<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 6, 1997
REGISTRATION NO. 333-16911
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE AMENDMENT NO. 1
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.
WILLIE E. DENNIS, ESQ. TIANNE BATAILLE, 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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
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. / /
------------------------
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(2)..................... 750,000 $5.50 $ 4,125,000 $1,250
Common Stock issuable upon exercise of
Redeemable Common Stock Purchase
Warrants(3)............................. 750,000 $6.00 $ 4,500,000 $1,364
Representative's Warrants(4).............. 75,000 $.001 $ 75 --
Common Stock issuable upon exercise of
Representative's Warrants(5)............ 75,000 $6.48 $ 486,000 $147
Warrants issuable upon exercise of
Representative's Warrants(3)............ 75,000 $0.12 $ 9,000 $2
Common Stock issuable upon exercise of
warrants issuable upon exercise of
Representative's Warrants(5)............ 75,000 $6.00 $ 450,000 $136
Total..................................... $ 9,570,075 $2,899(6)
</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) Includes 112,500 Units which the Underwriter has an option to purchase from
the Registrant to cover over-allotments, if any.
(3) Issuable upon the exercise of Redeemable Common Stock Purchase Warrants to
be offered to the public. Pursuant to Rule 416 under the Act, this
Registration Statement covers any additional shares of Common Stock, which
may become issuable by virtue of the anti-dilution provisions of such
Redeemable Common Stock Purchase Warrants.
(4) No registration fee required pursuant to Rule 457 under the Act.
(5) 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 Representative's Warrants.
(6) 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 NOVEMBER , 1997
[LOGO]
750,000 SHARES OF COMMON STOCK PAR VALUE $0.01 PER SHARE AND
750,000 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 (the "Units"). See
"Description of Securities."
The Securities will become separately tradeable at such time as National
Securities Corporation (the "Representative") may determine, provided, however,
that such determination shall not be made prior to the delivery of the Company's
audited financial statements to the Representative which reflect the receipt of
the proceeds of this Offering (the "Separation Date"). The Company has
covenanted to provide such audited financial statements no later than thirty
(30) days from the closing of this Offering. See "Risk Factors."
Each Warrant entitles the registered holder thereof to purchase one share of
Common Stock at an initial exercise price of $6.00 per share, at any time over a
forty-eight month period commencing on December , 1998. The Warrant exercise
price is subject to adjustment under certain circumstances. Commencing on
December , 1999, the Warrants are subject to redemption by the Company at a
price of $0.05 per Warrant upon thirty (30) days prior written notice to the
warrantholders if the average closing bid price of the Common Stock equals or
exceeds $8.25 per share, 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 Units, 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 the Separation Date, there will be
no public market for the Securities as units. See "Underwriting" for a
description of the factors considered in determining the public offering price.
The Company anticipates that the Units will be quoted on OTC Electronic Bulletin
Board under the symbol CASUU and that after the Separation Date 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 7 AND
"DILUTION" AT PAGE 15. 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............................... $5.50 $0.55 $4.95
Per Share............................ $5.40 $0.54 $4.86
Per Warrant.......................... $0.10 $0.01 $0.09
Total(3)............................... $4,125,000 $412,500 $3,712,500
</TABLE>
(1) Excludes (i) additional compensation payable to the Representative in the
form of a non-accountable expense allowance equal to 1.8% of the gross
proceeds of this Offering, and (ii) the value of five-year warrants (the
"Representative's Warrants") to purchase up to an aggregate of 75,000 shares
of Common Stock and/or 75,000 Warrants, at an exercise price of $6.48 per
share, and $0.12 per warrant, respectively, that will be sold to the
Representative at a nominal price. In addition, the Company has agreed to
indemnify the Representative 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
Representative.
(3) The Company has granted the Underwriters an option, exercisable within 45
days after the date of this Prospectus, to purchase up to 112,500 shares of
Common Stock and/or 112,500 Warrants solely to cover over-allotments (the
"Over-allotment Option"), if any. The Over-allotment Option may be exercised
to purchase shares of Common Stock or Warrants or any combination thereof.
If such option is exercised in full, the total Price to Public, Underwriting
Discount and Commissions, and Proceeds to the Company will be $4,743,750,
$474,375 and $4,269,375, respectively. See "Underwriting."
------------------------------
The Securities are being offered by the Underwriters, subject to prior sale,
when, as and if delivered to and accepted by the Underwriters, and subject to
approval of certain legal matters by their counsel and subject to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
this Offering and to reject any order in whole or in part. It is expected that
delivery of the Securities offered hereby will be made against payment in
Seattle, Washington on or about December , 1997.
NATIONAL SECURITIES CORPORATION
THE DATE OF THIS PROSPECTUS IS NOVEMBER , 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 "UNDERWRITING".
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 and on a non-exclusive basis thereafter. "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.
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS: (I) ASSUMES NO
EXERCISE OF THE OVER-ALLOTMENT OPTION (II) EXCLUDES SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF THE WARRANTS AND (III) EXCLUDES SECURITIES ISSUABLE
UPON EXERCISE OF THE REPRESENTATIVE'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 a 22 caliber double-action revolver, 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 or sell any firearms included on the Bureau of Alcohol Tobacco
and Firearms' list of assault weapons.
The Company plans to outsource the production of its revolvers to qualified
manufacturers. The Company has identified several manufacturers capable of
producing the firearms, and expects that outsourced manufacturing will begin in
the spring of 1998. The Company plans to begin the construction of its own
manufacturing facility within one year after the completion of this Offering.
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
4.3 million units in 1995.
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 Company's objective is to become an international provider of high
quality firearms. The Company intends to achieve its objective by (i) utilizing
the name "Casull" which is well recognized within the firearms industry; (ii)
producing a varied line of firearm products designed by Casull; (iii)
establishing a
3
<PAGE>
distribution network with major firearms dealers; (iv) increasing consumer
awareness and market penetration throughout the Company's market areas.
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.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered.............. 750,000 shares of Common Stock and 750,000 Warrants to
purchase one share of Common Stock per Warrant. The Common
Stock and Warrants are being offered hereby as units but
will become separately tradeable at such time as the
Representative may determine, provided, however, that such
determination shall not be made prior to the delivery of
the Company's audited financial statements to the
Representative which reflect the receipt of the proceeds
of this Offering. The Company has convenanted to provide
such audited financial statements within thirty (30) days
of the closing of this Offering. After the Separation Date
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 at any time over a forty-eight month period
commencing on December , 1998. Commencing on December
, 1999, the Warrants will be subject to redemption by
the Company, thirty (30) days prior at a price of $0.05
per Warrant upon written notice if the average closing bid
price of the Common Stock equals or exceeds $8.25 per
share 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 Offering(1)(2)...... 2,457,083 shares of Common Stock and Warrants to purchase
750,000 shares of Common Stock
</TABLE>
<TABLE>
<S> <C>
Proposed OTC Electronic Bulletin
Board Symbols................. Units: CASUU
Common Stock: CASU
Redeemable Warrants: CASUW
Use of Proceeds................. Acquisition of machinery, tooling and equipment; purchase
of inventory; purchase of land; construction of a
manufacturing facility; marketing and product development.
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>
- ------------------------
(1) 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) 750,000 shares of Common Stock issuable upon
exercise of the Warrants sold in this Offering, (ii) 75,000 shares of Common
Stock issuable upon exercise of the Representative's Warrants, (iii)
Warrants to purchase 75,000 shares of Common stock issuable upon exercise of
the Representative's Warrants and (iv) 75,000 shares of Common Stock
issuable upon exercise of the Warrants underlying the Representative's
Warrants.
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>
JULY 23,
1996
(INCEPTION) THREE MONTHS JULY 23, 1996
TO ENDED (INCEPTION) TO
JUNE 30, SEPTEMBER 30, SEPTEMBER 30,
1997(1) 1997 1997
------------ -------------- --------------
ACTUAL (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues......................................... $ -- $ -- $ --
General and administrative expenses.............. (275,651) (54,434) (330,085)
Net loss......................................... (212,716) (36,777) (249,493)
Net loss per common share........................ $ (.13) $ (.02)
Weighted average number of common shares
outstanding(2)................................. 1,588,760 1,707,083
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997(1)
----------------------------
(UNAUDITED)
----------------------------
ACTUAL AS ADJUSTED(3)
------------ --------------
<S> <C> <C>
BALANCE SHEET DATA
Working capital................................................. $ 2,881,551 $ 6,496,182
Total assets(4)................................................. 4,185,930 7,223,030
Total liabilities(4)............................................ 978,048 726,848
Stockholders' equity............................................ 3,207,882 6,496,182
</TABLE>
- ------------------------
(1) The Company's fiscal year 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 Securities offered hereby
at an assumed initial offering price of $5.40 per share of Common Stock and
$.10 per Warrant (after deducting estimated underwriting agent discounts and
commissions and all other expenses of this Offering). Assumes no exercise of
the Representative's Warrants. See "Underwriting."
(4) Includes $663,750 which would have been repayable to a Director if the
Company had sold on September 30, 1997 certain shares of common stock of a
publicly traded company used by such Director to pay the purchase price of
$1,000,000 for 333,333 shares of Common Stock acquired by such Director in
October 1996. The estimated fair market value of such shares on September
30, 1997 was $1,663,750. See "Certain Transactions".
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.
6
<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. The Company is in
the development stage and does not currently manufacture or sell firearms. There
is no guarantee that the Company will be able to manufacture and sell firearms
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 6 months
following the completion of this Offering.
DEPENDENCE ON LICENSED PATENTS AND TRADEMARKS. The Company has entered into
a License Agreement with Richard J. Casull ("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 upon 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 a federal trademark
registration to the "Casull" name, in connection with the Company's products,
but no assurance can be given that such federal trademark registration 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 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 will obtain a $1,000,000
key-man life insurance policy on Casull prior to the completion of the Offering.
No assurance can be given, however, that the Company will be able to obtain a
key-man life insurance policy on acceptable terms.
7
<PAGE>
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", which bans the sale
of assault weapons, took effect on September 13, 1994, however the Company
believes that none of its products will be banned as "assault weapons" under the
"Crime Bill". There can be no assurance, however, 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.
Though not currently required by law, there is a trend in the firearms
industry to provide secure methods of storing firearms. In 1997 President
Clinton called for legislation requiring firearms be sold with a trigger-locking
device or in a lockable container. Although no legislation has been introduced
by Congress, several of the major firearms producers have begun selling firearms
with trigger-locking devices or locking containers. The Company intends to sell
all its firearms with either a trigger-locking device or in a locking container.
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
8
<PAGE>
adequate insurance, any successful claims could materially and adversely affect
the reputation and prospects of the Company.
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.
DEPENDENCE ON THIRD-PARTY MANUFACTURERS AND SUPPLIERS. The Company will be
dependent upon third parties to manufacture and supply its products. Currently,
the Company is in discussions with manufacturers, however, no assurance can be
given that the Company will be able to enter into an agreement with a
third-party manufacturer or that such agreement will be maintained. Any failure
by such manufacturer to fulfill its obligations, or the failure by the Company
to secure an alternative third-party manufacturer at comparable prices, if
necessary, would have a material adverse effect on the Company. The Company does
not expect to maintain supply agreements with more than one third-party supplier
for identical parts, but instead expects to purchase pursuant to purchase orders
in the ordinary course of business. The Company will be substantially dependent
on the ability of its manufacturers and suppliers to, among other things, meet
the Company's performance and quality specifications. Failure by the Company's
manufacturers and suppliers to comply with these and other requirements could
have a material adverse effect on the Company. Furthermore, there can be no
assurance that the Company's manufacturers and suppliers will dedicate
sufficient production capacity to meet the Company's scheduled delivery
requirements or that the Company's suppliers or manufacturers will have
sufficient production capacity to satisfy the Company's requirements during any
period of sustained demand. Their failure to supply, or delay in supplying, the
Company with products could have a material adverse effect on the Company. See
"Business-- Manufacturing."
DEPENDENCE ON THIRD-PARTY DISTRIBUTORS. 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
9
<PAGE>
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.
There can be no assurance that the Company will successfully distribute its
products or that firearms dealers will agree to distribute its products. See
"Business--Marketing Strategy."
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 may not succeed in attracting and retaining qualified personnel,
particularly including management, marketing and other skilled personnel, to its
headquarters in Afton, Wyoming. There can be no assurance that the Company will
continue to grow or be 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. Commencing on
December , 1999, the Warrants are redeemable by the Company at a price of
$0.05 per Warrant upon thirty (30) days prior written notice if the average
closing bid price of the Common Stock equals or exceeds $8.25 per share for any
20 trading days within a period of 30 consecutive trading days ending on the
fifth trading day prior to the notice of redemption. 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 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
10
<PAGE>
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. The OTC Electronic Bulletin Board was
introduced seven years ago as an alternative to the NQB Pink Sheets published by
the National Quotation Bureau Incorporated for the 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 factors including the future market
price of the Common Stock or Warrants or the failure of the Company to deliver
audited financial statements reflecting the receipt of the proceeds from this
Offering to the Representative, 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. Upon the completion of the Offering,
current stockholders will beneficially own 1,707,083 shares or 69.3% of the
Common Stock outstanding. Of that number, Mr. Casull will beneficially own
71,875 shares or 2.9% of the Common Stock outstanding, and all officers and
directors as a class will beneficially own 1,041,750 shares or 42.4% of the
Common Stock outstanding. 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.
11
<PAGE>
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING. The Company
believes that its existing resources, together with the estimated net proceeds
of this 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 Representative, 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 "Underwriting."
