<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 16, 1997
REGISTRATION NO. 333-16911
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CASULL ARMS CORPORATION
(Name of Small Business Issuer in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 3484 83-0317822
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification
No.)
</TABLE>
456 FAIRVIEW ROAD
PO BOX 1629
AFTON, WYOMING 83110
(307) 886-0200
(Address and telephone number of principal executive offices
and principal place of business or intended principal place of business)
RICHARD J. CASULL
CHIEF EXECUTIVE OFFICER
CASULL ARMS CORPORATION
456 FAIRVIEW ROAD
PO BOX 1629
AFTON, WYOMING 83110
(307) 886-0200
(Name, address and telephone number of agent for service)
------------------------------
COPIES OF ALL COMMUNICATIONS TO:
ALAN I. ANNEX, ESQ. ARTHUR DON, ESQ.
WILLIAM N. HADDAD, ESQ. CHRISTINA E. WAHLIG, ESQ.
Camhy Karlinsky & Stein LLP D'ANCONA & PFLAUM
1740 Broadway, Sixteenth Floor 30 North LaSalle Street
New York, New York 10019-4315 Suite 2900
(212) 977-6600 Chicago, Illinois 60602
(312) 580-2000
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this Registration Statement becomes effective.
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. / /
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,
please check the following box. /X/
------------------------
CALCULATION OF REGISTRATION FEE
(SEE FOLLOWING PAGE.)
------------------------------
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 COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT (1) OFFERING PRICE (1) FEE
<S> <C> <C> <C> <C>
Units, each consisting of
1 share of Common Stock and
1 Redeemable Common Stock
Purchase Warrant........................ 1,400,000 $6.10 $ 8,540,000 $2,588
Common Stock issuable upon exercise of
Redeemable
Warrants................................ 1,400,000 $6.00 $ 8,400,000 $2,545
Placement Agent's Warrants(2)............. 140,000 $.001 $ 140 --
Common Stock issuable upon exercise of
Placement Agent's Warrants(3)........... 140,000 $7.20 $ 1,008,000 $306
Warrants issuable upon exercise of
Placement Agent's Warrants(3)........... 140,000 $0.12 $ 16,800 $5
Common Stock issuable upon exercise of
warrants issuable upon exercise of
Placement Agent's Warrants(3)........... 140,000 $9.30 $ 1,302,000 $395
Total..................................... $ 19,266,940 $5,839(4)
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a) under the Securities Act of 1933 (the "Act").
(2) No registration fee required pursuant to Rule 457 under the Act.
(3) Pursuant to Rule 416 under the Act there are also being registered such
additional securities as may become issuable pursuant to the antidilution
provisions of the Redeemable Common Stock Purchase Warrants or the Placement
Agent's Warrants.
(4) Previously paid.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 16, 1997
[LOGO]
MINIMUM OFFERING OF 400,000 AND MAXIMUM OFFERING OF
1,400,000 SHARES OF COMMON STOCK PAR VALUE $0.01 PER SHARE
AND REDEEMABLE COMMON STOCK PURCHASE WARRANTS
(AS UNITS, EACH CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE WARRANT)
This Prospectus relates to an offering (this "Offering") of shares of common
stock, par value $0.01 per share ("Common Stock"), and Redeemable Common Stock
Purchase Warrants (the "Warrants") initially as units, consisting of one share
of Common Stock and one Warrant, of Casull Arms Corporation (the "Company").
Such shares of Common Stock and Warrants are sometimes hereinafter collectively
referred to as the "Securities." The shares of Common Stock and the Warrants
offered hereby may only be purchased in this Offering together as a unit, on the
basis of one share of Common Stock and one Warrant, but are separately
transferable immediately upon issuance. See "Description of Securities."
This Offering is on a minimum basis of 400,000 shares of Common Stock and
400,000 Warrants (the "Minimum Offering") and a maximum basis of 1,400,000
shares of Common Stock and 1,400,000 Warrants (the "Maximum Offering"). The
Common Stock and Warrants constituting the Minimum Offering are being offered on
a "best efforts, all or none" basis and the remaining shares of Common Stock and
Warrants are being offered on a "best efforts" basis.
All funds received from subscribers for the Common Stock will be held in an
escrow account for the benefit of the subscribers by Continental Stock Transfer
and Trust Company (the "Escrow Agent") until a closing (a "Closing") of the
Minimum Offering or earlier termination of the Offering. The Offering will
expire on the earlier to occur of (i) 60 days from the date of this Prospectus,
and (ii) the sale of all of the Common Stock being offered hereby, unless the
Company and National Securities Corporation ("National") agree to extend the
Offering for an additional 30-day period (the 'Termination Date"). In the event
that subscriptions for the Minimum Offering are not received by the Termination
Date, the Offering will terminate and all funds will be returned promptly by the
Escrow Agent without interest and without any deduction therefrom. Pending each
Closing, subscriptions to be accepted at such Closing may be revoked, provided
that written notice of revocation is sent by certified or registered mail,
return receipt requested, and is received by the Company or the Placement Agent,
as applicable, at least two (2) business days prior to such Closing. Refunds
shall then be promptly made without interest and without deduction. The Common
Stock will be delivered promptly to subscribers after each respective Closing.
Each Warrant entitles the registered holder thereof to purchase one share of
Common Stock at an initial exercise price of $6.00 per share (100% of the
initial public offering price per share of Common Stock), at any time over a
forty-eight month period commencing on the first day of the thirteenth calendar
month after the date of this Prospectus. The Warrant exercise price is subject
to adjustment under certain circumstances. Commencing on the first day of the
thirteenth calendar month after the date of this Prospectus, the Warrants are
subject to redemption by the Company at $0.05 per Warrant on thirty (30) days'
prior written notice to the warrantholders if the closing bid price of the
Common Stock averages an amount equal to or in excess of $9.00 per share (150%
of the initial public offering price per share of Common Stock), for any twenty
(20) trading days within a period of thirty (30) consecutive trading days ending
on the fifth trading day prior to the notice of redemption. Unexercised Warrants
expire on the fifth anniversary date of this Prospectus. See "Description of
Securities."
Prior to this Offering, there has been no public market for the Common Stock
or the Warrants, and there is no assurance that any such market will develop or
be maintained after the completion of this Offering or, if developed, that it
will be sustained. After completion of this Offering, there will be no public
market for the Securities as units. See Plan of Distribution for a description
of the factors considered in determining the public offering price. The Company
anticipates that the Common Stock and the Warrants will be quoted on the OTC
Electronic Bulletin Board under the symbol CASU and CASUW, respectively.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE AND
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING AT PAGE 8 AND
"DILUTION" AT PAGE 16. THESE ARE SPECULATIVE SECURITIES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING DISCOUNTS
PRICE TO PUBLIC AND COMMISSIONS(1) PROCEEDS TO COMPANY(2)
<S> <C> <C> <C>
Per Unit............................... $6.10 $ $
Per Share............................ $6.00 $ $
Per Warrant.......................... $0.10 $ $
Total Minimum.......................... $ $ $
Total Maximum..........................
</TABLE>
(1) Excludes (i) additional compensation payable to National Securities
Corporation, (the "Placement Agent") in the form of a non-accountable
expense allowance equal to 3% of the gross proceeds of this Offering, and
(ii) the value of five-year warrants (the "Placement Agent's Warrants") to
purchase an aggregate of 140,000 shares of Common Stock and/or 140,000
Warrants, at an exercise price of $ per share (120% of the Price to
Public of the Common Stock), and $ per warrant (120% of the Price to
Public of the Warrants), respectively, that will be sold to the Placement
Agent at a nominal price. In addition, the Company has agreed to indemnify
the Placement Agents against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of $350,000 payable by the Company,
excluding the non-accountable expense allowance payable to the Placement
Agent.
The shares of Common Stock are being offered exclusively through the
Placement Agent, on a "best efforts" basis and on an all or none basis as to the
Minimum Offering. The Placement Agent reserves the right to reject any order in
whole or in part and to withdraw, cancel or modify this Offering without notice.
NATIONAL SECURITIES CORPORATION
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
[LOGO]
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and such other periodic reports as the
Company deems appropriate or as may be required by law.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
AND/OR THE WARRANTS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF
DISTRIBUTION".
454 Casull is a registered trademark of Richard J. Casull, who has
exclusively licensed the use of such trademark to Freedom Arms, Inc. until
February 1, 1998. "Casull Arms" and the Company's bullet logo are trademarks of
the Company. All other marks are trademarks of their respective owners.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, AND
SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL
STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS.
EACH PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY.
SOLELY FOR THE PURPOSE OF CALCULATIONS IN THIS PROSPECTUS, THE NUMBER OF SHARES
OF COMMON STOCK AND WARRANTS ASSUMED TO BE OFFERED FOR THE MINIMUM OFFERING AND
THE MAXIMUM OFFERING IS 400,000 AND 1,400,000 SHARES OF COMMON STOCK AND
WARRANTS, RESPECTIVELY. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS
PROSPECTUS: (I) EXCLUDES SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THE
WARRANTS AND (II) EXCLUDES SECURITIES ISSUABLE UPON EXERCISE OF THE PLACEMENT
AGENT'S WARRANTS. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION."
THE COMPANY
GENERAL
Casull Arms Corporation (the "Company"), a development stage company,
intends to design, manufacture and sell high quality firearms designed by
Richard J. Casull ("Casull"), a nationally known firearms designer with more
than 40 years of experience in the industry. The Company has entered into an
exclusive licensing agreement (the "License Agreement") with Casull for the
rights, with certain exceptions, to all of his present and future patents and
other intellectual property, which rights will serve as the basis for the
Company's products.
The Company's firearms, most of which will be sold under the Casull
trademark, will initially consist of 45 caliber, 32 caliber and 22 caliber
single-action revolvers and the newly designed Casull Rifle and Cartridge System
(the "Rifle") which will be manufactured in various calibers. The Company will
seek to position the majority of its products at the high end of their
respective markets because the Company believes that the expected superior power
and accuracy of the Company's products will fill a perceived void in the
firearms market for high quality firearms for use by gun enthusiasts and
hunters. In addition, the Company intends to pursue potential sales to military
and police organizations. The Company does not plan to manufacture any firearms
included on the Bureau of Alcohol Tobacco and Firearms' list of assault weapons.
The Company plans to construct a manufacturing facility which is expected to
have an annual production capacity of 10,000 -- 12,000 units of firearms. The
manufacturing facility is projected to begin operations within 18 months from
commencement of construction and is expected to be fully operational within two
years from the closing of this Offering. In addition to providing manufacturing
space, the facility will likely contain a retail showroom and custom shop in
which management plans to produce collectors editions and specially engraved
firearms. The manufacturing facility's initial output will be sold domestically,
although emphasis may also be placed on developing foreign markets.
The Company intends to order production equipment which will be computer
numerically controlled ("CNC") to ensure speed and repeatability of the
manufacturing process. The CNC milling centers, CNC lathes, and CNC barrel
forging machine are sophisticated machinery that will be installed by the
manufacturer and will be operated by machinists who will be trained by the
manufacturer.
The Company was incorporated under the laws of the State of Delaware on July
23, 1996. It maintains its principal executive offices at 456 Fairview Road,
P.O. Box 1629, Afton, Wyoming 83110 and its telephone number is 307-886-0200.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered.............. This Offering is on a minimum basis of 400,000 shares of
Common Stock and 400,000 Warrants to purchase one share of
Common Stock per Warrant and a maximum basis of 1,400,000
shares of Common Stock and 1,400,000 Warrants to purchase
one share of Common Stock. The Common Stock and Warrants
are being offered hereby as units but will be separately
tradeable immediately following this Offering. After
completion of this Offering there will be no public market
for the Securities as units.
Terms of Warrants............... Each Warrant entitles the holder to purchase one share of
Common Stock at an initial exercise price of $6.00 per
share (100% of the initial public offering price per share
of Common Stock). Commencing on the first day of the
thirteenth month from the date of this Prospectus, the
Warrants will be subject to redemption, subject to the
prior written consent of the Placement Agent, at a price
of $0.05 per Warrant upon written notice provided the
average closing bid price of the Common Stock equals or
exceeds $9.00 (150% of the initial public offering price
per share of Common Stock) for any 20 trading days within
a period of 30 consecutive trading days ending on the
fifth trading day prior to the date of the notice of
redemption. Unexercised Warrants expire on the fifth
anniversary date of this Prospectus. See "Description of
Securities."
Common Stock Outstanding Before
this Offering(1).............. 1,707,083 shares of Common Stock.
Securities to be Outstanding
After the Minimum
Offering(1)(2)................ 2,107,083 shares of Common Stock and 400,000 Warrants
Securities to be Outstanding
After the Maximum
Offering(1)(2)................ 3,107,083 shares of Common Stock and 1,400,000 Warrants.
Certain Terms................... The Minimum Offering is being offered by the Placement
Agent on a "best efforts, all or none" basis and the
remaining shares of Common Stock are being offered on a
"best efforts" basis, until the earlier of (i) 60 days
after the date of this Prospectus and (ii) the sale of all
the Common Stock being offered hereby, unless the Company
and the Placement Agent agree to extend this Offering for
an additional 30-day period.
</TABLE>
- ------------------------
(1) Includes 1,133,333 shares of Redeemable Common Stock which are subject to
redemption (the "Redeemable Common Stock") if an offering of at least
$5,000,000 is not consummated by May 31, 1997. (See "Description of
Securities--Common Stock"). Excludes 300,000 shares of Common Stock reserved
for issuance upon exercise of options available for future grant under the
Company's Stock Option Plan (the "Stock Option Plan"). See
"Management--Stock Option Plan."
(2) Does not include up to (i) 1,400,000 shares of Common Stock issuable upon
exercise of the Warrants sold in this Offering, (ii) 140,000 shares of
Common Stock issuable upon exercise of the Placement Agent's Warrants, (iii)
Warrants to purchase 140,000 shares of Common stock issuable upon exercise
of the Placement Agent's Warrants and (iv) 140,000 shares of Common Stock
issuable upon exercise of the Warrants underlying the Placement Agent's
Warrants assuming the sale of the Maximum Offering.
4
<PAGE>
<TABLE>
<S> <C>
Proposed OTC Electronic Bullen-
tin Board Symbols............. Common Stock: CASU
Redeemable Warrants: CASUW
Use of Proceeds................. For purchase of land; construction of manufacturing plant;
and acquisition of machinery and equipment. See "Use of
Proceeds."
Risk Factors and Dilution....... The purchase of the Securities offered hereby involves a
high degree of risk and immediate and substantial
dilution. Prospective investors should review carefully
and consider the information set forth under "Risk
Factors" and "Dilution."
</TABLE>
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK AND SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE LOSS OF
THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS."
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below is derived from and should
be read in conjunction with the financial statements, including the notes
thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 23, 1996
(DATE OF INCORPORATION)
THROUGH FEBRUARY 28,
1997(1)
------------------------
<S> <C>
ACTUAL
------------------------
STATEMENT OF OPERATIONS DATA
Revenues............................................................ $ --
General and administrative expenses................................. (204,764)
Net loss............................................................ (173,731)
Net loss per common share........................................... $ (.11)
Weighted average number of common shares outstanding(2)............. 1,542,288
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 28, 1997(1)
---------------------------------------------------------
<S> <C> <C> <C>
AS ADJUSTED FOR AS ADJUSTED(4)(5)
ACTUAL MINIMUM OFFERING(3) FOR MAXIMUM OFFERING
------------ -------------------- ---------------------
BALANCE SHEET DATA
Working capital.................... $ (6,537) $ 1,766,263 $ 10,233,263
Total assets....................... 3,592,966 5,235,585 10,300,085
Total liabilities.................. 309,322 309,322 66,822
Redeemable Common Stock............ 3,400,000 3,400,000 --
Stockholders' equity (deficit)..... (116,356) 1,526,263 10,233,263
</TABLE>
- ------------------------
(1) The Company plans to adopt a fiscal year which begins on July 1 and ends on
June 30.
(2) See note 2 to the Company's financial statements.
(3) As adjusted to give effect to the issuance of the Minimum Securities offered
hereby at an assumed initial offering price of $6.00 per share of Common
Stock and $.10 per Warrant (after deducting estimated placement agent
discounts and commissions and all other expenses of the Minimum Offering).
Assumes no termination of the redemption feature of the Redeemable Common
Stock as the proceeds of the Minimum Offering are assumed to be less than
$5,000,000. If the Offering does not result in raising at least $5,000,000
on or before May 31, 1997, the Company will need to receive a waiver of the
$5,000,000 threshold and/or the May 31, 1997 deadline from the Redeemable
Common Stockholders, or the Redeemable Common Stockholders will have the
right to sell their shares back to the Company for at least 90% of the
amounts paid. There is no assurance that such waiver can be obtained.
Assumes no exercise of the Placement Agent's Warrants. See "Plan of
Distribution."
(4) As adjusted to give effect to the issuance of the Maximum Securities offered
hereby at an assumed initial public offering price of $6.00 per share of
Common Stock and $0.10 per Warrant (after deducting estimated placement
agent discounts and commissions and all other expenses of the Maximum
Offering). See "Use of Proceeds." Assumes no exercise of the Placement
Agent's Warrants. See "Plan of Distribution."
(5) As adjusted to give effect to the removal of restrictions on cash and
investments of $2,160,000 and $1,242,500, respectively, the repayment of a
$242,500 liability to a director, and the termination of the redemption
feature of the Redeemable Common Stock in conjunction with the issuance of
the Maximum Securities offered hereby assuming the proceeds from the Maximum
Offering exceed $5,000,000 and the Maximum Offering occurs on or before May
31, 1997. If the Closing of the Offering does not occur on or before May 31,
1997, the Company will need to obtain waivers of the May 31, 1997 deadline
from the Redeemable Common Stockholders, or the Redeemable Common
Stockholders will have the right to sell their shares back to the Company
for at least 90% of the amounts paid. See the financial statements of the
Company and notes thereto.
6
<PAGE>
TO CALIFORNIA RESIDENTS ONLY:
California residents can only purchase the Securities if they have a minimum
gross income of $65,000 during the last tax year and expect to have (based on a
good faith estimate) a minimum gross income of $65,000 during the current tax
year and have a net worth (at fair market value but excluding home equity, home
furnishings and automobile) of $100,000, or have a net worth of $250,000.
7
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK AND WARRANTS OFFERED HEREBY IS HIGHLY
SPECULATIVE IN NATURE AND INVOLVES A HIGH DEGREE OF RISK AND IMMEDIATE AND
SUBSTANTIAL DILUTION. AN INVESTMENT SHOULD ONLY BE MADE BY PERSONS WHO CAN
AFFORD TO LOSE THEIR ENTIRE INVESTMENT IN THE COMPANY. THEREFORE, EACH
PROSPECTIVE INVESTOR SHOULD, PRIOR TO MAKING AN INVESTMENT, CONSIDER VERY
CAREFULLY THE FOLLOWING RISK FACTORS, AS WELL AS OTHER INFORMATION SET FORTH
ELSEWHERE IN THIS PROSPECTUS.
ABSENCE OF OPERATING HISTORY; DEVELOPMENT STAGE ENTITY; GOING CONCERN
OPINION. The Company is in the development stage and does not currently have
facilities to manufacture firearms. There is no guarantee that the Company will
be able to commence firearms manufacturing within its projected timetable or
that its products will be readily accepted in the marketplace. None of the
products discussed throughout this Prospectus have been manufactured in quantity
and the discussion is based on the use of prototypes only. In the absence of an
operating history, the Company remains vulnerable to a variety of business risks
generally associated with young, rapidly growing companies. The likelihood of
success of the Company must be considered in light of the problems, expenses,
complications, and delays frequently encountered in connection with the
development of new businesses. The Company does not expect to have revenues for
at least approximately 18 months following the completion of this Offering.
The report of Price Waterhouse LLP on the Company's financial statements
included herein contains an explanatory paragraph stating that the Company's
financial statements have been prepared assuming that the Company will continue
as a going concern and that the Company's ability to commence operations is
dependent on obtaining adequate financial resources through a contemplated
public offering or other financing which raises substantial doubt about its
ability to continue as a going concern.
DEPENDENCE ON LICENSED PATENTS AND TRADEMARKS. The Company has entered into
a License Agreement with Casull for rights to his present and future patents and
other intellectual property, with the exception of (i) U.S. Pat. No. 5,048,216,
generally referred to as the "barrel forcing cone bushing," (ii) the "454
Casull" trademark, registered in connection with ammunition, licensed
exclusively to Freedom Arms Inc. until February 1, 1998 and licensed to Freedom
Arms, Inc. on a non-exclusive basis thereafter, and (iii) a black powder
mini-revolver manufactured by North American Arms. The Company's success will
depend in part on its ability to obtain and enforce patent protection for its
products, enforce patent rights which it presently licenses, and operate without
infringing the property rights of others. The Company presently holds an
exclusive license in three pending patent applications relating to the Company's
business as described in this Prospectus. The Company also holds an exclusive
license to eight utility patents relating to firearms and one design patent for
a belt buckle. There can be no assurance that patent applications to which the
Company holds rights will result in the issuance of patents, or that any issued
patents will provide commercially significant protection to the Company's
technology and products. In addition, there can be no assurance that others will
not independently develop substantially equivalent proprietary information not
covered by patents to which the Company holds rights or obtain access to the
Company's know-how, or that others will not claim to have or will not be issued
patents which may prevent the sale of one or more of the Company's products. The
Company intends to apply for the trademark rights to the "Casull" name, in
connection with the Company's products, but no assurance can be given that such
trademark rights will be obtained.
The Company will rely upon a combination of contractual arrangements and
patent, copyright and trademark laws to protect its proprietary rights and the
proprietary rights of third-parties from whom the Company licenses intellectual
property. There can be no assurance that the steps taken by the Company in this
regard will be adequate to deter misappropriation of proprietary information or
that the Company will be able to detect unauthorized use and take appropriate
steps to enforce its intellectual property rights.
DEPENDENCE ON KEY PERSONNEL. The success of the Company is dependent on the
efforts and abilities of Casull. If the Company were to lose the services of
Casull before a qualified replacement could be
8
<PAGE>
obtained, its business could be materially and adversely affected. In such
event, no assurance can be given that an adequate replacement could be obtained.
The Company is in the process of obtaining a $3,000,000 key-man life insurance
policy on Casull. No assurance can be given, however, that the Company will be
able to obtain a key-man life insurance policy on acceptable terms.
Casull can terminate the License Agreement if the Company fails to pay to
Casull the royalties due him, or if the Company fails to keep or perform any
other material provision thereof, or if the Company files for protection under
federal or state bankruptcy laws, or is placed in the hands of a receiver or
trustee in bankruptcy. The Company may cure such default within 60 days of the
receipt of written notice from Casull. In the event the License Agreement is
canceled by Casull with cause, the licenses granted to the Company under the
License Agreement will terminate. See "Business--License Agreement with Casull."
GOVERNMENTAL REGULATION. The Company will be subject to extensive federal,
state, local and foreign firearms regulations. Among the federal firearms laws
under which the Company will be regulated are THE GUN CONTROL ACT OF 1968 (the
"GCA"), THE NATIONAL FIREARMS ACT (the "NFA"), THE ARMS EXPORT CONTROL ACT (the
"AECA") and THE FEDERAL FIREARMS ACT (the "FFA"). The Company plans to be in
compliance with all regulatory and licensing requirements of the GCA, NFA and
FFA. The Company currently does not export any firearms, and thus is not subject
to the requirements of AECA. However, the Company intends to apply for all
licenses necessary to export firearms.
The purchase of firearms is subject to federal, state, and local
governmental regulations. The applicable federal laws are the GCA, NFA and FFA.
These laws generally prohibit the private ownership of fully automatic weapons
and place certain restrictions on the interstate sale of firearms unless certain
licenses are obtained. The Company does not currently intend to manufacture
fully automatic weapons, and is in the process of obtaining all necessary
licenses under these federal laws. From time to time, congressional committees
review proposed bills relating to the regulation of firearms. These proposed
bills generally seek either to restrict or to ban the sale, and in some cases
the ownership, of various types of firearms, or to impose a mandatory waiting
period prior to their purchase. Several states and many local municipalities
currently have laws in effect similar to the aforementioned legislation or other
laws which have the effect of discouraging the sale of ownership of firearms.
The Brady Law, mandating a nationwide 5-day waiting period prior to the
purchase of a handgun, was signed into law in November 1993, and became
effective February 28, 1994. The Company believes that, because its anticipated
customers will be sportsmen, hunters, gun collectors, and law enforcement
agencies, and since approximately 26 states already had enacted some form of a
waiting period prior to purchase, the Brady Law will not have a significant
effect on the Company's sales of firearms. The "Crime Bill" took effect on
September 13, 1994, but the Company believes that none of its products will be
banned as so-called "assault weapons" under the "Crime Bill". However, there can
be no assurance that the regulation of firearms will not become more restrictive
in the future and that any such restrictions would not have a material effect on
the business of the Company.
PROSPECT OF CIVIL LIABILITY; INADEQUATE INSURANCE COVERAGE. Personal
injuries and property damage allegedly resulting from use of products that have
been or may be developed and sold by the Company may expose the Company to
potential liability from claims. The Company is not currently a defendant in any
product liability or personal injury lawsuit; however, there can be no assurance
that such claims will not arise in the future based on past, present or future
services or products offered by the Company. The Company currently does not
maintain liability insurance coverage. Prior to the Company producing any
firearms the Company will attempt to obtain product liability insurance
coverage. There can be no assurance that the Company will be able to obtain
coverage on acceptable terms or that any such insurance will provide adequate
coverage against any potential claims. Moreover, even if the Company maintains
adequate insurance, any successful claims could materially and adversely affect
the reputation and prospects of the Company.
9
<PAGE>
COMPETITION. The markets in which the Company operates are highly
competitive. The Company believes that competition in the firearms industry is
based primarily on quality, product innovation, product image, price and
customer service and support. The Company's competitors will vary according to
product line. Certain of these competitors will be subsidiaries of large
corporations with substantially greater financial resources than those of the
Company. The Company believes that it is not prevented from selling a gun which
contains a 454 cartridge; however, the Company's ability to market such firearms
may be hindered by its inability to use the "454 Casull" trademark until the
expiration on February 1, 1998 of the exclusivity of the license granted by
Casull to Freedom Arms, Inc. The mini-revolvers to be manufactured by the
Company will compete against similar small firearms produced by North American
Arms and other manufacturers. These mini-revolvers will be subject to the same
high standard of quality to which the Company's other products will be subject.
Most of the companies that compete for this segment of the market manufacture
firearms that are sold at lower prices. The Company will manufacture the Rifle
(chambered for the Casull cartridge) as well as rifles chambered for
conventional cartridges. The rifles chambered for conventional cartridges will
compete with rifles produced by larger manufacturers, such as Weatherby and
Remington, and smaller manufacturers, such as Dakota Arms, and custom gunsmiths.
There can be no assurance that additional competitors will not enter the markets
in which the Company expects to compete.
NEW PRODUCT INTRODUCTIONS. The Company's success is dependent upon its
ability to design and deliver new products. As is typical with new products,
demand for and market acceptance of new products introduced by the Company are
subject to uncertainty. Achieving market acceptance for new products may require
substantial marketing and other efforts and the expenditure of significant funds
to create customer demand. There can be no assurance that the Company's efforts
will be successful. In addition, the failure of new products to gain sufficient
market acceptance could adversely affect the image of the Casull brand name and
demand for other Casull products.
RELIANCE ON CERTAIN SUPPLIERS AND DISTRIBUTORS. The Company expects to
utilize various raw materials, including steel, lead, plastics and wood in the
manufacture of its products for which the Company may rely on one or several
suppliers. The Company does not expect to have long-term purchase contracts with
any of these suppliers. Alternative sources, including foreign sources, exist
for each of these materials from which the Company could obtain such raw
materials. Nonetheless, the Company cannot give any assurance that supply
relationships with alternative sources can be established or that such
relationships could provide a timely and sufficient quantity or quality of
materials. In addition, the Company may incur additional costs in sourcing raw
materials from alternative suppliers.
The Company plans to distribute its products primarily through firearms
dealers. Federal law requires the licensing of firearms dealers. Because the
Company will only be permitted by applicable law to make retail firearm sales to
local Wyoming residents, the major method of distribution will be through
entities that possess federal firearms licenses ("FFL"). FFLs are issued by the
Bureau of Alcohol Tobacco and Firearms ("BATF"). The number of FFL holders has
decreased substantially in the past four years. This decrease in FFL holders is
believed to have been caused by an increase in licensing requirements by the
BATF. If BATF licensing requirements are further restricted or other laws are
enacted which otherwise hinder firearm sales, the number of FFL holders may
decrease, thus decreasing the Company's ability to distribute its products.
MANAGEMENT OF GROWTH AND ATTRACTION OF QUALIFIED PERSONNEL. The Company's
business may grow significantly over the next several years. To enable such
growth, the Company intends to add numerous new personnel in several areas. The
Company is currently planning the construction of its principal facility and, if
growth continues, the Company may need to further expand its facilities and
enhance its related systems and operations. The Company may not succeed in
attracting and retaining qualified personnel, particularly including management,
marketing and other skilled personnel, to its principal facility in the small
town of Afton, Wyoming. There can be no assurance that the Company will continue
to grow or be
10
<PAGE>
effective in managing its future growth or expanding its facilities and
operations. Any failure to manage growth, expand its operations or attract and
retain qualified personnel could have a material adverse effect on the Company's
business, operating results or financial condition.
WARRANTS; FUTURE FINANCINGS. The holders of the Warrants will have the
opportunity to profit from a rise in the price of the Common Stock. The
existence of the Warrants may adversely affect the terms on which the Company
can obtain additional equity financing in the future and the holders can be
expected to exercise them when the Company would, in all likelihood, be able to
obtain additional capital by offering additional shares of its unissued Common
Stock on terms more favorable to the Company than the terms provided by these
Warrants.
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF THE WARRANTS. The Warrants are
redeemable by the Company at a price of $0.05 per Warrant commencing 13 months
from the date of this Prospectus, provided that (i) 30 days prior written notice
is given to the holders of the Warrants, and (ii) the closing bid price per
share of the Common Stock for any 20 trading days within a period of 30
consecutive trading days, ending on the fifth day prior to the date of the
notice of redemption, has been at least 150% of the initial public offering
price per share of Common Stock. The holders of the Warrants will automatically
forfeit their rights to purchase the shares of Common Stock issuable upon
exercise of such Warrants unless their Warrants are exercised before they are
redeemed. Notice of redemption of the Warrants could force the holders to
exercise their Warrants and pay the exercise price at a time when it may be
disadvantageous for them to do so, to sell the Warrants at the market price when
they might otherwise wish to hold the Warrants, or to accept the redemption
price which is likely to be substantially less than the market value of the
Warrants at the time of redemption. See "Description of Securities--Redeemable
Warrants."
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE
WARRANTS. Holders will have the right to exercise the Warrants and purchase
shares of Common Stock only if a current prospectus relating to such shares is
then in effect and only if the shares are qualified for sale under the
securities laws of the applicable state or states, or there is an exemption from
the applicable qualification requirements. The Company has undertaken and
intends to file and keep effective and current a prospectus which will permit
the purchase and sale of the Common Stock underlying the Warrants, but there can
be no assurance that the Company will be able to do so. Although the Company
intends to qualify for sale the shares of Common Stock underlying the Warrants
in those states in which the Securities are to be offered, no assurance can be
given that such qualification will occur. Holders of the Warrants may be
deprived of any value if a prospectus covering the shares issuable upon the
exercise thereof is not kept effective and current or if such underlying shares
are not, or cannot be, registered in the applicable states. Although the Company
does not presently intend to do so, the Company reserves the right to call the
Warrants for redemption whether or not a current prospectus is in effect or such
underlying shares are not, or cannot be, registered in the applicable states.
See "Description of Securities--Redeemable Warrants."
NO PRIOR PUBLIC TRADING MARKET; LISTING ON OTC ELECTRONIC BULLETIN BOARD;
ILLIQUIDITY OF TRADING MARKET
Prior to this Offering, there has been no public trading market for the
Common Stock or the Warrants and there can be no assurance that an active public
market for the Securities will be developed or sustained after this Offering.
The Common Stock and the Warrants will be quoted on the OTC Electronic Bulletin
Board, an NASD sponsored and operated inter-dealer automated quotation system
for equity securities not on NASDAQ, as well as in the NQB Pink Sheets published
by National Quotation Bureau Incorporated. The OTC Electronic Bulletin Board was
introduced two years ago as an alternative to "pink sheet" trading of
over-the-counter securities. There can be no assurance that the OTC Electronic
Bulletin Board will be recognized by the brokerage community as an acceptable
alternative to quotation on NASDAQ or in the NQB Pink Sheets. In the absence of
such recognition, the liquidity and stock price of the Securities in the
secondary market may be adversely affected, and there can be no assurance that a
public market for the Securities will develop or, if developed, that it will be
sustained. In addition, depending on several
11
<PAGE>
factors including the future market price of the Common Stock or Warrants, the
Securities could become subject to the so-called "penny stock" rules that impose
additional sales practice and market-making requirements on broker-dealers who
sell and/or make a market in such securities, which could affect the ability or
willingness of broker-dealers to sell and/or make a market in the Securities and
the ability of purchasers of the Securities to sell such Securities in the
secondary market.
LIMITS ON SECONDARY TRADING. Under the blue sky laws of most states, public
sales of Common Stock and Warrants after this Offering by persons other than the
Company in "non-issuer transactions" must either be qualified under applicable
blue sky laws, or exempt from such qualification requirements. By virtue of
conditions imposed by the Department of Corporations of the State of California
as a condition of qualifying the offer and sale of the Securities in this
Offering in California, purchasers of the Securities in this Offering in
California must meet certain investor suitability standards and will not be able
to resell Securities publicly (and there cannot be any public trading of the
Common Stock and Warrants in California) for at least 90 days after the closing
of this Offering. At that time, the Company intends to apply for an exemption
permitting secondary trading, and if the exemption is granted, secondary trading
in California may commence. Blue sky authorities in other states may impose
other restrictions on the secondary trading of Common Stock and Warrants in
those states. In many states, secondary trading of the Common Stock and Warrants
will be permitted only by virtue of an exemption so long as information about
the Company is published in a recognized manual such as manuals published by
Moody's Investor Service or Standard & Poor's Corporation. The Company intends
to apply for listing in a recognized manual and will attempt to be listed in a
recognized manual as soon after the closing of this Offering as practicable.
There will, however, be some period of time after the date of this Prospectus
during which purchasers of the Securities will not be able to resell shares of
Common Stock and Warrants in the states in which secondary trading is exempted
by virtue of a recognized manual exemption.
As a result of these or other restrictions that might be imposed, purchasers
in this Offering, existing stockholders and future stockholders may be
restricted or prohibited from selling the Common Stock or the Warrants in
particular states as a result of applicable blue sky laws. Purchasers of the
Securities should consult with their broker, counsel and other advisers to
determine whether there are any resale restrictions on public resale of the
Common Stock or the Warrants in the states in which they reside. These
restrictions may have the effect of reducing the liquidity of the Common Stock
or Warrants and could adversely affect the market price of the Common Stock or
the Warrants.
CONTROL BY CURRENT STOCKHOLDERS. If the Minimum Offering is completed,
current stockholders will beneficially own 573,750 shares or 59% of the Common
Stock outstanding. Of that number, Mr. Casull will beneficially own 71,875
shares or 12.5% of the Common Stock outstanding, and all officers and directors
as a class will beneficially own 375,084 shares or 39% of the Common Stock
outstanding. Such amounts and percentages do not include 1,133,333 shares of
Redeemable Common Stock which shares are subject to redemption for at least 90%
of the amount paid therefor by the holders of such shares if the Company does
not raise at least $5 million of additional equity capital on or before May 31,
1997. As a result, these stockholders acting in concert will have the ability to
elect or remove any or all of the Company's directors and to control
substantially all corporate activities involving the Company, including tender
offers, mergers, proxy contests and consolidations or other purchases of Common
Stock that could give stockholders of the Company the opportunity to realize a
premium over the then prevailing market price for their shares of Common Stock.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING. The Company will
only effect a closing of this Offering of less than $5,000,000 if the Company
obtains a waiver of the $5,000,000 threshold or a waiver of the May 31, 1997
deadline from the Redeemable Common Stockholders, however, in the event the
Company does obtain such waiver and does close on the Minimum Offering the
Company believes that the net proceeds from the Minimum Offering, together with
the Company's existing resources, will satisfy its cash requirements for less
than 12 months and the Company will then need to obtain additional funds.
12
<PAGE>
There can be no assurance that the Company will be able to obtain the necessary
additional funds on acceptable terms. The Company believes that its existing
resources, together with the estimated net proceeds of the Maximum Offering,
will satisfy its cash requirements for the next 12 months. If the Company
experiences unanticipated cash requirements during the next 12 months, however,
and in any event thereafter, the Company may require substantial additional
capital to fund its operations. The Company may seek such additional funding
through public or private financing or collaborative or other arrangements with
third parties. There can be no assurance that additional funds will be available
on acceptable terms. If additional funds are raised by issuing equity
securities, substantial dilution to existing shareholders, including purchasers
of the Securities offered hereby, may result. If adequate funds are not
available, the Company may be required to delay, scale back or eliminate one or
more of its strategies, or to obtain funds through entering into arrangements
with third parties that may require the Company to relinquish certain exclusive
rights that the Company might not otherwise relinquish. See "Management's
Discussion and Analysis or Plan of Operation."
ANTI-TAKEOVER PROVISIONS. Certain provisions of the Company's Certificate
of Incorporation and Bylaws, as well as the Delaware General Corporation law,
could discourage a third party from attempting to acquire, or make it more
difficult for a third party to acquire, control of the Company without approval
of the Company's board of directors. Such provisions could also limit the price
that certain investors might be willing to pay in the future for shares of the
Common Stock. Such provisions also could delay, deter, or prevent a merger,
consolidation, proxy contest, tender offer, or other business combination or
change of control involving the Company that some or a majority of the Company's
stockholders might consider to be in their best interest, including offers or
attempted takeovers that might otherwise result in such stockholders receiving a
premium over the market price for the Common Stock.
POSSIBLE VOLATILITY OF STOCK OR WARRANT PRICE. The stock market has, from
time to time, experienced significant price and volume fluctuations that may be
unrelated to the operating performance of particular companies. In addition, the
market price of the Securities, like the stock prices of many publicly-traded
companies, may prove to be highly volatile. Announcements of innovations or new
commercial products by the Company or its competitors, developments or disputes
concerning proprietary rights, regulatory developments in the United States or
in foreign countries, as well as period-to-period fluctuations in financial
results, among other factors, may have a significant impact on the market price
of the Securities.
ARBITRARY OFFERING PRICE OF THE SECURITIES AND EXERCISE PRICE OF THE
WARRANTS. The offering price of the Securities and the exercise price of the
Warrants are completely arbitrary and are not based upon the Company's assets,
book value, cash flow, potential earnings or any other established criteria of
value. The initial public offering price for the Securities and the exercise
price of the Warrants were determined by negotiations between the Company and
the Placement Agent, and should not be regarded as indicative of any future
market price of the Common Stock or the Warrants. Among the factors considered
in determining the initial public offering price were the history and prospects
of the Company and the industry in which it will operate, the previous
experience of the Company's executive officers and the general condition of the
securities markets at the time of this Offering. See "Plan of Distribution". On
October 21, 1996, the Company completed a private placement (the "Private
Placement") and raised $3,400,000 from the sale of 1,133,333 shares of the
Redeemable Common Stock. The Company agreed that it would not use more than 10%
of the proceeds of the Private Placement to effect its business objectives
unless it raises an additional $5 million of equity capital. The Company agreed
that if it does not raise at least $5 million of additional equity capital on or
before May 31, 1997, it will offer the Private Placement investors the right to
sell their Common Stock back to the Company for at least 90% of the amount paid
therefor.
REPRESENTATIVE'S INFLUENCE ON THE MARKET. A significant amount of the
Securities offered hereby may be sold to customers of the Placement Agent. Such
customers may subsequently engage in transactions for the sale or purchase of
such Securities through or with the Placement Agent. If it participates in the
13
<PAGE>
market, the Placement Agent may exert a dominating influence on the market, if
one develops, for the Securities described in this Prospectus. Such market
making activity may be discontinued at any time. The price and liquidity of the
Common Stock and the Warrants may be significantly affected by the degree, if
any, of the Representative's participation in such market. See "Description of
Securities" and "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALES. Sales of shares of Common Stock by
existing shareholders, or by holders of the Warrants, under Rule 144 of the
Securities Act or otherwise could have an adverse effect on the trading price of
the Common Stock or the Warrants. The Company has agreed with the Placement
Agent to cause all holders of the shares of Common Stock outstanding prior to
this Offering to execute lock-up agreements with the Placement Agent that
restrict the sale or disposition of shares of Common Stock for 18 months from
the date of this Prospectus without the prior written consent of the Placement
Agent. The Placement Agent may consent to a waiver of this lock-up period
without prior public notice. Subject to this lock-up restriction, of the
2,107,083 shares of Common Stock that will be outstanding in the event of the
Minimum Offering or the 3,107,083 shares of Common Stock that will be
outstanding after the Maximum Offering, the 1,400,000 shares of Common Stock
sold in this Offering will be freely tradeable without restriction under the
Securities Act, 573,750 shares will be eligible for sale under Rule 144 on
August 7, 1997 and 1,133,333 shares will be eligible for sale under Rule 144 on
October 21, 1997. See "Description of Securities" and "Shares Eligible for
Future Sale."
