<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 13, 1997
REGISTRATION STATEMENT NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
DUNN COMPUTER CORPORATION
(Name of small business issuer as specified in its charter)
--------------------------
<TABLE>
<S> <C> <C>
DELAWARE 54-1424654 5060
(State of Incorporation) (IRS Employer I.D. No.) (Primary Standard Industrial
Classification Code No.)
</TABLE>
1306 SQUIRE COURT
STERLING, VIRGINIA 20166
(703) 450-0400
(Address and Telephone Number of Principal Executive Offices
and Principal Place of Business)
------------------------------
THOMAS P. DUNNE, PRESIDENT
DUNN COMPUTER CORPORATION
1306 SQUIRE COURT
STERLING, VIRGINIA 20166
(703) 450-0400
(Name, address and telephone number of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
JAY M. KAPLOWITZ, ESQ. MICHAEL P WEINER, ESQ.
ARTHUR S. MARCUS, ESQ. STARK & STARK, P.C.
GERSTEN SAVAGE KAPLOWITZ, 993 Lenox Drive
FREDERICKS & CURTIN, LLP Lawrenceville, New Jersey 08648
101 East 52nd Street (609) 896-9060
New York, New York 10022
(212) 752-9700
</TABLE>
--------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT BEING OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES BEING REGISTERED REGISTERED PER SECURITY OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock(2)....................... 1,150,000 $5.00 $5,750,000 $1,742.42
Underwriter's Warrants................ 1 $.001 $10 $ (4)
Common Stock(3)....................... 100,000 $6.50 $650,000 $196.97
Total Registration Fee................ $1,939.39
</TABLE>
(1) Pursuant to Rule 457, estimated solely for the purpose of calculating the
registration fee.
(2) Includes shares issuable upon exercise of the Underwriter's over-allotment
option being sold by certain Stockholders of the Company.
(3) Consists of Common Stock issuable upon the exercise of the Underwriter's
Warrants.
(4) Pursuant to Rule 457(g), no fee is paid for the registration of such
securities.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
DUNN COMPUTER CORPORATION
CROSS REFERENCE SHEET SHOWING LOCATION
IN PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS OF FORM SB-2
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM AND HEADING PROSPECTUS CAPTION
- ----------------------------------------------------------------- ------------------------------------------------------
<C> <S> <C>
1. Front of Registration Statement and Outside Front
Cover Page of Prospectus............................ Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front and Outside Back Cover Pages
3. Summary Information and Risk Factors.................. Prospectus Summary; Risk Factors
4. Use of Proceeds....................................... Use of Proceeds
5. Determination of Offering Price....................... Cover Page; Underwriting
6. Dilution.............................................. Dilution
7. Selling Security Holders.............................. N/A
8. Plan of Distribution.................................. Cover Page; Underwriting
9. Legal Proceedings..................................... Business
10. Directors, Executive Officers, Promoters and Control
Persons............................................. Management
11. Security Ownership of Certain Beneficial
Owners and Management............................... Principal Stockholders
12. Description of Securities............................. Description of Securities
13. Interest of Named Experts and Counsel................. Legal Matters; Experts
14. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities...... Management
15. Organization Within Last 5 Years...................... Prospectus Summary; Business
16. Description of Business............................... Prospectus Summary; Business
17. Management's Discussion and Analysis or
Plan of Operations.................................. Management's Discussion and Analysis of Financial
Condition and Results of Operations
18. Description of Property............................... Business
19. Certain Relationships and
Related Transactions................................ Certain Transactions
20. Market for Common Equity and
Related Stockholder Matters......................... Description of Securities; Risk Factors
21. Executive Compensation................................ Management
22. Financial Statements.................................. Financial Statements
23. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure................................ Not Applicable
</TABLE>
<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
PRELIMINARY PROSPECTUS DATED JANUARY 13, 1997
PROSPECTUS
1,000,000 SHARES
DUNN COMPUTER CORPORATION
COMMON STOCK
The 1,000,000 shares of common stock, $.001 par value (the "Common Stock"),
offered hereby are being sold by Dunn Computer Corporation, a Delaware
corporation (the "Company") at an initial public offering price of $5.00 per
share (the "Offering"). The Offering price of the Common Stock was established
by negotiation between the Company and Network 1 Financial Securities Corp. (the
"Underwriter"), and does not necessarily bear any direct relationship to the
Company's assets, book value per share or other generally accepted criteria of
value. See "Underwriting" for a discussion of the factors considered in
determining the initial public Offering price.
Prior to this Offering there has been no public market for the Common Stock,
and there can be no assurance that any such market for the Common Stock will
develop after the closing of the Offering or that, if developed, it will be
sustained. The Company has applied for quotation of the Common Stock on the
National Association of Securities Dealers Automated Quotation National Market
System ("NMS") under the proposed symbol "DUNN."
SEE "RISK FACTORS" ON PAGE FOR A DISCUSSION OF CERTAIN RISK FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share................................................ $5.00 $.50 $4.50
Total(3)................................................. $5,000,000 $500,000 $4,500,000
</TABLE>
(1) Does not include additional consideration to be received by the Underwriter
in the form of (i) a non-accountable expense allowance equal to 3% of the
gross offering proceeds (of which $35,000 has been paid), (ii) any value
attributable to the Underwriter's Warrants ("Underwriter's Warrants")
entitling the Underwriter to purchase up to 100,000 shares of Common Stock
at a price per share equal to 130% of the initial public offering price,
(iii) a management and financial consulting agreement for a period of
twenty-four months for an aggregate consideration of $60,000 payable in full
on the closing of the Offering, and (iv) a right of first refusal with
respect to certain public or private sales of securities by the Company
during the next three years. In addition, the Company has agreed to
indemnify the Underwriter against certain liabilities under the Securities
Act of 1933, as amended (the "Act"). See "Underwriting."
(2) Before deducting expenses of the Offering (including the non-accountable
expense allowance of $150,000) payable by the Company estimated at $475,000
($497,500 if the over-allotment option granted by the Company's current
stockholders described below is exercised in full).
(3) The Company's current stockholders who are members of management of the
Company (the "Selling Stockholders") have granted the Underwriter an option
exercisable within 45 days of the date of this Prospectus (the
"Over-Allotment Option") to purchase from such Selling Stockholders up to
150,000 additional shares of Common Stock on the same terms set forth above
solely to cover over-allotments, if any. The Company will not receive any of
the proceeds from any such sale of shares of Common Stock by the Selling
Stockholders. If the Underwriter exercises this option in full, the total
price to the public, Underwriting Discounts and Commissions and proceeds to
the Company and the Selling Stockholders will be $5,750,000, $575,000,
$4,500,000 and $675,000, respectively. See "Underwriting."
The shares of Common Stock are being offered by the Underwriter on a "firm
commitment" basis subject to receipt and acceptance of the shares of Common
Stock by the Underwriter, subject to approval of certain legal matters by their
counsel and subject to prior sale. The Underwriter reserves the right to
withdraw, cancel or modify the Offering and to reject any order in whole or in
part. It is expected that delivery of certificates evidencing the shares of
Common Stock will be made against payment therefore at the offices of the
Underwriter on or about , 1997.
NETWORK 1 FINANCIAL SECURITIES, INC.
, 1997
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND MUST BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL
STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.
REFERENCES HEREIN TO THE "GOVERNMENT" ARE TO THE FEDERAL GOVERNMENT OF THE
UNITED STATES AND ITS DEPARTMENTS, AGENCIES AND OFFICES. UNLESS OTHERWISE
INDICATED, ALL INFORMATION INCLUDED IN THIS PROSPECTUS ASSUMES NO EXERCISE OF
THE OVER-ALLOTMENT OPTION. IN ADDITION, ALL REFERENCES IN THIS PROSPECTUS TO THE
"COMPANY" REFERS TO THE COMPANY AND ITS WHOLLY-OWNED SUBSIDIARY DUNN COMPUTER
CORPORATION, A VIRGINIA CORPORATION.
THE COMPANY
Dunn Computer Corporation ("Dunn" or the "Company") manufactures custom
computer systems for the Government and selected commercial accounts. Dunn
markets its products directly to the Government as a prime contractor or
indirectly as a sub-contractor to other federal contractors. The Company
supplies systems under its own label or the customer's brand name. The Company's
products include Intel based computer systems configured to meet customer
specifications, private label systems, notebook computers and high performance
local area and Internet servers. The Company also provides related services to
its customers, including integration and staging services, configuration
control, upgrading existing systems and world-wide warranty support.
The Company's primary market is the Government. The Company markets to a
wide array of Government organizations including the Department of Defense,
civilian agencies such as the Health Care and Finance Administration ("HCFA")
and the Judicial branch of the Government. The Government is budgeted to spend
over $26 billion on Information Technology ("IT") products and services in the
Government's fiscal 1997. In addition, the Electronic Industries Association, a
major industry trade association, estimates that Government agencies that are
not required to report their information technology expenditures, including the
intelligence community, will spend an additional $20 billion during the
Government's fiscal 1997 on such technology. The Government's IT budget has a
projected growth of 4% to 5% annually. The Company believes that while
Government down sizing has decreased the number of federal employees, there has
been an increase in the demand for productivity tools, such as computers.
The Company believes that its focus on the Government provides it with the
following advantages: (i) significant inventory risk is eliminated because
inventory is procured to satisfy firm fixed price contracts; (ii) Government
products are built to order allowing the Company to take advantage of the latest
in technology and market prices; (iii) a significant reduction in bad debts due
to the stability of the Government; and (iv) a reduction in selling and
marketing expenses. In addition, historically, prices of computer parts such as
memory, processors, and computer hard disks have decreased over time which
allows the Company to increase gross profits over the term of a contract. Since
the Company selects its parts to satisfy a specific contract, customization can
be easily accomplished. The Company believes that it is well-positioned to meet
its objective of providing responsive and high-quality performance products and
services to a growing market.
The Company is presently test marketing its "all in one" desktop computer
which incorporates a 17" monitor, stereo speakers, microphone, Internet
connection, television tuner, and full Pentium computer. The system is packaged
in a single chassis with all the computer parts in a removable drawer for ease
of upgrade and maintenance. The Company believes that initial reaction to the
"all in one" has been very positive. The Company further believes that the "all
in one" product will have applications to both the Government and to customers
outside of the Government. See "Business--Commercial Market." The Company is
currently developing its "all in one" marketing strategy to enable the Company
to continue to appeal to the Government as well as pursue the private markets.
The Company is preparing to enter into the lucrative high end file server
market by introducing a custom line of fault tolerant fileservers based on Intel
Pentium Pro (P6) Processors. The Company markets
2
<PAGE>
single, dual, and quad versions of the processor, all of which are Microsoft
Windows NT, Novell, Banyan, and Token Ring compatible. The new servers will
offer the latest in technology which the Company believes will provide it with a
significant price/performance advantage over its competitors. Although the
Company will market its file servers into the Government, it believes these
products are best suited for the commercial market. The Company intends to
market these products through systems software companies that currently port
applications from mainframe computers to client/server networks. These companies
offer Fortune 1000 companies a turn key solution to their IT problems. The
Company is presently manufacturing servers as a subcontractor to Lockheed Martin
on the multi-million dollar worldwide Defense Messaging System ("DMS"). DMS is
intended to be the largest private messaging network in the world, supporting
approximately 2,000,000 users.
The Company also manufactures, on a brand name basis, a state-of-the-art
notebook with a 12.1" active matrix screen, 8 speed CD-Rom, built-in stereo
sound, infrared communication, and many other advanced features. The Company
assembles and configures the system in the United States.
GENERAL
The Company was incorporated on January 3, 1997, in the State of Delaware,
and is the parent company of Dunn Computer Corporation, a Virginia corporation
which was incorporated on July 27, 1987. In January 1997, all of the
stockholders of the Virginia corporation exchanged their capital stock for
shares of Common Stock of the Delaware corporation. See "Certain Transactions."
The Company's principal executive offices are located at 1306 Squire Court,
Sterling, Virginia 20166 and its telephone number is (703) 450-0400. The
Company's web address is WWW.dunncomp.com.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered........... 1,000,000 shares of Common Stock. See "Description of
Securities."
Common Stock Outstanding
Prior to Offering(1)....... 4,000,000 shares of Common Stock.
Common Stock to be
Outstanding After the
Offering(1)(2)............. 5,000,000 shares of Common Stock.
Use of Proceeds.............. The net proceeds to the Company from the sale of the Common
Stock are estimated to be approximately $4,025,000, after
deducting commissions and expenses of the Offering estimated
at $975,000. The Company intends to use the net proceeds of
this Offering for improvements in its manufacturing
capabilities, selling and marketing, and for working capital
and general corporate purposes. See "Use of Proceeds."
Risk Factors................. An investment in the shares of Common Stock is speculative
and involves a high degree of risk and should not be
purchased by anyone who cannot afford the loss of his or her
entire investment. See "Risk Factors" and "Dilution."
Proposed Nasdaq National
Market Symbol(3)........... Common Stock--DUNN
</TABLE>
- ------------------------
(1) Does not include an aggregate of 600,000 shares of Common Stock reserved for
issuance upon the exercise of options available for future grant under the
Company's stock option plan (the "Plan") 232,500 of which have been granted.
See "Management--Stock Option Plan."
(2) Does not include 100,000 shares of Common Stock issuable upon exercise of
the Underwriter's Warrants. See "Underwriting."
(3) The proposed symbol does not imply that a liquid and active market will
develop or be sustained for the securities upon completion of the Offering.
4
<PAGE>
SUMMARY FINANCIAL DATA
(In thousands, except per share data)
The summary financial information set forth below is qualified by and should
be read in conjunction with the Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER
31,
--------------------
<S> <C> <C>
1995 1996
--------- ---------
STATEMENT OF OPERATIONS DATA
Revenues.................................................................................. $ 7,491 $ 18,099
Gross profit.............................................................................. 1,445 3,996
Income from operations.................................................................... 479 2,024
Net income................................................................................ 243 1,239
Earnings per share(1)..................................................................... $ .06 $ .31
Weighted average number of shares outstanding(1).......................................... 4,036 4,036
</TABLE>
<TABLE>
<CAPTION>
AT OCTOBER 31,
-------------------------------------
<S> <C> <C> <C>
1995 1996 AS ADJUSTED(2)
--------- --------- ---------------
BALANCE SHEET DATA
Working capital................................................................ $ 512 $ 1,872 $ 5,897
Total assets................................................................... 3,647 5,275 9,300
Long-term debt................................................................. -- -- --
Total liabilities.............................................................. 3,047 3,335 3,335
Stockholders' equity........................................................... 600 1,939 5,964
</TABLE>
- ------------------------
(1) Computed on the basis described in Note 2 of Notes to Dunn Computer
Corporation's consolidated financial statements included herein.
(2) Gives effect to the sale of the securities offered hereby.
5
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, IN
ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH INVESTMENTS IN THE SHARES OF COMMON STOCK OFFERED HEREBY. THIS PROSPECTUS
CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF
THE ACT. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN UNCERTAINTIES SET FORTH BELOW
AND ELSEWHERE IN THIS PROSPECTUS. AN INVESTMENT IN THE SECURITIES OFFERED HEREBY
INVOLVES A HIGH DEGREE OF RISK.
DEPENDENCE ON THE GOVERNMENT MARKET. Substantially all of the Company's
revenues in fiscal 1995 and 1996 were derived from contracts or subcontracts
with the Government. The Company believes that the success and development of
its business will continue to be dependent upon its ability to participate in
Government contract programs. Accordingly, the Company's financial performance
may be directly affected by changes in Government contracting policies. Among
the factors that could materially adversely affect the Company's Government
contracting business are budgetary constraints, changes in fiscal policies or
available funding, changes in Government programs and requirements, including
curtailment of the Government's use of technology services firms, the adoption
of new laws or regulations, technological developments and general economic
conditions. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Fiscal 1996 Compared with Fiscal 1995."
The Company derives significant revenues from sales made pursuant to certain
major procurement programs awarded in the ordinary course of business. These
include its General Services Administration Schedule ("GSA Schedule") and
related contracts. The GSA Schedule is an indefinite quantity, indefinite
delivery contract which is negotiated by the General Service Administration with
selected vendors that can be used by any Government agency to procure that
particular vendor's equipment. The Company's current GSA Schedule is a
three-year contract with an option to renew for an additional three years. The
Company's inability to renew or replace its GSA Schedule or other contracts
could have a material adverse effect on the Company. Many Government contracts
specify maximum amounts that Government clients can purchase under the contract
("total contract capacity"). Such total contract capacity is not indicative of
revenues which may be realized under the contract.
GOVERNMENT CONTRACTING RISKS. Government contracts, by their terms,
generally can be terminated at any time by the Government, without cause, for
the convenience of the Government. If a Government contract is so terminated,
the Company may only be entitled to receive compensation for the services
provided or costs incurred at the time of termination and a negotiated amount of
the profit on the contract to the date of termination. In addition, all
Government contracts require compliance with various contract provisions and
procurement regulations. The adoption of new or modified procurement regulations
could materially adversely affect the Company or increase its cost of competing
for or performing Government contracts. Any violation of these regulations could
result in the termination of the contracts, imposition of fines, and/or
debarment from award of additional Government contracts. The termination of any
of the Company's significant contracts or the imposition of fines, damages, or
suspension from bidding on additional contracts would have a material effect on
the Company. Further, all Government contract awards are subject to protest by
competitors. See "Business--Government Contracts."
Upon expiration of the Company's contracts, the renewal may be subjected to
a competitive rebidding process. There can be no assurance that the Company will
win on any particular bid or prevail in any ensuing legal protest. Furthermore,
with respect to GSA Schedule and Indefinite Delivery, Indefinite Quantity
("IDIQ") contracts, there can be no assurance that price levels will not be
reduced. The Company's failure to win a significant dollar volume of such
contracts could materially adversely affect the Company.
HIGHLY COMPETITIVE INDUSTRY. The markets for the Company's products and
services are highly competitive. Competitive pressures have intensified as the
rate of growth in the United States general
6
<PAGE>
computer market has slowed and general purpose microcomputer manufacturers have
attempted to enter the market. The Company competes with a large number of
systems integrators, manufacturers, and resellers. Most of these competitors
have significantly more financial resources and are larger than the Company. The
Company believes that competitive factors include quality of services, technical
qualifications, past contract performance, geographic presence, price and the
availability of key professional personnel. The inability to procure new
contracts and retain existing contracts would result in a reduction of Company
revenue and could have a material adverse effect on the Company's results of
operations. In addition, because the markets for the Company's products and
services are competitive, the Company may experience downward pressure on gross
and operating profits as a percentage of revenues. The Company believes that it
is likely that these competitive conditions and the commensurate pressure on
margins will continue in the future. There can be no assurance that the Company
will continue to compete successfully against existing or new competitors that
may enter markets in which the Company operates. See "Business--Competition."
INDUSTRY CONSOLIDATION AND PRICE REDUCTIONS. The microcomputer products
Government market is undergoing significant change. Certain systems integrators
are combining operations or acquiring or merging with other integrators to
increase efficiency. This industry consolidation could result in short-term
price-cutting. Decreased prices of microcomputers and related products may
require the Company to sell a greater number of products to achieve the same
level of net revenues and gross profit. Such a trend could make it more
difficult for the Company to continue to increase its net revenues and income.
In addition, if the industry's rate of growth were to decrease further, it could
have a material adverse effect on the Company's operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RAPID CHANGES IN PRODUCT STANDARDS AND RISK OF INVENTORY OBSOLESCENCE. The
microcomputer products Government market is characterized by rapid technological
change and the frequent introduction of new products and product enhancements.
The Company has sought to minimize its inventory exposure through a variety of
inventory control procedures and policies, including automated "just-in-time"
management and vendor price protection programs. Historically, the Company has
purchased inventory to fulfill existing orders. However, in order to satisfy
customer demand and to obtain greater purchasing discounts, the Company expects
to carry increased inventory levels of certain products in the future. The
Company attempts to anticipate and react to new product introductions and to
mitigate its exposure to losses from inventory obsolescence. There can be no
assurance that such efforts will be successful or that unexpected new product
introductions will not have a material adverse effect on the demand for the
Company's inventory. See "Business--Purchasing."
FLUCTUATING OPERATING RESULTS. The Company's results of operations have
varied from quarter to quarter as a result of many factors, including uneven
purchasing patterns under its GSA Schedule and IDIQ contracts, as well as
changes in policy or budgetary measures that adversely affect government
contracts in general, the condition of the microcomputer products Government
market, shifts in demand for microcomputer products and industry announcements
of new products or upgrades. No assurance can be given that these quarterly
variations will not occur in the future. The Company's planned operating
expenditures are based on sales forecasts. If revenues do not meet the Company's
expectations in any given quarter, it could have a material adverse effect on
operating results.
RELIANCE ON MANUFACTURERS AND DISTRIBUTORS. The Company acquires products
for resale both directly from manufacturers and indirectly through distributors.
During the fiscal year ended October 31, 1996, the Company purchased 13% of its
components from one local distributor. The Company did not purchase more than
10% of its components from any other supplier. The Company does not have supply
agreements with the majority of its suppliers. The discontinuation of a
necessary component by a subcontractor or supplier may be a significant negative
development for the Company if an appropriate alternate source can not be
located. Certain of the products offered by the Company are subject to
manufacturer allocation
7
<PAGE>
which limits the number of units of such products available to manufacturers,
including the Company. Certain manufacturers and distributors provide the
Company with substantial incentives in the form of discounts, and rebates. A
reduction in or discontinuance of such incentives could have a material adverse
effect on the Company.
DEPENDENCE ON CO-CONTRACTORS. In recent years, the Government has made use
of fewer, but larger-scale procurements to meet its information technology
requirements. This has led to an increase of teaming agreements among providers
of information technology services and products in order to make use of the
greater resources of such co-contractors to fulfill the requirements of the
larger procurements. The inability of the Company to enter into successful
teaming agreements with other Government contractors could materially adversely
affect the Company's ability to compete successfully for future government
procurements. In addition, approximately 11% of the Company's total revenues in
fiscal 1995 and 42% of the Company's total revenues in fiscal 1996 were derived
from subcontracts with prime contractors on Government contracts. Under these
subcontracts, the Company may be adversely affected if the prime contractor
fails to perform satisfactorily or is unable or unwilling to meet its
obligations to the Company.
DEPENDENCE ON KEY PERSONNEL. The Company's future success will depend to a
significant extent on the efforts of key management personnel, including Thomas
P. Dunne, Chief Executive Officer, John D. Vazzana, Executive Vice President,
and other key personnel. The Company has no employment agreements with Mr. Dunne
or Mr. Vazzana. The loss of one or more of these key employees could have a
material adverse effect on the Company's business. The Company is in the process
of obtaining key-man life insurance policies in the amount of $1,000,000 on each
of the lives of Mr. Dunne and Mr. Vazzana. In addition, the Company believes
that its future success will depend in large part upon its continued ability to
attract and retain highly qualified management, technical and sales personnel.
There can be no assurance that the Company will be able to attract and retain
the qualified personnel necessary for its business.
INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS. It is common in the computer
industry for companies to assert patent, copyright and other intellectual
property rights against other companies. Although there are no such claims
pending against the Company, if a claim were made, the Company would evaluate
such claim and, when appropriate, seek a license to use the protected technology
in its products. The Company could be placed at a disadvantage if competitors
were to obtain licenses with lower royalty fee payments or other terms more
favorable than those received by the Company. If the Company or its suppliers
were unable to obtain licenses necessary to use the protected technology in the
Company's products, the Company may be forced to market products without certain
protected technological features. The Company could also incur substantial costs
to redesign its products around other parties' protected technology or to defend
patent or copyright infringement actions against the Company. If any of the
Company's products were found to infringe protected technology, the Company
could be enjoined from further use of that technology in its products and could
be required to pay damages. The Company's inability to obtain such licenses on
competitive terms or a finding of infringement against the Company could have a
material adverse effect on the Company.
PROPRIETARY INFORMATION AND TECHNOLOGICAL CHANGE. The Company believes that
its business is dependent on its technical and organizational knowledge,
practices and procedures, and that the future success of the Company is based,
in part, on its ability to keep up to date with new technological breakthroughs
and incorporate such changes in its products and services. Also, the Company has
a proprietary interest in certain of its work products' methodologies and
know-how. Although the Company seeks to protect its proprietary information by
confidentiality agreements with its employees, there can be no assurance that
these measures will prevent the unauthorized disclosure or use of the Company's
technical knowledge, practices or procedures or that others may not
independently develop similar knowledge, practices or procedures. In addition,
the Government acquires certain proprietary rights to software programs and
other products that result from the Company's services under Government
contracts or subcontracts. The
8
<PAGE>
Government may disclose such information to third parties, including competitors
of the Company. In the case of subcontracts, the prime contractors also may have
certain rights to such programs and products. Any of these factors could reduce
the Company's ability to maximize the competitive value of its proprietary
information.
CONTROL BY EXISTING STOCKHOLDERS. Upon the completion of this Offering, the
Company's management will collectively beneficially own 80% (77% if the
Underwriters' over-allotment option is exercised in full) of the Company's
outstanding Common Stock. Because of their beneficial stock ownership, these
stockholders will be in a position to continue to elect the members of the Board
of Directors and decide matters requiring stockholder approval. See "Principal
Stockholders."
NO PRIOR PUBLIC MARKET. Prior to this Offering, there has been no public
market for the Common Stock. Accordingly, there can be no assurance that an
active trading market will develop and be sustained upon the completion of this
Offering. The initial public Offering price of the Common Stock has been
determined by negotiations between the Company and the Underwriter. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public Offering prices. The stock market has, from time to time,
experienced extreme price and volume fluctuations which often have been
unrelated to the operating performance of particular companies. Regulatory
developments and economic and other external factors, as well as
period-to-period fluctuations in financial results, may also have a significant
impact on the market price of such securities.
IMMEDIATE AND SUBSTANTIAL DILUTION. This Offering involves an immediate and
substantial dilution to investors. Purchasers of shares of Common Stock in the
Offering will incur an immediate dilution of $3.81 per share in the net tangible
book value of their investment from the initial public Offering price, which
dilution amounts to approximately 76% of the initial public Offering price per
Share. Investors in the Offering will pay $5.00 per Share, as compared with an
average cash price of $.03 per share of Common Stock paid by existing
stockholders. See "Dilution."
BROAD DISCRETION IN APPLICATION OF PROCEEDS; UNSPECIFIED
ACQUISITIONS. Approximately 75% of the net proceeds of this Offering will be
applied to working capital and general corporate purposes. In addition, the
Company may utilize a portion of the net proceeds of this Offering currently
allocated to working capital for potential acquisitions. As of the date of this
Prospectus, the Company has not identified any particular acquisition targets.
Stockholders of the Company may have no opportunity to approve specified
acquisitions or to review the financial condition of any potential target.
Accordingly, management of the Company will have broad discretion over the use
of proceeds. See "Use of Proceeds."
NEED FOR ADDITIONAL FINANCING. The Company believes that the proceeds of
the Offering will, together with revenues from operations, be sufficient to
finance the Company's working capital requirements for a period of at least 12
months following the completion of this Offering. In addition, a part of the
Company's strategy is to acquire companies with related and complementary
businesses, although the Company has not presently identified any specific
acquisitions. The continued expansion and operation of the Company's business
beyond such 12 month period and its ability to make acquisitions may be
dependent upon its ability to obtain additional financing. There can be no
assurance that additional financing will be available on terms acceptable to the
Company, or at all. In the event that the Company is unable to obtain such
additional financing as it becomes necessary, the Company may not be able to
achieve all of its business plans. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
SHARES ELIGIBLE FOR FUTURE SALE. Of the 5,000,000 shares of Common Stock of
the Company to be outstanding upon completion of this Offering, 4,000,000 shares
shall be "restricted securities," which are owned by "affiliates" of the
Company, as those terms are defined in Rule 144 promulgated under the Act.
Absent registration under the Act, the sale of such shares is subject to Rule
144, as promulgated under the Act. All of the "restricted securities" are
eligible for resale under Rule 144. In general, under Rule 144,
9
<PAGE>
subject to the satisfaction of certain other conditions, a person, including an
affiliate of the Company, who has beneficially owned restricted shares of Common
Stock for at least two years is entitled to sell in a brokerage transaction,
within any three-month period, a number of shares that does not exceed the
greater of 1% of the total number of outstanding shares of the same class, or if
the Common Stock is quoted on NASDAQ or a stock exchange, the average weekly
trading volume during the four calendar weeks preceding the sale. Rule 144 also
permits a person who presently is not and who has not been an affiliate of the
Company for at least three months immediately preceding the sale and who has
beneficially owned the shares of Common Stock for at least three years to sell
such shares without regard to any of the volume limitations as described above.
All of the Company's existing stockholders are affiliates of the Company. In
addition, such affiliates have agreed not to sell or otherwise dispose of any of
their shares of Common Stock now owned or issuable upon the exercise of
currently exercisable warrants for a period of six months from the date of its
Prospectus, without the prior written consent of the Underwriter. No prediction
can be made as to the effect, if any, that sales of shares of Common Stock or
the availability of such shares for sale will have on the market prices of the
Company's securities prevailing from time to time. The possibility that
substantial amounts of Common Stock may be sold under Rule 144 into the public
market may adversely affect prevailing market prices for the Common Stock and
could impair the Company's ability to raise capital in the future through the
sale of equity securities. See "Shares Eligible for Future Sale."
NO DIVIDENDS AND NONE ANTICIPATED. To date, no dividends have been declared
or paid on the Common Stock, and the Company does not anticipate declaring or
paying any dividends in the foreseeable future, but rather intends to reinvest
profits, if any, in its business. Investors should, therefore, be aware that it
is unlikely that any dividends will be paid on the Common Stock in the
foreseeable future. See "Dividends."
NASDAQ ELIGIBILITY AND MAINTENANCE REQUIREMENTS; POSSIBLE DELISTING OF
COMMON STOCK FROM NASDAQ NATIONAL MARKET SYSTEM; RISKS OF LOW-PRICED
STOCKS. Prior to this Offering, there has been no established public trading
market for the Company's Common Stock and there is no assurance that a public
trading market for the Company's securities will develop after the completion of
this Offering. If a trading market does in fact develop for the securities
offered hereby, there can be no assurance that it will be sustained.
The Company has applied for listing of the Common Stock on the NASDAQ
National Market System upon the Effective Date. The Commission has approved
rules imposing criteria for listing of securities on the NASDAQ National Market
System, including standards for maintenance of such listing. In order to qualify
for initial quotation of securities on the NASDAQ National Market System, an
issuer, among other things, must have at least $4,000,000 in net tangible
assets, $3,000,000 in market value of the public float and a minimum bid price
of $5.00 per share. For continued listing, an issuer, among other things, must
have $1,000,000 in net tangible assets, $1,000,000 in market value of securities
in the public float and a minimum bid price of $1.00 per share. If the Company
is unable to satisfy NASDAQ National Market System's maintenance criteria in the
future, its Common Stock may be delisted from NASDAQ National Market System. In
such event, the Company would seek to list its Common Stock on the NASDAQ Small
Capitalization Market; however, if it was unsuccessful, trading, if any, in the
Company's Common Stock, would thereafter be conducted in the over the counter
market in the so-called "pink sheets" or the NASD's "Electronic Bulletin Board."
As a consequence of such delisting, an investor would likely find it more
difficult to dispose of, or to obtain quotations as to, the price of the
Company's Common Stock.
PENNY STOCK REGULATION. In the event that the Company is unable to satisfy
the maintenance requirements for the NASDAQ National Market and its Common Stock
falls below the minimum bid price of $5.00 per share for the initial quotation,
the Company would seek to list its securities on the NASDAQ Small Capitalization
Market. If it was unsuccessful, trading would be conducted on the "pink sheets"
or the NASD's Electronic Bulletin Board. In the absence of the Common Stock
being quoted on NASDAQ, or the Company's having a minimum of $2,000,000 in
stockholders' equity, trading in the Common Stock
10
<PAGE>
would be covered by Rule 15g-9 promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), for non-NASDAQ and non-exchange listed
securities. Under such rule, broker-dealers who recommend such securities to
persons other than established customers and accredited investors must make a
special written suitability determination for the purchaser and receive the
purchaser's written agreement to a transaction prior to sale. Securities are
exempt from this rule if the market price is at least $5.00 per share.
The Commission adopted regulations that generally define a penny stock to be
any equity security that has a market price of less than $5.00 per share,
subject to certain exceptions. Such exceptions include an equity security listed
on NASDAQ, and an equity security issued by an issuer that has (i) net tangible
assets of at least $2,000,000, if such issuer has been in continuous operation
for three years, (ii) net tangible assets of at least $5,000,000, if such issuer
has been in continuous operation for less than three years, or (iii) average
revenue of at least $6,000,000 for the preceding three years. Unless an
exception is available, the regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated therewith.
If the Company's Common Stock were to become subject to the regulations
applicable to penny stocks, the market liquidity for the Common Stock would be
severely affected, limiting the ability of broker-dealers to sell the Common
Stock and the ability of purchasers in this Offering to sell their Common Stock
in the secondary market. There is no assurance that trading in the Common Stock
will not be subject to these or other regulations that would adversely affect
the market for such securities.
PREFERRED STOCK. The Company's Certificate of Incorporation authorizes the
issuance of 2,000,000 shares of "blank check" Preferred Stock with such
designations, rights and preferences as may be determined from time to time by
its Board of Directors. Accordingly, the Company's Board of Directors is
empowered, without further approval, to issue Preferred Stock with dividend,
liquidation, conversion, voting or other rights that could adversely affect the
voting power or other rights of the holders of the Common Stock. The Company has
no current plans to issue any shares of Preferred Stock; however, in the event
of issuance, the Preferred Stock could be used, under certain circumstances, as
a method of discouraging, delaying or preventing a change in control of the
Company. See "Description of Securities."
UNDERWRITER'S WARRANTS AND REGISTRATION RIGHTS. In connection with this
Offering, the Company has agreed to sell to the Underwriter, for $10, the
Underwriter's Warrants which entitles the Underwriter to purchase up to 100,000
shares of Common Stock. The Underwriter's Warrants are exercisable at $6.50
(130% of the Offering Price) per share of Common Stock for a period of four
years commencing one year from the date of this Prospectus. The exercise of the
Underwriter's Warrants may adversely affect the Company's ability to obtain
equity capital, and, if the Common Stock issuable upon the exercise of the
Underwriter's Warrants is sold in the public market, may adversely affect the
market price of the Common Stock. The Underwriter has been granted certain
"piggyback" and demand registration rights for a period of five years from the
date of this Prospectus with respect to the registration under the Act of the
securities directly issuable upon exercise of the Underwriter's Warrants. See
"Underwriting."
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby, after deducting underwriting discounts and commissions and other
expenses of this Offering are estimated to be $4,025,000.
The Company currently intends to utilize the net proceeds of the Offering as
follows:
<TABLE>
<S> <C> <C>
Improving Manufacturing Capabilities(1)................. $ 500,000 12.42%
Expansion of Marketing Activities(2).................... 500,000 12.42%
Working capital and general corporate purposes.......... 3,025,000 75.16%
--------- ---------
Total................................................... $4,025,000 100.00%
--------- ---------
--------- ---------
</TABLE>
- ------------------------
(1) Includes the purchase of rollers, testers and other production equipment.
The Company intends to apply for ISO 9000 certification after the Offering.
See "Business -- Facilities."
(2) Includes the cost of advertising in selected Government publications and
increased attendance at trade shows.