REPRESENTATIVE'S INFLUENCE ON THE MARKET. A significant amount of the
Securities offered hereby may be sold to customers of the Representative. Such
customers may subsequently engage in transactions for the sale or purchase of
such Securities through or with the Representative. If it participates in the
market, the Representative 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 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 Representative to cause
all holders of the 1,707,083 shares of Common Stock outstanding prior to this
Offering to execute
12
<PAGE>
lock-up agreements with the Representative that restrict the sale or disposition
of shares of Common Stock for 18 months after the completion of the Offering
without the prior written consent of the Representative. The Representative may
consent to a waiver of this lock-up period without prior public notice. Of the
2,457,083 shares of Common Stock that will be outstanding following the
completion of this Offering, the 750,000 shares of Common Stock sold in this
Offering will be freely tradeable without restriction or further registration
under the Act. Following the 18 month period, the remaining 1,707,083 shares of
Common Stock will be eligible for sale subject to the manner of sales, volume,
notice and information requirements of Rule 144. 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 $2.76 or approximately 51%
per share of Common Stock in the as adjusted net tangible book value of each
share of Common Stock from this Offering. 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."
13
<PAGE>
USE OF PROCEEDS
The gross proceeds from the sale of the Securities offered hereby will be
$4,125,000 ($4,743,750, if the Over-allotment Option is exercised in full), and
the net proceeds to be received by the Company from the sale of the Securities
offered hereby, after deducting the Underwriter's discounts and commissions and
all other applicable expenses, are estimated to be approximately $3,288,250
($3,833,987 if the Over-allotment Option is exercised in full). The Company
currently anticipates applying such proceeds approximately as follows:
<TABLE>
<CAPTION>
APPROXIMATE
APPROXIMATE PECENTAGE
DOLLAR OF NET
APPLICATION OF PROCEEDS AMOUNT PROCEEDS
- -------------------------------------------------------------------------------------- ------------ -------------
<S> <C> <C>
Purchase of Land...................................................................... $ 125,000 3.8%
Construction of Plant................................................................. 400,000 12.1%
Acquisition of Machinery, Tooling & Equipment......................................... 1,538,250 46.8%
Inventory............................................................................. 775,000 23.6%
Marketing............................................................................. 300,000 9.1%
Product Development................................................................... 150,000 4.6%
------------ -----
Total................................................................................. $ 3,288,250 100.0%
</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 intends to use the remaining net proceeds in the amount of
$3,200,000 received from the sale of common stock in a private placement (the
"Private Placement") of the Company in October 1996 for the acquisition of
machinery, tooling and equipment, the purchase of inventory, marketing, product
development and general corporate purposes, including working capital.
The Company believes that the estimated net proceeds to be received by the
Company from this Offering, together with the remaining net proceeds 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.
14
<PAGE>
DILUTION
The Company had a net tangible book value of $2,881,551 or $1.69 per share
as of September 30, 1997, based upon 1,707,083 shares of Common stock
outstanding. The 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. After giving effect to
the sale of 750,000 shares of Common Stock and 750,000 Warrants offered hereby
at an initial public offering price per share of $5.40 per share of Common Stock
and $.10 per Warrant, the proforma net tangible book value of the Common Stock
as of September 30, 1997 (after deducting estimated underwriting discounts and
commissions and all other estimated expenses of the Offering payable by the
Company) would have been $6,496,182 or $2.64 per share. This would represent an
immediate increase in net tangible book value of $.95 per share and an immediate
dilution of $2.76 or 51%. The following tables illustrate this dilution on a per
share basis (assuming $.10 is attributed to the Warrants):
<TABLE>
<S> <C> <C>
Assumed initial offering price per share................................. $ 5.40
Net tangible book value per share prior to the Offering(1)............. $ 1.69
Increase attributable to new investors................................. $ .95
Pro forma net tangible book value per share after the Offering(2)........ $ 2.64
-----
Dilution per share to new investors...................................... $ 2.76
-----
-----
</TABLE>
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 Offering
made by this Prospectus. The calculation below is based on an initial public
offering price of $5.40 per share of Common Stock (before deducting underwriting
discounts and commissions and all other estimated expenses of the Offering
payable by the Company).
<TABLE>
<CAPTION>
AVERAGE
PRICE PER
SHARES PURCHASED TOTAL CONSIDERATION SHARE
--------------------- ------------------------ -----------
<S> <C> <C> <C> <C> <C>
NUMBER % NUMBER %
---------- --- ------------- ---
Existing Stockholders(3).................................. 1,707,083 69% $ 3,457,375 46% $ 2.03
New Investors............................................. 750,000 31% 4,050,000 54% $ 5.40
---------- --- ------------- --- -----
2,457,083 100% $ 7,507,375 100%
</TABLE>
- ------------------------
(1) Net tangible book value per share excludes deferred registration costs of
$326,331. See the financial statements of the Company and the notes thereto.
(2) Pro forma net tangible book value per share after the Offering (after
deducting estimated underwriting discounts and commissions and all other
expenses of the Offering)
(3) 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 September 30, 1997 was $1,663,750.
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997 on an actual basis, and the capitalization on such date as
adjusted to give effect to the issuance and sale of the Securities offered by
the Company hereby (after deducting estimated underwriting discounts and
commissions and all other estimated expenses of this Offering payable by the
Company), assuming an initial public offering price of $5.40 per share of Common
Stock and $0.10 per Warrant:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997(1)
----------------------------
<S> <C> <C>
UNAUDITED
----------------------------
<CAPTION>
ACTUAL AS ADJUSTED(2)
------------ --------------
<S> <C> <C>
Stockholders' Equity:
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; 1,707,083
shares issued and outstanding actual; 2,457,083 shares outstanding (as
adjusted)....................................................................... 17,071 24,571
Additional paid-in capital........................................................ 3,440,304 6,721,104
Accumulated deficit............................................................... (249,493) (249,493)
------------ --------------
Total stockholders' equity........................................................ 3,207,882 6,496,182
------------ --------------
Total capitalization............................................................ $ 3,207,882 $ 6,496,182
------------ --------------
------------ --------------
</TABLE>
- ------------------------
(1) The Company has adopted a fiscal year which begins on July 1 and ends on
June 30.
(2) As adjusted to give effect to the issuance of Securities offered hereby at
an assumed initial offering price of $5.40 per share of Common Stock and
$.10 per Warrant (after deducting estimated underwriting discounts and
commissions and all other estimated expenses of this Offering payable by the
Company). See "Use of Proceeds." Assumes no exercise of the Representative's
Warrants. See "Underwriting."
16
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data as of June 30, 1997 and for the period
then ended have been derived from the Company's audited financial statements.
The balance sheet data as of Septemher 30, 1997 and the statement of operations
data for the three months then ended have been derived from unaudited financial
statements. In the opinion of Management, the unaudited financial statements
include all material adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the financial position and results of
operations for the period presented. 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>
JULY 23,
1996
(INCEPTION) THREE MONTHS JULY 23, 1996
TO ENDED (INCEPTION) TO
JUNE 30, SEPTEMBER 30, SEPTEMBER 30,
1997(1) 1997 1997
------------ --------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Revenues.................................... $ -- $ -- $ --
Expenses:
General and administrative expenses....... 275,651 54,434 330,085
Other income:
Interest and dividend income.............. 62,935 17,657 80,592
------------ --------------- --------------
Net loss.................................... $ (212,716) $ (36,777) $ 249,493)
------------ --------------- --------------
------------ --------------- --------------
Net loss per common share................... $ (0.13) $ (0.02)
------------ ---------------
------------ ---------------
Weighted average number of common shares
outstanding(2)............................ 1,588,760 1,707,083
------------ ---------------
------------ ---------------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997(1)
----------------------------
JUNE 30, 1997 (UNAUDITED)
------------- ----------------------------
ACTUAL ACTUAL AS ADJUSTED(3)
------------- ------------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA
Cash................................................................. $ 39,855 $ 2,195,849 $ 5,559,280
Working capital...................................................... (241,672) 2,881,551 6,496,182
Total assets(4)...................................................... 3,916,186 4,185,930 7,223,030
Total liabilities(4)................................................. 671,527 978,048 726,848
Stockholders' (deficit) equity....................................... (155,341) 3,207,882 6,496,182
</TABLE>
- ------------------------
(1) The Company's fiscal year 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 Securities offered hereby
at an assumed initial offering price of $5.40 per share of Common Stock and
$.10 per Warrant (after deducting estimated underwriting discounts and
commissions and all other expenses of this Offering payable by the Company).
Assumes no exercise of the Representative's Warrants. See "Underwriting."
(4) Includes $663,750 which would have been repayable to a Director if the
Company had sold on September 30, 1997 certain shares of common stock of a
publicly traded company used by such Director to pay the purchase price of
$1,000,000 for 333,333 shares of Common Stock acquired by such Director in
October 1996. The estimated fair market value of the shares on September 30,
1997 was $1,663,750. See "Certain Transactions."
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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, President and a Chief Financial Officer. The
Company's marketing plan was developed by an outside consultant and will be
implemented by the President and upon engagement of a Vice President of Sales.
Although the Company is in the development stage and does not expect any
revenues for 6 months following the date of this Prospectus, 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 on raising
capital, producing prototypes, engineering, identifying manufacturing suppliers,
hiring the management team, and marketing its product line.
The Company has identified suppliers that have the ability and the capacity
to manufacture the Company's products. The Company is currently in discussions
with a single supplier to manufacture the mini-revolver. The supplier was
selected because of its experience in manufacturing firearms and its ability to
manufacture most of the revolver parts within its facilities. Additionally, this
supplier will be required to produce all parts and finish the mini-revolver to
the Company's specifications. It is expected that pre-production run and all
testing of the mini-revolver will be completed during the 6 month period
following the completion of this Offering. Production and sales of the
mini-revolver will immediately follow the pre-production and testing period. The
Company will not accept any part or gun that is not produced to its required
quality and appearance standards. During the months following the completion of
this Offering, the Company expects to enter into a definite agreement relating
to the production of the mini-revolver.
During the pre-production period of the mini-revolver, the Company will
obtain production pricing for the large and small frame revolvers. It is
anticipated that the same supplier which produces the mini-revolver will also
manufacture many of the components of the large and small frame revolvers. The
Company has identified various other suppliers to manufacture the frame,
backstrap, grips and other components of its revolvers. The suppliers identified
are machine shops that have state of the art computer numeric controlled (CNC)
machine tool equipment that insures accuracy and high speed volume in the
manufacturing process. These suppliers will be required to have equipment such
as CNC machining centers, CNC turning centers and CNC screw machines. The
Company will supply the various tools to its manufacturers to be used within the
manufacturing process. Within 12 months after completion of this Offering, it is
expected that the Company will enter into agreements with specific suppliers for
the large and small frame revolvers.
The Company will incur substantial expenditures for tooling, machinery and
equipment. The Company will be required to pay for the tooling cost of its
suppliers. Tooling generally includes the cost of dies, molds, fixtures and
special tools to machine the various components of the firearms. The majority of
these assets, which will be owned by the Company, will have long lives and can
be used by different suppliers.
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The machinery and equipment to be purchased will be used in completion and
finishing revolvers and the production of rifles. The Company has trade secrets
regarding the assembly of the large and small frame revolver and the rifle that
may require certain procedures to be performed in-house.
The Company has completed the engineering of and the manufacturing blue
prints for the mini-revolver and has accepted a proposal from an engineering
firm to engineer and develop the manufacturing blue prints for the large and
small frame revolvers. All of the engineering and manufacturing blue prints of
the Company's revolvers should be completed within two months following the
completion of this Offering.
The Company began to market its products in 1997. The Company participated
in the Shooting, Hunting and Outdoor Trade Show ("SHOT") in January 1997 and
intends to participate in SHOT in 1998. SHOT is one of the largest shooting
trade shows in the world. The Company has approved and implemented a marketing
plan that includes specific plans to market the mini-revolver and its other
products. Following the completion of the Offering, the Company intends to hire
a full time Vice President of Marketing and Vice President of Sales. These
individuals will be responsible for implementing the Company's marketing and
sales plan. The Company will use manufacturer representatives as a sales conduit
to firearm dealers.
The Company intends to manufacture the Rifle in its own facility. Management
believes that this is necessary to maintain quality and keep confidential the
trade secrets associated with the manufacturing and production of the Rifle.
The Company anticipates constructing a manufacturing facility capable of
producing the rifles within one year after the completion of this Offering. The
manufacturing facility will also provide space for administrative offices, a
retail showroom and a custom shop in which management plans to produce
collectors editions and specially engraved firearms.
RESULTS OF OPERATIONS
NET LOSS. The Company reported a net loss of $249,493 from its inception on
July 23, 1996 to September 30, 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 September 30, 1997 were $0.
INTEREST AND DIVIDEND INCOME. Interest and dividend income from July 23,
1996 through September 30, 1997 was $80,592.
COSTS AND EXPENSES. Costs and expenses from July 23, 1996 through September
30, 1997 totalled $330,085.
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 other purchasers in two
private placements. 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. In
October 1996 the Company raised $3,400,000 from the Private Placement with the
sale of 1,133,333 shares of Common Stock. See "Certain Transactions."
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 completion of this
Offering. 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.
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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 a 22 caliber double action mini-revolver,
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 or sell any firearms included on the Bureau of Alcohol Tobacco
and Firearms' list of assault weapons.
The Company plans to outsource the production of its revolvers to qualified
manufacturers. The Company has identified several manufacturers capable of
producing the firearms, and expects that outsourced manufacturing will begin in
the spring of 1998. The Company plans to begin the construction of its own
manufacturing facility within one year of the date of this Offering.
The Company has identified suppliers that have the ability and the capacity
to manufacture the Company's products. The Company is currently in discussions
with a single supplier to manufacture the mini-revolver. The supplier was
selected because of its experience in manufacturing firearms and its ability to
manufacture most of the revolver parts within its facilities. Additionally, this
supplier will be required to produce all parts and finish the mini-revolver to
the Company's specifications. It is expected that pre-production run and all
testing of the mini-revolver will be completed during the six month period
following the completion of this Offering. Production and sales of the
mini-revolver will immediately follow the pre-production and testing period. The
Company will not accept any part or gun that is not produced to its required
quality and appearance standards. During the months following the completion of
this Offering, the Company expects to enter into a definite agreement relating
to the production of the mini-revolver.