ABSENCE OF DIVIDENDS. The Company has not paid any dividends on its Common
Stock and does not expect to do so in the foreseeable future.
IMMEDIATE SUBSTANTIAL DILUTION. The purchasers of the Securities will incur
immediate and substantial dilution of approximately $4.43 or approximately 74%
per share of Common Stock in the as adjusted net tangible book value of each
share of Common Stock from the Minimum Offering assuming no termination of the
redemption feature of the Redeemable Common Stock. The purchasers of securities
will incur immediate and substantial dilusion of approximately $2.71 or 45% in
the as adjusted net tangible book value of each share of Common Stock from the
Maximum Offering assuming termination of the redemption feature of the
Redeemable Common Stock. See "Dilution."
POSSIBLE ADVERSE EFFECTS OF AUTHORIZATION OF PREFERRED STOCK. The Company's
Certificate of Incorporation provides that up to 1,000,000 shares of Preferred
Stock may be issued by the Company from time to time in one or more series. The
Board of Directors is authorized to determine the rights, preferences,
privileges and restrictions granted to and imposed upon any wholly unissued
series of Preferred Stock and to fix the number of shares of any series of
Preferred Stock and the designation of any such series, without any vote or
action by the Company's stockholders. The Board of Directors may authorize and
issue Preferred Stock with voting or conversion rights that could adversely
affect the voting power or other rights of the holders of Common Stock. In
addition, the potential issuance of Preferred Stock may 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 the Common Stock. See
"Description of Securities--Preferred Stock."
14
<PAGE>
USE OF PROCEEDS
The gross proceeds from the sale of the Securities offered hereby if the
Minimum Offering is sold will be $2,440,000 and if the Maximum Offering is sold
will be $8,540,000, and the net proceeds to be received by the Company from the
sale of the Securities offered hereby, after deducting the Placement Agent's
discounts and commissions and all other applicable expenses, are estimated to be
between approximately $1,772,800 if the Minimum Offering is sold and
approximately $7,079,800 if the Maximum Offering is sold. The Company currently
anticipates applying such proceeds approximately as follows:
<TABLE>
<CAPTION>
MINIMUM OFFERING MAXIMUM OFFERING
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
APPROXIMATE APPROXIMATE
APPROXIMATE PECENTAGE APPROXIMATE PERCENTAGE
DOLLAR OF NET DOLLAR OF NET
APPLICATION OF PROCEEDS AMOUNT PROCEEDS AMOUNT PROCEEDS
- ---------------------------------------------------------- ------------ ------------- ------------ -------------
Purchase of Land.......................................... $ 120,000 6.8% $ 120,000 1.7%
Construction of Manufacturing Plant....................... 800,000 45.1% 800,000 11.3%
Acquisition of Machinery & Equipment...................... 852,800 48.1% 6,159,800 87.0%
------------ ----- ------------ -----
Total..................................................... $ 1,772,800 100.0% $ 7,079,800 100.0%
</TABLE>
The above figures represent the Company's best estimate based upon its
present plans and certain assumptions regarding general economic conditions and
the Company's future revenues and expenditures. The Company, therefore, reserves
the right to reallocate the net proceeds of this Offering among the various
categories set forth above as it, in its sole discretion, deems necessary or
advisable.
Any additional net proceeds realized from the exercise of the Over-allotment
Option or the Warrants will be added to the Company's working capital.
The Company will only effect a closing of this Offering of less than
$5,000,000 if the Company obtains a waiver of the $5,000,000 threshold or a
waiver of the May 31, 1997 deadline from the Redeemable Common Stockholders
however, in the event the Company does obtain such waiver and does close on the
Minimum Offering, the Company believes that the net proceeds from the Minimum
Offering, together with the Company's existing resources (i) will not be
sufficient to purchase the necessary machinery & equipment and (ii) will satisfy
its cash requirements for less than 12 months and the Company will then need to
obtain additional funds. There can be no assurance that the Company will be able
to obtain the necessary additional funding on acceptable terms.
The Company believes that the estimated net proceeds to be received by the
Company from the Maximum Offering, together with funds from the Private
Placement and from future operations, will be sufficient to meet the Company's
working capital requirements for a period of at least 12 months following the
date of this Prospectus. Thereafter, if the Company has insufficient funds for
its needs, there can be no assurance that additional funds can be obtained on
acceptable terms, if at all. If necessary funds are not available, the Company's
business would be materially and adversely affected.
Prior to expenditure, the net proceeds will be invested in short-term
interest-bearing securities or money market funds.
DIVIDEND POLICY
The Company currently anticipates that it will retain all available funds
for use in its business. The Company's future dividend policy will depend upon
the Company's earnings, capital requirements, financial condition and other
relevant factors.
15
<PAGE>
DILUTION
The Company had a deficit in net tangible book value of $(246,537) or $(.43)
per share as of February 28, 1997, based upon 573,750 shares of Common stock
outstanding. The deficit in net tangible book value per share is equal to the
Company's total tangible assets less its liabilities divided by the total number
of shares of its Common Stock outstanding prior to the Offering and termination
of the redemption feature of the Redeemable Common Stock. After giving effect to
the sale of 400,000 shares of Common Stock and 400,000 Warrants offered hereby
in the Minimum Offering at an initial public offering price per share of $6.00
per share of Common Stock and $.10 per Warrant and no termination of the
redemption feature of the Redeemable Common Stock, the as adjusted net tangible
book value of the Common Stock as of February 28, 1997 (after deducting
estimated placement agent discounts and commissions and all other expenses of
the Minimum Offering) would have been $1,526,263 or $1.57 per share. This would
represent an immediate increase in net tangible book value of $2.00 per share
and an immediate dilution of $4.43 or 74%. After giving effect to the sale of
1,400,000 shares of Common Stock and 1,400,000 Warrants offered hereby in the
Maximum Offering at an initial public offering price per share of $6.00 per
share of Common Stock and $.10 per Warrant and termination of the redemption
feature of the Redeemable Common Stock, the as adjusted net tangible book value
of the Common Stock as of February 28, 1997 (after deducting estimated placement
agent discounts and commissions and all other expenses of the Maximum Offering)
would have been $10,233,263 or $3.29 per share (including a $.17 per share
increase attributable to the termination of the redemption feature of the
Redeemable Common Stock). This would represent an immediate increase in as
adjusted net tangible book value of $3.72 per share and an immediate dilution of
$2.71 or 45%. The following tables illustrate this dilution on a per share basis
(assuming $.10 is attributed to the Warrants):
<TABLE>
<CAPTION>
MINIMUM
OFFERING
<S> <C> <C>
Assumed initial offering price per share..................................................... $ 6.00
Deficit in net tangible book value per share prior to the Minimum Offering(1).............. $ (.43)
Increase attributable to new investors..................................................... $ 2.00
As adjusted net tangible book value book value per share after the Minimum Offering and prior
to the termination of the redemption feature of the Redeemable Common Stock(2)(3).......... $ 1.57
-----
As adjusted dilution per share to new investors.............................................. $ 4.43
-----
-----
<CAPTION>
MAXIMUM
OFFERING
<S> <C> <C>
Assumed initial offering price per share..................................................... $ 6.00
Deficit in net tangible book value per share prior to the Maximum Offering(1).............. $ (.43)
Increase attributable to new investors..................................................... $ 3.89
As adjusted net tangible book value book value per share after the Maximum Offering and prior
to termination of the redemption feature of the Redeemable Common Stock(2)................. $ 3.46
-----
As adjusted dilution per share to new investors prior to termination of the redemption
feature of the Redeemable Common Stock..................................................... $ 2.54
Termination of the redemption feature of the Redeemable Common Stock(4)...................... $ .17
-----
As adjusted dilution per share to new investors.............................................. $ 2.71
-----
-----
</TABLE>
16
<PAGE>
The following tables summarize the number of shares of Common Stock
purchased, the percentage of total consideration paid, and the average price per
share paid by the existing stockholders and the new investors in the Minimum and
Maximum Offering made by this Prospectus. The Calculation below is based on an
initial public offering price of $6.00 per share of Common Stock (before
deducting placement agent discounts and commissions and all other estimated
expenses of the offering payable by the Company).
<TABLE>
<CAPTION>
MINIMUM OFFERING
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AVERAGE
PRICE PER
SHARES PURCHASED TOTAL CONSIDERATION SHARE
--------------------- ------------------------ -----------
<CAPTION>
NUMBER % NUMBER %
---------- --- ------------- ---
<S> <C> <C> <C> <C> <C>
Existing Stockholders(3).................................. 573,750 59% $ 57,375 2% $ 0.10
New Investors............................................. 400,000 41% 2,400,000 98% $ 6.00
---------- --- ------------- --- -----
973,750 100% $ 2,457,375 100%
<CAPTION>
MAXIMUM OFFERING
------------------------------------------------------------
AVERAGE
PRICE PER
SHARES PURCHASED TOTAL CONSIDERATION SHARE
--------------------- ------------------------ -----------
NUMBER % NUMBER %
---------- --- ------------- ---
<S> <C> <C> <C> <C> <C>
Existing Stockholders(2)(4)(5)............................ 1,707,083 55% $ 3,457,375 29% $ 2.03
New Investors............................................. 1,400,000 45% 8,400,000 71% $ 6.00
---------- --- ------------- --- -----
3,107,083 100% $ 11,857,375 100%
</TABLE>
- ------------------------
(1) Deficit in net tangible book value per share excludes deferred registration
costs of $130,181. See the financial statements of the Company and the notes
thereto.
(2) As adjusted net tangible book value per share after the Minimum Offering and
Maximum Offering (after deducting estimated placement agent discounts and
commissions and all other expenses of the Minimum Offering and Maximum
Offering).
(3) Assumes no termination of the redemption feature of the Redeemable Common
Stock as the proceeds of the Minimum Offering are assumed to be less than
$5,000,000.
(4) Assumes termination of the redemption feature of the Redeemable Common Stock
as the proceeds of the Maximum Offering are assumed to be in excess of
$5,000,000 and the Maximum Offering is assumed to have occurred on or before
May 31, 1997.
(5) Assumes that securities received in exchange for 333,333 shares of Common
Stock at a subscribed price of $1,000,000 are sold for cash. The estimated
fair market value of such securities on February 28, 1997 was $1,242,500.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
February 28, 1997 on an actual basis, and the capitalization on such date as
adjusted to give effect to the issuance and sale of an assumed 400,000 shares of
Common Stock and 400,000 Warrants in the Minimum Offering, and an assumed
1,400,000 shares of Common Stock and 1,400,000 Warrants in the Maximum Offering,
respectively, by the Company (after deducting estimated placement agent
discounts and commissions and all other expenses of the Minimum Offering and
Maximum Offering, respectively), assuming an initial public offering price of
$6.00 per share of Common Stock and $0.10 per Warrant:
<TABLE>
<CAPTION>
FEBRUARY 28, 1997(1)
-------------------------------------------
<S> <C> <C> <C>
AS ADJUSTED AS ADJUSTED
FOR MINIMUM FOR MAXIMUM
ACTUAL OFFERING(2) OFFERING(3)(4)
------------ -------------- -------------
Redeemable Common Stock, 1,133,333 shares of Common Stock designated
with redemption feature issued and outstanding at February 28, 1997
and as adjusted for the Minimum Offering; none isued and
outstanding, as adjusted for the Maximum Offering.................. $ 3,400,000 $ 3,400,000 $ --
Stockholders' Equity (Deficit):
Preferred Stock, par value $0.01 share; 1,000,000 shares
authorized, no shares issued and outstanding..................... -- -- --
Common Stock, par value $0.01 per share; 10,000,000 shares
authorized; 573,750 shares (excluding 1,133,333 shares of
Redeemable Common Stock) issued and outstanding actual; 973,750
and 3,107,083 shares outstanding (as adjusted), respectively..... 5,738 9,738 31,071
Additional paid-in capital......................................... 51,637 1,690,256 10,375,923
Accumulated deficit................................................ (173,731) (173,731) (173,731)
------------ -------------- -------------
Total stockholders' (deficit) equity............................... (116,356) 1,526,263 10,233,263
------------ -------------- -------------
Total capitalization............................................. $ 3,283,644 $ 4,926,263 $ 10,233,263
------------ -------------- -------------
------------ -------------- -------------
</TABLE>
- ------------------------
(1) The Company plans to adopt a fiscal year which begins on July 1 and ends on
June 30.
(2) As adjusted to give effect to the issuance of the Minimum Securities offered
hereby at an assumed initial offering price of $6.00 per share of Common
Stock and $.10 per Warrant (after deducting estimated placement agent
discounts and commissions and all other expenses of the Minimum Offering).
Assumes no termination of the redemption feature of the Redeemable Common
Stock as the proceeds of the Minimum Offering are assumed to be less than
$5,000,000. If the Offering does not result in raising at least $5,000,000
on or before May 31, 1997, the Company will need to receive a waiver of the
$5,000,000 threshold and/or the May 31, 1997 deadline from the Redeemable
Common Stockholders, or the Redeemable Common Stockholders will have the
right to sell their shares back to the Company for at least 90% of the
amounts paid. There is no assurance that such waiver can be obtained.
Assumes no exercise of the Placement Agent's Warrants. See "Plan of
Distribution."
(3) As adjusted to give effect to the issuance of the Maximum Securities offered
hereby at an assumed initial public offering price of $6.00 per share of
Common Stock and $0.10 per Warrant (after deducting estimated placement
agent discounts and commissions and all other expenses of the Maximum
Offering). See "Use of Proceeds." Assumes no exercise of the Placement
Agent's Warrants. See "Plan of Distribution."
(4) As adjusted to give effect to the removal of restrictions on cash and
investments of $2,160,000 and $1,242,500, respectively, the repayment of a
$242,500 liability to a director, and the termination of the redemption
feature of the Redeemable Common Stock in conjunction with the issuance of
the Maximum Securities offered hereby assuming the proceeds from the Maximum
Offering exceed $5,000,000 and the Maximum Offering occurs on or before May
31, 1997. If the Closing of the Offering does not occur on or before May 31,
1997, the Company will need to obtain waivers of the May 31, 1997 deadline
from the Redeemable Common Stockholders, or the Redeemable Common
Stockholders will have the right to sell their shares back to the Company
for at least 90% of the amounts paid. See the financial statements of the
Company and notes thereto.
18
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below for the Company's statement of
operations for the period July 23, 1996, the Company's date of incorporation,
through February 28, 1997, and the balance sheet as of February 28, 1997, are
derived from the Company's financial statements audited by Price Waterhouse LLP
which appear elsewhere in this Prospectus. The information set forth below
should be read in conjunction with the Company's financial statements and the
"Plan of Operations" included herein.
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
JULY 23, 1996
(DATE OF INCORPORATION)
THROUGH FEBRUARY 28,
1997(1)
--------------------------
<S> <C>
STATEMENTS OF OPERATIONS DATA
Revenues.............................................................................. $ --
Expenses:
General and administrative expenses................................................. 204,764
Other income:
Interest and dividend income........................................................ 31,033
-----------
Net loss.............................................................................. $ (173,731)
-----------
-----------
Net loss per common share............................................................. $ (.11)
-----------
-----------
Weighted average number of common shares outstanding(2)............................... 1,542,288
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 28, 1997(1)
----------------------------------------------------------
<S> <C> <C> <C>
AS ASJUSTED FOR AS ADJUSTED FOR
ACTUAL MINIMUM OFFERING(3) MAXIMUM OFFERING(4)(5)
------------ -------------------- ----------------------
BALANCE SHEET DATA
Cash................................................. $ 52,285 $ 1,825,085 $ 9,292,085
Working capital...................................... (6,537) 1,766,263 10,233,263
Total assets......................................... 3,592,966 5,235,585 10,300,085
Total liabilities.................................... 309,322 309,322 66,822
Redeemable Common Stock.............................. 3,400,000 3,400,000 --
Stockholders' equity (deficit)....................... (116,356) 1,526,263 10,233,263
</TABLE>
- ------------------------
(1) The Company plans to adopt a fiscal year which begins on July 1 and ends on
June 30.
(2) See note 2 to the Company's financial statements.
(3) As adjusted to give effect to the issuance of the Minimum Securities offered
hereby at an assumed initial offering price of $6.00 per share of Common
Stock and $.10 per Warrant (after deducting estimated placement agent
discounts and commissions and all other expenses of the Minimum Offering).
Assumes no termination of the redemption feature of the Redeemable Common
Stock as the proceeds of the Minimum Offering are assumed to be less than
$5,000,000. If the Offering does not result in raising at least $5,000,000
on or before May 31, 1997, the Company will need to receive a waiver of the
$5,000,000 threshold and/or the May 31, 1997 deadline from the Redeemable
Common Stockholders, or the Redeemable Common Stockholders will have the
right to sell their shares back to the Company for at least 90% of the
amounts paid. There is no assurance that such waiver can be obtained.
Assumes no exercise of the Placement Agent's Warrants. See "Plan of
Distribution."
(4) As adjusted to give effect to the issuance of the Maximum Securities offered
hereby at an assumed initial public offering price of $6.00 per share of
Common Stock and $0.10 per Warrant (after deducting estimated placement
agent discounts and commissions and all other expenses of the Maximum
Offering). See "Use of Proceeds." Assumes no exercise of the Placement
Agent's Warrants. See "Plan of Distribution."
(5) As adjusted to give effect to the removal of restrictions on cash and
investments of $2,160,000 and $1,242,500, respectively, the repayment of a
$242,500 liability to a director, and the termination of the redemption
feature of the Redeemable Common Stock in conjunction with the issuance of
the Maximum Securities offered hereby assuming the proceeds from the Maximum
Offering exceed $5,000,000 and the Maximum Offering occurs on or before May
31, 1997. If the Closing of the Offering does not occur on or before May 31,
1997, the Company will need to obtain waivers of the May 31, 1997 deadline
from the Redeemable Common Stockholders, or the Redeemable Common
Stockholders will have the right to sell their shares back to the Company
for at least 90% of the amounts paid. See the financial statements of the
Company and notes thereto.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
OVERVIEW
On July 23, 1996 the Company was created and on October 14, 1996 it acquired
the rights to manufacture and sell high quality firearms designed by Casull. At
that time, the Company began to assemble a management team and develop a
strategic marketing plan focusing on the introduction of the Company's products
to a variety of consumers. The Company anticipates distributing its products
domestically through a network of wholesalers and retail dealers who have
federal firearms licenses. On October 14, 1996, the Company entered into an
exclusive license agreement with Casull for all of the rights, with certain
exceptions, to his present and future patents and other intellectual property.
The Company has several of its management team in place. The management team
includes a Chief Executive Officer and President. It is anticipated that a Chief
Financial Officer, Vice President of Sales, Vice President of Administration and
Marketing and a Vice President of Manufacturing will be hired within 18 months
of the date of this Prospectus. The Company's marketing plan was developed by an
outside consultant and will be implemented by the President and Vice President
of Sales.
Although the Company is in the development stage and does not expect any
revenues for 18 months, the Company believes there will be significant interest
in the Company's prototypes.
PLAN OF OPERATION
Since the Company was formed on July 23, 1996 it has focused primarily on
raising capital, producing prototypes, hiring the management team, marketing its
future products in industry trade magazines and preparing for the shooting,
hunting, outdoor trade show and conference (the "SHOT" show) which will be held
in January, 1997. The Company's cost for appearing at the SHOT show will be
approximately $100,000.
During the 18 months following this Offering, the Company expects to
purchase land currently identified, construct a manufacturing facility, acquire
and install machine tool equipment, tool the equipment for manufacturing, hire
and train production employees and produce test products. Design and
construction of the facility will begin as soon thereafter as possible.
Once the Company has engaged a general contractor, the Company will focus
upon the acquisition and tooling of appropriate machine tools. The Company has
solicited proposals from several machine tool suppliers requesting
recommendations for specific machine tools and suggesting manufacturing
procedures best suited for the recommended equipment. Following the completion
of this Offering, the Company will order a barrel forging machine which will
produce hammer forged rifle and handgun barrels, CNC machining centers, CNC
turning centers and CNC screw machines. These machines are the major pieces of
equipment involved in the manufacturing process and allow for the longest lead
time between order and delivery. From month 3 to month 6 additional
manufacturing equipment will be ordered. Lead time between ordering and delivery
is important to insure that equipment is delivered to avoid production delays.
Equipment ordered as provided above will be ready for delivery beginning in the
tenth month. Delivery, assembly and testing of the machine tools will take
approximately two months.
Beginning in month 2 after the date of this Prospectus, the Company will
begin to hire employees and secure the management team previously described. The
first employee to be hired will be a machinist who will assist Casull with
research and development, assist in evaluating equipment and tooling, and assist
in producing detailed working drawings of various firearm parts. Once hired, the
Vice President of Manufacturing will be responsible for the manufacturing
process. This person's responsibilities will include the scheduling of product
flow and the planning of raw material acquisitions. Production workers will be
hired as equipment is installed and becomes ready for operation. These
individuals will receive on-the-job training from the machine tool
representatives and their supervisors.
20
<PAGE>
Between month 6 and month 9 the Company will submit a proposal to Afton,
Wyoming to obtain an economic development grant for job training. If obtained,
this grant may reimburse up to $100,000 of expenses incurred by the Company for
job training. There can be no assurances, however, that the Company will be able
to attract and retain employees with the necessary skills. See "Risk Factors--
Management of Growth and Attraction of Qualified Personnel."
Beginning in month 14 and proceeding through month 18, the Company will
finish tooling the equipment and produce pre-production test firearms. These
firearms will be subjected to rigorous performance testing and quality control.
This procedure is necessary to insure quality firearms.
RESULTS OF OPERATIONS
NET LOSS. The Company reported a net loss of $173,731 or $0.11 per common
share for its initial period of operations from inception (July 23, 1996) to
February 28, 1997. The loss is primarily the result of having no sales generated
for that period as compared to costs and expenses incurred pertaining primarily
to the organizational and developmental activities of the Company to date.
REVENUES. Revenues from July 23, 1996 through February 28, 1997 were $0.
COSTS AND EXPENSES. Costs and expenses from July 23, 1996 through February
28, 1997 totalled $204,764.
LIQUIDITY AND CAPITAL RESOURCES
Capital for the operations of the Company to date has been provided by sale
of Common Stock to the founders of the Company and to purchasers in the private
placement completed on October 21, 1996 (the "Private Placement"). On August 7,
1996, the Company sold 573,750 shares of Common Stock, at a purchase price of
$0.10 per share, to 14 investors. These funds have been or will be used to fund
the organizational activities of the Company.
The Company raised $3,400,000 from the Private Placement with the sale of
1,133,333 shares of Common Stock. The Company agreed that it would not use more
than 10% of the proceeds of the Private Placement to effect its business
objectives unless it raises an additional $5 million of equity capital. The
Company agreed with the purchasers of the Common Stock in the Private Placement
that if it does not raise at least $5 million of additional equity capital on or
before May 31, 1997 it will offer such purchasers the right to sell their Common
Stock back to the Company for at least 90% of the amount paid therefor. Assuming
the completion of this Offering, the Company expects to use the net proceeds of
the Private Placement for working capital and general corporate purposes.
The Company will only effect a closing of this Offering of less than
$5,000,000 if the Company obtains a waiver of the $5,000,000 threshold or a
waiver of the May 31, 1997 deadline from the Redeemable Common Stockholders;
however, in the event the Company does obtain such waiver and does close on the
Minimum Offering, the Company believes the net proceeds from the Minimum
Offering, together with the Company's existing resources, will satisfy its cash
requirements for less than 12 months and the Company will then need to obtain
additional Funds. There can be no assurance that the Company will be able to
obtain the necessary additional funding on acceptable terms.
The Company believes that the estimated net proceeds to be received by the
Company from this Offering, together with funds from the Private Placement and
from future operations, will be sufficient to meet the Company's working capital
requirements for a period of at least 12 months following the date of this
Prospectus. Thereafter, if the Company has insufficient funds for its needs,
there can be no assurance that additional funds can be obtained on acceptable
terms, if at all.
21
<PAGE>
BUSINESS
GENERAL
Casull Arms Corporation (the "Company"), a development stage company,
intends to design, manufacture and sell high quality firearms designed by
Richard J. Casull ("Casull"), a nationally known firearms designer with more
than 40 years of experience in the industry. The Company has entered into an
exclusive licensing agreement (the "License Agreement") with Casull for the
rights, with certain exceptions, to all of his present and future patents and
other intellectual property, which rights will serve as the basis for the
Company's products.
The Company's firearms, most of which will be sold under the Casull
trademark, will initially consist of 45 caliber, 32 caliber and 22 caliber
single-action revolvers and the newly designed Casull Rifle and Cartridge System
(the "Rifle") which will be manufactured in various calibers. The Company will
seek to position the majority of its products at the high end of their
respective markets because the Company believes that the expected superior power
and accuracy of the Company's products will fill a perceived void in the
firearms market for high quality firearms for use by gun enthusiasts and
hunters. In addition, the Company intends to pursue potential sales to military
and police organizations. The Company does not plan to manufacture any firearms
included on the Bureau of Alcohol Tobacco and Firearms' list of assault weapons.
The Company plans to construct a manufacturing facility which is expected to
have an annual production capacity of 10,000 -- 12,000 units of firearms. The
manufacturing facility is projected to begin operations within 18 months from
commencement of construction and is expected to be fully operational within two
years from the closing of this Offering. In addition to providing manufacturing
space, the facility will likely contain a retail showroom and custom shop in
which management plans to produce collectors editions and specially engraved
firearms in the custom shop. The manufacturing facility's initial output will be
sold domestically, emphasis may also be placed on developing foreign markets.
The Company intends to order production equipment which will be computer
numerically controlled ("CNC") to ensure speed and repeatability of the
manufacturing process. The CNC milling centers, CNC lathes and CNC barrel
forging machine are sophisticated machines that will be installed by the
manufacturer and will be operated by machinists who will be trained by the
manufacturer.
INDUSTRY OVERVIEW
According to a 1995 survey conducted by the National Sporting Goods
Association, the U.S. market for the firearms and hunting industry was
approximately $3.0 billion. A National Rifle Association study conducted in 1995
indicated that there were approximately 230 million firearms owned by
approximately 60-65 million people. According to American Sports Data
Incorporated, in 1994 approximately 20 million people participated in hunting,
approximately 20 million participated in target shooting and approximately 5
million participated in trap and skeet shooting. The Bureau of Alcohol Tobacco
and Firearms estimates that total U.S. production of firearms was approximately
5.2 million units in 1994.
In May 1996, the Company commissioned the preparation of a marketing plan by
Professor Michael Darling, a marketing professor at the Leonard Stern School of
Business of New York University. This marketing plan included a situation
analysis consisting of market data, consumer behavior information, retail
structure and a detailed competitive analysis. The results of the situation
analysis indicated the following: (i) the market for firearms in the United
States is large and growing; (ii) shooting sports are popular, evidenced by the
20 million Americans who hunt and the 20 million who target shoot; (iii) market
interest among women is growing; and (iv) gun owners typically own several guns.
The markets for handguns and rifles and hunting-related products are large,
mature markets that the Company believes have historically been relatively
stable and have exhibited modest growth over the past three years. Although
firearms may be used for decades with proper maintenance, the Company feels that
22
<PAGE>
the used firearms after-market has traditionally not undercut the new firearms
market significantly. The reason for this is in part because of demand by
collectors for used firearms and in part because of continuing demand for
improved products. The Company believes that much of the demand in the new
firearms market comes from repeat buyers who are motivated by new calibers and
technological advancements.
From 1985 to 1994 the U.S. production of rifles increased slightly while
sales of revolvers decreased slightly. However, the U.S. production of
semi-automatic pistols has increased substantially. In 1994 U.S. rifle
production was approximately 1.3 million units and revolver production exceeded
550,000 units.
The firearms industry has witnessed few innovative improvements in rifle
design since the turn of the century. Different rifle features have been
introduced, but, in general, cartridges, calibers, and mechanisms have remained
unchanged. As a result, the Company believes that consumer interest in rifles
have stagnated.
RICHARD J. CASULL
Casull enjoys a reputation within the firearms industry as a talented and
innovative firearms designer. In the Shootist Newsletter (May 1993), Alan
Taylor, a noted firearms expert, describes Casull as "the [firearms] design
genius of today". Casull has more than 40 years of experience in the firearms
industry and has been featured in numerous articles in U.S. magazines and also
in magazines published in Germany and Japan. For this reason Casull's reputation
in the firearms industry will be beneficial to the Company.
In the early 1950's Casull set out to build a high powered handgun. His
experiments began with loading "hot" ammunition for the 45 long Colt. The
pressures generated by these loads were generally too high for the quality of
existing handguns. In 1957, Casull developed a handgun chambered for a 454
cartridge while attempting to engineer and design a revolver to exceed the
strength requirements associated with the expected pressures. The strength and
design of this revolver allowed Casull to experiment with triplex loads which
generated over 50,000 pounds of pressure per square inch and still maintained a
safety factor. With the energy and velocity generated by the 454 cartridge,
Casull elevated the handgun to a level equal to high powered hunting rifles. A
handgun chambered for a 454 cartridge is capable of taking all big game animals
including "Africa's big five." The 454 Casull is currently produced by Freedom
Arms, Inc. under an exclusive license from Casull.
Casull also designed a mini-revolver that is accurate and easily fits into
the palm of the hand. The mini-revolver is currently manufactured and sold by
North American Arms. The Company expects to sell a mini-revolver of similar or
better design.
LICENSE AGREEMENT WITH RICHARD J. CASULL
On October 14, 1996, the Company entered into the License Agreement with
Casull, the Company's Chief Executive Officer, whereby Casull granted to the
Company the exclusive worldwide right to utilize any of the present or future
intellectual property developed by Casull not already licensed under prior
agreement. Products which other entities have the right to build include (i) a
design for a revolver chambered in a 454 cartridge and manufactured by Freedom
Arms and (ii) a black powder mini-revolver manufactured by North American Arms.
All other Casull products will be available for the Company to manufacture on an
exclusive basis. The License Agreement provides that the Company will pay Casull
a salary of $100,000 per year and 5% of the Company's revenues from products
utilizing the intellectual property or bearing the "Casull" name; provided that
Casull will be paid a minimum annual royalty of $40,000 and a maximum annual
royalty of $400,000 per calendar year. This fee is payable to Casull for the
remainder of his life. The royalty payments due under the License Agreement will
cease upon the death of Casull; however, if Casull's wife, Mrs. Geraldine
Casull, should survive Casull, the royalty payments will continue until the
earlier of ten years from the date the first royalty payment is made to Casull
pursuant to
23
<PAGE>
the License Agreement or the death of Mrs. Casull. In the event that Casull's
employment with the Company is terminated, the Company will cease payment of the
salary to Casull; however, the minimum annual royalty and the maximum annual
royalty will increase from $40,000 to $120,000 and from $400,000 to $500,000,
respectively. Casull may terminate the License Agreement if the Company fails to
pay to Casull the royalties due him, or if the Company fails to keep or perform
any other material provision of the License Agreement, or if the Company files
for protection under Federal or state bankruptcy laws, or is placed in the hands
of a receiver or trustee in bankruptcy. The Company may cure such default within
60 days of the receipt of written notice from Casull. In the event the License
Agreement is canceled by Casull with cause, the licenses granted to the Company
under the License Agreement will terminate.
PRODUCTS
The Company plans initially to manufacture four different types of firearm
products in two industry categories: revolvers (large frame, small frame and
mini-revolvers) and rifles. It is contemplated that these firearms will be made
available in several styles based upon caliber, barrel length and other
features.
REVOLVERS
A revolver is a handgun which has a cylinder that holds the ammunition in a
series of chambers which are successively aligned with the barrel of the gun
during each firing cycle. A cartridge is the casing that holds the bullet and
gun powder in place within the rifle.
LARGE FRAME
The Company expects to produce large frame revolvers primarily chambered for
a 454 cartridge. The 454 cartridge is a 45 caliber magnum revolver cartridge
that is approximately 60% more powerful than the 44 magnum. In addition to being
chambered in the 454 cartridge, other 45 caliber ammunition can be fired by
interchanging cylinders. The Company expects that cylinders for the large frame
revolver will be chambered to fire 45 ACP, 45 Winchester magnum and 45 long Colt
cartridges. The Company plans to sell interchangeable cylinders which will be
sold as accessories to the large frame revolver. Although the 45 caliber will be
the backbone of manufacturing and marketing for the large frame revolver, it can
be successfully chambered in any caliber, from 22 long rifle up to 50 AE (Action
Express). The Company believes that it is not prevented from selling a gun which
contains a 454 cartridge; however, the Company's ability to market such firearms
may be hindered by its inability to use the "454 Casull" trademark until the
expiration on February 1, 1998 of the exclusivity of the license granted by
Casull to Freedom Arms, Inc.
SMALL FRAME
Casull has designed a small frame revolver that is approximately 80% of the
size of the large frame revolver. The prototype small frame revolver is
currently chambered in 32 H&R magnum and is believed to be an ideal size for 22
long rifle and 22 magnum. When chambered in 22 caliber, the small frame revolver
can be sold with a 22 long rifle cylinder and 22 magnum cylinder which allow
either cartridge to be fired.
MINI-REVOLVER
Casull has two mini-revolver designs that the Company intends to produce.
The designs include a double action revolver with an enclosed hammer, a fold up
trigger and a manual safety. The other mini-revolver is a single action firearm.
These revolvers are designed to chamber either the 22 long rifle or the 22
Winchester magnum cartridge.
24
<PAGE>
RIFLES
A rifle is a long gun with spiral grooves cut into the interior of the
barrel to give the bullet a stabilizing spin after it leaves the barrel.
THE CASULL RIFLE.
The Rifle will differ from the conventional rifle, providing, management
believes, a more powerful and more accurate weapon. It has been engineered to
propel a bullet at greater velocities than conventional rifles without
significantly increasing pressures. This increase in efficient utilization of
energy is achieved by using a short fat cartridge.
The short fat cartridge system has advantages over current cartridges. The
short fat cartridge effectuates powder burning in the cartridge rather than
burning as it is pushed down the barrel. The result is that energy is focused
solely on propelling the bullet rather than propelling the bullet and the
powder.
In contrast, long narrow cartridges promote powder burning to occur both in
the cartridge and in the barrel, consequently reducing the amount of energy
applied to the bullet, thereby negatively affecting the velocity of a given
load.
Perhaps one of the most significant problems in developing a short fat
cartridge is the required bolt size. Traditionally, the bolt's diameter had to
be substantially greater than the diameter of the cartridge head. This was
necessary so that the extractor could connect to the case head exterior notch
and extract the shell. Casull believes he has solved this problem by designing a
case which is based on an interior extraction. The Casull bolt inserts into a
recessed area of the cartridge head and connects to an interior extraction ring.
This inside extraction method allows the bolt to be the same size as the case.
Thus a short fat cartridge may be used without having a prohibitively large
bolt.
CHARACTERISTICS OF THE CASULL RIFLE
SUPERIOR VELOCITIES. The efficient use of energy generated by the Rifle
creates superior velocities. In test firings of the 30 caliber Rifle
prototype conducted by Casull, superior velocities of 3,450 feet per second
were obtained using a 200 grain bullet.
BARREL LIFE. In addition to superior velocities, it is believed that the
Casull system increases barrel life. In conventional rifles, barrel wear
occurs because much of the powder is burned in the barrel, resulting in high
temperatures generated from the burning gun powder. The Rifle has been
designed to minimize the amount of powder burned in the barrel, increasing
the useful life of the barrel.
SAFETY CONSIDERATIONS. Conventional cartridges are designed to protrude
from the chamber allowing the extractor to attach to the cartridge rim. The
area where the cartridge extends beyond the chamber is vulnerable to
cracking, which can result in blow-backs. The Rifle, however, is designed so
that the cartridge is entirely inserted into the chamber. This design tends
to seal all gases in the chamber and thereby reduces the possibility of a
blow-back.
THE FLASH TUBE. It is believed that the Rifle can be further enhanced by
the use of a flash tube to achieve front ignition just behind the bullet. A
flash tube is a small cylindrical tube that fits in the interior of the case
and over the primer flash hole. As the primer detonates, the powder column
is ignited from just behind the bullet, and the powder column burns from the
bullet backwards. The advantage to this is that no powder burns in the
barrel, which eliminates the added weight of unburned and burning powder
being pushed down the barrel along with the bullet. The result is higher
velocities because less mass is being propelled.
The use of a flash tube also appears to improve the efficiency of the
Rifle. Without a flash tube, the powder at the bottom of the case (or by the
flash tube hole above the primer) is ignited first. Because the powder
column is narrow and the burning powder causes increased pressure, a slow
25
<PAGE>
burning powder should be used. Consequently, this powder is pushed down the
barrel, weighing on the bullet and negatively affecting its velocity. The
use of a flash tube, then, enhances the ability of the Rifle to use energy
efficiently.
RELOADING SIMPLICITY. The Rifle allows for simplicity and precision in
reloading. Casull has designed the Casull Cartridge System and flash tube
with manufacturing and reloading in mind. The case will be made of brass
with a stainless steel head. The stainless steel head not only provides
great strength around the primer pocket but is also conducive to increased
case life. Cases and ammunition will be manufactured for a flash tube and
will also be configured without the flash tube. Those cases designed to be
used with a flash tube will have a deep primer pocket. The flash tube will
be inserted through the primer pocket and held in place by the primer.
HAMMER FORGED BARRELS
In addition to manufacturing firearms, the Company intends to manufacture
hammer forged barrels to be sold as replacement barrels in used rifles. The
Company will acquire a precision hammer forging machine designed specifically to
produce hammer forged firearm barrels. In the opinion of some firearms experts,
hammer forging creates one of the highest quality rifle barrels available today.
Many of the high quality rifles available on the market today come with hammer
forged barrels.
It is management's belief that there is no current source for consumers to
acquire hammer forged barrels to be used in replacing the barrels on used
rifles. The Company will manufacture and sell hammer forged barrels to satisfy
this market. In addition to supplying hammer forged barrels to consumers, the
Company will use these barrels in producing revolvers and the Rifle.
The barrels produced by the Company will be marketed under the "Casull"
name, which is well-known as a result of Casull's affiliation with other noted
barrel makers. The Casull barrels will be for all types of calibers from 22 up
to 45. In addition, the barrels could be chambered at the plant for a specific
cartridge. Thus, for example, a barrel can be made to shoot a 22 caliber bullet
yet it can be chambered for one of several cartridges such as a 222
Remington-TM-, 223 Remington-TM-, 22 PPC-TM-, 225 Winchester-TM-, 22-250
Remington-TM- and various other cartridges. The Company will have the capability
of supplying barrels for most of the common calibers and chambers for most
cartridges.
PRODUCT DEVELOPMENT
The Company intends to introduce other products. Casull has also designed
reloading equipment, dies, presses and shell holders for certain cartridges.
Moreover, the Company will seek to manufacture or license a clothing-line under
the Casull name. These and other paraphernalia may be manufactured by or for the
Company with the intent to increase the awareness of the Casull brand in the
marketplace. The License Agreement provides that Casull will bear the costs
associated with developing prototypes. Once a prototype has been created, the
Company will incur research and development costs to develop manufacturing
procedures and methods for each product.
MANUFACTURING
The primary raw material which will be used in the manufacturing of the
Company's products is stainless steel. Aluminum, other steels and wood will be
used in the process. The stainless steel and the other metal products will be
available from various steel mills and steel distributors throughout the
country. Wood and other materials used in handgun grips and rifle stocks are
also available from various mills and distributors. The Company will purchase
raw materials from the suppliers that offer both favorable pricing and quality
materials.
The raw materials will then be developed with state of the art equipment.
The majority of the production equipment will be computer-operated and capable
of performing many functions at high
26
<PAGE>
speeds. The machinery to be acquired by the Company will have the ability to
manufacture 10,000 to 12,000 units per year. Although computer-controlled, the
equipment will still require constant monitoring by machinists for tool wear and
quality.
Prior to final finishing, firearms will be assembled and test-fired in order
to insure that the firearms function properly and operate safely. Much of the
final assembly and finishing of the firearms will be performed by craftsmen who
will insure that the firearm functions properly and that the aesthetics are of
fine quality.
MARKETING STRATEGY
The Company's management has identified several potential candidates for the
position of Vice President of Marketing. This individual will be responsible for
product packaging, advertising, customer relations and customer service. In
addition to the Vice President of Marketing, the Company expects to engage
manufacturers' representatives to sell the products. The Company is negotiating
with Star Valley Marketing, Inc. to provide for the marketing of the Company's
products in North America. Star Valley Marketing, Inc. is associated with 51
independent manufacturers' representatives who presently represent companies
such as Beretta-TM- and Swarovski Optics-TM-. These representatives deal
directly with over 2,500 licensed firearms dealers nationwide.
DOMESTIC DISTRIBUTION. Manufacturers' representatives will be instrumental
in the promotion of the Company's products. They will introduce the new products
to the dealer and will serve as liaison between the dealers and the Company. As
representatives of the product, they will also play a very important part in
trade shows such as the Shot Show, the Safari Club Show and the Nuremberg Gun
Show. Manufacturers' representatives will provide a medium for the efficient
dissemination of information and the introduction of new products, such as the
Rifle, to the market.