The foregoing represents the Company's estimate of the allocation of the net
proceeds of the Offering, based upon the current status of its operations and
anticipated business needs. It is possible, however, that the application of
funds will differ considerably from the estimates set forth herein due to
changes in the economic climate and/or the Company's planned business operations
or unanticipated complications, delays and expenses, as well as any potential
acquisitions that the Company may consummate, although no specific acquisition
has been identified. Any reallocation of the net proceeds will be at the
discretion of the Board of Directors of the Company.
Pending application, the net proceeds will be invested principally in United
States government securities, short-term certificates of deposit, money market
funds or other short-term interest-bearing investments.
The Company estimates that the net proceeds from this Offering will be
sufficient to meet the Company's liquidity and working capital requirements for
a period of 12 months from the completion of this Offering. In the event that
the Company consummates any acquisition, although no specific acquisition has
been identified, such funds will be derived from the funds currently allocated
to working capital or from revenues generated from the Company's operations.
There can be no assurance that the Company will generate sufficient revenues for
such acquisitions.
DIVIDEND POLICY
The Company has never paid or declared dividends on its Common Stock. The
payment of cash dividends, if any, in the future is within the discretion of the
Board of Directors and will depend upon the Company's earnings, its capital
requirements, financial condition and other relevant factors. The Company
intends, for the foreseeable future, to retain future earnings for use in the
Company's business.
12
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company at
October 31, 1996, and as adjusted to give effect to the sale of the 1,000,000
shares of Common Stock offered hereby and to the application of the net proceeds
therefrom, at the assumed initial public Offering price of $5.00 per share. See
"Use of Proceeds."
<TABLE>
<CAPTION>
AS OF OCTOBER 31, 1996
-----------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
---------- -----------
Stockholders' equity:
Preferred Stock, $.001 par value; 2,000,000 shares authorized, no
shares issued and outstanding on an actual and as adjusted
basis........................................................... $ -- $ --
Common Stock, $.001 par value; 20,000,000 shares authorized,
4,000,000(1) shares issued and outstanding on an actual basis,
5,000,000(1)(2) shares issued and outstanding on an as adjusted
basis........................................................... 4,000 5,000
Additional paid-in capital........................................ 111,857 4,135,857
Retained earnings................................................. 1,823,334 1,823,334
---------- -----------
Total Stockholders' equity.......................................... 1,939,191 5,964,191
---------- -----------
---------- -----------
</TABLE>
- ------------------------
(1) Does not include 600,000 shares of Common Stock reserved for issuance
pursuant to the Company's Stock Option Plan. See "Management--Incentive
Stock Option Plan."
(2) Does not include 100,000 shares of Common Stock issuable upon exercise of
the Underwriter's Warrants. See "Underwriting."
13
<PAGE>
DILUTION
At October 31, 1996 the net tangible book value of the Company was
$1,939,191 or $.48 per share of Common Stock based on 4,000,000 shares of Common
Stock outstanding. The net tangible book value per share represents the amount
of the Company's total assets less total liabilities, divided by the number of
shares of Common Stock outstanding. After giving effect to the receipt of the
net proceeds (estimated to be approximately $4,025,000) from the sale of the
shares of Common Stock offered hereby at an assumed initial public Offering
price of $5.00 per share, the proforma net tangible book value of the Company at
October 31, 1996 would be $5,964,191 or $1.19 per share of Common Stock. This
would result in dilution to the public investors (i.e. the difference between
the estimated initial public Offering price per share of Common Stock and the
net tangible book value thereof after giving effect to this Offering) of
approximately $3.81 per share. The following table illustrates the per share
dilution:
<TABLE>
<CAPTION>
PER SHARE OF
COMMON STOCK
--------------------
<S> <C> <C>
Assumed initial public Offering price........................................... $ 5.00
Net tangible book value at October 31, 1996................................... .48
Increase in proforma net tangible book value attributable to new investors.... .71
--
Proforma net tangible book value after this Offering............................ $ 1.19
---------
Proforma Dilution of net tangible book value to the new investors............... $ 3.81
---------
---------
</TABLE>
The following table sets forth as of the date of this Prospectus, with
respect to the Company's existing stockholders and investors in this Offering,
the number of shares of Common Stock acquired from the Company, the percentage
of ownership of such shares of Common Stock, the total consideration paid, the
percentage of total consideration paid, and the average price per share paid by
the existing stockholders and by the investors in this Offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENT NUMBER PERCENT PER SHARE
---------- ----------- ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............ 4,000,000 80% $ 115,857 2.3% $ .03
New investors.................... 1,000,000 20% 5,000,000 97.7% 5.00
---------- --- ------------
Total...................... 5,000,000 100% $ 5,115,857 100.0% $ 1.02
---------- --- ------------ ----- -----
---------- --- ------------ ----- -----
</TABLE>
14
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial data should be read in conjunction with the
consolidated financial statements and the notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere herein. The statement of income data set forth below with
respect to the fiscal years ended October 31, 1995 and 1996 and the balance
sheet data as of October 31, 1996 is derived from and is referenced to the
audited consolidated financial statements of the Company included elsewhere in
this Prospectus. The statement of income data set forth below with respect to
the fiscal years ended October 31, 1993 and 1994 and the balance sheet data as
of October 31, 1993, 1994 and 1995 is derived from audited consolidated
financial statements of the Company not included in this Prospectus. The
statement of income data set forth below with respect to the fiscal year ended
October 31, 1992 and the balance sheet data as of October 31, 1992 is derived
from unaudited consolidated financial statements of the Company not included in
this Prospectus. In the opinion of management, the unaudited consolidated
financial statements include all adjustments, consisting of normal recurring
adjustments, that the Company considers necessary for the fair presentation of
its financial position and results of its operations for that period.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues........................................................ $ 2,544 $ 5,812 $ 4,429 $ 7,491 $ 18,099
Cost of revenues................................................ 2,088 4,858 3,444 6,046 14,103
--------- --------- --------- --------- ---------
Gross profit.................................................... 456 954 985 1,445 3,996
Selling, general and administrative............................. 349 761 1,005 966 1,972
--------- --------- --------- --------- ---------
Income from operations.......................................... 107 193 (20) 479 2,024
Other income (expense).......................................... (1) (1) (32) 8 (9)
--------- --------- --------- --------- ---------
Net income (loss) before taxes.................................. 106 192 (52) 487 2,015
Provision for income taxes...................................... 35 65 (11) 244 776
--------- --------- --------- --------- ---------
Net income (loss)............................................... $ 71 $ 127 $ (41) $ 243 $ 1,239
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Earnings (loss) per share(1).................................... $ .03 $ .04 $ (.01) $ .06 $ .31
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average number of shares outstanding(1)................ 2,836 2,836 3,194 4,036 4,036
</TABLE>
<TABLE>
<CAPTION>
AT OCTOBER 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital....................................................... $ 187 $ 351 $ 340 $ 512 $ 1,872
Total assets.......................................................... 1,058 1,149 2,503 3,647 5,275
Long-term debt........................................................ 57 75 23 -- --
Total liabilities..................................................... 797 804 2,046 3,047 3,335
Stockholders' equity.................................................. 261 345 457 600 1,939
</TABLE>
- ------------------------
(1) Computed on the basis described in Note 2 of Notes to Dunn Computer
Corporation's consolidated financial statements included herein.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company has been in operation since July 1987. The Company manufactures
custom computer systems which are marketed primarily to the Government and
selected commercial accounts. The Company secures its contracts by bidding
directly as a prime contractor in response to Government RFPs or as a
sub-contractor with other federal contractors. The Government is budgeted to
spend over $26 billion on IT products and services in 1997. The Company's
strategy is to become a leading supplier of IT to the Government.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED OCTOBER 31, 1996 VS OCTOBER 31, 1995
Revenues for fiscal 1996 were $18,098,638, a 141.6% increase over 1995
revenues of $7,491,452. This increase is due to four significant new contracts.
Three of the contracts are with commercial companies that sell to the US
Government. Revenue from these four contracts were $1,588,000, $2,883,000,
$3,074,000, and $2,412,000 respectively. Revenues also increased from the
Company's existing contract with the US Courts.
Gross profit for fiscal 1996 was 22.1% of revenues compared to 19.3% in
fiscal 1995. The improvement can be attributed to increased volume discounts for
material and a reduction in warranty expense. Warranty expense decreased because
of a reduction in the failure rate and more efficient movement of replacement
parts. Management believes this trend will continue because of the quality of
the components used in the Company's systems. Gross profit increased $2,672,000
as a result of increased revenues.
Selling and marketing expenses increased $321,361 in fiscal 1996 over 1995.
As a percentage of revenues, selling and marketing expenses increased from 2.1%
to 2.6%. The increase is attributable to increased personnel and advertising.
Future increases in selling and marketing expenses are expected as the Company
implements its marketing strategy.
General and administrative expenses increased $684,933 from fiscal 1995 to
1996. The increase is a result of increased personnel cost necessitated by the
expansion of the Company's business. General and administrative expenses as a
percentage of revenues declined from 10.8% to 8.3% because certain personnel and
associated costs did not increase at the same rate as revenues.
Income from operations increased to $2,023,746 in 1996 compared to $478,816
in 1995, an increase of 322.7%. As a percentage of revenues, income from
operations increased to 11.2% in 1996 from 6.4% in fiscal 1995. The increase in
income from operations primarily resulted from increased sales volume and gross
profit margins and declining general and administrative expenses as a percentage
of revenues.
Interest expense increased $31,679 in fiscal 1996 from $26,246 to $57,925.
Interest expense increased because of the requirement for additional working
capital created by the increase in sales during the first six months of fiscal
1996. As a percentage of revenues in fiscal 1996, interest expense was .3%.
Other income (principally interest income) increased from $34,512 in fiscal 1995
to $49,343 in fiscal 1996.
Income tax expense increased from $244,000 to $776,000 due to the increase
in net income.
As a result, the Company's net income grew by 409.8% to $1,239,164 in fiscal
1996 when compared to $243,082 in 1995. Net income as a percentage of sales was
6.8% in 1996 and 3.2% in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically met its cash flow needs through cash generated
by operations and its bank credit arrangement.
16
<PAGE>
The Company has generated positive cash flow in each of the last two fiscal
years. In 1995, the Company had a positive cash flow of $27,865. In 1996, the
Company had a positive cash flow of $758,726. The Company anticipates generating
positive cash flows in the future as long as the Company can maintain its
profitability, of which there can be no assurance.
The Company has a secured revolving credit arrangement with Signet Bank in
Falls Church, Virginia (the "Bank") for a credit line of up to $2,000,000 that
is due on demand and bears interest at prime plus 3/4%. All borrowings are
collateralized by certain assets of the Company. The Company intends to maintain
this arrangement with the Bank for the foreseeable future. As of October 31,
1996, the Company had no outstanding borrowings under this line.
The Company has, and continues to have, a dependence upon a few major
customers for a significant portion of its revenues. This dependence for
revenues has not been responsible for any unusual fluctuations in operating
results on an annual basis in the past. Management does not believe this
concentration will generate annual fluctuations in operating results in the
future. Orders from these customers can create significant fluctuations from
quarter to quarter. In fiscal 1995, 85% of the Company's revenue was derived
from two customers. In fiscal 1996, approximately 77% of its revenue was derived
from five customers. Management intends to continue its efforts to expand the
customer base so that the loss of any one customer would not have a material
effect on the Company's operations.
The Company will receive net proceeds of this Offering in an amount
estimated to be approximately $4,025,000 (or approximately 80% of the estimated
gross proceeds of $5,000,000 to be received before payment of applicable
underwriting discounts and commissions and certain other expenses of the
Offering). The Company believes that the proceeds of the Offering coupled with
income from operations will fulfill the Company's working capital needs for at
least 12 months following the Offering. As the Company continues to grow, bank
borrowings, other debt placements and equity offerings may be considered, in
part or in combination, as the situation warrants.
RECENT PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation" which is effective for the
Company's 1997 consolidated financial statements. SFAS No. 123 allows companies
to account for stock-based compensation under either the new provisions of SFAS
123 or the provisions of APB No. 25, but requires pro forma disclosure in the
footnotes to the consolidated financial statements as if the measurement
provisions of SFAS No. 123 had been adopted. At this time, the Company intends
to account for its stock based compensation in accordance with the provisions of
APB No. 25. As such, the implementation of SFAS No. 123 will not materially
impact the financial position or results of operations of the Company.
17
<PAGE>
BUSINESS
GENERAL
Dunn Computer Corporation ("Dunn" or the "Company") manufactures custom
computer systems for the Government and selected commercial accounts. Dunn
markets its products directly to the Government as a prime contractor or
indirectly as a sub-contractor to other federal contractors. The Company
supplies systems under its own label or the customer's brand name. The Company's
products include Intel based computer systems configured to meet customer
specifications, private label systems, notebook computers and high performance
local area and Internet servers. The Company also provides related services to
its customers, including integration and staging services, configuration
control, upgrading existing systems and world-wide warranty support.
MARKET
The Company's primary market is the Government. The Company markets to a
wide array of Government organizations including the Department of Defense,
civilian agencies including the Health Care Finance Administration ("HCFA") and
the Judicial branch of the Government. The Government is budgeted to spend over
$26 billion on Information Technology ("IT") products and services in fiscal
1997. In addition, the Electronic Industries Association, a major industry trade
association, estimates that Government agencies that are not required to report
their information technology expenditures, including the intelligence community,
will spend an additional $20 billion in the Government's fiscal 1997 on such
technology. The Government's IT budget has a projected growth of 4% to 5%
annually. The Government alone represents 13% of U.S. spending on IT. The
Company believes that while the Government down sizing has decreased the number
of federal employees, there has been a corresponding increase in the demand for
productivity tools, such as computers.
Driving the growth in spending is the ongoing migration to an "electronic
government" called for in the National Performance Review. This trend has
necessitated closer federal, state, and local IT relationships to deliver
state-of-the art "service to the citizen" in the social services, safety,
transportation, environment and tax areas, while still accomplishing the
Government's goal to adopt computer networking technology to interconnect
personal computers into resource-sharing work groups referred to as "local area
networks." In order to perform these tasks, the Government is moving away from
centralized data processing. Instead, more micros, workstations and networks are
being bought to increase efficiency and improve productivity at every level.
Mid-level managers, such as functional managers and departmental specifiers,
have now been empowered to buy a specific vendor's technology.
Management believes that the Government is a microcosm of the U.S. market in
terms of breadth of IT uses, encompassing all vertical and horizontal segments
found in the commercial marketplace. Like commercial entities, Government
organizations have been steadily down sizing over the past few years, with
ambitious plans for migration to client/server architectures. Although overall
federal IT growth is projected to be 4.1% in fiscal 1997, computer hardware
sales is projected to grow at 20%.
Washington DC, Maryland, and Virginia accounted for 68% of IT spending in
fiscal year 1995. The Company believes that its location within this area of
concentration provides it with an advantage over its competitors in securing
Government contracts. The Company also believes that it is able to realize
significant cost savings due to its location.
Congress recently passed the Information Technology Reform Act (the "ITRA")
which took effect on August 8, 1996. The ITRA will have a profound effect on the
way Government procures computers and related products and services and how
vendors market and sell to the Government. The changes were made in an effort to
reduce costs and expedite the IT procurement process. The most sweeping changes
were (1) the repeal of the Brooks Act which had given the General Services
Administration ("GSA") sole authority for purchasing IT and, (2) the change in
the GSA schedule from a single year small purchase contracting program to a
multi-year, Indefinite Delivery, Indefinite Quantity ("IDIQ") contract with no
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<PAGE>
limit on the value of purchases. Prior to the new legislation, the GSA was
responsible for overseeing all IT purchases as well as assuring fair and open
competition. The new legislation has reduced GSA's role to negotiating and
awarding GSA contracts to qualified IT vendors. GSA is paid a 2% commission on
contract revenues for providing this service. The commission is paid equally by
the vendor and the procuring agency.
Although the legislation changes may seem minor or merely a technical
adjustment to those not familiar with IT procurement by the Government, the
Company believes that the new law will have far reaching effects in the
procurement process, and, although there can be no assurance, the changes in the
IT procurement rules will have a positive effect on the Company's revenues. The
Company was awarded a new GSA contract that is valid through March 31, 1999. The
new GSA schedule will provide the Company a perpetual procurement contract
vehicle to market its products to the Government. In the past, the Company was
forced to market only through the very competitive RFP process. IT purchases can
now be directed to a particular vendor or the competition can be limited to
selected vendors holding GSA contracts. The Company believes that its
classification as a small business (under 1000 employees) is an added advantage
when pursuing Government contracts. The Government in many cases will give
preferential treatment or limit competition to small businesses. Since being
awarded the contract in April 1996, the Company has received GSA contract orders
totaling over $3,300,000, for most of which the Company has already been paid.
The Company believes the GSA schedule to be the single most important contract
vehicle for capturing a share of the Government contract market and accordingly
the Company is expanding its marketing efforts to take advantage of these
changes. See "Use of Proceeds."
COMMERCIAL MARKET
Although the Company will continue to serve its Government market, the
Company firmly believes that its "all in one" and server products are more
suited to the commercial market. The Company also believes that the successful
marketing of these new products will create additional sales for its existing
products.
The Company will market its new line of server products through systems
software companies that currently port applications from mainframe computers to
client/server networks. These companies offer Fortune 1000 companies a turn key
solution to their IT problems. The successful sale of servers will give the
Company the opportunity to sell its Desktop systems as clients in the network.
The Company believes that it will also develop customer relationships that can
be utilized to market other existing products such as notebooks.
The Company also intends to market its all in one product to resellers that
concentrate in the legal and educational markets. The system combines a
computer, fax, stereo and television "all in one". The system has been designed
to take advantage of the recently announced Intel Pentium 200MMX processor. The
Pentium 200MMX is a multi-media CPU which is up to 20% faster than the
conventional Pentium 200.
PRODUCTS
The Company manufactures and assembles a full line of Intel based desktop
personal computers, client servers, and notebook computers. The Company has
recently entered into the high end fileserver and notebook markets. The Company
recently introduced a line of high end fileservers based on the newest Pentium
Pro processors and a high end Pentium notebook computer. The Company believes,
although there can be no assurance, that these two product lines will be two of
the fastest growing areas in the marketplace during the next three years.
DESKTOPS
The Company manufacturers a high performance line of Pentium desktop
personal computers that are used as standalone and/or network computers. The
systems incorporate the newest Intel technology and can accommodate all the
Intel Pentium processors. The Company's desktops and motherboards have been
tested by PC Magazine (September 1995) and Federal Computer Week (January 1996
and August
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1996) and have been awarded "Editors Choice," "Best Value," and the prestigious
"Best Buy" as the "fastest Pentium ever tested." The Company strives to keep
ahead of the competition by constantly testing and incorporating the latest
technology into its products.
The Company is presently test marketing an "all in one" desktop computer
that incorporates a 17" monitor, stereo speakers, microphone, Internet
connection, television tuner, and full Pentium computer. The system is packaged
in a single chassis with all the computer parts in a removable drawer for ease
of upgrade and maintenance. The Company believes that initial reaction to the
"all in one" has been very positive. The Company further believes that the "all
in one" product will have applications in the Government and with customers
outside of the Government. The Company is currently developing its "all in one"
marketing strategy to appeal to both the Government and the private markets.
FILESERVERS
The Company is preparing to enter the lucrative high end file server market
by introducing a custom line of fault tolerant fileservers based on Intel
Pentium Pro (P6) Processors. The Company markets a single, dual and quad version
of the processors. All of such processors are Microsoft Windows NT, Novell,
Banyan, and Token Ring compatible. The new servers will offer the latest in
technology which the Company believes will provide it with a significant
price/performance advantage over its competitors, such as Dell and Compaq. The
Company believes that Compaq and Dell are realizing significant margins in the
server market. The Company is presently manufacturing servers as a subcontractor
to Lockheed Martin on the multi-billion dollar worldwide Defense Messaging
System (DMS). DMS is intended to be the largest private messaging network in the
world supporting approximately 2,000,000 users.
NOTEBOOKS
The Company manufacturers, on a brand name basis, a state-of-the-art
notebook with a 12.1" active matrix screen, 8 speed CD-Rom, built-in stereo
sound, infrared communication, and many other advanced features. The system is
assembled and configured in the United States by Dunn and meets the Federal
Governments stringent Buy American and Trade Agreements Act requirements.
STRATEGY
The Company is an experienced Government contractor with significant
proposal and program management expertise. The Company primarily pursues
Government business by targeting two types of contracts, Indefinite Delivery and
Indefinite Quantity (IDIQ), and GSA Schedule business contracts. The Company has
determined that the Government market offers unique and significant
opportunities for a custom computer manufacturer. Acting as a prime or
subcontractor allows the Company to utilize its core expertise in Government
contracting and custom assembly manufacturing. The Company believes that it has
the ability to quickly react to the product requirements and the terms and
conditions of the Government contracts. By primarily concentrating on the
Government market, the Company believes that it has certain business advantages
over mass market manufacturers such as Dell, Compaq, Gateway, IBM, etc. (which
generally design and manufacture standard systems targeted at a broader market
while the Company designs and manufactures systems specifically for the
Government). Specifically, the Company believes that with its focus on a single
vertical market (i.e., the Government), while offering a wide variety of
horizontal computer applications, it has the following advantages:
SIGNIFICANT INVENTORY RISK IS ELIMINATED BECAUSE INVENTORY IS PROCURED
TO SATISFY FIRM FIXED PRICE CONTRACTS. The computer industry's volatile
inventory such as memory and processors are purchased to satisfy specific
contract requirements. Competitors like Compaq and IBM generally purchase or
commit to inventory significantly in advance to meet its forecasted or
historical requirements.
THE COMPANY'S PRODUCTS ARE BUILT TO CONTRACT ORDER ALLOWING THE COMPANY
TO TAKE ADVANTAGE OF THE LATEST IN TECHNOLOGY AND MARKET PRICES. Typically,
the Government requires delivery 30 days after ordering which allows the
Company to purchase the latest technology at the then prevailing prices
20
<PAGE>
while not incurring any extra expenses for ordering the technology on a rush
basis. The Company believes that, by purchasing the latest technology, it is
able to offer the "best of the breed" products.
RECEIVABLE COLLECTIONS AND BAD DEBT ARE SIGNIFICANTLY REDUCED DUE TO THE
STABILITY OF THE GOVERNMENT. The Government is a reliable payer who by law
(Prompt Payment Act) must pay interest to suppliers after 30 days. In the 9
years the Company has been in business, it has not experienced a bad debt
from the Government.
LESS MARKETING EXPENSES DUE TO CONSOLIDATED MARKET. Although the
Company intends to increase its marketing efforts after the Offering, the
Company, as compared with its competitors, can allocate less advertising
dollars to reach its buyers. Print advertising in the two main IT
periodicals will reach nearly 100% of the market. Travel is greatly reduced
because the Company's headquarters are located in the Washington DC area.
CUSTOMIZATION OF PRODUCTS CAN BE ACCOMPLISHED EASILY BECAUSE PRODUCTS
ARE PURCHASED TO SATISFY A SPECIFIC CONTRACT. The Company's parts are
selected specifically with customization, upgrade, and serviceability goals.
The Company's systems, unlike most competitors' systems, are not designed
for the mass market but rather for ease of modification, upgrade and repair.
Further, in the event that the Company develops an improved product or
wishes to change the price of one or several of its products, the GSA
Schedule has a built in mechanism which allows the Company to amend the
contract several times per year.
HISTORICAL PRICE DECREASES IN COMPUTER PARTS, SUCH AS MEMORY,
PROCESSORS, AND COMPUTER HARD DISKS ALLOW THE COMPANY TO INCREASE PROFIT
MARGINS OVER THE LIFE OF THE CONTRACT. During the life of a contract, the
Company has the opportunity to modify the contract with the latest
technology offering the Government lower prices and more power while
increasing profit margins. Although the Government uses multi-year fixed
price contracts, it is impossible to predict future technology changes and
pricing. Therefore the Government normally puts a "technology enhancement or
refresh clause" in all computer contracts. The clause encourages suppliers
to keep the contract refreshed with the latest technology.
The Company anticipates, although there can be no assurance, that the market
will continue to grow even as the Government down sizes. The Company's
client/server products, although custom configured, are used in everyday office
tasks as productivity tools. The Government is on its third generation of
personal computers and is a well educated user of technology. In many ways, the
Government leads industry in the adaptation and use of modern technology tools
such as personal computers. Based upon its general knowledge of the computer
industry, the Company believes that the Government typically upgrades its
information technology every two to three years.
The Government, although perceived as difficult to understand and work with,
offers the educated supplier unique opportunities. The Company's management
includes experienced and highly trained federal contractors and computer
specialists. The Company believes that its management's understanding of the
subtleties of this unique market provides the Company with a significant
advantage in penetrating and making profits in the Government arena.
MARKETING AND SALES
The Company uses an in-house sales force and program managers to market its
products and services. Although Dunn markets nationally, the Company's marketing
efforts are concentrated in the Washington DC metropolitan area. The Washington
metropolitan area (DC, VA, MD) accounts for 68% of all Government computers
procured. The Company's sales to the Government result primarily from submission
of proposals directly to the Government in response to RFPs, as a prime
contractor or subcontractor, and direct marketing of products from the Company's
GSA product catalogue.
The Company believes that marketing will become increasingly important in
light of the new procurement legislation and plans to begin a major brand
recognition advertising campaign in two federal publications. The campaign will
emphasize performance, value, and past experience. New products such as
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servers and the "all in one" system will be featured. The Company believes that
its ability to offer state-of-the art products, past experience and an
established customer base will prove to be an advantage now that Government
customers can purchase large quantities of products from their GSA contract.
AGGRESSIVE, TARGETED MARKETING. The Company targets the Government which is
a computer literate, price conscious customer. The Company believes the
Government represents the most attractive segment of the microcomputer direct
marketing industry because it tends to demand leading edge, high performance
technology products. The Company intends to generates sales opportunities
through print media advertisements placed regularly in leading federal computer
publications, such as Federal Computer Week and Government Computer News. The
Company's advertisements feature testimonials, value-pricing, detailed product
descriptions, and full color photographs.
BUILDING CUSTOMER LOYALTY. The Company strives to build a strong
relationship with its customers. The Company believes that a key to building
customer loyalty is a team of knowledgeable and responsive account executives
and technical and support staff. The Company assigns each customer a trained
account executive, to whom subsequent calls to the Company will be directed. The
Company believes that these strong one-on-one relationships improve the
likelihood that the customer may consider the Company for future purchases.
Product support technicians are available 24 hours per day 7 days a week.
INNOVATIVE TECHNOLOGICALLY ADVANCED INFRASTRUCTURE. The Company uses
advanced, standard off the shelf and proprietary, real-time information systems
to support customer service, enhance the integration of the sales and accounting
functions, and allow the Company to respond effectively to opportunities.
UTILIZATION OF EMERGING MARKETING TECHNOLOGIES. The Company intends to
exploit emerging electronic commerce technologies and believes that the
Government will continue to expand and utilize these technologies. Internet and
on-line computer services are being used by the Government to advertise
opportunities as well as reference vendor information. The Company maintains a
web site on the Internet wherein its GSA catalogue can be referenced by
Government agencies. In addition, the Company provides the capability for
customers to download updated software and drivers that become available. The
Company intends to place its catalogs on diskette and CD-ROM. The Company
believes that its targeted customer base will have a greater acceptance of these
interactive services because its customers tend to have a greater familiarity
with technology products and services.
SERVICE AND SUPPORT
The Company believes that its dedication to prompt, efficient customer
service and technical support are important factors in customer retention and
overall satisfaction.
TOLL-FREE TECHNICAL SUPPORT. The Company provides toll-free technical
support to its customers 365 days a year. Product support technicians assist
customers with questions concerning compatibility, installation, determination
of defects and general questions of product use. The product support technicians
authorize on-site service or Return Material Authorization ("RMA") to the
Company for warranty service. The Company generally provides for a one-year RMA
warranty on its products, although some customers require a three-year on-site
service warranty. The Company makes service calls to its customers in the
Washington, D.C. area and maintains arrangements with national service
organizations to provide repair services outside the area.
SPECIALTY COMMUNICATIONS. Company employees use the Internet network to
enhance customer support and interbusiness correspondence. Customers can utilize
the Internet to contact their sales, customer service and technical support
representatives via text-based messages which are promptly returned.
COMPETITION
The Company believes that unique terms and conditions and technical
specifications of Government customers typically preclude national brand
companies (IBM, Compaq, Dell Computer, AST, Apple, etc.) from being successful
in responding to Government RFPs. Certain provisions of Government contracts
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<PAGE>
(i.e. long-term fixed prices, mandatory maintenance response times, liquidated
damages, etc.) make it difficult for and often not in the best interests of high
volume mass market companies to pursue. There can be no assurance that such
companies will not devote significant resources to the Government market in the
future.
Although the Company has significant competition from local and remote
companies, it believes that its record and past performance provides it with an
advantage in competing for Government work. There has been a consolidation in
the industry as a result of acquisitions and the failure of many firms. The
competition has settled into a small group of competitors mostly in the
Washington area, some of whom are not manufacturers but rather systems
integrators. The Government has recently made past performance in federal
contracting a significant criteria in vendor selection.
The following companies are direct competitors of the Company:
<TABLE>
<CAPTION>
COMPANY TYPE
- --------------------------------------------------- ---------------------------------------------------
<S> <C>
BTG, Inc., Fairfax, VA System Integrator
Winn Laboratories, Inc. Manassas, VA Manufacturer
International Data Products Corp. (IDP) Rockville, Manufacturer
MD
Sysorex Information Systems, Inc., Winchester, VA Systems Integrator
Cordant, Inc., Fairfax, VA Systems Integrator
Zenith Data Systems, Inc., IL Manufacturer
</TABLE>
The microcomputer products industry is highly competitive. Pricing is very
aggressive in the industry and the Company expects pricing pressures to continue
to intensify. The microcomputer products industry is also characterized by rapid
changes in technology and consumer preferences, short product life cycles and
evolving industry standards.
Microcomputers are marketed through several distribution channels including
traditional microcomputer retailers, computer superstores, consumer electronic
and office supply superstores, GSA merchandisers, and other resellers. There can
be no assurance that the Company can continue to compete effectively against
existing competitors or new competitors that may enter the market in the future.
There are many manufacturers of microcomputers, substantially all of which
have greater financial, marketing and technological resources than the Company.
The Company competes with manufacturers such as Compaq Computer Corporation,
Dell Computer Corporation, Gateway 2000, IBM and Packard Bell Computer
Corporation. These national brand companies, for a variety of reasons, have not
focused on the Government market, but there can be no assurance they will not do
so in the future. The Company competes with microcomputer manufacturers that
market their products via direct marketing. The principal elements of
competition are product reliability and quality, customization, price, customer
service, technical support and product availability.
FACILITIES
The Company operates in a 35,000 square foot facility in Loudoun County,
Virginia. The facility is owned and operated by C&T Partnership, an entity
comprised of Thomas Dunne, the Company's President, and his wife Claudia Dunne,
the Company's Vice President. In addition, the mortgage on the facility is
guaranteed by the Company. See "Certain Transactions." The Company presently
utilizes approximately 20,000 square feet of the facility. The remaining 15,000
square feet are occupied by two non-affiliated tenants with concurrent leases
terminating in May of 1998. It is anticipated that the Company will occupy the
vacated space. The existing space in the facility can produce approximately
35,000 systems per year on a single shift basis. The Company's lease rate is
$8.74 per square foot, including
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facility maintenance. The Company's lease expires in 1999, but it has an option
to renew for an additional five years.
The Company's goal is to increase production capacity to 200,000 units per
year. The Company believes this can be accomplished in the existing facility on
a three shift basis. The Company intends to have its facility certified for the
International Quality Standard ISO 9000, which requires it to meet certain
stringent requirements established in Europe, but adopted throughout the world,
to ensure that facilities' manufacturing processes, equipment and associated
quality control systems will satisfy specific customer requirements. The Company
believes that the ISO 9000 quality standard will become a significant factor in
the Government selection process. The Company estimates that it will take
approximately 18 months to obtain ISO 9000 certification, but there can be no
assurance such certification will be obtained.
PATENTS, TRADEMARKS AND LICENSES
The Company does not maintain a traditional research and development group,
but works closely with microcomputer product suppliers and other technology
developers to stay abreast of the latest developments in microcomputer
technology. While the Company does not believe that its continued success will
depend upon the rights to a patent portfolio, there can be no assurance that the
Company will continue to have access to existing or new technology for use in
its products.
The Company conducts its business under the trademarks and service marks
"Dunn Computer Corporation". The Company has a copyright on its corporate logo.
The Company believes its trademarks and service marks have significant value and
are an important factor in the marketing of its products.
Because most software used on Dunn Computer Corporation-configured computers
is not owned by the Company, the Company has entered into software licensing
arrangements with several software manufacturers, including Microsoft
Corporation.
USE OF TRADENAMES AND PRODUCT NAMES
The following trademarks or tradenames are used in this Prospectus to
identify the entities claiming the marks or names of their products: "Apple" for
Apple Computer, Inc., "AST" for AST Research Inc., "Compaq" for Compaq Computer
Corporation, " "Dell Computer" for Dell Computer Corporation, "IBM" for
International Business Machines Corporation, "Intel" and "Pentium" for Intel
Corporation, "Microsoft," "MS-DOS" and "Microsoft Windows" for Microsoft
Corporation, " "Novell" for Novell, Inc.
EMPLOYEES
As of November 30, 1996, the Company employed 31 persons, of whom three are
employed in executive capacities, seven are engaged in sales and marketing, two
are engaged in administrative capacities, and nineteen (19) are engaged in
operations. None of the Company's employees is covered by a collective
bargaining agreement. The Company considers its relationship with its employees
to be good.
LEGAL PROCEEDINGS
In fiscal 1996, Pulsar Data Sytems, a vendor, commenced an action against
the Company in the Circuit Court for Loudoun County, Virginia. The Plaintiff
seeks refund of approximately $124,000 in connection with a rebate offered by
the manufacturer of certain products purchased from Plaintiff by the Company.
The Company is vigorously contesting the action, both factually and legally, and
has asserted a counter claim contending that the disputed money rightfully
belongs to the Company.
The Company is not aware of any other legal proceedings.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the Directors
and Executive Officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
Thomas P. Dunne................................. 54 Chairman, Chief Executive Officer, and President
John D. Vazzana................................. 52 Executive Vice President, Chief Financial
Officer, Director
Claudia N. Dunne................................ 37 Vice President, Director
VADM E. A. Burkhalter, Jr., USN................. 68 Director
</TABLE>
The term of office of each Director is until the next annual meeting of
shareholders and until a successor is elected and qualified or until the
Director's earlier death, resignation or removal from office. Executive officers
hold office until their successors are chosen and qualify, subject to earlier
removal by the Board of Directors. Set forth below is a biographical description
of each director and executive officer of the Company based on information
supplied by each of them.
THOMAS P. DUNNE has been Chairman, Chief Executive Officer and President of
the Company since he founded the Company in 1987. From 1982-1987, Mr. Dunne was
the Director of Sales for Syntrex Corporation, a corporation that supplies
computer hardware and software to the legal profession. Prior thereto, Mr. Dunne
spent 12 years with Perkin Elmer Corporation, a Delaware corporation, where he
held several positions, including Director of North American Sales. Mr. Dunne
also served in the Untied States Army for two years where he was a Senior
Instructor with the Army Electronics Command. Mr. Dunne is married to Ms.
Claudia Dunne, the Vice President of the Company.