During the pre-production period of the mini-revolver, the Company will
obtain production pricing for the large and small frame revolvers. It is
anticipated that the same supplier which produces the mini-revolver will also
manufacture many of the components of the large and small frame revolvers. The
Company has identified various other suppliers to manufacture the frame,
backstrap, grips and other components of its revolvers. The suppliers identified
are machine shops that have state of the art computer numeric controlled (CNC)
machine tool equipment that insures accuracy and high speed volume in the
manufacturing process. These suppliers will be required to have equipment such
as CNC machining centers, CNC turning centers and CNC screw machines. The
Company will supply the various tools to its manufacturers to be used within the
manufacturing process. Within twelve months after completion of this Offering,
it is expected that the Company will enter into agreements with specific
suppliers for the large and small frame revolvers.
The Company's objective is to become an international provider of high
quality firearms. The Company intends to achieve its objective by (i) utilizing
the name "Casull" which is well recognized within the firearms industry; (ii)
producing a varied line of firearm products designed by Casull; (iii)
establishing a distribution network with major firearms dealers; (iv) increasing
consumer awareness and market penetration throughout the Company's market areas.
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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.
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
4.3 million units in 1995.
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
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
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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 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 (mini-revolvers, large frame and
small frame) and rifles. It is contemplated that these firearms will be made
available in several styles based upon caliber, barrel length and other
features. The Company plans to outsource the production of its revolvers to
qualified manufacturers.
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.
MINI-REVOLVER
Casull has two mini-revolvers designs that the Company intends to produce.
The initial mini-revolver to be produced by the Company is similar to an old
fashion "baby hammerless." This double action revolver features a fold-up
trigger, hammer encased in the frame and a lever (when operated) that blocks the
hammer from contacting the firing pin. When the lever action is operated the
mini-revolver can not
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discharge a cartridge. This lever is not intended to replace firearm safety,
rather to assist in safe handling. The Company will introduce this revolver
chambered for 22 long rifle cartridges and intends to introduce a similar
revolver chambered for 22 Winchester magnum cartridge. The other mini-revolver
is a single action firearm. Firearms similar to this single action revolver have
been produced by other manufactures including North American Arms.
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.
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
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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
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.
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.
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MANUFACTURING
The Company has identified suppliers that have the ability and the capacity
to manufacture the Company's products. The Company is currently in discussions
with a single supplier to manufacture the mini-revolver. The supplier was
selected because of its experience with manufacturing firearms and its ability
to manufacture most of the revolver parts in its facilities. Additionally, this
supplier will be required to produce all parts and finish the mini-revolver to
the Company's specifications. It is expected that pre-production run and all
testing of the mini-revolver will be completed during the 6 month period
following the completion of this Offering. Production and sales of the
mini-revolver will immediately follow the pre-production and testing period. The
Company will not accept any part or gun that is not produced to its required
quality and appearance standards. During the months following the completion of
this Offering, the Company expects to enter into a definite agreement relating
to the production of the mini-revolver.
During the pre-production period of the mini-revolver, the Company will
obtain production pricing for the large and small frame revolvers. It is
anticipated that the same supplier which produces the mini-revolver will also
manufacture many of the components of the large and small frame revolvers. The
Company has identified various other suppliers to manufacture the frame,
backstrap, grips and other components of its revolvers. The suppliers identified
are machine shops that have state of the art computer numeric controlled (CNC)
machine tool equipment that insures accuracy and high speed volume in the
manufacturing process. These suppliers will be required to have equipment such
as CNC machining centers, CNC turning centers and CNC screw machines. The
Company will supply the various tools to its manufacturers to be used within the
manufacturing process. Within 12 months after completion of this Offering, it is
expected that the Company will enter into agreements with specific suppliers for
the large and small frame revolvers.
MARKETING STRATEGY
The Company's Management has identified several potential candidates for the
positions of Vice President of Marketing and Vice President of Sales. The Vice
President of Marketing will be responsible for product packaging, advertising,
customer relations and customer service. The Vice President of Sales will be
responsible for training and supervising manufacturer's representatives to sell
the Company's products. The Company has had preliminary discussions with various
manufacturers and has identified various representatives to assist the Company
in the sales of its products. These manufacturing representatives deal directly
with over 2,500 licensed firearms dealers nationwide.
PRICING. The Company estimates that the price of (i) the mini-revolver will
be between $200 and $300, (ii) the large frame and small frame revolver will be
between $1,500 and $2,000 and (iii) the rifle will be between $2,500 and $3,000.
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.
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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.
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 Casull has exclusively licensed to Freedom
Arms, Inc. through February 1, 1998 and which Casull 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.
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<PAGE>
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 initial product that the Company expects to bring to market is a 22
caliber double action mini-revolver. The Company does not know of any products
that are currently being manufactured that have the appearance or expected
quality of its mini-revolver. However, North American Arms manufactures a single
action mini-revolver that is approximately the same size as the Company's
mini-revolver. The Company's mini-revolver differs from the mini-revolver
manufactured by North American Arms in that it has a trigger that folds up into
the frame, grips that are larger and shaped differently, and a hammer that is
enclosed in the frame. The North American Arms revolver is currently priced
lower than the expected price of the Company's mini-revolver.
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. 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
27
<PAGE>
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.
Though not currently required by law, there is a trend in the firearms
industry to provide secure methods of storing firearms. In 1997 President
Clinton called for legislation requiring firearms be sold with a trigger-locking
device or in a lockable container. Although no legislation has been introduced
by Congress, several of the major firearms producers have begun selling firearms
with trigger-locking devices or locking containers. The Company intends to sell
all its firearms with either a trigger-locking device or in a locking container.
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 3 employees. However, the
Company anticipates that its operations over the next twelve months will require
approximately 25 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.
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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..................................... 61 Chairman of the Board
Richard J. Casull.................................... 66 Chief Executive Officer and Director
David M. Myers....................................... 44 President, Chief Operating Officer, Chief Financial
Officer and Director
David R. Markin...................................... 66 Director
Andrea L. Tessler.................................... 34 Director
Marshall Kiev........................................ 29 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. He is also Chairman of the Board of 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., and Allis-
Chalmers Corporation. 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 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 has been President and Chairman of the Board of Checker Motors
Corporation, a manufacturer, insurer, and operator of transportation equipment
since 1970. He was President of Great Dane from 1989 until December 1996. Mr.
Markin also serves as a director of Jackpot, DBC and Enhance.
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<PAGE>
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
an exercise price equal to the average of the closing bid and ask price of the
Common Stock as quoted on the OTC Electronic Bulletin Board on the date of
grant. This grant of options will begin in January 1998.
EXECUTIVE COMPENSATION
The Company did not pay any compensation prior to September 15, 1997. The
Company began paying Mr. Myers, the Company's President, and Mr. Casull, the
Company's Chief Executive Officer, each an annual salary of $100,000 on
September 15, 1997. Mr. 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 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
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<PAGE>
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, 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.
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<PAGE>
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.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth as of October 20, 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>
NUMBER OF PERCENT PERCENTAGE TO
SHARES OWNED BE OWNED
DIRECTORS, NAMED PERSONS, BENEFICIALLY BEFORE AFTER THIS
AND 5% STOCKHOLDERS(1) OWNED(2) OFFERING(3) OFFERING (4)
- ---------------------------- ----------- ------------- ---------------
<S> <C> <C> <C>
Allan R. Tessler(6)....................................................... 383,333 22.5% 15.6%
Richard J. Casull......................................................... 71,875 4.2% 2.9%
David M. Myers............................................................ 71,875 4.2% 2.9%
David R. Markin........................................................... 383,333 22.5% 15.6%
Andrea L. Tessler......................................................... 82,334 4.8% 33.5%
Marshall Kiev............................................................. 49,000 2.9% 2.0%
All executive officers and directors as a group........................... 1,041,750 61% 42.4%
</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.
(4) Based upon a total number of shares of Common Stock outstanding of
2,457,083.
(5) 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 excess of $1,000,000. The Company has agreed
to repay Mr. Tessler the amount by which the market value of such shares is
above $1,000,000 at the time the Company sells such shares. Mr. Tessler has
agreed to repay the Company the amount by which the market value of such shares
is below $1,000,000 at the time the Company sells such shares. On September 30,
1997 the shares had a market value of $1,663,750.
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
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<PAGE>
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.
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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 October 20, 1997, there were issued and outstanding
1,707,083 shares of Common Stock. 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."
UNITS
Each Unit consists of one share of Common Stock and one Warrant, each
Warrant entitles the holder to purchase one share of Common Stock. The
Securities will become separately tradeable at such time as the Representative
may determine, provided, however, that such determination shall not be made
prior to the delivery of the Company's audited statements to the Representative
which reflect receipt by the Company of the proceeds of this Offering.
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 the
first day of the thirteenth month after completion of the Offering (the Exercise
"Date"), one share of Common Stock at a price of $6.00 per share, exercised
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<PAGE>
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.
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 December , 1999, the Warrants are
subject to redemption by the Company 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 $8.25 per share, 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 the completion of this Offering, 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 or 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
36
<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 become separately tradeable at such
time as the Representative shall determine provided, however that such
determination shall not be made prior to the delivery of the Company-audited
financial statements. 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 Representative, for nominal consideration, warrants to purchase from
the Company up to 75,000 shares of Common Stock and/or 75,000 Warrants. Such
shares of Common Stock and Warrants may be purchased together as a unit, or
seperately, by the Representative. See "Underwriting."
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
this Offering 2,457,083 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 completing of this Offering, up to 750,000
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. The Company has agreed with the Representative
to cause all holders of the restricted securities to execute lock-up agreements
with the Representative 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 Representative (the "Lock-Up Period"). Beginning after
the expiration of the Lock-Up Period, (or earlier upon the prior written consent
of the Representative) the restricted securities may be sold in the public
market subject to Rule 144.
In general, under Rule 144, 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 24,571 shares immediately after this Offering) or (ii) the
average weekly trading volume in the Common Stock as reported through the OTC
Electronic Bulletin Board during the four calendar weeks preceding the sale.
37
<PAGE>
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 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.
38
<PAGE>
UNDERWRITING
The Over-allotment Option may be exercised to purchase units (each
consisting of one share of Common Stock and one Warrant) or shares of Common
Stock or Warrants or any combination thereof.
The Underwriters named below (the "Underwriters"), for whom National
Securities Corporation ("National") is acting as the representative (the
"Representative"), have severally agreed, subject to the terms and conditions of
the Underwriting Agreement among the Company and the Representative (the
"Underwriting Agreement"), to purchase from the Company and the Company has
agreed to sell to the Underwriters, the Securities set forth in the table below
at the price set forth on the cover page of this Prospectus under "Proceeds to
Company."
<TABLE>
<CAPTION>
NUMBER OF SHARES OF NUMBER OF
UNDERWRITER COMMON STOCK WARRANTS
- ------------------------------------------------------------- ------------------- -----------
<S> <C> <C>
National Securities Corporation.............................. 750,000 750,000
Total.................................................
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to purchase such Securities are subject to certain conditions. The Underwriters
are committed to purchase all of the Securities offered by this Prospectus, if
any are purchased.
The Representative has advised the Company that the Underwriters 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
Representative.
The Underwriters have been granted an Over-allotment Option, expiring at the
close of business 45 days after the date of this Prospectus, to purchase from
the Company up to 112,500 shares of Common Stock and/or 112,500 Warrants at the
public offering price per share of Common Stock and Warrant, respectively
offered hereby, less underwriting discounts and the non-accountable expense
allowance for the sole purpose of covering over-allotments, if any. To the
extent such option is exercised, each Underwriter will become obligated, subject
to certain conditions, to purchase approximately the same percentage of such
Securities as the percentage it was obligated to purchase pursuant to the
Underwriting Agreement. The Underwriters may exercise the option only to cover
over-allotments, if any, incurred in the sales of the Securities.
Upon the exercise of any Warrants on or after the Exercise Date, which
exercise was solicited by the Representative, 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
Representative a commission which shall not exceed 5% of the aggregate exercise
price of such Warrants in connection with bona fide services provided by the
Representative relating to any warrant solicitation. In addition, the individual
must designate the firm entitled to payment of such warrant solicitation fee. No
compensation, however, will be paid to the Representative 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
Representative 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 Representative may have to receive a fee. As a
result, the Representative may be unable to continue to provide a market for the
Common Stock or Warrants during certain periods while the Warrants are
39
<PAGE>
exercisable. If the Representative has engaged in any of the activities
prohibited by Rule 10b-6 during the periods described above, the Representative
undertakes to waive unconditionally its rights to receive a commission on the
exercise of such Warrants.
The Representative has informed the Company that it does not expect sales to
discretionary accounts by the Underwriters to exceed five percent of the
Securities offered hereby.
The Underwriting 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 Representative a non-accountable expense
allowance equal to 1.8% of the gross proceeds received by the Company from the
sale of the Securities.
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
Representative, for nominal consideration, warrants to purchase from the Company
up to 75,000 shares of Common Stock and/or 75,000 warrants (the
"Representative's Warrants"). The Representative's Warrants are initially
exercisable at a price of $6.48 per share of Common Stock, and $0.12 per warrant
for a four-year period commencing on the first anniversary of the issuance of
such warrants. The shares of Common Stock and warrants underlying the
Representative's Warrants may be purchased together as a unit, or separately, by
the Representative. The warrants issuable upon exercise of the Representative's
Warrants are the same as the Warrants offered hereby. The Representative's
Warrants may not be sold, transferred, assigned or hypothecated for a period of
one year following the completion of this Offering, except to officers or
directors of the Representative, Underwriters or members of the selling group.
The Representative'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 Representative's Warrants as a result of certain events, including
subdivisions and combinations of the Common Stock. The Representative's Warrants
grant to the holders thereof certain rights of registration for the securities
issuable upon exercise of the Representative's Warrants.
The Company has agreed that National 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 National for out-of-pocket expenses
incurred in connection with 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 Representative 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 this Offering.
40
<PAGE>
The units will be quoted on the OTC Electronic Bulletin Board under the
symbol CASUU and after the Separation Date the Common Stock and the Warrants
will trade on the OTC Electronic Bulletin Board under the symbols CASU and
CASUW, respectively.