INTERNATIONAL DISTRIBUTION. In addition to addressing the demands of the
U.S. market, the Company will seek to export products to foreign markets. Prior
to exporting any product, the Company must obtain an exportation license from
the Bureau of Alcohol Tobacco and Firearms, and must get approval from the State
Department. The Company will apply for these licenses and approvals during the
period that the manufacturing facility is being built. This will permit the
exporting of products and the development of foreign markets during the early
stages of production.
The Company expects that its products will be marketable for use in the
following markets:
RECREATIONAL SHOOTING. Recreational shooting, which includes target
shooting, silhouette shooting, action shooting and plinking is on the increase
in the U.S. Action shooting such as "cowboy shooting" has become popular. Cowboy
shooting requires the use of a single action revolver and a lever action rifle
over a predetermined course. The Company believes that the large and small frame
revolvers are ideal for these types of shooting activities.
HUNTING. The Company expects that the revolvers and the Rifle will be
popular hunting firearms. A handgun chambered in a 454 cartridge has taken
"Africa's big five." The Company believes that the combination of high velocity,
flat trajectory, increased accuracy, and impact energy contributes to an
outstanding hunting firearm. Both the Rifle and the revolvers are believed to
possess these qualities.
COMPETITIVE SHOOTING. The Company anticipates that the Rifle and the
revolvers will be favorably received by silhouette shooters. In the
International Handgun Metallic Silhouette Association's 1995 World Championship,
a majority of the shooters used guns designed by Casull. In the Centerfire
Revolver International Class, 43 of the top 47 shooters used a firearm designed
by Casull and manufactured by Freedom Arms, Inc. In the Rimfire Revolver
International Class, 17 of the top 20 shooters used a firearm designed by Casull
and manufactured by Freedom Arms, Inc. The Company plans on selling some, but
not all, of the firearms used by the top shooters in those competitions.
27
<PAGE>
Management believes the Rifle will improve competitive shooting, especially
in the long distance accuracy shooting arena which includes events such as the
Camp Perry competition. Long distance events are those which involve shooting
distances of 1,000 yards or more. It is expected that the Rifle will be in high
demand in these events because of the "flat" trajectory and high velocity. These
factors improve accuracy by decreasing the effect of wind and gravity on the
bullet over a specified distance.
COLLECTORS. In order to attract the gun collectors market, the Company
plans to open a custom shop. The custom shop will provide customers with the
ability to customize the Company's products with such items as exotic grips,
woods and engraving. Additionally, the custom shop will produce limited edition
runs of each new product introduced and commemorative special editions.
MILITARY & POLICE. The Company believes that the velocity, trajectory, and
terminal energy of a bullet fired from the Rifle will make it useful in military
and/or police service.
INTELLECTUAL PROPERTY
The Company has entered into a License Agreement with Casull for rights to
his present and future patents and other intellectual property, with the
exception of (i) the U.S. Pat. No. 5,048,216, generally referred to as the
"barrel forcing cone bushing", (ii) the "454 Casull" trademark, registered in
connection with ammunition, which the Company has exclusively licensed to
Freedom Arms, Inc. through February 1, 1998 and which the Company has licensed
to Freedom Arms, Inc. on a non-exclusive basis thereafter and (iii) a black
powder mini-revolver manufactured by North American Arms.
The Company will rely upon a combination of contractual arrangements,
patent, copyright and trademark laws to protect its proprietary rights and the
proprietary rights of third parties from whom the Company licenses intellectual
property. There can be no assurance that the steps taken by the Company in this
regard will be adequate to deter misappropriation of proprietary information or
that the Company will be able to detect unauthorized use and take appropriate
steps to enforce its intellectual property rights. All intellectual property
developed by Casull will be assigned to the Company.
COMPETITION
The markets in which the Company will operate are highly competitive. The
Company believes that competition in the firearms industry is based primarily on
quality, product innovation, product image, price, customer service and support.
The Company's competitors will vary according to product line. Certain of
these competitors are subsidiaries of large corporations with substantially
greater financial resources than the Company.
The Company believes that it is not prevented from selling a gun which
contains a 454 cartridge; however, the Companys' ability to market such firearms
may be hindered by its inability to use the "454 Casull" trademark until the
expiration on February 1, 1998 of the exclusivity of the license granted by
Casull to Freedom Arms, Inc.
The Company will manufacture the Rifle (chambered for the Casull cartridge)
and rifles chambered for conventional cartridges. Management believes that the
technology of the Rifle will place it in the high end of the market. The rifles
chambered for conventional cartridges will compete with rifles produced by large
manufacturers, such as Weatherby and Remington, smaller manufacturers such as
Dakota Arms, Lazzeroni Arms Company and custom gunsmiths.
The Company's large frame revolver will compete directly with Freedom Arms'
single action revolver. The primary difference between the Company's revolver
and Freedom Arms' revolver is the action. Casull has designed a new action that
prevents the firing pin from resting on the cartridge when the hammer is down.
The new action may prevent accidental discharge of the gun, if dropped or if the
hammer is mistakenly hit. Such accidental discharges have occurred in other
revolvers that do not have this feature.
28
<PAGE>
The Company's revolvers are expected to have distinctive cosmetic features such
as the grips, barrel design and other such variations.
GOVERNMENT REGULATION
The Company will be subject to extensive federal, state, local and foreign
firearms regulations. Among the Federal firearms laws to which the Company will
be subject are THE GUN CONTROL ACT OF 1968 (the "GCA"), THE NATIONAL FIREARMS
ACT (the "NFA"), THE ARMS EXPORT CONTROL ACT (the "AECA") and THE FEDERAL
FIREARMS ACT (the "FAA"). The Company plans to be in compliance with all
regulatory and licensing requirements of the GCA, NFA and FAA. The Company
currently does not export any firearms, and consequently is not subject to the
requirements of AECA. However, it is the Company's intention to obtain all
licenses necessary to export firearms.
The purchase of firearms is subject to federal, state, and local
governmental regulations. The applicable federal laws are the NFA and the FFA.
These laws generally prohibit the private ownership of fully automatic weapons
and place certain restrictions on the interstate sale of firearms unless certain
licenses are obtained. Currently, the Company does not intend to manufacture
fully automatic weapons, and is in the process of obtaining all necessary
licenses under these federal laws. From time to time, congressional committees
review proposed bills relating to the regulation of firearms. These proposed
bills generally seek either to restrict or to ban the sale, and in some cases
the ownership, of various types of firearms, or to impose a mandatory waiting
period prior to their purchase. Several states and many local municipalities
currently have laws in effect similar to the aforementioned legislation or other
laws which have the effect of discouraging the sale or ownership of firearms.
The Brady Law, mandating a nationwide 5-day waiting period prior to the
purchase of a handgun, was signed into law in November 1993, and became
effective February 28, 1994. The Company believes that, because its customers
are expected to be sportsmen, hunters, gun collectors, and law enforcement
agencies, and since approximately 26 states already have enacted some form of a
waiting period prior to purchase, the Brady Law will not have a significant
effect on the Company's sales of firearms. The "Crime Bill" took effect on
September 13, 1994, but the Company believes that none of its products appear to
qualify as "assault weapons" under the "Crime Bill." However, there can be no
assurance that the regulation of firearms will not become more restrictive in
the future and that any such restrictions would not have a material effect on
the business of the Company.
INSURANCE
The Company currently does not maintain liability insurance coverage. Prior
to producing any firearms, the Company will attempt to obtain product liability
insurance coverage. There can be no assurance that the Company will be able to
obtain adequate liability insurance coverage.
LEGAL PROCEEDINGS
The Company is currently not a party to any legal proceedings.
EMPLOYEES
As of the date of this Prospectus, the Company has no employees. However,
the Company anticipates that its operations over the next twelve months will
require approximately 8 employees, the majority of which will be members of the
management team.
PROPERTIES
Immediately upon the closing of this Offering, the Company intends to
purchase from International Financial Group of Wyoming, Inc. ("IFG"), an entity
controlled by Allan R. Tessler, land upon which the manufacturing facility will
be built. The land, located in Afton, Wyoming, consists of 10 acres and will be
purchased by the Company from IFG for $120,000. This amount approximates (i) the
price IFG paid for the land, (ii) IFG's transaction costs incurred for the
purchase and sale of the land and (iii) interest at the rate of 6% on the
purchase price of the land during the term of IFG's ownership of the land.
29
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
The executive officers, directors and other significant employees of the
Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Allan R. Tessler..................................... 60 Chairman of the Board
Richard J. Casull.................................... 64 Chief Executive Officer, Chief Operating Officer and
Director
David M. Myers....................................... 43 President and Director
David R. Markin...................................... 65 Director
Andrea L. Tessler.................................... 33 Director
Marshall Kiev........................................ 28 Director
</TABLE>
Directors hold office until the next annual meeting of stockholders and
until their respective successors have been elected and qualified. Executive
officers are chosen by and serve at the discretion of the Board of Directors.
Both Mr. Casull and Mr. Myers, the executive offices of the Company, intend to
devote their full time efforts to the Company.
ALLAN R. TESSLER, has served as Chairman of the Board of the Company since
its inception. Mr. Tessler also serves as Co-Chief Executive Officer and
Co-Chairman of the Board of Data Broadcasting Corporation ("DBC"), a distributor
of stock market and relevant information to individual investors, since June
1992 and has served as Chairman of the Board and CEO of International Financial
Group, Inc., an international merchant banking firm since 1987. He was Chairman
of the Board of Great Dane Holdings, Inc. ("Great Dane"), a diversified holding
company until December 1996, Enhance Financial Services Group Inc. ("Enhance), a
municipal bond reinsurer, and Jackpot Enterprises, Inc. ("Jackpot"), a gaming
machine route operator. From December 1991 through September 1993 Mr. Tessler
was Chairman of the Board and CEO of Ameriscribe Corporation, a national
provider of facilities management services. Mr. Tessler also serves on the
boards of The Limited, Inc., Allis-Chalmers Corporation and New T&T DBC Limited,
a joint-venture between DBC and New T&T Hong Kong Limited, a wholly-owned
subsidiary of Wharf Communications Investments, Ltd. Mr. Tessler was appointed
to serve on the restructuring team formed to address the financial problems of
Financial News Network Inc. ("FNN"), and in that capacity served as Co-Chief
Executive Officer of FNN from October 1990 until June 1992. On June 26, 1992,
the effective date of FNN's plan or reorganization under Federal bankruptcy
laws, DBC was spun off from FNN. Mr. Tessler currently serves as a director of
the FNN Estate, having been named to the board in June 1991. From October 1990
until September 1992, Mr. Tessler also served as a Co-Chief Executive Officer of
Infotechnology, Inc., an integrated information technology and communications
concern. Allan R. Tessler is the father of Andrea L. Tessler.
RICHARD J. CASULL has served as Chief Executive Officer, Chief Operating
Officer and a Director of the Company since its inception. Mr. Casull has over
forty years of experience in the firearms industry, and for the last five years
has been a self-employed firearms designer and consultant. He began his career
working with firearms experts such as P.O. Ackley, Bill Mayne and Jack Fulmer.
He has successfully introduced various handguns and rifles to companies such as
Freedom Arms, North American Arms, Rocky Mountain Arms and Western State Arms.
DAVID M. MYERS has served as President and a Director of the Company since
its inception. He is a Certified Public Accountant currently licensed to
practice in Wyoming, and from 1991 to the present, Mr. Myers has been a private
practicing accountant specializing in consulting and tax. From 1990 to 1991, he
was employed by Coopers & Lybrand as a Senior Tax Manager. Prior thereto, Mr.
Myers was a Senior
30
<PAGE>
Manager at KPMG Peat Marwick from 1978 to 1990. Mr. Myers has also served as an
accounting instructor at the University of Utah. Mr. Myers received his Master
of Professional Accountancy degree and his B.S. degree from the University of
Utah.
DAVID R. MARKIN has served as a Director of the Company since its inception.
Mr. Markin was the President and Chairman of the Board of Checker Motors
Corporation, a manufacturer, insurer, and operator of transportation equipment,
from 1970 until December 1996 and President of Great Dane from 1989 until
December 1996. Mr. Markin served as a director of FNN from July 1991 until June
1992, and as a director of Infotech from July 1991 until September 1992. Mr.
Markin also serves as a director of Jackpot, DBC and Enhance.
ANDREA L. TESSLER has served as a Director of the Company since its
inception. Ms. Tessler is a Managing Director of FH Capital Advisors, Inc., a
private merchant banking concern, and Senior Vice President of Family Management
Corporation, a registered investment advisory firm, located in New York City,
which provides financial counsel to high net worth individuals and families.
Since September of 1989, Ms. Tessler has been affiliated with Nathan & Lewis
Securities, Inc. (a "broker-dealer") as a registered representative. Prior to
her co-founding of Family Management, she was an independent financial services
representative licensed with Integrated Resources Equity Corporation (a
"broker-dealer") from 1987 to 1989. From 1985 to 1986 she was employed by E.F.
Hutton Corp. as a financial planner. Ms. Tessler received her B.A. degree in
Economics from Cornell University. Andrea L. Tessler is the daughter of Allan R.
Tessler.
MARSHALL KIEV has served as a Director of the Company since its inception.
Mr. Kiev is a Managing Director of FH Capital Advisors, Inc., a private merchant
banking concern and Vice President of Family Management Corporation, a
registered investment advisory firm, located in New York City, which provides
financial counsel to high net worth individuals and families. Since September of
1989, Mr. Kiev has been affiliated with Nathan & Lewis Securities, Inc. (a
"broker-dealer") as a registered representative. Mr. Kiev is a Director of The
Social Psychiatry Research Institute, serves on the Board of Trustees of the I.
Edward Kiev Library Foundation and serves on the Board of the National Council
for Arts and Science at George Washington University. He received his M.B.A.
degree in Finance and his B.A. degree in Sociology from New York University.
DIRECTOR COMPENSATION
Non-employee directors will receive a fee of $2,500 for each meeting of the
Board attended and $250 for each meeting of any committee of the Board attended,
and reimbursement of their actual expenses. The Company's cash compensation of
non-employee directors will not exceed $10,000 in any fiscal year, in addition
to reimbursement of their actual expenses. In addition, pursuant to the Stock
Option Plan, each non-employee director will receive an annual grant of options
to purchase 10,000 shares of Common Stock on the last trading day in January at
the average of the closing bid and ask price of the Common Stock as reported on
NASDAQ SCM. This grant of options will begin in February 1997.
EXECUTIVE COMPENSATION
The Company has not paid any compensation during 1996. The Company expects
that Mr. Myers, the Company's President, will be paid an annual salary of at
least $100,000 during 1997. The Company expects that Casull, the Company's Chief
Executive Officer, will be paid an annual salary of at least $100,000 during
1997. Casull will also receive royalties from the Company in accordance with the
License Agreement, dated October 14, 1996, entered into between Casull and the
Company. Casull will be paid 5% of the Company's revenues from products
utilizing the Intellectual Property or bearing the "Casull" name, provided that
Casull be paid a minimum annual royalty of $40,000 and a maximum annual royalty
of $400,000. In the event that Casull's employment with the Company terminates,
the minimum and
31
<PAGE>
maximum annual royalty will increase from $40,000 to $120,000 and from $400,000
to $500,000, respectively. See "Business--License Agreement with Richard J.
Casull."
MANAGEMENT AGREEMENT
FH Capital Advisors, Inc. (the "Advisor") and the Company entered into a
management agreement which term begins upon the closing of this Offering and
expires 30 days after either party gives written notice of termination to the
other. The agreement provides that the Advisor will provide to the Company such
reasonable advice, service, consultation and assistance as the Company will seek
from Advisor with respect to the Company's business affairs and will perform
such other services related to the business affairs of the Company as the Board
of Directors shall reasonably request. The services to be performed by the
Advisor will be performed by certain officers of the Advisor or such other
person designated by the Advisor and approved by the Board of Directors. The
agreement provides for a management fee of $5,000 per month. The Advisor will
bear the expense for rent, telephone, utilities, office furniture, equipment and
machinery and other office expenses of Advisor relating to the performance by
Advisor of its duties hereunder. The Company will be responsible for all other
expenses incurred by Advisor relating to the performance by Advisor of its
duties. See "Certain Transactions."
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's by-laws require the Company to indemnify its officers and
directors to the fullest extent allowed by law. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of the Company, the Company has been advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Company of expenses incurred or paid by a director, officer
or controlling person of the Company in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Company will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
STOCK OPTION PLAN
A total of 300,000 shares of Common Stock are reserved for issuance under
the Stock Option Plan (the "Plan"), and none of such options will be granted
prior to the closing of the Offering. The Plan provides for the award of
options, which may either be incentive stock options ("ISOs") within the meaning
of Section 422A of the Internal Revenue Code of 1986, as amended (the "Code") or
non-qualified options ("NQOs") which are not subject to special tax treatment
under the Code. The Plan is administered by the Board or a committee appointed
by the Board (the "Administrator"). Officers, directors, employees of, and
consultants to, the Company or any parent or subsidiary corporation selected by
the Administrator are eligible to receive options under the Plan. Subject to
certain restrictions, the Administrator is authorized to designate the number of
shares to be covered by each award, the terms of the award, the dates on which
and the rates at which options or other awards may be exercised, the method of
payment and other terms.
The exercise price for ISOs cannot be less than the fair market value of the
stock subject to the option on the grant date (110% of such fair market value in
the case of ISOs granted to a stockholder who owns more than 10% of the
Company's Common Stock). The exercise price of a NQO shall be fixed by the
Administrator at whatever price the Administrator may determine in good faith.
Unless the Administrator determines otherwise, options generally have a 10-year
term (or five years in the case of ISOs granted to a participant owning more
than 10% of the total voting power of the Company's capital stock). Unless the
Administrator provides otherwise, options terminate upon the termination of a
participant's employment,
32
<PAGE>
except that the participant may exercise an option to the extent it was
exercisable on the date of termination for a period of time after termination.
Generally, awards must be exercised by cash payment to the Company of the
exercise price. However, the Administrator may allow a participant to pay all or
a portion of the exercise price by means of a promissory note, stock or other
lawful consideration. The Plan also allows the Administrator to provide for
withholding and employment taxes payable by a participant to the Company upon
exercise of the award. Additionally, the Company may make cash grants or loans
to participants relating to the participant's withholding and employment tax
obligations and the income tax liability incurred by a participant upon exercise
of an award.
In the event of any change in the outstanding shares of Common Stock by
reason of any reclassification, recapitalization, merger, consolidation,
reorganization, spin-off, split-up, issuance of warrants, or rights or
debentures, stock dividend, stock split or reverse stock split, cash dividend,
property dividend or similar change in the corporate structure, the aggregate
number of shares of Common Stock underlying any outstanding options may be
equitably adjusted by the Administrator in its sole discretion.
The Administrator may, at any time, modify, amend or terminate the Plan as
is necessary to maintain compliance with applicable statutes, rules or
regulations; provided, however, that the Administrator may condition the
effectiveness of any such amendment on the receipt of stockholder approval as
may be required by applicable statute, rule or regulation. In addition, the Plan
may be terminated by the Board of Directors as it shall determine in its sole
discretion, in the absence of stockholder approval; provided, however, that any
such termination will not adversely alter or impair any option awarded under the
Plan prior to such termination without the consent of the holder thereof.
33
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth as of April 1, 1997, and as adjusted to
reflect the sale of shares offered hereby, certain information regarding the
ownership of shares of Common Stock by: (i) each person known to the Company to
be a beneficial owner of more than 5% of the outstanding shares of Common Stock;
(ii) each director, and (iii) all directors and executive officers as a group.
<TABLE>
<CAPTION>
PERCENTAGE TO PERCENTAGE TO
NUMBER OF PERCENT BE OWNED BE OWNED
SHARES OWNED AFTER AFTER
DIRECTORS, NAMED PERSONS, BENEFICIALLY BEFORE MINIMUM MAXIMUM
AND 5% STOCKHOLDERS(1) OWNED(2) OFFERING(3) OFFERING (4) OFFERING(5)
- ---------------------------- ----------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Allan R. Tessler(6)........................................ 383,333 22.5% 18.2% 12.3%
Richard J. Casull.......................................... 71,875 4.2% 3.4% 2.3%
David M. Myers............................................. 71,875 4.2% 3.4% 2.3%
David R. Markin............................................ 383,333 22.5% 18.2% 12.3%
Andrea L. Tessler.......................................... 82,334 4.8% 3.9% 2.6%
Marshall Kiev.............................................. 49,000 2.9% 2.3% 1.6%
All executive officers and directors as a group............ 1,041,750 61% 49.4% 33.5%
</TABLE>
- ------------------------
(1) All addresses are c/o Casull Arms Corporation, 3490 Clubhouse Drive, P.O.
Box 7443, Jackson, Wyoming 83001.
(2) Beneficial Ownership has been determined in accordance with Rule 13d-3 under
the Exchange Act and unless otherwise indicated, represents shares for which
the beneficial owner has sole voting and investment power. The percentage of
class is calculated in accordance with Rule 13d-3.
(3) Based upon a total number of shares of Common Stock outstanding of
1,707,083. Includes 1,133,333 shares of Redeemable Common Stock which shares
are subject to redemption for at least 90% of the amount paid therefor by
the holders of such shares if the Company does not raise at least $5 million
of additional equity capital on or before May 31, 1997.
(4) Based upon a total number of shares of Common Stock outstanding of
2,107,093. Includes 1,133,333 shares of Redeemable Common Stock which shares
are subject to redemption for at least 90% of the amount paid therefor by
the holders of such shares if the Company does not raise at least $5 million
of additional equity capital on or before May 31, 1997.
(5) Based upon a total number of shares of Common Stock outstanding of
3,107,083.
(6) Includes 50,000 shares of Common Stock owned by International Financial
Group of Wyoming, Inc. which is controlled by Allan R. Tessler.
CERTAIN TRANSACTIONS
Since the Company's inception there have not been any material transactions
between it and any of its affiliates, except as set forth herein.
In August 1996, the Company sold 573,750 shares of Common Stock to the
Company's founders for $0.10 per share. Of such shares, 71,875 shares were
purchased by Casull, 71,875 shares were purchased by David M. Myers, 50,000
shares were purchased by International Financial Group of Wyoming, Inc. which is
controlled by Allan R. Tessler, 50,000 shares were purchased by David R. Markin,
49,000 shares were purchased by Marshall Kiev and 82,334 shares were purchased
by Andrea L. Tessler.
In October 1996, the Company completed the Private Placement pursuant to
which it sold 34 units for $100,000 per unit to qualified investors. Each unit
consisted of 33,333 shares of Common Stock. Allan R. Tessler and David R.
Markin, directors of the Company, each purchased 10 units in the Private
Placement. Mr. Tessler paid for the units with common stock of a publicly traded
company which had a market value in
34
<PAGE>
excess of $1,000,000. The Company's ability to liquidate the shares is
contingent on the closing of this Offering. Mr. Tessler has agreed to pay the
amount by which the market value of such shares is below $1,000,000 at the time
the Company sells such shares.
On October 14, 1996, the Company entered into the License Agreement with
Casull, the Company's Chief Executive Officer, whereby Casull granted to the
Company the exclusive worldwide right to utilize any of the present or future
intellectual property developed by Casull not already licensed under a prior
agreement. The agreement provides that the Company will pay Casull a salary of
$100,000 per year and 5% of the Company's revenues from products utilizing the
intellectual property or bearing the "Casull" name; provided that Casull will be
paid a minimum annual royalty of $40,000 and a maximum annual royalty of
$400,000 per calendar year. This fee will be payable to Casull for the remainder
of his life. The royalty payments due hereunder will cease upon the death of
Casull, however, if Casull's wife, Mrs. Geraldine Casull, survives Casull, the
royalty payments will continue until the earlier of ten years from the date the
first royalty payment is made to Casull pursuant to the agreement or the death
of Mrs. Casull. In the event that Casull's employment with the Company is
terminated, the minimum annual royalty and the maximum annual royalty will
increase from $40,000 to $120,000 and from $400,000 to $500,000, respectively.
The Company has entered into a management agreement with FH Capital
Advisors, Inc. The management agreement provides that Marshall Kiev and Andrea
Tessler, directors of the Company, will provide advice, service, consultation
and assistance to the Company on behalf of FH Capital Advisors, Inc. The
agreement provides for a management fee of $5,000 per month. The Company will
also be responsible for certain expenses incurred by FH Capital Advisors
relating to the performance of its duties.
Immediately upon the closing of this Offering, the Company intends to
purchase from International Financial Group of Wyoming, Inc., an entity
controlled by Mr. Allan Tessler, the land upon which the manufacturing facility
will be built. The land located in Afton, Wyoming consists of 10 acres and will
be
purchased by the Company from IFG for $120,000. This amount approximates (i) the
price IFG paid for the land, (ii) IFG's transaction costs incurred for the
purchase and sale of the land and (iii) interest at the rate of 6% on the
purchase price of the land during the term of IFG's ownership of the land.
All future transactions, including loans, between the Company and its
officers, directors, principal stockholders and affiliates will be approved by a
majority of the Board of Directors, including a majority of the independent and
disinterested outside directors on the Board of Directors, and will be on terms
no less favorable to the Company than could be obtained from unaffiliated third
parties.
35
<PAGE>
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 10,000,000 shares of
Common Stock and 1,000,000 shares of Preferred Stock.
COMMON STOCK
The Company's authorized common stock consists of 10,000,000 shares of
Common Stock. As of November 25, 1996, there were issued and outstanding
1,707,083 shares of Common Stock. The 1,133,333 shares of Redeemable Common
Stock sold in the Private Placement are subject to redemption for at least 90%
of the amount paid therefor by the holders of such shares if the Company does
not raise at least $5 million of additional equity capital on or before May 31,
1997. The holders of outstanding shares of Common Stock are entitled to receive
dividends out of assets available therefor at such time and in such amounts as
the Board may, from time to time, determine. Each stockholder is entitled to one
vote for each share of Common Stock held of record, on all matters submitted to
a vote of stockholders. As is permitted by Delaware law, there will not be
cumulative voting in connection with the election of directors. Holders of
Common Stock have no preemptive rights or rights to convert their Common Stock
into any other securities under the Company's charter documents. There are no
sinking fund provisions applicable to the Common Stock. Upon liquidation,
dissolution or winding up of the Company, the assets legally available for
distribution to stockholders are distributable ratably among the holders of the
Common Stock outstanding at that time. All outstanding shares of Common Stock
are, and the Common Stock to be outstanding upon completion of this Offering
will be, fully paid and nonassessable.
PREFERRED STOCK
The Company is authorized to issue up to 1,000,000 shares of undesignated
Preferred Stock. The Board of Directors has the authority to issue the
undesignated Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions granted to or imposed upon any wholly
unissued shares of undesignated Preferred Stock, as well as to fix the number of
shares constituting any series and the designation of such series, without any
further vote or action by the stockholders. The Board of Directors, without
stockholder approval, may issue Preferred Stock with voting and conversion
rights which could materially adversely affect the voting power of the holders
of Common Stock. The issuance of Preferred Stock could also decrease the amount
of earnings and assets available for distribution to holders of Common Stock. In
addition, the issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of the Company. At present, the
Company has no plans to issue any shares of Preferred Stock. See "Risk
Factors--Possible Adverse Effects of Authorized Preferred Stock."
REDEEMABLE WARRANTS
The following is a brief summary of certain provisions of the Warrants, but
such summary does not purport to be complete and is qualified in all respects by
reference to the actual text of the Warrant Agreement between the Company and
Continental Stock Transfer & Trust Company (the "Warrant Agreement"). A copy of
the Warrant Agreement has been filed as an exhibit to the Registration Statement
of which this Prospectus is a part. See "Additional Information."
EXERCISE PRICE AND TERMS. Each Warrant entitles the registered holder
thereof to purchase, at any time over a period of four years commencing thirteen
months after the date of this Prospectus, one share of Common Stock at a price
of $6.00 per share, exercised subject to adjustment in accordance with the
anti-dilution and other provisions referred to below. The holder of any Warrant
may exercise such Warrant by surrendering the certificate representing the
Warrant to the Warrant Agent, with the subscription form thereon properly
completed and executed, together with payment of the exercise price. Commencing
one year after the date of this Prospectus, the Warrants may be exercised at any
time in whole or in part at the
36
<PAGE>
applicable exercise price until expiration of the Warrants. No fractional shares
will be issued upon expiration of the Warrants.
The exercise price of the Warrants bears no relationship to any objective
criteria of value and should in no event be regarded as an indication of any
future market price of the securities offered hereby.
ADJUSTMENTS. The exercise price and the number of shares of Common Stock
purchasable upon the exercise of the Warrants are subject to adjustment upon the
occurrence of certain events, including stock dividends, stock splits,
combination or reclassifications of the Common Stock, or sale by the Company of
shares of its Common Stock or other securities convertible into Common Stock at
a price below the then applicable exercise price of the Warrants. Additionally,
an adjustment would be made in the case of a reclassification or exchange of
Common Stock, consolidation or merger of the Company with or into another
corporation (other than a consolidation or merger in which the Company is the
surviving corporation), or sale of all or substantially all of the assets of the
Company in order to enable Warrantholders to acquire the kind and number of
shares of stock or other securities or property receivable in such event by a
holder of the number of shares of Common Stock that might have been purchased
upon the exercise of the Warrant.
REDEMPTION PROVISIONS. Commencing on the first day of the thirteenth
calendar month after the date of this Prospectus, the Warrants are subject to
redemption at $0.05 per Warrant on 30 day's prior written notice to the warrant
holders if the average closing bid price of the Common Stock equals or exceeds
$9.00 per share (150% of the initial public offering price per share of Common
Stock), for any twenty (20) trading days within a period of thirty (30)
consecutive trading days ending on the fifth trading day prior to the date of
the notice of redemption. In the event the Company exercises the right to redeem
the Warrants, such Warrants will be exercisable until the close of business on
the business day immediately preceding the date for redemption fixed in such
notice. If any Warrant called for redemption is not exercised by such time, it
will cease to be exercisable and the holder will be entitled only to the
redemption price. If the Company gives notice of its intention to redeem, a
holder would be forced to exercise his or her Warrant before the date specified
in the redemption notice or accept the redemption price.
TRANSFER, EXCHANGE AND EXERCISE. The Warrants are in registered form and,
if not earlier redeemed, may be presented to the Warrant Agent for transfer,
exchange or exercise at any time on or prior to their expiration at the close of
business on the fifth anniversary date of this Prospectus, at which time the
Warrants become wholly void and of no value. If a market for the Warrants
develops, the holder may sell the Warrants instead of exercising them. There can
be no assurance, however, that a market for the Warrants will develop or
continue.
WARRANTHOLDER NOT A STOCKHOLDER. The Warrants do not confer upon holders
any voting, dividend or other rights as stockholders of the Company.
MODIFICATION OF WARRANT. The Company and the Warrant Agent may make such
modifications to the Warrant as they deem necessary or desirable that do not
adversely affect the interests of the Warrant holders. The Company may, in its
sole discretion, lower the exercise price of the Warrants for a period of not
less than thirty (30) days on not less than thirty (30) days prior written
notice to the Warrant holders and the Representatives. No other modification may
be made to the Warrants without the consent of two-thirds of the Warrant
holders.
CURRENT PROSPECTUS. The Warrants are not exercisable unless, at the time of
the exercise, the Company has a current prospectus covering the shares of Common
Stock issuable upon exercise of the Warrants, and such shares have been
registered, qualified or deemed to be exempt under the securities or "blue sky"
laws of the state of residence of the exercising holder of the Warrants.
Although the Company will use its best efforts to have all the shares of Common
Stock issuable upon exercise of the Warrants
37
<PAGE>
registered or qualified on or before the exercise date and to maintain a current
prospectus relating thereto until the expiration of the Warrants, there can be
no assurance that it will be able to do so.
SEPARATELY TRADEABLE. The Warrants will be separately tradeable immediately
upon issuance. Although the Securities will not knowingly be sold to purchasers
in jurisdictions in which the Securities are not registered or otherwise
qualified for sale, purchasers may buy Warrants in the aftermarket or may move
to jurisdictions in which the shares underlying the Warrants are not so
registered or qualified during the period that the Warrants are exercisable. In
such event, the Company would be unable to issue shares to those persons
desiring to exercise their Warrants, and holders of Warrants would have no
choice but to attempt to sell the Warrants in a jurisdiction where such sale is
permissible or allow them to expire unexercised. The Company has also agreed to
sell to the Placement Agent, for nominal consideration, warrants to purchase
from the Company up to 140,000 shares of Common Stock and/or 140,000 Warrants.
See "Plan of Distribution."
TRANSFER AGENT AND REGISTRAR
The Company's Transfer Agent, Warrant Agent and Registrar is Continental
Stock Transfer & Trust Company, 2 Broadway, New York, New York 10004.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no public market for the Common Stock
or Warrants. No prediction can be made of the effect, if any, that future market
sales of shares of Common Stock or Warrants, or the availability of such shares
or Warrants for sale, will have on the prevailing market price of the Common
Stock or Warrants following this offering. Nevertheless, sales of substantial
amounts of such shares or Warrants in the open market following this offering
could adversely affect the prevailing market price of the Common Stock or
Warrants.
The Company will have issued and outstanding following the completion of the
Minimum Offering and the Maximum Offering, 2,107,083 and 3,107,083 shares of
Common Stock, respectively. The shares of Common Stock sold in this Offering
and, commencing on the first day of the thirteenth calendar month after the date
of this Prospectus, up to 1,400,000 shares of Common Stock issuable upon
exercise of the Warrants, subject to any applicable state law registrations and
secondary trading (see "Risk Factors Limits on Secondary Trading; Possible
Illiquidity of Trading Market"), will be freely tradeable without restriction
under the Securities Act, except that any shares purchased by an "affiliate" of
the Company (as that term is defined in Rule 144 under the Securities Act) will
be subject to the resale limitations of Rule 144.
The remaining 1,707,083 shares of Common Stock outstanding upon completion
of this Offering are "restricted securities" as that term is defined in Rule
144. As described below, Rule 144 permits resales of restricted securities
subject to certain restrictions. On the date of this Prospectus, 573,750 of such
1,707,083 shares will be eligible for sale under Rule 144 on August 7, 1997 and
the remaining 1,333,333 shares will be eligible for sale under Rule 144 on
October 21, 1997.
In general, under Rule 144, beginning April 29, 1997, a person (or persons
whose shares are aggregated), who has beneficially owned shares for at least one
year, including a person who may be deemed an Affiliate of the Company, may sell
within any three month period, a number of shares of Common Stock that does not
exceed the greater of (1) 1% of the then outstanding shares of Common Stock of
the Company (approximately 21,071 or 31,071 shares immediately after the Minimum
Offering or Maximum Offering, respectively) or (ii) the average weekly trading
volume in the Common Stock as reported through the Nasdaq during the four
calendar weeks preceding the sale. Sales under Rule 144 are also subject to
certain restrictions relating to manner of sale, notice and the availability of
current public information about the Company. In addition, under Rule 144(k), a
person who is not an Affiliate of the Company at any time (90) days preceding a
sale, and who has beneficially owned shares for at least two
38
<PAGE>
years, would be entitled to sell such shares immediately following this offering
without regard to the volume limitations, manner of sale provisions or notice or
other requirements of Rule 144.
Any employee, officer or director or consultant to the Company who purchased
his or her shares pursuant to a written compensatory plan or contract may be
entitled to rely on the resale provisions of Rule 701. Rule 701 permits
affiliates to sell their Rule 701 shares under Rule 144 without complying with
the holding period requirements of Rule 144. Rule 701 further provides that
non-affiliates may sell such shares in reliance on Rule 144 without having to
comply with the public information, volume limitation or notice provisions of
Rule 144. In both cases, a holder of Rule 701 shares is required to wait until
90 days after the date of this Prospectus before selling such shares.
Each of the Company's officers and directors and all of its existing
stockholders have agreed that for a period of 18 months from the date of this
Prospectus they will not sell any of the Company's securities without the prior
written consent of the Placement Agent.
39
<PAGE>
PLAN OF DISTRIBUTION
The Minimum Offering is being offered on a "best efforts" basis. The
proceeds from the sale of the Common Stock will be held in an escrow account for
the benefit of the subscribers by the Escrow Agent until the Minimum Offering
has been sold or earlier termination of the Offering. In the event that
subscriptions for the Minimum Offering are not received by the Termination Date,
the Offering will terminate and all funds will be returned promptly by the
Escrow Agent without any deductions therefrom or interest thereon. In any event,
this Offering will expire on the earlier to occur of (i) 60 days after the date
of this Prospectus and (ii) the sale of the Maximum Offering, unless the Company
and National agree to extend this Offering for an additional 30-day period.
The Placement Agent has advised the Company that they will propose to offer
the Securities to the public at the initial public offering price set forth on
the cover page of this Prospectus, and to selected dealers at such price less a
concession not in excess of $ per share and $ per Warrant. Such
dealers may reallow a concession not in excess of $ per share of Common
Stock and $ per Warrant to other dealers. After the initial public
offering of the Common Stock and Warrants, the public offering price, the
concessions to selected dealers and the reallowance to other dealers may be
changed by the Placement Agent.
Upon the exercise of any Warrants more than one year after the date of this
Prospectus, which exercise was solicited by the Placement Agent, and to the
extent not inconsistent with the guidelines of the National Association of
Securities Dealers, Inc. and the Rules and Regulations of the Commission, the
Company has agreed to pay the Placement Agent a commission which shall not
exceed 5% of the aggregate exercise price of such Warrants in connection with
bona fide services provided by the Placement Agent relating to any warrant
solicitation. In addition, the individual must designate in writing the firm
entitled to payment of such warrant solicitation fee. No compensation, however,
will be paid to the Placement Agent in connection with the exercise of the
Warrants if (a) the market price of the Common Stock is lower than the exercise
price, (b) the Warrants are held in a discretionary account, or (c) the Warrants
are exercised in an unsolicited transaction. Unless granted an exemption by the
Commission from Rule 10b-6 under the Exchange Act, the Placement Agent will be
prohibited from engaging in any market-making activities or solicited brokerage
activities with regard to the Company's securities for the period from nine
business days (or other such applicable periods as Rule 10b-6 may provide) prior
to any solicitation of the exercise of the Warrants until the later of the
termination of such solicitation activity (by waiver or otherwise) of any right
that the Placement Agent may have to receive a fee. As a result, the Placement
Agent may be unable to continue to provide a market for the Common Stock or
Warrants during certain periods while the Warrants are exercisable. If the
Placement Agent has engaged in any of the activities prohibited by Rule 10b-6
during the periods described above, the Placement Agent undertakes to waive
unconditionally its rights to receive a commission on the exercise of such
Warrants.
The Placement Agent may offer the shares through selected broker dealers and
may allow certain dealers who are members of the National Association of
Securities Dealers, Inc. ("NASD") concessions not in excess of $ per share of
Common Stock.
The Placement Agent has informed the Company that it does not expect sales
to discretionary accounts by the Placement Agent to exceed five percent of the
Securities offered hereby.
The Placement Agent Agreement provides for reciprocal indemnification
between the Company and its controlling persons on the one hand, and the
Underwriters and their respective controlling persons on the other hand, against
certain liabilities, including liabilities under the Securities Act, or to
contribute to payments the Underwriters may be required to make in respect
thereof.
The Company has agreed to pay the Placement Agent a non-accountable expense
allowance equal to three percent (3%) of the gross proceeds received by the
Company from the sale of the Securities.
40
<PAGE>
The Company and the holders of its Common Stock prior to this Offering have
entered into lock-up agreements. See "Shares Eligible For Future Sale."
In connection with this Offering the Company has agreed to sell to the
Placement Agent, for nominal consideration, warrants to purchase from the
Company up to 140,000 shares of Common Stock and/or 140,000 warrants (the
"Placement Agent's Warrants"). The Placement Agent's Warrants are initially
exercisable at a price of $ per share of Common Stock (120% of the initial
public offering price per share of Common Stock), and $ per warrant (120% of
the initial public offering price per Warrant) for a four-year period commencing
on the first anniversary of the issuance of such warrants. The warrants issuable
upon exercise of the Placement Agent's Warrants are the same as the Warrants
offered hereby, except that they are exercisable at a price of $ per
share of Common Stock (155% of the exercise price of the Warrants offered
hereby). The Placement Agent's Warrants may not be sold, transferred, assigned
or hypothecated for a period of one year following the date of this Prospectus,
except to officers or directors of the Placement Agent, or members of the
selling group. The Placement Agent's Warrants provide for adjustments in the
number of shares of Common Stock and Warrants issuable upon the exercise thereof
and in the exercise price of the Placement Agent's Warrants as a result of
certain events, including subdivisions and combinations of the Common Stock. The
Placement Agent's Warrants grant to the holders thereof certain rights of
registration for the securities issuable upon exercise of the Placement Agent's
Warrants.
The Company has agreed that the Placement Agent may designate one person to
attend all board of directors' meetings as an observer. Such person shall be
entitled to attend all such meetings and to receive all notices and other
correspondence and communications sent by the Company to members of its board of
directors. The Company shall reimburse such designee of the Placement Agent for
their out-of-pocket expenses incurred in connection with their attendance at the
Company's board of directors' meetings.