JOHN D. VAZZANA has been the Executive Vice President and Chief Financial
Officer of the Company and a Director since 1994. From 1992-1994, Mr. Vazzana
was the CEO of Hitchler Industry, a manufacturer of plastic lumber made from
recycled plastic. From 1986-1992, Mr. Vazzana was CEO of NRM Steelastic, a
company which he founded which was engaged in the manufacture of capital
equipment for the tire industry. In January 1992, NRM Steelastic filed for
bankruptcy protection primarily as a result of the loss of a significant portion
of its business due to the on-set of the Persian Gulf War. The corporate
bankruptcy has not been discharged to date. Prior thereto, Mr. Vazzana was
Executive Vice President for C3, Inc., a federal computer systems integrating
company which he co-founded in 1974.
CLAUDIA N. DUNNE, a co-founder of the Company, has been Vice President and a
Director of the Company since its inception. From 1985-1987, Ms. Dunne was
Federal Proposal Manager for Syntrex, Inc. From 1983-1985, Ms. Dunne was
Proposal Manager for Harris & Paulson, a company which, like Syntrex, Inc., sold
minicomputers and proprietary time and accounting software for law firms. Ms.
Dunne is married to Mr. Thomas Dunne, the President of the Company.
VICE ADMIRAL E. A. BURKHALTER, JR., has been a director of the Company since
January 1997. Mr. Burkhalter is currently the President of Burkhalter
Associates, Inc. a consulting firm providing services in the areas of
international and domestic strategy, management policy and technology
applications for both government and industry. Mr. Burkhalter is also currently
a member of the Director of Central Intelligence (DCI) Military Advisory Panel
and serves as an advisor to the Defense Intelligence Agency. He is also an
Officer and Director of the Navy Submarine League. Mr. Burkhalter has served as
an International Director for the Armed Forces Communications and Electronics
Association (AFCEA) and as Director of the Security Affairs Support Association
(SASA). Mr. Burkhalter spent 40 years as a member of the United States Navy,
during which time he held several positions, including Director of Strategic
Operations for the Chairman of the Joint Chiefs of Staff, commanding officer of
a nuclear
25
<PAGE>
submarine followed by command of a submarine division and squadron. During the
second half of Mr. Burkhalter's Naval career, he served principally in
intelligence assignments, including senior positions in Naval Intelligence, The
Defense Intelligence Agency, and as Director of the Intelligence Community
Staff. Upon retirement, he was senior military officer assigned to duty in the
U.S. Intelligence Community and directed the principal coordinating body for all
U.S. intelligence activities. As the Director of the Intelligence Community
Staff for four years, he had direct responsibilities for the integration of all
aspects of National and Military Intelligence, Space Programs and working
relationships with the Assistant Secretary of Defense for C3 I Systems, which
included the management of the Defense Reconnaissance Support Program Office.
Mr. Burkhalter has chaired a 20-person advisory panel for the Defense Advanced
Research Projects Agency concerning advanced space technology and light
satellite initiatives. He served on a review of antisubmarine warfare sponsored
by the U.S. Congress. He also chaired an interagency task force for then Vice
President George Bush which studied issues related to the prevention of
terrorists and narcotics traffickers from crossing U.S. borders. He is currently
the Chairman of the Attorney General's Policy Advisory Panel for Law Enforcement
Technology. Mr. Burkhalter is a 1951 graduate of the U.S. Naval Academy.
The Underwriter has the right, during the three year period following the
effective date of this Offering, to designate one director to serve as a member
of the Company's Board of Directors and the Company will use its best efforts to
elect such individual.
COMMITTEES OF THE BOARD
The Company's Board of Directors has an Audit Committee, comprised of the
two outside Directors, and a Compensation Committee, comprised of the two
outside directors and Thomas P. Dunne.
COMPENSATION OF DIRECTORS
The Company has not paid and does not presently propose to pay compensation
to any director for acting in such capacity, except for nominal sums for
attending Board of Directors meetings and reimbursement for reasonable expenses
in attending those meetings. As an incentive, each outside Director will be
granted a stock option for 10,000 shares of Common Stock at an exercise price
which management believes approximates their fair market value.
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EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid by the Company during each of the last two fiscal years to the Company's
Chief Executive Officer and to each of the Company's executive officers who
earned in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION -------------------
--------------------------------- NUMBER OF
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS GRANTED
- ---------------------------------------------------------------- --------- ---------- ---------- -------------------
<S> <C> <C> <C> <C>
Thomas P. Dunne................................................. 1995 $ 240,000 275,000
Chairman, Chief Executive Officer 1996 $ 240,000 $ -0-
and President
John D. Vazzana................................................. 1995 $ 240,000 275,000
Executive Vice President, Chief 1996 $ 240,000 $ -0-
Financial Officer, Director
</TABLE>
INCENTIVE STOCK OPTION PLAN
Under the Company's Incentive Stock Option Plan (the "Plan"), options to
purchase a maximum of 600,000 shares of Common Stock of the Company (subject to
adjustments in the event of stock splits, stock dividends, recapitalizations and
other capital adjustments) may be granted to employees, officers and directors
of the Company and other persons who provide services to the Company. As of the
date of this Prospectus, 232,500 of such options have been granted at an
exercise price of $4.15. The options to be granted under the Plan are designated
as incentive stock options or non-incentive stock options by the Board of
Directors which also has discretion as to the persons to be granted options, the
number of shares subject to the options and the terms of the option agreements.
Only employees, including officers and part time employees of the Company, may
be granted incentive stock options. Officers and directors who currently own
more than 5% of the outstanding stock are not eligible to participate in the
Plan.
The Plan provides that options granted thereunder shall be exercisable
during a period of no more than ten years from the date of grant, depending upon
the specific option agreement, and that, with respect to incentive stock
options, the option exercise price shall be at least equal to 100% of the fair
market value of the Common Stock at the time of the grant.
RETIREMENT PLANS
The Company established a discretionary contribution plan effective November
1, 1994 (the "401(k) Plan") for its employees who have completed three months of
service with the Company. The 401(k) Plan is administered by the Company and
permits pre-tax contributions by participants pursuant to Section 401(k) of the
Code up to the maximum allowable contributions as determined by the Code. The
Company may match participants' contributions on a discretionary basis. In
fiscal year 1995 and 1996, the Company contributed $.25 for each $1.00
contributed by the employees.
During the fiscal year ended October 31, 1995, the Company established a
defined benefit plan covering substantially all salaried employees (the "Pension
Plan"). The Pension Plan benefits are based on years of service and the
employee's compensation. The Company contributes, on an annual basis, amounts
sufficient to meet the minimum funding requirements set forth in the Employee
Retirement Income Security Act of 1974 ("ERISA"). Contributions are intended to
provide not only for benefits attributed to service to date, but also for those
expected to be earned in the future. The assets of the Pension Plan are invested
in money markets and corporate debt and equity instruments. The Company
contributed an aggregate of approximately $135,000 for the Pension Plan years
ending October 31, 1995 and 1996, which amount met the minimum funding
requirements under ERISA.
27
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, as of the date hereof,
and as adjusted to give effect to the Offering and the transactions contemplated
thereby, with respect to the beneficial ownership of the Common Stock by each
beneficial owner of more than 5% of the outstanding shares thereof, by each
director, each nominee to become a director and each executive named in the
Summary Compensation Table and by all executive officers, directors and nominees
to become directors of the Company as a group, both before and after giving
effect to the Offering.
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING
COMMON STOCK
BENEFICIALLY OWNED
NUMBER OF SHARES OF ------------------------------
NAME AND ADDRESS OF COMMON STOCK BEFORE AFTER
BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING(1) OFFERING(2)
--------------------------------- ------------------- --------------- -------------
<S> <C> <C> <C>
Thomas P. Dunne.................................................... 2,240,000(3) 56% 44.8%
c/o Dunn Computer Corporation
1306 Squire Court
Sterling, VA 20166
John D. Vazzana.................................................... 1,200,000 30% 24%
c/o Dunn Computer Corporation
1306 Squire Court
Sterling, VA 21066
Claudia N. Dunne................................................... 560,000(4) 14% 11.2%
c/o Dunn Computer Corporation
1306 Squire Court
Sterling, VA 20166
VADM E.A. Burkhalter............................................... 10,000(5) * *
All Executive Officers and Directors as a Group.................... 4,000,000 100% 80%
</TABLE>
- ------------------------
* less than 1%
(1) Calculated based upon 4,000,000 shares outstanding prior to the Offering and
does not give effect to 600,000 shares of Common Stock which are reserved
for issuance under the Plan.
(2) Assumes 5,000,000 shares outstanding after the Offering without giving
effect to the exercise of the Over-Allotment Option or the Underwriter's
Warrants.
(3) Mr. Dunne disclaims beneficial ownership of 560,000 shares of Common Stock
held by Claudia Dunne, the Company's Vice President, and Mr. Dunne's wife.
(4) Ms. Dunne disclaims beneficial ownership of 2,240,000 shares of Common Stock
held by Thomas Dunne, the Company's President and CEO, and Ms. Dunne's
husband.
(5) Represents shares of the Company's Common Stock underlying stock options
granted to Mr. Burkhalter pursuant to the Plan.
28
<PAGE>
CERTAIN TRANSACTIONS
The Company leases its facility from C&T Partnership, an entity owned and
controlled by Thomas and Claudia Dunne, both affiliates of the Company. In
addition, the mortgage on the facility is guaranteed by the Company. For the
terms of the lease and a description of the facility, see
"Business--Facilities."
On January 6, 1997, the Company issued options to purchase an aggregate of
232,500 of the Company's common stock to 17 affiliates of the Company. The
options vest over a period of 4 years and are exercisable at $4.15 per share.
The options expire on January 5, 2002.
On January 6, 1997, the Company entered into a share exchange agreement (the
"Share Exchange Agreement") with Dunn Computer Corporation, a Virginia
corporation, whereby such Virginia corporation became a wholly-owned subsidiary
of the Company. Pursuant to the Share Exchange Agreement, the Company exchanged
its stock on a 2,799.160251 for 1 basis with the holders of stock of the
Virginia corporation.
In July, 1994, John Vazzana, an officer of the Company, acquired an
aggregate of 428.7 shares of the Virginia corporation's Common Stock for an
aggregate consideration of $100,000. These shares were exchanged for 1,200,000
shares of the Company's Common Stock pursuant to the Share Exchange Agreement.
29
<PAGE>
DESCRIPTION OF SECURITIES
The following description of certain matters relating to the securities of
the Company does not purport to be complete and is subject in all respects to
applicable Delaware law and to the provisions of the Company's articles of
incorporation ("Articles of Incorporation") and bylaws (the "Bylaws"), and the
Underwriting Agreement between the Company and the Underwriter, copies of all
which have been filed with the Commission as Exhibits to the Registration
Statement of with this Prospectus is a part.
GENERAL
The Company is authorized by its Articles of Incorporation to issue an
aggregate of 20,000,000 shares of Common Stock, $.001 par value per share, and
2,000,000 shares, $.001 par value, of preferred stock (the "Preferred Stock").
Immediately prior to this Offering, an aggregate of 4,000,000 shares of Common
Stock are issued and outstanding. No shares of the authorized Preferred Stock
are issued and outstanding. All outstanding shares of Common Stock are of the
same class, and have equal rights and attributes.
PREFERRED STOCK
The Company is authorized by its Articles of Incorporation to issue a
maximum of 2,000,000 shares of Preferred Stock, in one or more series and
containing such rights, privileges and limitations, including voting rights,
dividend rates, conversion privileges, redemption rights and terms, redemption
prices and liquidation preferences, as the Board of Directors of the Company
may, from time to time, determine. No shares of Preferred Stock have been
issued, and the Company has no present plans to issue any Preferred Stock.
The issuance of shares of Preferred Stock pursuant to the Board's authority
described above could decrease the amount of earnings and assets available for
distribution to holders of Common Stock, and could otherwise adversely affect
the rights and powers, including voting rights, of such holders and may have the
effect of delaying, deferring or preventing a change in control of the Company.
The Board of Directors does not currently intend to seek stockholder approval
prior to any issuance of authorized but unissued Preferred Stock, unless
required by law.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of stockholders of the Company. In addition, such
holders are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the payment of preferential dividends with
respect to any shares of Preferred Stock that may be outstanding from time to
time. In the event of the dissolution, liquidation or winding up of the Company,
the holders of Common Stock are entitled to share ratably in all assets
remaining after payment of all liabilities of the Company, subject to the prior
distribution rights of the holders of any Preferred Stock that may be
outstanding at that time. All outstanding shares of Common Stock are, and when
issued, the shares of Common Stock offered hereby will be, fully paid and
nonassessable.
The holders of Common Stock do not have any subscription, redemption or
conversion rights, nor do they have any preemptive or other rights to acquire or
subscribe for additional, unissued or treasury shares. Accordingly, if the
Company were to elect to sell additional shares of Common Stock following this
Offering, persons acquiring Common Stock in this Offering would have no right to
purchase additional shares, and as a result, their percentage equity interest in
the Company would be reduced.
The holders of Common Stock do not have cumulative voting rights.
Accordingly, the holders of more than half of the outstanding shares of Common
Stock can elect all of the Directors to be elected in any election, if they
choose to do so. In such event, the holders of the remaining shares of Common
Stock
30
<PAGE>
would not be able to elect any Directors. The Board is empowered to fill any
vacancies on the Board created by the resignation, death or removal of
Directors.
Upon completion of this Offering (but without giving to the exercise of the
Over-Allotment Option, the Underwriter's Warrants or any outstanding stock
options), the Company's executive officers and directors will beneficially own
approximately 80% of the outstanding shares of Common Stock, and will be in a
position to control the voting results of certain actions required or permitted
to be taken by stockholders of the Company, including the election of directors.
However, as no voting agreement exists among these executive officers and
directors, each is able to vote as he or she may desire on any issue affecting
the Company.
DELAWARE ANTI-TAKEOVER LAW
Section 203 of the Delaware General Corporation Law (the "Delaware
anti-takeover law") generally prohibits a publicly held Delaware corporation
from engaging in a "business combination" with an interested stockholder for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless (i) the corporation has elected in its
original certificate of incorporation not to be governed by the Delaware
anti-takeover law (the Company has not made such an election), (ii) prior to
such date the Board of Directors of the corporation approved either the business
combination or the transaction in which the person became an interested
stockholder, (iii) upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the outstanding voting stock of the corporation excluding shares
owned by directors who are also officers of the corporation and by certain
employee stock plans, (iv) on or after such date the business combination is
approved by the Board of Directors of the corporation and by the affirmative
vote of at least 66 3/4% of the outstanding voting stock of the corporation that
is not owned by the interested stockholder, or (v) the majority of the
corporation's stockholders adopt an amendment to the corporation's certificate
of incorporation electing not to be governed by the Delaware anti-takeover law,
such amendment not being effective for 12 months following its adoption and not
applicable to any business combination between the corporation and a stockholder
who became an interested stockholder after its adoption. A "business
combination" generally includes mergers, asset sales and similar transactions
between the corporation and the interested stockholder, and other transactions
resulting in a financial benefit to the stockholder. An "interested stockholder"
is a person who, together with affiliates and associates, owns 15% or more of
the corporation's voting stock or who is an affiliate or associate of the
corporation and, together with his affiliates and associates, has owned 15% or
more of the corporation's voting stock within three years.
PERSONAL LIABILITY OF DIRECTORS
The Delaware General Corporation Law permits Delaware corporations to
eliminate or limit the personal liability of a director to the corporation for
monetary damages arising from certain breaches of fiduciary duties as a
director. The Company's Certificate of Incorporation includes such a provision
eliminating the personal liability of directors to the Company and its
stockholders for monetary damages for any breach of fiduciary duty as a
director, except (i) any breach of a director's duty of loyalty to the Company
or its stockholders; (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; (iii) for any
transaction from which the director derived an improper personal benefit; or
(iv) for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General Corporation Law.
Directors are also not insulated from liability for claims arising under the
federal securities laws. The foregoing provisions of the Company's Certificate
of Incorporation may reduce the likelihood of derivative litigation against
directors for breaches of their fiduciary duties, even though such an action, if
successful, might otherwise have benefitted the Company and its stockholders.
31
<PAGE>
The Company's Certificate of Incorporation also provides that the Company
shall indemnify its directors, officers and agents to the fullest extent
permitted by the Delaware General Corporation Law. The Company does not have
directors' and officers' liability insurance but may secure such insurance in
the future. Furthermore, the Company may enter into indemnity agreements with
its directors and officers for the indemnification of and advancing of expenses
to such persons to the fullest extent permitted by law.
TRANSFER AGENT
The Transfer Agent for the Common Stock of the Company is Continental Stock
Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this Offering, the Company will have 5,000,000
shares of Common Stock outstanding. In addition, the Company has reserved for
issuance 600,000 shares upon the exercise of options eligible for grant under
the Company's Stock Option Plan, 232,500 of which have been granted. Of the
shares of Common Stock to be issued and outstanding after this Offering, the
1,000,000 shares of Common Stock offered hereby (plus any additional shares sold
upon exercise of the Over-Allotment Option) will be freely tradeable without
restriction or further registration under the Act, except for any shares
purchased or held by an "affiliate" of the Company (in general, a person who has
a control relationship with the Company) which will be subject to the
limitations of Rule 144 adopted under the Act ("Rule 144"). The remaining
4,000,000 shares of Common Stock are "restricted securities" as that term is
defined under Rule 144, and may not be sold unless registered under the Act or
exempted therefrom. All of the foregoing shares are now eligible to be sold in
accordance with the exemptive provisions and the volume limitations of Rule 144.
In general, under Rule 144, as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an "affiliate" of
the Company, (or persons whose shares are aggregated), who for at least two
years has beneficially owned restricted securities acquired directly or
indirectly from the Company or an affiliate of the Company in a private
transaction is entitled to sell in brokerage transactions within any three-month
period, a number of shares that does not exceed the greater of (i) 1% of the
total number of outstanding shares of the same class, or (ii) if the stock is
quoted on the NASDAQ National Market System, the average weekly trading volume
in the stock during the four calendar weeks preceding the day notice is given to
the Securities and Exchange Commission with respect to such sale. A person (or
persons whose shares are aggregated) who is not an affiliate and has not been an
affiliate of the Company for at least three months immediately preceding the
sale and who has beneficially owned restricted securities for at least three
years is entitled to sell such shares pursuant to subparagraph (k) of Rule 144
without regard to any of the limitations described above.
All of the Company's directors and executive officers, (who hold in the
aggregate 4,000,000 shares), have agreed not to sell, offer to sell or otherwise
dispose of any shares of the Company's Common Stock until 180 days from the date
of this Prospectus, except pursuant to gifts or pledges in which the donee or
pledgee agrees to be bound by such restrictions, without the prior written
consent of the Underwriter. These agreements are enforceable only by the parties
thereto, and are subject to rescission or amendment at any time without approval
of other stockholders.
Sales of the Company's Common Stock by certain of the present stockholders
in the future, under Rule 144, may have a depressive effect on the price of the
Company's Common Stock.
32
<PAGE>
UNDERWRITING
The Company has agreed to sell, and the Underwriter has agreed, subject to
the terms and conditions of the Underwriting Agreement, to purchase from the
Company on a firm commitment basis, 1,000,000 shares of Common Stock.
The Underwriter has advised the Company that it proposes to offer the
1,000,000 shares of Common Stock to the public at the public Offering price set
forth on the cover page of this Prospectus and that it may allow to selected
dealers who are members of the National Association of Securities Dealers, Inc.
("NASD"), concessions of not in excess of $ per share of Common Stock of
which not more than $ per share of Common Stock may be re-allowed to
certain other dealers. After the initial public Offering, the public Offering
price, concessions and reallowances may be changed by the Underwriter.
The Underwriting Agreement provides further that the Underwriter will
receive a non-accountable expense allowance of 3% ($35,000 of which has been
previously paid) of the aggregate public Offering price of the shares of Common
Stock sold hereunder (including any shares of Common Stock sold pursuant to the
Over-Allotment Option) (which allowance amounts to $150,000 or $172,500 if the
Over-Allotment Option is exercised in full).
The Company's existing stockholders have granted to the Underwriter the
Over-Allotment Option, which is exercisable for a period of 45 calendar days
after the closing of the Offering, to purchase up to an aggregate of 150,000
additional shares of Common Stock at the public Offering price, less
underwriting discounts and commissions, solely to cover over-allotments, if any.
The Company has agreed to sell to the Underwriter for $10 the Underwriter's
Warrants to purchase 100,000 shares of Common Stock. The Underwriter's Warrants
will be non-exercisable for one year after the date of this Prospectus.
Thereafter, for a period of four years, the Underwriter's Warrants will be
exercisable at $6.50 per share of Common Stock. The Underwriter's Warrants are
not transferable for a period of one year after the date of this Prospectus,
except to officers and partners of the Underwriter and to members of the selling
group and their officers and partners. The Company has also granted certain
registration rights to the holders of the Underwriter's Warrants.
For the life of the Underwriter's Warrants, the holders thereof are given,
at nominal cost, the opportunity to profit from a rise in the market price of
the Company's Common Stock with a resulting dilution in the interest of other
stockholders. Further, the holders may be expected to exercise the Underwriter's
Warrants at a time when the Company would in all likelihood be able to obtain
equity capital on terms more favorable than those provided in the Underwriter's
Warrants.
The Company has granted the Underwriter, for a period of three years after
the date of this Prospectus, a right of first refusal with respect to the
underwriting or placement of any public or private sale of debt or equity
securities (excluding sales to employees) by the Company or any subsidiary of
the Company.
The Company has agreed to retain the Underwriter as a financial consultant
to the Company for a period of 24 months after the Offering for an aggregate fee
of $60,000 payable in full upon consummation of the Offering.
The Company has agreed, for a period of one year after the date of this
Prospectus, not to issue any shares of Common Stock or Preferred Stock or any
warrants, options or other rights to purchase Common Stock or Preferred Stock
without the prior written consent of the Underwriter. Notwithstanding the
foregoing, the Company may issue shares upon exercise of any warrants or options
outstanding on the date hereof or to be outstanding upon completion of the
Offering pursuant to the terms thereof, and may issue shares reserved for
issuance under the 1997 Option Plan. The Company has also agreed to cause the
Company's current stockholders owning all of the Common Stock outstanding as of
the date hereof to
33
<PAGE>
enter into written agreements with the Underwriter pursuant to which such
stockholders shall agree not to sell any of their shares for a period of six
months after the date of Prospectus without the prior written consent of the
Underwriter.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriter against liabilities in connection with the
Offering, including liabilities under the Act.
The Company has agreed, if requested by the Underwriter at any time within
three years after the closing of the Offering, to nominate and use its best
efforts to elect a designee of the Underwriter as a director of the Company or,
at the Underwriter's option, as a non-voting advisor to the Company's Board of
Directors. Such designee may be a director, officer, partner, employee or
affiliate of the Underwriter. The person to be designated by the Underwriter has
not been identified to date.
The initial public Offering price of the shares of Common Stock offered has
been determined by negotiation between the Company and the Underwriter. Factors
considered in determining the Offering price of the shares of Common Stock
offered hereby included the business in which the Company is engaged, the
Company's financial condition, an assessment of the Company's management, the
general condition of the securities markets and the demand for similar
securities of comparable companies.
The foregoing is a brief summary of the provisions of the Underwriting
Agreement, the Underwriter's Warrants and other agreements referred to above and
does not purport to be a complete statement of their respective term and
conditions. Copies of such agreements have been filed as exhibits to the
Registration Statement of which this Prospectus is a part. See "Additional
Information."
34
<PAGE>
LEGAL OPINIONS
The legality of the Common Stock offered by this Prospectus will be passed
upon for the Company by Gersten, Savage, Kaplowitz, Fredericks & Curtin, LLP,
New York, New York. Certain legal matters will be passed upon by Stark & Stark,
P.C., Lawrenceville, New Jersey, counsel for the Underwriter in connection with
the Offering. Gersten, Savage, Kaplowitz, Fredericks & Curtin, LLP has
represented the Underwriter in the past and may do so again in the future.
EXPERTS
The consolidated financial statements of Dunn Computer Corporation at
October 31, 1996, and for each of the two years in the period ended October 31,
1996, appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their reports
thereon appearing elsewhere herein and in the Registration Statement, and are
included in reliance upon such reports given upon the authority of such firm as
experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement under the
Act with respect to the Common Stock offered hereby. This Prospectus omits
certain information contained in the Registration Statement and the exhibits
thereto, and references is made to the Registration Statement and the exhibits
thereto for further information with respect to the Company and the Common Stock
offered hereby. Statements contained herein concerning the provisions of any
documents are not necessarily complete, and in each instance reference is made
to the copy of such document filed as an exhibit to the Registration Statement.
Each such statement is qualified in its entirety by such reference. The
Registration Statement, including exhibits and schedules filed therewith, may be
inspected without charge at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549 and at the regional offices of the Commission located at 7 World
Trade Center, Suite 1300, New York, New York 10048, and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such materials may be obtained from the Public Reference Section of the
Commission, Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549, and its public reference facilities in New York, New York and Chicago,
Illinois upon payment of the prescribed fees. At the date hereof, the Company
was not a reporting company under the Securities Exchange Act of 1934, as
amended.
35
<PAGE>
INDEMNIFICATION FOR ACT LIABILITIES
The Certificate of Incorporation and By-laws of the Company provide that the
Company shall indemnify to the fullest extent permitted by Delaware law any
person whom it may indemnify thereunder, including directors, officers,
employees and agents of the Company. Such indemnification (other than as ordered
by a court) shall be made by the Company only upon a determination that
indemnification is proper in the circumstances because the individual met the
applicable standard of conduct. Advances for such indemnification may be made
pending such determination. Such determination shall be made by a majority vote
of a quorum consisting of disinterested directors, or by independent legal
counsel or by the stockholders. In addition, the Certificate of Incorporation
provides for the elimination, to the extent permitted by Delaware law, of
personal liability of directors to the Company and its stockholders for monetary
damages for breach of fiduciary duty as directors.
The Company proposes to obtain a directors and officers insurance and
company reimbursement policy. The policy, if obtained, would insure directors
and officers against unindemnified losses arising from certain wrongful acts in
their capacities and would reimburse the Company for such loss for which the
Company has lawfully indemnified the directors and officers.
The Company has also agreed to indemnify each director and executive officer
pursuant to an Indemnification Agreement with each such director and executive
officer from and against any and all expenses, losses, claims, damages and
liability incurred by such director or executive officer for or as a result of
action taken while such director or executive officer was acting in his capacity
as a director, officer, employee or agent of the Company.
Insofar as indemnification for liabilities arising under the Act may be
provided to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the 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
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 of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
36
<PAGE>
DUNN COMPUTER CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................................................... F-2
Consolidated Balance Sheet as of October 31, 1996.......................................................... F-3
Consolidated Statements of Income for the years ended October 31, 1995 and 1996............................ F-4
Consolidated Statements of Stockholders' Equity for the years ended October 31, 1995 and 1996.............. F-5
Consolidated Statements of Cash Flows for the years ended October 31, 1995 and 1996........................ F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
We have audited the accompanying consolidated balance sheet of Dunn Computer
Corporation as of October 31, 1996, and the related consolidated statements of
income, stockholders' equity and cash flows for the two years in the period
ended October 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Dunn Computer Corporation at October 31, 1996, and the consolidated results of
its operations and its cash flows for the two years in the period ended October
31, 1996 in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Vienna, Virginia
December 13, 1996, except Notes 1 and 11,
as to which the date is January 6, 1997
F-2
<PAGE>
DUNN COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
OCTOBER 31,
1996
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................................... $ 897,664
Accounts receivable, less allowance for doubtful accounts of $15,000.............................. 3,174,060
Inventory, less obsolescence reserve of $20,000................................................... 985,603
Investments....................................................................................... 150,000
------------
Total current assets................................................................................ 5,207,327
Property and equipment, net......................................................................... 63,763
Other assets........................................................................................ 3,540
------------
Total assets........................................................................................ $ 5,274,630
------------
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................................. $ 2,452,161
Accrued expenses.................................................................................. 285,244
Income taxes payable.............................................................................. 519,308
Deferred tax credit............................................................................... 11,086
Unearned revenue.................................................................................. 67,640
------------
Total current liabilities........................................................................... 3,335,439
Commitments
Stockholders' equity:
Preferred Stock, $.001 par value; 2,000,000 shares authorized, no shares issued and outstanding... --
Common Stock, $.001 par value; 20,000,000 shares authorized, 4,000,000 shares issued and
outstanding..................................................................................... 4,000
Additional paid-in capital........................................................................ 111,857
Retained earnings................................................................................. 1,823,334
------------
Total stockholders' equity.......................................................................... 1,939,191
------------
Total liabilities and stockholders' equity.......................................................... $ 5,274,630
------------
------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
DUNN COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
---------------------------
<S> <C> <C>
1995 1996
------------ -------------
Revenues......................................................... $ 7,491,452 $ 18,098,638
Costs of revenues................................................ 6,046,480 14,102,442
------------ -------------
Gross profit..................................................... 1,444,972 3,996,196
Selling and marketing............................................ 154,110 475,471
General and administrative....................................... 812,046 1,496,979
------------ -------------
Income from operations........................................... 478,816 2,023,746
Other income..................................................... 34,512 49,343
Interest expense................................................. (26,246) (57,925)
------------ -------------
Net income before income taxes................................... 487,082 2,015,164
Provision for income taxes....................................... 244,000 776,000
------------ -------------
Net income....................................................... $ 243,082 $ 1,239,164
------------ -------------
------------ -------------
Earnings per share............................................... $ .06 $ .31
------------ -------------
------------ -------------
Weighted average number of shares outstanding.................... 4,036,125 4,036,125
------------ -------------
------------ -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
DUNN COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RECEIVABLE
--------------------- PAID-IN FROM RETAINED
SHARES AMOUNT CAPITAL STOCKHOLDER EARNINGS TOTAL
---------- --------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1994................... 4,000,000 $ 4,000 $ 111,857 $(132,538) $ 341,088 $ 324,407
Cash receipts from stockholder.............. -- -- -- 32,538 -- 32,538
Net income.................................. -- -- -- -- 243,082 243,082
---------- --------- ---------- ----------- ------------ ------------
Balance at October 31, 1995................... 4,000,000 4,000 111,857 (100,000) 584,170 600,027
Cash receipts from stockholder.............. -- -- -- 100,000 -- 100,000
Net income.................................. -- -- -- -- 1,239,164 1,239,164
---------- --------- ---------- ----------- ------------ ------------
Balance at October 31, 1996................... 4,000,000 $ 4,000 $ 111,857 $ -- $ 1,823,334 $ 1,939,191
---------- --------- ---------- ----------- ------------ ------------
---------- --------- ---------- ----------- ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
DUNN COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-------------------------
<S> <C> <C>
1995 1996
----------- ------------
OPERATING ACTIVITIES
Net income............................................................................. $ 243,082 $ 1,239,164
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization...................................................... 25,441 32,300
Changes in operating assets and liabilities:
Accounts receivable.............................................................. (734,660) (951,553)
Inventory........................................................................ (515,426) 211,763
Other assets..................................................................... (8,000) 9,460
Accounts payable................................................................. 652,864 471,636
Accrued expenses................................................................. 309,471 (193,084)
Income taxes payable............................................................. 223,582 260,947
Deferred tax credit.............................................................. 9,399 (66,276)
Unearned revenue................................................................. -- 67,640
----------- ------------
Net cash provided by operating activities.............................................. 205,753 1,081,997
INVESTING ACTIVITIES
Purchases of property and equipment.................................................... (15,617) (21,040)
Purchase of investments................................................................ -- (150,000)
----------- ------------
Net cash used in investing activities.................................................. (15,617) (171,040)
FINANCING ACTIVITIES
Net payments on bank line of credit.................................................... (194,809) (252,231)
Repayment from stockholder............................................................. 32,538 100,000
----------- ------------
Net cash used in financing activities.................................................. (162,271) (152,231)
Net increase in cash and cash equivalents.............................................. 27,865 758,726
Cash and cash equivalents at beginning of the year..................................... 111,073 138,938
----------- ------------
Cash and cash equivalents at end of the year........................................... $ 138,938 $ 897,664
----------- ------------
----------- ------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid.......................................................................... $ 26,246 $ 57,925
----------- ------------
----------- ------------
Income taxes paid...................................................................... $ -- $ 581,000
----------- ------------
----------- ------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Dunn Computer Corporation (the "Corporation") was incorporated on July 27,
1987 under the laws of the Commonwealth of Virginia.
On January 3, 1997, Dunn Computer Corporation (the "Company"), a Delaware
corporation, was formed as a holding company for the stock of Dunn Computer
Corporation, the Virginia corporation. On January 6, 1997, the Board of
Directors and stockholders of the Corporation approved and effected a
2,799.160251 for 1 stock exchange with the Company whereby the holders of the
Corporation's Common Stock would receive 2,799.160251 shares of Common Stock in
the Company for each share of Common Stock in the Corporation. All references in
the accompanying consolidated financial statements as to the number of shares of
Common Stock and per-share amounts have been restated to reflect the stock
exchange. Also, the Company authorized 2,000,000 shares of Preferred Stock with
rights and preferences to be determined by the Board of Directors at a later
date.
The Company is engaged in the business of providing custom computer systems
and related equipment to businesses and government agencies.
2. SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents.
INVESTMENTS
At October 31, 1996, investments consisted of shares of common stock of a
privately-held internet company with a cost basis of approximately $150,000. The
Company believes that this carrying amount represents the lower of cost or
market. The Company is accounting for this investment using the cost method
since the Company's investment represents less than 20% of the privately-held
internet company's outstanding stock.
INVENTORY
Inventory is stated at the lower of cost or market as determined by the
first-in first-out (FIFO) method.
INCOME TAXES
The Company provides for income taxes in accordance with the liability
method.
REVENUES
The Company generally recognizes revenues based on shipment of products.
Revenues are earned principally pursuant to various contracts with agencies of
the Federal government and commercial customers. The Company generally does not
require collateral on such contracts. The length of the Company's contracts
generally range from one to three years.
F-7
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The products sold are generally covered by a warranty for periods ranging
from two to three years. The Company accrues a warranty reserve for revenues
recognized during the year to record estimated costs to provide warranty
services.
Unearned revenue relates to cash received from credit card sales as of
October 31, 1996 for which the related inventory was shipped subsequent to
October 31, 1996.
During the year ended October 31, 1995, the Company had revenues from two
agencies of the Federal government which represented 73% and 12% of total
revenues. During the year ended October 31, 1996, the Company had revenues from
two agencies of the Federal government which represented 22% and 14% of total
revenues. In addition, during 1996, the Company had revenues from two commercial
customers which represented 17% and 16% of total revenues.
EARNINGS PER SHARE
The Company's earnings per share calculations are based upon the weighted
average number of shares of Common Stock outstanding. Pursuant to the
requirements of Securities and Exchange Commission Staff Accounting Bulletin No.
83, options to purchase Common Stock issued at prices below the initial public
offering (the "IPO") price during the twelve months immediately preceding the
contemplated initial filing of the registration statement relating to the IPO,
have been included in the computation of the earnings per share as if they were
outstanding for all periods presented (using the treasury stock method assuming
repurchase of Common Stock at the estimated IPO price). In subsequent periods,
stock options and warrants under the treasury stock method will be included to
the extent that they are dilutive.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
RECENT PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation" which is effective for the
Company's fiscal 1997 consolidated financial statements. SFAS No. 123 allows
companies to account for stock-based compensation under either the new
provisions of SFAS No. 123 or the provisions of APB No. 25, but requires pro
forma disclosure in the footnotes to the consolidated financial statements as if
the measurement provisions of SFAS No. 123 had been adopted. The Company intends
to continue accounting for its stock-based compensation in accordance with the
provisions of APB No. 25. As such, the implementation of SFAS No. 123 will not
materially impact the financial position or results of operations of the
Company.
