<PAGE>
As filed with the Securities and Exchange Commission on April 22, 1997
Registration No. 333-_______
=============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
------
SYSCOMM INTERNATIONAL CORPORATION
(exact name of Registrant as specified in its charter)
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<S> <C> <C>
Delaware 5081 1731 11-2889809
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Number) Identification Number)
</TABLE>
275 Marcus Boulevard
Hauppauge, New York 11788
(516) 273-3200
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
------
John H. Spielberger
Chairman of the Board, President and Chief Executive Officer
275 Marcus Boulevard
Hauppauge, New York 11788
(516) 273-3200 o (516) 952-3788 (fax)
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
------
Copies to:
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<S> <C>
Raymond S. Evans, Esq. Martin Todtman, Esq.
Norman M. Friedland, Esq. Beth S. Barash, Esq.
David M. Kastin, Esq. Todtman, Young, Nachamie, Hendler & Spizz, P.C.
Ruskin, Moscou, Evans & Faltischek, P.C. 425 Park Avenue
170 Old Country Road New York, New York 10022
Mineola, New York 11501 (212) 754-9400 o (212) 754-6262 (fax)
(516) 663-6600 o (516) 663-6641 (fax)
</TABLE>
------
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
<PAGE>
------
CALCULATION OF REGISTRATION FEE
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================================================================================================================
Proposed Maximum Proposed Maximum
Title of each Class of Securities Number of Shares Offering Price Aggregate Offering Amount of
to be Registered to be Registered (1) per Share (2) Price (2) Registration Fee
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value 1,840,000 $8.00 $14,720,000 $4,460.61
- ----------------------------------------------------------------------------------------------------------------
Representative's Common Stock
Purchase Warrants ................. 160,000 $.001 $160 (3)
- ----------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value (4) ... 160,000 $9.60 $1,536,000 $465.45
- ----------------------------------------------------------------------------------------------------------------
Total Fee ................................................................................... $4,926.06
================================================================================================================
</TABLE>
(1) Includes 240,000 shares to cover the Underwriter's over-allotment option.
(2) Estimated solely for purposes of calculating the registration fee.
(3) No fee due pursuant to Rule 457(g).
(4) Reserved for issuance upon exercise of the Representative's Common Stock
Purchase Warrants, together with such indeterminate number of shares
which may be issuable as a result of anti-dilution adjustments.
------
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 this Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
=============================================================================
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION
CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
INFORMATION REQUIRED BY ITEMS IN PART I OF FORM S-1
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Item Location in Prospectus
----------------------------------------------------------- --------------------------------------------------
<S> <C>
1. Forepart 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, Risk Factors and Ratio of
Earnings to Fixed Charges ............................. Prospectus Summary; The Company;
Risk Factors; Business
4. Use of Proceeds ....................................... Use of Proceeds
5. Determination of Offering Price ....................... Outside front cover page; Underwriting
6. Dilution .............................................. Dilution
7. Plan of Distribution .................................. Underwriting
8. Description of Capital Stock to be Registered ......... Description of Capital Stock
9. Interests of Named Experts and Counsel ................ Legal Matters; Experts
10. Information with Respect to the Registrant
(a) Item 101 of Regulation S-K ........................ The Company; Business
(b) Item 102 of Regulation S-K ........................ Business
(c) Item 103 of Regulation S-K ........................ Business
(d) Item 201 of Regulation S-K ........................ Dividend Policy; Underwriting; Description of Capital
Stock; Shares Eligible for Future Sale
(e) Financial Statements .............................. Summary Consolidated Financial Information; Selected
Consolidated Financial Data
(f) Item 301 of Regulation S-K ........................ Selected Consolidated Financial Data
(g) Item 302 of Regulation S-K ........................ Inapplicable
(h) Item 303 of Regulation S-K ........................ Management's Discussion and Analysis of Financial
Condition and Results of Operations
(i) Item 304 of Regulation S-K ........................ Experts
(j) Item 401 of Regulation S-K ........................ Management
(k) Item 402 of Regulation S-K ........................ Management
(l) Item 403 of Regulation S-K ........................ Principal Stockholders
(m) Item 404 of Regulation S-K ........................ Certain Transactions
(n) Item 405 of Regulation S-K ........................ Inapplicable
11. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities ............................ Management
</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.
SUBJECT TO COMPLETION, DATED APRIL 22, 1997
PROSPECTUS
SYSCOMM INTERNATIONAL CORPORATION
1,600,000 SHARES
COMMON STOCK
SysComm International Corporation ("SysComm" or the "Company") is hereby
offering 1,600,000 shares of Common Stock, $.01 par value per share ("Common
Stock"). Prior to the offering (the "Offering"), there has been no public
market for the Common Stock of the Company, and there can be no assurance
that such a market will develop or be sustained. See "Underwriting."
Application has been made to have the Common Stock approved for quotation
on the NASDAQ National Market, under the symbol "SYSC." It is currently
estimated that the initial public offering price of the Common Stock will be
between $6.00 and $8.00 per share. See "Underwriting" for information
relating to the factors to be considered in the initial public offering
price.
------
Investors should carefully consider the factors set forth under "Risk
Factors" commencing on page 7.
------
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 SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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=======================================================================================
Underwriting Discounts and
Price to Public Commissions(1) Proceeds to Company(2)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share ... $ $ $
- ---------------------------------------------------------------------------------------
Total (3) ... $ $ $
=======================================================================================
</TABLE>
<PAGE>
(1) Does not include additional compensation to be received by Commonwealth
Associates, as representative (the "Representative") of the several
underwriters (the "Underwriters"), in the form of: (i) a non-accountable
expense allowance in an amount equal to 1.5% of the gross proceeds
derived from the Offering; (ii) an advisory fee equal to 2% of the gross
proceeds derived from the Offering ("Advisory Fee"); and (iii) warrants
(the "Representative's Warrants") to purchase up to 160,000 shares of
Common Stock at a price equal to 120% of the initial public offering
price, exercisable for a period of four years commencing one year from
the date of this Prospectus. In addition, the Company has agreed to
indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses of the Offering payable by the Company,
including the non-accountable expense allowance and Advisory Fee,
estimated at $______ ($______ if the Underwriters' Over-Allotment Option
is exercised in full). See "Underwriting."
(3) The Company has granted to the Underwriters an option, exercisable within
30 days after the date of this Prospectus, to purchase up to 240,000
additional shares of Common Stock on the same terms and conditions as set
forth above solely to cover over-allotments, if any (the "Over-Allotment
Option"). If such option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and the Proceeds to Company will
be $_______, $_______ and $_______, respectively. See "Underwriting."
------
The shares of Common Stock are being offered on a firm commitment basis by
the Underwriters named herein, subject to prior sale, when, as and if
delivered to and accepted them subject to certain conditions. The
Underwriters reserve the right to withdraw, cancel or modify the Offering and
to reject any order in whole or in part. It is expected that certificates for
the shares of Common Stock offered hereby will be available for delivery on
or about __________, 1997, at the office of Commonwealth Associates, New
York, New York.
------
COMMONWEALTH ASSOCIATES
The date of this Prospectus is _____________, 1997
<PAGE>
[COMPANY ILLUSTRATIONS]
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S
COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------
Upon completion of the Offering, the Company will be subject to the
reporting requirements of the Securities Exchange Act of 1934. The Company
intends to furnish its stockholders with annual reports containing
consolidated financial statements audited by its independent auditors, and
quarterly reports for the first three quarters of each fiscal year containing
unaudited consolidated financial statements.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Each prospective investor is urged to read this
Prospectus in its entirety. Unless otherwise indicated, all information set
forth herein (i) assumes an initial public offering price of $7.00 per share,
(ii) assumes no exercise of the Underwriters' Over-Allotment Option, and
(iii) reflects a 2-for-1 split of Common Stock, effected on March 31, 1997,
and an amendment to the Company's Certificate of Incorporation filed with the
Secretary of State of Delaware on April 21, 1997, increasing the number of
authorized shares of Common Stock and creating a new class of preferred
stock. See "Description of Capital Stock."
THE COMPANY
SysComm International Corporation ("SysComm" or the "Company"), through
its wholly owned subsidiary, Information Technology Services, Inc.
("InfoTech"), is a leading systems integrator and reseller of computer
hardware, operating software and networking applications to Fortune 1000
companies. The Company provides its customers with cost efficient,
comprehensive solutions that satisfy their information technology
requirements. Since 1985, the Company's primary focus has been on the sale,
integration and servicing of International Business Machine Corporation
("IBM") products including personal computers, mid-range systems based on the
IBM RS/6000, servers, and the IBM AS/400. In addition, the Company
integrates, resells and services products from manufacturers such as Hewlett
Packard, Compaq, Apple, Microsoft, 3Com, Bay Networks and Novell.
In March 1997, the Company commenced the assembly and sale of IBM PCs
through IBM's Authorized Assembler Program (the "AAP") providing the Company
with greater flexibility in meeting its customers' needs. The Company
believes that this relationship with IBM will provide it with the opportunity
to enhance its responsiveness to client specific requests and orders, and
improve its operating efficiencies.
A significant percentage of the Company's revenues are derived from sales
to customers in the financial and investment communities. However, the
Company's customer base also includes mid-size retailers, manufacturers,
distributors, colleges, universities and state and local government agencies
in the Northeastern United States. The Company's customers include:
<TABLE>
<CAPTION>
<S> <C> <C>
Astra Pharmaceutical CPC International Merrill Lynch
Boston College Deutsche Bank Northeastern University
Boston Financial Group Fidelity Investments Oxford Healthcare
Brown Brothers Harriman The Gillette Company Pepsico
Cadbury-Motts GTE Services Corp. The Pershing Division of
Carrier Corporation Harvard University Donaldson Lufkin &
The Chase Manhattan Bank Healthsource Jenrette
Citibank International Business Machines Smith Barney
The City University of Corporation The Stop & Shop
New York J.P. Morgan Companies
</TABLE>
The Company intends to pursue new business by focusing on the sale and
integration of high-end systems in financial, commercial, governmental,
healthcare and educational arenas. To this end, the Company has the following
growth strategies: (i) targeting vertical markets, (ii) offering a complete
line of IBM products, including IBM mainframe systems, (iii) expanding its
role as an IBM Premier Business Partner, (iv) enhancing competitiveness
through the IBM PC Authorized Assembler Program, and (v) expanding into other
geographic regions through selected acquisitions and strategic alliances.
3
<PAGE>
The Company currently has five operating locations. From its Hauppague,
New York headquarters it operates a distribution center, a computer
configuration, integration and PC assembly facility and its technical support
services. The Company conducts its sales operations from offices located in
Hauppauge, New York City, Waltham, Massachusetts, Marlton, New Jersey, and
North Haven, Connecticut.
The Company's principal executive offices are located at 275 Marcus
Boulevard, Hauppauge, New York 11788 and its telephone number is (516)
273-3200.
IBM, AS/400, RS/6000, PC Server System/390, OS/2, Netfinity, Eduquest, and
Lotus Notes are registered trademarks of International Business Machines
Corporation. All other products are trademarks of their respective companies.
4
<PAGE>
THE OFFERING
Common Stock Offered........... 1,600,000 shares
Common Stock Outstanding
Before Offering (1).......... 3,170,540 shares
Common Stock Outstanding After
Offering (1)................. 4,770,540 shares
Use of Proceeds................ The Company intends to use the net proceeds of
the Offering (i) to establish and operate an
IBM PC assembly facility under IBM's Authorized
Assembler Program, including the lease or
purchase of a building, (ii) to reduce the
Company's interest bearing obligations to IBM
Credit Corporation, (iii) for general corporate
purposes including working capital, and (iv)
for acquisitions. See "Use of Proceeds."
Proposed NASDAQ National
Market Symbol................ SYSC
Risk Factors................... The Offering involves certain risks and
immediate substantial dilution. See "Risk
Factors" and "Dilution."
- ------
(1) Excludes 1,000,000 shares reserved for issuance under the Company's 1988
Stock Option Plan (of which 498,000 shares are issuable upon exercise of
the stock options outstanding as of the date of this Prospectus) and
160,000 shares of Common Stock issuable upon exercise of the
Representative's Warrants. See "Management -- Stock Option Plan" and
"Underwriting."
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The Summary Consolidated Financial Information set forth below was derived
from the financial statements of the Company and should be read in
conjunction with the financial statements and related notes thereto appearing
elsewhere in this Prospectus and with "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Six Months Ended March 31,
Year Ended September 30, (unaudited)
---------------------------------------------- ------------------------------
1994(1) 1995 1996 1996 1997
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales ......................... $45,459,575 $55,195,507 $98,446,698 $38,042,823 $39,158,875
Cost of sales ..................... 40,796,425 49,441,544 89,025,331 34,159,227 33,890,028
------------- ------------- ------------- ------------- -------------
Gross profit ...................... 4,663,150 5,753,963 9,421,367 3,883,596 5,268,847
Selling and administrative expenses . 3,406,316 4,079,184 5,028,812 2,382,727 2,957,149
------------- ------------- ------------- ------------- -------------
Income from operations ............ 1,256,834 1,674,779 4,392,555 1,500,869 2,311,698
Interest expense (Net) ............ (713,778) (1,207,316) (1,390,867) (633,193) (551,907)
Other income ...................... 39,630 37,126 63,151 7,964 57,324
------------- ------------- ------------- ------------- -------------
Income from continuing operations
before income taxes .............. 582,686 504,589 3,064,839 875,640 1,817,115
Provision for income taxes ........ 242,889 223,769 1,298,386 371,000 766,800
------------- ------------- ------------- ------------- -------------
Income from continuing operations . 339,797 280,820 1,766,453 504,640 1,050,315
Discontinued operations ........... 1,485,698 -- -- -- --
------------- ------------- ------------- ------------- -------------
Net income ........................ $ 1,825,495 $ 280,820 $ 1,766,453 $ 504,640 $ 1,050,315
============= ============= ============= ============= =============
Per Share Data:
Income (loss) from continuing
operations ....................... $ .10 $ .08 $ .48 $ .14 $ .29
Income (loss) from discontinued
operations ....................... $ .43 -- -- -- --
Weighted average number of shares
outstanding ...................... 3,448,900 3,614,040 3,677,290 3,686,040 3,668,540
</TABLE>
<TABLE>
<CAPTION>
March 31, 1997
---------------------------------------
(unaudited)
Actual As Adjusted (2)
------------ ---------------
<S> <C> <C>
Consolidated Balance Sheet:
Working capital ........... $ 4,217,120 $13,613,379
Total assets .............. 24,543,969 27,072,947
Short term debt ........... 6,907,940 40,669
Long term debt ............ 85,156 85,156
Stockholders' equity ...... 5,048,992 14,445,241
</TABLE>
- ------
(1) Includes sales of the Company's subsidiary, Romel Technology, Inc. (d/b/a
MSG) of $4,127,768, which was sold in November 1993. The loss from this
subsidiary was de minimis. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 11 to
Consolidated Financial Statements.
(2) As adjusted to give effect to the sale of 1,600,000 shares of Common
Stock and the initial application of the net proceeds. See "Use of
Proceeds."
6
<PAGE>
RISK FACTORS
Prospective purchasers of the Common Stock offered hereby should carefully
consider the following risk factors in addition to the other information
contained in this Prospectus or incorporated by reference. This Prospectus
contains forward-looking statements which include risks and uncertainties.
The Company's actual results, performance or achievements could differ
materially from the results expected in, or implied by, these forward-looking
statements. Factors that could cause or contribute to such differences
include those discussed in the following risk factors.
DEPENDENCE ON IBM AS A SUPPLIER
For the fiscal year ended September 30, 1996 and for the six months ended
March 31, 1997, in excess of 90% of the Company's revenues resulted from the
sale of personal computers, mid-range computer systems, networking systems
and operating software manufactured by International Business Machines
Corporation ("IBM"). Although the Company has had a long standing reseller
relationship with IBM, IBM may terminate this relationship with the Company
at will or upon relatively short notice. The Company's reseller arrangements
with IBM are not exclusive. Moreover, IBM is not obligated to have product on
hand for timely delivery to the Company, nor can IBM guarantee product
availability in sufficient quantities to meet the Company's demands.
If IBM were to discontinue direct sales to the Company as a result of
insufficient purchase volumes or for any other reason, the Company would be
required to purchase IBM products from a wholesaler or other reseller, which
would likely be on terms less favorable than those currently obtained from
IBM. There can be no assurance, therefore, that all IBM products will be
available in a timely fashion as required by the Company. The loss of IBM as
the Company's prime vendor or the loss of the Company's status as an
authorized reseller of IBM products, the deterioration of the Company's
relationship with IBM, the loss of the Company's status as a Premier Business
Partner or the deterioration of the industry's perception of IBM as a leading
manufacturer of high quality computers would have a material adverse effect
on the Company's business, results of operations or financial condition. See
"Business -- Products/IBM Relationship."
PERIODIC IBM PRODUCT SHORTAGES
From time to time, including during the quarter ended March 31, 1997, IBM
has been unable to deliver its products in a timely fashion to meet the
Company's outstanding orders, which has effected the Company's quarterly
results of operations. Specifically, during the quarter ended March 31, 1997,
delays by IBM in shipment of products resulted in a backlog of approximately
$4,000,000 of sales by the Company. For example, with respect to IBM PCs, IBM
allocates a significant portion of IBM PC's to dealers who then resell them
to customers in IBM's Large Account Initiative Program ("LAI"). IBM's
allocation of products for these large account customers, at times, has
resulted in delayed product shipments to the Company, which, in turn, delays
the Company from filling its customer orders. Accordingly, there can be no
assurance that IBM (and other manufacturers who the Company deals with) will
consistently provide an adequate supply of products in order for the Company
to fulfill all of its customers' orders in a timely manner. The failure to
obtain adequate product supplies would have a material adverse affect on the
Company's results of operations or financial condition.
SIGNIFICANT FLUCTUATIONS TO QUARTERLY RESULTS
The Company's quarterly operating results have fluctuated in the past and
will continue to do so in the future. Quarterly operating results may
fluctuate as a result of a variety of factors, including: the timing of the
Company's delivery of significant orders, the ability of IBM to deliver, in a
timely fashion, products for which the Company has received orders, the
length of the sales cycle, receipt of volume discounts by IBM, the demand for
products and services offered by the Company, the introduction or
announcements by IBM and other manufacturers relating to new products the
hiring and training of additional personnel, problems or delays associated
with the Company's assembly of personal computer systems (under the AAP) as
well as general business conditions.
7
<PAGE>
Historically, the size and timing of the Company's sales transactions have
varied substantially from quarter to quarter and the Company expects such
variations to continue in future periods, including the possibility of
repeated losses in one or more fiscal quarters. For example, in its second
quarter of fiscal year 1995, the Company did not achieve its expected
revenue, yielding a loss. This was caused by IBM's delays in shipping certain
computer systems for which the Company received orders that it expected to
deliver during that quarter. In contrast, in the second quarter of fiscal
year 1996, in the absence of significant delays by IBM in shipping computer
systems, the Company's revenue increased, generating a profit. Accordingly,
it is likely that in one or more future fiscal quarters, the Company's
operating results may be below the expectations of public market analysts and
investors. As a result, the market price of the Company's Common Stock would
be materially adversely affected. See "Management's Discussion And Analysis
Of Financial Condition And Results Of Operations."
PARTICIPATION IN IBM'S AUTHORIZED ASSEMBLER PROGRAM
In March 1997, the Company commenced operation of an IBM PC system
assembly facility under IBM's Authorized Assembler Program (the "AAP"). In
order to participate in the AAP, the Company intends to commit, in the near
future, significant capital to hire and train a high quality work force to
establish an appropriate assembly facility and to initially increase its
inventory of components to satisfy anticipated customer demand. As a
component assembler of finished products, the Company will face operational
concerns, which it has not faced as a reseller. The continued operation of
this assembly facility is dependent upon the Company complying with the terms
of its AAP agreement (the "AAP Agreement") with IBM, including satisfying
certain minimum purchase requirements, compliance with strict quality control
provisions and maintaining trained and certified personnel. The AAP Agreement
is terminable by either IBM or the Company upon 30 days' prior notice and is
immediately terminable by IBM in the event that IBM determines, in its sole
discretion, that (i) the assembled products fail to meet required
specifications, (ii) the Company materially breaches the terms and/or
conditions of the AAP Agreement, (iii) the Company engages in a course of
conduct that has injured IBM's reputation or the reputation of its products,
or (iv) the Company's status with IBM as a Business Partner is terminated for
any reason, expires or if the Company is no longer eligible to purchase IBM
personal computer components directly from IBM. In addition, the Company is
required to maintain ISO 9002 registration standards, the registered
international standard for ensuring the consistent and measurable quality of
products and services. Subject to the terms of the AAP Agreement, IBM is
permitted to periodically review the Company's performance in order to
monitor and assess continued compliance. The AAP Agreement expires on
December 31, 1997 and, although the Company plans to renew it, and there can
be no assurance that it will be renewed on similar terms, if at all.
The Company currently plans to expand its participation in the AAP to
include the workstation elements of IBM's RS/6000 computer systems. The
Company's ability to participate in the program with respect to such products
is contingent upon the Company moving into larger facilities to accommodate
such operations, equipping such facilities for assembly activities, hiring
technical employees and approval from IBM. The Company's planned operations
and future growth, to a significant extent, are dependent on the Company's
ability to participate in the AAP with respect to a broad range of IBM
product lines. There can be no assurance that the Company will be able to
successfully operate an IBM approved facility capable of serving an expanded
product line, that IBM will authorize the Company's participation in assembly
programs beyond personal computers, that the Company will maintain necessary
industry registrations or that the computer systems produced by such assembly
programs will gain market acceptance. See "Business -- Products/IBM
Relationship."
FINANCING AGREEMENT
The Company's business activities are capital intensive, requiring the
Company to finance accounts receivable and inventory. The failure to obtain
adequate product financing on a timely basis could have a material adverse
affect on the Company's business, results of operations and financial
condition. Pursuant to the Company's financing agreement ("Financing
Agreement") with IBM Credit Corporation ("IBM Credit"), the Company is
permitted to borrow up to $27,500,000, based upon 85% of all eligible
receivables due within 90 days and up to 100% of all eligible inventory. As
of March 31, 1997, borrowings outstanding under the Financing Agreement were
$6,867,271. Pursuant to the Financing Agreement, the Company's credit
availability is reduced by the
8
<PAGE>
aggregate amount of accounts payable owed to IBM Credit which, as of March
31, 1997, was $10,082,368. The Financing Agreement, which expires on
September 30, 1997, is subject to temporary increases, thereby increasing the
line of credit to $41,250,000 during certain periods. The Company is also
required to comply with certain additional financial covenants.
The amount of credit available to the Company pursuant to the Financing
Agreement at any point in time may be adversely affected by factors such as
delays in collection or deterioration in the quality of the Company's
accounts receivable, inventory obsolescence, economic trends in the computer
industry and interest rate fluctuations. Any decrease or material limitation
on the amount of capital available to the Company under the Financing
Agreement would limit the ability of the Company to fill existing sales
orders, purchase inventory or expand its sales levels and, therefore, would
have a material adverse effect on the Company's financial conditions and
results of operations. The Financing Agreement expires on September 30, 1997.
The Company has had a credit facility with IBM Credit since 1992, and the
Company believes that it will enter into a renewal of this credit facility
with IBM. There can be no assurance that the financing to the Company under
this renewal will be available in amounts at comparable or better terms than
those in effect, if at all. The inability of the Company to have continuous
access to such financing at reasonable costs would materially and adversely
impact the Company's financial condition and results of operations. See "Use
of Proceeds," "Management's Discussion And Analysis of Financial Condition
and Results of Operations."
DEPENDENCE ON IBM'S VOLUME DISCOUNT SCHEDULES AND MARKET DEVELOPMENT FUNDS
As part of its overall reseller arrangements with IBM, IBM provides the
Company with volume discounts and market development funds on products
purchased from IBM. These discounts and funds are used to offset a portion of
the Company's cost of IBM's products sold, thereby affecting income from
operation and the Company's expenses relating to marketing and technical
support resources for IBM products. Any adverse change in the volume discount
schedule available to the Company, which the Company believes is currently at
IBM's highest discount level, or changes in the availability, structure or
timing of the receipt of development funds, would materially adversely affect
the Company's business, results of operations and financial condition.
DEPENDENCE ON MAJOR CUSTOMERS; RISK OF INDUSTRY CONCENTRATION
For the last three fiscal years, 1994, 1995 and 1996, a significant
portion (47%, 55% and 50%, respectively) of the Company's revenues were
derived from sales to five principal customers, which customers vary
annually, and encompass markets wherein the demands of any one customer may
vary greatly. In addition, the Company does not have any exclusive long-term
arrangements with its customers for the continued sales of computer systems.
In fiscal year 1994, sales to The Chase Manhattan Bank accounted for 22% of
the Company's total revenues; revenues from sales to The Chase Manhattan Bank
and Deutsche Bank accounted for 23% and 14%, respectively, of the Company's
total revenues in fiscal year 1995; and revenues from sales to Deutsche Bank
and Citibank accounted for 19% and 16%, respectively, of the Company's total
revenues in fiscal year 1996. Although the number of customers who purchase
at least $250,000 of computer systems from the Company has increased from 25
in fiscal year 1994 to 37 in fiscal year 1996, the failure to acquire a
significant or principal customer could have a material adverse effect on the
Company's operations. See "Business -- Principal Markets and Customers."
In the fiscal year ended September 30, 1996, approximately 58% of the
Company's sales of computer systems were to customers in the banking,
financial and securities industry based in the Northeastern United States.
Although the Company continues to broaden its vertical market focus to
include sales to other markets, such as educational institutions, government
agencies, health care and insurance companies, the Company expects that it
will continue to derive a substantial percentage of its sales of computer
systems from such banking, financial and securities businesses. Accordingly,
unfavorable economic conditions or factors that relate to these industries,
particularly any such conditions that might result in reductions in capital
expenditures or changes in such company's information processing system
requirements, would have a material adverse affect on the Company's results
of operations.
RAPID TECHNOLOGICAL CHANGE
The industry in which the Company competes is characterized by rapid
technological change and frequent introduction of new products and product
enhancements which result in relatively short product life cycles and
9
<PAGE>
rapid product obsolescence. The expectation, or announcement of new or
enhanced products often causes customers to delay their purchasing decisions
until such new or enhanced products are announced and available. Furthermore,
the Company's success depends in large part on IBM's ability to identify and
develop products that meet the changing requirements of the marketplace. In
the event that IBM is unable to do so, the Company's continued success will
depend upon its ability to identify and source substitute products from other
vendors. There can be no assurance that the Company will be able to identify
and offer such products necessary to remain competitive or avoid losses
related to obsolete inventory and drastic price reductions. For the year
ended September 30, 1996, approximately 59% of the Company's revenues were
generated from the sale of IBM's RS/6000 mid-range business computer systems.
The failure of these systems to continue to command a significant market
share or IBM's discontinuing this computer system without a suitable
substitute would have a material adverse effect on the Company's business,
results of operations and financial condition.
MANAGEMENT OF GROWTH
The Company's ability to manage growth effectively and expand its AAP
operations will require it to continue to implement and improve its
operational, technical, financial, and sales systems, to develop the skills
of its managers and supervisors, and to hire, train, motivate and manage its
employees. There can be no assurance that the Company will be successful in
managing growth. The failure to do so would materially adversely affect the
Company's financial position and results of operations. The Company has
recently opened sales offices in Marlton, New Jersey and North Haven,
Connecticut. In October 1995 it closed a sales facility in Princeton, New
Jersey after eleven months of operation. Within the next twelve months, the
Company intends to relocate its headquarters, including its distribution
operations and assembly facilities, in the Long Island region. The Company
anticipates that it will incur substantial costs in connection with these
plans, including expenditures for construction, furniture, fixtures, and
equipment. There can be no assurance that the Company will be able to further
expand its operations successfully either through acquisition or the
establishment and operation of an IBM PC assembly facility. Expansion of the
Company's operations will be dependent upon, among other things, the
continued growth of the computer industry, the Company's ability to withstand
intense price competition, its ability to obtain new customers, and retain
skilled technicians, engineers, sales and other personnel. If the Company
does not have sufficient cash resources, its growth could be limited unless
it is able to obtain additional capital through debt or equity financings.
There can be no assurance that additional financings will be available to the
Company on commercially reasonable terms, if at all. See "Business --
Strategy."
ACQUISITION AND ACQUISITION FINANCING
In addition to expanding its operations through internal growth, the
Company intends to grow through the acquisition of selected regional
resellers. Management believes that increased competition for acquisition
candidates exists and may continue in the future, in which event there may be
fewer acquisition opportunities available to the Company as well as higher
acquisition prices. There can be no assurance that the Company will be able
to identify, acquire, manage or successfully integrate acquired businesses
into the Company without substantial costs, delays, operational, or financial
problems. To date, the Company has no understandings, commitments or
agreements with respect to any such acquisition. The Company may finance
future acquisitions by using cash and/or shares of its Common Stock for the
consideration to be paid. In the event that the Common Stock does not
maintain a sufficient market value or potential acquisition candidates are
otherwise unwilling to accept Common Stock as part of the consideration for
the sale of their businesses, the Company may be required to utilize more of
its cash resources, if available, in order to initiate and maintain its
acquisition program. If the Company does not have sufficient cash resources,
its growth could be limited unless it is able to obtain additional capital
through debt or equity financings. There can be no assurance that the
additional financing will be available to the Company on commercially
reasonable terms, if at all.
LIMITED BACKLOG OF ORDERS
Customers typically do not place recurring "long-term" orders with the
Company, resulting in a limited order backlog at any point in time. The
failure by the Company to receive orders from customers on a continuous basis
would have a material adverse affect on the Company's financial condition and
results of operations given the Company's lack of recurring orders.
