTS OF LAW
PROVISIONS).
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
[THE NEXT PAGE IS THE SIGNATURE PAGE.]
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<PAGE> 26
If the foregoing is in accordance with your understanding, please sign
and return to us seven counterparts hereof, and upon the acceptance hereof by
you, on behalf of each of the Underwriters, this letter and such acceptance
hereof shall constitute a binding agreement among each of the Underwriters and
the Company. It is understood that your acceptance of this letter on behalf of
each of the Underwriters is pursuant to the authority set forth in a form of
Agreement among Underwriters, the form of which shall be submitted to the
Company for examination, upon request, but without warranty on your part as to
the authority of the signers thereof.
Very truly yours,
ERGOBILT, INC.
By:
-----------------------------
Name:
Title:
Accepted as of the date hereof:
CRUTTENDEN ROTH INCORPORATED
PRINCIPAL FINANCIAL SECURITIES, INC.
By:
--------------------------------------
(Cruttenden Roth Incorporated)
On behalf of each of the Underwriters
26
<PAGE> 27
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF
OPTIONAL
TOTAL SHARES TO BE
NUMBER OF PURCHASED IF
FIRM MAXIMUM
SHARES TO BE OPTION
UNDERWRITER PURCHASED EXERCISED
----------- --------- ---------
<S> <C> <C>
Cruttenden Roth Incorporated. . . . . . . . . . . . . . . .
Principal Financial Securities, Inc. . . . . . . . . . . .
[Names of other Underwriters] . . . . . . . . . . . . . . .
--------- --------
Total 1,500,000 225,000
========= ========
</TABLE>
I-1
<PAGE> 28
ANNEX I
Pursuant to Section 7(e) of the Underwriting Agreement, KPMG Peat
Marwick LLP shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with
respect to the Company and its subsidiaries within the meaning of the
Securities Act and the applicable published Rules and Regulations;
(ii) In their opinion, the financial statements and any
supplementary financial information and schedules of the Company and
BodyBilt audited (and, if applicable, prospective financial statements
and/or pro forma financial information examined) by them and included in
the Prospectus or the Registration Statement comply as to form in all
material respects with the applicable accounting requirements of the
Securities Act and the related published Rules and Regulations; and, if
applicable, they have made a review in accordance with standards
established by the American Institute of Certified Public Accountants of
the unaudited consolidated interim financial statements, selected
financial data, pro forma financial information, prospective financial
statements and/or condensed financial statements derived from audited
financial statements of the Company and BodyBilt for the periods
specified in such letter, as indicated in their reports thereon, copies
of which have been furnished to the representatives of the Underwriters
(the "Representatives");
(iii) On the basis of limited procedures, not constituting an
audit in accordance with generally accepted auditing standards,
consisting of, in the case of the Company, a reading of the unaudited
financial statements and other information referred to below, a reading
of the latest available interim financial statements of the Company and
its subsidiaries, inspection of the minute books of the Company and its
subsidiaries since the date of the latest audited financial statements
included in the Prospectus, inquiries of officials of the Company and
its subsidiaries responsible for financial and accounting matters and
such other inquiries and procedures as may be specified in such letter
and in the case of BodyBilt, a reading of the latest available interim
financial statements of BodyBilt, inspection of the minute books of
BodyBilt since the date of the latest audited financial statements
included in the Prospectus, inquiries of officials of BodyBilt
responsible for financial and accounting matters and such other
inquiries and procedures as may be specified in such letter, nothing
came to their attention that caused them to believe that:
(A) any unaudited consolidated statements of income,
consolidated balance sheets and consolidated statements of cash
flows as of dates or for periods beginning after June 30, 1996
included in the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of
the Securities Act and the related published Rules and
Regulations, or are not in conformity with generally accepted
accounting principles applied on a basis substantially consistent
basis for the audited consolidated statements of income,
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<PAGE> 29
consolidated balance sheets and consolidated statements of cash
flows included in the Prospectus;
(B) any other unaudited income statement data and
balance sheet items for the periods or as of the dates referred
to in Clause (A) above included in the Prospectus do not agree
with the corresponding items in the unaudited consolidated
financial statements from which such data and items were derived,
and any such unaudited data and items were not determined on a
basis substantially consistent with the basis for the
corresponding amounts in the audited consolidated financial
statements included in the Prospectus;
(C) the unaudited financial statements which were not
included in the Prospectus but from which were derived any
unaudited condensed financial statements as of dates or for
periods beginning after June 30, 1996 and any unaudited income
statement data and balance sheet items included in the Prospectus
and referred to in Clause (B) were not determined on a basis
substantially consistent with the basis for the audited
consolidated financial statements included in the Prospectus;
(D) any unaudited pro forma consolidated condensed
financial statements included in the Prospectus do not comply as
to form in all material respects with the applicable accounting
requirements of the Securities Act and the published Rules and
Regulations or the pro forma adjustments have not been properly
applied to the historical amounts in the compilation of those
statements;
(E) as of a specified date not more than five days
prior to the date of such letter, there have been any changes in
the consolidated capital stock (other than issuances of capital
stock upon exercise of options and stock appreciation rights,
upon earn-outs of performance shares and upon conversions of
convertible securities, in each case which were outstanding on
the date of the latest financial statements included in the
Prospectus) or any increase in the consolidated long-term debt of
the Company and its subsidiaries or BodyBilt, or any decreases in
consolidated net current assets or net assets or other items
specified by the Representatives or any increases in any items
specified by the Representatives, in each case as compared with
amounts shown in the latest balance sheet included in the
Prospectus; except in each case for changes, increases or
decreases which the Prospectus discloses have occurred or may
occur or which are described in such letter; and
(F) for the period from the date of the latest
financial statements included in the Prospectus to the specified
date referred to in Clause (E) there were any decreases in
consolidated net revenues or operating profit or the total or per
share amounts of consolidated net income or other items specified
by the Representatives, or any increases in any items specified
by the Representatives, in each case as compared with the
comparable period of the preceding year and with
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any other period of corresponding length specified by the
Representatives, except in each case for decreases or increases
which the Prospectus discloses have occurred or may occur or which
are described in such letter; and
(iv) In addition to the audit referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of
minute books, inquiries and other procedures referred to in paragraph
(iii) above, they have carried out certain specified procedures, not
constituting an audit in accordance with generally accepted auditing
standards, with respect to certain amounts, percentages and financial
information specified by the Representatives, which are derived from the
general accounting records of the Company and its subsidiaries and
BodyBilt, which appear in the Prospectus, or in Part II of, or in
exhibits and schedules to, the Registration Statement specified by the
Representatives, and have compared certain of such amounts, percentages
and financial information with the accounting records of the Company and
its subsidiaries and BodyBilt and have found them to be in agreement.
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ANNEX II
Pursuant to Section 7(e) of the Underwriting Agreement, Thompson, Derrig
& Slovacek PC shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with
respect to the Company and its subsidiaries within the meaning of the
Securities Act and the applicable published Rules and Regulations; and
(ii) In their opinion, the financial statements and any
supplementary financial information and schedules of BodyBilt audited
(and, if applicable, prospective financial statements and/or pro forma
financial information examined) by them and included in the Prospectus
or the Registration Statement comply as to form in all material respects
with the applicable accounting requirements of the Securities Act and
the related published Rules and Regulations; and, if applicable, they
have made a review in accordance with standards established by the
American Institute of Certified Public Accountants of the unaudited
consolidated interim financial statements, selected financial data, pro
forma financial information, prospective financial statements and/or
condensed financial statements derived from audited financial statements
of BodyBilt for the periods specified in such letter, as indicated in
their reports thereon, copies of which have been furnished to the
representatives of the Underwriters (the "Representatives").
AII-1
<PAGE> 32
EXHIBIT A
<TABLE>
<CAPTION>
CORPORATE JURISDICTION OF
SUBSIDIARIES INCORPORATION
------------ -------------
<S> <C> <C>
1) EB Subsidiary, Inc. Texas
</TABLE>
E-1
<PAGE> 1
EXHIBIT 1(b)
WARRANT PURCHASE AGREEMENT
This WARRANT PURCHASE AGREEMENT (this "Agreement") is entered into as
of ____________, 1997 by and among ErgoBilt, Inc., a Texas corporation (the
"Company"), Cruttenden Roth Incorporated, a California corporation ("CR"), and
Principal Financial Securities, Inc., a Texas corporation ("Principal").