On September 26, 1997 the Company filed in the United States District Court
for the District of Wyoming a seven count complaint against National and Robert
A. Shuey, III, an individual formerly associated with National as an independent
contractor. The complaint, which was served upon National in early October 1997,
alleges that National and Robert A. Shuey, III failed to deliver on an alleged
promise to the Company that National and Robert A. Shuey, III could raise
capital for the Company through an initial public offering of stock. The
complaint asserts a variety of causes of action, including claims for breach of
contract, fiduciary duties, negligence and fraud and seeks both actual damages
and punitive damages. On November 4, 1997 the Company voluntarily dismissed its
complaint without prejudice pursuant to a tolling agreement entered into by both
the Company and National.
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 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 as of June 30, 1997 and for the
period July 23, 1996 (date of incorporation) through June 30, 1997 included in
this Prospectus have been so included in reliance on the report 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.
41
<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 -- June 30, 1997 and September 30, 1997 (unaudited)........................................ F-3
Statement of Operations for the period July 23, 1996 (inception) through June 30, 1997, for the three
months ended September 30, 1997 (unaudited) and for the period July 23, 1996 (inception) through
September 30, 1997 (unaudited)......................................................................... F-4
Statement of Redeemable Common Stock and Stockholders' (Deficit) Equity for the period July 23, 1996
(inception) through June 30, 1997 and for the three months ended September 30, 1997 (unaudited)........ F-5
Statement of Cash Flows for the period July 23, 1996 (inception) through June 30, 1997, for the three
months ended September 30, 1997 (unaudited) and for the period July 23, 1996 (inception) through
September 30, 1997 (unaudited)......................................................................... 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) equity and of
cash flows present fairly, in all material respects, the financial position of
Casull Arms Corporation (a development stage entity) at June 30, 1997, and the
results of its operations and its cash flows for the period July 23, 1996 (date
of incorporation) through June 30, 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.
PRICE WATERHOUSE LLP
NEW YORK, NEW YORK
NOVEMBER 4, 1997
F-2
<PAGE>
CASULL ARMS CORPORATION
(A DEVELOPMENT STAGE ENTITY)
BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
JUNE 30, -------------
1997
------------ (UNAUDITED)
<S> <C> <C>
ASSETS
ASSETS:
Cash and cash equivalents.......................................................... $ 39,855 $ 2,195,849
Investments........................................................................ -- 1,663,750
------------ -------------
Total current assets........................................................... 39,855 3,859,599
Restricted cash...................................................................... 2,160,000 --
Restricted investments............................................................... 1,390,000 --
Deferred registration costs.......................................................... 326,331 326,331
------------ -------------
Total assets................................................................... $ 3,916,186 $ 4,185,930
------------ -------------
------------ -------------
LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY
LIABILITIES:
Accounts payable and accrued expenses.............................................. $ 281,527 $ 314,298
Payable to director................................................................ -- 663,750
------------ -------------
Total current liabilities...................................................... 281,527 978,048
Payable to director.................................................................. 390,000 --
------------ -------------
REDEEMABLE COMMON STOCK, 1,133,333 shares of Common Stock designated with redemption
feature issued and outstanding at June 30, 1997 and none outstanding at September
30, 1997........................................................................... 3,400,000 --
STOCKHOLDERS' (DEFICIT) EQUITY:
Preferred stock, $0.01 par value, 1,000,000 shares authorized, no shares issued and
outstanding...................................................................... -- --
Common stock, $0.01 par value, 10,000,0000 shares authorized, 573,750 (excluding
1,133,333 shares of Redeemable Common Stock) and 1,707,083 shares issued and
outstanding at June 30, 1997 and September 30, 1997, respectively................ 5,738 17,071
Additional paid in capital......................................................... 51,637 3,440,304
Deficit accumulated during the development stage................................... (212,716) (249,493)
------------ -------------
Stockholders' (deficit) equity..................................................... (155,341) 3,207,882
Commitments and contingencies (Note 5)............................................... -- --
------------ -------------
Total liabilities and stockholders' (deficit) equity............................... $ 3,916,186 $ 4,185,930
------------ -------------
------------ -------------
</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
<TABLE>
<CAPTION>
JULY 23, 1996
(INCEPTION) THREE MONTHS JULY 23, 1996
TO ENDED SEPTEMBER (INCEPTION) TO
JUNE 30, 1997 30, 1997 SEPTEMBER 30, 1997
------------- ---------------- ------------------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Revenues..................................................... $ -- $ -- $ --
Expenses:
General and administrative expenses........................ 275,651 54,434 330,085
------------- ---------------- ----------
Other income:
Interest and dividend income............................... 62,935 17,657 80,592
------------- ---------------- ----------
Net loss..................................................... $ (212,716) $ (36,777) $ (249,493)
------------- ---------------- ----------
------------- ---------------- ----------
Net loss per common share.................................... $ (0.13) $ (0.02)
------------- ----------------
------------- ----------------
Weighted average number of common shares outstanding......... 1,588,760 1,707,083
------------- ----------------
------------- ----------------
</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) EQUITY
<TABLE>
<CAPTION>
STOCKHOLDERS' (DEFICIT) EQUITY
---------------------------------------------------------------
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 June
30, 1997................... -- -- -- $ (212,716) (212,716)
----------- ------------- ---------- --------- ------------ ------------ ------------
Balance at June 30, 1997..... 1,133,333 3,400,000 573,750 5,738 51,637 (212,716) (155,341)
Net loss for the Three Months
Ended September 30, 1997
(unaudited)................ -- -- -- -- -- (36,777) (36,777)
Release of restrictions on
redeemable common stock
(unaudited)................ (1,133,333) (3,400,000) 1,133,333 11,333 3,388,667 -- 3,400,000
----------- ------------- ---------- --------- ------------ ------------ ------------
Balance at September 30, 1997
(unaudited)................ -- $ -- 1,707,083 $ 17,071 $ 3,440,304 $ (249,493) $ 3,207,882
----------- ------------- ---------- --------- ------------ ------------ ------------
----------- ------------- ---------- --------- ------------ ------------ ------------
</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
<TABLE>
<CAPTION>
JULY 23, 1996
(INCEPTION) THREE MONTHS JULY 23, 1996
TO ENDED SEPTEMBER (INCEPTION) TO
JUNE 30, 1997 30, 1997 SEPTEMBER 30, 1997
------------- ---------------- ------------------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net loss................................................. $ (212,716) $ (36,777) $ (249,493)
Adjustments to reconcile net loss to net cash used in
operating activities:
Changes in assets and liabilities Deferred registration
costs................................................ (326,331) -- (326,331)
Accrued expenses..................................... 281,527 32,771 314,298
------------- ---------------- ------------------
Net cash used in operating activities.................. (257,520) (4,006) (261,526)
------------- ---------------- ------------------
Cash flows from financing activities:
Proceeds from issuance of common stock................... 2,457,375 -- 2,457,375
Restriction on proceeds received from issuance of common
stock.................................................. (2,160,000) 2,160,000 --
------------- ---------------- ------------------
Net cash provided by financing activities.............. 297,375 2,160,000 2,457,375
------------- ---------------- ------------------
Net increase (decrease) in cash and cash equivalents... 39,855 2,155,994 2,195,849
Cash and cash equivalents at beginning of period........... -- 39,855 --
------------- ---------------- ------------------
Cash and cash equivalents at end of period................. $ 39,855 $ 2,195,849 $ 2,195,849
------------- ---------------- ------------------
------------- ---------------- ------------------
</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 $1,390,000 and
$1,663,750 (unaudited) at June 30, 1997 and September 30, 1997, respectively.
In August 1997, the Company received waivers of the restrictions on the
proceeds from issuance of Common Stock.
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
$.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 were
subject to certain restrictions (See Note 4). 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 is seeking to obtain additional financial resources through a
contemplated public offering (the "Proposed Offering"). Note 3 discusses the
details of the Proposed Offering. In the event the Proposed Offering is not
consummated, the Company believes its current financial resources are adequate
to meet its obligations as they come due until at least June 30, 1998.
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 had initially agreed that it would not use more than 10%
of the proceeds of such issuance to effect its business objectives until it
raised an additional $5 million of equity capital or, if the Company did not
raise at least $5 million of additional equity capital, stockholders who
purchased shares in October 1996 would have the right to sell their shares back
to the Company for at least 90% of the amounts paid. Accordingly, the Company
has reflected 90% of the proceeds of the October 1996 Common Stock issuance as
restricted cash at June 30, 1997. In August 1997, the Company received written
waivers of the redemption feature of such common stock from the stockholders who
purchased shares in October 1996.
RESTRICTED INVESTMENTS AND 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 initially agreed that it would not sell the Securities
until the Company raised an additional $5 million of equity capital. In August
1997, the Company received a written waiver releasing such restriction on the
Securities. The Securities have been classified as available for sale and 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
presented 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 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.
F-7
<PAGE>
CASULL ARMS CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying value of cash and cash
equivalents, and accounts payable and accrued expenses approximates fair value
due to the relatively short maturity of these instruments.
UNAUDITED INTERIM INFORMATION: The information presented as of September 30,
1997 and for the three month period then ended has not been audited. In the
opinion of management, the unaudited interim financial information includes all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the Company's financial position as of September 30, 1997, and
the results of its operations and its cash flows for the three month period then
ended.
NEW ACCOUNTING PRONOUNCEMENTS: In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("FAS 128") which requires presentation of basic earnings
per share ("Basic EPS") and diluted earnings per share ("Diluted EPS") by all
entities that have publicly traded common stock or potential common stock
(options, warrants, convertible securities or contingent stock arrangements).
FAS 128 also requires presentation of earnings per share by an entity that has
made a filing or is in the process of filing with a regulatory agency in
preparation for the sale of those securities in a public market. Basic EPS is
computed by dividing income available to common stockholders by the weighted-
average number of common shares outstanding during the period. The computation
of Diluted EPS gives effect to all dilutive potential common shares outstanding
during the period. The computation of Diluted EPS does not assume conversion,
exercise or contingent exercise of securities that would have an antidilutive
effect on earnings. The statement is effective for both interim and annual
periods ending after December 15, 1997. The effect on the Company's earnings per
share resulting from the adoption of FAS 128 is not expected to be significant.
In June 1997, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"),
which requires the presentation of the components of comprehensive income in a
company's financial statements for reporting periods beginning subsequent to
December 15, 1997. Comprehensive income is defined as the change in a company's
equity during a financial reporting period from transactions and other
circumstances from nonowner sources (including cumulative translation
adjustments, minimum pension liabilities and unrealized gains/losses on
available for sale securities). The adoption of FAS 130 is not expected to have
a material impact on the Company's financial statements.
3. PROPOSED PUBLIC OFFERING OF SECURITIES
The Proposed Public Offering of Securities (the "Proposed Offering") calls
for the Company to offer for public sale 750,000 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 $6.00 per share, at any time over a 48 month period
commencing on the first day of the thirteenth calendar month after the
completion of the Offering (the "Closing Date") and ending five years from the
Closing Date. Commencing two years after the Closing Date, the Warrants will be
subject to redemption by the Company, in whole and not in part, upon 30 days
notice, at a price of $.05 per Warrant, only in the event that the reported
closing bid price of the Common Stock is at least $8.25 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.
F-8
<PAGE>
CASULL ARMS CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. PROPOSED PUBLIC OFFERING OF SECURITIES (CONTINUED)
In connection with the Proposed Offering, the Company intends to pay
additional compensation to the representatives (the "Representative") of the
several underwriters (the "Underwriters") of the Proposed Offering, in the form
of (i) a non-accountable expense allowance of 1.8% of the gross proceeds of the
Proposed Offering and (ii) warrants to purchase up to 75,000 shares of Common
Stock and/or 75,000 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 closing of the Offering.
The Company has granted the Underwriters an option, exercisable within 45
days from the Effective Date, to purchase up to 112,500 shares of Common Stock
and/or 112,500 additional Warrants. This option is solely for the purpose of
covering over-allotments, if any.
As of June 30, 1997 and September 30, 1997, the Company had incurred
$326,331 of deferred registration costs relating principally to professional
fees, printing charges 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 Offering
(assuming no exercise of the underwriters' over-allotment option or the
Representative's Warrants), there will be 6,492,917 authorized but unissued
shares of Common Stock available for issuance (after reserving 1,050,000 shares
for the issuance of Common Stock in connection with the Warrants and 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. In August 1997, the Company received
written waivers of the redemption feature of such common stock from these
stockholders. Shares issued in the October 1996 Common Stock issuance are
reflected in the June 30, 1997 balance sheet as redeemable common stock and in
the September 30, 1997 balance sheet as 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 "Investments") for 333,333 shares of Common Stock at a
subscription price of $1,000,000. The market value of the Investments received
at that date approximated $1,090,000. Initially, the Investments could not be
sold by the Company until the
F-9
<PAGE>
CASULL ARMS CORPORATION
(A DEVELOPMENT STAGE ENTITY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. RELATED PARTY TRANSACTIONS (CONTINUED)
Company raised an additional $5 million in equity capital. In August 1997, the
Company received a written waiver releasing such restriction on the Investments
and the Company intends to sell the Investments on 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 by the
director in cash. At June 30, 1997 and September 30 ,1997, the Company had
recorded a liability to the director of $390,000 and $663,750, respectively,
which represents the excess of the market value of the Investments over
$1,000,000 at such dates.
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 cancelable by the Company
on 30 days written notice.