Certain persons participating in this Offering may engage in transactions,
including stabilizing bids, syndicate covering transactions or the imposition of
penalty bids, which may involve the purchase of Common Stock and/or Warrants.
Such transactions may stabilize or maintain the market price of the Common Stock
and/or Warrants at a level above that which might otherwise prevail in the open
market and, if commenced, may be discontinued at any time.
Prior to this Offering, there has been no public market for the Common Stock
or the Warrants. Accordingly, the initial public offering price was determined
by negotiations between the Company and the Placement Agent and does not
necessarily bear any relationship to the Company's asset values, net worth, and
other established criteria of value. Among the factors considered in determining
the initial public offering price were the history and the prospects of the
Company and the industry in which it will compete, the past and present
operating results of the Company and the trends of such results, the Company's
plan of operation, an assessment of the Company's management, the Company's
capital structure, and the general condition of the securities markets at the
time of the offering.
The Common Stock and the Warrants will trade on the OTC Electronic Bulletin
Board under the symbols CASU and CASUW, respectively.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to copies
of each such agreement, which are filed as exhibits to
the registration statement of which this Prospectus is a part. See "Additional
Information."
LEGAL MATTERS
Certain legal matters in connection with the Securities offered hereby will
be passed upon for the Company by Camhy Karlinsky & Stein LLP, New York, New
York. Alan I. Annex, a partner of such firm, is the Secretary of the Company. In
addition, two partners of Camhy Karlinsky & Stein LLP may be deemed to be the
beneficial owners of 30,000 shares of the Company's Common Stock. Certain legal
matters in
41
<PAGE>
connection with this offering will be passed upon for the Underwriters by
D'Ancona & Pflaum, 30 North LaSalle Street, Suite 2900, Chicago, Illinois 60602.
EXPERTS
The financial statements of the Company for the period July 23, 1996 (date
of incorporation) through February 28, 1997 included in this Prospectus have
been so included in reliance on the report (which contains an explanatory
paragraph relating to the Company's ability to continue as a going concern as
described in Notes 1 and 3 to such financial statements) of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
SB-2 (the "Registration Statement") under the Securities Act of 1933, as amended
with respect to the Common Stock and Warrants offered hereby. This Prospectus,
which constitutes a part of the Registration Statement, omits certain of the
information contained in the Registration Statement and the exhibits and
schedules thereto on file with the Commission pursuant to the Securities Act and
the rules and regulations of the Commission thereunder. For further information
with respect to the Company and the Common Stock and Warrants, reference is
hereby made to such Registration Statement, exhibits and schedules, which may be
obtained from the Commission upon payment of the fees prescribed by the
Commission by writing to the Securities and Exchange Commission, Public
Reference Section, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549. Statements contained herein concerning the provisions of documents filed
with, or incorporated in, the Registration Statement as exhibits are necessarily
summaries of such provisions and documents and each such statement is qualified
in its entirety by reference to the copy of the applicable document filed with
the Commission.
42
<PAGE>
CASULL ARMS CORPORATION
(A DEVELOPMENT STAGE ENTITY)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS.......................................................................... F-2
FINANCIAL STATEMENTS
Balance Sheet--February 28, 1997......................................................................... F-3
Statement of Operations for the period July 23, 1996 (date of incorporation) through February 28, 1997... F-4
Statement of Redeemable Common Stock and Stockholders' Deficit for the period July 23, 1996 (date of
incorporation) through February 28, 1997............................................................... F-5
Statement of Cash Flows for the period July 23, 1996 (date of incorporation) through February 28, 1997... F-6
NOTES TO FINANCIAL STATEMENTS.............................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Casull Arms Corporation
In our opinion, the accompanying balance sheet and the related statements of
operations, of redeemable common stock and stockholders' deficit and of cash
flows present fairly, in all material respects, the financial position of Casull
Arms Corporation (a development stage entity) at February 28, 1997, and the
results of its operations and its cash flows for the period July 23, 1996 (date
of incorporation) through February 28, 1997 in conformity with generally
accepted accounting principles. 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
of these statements in accordance with generally accepted auditing standards
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes 1 and 3 to the
financial statements, the Company's ability to commence operations is dependent
on obtaining adequate financial resources through a contemplated public offering
or other financing, which raises substantial doubt about its ability to continue
as a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Price Waterhouse LLP
New York, New York
April 11, 1997
F-2
<PAGE>
CASULL ARMS CORPORATION
(A DEVELOPMENT STAGE ENTITY)
BALANCE SHEET
<TABLE>
<CAPTION>
FEBRUARY 28,
1997
------------
<S> <C>
ASSETS
ASSETS:
Cash and cash equivalents....................................................................... $ 52,285
Accrued dividend receivable..................................................................... 8,000
------------
Total current assets.......................................................................... 60,285
Restricted cash..................................................................................... 2,160,000
Restricted investments.............................................................................. 1,242,500
Deferred registration costs......................................................................... 130,181
------------
Total assets.................................................................................. $ 3,592,966
------------
------------
LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS' DEFICIT
LIABILITIES:
Accrued expenses................................................................................ $ 66,822
------------
Total current liabilities..................................................................... 66,822
Payable to director................................................................................. 242,500
------------
REDEEMABLE COMMON STOCK, 1,133,333 shares of Common Stock designated with redemption feature issued
and outstanding................................................................................... 3,400,000
STOCKHOLDERS' DEFICIT:
Preferred stock, $0.01 par value, 1,000,000 shares authorized, no shares issued and
outstanding................................................................................... --
Common stock, $0.01 par value, 10,000,000 shares authorized, 573,750 (excluding 1,133,333 shares
of Redeemable Common Stock) shares issued and outstanding..................................... 5,738
Additional paid in capital...................................................................... 51,637
Deficit accumulated during the development stage................................................ (173,731)
------------
Stockholders' deficit........................................................................... (116,356)
Commitments and contingencies (Note 5).............................................................. --
------------
Total liabilities, redeemable common stock and stockholders' deficit.......................... $ 3,592,966
------------
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CASULL ARMS CORPORATION
(A DEVELOPMENT STAGE ENTITY)
STATEMENT OF OPERATIONS
FOR THE PERIOD JULY 23, 1996 (DATE OF INCORPORATION)
THROUGH FEBRUARY 28, 1997
<TABLE>
<S> <C>
Revenues........................................................................ $ --
Expenses:
General and administrative expenses......................................... 204,764
---------
Other income:
Interest and dividend income................................................ 31,033
---------
Net loss........................................................................ $(173,731)
---------
---------
Net loss per common share....................................................... $ (.11)
---------
---------
Weighted average number of common shares outstanding............................ 1,542,288
---------
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CASULL ARMS CORPORATION
(A DEVELOPMENT STAGE ENTITY)
STATEMENT OF REDEEMABLE COMMON STOCK AND STOCKHOLDERS' DEFICIT
FOR THE PERIOD JULY 23, 1996 (DATE OF INCORPORATION)
THROUGH FEBRUARY 28, 1997
<TABLE>
<CAPTION>
STOCKHOLDERS' DEFICIT
---------------------------------------------------------------
DEFICIT
REDEEMABLE ACCUMULATED
COMMON STOCK COMMON STOCK ADDITIONAL DURING THE
------------------------- --------------------- PAID-IN DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE TOTAL
----------- ------------ ---------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of stock on August 7,
1996 to Initial Stockholders
for cash.................... -- -- 573,750 $ 5,738 $ 51,637 -- $ 57,375
Issuance of stock in October,
1996 to Private Placement
Stockholders for stock...... 333,333 $ 1,000,000 -- -- -- -- --
Issuance of stock in October,
1996 to Private Placement
Stockholders for cash....... 800,000 2,400,000 -- -- -- -- --
Net loss for the period July
23, 1996 (date of
incorporation) through
February 28, 1997........... -- -- -- -- -- $ (173,731) (173,731)
----------- ------------ ---------- --------- ------------ ------------ ------------
Balance at February 28,
1997........................ 1,133,333 $ 3,400,000 573,750 $ 5,738 $ 51,637 $ (173,731) $ (116,356)
----------- ------------ ---------- --------- ------------ ------------ ------------
----------- ------------ ---------- --------- ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CASULL ARMS CORPORATION
(A DEVELOPMENT STAGE ENTITY)
STATEMENT OF CASH FLOWS
FOR THE PERIOD JULY 23, 1996 (DATE OF INCORPORATION)
THROUGH FEBRUARY 28, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss...................................................................... $ (173,731)
Adjustments to reconcile net loss to net cash used in operating activities:
Changes in assets and liabilities:
Deferred registration costs............................................... (130,181)
Accrued dividend receivable............................................... (8,000)
Accrued expenses.......................................................... 66,822
----------
Net cash used in operating activities....................................... (245,090)
----------
Cash flows from financing activities:
Proceeds from issuance of common stock........................................ 2,457,375
Restriction on proceeds received from issuance of common stock................ (2,160,000)
----------
Net cash provided by financing activities................................... 297,375
----------
Net increase in cash and cash equivalents at end of period.................. $ 52,285
----------
----------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES
During the period, Casull Arms Corporation issued Common Stock in exchange
for investment securities with an estimated fair market value of $1,242,500 at
February 28, 1997.
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
CASULL ARMS CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS
Casull Arms Corporation (the "Company") was incorporated in the State of
Delaware on July 23, 1996 for the purpose of manufacturing and selling unique,
high quality firearms. In August 1996, the Company issued an aggregate of
573,750 shares of Common Stock for an aggregate purchase price of $57,375 or
$0.10 per share. In October 1996, the Company issued an aggregate of 1,133,333
shares of Common Stock for an aggregate purchase price of $3,400,000 or $3.00
per share. Proceeds received from the October 1996 Common Stock issuance are
subject to certain restrictions (See Note 2). The Company is currently in the
development stage, and in the process of raising capital. All activity of the
Company to date relates to its formation and proposed financing.
The Company's ability to commence operations is contingent upon obtaining
adequate financial resources through a contemplated public offering (the
"Proposed Offering") or financing. Note 3 discusses the details of the Proposed
Offering.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS: The Company considers all highly liquid investments with
an original maturity of three months or less at the time of purchase to be cash
equivalents.
RESTRICTED CASH: Under the terms of the Company's October 1996 Common Stock
issuance, the Company has agreed that it will not use more than 10% of the
proceeds of such issuance to effect its business objectives until it raises an
additional $5 million of equity capital. Initially, the Company was required to
raise at least $5 million of additional equity capital on or before March 31,
1997, or the stockholders who purchased shares in October 1996 would have had
the right to sell their shares back to the Company for at least 90% of the
amounts paid. In March 1997, the Company received written waivers from these
stockholders extending the term to raise at least $5 million in additional
equity capital until May 31, 1997. The Company has reflected 90% of the proceeds
of the October 1996 Common Stock issuance as restricted cash.
RESTRICTED INVESTMENTS: Restricted investments represent marketable
securities (the "Securities") received in exchange for shares issued by the
Company in October 1996. Under the terms of its agreement with the stockholder,
the Company has agreed that it will not sell the Securities until the Company
raises an additional $5 million of equity capital. Initially, the Company was
required to raise at least $5 million of additional equity capital on or before
March 31, 1997, or the stockholder would have had the right to sell his shares
back to the Company for at least 90% of the amount subscribed. In March 1997,
the Company received a written waiver from the Stockholder extending the term to
raise at least $5 million in additional equity capital until May 31, 1997.
Restricted investments are carried at quoted market price (See Note 5).
NET LOSS PER COMMON SHARE: Net loss per common share is computed based upon
the weighted average number of shares outstanding for the period. Pursuant to
the requirements of the Securities and Exchange Commission, shares issued by the
Company within one year of the date of the initial public offering at prices
below the proposed offering price have been included in the calculation of
weighted average shares outstanding as if they were outstanding for all periods
using the treasury stock method.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported
F-7
<PAGE>
CASULL ARMS CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amounts of some assets and liabilities and, in some instances, the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying value of cash
equivalents, and accounts payable and accrued expenses approximates fair value
due to the relatively short maturity of these instruments.
3. PROPOSED PUBLIC OFFERING OF SECURITIES
The Proposed Public Offering of Securities (the "Proposed Offering") calls
for the Company to offer for public sale a minimum of 400,000 (the "Minimum
Offering") and a maximum of 1,400,000 (the "Maximum Offering") units (the
"Units"), each Unit consisting of one share of the Company's Common Stock, $0.01
par value, and one Redeemable Common Stock Purchase Warrant (the "Warrants"),
each Warrant entitling the holder to purchase from the Company one share of
Common Stock at an exercise price of 100% of the initial public offering price
commencing on the first day of the thirteenth calendar month after the date of
the Prospectus (the "Effective Date") and ending five years from the Effective
Date. Commencing one year after the Effective Date, the Warrants will be subject
to redemption by the Company upon 30 days notice, at a price of $0.05 per
Warrant, only in the event that the reported closing bid price of the Common
Stock is at least 150% of the initial public offering price per share of Common
Stock for any twenty trading days within a period of thirty consecutive trading
days ending on the fifth trading day prior to the notice of redemption.
In connection with the Proposed Offering, the Company intends to pay
additional compensation to the representatives (the "Representatives") of the
Placement Agent of the Proposed Offering, in the form of (i) a non-accountable
expense allowance of 3% of the gross proceeds of the Proposed Offering and (ii)
warrants to purchase up to 140,000 shares of Common stock and/or 140,000
warrants (the "Representative's Warrants"), at an exercise price of 120% of the
initial public offering price per share of Common Stock and per Warrant,
respectively. The Representative's Warrants will be exercisable for a period of
four years commencing on the first day of the thirteenth calendar month after
the Effective Date.
If the Proceeds of the Proposed Offering are less than $5 million or the
Proposed Offering does not close on or before May 31, 1997, the Company will
need to receive a waiver of the $5 million threshold and/or the May 31, 1997
deadline from the Redeemable Common Stockholders, or the Redeemable Common
Stockholders will have the right to sell their shares back to the Company for at
least 90% of the amounts paid.
As of February 28, 1997, the Company had incurred $130,181 of deferred
registration costs relating principally to professional fees and registration
expenses incurred in connection with the Proposed Offering. Upon consummation of
the Proposed Offering, these costs as well as additional expenses to be incurred
will be charged to equity. Should the Proposed Offering prove to be
unsuccessful, these costs will be charged to operations.
4. CAPITAL STOCK
The Company's Certificate of Incorporation authorizes the issuance of
10,000,000 shares of Common Stock. Upon completion of the Proposed Maximum
Offering (assuming no exercise of the Representative's Warrants), there will be
5,192,917 authorized but unissued shares of Common Stock available for issuance
(after reserving 1,700,000 shares for the issuance of Common Stock in connection
with the Warrants and
F-8
<PAGE>
CASULL ARMS CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. CAPITAL STOCK (CONTINUED)
for future grants under the Company's Stock Option Plan). The Company's Board of
Directors has the power to issue any or all of the authorized but unissued
Common Stock without stockholder approval. To the extent that additional shares
of Common Stock are issued, dilution to the interests of the Company's
stockholders participating in the Proposed Offering may occur.
Initially, stockholders who purchased shares in the October 1996 Common
Stock issuance had the right to sell their shares back to the Company for at
least 90% of the amount paid therefor if the Company did not raise at least $5
million of additional equity capital on or before March 31, 1997. In March 1997,
the Company received written waivers from these stockholders, extending the term
to raise at least $5 million in additional equity capital until May 31, 1997.
Shares issued in the October 1996 Common Stock issuance are reflected in the
February 28, 1997 balance sheet as Redeemable Common Stock.
The Board of Directors of the Company is empowered, without stockholder
approval, to issue up to 1,000,000 shares of Preferred Stock with dividend,
liquidation, conversion, voting or other rights which could adversely affect the
voting power or other rights of the holders of the Company's Common Stock.
5. RELATED PARTY TRANSACTIONS
In connection with its issuance of shares of Common Stock in October 1996,
the Company received payment from a director in the form of marketable
securities (the "restricted investments") for 333,333 shares of Common Stock at
a subscription price of $1,000,000. The market value of the restricted
investments received at that date approximated $1,090,000. The restricted
investments cannot be sold by the Company until the Effective Date of the
Proposed Offering. If the Proposed Offering is successful and results in at
least $5 million in additional equity capital on or before May 31, 1997, the
Company intends to sell the restricted investments in an open market. If the
Company does not raise at least $5 million in additional equity capital on or
before May 31, 1997 the Company will need to receive a waiver of the $5 million
threshold and/or the May 31, 1997 deadline or the Stockholder will have the
right to sell his shares back to the Company for at least 90% of the amount
paid.
If the Company is successful in raising at least $5 million in additional
equity capital on or before May 31, 1997 and sells the restricted investments in
an open market, any excess of proceeds received from the sale over $1,000,000
will be refunded to the director; any deficit between the proceeds and
$1,000,000 will be paid to the Company by the director in cash. If the Company
is not sucessful in raising at least $5 million in additonal equity capital on
or before May 31, 1997 or in obtaining the necessary waivers, the Stockholder
will have the right to sell his shares back to the Company for at least 90% of
the amount paid, plus receive any excess of proceeds from the sale of the
restricted investments over $1,000,000. At February 28, 1997 the Company had
recorded a liability to the director of $242,500 which represents the excess of
the market value of the restricted investments over $1,000,000.
Two of the Company's directors are officers and directors of FH Capital
Advisors, Inc. ("FH Capital"). On December 1, 1996, the Company and FH Capital
entered into a management agreement whereby FH Capital will receive $5,000 per
month, beginning upon the closing of the Proposed Offering, for financial
consulting services. The agreement with FH Capital is cancellable by the Company
on 30 days written notice.
The Company has entered into the License Agreement with the Chief Executive
Officer of the Company, for the rights to use certain intellectual property
developed by him. Under terms of the
F-9
<PAGE>
CASULL ARMS CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. RELATED PARTY TRANSACTIONS (CONTINUED)
agreement, the Company will pay to the Chief Executive Officer a royalty,
beginning upon the closing of the Proposed Offering, of 5% of the Company's
revenues subject to an annual minimum of $40,000 and an annual maximum of
$400,000. This royalty is payable to the Chief Executive Officer for ten years
from the date of the first royalty payment or until his death, whichever is
later, however, if the Chief Executive Officer's wife should survive him,
royalty payments shall continue until the earlier of ten years from the date of
the first royalty payment or her death. In the event that the Chief Executive
Officer's employment with the Company is terminated, royalty payments will be
adjusted to a minimum of $120,000 and a maximum of $500,000.
Immediately upon closing of the Proposed Offering, the Company intends to
purchase land from a director which will serve as the site for the manufacturing
facility.
6. STOCK OPTION PLAN
The Company has reserved 300,000 shares of Common Stock for issuance under
its stock option plan (the "Plan"). Officers, directors, employees and
consultants to the Company are eligible to receive options (the "Options") under
the plan. There were no such Options issued or outstanding at February 28, 1997.
The Plan provides for Options that are intended to qualify either as
incentive stock options ("ISO") within the meaning of Section 422 of the
Internal Revenue Code of 1986 (the "Code"), as amended, or as non-qualified
stock options ("NQO") which are not subject to special tax treatment under the
Code.
The exercise price for ISO's granted under the Plan must be at least equal
to the fair market value of the stock subject to the option on the date of grant
or, in the case of ISO's granted to the holder of 10% or more of the Company's
Common Stock, at least 110% of the fair market value of such shares on the date
of the grant. The exercise price of all NQO's granted under the Plan shall be
determined by the Plan Administrator. The maximum exercise period for which the
Options may be granted is ten years from the date of the grant (five years in
the case of ISO's granted to an individual owning more than 10% of the Company's
Common Stock).
F-10
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION AND 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 A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT
INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 8
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 15
Dilution.................................................................. 16
Capitalization............................................................ 18
Selected Financial Data................................................... 19
Management's Discussion and Analysis or Plan of Operation................. 20
Business.................................................................. 22
Management................................................................ 30
Principal Stockholders.................................................... 34
Certain Transactions...................................................... 34
Description of Securities................................................. 36
Shares Eligible for Future Sale........................................... 38
Plan of Distribution...................................................... 39
Legal Matters............................................................. 41
Experts................................................................... 42
Additional Information.................................................... 42
Index to Financial Statements............................................. F-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
[LOGO]
MINIMUM OFFERING OF 400,000 AND
MAXIMUM OFFERING OF
1,400,000 SHARES OF COMMON STOCK
AND 1,400,000 REDEEMABLE
COMMON STOCK PURCHASE WARRANTS
(AS UNITS, EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK
AND ONE WARRANT)
---------------------
PROSPECTUS
---------------------
NATIONAL SECURITIES
CORPORATION
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102(b) of the Delaware General Corporations Law (the "DGCL") permits
a provision in the certificate of incorporation of each corporation organized
thereunder eliminating or limiting, with certain exceptions, the personal
liability of a director to the corporation or its stockholders for monetary
damages for certain breaches of fiduciary duty as a director. The Certificate of
Incorporation of the Registrant eliminates the personal liability of directors
to the fullest extent permitted by the DGCL.
Section 145 of the DGCL ("Section 145"), in summary, empowers a Delaware
corporation, within certain limitations, to indemnify its officers, directors,
employees and agents against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement, actually and reasonably incurred by them
in connection with any nonderivative suit or proceeding, if they acted in good
faith and in a manner they reasonably believed to be in or not opposed to the
best interest of the corporation, and, with respect to a criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful.
With respect to derivative actions, Section 145 permits a corporation to
indemnify its officers, directors, employees and agents against expenses
(including attorneys' fees) actually and reasonably incurred in connection with
the defense or settlement of such action or suit, provided such person meets the
standard of conduct described in the preceding paragraph, except that no
indemnification is permitted in respect of any claim where such person has been
found liable to the corporation, unless the Court of Chancery or the court in
which such action or suit was brought approves such indemnification and
determines that such person is fairly and reasonably entitled to be indemnified.
Reference is made to Article Eight of the Certificate of Incorporation of
the Registrant for the provisions which the Registrant has adopted relating to
indemnification of officers, directors, employees and agents, which provides for
the indemnification of such persons to the full extent permitted by Delaware
law.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been informed that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable.
Reference is also made to Section 8(b) of the Underwriting Agreement filed
as Exhibit 1.1 to this Registration Statement which provides for the
indemnification of the Company, its controlling persons, directors and certain
of its officers by the Underwriters against certain liabilities, including
liabilities under the securities laws.
Prior to the close of this Offering, the Registrant will have purchased
directors' and officers' liability insurance.
II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses to be incurred in connection with the offering are as
follows:
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 8,060
NASD filing fee................................................... $ 3,160
NASDAQ listing fee................................................ $ 8,107
Blue Sky expenses and legal fees.................................. $ 40,000
Printing and engraving expenses................................... $ 60,000
Registrar and transfer agent fees and expenses.................... $ 7,000
Accounting fees and expenses...................................... $ 40,000
Legal fees and expenses........................................... $ 150,000
Miscellaneous fees and expenses................................... $ 33,673
---------
TOTAL............................................................. $ 350,000
---------
---------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
<TABLE>
<CAPTION>
AGGREGATE
CLASS OF DATE OF TITLE OF NUMBER PURCHASE FORM OF
PURCHASERS SALE SECURITIES OF SHARES PRICE CONSIDERATION
- ------------------- ----------- ----------------- ----------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
14 Founders 8/7/96 Common Stock 573,750 $ 57,375 Cash
10 Investors 10/21/96 Common Stock 800,000 2,400,000 Cash
1 Investor 10/21/96 Common Stock 333,333 1,000,000 Common Stock
</TABLE>
The sales of all of the aforementioned securities were made in reliance upon
the exemption from the registration provisions of the Act afforded by section
4(2) thereof and/or Regulation D promulgated thereunder, as transactions by an
issuer not involving a public offering. To the best of the Registrant's
knowledge, the purchasers of the securities described above acquired them for
their own account and not with the view to any distribution thereof to the
public. The Registrant did not engage a placement agent for sale of any of the
aforementioned securities.
II-2
<PAGE>
ITEM 27. EXHIBITS.
The following exhibits are filed as part of this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1 Form of Placement Agent Agreement
3.1 Certificate of Incorporation, as amended*
3.2 By-Laws of the Registrant*
4.1 Form of Redeemable Warrant Agreement to be entered into between Registrant and Continental Stock
Transfer & Trust Co., including form of Redeemable Warrant Certificate
4.2 Form of Placement Agent's Warrant Agreement including Form of Placement Agent's Warrant
4.3 Specimens of Registrant's Common Stock and Redeemable Warrant Certificate*
5 Opinion and Consent of Camhy Karlinsky & Stein LLP
10.1 1996 Stock Option Plan*
10.2 License Agreement between Registrant and Richard J. Casull*
10.3 Management Agreement between Registrant and FH Capital Advisors, Inc.*
11.1 Statement re: computation of per share earnings
23.1 Consent of Camhy Karlinsky & Stein LLP--included in Exhibit 5
23.2 Consent of Price Waterhouse LLP
23.3 Consent of Professor Michael Darling*
24.1 Power of Attorney (contained on page II-5 of this Registration Statement)*
</TABLE>
- ------------------------
* Previously filed
ITEM 28. UNDERTAKINGS.
The Registrant hereby undertakes to provide to the Placement Agent 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.
The Registrant has agreed to indemnify the Placement Agent and its officers,
directors, partners, employees, agents and controlling persons as to any losses,
claims, damages, expenses or liabilities arising out of any untrue statement or
omission of a material fact contained in the registration statement. The
Placement Agent has agreed to indemnify the Registrant and its directors,
officers and controlling persons as to any losses, claims, damages, expenses or
liabilities arising out of any untrue statement or omission in the registration
statement based on information relating to the Placement Agent furnished by it
for use in connection with the registration statement.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling
II-3
<PAGE>
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The Registrant hereby also undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in the volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining liability under the Securities Act
of 1933, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant under Rule 424(b)(1), or (4) or 497(h) under
the Securities Act as part of this registration statement as of the time the
Commission declared it effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and has authorized this Registration
Statement to be signed on its behalf by the undersigned in the City of Jackson,
State of Wyoming on April 15, 1997.
CASULL ARMS CORPORATION
BY: /S/ ALLAN R. TESSLER
-----------------------------------------
Allan R. Tessler
CHAIRMAN OF THE BOARD
POWER OF ATTORNEY
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement on Form SB-2 has been signed below by the following
persons in the capacities and on the dates stated:
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ ALLAN R. TESSLER
- ------------------------------ Chairman of the Board April 15, 1997
Allan R. Tessler
Chief Executive Officer,
* Chief Operating
- ------------------------------ Officer and Director April 15, 1997
Richard J. Casull (Principal
Executive Officer)
President, Chief Financial
* Officer and
- ------------------------------ Director (Principal April 15, 1997
David M. Myers Financial and
Principal Accounting
Officer)
*
- ------------------------------ Director April 15, 1997
David R. Markin
*
- ------------------------------ Director April 15, 1997
Andrea L. Tessler
*
- ------------------------------ Director April 15, 1997
Marshall Kiev
* Attorney in fact
/s/ ALLAN R. TESSLER
- ------------------------------ April 15, 1997
Allan R. Tessler
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE NO.
- ----------- ---------------------------------------------------------------------------------------------- -------------
<C> <S> <C>
1 Form of Placement Agent Agreement
3.1 Certificate of Incorporation, as amended*
3.2 By-Laws of the Registrant*
4.1 Form of Redeemable Warrant Agreement to be entered into between Registrant and Continental
Stock Transfer & Trust Co., including form of Redeemable Warrant Certificate
4.2 Form of Placement Agent's Warrant Agreement including Form of Placement Agent's Warrant
4.3 Specimens of Registrant's Common Stock and Redeemable Warrant Certificate*
5 Opinion and Consent of Camhy Karlinsky & Stein LLP
10.1 1996 Stock Option Plan*
10.2 License Agreement between Registrant and Richard J. Casull*
10.3 Management Agreement between Registrant and FH Capital Advisors, Inc.*
11.1 Statement re: computation of per share earnings
23.1 Consent of Camhy Karlinsky & Stein LLP--included in Exhibit 5
23.2 Consent of Price Waterhouse LLP
23.3 Consent of Professor Michael Darling*
24.1 Power of Attorney (contained on page II-5 of this Registration Statement)*
</TABLE>
- ------------------------
* Previously Filed.
<PAGE>
CASULL ARMS CORPORATION
FORM
OF
PLACEMENT AGENT AGREEMENT
Afton, Wyoming
April , 1997
National Securities Corporation
As Placement Agent
1001 Fourth Avenue
Suite 2200
Seattle, Washington 98154
Ladies and Gentlemen:
Casull Arms Corporation, a Delaware corporation (the "Company"),
hereby agrees, subject to the terms and conditions stated herein, to offer and
sell through you, National Securities Corporation (the "Placement Agent" or
"National"), up to 1,400,000 shares of the Company's Common Stock, par value
$.01 per share (the "Common Stock") and 1,400,000 redeemable warrants (the
"Warrants"), each Warrant to purchase one (1) share of Common Stock at an
exercise price of $6.00 and exercisable at any time over a forty-eight (48)
month period commencing upon the first day of the thirteenth calendar month
after the date of the Company's prospectus ("Prospectus") pursuant to a Warrant
Agreement, as defined herein, to be entered into at the Closing, which
aggregates to 1,400,000 shares of Common Stock and 1,400,000 Warrants
(collectively, the "Securities"). The Securities are sold as units ("Units")
each consisting of one (1) share of Common Stock and one (1) Warrant, although
the parties anticipate that there will be no public market for the Securities as
Units. The Securities will be offered on a "best efforts, all or none" basis as
to the 400,000 share and 400,000 Warrant minimum offering (the "Minimum
Offering"), and on a "best efforts" basis as to the remaining 1,000,000 shares
and Warrants (the "Maximum Offering"). The offering period for the Common Stock
and Warrants will commence
1
<PAGE>
on or about ______________, 1997, and all funds received from subscribers for
the Common Stock will be held in an escrow account for the benefit of the
subscribers by Continental Stock Transfer and Trust Company (the "Escrow Agent")
until a closing (a "Closing") of the Minimum Offering or earlier termination of
the Offering. The Offering will expire on the earlier to occur of (i) 60 days
from the date of this Prospectus and (ii) the sale of all the Securities being
offered, unless the Company and the Placement Agent agree to extend the Offering
for an additional 30-day period (the "Termination Date").
The Warrants and Common Stock will be immediately separately tradeable.
The Warrants will be redeemable by the Company commencing upon the first day of
the thirteen (13) calendar month after the date of the Prospectus at $.05 per
Warrant on thirty (30) days' prior written notice if the closing bid price of
the Common Stock as reported on Nasdaq averages an amount equal to $9.00 per
share [150% of the initial public offering price per share of Common Stock] for
any twenty (20) trading days within a period of thirty (30) consecutive trading
days ending on the fifth trading day prior to the notice of redemption.
The Company also proposes to issue and sell to you warrants (the
"Placement Agent's War rants") pursuant to the Placement Agent's Warrant
Agreement dated ________, 1997 (the "Placement Agent's Warrant Agreement") for
the purchase of an additional 140,000 shares of Common Stock and/or 140,000
Warrants. The shares of Common Stock and the Warrants underlying the Placement
Agent's Warrants, and the shares of Common Stock underlying the Warrants
issuable upon exercise of the Placement Agent's Warrants, are hereinafter
referred to as the "Placement Agent's Securities." The Securities, Placement
Agent's Warrants and Placement Agent's Securities are more fully described in
the Registration Statement and the Prospectus referred to below.
1. Representations and Warranties of the Company.
(A) The Company represents and warrants to, and agrees with, the
Placement Agent as of the date hereof, and as of the Closing Date (as defined in
Section 2(a) hereof) and the Second Closing Date (as defined in Section 2(b)
hereof), if any, as follows:
(a) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and an
amendment or amendments thereto, on Form SB-2 (No.333- 16911) including any
related preliminary prospectus ("Preliminary Prospectus"), for the registration
of the Securities, Placement Agent's Warrants and the Placement Agent's
Securities (collectively, hereinafter referred to as the "Registered
Securities") under the Securities Act of 1933, as amended (the "Act"), which
registration statement and amendment or amendments have been prepared by the
Company in conformity with the requirements of the Act, and the Regulations (as
defined below) of the Commission under the Act. The Company will not file any
other amendment thereto to which the Placement Agent shall have objected in
writing after having been furnished with a copy thereof. Except as the context
may otherwise require, such registration statement, as amended, on file with the
Commission at the time the registration statement becomes effective (including
the prospectus, financial
2
<PAGE>
statements, schedules, exhibits and all other documents filed as a part thereof
or incorporated therein and all information deemed to be a part thereof as of
such time pursuant to paragraph (b) of Rule 430(A) of the Regulations), is
hereinafter called the "Registration Statement," and the form of prospectus in
the form first filed with the Commission pursuant to Rule 424(b) of the
Regulations, is hereinafter called the "Prospectus." For purposes hereof,
"Regulations" mean the rules and regulations adopted by the Commission under
either the Act or the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), as applicable.
(b) Neither the Commission nor any state regulatory authority
has issued any order preventing or suspending the use of any Preliminary
Prospectus, the Registration Statement or the Prospectus and no proceedings for
a stop order suspending the effectiveness of the Registration Statement have
been instituted, or, to the Company's knowledge, are threatened. Each of the
Preliminary Prospectus, the Registration Statement and the Prospectus at the
time of filing thereof conformed in all material respects with the requirements
of the Act and Regulations, and none of the Preliminary Prospectus, the
Registration Statement or the Prospectus at the time of filing thereof contained
an untrue statement of a material fact or omitted to state a material fact
required to be stated therein and necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, except
that this representation and warranty does not apply to statements made in
reliance upon and in conformity with written information furnished to the
Company with respect to the Placement Agent by or on behalf of the Placement
Agent expressly for use in such Preliminary Prospectus, Registration Statement
or Prospectus.
(c) When the Registration Statement becomes effective and at
all times subsequent thereto up to the Closing Date and the Second Closing Date,
if any, and during such longer period as the Prospectus may be required to be
delivered in connection with sales by the Placement Agent or a dealer, the
Registration Statement and the Prospectus, as amended or supplemented as
required, will contain all statements which are required to be stated therein in
accordance with the Act and the Regulations, and will conform in all material
respects to the requirements of the Act and the Regulations; neither the
Registration Statement nor the Prospectus, nor any amendment or supplement
thereto, will contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, provided, however, that this representation and warranty does
not apply to statements made or statements omitted in reliance upon and in
conformity with information furnished to the Company in writing by or on behalf
of the Placement Agent expressly for use in the Registration Statement or the
Prospectus or any amendment thereof or supplement thereto.
(d) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of Delaware. The
Company does not own or control, directly or indirectly, any corporation,
partnership, trust, joint venture or other business entity. The Company is duly
qualified and licensed and in good standing as a foreign corporation in each
jurisdiction in which its ownership or leasing of any properties or the
character of its operations require such qualification or licensing. The Company
has all requisite power and
3
<PAGE>
authority (corporate and other), and has obtained any and all necessary
authorizations, approvals, orders, licenses, certificates, franchises and
permits of and from all governmental or regulatory officials and bodies
(including, without limitation, those having jurisdiction over environmental or
similar matters), to own or lease its properties and conduct its business as
described in the Prospectus; the Company has been doing business in compliance
with all such authorizations, approvals, orders, licenses, certificates,
franchises and permits and all federal, state, local and foreign laws, rules and
regulations; and the Company has not received any notice of proceedings relating
to the revocation or modification of any such authorization, approval, order,
license, certificate, franchise, or permit which, singly or in the aggregate, if
the subject of an unfavorable decision, ruling or finding, would materially and
adversely affect the condition, financial or otherwise, or the business affairs,
operations, properties, or results of operations of the Company. The disclosures
in the Registration Statement concerning the effects of federal, state, local,
and foreign laws, rules and regulations on the Company's business as currently
conducted and as contemplated are correct in all material respects and do not
omit to state a material fact necessary to make the statements contained therein
not misleading in light of the circumstances in which they were made.
(e) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus under the headings
"Capitalization" and "Description of Securities" and will have the adjusted
capitalization set forth therein on the Closing Date and the Second Closing
Date, if any, based upon the assumptions set forth therein, and the Company is
not a party to or bound by any instrument, agreement or other arrangement
providing for it to issue any capital stock, rights, warrants, options or other
securities, except for this Agreement and as described in the Prospectus. The
Registered Securities and all other securities issued or issuable by the Company
conform or, when issued and paid for, will conform, in all material respects to
all statements with respect thereto contained in the Registration Statement and
the Prospectus. All issued and outstanding shares of capital stock of the
Company have been duly authorized and validly issued and are fully paid and
nonassessable. 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, the Company has no outstanding 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 stock
option and other stock plans or arrangements and the options or other rights
granted and exercised thereunder as set forth in the Prospectus conforms in all
material respects with the requirements of the Act. All issued and outstanding
securities of the Company have been duly authorized and validly issued and are
fully paid and non-assessable, and the holders thereof have no rights of
rescission with respect thereto and are not subject to personal liability by
reason of being such holders; and none of such securities were issued in
violation of the preemptive rights of any holders of any security of the Company
or similar contractual rights granted by the Company.
(f) The Registered Securities are not and will not be subject
to any preemptive or other similar rights of any stockholder, have been duly
authorized and, when issued, paid for and delivered in accordance with the terms
hereof, will be validly issued, fully paid
4
<PAGE>
and non-assessable and will conform in all material respects to the description
thereof contained in the Prospectus; the holders thereof will not be subject to
any liability solely as such holders; all corporate action required to be taken
for the authorization, issue and sale of the Registered Securities has been duly
and validly taken; and the certificates representing the Registered Securities
will be in due and proper form. Upon the issuance and delivery pursuant to the
terms hereof of the Registered Securities to be sold by the Company hereunder,
the Placement Agent will acquire good and marketable title to such Registered
Securities free and clear of any lien, charge, claim, encumbrance, pledge,
security interest, defect, or other restriction or equity of any kind
whatsoever. No stockholder of the Company has any right which has not been
waived in writing to require the Company to register the sale of any shares
owned by such stockholder under the Act in the public offering contemplated by
this Agreement. No further approval or authority of the stockholders or the
Board of Directors of the Company will be required for the issuance and sale of
the Registered Securities and the Placement Agent's Warrants to be sold by the
Company as contemplated herein.
(g) The financial statements of the Company, together with the
related notes and schedules thereto, included in the Registration Statement,
each Preliminary Prospectus and the Prospectus fairly present the financial
position, changes in stockholders' equity and the results of operations of the
Company at the respective dates and for the respective periods to which they
apply and such financial statements have been prepared in conformity with
generally accepted accounting principles and the Regulations, consistently
applied throughout the periods involved. There has been no material adverse
change or development involving a material prospective change in the condition,
financial or otherwise, or in the business, affairs, operations, properties, or
results of operation of the Company whether or not arising in the ordinary
course of business since the date of the financial statements included in the
Registration Statement and the Prospectus and the outstanding debt, the
property, both tangible and intangible, and the business of the Company conforms
in all material respects to the descriptions thereof contained in the
Registration Statement and the Prospectus. Financial information set forth in
the Prospectus under the headings "Selected Financial Data," "Capitalization,"
and "Management's Discussion and Analysis or Plan of Operation," fairly present,
on the basis stated in the Prospectus, the information set forth therein and
have been derived from or compiled on a basis consistent with that of the
audited financial statements included in the Prospectus.
(h) Except as otherwise disclosed in the Company's balance
sheet contained in the Prospectus, the Company (i) has paid all federal, state,
local, franchise, and foreign taxes for which it is liable, including, but not
limited to, withholding taxes and amounts payable under Chapters 21 through 24
of the Internal Revenue Code of 1986, as amended (the "Code"), and has furnished
all information returns it is required to furnish pursuant to the Code, (ii) has
established adequate reserves for such taxes which are not due and payable, and
(iii) does not have any tax deficiency or claims outstanding, proposed or
assessed against it.
(i) No transfer tax, stamp duty or other similar tax is
payable by or on behalf of the Placement Agent in connection with (i) the
issuance by the Company of the Registered Securities, (ii) the consummation by
the Company of any of its obligations under this Agreement,
5
<PAGE>
or (iii) resales of the Registered Securities in connection with the
distribution contemplated hereby.
(j) There is no claim, action, suit, proceeding, inquiry,
arbitration, mediation, investigation, litigation, governmental or other
proceeding (including, without limitation, those having jurisdiction over
environmental or similar matters), domestic or foreign, pending or threatened
against (or circumstances that may give rise to the same), or involving the
properties or businesses of, the Company which (i) questions the validity of the
capital stock of the Company, this Agreement, the Warrant Agreement or the
Placement Agent's Warrant Agreement, or of any action taken or to be taken by
the Company pursuant to or in connection with this Agreement, the Warrant
Agreement or the Placement Agent's Warrant Agreement, (ii) is required to be
disclosed in the Registration Statement which is not so disclosed (and such
proceedings as are summarized in the Registration Statement are accurately
summarized in all material respects), or (iii) might materially and adversely
affect the condition, financial or otherwise, or the business, affairs,
position, stockholders' equity, operation, properties, or results of operations
of the Company.