WITNESSETH:
WHEREAS, the Company and CR have entered into that certain Letter of
Intent dated December 20, 1996 (the "Letter of Intent") pursuant to which CR
proposes to organize and lead a group of underwriters for the purpose of
purchasing from the Company an aggregate of 1,500,000 shares of common stock,
par value $.01 per share, of the Company (the "Common Stock") in a "firm
commitment" underwriting (the "Offering"); and
WHEREAS, the Company has entered into that certain Underwriting
Agreement dated as of _____________, 1997 ("Underwriting Agreement") with CR
and Principal as representatives ("Representatives") of the several
underwriters named therein (collectively, the "Underwriters"), with respect to
the Offering; and
WHEREAS, pursuant to the Letter of Intent and as a condition to the
performance of the Underwriters under the Underwriting Agreement, the Company
has agreed to sell, and CR and Principal have agreed to purchase upon the
closing of the Offering (the "Closing Date"), warrants to purchase the number
of shares of Common Stock equal to 10% of the number of shares of Common Stock
offered to the public by the underwriters ("Warrants"),
NOW, THEREFORE, in consideration of the foregoing, the mutual
agreements contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company, CR and
Principal agree as follows:
ARTICLE I
WARRANTS
SECTION 1.1. Issuance and Sale. In consideration of the payment
by each of CR and Principal to the Company of Seventy-Five and No/100 Dollars
($75.00), receipt of which is hereby acknowledged, the Company hereby agrees to
issue and sell to each of CR and Principal on the closing date of the Offering
(the "Closing Date") Warrants to purchase 75,000 shares of Common Stock (the
"Warrant Shares").
SECTION 1.2. Warrant Exercise Price. Each Warrant shall be
exercisable, subject to the provisions of this Agreement, to purchase one
Warrant Share at an exercise price equal to [120% OF THE INITIAL OFFERING PRICE
PER SHARE IN THE OFFERING] ("Warrant Exercise Price").
<PAGE> 2
SECTION 1.3. Exercise of Warrants. (a) The Warrants may be
exercised in whole or in part at any time during the period commencing the
first anniversary of the Closing Date and ending on the fifth anniversary of
the Closing Date (the "Warrant Exercise Period"). The Warrants shall be
exercised by presentation of a certificate substantially in the form of the
warrant certificates attached as Exhibit A and Exhibit B hereto (each a
"Warrant Certificate") evidencing the Warrants to be exercised, with the form
of election to purchase on the reverse thereof duly completed and signed, to
the Company at the offices of the Company as set forth on the signature page of
this Agreement, together with payment of the aggregate Warrant Exercise Price
for the number of Warrant Shares in respect of which such Warrants are being
exercised in lawful money of the United States of America. Upon such
presentation, the Company shall issue and cause to be delivered to or upon the
written order of the registered holder or holders of such Warrants ("Registered
Holders") and in such name or names as such Registered Holder may designate, a
certificate for the Warrant Share or Warrant Shares issued upon such exercise
of such Warrants. Any person so designated therein shall be deemed to have
become a holder of record of such Warrant Share or Warrant Shares as of the
date of exercise of such Warrants; provided, that no Registered Holder will be
permitted to designate that such Warrant Shares be issued to any person other
than such Registered Holder unless each condition to transfer contained in
Section 1.7 hereof which would be applicable to a transfer of Warrants or
Warrant Shares has been satisfied.
(b) If less than all of the Warrants evidenced by a
Warrant Certificate are exercised at any time, a new Warrant Certificate or
Warrant Certificates shall be issued for the remaining number of Warrants
evidenced by such Warrant Certificate. All Warrant Certificates surrendered
upon exercise of Warrants shall be cancelled.
(c) The Company shall not be required to issue fractional
shares of any Common Stock upon exercise of any Warrants issued by it, but
shall pay for any such fraction of a share an amount in cash equal to the value
of such fractional share determined by the Company's board of directors in good
faith.
(d) The Company will pay all stock or other transfer
taxes attributable to the initial issuance of Warrant Shares upon the exercise
of the Warrants issued by it; provided that each Registered Holder shall use
its reasonable efforts to avoid any such tax on the issuance of Warrant Shares;
and provided further that the Company shall not be required to pay any income
tax or any other tax which may be payable in respect of any transfer involved
in the issue of any Warrant Certificate or any certificate for Warrant Shares
in a name other than that of the Registered Holder of a Warrant Certificate
surrendered upon the exercise of such a Warrant, and the Company shall not be
required to issue or deliver such certificates unless or until the person or
persons requesting the issuance thereof shall have paid to the Company the
amount of such tax or shall have established to the satisfaction of the Company
that such tax has been paid.
SECTION 1.4. Adjustment of Warrant Exercise Price and Number of
Warrant Shares Purchasable. The number of Warrant Shares purchasable upon the
exercise of each Warrant is
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<PAGE> 3
subject to adjustment from time to time upon the occurrence of any of the
events enumerated in this Section 1.4. Any such adjustment shall become
effective immediately after the effective date of such event retroactive to the
record date, if any, for such event.
(a) In the event that the Company shall at any time after
the date of this Agreement (i) declare a dividend on the Common Stock in shares
of its capital stock (whether shares of such Common Stock or of capital stock
of any other class of the Company), (ii) split or subdivide the outstanding
Common Stock or reclassify the Common Stock, (iii) combine the outstanding
Common Stock into a smaller number of shares, or (iv) otherwise reclassify the
Common Stock, the number of Warrant Shares purchasable upon an exercise of each
Warrant after the time of the record date for such dividend or of the effective
date of such split, subdivision, combination or reclassification shall be
adjusted to equal kind and number of shares of Common Stock which a Registered
Holder would have owned or have been entitled to receive after such record date
or effective date if such Warrant had been exercised immediately prior to such
record date or effective date.
(b) In case the Company shall fix a record date for the
making of a distribution to all holders of Common Stock (including any such
distribution made in connection with a consolidation or merger in which the
Company is the surviving corporation) of evidences of its indebtedness or
assets (including cash, cash dividends, and securities, but excluding (i)
dividends referred to in Section 1.4(a), (ii) distributions referred to in
Section 1.4(f) and (iii) cash dividends out of surplus of the Company), the
number of Warrant Shares purchasable upon an exercise of each Warrant after
such record date shall be adjusted to equal the product obtained by multiplying
the number of Warrant Shares purchasable upon an exercise of each Warrant
immediately prior to such record date by a fraction, the numerator of which
shall be the Warrant Exercise Price immediately prior to such distribution, and
the denominator of which shall be the Warrant Exercise Price immediately prior
to such distribution less the fair market value per share as determined by an
investment banking firm other than CR or Principal that is reasonably
acceptable to the Registered Holder (the cost of the engagement of said
investment banking firm to be borne by the Company) of the portion of the
assets or evidences of indebtedness so distributed. Such adjustment shall be
made successively whenever any such distribution is made and shall become
effective on the date of distribution retroactive to the record date for the
determination of shareholders entitled to receive such distribution. If such
distribution is not made, the number of Warrant Shares into which each Warrant
is exercisable shall again be adjusted to be such number of Warrant Shares in
effect if the distribution had not been made.
(c) No adjustment in the number of Warrant Shares
purchasable under this Agreement shall be required unless such adjustment would
require an increase or decrease of at least one-tenth of one percent (.1%) in
such number of Warrant Shares; provided that any adjustments which by reason of
this Section 1.4(c) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under this
Section 1.4 shall be made to the nearest hundredth of one percent.
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<PAGE> 4
(d) The Warrant Exercise Price in effect immediately
prior to any adjustment of the number of Warrant Shares into which each Warrant
is exercisable shall be simultaneously adjusted (but not below the par value of
the Common Stock) by multiplying the Warrant Exercise Price immediately prior
to such adjustment by a fraction, the numerator of which shall be the number of
Warrant Shares purchasable upon the exercise of each Warrant immediately prior
to such adjustment, and the denominator of which shall be the number of Warrant
Shares so purchasable immediately after such adjustment.