The Company has entered into a 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 agreement, the Company will pay to the
Chief Executive Officer a royalty, beginning in September 1997, of 5% of the
Company's revenues subject to an annual minimum of $40,000 and an annual maximum
of $400,000. The 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, 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 June 30, 1997 or
September 30, 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 Incentive Stock Options 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.............................................................. 7
Use of Proceeds........................................................... 14
Dividend Policy........................................................... 14
Dilution.................................................................. 15
Capitalization............................................................ 16
Selected Financial Data................................................... 17
Management's Discussion and Analysis or Plan of Operation................. 18
Business.................................................................. 20
Management................................................................ 29
Principal Stockholders.................................................... 33
Certain Transactions...................................................... 33
Description of Securities................................................. 35
Shares Eligible for Future Sale........................................... 37
Underwriting.............................................................. 39
Legal Matters............................................................. 41
Experts................................................................... 41
Additional Information.................................................... 41
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]
750,000 SHARES OF COMMON STOCK
AND 750,000 REDEEMABLE
COMMON STOCK PURCHASE WARRANTS
(AS UNITS, EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK
AND ONE WARRANT)
---------------------
PROSPECTUS
---------------------
NATIONAL SECURITIES
CORPORATION
NOVEMBER , 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................................................ $ 1000
Blue Sky expenses and legal fees.................................. $ 40,000
Printing and engraving expenses................................... $ 100,000
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................................... $ 780
---------
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 Underwriting Agreement
3.1 Certificate of Incorporation, as amended*
3.2 By-Laws of the Registrant*
4.1 Form of Representative Warrant Agreement to be entered into between Registrant and Continental Stock
Transfer & Trust Co., including form of Representative Warrant Certificate
4.2 Form of Representative's Warrant Agreement including Form of Representative'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 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*
</TABLE>
- ------------------------
* Previously filed
ITEM 28. UNDERTAKINGS.
The Registrant hereby undertakes to provide to the Representative 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 Representative 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
Representative 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 Representative 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 November 6, 1997.
CASULL ARMS CORPORATION
BY: /S/ ALLAN R. TESSLER
-----------------------------------------
Allan R. Tessler
CHAIRMAN OF THE BOARD
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE NO.
- ----------- ---------------------------------------------------------------------------------------------- -------------
<C> <S> <C>
1 Form of Underwriting 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 Representative's Warrant Agreement including Form of Representative'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 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*
</TABLE>
- ------------------------
* Previously Filed.
<PAGE>
CASULL ARMS CORPORATION
FORM
OF
UNDERWRITING AGREEMENT
Afton, Wyoming
_____________, 1997
National Securities Corporation
As Representative of the Several Underwriters
1001 Fourth Avenue
Suite 2200
Seattle, Washington 98154
Ladies and Gentlemen:
Casull Arms Corporation, a Delaware corporation (the "Company"),
hereby agrees with National Securities Corporation ("National") and each of
the underwriters named in Schedule A hereto (collectively, the
"Underwriters," which term shall also include any underwriter substituted as
hereinafter provided in Section 11), for whom National is acting as
representative (in such capacity National shall hereinafter be referred to as
"you" or the "Representative") with respect to the sale by the Company and
the purchase by the Underwriters, acting severally and not jointly, of
750,000 shares of the Company's Common Stock, par value $.01 per share (the
"Common Stock"), and 750,000 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 completion of this offering ("the Closing"), pursuant to a Warrant
Agreement, as defined herein, to be entered into at the Closing, which
aggregate to 750,000 shares of Common Stock and 750,000 Warrants
(collectively, the "Securities"). The Securities are sold as units ("Units")
each consisting of
1
<PAGE>
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 Warrants and Common Stock become separately tradeable at such time
as the Underwriter shall determine, provided that such determination shall
not be made prior to the delivery of the Company's audited financial
statements to the Underwriter. The Warrants will be redeemable by the Company
commencing upon the first day of the thirteenth calendar month after the date
of the Closing at $.10 per Warrant on thirty (30) days' prior written notice
if the closing bid price of the Common Stock as reported on the Nasdaq
SmallCap Market averages an amount equal to $8.25 per share 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.
Upon your request, as provided in Section 2(b) of this Agreement, the
Company shall also issue and sell to the Underwriters, acting severally and
not jointly, for the purpose of covering over-allotments, if any additional
aggregate of 112,500 shares of Common Stock and 112,500 Warrants. Such shares
of Common Stock and Warrants, and the shares of Common Stock issuable upon
exercise of such Warrants, are hereinafter referred to as the "Option
Securities." The Company also proposes to issue and sell to you warrants
(the "Representative's Warrants") pursuant to the Representative's Warrant
Agreement (the "Representative's Warrant Agreement") for the purchase of an
additional 75,000 shares of Common Stock and/or 75,000 Warrants. The shares
of Common Stock and the Warrants underlying the Representative's Warrants,
and the shares of Common Stock underlying the Warrants issuable upon exercise
of the Representative's Warrants, are hereinafter referred to as the
"Representative's Securities." The Securities, Option Securities,
Representative's Warrants, and Representative'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,
each of the Underwriters as of the date hereof, and as of the Closing Date
and the Option Closing Date, 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, Option Securities,
Representative's Warrants, and the Representative'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 Underwriters shall have objected in writing after having
been furnished with a copy thereof. Except as the context may otherwise
require, such registration statement,
2
<PAGE>
as amended, on file with the Commission at the time the registration
statement becomes effective (including the prospectus, financial statements,
schedules, exhibits and all other documents filed as a part thereof or
incorporated therein 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 Underwriters
by or on behalf of the Underwriters expressly for use in such Preliminary
Prospectus, Registration Statement or Prospectus.
(c) When the Registration Statement becomes effective
and at all times subsequent thereto up to the Closing Date (as defined in
Section 2(c) hereof) and each Option Closing Date (as defined in Section 2(b)
hereof), if any, and during such longer period as the Prospectus may be
required to be delivered in connection with sales by the Underwriters or a
dealer, the Registration Statement and the Prospectus, 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 any Underwriter
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
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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 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 Option Closing
Date, if any, based upon the assumptions set forth therein, and the Company
is not a party to or bound by any instrument, agreement or other arrangement
providing for it to issue any capital stock, rights, warrants, options or
other securities, except for this Agreement 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
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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 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 Underwriters or the Representative, as the case may
be, 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
Shares, the Option Shares and the Representative'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
Prospec-tus. 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.
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<PAGE>
(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 Underwriters in connection with (i) the
issuance by the Company of the Registered Securities, (ii) the purchase by
the Underwriters of the Registered Securities from the Company and the
purchase by the Representative of the Representative's Warrants from the
Company, (iii) the consummation by the Company of any of its obligations
under this Agreement, or (iv) 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 Representative'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 Representative'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 Representative's Warrant
Agreement, and to consummate the transactions provided for in such
agreements; and this Agreement, the Warrant Agreement and the
Representative'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 Representative'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
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<PAGE>
of the Company's issue and sale of the Registered Securities, execution,
delivery or performance of this Agreement, the Warrant Agreement and the
Representative'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
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 Representative'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 Underwriters' 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 contribution 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
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<PAGE>
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 Representative'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 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 or as presently
planned to be 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
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<PAGE>
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 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 Securities.
(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.
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(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 Closing until first day of the thirteenth (13) month following the
date of the Closing without the prior written consent of National (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 Representative
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 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 Representative with regard to
any such proposed sales and will offer the Representative 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 Representative 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
Representative, then the Representative 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 Representative'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
Underwriters' compensation as determined by the Commission and the National
Association of Securities Dealers, Inc. (the "NASD").
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(x) The Registered Securities have been approved for
quotation on the OTC Electronic Bulletin Board.
(y) 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.
(z) 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, 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.
(aa) 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.
(bb) Any certificate signed by any officer of the
Company and delivered to the Underwriters or to the Underwriters'
Counsel (as defined in Section 4(d) herein) shall be deemed a
representation and warranty by the Company to the Underwriters as
to the matters covered thereby.
(cc) The minute books of the Company have been
made available to the Underwriters and contain a complete summary
of all meetings and actions of the directors and stockholders of
the Company, since the time of its incorporation, and reflect all
transactions referred to in such minutes accurately in all
material respects.
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(dd) 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.
(ee) 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.
(ff) The Company has entered into a warrant agreement
(the "Warrant Agreement") substantially in the form filed as Exhibit ___ to
the Registration Statement with Continental Stock Transfer & Trust Company,
and the Representative, in form and substance satisfactory to the
Representative, with respect to the Warrants providing for the payment of
commissions contemplated by Section 4(z), hereof. The Warrant Agreement has
been duly and validly authorized by the Company and, assuming due execution
by the parties thereto other than the Company, constitutes a valid and
legally binding agreement of the Company, enforceable against the Company in
accordance with its terms, except (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.
(gg) The Company will purchase "key man" life insurance on the
life of Richard J. Casull in the amount of $1,000,000 prior to the Closing
and the Company will be named as the sole beneficiary of such insurance policy.
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2. PURCHASE, SALE AND DELIVERY OF THE REGISTERED SECURITIES.
(a) On the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company agrees to sell to each Underwriter,
and each Underwriter, severally and not jointly agrees to purchase from the
Company, at a price equal to $5.50 per Unit [$5.40 per share of Common Stock
and $.10 per Warrant], that number of Shares set forth in Schedule A opposite
the name of such Underwriter, subject to such adjustment as the
Representative in its discretion shall make to eliminate any sales or
purchases of fractional shares, plus any additional numbers of Securities
which such Underwriter may become obligated to purchase pursuant to the
provisions of Section 11 hereof.
(b) In addition, on the basis of the representations,
warranties, covenants and agreements, herein contained, but subject to the
terms and conditions herein set forth, the Company hereby grants an option to
the Underwriters, severally and not jointly, to purchase all or any part of
the Option Securities at a price equal to $5.40 per share of Common Stock and
$.10 per Warrant. The option granted hereby will expire 45 days after (i) the
date this Registration Statement becomes effective, if the Company has elected
not to rely on Rule 430A under the Regulations, or (ii) the date of this
Agreement if the Company has elected to rely upon Rule 430A under the
Regulations, and may be exercised in whole or in part from time to time (but
not on more than two (2) occasions) only for the purpose of covering
over-allotments which may be made in connection with the offering and
distribution of the Securities upon notice by the Representative to the
Company setting forth the number of Option Securities as to which the several
Underwriters are then exercising the option and the time and date of payment
and delivery for any such Option Securities. Any such time and date of
delivery (an "Option Closing Date") shall be determined by the
Representative, but shall not be later than three full business days after
the exercise of said option, nor in any event prior to the Closing Date, as
hereinafter defined, unless otherwise agreed upon by the Representative and
the Company. Nothing herein contained shall obligate the Underwriters to
exercise the over-allotment option described above. No Option Securities
shall be delivered unless the Securities shall be simultaneously delivered or
shall theretofore have been delivered as herein provided.
(c) Payment of the purchase price for, and delivery of
certificates for, the Securities shall be made at the offices of National, at
1001 Fourth Avenue, Suite 2200, Seattle, Washington, or at such other place
as shall be agreed upon by the Representative and the Company. Such delivery
and payment shall be made at 9:00 a.m. (New York time) on ______________,
1997 or at such other time and date as shall be agreed upon by the
Representative and the Company, but no more than four (4) business days after
the date hereof (such time and date of payment and delivery being herein
called the "Closing Date"). In addition, in the event that any or all of the
Option Securities are purchased by the Underwriters, payment of the purchase
price for, and delivery of certificates for, such Option Securities shall be
made at the above mentioned office of National or at such other place as
shall be
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agreed upon by the Representative and the Company on each Option Closing Date
as specified in the notice from the Representative to the Company. Delivery
of the certificates for the Securities and the Option Securities, if any,
shall be made to the Underwriters against payment by the Underwriters, of the
purchase price for the Securities and the Option Securities, if any, to the
order of the Company. In the event such option is exercised, each of the
Underwriters, acting severally and not jointly, shall purchase that
proportion of the total number of Option Securities then being purchased
which the total number of Securities set forth in Schedule A hereto opposite
the name of such Underwriter bears to the total number of Securities, subject
in each case to such adjustments as the Representative in its discretion
shall make to eliminate any sales or purchases of fractional shares.
Certificates for the Securities and the Option Securities, if any, shall be
in definitive, fully registered form, shall bear no restrictive legends and
shall be in such denominations and registered in such names as the
Underwriters may request in writing at least three (3) business days prior to
Closing Date or the relevant Option Closing Date, as the case may be. The
certificates for the Securities and the Option Securities, if any, shall be
made available to the Representative at such office or such other place as
the Representative may designate for inspection, checking and packaging no
later than 9:30 a.m. on the last business day prior to Closing Date or the
relevant Option Closing Date, as the case may be.
(d) On the Closing Date, the Company shall issue and sell to
the Representative Representative's Warrants at a purchase price of $.001 per
Representative's Warrant, which warrants shall entitle the holders thereof to
purchase an aggregate of 75,000 shares of Common Stock and/or 75,000
Warrants. The Representative'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
Representative's Warrant Agreement and form of Warrant Certificate shall be
substantially in the form filed as Exhibit ___ to the Registration Statement.
Payment for the Representative's Warrants shall be made on the Closing Date.
3. PUBLIC OFFERING OF THE SHARES. As soon after the Registration
Statement becomes effective as the Representative deems advisable, the
Underwriters shall make a public offering of the Securities (other than to
residents of or in any jurisdiction in which qualification of the Securities
is required and has not become effective) at the price and upon the other
terms set forth in the Prospectus. The Representative may from time to time
increase or decrease the public offering price after distribution of the
Securities has been completed to such extent as the Representative, in its
sole discretion, deems advisable. The Underwriters may enter into one or
more agreements as the Underwriters, in each of their sole discretion, deem
advisable with one or more broker-dealers who shall act as dealers in
connection with such public offering. In addition, the Common Stock and
Warrants shall be separately tradeable immediately upon issuance.
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<PAGE>
4. COVENANTS OF THE COMPANY. The Company covenants and agrees
with each of the Underwriters as follows:
(a) The Company shall use its best efforts to cause the
Registration Statement and any amendments thereto to become effective as
promptly as practicable and will not at any time, whether before or after the
effective date of the Registration Statement, file any amendment to the
Registration Statement or supplement to the Prospectus or file any document
under the Act or Exchange Act before termination of the offering of the
Securities by the Underwriters of which the Representative shall not
previously have been advised and furnished with a copy, or to which the
Representative 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 Representative 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 Representative) in accordance with the
requirements of the Act.
(d) The Company will give the Representative notice of its
intention to file or prepare any amendment to the Registration Statement
(including any post-effective amendment) or any amendment or supplement to
the Prospectus (including any revised prospectus which the Company proposes
for use by the Underwriters in connection with the offering of the 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 Representative 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
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<PAGE>
such amendment or supplement to which the Representative or D'Ancona & Pflaum
("Underwriters' Counsel") shall reasonably object.