10
<PAGE>
COMPETITION; PRICING COMPETITION
Many established computer manufacturers, system integrators and other
resellers of personal computer or networking products compete with the
Company in the configuration, integration and distribution of computer
systems and equipment. In the highly fragmented computer services area, the
Company competes with several larger competitors, other corporate resellers
pursuing high-end services opportunities, as well as several smaller computer
services companies. In addition, the Company competes directly with IBM for
the sale of several computer systems, including those systems manufactured by
IBM, including the RS/6000 computer system. The Company believes that the
principal competitive factors in the business in which it operates are price
and performance, product availability, technical expertise, adherence to
industry standards, financial stability, service support and reputation.
There can be no assurance that the Company will be able to compete
successfully with existing or new competition. Some of these competitors,
including IBM, have financial, technical, manufacturing, sales, marketing and
other resources which are substantially greater than those of the Company.
There can be no assurance that the Company will be able to continue to
compete successfully with existing or new competitors.
The Company and other U.S. based system integrators and resellers
currently face price and gross profit margin pressures. In recent years, all
major information system manufacturers have instituted extremely aggressive
price reductions in response to lower component costs, discount pricing by
certain competitors and increased competition from non-U.S. based information
systems manufacturers. The increased price competition among computer
manufacturers has resulted in declining gross margins for many computer
resellers and may result in a reduction in existing vendor subsidies and
reduced profitability for the Company. There can be no assurance that the
Company will be able to continue to compete effectively in the marketplace
given the continual price reductions and intense competition currently
existing in the information processing industry and any value-added
resellers. See "Business -- Competition."
DEPENDENCE ON KEY PERSONNEL
The Company's success during the foreseeable future will depend largely
upon the continued services of its founder and Chief Executive Officer, John
H. Spielberger, and the executive team of Dennis R. Wilson, Thomas J. Baehr
and Norman Gaffney, who joined the Company in 1995, 1994 and 1994,
respectively. Each of the executive officers will enter into employment
agreements upon the consummation of the Offering that expire on September 30,
1999. The loss of any of the services of the Company's key personnel could
have a material adverse affect on the Company's business, ongoing results and
financial condition. These employment agreements contain confidentiality,
non-compete, and non-solicitation provisions. In addition, the Company has
attempted to mitigate the risks associated with its dependence on John H.
Spielberger and Thomas Baehr by obtaining $1,000,000 key person life
insurance policies on each of such individuals. The Company's success also
depends in part on its ability to attract and retain qualified managerial,
technical, sales and marketing personnel. The Company's results of operations
could be adversely affected if the Company were unable to attract, hire,
assimilate, and train these personnel in a timely manner. See "Management."
CONTROL BY PRINCIPAL STOCKHOLDER
Upon completion of the Offering, John H. Spielberger, Chairman of the
Board, President and Chief Executive Officer of the Company, will continue to
beneficially own approximately 50% of the Company's outstanding Common Stock.
As a result of his stock ownership, Mr. Spielberger will have effective
control of the Company and will continue to have the power to control the
outcome of matters submitted to a vote of the Company's stockholders, such as
the election of at least a majority of the members of the Company's Board of
Directors and to direct the future operations of the Company. Such
concentration may have the effect of discouraging, delaying or preventing a
change in control of the Company. See "Principal Stockholders."
NO PRIOR MARKET FOR THE COMMON STOCK; DETERMINATION OF OFFERING PRICE;
POTENTIAL VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active trading market
will develop or be sustained or that the Common Stock will be resold
11
<PAGE>
at or above the initial public offering price. The initial public offering
price of the Common Stock offered hereby will be determined by negotiations
between the Company and the Representative. Among the factors to be
considered in determining the initial public offering price will be the
history of, and the prospects for, the Company's business and the industry in
which it competes, an assessment of the Company's management, its past and
present operations, the prospects for earnings of the Company, the general
condition of the securities market at the time of the Offering and the market
prices and earnings of similar securities of comparable companies at the time
of the Offering and prevailing market and economic conditions. See
"Underwriting."
After the Offering, the market price of the Common Stock may be subject to
significant fluctuations in response to numerous factors, including, but not
limited to, fluctuations or uncertainties in the Company's quarterly
operating results (including losses), delays with respect to the AAP,
announcements of technological innovations of new products by IBM or other
suppliers, conditions in the markets in which the Company and its competitors
compete, changes by financial analysts in their estimates of the earnings of
the Company, and the economy in general. From time to time, the stock market
experiences significant price and volume volatility which may affect the
market price of the Company's Common Stock for reasons unrelated to the
performance of the Company. Because the Company is closely dependent upon and
associated with IBM, the Company's stock price may be adversely affected
based on the performance of IBM's operations.
COMMON STOCK ELIGIBLE FOR FUTURE SALE
Immediately after completion of the Offering, the Company will have
4,770,540 shares of Common Stock outstanding, of which the 1,600,000 shares
(1,840,000 shares if the Underwriter's Over-Allotment Option is exercised in
full) sold pursuant to the Offering will be freely tradeable without
restriction or further registration under the Securities Act of 1933, as
amended ("Securities Act"), by persons other than "affiliates" of the
Company, as defined under the Securities Act. The remaining 3,170,540 shares
of Common Stock are deemed "restricted securities" as defined by Rule 144
under the Securities Act and may not be sold in the absence of registration
under the Securities Act unless an exemption from registration is available,
including the exemption provided by Rule 144. All of the restricted shares of
Common Stock will be eligible for trading under Rule 144, subject to certain
limitations and other restrictions prescribed by such rule, and to the
contractual restrictions described below, commencing 90 days following the
date of this Prospectus. The Company, its officers, directors, current
stockholders, and option holders have agreed to enter into agreements (the
"Lock-Up Agreements") under which they will agree not to sell or otherwise
dispose of any of their shares of Common Stock of the Company for a period of
one year commencing upon the date of this Prospectus, without the prior
written consent of the Representative. See "Underwriting." Sales of
substantial amounts of Common Stock, or the perception that these sales could
occur, could adversely affect the prevailing market price for the Common
Stock and could impair the ability of the Company to raise additional capital
through the sale of its securities or through debt financing.
In addition, upon completion of the Offering, the Company has agreed to
issue to the Representative warrants to purchase an aggregate of 160,000
shares of Common Stock exercisable for a four year period commencing one year
from the date of the Offering, at an exercise price equal to 120% of the
initial public offering price. The exercise of the Representative's Warrants
may dilute the book value per share of Common Stock. The holders of such
warrants may exercise them at a time when the Company would otherwise be able
to obtain additional equity capital on terms more favorable to the Company
and have the opportunity to benefit from increases in the price of the Common
Stock without risk of an equity investment. The Company has agreed to grant
certain demand and piggyback registration rights to the holders of these
warrants. Such registration rights could involve substantial expenses to the
Company and may adversely affect the terms upon which the Company may obtain
additional financing. See "Shares Eligible for Future Sale" and
"Underwriting."
Sale of substantial amounts of Common Stock in the public market may
adversely affect the market price of the Common Stock and may also adversely
affect the Company's ability to raise additional capital in the future. See
"Shares Eligible for Future Sale" and "Underwriting."
12
<PAGE>
DILUTION
Investors purchasing shares of the Common Stock in the Offering will incur
immediate and substantial dilution of approximately $3.98 per share in net
tangible book value from the assumed $7.00 per share initial public offering
price. Additional dilution may occur as a result of the exercise of options
and warrants to purchase shares of Common Stock or future acquisitions by the
Company in exchange for stock. See "Dilution."
ABSENCE OF DIVIDENDS
To date, the Company has not paid any cash dividends and does not
presently intend to pay cash dividends in the foreseeable future. See
"Dividend Policy."
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Amended Certificate of Incorporation
By-laws and Delaware Law may be deemed to have an anti-takeover effect. The
Company's Certificate of Incorporation provides that the Board of Directors
may issue additional shares of Common Stock or establish one or more classes
or series of Preferred Stock with such designations, relative voting rights,
dividend rates, liquidation and other rights, preferences and limitations
that the Board of Directors fixes without stockholder approval. Moreover, the
Company's Certificate of Incorporation and By-Laws provide that its Board of
Directors is divided into three classes serving staggered three year terms,
resulting in approximately one-third of the directors being elected each year
and also contain certain other provisions relating to voting and the removal
of the officers and directors. In addition, the Company is subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporation
Law. In general, the statute 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 the business combination is
approved in a prescribed manner. Each of the foregoing provisions may have
the effect of rendering more difficult, delaying, discouraging, preventing or
rendering more costly an acquisition of the Company or a change in control of
the Company. See "Description of Capital Stock -- Anti-Takeover Provisions;
Section 203 of the Delaware Corporation Law."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 1,600,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$9,400,000 assuming an initial public offering price of $7.00 per share and
after deducting the estimated underwriting discount and offering expenses
payable by the Company. The net proceeds will be used for (i) the
establishment and operation of an IBM assembly facility under IBM's
Authorized Assembler Program, including the lease or purchase of a building,
(ii) the reduction of the Company's interest bearing obligations to IBM
Credit Corporation, (iii) for general corporate purposes, including working
capital, and (iv) acquisitions.
The Company intends to use approximately $2,500,000 of the proceeds of the
Offering to establish and operate an IBM PC assembly facility under the AAP.
In connection with the establishment of an IBM PC assembly facility, the
Company anticipates leasing or purchasing a 25,000 to 30,000 square foot
building. In connection with the operation of this assembly facility, the
Company intends on increasing component parts inventory.
The Company intends to use the balance of the proceeds of the Offering for
working capital and acquisitions. Until such funds are required for these
purposes, these proceeds will be used to temporarily reduce the Company's
interest bearing obligations to IBM Credit Corporation under the Financing
Agreement. Pursuant to the Financing Agreement, which became effective on
September 30, 1996, the Company may borrow up to $27,500,000, based upon 85%
of all eligible receivables due within 90 days and up to 100% of all eligible
inventory. As of March 31, 1997, borrowings outstanding under this Financing
Agreement were $6,867,271. The Company's credit availability is reduced by
the aggregate amount of accounts payable owed to IBM Credit which, as of
March 31, 1997, was $10,082,368. The Financing Agreement, which expires on
September 30, 1997, is subject to temporary increases, increasing the amount
of credit to $41,250,000 during certain periods. Effective September 30,
1996, interest on the outstanding borrowings is payable monthly at prime plus
1.375%, or prime plus 6.5% should the Company fail to meet certain collateral
requirements. See "Risk Factors -- Financing Agreement."
The Company believes that there are numerous opportunities available to
acquire comparable and established regional system integrators. The Company
plans to actively seek out and evaluate potential acquisitions of such
businesses. As of the date of this Prospectus, however, the Company has no
agreements, understandings or commitments and is not engaged in any
negotiations relating to any potential acquisitions.
DIVIDEND POLICY
The Company intends to retain earnings for use in the operation and
expansion of its business and therefore does not anticipate paying cash
dividends on the Common Stock in the foreseeable future. The payment of
dividends is within the discretion of the Board of Directors and will be
dependent, among other things, upon earnings, capital requirements, financing
agreement covenants, including the Financing Agreement, the financial
condition of the Company and applicable law.
14
<PAGE>
DILUTION
As of March 31, 1997, the Company had a net tangible book value of
$5,003,359 or $1.58 per share of Common Stock outstanding. Net tangible book
value equals the tangible net worth of the Company (tangible assets less
total liabilities) divided by the aggregate number of shares of Common Stock
outstanding. After giving effect to the sale by the Company of 1,600,000
shares of Common Stock offered hereby at an assumed initial public offering
price of $7.00 per share and the application of the net proceeds therefrom,
the pro forma net tangible book value of the Company as of March 31, 1997,
would be $14,399,608 or $3.02 per share. This represents an immediate
increase in pro forma net tangible book value of $1.44 per share to current
stockholders and an immediate dilution of $3.98 per share to new investors.
The following table illustrates this per share dilution:
Assumed initial public offering price .............. $7.00
Net tangible book value before the Offering ... $1.58
Increase attributable to new investors ........ 1.44
-----
Pro forma net tangible book value after the Offering 3.02
-----
Dilution to new investors .......................... $3.98
=====
The following table sets forth the difference between the existing
stockholders of the Company and the new investors with respect to the
aggregate number of shares of Common Stock purchased from the Company, the
total cash consideration paid and the average cash price per share paid. The
calculation below is based upon an assumed initial public offering price of
$7.00 per share (before deducting underwriting discounts and commissions and
other estimated expenses of the Offering payable by the Company):
<TABLE>
<CAPTION>
Average Price
Shares Purchased Total Consideration Paid Per Share
--------------------------- ----------------------------- ---------------
Number Percentage Amount Percentage
----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders (1) 3,170,540 66.5% $ 152,290 1.3% $ .05
New Investors ........... 1,600,000 33.5% 11,200,000 98.7% $7.00
----------- ------------ ------------- ------------
Total ................. 4,770,540 100.0% $11,352,290 100.0%
=========== ============ ============= ============
</TABLE>
- ------
(1) Excludes 498,000 shares of Common Stock issuable upon exercise of
outstanding options and 160,000 shares of Common Stock issuable upon
exercise of the Representative's Warrants. See "Underwriting."
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1997 and as adjusted to give effect to the sale by the Company of
1,600,000 shares of Common Stock at an assumed public offering price of $7.00
per share, and the application by the Company of the net proceeds therefrom
as described under "Use of Proceeds." This table should be read in
conjunction with the Consolidated Financial Statements, including the Notes
thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
March 31, 1997
---------------------------
(unaudited, in thousands)
Actual As Adjusted
-------- -----------
<S> <C> <C>
Debt:
Short Term debt:
Credit facility ........................................ $ 6,867 $ 0
Current maturities of long-term debt ................... 41 41
-------- --------
Total short term debt ................................... 6,908 41
-------- --------
Long-term debt, less current maturities ................. 85 85
-------- --------
Stockholders' equity: (1)(2)
Common stock, $.01 par value, 5,000,000 shares
authorized, 3,170,540 shares outstanding, actual and
4,770,540 shares outstanding, as adjusted (3) ...... 36 52
Additional paid-in-capital ........................... 138 9,518
Unrealized loss on available for sale securities ..... (843) (843)
Retained earnings .................................... 5,860 5,860
Treasury stock ....................................... (142) (142)
-------- --------
Total stockholders' equity ........................... 5,049 14,445
-------- --------
Total capitalization ................................ $ 12,042 $ 14,571
======== ========
</TABLE>
- ------
(1) See "Description of Capital Stock" for description of the relative rights
of the Preferred Stock and Common Stock.
(2) On April 21, 1997, a special meeting of stockholders was held to amend
the Certificate of Incorporation to increase the aggregate of authorized
shares from 5,000,000 shares of Common Stock to 40,000,000 shares of
Common Stock and to authorize 1,000,000 shares of Preferred Stock.
(3) Excludes 498,000 shares of Common Stock issuable upon exercise of
outstanding options and 160,000 shares of Common Stock issuable upon
exercise of Representative's Warrants. See "Underwriting."
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected Consolidated Financial Data should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
included elsewhere herein. The financial statement data as of and for the
fiscal years ended September 30, 1994, 1995 and 1996 are derived from, and
are qualified by reference to, the audited Consolidated Financial Statements
included elsewhere in this Prospectus and should be read in conjunction with
those Consolidated Financial Statements and the Notes thereto. The financial
statement data as of and for the fiscal years ended September 30, 1992 and
1993 are derived from audited consolidated financial statements not included
in this Prospectus. The Selected Consolidated Financial Data presented for
the six months ended March 31, 1996 and 1997 have been derived from unaudited
consolidated financial statements of the Company, but in the opinion of
management of the Company include all adjustments necessary for a fair
presentation for the results of such operating periods. The operating results
for such interim periods are not necessarily indicative of operating results
for the full year. This data is qualified by reference to, and should be read
in conjunction with, the Company's consolidated financial statements and
related notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in this Prospectus.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended September 30, March 31,
------------------------------------------------------------------------ ------------------------
1992 1993 1994 1995 1996 1996 1997
------------- ------------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Net sales ...................... $40,355,000(1) $51,085,000(1) $45,459,575(1) $55,195,507 $98,446,698 $38,042,823 $39,158,875
Cost of sales .................. 37,575,000 46,948,000 40,796,425 49,441,544 89,025,331 34,159,227 33,890,028
------------- ------------- ------------- ----------- ----------- ----------- -----------
Gross profit ................... 2,780,000 4,137,000 4,663,150 5,753,963 9,421,367 3,888,596 5,268,847
Selling and administrative
expenses ..................... 2,754,000 3,565,000 3,406,316 4,079,184 5,028,812 2,382,727 2,957,149
------------- ------------- ------------- ----------- ----------- ----------- -----------
Income from operations ......... 26,000 572,000 1,256,834 1,674,779 4,392,555 1,500,869 2,311,698
Interest expense (net) ......... (225,000) (498,000) (713,778) (1,207,316 (1,390,867) (633,193) (551,907)
Other income ................... -- -- 39,630 37,126 63,151 7,964 57,324
------------- ------------- ------------- ----------- ----------- ----------- -----------
Income (loss) from continuing
operations before income taxes (199,000) 74,000 582,686 504,589 3,064,839 875,640 1,817,115
Provision for income taxes ..... 8,000 31,000 242,889 223,769 1,298,386 371,000 766,800
------------- ------------- ------------- ----------- ----------- ----------- -----------
Income (loss) from continuing
operations ................... (207,000) 43,000 339,797 280,820 1,766,453 504,640 1,050,315
Discontinued operations ........ -- -- 1,485,698 -- -- -- --
Cumulative effect of a change in
accounting principle ......... -- 78,000 -- -- -- -- --
------------- ------------- ------------- ----------- ----------- ----------- -----------
Net income (loss) .............. $ (207,000) $ 121,000 $ 1,825,495 $ 280,820 $ 1,766,453 $ 504,640 $ 1,050,315
=========== =========== =========== =========== =========== =========== ===========
Per Share Data:
Income (loss) from continuing
operations ................... $ (.06) $ .01 $ .10 $ .08 $ .48 $ .14 $ .29
Income from discontinued
operations ................... -- -- $ .43 -- --
Income from accounting changes . -- $ .02 -- -- -- -- --
Weighted average number of
shares outstanding ........... 3,584,164 3,615,830 3,448,900 3,614,040 3,677,290 3,686,040 3,668,540
</TABLE>
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------------------------
1992 1993 1994 1995 1996 March 31, 1997
----------- ------------ ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital ................ $ 579,000 $ 661,000 $ 1,171,764 $ 1,769,589 $ 3,342,545 $ 4,217,120
Total assets ................... 8,380,000 16,067,000 18,867,758 18,471,659 32,102,557 24,543,969
Short term debt ................ 2,665,000 7,677,000 6,469,072 10,797,111 12,510,017 6,907,940
Long term debt ................. -- -- -- -- 67,291 85,156
Stockholders' equity ........... 920,000 1,041,000 2,412,564 2,355,884 3,998,587 5,048,992
</TABLE>
- ------
(1) Includes sales of the Company's former subsidiary, Romel Technology, Inc.
(d/b/a MSG) of $19,876,500, $29,272,300 and $4,127,768 for the three
years ended September 30, 1994, respectively, which was sold in November
1993. The profit/loss from this subsidiary during these periods were de
minimis. After adjusting for these sales figures, the Company's revenues
were $20,478,500, $21,812,700 and $41,331,807 for the three years ended
September 30, 1994. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 11 to
Consolidated Financial Statements.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis is intended to assist the reader in
understanding and assessing the significant changes and trends relating to
the results of operations and financial condition of SysComm and its
subsidiaries. This discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements and Notes.
The Company is a systems integrator and a reseller of a broad range of
computers and related products. The Company offers integrated technological
expertise to serve its customers' automation and communication needs.
The Company has experienced significant growth over the past three years
with sales increasing approximately 21% from $45,459,575 in fiscal year ended
September 30, 1994 to $55,195,507 in the fiscal year ended September 30, 1995
and 78% from $55,195,507 in the fiscal year ended September 30, 1995 to
$98,446,698 in the fiscal year ended September 30, 1996. The Company operates
in a highly competitive industry which in turn places constant pressures on
maintaining gross profit margins. Many of the Company's sales are high volume
equipment sales which produce lower than average gross profit margins, but
are often accompanied by a service arrangement, which yields higher than
average gross profit margins.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain items in the Company's consolidated
statements of operations.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended September 30, March 31,
------------------------------- --------------------
(unaudited)
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales ...................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales .................. (89.7) (89.6) (90.4) (89.8) (86.5)
Gross profit ................... 10.3 10.4 9.6 10.2 13.5
Selling and administrative
expenses ...................... (7.5) (7.4) (5.1) (6.3) (7.6)
Income from operations ......... 2.8 3.0 4.5 3.9 5.9
Interest expense (Net) ......... (1.6) (2.1) (1.4) (1.6) (1.3)
Income from continuing
operations before income taxes 1.2 .9 3.1 2.3 4.6
Income taxes ................... (.5) (.4) (1.3) (1.0) (2.0)
Income from continuing
operations .................... .7 .5 1.8 1.3 2.6
Discontinued operations income
from sale of subsidiary ....... 3.3 -- -- -- --
Net income ..................... 4.0 .5 1.8 1.3 2.6
</TABLE>
SIX MONTHS ENDED MARCH 31, 1997 COMPARED TO SIX MONTHS ENDED MARCH 31, 1996
Sales for the six months ended March 31, 1997 increased 3% or $1,116,052
to $39,158,875 from $38,042,823 for the six months ended March 31, 1996. This
increase in sales was primarily attributable to an increase in demand for
IBM's mid-range RS/6000 computer systems. At March 31, 1997, the Company had
a backlog of approximately $4,000,000 which would have been shipped had
product been available. In addition, the Company's concentration and
dependence on any one customer diminished during the six months ended March
31, 1997 when no one customer accounted for more than 10% of the Company's
sales as compared to the six months ended March 31, 1996 when two customers
accounted for 26% and 13% of the Company's sales. Also the Company had a
major rollout for one of its customers postponed from the second quarter to
the third and fourth quarters of the current fiscal year.
18
<PAGE>
Gross profit as a percentage of sales increased to 13.5% for the six
months ended March 31, 1997 as compared to 10.2% for the six months ended
March 31, 1996. This increase is due in part to the Company taking lower
volume but higher margin business. In addition, the Company increased the
revenue it generated from both service business, which is generally higher
margin business. During the six months ended March 31, 1996, the Company sold
two RISC Symmetrical Processors which accounted for approximately $6,000,000
in sales. This type of sale is typically low margin business and tends to
pull down the overall gross profit percentage.
Selling and administrative expenses increased by 24% or $574,422 to
$2,957,149 in the six months ended March 31, 1997 from $2,382,727 for the six
months ended March 31, 1996. Included in the increase of $574,422 were
increases of approximately $290,000 in commissions, payroll and payroll
related expenses and an increase of approximately $100,000 in the Company's
bad debt expense.
Interest expense for the six months ended March 31, 1997 decreased 13% to
$552,143 from $633,716 for the six months ended March 31, 1996. This decrease
was primarily the result of credits received from IBM Credit Corporation
relating to various leases for which the Company's payment had been delayed.
In addition, the Company believes that its constant monitoring of accounts
receivable has helped to keep interest costs at a minimum. The Company uses
all available funds to reduce its outstanding loan balance on a daily basis.
Income from continuing operations before income taxes increased by 108% to
$1,817,115 for the six months ended March 31, 1997 from $875,640 for the six
months ended March 31, 1996. This increase resulted from the significant
increase in gross profit.
The Company's effective tax rate is 42.2% for the six months ended March
31, 1997 and 42.4% for the six months ended March 31, 1996.
The Company's net income for the six months ended March 31, 1997 increased
to $1,050,315 from $504,640 for the six months ended March 31, 1996 resulting
from all the factors described above.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
Sales for fiscal 1996 increased 78% or $43,251,191 to $98,446,698 from
$55,195,507 in fiscal year 1995. This increase in sales was primarily due to
the increase in sales in IBM's mid-range RS/6000 computer systems. The
Company also participated in major rollouts for a number of financial
institutions which produced substantial sales. In addition, two of the
Company's customers accounted for 16% and 19%, respectively, of those fiscal
year 1996 sales. During fiscal year 1996, the Company also increased the
amount of service and service related billings from the prior year.
Gross profit as a percentage of sales slightly decreased in fiscal year
1996 from fiscal year 1995. This decrease was the result of pricing
competition, major customer rollouts which typically produce lower gross
profit margins, vendor pricing, and rebate policies. A reduction of cost of
goods sold resulted from rebates and other favorable pricing from many
vendors. These rebates, if cancelled or lowered, will have an effect on gross
profit percentages and profitability.
Selling and administrative expenses increased by 23% or $949,628 to
$5,028,812 in fiscal year 1996 from $4,079,184 in fiscal year 1995. Included
in the increase of $949,628 were increases in commission expense of $456,587,
which was a direct result of the significant increase in sales during fiscal
year 1996. In addition, payroll expenses increased by approximately $350,000
due to additional personnel, payroll increases and management incentives of
approximately $100,000, which were paid based on the profitability of the
Company.
Interest expense for fiscal year 1996 increased 15% to $1,391,452 from
$1,211,727 in fiscal year 1995, due to an increase in borrowings necessary to
fund the Company's continuing sales growth. The Company believes that its
constant monitoring of accounts receivable has helped to keep interest costs
at a minimum. In addition, the Company uses all available funds to reduce its
outstanding loan balance on a daily basis. Net interest expense (interest
expenses less interest income) for fiscal year 1996 and 1995 was $1,390,867
and $1,207,316, respectively.
19
<PAGE>
Income from continuing operations before income taxes increased by 507% to
$3,064,839 in fiscal year 1996 from $504,589 in fiscal year 1995. This
increase resulted from a significant increase in sales during 1996.
The Company's effective tax rate was 42.4% for fiscal year 1996 and 44.3%
for fiscal year 1995.
The Company's net income for fiscal year 1996 increased to $1,766,453 from
$280,820 in fiscal year 1995 resulting from all the factors described above.
FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994
Sales for fiscal year 1995 increased 21% or $9,735,932 to $55,195,507 from
$45,459,575 in fiscal year 1994. This increase in sales was due to the fact
that the Company began selling IBM's RS/6000 mid-range computers during
fiscal year 1995.
Gross profit as a percentage of sales increased slightly over the
preceding year, resulting from the Company's effort to increase its service
and service related sales.
Selling and administrative expenses increased by 20% or $672,868 to
$4,079,184 in fiscal year 1995 from $3,406,316 in fiscal year 1994 due to
increases in payroll and payroll related expenses, the Company's move to a
new location in Waltham Massachusetts, the opening of a new office in
Princeton, New Jersey and the first full year of operations in the Company's
New York City office.
Interest expense for fiscal year 1995 increased 67% to $1,211,727 from
$726,367 in fiscal year 1994 resulting from inventory increases during the
year which were necessary due to the Company's increased sales level. Net
interest expense (interest expense less interest income) for fiscal year 1995
and 1994 was $1,207,316 and $713,778, respectively. Also, due to sporadic
collateral shortfalls, the Company was paying interest on the shortfall
amounts at the rate of 6.5% over the prime rate.
Income from continuing operations before income tax decreased $78,907 or
13% primarily due to the reasons described above.
The Company's effective tax rate was 44.3% for fiscal year 1995 and 41.7%
for fiscal year 1994.
Income from discontinued operations was $1,485,698 for fiscal year 1994.
Effective November 30, 1993, the Company exchanged 100% of the shares of a
subsidiary (Romel Technology, Inc. (d/b/a MSG) for 300,000 shares of
Ameriquest Technologies, Inc., formerly known as CMS Enhancements, Inc. Such
transaction qualified as a tax-free reorganization under Section 368 of the
Internal Revenue Code of 1986, as amended. The Company realized a gain as a
result of this transaction of $1,485,698, which is net of deferred taxes of
$641,000.
Net income for fiscal year 1995 was significantly below fiscal year 1994
due to the gain resulting from the sale of a subsidiary discussed above as
well as the other items mentioned above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current ratios at March 31, 1997 and 1996 were 1.22 and
1.10, respectively. Working capital at March 31, 1997 was $4,217,120, an
increase of $2,014,292 over the prior period. This increase was primarily due
to the Company's earnings.
Cash provided by operating activities was $5,338,600 for the six months
ended March 31, 1997. Cash used by operating activities was $7,966,923 for
the six months ended March 31, 1996. Cash used in investing activities was
$213,716 and $58,371 for the six months ended March 31, 1997 and 1996,
respectively, and was used to finance capital expenditures including computer
equipment, leasehold improvements, furniture and fixtures and automobiles.
Cash used by financing activities included $5,633,337 for the six months
ended March 31, 1997 and included net payments under the Financing Agreement
and cash provided by financing activities was $8,308,067 for the six months
ended March 31, 1996 and included net proceeds under the Financing Agreement.
Since 1992, the Company has had a series of credit arrangements with IBM
Credit Corporation. Pursuant to the Financing Agreement, the Company may
borrow up to 85% of its eligible receivables and 100% of eligible inventory,
to a maximum of $27,500,000. In addition to the permanent credit line, there
are various credit
20
<PAGE>
line uplifts during the year which can increase the line of credit by as much
as 50%. As of March 31, 1997 and 1996, interest on outstanding borrowings was
prime plus 1.375% and 1.625%, respectively, or prime plus 6.5%, should the
Company fail to meet certain collateral requirements. As of March 31, 1997
and 1996, borrowings outstanding under this facility were $6,867,271 and
$10,999,060, respectively. Additionally, $10,082,368 and $9,624,695 were
included in accounts payable at March 31, 1997 and 1996, respectively, and
are included against the maximum credit available.