(e) In the event of any capital reorganization of the
Company, (other than an event referred to in Section 1.4(a)), or in case of the
consolidation of the Company with, the merger of the Company with or into or
the sale of all or substantially all of the properties and assets of the
Company to any other person, and in connection therewith consideration is
payable to holders of Common Stock (or other securities or property purchasable
upon exercise of the Warrants) in exchange therefor, the Warrants shall remain
subject to the terms and conditions set forth in this Agreement and each
Warrant shall, after such capital reorganization, consolidation, merger or sale
be exercisable for the number of shares of stock or other securities or assets
to which a holder of the number of Warrant Shares purchasable (at the time of
such capital reorganization, reclassification of such Common Stock,
consolidation, merger or sale) upon exercise of such Warrant would have been
entitled if such Warrant had been exercised immediately prior to such capital
reorganization, reclassification of such Common Stock, consolidation, merger or
sale; and in any such case, if necessary, the provisions set forth in this
Agreement with respect to the rights and interests thereafter of the Registered
Holder of such shall be appropriately adjusted so as to be applicable, as
nearly as may reasonably be, to any shares of stock or other securities or
assets thereafter deliverable on the exercise of such Warrants. The Company
shall not effect any such consolidation, merger or sale, unless prior to or
simultaneously with the consummation thereof, the successor corporation (if
other than the Company) resulting from such consolidation or merger or the
corporation purchasing such assets or the appropriate corporation or entity
shall assume, by written instrument, the obligation to deliver to each
Registered Holder the shares of stock, securities or assets to which such
Registered Holder may be entitled pursuant to this Section 1.4(e).
(f) Notwithstanding the Section 1.4 (e), (i) if the
Company merges or consolidates with, or sells all or substantially all of its
property and assets to, any other person and consideration is payable to
holders of Common Stock in exchange for their Common Stock in connection with
such merger, consolidation or sale which consists solely of cash, or (ii) in
the event of the dissolution, liquidation or winding up of the Company, then
the Registered Holders of Warrants shall be entitled to receive distributions
on the date of such event on an equal basis with holders of Common Stock (or
other securities issuable upon exercise of the Warrants) as if the Warrants had
been exercised immediately prior to such event, less the Warrant Exercise
Price. Upon receipt of such payment, if any, the rights of Registered Holder
shall terminate and cease and such Registered Holder's Warrants shall expire.
In case of any such merger, consolidation or sale of assets, the surviving or
acquiring person and, in the event of any dissolution, liquidation or winding
up of the Company, the Company shall promptly, after receipt of
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<PAGE> 5
surrendered Warrant Certificates, make payment by delivering a check in such
amount as is appropriate (or, in the case of consideration other than cash,
such other consideration as is appropriate) to such person as it may be
directed in writing by the Registered Holder surrendering such Warrants.
(g) If any question shall at any time arise with respect
to the adjusted number of Warrant Shares, such question shall be determined by
the independent firm of certified public accountants of recognized national
standing selected by the Company and approved by the Registered Holder.
SECTION 1.5. Notices to Registered Holders. Upon any adjustment
of the Warrant Exercise Price of any Warrant pursuant to Section 1.4, the
Company shall promptly, but in any event within thirty (30) days thereafter,
cause to be given to each Registered Holder by first class mail, postage
prepaid, a certificate signed by the Company's Financial Officer setting forth
the Warrant Exercise Price as so adjusted and the number of Warrant Shares
issuable upon the exercise of each Warrant as so adjusted and describing in
reasonable detail the facts accounting for such adjustment and the method of
calculation used. Where appropriate, such certificate may be given in advance
and included as part of the notice required to be mailed under the other
provisions of this Section 1.5.
In the event:
(a) that the Company shall authorize the issuance to all
holders of its Common Stock of rights or warrants to subscribe for or purchase
capital stock of the Company or of any other subscription rights or warrants;
or
(b) that the Company shall authorize the distribution to
all holders of its Common Stock of evidences of its indebtedness or assets; or
(c) of any consolidation or merger to which the Company
is a party and for which approval of any stockholders of the Company is
required, or of the sale or transfer of the properties and assets of the
Company substantially as an entirety, or of any capital reorganization or
reclassification or change of the Common Stock (other than a change in par
value, or from par value to no par value, or from no par value to par value, or
as a result of a subdivision or combination); or
(d) of the voluntary dissolution, liquidation or winding
up of the Company; or
(e) that the Company proposes to take any other action
which would require an adjustment of the Warrant Exercise Price of the Warrants
issued by it pursuant to Section 1.4;
then the Company shall cause to be given to each Registered Holder, at least
twenty (20) days prior to the applicable record date hereinafter specified, by
first class mail, postage prepaid, a
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<PAGE> 6
written notice stating (i) the date as of which the holders of record of Common
Stock to be entitled to receive any such rights, warrants or distribution are
to be determined, or (ii) the date on which any such consolidation, merger,
sale, transfer, dissolution, liquidation or winding up is expected to become
effective, and the date as of which it is expected that holders of record of
Common Stock shall be entitled to exchange their shares for securities or other
property, if any, deliverable upon such reclassification, consolidation,
merger, sale, transfer, dissolution, liquidation or winding up.
SECTION 1.6. Reservation and Issuance of Warrant Shares. (a) The
Company will at all times have authorized, and reserve and keep available, free
from preemptive rights, for the purpose of enabling it to satisfy any
obligation to issue Warrant Shares upon the exercise of the Warrants, the
number of shares of Common Stock deliverable upon exercise of all outstanding
Warrants.
(b) The Warrants have been duly and validly authorized by
the Company and upon delivery to you in accordance with this Agreement will be
duly issued and legal, valid and binding obligations of the Company enforceable
against the Company in accordance with their terms except as enforceability may
be limited by bankruptcy, insolvency, reorganization, or other similar laws
affecting creditors' rights generally.
(c) Before taking any action which would cause an
adjustment pursuant to Section 1.4 hereof reducing the Warrant Exercise Price
below the then par value (if any) of the Warrant Shares, the Company will take
any corporate action which may be necessary in order that the Company may
validly and legally issue fully paid and nonassessable Warrant Shares at the
Warrant Exercise Price as so adjusted.
(d) The Company covenants that all Warrant Shares issued
by it will, upon issuance in accordance with the terms of this Agreement, be
fully paid and nonassessable and free from all taxes with respect to the
issuance thereof and free from all liens.
SECTION 1.7. Restrictions on Transfer. Each of CR and Principal
understands and agrees that the Warrants and Warrant Shares have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
and that accordingly, they will not be fully transferable except as permitted
under various exemptions contained in the Securities Act, or upon satisfaction
of the registration and prospectus delivery requirements of the Securities Act.
Each of CR and Principal acknowledges that it must bear the economic risk of
its investment in the Warrants and Warrant Shares for an indefinite period of
time (subject, however, to the Company's obligations with respect to the
Company's obligation to register the Registrable Securities (as defined herein)
pursuant to Article II hereof) since they have not been registered under the
Securities Act and therefore cannot be sold unless they are subsequently
registered or an exemption from registration is available. Absent an effective
notification under Regulation A or a registration statement under the
Securities Act covering the disposition of the Warrants and Warrant Shares,
neither CR nor Principal will sell, transfer, assign, pledge, hypothecate or
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<PAGE> 7
otherwise dispose of any or all of the Warrants or Warrant Shares without first
providing the Company with an opinion of counsel to the effect that such sale,
transfer, assignment, pledge, hypothecation or other disposition will be exempt
from the registration and prospectus delivery requirements of the Securities
Act and the registration or qualification requirements of any applicable state
securities laws.
SECTION 1.8. Registration, Transfer and Exchange of Certificates.
(a) The Company shall maintain at the offices of Company as set forth on the
signature pages of this Agreement, a register for registration of the Warrants
and Warrant Certificates and transfers thereof (the "Warrant Register"). On
the Closing Date, the Company shall register the outstanding Warrants and
Warrant Certificates in the name of CR and Principal in their respective
amounts. The Company may deem and treat the Registered Holder as the absolute
owner of the Warrants registered to such holder and (notwithstanding any
notation of ownership or other writing on the Warrant Certificates made by any
person) for the purpose of any exercise thereof or any distribution to the
Registered Holder, and for all other purposes.
(b) Upon satisfaction of each condition set forth in
Section 1.7 hereof, the Company shall register the transfer of any outstanding
Warrants in the Warrant Register upon surrender of the Warrant Certificate(s)
evidencing such Warrants to the Company at the offices of Company as set forth
on the signature pages of this Agreement, accompanied (if so required by it) by
a written instrument or instruments of transfer in form satisfactory to it,
duly executed by the Registered Holder or by the duly appointed legal
representative thereof. Upon any such registration of transfer, new Warrant
Certificate(s) evidencing such transferred Warrants shall be issued to the
transferee(s) and the surrendered Warrant Certificate(s) shall be cancelled.
If less than all the Warrants evidenced by a Warrant Certificate(s) surrendered
for transfer are to be transferred, a new Warrant Certificate(s) shall be
issued to the Registered Holder surrendering such Warrant Certificate(s)
evidencing such remaining number of Warrants.
(c) Warrant Certificates may be exchanged at the option
of the Registered Holder thereof, when surrendered to the Company at the
offices of Company as set forth on the signature pages of this Agreement, for a
new Warrant Certificate or Warrant Certificates of like tenor and representing
in the aggregate a like number of Warrants. Warrant Certificates surrendered
for exchange shall be cancelled.