(e) The Company shall endeavor in good faith, in cooperation
with the Representative, at or prior to the time the Registration Statement
becomes effective, to qualify the Registered Securities for offering and sale
under the securities laws of such jurisdictions as the Representative 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 Representative
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 Underwriters' Counsel, the Prospectus, as then
amended or supplemented, includes an untrue statement of a material fact or
omits to state any material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, or if it is necessary at any time to amend or
supplement the Prospectus to comply with the Act, the Company will notify the
Representative promptly and prepare and file with the Commission an
appropriate amendment or supplement in accordance with Section 10 of the Act,
each such amendment or supplement to be satisfactory to Underwriters'
Counsel, and the Company will furnish to the Underwriters copies of such
amendment or supplement as soon as available and in such quantities as the
Underwriters may request.
(g) As soon as practicable, but in any event not later than
45 days after the end of the 12-month period beginning on the day after the
end of the fiscal quarter of the Company during which the effective date of
the Registration Statement occurs (90 days in the event that the end of such
fiscal quarter is the end of the Company's fiscal year), the Company shall
make generally available to its security holders, in the manner specified in
Rule 158(b) of the Regulations, and to the Representative, 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
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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 Representative:
(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 SmallCap 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 Representative
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 Representative's
Warrants.
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<PAGE>
(j) The Company will furnish to the Representative or on the
Representative's order, without charge, at such place as the Representative
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 Representative may reasonably request.
(k) On or before the effective date of the Registration
Statement, the Company shall provide the Representative 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 Electronic Board or other such exchange 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 Representative, 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
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<PAGE>
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.
(s) The Company agrees that for a period of eighteen (18)
months following the Closing 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 Option Securities, the
Representative'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 National or Underwriters' Counsel, issue, directly or indirectly
any press release or other communication or hold any press conference with
respect to the Company or its activities or the offering contemplated hereby,
other than trade releases issued in the ordinary course of the Company's
business consistent with past practices with respect to the Company's
operations.
(u) For a period equal to the lesser of (i) five (5) years
from the date hereof, and (ii) the sale to the public of the Representative'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 Representative'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 his
attendance at such meetings.
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<PAGE>
(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.
(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 later of the effective date of the Registration Statement or the
latest Option Closing Date, as the case may be, 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 Underwriters' Counsel.
(z) The Company shall pay the Representative 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 Representative. However, no compensation will be paid to
the Representative 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 Representative must be
designated in writing by the account holder as having solicited the
transaction, otherwise the Representative shall not be paid the fee. In
addition, the Representative 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 Representative's Warrants, unless held by a person or entity
other than any of the Underwriters.
5. ROAD SHOWS: The Company agrees that road show presentations
will be given by the Underwriters 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 Representative and the Company. Travel will be "AirPass"
on Platinum upgrade and on American Airlines when available. The Company
acknowledges that the Representative requires a suite in New York in order to
accommodate meetings.
6. PAYMENT OF EXPENSES.
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(a) The Company hereby agrees to pay on each of the Closing
Date and each Option Closing Date (to the extent not previously paid) all
expenses and fees (other than fees of Underwriters' Counsel, except as
provided in (iv) below) incident to the performance of the obligations of the
Company under this Agreement, the Warrant Agreement, and the Representative'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 Agreement
Among Underwriters, 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 Underwriters and such dealers as the
Underwriters may request, in quantities as hereinabove stated, (iii) the
printing, engraving, issuance and delivery of the certificates representing
the Registered Securities, (iv) the 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 the Nasdaq SmallCap Market, and 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 Underwriters in
accordance with the provisions of Section 6, Section 10(a) or Section 11, the
Company shall reimburse and indemnify the Representative for all of their
actual out-of-pocket expenses, including the fees and disbursements of
Underwriters' Counsel, less any amounts already paid pursuant to Section 5(c)
hereof.
(c) The Company further agrees that, in addition to the
expenses payable pursuant to subsection (a) of this Section 5, it will pay to
the Representative on the Closing Date by certified or bank cashier's check
or, at the election of the Representative, by deduction from the proceeds of
the offering contemplated herein a non-accountable expense allowance equal to
1.8% 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
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Closing Date. In the event the Representative elects to exercise the
over-allotment option described in Section 2(b) hereof, the Company further
agree to pay to the Representative on the Option Closing Date (by certified
or bank cashier's check or, at the Representative's election, by deduction
from the proceeds of the offering) a non-accountable expense allowance equal
to 1.8 percent of the gross proceeds received by the Company from the sale of
the Option Securities.
7. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations
of the Underwriters hereunder shall be subject to the continuing accuracy of
the representations and warranties of the Company herein as of the date
hereof and as of the Closing Date and each Option Closing Date, if any, as if
they had been made on and as of the Closing Date or each Option Closing Date,
as the case may be; the accuracy on and as of the Closing Date or Option
Closing Date, if any, of the statements of officers of the Company made
pursuant to the provisions hereof; and the performance by the Company on and
as of the Closing Date and each Option Closing Date, if any, of its covenants
and obligations hereunder and to the following further conditions:
(a) The Registration Statement shall have become effective
not later than 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
Representative, and, at the Closing Date and each Option Closing Date, if
any, no stop order suspending the effectiveness of the Registration Statement
shall have been issued and no proceedings for that purpose shall have been
instituted or shall be pending or contemplated by the Commission and any
request on the part of the Commission for additional information shall have
been complied with to the reasonable satisfaction of Underwriters' Counsel.
If the Company has elected to rely upon Rule 430A of the Regulations, the
price of the Shares and any price-related information previously omitted from
the effective Registration Statement pursuant to such Rule 430A shall have
been transmitted to the Commission for filing pursuant to Rule 424(b) of the
Regulations within the prescribed time period, and prior to Closing Date the
Company shall have provided evidence satisfactory to the Representative 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 Representative shall not have advised the Company
that the Registration Statement, or any amendment thereto, contains an untrue
statement of fact which, in the Representative's opinion, is material, or
omits to state a fact which, in the Representative'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 Representative's
reasonable opinion, is material, or omits to state a fact which, in the
Representative'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.
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(c) On or prior to the Closing Date, the Underwriters shall
have received from Underwriters' 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 Representative may request and Underwriters' 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, the Underwriters shall have received the
favorable opinion of Camhy, Karlinsky & Stein, LLP ("CKS"), counsel to the
Company, dated the Closing Date, addressed to the Underwriters and in form
and substance satisfactory to Underwriters' 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
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
Representative'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
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holders of any security of the Company. The Registered
Securities to be sold by the Company hereunder and under
the Warrant Agreement and Representative'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 Representative'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
principles 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 Underwriters and the
Representative, 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 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 ren-
dered) 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 representatives of
the Company and the Representative and representatives 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
24
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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 State-
ment 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
Prospectus, 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 Agreement or the Representative's Warrant
Agreement, or of any action taken or to be 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 Agree-
ment, the Warrant Agreement or the Representative's
Warrant Agreement or which in any manner draws into
question the validity or enforceability of this Agree-
ment, the Warrant Agreement or the Representative's
Warrant Agreement;
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<PAGE>
(vii) the Company has the corporate power and
authority to enter into each of this Agreement, the
Warrant Agreement and the Representative's Warrant
Agreement and to consummate the transactions provided for
therein; and each of this Agreement, the Warrant
Agreement and the Representative's Warrant Agreement has
been duly authorized, executed and delivered by the
Company. Each of this Agreement, the Warrant Agreement
and the Representative'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 Representative's Warrant Agreement, its
consummation of the transactions contemplated herein or
therein, or the conduct of its business as described in
the Registration Statement, the Prospectus, and any
amendments or supplements thereto conflicts with or
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;
(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 Representative's Warrant Agreement, and
the transactions contemplated hereby and thereby, except
such as have been obtained under the Securities Act and
the Regulations;
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<PAGE>
(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 amend-
ed, and to the best of such counsel's knowledge after
reasonable investigation, not in violation of any
franchise, license, permit, judgment, 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) the Common Stock and Warrants have been
accepted for quotation on the Nasdaq Small Cap;
(xii) 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 regis-
tration 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 Underwriters' Counsel) of other counsel acceptable to
Underwriters' Counsel, familiar with the applicable laws; (B) as to matters
of fact, to the extent they deem proper, on certificates and written
statements of responsible officers of the Company and certificates or other
written statements of officers of departments of various jurisdictions having
custody of documents respecting the corporate existence or good standing of
the Company, provided that copies of any such statements or certificates
shall be delivered to Underwriters' Counsel if requested. The opinion of
such counsel shall state that know-ledge shall not include the knowledge of a
director or officer of the Company who is affiliated with
27
<PAGE>
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.
At each Option Closing Date, if any, the Underwriters shall have
received the favorable opinion of CKS, counsel to the Company, dated the
Option Closing Date, addressed to the Underwriters and in form and substance
satisfactory to Underwriters' Counsel confirming as of such Option Closing
Date the statements made by CKS in their opinion delivered on the Closing
Date.
(e) On or prior to each of the Closing Date and the Option
Closing Date, if any, Underwriters' Counsel shall have been furnished such
documents, certificates and opinions as they may reasonably require for the
purpose of enabling them to review or pass upon the matters referred to in
subsection (c) of this Section 6, or in order to evidence the accuracy,
completeness or satisfaction of any of the representations, warranties or
conditions of the Company or herein contained.
(f) Prior to each of the Closing Date and each Option 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.
28
<PAGE>
(g) At each of the Closing Date and each Option Closing Date,
if any, the Underwriters 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 or Option 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:
(i) The representations and warranties of the
Company in this Agreement are true and correct, as if
made on and as of the Closing Date or the Option Closing
Date, as the case may be, and the Company has complied
with all agreements and covenants and satisfied all
conditions contained in this Agreement on its part to be
performed or satisfied at or prior to such Closing Date
or Option Closing Date, as the case may be;
(ii) No stop order suspending the
effectiveness of the Registration Statement or any part
thereof has been issued, and no proceedings for that
purpose have been instituted or are pending or, to the
best of each of such person's knowledge after due
inquiry, are contemplated or threatened under the Act;
(iii) The Registration Statement and the
Prospectus and, if any, each amendment and each
supplement thereto, contain all statements and
information required 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 or the Option Closing
Date, as the case may be, other than in the ordinary
course of its business, any material liabilities or
obligations, direct or contingent; (b) 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 supple-
29
<PAGE>
mented 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 Underwriters will have received
clearance from the NASD as to the amount of compensation allowable or payable
to the Underwriters.
(i) At the time this Agreement is executed, the Underwriters
shall have received a letter, dated such date, addressed to the Underwriters
in form and substance satisfactory in all respects (including the
non-material nature of the changes or decreases, if any, referred to in
clause (iii) below) to the Underwriters and Underwriters' 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 Underwriters 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
30
<PAGE>
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 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 transaction contemplated hereby as the
Representative may reasonably request.
(j) At the Closing Date and each Option Closing Date, if any,
the Underwriters shall have received from Price Waterhouse a letter, dated as
of the Closing Date or the Option Closing Date, as the case may be, to the
effect that they reaffirm that statements made in the letter furnished
pursuant to Subsection (i) of this Section 6, except that the specified date
referred to shall be a date not more than five (5) days prior to Closing Date
or the Option Closing Date, as the case may be, and, if the Company has
elected to rely on Rule 430A of the Rules and Regulations, to the further
effect that they have carried out procedures as specified in clause (iv) of
Subsection (i) of this Section 6 with respect to certain amounts, percentages
and financial information as specified by the Representative 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 each of Closing Date and Option Closing Date, if any,
there shall have been duly tendered to the Representative for the several
Underwriters' accounts the appropriate number of Registered Securities.
(l) No order suspending the sale of the Registered Securities
in any jurisdiction designated by the Representative pursuant to subsection
(e) of Section 4 hereof shall have been issued on either the Closing Date or
the Option Closing Date, if any, and no proceedings for that purpose shall
have been instituted or shall be contemplated.
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<PAGE>
(m) On or before the Closing Date, the Company shall have
executed and delivered to the Representative, (i) the Representative's
Warrant Agreement, substantially in the form filed as Exhibit ___, to the
Registration Statement, in final form and substance satisfactory to the
Representative, and (ii) the Representative's Warrants in such denominations
and to such designees as shall have been provided to the Company.
(n) On or before Closing Date, the Common Stock and Warrants
shall have been duly approved for quotation on Nasdaq Small Cap.
(o) On or before Closing Date, there shall have been
delivered to the Representative all of the Lock-up Agreements in final form
and substance satisfactory to Underwriters' Counsel.
(p) On or before the Closing Date, the Company shall have
executed the Warrant Agreement, substantially in the form filed as Exhibit
___ to the Registration Statement, in final form and substance satisfactory
to the Representative and their counsel.
If any condition to the Underwriters' obligations hereunder to
be fulfilled prior to or at the Closing Date or the relevant Option Closing
Date, as the case may be, is not so fulfilled, the Representative may
terminate this Agreement or, if the Representative so elect, they may waive
any such conditions which have not been fulfilled or extend the time for
their fulfillment.
8. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each of
the Underwriters (for purposes of this Section 7 "Underwriters" shall include
the officers, directors, partners, employees, agents and counsel of the
Underwriters, including specifically each person who may be substituted for
an Underwriter as provided in Section 11 hereof), and each person, if any,
who controls the Underwriter ("controlling person") within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, from and against
any and all 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 7 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
32
<PAGE>
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 any
Underwriter by or on behalf of such Underwriter expressly for use in any
Preliminary Prospectus, the Registration Statement or Prospectus, or any
amendment thereof or supplement thereto, or in any application, as the case
may be; 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) Each of the Underwriters agrees severally, but not
jointly, to indemnify and hold harmless the Company, each of its directors,
each of its officers who has signed the Registration Statement, and each
other person, if any, who controls the Company, within the meaning of the
Act, to the same extent as the foregoing indemnity from the Company to the
Underwriters but only with respect to statements or omissions, if any, made
in any Preliminary Prospectus, the Registration Statement or Prospectus or
any amendment thereof or supplement thereto or in any application made in
reliance upon, and in strict conformity with, written information furnished
to the Company with respect to any Underwriter by such Underwriter or the
Representative expressly for use in such Preliminary Prospectus, the
Registration Statement or Prospectus or any amendment thereof or supplement
thereto or in any such application, provided that such written information or
omissions only pertain to disclosures in the Preliminary Prospectus, the
Registration Statement or Prospectus directly relating to the transactions
effected by the Underwriters in connection with this Offering. The Company
acknowledges that the statements with respect to the public offering of the
Registered Securities set forth under the heading "Underwriting" and the
stabilization legend in the Prospectus have been furnished by the
Underwriters expressly for use therein and constitute the only information
furnished in writing by or on behalf of the Underwriters or the
Representative for inclusion in the Prospectus. The indemnity agreement in
this subsection (b) shall be in addition to any liability which the
Underwriters may have at common law or otherwise.
(c) Promptly after receipt by an indemnified party under this
Section 7 of notice of the commencement of any action, suit or proceeding,
such indemnified party shall, if a claim in respect thereof is to be made
against one or more indemnifying parties under this Section 7, notify each
party against whom indemnification is to be sought in writing of the
commencement thereof (but the failure 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 7, 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
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<PAGE>
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 7
to the contrary notwithstanding, an indemnifying party shall not be liable
for any settlement of any claim or action effected without its written
consent; provided, however, that such consent was not unreasonably withheld.
(d) In order to provide for just and equitable contribution
in any case in which (i) an indemnified party makes claim for indemnification
pursuant to this Section 7, but it is judicially determined (by the entry of
a final judgment or decree by a court of competent jurisdiction and the
expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the
fact that the express provisions of this Section 7 provide for
indemnification in such case, or (ii) contribution under the Act may be
required on the part of any indemnified party, then each indemnifying party
shall contribute to the amount paid as a result of such losses, claims,
damages, expenses or liabilities (or actions in respect thereof) (A) in such
proportion as is appropriate to reflect the relative benefits received by
each of the contributing parties, on the one hand, and the party to be
indemnified on the other hand, from the offering of the 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 Underwriters are the indemnified
party, the relative benefits received by the Company on the one hand, and the
Underwriters, on the other, shall be deemed to be in the same proportion as
the total net
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<PAGE>
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 Underwriters hereun-der, in each case
as set forth in the table on the Cover Page of the Prospectus. Relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
the Company or by the Underwriters, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages, expenses or liabilities (or
actions in respect thereof) referred to above in this subdivision (d) shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this subdivision (d) the
Underwriters shall not be required to contribute any amount in excess of the
underwriting discount applicable to the Registered Securities purchased by
the Underwriters 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 7, each person, if any, who
controls the Company within the meaning of the Act, each officer of the
Company who has signed the Registration Statement, and each director of the
Company shall have the same rights to contribution as the Company, subject in
each case to this subparagraph (d). Any party entitled to contribution will,
promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect to which a claim for contribution
may be made against another party or parties under this subparagraph (d),
notify such party or parties from whom contribution may be sought, but the
omission so to notify such party or parties shall not relieve the party or
parties from whom contribution may be sought from any obligation it or they
may have hereunder or otherwise than under this subparagraph (d), or to the
extent that such party or parties were not adversely affected by such
omission. The contribution agreement set forth above shall be in addition to
any liabilities which any indemnifying party may have at common law or
otherwise.
9. 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 the Option Closing Date, as the case may
be, and such representations, warranties and agreements of the Company, and
the respective indemnity and contribution agreements contained in Section 7
hereof shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Underwriter, the Company, any
controlling person of either the Underwriter or the Company, and shall
survive termination of this Agreement or the issuance and delivery of the
Registered Securities to the Underwriters and the Representative, as the case
may be.
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<PAGE>
10. EFFECTIVE DATE.
(a) This Agreement shall become effective at 5:00 p.m., New
York City time, on the date hereof. For purposes of this Section 9, the
Registered Securities to be purchased hereun-der shall be deemed to have been
so released upon the earlier of dispatch by the Representative of telegrams
to securities dealers releasing such shares for offering or the release by
the Representative for publication of the first newspaper advertisement which
is subsequently published relating to the Registered Securities.
11. TERMINATION.
(a) Subject to subsection (b) of this Section 10, the
Representative 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 Representative'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) if trading on the Boston Stock Exchange, 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 Represent-ative'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 Representative'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 Representative in
accordance with any of the provisions of Section 6, Section 10(a) or Section
11, the Company shall promptly reimburse and indemnify the Underwriters
pursuant to Section 5(b) hereof. Notwithstanding any contrary provision
contained in this Agreement, any election hereunder or any termination of
this Agreement (including, without limitation, pursuant to Sections 6, 10, 11
and 12 hereof), and whether or not this Agreement is otherwise carried out,
the provisions of Section 5 and Section 7 shall not be in any way affected by
such election or termination or failure to carry out the terms of this
Agreement or any part hereof.
12. SUBSTITUTION OF THE UNDERWRITERS. If one or more of the
Underwriters shall fail (otherwise than for a reason sufficient to justify
the termination of this Agreement under
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<PAGE>
the provisions of Section 6, Section 10 or Section 12 hereof) to purchase the
Registered Securities which it or they are obligated to purchase on such date
under this Agreement (the "Defaulted Securities"), the Representative shall
have the right, within 24 hours thereafter, to make arrangement for one or
more of the non-defaulting Underwriters, or any other underwriters, to
purchase all, but not less than all, of the Defaulted Securities in such
amounts as may be agreed upon and upon the terms herein set forth. If,
however, the Representative shall not have completed such arrangements within
such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10%
of the total number of Shares to be purchased on such date, the
non-defaulting Underwriters shall be obligated to purchase the full amount
thereof in the proportions that their respective underwriting obligations
hereunder bear to the underwriting obligations of all non-defaulting
Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the
total number of Shares, this Agreement shall terminate without liability on
the part of any nondefaulting Underwriters.
No action taken pursuant to this Section shall relieve any
defaulting Underwriter from liability in respect of any default by such
Underwriter under this Agreement.
In the event of any such default which does not result in a
termination of this Agreement, the Representative shall have the right to
postpone the Closing Date for a period not exceeding seven days in order to
effect any required changes in the Registration Statement or Prospectus or in
any other documents or arrangements.
13. DEFAULT BY THE COMPANY. If the Company shall fail at the
Closing Date or any Option Closing Date, as applicable, to sell and deliver
the number of Registered Securities which it is obligated to sell hereunder
on such date, then this Agreement shall terminate (or, if such default shall
occur with respect to any Option Securities to be purchased on an Option
Closing Date, the Underwriters may at the Representative's option, by notice
from the Representative to the Company, terminate the Underwriters'
obligation to purchase Option Securities from the Company on such date)
without any liability on the part of any non-defaulting party other than
pursuant to Section 5, Section 7 and Section 10 hereof. No action taken
pursuant to this Section shall relieve the Company from liability, if any, in
respect of such default.
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 Underwriters shall be directed to the
Representative, c/o 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
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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 Underwriters, the Company and the controlling
persons, directors and officers referred to in Section 7 hereof and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or
claim under or in respect of or by virtue of this Agreement or any provisions
herein contained. No purchaser of Registered Securities from any Underwriter
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 Representative's Warrant Agreement constitute the entire
agreement of the parties hereto and supersede all prior written or oral
agreements, understandings and negotiations with respect to the subject
matter hereof. This Agreement may not be amended except in a writing, signed
by the Representative, and the Company.
If the foregoing correctly sets forth the understanding among
the Underwriters and the Company, please so indicate in the space
provided below for that purpose, whereupon this letter shall
constitute a binding agreement among us.
Very truly yours,
CASULL ARMS CORPORATION
By:_________________________________________
Name: Allan R. Tessler
Title: Chairman of the Board
CONFIRMED AND ACCEPTED AS OF THE DATE FIRST ABOVE WRITTEN:
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NATIONAL SECURITIES CORPORATION
By:__________________________________________________
Name: Steven A. Rothstein
Title: Chairman
For itself and as Representative of the Underwriters named in Schedule A
hereto.
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<PAGE>
SCHEDULE A
Total Number of
Name of Units to be
Underwriters Purchased
- ------------ ---------------
National Securities Corporation. . . . . . . . . . . . . . . _________
__________________________________ . . . . . . . . . . . . . _________
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . 750,000
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<PAGE>
CASULL ARMS CORPORATION
AND
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
AND
NATIONAL SECURITIES CORPORATION
_______________________
FORM OF
WARRANT AGREEMENT
DATED AS OF __________, 199_
<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 "Representative").
W I T N E S S E T H:
WHEREAS, in connection with (i) the Company's offering to the public of
750,000 shares of the Company's Common Stock (as defined in Section 1) and
750,000 redeemable common stock purchase warrants (as defined in Section 1),
each warrant entitling the holder thereof to purchase one share of Common
Stock; (ii) the over-allotment option to purchase up to an additional 112,500
shares of Common Stock and/or 112,500 Warrants; and (iii) the sale to
National of warrants (as defined in Section 1) to purchase up to 75,000
shares of Common Stock and 75,000 Warrants, the Company will issue up to
750,000 Warrants (subject to increase as provided in the Representative's
Warrant Agreement); 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.
(c) "Commission" shall mean the Securities and Exchange Commission.
<PAGE>
(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, $6.48 per share [120% 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 ______________, 199_
[the first day of the thirteenth calendar month after the day of the Company's
prospectus].
(i) "Initial Warrant Redemption Date" shall mean ___________,
199__ [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, or the OTC Electronic Bulletin
Board, 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.
(l) "Nasdaq" shall mean the Nasdaq Stock Market.
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<PAGE>
(m) "Over-Allotment Option" shall mean the Representative's option to
purchase an additional 112,500 shares of Common Stock and/or 112,500 Warrants to
cover over-allotments, if any.
(n) "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.
(o) "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 $.10 per Warrant, subject to adjustment from time to time
pursuant to the provisions of Section 9 hereof.
(p) "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.
(q) "Transfer Agent" shall mean Continental Stock Transfer & Trust
Company, or its authorized successor.
(r) "Underwriting Agreement" shall mean the underwriting agreement
dated ____________, 1996 between the Company and the several underwriters
listed therein relating to the purchase for resale to the public of the
750,000 shares of Common Stock and 750,000 Warrants, as well as securities
issued under the Over-Allotment Option.
(s) "Representative's Warrants" shall mean warrants issued pursuant
to the Representative's Warrant Agreement for the purchase of an additional
75,000 shares of Common Stock and/or 75,000 Warrants. Each Representative'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 $6.48 per share and $.12 per Warrant, respectively [120% of
the offering price per share and per Warrant, respectively].
(t) "Representative's Warrant Agreement" shall mean the agreement
dated as of _____________, 199_ between the Company and National relating to and
governing the terms and provisions of the Representative's Warrants.
(u) "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 [___% 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
completion of this Offering.
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<PAGE>
(v) "Warrant Certificate" shall mean a certificate representing each
of the Warrants substantially in the form annexed hereto as Exhibit A.
(w) "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 _________________, 200_ [five years after the date of the completion
of this Offering], 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), including
over-allotment options, shall be executed by the Company and delivered to the
Warrant Agent.
(c) Upon exercise of the Representative's Warrants as provided
therein, Warrant Certificates representing all or a portion of 75,000 Warrants
(subject to modification and adjustment as provided in Section 8 hereof and in
the Representative's Warrant Agreement), to purchase up to an aggregate of
75,000 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)
4
<PAGE>
Warrant Certificates issued pursuant to the Representative'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 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
5
<PAGE>
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 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 Representative'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
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<PAGE>
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 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
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<PAGE>
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
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.
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(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 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
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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 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
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<PAGE>
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 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
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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.
(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
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<PAGE>
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
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
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<PAGE>
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 $___; (C) the issuance or sale of shares of
Common Stock upon the exercise of any "incentive stock options" (as such term
is defined in the Internal Revenue Code of 1986, as amended) or non-qualified
stock options under the Company's existing stock option plans described in
the final prospectus relating to the public offering contemplated by the
Underwriting Agreement provided the exercise price of such options was not
less than ten percent (10%) of the Market Price on the date of grant; (D) the
issuance or sale of shares of Common Stock in an underwritten public offering
on behalf of the Company at a discount to the Market Price of not more than
seven percent (7%) per share; or (E) the issuance or sale of shares of Common
Stock for a bona fide business purpose of the Company in an arm's length
transaction with an unaffiliated party involving a strategic alliance, joint
venture or licensing arrangement provided (i) the number of shares so issued
or sold do not exceed, individually or in the aggregate at any time during
the term of Warrants, more than twenty percent (20%) of the then outstanding
shares of Common Stock; and (ii) such shares are issued or sold in exchange
for consideration valued by the Company's Board of Directors at not less than
ten percent (10%) of the Market Price on the date of issuance and/or sale.
In addition, Registered Holders shall not be entitled to cash dividends paid
by the Company prior to the exercise of any Warrant or Warrants held by them.
SECTION 9. REDEMPTION.
(a) Commencing on the Initial Warrant Redemption Date, the Company
may, on 30 days' prior written notice, redeem all the Warrants at ten cents
($.10) 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 on the
Small Cap Market (or the average closing sale price, if the Common Stock is
then traded on the Electronic Bulletin Board Exchange 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 $8.25 per share
(___% 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
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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 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.
SECTION 10. CONCERNING THE WARRANT AGENT.
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(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.
(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
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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.
SECTION 11. MODIFICATION OF AGREEMENT.
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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 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.
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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.
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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:_________________________________ By:_______________________________
Name:_______________________________ Name:_____________________________
Title:______________________________ Title:____________________________
ATTEST: NATIONAL SECURITIES
CORPORATION, INC.
By:_________________________________ By:_______________________________
Name:_______________________________ Name:_____________________________
Title:______________________________ Title:____________________________
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EXHIBIT A
No. W _______ VOID AFTER ______________, 2001
__________ 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 $8.25 per share, subject to adjustment [___% 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.