F-8
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment, including leasehold improvements, are stated at
cost. Property and equipment are depreciated and amortized using the
straight-line method over the estimated useful lives of five years. Leasehold
improvements are amortized over the lesser of the related lease term or the
useful life.
Property and equipment consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
1996
-----------
<S> <C>
Computer and office equipment.................................................... $ 69,626
Furniture and fixtures........................................................... 20,663
Leasehold improvements........................................................... 27,424
Vehicles......................................................................... 78,742
-----------
196,455
Less accumulated depreciation and amortization................................... (132,692)
-----------
$ 63,763
-----------
-----------
</TABLE>
4. BANK LINES OF CREDIT
In April 1996, the Company entered into a line of credit agreement with a
bank whereby the Company could borrow up to $2,000,000. Outstanding borrowings
bear interest at prime plus three-fourths of one percent. As of October 31,
1996, there were no outstanding borrowings under this line of credit facility.
The line of credit is secured by certain assets of the Company. Under the line
of credit agreement, the Company is required to maintain a net worth of
$1,250,000 and at October 31, 1996, the Company is in compliance with this
covenant. The Company's principal stockholders have personally guaranteed the
bank line of credit.
In November 1995, the Company repaid the outstanding portion of a $1,000,000
line of credit facility with a separate bank and subsequently canceled the line
of credit.
5. RELATED PARTY TRANSACTION
Two of the Company's principal stockholders acquired a building for the
purpose of leasing office space to the Company. In connection with the
acquisition of the building, the Company guaranteed the building's $1 million
mortgage. The two principal stockholders subsequently executed a noncancelable
operating lease with the Company (see Note 6).
6. LEASE COMMITMENTS
The Company leases office space under a noncancellable operating lease
agreement with two stockholders (see Note 5). The lease agreement terminates in
October 1999, but provides for a five year renewal at the Company's option. Rent
expense under this lease was $144,000 and $154,000 for the years ended October
31, 1995 and 1996, respectively.
F-9
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LEASE COMMITMENTS (CONTINUED)
Future minimum lease payments under noncancelable operating leases at
October 31, 1996 are as follows:
<TABLE>
<S> <C>
1997.............................................................. $ 179,799
1998.............................................................. 179,242
1999.............................................................. 176,679
2000.............................................................. 5,090
2001.............................................................. 424
---------
Total............................................................. $ 541,234
---------
---------
</TABLE>
7. RECEIVABLE FROM STOCKHOLDER
During fiscal year 1994, one of the Company's principal stockholders
purchased common stock for $100,000 in exchange for a demand note. This demand
note was repaid during December 1995. Another of the Company's principal
stockholders borrowed $32,538 from the Company during 1994 and repaid the amount
during the year ended October 31, 1995.
8. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Components of the Company's net deferred tax credit balance are as follows:
<TABLE>
<CAPTION>
OCTOBER 31,
1996
-----------
<S> <C>
Deferred tax assets:
Accrued expenses............................................................. $ 50,037
Asset reserves............................................................... 14,000
-----------
Total deferred assets............................................................ 64,037
Deferred tax credit:
Change from cash to accrual method for tax purposes.......................... 75,121
-----------
Net deferred tax credit........................................................ $ 11,086
-----------
-----------
</TABLE>
F-10
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
The components of the provision for income taxes for the years ended October
31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Current tax expense:
Federal....................................................... $ 188,242 $ 709,195
State......................................................... 35,340 133,081
---------- ----------
223,582 842,276
Deferred tax expense:
Federal....................................................... 17,355 (55,800)
State......................................................... 3,063 (10,476)
---------- ----------
20,418 (66,276)
---------- ----------
Total provision for income taxes...................................... $ 244,000 $ 776,000
---------- ----------
---------- ----------
</TABLE>
The reconciliation of income tax from the statutory rate of 34% is:
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------
<S> <C> <C>
1995 1996
---------- ----------
Tax at statutory rates................................................ $ 165,608 $ 685,156
Non-deductible expenses............................................... 58,675 9,610
State income tax net of federal benefit............................... 19,717 81,234
---------- ----------
$ 244,000 $ 776,000
---------- ----------
---------- ----------
</TABLE>
9. CONTINGENT LIABILITY
Pulsar Data Systems, a vendor, has filed a lawsuit against the Company
concerning a disputed payable in the amount of $124,200. While the ultimate
outcome of these matters is not known, the Company intends to vigorously dispute
the claim. The Company believes an adequate provision for the claim has been
made in the accompanying consolidated financial statements as of October 31,
1996.
10. RETIREMENT PLANS
401(K) PLAN
Effective April 1, 1995, the Company adopted a 401(k) Plan (the "Plan").
Employees are eligible to participate after completing six months of service and
attaining age 18. Employees can defer up to 15 percent of compensation. Employee
contributions are subject to Internal Revenue Service limitations. All employees
who contribute to the Plan are eligible to share in discretionary Company
matching contribution. During the years ended October 31, 1995 and 1996, the
Company contributed $4,469 and $3,300, respectively, to the Plan.
F-11
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. RETIREMENT PLANS (CONTINUED)
DEFINED BENEFIT PLAN
During the fiscal year ended October 31, 1995, the Company implemented a
defined benefit plan (the "Pension Plan") covering substantially all salaried
employees. The Pension Plan benefits are based on years of service and the
employee's compensation. The Company's funding policy is to annually contribute
amounts sufficient to meet minimum funding requirements set forth in the
Employee Retirement Income Security Act of 1974. Contributions are intended to
provide not only for benefits attributed to service to date, but also for those
expected to be earned in the future. The assets of the Pension Plan are invested
in money markets and corporate debt and equity instruments. The Company
contributed, in the aggregage, approximately $135,000 for the Pension Plan years
ending October 31, 1995 and 1996, which met the minimum funding requirements
under ERISA.
The following table sets forth the Pension Plan's funded status as reported
on activity, and amounts recognized in the Company's consolidated financial
statements:
<TABLE>
<CAPTION>
OCTOBER 31,
1996
-----------
<S> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of ($238,619).......... $ (320,973)
-----------
-----------
Projected benefit obligation..................................................... (320,973)
Pension Plan assets at fair value................................................ 168,336
-----------
Funded status--projected benefit obligation in excess of fair value of Pension
Plan assets.................................................................... $ (152,637)
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31,
---------------------
<S> <C> <C>
1995 1996
--------- ----------
Net periodic pension cost:
Service cost........................................................... $ 54,945 $ 59,066
Interest cost.......................................................... 12,810 17,892
Actual return on assets................................................ -- (33,982)
Net amortization and deferral.......................................... 6,832 38,127
--------- ----------
Total net periodic pension cost........................................ $ 74,587 $ 81,103
--------- ----------
--------- ----------
</TABLE>
Key assumptions used in the actuarial valuation were:
<TABLE>
<CAPTION>
OCTOBER 31,
1996
---------------
<S> <C>
Weighted average discount note................................................... 7.5%
Rate of return on assets:
Pre-retirement............................................................... 8.0%
Post-retirement.............................................................. 8.0%
</TABLE>
F-12
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SUBSEQUENT EVENTS
On January 6, 1997, the Company adopted the 1997 Stock Option Plan (the
"Plan"). Pursuant to the Plan, officers, directors and employees may receive
options to purchase Common Stock. The Company has reserved 600,000 shares to be
granted under this stock option plan. The Company's Board of Directors granted
232,500 options to purchase Common Stock to employees of the Company at $4.15
per share. These options vest over a stated period of time not to exceed four
years. All options were granted at a price which the Board of Directors believed
approximated the fair market value of the Common Stock at the date of grant.
On January 6, 1997, the Company amended the Pension Plan to change the
benefits to be paid out after retirement from 100% to 40% of its initial
liability.
F-13
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER, SOLICITATION OR SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS
PROSPECTUS.
------------------------
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 2
Risk Factors................................... 6
Use of Proceeds................................ 12
Dividend Policy................................ 12
Capitalization................................. 13
Dilution....................................... 14
Selected Financial Data........................ 15
Management's Discussion and
Analysis of Financial Condition and
Results of Operations......................... 16
Business....................................... 18
Management..................................... 25
Principal Stockholders......................... 28
Certain Transactions........................... 29
Description of Securities...................... 30
Shares Eligible for Future Sale................ 32
Underwriting................................... 33
Legal Opinions................................. 35
Experts........................................ 35
Additional Information......................... 35
Indemnification for Securities Act
Liabilities................................... 36
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 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.
DUNN COMPUTER
CORPORATION
1,000,000 SHARES OF COMMON STOCK
---------------------
PROSPECTUS
---------------------
NETWORK 1
FINANCIAL SECURITIES, INC.
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law, among other things, and
subject to certain conditions, authorizes the Company to indemnify its officers
and directors against certain liabilities and expenses incurred by such persons
in connection with claims made by reason of their being such an officer or
director. The restated Certificate of Incorporation and By-laws of the Company
provide for indemnification of its officers and directors to the full extent
authorized by law.
Reference is made to the Underwriting Agreement, the proposed form of which
is filed as Exhibit 1.1, pursuant to which the Underwriter agrees to indemnify
the directors and certain officers of the Registrant and certain other persons
against certain civil liabilities.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is a statement of the estimated expenses to be paid by the
Company in connection with the issuance and distribution of the securities being
registered:
<TABLE>
<S> <C>
SEC Registration Fee........................................... $ 1,939.39
NASD Filing Fee................................................ $ 1,140.00
NASDAQ Filing Fee.............................................. $25,000.00
Printing Engraving Expenses.................................... $75,000.00
Legal Fees and Expenses........................................ $125,000.00
Accounting Fees and Expenses................................... $60,000.00
Blue Sky Fees and Expenses..................................... $17,500.00
Transfer Agent and Registrar Fees and Expenses................. $ 3,500.00
Non-accountable expense allowance.............................. $150,000.00
Miscellaneous.................................................. $15,920.61
----------
Total.................................................... $475,000.00
----------
----------
</TABLE>
- ------------------------
* estimate
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Company has sold securities to one person,
as described below. There was no underwriters involved in the transaction and
there was no underwriting discounts or commissions paid in connection therewith,
except as disclosed below. The issuances of these securities were considered to
be exempt from registration under Section 4(2) of the Act, as amended, and the
regulations promulgated thereunder. The purchaser of the securities in such
transaction represented his intention to acquire the securities for investment
only and not with a view to or for sale in connection with any distribution
thereof and appropriate legends were affixed to the certificates for the
securities issued in such transaction. The purchaser of the securities in such
transaction had adequate access to information about the Registrant.
In July, 1994, John Vazzana, an officer of the Company, acquired an
aggregate of 428.7 shares of the Virginia corporation's Common Stock for an
aggregate consideration of $100,000. These shares were exchanged for 1,200,000
shares of the Company's Common Stock pursuant to the Share Exchange Agreement.
II-1
<PAGE>
ITEM 27. EXHIBITS
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.
1.2 Form of Selected Dealers Agreement.
3.1 Articles of Incorporation of the Registrant.
3.2 Articles of Incorporation and amendments thereto of Dunn Computer
Corporation, a Virginia Corporation.
3.3 By-laws, as amended, of Dunn Computer Corporation, a Virginia Corporation.
4.1* Form of Financial Advisory and Investment Banking Agreement with
Underwriter.
4.2 Form of Underwriter's Warrants.
4.3* Form of Common Stock Certificate.
5.1* Opinion of Gersten, Savage, Kaplowitz, Fredericks & Curtin, LLP.
10.1* 1997 Stock Option Plan.
10.2* Agreement dated April , 1996 by and between the Company and the General
Services Administration.
10.3* Share Exchange Agreement dated January 6, 1997 by and between the
Registrant and Thomas P. Dunne, John Vazzana, and Claudia Dunne.
11.1 Statement Regarding Computation of Earnings Per Share.
21.1* List of Subsidiaries of Registrant.
23.1 Consent of Ernst & Young LLP.
23.2* Consent of Gersten, Savage, Kaplowitz, Fredericks & Curtin, LLP.
27.0 Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by Amendment to this Registration Statement.
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to any charter provision, by-law contract arrangements statute,
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 small business issuer 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 small business issuer 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 Act and
will be governed by the final adjudication of such issue.
The undersigned small business issuer hereby 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
Act;
II-2
<PAGE>
(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;
(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 suit information in the registration statement.
(2) That, for the purpose of determining any liability under the Act,
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 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 small business issuer under Rule 424(b)(1), or (4) or 497(h),
under the Act as part of this registration statement as of the time the
Commission declared it effective.
(5) For determining any liability under the Act, treat each
post-effective amendment that contains a form of Prospectus as a new
registration statement at that time as the initial bona fide Offering of
those securities.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Act, the Registrant certifies that it
has reasonable grounds to believe that it meets all of the requirement for
filing on Form SB-2 and has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York on January 10, 1997.
DUNN COMPUTER CORPORATION
<TABLE>
<S> <C> <C>
By: /s/ THOMAS P. DUNNE
--------------------------------------
Thomas P. Dunne
</TABLE>
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints Thomas P. Dunn, President, his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same and all
exhibits thereto, and all documents in connection therewith, with the Securities
and Exchange Commission, granting said attorney-in-fact and agent, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Act, this Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ THOMAS P. DUNNE Chairman, Chief Executive
- ------------------------------ Officer and President January 10, 1997
Thomas P. Dunne
/s/ JOHN D. VAZZANA Executive Vice President,
- ------------------------------ Chief Financial Officer, January 10, 1997
John D. Vazzana and Director
/s/ CLAUDIA N. DUNNE Vice President and Director
- ------------------------------ January 10, 1997
Claudia N. Dunne
/s/ VADM E. A. BURKHALTER, Director
JR., USN
- ------------------------------ January 8, 1997
VADM E. A. Burkhalter, Jr.,
USN
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS PAGE NO.
- ------ -----------
<C> <S> <C>
1.1 Form of Underwriting Agreement............................................
1.2 Form of Selected Dealers Agreement........................................
3.1 Articles of Incorporation of the Registrant...............................
3.2 Articles of Incorporation and amendments thereto of Dunn Computer
Corporation, a Virginia Corporation.....................................
3.3 By-laws, as amended, of Dunn Computer Corporation, a Virginia
Corporation.............................................................
4.1* Form of Financial Advisory and Investment Banking Agreement with
Underwriter.............................................................
4.2 Form of Underwriter's Warrant.............................................
4.3* Form of Common Stock Certificate..........................................
5.1* Opinion of Gersten, Savage, Kaplowitz, Fredericks & Curtin, LLP...........
10.1* 1997 Stock Option Plan....................................................
10.2* Agreement dated April , 1996 by and between the Company and the General
Services Administration.................................................
10.3* Share Exchange Agreement dated January 6, 1997 by and between the
Registrant and Thomas P. Dunne, John Vazzana, and Claudia Dunne.........
11.1 Statement Regarding Computation of Earnings Per Share.....................
21.1* List of Subsidiaries of Registrant........................................
23.1 Consent of Ernst & Young LLP..............................................
23.2* Consent of Gersten, Savage, Kaplowitz, Fredericks & Curtin, LLP...........
27.0 Financial Data Schedule...................................................
</TABLE>
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* To be filed by Amendment to this Registration Statement.
<PAGE>
UNDERWRITING AGREEMENT
between
DUNN COMPUTER CORPORATION
and
NETWORK 1 FINANCIAL SECURITIES, INC.
Dated: ____________________, 1997
<PAGE>
TABLE OF CONTENTS
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1. Purchase and Sale of Securities............................................1
1.1 Firm Shares.....................................................1
1.1.1 Purchase of Firm Shares.........................................1
1.1.2 Delivery and Payment............................................2
1.2 Overallotment Option............................................2
1.2.1 Grant of Option.................................................2
1.2.2 Exercise of Option..............................................2
1.2.3 Delivery and Payment............................................3
1.3 Representative's Warrant........................................3
1.3.1 Purchase and Sale...............................................3
1.3.2 Delivery and Payment............................................3
2. Representations and Warranties of the Company
and the Selling Shareholders...............................................4
2.1 Representatives and Warranties of the Company...................4
2.1.1 Filings under Securities Laws...................................4
2.1.1.1 Pursuant to the Act.............................................4
2.1.1.2 Pursuant to the Exchange Act....................................5
2.1.2 No Stop or Other Orders.........................................5
2.1.3 Disclosures in Registration Statement...........................5
2.1.3.1 Representation as to Contents...................................5
2.1.3.2 Disclosure Regarding Contracts..................................6
2.1.3.3 Prior Securities Transactions...................................6
2.1.4 Changes After Dates in Registration Statement...................6
2.1.4.1 No Material Adverse Change......................................7
2.1.4.2 Recent Securities Transactions, Etc. ...........................7
2.1.5 Independent Accountants.........................................7
2.1.6 Financial Statements............................................7
2.1.7 Capitalization..................................................7
2.1.8 Representations Regarding Securities............................8
2.1.8.1 Outstanding Securities..........................................8
2.1.8.2 Securities Sold Hereunder.......................................8
2.1.9 No Registration Rights..........................................9
2.1.10 Representations Regarding This Agreement........................9
2.1.11 No Improper Payments...........................................10
2.1.12 No Defaults; Violations........................................10
2.1.13 Corporate Power; Licenses; Consents............................10
2.1.13.1 Conduct of Business............................................10
2.1.13.2 Required Consents..............................................10
2.1.14 Title to Property; Insurance...................................10
2.1.15 Litigation; Governmental Proceedings...........................11
2.1.16 Organization; Good Standing....................................11
2.1.17 Taxes..........................................................11
2.1.18 Transactions Affecting Disclosure to NASD......................12
2.1.18.1 Finders' Fees..................................................12
2.1.18.2 Payments Within Twelve (12) Months.............................12
2.1.18.3 Use of Proceeds................................................12
2.1.18.4 Insiders' NASD Affiliation.....................................12
</TABLE>
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2.1.19 Internal Accounting Controls...................................12
2.1.20 NASDAQ Listing.................................................13
2.1.21 Intangibles....................................................13
2.1.22 Employee Matters...............................................13
2.1.22.1 Relations With Employees.......................................13
2.1.22.2 Employee Benefit Plans.........................................14
2.1.23 Investment Company Representations.............................14
2.1.24 Officer's Certificate..........................................14
2.1.25 Lock-Up Agreements With Insiders...............................14
2.1.26 No Stabilization or Manipulation...............................15
2.1.27 Subsidiaries...................................................15
2.2 Representatives and Warranties of the Selling Shareholders.....15
3. Covenants of the Company..................................................16
3.1 Amendments to Registration Statement...........................16
3.2 Federal Securities Laws........................................16
3.2.1 Compliance.....................................................16
3.2.2 Filing of Prospectus...........................................17
3.2.3 Exchange Act Registration......................................17
3.3 Blue Sky Filings...............................................17
3.4 Delivery of Filings to Underwriters............................17
3.5 Effectiveness and Events Requiring Notice to the
Representative.................................................17
3.6 Financial Statements...........................................18
3.7 Reports to the Representative..................................18
3.7.1 Periodic Reports, Etc. ........................................18
3.7.2 Transfer Agent and Daily Transfer Sheets.......................19
3.8 Delivery of Representative's Warrant...........................19
3.9 Payment of Expenses............................................19
3.9.1 General Expenses...............................................19
3.9.2 Representative's Expenses......................................20
3.10 Application of Net Proceeds....................................21
3.11 Delivery of Earnings Statements to Security Holders............21
3.12 Reservation of Shares..........................................21
3.13 Designation of an Advisor or Director
and Board Meetings.............................................21
3.14 Management and Dissemination of Information....................22
3.15 Secondary Market Trading and Standard & Poor's.................22
3.16 Disqualification of Form S-1 (or other appropriate form).......22
3.17 Accountants....................................................22
3.18 Sale of Securities.............................................22
3.19 Issuances by Company...........................................23
3.20 Regulations Offerings..........................................23
3.21 Form S-8.......................................................23
3.22 Public Relations...............................................23
</TABLE>
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3.23 Due Diligence Investigation....................................23
3.24 Sale of Common Stock Within Six Months.........................24
3.25 Consulting Agreement...........................................24
3.26 Representative's Warrant.......................................24
3.27 Right of First Refusal.........................................26
3.28 Certificates and CUSIP Number..................................26
3.29 After Market Blue Sky Memorandum...............................26
3.30 Underwriting Materials.........................................26
3.31 Compliance with Legal Requirements.............................26
4. Conditions of the Underwriters' Obligations...............................27
4.1 Regulatory Matters.............................................27
4.1.1 Effectiveness of Registration Statement........................27
4.1.2 NASD Clearance.................................................27
4.1.3 No Blue Sky Stop Orders........................................27
4.2 Company Counsel Matters........................................27
4.2.1 Closing Date Opinion of Counsel................................27
4.2.2 Option Closing Date Opinion of Counsel.........................32
4.2.3 Reliance.......................................................32
4.3 Cold Comfort Letter............................................33
4.4 Certificates...................................................34
4.4.1 Officers' Certificates.........................................34
4.4.2 Chief Financial Officer's Certificate..........................34
4.5 No Material Changes............................................35
4.6 Delivery of Representative's Warrant...........................35
4.7 Opinion of Counsel for the Underwriter.........................35
4.8 Secondary Market Trading Memorandum............................36
4.9 Representative Sole Determinant of Break
of Conditions..................................................36
4.10 Indemnification................................................36
4.10.1 Indemnification of the Representative..........................36
4.10.2 Indemnification of the Company and the
Selling Shareholders...........................................37
4.10.3 Contribution...................................................37
4.10.3.1 Contribution Rights............................................37
4.10.3.2 Contribution Procedure.........................................38
4.11 NASDAQ Qualification...........................................38
4.12 Key Person Life Insurance......................................38
4.13 No Calamity....................................................39
4.14 No Qualifications..............................................39
4.15 No Change in Material or Conditions............................39
5. Default by an Underwriter.................................................39
5.1 Default Not Exceeding 10% of the Shares........................39
5.2 Default Exceeding 10% of the Shares............................39
5.3 Postponement of Closing Date...................................40
6. Underwriting Group........................................................40
</TABLE>
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7. Finder....................................................................40
8. Proceedings...............................................................40
9. Representations and Agreements to Survive Delivery........................40
10. Effective Date of This Agreement and Termination Thereof..................41
10.1 Effective Date....................................................41
10.2 Termination.......................................................41
10.3 Notice............................................................41
10.4 Expenses..........................................................41
10.5 Indemnification...................................................41
11. Miscellaneous.............................................................42
11.1 Notices...........................................................42
11.2 Headings..........................................................42
11.3 Amendment.........................................................42
11.4 Entire Agreement..................................................42
11.5 Binding Effect....................................................42
11.6 Governing Law; Jurisdiction.......................................43
11.7 Execution in Counterparts.........................................43
11.8 Waiver, Etc. .....................................................43
</TABLE>
(iv)
<PAGE>
INDEX OF DEFINITIONS
Term Section
- ---- -------
Act......................................................................2.1.1.1
Closing Date...............................................................1.1.2
Code......................................................................2.1.22
Commission...............................................................2.1.1.1
Common Stock...............................................................1.1.1
Company...................................................Introductory Paragraph
Effective Date.............................................................1.1.2
ERISA...................................................................2.1.22.2
ERISA Plan..............................................................2.1.22.2
Exchange Act.............................................................2.1.1.2
Firm Shares................................................................1.1.1
Insiders..................................................................2.1.25
Intangibles...............................................................2.1.21
NASD.......................................................................1.1.1
NASDAQ....................................................................2.1.20
Option Closing Date........................................................1.2.2
Option Shares..............................................................1.2.1
Overallotment Option.......................................................1.2.1
Preliminary Prospectus...................................................2.1.1.1
Prospectus...............................................................2.1.1.1
Registration Statement...................................................2.1.1.1
Regulations..............................................................2.1.1.1
Representative............................................Introductory Paragraph
Representative's Securities................................................1.3.1
Representative's Warrant...................................................1.3.1
Securities.................................................................1.3.1
Selling Shareholders......................................Introductory Paragraph
Shares.....................................................................1.2.1
Subsidiaries..............................................................2.1.27
Unaudited Financials.........................................................3.6
(v)
<PAGE>
1,000,000 SHARES
DUNN COMPUTER CORPORATION
Common Stock
UNDERWRITING AGREEMENT
New York, New York
Page
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[Date]
Network 1 Financial Securities, Inc.
as Representative of the
Several Underwriters
c/o Network Financial Securities, Inc.
The Galleria
Building Two, Penthouse
2 Bridge Avenue
Red Bank, New Jersey 07701-1106
Dear Sirs:
The undersigned, Dunn Computer Corporation, a Delaware corporation
(the "Company") hereby confirms its agreement with Network 1 Financial
Securities, Inc., a New Jersey corporation (being referred to herein variously
as "you" or the "Representative") and the other underwriters named in Schedule I
annexed hereto (the Representative and the other underwriters being collectively
called the "Underwriters" or individually an "Underwriter"), and the
Shareholders of the Company ("Selling Shareholders") listed on Schedule I
attached hereto and made a part hereof, as follows:
1. PURCHASE AND SALE OF SECURITIES.
1.1 FIRM SHARES.
1.1.1 PURCHASE OF FIRM SHARES. On the basis of the
representations and warranties and subject to the terms and conditions contained
herein, the Company agrees to issue and sell to the Underwriters 1,000,000
shares (the "Firm Shares") of the Company's Common Stock, $.001 par value per
share (the "Common Stock"), and the Underwriters agree to purchase from the
Company the Firm Shares, at a purchase price of Four and 50/100 ($4.50) Dollars
per Firm Share, which represents a 10% discount from the per share public
offering price, which shall be $5.00. The Underwriters may rely on soliciting
dealers who are members of the National Association of Securities Dealers, Inc.
("NASD") to participate in placing a portion of the offering and may offer the
Firm shares and the opinion shares (as defined in Section 1.2) at less than the
public offering price.
<PAGE>
1.1.2 DELIVERY AND PAYMENT. Delivery and payment for the Firm
Shares shall be made at 10:00 A.M., New York time, on or before the fifth
business day following the effective date (the "Effective Date") of the
Registration Statement (as hereinafter defined), or at such other time as shall
be agreed upon by the Representative and the Company, at the offices of the
Representative, or at such other place as shall be agreed upon by the
Representative and the Company. The date of delivery and payment for the Firm
Shares is called the "Closing Date." Payment for the Firm Shares shall be made
on the Closing Date by [ wire transfer, certified or bank cashier's check(s) in
New York Clearing House (next day) funds, payable to the order of the Company]
upon delivery to the Representative of certificates (in form and substance
complying with applicable law and satisfactory to the Representative)
representing the Firm Shares for the respective accounts of the Underwriters.
The Firm Shares shall be registered in such names and shall be in such
denominations as the Representative may request in writing at least two (2) full
business days prior to the Closing Date. The Company shall permit the
Representative to examine and package the Firm Shares for delivery, at least one
(1) full business day prior to the Closing Date. The Company shall not be
obligated to sell or deliver the Firm Shares, except upon tender of payment by
the Underwriters for all the Firm Shares.
1.2 OVERALLOTMENT OPTION.
1.2.1 GRANT OF OPTION. For the purposes of covering any
overallotments in connection with the distribution and sale of the Firm Shares,
the Underwriters, severally and not jointly, are hereby granted an option (the
"Overallotment Option") to purchase up to an additional 150,000 shares of Common
Stock (the "Option Shares") from the Selling Shareholders. The Option Shares
shall be resold to the public on the same terms as the Firm Shares. The Firm
Shares and the Option Shares are hereinafter collectively referred to as the
"Shares." The purchase price to be paid for each Option Share shall be the same
as the price paid for each Firm Share pursuant to Section 1.1.1 hereof.
1.2.2 EXERCISE OF OPTION. The Overallotment Option may be
exercised by the Representative on behalf of the Underwriters as to all or any
part of the Option Shares at any time, from time to time, within forty-five (45)
days after the Effective Date. The Underwriters shall not be under any
obligation to purchase any Option Shares prior to the exercise of the
Overallotment Option. The Overallotment Option granted hereby may be exercised
by the giving of oral notice to the Selling Shareholders from the
Representative, which must be confirmed by a letter or telecopy to the Selling
Shareholders by the Representative within 24 hours of such oral notice setting
forth the number of Option Shares to be purchased, the date and time for
delivery of and payment for the Option Shares and stating that the Option Shares
referred to therein are to be used for the purpose of covering overallotments in
connection with the distribution and
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<PAGE>
sale of the Firm Shares. If such notice is given two (2) full business days
prior to the Closing Date, the date set forth therein for such delivery and
payment shall be the Closing Date. If such notice is given thereafter, the date
set forth therein for such delivery and payment shall not be earlier than five
(5) full business days after the date of the notice. If such delivery and
payment for the Option Shares does not occur on the Closing Date, the date and
time of the closing for such Option Shares shall be as set forth in the notice
(the "Option Closing Date"). Upon exercise of the Overallotment Option, the
Selling Shareholders shall become obligated to convey to the Underwriters the
number of Option Shares specified in such notice, and, subject to the terms and
conditions set forth herein, each Underwriter shall be obligated to purchase the
percentage of the Option Shares as is equal to the percentage of Firm Shares
that such Underwriter is purchasing, as adjusted by the Representative so as to
avoid fractional shares.
1.2.3 DELIVERY AND PAYMENT. Payment for the Option Shares shall
be made by certified or bank cashier's check(s) in New York Clearing House (next
day) funds, payable to the order of the applicable Selling Shareholders and
shall be made at the offices of the Representative or at such other place as
shall be agreed upon by the Representative and the Selling Shareholders, upon
delivery to you of certificates representing the Option Shares being purchased
for the respective accounts of the Underwriters. The certificates representing
the Option Shares to be delivered shall be in such denominations and registered
in such names as the Representative requests not less than two (2) full business
days prior to the Closing Date or the Option Closing Date, as the case may be,
and shall be made available to the Representative for inspection, checking and
packaging at the aforesaid office of the Selling Shareholders' transfer agent or
correspondent not less than one (1) full business day prior to such Closing
Date.
1.3 REPRESENTATIVE'S WARRANT.
1.3.1 PURCHASE AND SALE. The Company hereby agrees to issue and
to sell to you on the Closing Date, a warrant for the purchase of an aggregate
of 100,000 shares of Common Stock (the "Representative's Warrant") for an
aggregate purchase price of $10.00. The Representative's Warrant and the shares
of Common Stock issuable upon exercise of the Representative's Warrant are
hereinafter referred to collectively as the "Representative's Securities." The
Shares and the Representative's Securities are hereinafter referred to
collectively as the "Securities."
1.3.2 DELIVERY AND PAYMENT. Delivery and payment for the
Representative's Warrant shall be made on the Closing Date. The Company shall
deliver to the Representative, upon payment therefor, certificates for the
Representative's Warrant in the name or names and in such denominations as the
Representative may request. The Representative's Warrant shall be exercisable
for a period of four (4) years commencing one (1) year after the Effective Date
at an initial exercise price per share of $6.50,
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<PAGE>
which represents 130% of the per share public offering price for the Shares and
shall be substantially in the form of the Representative's common stock purchase
warrant filed as an exhibit to the Registration Statement. In addition, the
Representative's Warrant shall not be transferable for a period of one year
following the Effective Date, except to officers and partners or the
Representative and to members of the selling group and their officers and
partners.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
SHAREHOLDERS.
2.1 REPRESENTATIVES AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to the Underwriters that:
2.1.1 FILINGS UNDER SECURITIES LAWS.
2.1.1.1 PURSUANT TO THE ACT. The Company has filed with the
Securities and Exchange Commission (the "Commission"), and has immediately
thereafter supplied to the Representative and its counsel two manually executed
copies of, together with all exhibits thereto, a registration statement and an
amendment or amendments thereto, on Form SB-2 (Registration No. 33-_____),
including any related preliminary prospectus (a "Preliminary Prospectus"), for
the registration of the Securities under the Securities Act of 1933, as amended
(the "Act"). Except as the context may otherwise require, such registration
statement, as amended, on file with the Commission at the time the registration
statement becomes effective (including the prospectus, financial 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 430A of the rules and regulations of the
commission under the Act "Regulations"), is hereinafter called the "Registration
Statement," and the form of the final prospectus dated the Effective Date (or,
if applicable, the form of final prospectus filed with the Commission pursuant
to Rule 424 of the Regulations), is hereinafter called the "Prospectus." The
Registration Statement has been declared effective on the date hereof. The
Registration Statement, the amendment(s) thereto, Prospectus and all other
documents filed with the SEC pursuant to the requirements of the Act shall
conform to the requirements of the Act and the Regulations in all material
respects and shall be in form and content satisfactory to counsel for matters
which relate to the Offering and other related transactions shall be
satisfactory in all material respects to the Representative's counsel. Second,
at least one week before the expected filing date of the Registration Statement,
the Company has supplied the Representative's legal counsel with a written
representation as to (a) the existence or nonexistence of any NASD affiliation
or association of any officer, director, or stockholder of unregistered
securities of the Company, (b) whether or not any unregistered securities of the
Company have been acquired by the NASD affiliated person during the twelve-month
period prior to
-4-
<PAGE>
filing the Registration Statement, and (c) whether or not key-man insurance has
been provided for any officer of the Company by any NASD affiliate. Finally, at
least ten (10) days prior to the expected filing date of the Registration
Statement, the Company shall submit the Registration Statement to the
Representative and its counsel.
2.1.1.2 PURSUANT TO THE EXCHANGE ACT. The Company represents
that it will prepare and file a Registration Statement with the SEC pursuant to
Section 12(g) of the Securities Exchange Act of 1934, ("Exchange Act"), and will
use its best efforts to have same declared effective by the SEC on an
accelerated basis on the day after the Effective Date, but only if necessary to
qualify the Securities for listing on the NASDAQ National Market System ("NMS")
in the event the Underwriter does not intend to commence trading on the
Effective Date. The Company understands that to register, it must prepare and
file with the Securities and Exchange Commission a General Form of Registration
of Securities (Form 8-A or Form 10). In addition, the Company agrees to the
requirement that its Securities be listed on the NASDAQ National Market System
on the Effective Date.
The Company agrees that for so long as the Common Stock is registered
under the Exchange Act, the Company will hold an annual meeting of stockholders
for the election of directors within 180 days after the end of each of the
Company's fiscal years and, within 150 days after the end of each of the
Company's fiscal years will provide the Company's stockholders with the audited
Financial statements of the Company as of the end of the fiscal year just
completed prior thereto. Such financial statements shall be those required by
Rule 14a-3 under the Exchange Act and shall be included in an annual report
pursuant to the requirements of such Rule.
2.1.2 NO STOP OR OTHER ORDERS. Neither the Commission, nor any
state regulatory authority, has issued any order preventing or suspending the
use of any Preliminary Prospectus or has instituted or threatened to institute
any proceedings with respect to such an order.