(k) The Company has the corporate power and authority to
authorize, issue, deliver, and sell the Registered Securities and to enter into
this Agreement, the Warrant Agreement and the Placement Agent's Warrant
Agreement, and to consummate the transactions provided for in such agreements;
and this Agreement, the Warrant Agreement and the Placement Agent's Warrant
Agreement have each been duly and properly authorized, executed, and delivered
by the Company. Each of this Agreement, the Warrant Agreement and the Placement
Agent's Warrant Agreement constitutes a legal, valid and binding agreement of
the Company enforceable against the Company in accordance with its respective
terms (except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
relating to or affecting enforcement of creditors' rights and the application of
equitable principles in any action, legal or equitable, and except as rights to
indemnity or contribution may be limited by applicable law), and none of the
Company's issue and sale of the Registered Securities, execution, delivery or
performance of this Agreement, the Warrant Agreement and the Placement Agent's
Warrant Agreement, its consummation of the transactions contemplated herein and
therein, or the conduct of its businesses as described in the Registration
Statement, the Prospectus, and any amendments or supplements thereto, conflicts
with or will conflict with or results or will result in any breach or violation
of any of the terms or provisions of, or constitutes or will constitute a
default under, or result in the creation or imposition of any lien, charge,
claim, encumbrance, pledge, security interest, defect or other restriction or
equity of any kind whatsoever upon, any property or assets (tangible or
intangible) of the Company pursuant to the terms of (i) the certificate of
incorporation or by-laws of the Company, as amended, (ii) any license, contract,
indenture, mortgage, deed of trust, voting trust agreement, stockholders
agreement, note, loan or credit agreement or any other agreement or instrument
to which the Company is a party or by which it is or may be bound or to which
its properties or assets (tangible or intangible) is or may be subject, or any
indebtedness, or (iii) any statute, judgment, decree, order, rule or regulation
applicable to the Company of any arbitrator, court, regulatory body or
administrative agency or other governmental agency or body (including, without
limitation, those
6
<PAGE>
having jurisdiction over environmental or similar matters), domestic or foreign,
having jurisdiction over the Company of any of its activities or properties.
(l) No consent, approval, authorization or order of, and no
filing with, any court, regulatory body, government agency or other body,
domestic or foreign, is required for the issuance of the Registered Securities
pursuant to the Prospectus and the Registration Statement, the performance of
this Agreement, the Warrant Agreement, the Placement Agent's Warrant Agreement,
and the transactions contemplated hereby and thereby, including without
limitation, any waiver of any preemptive, first refusal or other rights that any
entity or person may have for the issue and/or sale of any of the Registered
Securities, except such as have been or may be obtained under the Act or may be
required under state securities or Blue Sky laws in connection with the
Placement Agent's purchase and distribution of the Registered Securities to be
sold by the Company hereunder.
(m) All executed agreements, contracts or other documents or
copies of executed agreements, contracts or other documents filed as exhibits to
the Registration Statement to which the Company is a party or by which it may be
bound or to which its assets, properties or businesses may be subject have been
duly and validly authorized, executed and delivered by the Company and
constitute the legal, valid and binding agreements of the Company enforceable
against the Company in accordance with their respective terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as rights to indemnity
or contribu tion may be limited by applicable law). The descriptions in the
Registration Statement of such agreements, contracts and other documents are
accurate in all material respects and fairly present the information required to
be shown with respect thereto by Form SB-2, and there are no contracts or other
documents which are required by the Act to be described in the Registration
Statement or filed as exhibits to the Registration Statement which are not
described or filed as required, and the exhibits which have been filed are
complete and correct copies of the documents of which they purport to be copies.
(n) Since the respective dates as of which information is
given in the Registration Statement and Prospectus, and except as described in
or specifically contemplated by the Prospectus (i) the Company has not incurred
any material liabilities or obligations, indirect, direct or contingent, or
entered into any material verbal or written agreement or other transaction which
is not in the ordinary course of business or which could result in a material
reduction in the future earnings of the Company; (ii) the Company has not
sustained any material loss or interference with its business or properties from
fire, flood, windstorm, accident or other calamity, whether or not covered by
insurance; (iii) the Company has not paid or declared any dividends or other
distributions with respect to its capital stock, and the Company is not in
default in the payment of principal or interest on any outstanding debt
obligations; (iv) there has not been any change in the capital stock (other than
upon the sale of the Securities, the Option Securities and the Placement Agent's
Securities hereunder and upon the exercise of options and warrants described in
the Registration Statement) of, or indebtedness material to, the Company (other
than
7
<PAGE>
in the ordinary course of business); (v) the Company has not issued any
securities or incurred any liability or obligation, primary or contingent, for
borrowed money; and (vi) there has not been any material adverse change in the
condition (financial or otherwise), business, properties, results of operations,
or prospects of the Company.
(o) Except as disclosed in or specifically contemplated by the
Prospectus, (i) the Company has sufficient trademarks, trade names, patent
rights, copyrights, licenses, approvals and governmental authorizations to
conduct its business as now conducted; (ii) the expiration of any trademarks,
trade names, patent rights, copyrights, licenses, approvals or governmental
authorizations would not have a material adverse effect on the condition
(financial or otherwise), business, results of operations or prospects of the
Company; (iii) the Company has no knowledge of any infringement by it or its
subsidiaries of trademark, trade name rights, patent rights, copyrights,
licenses, trade secret or other similar rights of others; and (iv) there is no
claim being made against the Company regarding trademark, trade name, patent,
copyright, license, trade secret or other infringement which could have a
material adverse effect on the condition (financial or otherwise), business,
results of operations or prospects of the Company.
(p) Except as otherwise disclosed in the Prospectus, no
default exists, which would have a material adverse effect on the Company, in
the due performance and observance of any term, covenant or condition of any
license, contract, indenture, mortgage, installment sale agreement, lease, deed
of trust, voting trust agreement, stockholders agreement, note, loan or credit
agreement, or any other material agreement or instrument evidencing an
obligation for borrowed money, or any other material agreement or instrument to
which the Company is a party or by which the Company may be bound or to which
the property or assets (tangible or intangible) of the Company is subject or
affected.
(q) To the Company's knowledge, there are no pending
investigations involving the Company by the U.S. Department of Labor, or any
other governmental agency responsible for the enforcement of such federal,
state, local, or foreign laws and regulations. There is no unfair labor practice
charge or complaint against the Company pending before the National Labor
Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage
pending or to its knowledge threatened against or involving the Company. No
representation question exists respecting the employees of the Company. No
collective bargaining agreement, or modification thereof is currently being
negotiated by the Company. No grievance or arbitration proceeding is pending
under any expired or existing collective bargaining agreements of the Company.
No labor dispute with the employees of the Company exists or to its knowledge is
imminent.
(r) Except as described in the Prospectus, the Company does
not maintain, sponsor or contribute to any program or arrangement that is an
"employee pension benefit plan, " an "employee welfare benefit plan," or a
"multiemployer plan" as such terms are defined in Sections 3(2), 3(1) and 3(37),
respectively, of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") ("ERISA Plans"). The Company does not maintain or contribute to a
defined benefit plan, as defined in Section 3(35) of ERISA. No ERISA Plan (or
any trust
8
<PAGE>
created thereunder) has engaged in a "prohibited transaction" within the meaning
of Section 406 of ERISA or Section 4975 of the Code, which could subject the
Company to any tax penalty on prohibited transactions and which has not
adequately been corrected. Each ERISA Plan is in compliance with all material
reporting, disclosure and other requirements of the Code and ERISA as they
relate to any such ERISA Plan. Determination letters have been received from the
Internal Revenue Service with respect to each ERISA Plan which is intended to
comply with Code Section 401(a), stating that such ERISA Plan and the attendant
trust are qualified thereunder. The Company has never completely or partially
withdrawn from a "multiemployer plan."
(s) Neither the Company nor, to the best of the Company's
knowledge, any of its employees, directors, stockholders, or affiliates (within
the meaning of the Regulations) of any of the foregoing has taken or will take
directly or indirectly, any action designed to or which has constituted or which
might be expected to cause or result in stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Registered Securi ties.
(t) The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property stated
in the Prospectus to be owned or leased by it, free and clear of all liens,
charges, claims, encumbrances, pledges, security interests, or other
restrictions or equities of any kind whatsoever other than those referred to in
the Prospectus and liens for taxes not yet due and payable.
(u) To the best of the Company's knowledge, Price Waterhouse
LLP ("Price Waterhouse"), whose report is filed with the Commission as a part of
the Registration Statement, are independent certified public accountants as
required by the Act and the Regulations.
(v) The Company has caused to be duly executed legally binding
and enforceable agreements pursuant to which all persons or entities that
directly or beneficially own Common Stock, as of the effective date of the
Registration Statement, have agreed not to, directly or indirectly, offer, offer
to sell, sell, grant any option for the sale of, transfer, assign, pledge,
hypothecate or otherwise encumber or dispose of any shares of Common Stock or
securities convertible into Common Stock, exercisable or exchangeable for or
evidencing any right to purchase or subscribe for any shares of Common Stock
(either pursuant to Rule 144 of the Regulations or otherwise) or dispose of any
interest therein for a period from the date of the Prospectus until eighteen
(18) months following the date that the Registration Statement becomes
effective, without the prior written consent of Placement Agent (the "Lock-up
Agreements"). The Company will cause the Transfer Agent (as defined herein) to
place "stop transfer" orders on the Company's stock ledgers to effect the
Lock-up Agreements. The Lock-up Agreements shall also provide that each of the
stockholders of the Company shall grant the Placement Agent an irrevocable
preferential right for a period of three (3) years from the effective date of
the Registration Statement to purchase for its account or to sell for the
account of any of the stockholders of the Company any securities which such
stockholders may seek to sell into the open market, excluding transfers pursuant
to gifts, transfers to relatives or family members, or
9
<PAGE>
trusts for the benefit of such relatives or family members, provided that the
transferee agrees to be bound by the terms of the Lock-Up Agreements. Such
stockholders will consult the Placement Agent with regard to any such proposed
sales and will offer the Placement Agent the opportunity to purchase or sell any
such securities on the terms described in the notice in the next sentence and on
terms no less favorable to the seller of such securities than he can secure
elsewhere. If the Placement Agent fails to accept such offer within fifteen (15)
business days after the mailing of a notice containing such offer by registered
mail addressed to the Placement Agent, then the Placement Agent shall have no
further claim or right with respect to the proposed transfer described. If,
however, the terms of such proposal are subsequently modified, the preferential
right referred to herein shall apply to such modified proposal as if the
original proposal had not been made. The Placement Agent's failure to exercise
its preferential right with respect to any particular proposal shall not affect
its preferential right relative to future proposals.
(w) There are no claims, payments, arrangements or
understandings, whether oral or written, for services in the nature of a
finder's or origination fee with respect to the sale of the Registered
Securities hereunder or any other arrangements, agreements, understandings,
payments or issuance with respect to the Company or any of its officers,
directors, stockholders, employees or affiliates that may affect the Placement
Agent's compensation as determined by the Commission and the National
Association of Securities Dealers, Inc. (the "NASD").
(x) Neither the Company, nor, to the best of its knowledge,
any of its officers, employees, agents or any other person acting on behalf of
the Company has, directly or indirectly, given or agreed to give any money, gift
or similar benefit (other than legal price concessions to customers in the
ordinary course of business) to any customer, supplier, employee or agent of a
customer or supplier, or official or employee of any governmental agency
(domestic or foreign) or instrumentality of any government (domestic or foreign)
or any political party or candidate for office (domestic or foreign) or other
person who was, is, or may be in a position to help or hinder the business of
the Company (or assist the Company in connection with any actual or proposed
transaction) which might subject the Company or any other such person to any
damage or penalty in any civil, criminal or governmental litigation or
proceeding (domestic or foreign). The Company believes that its internal
accounting controls are sufficient to cause the Company to comply with the
Foreign Corrupt Practices Act of 1977, as amended.
(y) Except as set forth in the Prospectus, no officer,
director or stockholder of the Company, or any "affiliate" or "associate" (as
these terms are defined in Rule 405 promulgated under the Regulations) of any of
the foregoing persons or entities has or has had, either directly or indirectly,
(i) an interest in any person or entity which (A) furnishes or sells services or
products which are furnished or sold or are proposed to be furnished or sold by
the Company, or (B) purchases from or sells or furnishes to the Company any
goods or services, or (ii) a beneficiary interest in any contract or agreement
to which the Company is a party or by which it may be bound or affected. Except
as set forth in the Prospectus there are no existing agreements, arrangements,
understandings or transactions, or proposed agreements, arrangements,
understandings or transactions, between or among the Company, and any officer,
10
<PAGE>
director, principal shareholder (as such term is used in the Prospectus) of the
Company, or any affiliate or associate of any of the foregoing persons or
entities.
(z) The Company is not, and does not intend to conduct its
business in a manner in which it would become an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
(aa) Any certificate signed by any officer of the Company and
delivered to the Placement Agent or to the Placement Agent's Counsel (as defined
in Section 4(d) herein) shall be deemed a representation and warranty by the
Company to the Placement Agent as to the matters covered thereby.
(bb) The minute books of the Company have been made available
to the Placement Agent and contain a complete summary of all meetings and
actions of the directors and stockholders of the Company, since the time of its
incorporation, and reflect all transactions referred to in such minutes
accurately in all material respects.
(cc) The Company has not distributed and will not distribute
prior to the Closing Date any offering material in connection with the offering
and sale of the Securities in this offering other than the Prospectus, the
Registration Statement and the other materials permitted by the Act. Except as
described in the Prospectus, no holders of any securities of the Company or of
any options, warrants or other convertible or exchangeable securities of the
Company have the right to include any securities issued by the Company as part
of the Registration Statement or to require the Company to file a registration
statement under the Act and no person or entity holds any anti-dilution rights
with respect to any securities of the Company.
(dd) The Company maintains insurance by insurers of recognized
financial responsibility of the types and in the amounts as are prudent,
customary and adequate for the business in which it is engaged, including, but
not limited to, insurance covering real and personal property owned or leased by
the Company against theft, damage, destruction, acts of vandalism and all other
risks customarily insured against, all of which insurance is in full force and
effect. The Company has no reason to believe that it will not be able to renew
existing insurance coverage with respect to the Company as and when such
coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business, in either case, at a cost that would not
have a material adverse effect on the financial condition, operations, business,
assets or properties of the Company. The Company has not failed to file any
claims, has no material disputes with its insurance company regarding any claims
submitted under its insurance policies, and has complied with all material
provisions contained in its insurance policies.
(ee) The Company has entered into a warrant agreement (the
"Warrant Agreement") substantially in the form filed as Exhibit 4.1 to the
Registration Statement with Continental Stock Transfer & Trust Company, and the
Placement Agent, in form and substance satisfactory to the Placement Agent, with
respect to the Warrants providing for the payment of commissions contemplated by
Section 4(z), hereof. The Warrant Agreement has been duly and
11
<PAGE>
validly authorized by the Company and, assuming due execution by the parties
thereto other than the Company, constitutes a valid and legally binding
agreement of the Company, enforceable against the Company in accordance with its
terms, except (i) as such enforceability may be limited by bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally, (ii) as enforceability of any indemnification provision may be
limited under the federal and state securities laws, and (iii) that the remedy
of specific performance and injunctive and other forms of equitable relief may
be subject to the equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought.
(ff) The Company has purchased "key man" life insurance on the
life of Richard J. Casull in the amount of $3,000,000 and the Company is named
as the sole beneficiary of such insurance policy.
2. Closing; Second Closing. (a) If subscriptions for 400,000 shares
of Common Stock and 400,000 Warrants have been received and accepted by the
Company on or prior to the Termination Date, the closing (the "Closing") will be
held at such place as is agreed by the Placement Agent and the Company. The date
on which the Closing takes place shall be the "Closing Date."
(b) If (i) subscriptions for 400,000 shares of Common Stock and
400,000 Warrants have been received and accepted by the Company on or prior to
the Termination Date, (ii) the Closing occurs as provided in Subsection (a) of
this Section 2, (iii) the Company elects to extend the offering period as
provided herein, (iv) additional subscriptions are received and accepted by the
Company and (v) the conditions in Section 8 hereof have been satisfied or
waived, there shall be a second Closing (the "Second Closing") held as provided
in Subsection (a) of this Section 2, but in no event shall the Second Closing
take place later than ______________, 1997. The date on which the Second closing
takes place shall be the "Second Closing Date."
3. Purchase of the Placement Agent's Warrants. On the Closing Date,
the Company shall issue and sell to the Placement Agent Placement Agent's
Warrants at a purchase price of $0.01 per Placement Agent's Warrant, which
warrants shall entitle the holders thereof to purchase an aggregate of 140,000
shares of Common Stock and/or 140,000 Warrants. The Placement Agent's Warrants
shall expire five (5) years after the effective date of the Registration
Statement and shall be exercisable commencing one (1) year from the effective
date of the Registration Statement at a price equaling one hundred twenty
percent (120%) of the initial public offering price of the shares of Common
Stock and Warrants, respectively. The Placement Agent's Warrant Agreement and
form of Warrant Certificate shall be substantially in the form filed as Exhibit
4.2 to the Registration Statement. Payment for the Placement Agent's Warrants
shall be made on the Closing Date.
4. Covenants of the Company. The Company covenants and agrees with
the Placement Agent as follows:
12
<PAGE>
(a) The Company shall use its best efforts to cause the
Registration Statement and any amendments thereto to become effective as
promptly as practicable and will not at any time, whether before or after the
effective date of the Registration Statement, file any amendment to the
Registration Statement or supplement to the Prospectus or file any document
under the Act or Exchange Act before termination of the offering of the
Securities by the Placement Agent of which the Placement Agent shall not
previously have been advised and furnished with a copy, or to which the
Placement Agent shall have objected or which is not in compliance with the Act,
the Exchange Act or the Regulations.
(b) As soon as the Company is advised or obtains knowledge
thereof, the Company will advise the Placement Agent and confirm the notice in
writing, (i) when the Registration Statement, as amended, becomes effective, if
the provisions of Rule 430A promulgated under the Act will be relied upon, when
the Prospectus has been filed in accordance with said Rule 430A and when any
post-effective amendment to the Registration Statement becomes effective, (ii)
of the issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceeding, suspending the effectiveness of the Registration
Statement or any order preventing or suspending the use of the Preliminary
Prospectus or the Prospectus, or any amendment or supplement thereto, or the
institution of proceedings for that purpose, (iii) of the issuance by the
Commission or by any state securities commission of any proceedings for the
suspension of the qualification of any of the Registered Securities for offering
or sale in any jurisdiction or of the initiation, or the threatening, of any
proceeding for that purpose, (iv) of the receipt of any comments from the
Commission; and (v) of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the Prospectus or for
additional information. If the Commission or any state securities commission
authority shall enter a stop order or suspend such qualification at any time,
the Company will use its best efforts to obtain promptly the lifting of such
order.
(c) The Company shall file the Prospectus (in form and
substance satisfactory to the Placement Agent) in accordance with the
requirements of the Act.
(d) The Company will give the Placement Agent notice of its
intention to file or prepare any amendment to the Registration Statement
(including any post-effective amendment) or any amendment or supplement to the
Prospectus (including any revised prospectus which the Company proposes for use
by the Placement Agent in connection with the offering of the Registered
Securities which differs from the corresponding prospectus on file at the
Commission at the time the Registration Statement becomes effective, whether or
not such revised prospectus is required to be filed pursuant to Rule 424(b) of
the Regulations), and will furnish the Placement Agent with copies of any such
amendment or supplement a reasonable amount of time prior to such proposed
filing or use, as the case may be, and will not file any such amendment or
supplement to which the Placement Agent or D'Ancona & Pflaum ("Placement Agent's
Counsel") shall reasonably object.
(e) The Company shall endeavor in good faith, in cooperation
with the Placement Agent, at or prior to the time the Registration Statement
becomes effective, to qualify
13
<PAGE>
the Registered Securities for offering and sale under the securities laws of
such jurisdictions as the Placement Agent may reasonably designate to permit the
continuance of sales and dealings therein for as long as may be necessary to
complete the distribution, and shall make such applications, file such documents
and furnish such information as may be required for such purpose; provided,
however, the Company shall not be required to qualify as a foreign corporation
or become subject to service of process in any such jurisdiction. In each
jurisdiction where such qualification shall be effected, the Company will,
unless the Placement Agent agree that such action is not at the time necessary
or advisable, use all reasonable efforts to file and make such statements or
reports at such times as are or may reasonably be required by the laws of such
jurisdiction to continue such qualification.
(f) During the time when a prospectus is required to be
delivered under the Act, the Company shall use all reasonable efforts to comply
with all requirements imposed upon it by the Act, as now and hereafter amended,
and by the Regulations, as from time to time in force, so far as necessary to
permit the continuance of sales of or dealings in the Registered Securities in
accordance with the provisions hereof and the Prospectus, or any amendments or
supplements thereto. If at any time when a prospectus relating to the Registered
Securities is required to be delivered under the Act, any event shall have
occurred as a result of which, in the opinion of counsel for the Company or
Placement Agent's Counsel, the Prospectus, as then amended or supplemented,
includes an untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading, or
if it is necessary at any time to amend or supplement the Prospectus to comply
with the Act, the Company will notify the Placement Agent promptly and prepare
and file with the Commission an appropriate amendment or supplement in
accordance with Section 10 of the Act, each such amendment or supplement to be
satisfactory to Placement Agent's Counsel, and the Company will furnish to the
Placement Agent copies of such amendment or supplement as soon as available and
in such quantities as the Placement Agent may request.
(g) As soon as practicable, but in any event not later than 45
days after the end of the 12-month period beginning on the day after the end of
the fiscal quarter of the Company during which the effective date of the
Registration Statement occurs (90 days in the event that the end of such fiscal
quarter is the end of the Company's fiscal year), the Company shall make
generally available to its security holders, in the manner specified in Rule
158(b) of the Regulations, and to the Placement Agent, an earnings statement
which will be in the detail required by, and will otherwise comply with, the
provisions of Section 11(a) of the Act and Rule 158(a) of the Regulations, which
statement need not be audited unless required by the Act, covering a period of
at least 12 consecutive months after the effective date of the Registration
Statement.
(h) During a period of five (5) years after the date hereof,
the Company will furnish to its stockholders, as soon as practicable, annual
reports (including financial statements audited by independent public
accountants) and unaudited quarterly reports of earnings, and will deliver to
the Placement Agent:
14
<PAGE>
(i) concurrently with furnishing such quarterly reports
to its stockholders, statements of income of the Company for each
quarter in the form furnished to the Company's stockholders;
(ii) concurrently with furnishing such annual reports to
its stockholders, a balance sheet of the Company as at the end of
the preceding fiscal year, together with statements of operations,
stockholders' equity, and cash flows of the Company for such fiscal
year, accompanied by a copy of the report thereon of independent
certified public accountants;
(iii) as soon as they are available, copies of all
reports (financial or other) mailed to stockholders;
(iv) as soon as they are available, copies of all
reports and financial statements furnished to or filed with the
Commission, the Nasdaq or any securities exchange;
(v) every press release and every material news item or
article of interest to the financial community in respect of the
Company or its affairs which was released or prepared by or on
behalf of the Company; and
(vi) any additional information of a public nature
concerning the Company (and any future subsidiaries) or its
businesses which the Placement Agent may reasonably request.
During such five-year period, if the Company has active subsidiaries, the
foregoing financial statements will be on a consolidated basis to the extent
that the accounts of the Company and its subsidiaries are consolidated, and will
be accompanied by similar financial statements for any significant subsidiary
which is not so consolidated.
(i) The Company will maintain a transfer and warrant agent
(the "Transfer Agent") and, if necessary under the jurisdiction of incorporation
of the Company, a registrar (which may be the same entity as the transfer agent)
for the Common Stock, Warrants and the Placement Agent's Warrants.
(j) The Company will furnish to the Placement Agent or on the
Placement Agent's order, without charge, at such place as the Placement Agent
may designate, copies of each Preliminary Prospectus, the Registration Statement
and any pre-effective or post-effective amendments thereto (two of which copies
will be signed and will include all financial statements and exhibits), each
Preliminary Prospectus, the Prospectus, and all amendments and supplements
thereto, including any prospectus prepared after the effective date of the
Registration Statement, in each case as soon as available and in such quantities
as the Placement Agent may reasonably request.
15
<PAGE>
(k) On or before the effective date of the Registration
Statement, the Company shall provide the Placement Agent with true copies of
duly executed, legally binding and enforceable Lock-up Agreements. On or before
the Closing Date, the Company shall deliver instructions to the Transfer Agent
authorizing it to place appropriate stop transfer orders on the Company's
ledgers.
(l) The Company shall use its best efforts to cause its
officers, directors, stockholders or affiliates (within the meaning of the
Regulations) not to take, directly or indirectly, any action designed to, or
which might in the future reasonably be expected to cause or result in,
stabilization or manipulation of the price of any securities of the Company.
(m) The Company shall apply the net proceeds from the sale of
the Registered Securities substantially in the manner, and subject to the
conditions, set forth under "Use of Proceeds" in the Prospectus.
(n) The Company shall timely file all such reports, forms or
other documents as may be required (including, but not limited to, a Form SR as
may be required pursuant to Rule 463 under the Act) from time to time, under the
Act, the Exchange Act, and the Regulations, and all such reports, forms and
documents filed will comply as to form and substance with the applicable
requirements under the Act, the Exchange Act, and the Regulations.
(o) The Company shall cause the Registered Securities to be
quoted on the OTC Bulletin Board and for a period of two (2) years from the date
hereof shall use its best efforts to maintain the quotation of the Registered
Securities to the extent outstanding.
(p) For a period of two (2) years from the Closing Date, the
Company shall furnish to the Placement Agent, at the Company's sole expense,
monthly consolidated transfer sheets relating to the Common Stock.
(q) For a period of five (5) years after the effective date of
the Registration Statement the Company shall use its best efforts, at the
Company's sole expense, to take all necessary and appropriate actions to further
qualify the Company's securities in all jurisdictions of the United States in
order to permit secondary sales of such securities pursuant to the Blue-Sky laws
of those jurisdictions which do not require the Company to qualify as a foreign
corporation or to file a general consent to service of process.
(r) The Company (i) prior to the effective date of the
Registration Statement, has filed a Form 8-A with the Commission providing for
the registration of the Common Stock under the Exchange Act and (ii) as soon as
practicable, will use its best efforts to take all necessary and appropriate
actions to be included in Standard and Poor's Corporation Descriptions and
Moody's OTC Manual and to continue such inclusion for a period of not less than
five (5) years.
16
<PAGE>
(s) The Company agrees that for a period of eighteen (18)
months following the effective date of the Registration Statement it will not,
without the prior written consent of National, offer, issue, sell, contract to
sell, grant any option for the sale of or otherwise dispose of any Common Stock,
or securities convertible into Common Stock, except for the issuance of the
Placement Agent's Warrants, and shares of Common Stock upon the exercise of
currently outstanding warrants or options issued under any stock option plan in
effect on the Closing Date or options to purchase shares of Common Stock granted
pursuant to any stock option plan in effect on the Closing Date.
(t) Until the completion of the distribution of the Registered
Securities, the Company shall not without the prior written consent of the
Placement Agent or Placement Agent's Counsel, issue, directly or indirectly any
press release or other communication or hold any press conference with respect
to the Company or its activities or the offering contemplated hereby, other than
trade releases issued in the ordinary course of the Company's business
consistent with past practices with respect to the Company's operations.
(u) For a period equal to the lesser of (i) five (5) years
from the date hereof, and (ii) the sale to the public of the Placement Agent's
Securities, the Company will not take any action or actions which may prevent or
disqualify the Company's use of Form SB-2 (or other appropriate form) for the
registration under the Act of the Placement Agent's Securities.
(v) The Company agrees that upon the request of National it
shall use its best efforts, which shall include, but shall not be limited to,
the solicitation of proxies, to elect one (1) designee of National to the
Company's Board of Directors for a period of five (5) years following the
Closing, provided that such designee is reasonably acceptable to the Company. In
the event National does not exercise its right to designate a member of the
Board of Directors, then it shall have the right to designate one person to
attend all meetings of the Board of Directors of the Company, and all committees
thereof, as an observer. Such observer shall be entitled to receive notices of
all such meetings, and all correspondence and communications sent by the Company
to members of its Board of Directors, and to attend all such meetings. The
Company shall reimburse the designee of National for his out-of-pocket expenses
incurred in connection with their attendance at such meetings.
(w) The Company agrees that within forty-five (45) days after
the Closing it shall retain a public relations firm which is acceptable to
National. The Company shall keep such public relations firm, or any replacement,
for a period of three (3) years from the Closing. Any replacement public
relations firm shall be retained only with the consent of National.
(x) The Company agrees that any and all future transactions
between the Company and its officers, directors, principal stockholders and the
affiliates of the foregoing persons will be on terms no less favorable to the
Company than could reasonably be obtained in arm's length transactions with
independent third parties, and that any such transactions also be approved by a
majority of the Company's outside independent directors disinterested in the
transaction.
17
<PAGE>
(y) The Company shall prepare and deliver, at the Company's
sole expense, to National within the one hundred and twenty (120) day period
after the effective date of the Registration Statement, ten (10) bound volumes
containing all correspondence with regulatory officials, agreements, documents
and all other materials in connection with the offering as requested by the
Placement Agent's Counsel.
(z) The Company shall pay the Placement Agent a commission
equal to five percent (5%) of the exercise price of each Warrant exercised for
the period commencing twelve (12) months after the effective date of the
Registration Statement until the expiration of the term of the Warrants, payable
on the date of such exercise on terms provided for in the Warrant Agreement. The
Company will not solicit the exercise of the Warrants other than through the
Placement Agent. However, no compensation will be paid to the Placement Agent in
connection with the exercise of the Warrants if (i) the Warrants are held in a
discretionary account, or (ii) the Warrants are exercised in an unsolicited
transaction. Further, the Placement Agent must be designated in writing by the
account holder as having solicited the transaction, otherwise the Placement
Agent shall not be paid the fee. In addition, the Placement Agent will not
receive any commission with respect to the exercise of the Warrants contained in
the Units to be received upon the exercise of the Placement Agent's Warrants,
unless held by a person or entity other than any of the Placement Agent.
6. Road Shows: The Company agrees that road show presentations will
be given by the Placement Agent in the following cities: New York, Chicago,
Denver, Atlanta, Boca Raton, Dallas, San Diego, Irvine, Los Angeles, San
Francisco and Portland, as well as any other cities which may be mutually agreed
upon by the Placement Agent and the Company. Travel will be "AirPass" on
Platinum upgrade and on American Airlines when available. The Company
acknowledges that the Placement Agent requires a suite in New York in order to
accommodate meetings.
7. Payment of Expenses.
(a) The Company hereby agrees to pay on the Closing Date (to
the extent not previously paid) all expenses and fees (other than fees of
Placement Agent's Counsel, except as provided in (iv) below) incident to the
performance of the obligations of the Company under this Agreement, the Warrant
Agreement, and the Placement Agent's Warrant Agreement, including, without
limitation, (i) the fees and expenses of accountants and counsel for the
Company, (ii) all costs and expenses incurred in connection with the
preparation, duplication, printing, filing, delivery and mailing (including the
payment of postage with respect thereto) of the Registration Statement and the
Prospectus and any amendments and supplements thereto and the duplication,
mailing (including the payment of postage with respect thereto) and delivery of
this Agreement, the Selected Dealers Agreements, the Powers of Attorney, and
related documents, including the cost of all copies thereof and of the
Preliminary Prospectuses and of the Prospectus and any amendments thereof or
supplements thereto supplied to the Placement Agent and such dealers as the
Placement Agent may request, in quantities as hereinabove stated, (iii) the
printing, engraving, issuance and delivery of the certificates representing the
Registered Securities, (iv) the
18
<PAGE>
qualification of the Registered Securities under state or foreign securities or
"Blue Sky" laws and determination of the status of such securities under legal
investment laws, including the costs of printing and mailing the "Preliminary
Blue Sky Memorandum," the "Supplemental Blue Sky Memorandum" and "Legal
Investments Survey," if any, and reasonable disbursements and fees of counsel in
connection therewith, (v) postage, mailing, taxes, all costs of marketing their
Registered Securities including all air fares, hotels and road show
presentations, information meetings and presentations, ten (10) bound volumes of
the closing documents and prospectus memorabilia and "tombstone" advertisement
expenses, (vi) costs and expenses in connection with due diligence
investigations, including but not limited to the fees of any independent counsel
or consultant retained, (vii) fees and expenses of the transfer agent and
registrar, (viii) the fees payable to the Commission and the NASD, (ix) the fees
and expenses incurred in connection with the listing of the Registered
Securities on any other market or exchange, and (x) applications for assignments
of a rating of the Securities by qualified rating agencies.
(b) If this Agreement is terminated by the Placement Agent in
accordance with the provisions of Section 6, Section 10(a) or Section 11, the
Company shall reimburse and indemnify the Placement Agent for all of their
actual out-of-pocket expenses, including the fees and disbursements of Placement
Agent's Counsel, less any amounts already paid pursuant to Section 5(c) hereof.
(c) The Company further agrees that, in addition to the
expenses payable pursuant to subsection (a) of this Section 5, it will pay to
the Placement Agent on the Closing Date by certified or bank cashier's check or,
at the election of the Placement Agent, by deduction from the proceeds of the
offering contemplated herein a non-accountable expense allowance equal to three
percent (3%) of the gross proceeds received by the Company from the sale of the
Shares, $25,000 of which has been paid to date, $25,000 of which will be due
upon the printing of preliminary prospectuses, and any unpaid balance of which
will be paid on the Closing Date.
8. Conditions of the Placement Agent's Obligations. The obligations
of the Placement Agent hereunder shall be subject to the continuing accuracy of
the representations and warranties of the Company herein as of the date hereof
and as of the Closing Date and the Second Closing Date, if any, as if they had
been made on and as of the Closing Date; the accuracy on and as of the Closing
Date of the statements of officers of the Company made pursuant to the
provisions hereof; and the performance by the Company on and as of the Closing
Date (or Second Closing Date) of its covenants and obligations hereunder and to
the following further conditions:
(a) The Registration Statement shall have become effective not
later than 5:00 p.m., New York City time, on the date of this Agreement or such
later date and time as shall be consented to in writing by the Placement Agent,
and, at the Closing Date no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or shall be pending or contemplated by the
Commission and any request on the part of the Commission for additional
information shall have been complied with to the reasonable satisfaction of
Placement Agent's Counsel. If the Company has elected to rely upon Rule 430A of
the Regulations, the price of the Shares and any
19
<PAGE>
price-related information previously omitted from the effective Registration
Statement pursuant to such Rule 430A shall have been transmitted to the
Commission for filing pursuant to Rule 424(b) of the Regulations within the
prescribed time period, and prior to Closing Date the Company shall have
provided evidence satisfactory to the Placement Agent of such timely filing, or
a post-effective amendment providing such information shall have been promptly
filed and declared effective in accordance with the requirements of Rule 430A of
the Regulations.
(b) The Placement Agent shall not have advised the Company
that the Registration Statement, or any amendment thereto, contains an untrue
statement of fact which, in the Placement Agent's opinion, is material, or omits
to state a fact which, in the Placement Agent's opinion, is material and is
required to be stated therein or is necessary to make the statements therein not
misleading, or that the Prospectus, or any supplement thereto, contains an
untrue statement of fact which, in the Placement Agent's reasonable opinion, is
material, or omits to state a fact which, in the Placement Agent's reasonable
opinion, is material and is required to be stated therein or is necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
(c) On or prior to the Closing Date and the Second Closing
Date, if any, the Placement Agent shall have received from Placement Agent's
Counsel such opinion or opinions with respect to the organization of the
Company, the validity of the Registered Securities, the Registration Statement,
the Prospectus and other related matters as the Placement Agent may request and
Placement Agent's Counsel shall have received from the Company such papers and
information as they request to enable them to pass upon such matters.