The Company believes that its present line of credit coupled with its
current earning capacity will be sufficient to meet its capital requirements
for the coming year.
The Company has been notified by the Internal Revenue Service that it will
commence an audit of the Company's Federal Income Tax return for the fiscal
year ended September 30, 1995. In addition, New York State has notified the
Company that it will commence a sales tax audit for the period June 1, 1994
to February 28, 1997. Management believes that both these audits are within
the ordinary course of business and will not have a material adverse affect
on the Company.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company has historically experienced, and expects to continue to
experience, seasonal fluctuations in its net sales, earnings from operations
and net earnings. As the Company continues to increase its percentage of
sales from business, education and government markets, management believes
that the Company's quarterly net sales will be less impacted by seasonality.
The following table sets forth certain quarterly information for the periods
indicated:
<TABLE>
<CAPTION>
Fiscal Year 1995 Fiscal Year 1996 Fiscal Year 1997
--------------------------------------- ------------------------------------- -----------------
Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1994 1995 1995 1995 1995 1996 1996 1996 1996 1997
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ............... $10,135 $13,723 $15,840 $15,497 $14,556 $23,487 $33,644 $26,760 $21,283 $17,876
Gross profit ............ 1,333 1,059 1,376 1,986 1,490 2,393 2,497 3,041 2,640 2,629
Income (loss) from
continuing operations
before income taxes .... 198 (306) 73 539 198 678 1,022 1,167 962 855
Net income (loss) (1) ... 116 (223) 73 315 114 390 589 673 560 490
</TABLE>
- ------
(1) Taxes are computed based on effective tax rates for the respective fiscal
years.
RECENT PRONOUNCEMENT OF THE FINANCIAL ACCOUNTING STANDARDS BOARD
A recent pronouncement of the Financial Accounting Standards Board
("FASB"), which is not required to be adopted at this date, is Statement of
Financial Accounting Standards (SFAS") No. 128, "Earnings Per Share," issued
in February 1997. This statement establishes standards for computing and
presenting earnings per share and is effective for periods ending after
December 15, 1997. This standard requires the Company to present basic
earnings per share and diluted earnings per share. The impact of adopting
this standard has not yet been determined.
21
<PAGE>
BUSINESS
GENERAL
SysComm International Corporation ("SysComm" or the "Company"), through
its wholly owned subsidiary, Information Technology Services, Inc.
("InfoTech"), is a leading systems integrator and reseller of computer
hardware, operating software and networking applications to Fortune 1000
companies. The Company provides its customers with cost efficient,
comprehensive solutions that satisfy their information technology
requirements. Since 1985 the Company's primary focus has been on the sale,
integration and servicing of International Business Machine Corporation
("IBM") products including personal computers, mid-range systems based on the
IBM RS/6000, servers, and the IBM AS/400. In addition, the Company
integrates, resells and services products from manufacturers such as Hewlett
Packard, Compaq, Apple, Microsoft, 3Com, Bay Networks and Novell.
In March 1997, the Company commenced the assembly and sale of IBM PCs
through the "AAP" providing the Company with greater flexibility in meeting
its customers' needs. The Company believes that this relationship with IBM
will provide it with the opportunity to enhance its responsiveness to client
specific requests and orders, and improve its operating efficiencies.
A significant percentage of the Company's revenues are derived from sales
to customers in the financial and investment communities. However, the
Company's customer base also includes mid-size retailers, manufacturers,
distributors, colleges, universities and state and local government agencies
in the Northeastern United States. The Company's customers include:
<TABLE>
<CAPTION>
<S> <C> <C>
Astra Pharmaceutical CPC International Merrill Lynch
Boston College Deutsche Bank Northeastern University
Boston Financial Group Fidelity Investments Oxford Healthcare
Brown Brothers Harriman The Gillette Company Pepsico
Cadbury-Motts GTE Services Corp. The Pershing Division of
Carrier Corporation Harvard University Donaldson Lufkin & Jenrette
The Chase Manhattan Bank Healthsource Smith Barney
Citibank International Business The Stop & Shop Companies
The City University of Machines Corporation
New York J.P. Morgan
</TABLE>
The Company intends to pursue new business by focusing on the sale and
integration of high-end systems in financial, commercial, governmental,
healthcare and educational arenas. To this end, the Company has the following
growth strategies: (i) targeting vertical markets, (ii) offering a complete
line of IBM products, including IBM mainframe systems, (iii) expanding its
role as an IBM Premier Business Partner, (iv) enhancing competitiveness
through the AAP, and (v) expanding into other geographic regions through
selected acquisitions and strategic alliances.
The Company currently has five operating locations. From its Hauppague,
New York headquarters it operates a distribution center, a computer
configuration, integration and PC assembly facility and its technical support
services. The Company conducts its sales operations from offices located in
Hauppauge, New York City, Waltham, Massachusetts, Marlton, New Jersey, and
North Haven, Connecticut.
STRATEGY
The Company strives to offer its customers high quality computer and
networking system hardware (particularly IBM products), related operating
system software and network design, system installation and testing in a
timely, cost-effective and value-added manner. The Company believes that the
following factors are significant elements to the successful implementation
of this strategy:
TARGETING VERTICAL MARKETS
The Company has a ten year track record as a market leader in the
installation and integration of high-level information systems to the
banking and financial services communities. In addition, the Company focuses
22
<PAGE>
on other selected, major vertical markets, including retailers, manufacturers
and distributors, institutions of higher learning, health care and
pharmaceutical companies, and state and local government agencies. The
Company's in-depth understanding with its customers current and future needs
combined with its experience and in-depth market focus enable it to offer an
optimum range of products and services that meet each customer's
requirements.
OFFERING A COMPLETE LINE OF IBM PRODUCTS
The Company has chosen to represent IBM products because it believes that
IBM is the world's premier designer and manufacturer of computer equipment,
software and networking products. The wide range of products and services
offered by the Company, include personal computers (desktop workstations,
file servers and notebook computers), mid-range computers (RS/6000 and AS/400
systems), networking products (network hubs, routers, bridges and switches)
and IBM software products, including OS/2, Netfinity, Eduquest and Lotus
Notes. The Company also offers warranty repair, systems support and
customized training programs. In order to offer its customers a full line of
IBM products, the Company is planning on becoming a value-added reseller of
IBM S/390 mainframe systems. The Company believes that its current mix of IBM
products meets the needs of its customers and brings the Company closer to
reaching its goal of becoming a total solution integrator of the complete IBM
product line.
EXPANDING THE COMPANY'S ROLE AS AN IBM PREMIER BUSINESS PARTNER
The Company's designation as an IBM Premier Business Partner provides it
with important competitive advantages. In 1997, the Company was among a small
number of original value-added resellers selected by IBM as a Premier
Business Partner. This designation by IBM was in recognition of the Company's
long-standing relationship with IBM, combined with its overall value,
performance and contribution in value to its customers. The Company believes
that the principal advantage to being a Premier Business Partner is the
potential referral of business by the IBM sales force.
ENHANCING COMPETITIVENESS THROUGH THE IBM AAP
Within the past twelve months, the PC industry has experienced a
fundamental change as major PC suppliers, led by IBM, have begun shifting
responsibility for the final assembly and delivery of PC products to a select
number of companies, including the Company. The AAP will allow the Company to
sell IBM PCs configured to the exact customer hardware and software
specifications in a more timely and efficient manner. In addition to
permitting the Company to offer greater product selection, the Company
believes AAP will afford it future opportunities and competitive advantages,
including the potential to increase gross margins on build-to-order systems,
and the ability to act as an assembler and distributor to other resellers.
The Company is also planning on becoming an assembler of the RS/6000 product
line.
EXPANDING INTO OTHER GEOGRAPHIC REGIONS THROUGH ACQUISITION AND STRATEGIC
ALLIANCE
The Company's participation in the AAP will make it an attractive acquirer
and/or joint venture partner to companies that do not possess the expertise
or resources to attain this status. The Company believes that the systems
integration business which targets Fortune 1000 companies is both extremely
competitive and based on existing relationships.
The Company believes that the expansion of its business into growing
markets and varied geographic regions, including the possibility of
acquisitions of qualified systems integrators and resellers, will allow it to
service existing customers in these new locations, expand its customer base,
expand its product and service offerings, and obtain more competitive pricing
as a result of increased purchasing volumes of particular products. The
Company intends to focus its expansion efforts on value-added resellers that
complement its existing operations. In particular, the Company believes that
IBM resellers who do not participate in the AAP will be at a competitive
disadvantage to the Company and other AAP participants. Accordingly, the
Company believes that certain of these companies will find that an
acquisition by, or a joint venture with, the Company to be an attractive
alternative.
23
<PAGE>
INDUSTRY BACKGROUND
Complex computer information processing systems, the foundation on which
business and organizations now function, are continuously being redesigned,
modified and upgraded as new computer and telecommunications technologies are
introduced. Until the mid-1980's, either mid-range or mainframe computer
systems, were used to manage an organization's mission-critical,
transaction-oriented commerce and business functions, such as banking, credit
transactions, retail point-of-sale transactions and airline reservations.
Client/server networks, otherwise known as "hub and spoke" networks,
supported access to these functions, either within a single site or from
numerous geographically-dispersed sites.
In the late 1980's, a new architecture for information processing called
"client/server" computing emerged, fueled by the growing intelligence in
desktop computers, expanding capabilities of software applications and
growing capabilities of networks. A client/server system typically consists
of multiple intelligent desktop client computers linked with high performance
server computers by a local and/or wide area network ("LAN" and/or "WAN") and
is characterized by the flexibility and mobility of both application and
user. In order to take advantage of their established operational staff and
physical plant, many corporations are seeking to reconfigure their existing
mainframe/mid-range computers (sometimes referred to as "legacy" systems) to
operate in parallel with client/server networks.
The Company believes that these two information system models - legacy
systems and client/server systems - will continue to coexist, each with
advantages for certain applications. Thus, organizations are faced with
complex decisions concerning the current and future configurations of their
information systems, based upon factors such as the re-engineering of aspects
of legacy systems to function more efficiently with related client/server
systems, the explosive growth of the Internet (and related World Wide Web)
and stand-alone intranets, the convergence of computer and telecommunications
technologies and the universal recognition of information systems as the
medium for commerce, finance, education and administration. Mid-range and
mainframe computer systems remain important in this changing environment, and
the Company intends to exploit opportunities in both segments of the high end
computer system markets. At the same time, manufacturers such as IBM are
increasing their reliance upon companies such as SysComm to work with mid-
and large-sized businesses and organizations to provide single-source
responsibility for the design, procurement, installation and implementation
of such systems.
24
<PAGE>
PRINCIPAL MARKETS AND CUSTOMERS
Since 1994, the Company has sold and delivered computer systems, network
products, software, maintenance and system support services to more than 700
customers throughout the United States and in more than 20 countries
worldwide. Based on its installed customer base, the Company believes it is a
leading IBM supplier/systems integrator of mid-range and computer/network
systems in the northeast United States. In fiscal year 1994, sales to The
Chase Manhattan Bank accounted for 22% of the Company's total revenues;
revenues from sales to The Chase Manhattan Bank and Deutsche Bank accounted
for 23% and 14%, respectively, of the Company's total revenues in fiscal year
1995; and revenues from sales to Deutsche Bank and Citibank accounted for 19%
and 16%, respectively, of the Company's total revenues in fiscal year 1996.
In fiscal year 1996, the Company's top five customers (two of which were new
customers) accounted for 50% of total revenues.
The Company's significant markets, some of its representative customers
and some of the applications to which the customers adapted the Company's
systems are described below.
<TABLE>
<CAPTION>
Market Organizations Applications
- ------ ------------- ------------
<S> <C> <C>
Banking Bankers Trust; Citibank; The Chase Credit Card Processing; Retail Banking;
Manhattan Bank Research; Customer Service; Account
Inquiry; Data Mining
Brokerage Deutsche Bank; J.P. Morgan; Merrill Lynch; Electronic Mail; Foreign Exchange;
Smith Barney; Spear, Leeds & Kellogg; Brown Securities Trading; Currency Trading;
Brothers Harriman; Fidelity Investments Client-Server Computing; Analytics
Pharmaceutical/ Astra; Health Source; Private Healthcare Office Automation; Order Entry; Bill
Healthcare Systems; Oxford Healthcare Payments; Invoicing; Account History;
Healthcare Electronic Mail
Education Boston College; Harvard University; Student Registration; Office Automation;
Lawrence Public Schools; MIT; Northeastern Electronic Mail; Primary Education;
University; City University of New York Teaching Aid; School Administration;
Student Scheduling; Grades Administration,
Reporting, Research
Governmental State and local government agencies Office Automation; Reporting; Printing
throughout the Northeastern United States Systems
Industrial and Consumer Cadbury-Motts; Carrier Corporation; The Office Automation; Order Processing;
Stop & Shop Companies; CPC International; Electronic Mail; Invoicing; Client-Server
Pepsico; Barnes & Noble Computing
</TABLE>
25
<PAGE>
Banking. The Company was engaged by a large international bank to
configure, install and provide operating and network support for a 98 node
RS/6000 Power Parallel System 2 for data mining and market evaluations for
credit card products. Examples of data mining include profiling prospective
credit card customers and usage, spending patterns, credit risks, new credit
card product offerings, credit card marketing and promotion.
Brokerage. The Company provided RS/6000 workstations, servers and Power
Parallel System 2 systems to the investment banking and finance operations
departments of a large investment bank to assist in the international trading
of loans in the United States, Asia and Latin America.
Pharmaceutical/Healthcare Industry. The Company has been an ongoing
supplier of IBM PC's and related hardware to several divisions of a
pharmaceutical company. In connection with the sales of the computer systems,
the Company provided the pharmaceutical company with a long-term on-site
support technician. The Company has assisted the pharmaceutical company in
establishing its computer system to operate salesforce automation and FDA
application programs based on Windows NT and the Pentium Pro server.
Education. One of the public school systems in the Massachusetts area has
implemented a technology plan to incorporate computers in the teaching
environment. The plan, which covers 22 schools, includes the installation of
a LAN comprised of IBM servers and running the IBM Schoolview(TR) software,
and a WAN, running a large Lotus Notes network, utilizing attendance,
discussion, and mail databases. Each LAN server connects each classroom,
containing 4 student and 1 teacher workstations. Systemwide, the Company
supplied the schools with 2,000 PCs and 40 servers. The Company believes that
working closely with school systems affords it the opportunity to increase
the utilization of technology in the classroom.
Industrial and Consumer. The Company completed the installation and
integration of a networking system linking 180 stores of a major retail
chain. To accomplish this task, the Company custom configured each RS/6000
and PC systems with specific store information, allowing the systems to "plug
& play" immediately upon their arrival at each store location. The Company
worked closely with IBM to coordinate delivery of all hardware in a timely
and orderly manner, resulting in the successful installation of the systems
within a two month time-frame.
26
<PAGE>
PRODUCTS/IBM RELATIONSHIP
The Company has access to a full range of computer product lines,
networking and interconnectivity systems and operating software, from IBM,
Hewlett Packard and Compaq, as well as other selected manufacturers. However,
the Company has concentrated its efforts in developing strong relationships
with IBM because it believes that IBM offers the most comprehensive and well
established product line in the industry. The Company has had a long term
relationship with IBM whereby it has the opportunity to configure, sell and
service IBM's full line of PCs and mid-range information processing systems.
In addition, as a member of several IBM advisory committees, the Company
maintains close communications with IBM's future plans and directions. The
Company believes its strong marketing and technical skills have enabled it to
become North America's largest reseller of IBM's RS/6000 product line, and
the Company believes it will continue to have a close business relationship
with IBM. The Company's principal sales are derived from the following: (i)
IBM PC systems; (ii) IBM RS/6000 systems; (iii) IBM AS/400 systems; and (iv)
communication and networking systems.
IBM PC PRODUCT LINE AND PARTICIPATION IN IBM'S PC COMPANY AUTHORIZED
ASSEMBLER PROGRAM
IBM is one of the world's leading designers and manufacturers of personal
computer systems. IBM's personal computer product line includes mobile
(notebook) and desktop workstations as well as file, application and network
servers. In 1996, according to industry estimates, IBM produced and sold more
than $13 billion of PC products worldwide. Accordingly, in 1996, IBM had
approximately a 9% marketshare of the worldwide personal computer market.
IBM PC systems feature Pentium(TR) processors from Intel and are available
with a choice of operating software, including SelectaSystem, which allows
end-users' systems to store both IBM OS/2 Warp and Microsoft DOS/Windows on
the same hardware, or Microsoft(R) Windows 95(TR). For the last five years,
due to the amount of sales volume for IBM products generated by the Company,
IBM has enabled the Company to purchase products directly from IBM for resale
at the lowest prices available. There can be no assurances that the Company
will be able to continue to purchase at these prices, and loss of this
competitive pricing could have a material adverse affect on the Company's
business and results of operations.
In fiscal year 1996, the Company's sales of IBM PC products were
approximately $30 million, or 30.5%, of the Company's annual sales.
In March 1997, the Company commenced participation in the AAP at its
Hauppauge, New York location. By combining the assembly of PCs with its
proven systems integration abilities, the Company believes that it will
provide its clients with speed of delivery and flexibility of design at both
the PC and systems levels. The Company also believes that the establishment
and operation of its IBM PC assembly facility will greatly enhance the
Company's position in the marketplace, enabling it to assemble various IBM
personal computer systems, which in effect permits it to better serve its
customers as well as reduce finished goods inventory levels.
The continued operation of this assembly facility is dependent upon the
Company complying with the terms of the AAP Agreement, including satisfying
certain minimum purchase requirements, compliance with strict quality control
provisions and maintaining trained and certified personnel. The AAP Agreement
is terminable by either IBM or the Company upon 30 days' prior notice and
immediately terminable by IBM in the event that IBM determines, in its sole
discretion, that (i) the assembled products fail to meet required
specifications (whether or not the Company is at fault), (ii) the Company
materially breaches the terms and/or conditions of the AAP Agreement, (iii)
the Company engages in a course of conduct that has injured IBM's reputation
or the reputation of its products, or (iv) the Company's status with IBM as a
Business Partner is terminated for any reason, expires or if the Company is
no longer eligible to purchase IBM personal computer products directly from
IBM. In addition, the Company is required to maintain ISO 9002 registration
standards, the registered international standard for ensuring the consistent
and measurable quality of products and services. Subject to the terms of the
AAP Agreement, IBM is permitted to periodically review the Company's
performance in order to monitor and assess continued compliance. The AAP
Agreement expires on December 31, 1997. The Company intends to renew it.
By being part of the AAP, the Company believes it may increase its
inventory turnover rate, expand the range of products available to its
customers and improve delivery time to its customers. In addition, the
Company will maintain an inventory of component parts, rather than an
inventory of fully-configured PC models.
27
<PAGE>
IBM RISC SYSTEM/6000
The IBM RISC System/6000 is a mid-range computer workstation and server
configuration providing industry-leading computing and graphic performance
that meets large-scale, data handling and network management demands for many
types of businesses. RS/6000 systems perform mission critical applications,
such as those found in financial trading systems, from the combination of a
robust UNIX operating system with fast 2D and 3D graphic capabilities. The
RS/6000 is a flexible and scalable system incorporating (1) symmetric
multiprocessing capabilities, a design that makes it possible for a number of
processors to share memory and other existing features more efficiently; (2)
scalable parallel processing, a technology that allows several hundred
processor nodes to run in tandem as application servers, data servers,
Internet or Intranet servers; and (3) a multi-operating system support,
allowing a user to run existing programs simultaneously.
RS/6000 systems have been used for general business and financial
applications, including billing, payroll and accounts receivable, as well as
for advanced graphics programs for mechanical and electrical design,
scientific visualization, communications and networking applications for
optimum client/server and Internet performance, and word processing and
desktop publishing applications for both scientific and commercial documents.
These applications are particularly useful for the securities, manufacturing,
retail, education and transportation industries.
As Internet and Intranet-based transactions grow, RS/6000 systems'
networking capabilities, including security and integrity features, are
becoming increasingly important.
IBM has recognized the Company (ranked by dollar value of systems sold) as
its largest "Industry Remarketer" for RS/6000 systems in North America for
the year ending December 31, 1996, with sales of the RS/6000 for fiscal year
1996 of approximately $59 million, or 59%, of the Company's annual sales. The
Company considers RS/6000 systems to be an integral product for future
increases in the Company's sales volume.
ALL OTHER PRODUCTS
IBM AS/400 Product Line. Although the IBM Application System/400 (also
known as AS/400) has not been a major source of revenue to the Company, the
Company is attempting to increase its revenue in this market. The AS/400 is
designed and built as a multi-user commercial application platform
integrating a relational database and networking capabilities into the
operating system of the computer. It is designed as a general purpose
business computer, optimized for the commercial environment. Its design
reflects the dominant requirements for businesses, i.e., integration of new
technology without disrupting existing applications, large portfolio of
business solutions allowing companies to discover the most suitable
application for their needs, integration of functions including security,
database, system management, communications and on-line teleprocessing,
enabling companies to manage a system with limited resources in a demanding
business climate.
The AS/400 provides businesses with a cost effective solution, allowing
them to adopt advanced technologies at their own pace, integrating high
quality PC technology and associated software to enhance the computer's speed
for PC file serving. The AS/400 is a popular business computing system due to
its ease of installation, implementation, usage (it can support up to 7,000
users) and ability to upgrade.
Communication -- Networking Systems. The Company provides various
communications and networking products including complex data communications
equipment and software such as bridges, hubs and routers, as well as modems
and network interface cards (NIC) to connect personal computers to local and
wide area networks (LAN/WAN). Nearly every computer sold today in the
commercial marketplace is connected to a communications network.
Other. The Company is authorized to sell other manufacturers' personal
computer systems, networking, printers and software products including: Bay
Networks, Compaq, Lexmark, Hewlett Packard, Apple, MicroSoft, Novell, and
3Com. Certain of the Company's agreements with such suppliers provide for
minimum annual purchase requirements. Although the Company, to date, has
complied with these agreements, there is no assurance that the Company will
continue to meet such minimum purchase requirements or other terms of such
agreements. To the extent that it does not comply with such terms, the
Company may lose its status as an authorized reseller for such suppliers. For
fiscal year 1996, the Company's sales of non-IBM products accounted for
approximately $6 million, or 6.1%, of total revenue.
28
<PAGE>
SALES AND MARKETING
The Company has a broad customer base of primarily Fortune 1000 companies.
The Company's sales and marketing efforts are focused on high level decision
making executives, whose purchasing decisions are based on factors such as
the overall cost of purchasing and maintaining a system and the Company's
reputation and expertise in delivering and installing effective total
information technology solutions, which initially may not be the least
expensive. The Company relies on its marketing and sales programs, its
industry-wide expertise, its relationship with existing customers and its
status as an IBM Premier Business Partner to generate sales opportunities.
The Company currently has sales offices in five locations: New York City
and Hauppauge, New York, Waltham, Massachusetts, Marlton, New Jersey and
North Haven, Connecticut. Currently, the Company employs 28 field sales
representatives and system engineers. The sales efforts are led by the
Company's senior executives, John H. Spielberger, Thomas Baehr and Norman
Gaffney, who have more than 69 years of combined experience in sales of
high-level computer systems. The Company believes that due to the complex
nature of the computer products it sells and supports, maximum marketing
effectiveness can only be achieved by sales specialization. Each sales
representative is trained in one specific product line and representatives of
one product line can call upon specialized sales and systems engineering
personnel from another product line.
The Company pursues new business opportunities by referrals from IBM or
other manufacturers, referrals from existing customers, direct solicitation
by telephone or mail of prequalified customers, and participation in IBM and
other industry trade shows.
The Company has developed and maintained automated sales tools intended to
improve sales productivity, quality and reliability and increased customer
satisfaction. These systems include on-line systems configuration and
pricing, real time order entry, order confirmation and electronic mail for
customers through privately leased telephone lines and through the Internet.
CUSTOMER SUPPORT AND SERVICE
The Company believes that its ability to provide effective total solutions
to meet the needs of its customers is enhanced by its internal management
information system, which combines accounting, purchasing, inventory control,
sales order processing and work order management. The Company provides a
large array of services to its customers, including warranty repair on all
IBM personal computer products; toll-free telephone number for sales and
product information and order placement; toll-free telephone number for
customer service on all products sold, including technical assistance and
repair warranty; E-mail network access for customers to receive real time
price quotations, place orders and check order status; on-site system
engineers to provide technical assistance for installations and upgrades;
partnership with IBM to provide customized services such as helpdesk,
consulting, extended warranty, extended maintenance coverage; and IBM Credit
Corporation financing options on all products sold.
COMPETITION
The markets in which the Company operates are characterized by intense
competition from several types of network integrators and technical service
providers, including mainframe and mid-range computer manufacturers and
outsourcers, including, among others, Digital Equipment Corporation, Sun
Microsystems, Electronic Data Systems Corporation, Hewlett-Packard Company
and Integrated Systems Solution Corporation. Other competitors include value
added resellers, systems integrators and third-party service companies,
including AmeriData Technologies, Inc., CompuCom Systems, Inc., Entex
Information Services, InaCom Corp., MicroAge, Inc. and Vanstar. While the
Company receives substantial sales and marketing assistance from IBM,
including introductions and referrals to potential customers, the Company,
from time to time, faces direct competition from IBM with respect to large
contracts. The Company expects to face further competition from new market
entrants and possible alliances between competitors in the future. Certain of
the Company's current and potential competitors have greater financial,
technical, marketing and other resources than the Company. As a result, they
may be able to respond more quickly to new or emerging technologies and
changes in customer requirements or to devote greater resources to the
development, promotion and sales of their services than the Company. No
assurance can be given that the Company will be able to compete successfully
against current and future competitors.
29
<PAGE>
The Company's ability to compete successfully depends on a number of
factors such as breadth of product and service offerings, sales and marketing
efforts, pricing, quality and reliability of services and other support
capabilities. While there can be no assurance that the Company will be able
to continue to compete successfully with existing or new competition, the
Company believes that it currently competes favorably due to its focus and
expertise of network integration and its concentration on sales of IBM
product lines.
EMPLOYEES
As of March 31, 1997, the Company had 59 full-time employees. The Company
has no collective bargaining agreements and believes its relations with its
employees are good.
DESCRIPTION OF PROPERTY
The Company leases 11,200 square feet of executive office and warehouse
space in Hauppauge, New York pursuant to a five year contract which expires
on January 31, 1999. The lease provides for payments totaling $288,580 over
the course of the lease.
The Company leases 5,027 square feet of general office space in New York
City pursuant to a five year lease at an annual rental of $130,704. This
lease expires on February 28, 2002.
The Company leases 5,350 square feet of general office space in Waltham,
Massachusetts pursuant to a five year lease which expires on October 31,
1999. The lease provides payments in the amount of $70,085 annually for the
period from December 1, 1994 through September 30, 1997 and $76,772 annually
for the period from October 1, 1997 through December 31, 1999.
The Company leases 300 square feet of general office space in Marlton, New
Jersey and North Haven, Connecticut for $7,800 per year and $8,100 per year,
expiring on January 31, 1998 and December 31, 1997, respectively.
LEGAL PROCEEDINGS
The Company is involved in a legal proceeding that is incidental to the
conduct of its business. This proceeding is not, in the opinion of
management, material. In the ordinary course of its business, the Company is,
from time to time, subject to litigation. The Company does not believe that
any litigation to which the Company is currently subject is likely,
individually or in the aggregate, to have a material adverse affect on the
financial condition of the Company.
30
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and ages of the Company's
directors and persons nominated to become directors and executive officers
and the positions they hold with the Company.
<TABLE>
<CAPTION>
Name Age Position
------------------------- ----- ----------------------------------------
<S> <C> <C>
John H. Spielberger 55 Chairman of the Board of Directors, President
and Chief Executive Officer of SysComm
Thomas J. Baehr (2) 40 Vice President, Director of SysComm,
President and Chief Operating Officer of
InfoTech
Dennis R. Wilson 47 Vice President, Chief Financial Officer,
Secretary and Director of SysComm
Norman M. Gaffney (1) 49 Director of SysComm, Executive Vice President
of Marketing and Sales of InfoTech
John C. Spielberger (1) 27 Director of SysComm
Cornelia Eldridge (1) (2) 55 Nominee for Director of SysComm
Lee Adams (2) 65 Nominee for Director of SysComm
</TABLE>
- ------
(1) Member of Audit Committee
(2) Member of Compensation Committee
John H. Spielberger is the Chairman of the Board of Directors, President
and Chief Executive Officer of SysComm, which he founded in 1986. He is also
currently the Chairman of the Board and Chief Executive Officer of InfoTech,
which he founded in 1980. From 1968 through 1976, Mr. Spielberger worked for
IBM as a sales representative. From 1976 through 1980, Mr. Spielberger was
employed as Vice President of The Harvey Group Inc., a company listed on the
American Stock Exchange, where he was responsible for all management
information systems and communications. In 1980, Mr. Spielberger founded John
Spielberger & Associates, Inc., a designer, programmer and installer of
computer systems, which later became known as InfoTech. Mr. Spielberger is a
member of various IBM advisory boards which assist IBM in developing new and
innovative programs to market their products. Mr. Spielberger graduated from
Long Island University, C.W. Post Campus, New York in May 1966 with a B.A. in
Biology.