2.1.3 DISCLOSURES IN REGISTRATION STATEMENT.
2.1.3.1 REPRESENTATION AS TO CONTENTS. At the time the
Registration Statement became effective and at all times subsequent thereto up
to the Closing Date and any Option Closing Date, the Registration Statement and
the Prospectus shall contain all material statements that are required to be
stated therein in accordance with the Act and the Regulations, and shall in all
material respects conform to the requirements of the Act and the Regulations;
neither the Registration Statement nor the Prospectus, nor any amendment or
supplement thereto, on such dates, shall 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. When any Preliminary
-5-
<PAGE>
Prospectus was first filed with the Commission (whether filed as part of the
Registration Statement for the registration of the Securities or any amendment
thereof or pursuant to Rule 424(a) of the Regulations) and when any amendment
thereof or supplement thereto was first filed with the Commission, such
Preliminary Prospectus and any amendments thereof and supplements thereto
complied or will comply in all material respects with the applicable provisions
of the Act and the Regulations, and did not and will not contain an untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. The
representation and warranty made in this Section 2.1.3.1 does not apply to
statements made or statements omitted in reliance upon and in conformity with
written information furnished to the Company with respect to the Underwriters by
the Representative expressly for use in the Registration Statement or Prospectus
or any amendment thereof or supplement thereto. The Company acknowledges that
such information referred to in the immediately preceding sentence consists
solely of the information under the heading "Underwriting" in the Prospectus.
2.1.3.2 DISCLOSURE REGARDING CONTRACTS. The description in the
Registration Statement and the Prospectus of contracts, instruments and other
documents is accurate in all material respects and presents fairly the
information required to be disclosed. There are no contracts, instruments or
other documents of a character required to be described in the Registration
Statement or the Prospectus or to be filed with the Commission as exhibits to
the Registration Statement, which have not been so described or filed. Each
contract, instrument and other document (however characterized or described) to
which the Company is a party or by which its property or business is or may be
bound or affected and which is referred to in the Prospectus, or is material to
the Company's business, has been duly and validly executed, is in full force and
effect and is enforceable against the parties thereto in accordance with its
terms and none of such contracts, instruments of documents has been assigned by
the Company. Neither the Company nor, to the best knowledge of the Company, any
other party thereto is in default thereunder and no event has occurred which,
with the lapse of time or the giving of notice, or both, would constitute a
default by the Company thereunder.
2.1.3.3 PRIOR SECURITIES TRANSACTIONS. No securities of the
Company have been sold by the Company or by or on behalf of, or for the benefit
of, any person or persons controlling, controlled by, or under common control
with the Company, within three (3) years prior to the date hereof, except as
disclosed in the Registration Statement.
2.1.4 CHANGES AFTER DATES IN REGISTRATION STATEMENT.
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<PAGE>
2.1.4.1 NO MATERIAL ADVERSE CHANGE. Since the respective dates
as of which information is given in the Registration Statement and the
Prospectus, except as otherwise specifically stated therein, (i) there has been
no material adverse change in the condition, financial or otherwise, or in the
results of operations, assets, properties, business or business prospects of the
Company, including, but not limited to, any material loss or interference with
its business from fire, storm, explosion, flood or other casualty, whether or
not covered by insurance, or from any labor dispute or court or governmental
action, order or decree, whether or not arising in the ordinary course of
business, and (ii) there have been no transactions entered into by the Company,
other than those in the ordinary course of business, which are material with
respect to the condition, financial or otherwise, or to the results of
operations, business or business prospects of the Company.
2.1.4.2 RECENT SECURITIES TRANSACTIONS, ETC. Subsequent to the
respective dates as of which information is given in the Registration Statement
and the Prospectus, and except as may otherwise be indicated or contemplated
herein or therein, the Company has not (i) issued any securities or incurred any
liability or obligation, direct or contingent, for borrowed money; or (ii)
declared or paid any dividend or made any other distribution on or in respect to
its capital stock.
2.1.5 INDEPENDENT ACCOUNTANTS. To the best knowledge of the
Company, Ernst & Young, LLP, whose report is filed with the Commission as part
of the Registration Statement, are independent accountants as required by the
Act and the Regulations. The statements included in the Registration Statement
with respect to such accountants are true and correct in all material respects.
2.1.6 FINANCIAL STATEMENTS. The financial statements, including
the notes thereto and supporting schedules, if any, included in the Registration
Statement and Prospectus fairly present the financial position, the results of
operations and cash flows of the Company at the dates and for the periods to
which they apply; and such financial statements have been prepared in conformity
with United States generally accepted accounting principles, consistently
applied throughout the periods involved; and the supporting schedules, if any,
included in the Registration Statement present fairly the information required
to be stated therein. No other financial statements or schedules are required
to be included in the Registration Statement. The selected financial data set
forth in the Prospectus under the captions "Summary Financial Information,"
"Capitalization" and "Selected Financial Data" fairly present the information
set forth therein on the basis stated in the Registration Statement.
2.1.7 CAPITALIZATION.
2.1.7.1 The Firm Shares will represent twenty (20%) percent of
the issued and outstanding shares of the Company,
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<PAGE>
which may be issued under the Company's outstanding Common Stock (on a
post-offering basis) which may be issued under the Company's stock option plan.
The Company will supply the Underwriters with a list of all current stockholders
of the Company and all persons who possess securities exercisable or
exchangeable for, or convertible into, capital stock.
2.1.7.2 Except for the shares already issued and outstanding
and those to be offered in the Offering, no other shares of capital stock or
securities convertible or exercisable or exchangeable for, or convertible into,
capital stock shall be outstanding at the completion of the proposed Offering
without the consent of the Underwriter, which consent shall not be unreasonably
withheld.
2.1.8 REPRESENTATIONS REGARDING SECURITIES.
2.1.8.1 OUTSTANDING SECURITIES. All issued and outstanding
securities of the Company have been duly authorized and validly issued and are
fully paid and non-assessable; the holders thereof have no rights of rescission
with respect thereto, and are not subject to personal liability by reason of
being such holders; and none of such securities were issued in violation of the
preemptive rights of any holder of any security of the Company or similar
contractual rights granted by the Company. The outstanding options and
warrants[, if any,] to purchase shares of Common Stock constitute the valid and
binding obligations of the Company, enforceable in accordance with their terms.
The authorized Common Stock and any outstanding options and warrants to purchase
shares of Common Stock conform to all statements relating thereto contained in
the Registration Statement and the Prospectus. The offers and sales of the
outstanding Common Stock, and any options and warrants to purchase shares of
Common Stock, were at all relevant times either registered under the Act and
applicable state securities or Blue Sky Laws or were exempt from such
registration requirements.
2.1.8.2 SECURITIES SOLD HEREUNDER. The Securities have been
duly authorized and, when issued and paid for, will be validly issued, fully
paid and non-assessable and the holders thereof are not and will not be subject
to personal liability by reason of being such holders; the Securities are not
and will not be subject to the preemptive rights of any holders of any security
of the Company or similar contractual rights granted by the Company; and all
corporate action required to be taken for the authorization, issuance and sale
of the Securities has been duly and validly taken. When issued, the
Representative's Warrant will 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 and the
Representative's Warrant are enforceable against the Company in accordance with
their respective terms.
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2.1.9 NO REGISTRATION RIGHTS. No holder of any securities of the
Company or of any options or warrants of the Company exercisable for or
convertible or exchangeable into securities of the Company has the right to
require the Company to register any such securities of the Company under the Act
or to include any such securities in a registration statement to be filed by the
Company, including the Registration Statement. Any such holder who would
otherwise have such right has waived same.
2.1.10 REPRESENTATIONS REGARDING THIS AGREEMENT. The Company has
full power and authority, corporate and otherwise, to enter into this Agreement
and the Agreement governing the Representative's Warrant ("Representative's
Warrant Agreement") and to carry out the provisions and conditions, hereof and
thereof. This Agreement and the Representative's Warrant Agreement have been
duly and validly authorized by the Company and constitute, or when executed and
delivered will constitute, valid and binding agreements of the Company,
enforceable against the Company in accordance with their respective terms,
except (a) as such enforceability may be limited by bankruptcy, insolvency,
reorganization or similar laws offering creditors' rights generally, (b) as
enforceability of any indemnification and contribution provision may be limited
under the federal and state securities laws, and (c) that, the remedy of
specific performance and injunctive and other forms of equitable relief may be
subject to equitable defenses and to the discretion of the court before which
any proceeding therefor may be brought. The execution, delivery and performance
by the Company of this Agreement and the Representative's Warrant Agreement, the
consummation by the Company of the transactions herein and therein contemplated
and the compliance by the Company with the terms and conditions hereof and
thereof have been duly authorized by all necessary corporate action and do not
and will not, with or without the giving of notice or the lapse of time or both,
(i) result in a breach of, or conflict with any of the terms and provisions of,
or constitute a default under, or result in the creation, modification,
termination or imposition of any lien, charge or encumbrance upon any property
or assets of the Company pursuant to the terms of any indenture, mortgage, deed
of trust, 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 may be bound
or to which any of the property or assets of the Company is subject, which
breach, conflict or default would have a material adverse effect on the
condition (financial or other), business, prospects or properties of the
Company; (ii) result in any violation of the provisions of the Certificate of
Incorporation or the By-Laws of the Company; (iii) violate any existing
applicable law, rule, regulation, judgment, order or decree of any governmental
agency or court, domestic or foreign, having jurisdiction over the Company or
any of its properties or business; or (iv) have a material adverse effect on any
permit, license, certificate, registration approval, consent, license or
franchise concerning the Company.
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2.1.11 NO IMPROPER PAYMENTS. Neither the Company nor, to the
Company's knowledge, any director, officer, employee or agent of the Company has
made any payment of funds of the Company or received or retained any funds in
violation of any law, rule or regulation or of a character required to be
disclosed in the Prospectus.
2.1.12 NO DEFAULTS; VIOLATIONS. Except as set forth in the
Prospectus, no default exists in the due performance and observance of any
material term, covenant or condition of any license, contract, indenture,
mortgage, deed of trust, 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
may be bound or to which any of the properties or assets of the Company is
subject. The Company is not in violation of any term or provision of its
Certificate of Incorporation or By-Laws. The Company is not in violation of any
franchise, license, permit, applicable law, rule, regulation, judgment or decree
of any governmental agency or court, domestic or foreign, having jurisdiction
over the Company or any of its properties or business, which violation would
result in a material adverse change in the condition (financial or other),
business, prospects or properties of the Company.
2.1.13 CORPORATE POWER; LICENSES; CONSENTS.
2.1.13.1 CONDUCT OF BUSINESS. The Company has all requisite
corporate power and authority, and has all necessary authorizations, approvals,
orders, licenses, certificates and permits of and from all governmental
regulatory officials and bodies to own or lease its properties and conduct its
business as described in the Prospectus, and the Company is and has been doing
business in compliance with all such authorizations, approvals, orders,
licenses, certificates and permits and all federal, state and local laws, rules
and regulations, except where the failure to so comply would not have a material
adverse effect on the condition (financial or other), business, prospects or
properties of the Company.
2.1.13.2 REQUIRED CONSENTS. The Company has obtained all
consents, authorizations, approvals and orders required in connection with the
execution and delivery of this Agreement and the Representative's Warrant
Agreement and the performance of its obligations hereunder and thereunder. No
consent, authorization or order of, and no filing with, any court, government
agency or other body is required for the valid issuance, sale and delivery of
the Securities pursuant to this Agreement and the Representative's Warrant
Agreement and as contemplated by the Prospectus, except those required under
applicable federal and state securities laws.
2.1.14 TITLE TO PROPERTY; INSURANCE. The Company has good and
marketable title to, or valid and enforceable leasehold
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estates in, all items of real and personal property (tangible and intangible)
owned or leased by it, free and clear of all liens, encumbrances, claims,
security interests, defects and restrictions of any material nature whatsoever,
other than those referred to in the Prospectus. The Company has adequately
insured its properties against loss or damage by fire or other casualty and
maintains, in adequate amounts, such other insurance as is usually maintained by
companies engaged in the same business or in similar businesses.
2.1.15 LITIGATION; GOVERNMENTAL PROCEEDINGS. Except as set forth
in the Prospectus, there is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding pending or threatened
against, or involving the properties or business of, the Company which would
materially and adversely affect the financial position, prospects, value or the
operation or the properties or the business of the Company, or which question
the validity of the capital stock of the Company or this Agreement or of any
action taken or to be taken by the Company pursuant to, or in connection with,
this Agreement. There are no outstanding orders, judgments or decrees of any
court, governmental agency or other tribunal naming the Company and enjoining
the Company from taking, or requiring the Company to take, any action, or to
which the Company, its properties or business, is bound or subject.
2.1.16 ORGANIZATION; GOOD STANDING. The Company has been duly
organized and is validly existing as a corporation and is in good standing under
the laws of its state of incorporation. The Company is duly qualified and
licensed and in good standing as a foreign corporation in each jurisdiction in
which ownership or leasing of any properties or the character of its operations
requires such qualification or licensing.
2.1.17 TAXES. The Company has filed all returns (as hereinafter
defined) required to be filed with taxing authorities prior to the date hereof
or has duly obtained extensions of time for the filing thereof. The Company has
paid all taxes (as hereinafter defined) shown as due on such returns that were
filed and has paid all taxes imposed on or assessed against the Company. The
provisions for taxes payable, if any, shown on the financial statements filed
with or as part of the Registration Statement are sufficient for all accrued and
unpaid taxes, whether or not distributed, and for all accrued and unpaid taxes,
whether or not disputed, and for all periods to and including the dates of such
consolidated financial statements. No issues have been raised (and are
currently pending) by any taxing authority in connection with any of the returns
or taxes asserted as due from the Company, and no waivers of statutes of
limitation with respect to the returns or collection of taxes have been given by
or requested from the Company or any subsidiary. The term "taxes" mean all
federal, state, local, foreign, and other net income, gross income, gross
receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease,
service, service use, withholding, payroll, employment, excise, severance,
stamp, occupation, premium,
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property, windfall profits, customs, duties or other taxes, fees, assessments,
or charges of any kind whatsoever together with any interest and any penalties,
additions to tax, or additional amounts with respect thereto. The term
"returns" means all returns, declarations, reports, statements, and other
documents required to be filed in respect to taxes.
2.1.18 TRANSACTIONS AFFECTING DISCLOSURE TO NASD.
2.1.18.1 FINDERS' FEES. As of the Effective Date, there will be
no claims, payments, issuances, arrangements or understandings for services in
the nature of a finder's or origination fee with respect to the sale of the
Securities hereunder or any other arrangements, agreements, understandings,
payments or issuances with respect to the Company that may affect the
Representative's compensation, as determined by the NASD. The Company
acknowledges and agrees that the Underwriters will not proceed to perform
hereunder until they receive assurances, inform and substance satisfactory to
the Representative and its counsel, that, as of the Effective Date, there will
be no such fees. The Underwriters shall compensate any of their personnel who
may have acted in such capacities as they shall determine.
2.1.18.2 PAYMENTS WITHIN TWELVE (12) MONTHS. The Company has
not made any direct or indirect payments (in cash, securities or otherwise) to
(i) any person, as a finder's fee, investing fee or otherwise, in consideration
of such person raising capital for the Company or introducing to the Company
persons who provided capital to the Company, (ii) to any NASD member, or (iii)
to any person or entity that has any direct or indirect affiliation within the
twelve month period prior to __________, the date on which the Registration
Statement was filed with the Commission ("Filing Date") or thereafter, other
than payments to the Representative.
2.1.18.3 USE OF PROCEEDS. None of the net proceeds of the
offering will be paid by the Company to any participating NASD member or any of
its affiliates.
2.1.18.4 INSIDERS' NASD AFFILIATION. No officer, director of
the Company or, to the best knowledge of the Company, any holder of the
Company's unregistered securities has any direct or indirect affiliation or
association with any NASD member. To the best knowledge of the Company, no
beneficial owner of the Company's unregistered securities has any direct or
indirect affiliation or association with any NASD member. The Company will
advise the Representative and the NASD if the Company becomes aware of any 5% or
greater stockholder of the Company who is or becomes an affiliate or associated
person of an NASD member participating in the distribution.
2.1.19 INTERNAL ACCOUNTING CONTROLS. The Company maintains and
will continue to maintain a system of internal accounting control sufficient to
provide reasonable assurance that
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(i) transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
2.1.20 NASDAQ LISTING. As of the Effective Date, the Shares have
been approved for listing on the National Association of Securities Dealers
Automated Quotation ("NASDAQ") [National Market System ("NMS")].
2.1.21 INTANGIBLES. The Company owns or possesses the requisite
licenses or rights to use all trademarks, service marks, service names, trade
names, patents and patent applications, copyrights and other rights
(collectively, the "Intangibles") owned or used by it. The Company's
Intangibles which have been registered in the United States Patent and Trademark
Office and/or the United States Copyright Office have been fully maintained and
are in full force and effect. There is no claim or action by any person, or
proceeding pending or, to the Company's knowledge, threatened, and the Company
has not received any notice of conflict with the asserted rights of others,
which challenges the exclusive right of the Company with respect to any
Intangibles used in the conduct of the Company's business. To the Company's
knowledge, neither the Company's Intangibles, nor the Company's current
products, services and processes infringe on any Intangibles held by any third
party. To the best of the Company's knowledge, no others have infringed or are
infringing upon the Intangibles of the Company.
2.1.22 EMPLOYEE MATTERS.
2.1.22.1 RELATIONS WITH EMPLOYEES. The Company has generally
enjoyed a satisfactory relationship with its employees and is in compliance with
all federal, state and local laws and regulations respecting the employment of
its employees and employment practices, terms and conditions of employment and
wages and hours relating thereto. 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 or local 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 threatened against
or involving the Company or any predecessor entity, and none has ever occurred.
No issue concerning representation exists respecting the employees of the
Company and no collective bargaining agreement or modification thereof is
currently being negotiated by the Company. No grievance or arbitration
proceeding
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is pending or threatened under any expired or existing collective bargaining
agreement of the Company, if any.
2.1.22.2 EMPLOYEE BENEFIT PLANS. Other than as set forth in the
Registration Statement, the Company neither maintains, sponsors nor contributes
to, nor is it required to maintain, sponsor or contribute to, any program or
arrangement that is an "employee pension benefit plan," an "employee welfare
benefit plan," or a, "multi-employer plan" (each, an "ERISA 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"). The Company does
not, and has at no time, maintained or contributed to a defined benefit plan, as
defined in Section 3(35) of ERISA. If the Company does maintain or contribute
to a defined benefit plan, any termination of the plan on the date hereof would
not give rise to liability under Title IV 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 Internal Revenue Code of 1986, as
amended (the "Code"), which could subject the Company to any tax penalty for
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 that 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 "multi-employer
plan."
2.1.23 INVESTMENT COMPANY REPRESENTATIONS. The Company is not an
"investment company" or an "affiliated person" of, or "promoter" or "principal
underwriter" for, an "investment company," as such terms are defined in the
Investment Company Act of 1940, as amended.
2.1.24 OFFICER'S CERTIFICATE. Any certificate signed by any duly
authorized officer of the Company and delivered to you or to your counsel shall
be deemed a representation and warranty by the Company to the Representative as
to the matters covered thereby.
2.1.25 LOCK-UP AGREEMENTS WITH INSIDERS. The Company has caused to
be duly executed a legally binding and enforceable agreement pursuant to which
all officers, all directors of the Company and all Stockholders who own 5% or
more of the outstanding Common Stock of the Company or options, warrants or
other securities convertible into 5% or more of the Company's Common Stock and
the family members and affiliates (as defined in the securities laws)
(collectively, the "Insiders") of such persons agree not to sell any shares of
Common Stock or warrants or options to purchase Common Stock or such warrants,
options or convertible securities owned by them (either pursuant to Rule 144 of
the Regulations or otherwise) for a period of six (6) months following
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the Effective Date, except with the consent of the Representative (other than by
the laws of descent and distribution in the event such transferee signs an
agreement containing the lock-up restrictions contemplated by this Section). In
order to enforce such agreements, the Company shall impose stop transfer
instructions with respect to all such shares of Common Stock or warrants or
options to purchase Common Stock or securities convertible into Common Stock
until the end of such period.
2.1.26 NO STABILIZATION OR MANIPULATION. Neither the Company, nor
any of its officers, directors or controlling persons, has taken, directly or
indirectly, any action designed, or which reasonably might be expected, to cause
or result, under the Act or Exchange Act otherwise, in, or that has constituted,
stabilization or manipulation of the price of any Security or to facilitate the
sale or resale of the Shares.
2.1.27 SUBSIDIARIES. The representations and warranties made by
the Company in this Agreement shall, in the event that the Company has one or
more subsidiaries (the "subsidiary(ies)") also apply and be true with respect to
each subsidiary, individually (except as the context otherwise requires) and
taken as a whole with the Company and all other subsidiaries, as if each
representation and warranty contained herein made specific reference to each
subsidiary each time the term "Company" was used. Except as described in the
Prospectus, the Company does not own any interest in any corporation,
partnership, joint venture, trust or other business entity.
2.2 REPRESENTATIVES AND WARRANTIES OF THE SELLING SHAREHOLDERS. The
Selling Shareholders jointly and severally represent and warrant that:
2.2.1 (i) They have the full right, power and authority to execute
and deliver this Agreement; (ii) are, and on the Closing Date will be, the
owners of the Selling Shareholders' Stock to be sold pursuant to the terms
hereof, free and clear of all liens, charges, encumbrances and restrictions;
(iii) have paid the full purchase price required to be paid for such Stock;
(iv) on the Closing Date will have paid or provided for all stock transfer or
other taxes (other than income taxes) required to be paid by the Selling
Shareholders in connection with the sale and transfer of the Selling
Shareholders' Stock and all laws imposing such taxes will have been fully
complied with; (v) have, and on the Closing Date will have, the full legal
right, power and authority to sell, transfer and deliver the Selling
Shareholders' Stock hereunder and convey good and marketable title to such
Selling Shareholders' Stock, free and clear of all liens, charges, encumbrances,
equities, claims and restrictions whatsoever.
2.2.2 This Agreement has been duly authorized, executed and
delivered by the Selling Shareholders. This Agreement constitutes the valid and
binding agreements of the Selling Shareholders enforceable in accordance with
its terms.
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2.2.3 Neither the execution and delivery of this Agreement nor the
consummation of the transactions herein or contemplated nor the compliance with
the terms hereof by the Selling Shareholders will conflict with, or result in a
breach of any of the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, purchase agreement or other agreement or
instrument to which the Selling Shareholders or any one of them is a party or by
which the Selling Shareholders are bound and no consent, approval, authorization
or order of any court or governmental agency or body is required for the
consummation by the Selling Shareholders of the transactions on the Selling
Shareholders' part herein contemplated, except such as may be required under the
Act or under state securities or blue sky laws.
2.2.4 The Selling Shareholders have not, and at the Closing Date
will not have, taken, and agree that they will not take, directly or indirectly,
any action to cause or result in, or which has constituted, or might reasonably
be expected to constitute, the stabilization or manipulation of the price of the
Common Stock to facilitate the sale or resale of any of the Stock. Other than
as permitted by the Act and the rules and regulations thereunder, the Selling
Shareholders have not distributed and will not distribute any Preliminary
Prospectus the Prospectus or any other offering material in connection with the
offering and sale of the Stock.
3. COVENANTS OF THE COMPANY. The Company covenants and agrees with the
Underwriters as follows:
3.1 AMENDMENTS TO REGISTRATION STATEMENT. The Company shall deliver to
the Representative, prior to filing, any amendment or supplement to the
Registration Statement or Prospectus proposed to be filed after the Effective
Date and shall not file any such amendment or supplement to which the
Representative shall reasonably object. In addition, the Company shall
immediately forward to the Representative and its counsel the content of any
oral comments and copies of all comment letters received from the SEC.
3.2 FEDERAL SECURITIES LAWS.
3.2.1 COMPLIANCE. 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, the Regulations and the
Exchange Act and by the regulations under the Exchange Act, as from time to time
in force, so far as necessary to permit the continuance of sales of or dealings
in the Shares in accordance with the provisions hereof and the Prospectus. If
at any time when a Prospectus relating to the Shares 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 counsel for the Underwriters, the
Prospectus, as then amended or supplemented, includes any untrue statement of a
material fact or omits to state any material fact required to be
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stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or if it is necessary
at any time to amend the Prospectus to comply with the Act, the Company shall
notify the Representative promptly and prepare and file with the Commission,
subject to Section 3.1 hereof, an appropriate amendment or supplement in
accordance with Section 10 of the Act.
3.2.2 FILING OF PROSPECTUS. The Company shall file the Final
Prospectus (in form and substance satisfactory to the Representative) with the
Commission pursuant to the requirements of Rule 424 of the Regulations, if
applicable.
3.2.3 EXCHANGE ACT REGISTRATION. For a period of five years from
the Effective Date, the Company will use its best efforts to maintain the
registration of the Common Stock under the provisions of the Exchange Act.
3.3 BLUE SKY FILINGS. The Company shall endeavor in good faith, in
cooperation with the Representative and its counsel, at or prior to the time the
Registration Statement becomes effective, to qualify the Shares for offering and
sale under the securities laws of such jurisdictions as the Representative may
reasonably designate, provided that no such qualification shall be required in
any jurisdiction where, as a result thereof, the Company would be subject to
service of general process or would be required to qualify to do business as a
foreign corporation. In each jurisdiction where such qualification shall be
effected, the Company shall, unless the Representative agrees 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 be required by
the laws of such jurisdiction. In turn, the Representative, through its
counsel, agrees to likewise use its best efforts to effect such regulation and
to obtain such qualifications.
3.4 DELIVERY OF FILINGS TO UNDERWRITERS. The Company shall deliver to the
several Underwriters, without charge, from time to time during the period when
the Prospectus is required to be delivered under the Act or the Exchange Act,
such number of copies of each Preliminary Prospectus and the Prospectus as the
Underwriter may reasonably request and, immediately after the Registration
Statement or any amendment or supplement thereto is filed, deliver to the
Representative two (2) original executed Registration Statements, including
exhibits, and all post-effective amendments thereto and copies of documents
filed therewith or incorporated therein by reference and all original executed
consents of certified experts.
3.5 EFFECTIVENESS AND EVENTS REQUIRING NOTICE TO THE REPRESENTATIVE. The
Company shall cause the Registration Statement to remain effective until the
later of the completion by the Underwriters of the distribution of the Shares
(but in no event more than 9 months after the date on which the Registration
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Statement shall have been declared effective) or 25 days after the date on which
the Registration Statement shall have been declared effective and shall notify
the Representative immediately and shall promptly confirm the notice in writing
of (i) the effectiveness of the Registration Statement and any amendment
thereto, (ii) the issuance by the Commission of any stop order or of the
initiation, or the threatening, of any proceeding for that purpose, (iii) the
issuance by any state securities commission of any proceedings for the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction or of the initiation, or the threatening, of any proceeding for
that purpose, (iv) the mailing and delivery to the Commission for filing of any
amendment or supplement to the Registration Statement or Prospectus, (v) the
receipt of any comments or request for any additional information from the
Commission, and (vi) the happening of any event during the period described in
Section 3.4 hereof that makes any statement of a material fact made in the
Registration Statement or the Prospectus untrue or that requires the making of
any changes in the Registration Statement or the Prospectus in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. If the Commission or any state securities commission shall
enter a stop order or suspend such qualification at any time, the Company shall
make every reasonable effort to obtain promptly the lifting of such order.
3.6 FINANCIAL STATEMENTS. The Company shall furnish to the Representative
as early as practicable prior to the date hereof and the Closing Date, but no
later than two (2) full business days prior thereto, a copy of the latest
available unaudited interim financial statements (the "Unaudited Financials") of
the Company (which in no event shall be as of a date more than ninety (90) days
prior to the Effective Date) which have been read by the Company's independent
accountants, as stated in their letter to be furnished pursuant to Section 4.3
hereof.
3.7 REPORTS TO THE REPRESENTATIVE.
3.7.1 PERIODIC REPORTS, ETC. For a period of five (5) years after
the Effective Date, the Company shall furnish to the Representative, and to each
other Underwriter who may so request, copies of such financial statements and
other periodic and special reports as the Company from time to time furnishes
generally to holders of any class of its securities, and promptly furnish to the
Representative (i) a copy of each periodic report the Company shall be required
to file with the Commission, a copy of every press release and every news item
and article with respect to the Company or its affairs which was released by the
Company, (iii) copies of each Form SR, (iv) a copy of each Form 8-K or Schedules
13D, 13G, 14D-1 or 13E-4 received or prepared by the Company, and (v) such
additional documents and information with respect to the Company and the affairs
of any future subsidiaries of the Company as the Representative may from time to
time reasonably request.
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3.7.2 TRANSFER AGENT AND DAILY TRANSFER SHEETS. The Company
agrees to designate a mutually acceptable company as transfer agent for the
Company's securities or such other transfer agent as is mutually agreeable by
the Company and the Representative. For a period of three (3) years from the
Effective Date, the Company, at its expense, shall provide the Representative
with copies of the Company's daily transfer sheets. The Company shall cause its
depository (at the Company's expense) to fax a "special security position
report" to the Representative on a weekly basis.
3.8 DELIVERY OF REPRESENTATIVE'S WARRANT. On the Closing Date, the
Company shall execute and deliver to the Representative the Representative's
Warrant substantially in the form filed as an exhibit to the Registration
Statement.
3.9 PAYMENT OF EXPENSES.
3.9.1 GENERAL EXPENSES. The Company shall pay on each of the
Closing Date and any Option Closing Date to the extent not paid at the Closing
Date, all expenses incident to the performance of the obligations of the
Company under this Agreement, including, but not limited to, (i) the
preparation, printing, filing and mailing (including the payment of postage
with respect to such mailing) of the Registration Statement, the Preliminary
Prospectuses and the Prospectus and the printing and mailing of this Agreement,
the Agreement among Underwriters, the Selected Dealers' Agreement and related
documents, including the cost of all copies thereof and any amendments,
supplements or other materials relating thereto supplied to the Underwriters
and Selected Dealers in quantities as may be required by the Underwriters, (ii)
the printing, engraving, issuance and delivery of the Shares and the
Representative's Warrant, including any transfer taxes and other taxes payable
thereon, (iii) the qualification of the Shares under state or foreign
securities or Blue Sky laws, including the filing fees under such Blue Sky
laws, such fees to be paid upon commencement of such filings to the
Representative's counsel, at the request of such counsel,, including the costs
of printing and mailing the "Preliminary Blue Sky Memorandum," and all
amendments and supplements thereto, fees and disbursements for the
Underwriters' counsel and fees up to an aggregate of $27,500, $2,500 of which
shall be due and payable upon the commencement of such filings, which fees
shall be based upon such counsel's hourly billing rates, plus disbursements
relating to, but not limited by, long distance telephone calls, photocopying,
messengers, excess postage, overnight mail and courier services. Such fee
shall not include fees of special counsel if same is required to be incurred in
a merit review state which may require local counsel. The Representative will
not retain special counsel in any state without the prior consent of the
Company. In this connection, Blue Sky applications shall be made in such
states and jurisdictions as shall be required by the Representative ,and a
one-time fee of $7,500.00 payable to the Representative's counsel for the
preparation of the Secondary Market Trading Memorandum, (iv) costs
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associated with applications for assignments of a rating of the Shares by
qualified rating agencies, (v) filing fees incurred in registering the offering
with the NASD, (vi) advertising costs and expenses, including but not limited
to, costs of placing "tombstone" and "road show" advertisements in publications
that shall be selected by the Representative, (vii) fees and disbursements of
the transfer agent, (viii) the Company's expenses associated with "due
diligence" meetings arranged by the Representative; (ix) the preparation,
binding and delivery of four transaction "bibles" for the Representative; (x)
any listing of the Shares on the NASDAQ National Market System or on any
securities exchange or any listing in Standard & Poor's, and (xi) the fees and
disbursements of counsel for the Company and the accountant for the Company;
(xii) all reasonable traveling and lodging expenses incurred by the
Representative and its counsel in connection with visits to, and examination of
the Company's premises; (xiii) conferences and discussions between the Company
and the Underwriter which shall be held as required within the City of New York
in the State of New York. If meetings shall be held outside of these areas and
should the Representative be required to incur special travel expenses in
connection with such meetings and the Offering, the Company agrees to pay such
reasonable amount of pre-approved traveling and lodging out-of-pocket expenses
as may be necessarily incurred by the Representative and/or its counsel, payable
when incurred and billed; and (xiv) all other costs and expenses incident to the
performance of its obligations hereunder that are not otherwise specifically
provided for in this Section 3.9.1. Since an important part of the
Representative's due diligence investigation involves examination of both the
background of the principals of the Company and the Company's competitive
position in its industry, the Company agrees to engage and pay for, on the
Representative's behalf and as reasonably requested by the Representative (i) an
investigative search firm of the Representative's choice (which charges shall
not exceed $5,000) to conduct an investigation of the principals of the Company
to be mutually selected by the Representative and the Company; and (ii) a
consultant to be mutually selected by the Representative and the Company who is
an expert in the industry in which the Company does business (which charges
shall not exceed $5,000), to analyze the Company's prospects and respond tot he
Representative's questions and concerns. The Representative may deduct from the
net proceeds of the offering payable to the Company on the Closing Date, the
expenses set forth herein to be paid by the Company to the Representative and/or
to third parties. If this Agreement shall not be carried out for any reason
whatsoever, the Company shall remain liable for all of its actual out-of-pocket
expenses pursuant to this Section 3.9.1.
3.9.2 REPRESENTATIVE'S EXPENSES. The Company further agrees that,
in addition to the expenses payable pursuant to Section 3.9.1, upon the sale of
the Firm Shares or any of the Option Shares, it shall pay to the Representative,
as a non-accountable expense allowance, an amount equal to 3% of the gross
proceeds payable to the Company from the sale of the Firm Shares
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and the Option Shares, if any are sold, of which $35,000.00 has been paid to
date, and the Company shall pay the balance on the Closing Date as to the Firm
Shares and any Option Closing Date as to Option Shares, by certified or bank
cashier's check or, at the election of the Representative, by deduction from the
proceeds of the offering contemplated hereby. In the event that within six (6)
months of an alternate financing with an Underwriter other than the
Representative are thereby presented from proceeding with the Registration
Statement, then the Company will promptly pay the Representative $150,000 (in
addition to the advances referred to in Paragraph 8 and Underwriter's counsel's
Blue Sky Fees and expenses relating to the offering.
3.10 APPLICATION OF NET PROCEEDS. The Company shall apply the net proceeds
from the offering received by it in a manner consistent with the application
described under the caption "Use of Proceeds" in the Prospectus and shall file
such reports with the Commission with respect to the sale of the Shares and the
application of the proceeds therefrom as may be required pursuant to Rule 463
under the Act.
3.11 DELIVERY OF EARNINGS STATEMENTS TO SECURITY HOLDERS. The Company
shall make generally available to its security holders as soon as practicable,
but not later than [the first of the fifteenth full calendar month following the
Effective Date], an earnings statement (which need not be certified by
independent public or independent certified public accountants unless required
by the Act or the Regulations, but which shall satisfy the provisions of Rule
158(a) under Section 11(a) of the Act) covering a period of at least twelve (12)
consecutive months beginning on the date immediately after the Effective Date.
3.12 RESERVATION OF SHARES. The Company shall reserve and keep available
that maximum number of its authorized but unissued shares of Common Stock as is
issuable upon the exercise of the Representative's Warrant.