(d) At Closing Date and the Second Closing Date, if any, the
Placement Agent shall have received the favorable opinion of Camhy, Karlinsky &
Stein, LLP ("CKS"), counsel to the Company, dated the Closing Date (or the
Second Closing Date), addressed to the Placement Agent and in form and substance
satisfactory to Placement Agent's Counsel, to the effect that:
(i) the Company (A) has been duly organized and is
validly existing as a corporation in good standing under the laws of
its jurisdiction of incorporation, (B) is duly qualified and
licensed and in good standing as a foreign corporation in each
jurisdiction in which its ownership or leasing of any properties or
the character of its operations requires such qualification or
licensing, and (C) to the best of such counsel's knowledge, has the
requisite corporate power and authority and has obtained the
necessary authorizations, approvals, orders, licenses, certificates,
franchises and permits of and from all governmental or regulatory
officials and bodies including, without limitation, those having
jurisdiction over environmental or similar matters (the absence of
which would have a material adverse effect on the Company), to own
or lease its properties and conduct its business as described in the
Prospectus;
(ii) except as described in the Prospectus, and to the
best of such counsel's knowledge after reasonable investigation, the
Company does not own an
20
<PAGE>
interest in any corporation, limited liability company, partnership,
joint venture, trust or other business entity;
(iii) the Company has a duly authorized, issued and
outstanding capitalization as set forth in the Prospectus, and any
amendment or supplement thereto, under "Capitalization" and
"Description of Securities," and to the best knowledge of such
counsel, the Company is not a party to or bound by any instrument,
agreement or other arrangement providing for it to issue any capital
stock, rights, warrants, options or other securities, except for
this Agreement, the Warrant Agreement, the Placement Agent's Warrant
Agreement, and as described in the Prospectus. The Registered
Securities and all other securities issued or issuable by the
Company conform in all material respects to the statements with
respect thereto contained in the Registration Statement and the
Prospectus. All issued and outstanding securities of the Company
have been duly authorized and validly issued and are fully paid and
non-assessable; and to the best of such counsel's knowledge, none of
such securities were issued in violation of the preemptive rights of
any holders of any security of the Company. The Registered
Securities to be sold by the Company hereunder and under the Warrant
Agreement and Placement Agent's Warrant Agreement are not and will
not, to the best of such counsel's knowledge, be subject to any
preemptive or other similar rights of any stockholder, have been
duly authorized and, when issued, paid for and delivered in
accordance with their terms, will be validly issued, fully paid and
non-assessable and conform in all material respects to the
description thereof contained in the Prospectus; all corporate
action required to be taken for the authorization, issue and sale of
the Registered Securities has been duly and validly taken; and the
certificates representing the Registered Securities are in due and
proper form. The Placement Agent's Warrants constitute valid and
binding obligations of the Company to issue and sell, upon exercise
thereof and payment therefor, the number and type of securities of
the Company called for thereby (except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the application of
equitable princi ples in any action, legal or equitable, and except
as rights to indemnity or contribution may be limited by applicable
law). Upon the issuance and delivery pursuant to this Agreement of
the Registered Securities to be sold by the Company, the Company
will convey, against payment therefor as provided herein, to the
Placement Agent and the Placement Agent, respectively, good and
marketable title to the Registered Securities free and clear of all
liens and other encumbrances;
(iv) the Registration Statement is effective under the
Act, and, if applicable, filing of all pricing information has been
timely made in the appropriate form under Rule 430A, and no stop
order suspending the use of the Preliminary Prospectus, the
Registration Statement or Prospectus or any part of any thereof or
suspending the effectiveness of the Registration Statement has been
issued and no
21
<PAGE>
proceedings for that purpose have been instituted or are pending or,
to the best of such counsel's knowledge, threatened or contemplated
under the Act;
(v) each of the Preliminary Prospectus, the Registration
Statement, and the Prospectus and any amendments or supplements
thereto (other than the financial statements and other financial and
statistical data included therein as to which no opinion need be
rendered) comply as to form in all material respects with the
requirements of the Act and the Regulations. Such counsel shall
state that such counsel has participated in conferences with
officers and other representations of the Company and the Placement
Agent and representations of the independent public accountants for
the Company, at which conferences the contents of the Preliminary
Prospectus, the Registration Statement, the Prospectus, and any
amendments or supplements thereto were discussed, and, although such
counsel is not passing upon and does not assume any responsibility
for the accuracy, completeness or fairness of the statements
contained in the Preliminary Prospectus, the Registration Statement
and Prospectus, and any amendments or supplements thereto, on the
basis of the foregoing, no facts have come to the attention of such
counsel which lead them to believe that either the Registration
Statement or any amendment thereto, at the time such Registration
Statement or amendment became effective or the Preliminary
Prospectus or Prospectus or amendment or supplement thereto as of
the date of such opinion contained any untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading (it being understood that such counsel need express no
opinion with respect to the financial statements and schedules and
other financial and statistical data included in the Preliminary
Prospectus, the Registration Statement or Pro spectus, and any
amendments or supplements thereto);
(vi) to the best of such counsel's knowledge after
reasonable investigation, (A) there are no agreements, contracts or
other documents required by the Act to be described in the
Registration Statement and the Prospectus and filed as exhibits to
the Registration Statement other than those described in the
Registration Statement and the Prospectus and filed as exhibits
thereto; (B) the descriptions in the Registration Statement and the
Prospectus and any supplement or amendment thereto of contracts and
other documents to which the Company is a party or by which it is
bound are accurate in all material respects and fairly represent the
information required to be shown by Form SB-2; (C) there is not
pending or threatened against the Company any action, arbitration,
suit, proceeding, litigation, governmental or other proceeding
(including, without limitation, those having jurisdiction over
environmental or similar matters), domestic or foreign, pending or
threatened against the Company which (x) is required to be disclosed
in the Registration Statement which is not so disclosed (and such
proceedings as are summarized in the Registration Statement are
accurately summarized in all material respects), (y) questions the
validity of the capital stock of the Company or this Agreement, the
Warrant Agree ment or the Placement Agent's Warrant Agreement, or of
any action taken or to be
22
<PAGE>
taken by the Company pursuant to or in connection with any of the
foregoing; and (D) there is no action, suit or proceeding pending or
threatened against the Company before any court or arbitrator or
governmental body, agency or official in which there is a reasonable
possibility of an adverse decision which may result in a material
adverse change in the financial condition, business, affairs,
stockholders' equity, operations, properties, business or results of
operations of the Company, which could adversely affect the present
or prospective ability of the Company to perform its obligations
under this Agreement, the Warrant Agreement or the Placement Agent's
Warrant Agreement or which in any manner draws into question the
validity or enforceability of this Agreement, the Warrant Agreement
or the Placement Agent's Warrant Agreement;
(vii) the Company has the corporate power and authority
to enter into each of this Agreement, the Warrant Agreement and the
Placement Agent's Warrant Agreement and to consummate the
transactions provided for therein; and each of this Agreement, the
Warrant Agreement and the Placement Agent's Warrant Agreement has
been duly authorized, executed and delivered by the Company. Each of
this Agreement, the Warrant Agreement and the Placement Agent's
Warrant Agreement, assuming due authorization, execution and
delivery by each other party thereto, constitutes a legal, valid and
binding agreement of the Company enforceable against the Company in
accordance with its terms (except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the application of
equitable principles in any action, legal or equitable, and except
as rights to indemnity or contribution may be limited by applicable
law), and none of the Company's execution, delivery or performance
of this Agreement, the Warrant Agreement and the Placement Agent's
Warrant Agreement, its consummation of the transactions contemplated
herein or therein, or the conduct of its business as de scribed in
the Registration Statement, the Prospectus, and any amendments or
supple ments thereto conflicts with or results in any breach or
violation of any of the terms or provisions of, or constitutes a
default under, or result in the creation or imposition of any lien,
charge, claim, encumbrance, pledge, security interest, defect or
other restriction or equity of any kind whatsoever upon, any
property or assets (tangible or intangible) of the Company pursuant
to the terms of (A) the certificate of incorporation or by-laws of
the Company, as amended, (B) any license, contract, indenture,
mortgage, deed of trust, voting trust agreement, stockholders'
agreement, note, loan or credit agreement or any other agreement or
instrument known to such counsel to which the Company is a party or
by which it is bound, or (C) any federal, state or local statute,
rule or regulation applicable to the Company or any judgment, decree
or order known to such counsel of any arbitrator, court, regulatory
body or administrative agency or other governmental agency or body
(including, without limitation, those having jurisdiction over
environmental or similar matters), domestic or foreign, having
jurisdiction over the Company or any of its activities or
properties;
23
<PAGE>
(viii) no consent, approval, authorization or order, and
no filing with, any court, regulatory body, government agency or
other body (other than such as may be required under federal
securities or Blue Sky laws, as to which no opinion need be
rendered) is required in connection with the issuance of the
Registered Securities pursuant to the Prospectus, and the
Registration Statement, the performance of this Agreement, the
Warrant Agreement and the Placement Agent's Warrant Agreement, and
the transactions contemplated hereby and thereby, except such as
have been obtained under the Securities Act and the Regulations;
(ix) to the best knowledge of such counsel, and except
as disclosed in Registration Statement and the Prospectus, the
Company is not in breach of, or in default under, any material term
or provision of any license, contract, indenture, mortgage,
installment sale agreement, deed of trust, lease, voting trust
agreement, stockholders' agreement, note, loan or credit agreement
or any other agreement or instrument evidencing an obligation for
borrowed money, or any other agreement or instrument to which the
Company is a party or by which the Company is bound or to which the
property or assets (tangible or intangible) of the Company is
subject; and the Company is not in violation of any term or
provision of its certificate of incorporation or by-laws, as
amended, and to the best of such counsel's knowledge after
reasonable investigation, not in violation of any franchise,
license, permit, judg ment, decree, order, statute, rule or
regulation which would have a material adverse effect on the
Company;
(x) the statements in the Prospectus under "Dividend
Policy" and "Description of Securities," have been reviewed by such
counsel, and insofar as they refer to statements of law,
descriptions of statutes, licenses, rules or regulations or legal
conclusions, are accurate summaries and fairly and correctly present
the information called for therein;
(xi) except as otherwise described in the Prospectus, to
the best of such counsel's knowledge and based upon a review of the
outstanding securities and the contracts furnished to such counsel
by the Company, no person, corporation, trust, partnership,
association or other entity has the right to include and/or register
any securities of the Company in the Registration Statement, require
the Company to file any registration statement or, if filed, to
include any security in such registration statement.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws, rules and regulations of
the United States and the laws, rules and regulations of the State of New York,
to the extent such counsel deems proper and to the extent specified in such
opinion, if at all, upon an opinion or opinions (in form and substance
satisfactory to Placement Agent's Counsel) of other counsel acceptable to
Placement Agent's Counsel, familiar with the applicable laws; (B) as to matters
of fact, to the extent they deem proper, on certificates and written statements
of responsible officers of the Company and certificates or other
24
<PAGE>
written statements of officers of departments of various jurisdictions having
custody of documents respecting the corporate existence or good standing of the
Company, provided that copies of any such statements or certificates shall be
delivered to Placement Agent's Counsel if requested. The opinion of such counsel
shall state that knowledge shall not include the knowledge of a director or
officer of the Company who is affiliated with such firm in his or her capacity
as an officer or director of the Company. The opinion of such counsel for the
Company shall state that the opinion of any such other counsel is in form
satisfactory to such counsel.
(e) On or prior to the Closing Date and the Second Closing
Date, if any, Placement Agent's Counsel shall have been furnished such
documents, certificates and opinions as they may reasonably require for the
purpose of enabling them to review or pass upon the matters referred to in
subsection (c) of this Section 6, or in order to evidence the accuracy,
completeness or satisfaction of any of the representations, warranties or
conditions of the Company or herein contained.
(f) Prior to the Closing Date and the Second Closing Date, if
any, (i) there shall have been no material adverse change nor development
involving a prospective change in the condition, financial or otherwise,
prospects, stockholders' equity or the business activities of the Company,
whether or not in the ordinary course of business, from the latest dates as of
which such condition is set forth in the Registration Statement and Prospectus;
(ii) there shall have been no transaction, not in the ordinary course of
business, entered into by the Company, from the latest date as of which the
financial condition of the Company is set forth in the Registration Statement
and Prospectus which is adverse to the Company; (iii) the Company shall not be
in default under any provision of any instrument relating to any outstanding
indebtedness which default has not been waived; (iv) the Company shall not have
issued any securities (other than the Registered Securities) or declared or paid
any dividend or made any distribution in respect of its capital stock of any
class and there has not been any change in the capital stock, or any material
increase in the debt (long or short term) or liabilities or obligations of the
Company (contingent or otherwise); (v) no material amount of the assets of the
Company shall have been pledged or mortgaged, except as set forth in the
Registration Statement and Prospectus; (vi) no action, suit or proceeding, at
law or in equity, shall have been pending or threatened (or circumstances giving
rise to same) against the Company, or affecting any of its respective properties
or businesses before or by any court or federal, state or foreign commission,
board or other administrative agency wherein an unfavorable decision, ruling or
finding may materially adversely affect the business, operations, prospects or
financial condition or income of the Company, except as set forth in the
Registration Statement and Prospectus; and (vii) no stop order shall have been
issued under the Act and no proceedings therefor shall have been initiated,
threatened or contemplated by the Commission.
(g) At the Closing Date and the Second Closing Date, if any,
the Placement Agent shall have received a certificate of the Company signed on
behalf of the Company by the principal executive officer of the Company, dated
the Closing Date as the case may be, to the effect that such executive has
carefully examined the Registration Statement, the Prospectus and this
Agreement, and that:
25
<PAGE>
(i) The representations and warranties of the Company in
this Agreement are true and correct, as if made on and as of the
Closing Date and the Second Closing Date, if any, and the Company
has complied with all agreements and covenants and satisfied all
conditions contained in this Agreement on its part to be performed
or satisfied at or prior to such Closing Date;
(ii) No stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued, and no
proceedings for that purpose have been instituted or are pending or,
to the best of each of such person's knowledge after due inquiry,
are contemplated or threatened under the Act;
(iii) The Registration Statement and the Prospectus and,
if any, each amendment and each supplement thereto, contain all
statements and information required by the Act to be included
therein, and none of the Registration Statement, the Prospectus nor
any amendment or supplement thereto includes any untrue statement of
a material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading and neither the Preliminary Prospectus or any supplement,
as of their respective dates, thereto included any untrue statement
of a material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not
misleading; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and the
Prospectus, (a) the Company has not incurred up to and including the
Closing Date and the Second Closing Date, if any, other than in the
ordinary course of its business, any material liabilities or
obligations, direct or contingent; (b) the Company has not paid or
declared any dividends or other distributions on its capital stock;
(c) the Company has not entered into any transactions not in the
ordinary course of business; (d) there has not been any change in
the capital stock or material increase in long-term debt or any
increase in the short-term borrowings (other than any increase in
the short-term borrowings in the ordinary course of business) of the
Company, (e) the Company has not sustained any loss or damage to its
property or assets, whether or not insured, (f) there is no
litigation which is pending or threatened (or circumstances giving
rise to same) against the Company or any affiliated party of any of
the foregoing which is required to be set forth in an amended or
supplemented Prospectus which has not been set forth, and (g) there
has occurred no event required to be set forth in an amended or
supplemented Prospectus which has not been set forth.
References to the Registration Statement and the Prospectus in this subsection
(g) are to such documents as amended and supplemented at the date of such
certificate.
(h) By the Closing Date, the Placement Agent will have
received clearance from the NASD as to the amount of compensation allowable or
payable to the Placement Agent.
26
<PAGE>
(i) At the time this Agreement is executed, the Placement
Agent shall have received a letter, dated such date, addressed to the Placement
Agent in form and substance satisfactory in all respects (including the
non-material nature of the changes or decreases, if any, referred to in clause
(iii) below) to the Placement Agent and Placement Agent's Counsel, from Price
Waterhouse:
(i) confirming that they are independent certified
public accountants with respect to the Company within the meaning of
the Act and the applicable Rules and Regulations;
(ii) stating that it is their opinion that the financial
statements and supporting schedules of the Company included in the
Registration Statement comply as to form in all material respects
with the applicable accounting requirements of the Act and the
Regulations thereunder and that the Placement Agent may rely upon
the opinion of Price Waterhouse with respect to the financial
statements and supporting schedules included in the Registration
Statement;
(iii) stating that, on the basis of a limited review
which included a reading of the latest available unaudited interim
financial statements of the Company (with an indication of the date
of the latest available unaudited interim financial statements), a
reading of the latest available minutes of the stockholders and
board of directors and the various committees of the board of
directors of the Company, consultations with officers and other
employees of the Company responsible for financial and accounting
matters and other specified procedures and inquiries, nothing has
come to their attention which would lead them to believe that (A)
the unaudited financial statements and supporting schedules of the
Company included in the Registration Statement, if any, do not
comply as to form in all material respects with the applicable
accounting requirements of the Act and the Regulations or are not
fairly presented in conformity with generally accepted accounting
principles applied on a basis substantially consistent with that of
the audited financial statements of the Company included in the
Registration Statement, or (B) at a specified date not more than
five (5) days prior to the effective date of the Registration
Statement, there has been any change in the capital stock or
material increase in long-term debt of the Company, or any material
decrease in the stockholders' equity or net current assets or net
assets of the Company as compared with amounts shown in the balance
sheet included in the Registration Statement, other than as set
forth in or contemplated by the Registration Statement, or, if there
was any change or decrease, setting forth the amount of such change
or decrease;
(iv) stating that they have compared specific dollar
amounts, numbers of shares, percentages of revenues and earnings,
statements and other financial information pertaining to the Company
set forth in the Prospectus in each case to the extent that such
amounts, numbers, percentages, statements and information may be
derived from the general accounting records, including work sheets,
of the Company
27
<PAGE>
and excluding any questions requiring an interpretation by legal
counsel, with the results obtained from the application of specified
readings, inquiries and other appropriate procedures (which procedures
do not constitute an examination in accordance with generally accepted
auditing standards) set forth in the letter and found them to be in
agreement; and
(v) statements as to such other material matters
incident to the transac tion contemplated hereby as the Placement
Agent may reasonably request.
(j) At the Closing Date and the Second Closing Date, if any,
the Placement Agent shall have received from Price Waterhouse a letter, dated as
of the Closing Date (or the Second Closing Date), to the effect that they
reaffirm that statements made in the letter furnished pursuant to Subsection (i)
of this Section 8, except that the specified date referred to shall be a date
not more than five (5) days prior to Closing Date (or the Second Closing Date),
and, if the Company has elected to rely on Rule 430A of the Rules and
Regulations, to the further effect that they have carried out procedures as
specified in clause (iv) of Subsection (i) of this Section 8 with respect to
certain amounts, percentages and financial information as specified by the
Placement Agent and deemed to be a part of the Registration Statement pursuant
to Rule 430A(b) and have found such amounts, percentages and financial
information to be in agreement with the records specified in such clause (iv).
(k) On the Closing Date and the Second Closing Date, if any,
there shall have been duly tendered to the Placement Agent for the several
Placement Agent's accounts the appropriate number of Registered Securities.
(l) No order suspending the sale of the Registered Securities
in any jurisdiction designated by the Placement Agent pursuant to subsection (e)
of Section 4 hereof shall have been issued on the Closing Date (or the Second
Closing Date) and no proceedings for that purpose shall have been instituted or
shall be contemplated.
(m) On or before the Closing Date and the Second Closing Date,
if any, the Company shall have executed and delivered to the Placement Agent,
(i) the Placement Agent's Warrant Agreement, substantially in the form filed as
Exhibit 4.2, to the Registration Statement, in final form and substance
satisfactory to the Placement Agent, and (ii) the Placement Agent's Warrants in
such denominations and to such designees as shall have been provided to the
Company.
(n) On or before Closing Date and the Second Closing Date, if
any, there shall have been delivered to the Placement Agent all of the Lock-up
Agreements in final form and substance satisfactory to Placement Agent's
Counsel.
(o) On or before the Closing Date or the Second Closing Date,
if any, the Company shall have executed the Warrant Agreement, substantially in
the form filed as Exhibit
28
<PAGE>
4.1 to the Registration Statement, in final form and substance satisfactory to
the Placement Agent and their counsel.
If any condition to the Placement Agent's obligations hereunder to
be fulfilled prior to or at the Closing Date is not so fulfilled, the Placement
Agent may terminate this Agreement or, if the Placement Agent so elect, they may
waive any such conditions which have not been fulfilled or extend the time for
their fulfillment.
9. Indemnification.
(a) The Company agrees to indemnify and hold harmless the
Placement Agent (for purposes of this Section 9 "Placement Agent" shall include
the officers, directors, partners, employees, agents and counsel of the
Placement Agent), from and against any and all loss, liability, claim, damage,
and expense whatsoever (including, but not limited to, reasonable attorneys'
fees and any and all reasonable expense whatsoever incurred in investigating,
preparing or defending against any litigation, commenced or threatened, or any
claim whatsoever and any and all amounts paid in settlement of any claim or
litigation provided that the indemnified persons may not agree to any such
settlement without the prior written consent of the Company), as and when
incurred, arising out of, based upon or in connection with (i) any untrue
statement or alleged untrue statement of a material fact contained (A) in any
Preliminary Prospectus, the Registration Statement or the Prospectus (as from
time to time amended and supplemented); or (B) in any application or other
document or communication (in this Section 9 collectively called "application")
executed by or on behalf of the Company or based upon written information
furnished by or on behalf of the Company in any jurisdiction in order to qualify
the Registered Securities under the securities laws thereof or filed with the
Commission, any state securities commission or agency, The Nasdaq Stock Market,
Inc. or any securities exchange; or any omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading (in the case of the Prospectus, in the light of the
circumstances under which they were made), unless such statement or omission was
made in reliance upon and in conformity with written information furnished to
the Company with respect to the Placement Agent by or on behalf of the Placement
Agent expressly for use in any Preliminary Prospectus, the Registration
Statement or Prospectus, or any amendment thereof or supplement thereto, or in
any application, as the case may be; or (ii) any breach of any representation,
warranty, covenant or agreement of the Company contained in this Agreement. The
indemnity agreement in this subsection (a) shall be in addition to any liability
which the Company may have at common law or otherwise.
(b) The Placement Agent agrees to indemnify and hold harmless
the Company, each of its directors, each of its officers who has signed the
Registration Statement, and each other person, if any, who controls the Company,
within the meaning of the Act, to the same extent as the foregoing indemnity
from the Company to the Placement Agent but only with respect to statements or
omissions, if any, made in any Preliminary Prospectus, the Registration
Statement or Prospectus or any amendment thereof or supplement thereto or in any
application made in reliance upon, and in strict conformity with, written
information furnished to the
29
<PAGE>
Company with respect to the Placement Agent by the Placement Agent expressly for
use in such Preliminary Prospectus, the Registration Statement or Prospectus or
any amendment thereof or supplement thereto or in any such application, provided
that such written information or omissions only pertain to disclosures in the
Preliminary Prospectus, the Registration Statement or Prospectus directly
relating to the transactions effected by the Placement Agent in connection with
this Offering. The Company acknowledges that the statements with respect to the
public offering of the Registered Securities set forth under the heading "Plan
of Distribution" and the stabilization legend in the Prospectus have been
furnished by the Placement Agent expressly for use therein and constitute the
only information furnished in writing by or on behalf of the Placement Agent for
inclusion in the Prospectus. The indemnity agreement in this subsection (b)
shall be in addition to any liability which the Placement Agent may have at
common law or otherwise.
(c) Promptly after receipt by an indemnified party under this
Section 9 of notice of the commencement of any action, suit or proceeding, such
indemnified party shall, if a claim in respect thereof is to be made against one
or more indemnifying parties under this Section 9, notify each party against
whom indemnification is to be sought in writing of the commencement thereof (but
the failure to so notify an indemnifying party shall not relieve it from any
liability which it may have otherwise or which it may have under this Section 9,
except to the extent that it has been prejudiced in any material respect by such
failure). In case any such action is brought against any indemnified party, and
it notifies an indemnifying party or parties of the commencement thereof, the
indemnifying party or parties will be entitled to participate therein, and to
the extent it may elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by the indemnifying parties in connection with
the defense of such action at the expense of the indemnifying party, (ii) the
indemnifying parties shall not have employed counsel reasonably satisfactory to
such indemnified party to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded, based on the
advise of counsel, that there may be defenses available to it or them which are
different from or additional to those available to one or all of the
indemnifying parties (in which case the indemnifying parties shall not have the
right to direct the defense of such action on behalf of the indemnified party or
parties), in any of which events the reasonable fees and expenses of one
additional counsel shall be borne by the indemnifying parties. In no event shall
the indemnifying parties be liable for fees and expenses of more than one
counsel (in addition to any local counsel) separate from their own counsel for
all indemnified parties in connection with any one action or separate but
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances. Anything in this Section 9 to the contrary
notwithstanding, an indemnifying party shall not be liable for any settlement of
any claim or action effected without its written consent; provided, however,
that such consent was not unreasonably withheld.
30
<PAGE>
(d) In order to provide for just and equitable contribution in
any case in which (i) an indemnified party makes claim for indemnification
pursuant to this Section 9, but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the expiration
of time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this Section 9 provide for indemnification in such
case, or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or liabilities (or
actions in respect thereof) (A) in such proportion as is appropriate to reflect
the relative benefits received by each of the contributing parties, on the one
hand, and the party to be indemnified on the other hand, from the offering of
the Registered Securities or (B) if the allocation provided by clause (A) above
is not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above but also
the relative fault of each of the contributing parties, on the one hand, and the
party to be indemnified on the other hand in connection with the statements or
omissions that resulted in such losses, claims, damages, expenses or
liabilities, as well as any other relevant equitable considerations. In any case
where the Company is a contributing party and the Placement Agent are the
indemnified party, the relative benefits received by the Company on the one
hand, and the Placement Agent, on the other, shall be deemed to be in the same
proportion as the total net proceeds from the offering of the Registered
Securities (before deducting expenses other than underwriting discounts and
commissions) bear to the total underwriting discounts received by the Placement
Agent hereunder, in each case as set forth in the table on the Cover Page of the
Prospectus. Relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Placement Agent, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages, expenses or liabilities (or
actions in respect thereof) referred to above in this subdivision (d) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this subdivision (d) the Placement
Agent shall not be required to contribute any amount in excess of the
underwriting discount applicable to the Registered Securities purchased by the
Placement Agent hereunder. No person guilty of fraudulent misrepresentation
(within the meaning of Section 12(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 9, each person, if any, who
controls the Company within the meaning of the Act, each officer of the Company
who has signed the Registration Statement, and each director of the Company
shall have the same rights to contribution as the Company, subject in each case
to this subparagraph (d). Any party entitled to contribution will, promptly
after receipt of notice of commencement of any action, suit or proceeding
against such party in respect to which a claim for contribution may be made
against another party or parties under this subparagraph (d), notify such party
or parties from whom contribution may be sought, but the omission so to notify
such party or parties shall not relieve the party or parties from whom
contribution may be sought from any obligation it or they may have hereunder or
otherwise than under this subparagraph (d), or to
31
<PAGE>
the extent that such party or parties were not adversely affected by such
omission. The contribution agreement set forth above shall be in addition to any
liabilities which any indemnifying party may have at common law or otherwise.
10. Representations and Agreements to Survive Delivery. All
representations, warranties and agreements contained in this Agreement or
contained in certificates of officers of the Company submitted pursuant hereto,
shall be deemed to be representations, warranties and agreements of the Company,
at the Closing Date and Second Closing Date, if any, and such representations,
warranties and agreements of the Company, and the respective indemnity and
contribution agreements contained in Section 9 hereof shall remain operative and
in full force and effect regardless of any investigation made by or on behalf of
the Placement Agent, the Company, any controlling person of either the Placement
Agent or the Company, and shall survive termination of this Agreement or the
issuance and delivery of the Registered Securities to the Placement Agent.
11. Effective Date.
This Agreement shall become effective at 5:00 p.m., New York
City time, on the date hereof.
12. Termination.
(a) Subject to subsection (b) of this Section 12, the
Placement Agent shall have the right to terminate this Agreement, (i) if any
domestic or international event or act or occurrence has materially disrupted,
or in the Placement Agent's reasonable opinion will in the immediate future
materially disrupt the financial markets; or (ii) any material adverse change in
the financial markets shall have occurred; or (iii) or in the over-the-counter
market shall have been suspended, or minimum or maximum prices for trading shall
have been fixed, or maximum ranges for prices for securities shall have been
required on the over-the-counter market by the NASD or by order of the
Commission or any other government authority having jurisdiction; or (iv) if the
United States shall have become involved in a war or major hostilities, or if
there shall have been an escalation in an existing war or major hostilities or a
national emergency shall have been declared in the United States; or (v) if a
banking moratorium has been declared by a state or federal authority; or (vi) if
the Company shall have sustained a loss material or substantial to the Company
by fire, flood, accident, hurricane, earthquake, theft, sabotage or other
calamity or malicious act which, whether or not such loss shall have been
insured, will, in the Placement Agent's opinion, make it inadvisable to proceed
with the delivery of the Registered Securities; or (viii) if there shall have
been such a material adverse change in the prospects or conditions of the
Company, or such material adverse change in the general market, political or
economic conditions, in the United States or elsewhere as in the Placement
Agent's judgment would make it inadvisable to proceed with the offering, sale
and/or delivery of the Registered Securities.
(b) If this Agreement is terminated by the Placement Agent in
accordance with any of the provisions of Section 8, Section 11(a) or Section 12,
the Company shall promptly reimburse and indemnify the Placement Agent pursuant
to Section 7(b) hereof. Notwithstanding
32
<PAGE>
any contrary provision contained in this Agreement, any election hereunder or
any termination of this Agreement (including, without limitation, pursuant to
Sections 8, 12, 13 and 14 hereof), and whether or not this Agreement is
otherwise carried out, the provisions of Section 7 and Section 9 shall not be in
any way affected by such election or termination or failure to carry out the
terms of this Agreement or any part hereof.
13. Default by the Company. If the Company shall fail at the Closing
Date to sell and deliver the number of Registered Securities which it is
obligated to sell hereunder on such date, then this Agreement shall terminate
without any liability on the part of any non-defaulting party other than
pursuant to Section 7, Section 9 and Section 12 hereof. No action taken pursuant
to this Section shall relieve the Company from liability, if any, in respect of
such default.
14. Notices. All notices and communications hereunder, except as
herein otherwise specifically provided, shall be in writing and shall be deemed
to have been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Placement Agent shall be directed to National
Securities Corporation, 1001 Fourth Avenue, Suite 2200, Seattle, Washington
98154, Attention: Steven Rothstein, with a copy, which shall not constitute
notice, to D'Ancona & Pflaum, 30 N. LaSalle St., Suite 2900, Chicago, Illinois
60602, Attention: Arthur Don, Esq. Notices to the Company shall be directed to
the Company at Casull Arms Corporation, 456 Fairview Road, P.O. Box 1090, Afton,
Wyoming 83110, Attention: Allan R. Tessler, with a copy, which shall not
constitute notice, to Camhy, Karlinsky & Stein LLP, 1740 Broadway, 16th Floor,
New York, New York 10019, Attention: Alan I. Annex, Esq.
15. Parties. This Agreement shall inure solely to the benefit of and
shall be binding upon the Placement Agent, the Company and the controlling
persons, directors and officers referred to in Section 7 hereof and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Agreement or any provisions herein
contained. No purchaser of Registered Securities from any Placement Agent shall
be deemed to be a successor by reason merely of such purchase.
16. Construction. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of New York without giving
effect to the choice of law or conflict of laws principles.
17. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
18. Entire Agreement; Amendments. This Agreement, the Warrant
Agreement and the Placement Agent's Warrant Agreement constitute the entire
agreement of the parties hereto and supersede all prior written or oral
agreements, understandings and negotiations with respect
33
<PAGE>
to the subject matter hereof. This Agreement may not be amended except in a
writing, signed by the Placement Agent, and the Company.
If the foregoing correctly sets forth the understanding among the
Placement Agent and the Company, please so indicate in the space provided below
for that purpose, whereupon this letter shall constitute a binding agreement
among us.
Very truly yours,
CASULL ARMS CORPORATION
By:______________________________________
Name: Allan R. Tessler
Title: Chairman of the Board
CONFIRMED AND ACCEPTED AS OF THE DATE FIRST ABOVE WRITTEN:
NATIONAL SECURITIES CORPORATION
By:___________________________________
Name: Steven A. Rothstein
Title: Chairman
-34-
<PAGE>
CASULL ARMS CORPORATION
AND
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
AND
NATIONAL SECURITIES CORPORATION
-----------------------
FORM OF
WARRANT AGREEMENT
Dated as of __________, 1997
<PAGE>
AGREEMENT, dated this ____ day of ___________, 1997, among CASULL ARMS
CORPORATION, a Delaware corporation (the "Company"), CONTINENTAL STOCK TRANSFER
AND TRUST COMPANY, a New York banking corporation, as Warrant Agent (the
"Warrant Agent"), and NATIONAL SECURITIES CORPORATION, its successors and
assigns ("National" or the "Placement Agent").
W I T N E S S E T H:
WHEREAS, in connection with (i) the Company's offering to the public of up
to 1,400,000 shares of the Company's Common Stock (as defined in Section 1) and
1,400,000 redeemable common stock purchase warrants (as defined in Section 1),
each warrant entitling the holder thereof to purchase one share of Common Stock;
and (ii) the sale to National of warrants (as defined in Section 1) to purchase
up to 140,000 shares of Common Stock and 140,000 Warrants, the Company will
issue up to 1,540,000 Warrants (subject to increase as provided in the Placement
Agent's Warrant Agreement); and
WHEREAS, the securities will be offered on a "best efforts, all or none"
basis as to the 400,000 share and 400,000 Warrant minimum offering, and on a
"best efforts" basis as to the remaining 1,000,000 shares and Warrants; and
WHEREAS, the Company desires to provide for the issuance of certificates
representing the Warrants; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer, exchange and redemption of the Warrants, the
issuance of certificates representing the Warrants, the exercise of the Warrants
and the rights of the holders thereof.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
hereinafter set forth and for the purpose of defining the terms and provisions
of the Warrants and the certificates representing the Warrants and the
respective rights and obligations thereunder of the Company, National, the
holders of certificates representing the Warrants and the Warrant Agent, the
parties hereto agree as follows:
SECTION 1. Definitions. As used herein, the following terms shall have the
following meanings, unless the context shall otherwise require:
(a) "Act" shall mean the Securities Act of 1933, as amended.
(b) "Common Stock" shall mean the authorized stock of the Company of
any class, whether now or hereafter authorized, which has the right to
participate in the voting and in the distribution of earnings and assets of the
Company without limit as to amount or percentage which at the date hereof
consists of 10,000,000 shares of Common Stock, par value $.01 per share.
<PAGE>
(c) "Commission" shall mean the Securities and Exchange Commission.
(d) "Corporate Office" shall mean the office of the Warrant Agent
(or its successor) at which at any particular time its business in New York, New
York, shall be administered, which office is located on the date hereof c/o
Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York
10004.
(e) "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
(f) "Exercise Date" shall mean, subject to the provisions of Section
5(b) hereof, as to any Warrant, the date on which the Warrant Agent shall have
received both (i) the Warrant Certificate representing such Warrant, with the
exercise form thereon duly executed by the Registered Holder hereof or his
attorney duly authorized in writing, and (ii) payment in cash or by official
bank or certified check made payable to the Warrant Agent for the account of the
Company, of the amount in lawful money of the United States of America equal to
the applicable Exercise Price (as hereinafter defined) in good funds.
(g) "Exercise Price" shall mean, subject to modification and
adjustment as provided in Section 8, $6.00 per share [100% of the initial public
offering price per share of Common Stock] and further subject to the Company's
right, in its sole discretion, to decrease the Exercise Price for a period of
not less than 30 days on not less than 30 days' prior written notice to the
Registered Holders and National.
(h) "Initial Warrant Exercise Date" shall mean ______________, 1998
[the first day of the thirteenth calendar month after the day of the Company's
prospectus].
(i) "Initial Warrant Redemption Date" shall mean ___________, 1998
[the first day of the thirteenth calendar month after the day of the Company's
prospectus].
(j) "Market Price" shall mean the last reported sale price, or, in
case no such reported sale takes place on such day, the average of the last
reported sales prices for the last three (3) trading days, in either case as
officially reported by the principal securities exchange on which the Common
Stock is listed or admitted to trading or by the Nasdaq Stock Market, or, if the
Common Stock is not listed or admitted to trading on any national securities
exchange or quoted by Nasdaq, the average closing bid price as furnished by
Nasdaq through Nasdaq or similar organization if Nasdaq is no longer reporting
such information, or if the Common Stock is not quoted on Nasdaq, as determined
in good faith (using customary valuation methods) by resolution of the members
of the Board of Directors of the Company, based on the best information
available to it.
(k) "NASD" shall mean the National Association of Securities
Dealers, Inc.
2
<PAGE>
(l) "Nasdaq" shall mean the Nasdaq Stock Market.
(m) "Placement Agent Agreement" shall mean the underwriting
agreement dated ____________, 1997 between the Company and the Placement Agent
relating to the sale to the public of the 1,400,000 shares of Common Stock and
1,400,000 Warrants.
(n) "Placement Agent's Warrants" shall mean warrants issued pursuant
to the Placement Agent's Warrant Agreement for the purchase of an additional
140,000 shares of Common Stock and/or 140,000 Warrants. Each Placement Agent's
Warrant shall entitle the holder thereof to purchase one share of Common Stock
and/or one Warrant to purchase one share of Common Stock, at an initial exercise
price of $7.20 per share and $.12 per Warrant, respectively [120% of the
offering prices per share and per Warrant, respectively].
(o) "Placement Agent's Warrant Agreement" shall mean the agreement
dated as of _____________, 1997 between the Company and National relating to and
governing the terms and provisions of the Placement Agent's Warrants.
(p) "Redemption Date" shall mean the date (which may not occur
before the Initial Warrant Redemption Date) fixed for the redemption of the
Warrants in accordance with the terms hereof.
(q) "Redemption Price" shall mean the price at which the Company
may, at its option, redeem the Warrants, in accordance with the terms hereof,
which price shall be $.05 per Warrant, subject to adjustment from time to time
pursuant to the provisions of Section 9 hereof.
(r) "Registered Holder" shall mean the person in whose name any
certificate representing the Warrants shall be registered on the books
maintained by the Warrant Agent pursuant to Section 6.
(s) "Transfer Agent" shall mean Continental Stock Transfer & Trust
Company, or its authorized successor.
(t) "Warrants" shall mean redeemable common stock purchase warrants
offered to the public in connection with this offering, each Warrant entitling
the holder thereof to purchase one share of Common Stock, exercisable at an
initial exercise price of $6.00 per share [100% of the initial public offering
price per share of Common Stock] at any time over a forty-eight month period
commencing on the first day of the thirteenth calendar month after the date of
the Company's prospectus.
(u) "Warrant Certificate" shall mean a certificate representing each
of the Warrants substantially in the form annexed hereto as Exhibit A.
3
<PAGE>
(v) "Warrant Expiration Date" shall mean, unless the Warrants are
redeemed as provided in Section 9 hereof prior to such date, 5:00 p.m. (New York
time), on _________________, 2002 [five years after the date of the Company's
prospectus], the Redemption Date as defined herein, whichever date is earlier;
provided that if such date shall in the State of New York be a holiday or a day
on which banks are authorized to close, then 5:00 p.m. (New York time) on the
next following day which, in the State of New York, is not a holiday or a day on
which banks are authorized to close. Upon five business days' prior written
notice to the Registered Holders, the Company shall have the right to extend the
Warrant Expiration Date.
SECTION 2. Warrants and Issuance of Warrant Certificates.
(a) Each Warrant shall initially entitle the Registered Holder of
the Warrant Certificate representing such Warrant to purchase at the Exercise
Price therefor from the Initial Warrant Exercise Date until the Warrant
Expiration Date one share of Common Stock upon the exercise thereof in
accordance with the terms hereof, subject to modification and adjustment as
provided in Section 8.
(b) Upon execution of this Agreement, Warrant Certificates
representing the number of Warrants sold pursuant to the Underwriting Agreement
(subject to modification and adjustment as provided in Section 8) shall be
executed by the Company and delivered to the Warrant Agent.
(c) Upon exercise of the Placement Agent's Warrants as provided
therein, Warrant Certificates representing all or a portion of 140,000 Warrants
(subject to modification and adjustment as provided in Section 8 hereof and in
the Placement Agent's Warrant Agreement), to purchase up to an aggregate of
140,000 shares of Common Stock shall be countersigned, issued and delivered by
the Warrant Agent upon written order of the Company signed by its Chairman of
the Board, Chief Executive Officer, President or a Vice President and by its
Treasurer or an Assistant Treasurer or its Secretary or an Assistant Secretary.
(d) From time to time, up to the Warrant Expiration Date or the
Redemption Date, whichever date is earlier, the Warrant Agent shall countersign
and deliver Warrant Certificates in required denominations of one or whole
number multiples thereof to the person entitled thereto in connection with any
transfer or exchange permitted under this Agreement. Except as provided herein,
no Warrant Certificates shall be issued except (i) Warrant Certificates
initially issued hereunder and those issued on or after the Initial Warrant
Exercise Date, upon the exercise of fewer than all Warrants held by the
exercising Registered Holder, (ii) Warrant Certificates issued upon any transfer
or exchange of Warrants, (iii) Warrant Certificates issued in replacement of
lost, stolen, destroyed or mutilated Warrant Certificates pursuant to Section 7,
(iv) Warrant Certificates issued pursuant to the Placement Agent's Warrant
Agreement, and (v) at the option of the Company, Warrant Certificates in such
form as may be approved by its Board of Directors, to reflect any adjustment or
change in the Exercise Price, the number of shares of
4
<PAGE>
Common Stock purchasable upon exercise of the Warrants or the Redemption Price
therefor made pursuant to Section 8 hereof.
SECTION 3. Form and Execution of Warrant Certificates.
(a) The Warrant Certificates shall be substantially in the form
annexed hereto as Exhibit A (the provisions of which are hereby incorporated
herein) and may have such letters, numbers or other marks of identification or
designation and such legends, summaries or endorsements printed, lithographed or
engraved thereon as the Company may deem appropriate and as are not inconsistent
with the provisions of this Agreement, or as may be required to comply with any
law or with any rule or regulation made pursuant thereto or with any rule or
regulation of any stock exchange on which the Warrants may be listed, or to
conform to usage. The Warrant Certificates shall be dated the date of issuance
thereof (whether upon initial issuance, transfer, exchange or in lieu of
mutilated, lost, stolen or destroyed Warrant Certificates) and issued in
registered form. Warrants shall be numbered serially with the letter "W" on the
Warrants.
(b) Warrant Certificates shall be executed on behalf of the Company
by its Chairman of the Board, Chief Executive Officer, President or any Vice
President and by its Treasurer or an Assistant Treasurer or its Secretary or an
Assistant Secretary, by manual signatures or by facsimile signatures printed
thereon, and shall have imprinted thereon a facsimile of the Company's seal.
Warrant Certificates shall be manually countersigned by the Warrant Agent and
shall not be valid for any purpose unless so countersigned. In any case any
officer of the Company who shall have signed any of the Warrant Certificates
shall cease to be such officer of the Company before the date of issuance of the
Warrant Certificates or before countersignature by the Warrant Agent and issue
and delivery thereof, such Warrant Certificates, nevertheless, may be
countersigned by the Warrant Agent, issued and delivered with the same force and
effect as though the person who signed such Warrant Certificates had not ceased
to be such officer of the Company. After countersignature by the Warrant Agent,
Warrant Certificates shall be delivered by the Warrant Agent to the Registered
Holder promptly and without further action by the Company, except as otherwise
provided by Section 4(a) hereof.
SECTION 4. Exercise.
(a) Warrants in denominations of one or whole number multiples
thereof may be exercised by the Registered Holder thereof commencing at any time
on or after the Initial Warrant Exercise Date, but not after the Warrant
Expiration Date, upon the terms and subject to the conditions set forth herein
and in the applicable Warrant Certificate. A Warrant shall be deemed to have
been exercised immediately prior to the close of business on the Exercise Date
and the person entitled to receive the securities deliverable upon such exercise
shall be treated for all purposes as the holder, upon exercise thereof, as of
the close of business on the Exercise Date. If Warrants in denominations other
than whole number multiples thereof shall be exercised at one time by the same
Registered Holder, the number of full shares of Common Stock which shall
5
<PAGE>
be issuable upon exercise thereof shall be computed on the basis of the
aggregate number of full shares of Common Stock issuable upon such exercise. As
soon as practicable on or after the Exercise Date and in any event within five
business days after such date, if one or more Warrants have been exercised, the
Warrant Agent on behalf of the Company shall cause to be issued to the person or
persons entitled to receive the same a Common Stock certificate or certificates
for the shares of Common Stock deliverable upon such exercise, and the Warrant
Agent shall deliver the same to the person or persons entitled thereto. Upon the
exercise of any one or more Warrants, the Warrant Agent shall promptly notify
the Company in writing of such fact and of the number of securities delivered
upon such exercise and, subject to subsection (b) below, shall cause all
payments of an amount in cash or by check made payable to the order of the
Company, equal to the Exercise Price, to be deposited promptly in the Company's
bank account.
(b) The Company shall engage National as a Warrant solicitation
agent, and, at any time upon the exercise of any Warrants after one year from
the date hereof, the Company shall instruct the Warrant Agent to, and the
Warrant Agent shall, on a daily basis, within two business days after such
exercise, notify National of the exercise of any such Warrants and shall, on a
weekly basis (subject to collection of funds constituting the tendered Exercise
Price, but in no event later than five business days after the last day of the
calendar week in which such funds were tendered), remit to National an amount
equal to five percent (5%) of the Exercise Price of such Warrants then being
exercised unless National shall have notified the Warrant Agent that the payment
of such amount with respect to such Warrant is violative of the General Rules
and Regulations promulgated under the Exchange Act, or the rules and regulations
of the Nasdaq or applicable state securities or "blue sky" laws, or the Warrants
are those underlying the Placement Agent's Warrants in which event, the Warrant
Agent shall have to pay such amount to the Company; provided, that, the Warrant
Agent shall not be obligated to pay any amounts pursuant to this Section 4(b)
during any week that such amounts payable are less than $1,000 and the Warrant
Agent's obligation to make such payments shall be suspended until the amount
payable aggregates $1,000, and provided further, that, in any event, any such
payment (regardless of amount) shall be made not less frequently than monthly.