Thomas J. Baehr joined InfoTech in January 1994 and has been a member of
SysComm's Board of Directors since August 1995. Mr. Baehr became InfoTech's
President in January 1996 and is currently its Chief Operating Officer. From
June 1978 through October 1979, Mr. Baehr worked as a sales representative at
the Burroughs Corporation. From October 1979 through November 1986, Mr. Baehr
was employed at Honeywell Information Systems, where he was responsible for
the sale of mainframe and minicomputers to the General Electric Company. From
November 1986 through July 1992, Mr. Baehr was employed by Prime Computer
Inc. in various positions including sales manager for the New York
metropolitan area and regional manager for the northeastern United States.
From July 1992 through January 1994, Mr. Baehr was employed by Basic Computer
Corporation in White Plains, New York. Mr. Baehr graduated Fairfield
University, Connecticut in May of 1978 with a B.S. in Marketing.
Dennis R. Wilson has been a director of the Company since 1986 and became
Vice President and Chief Financial Officer of SysComm and InfoTech in March
1995. From 1972 through March 1992, Mr. Wilson was employed by The Harvey
Group Inc. During his career at The Harvey Group, Mr. Wilson held the
following positions: Member of the Board of Directors, Executive Vice
President and Chief Financial Officer, Corporate Secretary and Director of
Internal Audit. From 1992 through February 1995, Mr. Wilson was employed at
31
<PAGE>
The Boerner Company, a successor to the Harvey Group, as Chief Financial
Officer. He received a B.S. in Accounting from St. John's University in June
1970 and received his M.B.A. from St. John's in January 1976. He is also a
member of the Association of Management Accountants and the Association of
MBA Executives.
Norman M. Gaffney has been a Director of the Board of SysComm since
September 1996. He joined the Company in November 1994 and has served as
Executive Vice President of Sales and Marketing of InfoTech since January
1996. Prior to joining SysComm, Mr. Gaffney was employed by IBM in various
positions including Consulting Marketing Representative and Senior Accounts
Manager for 22 years. Mr. Gaffney graduated from the University of Miami
receiving a B.S. in Marketing.
John C. Spielberger is a Director of the Board of SysComm. In 1991, he
received a B.S. in Marketing from the Wallace School of Management, Boston
College. From February 1992 through October 1992, Mr. Spielberger was
employed as a marketing support representative for Lexmark International. Mr.
Spielberger joined InfoTech in October 1992 and is a sales specialist for the
RISC System/6000. Mr. Spielberger is the son of John H. Spielberger, the
Chairman of the Board, President and Chief Executive Officer of SysComm.
Cornelia Eldridge has been nominated to serve on the Company's Board of
Directors upon consummation of the Offering. Since 1981, Ms. Eldridge has
been President of Eldridge Associates, Inc., a management consulting firm.
Eldridge Associates provides strategic planning and organizational consulting
services to senior executive management including Chief Executive Officers.
Ms. Eldridge has a B.A. from Ohio Wesleyan University and an M.B.A. from the
University of Massachusetts. She serves on the Board of Directors of DE Frey,
Inc., a privately-held financial services firm. Ms. Eldridge also currently
provides consulting services to the Representatives.
Lee Adams has been nominated to serve on the Company's Board of Directors
upon consummation of the Offering. From 1989 through March 1997, when that
company was sold, Mr. Adams was the Chairman and Chief Executive Officer of
Target Solutions, Incorporated, a privately-held vertical remarketer of IBM's
AS/400 line of products. From 1963 to 1989, Mr. Adams held various executive
sales and marketing positions at IBM. Mr. Adams received a B.B.A. from
Kalamazoo College in June 1963.
BOARD OF DIRECTORS
The Board of Directors currently consists of five members. There are two
vacancies on the Board. Upon completion of the Offering, the Company expects
to appoint Cornelia Eldridge and Lee Adams as directors to its Board of
Directors.
The Company's Board of Directors is divided into three classes with each
class consisting, as nearly as may be possible, of one-third of the total
number of directors constituting the entire Board. The Company's Board of
Directors presently consists of five members with two members in Classes I
and II and one member in Class III. Class I consists of John H. Spielberger
and Thomas Baehr, whose term will expire at the 2000 annual meeting of
stockholders; Class II consists of Norman Gaffney and John C. Spielberger,
whose term will expire at the 1999 annual meeting of stockholders; and Class
III currently consists of Dennis Wilson, and upon their appointment upon
completion of the Offering, will additionally consist of Cornelia Eldridge
and Lee Adams, whose term will expire at the 1998 annual meeting of
stockholders. Each Class is elected for a term of three years. At each annual
meeting, directors are elected to succeed those in the Class whose term
expires at that annual meeting, such newly elected directors to hold office
until the third succeeding annual meeting and the election and qualification
of their respective successors.
Executive officers of the Company are elected annually by the Board of
Directors and serve until their successors are duly elected and qualified.
BOARD COMMITTEES
The Board of Directors has an Audit Committee and Compensation Committee.
The Audit Committee makes annual recommendations to the Board of Directors
concerning the appointment of the independent public accountants of the
Company and reviews the results and scope of the audit and other services
provided by the Company's independent auditors. The Audit Committee is
currently comprised of two Board Members,
32
<PAGE>
Norman Gaffney and John C. Spielberger. The Compensation Committee, currently
comprised of Thomas Baehr, makes recommendations to the Board of Directors
concerning salaries and incentive compensation for employees of the Company.
Upon consummation of the Offering, the Board of Directors intends to appoint
Cornelia Eldridge to the Audit Committee and the Compensation Committee, and
Lee Adams to the Compensation Committee.
DIRECTOR COMPENSATION
Directors who are employees of the Company receive no compensation, as
such, for service as members of the Board. It is expected that directors who
are not employees of the Company will receive options to purchase 5,000
shares of Common Stock for each year served on the Board of Directors, and
reimbursement of expenses incurred in connection with attendance of Board and
committee meetings.
KEY MAN INSURANCE
The Company is the beneficiary of $1,000,000 whole life policy covering
the life of John H. Spielberger and a $1,000,000 term policy covering the
life of Thomas J. Baehr.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation of the Company (the "Certificate")
provides that a director shall not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except: (i) for any breach of the 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 knowing violations of law; (iii) for
liability under Section 174 of the Delaware General Corporation Law (relating
to certain unlawful dividends, stock repurchases or stock redemptions); or
(iv) for any transaction from which the director derived any improper
personal benefit. The effect of this provision in the Certificate is to
eliminate the rights of the Company and its stockholders (through
stockholders' derivative suits on behalf of the Company) to recover monetary
damages against a director for breach of the fiduciary duty of care as a
director (including breaches resulting from negligent or grossly negligent
behavior) except in certain limited situations. This provision does not limit
or eliminate the rights of the Company or any stockholder to seek
non-monetary relief such as an injunction or rescission in the event of a
breach of a director's duty of care. These provisions will not alter the
liability of directors under federal securities laws.
The Company's By-Laws provides that the Company shall indemnify each
director and such of the Company's officers, employees and agents as the
Board of Directors shall determine from time to time in its sole discretion
to the fullest extent provided by the laws of the State of Delaware.
33
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation for services in all
capacities awarded to, earned by or paid to the Company's Chief Executive
Officer and the most highly compensated executive officers of the Company
whose aggregate cash compensation exceeded $100,000 during the last three
fiscal years:
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
Other Annual
Compensation
Name and Principal Position Year Salary ($) Bonus ($) ($)
--------------------------------------- ------ ---------- --------- --------------
<S> <C> <C> <C> <C>
John H. Spielberger, Chairman of the 1996 100,000 90,000 $29,411 (1)
Board of Directors, President and Chief 1995 100,000 -- --
Executive Officer 1994 100,000 -- --
Dennis R. Wilson, Vice President, 1996 100,000 35,000 --
Chief Financial Officer, Secretary and 1995 58,333 -- --
Director 1994 -- -- --
Thomas J. Baehr, Vice President and 1996 134,579 157,000 --
Director of SysComm, President and 1995 157,016 -- --
Chief Operating Officer of InfoTech 1994 101,272 -- --
Norman M. Gaffney, Director of 1996 304,613 -- --
SysComm, Executive Vice President, 1995 141,972 -- --
Marketing and Sales of InfoTech 1994 -- -- --
</TABLE>
- ------
(1) Consists of expenses for a Company car ($4,464), life insurance premiums
($23,897) for John H. Spielberger, and administration fees on his pension
plan ($1,050). This life insurance policy will be cancelled after the
effective date of this Prospectus and any cash value will be returned to
the Company.
EMPLOYMENT AGREEMENTS
The Company will enter into employment agreements effective upon the
consummation of the Offering with its executive officers. Each of the
employment agreements expire on September 30, 1999, unless sooner terminated
for death, physical or mental incapacity or cause (which is defined as the
uncured refusal to perform, or habitual neglect of, the performance of his
duties, willful misconduct, dishonesty or breach of trust which causes the
Company to suffer any loss, fine, civil penalty, judgment, claim, damage or
expense, a material breach of the employment agreement, or a felony
conviction), or terminated by either party with thirty (30) days' written
notice, and are automatically renewed for consecutive terms, unless cancelled
at least one year prior to expiration of the existing term. Each Employment
Agreement provides that all of such executive's business time be devoted to
the Company. In addition, each of the Employment Agreements also contain: (i)
non-competition provisions that preclude each employee from competing with
the Company for a period of two years from the date of the termination of his
employment of the Company, (ii) non-disclosure and confidentiality provisions
providing that all confidential information developed or made known during
the term of employment shall be exclusive property of the Company, and (iii)
non-interference provisions whereby, for a period of two years after his
termination of employment with the Company, the executive shall not interfere
with the Company's relationship with its customers or employees.
The employment agreements also include compensation plans for fiscal year
1997 as follows: John H. Spielberger will receive base salary of $140,000
plus a bonus based on 3% of all pre-tax earnings of the Company; Thomas J.
Baehr will receive $150,000 plus a bonus based on 3.5% of all pre-tax
earnings of InfoTech, payable quarterly; Dennis R. Wilson will receive
$120,000 plus a discretionary bonus determined by the Compensation Committee;
and Norman M. Gaffney will receive $125,000 plus a bonus plan based on 1.5%
of gross profit dollars of InfoTech, payable monthly.
These employment agreements contain annual performance incentive plans
which will be reviewed during the fiscal year and new incentive plans will be
implemented by the Company's Compensation Committee for fiscal year 1998, and
thereafter as applicable.
34
<PAGE>
In addition, the employment agreements provide that if an executive
officer is terminated for reasons other than for cause, the Company has
agreed to continue to pay his total base salary for the remainder of the term
of the employment agreement or one year, whichever is greater.
STOCK OPTION PLAN
On July 29, 1988, the stockholders approved a stock option plan (the "1988
Stock Option Plan"). In connection with the 1988 Stock Option Plan, 1,000,000
shares of Common Stock are reserved for issuance pursuant to options that may
be granted under the plan through May 5, 1998. As of September 30, 1996,
498,000 options were granted at exercise prices ranging from $.68 to $.75 per
share. To date, none of those options has been exercised. The options vest
over a three year period following the date of the grant. Currently, only
166,000 shares are exercisable.
The purpose of the 1988 Stock Option Plan is to encourage stock ownership
by employees of the Company, its divisions and subsidiary corporations and to
give them a greater personal interest in the success of the Company. The 1988
Stock Option Plan is administered by the Compensation Committee. The
Compensation Committee consists of at least three members of the Board of
Directors. The Compensation Committee shall have the authority in its
discretion, subject to and not inconsistent with the express provisions of
the Plan, to administer the Plan and to exercise all the powers and
authorities either specifically granted to it under the Plan or necessary or
advisable in the administration of the Plan, including, without limitation,
the authority to grant Options; to determine which Options shall constitute
incentive stock options ("ISO") and which Options shall constitute
Non-Qualified Stock Options; to determine which Options (if any) shall be
accompanied by rights or limited rights; to determine the purchase price of
the shares of Common Stock covered by each Option (the "Option Price"); to
determine the persons to who, and the time or times at which, Options shall
be granted; to determine the number of shares to be covered by each Option;
to interpret the Plan; to prescribe, amend and rescind rules and regulations
relating to the Plan; and to make all other determinations deemed necessary
or advisable for the administration of the Plan. The Compensation Committee
may delegate to one or more of its members or to one or more agents such
administrative duties as it may deem advisable, and the Compensation
Committee or any person to whom it has delegated duties as aforesaid may
employ one or more persons to render advice with respect to any
responsibility the Compensation Committee or such person may have under the
Plan.
Options granted under the 1988 Stock Option Plan may not be granted at a
price less than the fair market value of the Common Stock on the date of
grant (or 110% of fair market value in the case of persons holding 10% or
more of the voting stock of the Company). The aggregate fair market value of
shares for which ISOs granted to any employee are exercisable for the first
time by such employee during any calendar year (under all stock option plans
of the Company and any related corporation) may not exceed $100,000. Options
granted under the 1988 Stock Option Plan will expire not more than ten years
from the date of grant (five years in the case of ISOs granted to persons
holding 10% or more of the voting stock of the Company). Options granted
under the 1988 Stock Option Plan are not transferable during an optionee's
lifetime but are transferable at death by will or by the laws of descent and
distribution.
Each Executive Officer and Director has been granted options to purchase
Common Stock pursuant to the 1988 Stock Option Plan as follows:
OPTION GRANTS
Dated Options Exercise Expiration
Name Granted Granted (1) Price Date
------------------- --------- ----------- ---------- ------------
John H. Spielberger 6/30/95 40,000 $.75 9/1/98
Dennis R. Wilson 6/30/95 104,000 $.68 9/1/98
Thomas J. Baehr 6/30/95 100,000 $.68 9/1/98
Norman M. Gaffney 6/30/95 100,000 $.68 9/1/98
John C. Spielberger 6/30/95 4,000 $.68 9/1/98
401(K) PLAN
On January 1, 1994, the Company adopted a 401(k) savings plan for the
benefit of all eligible employees. All employees as of the effective date of
the 401(k) became eligible. An employee who became employed after
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<PAGE>
January 1, 1994 would become a participant after the completion of six months
of service and attainment of 20 years of age. Under the 401(k) plan,
participants may elect to contribute from their compensation any amount up to
the maximum deferral allowed by the Internal Revenue Code. Company
contributions are discretionary and the Company may make optional
contributions for any plan year at its discretion. During the fiscal years
ended September 30, 1996, 1995 and 1994, the Company recorded 401(k) costs
totalling $31,738, $19,148 and $100, respectively.
36
<PAGE>
CERTAIN TRANSACTIONS
John H. Spielberger has a consulting agreement with Ameriquest
Technologies, Inc., a company that purchased Romel Technology, Inc., a
SysComm subsidiary. This agreement, which commenced in December 1993, pays
Mr. Spielberger $10,000 per month through January 1998.
Currently, the Company is required to purchase as much as $1,000,000 worth
of Mr. Spielberger's stock from his family upon the occurrence of his death.
The buy-back price per share would be the greater of ten times the net income
for the prior four quarters preceding his death divided by the average number
of shares outstanding during that period or three times the current net worth
divided by the current number of shares outstanding, whichever is greater.
The Company and Mr. Spielberger have agreed to cancel the buy-back
arrangement concurrent with the Offering.
In addition, Mr. Spielberger has personally guaranteed the Company's
financing arrangements with IBM Credit Corporation. The Company and Mr.
Spielberger anticipate that IBM Credit Corporation will release Mr.
Spielberger from his personal guarantee immediately prior to, or upon
completion of, the Offering.
37
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of shares of
Common Stock as of the date of this Prospectus, and as adjusted to reflect
the sale of 1,600,000 shares of Common Stock offered hereby by (i) each
person known to the Company to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock, (ii) each director and nominee director
of the Company, (iii) each named executive officer of the Company, and (iv)
all directors and executive officers of the Company as a group:
<TABLE>
<CAPTION>
Percentage Beneficially Owned (2)
---------------------------------
Number of Shares
Beneficially Owned
Name and Address (2) Before Offering After Offering
------------------------------------- -------------------- --------------- --------------
<S> <C> <C> <C>
John H. Spielberger (1) (3) 2,506,667 73.67% 50.11%
Dennis R. Wilson (1) (5) 89,337 2.63% 1.79%
Thomas J. Baehr (1) (6) 86,667 2.55% 1.73%
Norman M. Gaffney (1) (6) 66,667 1.96% 1.33%
John C. Spielberger (1) (4) 7,667 .23% .15%
Cornelia Eldridge (7) -- -- --
Lee Adams (8) -- -- --
Mark Vinelli (1) 270,000 7.94% 5.40%
All Officers and Directors as a group
(five persons) 2,757,001 81.03% 55.11%
</TABLE>
- ------
(1) The addresses of John H. Spielberger, Dennis R. Wilson, Thomas Baehr,
John C. Spielberger, Norman Gaffney, and Mark Vinelli are c/o SysComm
International Corporation, 275 Marcus Boulevard, Hauppauge, New York
11788.
(2) Beneficial ownership is determined in accordance with the Rule 13d-3 of
the Securities Exchange Act of 1934 and generally includes voting and
investment power with respect to securities, subject to community
property laws, where applicable. A person is deemed to be the beneficial
owner of securities that can be acquired by such person within 60 days
from the date of this Prospectus upon exercise of options or warrants.
Each beneficial owner's percentage ownership is determined by assuming
that options or warrants that are held by such person (but not those held
by any other person) and that are exercisable within 60 days from the
date of this Prospectus have been exercised. Unless otherwise noted, the
Company believes that all persons named in the table have sole voting and
investment power with respect to all shares of Common Stock beneficially
owned by them.
(3) Includes 600,000 shares owned by Bearpen Limited Partnership, a
partnership of which John H. Spielberger and his wife, Catherine, are the
general partners. Excludes 50,000 shares owned by Mr. Spielberger's wife,
Catherine, of which John H. Spielberger disclaims beneficial ownership.
Includes options to purchase 26,667 shares of Common Stock at an exercise
price of $.75 per share, exercisable as of June 30, 1997. Does not
include options to purchase 13,333 shares of Common Stock at an exercise
price of $.75 per share.
(4) Excludes 20,000 shares owned by Teresa Murphy, John C. Spielberger's
wife. Includes options to purchase 2,667 shares of Common Stock at an
exercise price of $.68 per share, exercisable as of June 30, 1997. Does
not include options not currently exercisable to purchase 1,333 shares of
Common Stock at an exercise price of $.75 per share.
(5) Includes options to purchase 69,333 shares of Common Stock at an exercise
price of $.68 per share, exercisable as of June 30, 1997. Does not
include options not currently exercisable to purchase 34,667 shares of
Common Stock at an exercise price of $.68 per share.
(6) Includes options to purchase 66,667 shares of Common Stock at an exercise
price of $.68 per share, exercisable as of June 30, 1997. Does not
include options not currently exercisable to purchase 33,333 shares of
Common Stock at an exercise price of $.68 per share.
(7) The address of Cornelia Eldridge is 4514 Elkhorn Road, P.O. Box 6243, Sun
Valley, Idaho 83354.
(8) The address of Lee Adams is P.O. Box 2404, Lake Arrowhead, California
92352.
38
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 40,000,000 shares of
Common Stock, par value $.01 per share, and 1,000,000 shares of preferred
stock, par value $.01 per share. As of April 15, 1997, there were 3,632,200
shares of Common Stock issued and 3,170,540 shares of Common Stock
outstanding held of record by 30 stockholders. No shares of Preferred Stock
are issued and outstanding.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote for each share
held of record on matters to be voted on by the stockholders of the Company.
Holders of shares of Common Stock are entitled to receive dividends when, as,
and if declared by the Company's Board of Directors out of funds legally
available to the Company. The Company currently intends to retain all future
earnings for the use in the operation of its business and therefore does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future. See "Dividend Policy." Upon liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to share ratably in the
assets remaining after payment of all liabilities and liquidation of
preferences if any. Shares of Common Stock are not redeemable and have no
preemptive or similar rights to subscribe for additional shares. All
outstanding shares of Common Stock are, and the shares of Common Stock
offered hereby will, upon issuance and payment, be fully paid and
non-assessable.
PREFERRED STOCK
The Board of Directors has the authority to cause the Company to issue
without any further vote or action by the stockholders, up to 1,000,000
shares of preferred stock, par value $.01 per share (the "Preferred Stock"),
in one or more series, to designate the number of shares constituting any
series, and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, voting rights, rights and terms of
redemption, redemption price or prices and liquidation preferences of such
series. The issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control of the Company without further
action by the stockholders. The issuance of preferred stock with voting and
conversion rights may adversely affect the voting power of the holders of
Common Stock, including the loss of voting control. The Company has no
present plans to issue any shares of preferred stock. See "Risk Factors --
Anti-Takeover Provisions."
ANTI-TAKEOVER PROVISIONS; SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is governed by Section 203 of the Delaware General Corporation
Law, an anti-takeover law. In general, this statute restricts a corporation
from entering into certain business combinations with an interested
stockholder (defined as any person or entity that is the beneficial owner of
at least 15% of a corporation's voting stock) or its affiliates for a period
of three years after the date of the transaction in which the person became
an interested stockholder unless (i) the transaction is approved by the Board
of Directors of the corporation prior to such business combination, (ii) the
interested stockholder acquires 85% of the corporation's voting stock in the
same transaction in which it exceeds 15%, or (iii) the business combination
is approved by the Board of Directors and by a vote of two-thirds of the
outstanding voting stock not owned by the interested stockholder. A "business
combination" includes mergers, asset sales and other transactions resulting
in a financial benefit to the interested stockholder. The Company's Amended
and Restated Certificate of Incorporation excludes John H. Spielberger from
the definition of "interested stockholder."
The Company's Amended and Restated Certificate of Incorporation and
Amended and Restated By-Laws include certain provisions which may have an
anti-takeover effect and may delay, defer or prevent a tender offer or
takeover attempt that a stockholder might consider in its best interests,
including attempts that might result in a premium over the market for the
shares held by the stockholders and could make it more difficult to remove
incumbent management. The Company's Amended and Restated Certificate of
Incorporation and Amended and Restated By-Laws provide (i) that the Board of
Directors will be divided into three classes of directors serving staggered
three year terms resulting in approximately one-third of the Company's Board
of Directors being elected each year; (ii) that directors may be removed from
office only for cause and only by the affirmative vote of the holders of
66 2/3% of the then outstanding shares of capital stock entitled to vote
generally in an election of directors; (iii) that, except as otherwise
required by law, vacancies in the Board of Directors may be filled
39
<PAGE>
only by the remaining directors; (iv) that commencing with the consummation
of the Offering, any action required or permitted to be taken by the
stockholders of the Company may be effected only at an annual or special
meeting of stockholders and not by written consent of the stockholders; (v)
that any meeting of stockholders may be called only upon the affirmative vote
of at least a majority of the members of the Board of Directors; and (vi) for
an advance notice procedure for the nomination other than by or at the
discretion of the Board of Directors or a committee of the Board of Directors
the candidates for election as directors as well as for other stockholder
proposals to be considered at annual meetings of the stockholders. In
general, notice of an intent to nominate a director or raise business at such
meetings must be received by the Company not less than sixty (60) nor more
than ninety (90) days before the meeting and must contain certain information
concerning the person to be nominated or the matters to be brought before the
meeting and concerning stockholders submitting the proposal. The affirmative
vote of at least a majority of the directors or the holders of at least
66 2/3% of the voting power of the Company's Common Stock is required to alter,
amend, repeal or adopt any provision inconsistent with the provisions
described in this paragraph.
The Delaware General Corporation Law, the Amended and Restated Certificate
of Incorporation and the Amended and Restated By-Laws may discourage certain
types of transactions involving an actual or potential change in control of
the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, Inc.
40
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The 1,600,000 shares of Common Stock sold in the Offering will be freely
transferable without restriction or further registration under the Securities
Act of 1933 ("Securities Act") unless acquired by an "affiliate" of the
Company within the meaning of the Securities Act. Upon completion of the
Offering, the existing stockholders of the Company will own 3,170,540 shares
of Common Stock. All of these shares are deemed "restricted securities" as
defined by Rule 144 under the Securities ("Rule 144"). Upon expiration of the
contractual restrictions between the Company, its officers, directors and
current stockholders and option holders and the Representative, beginning one
year after the date of this Prospectus, these shares will be available for
sale in the public market, subject to compliance with Rule 144.
Rule 144, as currently in effect, provides that a person (or persons whose
sales are aggregated) who is an affiliate of the Company, or who has
beneficially owned shares for at least one year which were issued and sold in
reliance upon certain exemptions from registration under the Act ("Restricted
Shares"), is entitled to sell within any three month period a number of
shares that does not exceed the greater of one percent of the then
outstanding shares of Common Stock or the average weekly trading volume in
the Common Stock during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to certain manner-of-sale provisions, notice
requirements and the availability of current public information about the
Company. However, a person who has beneficially owned Restricted Shares for
at least two years and who is not an affiliate of the Company may sell such
shares under Rule 144 without regard to volume limitations, manner-of-sale
provisions, notice requirements or the availability of current public
information about the Company.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 of the Securities Act ("Rule 701")
may be relied upon with respect to the resale of securities originally
purchased from the Company by its employees, directors, officers, consultants
or advisors prior to the date the issuer becomes subject to the reporting
requirements of the Exchange Act, pursuant to written compensatory benefit
plans or written contracts relating to the compensation of such persons. In
addition, the Commission has indicated that Rule 701 will apply to typical
stock options granted by an issuer before it becomes subject to the reporting
requirements of the Exchange Act, along with the shares acquired upon
exercise of such options (including exercises after the date of this
Prospectus). Securities issued in reliance on Rule 701 are restricted
securities and subject to the contractual restrictions described above,
beginning ninety days after the date of this Prospectus, may be sold by
persons other than Affiliates subject only to the manner of sale provisions
of Rule 144 and by Affiliates under Rule 144 without compliance with its
one-year minimum holding period requirements.
Prior to the Offering, there has been no public market for the Common
Stock, and no predictions can be made as to the effect, if any, that market
sales of Restricted Shares or the availability of Restricted Shares for sale
will have on the market price prevailing from time to time. Nevertheless,
sales of substantial amounts of Restricted Shares in the public market could
adversely affect prevailing market prices.
41
<PAGE>
UNDERWRITING
The underwriters named below (collectively, the "Underwriters") for which
Commonwealth Associates is acting as representative (the "Representative"),
have severally, not jointly, subject to the terms and conditions of the
underwriting agreement ("Underwriting Agreement") agreed to purchase from the
Company, and the Company has agreed to sell, the shares of Common Stock which
equal the number of shares set forth opposite the name of such Underwriters
below:
Underwriter Number of Shares
----------- ----------------
Commonwealth Associates
----------------
Total ................. 1,600,000
================
The Underwriters are committed on a "firm commitment" basis to purchase
and pay for all shares of Common Stock offered hereby (other than those
covered by the Over-Allotment Option described below), if any such shares are
purchased. The shares are being offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters and
subject to approval of certain legal matters by counsel and to certain other
conditions.
Through the Representative, the several Underwriters have advised the
Company that they propose to offer the shares of Common Stock to the public
at the price set forth on the cover page of this Prospectus and the
Underwriters may allow to certain dealers who are members of the National
Association of Securities Dealers, Inc. ("NASD") concessions, not in excess
of $------ per share, of which not in excess of $------ per share may be
reallowed to other dealers who are members of the NASD. After the
commencement of the Offering, the public offering price, concessions and
reallowance may be changed. The Representative has informed that Company that
it does not expect any sales of the shares of Common Stock offered hereby to
be made to discretionary accounts of the Underwriters.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 240,000 additional
shares of Common Stock, at the initial public offering price set forth on the
cover page hereof, less underwriting discounts and commissions. Such option
may be exercised in whole or, from time to time, in part, to purchase
additional shares solely for the purpose of covering over-allotments, if
any, incurred in connection with the sale of the shares offered hereby.
The Company has agreed to pay to Commonwealth individually, and not as
Representative of the Underwriters, a non-accountable expense allowance in
the amount of 1.5% of the gross proceeds of the Offering, including the
Over-Allotment Option, $50,000 of which has been paid to date. The Company
shall bear all fees and expenses incurred by the Company in connection with
clearing the Offering with the NASD and qualifying the shares of Common Stock
offered hereby for sale under the laws of such states as the Representative
may designate, including expenses of counsel retained for such purposes by
the Representative.
In addition, the Company has agreed to pay to Commonwealth individually,
and not as Representative of the Underwriters, a corporate advisory fee equal
to 2% of the gross proceeds of the Offering (including any shares purchased
pursuant to the Underwriters' Over-Allotment Option) as reimbursement for
Commonwealth's advisory services, which is payable at the closing of the
Offering.
The Company has agreed to grant to Commonwealth for the two year period
commencing on the date of this Prospectus the right of first refusal to act
as lead manager, placement agent, or investment banker with respect to any
proposed underwritten public distribution or private placement of the
Company's securities or any merger, acquisition, or disposition of assets of
the Company, if the Company uses a lead manager, placement agent or
investment banker or person performing such functions for a fee.