(d) No charge shall be made for any such transfer or
exchange except for any tax or other governmental charge imposed in connection
therewith.
SECTION 1.9. Mutilated or Missing Warrant Certificates. If any
Warrant Certificate shall be mutilated, lost, stolen or destroyed, the Company
shall issue, in exchange and substitution for and upon cancellation of the
mutilated Warrant Certificate, or in lieu of and substitution for the Warrant
Certificate lost, stolen or destroyed, a new Warrant Certificate of like tenor
and representing an equivalent number of Warrants, but only upon receipt of
evidence satisfactory to the Company of such loss, theft or destruction of such
Warrant Certificate and, if requested,
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<PAGE> 8
indemnity satisfactory to it. No service charge shall be made for any such
substitution, but all expenses and reasonable charges associated with procuring
such indemnity and all stamp, tax and other governmental duties that may be
imposed in relation thereto shall be borne by the holder of such Warrant
Certificate.
ARTICLE II
REGISTRATION RIGHTS
SECTION 2.1. Demand Registration. Upon the request of one or more
holders of Registrable Securities at any time during the Warrant Exercise
Period, the Company shall promptly file and use its best efforts to cause to
become effective an appropriate registration statement under the Securities Act
covering such number of Registrable Securities as such holders shall request
and to register the sale of such Registrable Securities so that such
Registrable Securities may be sold at such times and in such manner as the
holders thereof shall determine, provided, that holders of Registrable
Securities may effect such demand registration only one time and provided
further, that such demand registration right shall terminate upon the
registration for sale to the public of the Warrants, or the common stock
underlying such warrants, issued by the Company to Summit Partners Management
Co. Registrations under this Section 2.1 shall be on such appropriate
registration form of the Securities and Exchange Commission (the "Commission")
(i) as shall be selected by holders of a majority of the Registrable Securities
so to be registered and (ii) as shall permit the disposition of such
Registrable Securities in accordance with the method or methods of disposition
desired by such holders. The Company agrees to include in any such
registration statement all information which holders of Registrable Securities
being registered shall reasonably request. If the registration pursuant to
this Section 2.1 involves an underwritten offering, the underwriter or
underwriters shall be selected by the holders of a majority of Registrable
Securities to be included in such registration.
SECTION 2.2. Piggyback Registration. (a) If the Company at any
time during the Warrant Exercise Period proposes to register any of its
securities under the Securities Act (other than by a registration on Form S-8,
S-4 or any successor similar forms or any other form not available for
registering the Registrable Securities) for sale to the public, whether or not
for sale for its own account, it will each such time, at least 30 days prior to
filing the registration statement, give written notice to all holders of
Registrable Securities (as defined herein) of its intention to do so. Upon the
written request of any such holder made within 15 days after the receipt of any
such notice (which request shall specify the Registrable Securities intended to
be disposed of by such holder and the intended method of disposition thereof),
the Company will use its best efforts to effect the registration under the
Securities Act of all Registrable Securities which the Company has been so
requested to register by the holders of such Registrable Securities, to the
extent required to permit the disposition of the Registrable Securities so to
be registered, provided that if, at any time after giving written notice of its
intention to register any securities and prior to the effective date of the
registration statement filed in connection with such
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<PAGE> 9
registration, the Company shall determine for any reason not to register or to
delay registration of such securities, the Company may, at its election, give
written notice of such determination to each holder of Registrable Securities
and, thereupon, (i) in the case of a determination not to register, shall be
relieved of its obligation to register any Registrable Securities in connection
with such registration but not from its obligation to grant such piggyback
registration in any subsequent registration by the Company, and (ii) in the
case of a determination to delay registering, shall be permitted to delay
registering any Registrable Securities being registered pursuant to this
Section 2.2, for the same period as the delay in registering such other
securities, and provided further, that holders of Registrable Securities may
effect such piggyback registration only one time.
(b) If (i) a registration pursuant to this Section 2.2
involves an underwritten offering of the securities so being registered,
whether or not for sale for the account of the Company, to be distributed (on a
firm commitment basis) by or through one or more underwriters of recognized
standing, whether or not the Registrable Securities so requested to be
registered for sale for the account of holders of Registrable Securities are
also to be included in such underwritten offering, and (ii) the managing
underwriter of such underwritten offering shall inform the Company and the
holders of the Registrable Securities requesting such registration by letter of
its belief that the number of securities requested to be included in such
registration exceeds the number which can be sold in (or during the time of)
such offering, then the Company may include in such offering all securities
proposed by the Company to be sold for its own account and may decrease the
number of Registrable Securities and other securities of the Company requested
to be included in such registration by decreasing the number of Registrable
Securities and other securities of the Company requested to be included in such
registration (pro rata on the basis of the number of shares of such securities
held by such person immediately prior to the filing of the registration
statement with respect to such registration) to the extent necessary to reduce
the number of securities to be included in the registration to the level
recommended by the managing underwriter.
(c) Except as otherwise provided in this Section 2.2, all expenses
incurred in connection with each effective registration pursuant to Section 2.1
or Section 2.2 (excluding in each case underwriter's discounts and commissions
applicable to Registrable Securities), including, without limitation, in each
case, all registration, filing and National Association of Securities Dealer
fees; all fees and expenses of complying with securities or blue sky laws; all
word processing, duplicating and printing expenses, messenger, delivery and
shipping expenses; fees and disbursements of the accountants and counsel for
the Company including the expenses of any special audits or "cold comfort"
letters or opinions required by or incident to such registrations; and the
premiums and other costs of policies of insurance against liabilities arising
out of the public offering of the Registrable Securities; and any fees and
disbursements of underwriters customarily paid by issuers or sellers of
securities (but excluding underwriting discounts and commissions, if any) shall
be borne by the Company. In all cases, each holder of Registrable Securities
shall pay the underwriter's discounts and commissions applicable to the
securities sold by such holder.
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<PAGE> 10
SECTION 2.3. Registration Procedures. If and whenever the Company
is required to use reasonable efforts to effect the registration of any
Registrable Securities under the Securities Act as provided in Section 2.1 and
Section 2.2, the Company will, subject to the limitations provided herein, as
expeditiously as possible:
(a) prepare and (as soon thereafter as possible or in any
event no later than 60 days after the end of the period within which requests
for registration may be given to the Company or such longer period as the
Company shall in good faith require to produce the financial statements
required in connection with such registration) file with the Commission the
requisite registration statement to effect such registration and thereafter use
reasonable efforts to cause such registration statement to become effective,
provided that the Company may discontinue any registration of its securities
which are not Registrable Securities at any time prior to the effective date of
the registration statement relating thereto;
(b) prepare and file with the Commission such amendments
and supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration statement
effective and to comply with the provisions of the Securities Act with respect
to the disposition of all securities covered by such registration statement
until such time as all of such securities have been disposed of in accordance
with the intended methods of disposition by the seller or sellers thereof set
forth in such registration statement; provided, however, that the Company shall
not in any event be required to keep the registration statement effective for a
period of more than nine months after such registration statement becomes
effective;
(c) furnish to each seller of Registrable Securities
covered by such registration statement such number of conformed copies of such
registration statement and of each such amendment and supplement thereto (in
each case including all exhibits), such number of copies of the prospectus
contained in such registration statement (including each preliminary prospectus
and any summary prospectus) and any other prospectus filed under Rule 424 under
the Securities Act, and such other documents, as such seller may reasonably
request;
(d) use its reasonable best efforts to register or
qualify all Registrable Securities and other securities covered by such
registration statement under such other securities or blue sky laws of such
jurisdictions as each seller thereof shall reasonably request, to keep such
registration or qualification in effect for so long as such registration
statement remains in effect (provided, however, that the Company shall not in
any event be required to keep such registration or qualification in effect for
a period of more than nine months after such registration or qualification
becomes effective), and take any other action which may be reasonably necessary
or advisable to enable such seller to consummate the disposition in such
jurisdictions of the securities owned by such seller, except that the Company
shall not for any such purpose be required to qualify generally to do business
as a foreign corporation in any jurisdiction wherein it would not but for the
requirements of this subsection (d) be obligated to be so qualified or to
consent to general service of process in any such jurisdiction;
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<PAGE> 11
(e) use its reasonable best efforts to cause all