Notwithstanding the foregoing, National shall be entitled to receive the
commission contemplated by this Section 4(b) as Warrant solicitation agent only
if: (i) National has provided actual services in connection with the
solicitation of the exercise of a Warrant by a Registered Holder and (ii) the
Registered Holder exercising a Warrant affirmatively designates in writing on
the exercise form on the reverse side of the Warrant Certificate that the
exercise of such Registered Holder's Warrant was solicited by National.
(c) The Company shall not be required to issue fractional shares on
the exercise of Warrants. Warrants may only be exercised in such multiples as
are required to permit the issuance by the Company of one or more whole shares.
If one or more Warrants shall be presented for exercise in full at the same time
by the same Registered Holder, the number of whole shares which shall be
issuable upon such exercise thereof shall be computed on the basis of the
aggregate number of shares purchasable on exercise of the Warrants presented. If
any fraction of a share would, except for the provisions provided herein, be
issuable on the exercise
6
<PAGE>
of any Warrant (or specified portion thereof), the Company shall pay an amount
in cash equal to such fraction multiplied by the then current market value of a
share of Common Stock, determined as follows:
(1) If the Common Stock is listed, or admitted to unlisted trading
privileges on a national securities exchange, or is traded on Nasdaq, the
current market value of a share of Common Stock shall be the closing sale price
of the Common Stock at the end of the regular trading session on the last
business day prior to the date of exercise of the Warrants on whichever of such
exchanges or Nasdaq had the highest average daily trading volume for the Common
Stock on such day; or
(2) If the Common Stock is not listed or admitted to unlisted
trading privileges on any national securities exchange, or listed, quoted or
reported for trading on Nasdaq, but is traded in the over-the-counter market,
the current market value of a share of Common Stock shall be the average of the
last reported bid and asked prices of the Common Stock reported by the National
Quotation Bureau, Inc. on the last business day prior to the date of exercise of
the Warrants; or
(3) If the Common Stock is not listed, admitted to unlisted trading
privileges on any national securities exchange, or listed, quoted or reported
for trading on Nasdaq, and bid and asked prices of the Common Stock are not
reported by the National Quotation Bureau, Inc., the current market value of a
share of Common Stock shall be an amount, not less than the book value thereof
as of the end of the most recently completed fiscal quarter of the Company
ending prior to the date of exercise, determined by the members of the Board of
Directors of the Company exercising good faith and using customary valuation
methods.
SECTION 5. Reservation of Shares; Listing; Payment of Taxes; etc.
(a) The Company covenants that it will at all times reserve and keep
available out of its authorized Common Stock, solely for the purpose of issue
upon exercise of Warrants, such number of shares of Common Stock as shall then
be issuable upon the exercise of all outstanding Warrants. The Company covenants
that all shares of Common Stock which shall be issuable upon exercise of the
Warrants shall, at the time of delivery thereof, be duly and validly issued and
fully paid and nonassessable and free from all preemptive or similar rights,
taxes, liens and charges with respect to the issue thereof, and that upon
issuance such shares shall be listed on each securities exchange, if any, on
which the other shares of outstanding Common Stock of the Company are then
listed.
(b) The Company covenants that if any securities to be reserved for
the purpose of exercise of Warrants hereunder require registration with, or
approval of, any governmental authority under any federal securities law before
such securities may be validly issued or delivered upon such exercise, then the
Company will file a registration statement under the federal securities laws or
a post-effective amendment, use its best efforts to cause the same to
7
<PAGE>
become effective and to keep such registration statement current while any of
the Warrants are outstanding and deliver a prospectus which complies with
Section 10(a)(3) of the Act, to the Registered Holder exercising the Warrant
(except, if in the opinion of counsel to the Company, such registration is not
required under the federal securities law or if the Company receives a letter
from the staff of the Commission stating that it would not take any enforcement
action if such registration is not effected). The Company will use its best
efforts to obtain appropriate approvals or registrations under state "blue sky"
securities laws with respect to any such securities. However, Warrants may not
be exercised by, or shares of Common Stock issued to, any Registered Holder in
any state in which such exercise would be unlawful.
(c) The Company shall pay all documentary, stamp or similar taxes
and other governmental charges that may be imposed with respect to the issuance
of Warrants, or the issuance or delivery of any shares of Common Stock upon
exercise of the Warrants; provided, however, that if shares of Common Stock are
to be delivered in a name other than the name of the Registered Holder of the
Warrant Certificate representing any Warrant being exercised, then no such
delivery shall be made unless the person requesting the same has paid to the
Warrant Agent the amount of transfer taxes or charges incident thereto, if any.
(d) The Warrant Agent is hereby irrevocably authorized as the
Transfer Agent to requisition from time to time certificates representing shares
of Common Stock or other securities required upon exercise of the Warrants, and
the Company will comply with all such requisitions.
SECTION 6. Exchange and Registration of Transfer.
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants of the same
class or may be transferred in whole or in part. Warrant Certificates to be
exchanged shall be surrendered to the Warrant Agent at its Corporate Office,
and, upon satisfaction of the terms and provisions hereof, the Company shall
execute and the Warrant Agent shall countersign, issue and deliver in exchange
therefor the Warrant Certificate or Certificates which the Registered Holder
making the exchange shall be entitled to receive.
(b) The Warrant Agent shall keep, at its office, books in which,
subject to such reasonable regulations as it may prescribe, it shall register
Warrant Certificates and the transfer thereof in accordance with customary
practice. Upon due presentment for registration of transfer of any Warrant
Certificate at such office, the Company shall execute and the Warrant Agent
shall issue and deliver to the transferee or transferees a new Warrant
Certificate or Certificates representing an equal aggregate number of Warrants
of the same class.
(c) With respect to all Warrant Certificates presented for
registration of transfer, or for exchange or exercise, the subscription or
exercise form, as the case may be, on the reverse thereof shall be duly endorsed
or be accompanied by a written instrument or instruments
8
<PAGE>
of transfer and subscription, in form satisfactory to the Company and the
Warrant Agent, duly executed by the Registered Holder thereof or his
attorney-in-fact duly authorized in writing.
(d) A service charge may be imposed by the Warrant Agent for any
exchange or registration of transfer of Warrant Certificates. In addition, the
Company may require payment by such holder of a sum sufficient to cover any tax
or other governmental charge that may be imposed in connection therewith.
(e) All Warrant Certificates surrendered for exercise or for
exchange in case of mutilated Warrant Certificates shall be promptly canceled by
the Warrant Agent and thereafter retained by the Warrant Agent until termination
of this Agreement.
(f) Prior to due presentment for registration of transfer thereof,
the Company and the Warrant Agent may deem and treat the Registered Holder of
any Warrant Certificate as the absolute owner thereof and of each Warrant
represented thereby (notwithstanding any notations of ownership or writing
thereon made by anyone other than a duly authorized officer of the Company or
the Warrant Agent) for all purposes and shall not be affected by any notice to
the contrary.
SECTION 7. Loss or Mutilation. Upon receipt by the Company and the Warrant
Agent of evidence satisfactory to them of the ownership of and the loss, theft,
destruction or mutilation of any Warrant Certificate and (in the case of loss,
theft or destruction) of indemnity satisfactory to them, and (in case of
mutilation) upon surrender and cancellation thereof, the Company shall execute
and the Warrant Agent shall (in the absence of notice to the Company and/or the
Warrant Agent that a new Warrant Certificate has been acquired by a bona fide
purchaser) countersign and deliver to the Registered Holder in lieu thereof a
new Warrant Certificate of like tenor representing an equal aggregate number of
Warrants. Applicants for a substitute Warrant Certificate shall also comply with
such other reasonable regulations and pay such other reasonable charges as the
Warrant Agent may prescribe.
SECTION 8. Adjustment of Exercise Price and Number of Shares of Common
Stock Deliverable.
(a) Except as hereinafter provided, in the event the Company shall,
at any time or from time to time after the date hereof and during the term of
the Warrants, issue or sell any shares of Common Stock for a consideration per
share less than the Exercise Price or issue any shares of Common Stock as a
stock dividend to the holders of Common Stock, or subdivide or combine the
outstanding shares of Common Stock into a greater or lesser number of shares
(any such issuance, subdivision or combination being herein called a "Change of
Shares"), then, and thereafter upon each further Change of Shares, the Exercise
Price for the Warrants (whether or not the same shall be issued and outstanding)
in effect immediately prior to such Change of Shares shall be changed to a price
(including any applicable fraction of a cent to the nearest cent) determined by
dividing (i) the sum of (a) the total number of shares of Common Stock
9
<PAGE>
outstanding immediately prior to such Change of Shares, multiplied by the
Exercise Price in effect immediately prior to such Change of Shares and (b) the
consideration, if any, received by the Company upon such sale, issuance,
subdivision or combination, by (ii) the total number of shares of Common Stock
outstanding immediately after such Change of Shares; provided, however, that in
no event shall the Exercise Price be adjusted pursuant to this computation to an
amount in excess of the Exercise Price in effect immediately prior to such
computation, except in the case of a combination of outstanding shares of Common
Stock.
For the purposes of any adjustment to be made in accordance with
this Section 8(a), the following provisions shall be applicable:
(A) In case of the issuance or sale of shares of Common Stock
(or of other securities deemed hereunder to involve the issuance or sale of
shares of Common Stock) for a consideration part or all of which shall be cash,
the amount of the cash portion of the consideration therefor deemed to have been
received by the Company shall be (i) the subscription price, if shares of Common
Stock are offered by the Company for subscription, or (ii) the public offering
price (before deducting therefrom any compensation paid or discount allowed in
the sale, underwriting or purchase thereof by underwriters or dealers or others
performing similar services, or any expenses incurred in connection therewith),
if such securities are sold to underwriters or dealers for public offering
without a subscription offering, or (iii) the gross amount of cash actually
received by the Company for such securities, in any other case.
(B) In case of the issuance or sale (otherwise than as a
dividend or other distribution on any stock of the Company, and otherwise than
on the exercise of options, rights or warrants or the conversion or exchange of
convertible or exchangeable securities) of shares of Common Stock (or of other
securities deemed hereunder to involve the issuance or sale of shares of Common
Stock) for a consideration part or all of which shall be other than cash, the
amount of the consideration therefor other than cash deemed to have been
received by the Company shall be the value of such consideration as determined
in good faith by the Board of Directors of the Company, using customary
valuation methods and on the basis of prevailing market values for similar
property or services.
(C) Shares of Common Stock issuable by way of dividend or
other distribution on any stock of the Company shall be deemed to have been
issued immediately after the opening of business on the day following the record
date for the determination of shareholders entitled to receive such dividend or
other distribution and shall be deemed to have been issued without
consideration.
(D) The reclassification of securities of the Company other
than shares of Common Stock into securities including shares of Common Stock
shall be deemed to involve the issuance of such shares of Common Stock for a
consideration other than cash immediately prior to the close of business on the
date fixed for the determination of security holders entitled
10
<PAGE>
to receive such shares, and the value of the consideration allocable to such
shares of Common Stock shall be determined as provided in subsection (B) of this
Section 8(a).
(E) The number of shares of Common Stock at any one time
outstanding shall be deemed to include the aggregate maximum number of shares
issuable (subject to readjustment upon the actual issuance thereof) upon the
exercise of options, rights or warrants and upon the conversion or exchange of
convertible or exchangeable securities.
(b) Upon each adjustment of the Exercise Price pursuant to this
Section 8, the number of shares of Common Stock purchasable upon the exercise of
each Warrant shall be the number derived by multiplying the number of shares of
Common Stock purchasable immediately prior to such adjustment by the Exercise
Price in effect prior to such adjustment and dividing the product so obtained by
the applicable adjusted Exercise Price.
(c) In case the Company shall at any time after the date hereof
issue options, rights or warrants to subscribe for shares of Common Stock, or
issue any securities convertible into or exchangeable for shares of Common
Stock, for a consideration per share (determined as provided in Sections 8(a)
and 8(b) and as provided below) less than the Exercise Price in effect
immediately prior to the issuance of such options, rights or warrants, or such
convertible or exchangeable securities, or without consideration (including the
issuance of any such securities by way or dividend or other distribution), the
Exercise Price for the Warrants (whether or not the same shall be issued and
outstanding) in effect immediately prior to the issuance of such options, rights
or warrants, or such convertible or exchangeable securities, as the case may be,
shall be reduced to a price determined by making the computation in accordance
with the provisions of Sections 8(a) and 8(b) hereof, provided that:
(A) The aggregate maximum number of shares of Common Stock, as
the case may be, issuable or that may become issuable under such options, rights
or warrants (assuming exercise in full even if not then currently exercisable or
currently exercisable in full) shall be deemed to be issued and outstanding at
the time such options, rights or warrants were issued, for a consideration equal
to the minimum purchase price per share provided for in such options, rights or
warrants at the time of issuance, plus the consideration, if any, received by
the Company for such options, rights or warrants; provided, however, that upon
the expiration or other termination of such options, rights or warrants, if any
thereof shall not have been exercised, the number of shares of Common Stock
deemed to be issued and outstanding pursuant to this subsection (A) (and for the
purposes of subsection (E) of Section 8(a) hereof) shall be reduced by the
number of shares as to which options, warrants and/or rights shall have expired,
and such number of shares shall no longer be deemed to be issued and
outstanding, and the Exercise Price then in effect shall forthwith be readjusted
and thereafter be the price that it would have been had adjustment been made on
the basis of the issuance only of the shares actually issued plus the shares
remaining issuable upon the exercise of those options, rights or warrants as to
which the exercise rights shall not have expired or terminated unexercised.
11
<PAGE>
(B) The aggregate maximum number of shares of Common Stock
issuable or that may become issuable upon conversion or exchange of any
convertible or exchangeable securities (assuming conversion or exchange in full
even if not then currently convertible or exchangeable in full) shall be deemed
to be issued and outstanding at the time of issuance of such securities, for a
consideration equal to the consideration received by the Company for such
securities, plus the minimum consideration, if any, receivable by the Company
upon the conversion or exchange thereof; provided, however, that upon the
termination of the right to convert or exchange such convertible or exchangeable
securities (whether by reason of redemption or otherwise), the number of shares
of Common Stock deemed to be issued and outstanding pursuant to this subsection
(B) (and for the purposes of subsection (E) of Section 8(a) hereof) shall be
reduced by the number of shares as to which the conversion or exchange rights
shall have expired or terminated unexercised, and such number of shares shall no
longer be deemed to be issued and outstanding, and the Exercise Price then in
effect shall forthwith be readjusted and thereafter be the price that it would
have been had adjustment been made on the basis of the issuance only of the
shares actually issued plus the shares remaining issuable upon conversion or
exchange of those convertible or exchangeable securities as to which the
conversion or exchange rights shall not have expired or terminated unexercised.
(C) If any change shall occur in the price per share provided
for in any of the options, rights or warrants referred to in subsection (A) of
this Section 8(c), or in the price per share or ratio at which the securities
referred to in subsection (B) of this Section 8(c) are convertible or
exchangeable, such options, rights or warrants or conversion or exchange rights,
as the case may be, to the extent not theretofore exercised, shall be deemed to
have expired or terminated on the date when such price change became effective
in respect of shares not theretofore issued pursuant to the exercise or
conversion or exchange thereof, and the Company shall be deemed to have issued
upon such date new options, rights or warrants or convertible or exchangeable
securities.
(d) In case of any reclassification or change of outstanding shares
of Common Stock issuable upon exercise of the Warrants (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 in case of any consolidation
or merger of the Company with or into another corporation (other than a merger
with a Subsidiary in which merger the Company is the continuing corporation) and
which does not result in any reclassification or change of the then outstanding
shares of Common Stock or other capital stock issuable upon exercise of the
Warrants (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 subdivision or combination)
or in case of any sale or conveyance to another corporation of the property of
the Company as an entirety or substantially as an entirety, then, as a condition
of such reclassification, change, consolidation, merger, sale or conveyance, the
Company, or such successor or purchasing corporation, as the case may be, shall
make lawful and adequate provision whereby the Registered Holder of each Warrant
then outstanding shall have the right thereafter to receive on exercise of such
Warrant the kind and amount of securities and property receivable upon such
reclassification, change, consolidation, merger, sale or conveyance by a
12
<PAGE>
holder of the number of securities issuable upon exercise of such Warrant
immediately prior to such reclassification, change, consolidation, merger, sale
or conveyance and shall forthwith file at the Corporate Office of the Warrant
Agent a statement signed by its Chief Executive Officer, President or a Vice
President and by its Treasurer or an Assistant Treasurer or its Secretary or an
Assistant Secretary evidencing such provision. Such provisions shall include
provision for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in Sections 8(a), (b) and (c). The
above provisions of this Section 8(d) shall similarly apply to successive
reclassifications and changes of shares of Common Stock and to successive
consolidations, mergers, sales or conveyances.
(e) Irrespective of any adjustments or changes in the Exercise Price
or the number of shares of Common Stock purchasable upon exercise of the
Warrants, the Warrant Certificates theretofore and thereafter issued shall,
unless the Company shall exercise its option to issue new Warrant Certificates
pursuant to Section 2(e) hereof, continue to express the Exercise Price per
share and the number of shares purchasable thereunder as the Exercise Price per
share and the number of shares purchasable thereunder were expressed in the
Warrant Certificates when the same were originally issued.
(f) After each adjustment of the Exercise Price pursuant to this
Section 8, the Company will promptly prepare a certificate signed by the
Chairman, Chief Executive Officer or President, and by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary, of the Company
setting forth: (i) the Exercise Price as so adjusted, (ii) the number of shares
of Common Stock purchasable upon exercise of each Warrant, after such
adjustment, and (iii) a brief statement of the facts accounting for such
adjustment. The Company will promptly file such certificate with the Warrant
Agent and cause a brief summary thereof to be sent by ordinary first class mail
to each Registered Holder at his last address as it shall appear on the registry
books of the Warrant Agent. No failure to mail such notice nor any defect
therein or in the mailing thereof shall affect the validity thereof except as to
the holder to whom the Company failed to mail such notice, or except as to the
holder whose notice was defective. The affidavit of an officer of the Warrant
Agent or the Secretary or an Assistant Secretary of the Company that such notice
has been mailed shall, in the absence of fraud, be prima facie evidence of the
facts stated herein.
(g) No adjustment of the Exercise Price shall be made as a result of
or in connection with (A) the issuance or sale of shares of Common Stock
pursuant to options, warrants, stock purchase agreements and convertible or
exchangeable securities outstanding or in effect on the date hereof and on the
terms described in the final prospectus relating to the public offering
contemplated by the Underwriting Agreement; (B) the issuance or sale of shares
of Common Stock if the amount of said adjustment shall be less than $___,
provided, however, that in such case, any adjustment that would otherwise be
required then to be made shall be carried forward and shall be made at the time
of and together with the next subsequent adjustment that shall amount, together
with any adjustment so carried forward, to at least $___; (C) the issuance or
sale of shares of Common Stock upon the exercise of any "incentive stock
options" (as such
13
<PAGE>
term is defined in the Internal Revenue Code of 1986, as amended) or
non-qualified stock options under the Company's existing stock option plans
described in the final prospectus relating to the public offering contemplated
by the Underwriting Agreement provided the exercise price of such options was
not less than ten percent (10%) of the Market Price on the date of grant; (D)
the issuance or sale of shares of Common Stock in an underwritten public
offering on behalf of the Company at a discount to the Market Price of not more
than seven percent (7%) per share; or (E) the issuance or sale of shares of
Common Stock for a bona fide business purpose of the Company in an arm's length
transaction with an unaffiliated party involving a strategic alliance, joint
venture or licensing arrangement provided (i) the number of shares so issued or
sold do not exceed, individually or in the aggregate at any time during the term
of Warrants, more than twenty percent (20%) of the then outstanding shares of
Common Stock; and (ii) such shares are issued or sold in exchange for
consideration valued by the Company's Board of Directors at not less than ten
percent (10%) of the Market Price on the date of issuance and/or sale. In
addition, Registered Holders shall not be entitled to cash dividends paid by the
Company prior to the exercise of any Warrant or Warrants held by them.
SECTION 9. Redemption.
(a) Commencing on the Initial Warrant Redemption Date, the Company
may, on 30 days' prior written notice, redeem all the Warrants at five cents
($.05) per Warrant, provided, however, that before any such call for redemption
of Warrants can take place, the average closing bid price for the Common Stock
as reported by Nasdaq, if the Common Stock is then traded or reported on Nasdaq
or in the Over-the-Counter Market (or the average closing sale price, if the
Common Stock is then traded on the Nasdaq National Market or on a national
securities exchange) and the closing bid price of the Common Stock shall have
averaged an amount equal or in excess of $9.00 per share (150% of the initial
public offering price per share of Common Stock) for any twenty (20) trading
days within a period of thirty (30) consecutive trading days ending on the fifth
trading day prior to the date on which the notice contemplated by (b) and (c)
below is given (subject to adjustment in the event of any stock splits or other
similar events as provided in Section 8 hereof) and if National gives its prior
written consent to the giving of the notice of redemption and the proposed
redemption.
(b) In case the Company shall exercise its right to redeem all of
the Warrants, it shall give or cause to be given notice to the Registered
Holders of the Warrants, by mailing to such Registered Holders a notice of
redemption, first class, postage prepaid, at their last address as shall appear
on the records of the Warrant Agent. Any notice mailed in the manner provide
herein shall be conclusively presumed to have been duly given whether or not the
Registered Holder receives such notice. Not less than five (5) business days
prior to the mailing to the Registered Holders of the Warrants of the notice of
redemption, the Company shall deliver or cause to be delivered to National a
similar notice telephonically and confirmed in writing, and if National is
engaged as a Warrant solicitation agent, the Company shall also deliver to cause
to be delivered to National a list of the Registered Holders (including their
respective addresses and
14
<PAGE>
number of Warrants beneficially owned) to whom such notice of redemption has
been or will be given.
(c) The notice of redemption shall specify (i) the redemption price,
(ii) the Redemption Date, which shall in no event be less than thirty (30) days
after the date of mailing of such notice, (iii) the place where the Warrant
Certificate shall be delivered and the redemption price shall be paid, (iv) that
National shall receive the commission contemplated by Section 4(b) hereof, and
(v) that the right to exercise the Warrant shall terminate at 5:00 p.m. (New
York time) on the business day immediately preceding the date fixed for
redemption. No failure to mail such notice nor any defect therein or in the
mailing thereof shall affect the validity of the proceedings for such redemption
except as to a holder (a) to whom notice was not mailed or (b) whose notice was
defective. An affidavit of the Warrant Agent or the Secretary or Assistant
Secretary of the Company that notice of redemption has been mailed shall, in the
absence of fraud, be prima facie evidence of the facts stated therein.
(d) Any right to exercise a Warrant shall terminate at 5:00 p.m.
(New York time) on the business day immediately preceding the Redemption Date.
The redemption price payable to the Registered Holders shall be mailed to such
persons at their addresses of record.
(e) If National acts as the Warrant solicitation agent for the
Company, the Company shall indemnify National and each person, if any, who
controls National within the meaning of Section 15 of the Act or Section 20(a)
of the Exchange Act against all loss, claim, damage, expense or liability
(including all expenses reasonably incurred in investigating, preparing or
defending against any claim whatsoever) to which any of them may become subject
under the Act, the Exchange Act or otherwise, arising from the registration
statement or prospectus referred to in Section 5(b) hereof to the same extent
and with the same effect (including the provisions regarding contribution) as
the provisions pursuant to which the Company has agreed to indemnify National
contained in Section 7 of the Underwriting Agreement.
(f) Five business days prior to the Redemption Date, the Company
shall furnish to National, as Warrant solicitation agent, (i) an opinion of
counsel to the Company, dated such date and addressed to National, and (ii) a
"cold comfort" letter dated such date addressed to National, signed by the
independent public accountants who have issued a report on the Company's
financial statements included in such registration statement, in each case
covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) and, in the case of such
accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions of issuer's counsel
and in accountants' letters delivered to underwriters in underwritten public
offerings of securities.
15
<PAGE>
SECTION 10. Concerning the Warrant Agent.
(a) The Warrant Agent acts hereunder as agent and in a ministerial
capacity for the Company and National, and its duties shall be determined solely
by the provisions hereof. The Warrant Agent shall not, by issuing and delivering
Warrant Certificates or by any other act hereunder, be deemed to make any
representations as to the validity or value or authorization of the Warrant
Certificates or the Warrants represented thereby or of any securities or other
property delivered upon exercise of any Warrant or whether any stock issued upon
exercise of any Warrant is fully paid and nonassessable.
(b) The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of Warrant Certificates to make or cause to be made
any adjustment of the Exercise Price or the Redemption Price provided in this
Agreement, or to determine whether any fact exists which may require any such
adjustments, or with respect to the nature or extent of any such adjustments,
when made, or with respect to the method employed in making the same. It shall
not (i) be liable for any recital or statement of fact contained herein or for
any action taken, suffered or omitted by it in reliance on any Warrant
Certificate or other document or instrument believed by it in good faith to be
genuine and to have been signed or presented by the proper party or parties,
(ii) be responsible for any failure on the part of the Company to comply with
any of its covenants and obligations contained in this Agreement or in any
Warrant Certificate, or (iii) be liable for any act or omission in connection
with this Agreement except for its own negligence, bad faith or willful
misconduct.
(c) The Warrant Agent may at any time consult with counsel
satisfactory to it (who may be counsel for the Company or for National) and
shall incur no liability or responsibility for any action taken, suffered or
omitted by it in good faith in accordance with the opinion or advice of such
counsel.
(d) Any notice, statement, instruction, request, direction, order or
demand of the Company shall be sufficiently evidenced by an instrument signed by
the Chairman of the Board of Directors, Chief Executive Officer, Chief Financial
Officer, President or any Vice President (unless other evidence in respect
thereof is herein specifically prescribed). The Warrant Agent shall not be
liable for any action taken, suffered or omitted by it in accordance with such
notice, statement, instruction, request, direction, order or demand reasonably
believed by it to be genuine.
(e) The Company agrees to pay the Warrant Agent reasonable
compensation for its services hereunder and to reimburse it for its reasonable
expenses hereunder; the Company further agrees to indemnify the Warrant Agent
and save it harmless from and against any and all losses, expenses and
liabilities, including judgments, costs and counsel fees, for anything done or
omitted by the Warrant Agent in the execution of its duties and powers hereunder
except losses, expenses and liabilities arising as a result of the Warrant
Agent's negligence, bad faith or willful conduct.
16
<PAGE>
(f) The Warrant Agent may resign its duties and be discharged from
all further duties and liabilities hereunder (except liabilities resulting as a
result of the Warrant Agent's own gross negligence or willful misconduct), after
giving 30 days' prior written notice to the Company. At least 15 days prior to
the date such resignation is to become effective, the Warrant Agent shall cause
a copy of such notice of resignation to be mailed to the Registered Holder of
each Warrant Certificate at the Company's expense. Upon such resignation, or any
inability of the Warrant Agent to act as such hereunder, the Company shall
appoint in writing a new warrant agent. If the Company shall fail to make such
appointment within a period of 15 days after it has been notified in writing of
such resignation by the resigning Warrant Agent, then the Registered Holder of
any Warrant Certificate may apply to any court of competent jurisdiction for the
appointment of a new warrant agent. Any new warrant agent, whether appointed by
the Company or by such a court, shall be a bank or trust company having a
capital and surplus, as shown by its last published report to its stockholders,
of not less than $10,000,000 or a stock transfer company. After acceptance in
writing of such appointment by the new warrant agent is received by the Company,
such new warrant agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named herein as the Warrant Agent,
without any further assurance, conveyance, act or deed; but if for any reason it
shall be necessary or expedient to execute and deliver any further assurance,
conveyance, act or deed, the same shall be done at the expense of the Company
and shall be legally and validly executed and delivered by the resigning Warrant
Agent. Not later than the effective date of any such appointment the Company
shall file notice thereof with the resigning Warrant Agent and shall forthwith
cause a copy of such notice to be mailed to the Registered Holder of each
Warrant Certificate.
(g) Any corporation into which the Warrant Agent or any new warrant
agent may be converted or merged, any corporation resulting from any
consolidation to which the Warrant Agent or any new warrant agent shall be a
party, or any corporation succeeding to the corporate trust business of the
Warrant Agent or any new warrant agent shall be a successor warrant agent under
this Agreement without any further act, provided that such corporation is
eligible for appointment as successor to the Warrant Agent under the provisions
of the preceding paragraph. Any such successor warrant agent shall promptly
cause notice of its succession as warrant agent to be mailed to the Company and
to the Registered Holders of each Warrant Certificate.
(h) The Warrant Agent, its subsidiaries and affiliates, and any of
its or their officers or directors, may buy and hold or sell Warrants or other
securities of the Company and otherwise deal with the Company in the same manner
and to the same extent and with like effect as though it were not Warrant Agent.
Nothing herein shall preclude the Warrant Agent from acting in any other
capacity for the Company or for any other legal entity.
(i) The Warrant Agent shall retain for a period of two years from
the date of exercise any Warrant Certificate received by it upon such exercise.
17
<PAGE>
SECTION 11. Modification of Agreement.
The Warrant Agent and the Company may by supplemental agreement make any
changes or corrections in this Agreement (i) that they shall deem appropriate to
cure any ambiguity or to correct any defective or inconsistent provision or
manifest mistake or error herein contained; or (ii) that they may deem necessary
or desirable and which shall not adversely affect the interests of the holders
of Warrant Certificates; provided, however, that this Agreement shall not
otherwise be modified, supplemented or altered in any respect except with the
consent in writing of the Registered Holders representing not less than 66-2/3%
of the Warrants then outstanding; provided, further, that no change in the
number or nature of the securities purchasable upon the exercise of any Warrant,
or to increase the Exercise Price therefor or to accelerate of the Warrant
Expiration Date, shall be made without the consent in writing of the Registered
Holder of the Warrant Certificate representing such Warrant, other than such
changes as are presenting specifically prescribed by this Agreement as
originally executed. In addition, this Agreement may not be modified, amended or
supplemented without the prior written consent of National, other than to cure
any ambiguity or to correct any provision which is inconsistent with any other
provision of this Agreement or to make any such change that is necessary or
desirable and which shall not adversely affect the interests of National and
except as may be required by law.
SECTION 12. Notices.
All notices, requests, consents and other communications hereunder shall
be in writing and shall be deemed to have been made when delivered or mailed
first-class registered or certified mail, postage prepaid, as follows: if to the
Registered Holder of a Warrant Certificate, at the address of such holder as
shown on the registry books maintained by the Warrant Agent; if to the Company
at 456 Fairview Road, P.O. Box 1629, Afton, Wyoming 83110, Attention: Allan R.
Tessler, or at such other address as may have been furnished to the Warrant
Agent in writing by the Company; and if to the Warrant Agent, at 2 Broadway, New
York, New York 10004. Copies of any notice delivered pursuant to this Agreement
shall also be delivered to National Securities Corporation, 1001 Fourth Avenue,
Suite 2200, Seattle, Washington 98154-1100, Attention: General Counsel, or at
such other address as may have been furnished to the Company and the Warrant
Agent in writing.
SECTION 13. Governing Law.
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York without giving effect to conflicts of laws.
SECTION 14. Binding Effect.
This Agreement shall be binding upon and inure to the benefit of the
Company, National, the Warrant Agent and their respective successors and assigns
and the holders from time to time of Warrant Certificates or any of them.
Nothing in this Agreement is intended or shall be
18
<PAGE>
construed to confer upon any other person any right, remedy or claim, in equity
or at law, or to impose upon any other person any duty, liability or obligation.
SECTION 15. Termination.
This Agreement shall terminate at the close of business on the Expiration
Date of all of the Warrants or such earlier date upon which all Warrants have
been exercised or redeemed, except that the Warrant Agent shall account to the
Company for cash held by it and the provisions of Section 10 hereof shall
survive such termination.
SECTION 16. Counterparts.
This Agreement may be executed in several counterparts, which taken
together shall constitute a single document.
19
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the first date first above written.
ATTEST: CASULL ARMS CORPORATION
By:_______________________________ By:__________________________________
Name: Allan R. Tessler Name:________________________________
Title: Chairman of the Board Title:_______________________________
ATTEST: CONTINENTAL STOCK
TRANSFER & TRUST
COMPANY, as Warrant Agent
By:_______________________________
Name:_____________________________ By:__________________________________
Title:____________________________ Name:________________________________
Title:_______________________________
ATTEST: NATIONAL SECURITIES
CORPORATION, INC.
By:_______________________________
By:__________________________________
Name:_____________________________ Name:________________________________
Title:____________________________ Title:_______________________________
20
<PAGE>
EXHIBIT A
No. W _______ VOID AFTER ______________, 2002
____________ WARRANTS
FORM OF
REDEEMABLE WARRANT CERTIFICATE TO
PURCHASE ONE SHARE OF COMMON STOCK
CASULL ARMS CORPORATION
CUSIP #__________________
THIS CERTIFIES THAT, FOR VALUE RECEIVED _______________________________________,
or its registered assigns (the "Registered Holder") is the owner of the number
of Redeemable Warrants (the "Warrants") specified above. Each Warrant initially
entitles the Registered Holder to purchase, subject to the terms and conditions
set forth in this Certificate and the Warrant Agreement (as hereinafter
defined), one fully paid and nonassessable share of Common Stock, par value $.01
per share, of Casull Arms Corporation, a Delaware corporation (the "Company"),
par any time between _____________, 1997 (the "Initial Warrant Exercise Date"),
and the Expiration Date (as hereinafter defined) upon the presentation and
surrender of this Warrant Certificate with the Subscription Form on the reverse
hereof duly executed, at the corporate office of Continental Stock Transfer &
Trust Company, as Warrant Agent, or its successor (the "Warrant Agent"),
accompanied by payment of $6.00 per share, subject to adjustment [100% of the
initial public offering price per share of Common Stock] (the "Exercise Price'),
in lawful money of the United States of America in cash or by check made payable
to the Warrant Agent for the account of the Company.
This Warrant Certificate and each Warrant represented hereby are
issued pursuant to and are subject in all respects to the terms and conditions
set forth in the Warrant Agreement (the "Warrant Agreement"), dated
_____________, 1997, by and between the Company, National Securities Corporation
("National") and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Exercise Price and the number of shares of Common Stock subject
to purchase upon the exercise of each Warrant represented hereby are subject to
modification or adjustment.
A-1
<PAGE>
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional interests will be issued. In the case of
the exercise of less than all the Warrants represented hereby, the Company shall
cancel this Warrant Certificate upon the surrender hereof and shall execute and
deliver a new Warrant Certificate or Warrant Certificates of like tenor, which
the Warrant Agent shall countersign, for the balance of such Warrants.
The term "Expiration Date" shall mean 5:00 p.m. (New York time) on
the date which is five (5) years after the Initial Warrant Exercise Date. If
each such date shall in the State of New York be a holiday or a day on which the
banks are authorized to close, then the Expiration Date shall mean 5:00 p.m.
(New York time) the next following day which in the State of New York is not a
holiday or a day on which banks are authorized to close.
The Company shall not be obligated to deliver any securities
pursuant to the exercise of this Warrant unless a registration statement under
the Securities Act of 1933, as amended (the "Act'), with respect to such
securities is effective or an exemption thereunder is available. The Company has
covenanted and agreed that it will file a registration statement under the
Federal securities laws, use its best efforts to cause the same to become
effective, use its best efforts to keep such registration statement current, if
required under the Act, while any of the Warrants are outstanding, and deliver a
prospectus which complies with Section 10(a)(3) of the Act to the Registered
Holder exercising this Warrant. This Warrant shall not be exercisable by a
Registered Holder in any state where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof
by the Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment and payment of any tax or other
charge imposed in connection therewith or incident thereto, for registration of
transfer of this Warrant Certificate at such office, a new Warrant Certificate
or Warrant Certificates representing an equal aggregate number of Warrants will
be issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the
Registered Holder shall not be entitled to any rights of a stockholder of the
Company, including, without limitation, the right to vote or to receive
dividends or other distributions, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided in the Warrant
Agreement.
Subject to the provisions of the Warrant Agreement, this Warrant may
be redeemed at the option of the Company, at a redemption price of $.05 per
Warrant, at any time commencing after ______________, 199__, provided that the
average closing bid price for the Common Stock as reported by Nasdaq, if the
Common Stock is then traded or reported on Nasdaq (or the average closing sale
price, if the Common Stock is then traded on the Nasdaq National Market or a
national securities exchange), shall have equaled or exceeded $9.00 per share
(150% of the
A-2
<PAGE>
initial public offering price per share of Common Stock) for any twenty (20)
trading days within a period of thirty (30) consecutive trading days ending on
the fifth trading day prior to the Notice of Redemption, as defined below
(subject to adjustment in the event of any stock splits or other similar events)
and National has given its prior written consent to such redemption. Notice of
redemption (the "Notice of Redemption") shall be given not later than the
thirtieth (30th) day before the date fixed for redemption, or as provided in the
Warrant Agreement. On and after the date fixed for redemption, the Registered
Holder shall have no rights with respect to the Warrants except to receive the
$.05 per Warrant upon surrender of this Warrant Certificate.
Upon certain circumstances, National may be entitled to receive an
aggregate of five percent (5%) of the Exercise Price of the Warrants represented
hereby, if it is engaged as a Warrant solicitation agent by the Company.
Prior to due presentment for registration of transfer hereof, the
Company and the Warrant Agent may deem and treat the Registered Holder as the
absolute owner hereof and of each Warrant represented hereby (notwithstanding
any notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary, except as provided in the
Warrant Agreement.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New York without giving effect to
conflicts of laws.
This Warrant Certificate is not valid unless countersigned by the
Warrant Agent.
A-3
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate
to be duly executed, manually or in facsimile by two of its officers thereunto
duly authorized and a facsimile of its corporate seal to be imprinted hereon.
Dated: _____________, 1997
[SEAL] CASULL ARMS CORPORATION
By:______________________________________
Name: Allan R. Tessler
Title: Chairman of the Board
By:______________________________________
Name:____________________________________
Title: Secretary
COUNTERSIGNED:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY,
as Warrant Agent
By:______________________________
Authorized Officer
A-4
<PAGE>
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably elects to
exercise ________ Warrants represented by this Warrant Certificate, and to
purchase the securities issuable upon the exercise of such Warrants, and
requests that certificates for such securities shall be issued in the name of
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
----------------------------------------
----------------------------------------
----------------------------------------
(please print or type name and address)
and be delivered to
------------------------------------------
------------------------------------------
------------------------------------------
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
A-5
<PAGE>
IMPORTANT: PLEASE COMPLETE THE FOLLOWING
1. The exercise of this Warrant was solicited by:
-------------------------------------.
[ ]
2. The exercise of this Warrant was not solicited. [ ]
Dated: _________________________________
_________________________________
----------------------------------
----------------------------------
Address
---------------------------------
Social Security or Taxpayer
Identification Number
---------------------------------
Signature Guaranteed
---------------------------------
A-6
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, _____________________, hereby sells, assigns and
transfers unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER
---------------------------------------
---------------------------------------
---------------------------------------
---------------------------------------
(please print or type name and address)
______________________________________ of the Warrants represented by this
Warrant Certificate, and hereby irrevocably constitutes and appoints
__________________________ Attorney to transfer this Warrant Certificate on the
books of the Company, with full power of substitution in the premises.
Dated: _____________________
___________________________________
Signatured Guaranteed
___________________________________
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER AND MUST BE
GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
A-7
<PAGE>
---------------------------------------------
CASULL ARMS CORPORATION
AND
NATIONAL SECURITIES CORPORATION
FORM OF
PLACEMENT AGENT'S
WARRANT AGREEMENT
Dated as of April , 1997
---------------------------------------------
<PAGE>
PLACEMENT AGENT'S WARRANT AGREEMENT dated as of April , 1997,
between CASULL ARMS CORPORATION, a Delaware corporation (the "Company"), and
NATIONAL SECURITIES CORPORATION and its assignees or designees (each hereinafter
referred to variously as a "Holder" or "Placement Agent").
W I T N E S S E T H :
WHEREAS, the Placement Agent has agreed pursuant to the placement
agent agreement (the "Placement Agent Agreement") between the Placement Agent
and the Company, to act as the placement agent of the Company in connection with
the Company's proposed public offering of up to 1,400,000 shares of the
Company's Common Stock (as hereinafter defined) and 1,400,000 redeemable Common
Stock purchase warrants (the "Warrants"), each warrant entitling the holder
thereof to purchase one share of Common Stock (collectively, the "Securities").
The Securities are sold as units ("Units"), each consisting of one (1) share of
Common Stock and one (1) Warrant, although the parties anticipate that there
will be no public market for the Securities as Units;
WHEREAS, pursuant to the Placement Agent Agreement, the Company
proposes to issue warrants to the Placement Agent to purchase up to an aggregate
of 140,000 Units (the "Placement Agent's Warrants"); and
WHEREAS, the Placement Agent's Warrants to be issued pursuant to
this Agreement will be issued on the Closing Date (as such term is defined in
the Placement Agent Agreement) by the Company to the Placement Agent in
consideration for, and as part of the
<PAGE>
Placement Agent's compensation in connection with, the Placement Agent acting as
the Placement Agent pursuant to the Placement Agent Agreement.