42
<PAGE>
The Company has agreed to sell to the Representative and its designees for
an aggregate price of $160, the warrants ("Representative's Warrants") to
purchase up to 160,000 shares of Common Stock at an exercise price per share
equal to 120% of the initial public offering price per share of Common Stock
offered hereby. The Representative's Warrants may not be transferred for one
year from the date of this Prospectus, except to the officers, directors,
employees or partners of the Representative and are exercisable during the
four-year period commencing one year from the date of this Prospectus (the
"Warrant Exercise Term"). During the Warrant Exercise Term, the holders of
the Representative's Warrants are given, at nominal cost, the opportunity to
profit from a rise in the market price of the Company's Common Stock. To the
extent that the Representative's Warrants are exercised or exchanged,
dilution to the interests of the Company's stockholders will occur. Further,
the terms upon which the Company will be able to obtain additional equity
capital may be adversely affected since the holders of the Representative's
Warrants can be expected to exercise them at a time when the Company would,
in all likelihood, be able to obtain any needed capital on terms more
favorable to the Company than those provided in the Representative's
Warrants. Any profit realized by the Representative on the sale of the
Representative's Warrants or the underlying shares of Common Stock may be
deemed additional underwriting compensation. Subject to certain limitations
and exclusions, the Company has agreed to register the Representative's
Warrants and the underlying shares of Common Stock under the Securities Act
on one occasion during the Warrant Exercise Term and to include such
Representative's Warrants and shares in any appropriate Registration
Statement that is filed by the Company during the seven years following the
date of this Prospectus. The Representative's Warrants include a provision
permitting the holders to elect a "cashless exercise" whereby the holders may
exchange, in lieu of cash, such number of shares issuable upon exercise of
the Representative's Warrants equal in value to the aggregate exercise price.
The Company and its officers, directors, stockholders and holders of any
options, warrants or other securities convertible into, or exercisable for,
shares of Common Stock, have agreed that they will not, directly or
indirectly, offer, sell, contract to sell, pledge, grant any option to
purchase or otherwise sell or dispose of any shares of Common Stock or other
capital stock of the Company, or any securities convertible into or
exchangeable for any shares of Common Stock or other capital stock of the
Company for a period of one year commencing upon the date of this Prospectus,
without the prior written consent of Commonwealth, on behalf of the
Underwriters.
The Underwriting Agreement provides for reciprocal indemnification and
contribution between the Company and the Underwriters against certain civil
liabilities in connection with the Registration Statement of which this
Prospectus forms a part, including liabilities under the Securities Act.
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be
determined by negotiations between the Company and the Representative. Among
the factors considered in determining the initial public offering price are
the history of, and the prospects for, the Company's business and the
industry in which it competes, an assessment of the Company's management, its
past and present operations, the prospects for earnings of the Company, the
present state of the Company's development, the general condition of the
securities market at the time of the Offering and the market prices and
earnings of similar securities of comparable companies at the time of the
Offering and prevailing market and economic conditions.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Ruskin, Moscou, Evans & Faltischek, P.C., Mineola,
New York. Certain legal matters in connection with the Offering will be
passed upon for the Underwriters by Todtman, Young, Nachamie, Hendler &
Spizz, P.C., New York, New York.
EXPERTS
The Consolidated Financial Statements of SysComm International Corporation
and its subsidiaries included in this prospectus and the related financial
statement schedules included elsewhere in the Registration Statement
43
<PAGE>
have been audited by Albrecht, Viggiano, Zureck & Company, P.C., independent
auditors, as stated in their reports appearing herein and elsewhere in the
Registration Statement, and are included in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the United States Securities and Exchange
Commission (the "Commission") a Registration Statement on Form S-1 (the
"Registration Statement") under the Securities Act with respect to the shares
of Common Stock offered hereby. This Prospectus, which forms a part of the
Registration Statement, does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement and such exhibits and
schedules, which may be inspected without charge at the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at Northwestern Atrium Center, Suite 1400, 500 West Madison Street,
Chicago, Illinois 60661-2511 or Seven World Trade Center, New York, New York
10048. Copies of such material may also be obtained at prescribed rates from
the Public Reference Section of the Commission in Washington, D.C. 20549.
Statements contained in the Prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and in each
instance, reference is made to the copy of such contract or document filed as
an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference. The Commission maintains a Web site that
contains reports, proxy and information statements and other information
regarding the Company; the address of such site is http://www.sec.gov.
44
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
INDEPENDENT AUDITORS' REPORT ................................................................... F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 1995 and 1996 and March 31, 1997
(unaudited) ............................................................................. F-3
Consolidated Statements of Operations for the Years Ended September 30, 1994, 1995, and
1996 and the Six Months Ended March 31, 1996 (unaudited) and 1997 (unaudited) ........... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 1994,
1995, and 1996 and the Six Months Ended March 31, 1997 (unaudited) ...................... F-5
Consolidated Statements of Cash Flows for the Years Ended September 30, 1994, 1995, and
1996 and the Six Months Ended March 31, 1996 (unaudited) and 1997 (unaudited) ........... F-6
Notes to Consolidated Financial Statements ................................................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
SysComm International Corporation and Subsidiaries
Hauppauge, New York
We have audited the accompanying consolidated balance sheets of SysComm
International Corporation and Subsidiaries as of September 30, 1995 and 1996
and the related consolidated statements of operations, stockholders' equity,
and cash flows for each of the years in the three-year period ended September
30, 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 SysComm International Corporation and Subsidiaries as of September 30,
1995 and 1996 and the results of its operations and its cash flows for each
of the years in the three-year period ended September 30, 1996, in conformity
with generally accepted accounting principles.
ALBRECHT, VIGGIANO, ZURECK & COMPANY, P.C.
Hauppauge, New York
November 1, 1996, except as to
Note 14 which is as of April 21, 1997
F-2
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
-------------------------------- March 31,
1995 1996 1997
-------------- -------------- --------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents .................. $ 1,064,949 $ 1,180,680 $ 672,227
Accounts receivable, net ................... 10,343,186 21,012,242 13,834,592
Note receivable ............................ 21,939 -0- -0-
Inventory .................................. 5,976,192 8,936,845 8,703,014
Prepaid expenses ........................... 66,598 43,207 210,708
Investments ................................ 412,500 206,250 206,400
-------------- -------------- --------------
Total Current Assets .................. 17,885,364 31,379,224 23,626,941
Property, Plant and Equipment, Net .............. 399,708 539,174 723,148
Other Assets .................................... 186,587 184,159 193,880
-------------- -------------- --------------
Total Assets .......................... $18,471,659 $32,102,557 $24,543,969
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Supplier credit facility ................... $10,797,111 $12,483,391 $ 6,867,271
Accounts payable and accrued liabilities ... 5,194,454 14,440,421 12,384,282
Current portion of long-term liabilities ... -0- 26,626 40,669
Income taxes payable ....................... 23,053 1,069,197 100,495
Deferred income taxes ...................... 101,157 17,044 17,104
-------------- -------------- --------------
Total Current Liabilities ............. 16,115,775 28,036,679 19,409,821
Long-Term Liabilities ........................... -0- 67,291 85,156
-------------- -------------- --------------
Total Liabilities ..................... 16,115,775 28,103,970 19,494,977
-------------- -------------- --------------
Commitments and Contingencies
Stockholders' Equity
Common stock; $.01 par value; 5,000,000
shares authorized; 3,632,200 shares
issued; 3,170,540 shares outstanding ..... 36,322 36,322 36,322
Additional paid-in capital ................. 138,143 138,143 138,143
Unrealized loss on available-for-sale
securities ............................... (720,000) (843,750) (843,660)
Retained earnings .......................... 3,043,589 4,810,042 5,860,357
Less: Treasury stock (at cost) -- 461,660
shares ................................... (142,170) (142,170) (142,170)
-------------- -------------- --------------
Total Stockholders' Equity ............ 2,355,884 3,998,587 5,048,992
-------------- -------------- --------------
Total Liabilities and Stockholders'
Equity .............................. $18,471,659 $32,102,557 $24,543,969
============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended September 30, March 31,
------------------------------------------------- --------------------------------
1994 1995 1996 1996 1997
-------------- -------------- -------------- -------------- --------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net Sales .......................... $45,459,575 $55,195,507 $98,446,698 $38,042,823 $39,158,875
Cost of Sales ...................... 40,796,425 49,441,544 89,025,331 34,159,227 33,890,028
-------------- -------------- -------------- -------------- --------------
Gross Profit ............. 4,663,150 5,753,963 9,421,367 3,883,596 5,268,847
Selling and Administrative Expenses 3,406,316 4,079,184 5,028,812 2,382,727 2,957,149
-------------- -------------- -------------- -------------- --------------
Income from Operations ... 1,256,834 1,674,779 4,392,555 1,500,869 2,311,698
-------------- -------------- -------------- -------------- --------------
Other Income (Expense)
Interest expense ................. (726,367) (1,211,727) (1,391,452) (633,716) (552,143)
Interest income .................. 12,589 4,411 585 523 236
Other income ..................... 39,630 37,126 63,151 7,964 57,324
-------------- -------------- -------------- -------------- --------------
Total Other Expense ...... (674,148) (1,170,190) (1,327,716) (625,229) (494,583)
-------------- -------------- -------------- -------------- --------------
Income from Continuing
Operations Before Income
Taxes .................. 582,686 504,589 3,064,839 875,640 1,817,115
Provision for Income Taxes ......... 242,889 223,769 1,298,386 371,000 766,800
-------------- -------------- -------------- -------------- --------------
Income from Continuing
Operations ............. 339,797 280,820 1,766,453 504,640 1,050,315
Discontinued Operations
Income from sale of subsidiary ... 1,485,698 -0- -0- -0- -0-
-------------- -------------- -------------- -------------- --------------
Net Income ............... $ 1,825,495 $ 280,820 $ 1,766,453 $ 504,640 $ 1,050,315
============== ============== ============== ============== ==============
Net Income Per Common Share
Continuing Operations ............ $ .10 $ .08 $ .48 $ .14 $ .29
Discontinued Operations .......... .43 -0- -0- -0- -0-
-------------- -------------- -------------- -------------- --------------
Net Income per Common
Share .................. $ .53 $ .08 $ .48 $ .14 $ .29
============== ============== ============== ============== ==============
Weighted Average Number of Common
Shares Outstanding ............... 3,448,900 3,614,040 3,677,290 3,686,040 3,668,540
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock Unrealized Total
-------------------- Paid-In -------------------- Gain (Loss) Retained Stockholders'
Shares Amount Capital Shares Amount on Securities Earnings Equity
--------- ------- -------- ------- --------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of September 30, 1993 3,368,164 $36,322 $138,143 264,036 $ (72,440) $ 937,274 $1,039,299
Net Income ...................... 1,825,495 1,825,495
Purchase of Common Stock ........ (197,624) 197,624 (69,730) (69,730)
Unrealized Loss on Available-for-
Sale Securities ............... $(382,500) (382,500)
--------- ------- -------- ------- --------- --------- ---------- ----------
Balance as of September 30, 1994 3,170,540 36,322 138,143 461,660 (142,170) (382,500) 2,762,769 2,412,564
Net Income ...................... 280,820 280,820
Unrealized Loss on Available-for-
Sale Securities ............... (337,500) (337,500)
--------- ------- -------- ------- --------- --------- ---------- ----------
Balance as of September 30, 1995 3,170,540 36,322 138,143 461,660 (142,170) (720,000) 3,043,589 2,355,884
Net Income ...................... 1,766,453 1,766,453
Unrealized Loss on Available-for-
Sale Securities ............... (123,750) (123,750)
--------- ------- -------- ------- --------- --------- ---------- ----------
Balance as of September 30, 1996 3,170,540 36,322 138,143 461,660 (142,170) (843,750) 4,810,042 3,998,587
Net Income (unaudited) .......... 1,050,315 1,050,315
Unrealized Gain on Available-for-
Sale Securities (unaudited) ... 90 90
--------- ------- -------- ------- --------- --------- ---------- ----------
Balance as of March 31, 1997
(unaudited) ................... 3,170,540 $36,322 $138,143 461,660 $(142,170) $(843,660) $5,860,357 $5,048,992
========= ======= ======== ======= ========= ========= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended September 30, March 31,
-------------------------------------------- -------------------------------
1994 1995 1996 1996 1997
------------- ------------ -------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net income .................................... $ 1,825,495 $ 280,820 $ 1,766,453 $ 504,640 $ 1,050,315
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization .............. 111,412 134,139 149,090 67,781 81,437
Income from sale of subsidiary ............. (1,485,698) -0- -0- -0- -0-
Disposition of accumulated deficit of subsidiary 514,198 -0- -0- -0- -0-
Deferred tax (benefit) expense ............. 35,115 (5,442) (1,614) -0- -0-
(Gain) loss on disposition of fixed assets . 2,701 114 (23) -0- (2,570)
Changes in assets and liabilities:
Accounts receivable ...................... (592,271) (585,610) (10,669,056) (6,538,994) 7,177,650
Note receivable .......................... (40,217) 41,705 21,939 20,621 -0-
Inventory ................................ (55,516) 93,808 (2,960,653) (554,133) 233,831
Prepaid expenses and other assets ........ (37,028) (55,666) 25,819 40,579 (177,222)
Accounts payable and accrued liabilities . 2,465,743 (287,525) 9,245,967 (1,733,399) (2,056,139)
Income taxes payable ..................... 156,237 (164,451) 1,046,144 225,982 (968,702)
Deferred revenue ......................... (89,517) -0- -0- -0- -0-
------------- ------------ -------------- ------------- -------------
Net Cash Provided (Used) by Operating
Activities .......................... 2,810,654 (548,108) (1,375,934) (7,966,923) 5,338,600
------------- ------------ -------------- ------------- -------------
Cash Flows From Investing Activities
Purchase of fixed assets ...................... (291,387) (92,697) (235,388) (58,371) (221,016)
Proceeds from disposition of fixed assets ..... 10,000 400 450 -0- 7,300
------------- ------------ -------------- ------------- -------------
Net Cash Used in Investing Activities . (281,387) (92,297) (234,938) (58,371) (213,716)
------------- ------------ -------------- ------------- -------------
Cash Flows From Financing Activities
Net proceeds from (payments under) supplier credit
facility ................................... (1,436,428) 343,000 1,686,280 8,313,021 (5,616,120)
Net proceeds from long-term debt .............. -0- -0- 58,229 -0- -0-
Payments of long-term liabilities ............. -0- -0- (17,906) (4,954) (17,217)
Purchase of treasury stock .................... (69,730) -0- -0- -0- -0-
------------- ------------ -------------- ------------- -------------
Net Cash Provided (Used) by Financing
Activities .......................... (1,506,158) 343,000 1,726,603 8,308,067 (5,633,337)
------------- ------------ -------------- ------------- -------------
Net Increase (Decrease) in Cash and Cash
Equivalents ......................... 1,023,109 (297,405) 115,731 282,773 (508,453)
Cash and Cash Equivalents at Beginning of Period . 339,245 1,362,354 1,064,949 1,064,949 1,180,680
------------- ------------ -------------- ------------- -------------
Cash and Cash Equivalents at End of Period ...... $ 1,362,354 $1,064,949 $ 1,180,680 $ 1,347,722 $ 672,227
============= ============ ============== ============= =============
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Income taxes ............................... $ 63,709 $ 219,543 $ 248,606 $ 77,114 $ 566,885
Interest ................................... 732,864 1,211,727 1,391,452 633,716 552,143
Supplemental Schedules of Noncash Investing and
Financing Activities
Acquisition of equipment:
Cost of equipment .......................... $ -0- $ -0- $ 53,594 $ 78,472 $ 49,125
Less: Equipment financed ................. -0- -0- (53,594) (78,472) (49,125)
------------- ------------ -------------- ------------- -------------
Cash Paid for Capital Expenditures .... $ -0- $ -0- $ -0- $ -0- $ -0-
============= ============ ============== ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1994, 1995, AND 1996
AND THE SIX MONTHS ENDED MARCH 31, 1996 AND 1997
(INFORMATION AS IT RELATES TO THE SIX MONTHS ENDED
MARCH 31, 1996 AND 1997 IS UNAUDITED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
SysComm International Corporation (the "Company"), incorporated on
September 30, 1987, is a Delaware corporation with one active subsidiary:
Information Technology Services, Inc. (doing business as InfoTech, a New York
Corporation since 1980).
The Company, through its subsidiary, is authorized to conduct business in
New York, New Jersey, Massachusetts, and Connecticut. The Company is a
supplier and systems integrator of a broad range of computer and related
products.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of SysComm
International Corporation and its wholly-owned subsidiary. Significant
intercompany accounts and transactions have been eliminated in consolidation.
ESTIMATES
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
ACCOUNTS RECEIVABLE
Accounts receivable are presented net of allowances for doubtful accounts
and for sales returns. The allowances are based on prior experience and
management's evaluation of the collectibility of accounts receivable and
returned merchandise credits. Authorized sales returns from the supplier are
classified as receivables. Management believes that the allowances are
adequate. However, further additions to the allowances may be necessary based
on changes in economic conditions.
The allowance for doubtful accounts was $50,000, $63,846, and $114,127 as
of September 30, 1995, September 30, 1996, and March 31, 1997, respectively.
The allowance for sales returns was $125,000 as of September 30, 1995 and
$37,389 as of September 30, 1996 and March 31, 1997.
INVENTORY
Inventory consists principally of computer hardware and software, and is
valued at the lower of cost (first-in, first-out) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost, net of accumulated
depreciation. Expenditures for maintenance and repairs are charged against
operations as incurred. Upon retirement or sale, the assets disposed are
removed from the accounts and any resulting gain or loss is reflected in the
results of operations. Capitalized values of property under leases are
amortized over the life of the lease or the estimated life of the asset,
whichever is less.
F-7
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1994, 1995, and 1996
and the six months ended March 31, 1996 and 1997
(information as it relates to the six months ended
March 31, 1996 and 1997 is unaudited) - (Continued)
Note 1 -- Summary of Significant Accounting Policies - (Continued)
Depreciation and amortization are computed using the straight-line method
over the following estimated useful lives:
Estimated
Useful Lives
----------------
Vehicles ............................................... 1-5 years
Computer Equipment ..................................... 5 years
Furniture and Fixtures ................................. 7 years
Leasehold Improvements ................................. 5 years
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts and the tax
basis of existing assets and liabilities.
INVESTMENTS
The Company evaluates its investment policies consistent with Financial
Accounting Standards Board Statement No. 115, Accounting for Certain
Investments in Debt and Equity Securities ("FASB 115"). Accordingly,
investment securities are classified as available-for-sale securities and
carried at fair value, with the unrealized gains and losses reported as a
separate component of stockholders' equity.
NET INCOME PER COMMON SHARE
Net income per common share is based on the weighted average number of
shares of common stock and dilutive common share equivalents outstanding
during each period. Dilutive common share equivalents include stock options.
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers all
liquid instruments purchased with a maturity of three months or less to be
cash equivalents.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the
current financial statement presentation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, prepaid expenses, accounts payable and
accrued liabilities, approximate fair value due to the relatively short
maturity of these instruments. The fair value of investments is estimated
based on quoted market price. The carrying value of the supplier credit
facility and long-term debt, including the current portion, approximates fair
value based on the incremental borrowing rates currently available to the
Company for financing with similar terms and maturities.
UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the unaudited consolidated financial
statements for the six months ended March 31, 1996 and 1997 are presented on
a basis consistent with the audited consolidated financial statements and
reflect all adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation of the results thereof. The results of
operations for the six months ended March 31, 1997, are not necessarily
indicative of the results to be expected for the year ending September 30,
1997.
F-8
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1994, 1995, and 1996
and the six months ended March 31, 1996 and 1997
(information as it relates to the six months ended
March 31, 1996 and 1997 is unaudited) - (Continued)
Note 1 -- Summary of Significant Accounting Policies - (Continued)
RECENTLY ISSUED PRONOUNCEMENT
Statement of Financial Accounting Standards No. 128, Earnings Per Share,
issued in February 1997, establishes standards for computing and presenting
earnings per share and is effective for periods ending after December 15,
1997. This standard requires the Company to present basic earnings per share
and diluted earnings per share. The impact of adopting this standard has not
yet been determined.
NOTE 2 -- INVESTMENTS
Investments consist of the following:
September 30,
-------------------------- March 31,
1995 1996 1997
----------- ----------- -----------
(unaudited)
Ameriquest Technologies, Inc.
(Formerly CMS Enhancements, Inc.)
Number of Shares .............. 300,000 300,000 300,000
Fair Value .................... $412,500 $206,250 $206,400
Cost .......................... $ 10,000 $ 10,000 $ 10,000
Marketable equity securities have been categorized as available for sale
and are stated at fair value. At September 30, 1995 and 1996, unrealized
losses of $1,200,000 and $1,406,250, respectively, are shown, net of deferred
taxes of $480,000 and $562,500, respectively, as a separate component of
stockholders' equity until realized. At March 31, 1997, unrealized losses of
$1,406,100 are shown net of deferred taxes of $562,440. The increase in the
net unrealized loss for the years ended September 30, 1995 and 1996 totaled
$337,500 and $123,750, respectively, and $67,500 for the six months ended
March 31, 1996. The net unrealized gain for the six months ended March 31,
1997, was $90.
NOTE 3 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is set forth below.
September 30,
-------------------------- March 31,
1995 1996 1997
----------- ----------- -----------
(unaudited)
Vehicles .......................... $ 33,182 $ 93,412 $ 119,159
Computer equipment ................ 615,786 733,297 886,195
Furniture and fixtures ............ 267,090 360,106 442,145
Leasehold improvements ............ 76,017 93,243 93,243
----------- ----------- -----------
992,075 1,280,058 1,540,742
Accumulated depreciation .......... (592,367) (740,884) (817,594)
----------- ----------- -----------
Property, plant and equipment, net $ 399,708 $ 539,174 $ 723,148
----------- ----------- -----------
F-9
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1994, 1995, and 1996
and the six months ended March 31, 1996 and 1997
(information as it relates to the six months ended
March 31, 1996 and 1997 is unaudited)
- (Continued)
NOTE 4 -- OTHER ASSETS
The Company is the owner and beneficiary of a $1,000,000 whole life policy
covering the life of the principal stockholder/officer. The cash surrender
value of life insurance included in Other Assets as of September 30, 1995,
September 30, 1996, and March 31, 1997, amounted to $137,546, $145,046, and
$145,046, respectively.
NOTE 5 -- FINANCING ARRANGEMENTS
The Company entered into a formal credit agreement with the financing
subsidiary of its major supplier. Under the credit facility, the Company may
borrow up to 85% of receivables due within 90 days and up to 100% of eligible
inventory, to a maximum of $27,500,000. The agreement, which expires on
September 30, 1997, is subject to temporary increases, thereby increasing the
line of credit to $41,250,000 during certain periods.
As of September 30, 1995, September 30, 1996 and March 31, 1997,
borrowings outstanding under this facility were $10,591,511, $12,483,391, and
$6,867,271, respectively. For the years ended September 30, 1995 and 1996,
and for the six months ended March 31, 1996 and 1997, interest on the
outstanding borrowings was payable monthly at prime plus 1.625%, 1.375%,
1.625% and 1.375%, respectively, or prime plus 6.5%, should the Company fail
to meet certain collateral requirements. Interest costs included in interest
expense for the years ended September 30, 1994, 1995, and 1996 totaled
$726,367, $1,188,525, and $1,381,373, respectively. Interest costs included
in interest expense for the six months ended March 31, 1996 and 1997, totaled
$633,716 and $552,143, respectively.
The credit facility contains certain financial covenants and is personally
guaranteed by the principal stockholder/officer of the Company. Additionally,
$4,772,075, $12,560,441, and $10,082,368, were included in accounts payable
at September 30, 1995, September 30, 1996, and March 31, 1997, respectively,
and are included against the maximum credit available.
F-10
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1994, 1995, and 1996
and the six months ended March 31, 1996 and 1997
(information as it relates to the six months ended
March 31, 1996 and 1997 is unaudited)
- (Continued)
NOTE 6 -- LONG-TERM LIABILITIES
Long-term liabilities consist of the following:
<TABLE>
<CAPTION>
September 30, March 31,
1996 1997
--------------- -----------
(unaudited)
<S> <C> <C>
Ford Motor Credit Corp.
Collateralized by a lien on a Company automobile; payable in 36
monthly installments of $815 including interest of 9.0% per annum;
final payment due October 1999. ..................................... $ -0- $ 22,470
Collateralized by a lien on a Company automobile; payable in 36
monthly installments of $1,194 including interest of 9.9% per annum;
final payment due December 1998. .................................... 27,832 21,928
Collateralized by a lien on a Company automobile; payable in 36
monthly installments of $678 including interest of 8.9% per annum;
final payment due November 1998. .................................... 16,480 13,066
AT&T Credit Corp.
Capital lease collateralized by a lien on the Company's phone system;
payable in monthly installments of $654 including interest of
14.446% per annum; final payment due May 2001. ..................... 29,497 27,105
Capital lease collateralized by a lien on the Company's phone system;
payable in monthly installments of $573 including interest of
15.089% per annum; final payment due December 2000. ................ 20,108 18,256
Capital lease collateralized by a lien on the Company's phone system;
payable in monthly installments of $494 including interest of 9.9%
per annum; final payment due February 2002. ........................ -0- 23,000
-------- --------
93,917 125,825
Less: Current maturities ........................................... (26,626) (40,669)
-------- --------
$ 67,291 $ 85,156
======== ========
</TABLE>
Maturities of long-term liabilities as of March 31, 1997 are as follows:
1998 ........................ $ 40,669
1999 ........................ 38,958
2000 ........................ 22,010
2001 ........................ 17,673
2002 ........................ 6,515
--------
$125,825
========
NOTE 7 -- CAPITAL LEASES
As further discussed in Note 6, the Company began leasing telephone
equipment in December 1995. As of September 30, 1996 and March 31, 1997, the
gross assets capitalized under such leases totaled $54,486 and $77,980,
respectively, and the accumulated amortization totaled $3,892 and $7,934,
respectively. The amortization expense for the year ended September 30, 1996,
of $3,892 is included in depreciation expense. Amortization expense included
in depreciation expense for the six months ended March 31, 1997 is $4,042.
F-11
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1994, 1995, and 1996
and the six months ended March 31, 1996 and 1997
(information as it relates to the six months ended
March 31, 1996 and 1997 is unaudited)
- (Continued)
NOTE 8 -- INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended September 30, March 31,
------------------------------------------ --------------------------
1994 1995 1996 1996 1997
----------- ----------- ------------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Current:
Federal ................ $145,859 $148,504 $ 956,000 $262,000 $566,100
State .................. 61,915 80,707 344,000 109,000 200,700
-------- -------- ---------- -------- --------
Total Current .. 207,774 229,211 1,300,000 371,000 766,800
-------- -------- ---------- -------- --------
Deferred:
Federal ................ 29,848 (4,626) (1,517) -0- -0-
State .................. 5,267 (816) (97) -0- -0-
-------- -------- ---------- -------- --------
Total Deferred . 35,115 (5,442) (1,614) -0- -0-
-------- -------- ---------- -------- --------
Provision for Income Taxes $242,889 $223,769 $1,298,386 $371,000 $766,800
======== ======== ========== ======== ========
</TABLE>
The difference between the provision for income taxes at the Company's
effective income tax rate and the federal statutory rate of 34% is as
follows:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended September 30, March 31,
------------------------------------------ --------------------------
1994 1995 1996 1996 1997
----------- ----------- ------------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Income taxes at statutory rate ..... $198,113 $171,560 $1,042,045 297,718 617,819
State taxes, net of federal benefit 44,340 52,728 226,976 71,940 132,462
Other .............................. 436 (519) 29,365 1,342 16,519
-------- -------- ---------- -------- --------
Provision for Income Taxes ....... $242,889 $223,769 $1,298,386 $371,000 $766,800
======== ======== ========== ======== ========
</TABLE>
The tax effects of temporary differences giving rise to significant
portions of deferred taxes are as follows:
<TABLE>
<CAPTION>
September 30,
----------------------------- March 31,
1995 1996 1997
------------- ------------ ------------
(unaudited)
<S> <C> <C> <C>
Allowance for doubtful accounts $ 20,000 $ 25,538 $ 30,000
Inventory capitalization ...... 21,753 15,742 16,000
Unrealized loss on securities . (161,000) (78,500) (78,560)
Depreciation .................. -0- 5,840 5,360
Other ......................... 18,090 14,336 10,096
---------- --------- ---------
Net deferred tax liability .... $(101,157) $(17,044) $(17,104)
========== ========= =========
</TABLE>
NOTE 9 -- STOCK OPTION PLAN
On July 29, 1988, the stockholders approved a stock option plan. In
connection therewith, 1,000,000 shares of common stock are reserved for
issuance pursuant to options that may be granted under the plan through May
5, 1998. The options vest straight-line over a three-year period following
the date of grant.
F-12
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1994, 1995, and 1996
and the six months ended March 31, 1996 and 1997
(information as it relates to the six months ended
March 31, 1996 and 1997 is unaudited) - (Continued)
Note 9 -- Stock Option Plan - (Continued)
A summary of stock option activity related to the Company's plan is as
follows:
<TABLE>
<CAPTION>
Beginning Granted Exercised Canceled Ending
Balance During During During Balance
Outstanding Period Period Period Outstanding Exercisable
------------- --------- ----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Year ended September 30, 1994
Number of shares .............. 0 302,000 0 0 302,000 0
Average option price per share 0 $ .95 0 0 $ .95 0
Year ended September 30, 1995
Number of shares .............. 302,000 768,000 0 502,000 568,000 0
Average option price per share $ .95 $ .72 0 $ .90 $ .69 0
Year ended September 30, 1996
Number of shares .............. 568,000 0 0 70,000 498,000 166,000
Average option price per share $ .69 0 0 $ .68 $ .69 $ .69
Six months ended March 31, 1997
Number of shares .............. 498,000 0 0 0 498,000 166,000
Average option price per share $ .69 0 0 0 $ .69 $ .69
</TABLE>
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, Accounting for Stock-Based Compensation ("FASB 123"), which is
effective for the Company's year beginning October 1, 1996. As permitted
under FASB 123, the Company has elected not to adopt the fair value based
method of accounting for its stock-based compensation plans, but will
continue to account for such compensation under the provisions of Accounting
Principles Board Opinion No. 25. FASB 123 requires pro forma disclosures of
the effects of all awards granted in years that begin after December 15,
1994, which would be the Company's year beginning October 1, 1995 and ending
September 30, 1996. There is no impact of FASB 123 on the Company's operating
results or financial position, since the Company has not granted any options
since June 30, 1995.