3.13 DESIGNATION OF AN ADVISOR OR DIRECTOR AND BOARD MEETINGS. The Company
agrees that it will, upon completion of the proposed Offering contemplated
herein, for a period of no less than three (3) years, engage a designee of the
Representative as to whom the Company has no reasonable objection either (solely
at the Representative's election) as a member of the Company's Board of
Directors (in which case the Company agrees to use its best efforts to secure
the election of such designee to its Board of Directors) or as an Advisor to its
Board of Directors. The Director or Advisor shall attend meetings of the Board,
receive all notices and other correspondence and communications sent by the
Company to members of its Board of Directors and receive compensation equal to
entitlement of other non-officer Directors. In addition, such Director or
Advisor shall be entitled to receive reimbursement for all costs incurred in
attending such meetings including but not limited to, food, lodging, and
transportation. The Company further agrees that, during said three (3) year
period, it shall schedule
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no less than four (4) formal and "in person" meetings of its Board of Directors
in each such year at which meetings such Advisor shall be permitted to attend as
set forth herein; said meetings shall be held quarterly each year and advance
notice of such meetings identical to the notice given to Directors shall be
given to the Advisor. Further, in the event the Representative shall not have
designated a Director or Advisor during such three (3) year period, the Company
and its principal shareholders shall give notice to the Representative with
respect to any proposed acquisitions, mergers, reorganizations or other similar
transactions.
3.14 MANAGEMENT AND DISSEMINATION OF INFORMATION. All necessary and
desirable measures will be taken by the Company to ensure management
continuity. Further, in order to avoid the occurrence of a de facto public
offering, the Company agrees and undertakes to consult with the Representative
prior to distribution to third parties of any financial information, news
releases, and/or other publicity regarding the Company, its business, or any
terms of the proposed offering. Copies of all documents which the Company or
its public relations advisors intend to distribute will be provided to the
Representative for review prior to such distribution.
3.15 SECONDARY MARKET TRADING AND STANDARD & POOR'S. The Company will take
all necessary and appropriate actions to be included in Standard and Poor's
Daily News and Corporation Records Corporate Descriptions for a period of five
years from the Effective Date, including the payment of any necessary fees and
expenses. The Company shall take such action as may be reasonably requested by
the Representative to obtain a secondary market trading exemption in such States
as may be requested by the Representative, including the payment of any
necessary fees and expenses and the filing of a Form (e.g., 25101(b)) for
secondary market trading in the State of California on the Effective Date.
3.16 DISQUALIFICATION OF FORM S-1 (OR OTHER APPROPRIATE FORM). For a
period equal to seven years from the date hereof, the Company will not take any
action or actions which may prevent or disqualify the Company's use of Form S-1
(or other appropriate form) for the registration of the shares underlying
Representative's Warrant under the Act.
3.17 ACCOUNTANTS. For a period of three years from the Effective Date, the
Company will not effect a change in its accounting firm without the prior
written consent of the Representative, which consent will not be unreasonably
withheld, except that no such consent is required if the new firm is a member of
the so-called "Big-Six."
3.18 SALE OF SECURITIES. The Company agrees not to permit or cause a
private or public sale or private or public offering of any of its securities
(in any manner, including pursuant to Rule 144 under the Act) owned nominally or
beneficially by the Insiders for
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a period of 18 months following the Effective Date without obtaining the prior
written consent of the Representative.
3.19 ISSUANCES BY COMPANY. The Company has agreed, for a period of twelve
(12) months after the Effective Date, not to issue any shares of Common Stock or
Preferred Stock or any warrants, options, or other rights to purchase Common
Stock or Preferred Stock without the prior written consent of the
Representative. Notwithstanding the foregoing, the Company may issue shares
upon exercise of any warrants or options outstanding on the Effective Date or to
be outstanding upon completion of the offering pursuant to the terms of this
Agreement and may issue shares reserved for issuance under the Company's 1996
Option Plan. The Underwriters acknowledge that a significant aspect of the
Company's growth strategy is to utilize equity securities for the purpose of
making acquisitions.
3.20 REGULATIONS OFFERINGS. For a period of twenty-four (24) months
following the Effective Date, the Company will not effect any offerings of
securities pursuant to Regulation S (or any successor statute) under the
Securities Act, without the Underwriters' consent, which consent shall not be
unreasonably withheld.
3.21 FORM S-8. For a period of twelve (12) months following the Effective
Date, the Company will not file a Registration Statement on Form S-8 registering
securities owned by persons other than employees of the Company and its
subsidiaries, without the Underwriters' consent, which consent shall not be
unreasonably withheld.
3.22 PUBLIC RELATIONS. The Company agrees that it will engage a financial
public relations firm, reasonably satisfactory to the Representative, if
requested by the Representative, no later than the date of the initial filing of
the Registration Statement. Such firm, or an acceptable substitute firm, shall
be continuously engaged from such filing to a date twelve (12) months from the
closing of the proposed public offering. In addition, the Company shall retain
Representative's counsel and a financial printer, both of which are reasonably
acceptable to the Representative.
3.23 DUE DILIGENCE INVESTIGATION.
3.23.1 The Company agrees and undertakes to cooperate with and
assist the Representative, its counsel and/or its representatives in their due
diligence investigation of the Company and its operational activities. The
Company shall (i) make available to the Representative operating and financial
records, certified public account' reports and letters, a business plan
inclusive of cash flows and estimates and corporate documents (e.g.,certificates
or articles of incorporation, by-laws, minute books, partnership agreement
contracts, etc.); (ii) facilitate visits by the Representative with key
management personnel; and (iii) afford access to facilities, all at times
convenient to the
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Company and to the extent that such activities do not impede the orderly conduct
of the Company's business.
3.23.2 As part of their due diligence investigation, the
Representative will review all existing and proposed relationships between the
Company and its officers, directors and/or principal stockholders ("Related
Party Transactions"), including any license or employment agreements, loans and
services.
3.23.3 It is understood that the Representative will not proceed to
the signing of an Underwriting Agreement unless it, in its sole judgment, is
satisfied with its due diligence investigations.
3.24 SALE OF COMMON STOCK WITHIN SIX MONTHS. Prior to the Effective Date,
the Company will cause each of its current stockholders who own any of the
Company's outstanding shares of unregistered Common Stock, or warrants or
options to purchase Common Stock or other securities exercisable or exchangeable
for, or convertible into, Common Stock and each officer and director of the
Company to enter into a written agreement with the Representative that he will
not publicly sell any shares of the Company's Common Stock owned directly or
indirectly by him or owned beneficially by him (as defined by the 1934 Act and
rules promulgated thereunder) on the Effective Date of the Registration
Statement for a period of six (6) months from such date without the
Representative's prior written consent.
3.25 CONSULTING AGREEMENT. At or prior to the Closing Date, the Company
shall enter into an agreement retaining the Representative as management and
financial consultants to the Company for a twenty-four (24) month period
commencing as of the Closing Date at a fee equal to $2,500 per month, or an
aggregate of $60,000. The entire fee of $60,000 shall be paid in its entirety
on the Closing Date.
3.26 REPRESENTATIVE'S WARRANT.
3.26.1 For five (5) years following the Effective Date, the Company
will agree not to merge, reorganize or take any other action which would
terminate the Representative the Representative's Warrant without first making
adequate provision for the Representative's Warrant. Furthermore, the Company
may not under any circumstances call for the redemption of the Representative's
Warrant. The Representative's Warrant will contain certain anti-dilution
provisions in the event the Company (a) subdivides or combines the outstanding
shares of Common Stock, (b) issues or sells any shares of Common Stock or
options or warrants to purchase Common Stock or securities convertible into
Common Stock for consideration less than the prevailing market price of a share
of Common Stock or (c) engages in a merger or combination which results in a
reclassification or change of the outstanding Common Stock. In the event of a
merger or acquisition of the Company which involves the issuance of shares of
Common Stock, any change in the exercise price of the Representative's Warrant
shall be adjusted based upon the difference between the exercise price of the
Representative's Warrant and fair market value of the Common Stock issued in
connection with such merger or acquisition (if lower than the market price of
the Common
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Stock) and the total number of outstanding shares of Common Stock. The Company
shall set aside and at all times have available a sufficient number of Shares of
Common Stock to be issued upon exercise of the Representative's Warrant. The
Representative's Warrant will not be transferable to anyone for a period of one
year after the Effective Date, except to officers and partners of the
Representative, Co-Representative, Selling Group Members and their officers or
partners.
3.26.2 The Company agrees that, upon written request of the then
holder(s) of at least a majority of the shares of Common Stock issued and
issuable upon exercise of the Representative's Warrant (the "Warrant
Securities") which were originally issued to the Representative or to its
designees, made at the time within the period commencing one year and ending
five (5) years after the Effective Date, the Company will file, at its sole
expense, no more than once, a registration statement on Forms SB-2, S-1 or S-3
or other appropriate form, or offering statement, under the 1933 Act, or will
file an amendment to the registration statement filed in connection with the
Offering, registering the Warrant Securities. The Company agrees to use its
efforts to cause the registration statement, offering statement, or
post-effective amendment, to become effective. The holders of the
Representative's Warrant may demand registration without exercising the
Representative's Warrant and, in fact, are never required to exercise same.
3.26.3 The Company agrees that if, at any time within the period
commending one year and ending five (5) years after the Effective Date, it
should file a registration statement with the SEC pursuant to the 1933 Act,
regardless of whether some of the holders of the Representative's Warrant and
Warrant Securities shall have therefore availed themselves of any of the
registration rights described above, the Company at its own expense, will offer
to said holders the opportunity to register or qualify the Warrant Securities,
limited, in the case of a Regulation A offering, to the amount of available
exemption. This paragraph is not applicable to a Registration Statement filed
by the Company with the SEC on Forms S-4, S-8 or any other inappropriate form.
The objection of a subsequent representative to the above piggyback rights would
preclude such inclusion, to the extent deemed necessary by such Representative.
However, in such event the Company will, within six (6) months of the completion
of such subsequent underwriting, file at its sole expense a registration
statement relating to such excluded securities.
3.26.4 In addition to the rights above provided, the Company will
cooperate with the then holders of the Representative's Warrant and Warrant
Securities in the preparation
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and execution of any registration statement, in addition to the registration
statements and offering statements discussed above, required in order to sell or
transfer the aforesaid Warrant Securities and will supply all information
required to be included in such registration statement, but the expenses of such
additional registration statement or offering statement will be pro-rated
between the Company and the holders of the Representative's Warrant and Warrant
Securities according to the aggregate sales price of the securities being sold.
3.26.5 The Company may not under any circumstances, call for
redemption of the Representative's Warrant.
3.27 RIGHT OF FIRST REFUSAL. The Company, its subsidiaries and its
principal stockholders will grant to the Representative a right of first refusal
for a period of three (3) years from the Effective Date for any public or
private offering of securities to raise capital and sale of securities to be
made by the Company, its principal stockholders and/or any of its present or
future subsidiaries.
3.28 CERTIFICATES AND CUSIP NUMBER. The Company shall deliver certificates
representing the Securities first to the Representative for approval prior to
printing. As promptly as possible after filing the Registration Statement with
the SEC, the Company shall obtain a CUSIP number for the Securities.
3.29 AFTER MARKET BLUE SKY MEMORANDUM. The Company shall engage Stark &
Stark, A Professional Corporation, counsel for the Representative, for an
aggregate fee of no greater than $7,500 (which shall be payable at the closing),
to provide the Representative, at the closing of the Public Offering and
quarterly thereafter, with an opinion, setting forth those states in which the
Common Stock may be traded in non-issuer transactions under the Blue Sky laws of
the 50 states, unless the Company's Common Stock is listed on the NASDAQ
National Market System.
3.30 UNDERWRITING MATERIALS. The Company, at the Company's cost, shall
supply the Representative with two, and its counsel with three (total of five),
bound volumes of each of the underwriting materials within a reasonable time
after the Closing Date or the Option Closing Date, if applicable.
3.31 COMPLIANCE WITH LEGAL REQUIREMENTS. The Company shall undertake to
comply with legal requirements in connection with its Certificate of
Incorporation and By-Laws, which requirements are necessary and proper to effect
the sale of the Securities.
In addition, the officers, directors and principal stockholders of the
Company will each complete, sign and return to the Underwriter's counsel, the
officers' and directors' and principal shareholder's questionnaire which will be
delivered to the Company by the Representative's counsel.
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4. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of the
Underwriters to purchase and pay for the Shares, as provided herein, shall be
subject to the continuing accuracy of the representations and warranties of the
Company as of the date hereof and as of each of the Closing Date and any Option
Closing Date to the accuracy of the statements of officers of the Company made
pursuant to the provisions hereof and to the performance by the Company of its
obligations hereunder and to the following conditions:
4.1 REGULATORY MATTERS.
4.1.1 EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration
Statement shall have become effective not later than 5:00 P.M., New York time,
on the date of this Agreement or such later date and time as shall be consented
to in writing by you, and, at each of the Closing Date and any Option Closing
Date, no stop order suspending the effectiveness of the Registration Statement
shall have been issued and no proceedings for the 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 Stark & Stark, A Professional
Corporation, counsel to the Representative.
4.1.2 NASD CLEARANCE. On or before the Effective Date, the
Representative shall have received clearance from the NASD as to the amount of
compensation allowable or payable to the Representative as described in the
Registration Statement. The Representative reserves the right to cover any
items of the Representative's compensation as specified in this Agreement in the
event that a determination is made by the NASD to the effect that the aggregate
compensation to be received by the Representative is excessive. Any such
revisions shall not affect any other terms or provisions of this Agreement.
4.1.3 NO BLUE SKY STOP ORDERS. No order suspending the sale of
the Shares in any jurisdiction designated by you pursuant to Section 3.3 hereof
shall have been issued either on the Closing Date or any Option Closing Date,
and no proceedings for that purpose shall have been instituted or shall be
contemplated.
4.2 COMPANY COUNSEL MATTERS.
4.2.1 CLOSING DATE OPINION OF COUNSEL. On the Closing Date, the
Underwriters shall have received the favorable opinion of Gersten, Savage,
Kaplowitz & Curtin, LLP, counsel to the Company, dated the Closing Date,
addressed to the Underwriters and in form and substance satisfactory to Stark &
Stark, A Professional Corporation, counsel to the Representative, to the effect
that:
4.2.1.1 The Company has been duly organized and is validly
existing as a corporation and is in good standing under the laws of its state of
incorporation. The Company is duly qualified
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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 (except where the failure to
be so qualified or licensed would not have a material adverse effect on the
Company).
4.2.1.2 The Company has all requisite corporate power and
authority, and, to such counsel's [our] knowledge after due inquiry, has all
necessary authorizations, approvals, orders, licenses, certificates and permits
of and from all governmental or regulatory officials and bodies to own or lease
its properties and to conduct its business as described in the Prospectus, and
the Company is, to such counsel's [our] knowledge, in compliance with all such
authorizations, approvals, orders, licenses, certificates and permits and all
federal, state and local laws, rules and regulations. The Company has all
requisite corporate power and authority to enter into this Agreement and to
carry out the terms and conditions hereof. No consents, approvals,
authorizations or orders of, and no filing with any court or governmental agency
or body (other than such as may be required under the Act and applicable Blue
Sky laws), is required for the valid authorization, issuance, sale and delivery
of the Securities, and the consummation of the transactions and agreements
contemplated by this Agreement and the Representative's Warrant, and as
contemplated by the Prospectus or, if required, all such authorizations,
approvals, consents, orders, registrations, licenses and permits have been duly
obtained and are in full force and effect and have been disclosed to the
Representative.
4.2.1.3 All issued and outstanding securities of the
Company have been duly authorized and validly issued and are fully paid and
non-assessable; to the best of [our] such counsel's knowledge after due respect
thereto, the holders thereof have no rights of rescission with respect thereto,
and (except as may be provided pursuant to Delaware General Corporation Law)
are not subject to personal liability by reason of being such holders; and, to
the best of [our] such counsel's knowledge after due inquiry, 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. The outstanding options and warrants, if any, to purchase shares of
Common Stock constitute the valid and binding obligations of the Company,
enforceable in accordance with their respective terms, except (a) as such
enforceability may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally, (b) as enforceability of
any indemnification and contribution provision may be limited under the federal
and state securities laws, and (c) that the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any proceeding
therefor may be brought. The offers and sales of the outstanding Common Stock,
and[, if any,] options and warrants to purchase shares of Common Stock, have
been at all relevant times either registered under the Act and the applicable
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state securities or Blue Sky Laws or exempt from such registration
requirements. To [our] such counsel's knowledge, the authorized and
outstanding capital stock of the Company is as set forth under the caption
"Capitalization" in the Prospectus.
4.2.1.4 The Securities have been duly authorized and when
issued and delivered in accordance herewith will be, validly issued, fully paid
and non-assessable; the holders thereof (except as may be provided pursuant to
Delaware General Corporation Law) are not and will not be subject to personal
liability by reason of being such holders. The Securities are not and will not
be subject to the preemptive rights of any holders of any security of the
Company or, to the best of [our] such counsel's knowledge after due inquiry,
similar contractual rights granted by the Company. All corporate action
required to be taken for the authorization, issuance and sale of the Securities
has been duly and validly taken. When issued, the Representative's Warrant
will 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 and the Representative's Warrant, when
issued, will be enforceable against the Company in accordance with their terms,
except (a) as such enforceability may be limited by bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally, (b) as
enforceability of any indemnification and contribution provision may be limited
under federal and state securities laws, and (c) that the remedy of specific
performance and injunctive and other forms of equitable relief may be subject
to equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought. The certificates representing the
Securities are in due and proper form.
4.2.1.5 To the best of such [our] counsel's knowledge
after due inquiry, except as set forth in the Prospectus, no holders of any
securities of the Company or of any options, warrants or securities of the
Company exercisable for or convertible or exchangeable into securities of the
Company have the right to require the Company to register any such securities
of the Company under the Act or to include any such securities in a
registration statement to be filed by the Company.
4.2.1.6 The shares have been approved for listing on NASDAQ
National Market System.
4.2.1.7 This Agreement and the Representative's Warrant
have each been duly and validly authorized, executed and delivered by the
Company and constitute valid and binding obligations of the Company,
enforceable against the Company in accordance with their respective terms,
except (a) as such enforceability may be limited by bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally, (b) as
enforceability of any indemnification provisions may be limited under federal
and state securities laws and (c) that the remedy of specific performance and
injunctive and other forms
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of equitable relief may be subject to equitable defenses and to the discretion
of the court before which any proceeding therefor may be brought.
4.2.1.8 The execution, delivery and performance of this
Agreement and the Representative's Warrant, the issuance and sale of the
Securities, the consummation of the transactions contemplated hereby and
thereby and the compliance by the Company with the terms and provisions hereof
and thereof, do not and will not, with or without the giving of notice or the
lapse of time, or both, (a) to [our] such counsel's knowledge after due
inquiry, conflict with, or result in a breach of, any of the terms or
provisions of, or constitute a default under, or result in the creation or
modification of any lien, security interest, charge or encumbrance upon any of
the properties or assets of the Company pursuant to the terms of, any material
mortgage, deed of trust, note, indenture, loan, contract, commitment or other
material agreement or instrument known to such counsel, to which the Company is
a party or by which the Company or any of its properties or assets may be
bound, (b) result in any violation of any of the provisions of the Certificate
of Incorporation or the By-Laws of the Company, (c) to [our] such counsel's
knowledge after due inquiry, violate any statute or any judgment, order or
decree, rule or regulation applicable to the Company of any court, domestic or
foreign, or of any federal, state or other regulatory authority or other
governmental body having jurisdiction over the Company, its properties or
assets, or (b) to [our] such counsel's knowledge after due inquiry have a
material effect on any permit, certification, registration, approval, consent,
license or franchise of the Company.
4.2.1.9 The Registration Statement, each Preliminary
Prospectus and the Prospectus and any post-effective amendments or supplements
thereto (other than the financial statements and notes thereto and other
financial, numerical, accounting and statistical data included therein or
omitted therefrom, as to which no opinion need be rendered) comply as to form
in all material respects with the requirements of the Act and the Regulations.
The Securities and all other securities issued or issuable by the Company
conform in all respects to the description thereof contained in the
Registration Statement and the Prospectus. All statements in the Prospectus
(other than those set forth under the caption "Underwriting"), have been
reviewed by such counsel and insofar as they refer to statements of law,
descriptions of statutes, licenses, rules or regulations have been reviewed by
such counsel and are correct in all material respects. No statute or
regulation or legal or, to the best of our knowledge after due inquiry, any
governmental proceeding required to be described in the Prospectus is not
described as required, nor are any contracts, instruments or other documents
[known to such counsel, after due inquiry,] of a character required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement not so described or filed as required.
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4.2.1.10 Such counsel has participated in conferences with
officers and other representatives of the Company, representatives of the
independent public accountants for the Company, the Representative and counsel
to the Underwriters at which the contents of the Registration Statement and
Prospectus and related matters 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 Registration
Statement and Prospectus (except as otherwise expressly set forth in its
opinion), on the basis of the foregoing (relying as to the factual matters upon
the statements of officers and other representatives of the Company and state
officials) no facts have come to the attention of such counsel that caused it to
believe that either the Registration Statement or the Prospectus or any
amendment or supplement thereto (other than the financial statements, schedules
and notes thereto and other financial, numerical, statistical and accounting
data included therein, or omitted therefrom, as to which no opinion is requested
or need be rendered) as of the date of its opinion, contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading (other
than information omitted therefrom in reliance on Rule 430A under the Act).
4.2.1.11 The Registration Statement is effective under the Act
and no stop order suspending the effectiveness of the Registration Statement has
been issued and no proceedings for that purpose have been instituted or, to such
counsel's knowledge, are pending or threatened under the Act or applicable state
securities laws.
4.2.1.12 To the best of [our] such counsel's knowledge after due
inquiry, except as described in the Prospectus, no default exists in the due
performance and observance of any term, covenant or condition of any material
license, contract, indenture, mortgage, deed of trust, note, loan or credit
agreement, or any other material agreement, instrument or other document
evidencing an obligation for borrowed money, or any other material agreement,
instrument or other document to which the Company is a party or by which the
Company may be bound or to which any of the properties or assets of the Company
is subject. The Company is not in violation of any term or provision of its
Certificate of Incorporation or By-Laws, or, to the best of [our] such counsel's
knowledge after due inquiry, any material franchise, license, permit, applicable
law, rule, regulation, judgment or decree of any governmental agency or court,
domestic or foreign, having jurisdiction over the Company or any of its
properties or business, except as described in the Prospectus.
4.2.1.13 To the best of [our] such counsel's knowledge after due
inquiry, there are no claims, payments, issuances, arrangements or
understandings for services in the nature of a finder's or origination fee with
respect to the sale of the Securities hereunder or financial consulting
arrangements or
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any other arrangements, agreements, understandings, payments or issuances that
may affect the Underwriters' compensation, as determined by the NASD.
4.2.1.14 To the best of [our] such counsel's knowledge after due
inquiry, except as set forth in the Prospectus, the Company does not own any
interest in any corporation, partnership, joint venture, trust or other business
entity.
4.2.1.15 To the best of [our] such counsel's knowledge after due
inquiry, except as set forth in the Prospectus, there is no action, suit or
proceeding before or by any court of governmental agency or body, domestic or
foreign, now pending, or threatened against the Company, which would have a
material adverse effect on the Company.
4.2.2 OPTION CLOSING DATE OPINION OF COUNSEL. On the Option
Closing Date, if any, the Representative shall have received the favorable
opinion of Gerstein, Savage, Kaplowitz & Curtin LLP, counsel to the Company, and
dated the Option Closing Date, addressed to the Representative and in form and
substance reasonably satisfactory to Stark & Stark, A Professional Corporation,
counsel to the Underwriters, confirming, as of the Option Closing Date, the
statements made by such counsel for the Company and the Other Counsel,
respectively, in their Closing Date opinions delivered on the Effective Date.
4.2.3 RELIANCE. In rendering such opinions, such counsel may rely
(i) as to matters involving the application of laws other than the laws of the
United States, and jurisdictions in which they are admitted, 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 reasonably acceptable to Underwriters' counsel,
familiar with the applicable laws, and (ii) as to matters of fact, to the extent
they deem proper, (A) on certificates or other written statements of responsible
officers of the Company and (B) on certificates or other written statements of
officers of departments of various jurisdiction 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. Such opinions of counsel shall include a statement to
the effect that they may be relied upon by counsel for the Underwriters. Such
opinion may assume the due authorization, execution and delivery of all
documentation referred to therein by the parties thereto other than the Company.
4.3 COLD COMFORT LETTER.
4.3.1 At the time this Agreement is executed, and at each of the
Closing Date and any Option Closing Date, you shall have received a letter,
addressed to the Representative and in form and substance satisfactory in all
respects (including the non-
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material nature of the changes or decreases, if any, referred to in clause (iii)
below) to you and to Stark & Stark, A Professional Corporation, counsel for the
Representative, from Ernst & Young, LLP, dated, respectively, as of the date of
this Agreement, as of the Closing Date and as of any Option Closing Date:
4.3.2 Confirming that they are independent accountants with
respect to the Company within the meaning of the Act and the applicable
Regulations;
4.3.3 Stating that in their opinion the financial statements of
the Company included in the Registration Statement and Prospectus comply as to
form in all material respects with the applicable accounting requirements of the
Act and the Regulations thereunder;
4.3.4 Stating that, based on the performance of procedures
specified by the American Institute of Certified Public Accountants for a review
of the latest available unaudited interim financial statements of the Company
(as defined in SAS No. 71 Interim Financial Interpretation) with an indication
of the date of such unaudited financial statements, a reading of the latest
available minutes of the stockholders and Board of Directors of the Company 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
financials of the Company included in the Registration Statement do not comply
as to form in all material respects with the applicable accounting requirements
of the Act and the Regulations or any material modification should be made to
the unaudited interim financial statements included in the registration
statement for them to be 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, (b)
at a date not later than five (5) days prior to the Effective Date, Closing Date
or any Option Closing Date, as the case may be, there was any change in the
capital stock or long-term debt of the Company, or any decrease in the
stockholders' equity of the Company as compared with amounts shown in the most
recent balance sheet included in the Registration Statement, other than as set
forth in or contemplated by the Registration Statement, or, if there was any
decrease, setting forth the amount of such decrease, and (c) during the period
from ________________________ to a specified date not later than five (5) days
prior to the Effective Date, Closing Date or Option Closing Date, if any, as the
case may be, there was any decrease in revenues, net earnings or net earnings
per share of Common Stock, in each case as compared with the corresponding
period in the preceding year, and as compared with the corresponding period in
the preceding quarter other than as set forth in or contemplated by the
Registration Statement, or, if there was any such decrease, setting forth the
amount of such decrease;
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4.3.5 Setting forth, at a date not later than five days prior to
the Effective Date, the amount or liability of the Company (including a
break-down of commercial papers and notes payable to banks);
4.3.6 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, 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;
4.3.7 Stating that they have not during the immediately preceding
five year period brought to the attention of the Company's management any
reportable condition related to internal structure, design or operation as
defined in the Statement on Auditing Standards No, 60 -- "Communication of
Internal Control Structure Related Matters Noted in an Audit," in the Company's
internal controls; and
4.3.8 Statements as to such other matters incident to the
transactions contemplated hereby as you may reasonably request.
4.4 CERTIFICATES.
4.4.1 OFFICERS' CERTIFICATES. At each of the Closing Date and any
Option Closing Date the Representative shall have received a certificate of the
Company signed by each of the Chairman of the Board or President and the Chief
Financial Officer or Secretary of the Company, dated the Closing Date or any
Option Closing Date, as the case may be, respectively, to the effect that the
Company has performed all covenants and complied with all conditions required by
this Agreement to be performed or complied with by the Company prior to and as
of the Closing Date, or any Option Closing Date, as the case may be, and that
the conditions set forth in Section 4.5 hereof have been satisfied as of such
date and that, as of Closing Date and any Option Closing Date, as the case may
be, the representations and warranties of the Company set forth in Section 2
hereof are true and correct. In addition, the Representative shall have
received such other and further certificates of officers of the Company as the
Representative may reasonably request.
4.4.2 CHIEF FINANCIAL OFFICER'S CERTIFICATE. At each of the
Closing Date and the Option Closing Date, if any, the Representative shall have
received a certificate of the Company signed by the Chief Financial Officer of
the Company, dated the Closing Date or any Option Closing Date, as the case may
be, respectively, certifying (i) that the Certificate of Incorporation
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and By-Laws, as amended, of the Company are true and complete, have not been
modified and are in full force and effect, (ii) that the resolutions relating to
the offering contemplated by this Agreement are in full force and effect and
have not been modified, (iii) all correspondence between the Company or its
counsel and the Commission, (iv) all correspondence between the Company or its
counsel and NASDAQ and (v) as to the incumbency of the officers of the Company.
The documents referred to in such certificate shall be attached to such
certificate.
4.5 NO MATERIAL CHANGES. Prior to and on each of the Closing Date and any
Option Closing Date, (i) there shall have been no material adverse change or
development involving a prospective material change in the condition or
prospects or the business activities, financial or otherwise, of the Company
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 the Prospectus which is or might be
materially 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 would have a material adverse effect on the Company, (iv) 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, (v)
no action, suit or proceeding, at law or in equity, shall be pending or
threatened against the Company or affecting any of its property or business
before or by any court or federal or state 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, (vi) no stop order shall have been issued
under the Act and no proceedings therefor shall have been initiated or
threatened by the Commission, and (vii) the Registration Statement and the
Prospectus and any amendments or supplements thereto shall contain all material
statements that are required to be stated therein in accordance with the Act and
the Regulations and shall conform in all material respects to the requirements
of the Act and the Regulations, and neither the Registration Statement nor the
Prospectus nor any amendment or supplement thereto shall 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.
4.6 DELIVERY OF REPRESENTATIVE'S WARRANT. The Company shall have
delivered to the Representative executed copies of the Representative's Warrant,
registered in such names and in such denominations as the Representative shall
have requested.
4.7 OPINION OF COUNSEL FOR THE UNDERWRITER. All proceedings taken in
connection with the authorization, issuance or sale of the
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Securities as herein contemplated shall be reasonably satisfactory in form and
substance to you and to Stark & Stark, A Professional Corporation, counsel for
the Representative, and you shall have received from such counsel a favorable
opinion, dated the Closing Date and any Option Closing Date, with respect to
such of these proceedings as you may reasonably require. On or prior to the
Effective Date, the Closing Date and any Option Closing Date, as the case may
be, counsel for the Underwriters shall have been furnished with 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 this Section
4.7, or in order to evidence the accuracy, completeness or satisfaction of any
of the representations, warranties or conditions herein contained.
4.8 SECONDARY MARKET TRADING MEMORANDUM. On the Effective Date the
Representative shall have received the Secondary Market Trading Memorandum.
4.9 REPRESENTATIVE SOLE DETERMINANT OF BREAK OF CONDITIONS. The
Underwriter shall be the sole determining party as to whether any of the above
conditions have not been met.
4.10 INDEMNIFICATION.
4.10.1 INDEMNIFICATION OF THE REPRESENTATIVE.
4.10.1.1 The Company shall indemnify and hold the Representative
harmless against any and the Selling Shareholders and all liabilities, claims
and lawsuits, including any and all awards and/or judgments to which it may
become subject under the 1933 Act, the Exchange Act or any other federal or
state statute, at common law or otherwise, insofar as said liabilities, claims
and lawsuits (including awards and/or judgments) arise out of or are in
connection with the Registration Statement, Prospectus and related Exhibits
filed under the Exchange Act, except for any liabilities, claims and lawsuits
(including awards and/or judgements), that are found in a final judgment by a
court of competent jurisdiction to have arisen primarily from our willful
misconduct or negligence. In addition, the Company and the Selling Shareholders
shall also indemnify and hold the Representative harmless against any and all
costs and expenses, including reasonable counsel fees, incurred or relating to
the foregoing.
4.10.1.2 The Representative shall give the Company and the
Selling Shareholders' prompt notice of any such liability, claim or lawsuit
which the Representative contends is the subject matter of the Company's and the
Selling Shareholders' indemnification and the Company thereupon shall be granted
the right to take any and all necessary and proper action, at its sole cost and
expense and provided that counsel selected by the Company shall be acceptable to
the Representative, with respect to such liability, claim and lawsuit, including
the right to settle, compromise and dispose of such liability, claim or lawsuit,
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excepting therefrom any and all proceedings or hearings before any regulatory
bodies and/or authorities.
4.10.2 INDEMNIFICATION OF THE COMPANY AND THE SELLING SHAREHOLDERS.
4.10.2.1 The Representative shall indemnify and hold the Company
and the Selling Shareholders harmless against any and all liabilities, claims
and lawsuits, including any and all awards and/or judgments to which it may
become subject under the Act, the Exchange Act, or any federal or state statute,
at common law or otherwise, insofar as said liabilities, claims, and lawsuits
(including awards and/or judgments) arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact or omission of a
material fact, which statement or omission was made in reliance upon information
furnished in writing to the Company and the Selling Shareholders by or on behalf
of the Representative and shall also indemnify and hold the Company and the
Selling Shareholders harmless against any and all costs and expenses, including
reasonable counsel fees, incurred or relating to the foregoing.
4.10.2.2 The Company and the Selling Shareholders shall give to
the Representative prompt notice of any such liability, claim or lawsuit which
the Company and/or the Selling Shareholders contend is the subject matter of the
Representative's indemnification and the Representative thereupon shall be
granted the right to take any and all necessary and proper action, at its sole
cost and expense (provided that counsel selected by the Representative shall be
acceptable to the Company and the Selling Shareholders), with respect to such
liability, claim and lawsuit, including any right to settle, compromise or
dispose of such liability, claim and lawsuit, excepting therefrom any and all
proceedings or hearings before any regulatory bodies and/or authorities.
4.10.3 CONTRIBUTION.
4.10.3.1 CONTRIBUTION RIGHTS. In order to provide for just and
equitable contribution under the Act in any case in which (i) any person
entitled to indemnification under this Section 4.9 makes claim for
indemnification pursuant hereto 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 this Section 5 provides for indemnification in such case, or (ii)
contribution under the Act, the Exchange Act or otherwise may be required on the
part of any such person in circumstances for which indemnification is provided
under this Section 5, then, and in each such case, the Company and the
Underwriters shall contribute to the aggregate losses, liabilities, claims,
damages and expenses of the nature contemplated by said indemnity agreement
incurred by the Company and the Underwriters,
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as incurred, in such proportions that the Underwriters are responsible for that
portion represented by the percentage that the underwriting discount appearing
on the cover page of the Prospectus bears to the initial offering price
appearing thereon and the Company is responsible for the balance; provided,
however, that no person guilty of a fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. Notwithstanding
the provisions of this Section 4.9, no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which
the Shares underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages which such Underwriter has otherwise
been required to pay in respect of such losses, liabilities, claims, damages and
expenses. For purposes of this Section 4.9, each respective director, officer
and employee of any Underwriter, and each respective person, if any, who
controls any Underwriter within the meaning of Section 15 of the Act shall have
the same rights to contribution as such Underwriter.
4.10.3.2 CONTRIBUTION PROCEDURE. Within fifteen (15) days after
receipt by any party to this Agreement (or its representative) of notice of the
commencement of any action, suit or proceeding, such party will, if a claim for
contribution in respect thereof is to be made against another party (the
contributing party), notify the contributing party of the commencement thereof,
but the omission to so notify the contributing party will not relieve it from
any liability which it may have to any other party other than for contribution
hereunder. In case any such action, suit or proceeding is brought against any
party, and such party notifies a contributing party or its representative of the
commencement thereof within the aforesaid (15) fifteen days, the contributing
party will be entitled to participate therein with the notifying party and any
other contributing party similarly notified. Any such contributing party shall
not be liable to any party seeking contribution on account of any settlement of
any claim, action or proceeding effected by such party seeking contribution on
account of any settlement of any claim, action or proceeding effected by such
party without the written consent of such contributing party. The contribution
provisions contained in this Section 5 are intended to supersede, to the extent
permitted by law, any right to contribution under the Act, the Exchange Act or
otherwise available.