NOW, THEREFORE, in consideration of the premises, the payment by the
Placement Agent to the Company of an aggregate of eighty-five dollars and forty
cents ($85.40), the agreements herein set forth and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. Grant. The Placement Agent is hereby collectively granted the
right to purchase, at any time from April , 1998 [the first anniversary of the
issuance of the Placement Agent's Warrants] until 5:30 p.m., New York time, on
April , 2002 [5 years from the Effective Date of the Registration Statement], at
which time the Placement Agent's Warrants expire, up to an aggregate 140,000
shares of Common Stock and 140,000 Warrants, subject to adjustment as provided
in Section 8 hereof (the "Placement Agent's Securities"). Each Placement Agent's
Warrant shall entitle the holder thereof to purchase one (1) share of common
stock, par value $.01 per share, of the Company (the "Common Stock") and/or one
(1) Warrant to purchase one (1) share of Common Stock, at an initial exercise
price of $7.20 per share and $.12 per Warrant, respectively [120% of the
offering prices per share and per warrant to the public, respectively] (the
"Common Stock Exercise Price" and the "Warrant Exercise Price," respectively).
2. Placement Agent's Warrant Certificates. The Placement Agent's
warrant certificates (the "Warrant Certificates") delivered and to be delivered
pursuant to this Agreement shall be in the form set forth in Exhibit A, attached
hereto and made a part hereof, with such
2
<PAGE>
appropriate insertions, omissions, substitutions, and other variations as
required or permitted by this Agreement.
3. Registration of Warrant. The Placement Agent's Warrants shall be
numbered and shall be registered on the books of the Company when issued.
4. Exercise of Placement Agent's Warrant.
4.1 Method of Exercise. The Placement Agent's Warrants
initially are exercisable at the Common Exercise Price and/or Warrant Exercise
Price (subject to adjustment as provided in Section 11 hereof) per Placement
Agent's Warrant set forth in Section 8 hereof payable by certified or official
bank check in New York Clearing House funds. Upon surrender of a Placement
Agent's Warrant Certificate with the annexed Form of Election to Purchase duly
executed, together with payment of the Common Stock Exercise Price and/or the
Warrant Exercise Price for shares of Common Stock and/or Warrants purchased at
the Company's principal offices presently located at 456 Fairview Road, P.O. Box
1629, Afton, Wyoming 83110 the registered holder of a Placement Agent's Warrant
Certificate ("Holder" or "Holders") shall be entitled to receive a certificate
or certificates for the shares of Common Stock and/or Warrants so purchased. The
purchase rights represented by each Placement Agent's Warrant Certificate are
exercisable at the option of the Holder thereof, in whole or in part (but not as
to fractional shares underlying the Placement Agent's Warrants). In the case of
the purchase of less than all of the shares or warrants purchasable under any
Placement Agent's Warrant Certificate, the Company shall cancel said Placement
Agent's Warrant Certificate upon the surrender thereof and shall execute and
3
<PAGE>
deliver a new Placement Agent's Warrant Certificate of like tenor for the
balance of the shares or warrants purchasable thereunder.
5. Issuance of Certificates. Upon the exercise of the Placement
Agent's Warrant, the issuance of certificates for securities, properties or
rights underlying such Placement Agent's Warrant shall be made forthwith (and in
any event within five (5) business days thereafter) without charge to the Holder
thereof including, without limitation, any tax which may be payable in respect
of the issuance thereof, and such certificates shall (subject to the provisions
of Sections 7 and 9 hereof) be issued in the name of, or in such names as may be
directed by, the Holder thereof; provided, however, that the Company shall not
be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any such certificates in a name other
than that of the Holder and the Company shall not be required to issue or
deliver such certificates unless or until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
The Placement Agent's Warrant Certificates and the certificates
representing the securities, property or rights issued upon exercise of the
Placement Agent's Warrant shall be executed on behalf of the Company by the
manual or facsimile signature of the then present President or any Vice
President of the Company under its corporate seal reproduced thereon, attested
to by the manual or facsimile signature of the then present Secretary or any
Assistant Secretary of the Company. Placement Agent's Warrant Certificates shall
be dated the date of execution by the Company upon initial issuance, division,
exchange, substitution or transfer.
4
<PAGE>
6. Transfer of Placement Agent's Warrant. The Placement Agent's
Warrant shall be transferable only on the books of the Company maintained at its
principal office, where its principal office may then be located, upon delivery
thereof duly endorsed by the Holder or by its duly authorized attorney or
Placement Agent accompanied by proper evidence of succession, assignment or
authority to transfer. Upon any registration transfer, the Company shall execute
and deliver the new Placement Agent's Warrant to the person entitled thereto.
7. Restriction On Transfer of Placement Agent's Warrant. The Holder
of a Placement Agent's Warrant Certificate, by its acceptance thereof, covenants
and agrees that the Placement Agent's Warrant is being acquired as an investment
and not with a view to the distribution thereof, and that the Placement Agent's
Warrant may not be sold, transferred, assigned, hypothecated or otherwise
disposed of, in whole or in part, for the term of the Placement Agent's Warrant,
except to officers or partners of the Placement Agent, or by operation of law.
8. Exercise Price and Number of Securities. Except as otherwise
provided in Section 10 hereof, each Placement Agent's Warrant is exercisable to
purchase one share of Common Stock and/or one Warrant to purchase one share of
Common Stock at an initial exercise price equal to the Common Stock Exercise
Price and/or the Warrant Exercise Price. The Common Stock Exercise Price and/or
Warrant Exercise Price, and the number of shares and/or warrants for which the
Placement Agent's Warrant may be exercised shall be the price(s) and the number
of shares and/or warrants which shall result from time to time from any and all
adjustments in accordance with the provisions of Section 11 hereof.
5
<PAGE>
9. Registration Rights.
9.1 Registration Under the Securities Act of 1933. Each
Placement Agent's Warrant Certificate and each certificate representing
securities issuable upon exercise of the Placement Agent's Warrant or upon
exercise of warrants underlying the Placement Agent's Warrants (collectively,
the "Warrant Shares") shall bear the following legend unless (i) such Placement
Agent's Warrant or Warrant Shares are distributed to the public or sold to the
underwriters for distribution to the public pursuant to Section 9 hereof or
otherwise pursuant to a registration statement filed under the Securities Act of
1933, as amended (the "Act"), or (ii) the Company has received an opinion of
counsel, in form and substance reasonably satisfactory to counsel for the
Company, that such legend is unnecessary for any such certificate:
THE PLACEMENT AGENT'S WARRANT REPRESENTED BY THIS
CERTIFICATE AND THE OTHER SECURITIES ISSUABLE UPON
EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933, (ii) TO THE EXTENT
APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR
RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF
SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF SUCH
OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL
FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION
UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE PLACEMENT AGENT'S
WARRANT REPRESENTED BY THE CERTIFICATE IS RESTRICTED
IN ACCORDANCE WITH THE
6
<PAGE>
PLACEMENT AGENT'S WARRANT AGREEMENT REFERRED TO
HEREIN.
9.2 Piggyback Registration. If, at any time commencing after
the effective date of the Registration Statement and expiring five (5) years
thereafter, the Company proposes to register any of its securities under the Act
(other than in connection with a merger or pursuant to Form S-4 or Form S-8), it
will give written notice by registered mail, at least thirty (30) days prior to
the filing of each such registration statement, to the Holders of the Placement
Agent's Warrants and/or the Warrant Shares of its intention to do so. If any of
the Holders of the Placement Agent's Warrants and/or Warrant Shares notify the
Company within twenty (20) days after mailing of any such notice of its or their
desire to include any such securities in such proposed registration statement,
the Company shall afford such Holders of the Placement Agent's Warrants and/or
Warrant Shares the opportunity to have any such Placement Agent's Warrants
and/or Warrant Shares registered under such registration statement. In the event
that the managing underwriter for said offering advises the Company in writing
that in its opinion the number of securities requested to be included in such
registration exceeds the number which can be sold in such offering without
causing a diminution in the offering price or otherwise adversely affecting the
offering, the Company will include in such registration (a) first, the
securities the Company proposes to sell, (b) second, the securities held by the
entities that made the demand for registration, (c) third, the Placement Agent's
Warrants and/or Warrant Shares requested to be included in such registration
which in the opinion of such underwriter can be sold, pro rata among the Holders
of Placement Agent's Warrants and/or Warrant Shares on the basis of the number
of
7
<PAGE>
Placement Agent's Warrants and/or Warrant Shares requested to be registered by
such Holders, and (d) fourth, other securities requested to be included in such
registration.
Notwithstanding the provisions of this Section 9.2, the Company
shall have the right at any time after it shall have given written notice
pursuant to this Section 9.2 (irrespective of whether a written request for
inclusion of any such securities shall have been made) to elect not to file any
such proposed registration statement or to withdraw the same after the filing
but prior to the effective date thereof.
9.3 Demand Registration.
(a) At any time commencing one (1) year after the
effective date of the Registration Statement and expiring five (5) years from
the effective date of the Registration Statement, the Holders of the Placement
Agent's Warrants and/or Warrant Shares representing a "Majority" (as hereinafter
defined) of the Placement Agent's Warrants and/or Warrant Shares shall have the
right (which right is in addition to the registration rights under Section 9.2
hereof), exercisable by written notice to the Company, to have the Company
prepare and file with the Securities and Exchange Commission (the "Commission"),
on one occasion, a registration statement and such other documents, including a
prospectus, as may be necessary in the opinion of both counsel for the Company
and counsel for the Holders, in order to comply with the provisions of the Act,
so as to permit a public offering and sale by such Holders and any other Holders
of the Placement Agent's Warrant and/or Warrant Shares who notify the Company
within fifteen (15) days after the Company mails notice of such request pursuant
to Section 9.3(b) hereof (collectively, the "Requesting Holders") of their
respective Warrant Shares for the earlier of (i)
8
<PAGE>
six (6) consecutive months or (ii) until the sale of all of the Warrant Shares
requested to be registered by the Requesting Holders.
(b) The Company covenants and agrees to give written
notice of any registration request under this Section 9.3 by any Holder or
Holders representing a Majority of the Placement Agent's Warrants and/or Warrant
Shares to all other registered Holders of the Placement Agent's Warrants and the
Warrant Shares within ten (10) days from the date of the receipt of any such
registration request.
(c) In addition to the registration rights under Section
9.2 and subsection (a) of this Section 9.3, at any time commencing one (1) year
after the effective date of the Registration Statement and expiring five (5)
years from the effective date of the Registration Statement, the Holders of a
Majority of the Placement Agent's Warrants and/or Warrant Shares shall have the
right on one occasion, exercisable by written request to the Company, to have
the Company prepare and file with the Commission a registration statement so as
to permit a public offering and sale by such Holders of their respective Warrant
Shares for the earlier of (i) six (6) consecutive months or (ii) until the sale
of all of the Warrant Shares requested to be registered by such Holders;
provided, however, that the provisions of Section 9.4(b) hereof shall not apply
to any such registration request and registration and all costs incident thereto
shall be at the expense of the Holder or Holders making such request. If the
Holders have exercised their rights under Section 9.3(a) then the Holders may
not exercise their rights under Section 9.3(c) for a period of six (6) months
following the effective date of any registration statement filed pursuant to
Section 9.3(a).
9
<PAGE>
(d) Notwithstanding anything to the contrary contained
herein, if the Company shall not have filed a registration statement for the
Warrant Shares within the time period specified in Section 9.4(a) hereof
pursuant to the written notice specified in Section 9.3(a) of the Holders of a
Majority of the Placement Agent's Warrants and/or Warrant Shares, the Company,
at its option, may repurchase (i) any and all Warrant Shares at the higher of
the Market Price (as defined in Section 9.3(e)) per share of Common Stock on (x)
the date of the notice sent pursuant to Section 9.3(a) or (y) the expiration of
the period specified in Section 9.4(a) and (ii) any and all Placement Agent's
Warrant at such Market Price less the exercise price of such Placement Agent's
Warrant. Such repurchase shall be in immediately available funds and shall close
within two (2) days after the later of (i) the expiration of the period
specified in Section 9.4(a) or (ii) the delivery of the written notice of
election specified in this Section 9.3(d).
(e) Definition of Market Price. As used herein, the
phrase "Market Price" at any date shall be deemed to be the last reported sale
price, or, in case no such reported sale takes place on such day, the average of
the last reported sale prices for the last three (3) trading days, in either
case as officially reported by the principal securities exchange on which the
Common Stock is listed or admitted to trading, or, if the Common Stock is not
listed or admitted to trading on any national securities exchange, the average
closing sale price as furnished by the NASD through The NASDAQ Stock Market,
Inc. ("NASDAQ") or similar organization if NASDAQ is no longer reporting such
information, or if the Common Stock is not quoted or reported on NASDAQ, as
determined in good faith by resolution of the Board of Directors of the Company,
based on the best information available to it.
10
<PAGE>
9.4 Covenants of the Company With Respect to Registration. In
connection with any registration under Sections 9.2 or 9.3 hereof, the Company
covenants and agrees as follows:
(a) The Company shall use its best efforts to file a
registration statement within ninety (90) days of receipt of any demand
therefor, and to have any registration statements declared effective at the
earliest possible time, and shall furnish each Holder desiring to sell Warrant
Shares such number of prospectuses as shall reasonably be requested.
(b) The Company shall pay all costs (excluding fees and
expenses of Holder(s)' counsel and any Placement Agent or selling commissions),
fees and expenses in connection with all registration statements filed pursuant
to Sections 9.2 and 9.3(a) hereof including, without limitation, the Company's
legal and accounting fees, printing expenses, blue sky fees and expenses. The
Holder(s) will pay all costs, fees and expenses (including those of the Company)
in connection with the registration statement filed pursuant to Section 9.3(c).
(c) The Company will take all necessary action which may
be required in qualifying or registering the Warrant Shares included in a
registration statement for offering and sale under the securities or blue sky
laws of such states as reasonably are requested by the Holder(s), provided that
the Company shall not be obligated to execute or file any general consent to
service of process or to qualify as a foreign corporation to do business under
the laws of any such jurisdiction.
11
<PAGE>
(d) The Company shall indemnify the Holder(s) of the
Warrant Shares to be sold pursuant to any registration statement and each
person, if any, who controls such Holders within the meaning of Section 15 of
the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended
("Exchange Act"), against all loss, claim, damage, expense or liability
(including all expenses reasonably incurred in investigating, preparing or
defending against any claim whatsoever) to which any of them may become subject
under the Act, the Exchange Act or otherwise, arising from such registration
statement but only to the same extent and with the same effect as the provisions
pursuant to which the Company has agreed to indemnify the Placement Agent
pursuant to the Placement Agent Agreement.
(e) The Holder(s) of the Warrant Shares to be sold
pursuant to a registration statement, and their successors and assigns, shall
severally, and not jointly, indemnify the Company, its officers and directors
and each person, if any, who controls the Company within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act, against all loss, claim,
damage or expense or liability (including all expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever) to which
they may become subject under the Act, the Exchange Act or otherwise, arising
from information furnished by or on behalf of such Holders, or their successors
or assigns, for specific inclusion in such registration statement to the same
extent and with the same effect as the provisions contained in Section 7 of the
Placement Agent Agreement pursuant to which the Placement Agent has agreed to
indemnify the Company.
12
<PAGE>
(f) Nothing contained in this Agreement shall be
construed as requiring the Holder(s) to exercise their Placement Agent's Warrant
prior to the initial filing of any registration statement or the effectiveness
thereof.
(g) The Company shall not permit the inclusion of any
securities other than the Warrant Shares in any registration statement filed
pursuant to Section 9.3 hereof, or permit any other registration statement to be
or remain effective during the effectiveness of a registration statement filed
pursuant to Section 9.3 hereof, without the prior written consent of National
Securities Corporation or as otherwise required by the terms of any existing
registration rights granted prior to the date of this Agreement by the Company
to the holders of any of the Company's securities.
(h) The Company shall furnish to each Holder
participating in the offering and to each underwriter, if any, a signed
counterpart, addressed to such Holder or underwriter, of (i) an opinion of
counsel to the Company, dated the effective date of such registration statement
(and, if such registration includes an underwritten public offering, an opinion
dated the date of the closing under the Placement Agent agreement), and (ii) a
"cold comfort" letter dated the effective date of such registration statement
(and, if such registration includes an underwritten public offering, a letter
dated the date of the closing under the underwriting agreement) signed by the
independent public accountants who have issued a report on the Company's
financial statements included in such registration statement, in each case
covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) and, in the case of such
accountants' letter, with respect to events
13
<PAGE>
subsequent to the date of such financial statements, as are customarily covered
in opinions of issuer's counsel and in accountants' letters delivered to
underwriters in underwritten public offerings of securities.
(i) The Company shall as soon as practicable after the
effective date of the registration statement, and in any event within 15 months
thereafter, make "generally available to its security holders" (within the
meaning of Rule 158 under the Act) an earnings statement (which need not be
audited) complying with Section 11(a) of the Act and covering a period of at
least 12 consecutive months beginning after the effective date of the
registration statement.
(j) The Company shall enter into an underwriting
agreement with the managing underwriters selected for such underwriting by
Holders holding a Majority of the Warrant Shares requested to be included in
such underwriting, which may be the Placement Agent. Such agreement shall be
satisfactory in form and substance to the Company, each Holder and such managing
underwriters, and shall contain such representations, warranties and covenants
by the Company and such other terms as are customarily contained in agreements
of that type used by the managing underwriter. The Holders shall be parties to
any underwriting agreement relating to an underwritten sale of their Warrant
Shares and may, at their option, require that any or all the representations,
warranties and covenants of the Company to or for the benefit of such
underwriters shall also be made to and for the benefit of such Holders. Such
Holders shall not be required to make any representations or warranties to or
agreements with the Company or the underwriters except as they may relate to
such Holders and their intended methods of distribution.
14
<PAGE>
(k) For purposes of this Agreement, the term "Majority"
in reference to the Placement Agent's Warrants or Warrant Shares, shall mean in
excess of fifty percent (50%) of the then outstanding Placement Agent's Warrants
or Warrant Shares that (i) are not held by the Company, an affiliate, officer,
creditor, employee or agent thereof or any of their respective affiliates,
members of their family, persons acting as nominees or in conjunction therewith
or (ii) have not been resold to the public pursuant to a registration statement
filed with the Commission under the Act.
10. Obligations of Holders. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to Section 9 hereof that
each of the selling Holders shall:
(a) Furnish to the Company such information regarding
themselves, the Warrant Shares held by them, the intended method of sale or
other disposition of such securities, the identity of and compensation to be
paid to any underwriters proposed to be employed in connection with such sale or
other disposition, and such other information as may reasonably be required to
effect the registration of their Warrant Shares.
(b) Notify the Company, at any time when a prospectus
relating to the arrant Shares covered by a registration statement is required to
be delivered under the Act, of the happening of any event with respect to such
selling Holder 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 a material fact required to be stated therein or necessary to
make the
15
<PAGE>
statements therein not misleading in the light of the circumstances then
existing.
11. Adjustments to Common Stock Exercise Price and Number of
Securities. The Common Stock Exercise Price in effect at any time and the number
and kind of securities purchased upon the exercise of the Placement Agent's
Warrant shall be subject to adjustment from time to time only upon the happening
of the following events:
11.1 Stock Dividend, Subdivision and Combination. In case the
Company shall (i) declare a dividend or make a distribution on its outstanding
shares of Common Stock in shares of Common Stock, (ii) subdivide or reclassify
its outstanding shares of Common Stock into a greater number of shares, or (iii)
combine or reclassify its outstanding shares of Common Stock into a smaller
number of shares, the Common Stock Exercise Price in effect at the time of the
record date for such dividend or distribution or of the effective date of such
subdivision, combination or reclassification shall be adjusted so that it shall
equal the price determined by multiplying the Common Stock Exercise Price by a
fraction, the denominator of which shall be the number of shares of Common Stock
outstanding after giving effect to such action, and the numerator of which shall
be the number of shares of Common Stock outstanding immediately prior to such
action. Such adjustment shall be made successively whenever any event listed
above shall occur.
11.2 Adjustment in Number of Securities. Upon each adjustment
of the Common Stock Exercise Price pursuant to the provisions of this Section
11, the number of
16
<PAGE>
Warrant Shares issuable upon the exercise at the adjusted Common Stock Exercise
Price of each Placement Agent's Warrant shall be adjusted to the nearest number
of whole shares of Common Stock by multiplying a number equal to the Common
Stock Exercise Price in effect immediately prior to such adjustment by the
number of Warrant Shares issuable upon exercise of the Placement Agent's Warrant
immediately prior to such adjustment and dividing the product so obtained by the
adjusted Common Stock Exercise Price.
11.3 Definition of Common Stock. For the purpose of this
Agreement, the term "Common Stock" shall mean (i) the class of stock designated
as Common Stock in the Articles of Incorporation of the Company as amended as of
the date hereof, or (ii) any other class of stock resulting from successive
changes or reclassifications of such Common Stock consisting solely of changes
in par value, or from par value to no par value, or from no par value to par
value.
11.4 Merger or Consolidation. In case of any consolidation of
the Company with, or merger of the Company into, another corporation (other than
a consolidation or merger which does not result in any reclassification or
change of the outstanding Common Stock), the corporation formed by such
consolidation or merger shall execute and deliver to the Holder a supplemental
warrant agreement providing that the Holder of each Placement Agent's Warrant
then outstanding or to be outstanding shall have the right thereafter (until the
expiration of such Placement Agent's Warrant) to receive, upon exercise of such
Placement Agent's Warrant, the kind and amount of shares of stock and other
securities and property receivable upon such consolidation or merger by a holder
of the number of shares of Common Stock for which such
17
<PAGE>
Placement Agent's Warrant might have been exercised immediately prior to such
consolidation, merger, sale or transfer. Such supplemental warrant agreement
shall provide for adjustments which shall be identical to the adjustments
provided in Section 11. The above provision of this subsection shall similarly
apply to successive consolidations or mergers.
11.5 No Adjustment of Exercise Price in Certain Cases. No
adjustment of the Common Stock Exercise Price or the Warrant Exercise Price
shall be made:
(a) Upon the issuance or sale of the Placement Agent's
Warrant or the Warrant Shares;
(b) Upon the issuance or sale of Common Stock (or any
other security convertible, exercisable, or exchangeable into shares of Common
Stock) upon the direct or indirect conversion, exercise, or exchange of any
options, rights, warrants, or other securities or indebtedness of the Company
outstanding as of the date of this Agreement or granted pursuant to any stock
option plan of the Company in existence as of the date of this Agreement,
pursuant to the terms thereof; or
(c) If the amount of said adjustment shall be less than
two cents ($.02) per share, provided, however, that in such case any adjustment
that would otherwise be required then to be made shall be carried forward and
shall be made at the time of and together with the next subsequent adjustment
which, together with any adjustment so carried forward, shall amount to at least
two cents ($.02) per Placement Agent's Warrant.
18
<PAGE>
11.6 Adjustment of Warrant Exercise Price. With respect to any
of the Warrants whether or not the Warrants have been exercised (or are
exercisable) and whether or not the Warrants are issued and outstanding, the
Warrant Exercise Price and the number of shares of Common Stock underlying such
Warrants shall be automatically adjusted in accordance with Section 8 of the
Warrant Agreement between the Company and Continental Stock Transfer & Trust
Company dated ___________, 1997 (the "Warrant Agreement"), upon the occurrence
of any of the events described therein. Thereafter, the underlying Warrants
shall be exercisable at such adjusted Warrant Exercise Price for such adjusted
number of underlying shares of Common Stock or other securities, properties or
rights.
12. Exchange and Replacement of Placement Agent's Warrant
Certificates. Each Placement Agent's Warrant Certificate is exchangeable,
without expense, upon the surrender thereof by the registered Holder at the
principal executive office of the Company for a new Placement Agent's Warrant
Certificate of like tenor and date representing in the aggregate the right to
purchase the same number of Warrant Shares in such denominations as shall be
designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to
it of the loss, theft, destruction or mutilation of any Placement Agent's
Warrant Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
the Placement Agent's Warrant, if mutilated, the Company will make and deliver a
new Warrant Certificate of like tenor, in lieu thereof.
19
<PAGE>
13. Elimination of Fractional Interests. The Company shall not be
required to issue certificates representing fractions of shares of Common Stock
upon the exercise of the Placement Agent's Warrant, nor shall it be required to
issue scrip or pay cash in lieu of fractional interests, it being the intent of
the parties that all fractional interests shall be eliminated by rounding any
fraction up to the nearest whole number of shares of Common Stock or other
securities, properties or rights.
14. Reservation and Listing of Securities. The Company shall at all
times reserve and keep available out of its authorized shares of Common Stock,
solely for the purpose of issuance upon the exercise of the Placement Agent's
Warrant and the Warrant, such number of shares of Common Stock or other
securities, properties or rights as shall be issuable upon the exercise thereof.
Every transfer agent ("Transfer Agent") for the Common Stock and other
securities of the Company issuable upon the exercise of the Placement Agent's
Warrant will be irrevocably authorized and directed at all times to reserve such
number of authorized shares of Common Stock and other securities as shall be
requisite for such purpose. The Company will keep a copy of this Agreement on
file with every Transfer Agent for the Common Stock and other securities of the
Company issuable upon the exercise of the Placement Agent's Warrant. The Company
will supply every such Transfer Agent with duly executed stock and other
certificates, as appropriate, for such purpose. The Company covenants and agrees
that, upon exercise of the Placement Agent's Warrant and payment of the Common
Stock Exercise Price or Warrant Exercise Price therefor, all shares of Common
Stock and other securities issuable upon such exercise shall be duly and validly
issued, fully paid, non-assessable and not subject to the
20
<PAGE>
preemptive rights of any stockholder. As long as the Placement Agent's Warrant
shall be outstanding, the Company shall use its best efforts to cause all shares
of Common Stock issuable upon the exercise of the Placement Agent's Warrant to
be listed (subject to official notice of issuance) on all securities exchanges
on which the Common Stock issued to the public in connection herewith may then
be listed and/or quoted on NASDAQ Market.
15. Notices to Placement Agent's Warrant Holders. Nothing contained
in this Agreement shall be construed as conferring upon the Holders the right to
vote or to consent or to receive notice as a stockholder in respect of any
meetings of stockholders for the election of directors or any other matter, or
as having any rights whatsoever as a stockholder of the Company. If, however, at
any time prior to the expiration of the Placement Agent's Warrants and their
exercise, any of the following events shall occur:
(a) the Company shall take a record of the holders of
its shares of Common Stock for the purpose of entitling them to receive a
dividend or distribution payable otherwise than in cash, or a cash dividend or
distribution payable otherwise than out of current or retained earnings, as
indicated by the accounting treatment of such dividend or distribution on the
books of the Company; or
(b) the Company shall offer to all the holders of its
Common Stock any additional shares of capital stock of the Company or securities
convertible into or exchangeable for shares of capital stock of the Company, or
any option, right or warrant to subscribe therefor; or
21
<PAGE>
(c) a dissolution, liquidation or winding up of the
Company (other than in connection with a consolidation or merger) or a sale of
all or substantially all of its property, assets and business as an entirety
shall be proposed;
then in any one or more of said events, the Company shall give written notice of
such event at least fifteen (15) days prior to the date fixed as a record date
or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall specify
such record date or the date of closing the transfer books, as the case may be.
Failure to give such notice or any defect therein shall not affect the validity
of any action taken in connection with the declaration or payment of any such
dividend, or the issuance of any convertible or exchangeable securities, or
subscription rights, options or warrants, or any proposed dissolution,
liquidation, winding up or sale.
16. Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
duly made and sent when delivered, or mailed by registered or certified mail,
return receipt requested:
(a) if to the registered Holder of the Placement Agent's
Warrant, to the address of such Holder as shown on the books of the Company; or
(b) if to the Company, to the address set forth in
Section 4 hereof or to such other address as the Company may designate by notice
to the Holders.
22
<PAGE>
17. Warrants. The form of the certificate representing Warrants (and
the form of election to purchase shares of Common Stock upon the exercise of
Warrants and the form of assignment period on the reverse thereof) shall be
substantially as set forth in Exhibit "A" to the Warrant Agreement. Each Warrant
issuable upon exercise of the Placement Agent's Warrants shall evidence the
right to initially purchase one fully paid and non-assessable share of Common
Stock at an initial purchase price of $7.20 per share commencing on the Initial
Exercise Date and ending at 5:00 p.m. New York time on the Warrant Expiration
Date at which time the Warrant shall expire. The exercise price of the Warrants
and the number of shares of Common Stock issuable upon the exercise of the
Warrants are subject to adjustment, whether or not the Placement Agent's
Warrants have been exercised and the Warrants have been issued, in the manner
and upon the occurrence of the events set forth in Section 8 of the Warrant
Agreement, which is hereby incorporated herein by reference and made a part
hereof as if set forth in its entirety herein. Subject to the provisions of this
Agreement and upon issuance of the Warrants underlying the Placement Agent's
Warrants, each registered holder of such Warrants shall have the right to
purchase from the Company (and the Company shall issue to such registered
holders) up to the number of fully paid and non-assessable shares of Common
Stock (subject to adjustment as provided herein and in the Warrant Agreement),
free and clear of all preemptive rights of stockholders, provided that such
registered holder complies with the terms governing exercise of the Warrants set
forth in the Warrant Agreement, and pays the applicable exercise price,
determined in accordance with the terms of the Warrant Agreement. Upon exercise
of the Warrants, the Company shall forthwith issue to the registered holder of
any such Warrant in his name or in such name as may be directed by him,
certificates for the number of shares of Common
23
<PAGE>
Stock so purchased. Except as otherwise provided herein, the Warrants underlying
the Placement Agent's Warrants shall be governed in all respects by the terms of
the Warrant Agreement. The Warrants shall be transferable in the manner provided
in the Warrant Agreement, and upon any such transfer, a new Warrant Certificate
shall be issued promptly to the transferee. The Company covenants to, and agrees
with, the Holder(s) that without the prior written consent of the Holder(s), the
Warrant Agreement will not be modified, amended, canceled, altered or
superseded, and that the Company will send to each Holder, irrespective of
whether or not the Warrants have been exercised, any and all notices required by
the Warrant Agreement to be sent to holders of Warrants.
18. Supplements; Amendments; Entire Agreement. This Agreement
(including the Placement Agent Agreement to the extent portions thereof are
referred to herein) contains the entire understanding between the parties hereto
with respect to the subject matter hereof and may not be modified or amended
except by a writing duly signed by the party against whom enforcement of the
modification or amendment is sought. The Company and the Placement Agent may
from time to time supplement or amend this Agreement without the approval of any
holders of Placement Agent's Warrant Certificates (other than the Placement
Agent) in order to cure any ambiguity, to correct or supplement any provision
contained herein which may be defective or inconsistent with any provisions
herein, or to make any other provisions in regard to matters or questions
arising hereunder which the Company and the Placement Agent may deem necessary
or desirable and which the Company and the Placement Agent deem shall not
adversely affect the interests of the Holders of Placement Agent's Warrant
Certificates.
24
<PAGE>
19. Successors. All of the covenants and provisions of this
Agreement shall be binding upon and inure to the benefit of the Company, the
Holders and their respective successors and assigns hereunder.
20. Survival of Representations and Warranties. All statements in
any schedule, exhibit or certificate or other instrument delivered by or on
behalf of the parties hereto, or in connection with the transactions
contemplated by this Agreement, shall be deemed to be representations and
warranties hereunder. Notwithstanding any investigations made by or on behalf of
the parties to this Agreement, all representations, warranties and agreements
made by the parties to this Agreement or pursuant hereto shall survive.
21. Governing Law. This Agreement and each Placement Agent's Warrant
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of New York and for all purposes shall be construed in
accordance with the laws of said State without giving effect to the rules of
said State governing the conflicts of laws.
22. Severability. If any provision of this Agreement shall be held
to be invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provision of this Agreement.
23. Captions. The caption headings of the Sections of this Agreement
are for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
25
<PAGE>
24. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
Placement Agent and any other registered Holder(s) of the Placement Agent's
Warrant Certificates or Warrant Shares any legal or equitable right, remedy or
claim under this Agreement; and this Agreement shall be for the sole and
exclusive benefit of the Company and the Placement Agent and any other Holder(s)
of the Placement Agent's Warrant Certificates or Warrant Shares.
25. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
IN WITNESS OF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
ATTEST: CASULL ARMS CORPORATION
By: ___________________ By:___________________________________
Name: Richard J. Casull Name: Allan R. Tessler
Title: CEO Title: Chairman of the Board
NATIONAL SECURITIES CORPORATION
By:___________________________________
Name: Steven A. Rothstein
Title: Chairman
26
<PAGE>
EXHIBIT A
[FORM OF PLACEMENT AGENT'S WARRANT CERTIFICATE]
THE PLACEMENT AGENT'S WARRANT REPRESENTED BY THIS CERTIFICATE AND THE OTHER
SECURITIES ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR
RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN
OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL
FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE PLACEMENT AGENT'S WARRANT REPRESENTED BY THIS
CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO
HEREIN.
EXERCISABLE ON OR BEFORE
5:30 P.M., NEW YORK TIME,__________, 2001
PLACEMENT AGENT'S Warrant No.
Issuable for
_____ Shares of Common Stock and
______ Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that , or registered assigns, is
the registered holder of Warrants to purchase initially, at any time from
_____________, 1997 until 5:30 p.m., New York time on _____________, 2002
("Expiration Date"), up to shares of common stock, par value $.01 per share, of
the Company (the "Common Stock") and/or ______ warrants, each warrant to
purchase one (1) share of Common Stock, at an exercise price of $7.20 per share
and $.12 per Warrant, respectively [120% of the offering prices per share and
per warrant to the public, respectively] (the "Common Stock Exercise Price" and
the "Warrant Exercise Price", respectively), upon surrender of this Placement
Agent's Warrant Certificate and payment of the Common Stock Exercise Price and
the Warrant Exercise Price at an office or agency of the Company, but subject to
the conditions set forth herein and in the Placement Agent's Warrant Agreement
dated as of ___________, 1997 among the Company and National Securities
A-1
<PAGE>
Corporation (the "Warrant Agreement"). Payment of the Exercise Price shall be
made by certified or official bank check in New York Clearing House funds
payable to the order of the Company.
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Placement Agent's Warrant evidenced hereby,
unless exercised prior thereto, shall thereafter be void.
The Placement Agent's Warrant evidenced by this Warrant Certificate
are part of a duly authorized issue of Placement Agent's Warrant issued pursuant
to the Warrant Agreement, which Warrant Agreement is hereby incorporated by
reference in and made a part of this instrument and is hereby referred to for a
description of the rights, limitation of rights, obligations, duties and
immunities thereunder of the Company and the holders (the words "holders" or
"holder" meaning the registered holders or registered holder) of the Placement
Agent's Warrant.
The Warrant Agreement provides that upon the occurrence of certain
events the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Placement Agent's
Warrant; provided, however, that the failure of the Company to issue such new
Warrant Certificates shall not in any way change, alter, or otherwise impair,
the rights of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Placement Agent's Warrant shall be issued to the transferee(s) in exchange
for this Warrant Certificate, subject to the limitations provided herein and in
the Warrant Agreement, without any charge except for any tax or other
governmental charge imposed in connection with such transfer.
Upon the exercise of less than all of the Placement Agent's Warrant
evidenced by this Certificate, the Company shall forthwith issue to the holder
hereof a new Warrant Certificate representing such numbered unexercised
Placement Agent's Warrant.
The Company may deem and treat the registered holder(s) hereof as
the absolute owner(s) of this Warrant Certificate (notwithstanding any notation
of ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the
Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
A-2
<PAGE>
This Warrant Certificate does not entitle any holder thereof to any
of the rights of a shareholder of the Company.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate
to be duly executed under its corporate seal.
Dated as of _________, 1997
ATTEST: CASULL ARMS CORPORATION
By:___________________________ By:______________________________________
Name: Richard J. Casull Name: Allan R. Tessler
Title: CEO Title: Chairman of the Board
By:______________________________________
Name:
Title: Secretary
A-3
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.11]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase shares of Common Stock
and/or _______ warrants, each warrant to purchase one (1) share of Common Stock,
and herewith tenders in payment for such securities a certified or official bank
check payable in New York Clearing House Funds to the order of Casull Arms
Corporation (the "Company") in the amount of $_____, all in accordance with the
terms of Section 3.1 of the Placement Agent's Warrant Agreement dated as of
__________, 1997 among the Company and National Securities Corporation. The
undersigned requests that a certificate for such securities be registered in the
name of________________________________________________________________________,
whose address is ____________________________, and that such certificate be
delivered to _______________________, whose address is ________________________,
and if said number of shares shall not be all the shares purchasable hereunder,
that a new Warrant Certificate for the balance of the shares purchasable under
the within Warrant Certificate be registered in the name of the undesigned
warrant holder or his assignee as below indicated and delivered to the address
stated below.
Dated:___________________________
Signature:__________________________________________
(Signature must conform in all respects to name
of holder as specified on the face of the
Warrant Certificate.)
Address:________________________________________
________________________________________
________________________________________________
(Insert Social Security or Other Identifying
Number of Holder)
Signature Guaranteed:___________________________________________________________
(Signature must be guaranteed by a bank savings and loan association,
stockbroker, or credit union with membership in an approved signature guaranty
Medallion Program pursuant to Securities Exchange Act Rule 17Ad-15.)
A-4
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder desires to
transfer the Warrant Certificate.)
FOR VALUE RECEIVED ____________________ here sells, assigns and transfers unto
[NAME OF TRANSFEREE] this Warrant Certificate, together with all right, title
and interest therein, and does hereby irrevocably constitute and appoint
________________ Attorney, to transfer the within Warrant Certificate on the
books of the within-named Company, with full power of substitution.
Dated:_______________________
Signature:______________________________________
(Signature must conform in all respects to name
of holder as specified on the face of the
Warrant Certificate.)
Address:________________________________________
________________________________________
________________________________________________
(Insert Social Security or Other Identifying
Number of Holder)
Signature Guaranteed:___________________________________________________________
(Signature must be guaranteed by a bank savings and loan association,
stockbroker, or credit union with membership in an approved signature guaranty
Medallion Program pursuant to Securities Exchange Act Rule 17Ad-15.)
A-5
<PAGE>
Exhibit 5
April 15, 1997
Casull Arms Corporation
456 Fairview Road
Afton, Wyoming 83110
Re: REGISTRATION STATEMENT ON FORM SB-2
Ladies and Gentlemen:
You have requested our opinion in connection with the above-captioned
Registration Statement on Form SB-2 to be filed by Casull Arms Corporation, a
Delaware corporation (the "Company"), with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended (the "Act"), and
the rules and regulations promulgated thereunder (the "Rules"). The
Registration Statement relates to the offering of up to 1,400,000 shares (the
"Shares") of common stock, par value $.01 per share (the "Common Stock")
1,400,000 warrants (the "Warrants"); 1,400,000 shares of Common Stock
underlying the Warrants; 140,000 Representative's Warrants; 140,000 shares
of Common Stock issuable upon exercise of Representative's Warrants; 140,000
Warrants issuable upon exercise of Representative's Warrants; and 140,000
shares of Common Stock issuable upon exercise of warrants issuable upon
exercise of Representative's Warrants.
We have examined such records and documents and have made such
examination of law as we considered necessary to form a basis for the
opinions set forth herein. In our examination, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to
us as originals, and the conformity with the originals of all documents
submitted to us as copies thereof.
Based upon such examination, it is our opinion that when there has been
compliance with the Act and applicable state securities laws and when the
Placement Agent Agreement, a form of which will be filed as an exhibit to the
Registration Statement, is duly and validly executed and delivered, the
Common Stock and Warrants, when issued, delivered and paid for in the manner
described in such Placement Agent Agreement, will be validly issued, fully paid
and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Opinions" in the Registration Statement. In so doing, we do not admit that we
are in the category of persons whose consent is required under Section 7 of the
Act or under the Rules.
Very truly yours,
/s/ CAMHY KARLINSKY & STEIN LLP
Camhy Karlinsky & Stein LLP
<PAGE>
Exhibit 11
CASULL ARMS CORPORATION
COMPUTATION OF NET LOSS PER COMMON SHARE
<TABLE>
<CAPTION>
February 28, 1997
----------------------------------------
Days Weighted Avg.
Shares Outstanding(1) Shares Outstanding(2)
--------- -------------- ---------------------
<S> <C> <C> <C>
Shares issued to founders on August 7, 1996 573,750 205 532,212
Cheap stock consideration for shares issued to
founders 564,188 16 40,846
Shares issued in private placement through
October 1996 1,133,333 157 805,128
Cheap stock consideration for shares issued
in private placement 566,666 64 164,102
-----------
Weighted average shares
outstanding 1,542,288
Net loss for period $ (173,731)
-----------
Net loss per common share $ (0.11)
-----------
-----------
</TABLE>
(1) Days outstanding for shares issued in private placement represents
weighted average days outstanding for private placement share issuances
which occurred in September and October, 1996.
(2) Weighted average shares based on days for the period July 23, 1996 (date
of incorporation) through February 28, 1997.
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form SB-2 of our report dated April 11, 1997
relating to the financial statements of Casull Arms Corporation, which
appears in such Prospectus. We also consent to the references to us under
the headings "Experts" and "Selected Financial Data" in such Prospectus.
However, it should be noted that Price Waterhouse LLP has not prepared or
certified such "Selected Financial Data."
PRICE WATERHOUSE LLP
New York, New York
April 15, 1997