NOTE 10 -- 401(K) PLAN
On January 1, 1994, the Company adopted a 401(k) Savings Plan (the "Plan")
for the benefit of all eligible employees. All employees as of the effective
date of the Plan became eligible. An employee who became employed after
January 1, 1994, would become a participant after the completion of a
half-year of service and the attainment of 20 years of age.
Participants may elect to contribute from their compensation any amount up
to the maximum deferral allowed by the Internal Revenue Code. Employer
contributions are a discretionary percentage match. The Company may make
optional contributions for any plan year at its discretion.
During the years ended September 30, 1994, 1995, and 1996, the Company
incurred 401(k) costs totaling $100, $19,148, and $31,738, respectively.
During the six months ended March 31, 1997, the Company's 401(k) costs
totaled $7,181.
NOTE 11 -- SALE OF SUBSIDIARY
Effective November 30, 1993, the Company exchanged 100% of the shares of a
subsidiary (Romel Technology, Inc. (d/b/a MSG)) for 300,000 shares of CMS
Enhancements, Inc. Such transaction qualified as a tax-
F-13
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1994, 1995, and 1996
and the six months ended March 31, 1996 and 1997
(information as it relates to the six months ended
March 31, 1996 and 1997 is unaudited) - (Continued)
Note 11 -- Sale of Subsidiary - (Continued)
free reorganization under Section 368 of the Internal Revenue Code. The
Company realized a gain as a result of this transaction of $1,485,698, which
is net of deferred income taxes of $641,000. Included in the consolidated
statement of operations for the year ended September 30, 1994, are net sales
of $4,127,768, cost of sales of $3,775,372, and an operating loss of $22,432.
NOTE 12 -- CONCENTRATION OF CREDIT RISK
CASH
The Company places most of its temporary cash investments with one
financial institution and normally exceeds the Federal Deposit Insurance
Corporation limit. The Company has not experienced any loss to date as a
result of this policy.
MAJOR CUSTOMERS
Computer sales encompass markets wherein the demands of any one customer
may vary greatly due to changes in technology. One customer accounted for 22%
of sales for the year ended September 30, 1994, and 31% of accounts
receivable as of September 30, 1994. In comparison, two customers accounted
for 23% and 14%, respectively, of sales for the year ended September 30,
1995. One of these customers accounted for 10% of accounts receivable as of
September 30, 1995. Two customers comprised 16% and 19%, respectively, of
sales for the year ended September 30, 1996. One of these customers accounted
for 33% of accounts receivable as of September 30, 1996. Two customers
accounted for 26% and 13%, respectively, of sales during the six months ended
March 31, 1996. No single customer comprised more than 10% of sales during
the six months ended March 31, 1997. At March 31, 1997, one customer
accounted for 15% of accounts receivable.
PURCHASES
The Company purchases a majority of goods from International Business
Machines Corporation, whose subsidiary represents the Company's major lending
source. The loss of this supplier could materially affect the Company.
Purchases from this supplier represented 70% of total purchases for each of
the years ended September 30, 1994 and 1995 and approximately 90% of total
purchases for the year ended September 30, 1996 and the six months ended
March 31, 1996 and 1997.
NOTE 13 -- COMMITMENTS AND CONTINGENCIES
The Company has operating leases on real property and equipment expiring
through the year 2002. In addition to fixed rentals, the real property leases
have escalation clauses that require the Company to pay a percentage of
common area maintenance, real estate taxes, and insurance.
Rent expense and other charges totaled $173,051, $255,307, and $253,412
for years ended September 30, 1994, 1995, and 1996, and $128,357 and $131,919
for the six months ended March 31, 1996 and 1997, respectively.
As of March 31, 1997, the future minimum rental commitments for the twelve
months ending March 31, are as follows:
1998 ........................ $276,657
1999 ........................ 254,748
2000 ........................ 175,488
2001 ........................ 130,704
2002 ........................ 119,812
--------
$957,409
========
F-14
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 1994, 1995, and 1996
and the six months ended March 31, 1996 and 1997
(information as it relates to the six months ended
March 31, 1996 and 1997 is unaudited) - (Continued)
Note 13 -- Commitments and Contingencies - (Continued)
The Company is a defendant in a lawsuit which alleges wrongful termination
of employment. The action has been in the discovery stage since 1992, and it
is not possible at this time to estimate the outcome. In the opinion of
management, the amount of ultimate liability with respect to these actions
will not materially affect the financial position of the Company.
NOTE 14 -- SUBSEQUENT EVENTS
In March 1997, the Company and an underwriter agreed to a proposed public
offering of 1,600,000 shares of the Company's common stock.
On March 31, 1997, the Company effected a two-for-one split of common
stock. All references in the accompanying consolidated financial statements
and notes thereto relating to common stock and additional paid-in capital,
stock options, per share and share data have been retroactively adjusted to
reflect the two-for-one stock split.
On April 21, 1997, a special meeting of the stockholders was held to amend
the Certificate of Incorporation to increase the aggregate of authorized
shares of common stock from 5,000,000 shares of common stock to 40,000,000
shares of common stock and to authorize 1,000,000 shares of preferred stock.
The preferred stock is not expected to be issued at any time in the near
future. The preferred stock's rights, preferences and characteristics will be
determined by the Board of Directors at such time as the preferred stock is
issued.
F-15
<PAGE>
=============================================================================
No person is authorized in connection with any offering made hereby to give
any information or to make any representation not contained in this
Prospectus, and, if given or made, such information or representation must
not be relied upon as having been authorized by the Company or any
Underwriter. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any security other than the shares of Common
Stock offered hereby, nor does it constitute an offer to sell or a
solicitation of any offer to buy any of the securities offered hereby to any
person in any jurisdiction in which it is unlawful to make such an offer or
solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstance create any implication that the
information contained herein is correct as of any date subsequent to the date
hereof or that there has been no change in the affairs of the Company since
such date.
------
TABLE OF CONTENTS
Page
--------
Prospectus Summary ...................... 3
Risk Factors ............................ 7
Use of Proceeds ......................... 14
Dividend Policy ......................... 14
Dilution ................................ 15
Capitalization .......................... 16
Selected Consolidated Financial Data .... 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ............................. 18
Business ................................ 22
Management .............................. 31
Certain Transactions .................... 37
Principal Stockholders .................. 38
Description of Capital Stock ............ 39
Shares Eligible for Future Sale ......... 41
Underwriting ............................ 42
Legal Matters ........................... 43
Experts ................................. 43
Additional Information .................. 44
Index to Financial Statements ........... F-1
=============================================================================
=============================================================================
1,600,000 SHARES
SYSCOMM INTERNATIONAL
CORPORATION
COMMON STOCK
------
PROSPECTUS
_________________, 1997
------
COMMONWEALTH ASSOCIATES
_____________, 1997
=============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses payable by the
Registrant in connection with the sale and distribution of the securities
being registered, other than underwriting discounts. All of the amounts shown
are estimated except the Securities and Exchange Commission registration fee
and the NASD filing fee.
SEC registration fee ....................................... $ 4,926.06
NASDAQ listing fee ......................................... 28,853
NASD filing fee ............................................ 1,972
Printing and engraving expenses ............................ 100,000
Legal fees and expenses .................................... 200,000
Accounting fees and expenses ............................... 60,000
Transfer agent and registrar fee ........................... 20,000
Miscellaneous .............................................. 100,000
-------------
Total .................................................... $515,751.06
=============
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law empowers a corporation
to indemnify its directors and officers and to purchase insurance with
respect to liability arising out of their capacity or status as directors and
officers provided that this provision shall not eliminate or limit the
liability of a directors (i) for any breach of the 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) arising under Section 174 of the Delaware General Corporation Law, or
(iv) for any transaction from which the director derived an improper personal
benefit.
The Delaware General Corporation Law provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any
other rights to which the directors and officers may be entitled under the
Company' By-Laws, any agreement, vote of shareholders or otherwise.
The Company's Certificate of Incorporation eliminates the personal
liability of directors to the fullest extent permitted by Section 102(b)(7)
of the Delaware General Corporation Law.
The effect of the foregoing is to require the Company to indemnify the
officers and directors of the Company for any claim arising against such
persons in their official capacities if such person acted in good faith and
in a manner that he reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonably cause to believe his conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling
the Company pursuant to the applicable provisions, the Company has been
informed that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
<S> <C>
(a) Exhibits
1.1 Form of Underwriting Agreement
1.2 Form of Financial and Advisory Consulting Agreement
3.1 Form of Amended and Restated Certificate of Incorporation
3.2 Form of Amended and Restated By-Laws
*4.1 Form of Common Stock Certificate
4.2 Form of Representative's Warrant
*5.1 Opinion and Consent of Ruskin, Moscou, Evans & Faltischek, P.C.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.1 1988 Incentive Stock Option Plan
Inventory and Working Capital Financing Agreement, dated September 26, 1996, and amendment thereto,
10.2 dated October 31, 1996
*10.3 Form of Employment Agreement between the Company and John H. Spielberger
*10.4 Form of Employment Agreement between the Company and Thomas J. Baehr
*10.5 Form of Employment Agreement between the Company and Dennis R. Wilson
*10.6 Form of Employment Agreement between the Company and Norman Gaffney
21.1 Subsidiaries of Registrant
23.1 Consent of Albrecht, Viggiano, Zureck & Company, P.C., Independent Auditors
*23.2 Consent of Ruskin, Moscou, Evans & Faltischek, P.C. (included in Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
27.1 Financial Statement Schedule
99.1 Valuation and Qualifying Accounts Schedule (with consent)
</TABLE>
- ------
* To be filed by amendment
Schedules other than the ones listed above are omitted for the reason that they
are not required or are not applicable, or the required information is shown in
the financial statements or notes thereto.
UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issues.
The undersigned Registrant hereby undertakes to provide to the
Underwriter, at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required
by the Underwriter to permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(b) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act each
Post-Effective Amendment that contains a form of Prospectus shall be deemed
to be a new Registration Statement relating to the securities offered therein
and the Offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Act, the Registrant has duly caused
this Registration Statement to be signed on its behalf by the undersigned
thereunto duly authorized, in Hauppauge, New York, on April 21, 1997.
SYSCOMM INTERNATIONAL CORPORATION
By: /s/ John H. Spielberger
--------------------------------
John H. Spielberger, President
Dated: April 21, 1997
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. Each person whose signature appears below hereby authorizes each
of John H. Spielberger, Dennis R. Wilson and Thomas J. Baehr with full power
of substitution to execute in the name of such person and to file any
Amendment or Post-Effective Amendment to this Registration Statement making
such changes in this Registration Statement as the Registrant deems
appropriate and appoints each of John H. Spielberger and Dennis R. Wilson
with full power of substitution, attorney-in-fact to sign and to file any
amendment and Post-Effective Amendment to this Registration Statement.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ John H. Spielberger Chairman of the Board of Directors, President April 21, 1997
- -------------------------- and Chief Executive Officer
John H. Spielberger
/s/ Thomas J. Baehr Vice President and Director April 21, 1997
- --------------------------
Thomas J. Baehr
/s/ Dennis R. Wilson Vice President, Chief Financial Officer, April 21, 1997
- -------------------------- Secretary and Director
Dennis R. Wilson
/s/ Norman Gaffney Director April 21, 1997
- --------------------------
Norman Gaffney
/s/ John C. Spielberger Director April 21, 1997
- --------------------------
John C. Spielberger
</TABLE>
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
1.1 Form of Underwriting Agreement
1.2 Form of Financial and Advisory Consulting Agreement
3.1 Form of Amended and Restated Certificate of Incorporation
3.2 Form of Amended and Restated By-Laws
*4.1 Form of Common Stock Certificate
4.2 Form of Representative's Warrant
*5.1 Opinion and Consent of Ruskin, Moscou, Evans & Faltischek, P.C.
10.1 1988 Incentive Stock Option Plan
10.2 Inventory and Working Capital Financing Agreement, dated September 26, 1996, and amendment thereto,
dated October 31, 1996
*10.3 Form of Employment Agreement between the Company and John H. Spielberger
*10.4 Form of Employment Agreement between the Company and Thomas J. Baehr
*10.5 Form of Employment Agreement between the Company and Dennis R. Wilson
*10.6 Form of Employment Agreement between the Company and Norman Gaffney
21.1 Subsidiaries of Registrant
23.1 Consent of Albrecht, Viggiano, Zureck & Company, P.C., Independent Auditors
*23.2 Consent of Ruskin, Moscou, Evans & Faltischek, P.C. (included in Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
27.1 Financial Statement Schedule
99.1 Valuation and Qualifying Accounts Schedule (with consent)
</TABLE>
- ------
* To be filed by amendment
<PAGE>
COMMONWEALTH ASSOCIATES
1,600,000 Shares
SYSCOMM INTERNATIONAL CORPORATION
Common Stock
UNDERWRITING AGREEMENT
___________, 1997
Commonwealth Associates
As Representative of the
Several Underwriters
733 Third Avenue
New York, New York 10017
SysComm International Corporation, a Delaware corporation (the
"Company"), proposes to issue and sell to the underwriters named in Schedule A
(the "Underwriters") of this Underwriting Agreement (the "Agreement"), for whom
you are acting as representative (the "Representative"), an aggregate of
1,600,000 shares (the "Stock") of Common Stock, $.01 par value (such class of
stock being herein called the "Common Stock"), of the Company. In addition, the
Company proposes to grant to the Underwriters (or, at its option, the
Representative, individually) the option referred to in Section 3(b) hereof to
purchase all or any part of an aggregate of 240,000 additional shares of Common
Stock, if and to the extent that you, as Representative, shall have determined
to exercise, on behalf of the Underwriters, the right to purchase such shares of
Common Stock. Unless the context otherwise indicates, the term "Stock" shall
include the 240,000 additional shares referred to above.
You have advised the Company that you and the other Underwriters desire
to purchase, severally, the Stock, and that you have been authorized by the
Underwriters to execute this agreement on their behalf. The Company confirms the
agreements made by it with respect to the purchase of the Stock by the several
Underwriters on whose behalf you are signing this Agreement, as follows:
<PAGE>
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the Underwriters that:
(a) A registration statement (File No. 333-______) on Form S-1
relating to the public offering of the Stock, including a form of
prospectus subject to completion, copies of which have heretofore been
delivered to you, has been prepared by the Company in conformity with
the requirements of the Securities Act of 1933, as amended (the "Act"),
and the rules and regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder, and
has been filed with the Commission under the Act and one or more
amendments to such registration statement may have been so filed. After
the execution of this Agreement, the Company will file with the
Commission either (i) if such registration statement, as it may have
been amended, has been declared by the Commission to be effective under
the Act, a prospectus in the form most recently included in an
amendment to such registration statement (or, if no such amendment
shall have been filed, in such registration statement), with such
changes or insertions as are required by Rule 430A under the Act or
permitted by Rule 424(b) under the Act and as have been provided to and
approved by the Representative prior to the execution of this
Agreement, or (ii) if such registration statement, as it may have been
amended, has not been declared by the Commission to be effective under
the Act, an amendment to such registration statement, including a form
of prospectus, a copy of which amendment has been furnished to and
approved by the Representative prior to the execution of this
Agreement. As used in this Agreement, the term "Registration Statement"
means such registration statement, as amended at the time when it was
or is declared effective, including all financial schedules and
exhibits thereto and including any information omitted therefrom
pursuant to Rule 430A under the Act and included in the Prospectus (as
hereinafter defined); the term "Preliminary Prospectus" means each
prospectus subject to completion filed with such registration statement
or any amendment thereto (including the prospectus subject to
completion, if any, included in the Registration Statement or any
amendment thereto at the time it was or is declared effective); and the
term "Prospectus" means the prospectus first filed with the Commission
pursuant to Rule 424(b) under the Act, or, if no prospectus is required
to be filed pursuant to said Rule 424(b), such term means the
prospectus included in the Registration Statement; except that if such
registration statement or prospectus is amended or such prospectus is
supplemented, after the effective date of such registration statement
and prior to the Option Closing Date (as hereinafter defined), the
terms "Registration Statement" and "Prospectus" shall include such
registration statement and prospectus as so amended, and the term
"Prospectus" shall include the prospectus as so supplemented, or both,
as the case may be.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus. When the Registration
Statement becomes
2
<PAGE>
effective and at all times subsequent thereto up to and on the Closing
Date (as hereinafter defined) or the Option Closing Date, as the case
may be, (i) the Registration Statement and Prospectus will in all
respects conform to the requirements of the Act and the Rules and
Regulations; and (ii) neither the Registration Statement nor the
Prospectus will include any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary
to make statements therein not misleading; provided, however, that the
Company makes no representations, warranties or agreements as to
information contained in or omitted from the Registration Statement or
Prospectus in reliance upon, and in conformity with, written
information furnished to the Company by or on behalf of the
Underwriters specifically for use in the preparation thereof. It is
understood that the statements set forth in the Prospectus on page 2
with respect to stabilization, under the heading "Underwriting" and the
identity of counsel to the Underwriters under the heading "Legal
Matters" constitute the only information furnished in writing by or on
behalf of the several Underwriters for inclusion in the Registration
Statement and Prospectus, as the case may be.
(c) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, with full power and authority
(corporate and other) to own its properties and conduct its business as
described in the Prospectus and is duly qualified to do business as a
foreign corporation and is in good standing in all other jurisdictions
in which the nature of its business or the character or location of its
properties requires such qualification, except where failure to so
qualify will not materially adversely affect the Company's business,
properties or financial condition. The Company has no subsidiaries
other than those listed on Schedule B attached hereto (the
"Subsidiaries"). Except as set forth in Schedule B attached hereto, the
Company does not own any equity interest in any other corporation,
joint venture, partnership or other business entity, other than the
Subsidiaries. The Company owns all of the capital stock of each
Subsidiary free and clear of all liens, security interests and
encumbrances. Each Subsidiary is a corporation, duly organized, validly
existing and in good standing under the laws of the state of its
respective incorporation, with full power and authority, corporate and
other, to own or lease and operate its respective properties and to
conduct its respective business as described in the Registration
Statement. Each Subsidiary is duly qualified to do business as a
foreign corporation and is in good standing in all jurisdictions in
which the nature of its business or the character or location of its
properties requires such qualification, except where failure to so
qualify will not materially adversely affect such Subsidiary's
business, properties or financial condition.
(d) The authorized, issued and outstanding capital stock of
the Company as of March 31, 1997 is as set forth in the Prospectus
under "Capitalization"; the
3
<PAGE>
shares of issued and outstanding capital stock of the Company set forth
thereunder have been duly authorized, validly issued and are fully paid
and non-assessable and have been issued in compliance with all federal
and state securities laws; except as set forth in the Prospectus, no
options, warrants or other rights to purchase, agreements or other
obligations to issue, or agreements or other rights to convert any
obligation into, any shares of capital stock of the Company have been
granted or entered into by the Company; and the capital stock conforms
to all statements relating thereto contained in the Registration
Statement and Prospectus.
(e) The Stock and the Common Stock to be issued upon exercise
of the common stock purchase warrants to be issued to the
Representative (the "Warrants") are duly authorized, and when issued,
paid for and delivered pursuant to this Agreement, will be duly
authorized, validly issued, fully paid and non-assessable and free of
preemptive rights of any security holder of the Company. Neither the
filing of the Registration Statement nor the offering or sale of the
Stock as contemplated in this Agreement gives rise to any rights, other
than those which have been waived or satisfied, for or relating to the
registration of any shares of Common Stock, except as described in the
Registration Statement.
(f) This Agreement, the Warrants and the Advisory Agreement
(to be delivered to you in accordance with Section 3(o) and 3(r),
respectively, hereof) have been duly and validly authorized, executed
and delivered by the Company. The Company has full power and lawful
authority to authorize, issue and sell the Stock to be sold by it
hereunder on the terms and conditions set forth herein, and no consent,
approval, authorization or other order of any governmental authority is
required in connection with such authorization, execution and delivery
or with the authorization, issue and sale of the Stock or the Warrants,
except such as may be required under the Act or state securities laws.
(g) Except as described in the Prospectus, neither the Company
nor any of its Subsidiaries is in violation, breach or default of or
under, and consummation of the transactions herein contemplated and the
fulfillment of the terms of this Agreement will not conflict with, or
result in a breach or violation of, any of the terms or provisions of,
or constitute a default under, or result in the creation or imposition
of any lien, charge or encumbrance upon any of the respective
properties or assets of the Company or any of its Subsidiaries pursuant
to the terms of any indenture, mortgage, deed of trust, loan agreement
or other agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound or to which any of the respective properties or
assets of the Company or any of its Subsidiaries is subject, nor will
such action result in any violation of the provisions of the respective
articles of incorporation or the by-laws of the Company or any of its
Subsidiaries, as amended, or any statute or any
4
<PAGE>
order, rule or regulation applicable to the Company or any of its
Subsidiaries of any court or of any regulatory authority or other
governmental body having jurisdiction over the Company or any of its
Subsidiaries.
(h) Subject to the qualifications stated in the Prospectus,
the Company and each of its Subsidiaries has good and marketable title
to all respective properties and assets described in the Prospectus as
owned by the Company and each of its Subsidiaries, free and clear of
all liens, charges, encumbrances or restrictions, except such as are
not materially significant or important in relation to its respective
business; all of the material leases and subleases under which the
Company or any of its Subsidiaries is the lessor or sublessor of
properties or assets or under which the Company or any of its
Subsidiaries holds properties or assets as lessee or sublessee as
described in the Prospectus are in full force and effect, and, except
as described in the Prospectus, the Company and each of its
Subsidiaries is not in default in any material respect with respect to
any of the terms or provisions of any of such leases or subleases, and
no claim has been asserted by anyone adverse to rights of the Company
or any of its Subsidiaries as lessor, sublessor, lessee or sublessee
under any of the leases or subleases mentioned above, or affecting or
questioning the right of the Company or any of its Subsidiaries to
continued possession of the leased or subleased premises or assets
under any such lease or sublease except as described or referred to in
the Prospectus; and the Company and each of its Subsidiaries owns or
leases all such properties described in the Prospectus as are necessary
to its respective operations as now conducted and, except as otherwise
stated in the Prospectus, as proposed to be conducted as set forth in
the Prospectus.
(i) Albrecht, Viggiano, Zureck & Company, P.C., who have given
their reports on certain financial statements filed and to be filed
with the Commission as a part of the Registration Statement, which are
incorporated in the Prospectus, are with respect to the Company,
independent public accountants as required by the Act and the Rules and
Regulations.
(j) The financial statements, together with related notes, set
forth in the Prospectus or the Registration Statement present fairly
the financial position and results of operations and changes in cash
flow of the Company and each of its Subsidiaries on the basis stated in
the Registration Statement, at the respective dates and for the
respective periods to which they apply. Said statements and related
notes have been prepared in accordance with generally accepted
accounting principles applied on a basis which is consistent during the
periods involved and the Rules and Regulations. The information set
forth under the captions "Dilution," "Capitalization" and "Selected
Financial Data" in the Prospectus fairly present, on the basis stated
in the Prospectus, the information included therein.
5
<PAGE>
(k) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus, neither the
Company nor any of its Subsidiaries has incurred any liabilities or
obligations, direct or contingent, not in the ordinary course of
business, or entered into any transaction not in the ordinary course of
business, which is material to the respective businesses of the Company
or any of its Subsidiaries, and there has not been any change in the
capital stock of, or any incurrence of short-term or long-term debt by,
the Company or any of its Subsidiaries or any issuance of options,
warrants or other rights to purchase the capital stock of the Company
or any of its Subsidiaries or any adverse change or any development
involving, so far as the Company can now reasonably foresee a
prospective adverse change in the respective conditions (financial or
other), net worth, results of operations, businesses, key personnel or
properties of the Company or any of its Subsidiaries which would be
material to the respective businesses or financial conditions of the
Company or any of its Subsidiaries and neither the Company nor any of
its Subsidiaries has become a party to, and neither the respective
businesses nor the properties of the Company or any of its Subsidiaries
has become the subject of, any material litigation whether or not in
the ordinary course of business.
(l) Except as set forth in the Prospectus, there is not now
pending or, to the knowledge of the Company, threatened, any action,
suit or proceeding to which the Company or any of its Subsidiaries is a
party before or by any court or governmental agency or body, which
might result in any material adverse change in the respective
conditions (financial or other), business prospects, net worths, or
properties of the Company or any of its Subsidiaries, nor are there any
actions, suits or proceedings related to environmental matters or
related to discrimination on the basis of age, sex, religion or race;
and no labor disputes involving the employees of the Company or any of
its Subsidiaries exist or are imminent which might materially adversely
affect the conduct of the respective businesses, properties or
operations or the financial conditions or results of operations of the
Company or any of its Subsidiaries.
(m) Except as disclosed in the Prospectus, the Company and
each of its subsidiaries has filed all necessary federal, state and
foreign income and franchise tax returns and has paid all taxes shown
as due thereon; and there is no tax deficiency which has been or to the
knowledge of the Company might be asserted against the Company or any
of its Subsidiaries.
(n) The Company and each of its Subsidiaries has sufficient
licenses, permits and other governmental authorizations as are required
for the conduct of its respective business or the ownership of its
properties as described in the Prospectus and is in all material
respects complying therewith and owns or possesses adequate rights to
use all material trademarks, service marks, trade-names, trademark
6
<PAGE>
registrations, service mark registrations, copyrights and licenses
necessary for the conduct of such business and none of the foregoing
are in dispute or are in conflict with the right of any other person or
entity. To the best knowledge of the Company, none of the activities or
business of the Company or any of its Subsidiaries are in violation of,
or cause the Company or any of its Subsidiaries to violate, any law,
rule, regulation or order of the United States, any state, county or
locality, or of any agency or body of the United States or of any
state, county or locality, the violation of which would have a material
adverse impact upon the respective conditions (financial or otherwise),
businesses, properties, prospective results of operations, or net worth
of the Company or any of its Subsidiaries.
(o) Neither the Company nor any of its Subsidiaries has
directly or indirectly, at any time (i) made any contributions to any
candidate for political office, or failed to disclose fully any such
contribution in violation of law or (ii) made any payment to any state,
federal or foreign governmental officer or official, or other person
charged with similar public or quasi-public duties, other than payments
or contributions required or allowed by applicable law. The Company's
internal accounting controls and procedures are sufficient to cause the
Company to comply in all material respects with the Foreign Corrupt
Practices Act of 1977, as amended.
(p) On the Closing Dates (hereinafter defined) all transfer or
other taxes (including franchise, capital stock or other tax, other
than income taxes, imposed by any jurisdiction) if any, which are
required to be paid in connection with the sale and transfer of the
Stock to the several Underwriters hereunder will have been fully paid
or provided for by the Company and all laws imposing such taxes will
have been fully complied with.
(q) All contracts and other documents of the Company and each
of its subsidiaries which are, under the Rules and Regulations,
required to be filed as exhibits to the Registration Statement have
been so filed.
(r) Neither the Company nor any of its Subsidiaries has taken
and will not take, directly or indirectly, any action designed to
cause, or result in, or which has constituted or which might reasonably
be expected to constitute, the stabilization or manipulation of the
price of the shares of Common Stock.
(s) Neither the Company nor any of its Subsidiaries has
entered into any agreement pursuant to which any person is entitled,
either directly or indirectly, to compensation from the Company for
services as a finder in connection with the public offering referred to
herein.
7
<PAGE>
(t) Except as previously disclosed in writing by the Company
to the representative, no officer, director or stockholder of the
Company or any of its Subsidiaries has any National Association of
Securities Dealers Inc. (the "NASD") affiliation.
(u) Neither the Company nor any of the Subsidiaries is and
upon receipt of the proceeds from the sale of the Stock will be, an
"investment company" within the meaning of the Investment Company Act
of 1940, as amended, and the rules and regulations thereunder.
(v) Neither the Company nor any of its Subsidiaries has
distributed nor will distribute prior to the First Closing Date any
offering material in connection with the offering and sale of the Stock
other than the Prospectus, the Registration Statement and the other
materials permitted by the Act.
2. Purchase, Delivery and Sale of the Stock.
(a) Subject to the terms and conditions of this Agreement, and
upon the basis of the representations, warranties, and agreements
herein contained, the Company agrees to issue and sell to the
Underwriters, and each such Underwriter agrees, severally and not
jointly, to buy from the Company at $______ per share of Stock, at the
place and time hereinafter specified, the number of shares of Stock set
forth opposite the names of the Underwriters in Schedule A attached
hereto (the "First Stock"), plus any additional shares of Stock which
such Underwriters may become obligated to purchase pursuant to the
provisions of Section 9 hereof. The First Stock shall consist of
1,600,000 shares of Stock.
Delivery of the First Stock against payment therefor shall
take place at the offices of Commonwealth Associates, 733 Third Avenue,
New York, New York 10017 (or at such other place as may be designated
by agreement between you and the Company) at 10:00 a.m., New York time,
on _____, 1997, or at such later time and date as you may designate,
such time and date of payment and delivery for the First Stock being
herein called the "First Closing Date."