4.11 NASDAQ QUALIFICATION. The Company agrees to qualify its shares of
Common Stock for listing on the NASDAQ on the Effective Date subject to the
Representative selling the Securities to such minimum number of stockholders as
may be required pursuant to the listing criteria of NASDAQ.
4.12 KEY PERSON LIFE INSURANCE. The Company will maintain key person life
insurance policies in such amounts and on the lives of such employees of the
Company as are satisfactory to the Representative.
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4.13 NO CALAMITY. There shall have been no war or act of God or other
calamity which would have a substantial adverse effect or loss to the Company.
4.14 NO QUALIFICATIONS. Representative shall have no qualifications
received or provided by the Company's independent public accountants or
attorneys to the effect of either difficulties in furnishing certifications to
material items including, without limitation, information contained within the
footnotes to financial statements, or as affecting matters incident to the
issuance and sale of the Securities or as to corporate proceedings or other
matters.
4.15 NO CHANGE IN MATERIAL OR CONDITIONS. The market for securities in
general or for the Company's Common Stock in particular, or political, financial
or economic conditions shall not have materially changed from those reasonably
foreseeable as of the date of this Agreement as to render it impracticable in
the Representative's judgment to make a public offering of the Securities.
There also shall have been no material adverse change in market levels for
securities in general (or those of the Company in particular) or financial or
economic conditions which render it inadvisable to proceed.
5. DEFAULT BY AN UNDERWRITER.
5.1 DEFAULT NOT EXCEEDING 10% OF THE SHARES. If any Underwriter or
Underwriters shall default in its or their obligations to purchase the Shares or
the Option Shares if exercised, hereunder, and if the number of the Shares with
respect to which such default relates does no exceed in the aggregate 10% of the
number of Shares or Option Shares which all Underwriters have agreed to purchase
hereunder, then such Shares or Option Shares to which the default relates shall
be purchased by the non-defaulting Underwriters in proportion to their
respective commitments hereunder.
5.2 DEFAULT EXCEEDING 10% OF THE SHARES. In the event that such default
relates to more than 10% of the Shares or Option Shares, you may in your
discretion arrange for your self or for another party or parties to purchase
such Shares or Option Shares to which such default relates on the terms
contained herein. If within one business day after such default relating to
more than 10% of the Shares or Option Shares you do not arrange for the purchase
of such Shares or Option Shares, then the Company shall be entitled to a further
period of one business day within which to procure another party or parties
satisfactory to you to purchase said Shares or Option Shares on such terms. In
the event that neither you nor the Company arrange for the purchase of the
Shares of Option Shares to which a default relates as provided in this Section
6, this Agreement may be terminated by you or the Company without liability on
the part of the Company (except as provided in Section 3.9 and Section 4.9.1
hereof) or the several Underwriters but nothing herein shall relieve a
defaulting Underwriter of its
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liability, if any, to the other several Underwriters and to the Company for
damages occasioned by its default hereunder.
5.3 POSTPONEMENT OF CLOSING DATE. In the event that the Shares or Option
Shares to which a default relates are to be purchased by the non-defaulting
Underwriters, or are to be purchased by another party or parties as aforesaid,
you or the Company shall have the right to postpone the Closing Date or Option
Closing Date for a reasonable period, but not in any event exceeding five
business days, in order to effect whatever changes may thereby by made necessary
in the Registration Statement or the Prospectus or in any other documents and
arrangements, and the Company agrees to file promptly any amendment to the
Registration Statement or the Prospectus which in the opinion of counsel for the
Underwriters may thereby be made necessary. The term "Underwriter" as used in
this Agreement shall include any party substituted under this Section 6 with
like effect as if it had originally been a party to this Agreement with respect
to the Securities.
6. UNDERWRITING GROUP. The Representative shall have the sole right to
determine which, if any, firms shall comprise the group of Underwriters.
Pending completion of the financing contemplated herein, the Company agrees that
it will not negotiate with any other Underwriter or other person relating to a
possible public offering of its securities until nine (9) months from
December 17, 1996 if the offering has not been consummated.
7. FINDER. The Representative and the Company represent to each other that no
person has acted as a finder in connection with the transactions contemplated
herein and the Representative and the company will indemnify each other with
respect to any claim for finder's fees in connection therewith.
8. PROCEEDINGS. The Underwriters and the Company will advise each other
immediately and confirm in writing the receipt of any threat of or the imitation
of any steps or procedures which would impair or prevent the right to offer any
of the Company's securities or the issuance of any orders or other prohibitions,
preventing or impairing the proposed Offering, by the SEC or any other
regulatory authority. In the case of the happening of any such event, except as
required by law, neither the Underwriters nor the Company will acquiesce in such
steps, procedures or suspension orders, and the Underwriters and the Company
will actively defend any such actions or orders unless the Underwriters and the
Company mutually agree in writing to acquiesce in such actions or orders.
9. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. Except as the context
otherwise requires, all representations, warranties and agreements contained in
this Agreement shall be deemed to be representations, warranties and agreements
at the Closing Date and any Option Closing Date, and such representations,
warranties and agreements of the Underwriters and the Company, including the
indemnity agreements contained in Section 4.9 hereof, shall remain operative and
in full force and effect regardless of any
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investigation made by or on behalf of any Underwriter, the Company or any
controlling person, and shall survive termination of this Agreement or the
issuance and delivery of the Shares to the Underwriters.
10. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION THEREOF.
10.1 EFFECTIVE DATE. This Agreement shall become effective upon its
execution, except that you may, at your option, delay its effectiveness until
11:00 A.M., New York time, on the first full business day following the
Effective Date or at the time of the initial public offering of the Shares,
whichever is earlier. The time of the initial public offering, for the purpose
of this Section 8 shall mean the time, after the Registration Statement becomes
effective, of the release by you for publication of the first newspaper
advertisement which is subsequently published relating to the Shares or the
time, after the Registration Statement becomes effective, when the Shares are
first released by you for offering by the Underwriters or dealers by letter or
telegram, whichever shall first occur. You may prevent this Agreement from
becoming effective without liability to any other party, except as noted below,
by giving the notice indicated below in this Section 7 before the time this
Agreement becomes effective. You agree to give the undersigned notice of the
commencement of the offering described herein.
10.2 TERMINATION. You shall have the right to terminate this Agreement at
any time prior to the Closing Date if the Company has breached any of its
representations, warranties or obligations hereunder, or failed to expeditiously
proceed with the offering or to cooperate with you in requesting effectiveness
of the Registration Statement at such time as you may deem appropriate.
10.3 NOTICE. If you elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 7, the
Company shall be notified on the same day as such election is made by you by
telephone or telecopy, confirmed by letter.
10.4 EXPENSES. In the event that this Agreement shall not be carried out
for any reason whatsoever within the time specified herein or any extensions
thereof pursuant to the terms herein, the obligations of the Company to pay the
expenses related to the transactions contemplated herein shall be governed by
Section 3.9 hereof.
10.5 INDEMNIFICATION. Notwithstanding any contrary provision contained in
this Agreement, any election hereunder or any termination of this Agreement, and
whether or not this Agreement is otherwise carried out, the provisions of
Section 4.9 shall not be in any way affected by, such election or termination or
failure to carry out the terms of this Agreement or any part hereof.
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11. MISCELLANEOUS.
11.1 NOTICES. All communications hereunder, except as herein otherwise
specifically provided, shall be in writing and shall be mailed, delivered or
telecopied and confirmed:
If to the Underwriters:
Network 1 Financial Securities, Inc.
The Galleria
Building Two, Penthouse
2 Bridge Avenue
Red Bank, New Jersey 07701-1106
Attention: William Hunt
Copy to:
Stark & Stark, A Professional Corporation
993 Lenox Drive, Building Two
Lawrenceville, New Jersey 08648
Attention: Michael P. Weiner, Esquire
If to the Company:
Dunn Computer Corporation
1306 Squire Court
Sterling, Virginia 20166
Attention: Thomas P. Dunn, President and C.E.O.
Copy to:
Gerstein, Savage, Kaplowitz & Curtin LLP,
575 Lexington Avenue
New York, New York 10022
Attention: Jay M. Kaplowitz, Esq.
Arthur S. Marcus, Esq.
11.2 HEADINGS. The headings contained herein are for the sole purpose of
convenience of reference, and shall not in any way limit or affect the meaning
or interpretation of any of the terms or provisions of this Agreement.
11.3 AMENDMENT. This Agreement may only be amended by a written instrument
executed by each of the parties hereto.
11.4 ENTIRE AGREEMENT. This Agreement (together with the other agreements
and documents being delivered pursuant to or in connection with this Agreement)
constitute the entire agreement of the parties hereto with respect to the
subject matter hereof, and supersede all prior agreements and understandings of
the parties, oral and written, with respect to the subject matter hereof.
11.5 BINDING EFFECT. This Agreement shall inure solely to the benefit of
and shall be binding upon, the Representative, the
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Underwriter, the Company, and the controlling persons, directors and officers
referred to in Section 4.9 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.
11.6 GOVERNING LAW; JURISDICTION. 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 conflict of laws rules of such State. Any action,
proceeding or claim against any of the parties hereto arising out of, relating
in any way to, this Agreement shall be brought and enforced in the courts of the
State of New York or the federal court for the Southern District of New York,
and the parties hereto irrevocably submit to such jurisdiction, which
jurisdiction shall be exclusive. The parties hereto hereby waive any objection
to such exclusive jurisdiction and that such courts represent an inconvenient
forum. Except as otherwise provided in this Agreement, the prevailing
party(ies) in any such action shall be entitled to recover from the other
party(ies) all of its reasonable attorneys' fees and expenses relating to such
action or proceeding and/or incurred in connection with the preparation
therefor.
11.7 EXECUTION IN COUNTERPARTS. This Agreement may be executed in one or
more counterparts, and by the different parties hereto in separate counterparts,
each of which shall be deemed to be an original, but all of which taken together
shall constitute one and the same agreement, and shall become effective when one
or more counterparts has been signed by each of the parties hereto and delivered
to each of the other parties hereto.
11.8 WAIVER, ETC. The failure of any of the parties hereto to at any time
enforce any of the provisions of this Agreement shall not be deemed or construed
to be a waiver of any such provision, nor to in any way effect the validity of
this Agreement or any provision hereof or the right of any of the parties hereto
to thereafter enforce each and every provision of this Agreement. No waiver of
any breach, non-compliance or non-fulfillment of any of the provisions of this
Agreement shall be effective unless set forth in a written instrument executed
by the party or parties against whom or which enforcement of such waiver is
sought; and no waiver of any such breach, non-compliance or non-fulfillment
shall be construed or deemed to be a waiver of any other or subsequent breach,
non-compliance or non-fulfillment.
-43-
<PAGE>
If the foregoing correctly sets forth the understanding between the
Representative, for itself and as Representative of the Underwriters listed on
Schedule I hereto, 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,
DUNN COMPUTER CORPORATION
By: ____________________________________
Name:
Title:
Accepted as of the date first
above written.
New York, New York
NETWORK 1 FINANCIAL SECURITIES, INC.
Acting on behalf of itself
and as the Representative
of the other several
Underwriters named in
Schedule I hereof.
By: NETWORK 1 FINANCIAL SECURITIES, INC.
By:______________________
Name:
Title:
-44-
<PAGE>
SCHEDULE I
SELLING SHAREHOLDERS
-45-
<PAGE>
SCHEDULE II
Number of Firm
Name of Underwriter Shares to be Purchased
-46-
<PAGE>
DUNN COMPUTER CORPORATION
1,000,000 SHARES OF COMMON STOCK
($.001 PAR VALUE)
SELECTED DEALER AGREEMENT
New York, New York
______________, 1997
Dear Sirs:
1. A registration statement on Form SB-2 (the "Registration
Statement") filed by Dunn Computer Corporation (the "Company") under the
Securities Act of 1933, as amended (the "Securities Act"), covering 1,000,000
shares of the Company's Common stock, $.001 par value, plus up to 150,000
additional shares of such Common Stock which are subject to an option granted to
us by certain shareholders of the Company for the purpose of covering
over-allotments, has become effective. The Shares (which term as used in this
Agreement means such 1,000,000 shares plus any of such 150,000 shares purchased
upon exercise of such option) are being sold for the account of the Company,
and, in the case of any over-allotments, for the account of such shareholders of
the Company, and are described in the enclosed final prospectus (the
"Prospectus"). We are offering certain of the Shares for purchase by a selected
group of dealers (the "Selected Dealers") as principals on the terms and
conditions stated herein.
Authorized Public Offering
Price: $5.00 per Share.
Dealers' Selling Concession: $_____ per Share, except that in the event that
prior to the termination of this agreement (or
prior to such earlier date as we may determine)
any of the Shares delivered to you are sold in the
open market, at or below the public offering
price, we reserve the right not to pay you, or to
charge you, and you agree to repay us on
<PAGE>
demand, the amount of the dealer's selling
concession allowed to you.
Reallowance: You may reallow not more than $____ per Share as a
selling concession on the Shares to dealers that
are members in good standing of the National
Association of Securities Dealers, Inc. (the
"NASD") or to foreign dealers not eligible to be
members of the NASD that agree to abide by the
Rules of Fair Practice of the NASD.
Delivery and Payment: On or about ________________, 1997 or such later
date as we may advise on not less than one day's
notice to you, at the offices of Network 1
Financial Securities, Inc., The Galleria, Building
Two, Penthouse, 2 Bridge Avenue, Red Bank, NJ
07701-1106, or at such other place as we may
specify on not less than one day's notice to you.
Payment is to be made, against delivery, at the
full public offering price less the concession to
dealers stated above, by a certified or official
bank check in New York Clearing House funds
payable to the order of Network 1 Financial
Securities, Inc.
Termination: This Agreement will terminate at the close of
business on the 30th day following the effective
date of the Registration Statement unless
extended, at our discretion, for a period or
periods not to exceed in the aggregate 30
additional days; but we may terminate this
Agreement, whether or not extended, at any time
without notice.
2. Any of the Shares purchased by you hereunder are to be offered by
you to the public at the public offering price, except as herein otherwise
provided and except that a reallowance from such public offering price not in
excess of the amount set forth in the Prospectus under the caption
"Underwriting" may be allowed as consideration for services rendered in
distribution to
-2-
<PAGE>
dealers that (a) are actually engaged in the investment banking or securities
business; (b) execute the written agreement prescribed by Section 24(c) of
Article III of the Rules of Fair Practice of the NASD; and (c) are either
members in good standing of the NASD or foreign banks, dealers or institutions
not eligible for membership in the NASD which represent to you that they will
promptly reoffer such Shares at the public offering price and will abide by the
conditions with respect to foreign banks, dealers and institutions set forth in
your confirmation below. We, in turn, are prepared to receive orders subject to
confirmation and allotment by us. We reserve the right to reject any order in
whole or in part or to allot less than the number of Shares applied for. Orders
transmitted by telephone must be promptly confirmed by letter or telegram.
3. You, by becoming a Selected Dealer, agree (a) to take up and pay
for the number of Shares allotted and confirmed to you; (b) not to use any such
Shares to reduce or cover any short position you may have; and (c) upon our
request, to advise us of the number of Shares purchased from us, as manager of
the selling group comprised of all the Selected Dealers (the "Selling Group"),
remaining unsold by you and to resell to us any or all of such unsold Shares at
the public offering price stated above, less all or such part of the concession
allowed you as we may determine. You are not authorized to give any information
or to make any representations other than those contained in the Prospectus or
any supplements or amendments thereto. You confirm that you have distributed
expeditiously copies of a preliminary prospectus complying with Rule 430 under
the Securities Act to all persons to whom you expected to mail confirmation of
sale not less than 48 hours prior to the time you expected to mail any such
confirmation, and that you have informed us by telegram of compliance with this
provision not later than 2:00 P.M., New York City time, on the day prior to the
anticipated effective date of the Registration Statement. You confirm that you
are conversant with the requirements for delivery of the Prospectus pursuant to
Rule 15c2-8 under the Securities Exchange Act of 1934 and that you will comply
with all of the applicable provisions thereof.
4. You agree that until termination of this Agreement you will not
make purchases or sales of Shares except (a) pursuant to this Agreement; (b)
pursuant to authorization received from us; or (c) in the ordinary course of
business as broker or agent for a customer pursuant to an unsolicited order.
5. Additional copies of the Prospectus and any supplements or
amendments thereto will be supplied in reasonable quantities upon request.
-3-
<PAGE>
6. It is expected that a public advertisement of the Shares will be
made on or about _____________, 1997. After the date of appearance of such
advertisement, but not before, you are free to advertise over your own name at
your own expense and risk.
7. The Shares are offered for delivery when, as and if sold to, and
accepted by, the Underwriters and subject to the terms stated herein and in the
Prospectus or any supplements or amendments thereto, to our right to vary the
concession and terms of offering after the release of the Shares for public
sale, to approval of counsel as to legal matters and to withdrawal, cancellation
or modification of the offer without notice.
8. Upon application, you will be informed as to the states and
jurisdictions under the securities or Blue Sky laws of which we believe the
Shares are eligible for sale, but we will assume no responsibility as to such
eligibility or the right of any Selected Dealer to sell any Shares in any state
or jurisdiction.
9. Each dealer, in becoming a Selected Dealer and accepting
membership in the Selling Group, represents that it is a member in good standing
of the NASD, or, if a foreign dealer not eligible for membership in the NASD,
that it agrees to comply with all applicable provisions of the Rules of Fair
Practice of the NASD and to make no sales within the United States, its
territories or possessions or to persons who are citizens thereof or residents
therein.
10. Nothing herein will constitute the Selected Dealers partners with
us, or each other, but you agree, notwithstanding any prior settlement of
accounts or termination of this Agreement, to bear your proper proportion of any
tax or other liability based upon the claim that the Selling Group constitutes a
partnership, association, unincorporated business or other separate entity and a
like share of any expenses of resisting any such claim.
11. Each dealer, in becoming a Selected Dealer, represents that it is
not purchasing any of the Shares for the account of anyone other than a United
States or Canadian person and agrees that it will not offer or resell any Shares
directly or indirectly outside the United States or Canada or to anyone other
than a United States or Canadian person or to any other dealer who does not so
represent and agree. As used herein "United States person" means any resident
of the United States, or any corporation, pension, profit-sharing or other trust
or other entity organized under the laws of the United States or any political
subdivision thereof (other than a branch located
-4-
<PAGE>
outside the United States of any United States person) and includes any United
States branch or office of a person who is otherwise not a United States person.
As used herein, "Canadian person" means any individual who is resident in
Canada, or any corporation, pension, profit sharing or other trust or other
entity organized under or governed by the laws of Canada or any political
subdivision thereof (other than a foreign branch or office of any Canadian
person) and includes any Canadian branch or office of a non-Canadian person.
12. As manager of the Selling Group, we will have full authority to
take such action as we may deem advisable in respect of all matters pertaining
to the offering or the Selling Group. Except as expressly stated herein, or as
may arise under the Securities Act, we will not be under any liability to any
Selected Dealer for, or in respect of, the validity or value of the Shares, the
form of, or the statements contained in, the Prospectus, the Registration
Statement, any preliminary prospectus (or any amendments or supplements to the
Prospectus or the Registration Statement) or any supplemental sales data or
other letters or instruments executed by, or obtained from, the Company, or
others, the form or validity of this Agreement or the Underwriting Agreement
between the Company and us, the eligibility of the Shares for sale under the
laws of any state or jurisdiction, the delivery of the Shares or the performance
by the Company or others of any agreement on its or their part, or any matter in
connection with any of the foregoing, except our own lack of good faith.
If you desire to become a Selected Dealer, please advise us to that
effect immediately by telegram and sign and return to us the enclosed
counterpart of this letter.
Very truly yours,
NETWORK 1 FINANCIAL
SECURITIES, INC.
By:
---------------------------------
Name:
Title:
-5-
<PAGE>
NETWORK 1 FINANCIAL SECURITIES, INC.
EXHIBIT A
TO
SELECTED DEALER AGREEMENT
Network 1 Financial Securities, Inc.
The Galleria
Building Two
Penthouse
2 Bridge Avenue
Red Bank, NJ 07701-1106
Dear Sirs:
We hereby confirm our agreement to purchase the Shares (as defined in
the foregoing Agreement) allotted to us subject to the terms and conditions of
the foregoing Agreement and your telegram to us confirming our allotment. We
hereby acknowledge receipt of the definitive Prospectus relating to the Shares,
and we confirm that in purchasing Shares we have not relied upon any statements
whatsoever, written or oral, other than the statements in such Prospectus. We
have made a record of our distribution of preliminary prospectuses and, when
furnished with copies of any revised preliminary prospectus, we have upon your
request promptly forwarded copies thereof to each person to whom we had
theretofore distributed preliminary prospectuses. We hereby represent that we
are actually engaged in the investment banking or securities business and that
we are either a member in good standing of the National Association of
Securities Dealers, Inc. (the "NASD") of if we are not such a member, that we
are a foreign dealer or institution not eligible for membership in the NASD
which agrees (i) not to make any sales within the United States, its territories
or its possessions or to persons who are citizens thereof or residents therein
and (ii) in making other sales, to comply with the NASD's interpretation with
respect to free-riding and withholding.
-6-
<PAGE>
We agree that, in connection with any purchase or sale of the Shares
wherein a selling concession, discount or other allowance is received or
granted, (1) we will comply with the provisions of Section 24 of Article III of
the NASD's Rules of Fair Practice; (2) if we are a non-NASD member broker or
dealer in a foreign country, we will also comply (a) as though we were an NASD
member, with the provisions of Sections 8 an 36 thereof and (b) with Section 25
thereof as that Section applies to a non-NASD member broker or dealer in a
foreign country.
_____________________________
Name of Selected Dealer
By:__________________________
(Authorized Signature)
Dated: _________________, 1997
-7-
<PAGE>
CERTIFICATE OF INCORPORATION
OF
DUNN COMPUTER CORPORATION
* * * * * *
1. The name of the corporation is
Dunn Computer Corporation
2. The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
3. The nature of the business or purposes to be conducted or
promoted is to engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of Delaware.
4. The aggregate number of shares of all classes of stock which the
Corporation shall have authority to issue is Twenty-Two Million (22,000,000)
shares, divided into classes as follows:
(1) Twenty Million (20,000,000) shares of
Common Stock, $.001 par value per share; and
<PAGE>
(2) Two Million (2,000,000) shares of
Preferred Stock, $.001 par value per share,
to be issued in series with such designations,
rights and preferences as shall be
determined by the Board of Directors of
the Corporation.
5. The name and address of the sole incorporator is: Denis Dufresne,
c/o Gersten, Savage, Kaplowitz & Curtin, LLP, 575 Lexington Avenue, New York,
New York 10022.
6. The corporation is to have perpetual existence.
7. In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, alter or repeal
the by-laws of the corporation.
8. Elections of directors need not be by written ballot unless the
by-laws of the corporation shall so provide.
9. Meetings of stockholders may be held within or without the State
of Delaware, as the by-laws may provide. The books of the corporation may be
kept (subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the by-laws of the corporation.
10. The corporation reserves the right to amend, alter, change or
repeal any provision contained in this
-2-
<PAGE>
certificate of incorporation, in the manner now or hereafter prescribed by
statute, and all rights conferred upon stockholders herein are granted subject
to this reservation.
11. A director of the corporation shall not be personally liable to
the corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived any improper
personal benefit.
I, THE UNDERSIGNED, being the sole incorporator hereinbefore named,
for the purpose of forming a corporation pursuant to the General Corporation Law
of the State of Delaware, do make this certificate, hereby declaring and
certifying that this is my act and deed and the facts herein stated are true,
and accordingly have hereunto set my hand this 3rd day of January, 1997.
/s/ Denis Dufresne
-----------------------------------
DENIS DUFRESNE
Gersten, Savage, Kaplowitz & Curtin
575 Lexington Avenue
New York, New York 10022
-3-
<PAGE>
EXHIBIT 3.2
ARTICLES OF INCORPORATION
OF
DUNN & ASSOCIATES, INC.
I hereby form a stock corporation under the provisions of Chapter 1 of Title
13.1 of the Code of virginia, as amended, and to that end, set forth the
following:
1. NAME. The name of the Corporation is DUNN & ASSOCIATES, INC.
2. AUTHORIZED SHARES. The aggregate number of shares which the Corporation
shall have authority to issue, and the par value per share is as follows:
<TABLE>
<CAPTION>
NUMBER
OF PAR
CLASS AND SERIES SHARES VALUE
- ----------------------------------------------------------------------------- ----------- -----
<S> <C> <C>
Common Stock................................................................. 5,000 $ .01
Preferred Stock.............................................................. 5,000 $ .01
</TABLE>
The Board of Directors may determine, in whole or in part, the preferences,
limitations and relative rights within the limits set forth in Section 13.1-638
of the preferred shares authorized by these Articles of Incorporation pursuant
to an amendment of the Articles of Incorporation in accordance with Section
13.1-639 of the Virginia Code.
3. PREEMPTIVE RIGHTS. No preemptive rights shall exist to any shareholder
who acquires shares of the Corporation.
4. REGISTERED OFFICE AND AGENT. The address of the initial registered office
of the Corporation is 11718 Bowman Green Drive, Reston, Virginia, 22090. The
name of the County in which the initial registered office is located is Fairfax
County, Virginia. The name of the Corporation's initial Registered Agent is
David W. Ralston, who is a resident of Virginia and a member of the Virginia
State Bar, and whose business address is the same as the address of the initial
Registered Office of the Corporation.
5. INITIAL BOARD OF DIRECTORS. The initial board of directors of the
Corporation shall be the following:
<TABLE>
<S> <C>
THOMAS P. DUNN 11248 Harbor Court
Reston, Virginia 22091
CLAUDIA N. OTTENSTEIN 2333 Senseney Lane
Falls Church, Virginia 22043
JUDY R. WHITE 8350 Greensboro Drive
Unit 410
McLean, Virginia 22102
LEONARD F. BARNABA 133 Cassia Street
Herndon, Virginia 22070
</TABLE>
6. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Corporation shall
indemnify each member of the Board and each officer of the Corporation now or
hereafter serving as such, who was, is or is threatened to be made a party to
any threatened, pending, or completed action, suit or proceeding, whether civil,
criminal, administrative, or investigative (including an action by, or in the
right of, the Corporation), by reason of the fact that he is or was a Board
member, officer, or agent of the Corporation
<PAGE>
or is or was serving at the request of the Corporation as a Board member,
officer or agent of another corporation, partnership, joint venture, trust or
other enterprise.
Said indemnification shall be against expenses (including attorney's fees),
judgments, fines, and amounts paid in settlement actually and reasonably
incurred by the aforementioned individuals in connection with such action, suit
or proceeding, including any appeal thereof, if they acted in good faith and in
a manner reasonably believed to be in, or not opposed to, the best interest of
the Corporation.
No indemnification shall be made in respect to any claim, issue, or manner
as to which such person shall have been adjudged to such action, suit or
proceeding to be liable for gross negligence or willful misconduct in the
performance of his duties to the Corporation, except to the extent that the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of libility and in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses that such court shall deem proper. Indemnity with respect to any
criminal action or proceeding will be provided only when the Board member or
officer had no reasonable cause to believe his act was unlawful.
The amount paid to any Board member, officer or agent of the Corporation by
way of indemnification shall not exceed the actual, reasonable and necessary
expenses incurred in connection with the matter involved. The foregoing right of
indemnification whall be in addition to but not exclusive of, any other right to
which such Board member, or officer of the Corporation may otherwise be entitled
by law.
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Incorporation this 22nd day of July, 1987.
/s/ DAVID RALSTON_______________________
INCORPORATOR
<PAGE>
EXHIBIT 3.3
BYLAWS
OF
DUNN & ASSOCIATES, INC.
ARTICLE I
OFFICES
The principal office and place of business of this corporation will be 11307
Sunset Hills Road, Suite B7, Reston, Virginia 22090. Permission and authority is
hereby given the Board of Directors to change the location of said principal
office and of said principal place of business, or either, from time to time as
it may deem advisable, and also to establish such offices or places of business
elsewhere, either within or without the State of Virginia, as in the opinion of
the Board may be advisable.
ARTICLE II
STOCKHOLDERS ANNUAL MEETINGS
SECTION 1. The annual meetings of the stockholders of this corporation
shall be held on the second Tuesday of April of each year either at the
principal office of the corporation or at such other place either in or out of
the State of Virginia as the Board of Directors may authorize and fix by
resolution or order. No prior Notice of said annual meeting shall be required.
SPECIAL MEETINGS
SECTION 2. Special meetings of the stockholders may be called at any time
by the Board of Directors, the President, or any number of stockholders holding
in the aggregate at least twenty-five percent (25%) of the number of shares
outstanding. Such meetings shall be held at the principal office of the
corporation unless called by the Board of Directors to be held at some other
place, in which event it shall be held at such other place.
NOTICE OF SPECIAL MEETINGS
SECTION 3. Notice of any special meeting of the stockholders shall be given
by written notice of the time and place thereof mailed to each of the
stockholders at least ten (10) days prior to such meeting, such notice to be
addressed to the stockholder at his last post office address appearing on the
books of the corporation.
The notice of special meetings shall state the business to be transacted,
and no business other than that included in the notice or incidental thereto
shall be transacted at such meeting.
WAIVER OF NOTICE
SECTION 4. Any meeting of the stockholders may be held by agreement in
writing of all the stockholders, and where notice or publication of any notice
is required, the same may be waived in writing by all of the stockholders. Any
meeting of the stockholders at which all the outstanding stock cf the
corporation is present or represented shall be valid and binding,
notwithstanding lack or insufficiency of notice.
QUORUM--ADJUSTMENTS
SECTION 5. At all meetings of the stockholders, a quorum shall consist of
at least a majority of all of the shares of stock issued and outstanding,
exclusive of that held by the corporation, either in person or by proxy.
<PAGE>
If a sufficient number of shares is not present at the time and place
appointed, any number of shares present or represented, less than a quorum, may
adjourn any stockholders' meeting from time to time until the meeting is
regularly constituted and the business to come before the meeting is completed.
VOTING
SECTION 6. Upon any question to be determined at a stockholders' meeting
other than the election of directors, which is otherwise provided for by statute
or by Section 3 of Article III of these Bylaws, if a vote by stock be demanded
upon such question by any stockholder, each stockholder shall be entitled to one
vote for each share of stock owned by him and entitled to a vote, and he may
exercise this right in person or by proxy.
The concurrence by the vote of not less than a majority of the capital stock
present or represented at any meeting and entitled to vote shall be necessary
and prerequisite to any corporate action to be taken at any stockholders'
meeting.
RECORD OF MEETINGS
SECTION 7. A record shall be kept of the meeting of the stockholders and
the action taken at the same, which shall be verified by the person acting as
Secretary thereof.
ARTICLE III
DIRECTORS
NUMBER, QUALIFICATION AND TERM OF OFFICE
SECTION 1. The business, property and affairs of the corporation shall be
managed and controlled by its Board of Directors. The Board of Directors shall
consist of not less than three nor more than seven persons, as may be determined
by the stockholders from time to time, to be elected at the first meeting of the
stockholders and at every annual meeting thereafter. Such directors need not be
stockholders of the corporation nor residents of the State of Virginia. They
shall hold office for one year and until their successors are elected and
qualified.
EXECUTIVE COMMITTEE
SECTION 2. The Board of Directors may by resolution or resolutions passed
by majority of the whole Board, designate and elect an Executive Committee of
not less than three members of the Board of whom one shall be the President of
the corporation. The Executive Committee shall have and may exercise all the
powers of the Board of Directors in the management of the business affairs of
the corporation when the Board is not in session, and shall have power to
authorize the seal of the corporation to be affixed to all papers which may
require it. The Executive Committee shall meet upon the call of the President
and shall keep a full record of its proceedings which may be reviewed by the
Board of Directors at any time. The Executive Committee shall serve at the will
and pleasure of the Board of Directors and the Board of Directors may change the
membership of the Executive Committee at any time, provided, however, that the
President of the corporation shall always be a member of the Executive
Committee.
ELECTIONS
SECTION 3. In all elections of directors each stockholder shall have the
right to cast one vote for each share of stock owned by him and entitled to
vote, and he may cast the same in person or by proxy, for as many persons as
there are directors to be elected, or he may cumulate such votes and give one
candidate as many votes as the number of directors to be elected multiplied by
the number of his shares of stock shall equal; or he may distribute them on the
same principle among as many candidates and in such manner as he shall desire,
and the directors shall not be elected in any other manner.
<PAGE>
VACANCIES
SECTION 4. The stockholders at any meeting may remove any director and fill
the vacancy until the next annual meeting. A vacancy in the Board occurring from
any other cause may be filled by the Board until the next annual meeting of the
stockholders.
MEETINGS
SECTION 5. Regular meetings of the Board of Directors may be held at such
time and place as may be hereafter prescribed by these Bylaws, or as the Board
may from time to time designate by resolution. No notice shall be required as to
regular meetings of the Board if the Board by resolution determines a precise
time and place for such meetings.
Special meetings of the Board may be called by the President, or any two
directors.
Notice of any meeting of the Board may be given, until otherwise ordered by
the Board of Directors, by the Secretary of the corporation or by the person or
persons calling such meeting, at least five days before the time of such
meeting, either by written notice thereof mailed to each director, or by
telegram or telephone.
Meetings of the Board may be held at any time and place without notice upon
the written consent of all the directors.
The action of a majority of the Board, although not at a regularly called
meeting, and the record thereof, if assented to in writing by all the members of
the Board, shall be as valid and effective in all respects as if such action
were taken by the Board in regular meeting assembled.
QUORUM
SECTION 6. Until otherwise prescribed by these Bylaws, a majority of the
Board shall constitute a quorum for the transaction of business; but if at any
meeting of the Board there be less than a quorum present, a majority of those
persons present may adjourn the meeting from time to time until a quorum is
present.
AUTHORITY OF BOARD TO ENCUMBER
PROPERTY OF CORPORATION
SECTION 7. In addition to the power and authority vested in the Board of
Directors of this corporation by the statutes and laws of the State of Virginia
and under the By Laws of the corporation, the Board of Directors shall have, and
it is hereby expressly given and granted, the power, right and authority to
encumber and mortgage the real estate and other property of this corporation or
any part or parts thereof, and to convey the same in trust to secure the payment
of corporate obligations.
WHEN INTEREST OF DIRECTOR DOES NOT DISQUALIFY HIM
SECTION 8. No person duly elected a director of this corporation shall be
disqualified to take office as such director, or to serve as such, or to vote
upon any matter coming before the Board of Directors of this corporation, or to
do any other act or thing otherwise proper to be done as such director, by
reason of the fact that such person is a stockholder, director, officer or
employee of any other corporation; or is a partner, or proprietor of another
business, the Board of Directors of this corporation being expressly authorized
to make, approve or ratify contracts, leases, agreements and other transactions
between this corporation and any other corporation or business notwithstanding
any interest which any member or members of the Board of Directors of this
corporation may have in such corporation or business.
<PAGE>
RECORD OF THE BOARD
SECTION 9. The Board of Directors shall cause to be kept a record of its
proceedings which shall be verified by the signature of the person acting as
Secretary of the meeting. On any question as to which there is disagreement the
names of the record, if any member at the time requires it.