Registrable Securities covered by such registration statement to be registered
with or approved by such other United States Federal or state governmental
agencies or authorities as may be necessary to enable the seller or sellers
thereof to consummate the disposition of such Registrable Securities;
(f) furnish to each seller of Registrable Securities a
copy, or, upon request, a signed counterpart, addressed and the underwriters,
if any, of (i) an opinion of counsel for the Company, dated the effective date
of such registration statement (and, if such registration includes an
underwritten public offering, dated the date of the closing under the
underwriting agreement), and (ii) a "comfort" letter, dated the effective date
of such registration statement (and, if such registration includes an
underwritten public offering, dated the date of the closing under the
underwriting agreement), signed by the independent public accountants who have
audited the Company's financial statements included in such registration
statement, covering substantially the same matters with respect to such
registration statement (and the prospectus included therein) and, in the case
of the accountants' letter, with respect to events subsequent to the date of
such financial statements, as are customarily covered in opinions of issuer's
counsel and in accountants' letters delivered to the underwriters in
underwritten public offerings of securities and, in the case of the
accountants' letter, such other financial matters as the underwriters, if any,
may reasonably request;
(g) notify each seller of Registrable Securities covered
by such registration statement, at any time when a prospectus relating thereto
is required to be delivered under the Securities Act, upon discovery that, or
upon the happening of any event as a result of which, the prospectus included
in such registration statement, as then in effect, includes an untrue statement
of a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading in the light
of the circumstances under which they were made, and at the request of any such
seller, prepare and furnish to such seller a reasonable number of copies of a
supplement to or an amendment of such prospectus as may be necessary so that,
as thereafter delivered to the purchasers of such securities, such prospectus
shall not include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances under which they were
made;
(h) otherwise use reasonable efforts to comply with all
applicable rules and regulations of the Commission, and make available to its
security holders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve months beginning with the first full
calendar month after the effective date of such registration statement, which
earnings statement shall satisfy the provisions of Section 11(a) of the
Securities Act, and will furnish to each such seller, upon request of such
seller, at least five days prior to the filing thereof a copy of any amendment
or supplement to such registration statement or prospectus and shall not file
any thereof to which any such seller shall have delivered to the Company an
opinion of counsel that such amendment or supplement does not comply in all
material respects with the requirements of the Securities Act or of the rules
or regulations thereunder;
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<PAGE> 12
(i) provide and cause to be maintained a transfer agent
for all Registrable Securities covered by such registration statement from and
after a date not later than the effective date of such registration statement;
(j) use its reasonable best efforts to list all
Registrable Securities covered by such registration statement on any securities
exchange on which any of the Registrable Securities is then listed; and
(k) refrain from making any sale or distribution of any
equity securities of the Company, except pursuant to any employee stock option
plan and any preexisting agreement for the sale of such securities, for at
least ninety (90) days after the closing of the public offering pursuant to
such registration.
It shall be a condition precedent to the obligations of the Company to
take any action with respect to registering a holder's Registrable Securities
pursuant to this Section 2.3 that such seller of Registrable Securities as to
which any registration is being effected furnish the Company in writing such
information regarding such seller, the Registrable Securities and other
securities of the Company held by such seller, and the distribution of such
securities as the Company may from time to time reasonably request in writing.
If a holder refuses to provide the Company with any of such information on the
grounds that it is not necessary to include such information in the
registration statement, the Company may exclude such holder's Registrable
Securities from the registration statement if the Company provides such holder
with an opinion of counsel to the effect that such information must be included
in the registration statement and such holder thereafter continues to withhold
such information. The deletion of such holder's Registrable Securities from a
registration statement shall not affect the registration of the other
Registrable Securities to be included in such registration statement.
Each holder of Registrable Securities agrees by acquisition of such
Registrable Securities that upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 2.3(g), such holder
will forthwith discontinue such holder's disposition of Registrable Securities
pursuant to the registration statement relating to such Registrable Securities
until such holder's receipt of the copies of the supplemented or amended
prospectus contemplated by Section 2.3(g) and, if so directed by the Company,
will deliver to the Company (at the Company's expense) all copies, other than
permanent file copies then in such holder's possession, of the prospectus
relating to such Registrable Securities current at the time of receipt of such
notice.
SECTION 2.4. Underwritten Offerings. If the Company at any time
proposes to register any of its securities under the Securities Act as
contemplated by Section 2.1 or Section 2.2 and such securities are to be
distributed by or through one or more underwriters, the Company will, if
requested by any holder of Registrable Securities as provided in Section 2.1 or
Section 2.2 and subject to the provisions of Section 2.2(b), arrange for such
underwriters to include all the Registrable Securities to be offered and sold
by such holder owning the securities to be
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<PAGE> 13
distributed by such underwriters. In such event, the holders of Registrable
Securities to be distributed by such underwriters shall be parties to the
underwriting agreement between the Company and such underwriters. Any such
holder shall not be required to make any representations or warranties to or
agreements with the Company or the underwriters other than representations,
warranties or agreements regarding such holder, such holder's Registrable
Securities or other securities of the Company, such holder's intended method of
distribution and any representations, warranties or agreements required by law.
SECTION 2.5. Preparation; Reasonable Investigation. In connection
with the preparation and filing of each registration statement under the
Securities Act pursuant to this Agreement, the Company will give the holders of
Registrable Securities registered under such registration statement, their
underwriters, if any, and one counsel or firm of counsel and one accountant or
firm of accountants representing all the holders of Registrable Securities to
be registered under such registration statement, the opportunity to participate
in the preparation of such registration statement, each prospectus included
therein or filed with the Commission, and each amendment thereof or supplement
thereto, and will give each of them such access to its books and records and
such opportunities to discuss the business of the Company with its officers and
the independent public accountants who have certified its financial statements
as shall be necessary, in the opinion of such holders' and such underwriters'
respective counsel, to conduct a reasonable investigation within the meaning of
the Securities Act.
SECTION 2.6. Indemnification. (a) In the event any Registrable
Securities are included in a registration statement under this Section 2, to
the extent permitted by law, the Company will, and hereby does, indemnify and
hold harmless the seller of any Registrable Securities covered by such
registration statement, its directors and officers, each other person who
participates as an underwriter in the offering or sale of such securities and
each other person, if any, who controls such seller or any such underwriter
within the meaning of the Securities Act, against any losses, claims, damages
or liabilities, joint or several, to which such seller or any such director or
officer or underwriter or controlling person may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions or proceedings, whether commenced or threatened, in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any registration statement
under which such securities were registered under the Securities Act, any
preliminary prospectus, final prospectus or summary prospectus contained
therein, or any amendment or supplement thereto, or any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and the Company will
reimburse such seller and each such director, officer, underwriter and
controlling person for any legal or any other expenses reasonably incurred by
them in connection with investigating or defending any such loss, claim,
liability, action or proceeding; provided that the Company shall not be liable
in any such case to the extent that any such loss, claim, damage, liability (or
action or proceeding in respect thereof) or expense arises solely out of or is
based solely upon an untrue statement or alleged untrue statement or omission
or alleged omission made in such registration statement, any such preliminary
prospectus, final prospectus, summary prospectus, amendment
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<PAGE> 14
or supplement in reliance upon and in conformity with written information
furnished to the Company by such seller expressly for use in the preparation
thereof, and provided further that the Company shall not be liable to any
person who participates as an underwriter in the offering or sale of
Registrable Securities or any other person, if any, who controls such
underwriter within the meaning of the Securities Act, in any such case to the
extent that any such loss, claim, damage, liability (or action or proceeding in
respect thereof) or expense arises out of such person's failure to send or give
a copy of the final prospectus, as the same may be then supplemented or
amended, to the person asserting an untrue statement or alleged untrue
statement or omission or alleged omission at or prior to the written
confirmation of the sale of Registrable Securities to such person if such
statement or omission was corrected in such final prospectus. Such indemnity
shall remain in full force and effect regardless of any investigation made by
or on behalf of such seller or any such director, officer, underwriter or
controlling person and shall survive the transfer of such securities by such
seller.