(b) In addition, subject to the terms and conditions of this
Agreement, and upon the basis of the representations, warranties and
agreements herein contained, the Company hereby grants, an option to
the several Underwriters (which may be exercised, at its option, by the
Representative, individually) to purchase all or any part of an
aggregate of an additional 240,000 shares of Stock, at the same price
per share of Stock, as the Underwriters shall pay for the First Stock
being sold pursuant to the provisions of subsection (a) of this Section
2 (such additional Stock being referred to herein as the "Option
Stock"). This option may be exercised within 30
8
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days after the effective date of the Registration Statement upon notice
by the Representative to the Company advising as to the amount of
Option Stock as to which the option is being exercised, the names and
denominations in which the certificates for such Option Stock are to be
registered and the time and date when such certificates are to be
delivered. Such time and date shall be determined by the Representative
but shall not be earlier than four nor later than ten full business
days after the exercise of said option, nor in any event prior to the
First Closing Date, and such time and date is referred to herein as the
"Option Closing Date." Delivery of the Option Stock against payment
therefor shall take place at the offices of Commonwealth Associates,
733 Third Avenue, New York, New York 10017. The number of shares of
Option Stock to be purchased by each Underwriter, if any, shall bear
the same percentage to the total number of shares of Option Stock being
purchased by the several Underwriters pursuant to this subsection (b)
as the number of shares of Stock such Underwriter is purchasing bears
to the total number of the First Stock being purchased pursuant to
subsection (a) of this Section 2, as adjusted, in each case by the
Representative in such manner as the Representative may deem
appropriate. The option granted hereunder may be exercised only to
cover overallotments in the sale by the Underwriters of First Stock
referred to in subsection (a) above. In the event the Company declares
or pays a dividend or distribution on its Common Stock, whether in the
form of cash, shares of Common Stock or any other consideration, prior
to the Option Closing Date, such dividend or distribution shall also be
paid on the Option Stock at the Option Closing Date.
(c) The Company will make the certificates for the Stock to be
purchased by the Underwriters hereunder available to you for checking
at least two full business days prior to the First Closing Date or the
Option Closing Date (which are collectively referred to herein as the
"Closing Dates"). The certificates shall be in such names and
denominations as you may request, at least two full business days prior
to the Closing Dates. Time shall be of the essence and delivery at the
time and place specified in this Agreement is a further condition to
the obligations of each Underwriter.
Definitive certificates in negotiable form for the Stock to be
purchased by the Underwriters hereunder will be delivered by the
Company to you for the accounts of the several Underwriters against
payment of the respective purchase prices therefor by the several
Underwriters, by certified or bank cashier's checks in New York
Clearing House funds, payable to the order of the Company.
In addition, in the event the Underwriters (or the
Representative, individually) exercise the option to purchase from the
Company all or any portion of the Option Stock pursuant to the
provisions of subsection (b) above, payment for such stock shall be
made to or upon the order of the Company by certified or bank cashier's
checks
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<PAGE>
payable in New York Clearing House funds at the offices of Commonwealth
Associates, at the time and date of delivery of such Stock as required
by the provisions of subsection (b) above, against receipt of the
certificates for such Stock by the Representative for the respective
accounts of the several Underwriters registered in such names and in
such denominations as the Representative may request.
It is understood that the several Underwriters propose to
offer the Stock to be purchased hereunder to the public upon the terms
and conditions set forth in the Registration Statement, after the
Registration Statement becomes effective.
3. Covenants of the Company. The Company covenants and agrees with the
several Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement to become effective. If required, the Company
will file the Prospectus and any amendment or supplement thereto with
the Commission in the manner and within the time period required by
Rule 424(b) under the Act. Upon notification from the Commission that
the Registration Statement has become effective, the Company will so
advise you and will not at any time, whether before or after the
effective date, file any amendment to the Registration Statement or
supplement to the Prospectus of which you shall not previously have
been advised and furnished with a copy or to which you or your counsel
shall have objected in writing or which is not in compliance with the
Act and the Rules and Regulations. At any time prior to the later of
(A) the completion by all of the Underwriters of the distribution of
the Stock contemplated hereby (but in no event more than nine months
after the date on which the Registration Statement shall have become or
been declared effective) and (B) 25 days after the date on which the
Registration Statement shall have become or been declared effective
(the "Minimum Period"), the Company will prepare and file with the
Commission, promptly upon your request, any amendments or supplements
to the Registration Statement or Prospectus which, in your opinion, may
be necessary or advisable in connection with the distribution of the
Stock.
As soon as the Company is advised thereof, the Company will
advise you, and confirm the advice in writing, of the receipt of any
comments of the Commission, of the effectiveness of any post-effective
amendment to the Registration Statement, of the filing of any
supplement to the Prospectus or any amended Prospectus, of any request
made by the Commission for amendment of the Registration Statement or
for supplementing of the Prospectus or for additional information with
respect thereto, of the issuance by the Commission or any state or
regulatory body of any stop order or other order or threat thereof
suspending the effectiveness of the Registration Statement or any order
preventing or suspending the use of any preliminary
10
<PAGE>
prospectus, or of the suspension of the qualification of the Stock for
offering in any jurisdiction, or of the institution of any proceedings
for any of such purposes, and will use its best efforts to prevent the
issuance of any such order, and, if issued, to obtain as soon as
possible the lifting thereof.
The Company has caused to be delivered to you copies of each
Preliminary Prospectus, and the Company has consented and hereby
consents to the use of such copies for the purposes permitted by the
Act. The Company authorizes the Underwriters and dealers to use the
Prospectus in connection with the sale of the Stock for such period as
in the opinion of counsel to the several Underwriters the use thereof
is required to comply with the applicable provisions of the Act and the
Rules and Regulations. In case of the happening, at any time within
such period as a Prospectus is required under this Act to be delivered
in connection with sales by an underwriter of any event of which the
Company has knowledge and which materially affects the Company or the
securities of the Company, or which in the opinion of counsel for the
Company or counsel for the Underwriters should be set forth in an
amendment of the Registration Statement or a supplement to the
Prospectus in order to make the statements therein not then misleading,
in light of the circumstances existing at the time the Prospectus is
required to be delivered to a purchaser of the Stock or in case it
shall be necessary to amend or supplement the Prospectus to comply with
law or with the Rules and Regulations, the Company will notify you
promptly and forthwith prepare and furnish to you copies of such
amended Prospectus or of such supplement to be attached to the
Prospectus, in such quantities as you may reasonably request, in order
that the Prospectus, as so amended or supplemented, will not contain
any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements in the Prospectus, in
the light of the circumstances under which they are made, not
misleading. The preparation and furnishing of any such amendment or
supplement to the Registration Statement or amended Prospectus or
supplement to be attached to the Prospectus shall be without expense to
the Underwriters, except that in case any Underwriter is required, in
connection with the sale of the Stock, to deliver a Prospectus nine
months or more after the effective date of the Registration Statement,
the Company will upon request of and at the expense of the Underwriter,
amend or supplement the Registration Statement and Prospectus and
furnish the Underwriter with reasonable quantities of prospectuses
complying with Section 10(a)(3) of the Act.
The Company will comply with the Act, the Rules and
Regulations and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations thereunder in connection
with the offering and issuance of the Stock.
(b) The Company will use its best efforts to qualify to
register the Stock for sale under the securities or "blue sky" laws of
such jurisdictions as the
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Representative may designate and will make such applications and
furnish such information as may be required for that purpose and to
comply with such laws, provided the Company shall not be required to
qualify as a foreign corporation or a dealer in securities or to
execute a general consent to service of process in any jurisdiction in
any action other than one arising out of the offering or sale of the
Stock. The Company will from time to time, prepare and file such
statements and reports as are or may be required to continue such
qualification in effect for so long a period as the Underwriters may
reasonably request.
(c) If the sale of the Stock provided for herein is not
consummated for any reason caused by the Company, the Company shall pay
all costs and expenses incident to the performance of the Company's
obligations hereunder, including but not limited to, all of the
expenses itemized in Section 8, including the accountable expenses of
the Underwriters, including legal fees.
(d) The Company will use its best efforts to (i) cause a
registration statement under the Exchange Act to be declared effective
concurrently with the completion of this offering (and will notify the
Representative in writing immediately upon the effectiveness of such
registration statement), and (ii) if requested by the Representative,
to obtain and keep current a listing in the Standard & Poors or Moody's
Industrial OTC Manual.
(e) For so long as the Company is a reporting company under
either Section 12(g) or 15(d) of the Exchange Act, the Company, at its
expense, will furnish to its stockholders an annual report (including
financial statements audited by independent public accountants), in
reasonable detail, and at its expense, will furnish to you during the
period ending five (5) years from the date hereof, (i) as soon as
practicable after the end of each fiscal year, a balance sheet of the
Company and any of its subsidiaries as at the end of such fiscal year,
together with statements of income, surplus and cash flow of the
Company and any subsidiaries for such fiscal year, all in reasonable
detail and accompanied by a copy of the certificate or report thereon
of independent accountants; (ii) as soon as practicable after the end
of each of the first three fiscal quarters of each fiscal year,
consolidated summary financial information of the Company for such
quarter in reasonable detail; (iii) as soon as they are available, a
copy of all reports (financial or other) mailed to security holders;
(iv) as soon as they are available, a copy of all non-confidential
reports and financial statements furnished to or filed with the
Commission of any securities exchange or automated quotation system on
which any class of securities of the Company is listed; and (v) such
other information as you may from time to time reasonably request.
(f) In the event the Company has an active subsidiary or
subsidiaries, such financial statements referred to in subsection (e)
above will be on a consolidated basis
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<PAGE>
to the extent the accounts of the Company and its subsidiary or
subsidiaries are consolidated in reports furnished to its stockholders
generally.
(g) The Company will deliver to you at or before the First
Closing Date two signed copies of the Registration Statement including
all financial statements and exhibits filed therewith, and of all
amendments thereto, and will deliver to the several Underwriters such
number of conformed copies of the Registration Statement, including
such financial statements but without exhibits, and of all amendments
thereto, as the several Underwriters may reasonably request. The
Company will deliver to or upon the order of the several Underwriters,
from time to time until the effective date of the Registration
Statement, as many copies of any Preliminary Prospectus filed with the
Commission prior to the effective date of the Registration Statement as
the Underwriters may reasonably request. The Company will deliver to
the Underwriters on the effective date of the Registration Statement
and thereafter for so long as a Prospectus is required to be delivered
under the Act, from time to time, as many copies of the Prospectus, in
final form, or as thereafter amended or supplemented, as the
Underwriters may from time to time reasonably request.
(h) The Company will make generally available to its security
holders and deliver to you as soon as it is practicable to do so but in
no event later than 90 days after the end of twelve months after its
current fiscal quarter, an earnings statement (which need not be
audited) covering a period of at least twelve consecutive months
beginning after the effective date of the Registration Statement, which
shall satisfy the requirements of Section 11(a) of the Act.
(i) The Company will apply the net proceeds from the sale of
the Stock for the purposes set forth under "Use of Proceeds" in the
Prospectus, and will file such reports with the Commission with respect
to the sale of the Stock and the application of the proceeds therefrom
as may be required pursuant to Rule 463 under the Act.
(j) The Company will, promptly upon your request, prepare and
file with the Commission any amendments or supplements to the
Registration Statement, Preliminary Prospectus or Prospectus and take
any other action, which in the reasonable opinion of Todtman, Young,
Nachamie, Hendler & Spizz, P.C., counsel to the several Underwriters,
may be reasonably necessary or advisable in connection with the
distribution of the Stock, and will use its best efforts to cause the
same to become effective as promptly as possible.
(k) The Company will reserve and keep available that maximum
number of its authorized but unissued shares of Common Stock which are
issuable upon exercise of the Warrants outstanding from time to time.
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<PAGE>
(l) For a period of twelve months from the First Closing Date,
no officer, director, stockholder of the Company (the "Principal
Stockholders"), holders of options and/or warrants to purchase and/or
securities convertible into or exercisable for shares of Common Stock
(hereinafter, collectively, the "Securities") will offer, sell or
dispose of, directly or indirectly, any Securities without the prior
written consent of the Representative. In order to enforce this
covenant, the Company shall impose stop-transfer instructions with
respect to such Securities until the end of each such-period.
(m) Upon completion of this offering, the Company will make
all filings required, including registration under the Exchange Act, to
obtain the listing of its Common Stock on the Nasdaq National Market,
and will effect and use its best efforts to maintain such listing for
at least five (5) years from the date of this Agreement.
(n) The Company and each of the Principal Stockholders
represents that it or he has not taken and agree that it or he will not
take, directly or indirectly, any action designed to or which has
constituted or which might reasonably be expected to cause or result in
the stabilization or manipulation of the price of the Stock or to
facilitate the sale or resale of the Stock.
(o) On the Closing Date, and simultaneously with the delivery
of the Stock, the Company shall execute and deliver to you,
individually and not as representative of the Underwriters, the
Warrants. The Warrants will be substantially in the form of the Stock
Purchase Warrant filed as an Exhibit to the Registration Statement.
(p) The Company will not grant additional options under its
1988 Stock Option Plan to purchase in excess 100,000 shares of Common
Stock. In addition, during the 18 month period commencing on the date
of this Agreement the Company will not, without the prior written
consent of the Representative, grant options to purchase shares of
Common Stock at a price less than the lesser of (i) the initial public
offering price of the Stock or (ii) the fair market value of the Common
Stock on the date of grant.
(q) John H. Speilberger will be Chief Executive Officer of the
Company on the Closing Dates. The Company has obtained key person life
insurance on the lives of each of John H. Speilberger and Thomas J.
Baehr in an amount of not less than $1 million and will use its best
efforts to maintain such insurance until the end of the third
anniversary of the effective date of the Registration Statement or, if
such individual's employment is terminated prior to such date, to
maintain such insurance on his successor until the expiration of such
period. For a period of thirteen months from the First Closing Date,
the compensation of the executive officers of the Company (other than
bonuses granted in the discretion of the Compensation
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<PAGE>
Committee of the Board of Directors of the Company) shall not be
increased from the compensation levels disclosed in the Prospectus.
(r) On the Closing Date and simultaneously with the delivery
of the Stock the Company shall execute and deliver to you, individually
and not as representative of the Underwriters, a financial advisory and
consulting agreement with you, in the form previously delivered to the
Company by you (the "Advisory Agreement") along with payment of the fee
due thereunder, by certified or bank cashier's checks, in New York
Clearing House Funds, payable to the order of the Representative.
(s) For a period of five (5) years from the effective date of
the Registration Statement the Company (i) at its expense, shall cause
its regularly engaged independent certified public accountants to
review (but not audit) the Company's financial statements for each of
the first three (3) fiscal quarters prior to the announcement of
quarterly financial information, the filing of the Company's 10-Q
quarterly report and the mailing of quarterly financial information to
stockholders and (ii) shall not change its accounting firm without the
prior written consent of the Chairman or the President of the
Representative.
(t) As promptly as practicable after the Closing Date, the
Company will prepare, at its own expense, hard cover "bound volumes"
relating to the offering, and will distribute at least four of such
volumes to the individuals designated by the Representative or counsel
to the several Underwriters.
(u) The Company shall, for a period of six years after the
date of this Agreement, submit such reports to the Secretary of the
Treasury and to stockholders, as the Secretary may require, pursuant to
Section 1202 of the Internal Revenue Code, as amended, or regulations
promulgated thereunder, in order for the Company to qualify as a "small
business" so that stockholders may realize special tax treatment with
respect to their investment in the Company.
(v) The Company shall not grant any additional registration
rights to any person which are exercisable prior to 13 months after the
First Closing Date.
(w) For a period of three years after the Closing Date, the
Company shall cause the transfer agent for the Company's Common Stock,
at its own expense, to provide the Representative, if so requested,
with copies of the Company's daily transfer sheets.
(x) For a period of three years after the Closing Date, the
Company shall maintain Albrecht, Viggiano, Zureck & Company, P.C. as
the regularly engaged independent certified public accounts to the
Company, and shall not effect a change
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<PAGE>
therefrom without the prior written consent of the Representative;
provided that no such consent shall be necessary if the new independent
certified public accountant to the Company is a firm which is a member
of the so-called "Big Six."
(y) The Representative shall have as preferential right for a
period of two (2) years from the effective date of the Registration
Statement to act as lead manager, placement agent or investment banker,
as the case may be, in (i) purchasing for its account or selling for
the account of the Company, or any subsidiary of or successor to the
Company (collectively referred to herein as the "Company"), or any of
the Company's stockholders owning at least five percent (5%) of the
Company's outstanding securities (either immediately preceding or after
the consummation of the sale of the Stock) ("Selling Stockholders"),
any securities of the Company with respect to which the Company or any
of its Selling Stockholders may seek a private or public offering, or
(ii) any merger, acquisition or disposition of assets of the Company
(hereinafter, the events specified in items (i) and (ii) shall
collectively be referred to as the "Transactions"), if the Company uses
a lead manager, placement agent or investment banker or person
performing any such function for a fee. The Company and its Selling
Stockholders will consult with the Representative with regard to any
such Transaction and will offer the Representative the opportunity to
purchase or sell any such securities on terms not more favorable to the
Company or its Selling Stockholders than they can secure elsewhere or,
in the case of a merger, acquisition or disposition of assets, to
participate as investment banker. If the Representative fails to accept
in writing such proposal made by the Company and/or its Selling
Stockholders within ten (10) business days after the receipt by the
Representative of a notice containing such proposal by certified mail
or private overnight courier addressed to the Representative, then the
Representative shall have no further claim or right with respect to the
Transaction contained in such notice. If, thereafter such proposal is
modified, the Company or its Selling Stockholders shall adopt the same
procedure as with respect to the original proposal. Should the
Representative not avail itself of such opportunity to act in a
Transaction, as specified above, this will not affect any preferential
rights for future Transactions. Any breach by the Company or any of the
Selling Stockholders of the Representative's rights of first refusal
shall be enforceable by the Representative through injunctive relief.
The Company represents and warrants that no other person or entity has
any rights to participate in any Transaction with respect to which the
Representative shall have preferential rights.
4. Conditions of Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the Stock which they have
respectively agreed to purchase hereunder, are subject to the accuracy (as of
the date hereof, and as of the Closing Dates) of and compliance with the
respective representations and warranties of the Company herein, to the
performance by the Company of its obligations hereunder, and to the following
conditions:
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(a) The Registration Statement shall have become effective and
you shall have received notice thereof not later than 10:00 A.M., New
York time, on the day following the date of this Agreement, or at such
later time or on such later date as to which you may agree in writing;
on or prior to the Closing Dates no stop order suspending the
effectiveness of the Registration Statement shall have been issued and
no proceedings for that or a similar purpose shall have been instituted
or shall be pending or, to your knowledge or to the knowledge of the
Company, shall be contemplated by the Commission; any request on the
part of the Commission for additional information shall have been
complied with to the reasonable satisfaction of Todtman, Young,
Nachamie, Hendler & Spizz, P.C., counsel to the several Underwriters;
and no stop order shall be in effect denying or suspending
effectiveness of such qualification nor shall any stop order
proceedings with respect thereto be instituted or pending or
threatened. If required, the Prospectus shall have been filed with the
Commission in the manner and within the time period required by Rule
424(b) under the Act.
(b) At the First Closing Date, you shall have received the
opinion, addressed to the Underwriters, dated as of the First Closing
Date, of Ruskin, Moscou, Evans & Faltischek, P.C., counsel for the
Company, in form and substance satisfactory to counsel for the several
Underwriters, to the effect that:
(i) the Company has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of the State of Delaware, with full corporate power and
authority to own its properties and conduct its business as
described in the Registration Statement and Prospectus and is
duly qualified or licensed to do business as a foreign
corporation and is in good standing in each other jurisdiction
in which the ownership or leasing of its properties or conduct
of its business requires such qualification;
(ii) each of the Subsidiaries has been duly
incorporated and is validly existing as a corporation in good
standing under the laws of its respective state of
incorporation, as set forth on Schedule B, with full corporate
power and authority to own its properties and conduct its
business as described in the Registration Statement and
Prospectus and is duly qualified or licensed to do business as
foreign corporations and is in good standing in each other
jurisdiction in which the ownership or leasing of its
properties or conduct of its business requires such
qualification;
(iii) to the best knowledge of such counsel, (a) the
Company and each of its Subsidiaries has obtained, or is in
the process of obtaining, all licenses, permits and other
governmental authorizations necessary to the conduct of its
respective business as described in the Prospectus, (b) such
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licenses, permits and other governmental authorizations
obtained are in full force and effect, and (c) the Company and
each of its Subsidiaries are in all material respects
complying therewith;
(iv) the authorized capitalization of the Company as
of March 31, 1997 is as set forth under "Capitalization" in
the Prospectus; all shares of the Company's outstanding stock
requiring authorization for issuance by the Company's board of
directors have been duly authorized, validly issued, are fully
paid and non-assessable and conform to the description thereof
contained in the Prospectus; the outstanding shares of Common
Stock of the Company have not been issued in violation of the
preemptive rights of any stockholder and the stockholders of
the Company do not have any preemptive rights or other rights
to subscribe for or to purchase, nor are there any
restrictions upon the voting or transfer of any Common Stock;
the Stock conforms to the description thereof contained in the
Prospectus; the Stock has been duly authorized and, when
issued, paid for and delivered pursuant to this Agreement,
will be duly and validly issued, fully paid, non-assessable,
free of preemptive rights and no personal liability will
attach to the ownership thereof, to the best knowledge of such
counsel, all prior sales by the Company of the Company's
securities have been made in compliance with or under an
exemption from registration under the Act and applicable state
securities laws and the stockholders of the Company have no
recision rights with respect to any outstanding securities of
the Company; and, neither the filing of the Registration
Statement nor the offering or sale of the Stock as
contemplated by this Agreement gives rise to any registration
rights or other rights, other than those which have been
waived or satisfied for or relating to the registration of any
shares of Common Stock;
(v) each of this Agreement, the Warrants and the
Advisory Agreement have been duly and validly authorized,
executed and delivered by the Company and assuming due
execution by each other party thereto, constitutes a legal,
valid and binding obligation of the Company enforceable
against the Company in accordance with its respective terms
(except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other
laws of general application relating to or affecting
enforcement of creditors' rights and the application of
equitable principles in any action, legal or equitable, and
except as rights to indemnity or contribution may be limited
by applicable law);
(vi) the certificates evidencing the Stock are in due
and proper form; the Warrants will be exercisable for shares
of Common Stock of the Company in accordance with the terms of
the Warrants and at the prices therein
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provided for; at all times during the term of the Warrants the
shares of Common Stock of the Company issuable upon exercise
of the Warrants will have been duly authorized and reserved
for issuance upon such exercise and such shares, when issued
upon such exercise in accordance with the terms of the
Warrants and at the price provided for, will be duly and
validly issued, fully paid and non-assessable;
(vii) such counsel knows of no pending or threatened
legal or governmental proceedings to which the Company or any
of its Subsidiaries is a party which would materially
adversely affect the respective businesses, properties,
financial conditions or operations of the Company or any of
its Subsidiaries; or which question the validity of the Common
Stock of the Company, the Stock, this Agreement, the Warrants
or the Advisory Agreement, or of any action taken or to be
taken by the Company pursuant to this Agreement, the Warrants
or the Advisory Agreement, and no such proceedings are known
to such counsel to be contemplated against the Company or any
of its Subsidiaries; there are no governmental proceedings or
regulations required to be described or referred to in the
Registration Statement which are not so described or referred
to;
(viii) neither the Company nor any of its
Subsidiaries is in violation of or default under, nor will the
execution and delivery of this Agreement, the Warrants or the
Advisory Agreement, and the incurrence of the obligations
herein or therein set forth and the consummation of the
transactions herein or therein contemplated, result in a
breach or violation of, or constitute a default under the
respective certificate or articles of incorporation or
by-laws, in the performance or observance of any material
obligations, agreement, covenant or condition contained in any
bond, debenture, note or other evidence of indebtedness or in
any contract, indenture, mortgage, loan agreement, lease,
joint venture or other agreement or instrument to which the
Company or any of its Subsidiaries is a party or by which the
Company or any of its Subsidiaries or any of their respective
properties are bound or in violation of any material order,
rule, regulation, writ, injunction, or decree of any
governmental instrumentality or court, domestic or foreign;
(ix) the Registration Statement has become effective
under the Act, and to the best of such counsel's knowledge,
(a) no stop order suspending the effectiveness of the
Registration Statement is in effect, and (b) no proceedings
for that purpose have been instituted or are pending before,
or threatened by, the Commission; the Registration Statement
and the Prospectus (except for the financial statements and
other financial data contained therein, or omitted therefrom
as to which such counsel need express no opinion) comply as to
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form in all material respects with the applicable requirements
of the Act and the Rules and Regulations;
(x) such counsel has participated in the preparation
of the Registration Statement and the Prospectus and nothing
has come to the attention of such counsel to cause such
counsel to have reason to believe that the Registration
Statement or any amendment thereto at the time it became
effective or as of the Closing Dates contained any untrue
statement of a material fact required to be stated therein or
omitted to state any material fact required to be stated
therein or necessary to make the statements therein not
misleading or that the Prospectus or any supplement thereto
contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make statements
therein, in light of the circumstances under which they were
made, not misleading (except, in the case of both the
Registration Statement and any amendment thereto and the
Prospectus and any supplement thereto, for the financial
statements, notes thereto and other financial information and
schedules contained therein, as to which such counsel need
express no opinion);
(xi) all descriptions in the Registration Statement
and the Prospectus, and any amendment or supplement thereto,
of contracts and other documents are accurate and fairly
present the information required to be shown, and such counsel
is familiar with all contracts and other document referred to
in the Registration Statement and the Prospectus and any such
amendment or supplement or filed as exhibits to the
Registration Statement, and such counsel does not know of any
contracts or documents of a character required to be
summarized or described therein or to be filed as exhibits
thereto which are not so summarized, described or filed;
(xii) no authorization, approval, consent, or license
of any governmental or regulatory authority or agency is
necessary in connection with the authorization, issuance,
transfer, sale or delivery of the Stock by the Company, in
connection with the execution, delivery and performance of
this Agreement by the Company or in connection with the taking
of any action contemplated herein, or the issuance of the
Warrants or the Common Stock underlying the Warrants, other
than registrations or qualifications of the Stock under
applicable state or foreign securities or Blue Sky laws and
registration under the Act;
(xiii) the statements in the Registration Statement
under the captions "Business", "Use of Proceeds",
"Management", and "Description of Common Stock" have been
reviewed by such counsel and insofar as they refer to
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descriptions of agreements, statements of law, descriptions of
statutes, licenses, rules or regulations or legal conclusions,
are correct in all material respects; and
(xiv) the Stock has been duly authorized for
quotation on the Nasdaq National Market.
Such opinion shall also cover such matters incident
to the transactions contemplated hereby as the Representative
or counsel for the several Underwriters shall reasonably
request. In rendering such opinion, such counsel may rely upon
certificates of any officer of the Company or public officials
as to matters of fact; and may rely as to all matters of law
other than the law of the United States or of the State of
Delaware upon opinions of counsel satisfactory to you, in
which case the opinion shall state that they have no reason to
believe that you and they are not entitled to so rely.
(c) All corporate proceedings and other legal matters relating
to this Agreement, the Registration Statement, the Prospectus and other
related matters shall be satisfactory to or approved by Todtman, Young,
Nachamie, Hendler & Spizz, P.C., counsel to the several Underwriters,
and you shall have received from such counsel a signed opinion, dated
as of the First Closing Date, together with copies thereof for each of
the other Underwriters, with respect to the validity of the issuance of
the Stock, the form of the Registration Statement and Prospectus (other
than the financial statements and other financial data contained
therein), the execution of this Agreement and other related matters as
you may reasonably require. The Company shall have furnished to counsel
for the several Underwriters such documents as they may reasonably
request for the purpose of enabling them to render such opinion.
(d) You shall have received a letter prior to the effective
date of the Registration Statement and again on and as of the First
Closing Date from Albrecht, Viggiano, Zureck & Company, P.C.,
independent public accountants for the Company, substantially in the
form approved by you, and including estimates of the Company's revenues
and results of operations for the period ending at the end of the month
immediately preceding the effective date and results of the comparable
period during the prior fiscal year.
(e) At the Closing Dates, (i) the representations and
warranties of the Company contained in this Agreement shall be true and
correct with the same effect as if made on and as of the Closing Dates
and the Company shall have performed all of its obligations hereunder
and satisfied all the conditions on its part to be satisfied at or
prior to such Closing Date, (ii) the Registration Statement and the
Prospectus and any amendments or supplements thereto shall contain all
statements which are
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required to be stated therein in accordance with the Act and the Rules
and Regulations, and in all material respects conform to the
requirements thereof, 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 not misleading, (iii) there shall have been, since the
respective dates as of which information is given, no material adverse
change, or any development involving a prospective material adverse
change in the respective businesses, properties or conditions
(financial or otherwise), results of operations, capital stock,
long-term or short-term debt or general affairs of the Company or any
of its Subsidiaries from that set forth in the Registration Statement
and the Prospectus, except changes which the Registration Statement and
Prospectus indicate might occur after the effective date of the
Registration Statement, and the neither Company nor any of its
Subsidiaries shall have incurred any material liabilities or agreement
not in the ordinary course of business other than as referred to in the
Registration Statement and Prospectus; and (iv) except as set forth in
the Prospectus, no action, suit or proceeding at law or in equity shall
be pending or threatened against the Company or any of its Subsidiaries
which would be required to be set forth in the Registration Statement,
and no proceedings shall be pending or threatened against the Company
or any of its Subsidiaries before or by any commission, board or
administrative agency in the United States or elsewhere, wherein an
unfavorable decision, ruling or finding would materially and adversely
affect the respective businesses, properties, conditions (financial or
otherwise), results of operations or general affairs of the Company or
any of its Subsidiaries, and (v) you shall have received, at the First
Closing Date, a certificate signed by each of the Chairman of the Board
or the President and the principal financial or accounting officer of
the Company, dated as of the First Closing Date, evidencing compliance
with the provisions of this subsection (e).