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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 $.10 per
Warrant, at any time commencing after ______________, 199__, provided that
the average closing bid price for the Common Stock as reported by the OTC
Electronic Bulletin Board or Nasdaq Small Cap Market, if the Common Stock is
then traded on the Nasdaq Small Cap Market (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 $8.25
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per share (___% 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, 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 $.10 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.
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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: _____________, 1996
[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
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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.
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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
_________________________________
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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.
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--------------------------------------------
CASULL ARMS CORPORATION
AND
NATIONAL SECURITIES CORPORATION
FORM OF
REPRESENTATIVE'S
WARRANT AGREEMENT
DATED AS OF ___________, 1997
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REPRESENTATIVE'S WARRANT AGREEMENT dated as of ________, 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 "Representative").
W I T N E S S E T H :
WHEREAS, the Representative has agreed pursuant to the underwriting
agreement (the "Underwriting Agreement") between the Representative and the
Company, to act as the representative of the several underwriters listed
therein (the "Underwriters") in connection with the Company's proposed public
offering of 750,000 shares of the Company's Common Stock (as hereinafter
defined) and 750,000 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 Underwriting Agreement, upon the Representative's
request, the Company proposes to issue up to an additional 112,500 shares of
Common Stock and 112,500 Warrants for the purpose of over-allotments, if any;
WHEREAS, pursuant to the Underwriting Agreement, the Company proposes to
issue warrants to the Representative to purchase up to an aggregate of 75,000
Units (the "Representative's Warrants"); and
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WHEREAS, the Representative's Warrants to be issued pursuant to this
Agreement will be issued on the Closing Date (as such term is defined in the
Underwriting Agreement) by the Company to the Representative in consideration
for, and as part of the Underwriters' compensation in connection with, the
Representative acting as the representative pursuant to the Underwriting
Agreement.
NOW, THEREFORE, in consideration of the premises, the payment by the
Representative to the Company of an aggregate of ___________________________
____ ($_____), 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 Representative is hereby collectively granted the right to
purchase, at any time from ________, 1998 [the first anniversary of the issuance
of the Representative's Warrants] until 5:30 p.m., New York time, on __________,
200_ [5 years from the completion of this Offering ("Closing")], at which
time the Representative's Warrants expire, up to an aggregate 75,000 shares of
Common Stock and 75,000 Warrants, subject to adjustment as provided in Section
8 hereof (the "Representative's Securities"). Each Representative'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 $6.48 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).
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2. REPRESENTATIVE'S WARRANT CERTIFICATES. The Representative'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 appropriate insertions, omissions,
substitutions, and other variations as required or permitted by this Agreement.
3. REGISTRATION OF WARRANT. The Representative's Warrants shall be
numbered and shall be registered on the books of the Company when issued.
4. EXERCISE OF REPRESENTATIVE'S WARRANT.
4.1 METHOD OF EXERCISE. The Representative'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 Representative'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 Representative'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 Representative'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 Representative'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 Representative's Warrants). In the case of
the purchase of less than all of the
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shares or warrants purchasable under any Representative's Warrant
Certificate, the Company shall cancel said Representative's Warrant
Certificate upon the surrender thereof and shall execute and deliver a new
Representative'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 Representative's
Warrant, the issuance of certificates for securities, properties or rights
underlying such Representative'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 Representative's Warrant Certificates and the certificates representing
the securities, property or rights issued upon exercise of the Representative'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
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Secretary of the Company. Representative's Warrant Certificates shall be
dated the date of execution by the Company upon initial issuance, division,
exchange, substitution or transfer.
6. TRANSFER OF REPRESENTATIVE'S WARRANT. The Representative'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
representative accompanied by proper evidence of succession, assignment or
authority to transfer. Upon any registration transfer, the Company shall
execute and deliver the new Representative's Warrant to the person entitled
thereto.
7. RESTRICTION ON TRANSFER OF REPRESENTATIVE'S WARRANT. The Holder of a
Representative's Warrant Certificate, by its acceptance thereof, covenants and
agrees that the Representative's Warrant is being acquired as an investment and
not with a view to the distribution thereof, and that the Representative's
Warrant may not be sold, transferred, assigned, hypothecated or otherwise
disposed of, in whole or in part, for the term of the Representative's Warrant,
except to officers or partners of the Underwriters, or by operation of law.
8. EXERCISE PRICE AND NUMBER OF SECURITIES. Except as otherwise provided
in Section 10 hereof, each Representative'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
Representative's Warrant may be exercised shall be the price(s) and the number
of
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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.
9. REGISTRATION RIGHTS.
9.1 REGISTRATION UNDER THE SECURITIES ACT OF 1933. Each
Representative's Warrant Certificate and each certificate representing
securities issuable upon exercise of the Representative's Warrant or upon
exercise of warrants underlying the Representative's Warrants (collectively, the
"Warrant Shares") shall bear the following legend unless (i) such
Representative'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 REPRESENTATIVE'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.
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THE TRANSFER OR EXCHANGE OF THE REPRESENTATIVE'S WARRANT REPRESENTED
BY THE CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE
REPRESENTATIVE'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
Representative's Warrants and/or the Warrant Shares of its intention to do so.
If any of the Holders of the Representative'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 Representative's
Warrants and/or Warrant Shares the opportunity to have any such Representative'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 Representative'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
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the Holders of Representative's Warrants and/or Warrant Shares on the basis
of the number of Representative'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 Closing, the Holders of the Representative's Warrants
and/or Warrant Shares representing a "Majority" (as hereinafter defined) of
the Representative'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 Representative'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
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(collectively, the "Requesting 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 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 Representative's Warrants and/or Warrant Shares
to all other registered Holders of the Representative'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 Representative'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
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six (6) months following the effective date of any registration statement
filed pursuant to Section 9.3(a).
(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
Representative'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 Representative's Warrant at
such Market Price less the exercise price of such Representative'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 on
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NASDAQ, the OTC Electronic Bulletin Board, or as determined in good faith by
resolution of the Board of Directors of the Company, based on the best
information available to it.
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 underwriting 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
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to service of process or to qualify as a foreign corporation to do business
under the laws of any such jurisdiction.
(d) The Company shall indemnify the Holder(s) of the Warrant
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 each of the Underwriters contained in Section 7
of the Underwriting 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
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Underwriting Agreement pursuant to which the Underwriters have agreed to
indemnify the Company.
(f) Nothing contained in this Agreement shall be construed as
requiring the Holder(s) to exercise their Representative'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 to be included 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 underwriting 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
13
<PAGE>
Company's financial statements included in such registration statement, in
each case covering substantially the same matters with respect to such
registration statement (and the prospectus included therein) and, in the case
of such accountants' letter, with respect to events subsequent to the date of
such financial statements, as are customarily covered in opinions of issuer's
counsel and in accountants' letters delivered to underwriters in underwritten
public offerings of securities.
(i) The Company shall as soon as practicable after the effective
date of the registration statement, and in any event within 15 months
thereafter, make "generally available to its security holders" (within the
meaning of Rule 158 under the Act) an earnings statement (which need not be
audited) complying with Section 11(a) of the Act and covering a period of at
least 12 consecutive months beginning after the effective date of the
registration statement.
(j) The Company shall 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 Representative. 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
14
<PAGE>
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.
(k) For purposes of this Agreement, the term "Majority" in
reference to the Representative's Warrants or Warrant Shares, shall mean in
excess of fifty percent (50%) of the then outstanding Representative'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 Warrant 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
15
<PAGE>
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 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 Representative'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.
16
<PAGE>
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 Warrant Shares issuable upon the exercise at the adjusted Common Stock
Exercise Price of each Representative'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 Representative'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 Representative's Warrant then
outstanding or to be outstanding shall have the right thereafter (until the
expiration of such Representative's Warrant) to receive, upon exercise of such
Representative's Warrant, the kind
17
<PAGE>
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 Representative'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 Representative'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
18
<PAGE>
next subsequent adjustment which, together with any adjustment so carried
forward, shall amount to at least two cents ($.02) per Representative's
Warrant.
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 REPRESENTATIVE'S WARRANT CERTIFICATES.
Each Representative'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 Representative'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 Representative's Warrant
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it and reimbursement to
19
<PAGE>
the Company of all reasonable expenses incidental thereto, and upon surrender
and cancellation of the Representative's Warrant, if mutilated, the Company
will make and deliver a new Warrant Certificate of like tenor, in lieu
thereof.
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 Representative'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 Representative'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 Representative'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 Representative'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
20
<PAGE>
Representative'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 preemptive rights of any
stockholder. As long as the Representative'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 Representative'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 REPRESENTATIVE'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 Representative'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
21
<PAGE>
(b) the Company shall offer to all the holders of its Common
Stock any additional shares of capital stock of the Company or securities
convertible into or exchangeable for shares of capital stock of the Company, or
any option, right or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business as an entirety shall be
proposed;
then in any one or more of said events, the Company shall give written notice of
such event at least fifteen (15) days prior to the date fixed as a record date
or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall
specify such record date or the date of closing the transfer books, as the case
may be. Failure to give such notice or any defect therein shall not affect the
validity of any action taken in connection with the declaration or payment of
any such dividend, or the issuance of any convertible or exchangeable
securities, or subscription rights, options or warrants, or any proposed
dissolution, liquidation, winding up or sale.
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:
22
<PAGE>
(a) if to the registered Holder of the Representative'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.
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 Representative'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 $6.48 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 Representative'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 Representative'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
23
<PAGE>
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 Stock so purchased. Except as otherwise provided herein, the
Warrants underlying the Representative'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 Underwriting Agreement to the extent portions thereof are referred to
herein) contains the entire understanding between the parties hereto with
respect to the subject matter hereof and may not be modified or amended except
by a writing duly signed by the party against whom enforcement of the
modification or amendment is sought. The Company and the Representative may
from time to time supplement or amend this Agreement without the approval of any
holders of Representative's Warrant Certificates (other than the Representative)
in order to cure any ambiguity, to correct or supplement any provision contained
herein which may be defective or
24
<PAGE>
inconsistent with any provisions herein, or to make any other provisions in
regard to matters or questions arising hereunder which the Company and the
Representative may deem necessary or desirable and which the Company and the
Representative deem shall not adversely affect the interests of the Holders
of Representative's Warrant Certificates.
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 Representative'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.
25
<PAGE>
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.
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
Representative and any other registered Holder(s) of the Representative'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 Underwriters and any other Holder(s) of
the Representative's Warrant Certificates or Warrant Shares.
26
<PAGE>
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
27
<PAGE>
EXHIBIT A
[FORM OF REPRESENTATIVE'S WARRANT CERTIFICATE]
THE REPRESENTATIVE'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 REPRESENTATIVE'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,__________, 200_
Representative'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
_____________, 199___ until 5:30 p.m., New York time on _____________, 200_
("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 $6.48 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
Representative'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 Representative's Warrant
Agreement dated as of ___________, 199_ among the Company and National
Securities 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.
A-1
<PAGE>
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Representative's Warrant evidenced hereby,
unless exercised prior thereto, shall thereafter be void.
The Representative's Warrant evidenced by this Warrant Certificate are part
of a duly authorized issue of Representative'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
Representative'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 Representative'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 Representative'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 Representative's Warrant
evidenced by this Certificate, the Company shall forthwith issue to the holder
hereof a new Warrant Certificate representing such numbered unexercised
Representative'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 _________, 1996.
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 Representative's
Warrant Agreement dated as of __________, 199_ 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
November 6, 1997
Casull Arms Corporation
456 Fairview Road
Afton, Wyoming 83110
Re: REGISTRATION STATEMENT ON FORM SB-2 (No. 333-16911)
Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in
connection with the above-captioned Registration Statement, as amended, 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 750,000
shares (the "Shares") of common stock, par value $.01 per share (the "Common
Stock") 750,000 Redeemable Common Stock Purchase Warrants (the "Warrants");
750,000 shares of Common Stock underlying the Warrants; 75,000 warrants to be
sold to National Securities Corporation (the "Representative's Warrants");
75,000 shares of Common Stock issuable upon exercise of Representative's
Warrants; 75,000 warrants issuable upon exercise of Representative's
Warrants; and 75,000 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 the
Underwriting 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 Underwriting 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>
<TABLE>
<CAPTION>
Exhibit 11
Casull Arms Corporation
Computation of per share earnings
July 23, 1996 (inception) to Three months Ended
June 30, 1997 September 30, 1997
--------------------------------- ----------------------------
Days Weighted Avg. Days Weighted Avg.
Shares Outstanding(1) Shares Outstanding(2) Shares Outstanding Shares Outstanding
-------- --------------- --------------------- -------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Shares issued to founders on
August 7, 1996 573,750 328 546,908 573,750 91 573,750
Cheap stock consideration for
shares issued to founders 563,125 16 26,345 563,125 0
Shares issued in private placement
through October 1995 1,133,333 278 921,247 1,133,333 91 1,133,333
Cheap stock consideration for
shares issued in private placement 503,703 64 94,260 503,703 0
-------------------- -----------------
Weighted average shares
outstanding 1,588,760 1,707,083
Net loss for period $ (212,716) $ (36,777)
-------------------- -----------------
-------------------- -----------------
Net loss per common share $ (0.13) $ (0.02)
-------------------- -----------------
-------------------- -----------------
</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, 1998.
(2) Weighted average shares based on days for the period July 23, 1996 (date
of incorporation) through June 30, 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 November 4, 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
November 6, 1997
<PAGE>
EXHIBIT 23.3
November 6, 1997
Casull Arms Corporation
456 Fairview Road
Afton, Wyoming 83110
Attention: Board of Directors
Re: Casull Arms Coropration
Dear Sir/Madam:
I hereby consent to the use of the results and conclusions of the
marketing plan, prepared on behalf of Casull Arms Corporation, in the Form
SB-2 Registration Statement, as amended, prepared in connection with the
initial public offering of Casull Arms Corporation.
Sincerely,
/s/ Michael Darling
-----------------------
Michael Darling