(b) Indemnification by the Sellers. The Company may
require, as a condition to including any Registrable Securities in any
registration statement filed pursuant to Section 2.3, that the Company shall
have received an undertaking satisfactory to it from the prospective seller of
such securities, to indemnify and hold harmless (in the same manner and to the
same extent as set forth in subdivision (a) of this Section 2.6) each
underwriter, each person who controls such underwriter within the meaning of
the Securities Act, the Company, each director of the Company, each officer of
the Company and each other person, if any, who controls the Company within the
meaning of the Securities Act, with respect to any statement or alleged
statement in or omission or alleged omission from such registration statement,
any preliminary prospectus, final prospectus or summary prospectus contained
therein, or any amendment or supplement thereto, if such statement or alleged
statement or omission or alleged omission was made in reliance upon and in
strict conformity with written information furnished to the Company by such
seller expressly for use in the preparation of such registration statement,
preliminary prospectus, final prospectus, summary prospectus, amendment or
supplement; provided that such prospective seller shall not be liable to any
person who participates as an underwriter in the offering or sale of
Registrable Securities or any other person, if any, who controls such
underwriter within the meaning of the Securities Act, in any such case to the
extent that any such loss, claim, damage, liability (or action or proceeding in
respect thereof) or expense arises out of such person's failure to send or give
a copy of the final prospectus, as the same may be then supplemented or
amended, to the person asserting an untrue statement or alleged untrue
statement or omission or alleged omission at or prior to the written
confirmation of the sale of Registrable Securities to such person if such
statement or omission was corrected in such final prospectus. Such indemnity
shall remain in full force and effect, regardless of any investigation made by
or on behalf of any underwriter, the Company or any such director, officer or
controlling person and shall survive the transfer of such securities by such
seller. In no event shall the liability of any selling holder of Registrable
Securities under this Section 2.6(b) be greater in amount than the dollar
amount of the proceeds received by such holder upon the sale of the Registrable
Securities giving rise to such indemnification obligation.
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<PAGE> 15
(c) Notices of Claims, etc. Promptly after receipt by an
indemnified party of notice of the commencement of any action or proceeding
involving a claim referred to in the preceding subdivisions of this Section
2.6, such indemnified party will, if a claim in respect thereof is to be made
against an indemnifying party, give written notice to the latter of the
commencement of such action, provided that the failure of any indemnified party
to give notice as provided herein shall not relieve the indemnifying party of
its obligations under the preceding subdivisions of this Section 2.6, except to
the extent that the indemnifying party is actually prejudiced by such failure
to give notice. In case any such action is brought against an indemnified
party, unless in such indemnified party's reasonable judgment a conflict of
interest between such indemnified and indemnifying parties shall exist in
respect of such claim, the indemnifying parties shall be entitled to
participate in and to assume the defense thereof, jointly with any other
indemnifying party similarly notified to the extent that it may wish, with
counsel reasonably satisfactory to such indemnified party, and after notice
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof, the indemnifying party shall not be liable to such
indemnified party for any legal or other expenses subsequently incurred by the
latter in connection with the defense thereof other than reasonable costs of
investigation. No indemnifying party shall, without the consent of the
indemnified party, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the giving
by the claimant or plaintiff to such indemnified party of a release from all
liability in respect to such claim or litigation.
(d) Other Indemnification. Indemnification similar to
that specified in the preceding subdivisions of this Section 2.6 (with
appropriate modifications) shall be given by the Company and each seller of
Registrable Securities with respect to any required registration or other
qualification of securities under any Federal or state law or regulation of any
governmental authority other than the Securities Act.
(e) Indemnification Payments. The indemnification
required by this Section 2.6 shall be made by periodic payments of the amount
thereof during the course of the investigation or defense, as and when bills
are received or expense, loss, damage or liability is incurred.
(f) Contribution. If the indemnification provided for in
this Section 2.6 from the indemnifying party is unavailable to an indemnified
party hereunder in respect of any losses, claims, damages, liabilities or
expenses referred to therein, then the indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such loss, claims, damages,
liabilities or expenses in such proportion as is appropriate to reflect the
relative fault of the indemnifying party and indemnified parties in connection
with the actions which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
fault of such indemnifying party and indemnified parties shall be determined by
reference to, among other things, whether any action in question, including any
untrue statement of material fact or omission or alleged omission to state a
material fact, has been made by, or relates to information
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<PAGE> 16
supplied by, such indemnifying party or indemnified parties, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such action. The amount paid or payable by a party as a result of the
losses, claims, damages, liabilities and expenses referred to above shall be
deemed to include, subject to the limitations set forth in Section 2.6(c), any
legal or other fees or expenses reasonably incurred by such party in connection
with any investigation or proceeding.
The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 2.6(f) were determined by
pro rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to in the immediately
preceding paragraph. Notwithstanding the provisions of this Section 2.6(f), no
underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Registrable Securities underwritten by it
and distributed to the public were offered to the public exceeds the amount of
any damages which such underwriter has otherwise been required to pay by reason
on such untrue or alleged untrue statement or omission or alleged omission, and
no selling holder shall be required to contribute any amount in excess of the
amount by which the total price at which the Registrable Securities of such
selling holder were offered to the public exceeds the amount of any damages
which such selling holder has otherwise been required to pay by reason of such
untrue statement or omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled
to contribution from any person who was not guilty of such fraudulent
misrepresentation.
If indemnification is available under this Section 2.6, the
indemnifying parties shall indemnify each indemnified party to the full extent
provided in Section 2.6(a) through Section 2.6(e) without regard to the
relative fault of said indemnifying party or indemnified party or any other
equitable consideration provided for in this Section 2.6(f).
SECTION 2.7. Reporting Requirements Under Securities Exchange Act
of 1934. (a) When it is first legally required to do so, the Company shall
register its Common Stock under Section 12 of the Exchange Act (as hereinafter
defined) and shall keep effective such registration and shall timely file such
information, documents and reports as the Commission may require or prescribe
under Section 13 of the Exchange Act. From and after the effective date of the
first registration statement filed by the Company under the Securities Act, the
Company shall (whether or not it shall then be required to do so) timely file
such information, documents and reports which a corporation, partnership or
other entity subject to Section 13 or 15(d) (whichever is applicable) of the
Exchange Act is required to file.
Immediately upon becoming subject to the reporting
requirements of either Section 13 or 15(d) of the Exchange Act, the Company
shall forthwith upon request furnish any holder of Registrable Securities (i) a
written statement by the Company that it has complied with such reporting
requirements, (ii) a copy or the most recent annual or quarterly report of the
Company, and (iii) such other reports and documents filed by the Company with
the Commission as such holder may reasonably request in availing itself of an
exemption for the sale of Registrable
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<PAGE> 17
Securities without registration under the Securities Act. The Company
acknowledges and agrees that the purposes of the requirements contained in this
Section 2.7 are (i) to enable any such holder to comply with the current public
information requirement contained in Paragraph (c) of Rule 144 under the
Securities Act should such holder ever wish to dispose of any of the securities
of the Company acquired by it without registration under the Securities Act in
reliance upon Rule 144 (or any other similar exemptive provision) and (ii) to
qualify the Company for the use of registration statements on Form S-3. In
addition, the Company shall take such other measures and file such other
information, documents and reports, as shall hereafter be required by the
Commission as a condition to the availability of Rule 144 under the Securities
Act (or any similar exemptive provision hereafter in effect) and the use of
Form S-3. The Company also covenants to use its best efforts, to the extent
that it is reasonably within its power to do so, to qualify for the use of Form
S-3.
SECTION 2.8. Shareholder Information. The Company may require
each holder of Registrable Securities as to which any registration is to be
effected pursuant to this Section 2 to furnish the Company such information in
writing with respect to such holder and the distribution of such Registrable
Securities as the Company may from time to time reasonably request in writing
and as shall be required by law or by the Commission in connection therewith.
SECTION 2.9. Forms. All references in this Agreement to
particular forms of registration statements are intended to include, and shall
be deemed to include, references to all successor forms which are intended to
replace, or to apply to similar transactions as, the forms herein referenced.
SECTION 2.10. Registrable Securities. As used in this Agreement,
"Registrable Securities" shall mean the Warrants, the shares of Common Stock
issuable upon exercise of the Warrants, and any shares of Common Stock issued
in respect of such shares (due to stock splits, stock dividends,
reclassifications, recapitalizations, or similar events).
ARTICLE III
MISCELLANEOUS
SECTION 3.1. Amendment. This Agreement may be amended, modified
or supplemented only by an instrument in writing executed by the party against
which enforcement of the amendment, modification or supplement is sought.
SECTION 3.2. Assignment. This Agreement nor any right or
obligation created hereby shall be assignable by the Company. CR or Principal
may assign their respective rights and obligations to a transferee pursuant to
Section 1.8.
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<PAGE> 18
SECTION 3.3. Notice. Any notice or communication must be in
writing and given by depositing the same in the United States mail, addressed
to the party to be notified, postage prepaid and registered or certified with
return receipt requested, or by delivering the same in person or by telecopier.
Such notice may be deemed received on the date on which it is hand-delivered or
telecopied or on the third business day following the date on which it is so
mailed. For purposes of notice, the addresses of the parties shall be:
If to CR: Cruttenden Roth Incorporated
18301 Von Karman
Irvine, California 92612
Attention: William A. Owen
Telecopy: (714) 852-9603
with a copy to: Gardere & Wynne, L.L.P.