BOOKS OF ACCOUNT--ANNUAL REPORT
SECTION 10. The directors and officers shall keep accurate accounts of the
corporate transactions and to such end shall cause the books of the corporation
to be settled and balanced at least once in every twelve months. The Board of
Directors may from time to time adopt such annual accounting periods as it shall
deem advisable.
ARTICLE IV
OFFICERS AND AGENTS
ELECTION AND APPOINTMENT
SECTION 1. As soon as may be after their election, the Board of Directors
shall choose a President of the corporation from among the directors, who shall
hold office until his successor is elected and qualified.
At the same time the Board of Directors shall choose a Vice President, a
Secretary and a Treasurer, none of whom need be members of the Board. The
directors may at any time elect from among the directors a Chairman of the Board
of Directors, and may also elect an Executive Vice President, an Assistant
Secretary and an Assistant Treasurer, who need not be members of the Board. All
of the officers in this paragraph mentioned shall hold office during the
pleasure of the Board.
The Board of Directors may employ such other employees, agents, attorneys
and representatives as the Board may deem advisable to perform such duties as
the Board may prescribe, and fix their compensation.
If required by the Board, the President, Vice President, Executive Vice
President, Treasurer, Secretary or any officer, agent or employee appointed by
the Board shall give bond payable to the corporation in such penalty and with
such conditions and security as the Board may approve.
COMPENSATION
SECTION 2. The Board of Directors of this corporation shall have, and it is
hereby given, the authority and right to fix the compensation of all officers
(including members of the Board of Directors and the officers mentioned in
Section 1 immediately above), agents, and employees of the corporation, who
shall receive such compensation as the Board may from time to time prescribe.
PRESIDENT
SECTION 3. The President shall be the chief executive officer of the
corporation. Unless some other officer or agent is specially appointed and
authorized for the purpose, the President shall sign the corporate name of the
corporation to all deeds, mortgages, writings and other contracts made by the
corporation, except such as are necessary or incidental to the exercise of the
powers vested in other officers or agents by the Board of Directors; and
generally, the President shall have and exercise supervision and control over
all the business, affairs and property of the corporation, except as may be
vested in other officers or agents by action of the Board of Directors, and
shall perform such duties as are incident to the conduct of its business not
otherwise provided for in its Bylaws or by action of the Board of Directors or
vested in other officers or agents by action of the Board of Directors.
<PAGE>
VICE PRESIDENT
SECTION 4. The vice President shall in the absence or incapacity of the
President perform the duties of the President and shall have such other powers
and authority as may be assigned to him by the Board of Directors, either
generally or specifically.
EXECUTIVE VICE PRESIDENT
SECTION 5. The Executive Vice President shall nave supervision and control
over so much of the business affairs and property of the corporation as may be
delegated to him from time to time by the Board of Directors, either generally
or specifically.
SECRETARY
SECTION 6. The Secretary, or an Assistant Secretary, shall have the custody
of the minute book, stock book, corporate seal and all records and papers of the
corporation, subject to the supervision and control of the President, except
such as the Board may put in the custody of other officers, agents or employees.
The Secretary, or an Assistant Secretary, shall attend all meetings of the
stockholders and of the Board of Directors and act as Secretary thereof, keeping
a record of the proceedings of such meetings in a book to be maintained for the
purpose. The Secretary shall give or cause to be given, unless otherwise
specially provided, notice to all meetings of the stockholders, directors,
committees and other meetings of the officers or representatives of the
corporation, and shall perform such other duties as may be prescribed by the
Board of Directors or the President.
TREASURER
SECTION 7. The Treasurer or Assistant Treasurer shall have custody of the
corporate funds and securities, subject to the supervision and control of the
President, shall keep full and accurate accounts of receipts and disbursements
of the corporation; and shall deposit all moneys and other valuable effects, in
the name and to the credit of the corporation, in such depositories as may be
designated by the Board of Directors.
The Treasurer shall disburse the funds of the corporation subject to such
regulations as may be prescribed by the Board of Directors, taking proper
vouchers for such disbursements, and shall render to the President and to the
directors at regular meetings of the Board whenever they, or any of them, may
request it, an account of transactions as Treasurer and of the financial
condition of the corporation, and such other reports as may from time to time be
required of him by the President.
SIGNATURE OF ORDERS FOR THE
PAYMENT OF MONEY
SECTION 8. The funds of the corporation shall be disbursed in such manner
as may be prescribed by the Board of Directors. All checks, notes, drafts and
other orders of the corporation for the payment of money shall be drawn, signed
or countersigned as the Board of Directors may from time to time prescribe.
ARTICLE V
CAPITAL STOCK
CERTIFICATE OF STOCK
SECTION 1. The Board of Directors shall cause to be issued to any
association or its legal receiver appearing on the books of the corporation to
be the owner of any shares of its stock, a certificate or certificates therefor,
under the corporate seal of the corporation, to be signed by the President, or a
Vice President, and the Secretary, or an Assistant Secretary, of the
corporation, which certificate shall be in
<PAGE>
such form as the Board of Directors may adopt. Such certificates shall be issued
in order from a stock certificate book to be kept by the Secretary under the
supervision of the Board.
Unless otherwise specially ordered by the Board, such certificate shall be
issued or delivered until the stock represented thereby has been fully paid for
or security satisfactory to the Board given for the residue remaining unpaid;
but such payment may be made in property, property rights services or otherwise
when authorized and approved by the Board of Directors.
TRANSFER OF STOCK
SECTION 2. Shares of the capital stock of the corporation shall be
transferable by it only upon the books of the corporation by the holder thereof
in person or by attorney upon surrender and cancellation of the certificate for
the same.
CLOSING OF TRANSFER BOOKS AND FIXING RECORD DATE
SECTION 3. For the purpose of determining shareholders entitled to notice
of or to vote at any meeting of shareholders, or shareholders entitled to
receive payment of any dividend, or in order to make a determination of
shareholders for any proper purpose, the Board of Directors may provide that the
stock transfer books shall be closed for a stated period, but not to exceed, in
any case, fifty (50) days. If the stock transfer books shall be closed for the
purpose of determining shareholders entitled to notice of or to vote at a
meeting of shareholders, such books shall be closed for at least ten (10) days
immediately preceding such meeting. In lieu of closing the stock transfer books,
the Board of Directors may fix, in advance, a date as the record date for any
determination of shareholders, such date, in any case, to be not more than fifty
(50) days and, in case of a meeting of shareholders, not less than ten (10) days
prior to the date on which the particular action requiring such determination of
shareholders is to be taken. If the stock transfer books are not closed and no
record date is fixed for the determination of shareholders entitled to notice of
or to vote at a meeting of shareholders, or shareholders entitled to receive
payment of a dividend, the date on which notice of the meeting is mailed, or the
date on which the resolution of the Board of Directors declaring such dividend
is adopted, as the case may be, shall be the record date for such determination
of shareholders.
ARTICLE VI
GENERAL PROVISIONS
DIVIDENDS
SECTION 1. The Board of Directors may declare, and the corporation may pay,
dividends on its outstanding shares in cash, property, or its own shares,
pursuant to law and subject to the provisions of its Articles of Incorporation.
SECTION 2. Before payment of any dividend, there may be set aside out of
any funds of the corporation available for dividends, such sum or sums as the
directors, from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or equalizing dividends, or for such
other purpose as the directors shall think conducive to the interest of the
Corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
CHECKS
SECTION 3. All checks or demands for money and notes of the corporation
shall be signed by such officer or officers, or such other person or persons as
the Board of Directors may, from time to time, designate.
FISCAL YEAR
SECTION 4. The fiscal year of the corporation shall be fixed by resolution
of the Board of Directors.
<PAGE>
SEAL
SECTION 5. The corporate seal of the corporation shall have inscribed
thereon the name of the corporation, the year of its organization, and the state
of incorporation. The seal may be used by causing it, or a facsimile thereof, to
be impressed or affixed or reproduced or otherwise.
ARTICLE VII
AMENDMENTS
SECTION 1. These Bylaws may be altered, amended or repealed, or new bylaws
adopted, at any regular meeting of the Board of Directors, or at any special
meeting of the Board of Directors, if notice of such proposed action be
contained in the notice of such special meeting.
<PAGE>
UNDERWRITER'S WARRANT TO PURCHASE
__________ Common Shares
DUNN COMPUTER CORPORATION
(a Delaware corporation)
Dated: ______________, 1997
NO PUBLIC OFFERING OF THIS WARRANT OR THE UNDERLYING SECURITIES MAY BE MADE
UNTIL THE EFFECTIVENESS OF A REGISTRATION STATEMENT OR OF A POST-EFFECTIVE
AMENDMENT THERETO UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT")
COVERING THIS WARRANT OR SUCH UNDERLYING SECURITIES. TRANSFER OF THIS WARRANT IS
RESTRICTED UNDER PARAGRAPHS 1 AND 3 BELOW.
THIS CERTIFIES THAT ___________________________ (the "Holder"), is entitled
to purchase from Dunn Computer Corporation, a Delaware corporation (hereinafter
called the "Company"), at the prices and during the periods as hereinafter
specified, _______ shares (the "Shares") of the Company's Common Stock, at an
exercise price of $6.50 per Share (the "Exercise Price").
This Warrant, which is non-redeemable, is issued pursuant to an
Underwriter's Agreement between the Company and Network 1 Financial Securities,
Inc. (the "Underwriter") in connection with a public offering of 1,000,000
Shares through the Underwriters, in consideration of $10.00 received therefore.
Except as specifically otherwise provided herein, the Shares issued pursuant to
this Warrant (the "Warrant") shall bear the same terms and conditions as
described under the caption "Description of Securities-Common Stock" in the
Company's Registration Statement on Form SB-2, File No. 33-_______
("Registration Statement"), except that the Holder shall have registration
rights under the Securities Act of 1933, as amended (the "Act"), for the Shares
and as more fully described in Paragraph 6 of this Warrant.
1. The rights represented by this Warrant shall be exercised at the
prices and during the periods as follows:
<PAGE>
(a) During the period from January 26, 1994 to January 25, 1995,
inclusive, the Holder shall have no right to purchase any Shares hereunder.
(b) Between __________, 1998 and __________, 2002, inclusive, the
Holder shall have the right to purchase the Shares hereunder at a Exercise Price
of one hundred and thirty percent 130% of the public offering price for the
shares set forth in the Registration Statement.
(c) After __________, 2002, the Holder shall have no right to
purchase any Shares hereunder and this Warrant shall expire thereon effective at
5:00 p.m., New York City time on __________, 2002.
2. The rights represented by this Warrant may be exercised at any time
within the period above specified in Paragraph 1(b), in whole or in part, by (i)
the surrender of this Warrant (with the purchase form at the end hereof properly
executed) at the principal executive office of the Company (or such other office
or agency of the Company as it may designate by notice in writing to the Holder
at the address of the Holder appearing on the books of the Company); (ii)
payment to the Company of the Exercise Price then in effect for the number of
Shares specified in the above mentioned purchase form together with applicable
stock transfer taxes, if any; and (iii) delivery to the Company of a duly
executed agreement signed by the person(s) designated in the purchase form to
the effect that such person(s) agree(s) to be bound by the provisions of
Paragraph 6 and subparagraphs (b), (c) and (d) of Paragraph 7 hereof. This
Warrant shall be deemed to have been exercised, in whole or in part to the
extent specified, immediately prior to the close of business on the date this
Warrant is surrendered and payment is made in accordance with the foregoing
provisions of this Paragraph 2, and the person or persons in whose name or names
the certificates for Shares shall be issuable upon such exercise shall become
the holder or holders of record of such Shares at that time and date. The
certificates for the Shares so
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<PAGE>
purchased shall be delivered to the Holder within a reasonable time, not
exceeding 10 business days, after the rights represented by this Warrant shall
have been so exercised.
3. This Warrant shall not be transferred, sold, assigned, hypothecated or
exercised for a period of 12 months commencing __________, 1997, except that at
any time, subject to Paragraph 1 hereof, it may be transferred and assigned to
officers of the Underwriter or to officers or partners of the several
Underwriters or by will or pursuant to the laws of descent and distribution
(sometimes collectively referred to with the Holder as the "Holders"). In
addition, beginning 12 months after __________, 1997, transfers to parties other
than the Holders may occur. Any permitted transfer or assignment shall be
effected by the Holder (i) completing and executing the form of assignment at
the end hereof and (ii) surrendering this Warrant with such duly completed and
executed assignment form for cancellation, accompanied by funds sufficient to
pay any transfer tax, at the office or agency of the Company referred to in
Paragraph 2 hereof, accompanied by a certificate (signed by a duly authorized
representative of the Holder) stating that each transferee or assignee is a
permitted transferee or assignee under this Paragraph 3 hereof, accompanied by
an opinion of the Holder's counsel reasonably satisfactory to the Company's
counsel to the effect that such transfer or assignment is exempt from
registration under the Act, and accompanied by the written representation from
each such transferee or assignee addressed to the Company stating that such
transferee or assignee agrees to be bound by the terms of this Warrant;
whereupon the Company shall issue, in the name or names specified by the Holder
(including the Holder) a new Warrant or Warrants of like tenor with appropriate
legends restricting transfer under the Act and representing in the aggregate
rights to purchase the same number of Shares as are purchasable hereunder.
4. The Company covenants and agrees that all Shares purchased hereunder
will, upon issuance, be duly and validly issued, fully paid and nonassessable
and no personal liability will
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<PAGE>
attach to the Holder thereof. The Company further covenants and agrees that
during the period within which this Warrant may be exercised, the Company will
at all times have authorized and reserved a sufficient number of common shares
to provide for the exercise of this Warrant.
5. This Warrant shall not entitle the Holder to any voting rights or
other rights as a stockholder of the Company, either at law or in equity, and
the rights of the Holder are limited to those expressed in this Warrant and are
not enforceable against the Company except to the extent set forth herein.
6. (a) The Company shall advise the Holders, whether the Holders hold
this Warrant or have exercised this Warrant and hold common shares, by written
notice at least 30 days prior to the filing of any post-effective amendment to
the Registration Statement or of any new registration statement or
post-effective amendment thereto under the Act (excluding, however, registration
statements on Form S-4 or S-8 or such forms as shall be comparable to these
forms) covering any securities of the Company inclusive of any registration
statement on Form SB-2 or any successor form thereto, for its own account or for
the account of others, and will for a period of five years commencing one year
from the date of SEC effectiveness upon the request of the Holders, include, at
its own expense on one occasion only, in any such post-effective amendment or
registration statement such information as may be required to permit a public
offering of any of the Shares (the "Registrable Securities"). The Company shall
supply prospectuses in order to facilitate the public sale or other disposition
of the Registrable Securities, use its best efforts to register and qualify any
of the Registrable Securities for sale in such states as such Holders reasonably
designate and do any and all other acts and things which may be necessary to
enable such Holders to consummate the public sale of the Registrable Securities,
and furnish indemnification in the manner provided in Paragraph 7 hereof. The
Holders shall furnish information reasonably requested by the Company in
connection with such post-effective
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<PAGE>
amendments or registration statements, including their intentions with respect
thereto, and shall furnish indemnification as set forth in Paragraph 7 hereof.
The Company shall continue to advise any Holders of the Registrable Securities
of its intention to file a registration statement or amendment pursuant to this
subparagraph 6(a) until the earlier of (i) five years from the date of the
definitive Prospectus; or (ii) such time as all of the Registrable Securities
have been registered under the Act.
(b) If any 50% holder (as defined below) shall give notice to the
Company at any time during the five year period commencing one year from the
date of SEC effectiveness to the effect that such holder desires to register
under the Act any Registrable Securities, under such circumstances that a public
distribution (within the meaning of the Act) of any such Registrable Securities
will be involved, then the Company will as promptly as practicable after receipt
of such notice, but not later than 60 days after receipt of such notice, file a
post-effective amendment to the current Registration Statement or a new
registration statement pursuant to the Act to the end that the Registrable
Securities may be publicly sold under the Act as promptly as practicable
thereafter and the Company will use its best efforts to cause such registration
to become and remain effective as provided herein (including the taking of such
steps as are necessary to obtain the removal of any stop order); provided, that
such 50% holder shall furnish the Company with appropriate information in
connection therewith as the Company may reasonably request; and provided,
further, that the Company shall not be required to file such a post-effective
amendment or registration statement on more than one occasion. All expenses of
such registration or qualification, including, but not limited to, legal,
accounting and printing and mailing fees, will be borne by the Company. The
Company will maintain such registration statement or post-effective amendment
current under the Act for a period of at least nine months from the effective
date thereof. The Company shall supply prospectuses in order to facilitate the
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<PAGE>
public sale of the Registrable Securities, use its best efforts to register and
qualify any of the Registrable Securities for sale in such states as such 50%
holder reasonably designates and furnish indemnification in the manner provided
in Paragraph 7 hereof.
(c) The Holders may, in accordance with subparagraphs 6(a) or 6(b),
at their option, request the registration of the Shares in a filing made by the
Company prior to the acquisition of the Shares upon exercise of the Warrants.
The Holders may thereafter exercise the Warrants at any time or from time to
time subsequent to the effectiveness under the Act of the registration statement
in which the Shares were included.
(d) The term "50% holder", as used in this Paragraph 6, shall include
any owner or any combination of owners of Warrants or Shares obtainable upon
exercise of the Warrants if the aggregate number of Shares held of record by it
or them, plus the aggregate number of Shares which it or they are entitled to
purchase pursuant to the exercise of Warrants of which it or they are the Holder
or Holders, would constitute 50% percent of the Shares issuable upon exercise of
the Warrant(s) originally issued.
(e) The following provisions of this Paragraph 6 shall also be
applicable:
(i) Within 10 days after receiving any notice pursuant to
subparagraph 6(b), the Company shall give notice to the other Holders of the
Warrants and Shares, advising that the Company is proceeding with such
post-effective amendment or registration and offering to include therein the
Registrable Securities of such other Holders, provided that they shall furnish
the Company with all information in connection therewith as shall be necessary
or appropriate and as the Company shall reasonably request in writing. Following
the effective date of such post-effective amendment or registration, the Company
shall, upon the request of any Holders of Registrable Securities, forthwith
supply such number of prospectuses meeting the requirements of the Act, as shall
be reasonably requested by such Holders. The Company shall
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<PAGE>
use its best efforts to qualify the Registrable Securities for sale in such
states as the 50% percent holder shall designate at such times as the
registration statement is effective under the Act, provided the Company shall
not be required to qualify the Registrable Securities in any state which as a
condition to qualification, impose restrictions on the transfer of shares by any
other shareholders of the Company.
(ii) To the extent permitted by law, the Company shall bear the
entire cost and expense of any registration of securities initiated by it under
subparagraph 6(a) hereof notwithstanding that the Registrable Securities subject
to this Warrant may be included in any such registration. To the extent
permitted by law, the Company shall also comply with one request for
registration made by the 50% holder pursuant to subparagraph 6(b) hereof at the
Company's own expense and without charge to any Holders of the Registrable
Securities. Notwithstanding the foregoing, any Holders whose Registrable
Securities are included in any such registration statement pursuant to this
Paragraph 6 shall, however, bear the fees of any counsel retained by them, blue
sky fees relating to such Registrable Securities and attendant legal fees, and
any transfer taxes or underwriting discounts or commissions applicable to the
Registrable Securities sold by them pursuant thereto and, in the case of a
registration pursuant to subparagraph 6(a) hereof, any additional registration
fees attributable to the registration of such Holder's Registrable Securities.
7. (a) Whenever, pursuant to Paragraph 6, a registration statement
relating to any Registrable Securities is filed under the Act, amended or
supplemented, the Company, by executing this Warrant, acknowledges that it will
indemnify and hold harmless each of the Holders of the Registrable Securities
covered by such registration statement, amendment or supplement (each of such
Holders being hereinafter called the "Distributing Holder"), each person, if
any, who controls (within the meaning of the Act) the Distributing Holder, and
each officer, employee, partner or agent of the Distributing Holder, if the
Distributing Holder is a broker or dealer, and each underwriter (within the
meaning of the Act) of such securities and each person, if any, who controls
(within the meaning of the Act) any such underwriter, and each officer,
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<PAGE>
employee, agent or partner of such underwriter against any losses, claims,
damages or liabilities, joint or several, to which the Distributing Holder, any
such underwriter or any other such person may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any such registration
statement or any preliminary prospectus or final prospectus constituting a part
thereof or any amendment or supplement thereto, or arise out of or are based
upon the omission to state therein, material fact required to be stated therein
or necessary to make the statements therein not misleading; and will reimburse
the Distributing Holder and each such underwriter or such other person for any
legal or other expenses reasonably incurred by the Distributing Holder,
underwriter or such other person in connection with investigating or defending
any such loss, claim, damage, liability or action; provided, however, that the
Company will not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in said
registration statement, said preliminary prospectus, said final prospectus or
said amendment or supplement in reliance upon and in conformity with written
information furnished by such Distributing Holder, any other Distributing Holder
or any such underwriter for use in the preparation thereof.
(b) Whenever, pursuant to Paragraph 6, a registration statement
relating to the Company's common shares is filed under the Act, amended or
supplemented, the Distributing Holder by its acceptance of this Warrant
acknowledges that it will indemnify and hold harmless the Company, each of its
directors, each of its officers who have signed said registration
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<PAGE>
statement and such amendments and supplements thereto, and each person, if any,
who controls the Company (within the meaning of the Act) against any losses,
claims, damages or liabilities to which the Company or any such director,
officer or controlling person may become subject, under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue or alleged untrue statement
of any material fact contained in any such registration statement or any
preliminary prospectus or final prospectus constituting a part thereof, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or the alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent that such untrue statement or alleged
untrue statement or omission or alleged omission was made in said registration
statement, said preliminary prospectus, said final prospectus or said amendment
or supplement in reliance upon and in conformity with written information
furnished by such Distributing Holder for use in the preparation thereof; and
will reimburse the Company or any such director, officer or controlling person
for any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action.
(c) After receipt by an indemnified party under this Paragraph 7 of
notice of the commencement of any action, such indemnified party will, within 15
days thereof, give the indemnifying party notice of the commencement of such
action if a claim in respect thereof is to be made against any indemnifying
party; the omission so to notify the indemnifying party will relieve it from any
liability which it may have to any indemnified party under this Paragraph 7.
Notice shall be mailed, delivered or telegraphed and confirmed, if to Holder,
at:
Network 1 Financial Securities, Inc.
2 Bridge Avenue
Red Bank, New Jersey 07701-1106
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<PAGE>
and if to the Company, at:
Dunn Computer Corporation
1306 Squire Court Sterling,
Virginia 20166
Attention: Thomas P.Dunn
with a courtesy copy to the Company's counsel, at:
Gersten, Savage, Kaplowitz & Curtin, LLP
575 Lexington Avenue
New York, New York 10022-6102
or to such other addresses as the Holder and the Company may provide the other.
(d) In case any such action is brought against any indemnified party,
and it notifies an indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Paragraph 7 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation.
(e) In the event any indemnified party pays any amount in total or
partial settlement of any claim without the prior written approval of any
indemnifying party which approval shall not be unreasonably withheld, then the
failure to obtain such approval will relieve the indemnifying party from any
liability it may have to any indemnified party under this Paragraph 7.
8. The Exercise Price and the number and kind of securities purchasable
upon the exercise of each Warrant shall be subject to adjustment from time to
time upon the happening of certain events as hereinafter provided. The Exercise
Price in effect at any time and the number
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<PAGE>
and kind of securities purchasable upon exercise of each Warrant shall be
subject to adjustment as follows:
(a) In case the Company shall: (i) pay a stock dividend of its common
shares on its common shares; (ii) subdivide or reclassify its outstanding common
shares into a greater number of shares; or (iii) combine or reclassify its
outstanding common shares into a smaller number of shares, the 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
proportionately adjusted so that each of the Holders of any Warrants exercised
after such date shall be entitled to receive the aggregate number and kind of
shares which, if such Warrant had been exercised immediately prior to such time,
the Holder would have received upon such exercise. Such adjustment shall be made
successively whenever any event listed above shall occur.
(b) In case the Company shall hereafter issue rights or warrants to
all holders of its common shares entitling them to subscribe for or purchase
common shares (or securities convertible into common shares) at a price or
having a conversion price per share less than the current market price of each
common share (as defined in subparagraph 8(d) below)) on the record date
mentioned below, the Exercise Price shall be adjusted so that the same shall
equal the price determined by multiplying the Exercise Price in effect
immediately prior to the date of such issuance by a fraction, of which the
numerator shall be the number of Shares outstanding on the record date mentioned
below, plus the number of additional common shares which the aggregate offering
price of the total number of common shares so offered (or the aggregate
conversion price of the convertible securities so offered) would purchase at
such current market price per common share, and of which the denominator shall
be the number of common shares outstanding on such record date, plus the number
of common shares offered for subscription or
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<PAGE>
purchase (or into which the convertible securities so offered are convertible).
Such adjustment shall be made successively whenever such rights or warrants are
issued and shall become effective immediately after the record date for the
determination of shareholders entitled to receive such rights or warrants; and
to the extent that common shares are not delivered (or securities convertible
into common shares are not delivered) after the expiration of such rights or
warrants, the conversion price shall be readjusted to the conversion price which
would then be in effect had the adjustments made upon the issuance of such
rights or warrants been made upon the basis of delivery of only the number of
common shares (or securities convertible into common shares) actually delivered.
(c) Whenever the Exercise Price payable upon exercise of each Warrant
is adjusted pursuant to the above provisions, the number of Shares purchasable
upon exercise of each Warrant shall simultaneously be adjusted by multiplying
the number of Shares initially issuable upon exercise of each Warrant by the
Exercise Price in effect on the date hereof and dividing the product so obtained
by the Exercise Price, as adjusted.
(d) For the purpose of any computation under the above provisions,
the current market price per common share at any date shall be deemed to be the
average of the daily closing prices for any 30 consecutive business days
commencing not more than 45 business days before such date, such consecutive day
period to be determined by the Board of Directors of the Company. The closing
price for each day shall be the last sale price regular way or, in case no such
reported sale takes place on such day, the average of the last reported bid and
asked prices regular way, in either case on the principal national securities
exchange on which the common shares are admitted to trading if listed, or if not
listed or admitted to trading on any such exchange, the average of the highest
reported bid and lowest reported asked prices as reported
-12-
<PAGE>
by NASDAQ, or other similar organization if NASDAQ is no longer reporting such
information, or if not so available, the fair market price as determined by the
Board of Directors.
(e) No adjustment in the Exercise Price shall be required unless such
adjustment would require an increase or decrease of at least $.05 in such price;
provided, however, that any adjustments which, by reason of this subparagraph
8(e) are not required to be made, shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this Paragraph 8
shall be made to the nearest cent or to the nearest one-hundredth of a share, as
the case may be.
(f) Whenever the Exercise Price is adjusted, as herein provided, the
Company shall promptly cause a notice setting forth the adjusted Exercise Price
and adjusted number of Shares issuable upon exercise of each Warrant to be
mailed to the Holder, at its last address appearing in the Warrant Register, and
shall cause a certified copy thereof to be mailed to the Company's transfer
agent, if any. The Company may retain a firm of independent public accountants
of recognized standing selected by the Board of Directors (who may be the
regular accountants employed by the Company) to make any computation required by
this Paragraph 8, and a certificate signed by such firm shall be conclusive
evidence of the correctness of such adjustment.
(g) In the event that at any time, as a result of an adjustment made
pursuant to the above provisions, the Holders of any Warrant thereafter shall
become entitled to receive any shares of the Company, other than common shares,
thereafter the number of such other shares so receivable upon exercise of any
Warrant shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
common shares contained in subparagraphs (a) through (g) of Paragraph 8,
inclusive, above.
-13-
<PAGE>
(h) Irrespective of any adjustments in the Exercise Price or the
number or kind of shares purchasable upon exercise of Warrants, Warrants
theretofore or thereafter issued may continue to express the same price and
number and kind of shares as are stated in the similar Warrants initially
issuable pursuant to this Agreement.
(i) No adjustment will be made pursuant to the above provisions
contained in subparagraph (a) through (h) of Paragraph 8, inclusive, regarding
the issuance of up to _________ common shares under the Company's Stock Option
Plan.
9. OFFICERS CERTIFICATE. Whenever the Exercise Price shall be adjusted,
as required by the provisions of the foregoing Paragraph 8, the Company shall
forthwith file in the custody of its Secretary or an Assistant Secretary at its
principal office and with its stock transfer agent, if any, an officer's
certificate showing the adjusted Exercise Price determined as herein provided,
setting forth in reasonable detail the facts requiring such adjustment,
including a statement of the number of additional common shares, if any, and
such other facts as shall be necessary to show the reason for and the manner of
computing such adjustment. Each such officer's certificate shall be made
available at all reasonable times for inspection by any holder of a Warrant and
the Company shall, forthwith after each such adjustment, mail a copy by
certified mail of such certificate to the Holder of any such Warrant.
10. NOTICES TO WARRANT HOLDERS. So long as this Warrant shall be
outstanding (a) if the Company shall pay any dividend or make any distribution
upon the common shares otherwise than in cash out of earned surplus; or (b) if
the Company shall offer to the holders of common shares for subscription or
purchase by them any share of any class or any other rights; or (c) if any
capital reorganization of the Company, reclassification of the capital stock of
the Company (other than a change in par value, or from no par value to par value
or as a result of a subdivision or combination of its outstanding common
shares), consolidation or merger of the
-14-
<PAGE>
Company with or into another corporation, sale, conveyance, lease or transfer of
all or substantially all of the property and assets of the Company to another
corporation, or voluntary or involuntary dissolution, liquidation or winding up
of the Company shall be effected, then, in any such case, the Company shall
cause to be mailed by certified mail to each of the Holders, at least 15 days
prior to the date specified in 10(x) or 10(y) below, as the case may be, a
notice containing a brief description of the proposed action, and stating the
date on which (x) a record date is to be taken for the purpose of such dividend,
distribution or rights, or (y) such reclassification, reorganization,
consolidation, merger, conveyance, lease, dissolution, liquidation or winding up
is to take place and the date, if any, to be fixed, as of which the holders of
common shares or other securities shall receive cash or other property
deliverable upon such reclassification, reorganization, consolidation, merger,
sale, conveyance, lease, dissolution, liquidation or winding up.
11. RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any
reclassification, capital reorganization or other change of outstanding common
shares (other than a change in 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, capital reorganization or other change
of outstanding common shares of the class issuable upon exercise of this
Warrant) or in case of any sale, lease or conveyance to another corporation of
the property of the Company as an entirety, the Company shall, as a condition
precedent to such transaction, cause effective provisions to be made so that the
Holder shall have the right thereafter by exercising this Warrant, to purchase
the kind and amount of shares of stock and other securities and property
receivable upon such reclassification, capital reorganization and other change,
consolidation, merger, sale or conveyance
-15-
<PAGE>
by a holder of the number of common shares which might have been purchased upon
exercise of this Warrant immediately prior to such reclassification, change,
consolidation, merger, sale or conveyance. Any such provision shall include
provision for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Warrant. The foregoing
provisions of this Paragraph 11 shall similarly apply to successive
reclassifications, capital reorganizations and changes of the common shares and
to successive consolidations, mergers, sales or conveyances.
The foregoing notwithstanding, in the event of any transaction in which the
holders of the Company's outstanding common shares would receive cash or cash
equivalents, the Company shall, as a condition precedent to such transaction,
cause effective provisions to be made so that the Holder shall receive cash or
cash equivalents equal to the cash or cash equivalent per share that has been
offered to all holders of the Company's then outstanding common shares
multiplied by the number of common shares which the Holder of this Warrant might
have purchased upon exercise of this Warrant in its entirety immediately prior
to such transaction, less the Exercise Price per share.
12. The Company shall not be required to issue fractions of common shares
on the exercise of this Warrant. If any fraction of a common share would, except
for the provisions of this Paragraph 12, be issuable on the exercise of this
Warrant (or any portion hereof), the Company shall purchase such fraction for an
amount in cash equal to the same fraction of the current market price of each
common share or Warrant, as defined in subparagraph 8(d) above.
The Holder of this Warrant, by acceptance hereof, expressly waives the
right to receive any fractional common share or Warrant upon exercise hereof.
13. This Agreement shall be governed by and in accordance with the laws of
the State of New Jersey.
-16-
<PAGE>
IN WITNESS WHEREOF, Dunn Computer Corporation has caused this Warrant to be
signed by its duly authorized officer and this Warrant to be dated __________,
1997.
DUNN COMPUTER CORPORATION
By:
----------------------------
THOMAS DUNN, President
-17-
<PAGE>
PURCHASE FORM
(To be signed only upon exercise of Warrant)
The undersigned, the holder of the foregoing Warrant, hereby irrevocably
elects to exercise the purchase rights represented by such Warrant for, and to
purchase thereunder, __________ Shares of the common stock of Dunn Computer
Corporation, and herewith makes payment of $________ therefore, and requests
that the shares certificates be issued in the name(s) of, and delivered to
_______________________________________________________________________________
whose address(es) is (are) ____________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
Dated: ____________________
_______________________
(Signature)
_______________________
Name (Print or Type)
_______________________
Address
_______________________
-18-
<PAGE>
TRANSFER FORM
(To be signed only upon transfer of the Warrant)
For value received, the undersigned hereby sells, assigns, and transfers
unto __________________________________________ the right to purchase shares of
the common stock of Dunn Computer Corporation, represented by the foregoing
Warrant to the extent of __________ shares, and appoints ______________________,
attorney to transfer such rights on the books of Dunn Computer Corporation, with
full power of substitution in the premises.
Dated: _______________________
_______________________
Name (Print or Type)
_______________________
Address
_______________________
SIGNATURE GUARANTEED:
______________________________________
______________________________________
<PAGE>
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------------
1995 1996
------------ ------------
<S> <C> <C>
Earnings per share:
Weighted average number of shares outstanding......................................... 4,000,000 4,000,000
Common equivalent shares from options issued during the twelve month period prior to
the initial filing of the SB-2 (using the treasury stock method)..................... 36,125 36,125
------------ ------------
Total................................................................................. 4,036,125 4,036,125
------------ ------------
------------ ------------
Net income............................................................................ $ 243,082 $ 1,239,164
------------ ------------
Earnings per share.................................................................... $ 0.06 $ 0.31
------------ ------------
------------ ------------
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated December 13, 1996, in the Registration Statement
(Form SB-2 No. 333- ) and related Prospectus of Dunn Computer Corporation
for the registration of 1,000,000 shares of its common stock.
/S/ ERNST & YOUNG LLP
Vienna, Virginia
January 8, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) DUNN
COMPUTER CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B)
FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED OCTOBER 31, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<CASH> 897,664
<SECURITIES> 150,000
<RECEIVABLES> 3,189,060
<ALLOWANCES> 15,000
<INVENTORY> 985,603
<CURRENT-ASSETS> 5,207,327
<PP&E> 196,455
<DEPRECIATION> 132,692
<TOTAL-ASSETS> 5,274,630
<CURRENT-LIABILITIES> 3,335,439
<BONDS> 0
0
0
<COMMON> 4,000
<OTHER-SE> 1,935,191
<TOTAL-LIABILITY-AND-EQUITY> 5,274,630
<SALES> 18,098,638
<TOTAL-REVENUES> 18,098,638
<CGS> 14,102,442
<TOTAL-COSTS> 14,102,442
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 57,925
<INCOME-PRETAX> 2,015,164
<INCOME-TAX> 776,000
<INCOME-CONTINUING> 1,239,164
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,239,164
<EPS-PRIMARY> .31
<EPS-DILUTED> 0
</TABLE>