3000 Thanksgiving Tower
1601 Elm Street
Dallas, Texas 75201-4761
Attention: Katherine M. Seaborn
Telecopy: (214) 999-4667
If to Principal: Principal Financial Securities, Inc.
701 Fourth Avenue, South
11th Floor
Minneapolis, Minnesota 55415
Attention: Stuart H. Mason
Telecopy: (612) 342-0593
with a copy to: Gardere & Wynne, L.L.P.
3000 Thanksgiving Tower
1601 Elm Street
Dallas, Texas 75201-4761
Attention: Katherine M. Seaborn
Telecopy: (214) 999-4667
If to the Company: ErgoBilt, Inc.
5000 Quorum Drive, Suite 147
Dallas, Texas 75240
Attention: Chief Executive Officer
Telecopy: (972) 392-9719
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<PAGE> 19
with a copy to: Wolin, Fuller, Ridley & Miller, L.L.P.
3100 Bank One Center
1717 Main Street
Dallas, Texas 75201-4681
Attention: Norman R. Miller
Telecopy: (214) 939-4949
Any party may change its address for notice by written notice given to
the other parties.
SECTION 3.4. Entire Agreement. This Agreement and the exhibits
hereto supersede all prior agreements and understandings relating to the
subject matter hereof, except that any obligations of any party under any
agreement executed pursuant to this Agreement shall not be affected by this
Section 3.4.
SECTION 3.5. Costs, Expenses and Legal Fees. Whether or not the
transactions contemplated hereby are consummated, each party hereto shall bear
its own costs and expenses (including attorneys' fees) except that each party
hereto agrees to pay the costs and expenses, including reasonable attorneys'
fees, incurred by the other parties and successfully (a) enforcing any of the
terms of this Agreement, or (b) proving that the other parties breached any of
the terms of this Agreement. Fees and expenses arising out of the registration
of any Registrable Securities shall be borne by the Company as set forth in
Section 2.2(c).
SECTION 3.6. Severability. If any provision of this Agreement is
held to be illegal, invalid or unenforceable under present or future laws
effective during the term hereof, such provisions shall be fully severable and
this Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision never comprised a part hereof; and the remaining
provisions hereof shall remain in full force and effect and shall not be
affected by the illegal, invalid or unenforceable provision or by its severance
herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable
provision, there shall be added automatically as part of this Agreement, a
provision as similar in its terms to such illegal, invalid or unenforceable
provision as may be possible and be legal, valid and enforceable.
SECTION 3.7. Governing Law and Venue. The parties acknowledge and
agree that this Agreement and the obligations and undertakings of the parties
hereunder will be performable in Irvine, Orange County, California. This
Agreement shall be governed by and construed in accordance with, the laws of
the State of California. If any action is brought to enforce or interpret this
Agreement, venue for such action shall be in Orange County, California.
SECTION 3.8. Captions. The captions in this Agreement are for
convenience of reference only and shall not limit or otherwise affect any of
the terms or provisions hereof.
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<PAGE> 20
SECTION 3.9. Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
[THE NEXT PAGE IS THE SIGNATURE PAGE]
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<PAGE> 21
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
ERGOBILT, INC.
By:
---------------------------------
Name:
Title:
Address:
----------------------------
------------------------------------
------------------------------------
CRUTTENDEN ROTH INCORPORATED
By:
---------------------------------
Name:
Title:
PRINCIPAL FINANCIAL SECURITIES, INC.
By:
---------------------------------
Name:
Title:
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<PAGE> 22
EXHIBIT A
FORM OF WARRANT CERTIFICATE
THE OFFER AND SALE OF THE WARRANTS EVIDENCED BY THIS CERTIFICATE AND THE
SECURITIES ISSUABLE UPON AN EXERCISE OF SUCH WARRANT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND SUCH SECURITIES MAY NOT BE SOLD OR
TRANSFERRED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT
COVERING SUCH SALE OR TRANSFER OR THE COMPANY RECEIVES AN OPINION OF COUNSEL
(WHICH MAY BE COUNSEL FOR THE COMPANY) STATING THAT SUCH SALE OR TRANSFER IS
EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON
AN EXERCISE OF SUCH WARRANTS ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON
TRANSFER AND CERTAIN OTHER AGREEMENTS SET FORTH IN A WARRANT PURCHASE AGREEMENT
BY AND AMONG THE COMPANY, CRUTTENDEN ROTH INCORPORATED AND PRINCIPAL FINANCIAL
SECURITIES, INC., DATED AS OF _________________, 1997, A COPY OF WHICH MAY BE
OBTAINED BY THE HOLDER HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS.
TERMS NOT DEFINED HEREIN SHALL HAVE THE MEANINGS SET FORTH IN THE WARRANT
PURCHASE AGREEMENT.
No. W-1 75,000 Warrants
WARRANT CERTIFICATE
This Warrant Certificate ("Warrant Certificate") certifies that
Cruttenden Roth Incorporated, a California corporation ("CR"), or registered
assigns, is the Registered Holder of Seventy-Five Thousand (75,000) Warrants
("Warrants") to purchase Common Stock of ErgoBilt, Inc., a Texas corporation
(the "Company"). Each Warrant entitles the holder, subject to the conditions
set forth herein and in the Warrant Purchase Agreement referred to below, to
purchase from the Company at any time during the Warrant Exercise Period, one
fully paid and nonassessable share of the Common Stock of the Company (the
"Warrant Shares") at a price per Warrant Share (the "Warrant Exercise Price")
equal to 120% of the initial offering price to the public of shares sold in the
Offering, subject to adjustment as provided in Section 1.4 of the Warrant
Purchase Agreement, payable in lawful money of the United States of America,
upon surrender of this Warrant Certificate, execution of the form of Election
to Purchase on the reverse hereof, and payment of the Warrant Exercise Price to
the Company, at its offices located at 5000 Quorum Drive, Dallas, Texas 75240,
or at such other address as the Company may specify in writing to the
Registered Holder of the Warrants evidenced hereby (the "Warrant Office"). The
Warrant Exercise Price and number of Warrant Shares purchasable upon exercise
of the Warrants are subject to adjustment during the Warrant Exercise Period
upon the occurrence of certain events as set forth in Section 1.4 of the
Warrant Purchase Agreement.
EXHIBIT A - PAGE 1
<PAGE> 23
No Warrant may be exercised after 5:00 P.M., Dallas, Texas time, on
the final day of the Warrant Exercise Period. All rights of the Registered
Holder of the Warrants shall cease after 5:00 P.M., Dallas, Texas time, on such
date.
The Company may deem and treat the Registered Holder of the Warrants
evidenced hereby as the absolute owner(s) thereof (notwithstanding any notation
of ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
Warrant Certificates, when surrendered at the office of the Company at
the above-mentioned address by the Registered Holder hereof in person or by a
legal representative duly authorized in writing, may be exchanged, in the
manner and subject to the limitations provided in the Warrant Purchase
Agreement, but without payment of any service charge, for a new Warrant
Certificate or Warrant Certificates of like tenor evidencing in the aggregate a
like number of Warrants.
Upon due presentment for registration of transfer of this Warrant
Certificate at the office of the Company at the above-mentioned address and
subject to the conditions set forth on this Certificate and in Sections 1.7 and
1.8 of the Warrant Purchase Agreement, a new Warrant Certificate or Warrant
Certificates of like tenor and evidencing in the aggregate a like number of
Warrants shall be issued in exchange for this Warrant Certificate to the
transferee(s) and, if less than all the Warrants evidenced hereby are to be
transferred, to the Registered Holder hereof, subject to the limitations
provided in the Warrant Purchase Agreement, without charge except for any tax
or other governmental charge imposed in connection therewith.
This Warrant Certificate is one of the Warrant Certificates referred
to in the Warrant Purchase Agreement, dated as of ___________, 1997 (the
"Warrant Purchase Agreement"), among the Company, CR and Principal Financial
Securities, Inc. Said Warrant Purchase Agreement is hereby incorporated by
referenced in and made a part of this instrument and is hereby referred to for
a description of the rights, limitation of rights, obligations, duties and
immunities thereunder of the Company and the holders.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be signed by its duly authorized officers and has caused its corporate seal to
be affixed hereunto.
ERGOBILT, INC.
By:
------------------------------
Title:
---------------------------
EXHIBIT A - PAGE 2
<PAGE> 24
FORM OF ELECTION TO PURCHASE
(To be executed upon exercise of Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ______ Warrant Shares and
herewith tenders payment for such Warrant Shares to the order of the Company in
the amount of $_______ in accordance with the terms hereof in payment for the
Warrant Shares. The undersigned requests that a certificate for such Warrant
Shares be registered in the name of ______________________________ whose
address is _______________________________________ and that such certificate be
delivered to _____________________________ whose address is
__________________________________. If said number of Warrant Shares is less
than all of the Warrant Shares purchased hereunder, the undersigned requests
that a new Warrant Certificate be registered in the name of ______________
whose address is _______________________________________ and that such Warrant
Certificate is to be delivered to ____________________________ whose address is
_______________________________________.
Signature:
--------------------------------
(Signature must conform in all respects to
name as specified on the face of the
Warrant Certificate.)
Date:
--------------------------------
EXHIBIT A - PAGE 3
<PAGE> 25
EXHIBIT B
FORM OF WARRANT CERTIFICATE
THE OFFER AND SALE OF THE WARRANTS EVIDENCED BY THIS CERTIFICATE AND THE
SECURITIES ISSUABLE UPON AN EXERCISE OF SUCH WARRANT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND SUCH SECURITIES MAY NOT BE SOLD OR
TRANSFERRED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT
COVERING SUCH SALE OR TRANSFER OR THE COMPANY RECEIVES AN OPINION OF COUNSEL
(WHICH MAY BE COUNSEL FOR THE COMPANY) STATING THAT SUCH SALE OR TRANSFER IS
EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON
AN EXERCISE OF SUCH WARRANTS ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON
TRANSFER AND CERTAIN OTHER AGREEMENTS SET FORTH IN A WARRANT PURCHASE AGREEMENT
BY AND AMONG THE COMPANY, CRUTTENDEN ROTH INCORPORATED AND PRINCIPAL FINANCIAL
SECURITIES, INC., DATED AS OF _________________, 1997, A COPY OF WHICH MAY BE
OBTAINED BY THE HOLDER HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS.
TERMS NOT DEFINED HEREIN SHALL HAVE THE MEANINGS SET FORTH IN THE WARRANT
PURCHASE AGREEMENT.
No. W-2 75,000 Warrants
WARRANT CERTIFICATE
This Warrant Certificate ("Warrant Certificate") certifies that
Principal Financial Securities, Inc., a Texas corporation ("Principal"), or
registered assigns, is the Registered Holder of Seventy-Five Thousand (75,000)
Warrants ("Warrants") to purchase Common Stock of ErgoBilt, Inc., a Texas
corporation (the "Company"). Each Warrant entitles the holder, subject to the
conditions set forth herein and in the Warrant Purchase Agreement referred to
below, to purchase from the Company at any time during the Warrant Exercise
Period, one fully paid and nonassessable share of the Common Stock of the
Company (the "Warrant Shares") at a price per Warrant Share (the "Warrant
Exercise Price") equal to 120% of the initial offering price to the public of
shares sold in the Offering, subject to adjustment as provided in Section 1.4
of the Warrant Purchase Agreement, payable in lawful money of the United States
of America, upon surrender of this Warrant Certificate, execution of the form
of Election to Purchase on the reverse hereof, and payment of the Warrant
Exercise Price to the Company, at its offices located at 5000 Quorum Drive,
Dallas, Texas 75240, or at such other address as the Company may specify in
writing to the Registered Holder of the Warrants evidenced hereby (the "Warrant
Office"). The Warrant Exercise Price and number of Warrant Shares purchasable
upon exercise of the Warrants are subject to adjustment during the Warrant
Exercise Period upon the occurrence of certain events as set forth in Section
1.4 of the Warrant Purchase Agreement.
EXHIBIT B - PAGE 1
<PAGE> 26
No Warrant may be exercised after 5:00 P.M., Dallas, Texas time, on
the final day of the Warrant Exercise Period. All rights of the Registered
Holder of the Warrants shall cease after 5:00 P.M., Dallas, Texas time, on such
date.
The Company may deem and treat the Registered Holder of the Warrants
evidenced hereby as the absolute owner(s) thereof (notwithstanding any notation
of ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
Warrant Certificates, when surrendered at the office of the Company at
the above-mentioned address by the Registered Holder hereof in person or by a
legal representative duly authorized in writing, may be exchanged, in the
manner and subject to the limitations provided in the Warrant Purchase
Agreement, but without payment of any service charge, for a new Warrant
Certificate or Warrant Certificates of like tenor evidencing in the aggregate a
like number of Warrants.
Upon due presentment for registration of transfer of this Warrant
Certificate at the office of the Company at the above-mentioned address and
subject to the conditions set forth on this Certificate and in Sections 1.7 and
1.8 of the Warrant Purchase Agreement, a new Warrant Certificate or Warrant
Certificates of like tenor and evidencing in the aggregate a like number of
Warrants shall be issued in exchange for this Warrant Certificate to the
transferee(s) and, if less than all the Warrants evidenced hereby are to be
transferred, to the Registered Holder hereof, subject to the limitations
provided in the Warrant Purchase Agreement, without charge except for any tax
or other governmental charge imposed in connection therewith.
This Warrant Certificate is one of the Warrant Certificates referred
to in the Warrant Purchase Agreement, dated as of ___________, 1997 (the
"Warrant Purchase Agreement"), among the Company, Cruttenden Roth Incorporated
and Principal. Said Warrant Purchase Agreement is hereby incorporated by
referenced in and made a part of this instrument and is hereby referred to for
a description of the rights, limitation of rights, obligations, duties and
immunities thereunder of the Company and the holders.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be signed by its duly authorized officers and has caused its corporate seal to
be affixed hereunto.
ERGOBILT, INC.
By:
------------------------------
Title:
---------------------------
EXHIBIT B - PAGE 2
<PAGE> 27
FORM OF ELECTION TO PURCHASE
(To be executed upon exercise of Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ______ Warrant Shares and
herewith tenders payment for such Warrant Shares to the order of the Company in
the amount of $_______ in accordance with the terms hereof in payment for the
Warrant Shares. The undersigned requests that a certificate for such Warrant
Shares be registered in the name of ______________________________ whose
address is _______________________________________ and that such certificate be
delivered to _____________________________ whose address is
__________________________________. If said number of Warrant Shares is less
than all of the Warrant Shares purchased hereunder, the undersigned requests
that a new Warrant Certificate be registered in the name of ______________
whose address is _______________________________________ and that such Warrant
Certificate is to be delivered to ____________________________ whose address is
_______________________________________.
Signature:
----------------------------------
(Signature must conform in all respects to
name as specified on the face of the Warrant
Certificate.)
Date:
--------------------------------------
EXHIBIT B - PAGE 3
<PAGE> 1
EXHIBIT 5
[WOLIN, FULLER, RIDLEY & MILLER LLP LETTERHEAD]
January 16, 1997
ErgoBilt, Inc.
5000 Quorum Drive
Suite 147
Dallas, Texas 75240
Re: Initial Public Offering of Common Stock Pursuant to
Registration Statement on Form S- 1, As Amended, SEC File No.
333-14205 (the "Registration Statement")
Ladies and Gentlemen:
We are counsel to ErgoBilt, Inc., a Texas Corporation (the "Company"),
in connection with the registration under the Securities Act of 1933 (the
"Act") of up to 1,725,000 shares of the Company's Common Stock, $.01 par value
per share (the "Shares"), pursuant to the Registration Statement.
We have examined and relied upon such records, documents and other
instruments as in our judgment are necessary and appropriate to express the
opinion set forth in this letter, and have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals and
the conformity to original documents of all documents submitted to us as
certified or photostatic copies. Based upon the foregoing, we are of the
opinion that the Shares, when sold and fully paid for in the manner and on the
terms described in the Registration Statement (after the Registration Statement
is declared effective), will be legally issued, fully paid and nonassessable.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the prospectus included in the Registration Statement.
Sincerely,
WOLIN, FULLER, RIDLEY & MILLER LLP
/s/ WOLIN, FULLER, RIDLEY & MILLER LLP
<PAGE> 1
EXHIBIT 23(A)
INDEPENDENT AUDITORS' CONSENT
ErgoBilt, Inc.
We consent to the use of our reports included herein and to the reference
to our firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Houston, Texas
January 27, 1997
<PAGE> 1
EXHIBIT 23(B)
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors
Body Bilt Seating, Inc.
Bryan, Texas
We consent to the use of our report on the financial statements of BodyBilt
Seating, Inc. and to the reference to our firm under the heading "Experts" in
the registration statement on Form S-1 and prospectus of ErgoBilt, Inc. relating
to the registration of 1,500,000 shares of common stock.
Thompson, Derrig & Slovacek PC
Bryan, Texas
January 27, 1997