(f) Upon exercise of the option provided for in Section 3(b)
hereof, the obligations of the several Underwriters (or, at its option,
the Representative, individually) to purchase and pay for the Option
Stock referred to therein will be subject (as of the date hereof and as
of the Option Closing Date) to the following additional conditions:
(i) The Registration Statement shall remain effective
at the Option Closing Date, and no stop order suspending the
effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been instituted or
shall be pending, or, to your knowledge or the knowledge of
the Company, shall be contemplated by the Commission, and any
reasonable request on the part of the Commission for
additional information shall have been complied
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<PAGE>
with to the satisfaction of Todtman, Young, Nachamie, Hendler
& Spizz, P.C., counsel to the several Underwriters.
(ii) At the Option Closing Date there shall have been
delivered to you as Representative the signed opinion of
Ruskin, Moscou, Evans & Faltischek, P.C., counsel for the
Company, dated as of the Option Closing Date, in form and
substance satisfactory to Todtman, Young, Nachamie, Hendler &
Spizz, P.C., counsel to the several Underwriters, together
with copies of such opinions for each of the other several
Underwriters, which opinion shall be substantially the same in
scope and substance as the opinion furnished to you at the
First Closing Date pursuant to Section 4(b), except that such
opinion, where appropriate, shall cover the Option Stock.
(iii) At the Option Closing Date there shall have
been delivered to you a certificate of the Chairman of the
Board or the President and the principal financial or
accounting officer of the Company, dated the Option Closing
Date, in form and substance satisfactory to Todtman, Young,
Nachamie, Hendler & Spizz, P.C., counsel to the several
Underwriters, substantially the same in scope and substance as
the certificate furnished to you at the First Closing Date
pursuant to Section 4(e).
(iv) At the Option Closing Date there shall have been
delivered to you a letter in form and substance satisfactory
to you from Albrecht, Viggiano, Zureck & Company, P.C., dated
the Option Closing Date and addressed to the Underwriters
confirming the information in their letter referred to in
Section 4(d) hereof and stating that nothing has come to their
attention during the period from the ending date of their
review referred to in said letter to a date not more than five
business days prior to the Option Closing Date, which would
require any change in said letter if it were required to be
dated the Option Closing Date.
(v) All proceedings taken at or prior to the Option
Closing Date in connection with the sale and issuance of the
Option Stock shall be satisfactory in form and substance to
you, and you and Todtman, Young, Nachamie, Hendler & Spizz,
P.C., counsel to the several Underwriters, shall have been
furnished with all such documents, certificates, affidavits
and opinions as you may request in connection with this
transaction in order to evidence the accuracy and completeness
of any of the representations, warranties or statements of the
Company or its compliance with any of the covenants or
conditions contained herein.
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<PAGE>
(g) No action shall have been taken by the Commission or the
NASD the effect of which would make it improper, at any time prior to
the Closing Date, for members of the NASD to execute transactions (as
principal or agent) in the Common Stock and no proceedings for the
taking of such action shall have been instituted or shall be pending,
or, to the knowledge of the several Underwriters or the Company, shall
be contemplated by the Commission or the NASD. The Company represents
that at the date hereof it has no knowledge that any such action is in
fact contemplated by the Commission or the NASD. The Company shall
advise the several Underwriters of any NASD affiliation of any of its
officers, directors, stockholders or their affiliates.
If any of the conditions herein provided for in this Section
shall not have been fulfilled as of the date indicated, this Agreement
and all obligations of the several Underwriters under this Agreement
may be cancelled at, or at any time prior to, each Closing Date by the
Representative. Any such cancellation shall be without liability of the
Underwriters to the Company or the Selling Stockholder.
5. Conditions of the Obligations of the Company. The obligation of the
Company to sell and deliver the Stock is subject to the following conditions:
(a) The Registration Statement shall have become effective not
later than 10:00 A.M. New York time, on the day following the date of
this Agreement, or on such later date as the Company and the
Representative may agree to in writing.
(b) At the Closing Dates, no stop orders suspending the
effectiveness of the Registration Statement shall have been issued
under the Act or any proceedings therefor initiated or threatened by
the Commission.
If the conditions to the obligations of the Company provided
for in this Section have been fulfilled on the First Closing Date but
are not fulfilled after the First Closing Date and prior to the Option
Closing Date, then only the obligation of the Company to sell and
deliver the Stock on exercise of the option provided for in Section
2(b) hereof shall be affected.
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<PAGE>
6. Indemnification.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter
within the meaning of the Act against any losses, claims, damages or
liabilities, joint or several (which shall, for all purposes of this
Agreement, include, but not be limited to, all reasonable costs of
defense and investigation and all reasonable attorneys' fees), to which
such Underwriter or such controlling person may become subject, under
the Act or otherwise, and will reimburse, as incurred, such Underwriter
and such controlling persons for any legal or other expenses reasonably
incurred in connection with investigating, defending against or
appearing as a third party witness in connection with any losses,
claims, damages or liabilities, 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 (A) the Registration Statement, any
Preliminary Prospectus, the Prospectus, or any amendment or supplement
thereto, (B) any blue sky application or other document executed by the
Company specifically for that purpose or based upon written information
furnished by the Company filed in any state or other jurisdiction in
order to qualify any or all of the Stock under the securities laws
thereof (any such application, document or information being
hereinafter called a "Blue Sky Application"), or arise out of or are
based upon the omission or alleged omission to state in the
Registration Statement, any Preliminary Prospectus, Prospectus, or any
amendment or supplement thereto, or in any Blue Sky Application, a
material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that the Company
will not be liable in any such case to the extent, but only 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 reliance upon and in conformity
with written information furnished to the Company by or on behalf of
the Underwriters specifically for use in the preparation of the
Registration Statement or any such amendment or supplement thereof or
any such Blue Sky Application or any such preliminary Prospectus or the
Prospectus or any such amendment or supplement thereto.
(b) Each Underwriter severally, but not jointly, will
indemnify and hold the Company, each of the Company's directors, each
nominee (if any) for director of the Company named in the Prospectus,
each of the Company's officers who have signed the Registration
Statement, and each person, if any, who controls the Company within the
meaning of the Act, against any losses, claims, damages or liabilities
(which shall, for all purposes of this Agreement, include, but not be
limited to, all costs of defense and investigation and all attorneys'
fees) to which the Company or any such director, nominee, officer or
controlling person may become subject under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in
respect
25
<PAGE>
thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, 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 the Registration Statement, any
Preliminary Prospectus, the Prospectus, or any amendment or supplement
thereto, (i) in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through you
specifically for use in the preparation thereof and (ii) relates to the
transactions effected by the Underwriters in connection with the offer
and sale of the Stock contemplated hereby. This indemnity agreement
will be in addition to any liability which the Underwriters may
otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 7 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section, notify in writing the
indemnifying party of the commencement thereof, but the omission so to
notify the indemnifying party will not relieve it from any liability
which it may have to any indemnified party otherwise than under this
Section. In case any such action is brought against any indemnified
party, and it notifies the 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,
subject to the provisions herein stated, 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 Section for any legal or other
expenses subsequently incurred by such indemnified party in connection
with the defense thereof other than reasonable costs of investigation.
The indemnified party shall have the right to employ separate counsel
in any such action and to participate in the defense thereof, but the
fees and expenses of such counsel shall not be at the expense of the
indemnifying party if the indemnifying party has assumed the defense of
the action with counsel reasonably satisfactory to the indemnified
party; provided that if the indemnified party is an Underwriter or a
person who controls such Underwriter within the meaning of the Act, the
fees and expenses of such counsel shall be at the expense of the
indemnifying party if (i) the employment of such counsel has been
specifically authorized in writing by the indemnifying party or (ii)
the named parties to any such action (including any pleaded parties)
include both such Underwriter or such controlling person and the
indemnifying party and in the judgment of the Representative, it is
advisable for the Representative or such Underwriters or controlling
persons to be represented by
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<PAGE>
separate counsel (in which case the indemnifying party shall not have
the right to assume the defense of such action on behalf of such
Underwriter or such controlling person, it being understood, however,
that the indemnifying party shall not, in connection with any one such
action or separate but substantially similar or related actions in the
same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of more
than one separate firm of attorneys for all such Underwriters and
controlling persons, which firm shall be designated in writing by you).
No settlement of any action against an indemnified party shall be made
without the consent of the indemnifying party, which shall not be
unreasonably withheld in light of all factors of importance to such
indemnifying party.
7. Contribution. In order to provide for just and equitable
contribution under the Act in any case in which (i) any Underwriter makes claim
for indemnification pursuant to Section 6 hereof but it is judicially determined
(by the entry of a final judgment or decree by a court of competent jurisdiction
and the expiration of time to appeal or the denial of the last right of appeal)
that such indemnification may not be enforced in such case, notwithstanding the
fact that the express provisions of Section 6 provide for indemnification in
such case, or (ii) contribution under the Act may be required on the part of any
Underwriter, then the Company and each person who controls the Company and any
such Underwriter shall contribute to the aggregate losses, claims, damages or
liabilities to which they may be subject (which shall, for all purposes of this
Agreement, include, but not be limited to, all reasonable costs of defense and
investigation and all reasonable attorneys' fees) in either such case (after
contribution from others) in such proportions that all such Underwriters are
responsible in the aggregate for that portion of such losses, claims, damages or
liabilities represented by the percentage that the underwriting discount per
share appearing on the cover page of the Prospectus bears to the public offering
price appearing thereon, and the Company shall be responsible for the remaining
portion, provided, however, that (a) if such allocation is not permitted by
applicable law then the relative fault of the Company and the Underwriters and
controlling persons, in the aggregate, in connection with the statements or
omissions which resulted in such damages and other relevant equitable
considerations shall also be considered. The relative fault shall be determined
by reference to, among other things, whether in the case of an untrue statement
of a material fact or the omission to state a material fact, such statement or
omission relates to information supplied by the Company or the Underwriters and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission. The Company and the
Underwriters agree that (a) it would not be just and equitable if the respective
obligations of the Company and the Underwriters to contribute pursuant to this
Section 7 were to be determined by pro rata or per capita allocation of the
aggregate damages (even if the Underwriters and their respective controlling
persons in the aggregate were treated as one entity for such purpose) or by any
other method of allocation that does not take account of the equitable
considerations referred to in the first sentence of this
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Section 7 and (b) the contribution of each contributing Underwriter shall not be
in excess of its proportionate share (based on the ratio of the number of shares
of Stock purchased by such Underwriter to the number of shares of Stock
purchased by all contributing Underwriters) of the portion of such losses,
claims, damages or liabilities for which the Underwriters are responsible. 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 is not
guilty of such fraudulent misrepresentation. As used in this paragraph, the term
"Underwriter" includes any officer, director, or other person who controls an
Underwriter within the meaning of Section 15 of the Act and the word "Company"
includes any officer, director, or person who controls the Company within the
meaning of Section 15 of the Act. If the full amount of the contribution
specified in this paragraph is not permitted by law, then any Underwriter and
each person who controls any Underwriter shall be entitled to contribution from
the Company, its officers, directors and controlling persons to the full extent
permitted by law. The foregoing contribution agreement shall in no way affect
the contribution liabilities of any persons having liability under Section 11 of
the Act other than the Company and the Underwriters. No contribution shall be
requested with regard to the settlement of any matter from any party who did not
consent to the settlement; provided, however, that such consent shall not be
unreasonably withheld in light of all factors of importance to such party.
8. Costs and Expenses.
(a) Whether or not this Agreement becomes effective or the
sale of the Stock to the Underwriters is consummated, the Company will
pay all costs and expenses incident to the performance of this
Agreement by the Company including, but not limited to, the fees and
expenses of counsel to the Company; the costs of investigative reports
regarding the Company, its principal stockholders and/or its officers
and directors and each of its Subsidiaries; the costs and expenses
incident to the preparation, printing, filing and distribution under
the Act of the Registration Statement (including the financial
statements therein and all amendments and exhibits thereto),
Preliminary Prospectus and the Prospectus, as amended or supplemented,
the fee of the NASD in connection with the offering required by the
NASD relating to the offering of the Stock contemplated hereby; all
expenses, including reasonable fees and disbursements of counsel to the
Underwriters, in connection with the qualification of the Stock under
the state securities or blue sky laws which the Representative shall
designate; the cost of printing and furnishing to the several
Underwriters copies of the Registration Statement, each Preliminary
Prospectus, the Prospectus, this Agreement, the Selling Agreement,
Underwriters' Questionnaire, Underwriters' Power of Attorney and the
Blue Sky Memorandum, any fees relating to the listing of the Common
Stock on the Nasdaq National Market or other securities exchange, the
cost of printing the certificates representing the Stock, the fees of
the transfer agent, the cost of publication of at least three
"tombstones" of the offering
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(at least one of which shall be in a national business newspaper and
one of which shall be in a major New York newspaper) and the cost of
preparing at least four hard cover "bound volumes" relating to the
offering for individuals designated by the Representative. The Company
shall pay any and all taxes (including any transfer, franchise, capital
stock or other tax imposed by any jurisdiction) on sales to the
Underwriters hereunder. The Company will also pay all cost and expenses
incident to the furnishing of any amended Prospectus or of any
supplement to be attached to the Prospectus as called for in Section
3(a) of this Agreement except as otherwise set forth in said Section.
(b) In addition to the foregoing expenses the Company shall at
the First Closing Date pay to Commonwealth Associates in its individual
rather than representative capacity, a non-accountable expense
allowance of $___________ of which $50,000 has been paid. In the event
the overallotment option is exercised, the Company shall pay to
Commonwealth Associates at the Option Closing Date an additional amount
equal to 1.5% of the gross proceeds from the sale of Stock by the
Company on exercise of the overallotment option. In the event the
transactions contemplated hereby are not consummated by reason of any
action by the Representative (except if such prevention is based upon a
breach by the Company of any covenant, representation or warranty
contained herein or because any other condition to the Underwriters'
obligations hereunder required to be fulfilled by the Company is not
fulfilled) the Company shall be liable for the accountable expenses of
the Underwriters, including legal fees. In the event the transactions
contemplated hereby are not consummated by reason of any action of the
Company or because of a breach by the Company of any covenant,
representation or warranty herein, the Company shall be liable for the
accountable expenses of the Underwriters, including legal fees.
(c) No person is entitled either directly or indirectly to
compensation from the Company, from the Representative or from any
other person for services as a finder in connection with the proposed
offering, and the Company agrees to indemnify and hold harmless the
Representative and the other Underwriters, against any losses, claims,
damages or liabilities, joint or several (which shall, for all purposes
of this Agreement, include, but not be limited to, all costs of defense
and investigation and all attorneys' fees), to which the Company, the
Representative or such other Underwriter or person may become subject
insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon the claim of any person
(other than an employee of the party claiming indemnity) or entity that
he or it is entitled to a finder's fee in connection with the proposed
offering by reason of such person's or entity's influence or prior
contact with the indemnifying party.
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9. Substitution of Underwriters. If any Underwriters shall for any
reason not permitted hereunder cancel their obligations to purchase the First
Stock hereunder, or shall fail to take up and pay for the number of First Stock
set forth opposite their respective names in Schedule A hereto upon tender of
such First Stock in accordance with the terms hereof, then:
(a) If the aggregate number of shares of First Stock which
such Underwriter or Underwriters agreed but failed to purchase does not
exceed 10% of the total number of First Stock, the other Underwriters
shall be obligated severally, in proportion to their respective
commitments hereunder, to purchase the First Stock which such
defaulting Underwriter or Underwriters agreed but failed to purchase.
(b) If any Underwriter or Underwriters so default and the
agreed number of First Stock with respect to which such default or
defaults occurs is more than 10% of the total number of First Stock,
the remaining Underwriters shall have the right to take up and pay for
(in such proportion as may be agreed upon among them) the First Stock
which the defaulting Underwriter or Underwriters agreed but failed to
purchase. If such remaining Underwriters do not, at the First Closing
Date, take up and pay for the First Stock which the defaulting
Underwriter or Underwriters agreed but failed to purchase, the time for
delivery of the First Stock shall be extended to the next business day
to allow the several Underwriters the privilege of substituting within
twenty-four hours (including nonbusiness hours) another underwriter or
underwriters satisfactory to the Company. If no such underwriter or
underwriters shall have been substituted as aforesaid, within such
twenty-four hour period, the time of delivery of the First Stock may,
at the option of the Company, be again extended to the next following
business day, if necessary, to allow the Company the privilege of
finding within twenty-four hours (including nonbusiness hours) another
underwriter or underwriters to purchase the First Stock which the
defaulting Underwriter or Underwriters agreed but failed to purchase.
If it can be arranged for the remaining Underwriters or substituted
Underwriters to take up the First Stock of the defaulting Underwriter
or Underwriters as provided in this Section, (i) the Company or the
Representative shall have the right to postpone the time of delivery
for a period of not more than seven business days, in order to effect
whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus, or in any other documents or arrangements,
and the Company agrees promptly to file any amendments to the
Registration Statement or supplements to the Prospectus which may
thereby be made necessary, and (ii) the respective numbers of First
Stock to be purchased by the remaining Underwriters or substituted
Underwriters shall be taken at the basis of the underwriting obligation
for all purposes of this Agreement.
If in the event of a default by one or more Underwriters and
the remaining Underwriters shall not take up and pay for all the First
Stock agreed to be purchased
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by the defaulting Underwriters or substitute another underwriter or
underwriters as aforesaid, the Company shall not find or shall not
elect to seek another underwriter or underwriters for such First Stock
as aforesaid, then this Agreement shall terminate.
If, following exercise of the option provided in Section 2(b)
hereof, any Underwriter or Underwriters shall for any reason not
permitted hereunder cancel their obligations to purchase Option Stock
at the Option Closing Date, or shall fail to take up and pay for the
number of Option Stock, which they become obligated to purchase at the
Option Closing Date upon tender of such Option Stock in accordance with
the terms hereof, then the remaining Underwriters or substituted
Underwriters may take up and pay for the Option Stock of the defaulting
Underwriters in the manner provided in Section 9(b) hereof. If the
remaining Underwriters or substituted Underwriters shall not take up
and pay for all such Option Stock, the Underwriters shall be entitled
to purchase the number of Option Stock for which there is no default
or, at their election, the option shall terminate, the exercise thereof
shall be of no effect.
As used in this Agreement, the term "Underwriter" includes any
person substituted for an Underwriter under this Section. In the event
of termination, there shall be no liability on the part of any
nondefaulting Underwriter to the Company, provided that the provisions
of this Section 9 shall not in any event affect the liability of any
defaulting Underwriter to the Company arising out of such default.
10. Effective Date. The 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 of the Registration Statement, or at such earlier time after the effective
date of the Registration Statement as you in your discretion shall first
commence the initial public offering by the Underwriters of any of the Stock.
The time of the initial public offering shall mean the time of release by you of
the first newspaper advertisement with respect to the Stock, or the time when
the Stock is first generally offered by you to dealers by letter or telegram,
whichever shall first occur. This Agreement may be terminated by you at any time
before it becomes effective as provided above, except that Sections 3(c), 6, 7,
8, 13, 14, 15 and 16 shall remain in effect notwithstanding such termination.
11. Termination.
(a) This Agreement, except for Sections 3(c), 6, 7, 8, 12, 13,
14, 15 and 16 hereof, may be terminated at any time prior to the First
Closing Date, and the option referred to in Section 2(b) hereof, if
exercised, may be cancelled at any time prior to the Option Closing
Date, by you if in your judgment it is impracticable to offer for sale
or to enforce contracts made by the Underwriters for the resale of the
31
<PAGE>
Stock agreed to be purchased hereunder by reason of (i) the Company
having sustained a material loss, whether or not insured, by reason of
fire, earthquake, flood, accident or other calamity, or from any labor
dispute or court or government action, order or decree; (ii) trading in
securities on the New York Stock Exchange, the American Stock Exchange,
the Nasdaq SmallCap Market or the Nasdaq National Market having been
suspended or limited; (iii) material governmental restrictions having
been imposed on trading in securities generally (not in force and
effect on the date hereof); (iv) a banking moratorium having been
declared by federal or New York state authorities; (v) an outbreak of
international hostilities or other national or international calamity
or crisis or change in economic or political conditions having
occurred; (vi) a pending or threatened legal or governmental proceeding
or action relating generally to either of the Company's or any of its
Subsidiaries businesses, or a notification having been received by the
Company or any of its Subsidiaries of the threat of any such proceeding
or action, which could materially adversely affect the Company or any
of its Subsidiaries; (vii) except as contemplated by the Prospectus,
the Company or any of its Subsidiaries are merged or consolidated into
or all or substantially all of the capital stock or assets of the
Company or any of its Subsidiaries are acquired by another company or
group or there exists a binding legal commitment for the foregoing or
any other material change of ownership or control occurs; (viii) the
passage by the Congress of the United States or by any state
legislative body, or federal or state agency or other authority of any
act, measure, rule or regulation, or the adoption of any orders, rules
or regulations by any governmental body or any authoritative accounting
institute or board, or any governmental executive, which is reasonably
believed likely by the Representative to have a material impact on the
respective businesses, financial conditions or financial statements of
the Company or any of its Subsidiaries or the market for the securities
offered pursuant to the Prospectus; (ix) any adverse change in the
financial or securities markets beyond normal market fluctuations,
having occurred since the date of this Agreement, or (x) any material
adverse change having occurred, since the respective dates of which
information is given in the Registration Statement and Prospectus, in
the respective earnings, businesses, prospects or general conditions of
the Company or any of its Subsidiaries, financial or otherwise, whether
or not arising in the ordinary course of business.
(b) If you elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 11
or in Section 10, the Company shall be promptly notified by you, by
telephone or telegram confirmed by letter.
12. Warrants. At or before the First Closing Date, the Company will
sell to Commonwealth Associates (for its own account and not as Representative
of the several Underwriters), or its designees for a consideration of $160, and
upon the terms and
32
<PAGE>
conditions set forth in the form of Warrant annexed as an exhibit to the
Registration Statement, Warrants to purchase an aggregate of 160,000 shares of
Common Stock of the Company. In the event of conflict in the terms of this
Agreement and the Warrants, the language of the Warrants shall control.
13. Representations, Warranties and Agreements to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the Company or its Principal Stockholder where appropriate, and
the Underwriters set forth in or made pursuant to this Agreement will remain in
full force and effect, regardless of any investigation made by or on behalf of
the Underwriters, the Company or any of its officers or directors or any
controlling person and will survive delivery of and payment of the Stock and the
termination of this Agreement.
14. Notice. Any communications specifically required hereunder to be in
writing, if sent to the Underwriters, will be mailed, delivered or telegraphed
and confirmed to them at Commonwealth Associates, 733 Third Avenue, New York,
New York 10017 with a copy sent to Todtman, Young, Nachamie, Hendler & Spizz,
P.C., 425 Park Avenue, New York, New York 10022, or if sent to the Company, will
be mailed, delivered or telegraphed and confirmed to it at 275 Marcus Boulevard,
Hauppauge, New York 11788, with a copy sent to Ruskin, Moscou, Evans &
Faltischek, P.C., 170 Old Country Road, Mineola, New York 11501.
15. Parties in Interest. The Agreement herein get forth is made solely
for the benefit of the several Underwriters, the Company and, to the extent
expressed, the Principal Stockholders and any person controlling the Company or
any of the several Underwriters and directors of the Company, nominees for
directors (if any) named in the Prospectus, its officers who have signed the
Registration Statement, and their respective executors, administrators,
successors, and assigns and no other person shall acquire or have any right
under or by virtue of this Agreement. The term "successors and assigns" shall
not include any purchaser, as such purchaser, from any of the several
Underwriters of the Stock. All of the obligations of the Underwriters hereunder
are several and not joint.
16. Applicable Law. This Agreement will be governed by, and construed
in accordance with, the laws of the State of New York applicable to agreements
made and to be entirely performed within New York.
33
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement kindly sign and return this agreement, whereupon it will become a
binding agreement between the Company and the several Underwriters in accordance
with its terms.
Very truly yours,
SYSCOMM INTERNATIONAL CORPORATION
By: _______________________________
The foregoing Underwriting Agreement is hereby confirmed and accepted
as of the date first above written.
COMMONWEALTH ASSOCIATES
By: _______________________________
Michael Lyall, Managing Director
For itself and as
Representative of the
several Underwriters
34
<PAGE>
SCHEDULE A
----------
Name of Underwriter Number of Shares of Stock to be Purchased
- ------------------- -----------------------------------------
Commonwealth Associates 1,600,000
TOTAL 1,600,000
=========
Total:____________
Schedule A-1
<PAGE>
SCHEDULE B
----------
Subsidiary State of Incorporation
- ---------- ----------------------
Information Technology Services, Inc. New York
Schedule B-1
<PAGE>
______________, 1997
SysComm International Corporation
275 Marcus Boulevard
Hauppauge, New York 11788
Attn: Mr. John H Spielberger
Chairman of the Board,
President and Chief Executive Officer
Dear Mr. Spielberger:
This will confirm the arrangements, terms and conditions pursuant to
which Commonwealth Associates (the "Consultant"), has been retained to serve as
a financial consultant and advisor to SysComm International Corporation, a
Delaware corporation (the "Company"), on a non-exclusive basis for services
rendered in association with the Company's initial public offering and
terminating on the closing of the Company's initial public offering (the
"Closing"). The undersigned hereby agrees to the following terms and conditions:
1. Duties of Consultant: Consultant shall, at the request of the
Company, upon reasonable notice, provide such financial consulting services and
advice pertaining to the Company's business affairs as the Company may from time
to time reasonably request.
The services described in this Section 1 shall be rendered by
Consultant without any direct supervision by the Company at such time and place
and in such manner (whether by conference, telephone, letter or otherwise) as
Consultant may determine.
2. Compensation: As compensation for consultant's services hereunder,
the Company shall pay Consultant ________________ ($________) with payment due
at the Closing.
3. Additional Compensation in Certain Circumstances: In additional to
the financial consulting services described in Section 1 above, Consultant may
bring the Company in contact with persons, whether individuals or entities that
may be suitable candidates for providing the Company with, or may lead the
Company to other individuals or entities that may provide the Company with, debt
or equity financing or that may be suitable candidates, or may lead the Company
to such suitable candidates, to purchase substantially all of the stock or
assets of the Company, sell all or substantially all of such candidate's stock
or otherwise transfer control of, or a material interest in, such candidate to
the Company, merge with the Company, or enter into a joint venture, strategic
alliance or other transaction with the Company (a "Transaction"). If the Company
enters into an agreement with any persons or their affiliates, or with any
persons introduced to the Company by any such persons or their affiliates during
the term of this Agreement or within six months of the expiration of the term of
this Agreement, pursuant to
<PAGE>
which the Company enters into a Transaction, the Company will pay to Consultant,
upon the closing of the Transaction, an amount mutually agreeable to both the
Company and Consultant which should be such amount as it generally customary for
the type of Transaction.
4. Available Time: Consultant shall make available such time as it, in
its sole discretion, shall deem appropriate for the performance of its
obligations under this Agreement and may in certain circumstances be entitled to
additional compensation in connection therewith.
5. Relationship: Nothing herein shall constitute Consultant as an
employee or agent of the Company, except to such extent as might hereinafter be
agreed upon for a particular purpose. Except as might hereinafter be expressly
agreed, Consultant shall not have the authority to obligate or commit the
Company in any manner whatsoever.
6. Indemnification: Since Consultant will be acting on behalf of the
Company, the Company agrees to the indemnification provisions attached to this
Agreement as Annex A and incorporated herein in their entirety.
7. Confidentiality: Except in the course of the performance of its
duties hereunder, Consultant agrees that it shall not disclose any trade
secrets, knowhow, or other proprietary information not in the public domain
learned as a result of this Agreement unless and until such information becomes
generally known.
8. Assignment and Termination: This Agreement shall not be assignable
by any party except to successors to all or substantially all of the business of
either party for any reason whatsoever without the prior written consent of the
other party, which consent may not be arbitrarily withheld by the party whose
consent is required.
9. Governing Law: This Agreement shall be deemed to be a contract made
under the laws of the State of New York and for all purposes shall be construed
in accordance with the laws of said State.
Very truly yours,
By: __________________________
Confirmed and Agreed to this
________ day of March, 1997
SYSCOMM INTERNATIONAL CORPORATION
By: _______________________________________
John H. Spielberger
Chairman of the Board,
President and Chief Executive Officer
<PAGE>
ANNEX A
INDEMNIFICATION PROVISIONS
In connection with the engagement of Commonwealth Associates
("Consultant") by SysComm International Corporation (the "Company") pursuant to
that certain agreement dated as of ___________________, 1997 ("Agreement") the
Company hereby agrees as follows:
1. In connection with or arising out of or relating to the engagement
of Consultant under the Agreement, or any actions taken or omitted, services
performed or matters contemplated by or in connection with the Agreement, the
Company agrees to reimburse Consultant, its affiliates nd their respective
directors, officers, employees, agents and controlling persons (each an
"Indemnified Party") promptly upon demand for expenses (including fees and
expenses of legal counsel) as they are incurred in connection with the
investigation of, preparation for or defense of any pending or threatened claim,
or any litigation, proceeding or other action in respect to thereof. The Company
also agrees (in connection with the foregoing) to indemnify and hold harmless
each Indemnified Party from and against any and all losses, claims, damages and
liabilities, joint or several, to which any Indemnified Party may become
subject, including any amount paid in settlement of any litigation or other
action (commenced or threatened), to which the Company shall have consented in
writing (such consent not to be unreasonably withheld), whether or not any
Indemnified Party is a party and whether or not liability resulted; provided,
however, that the Company shall not be liable pursuant to this sentence in
respect of any loss, claim, damage or liability to the extent that a court
having competent jurisdiction shall have determined by final judgment (not
subject to further appeal) that such loss, claim, damage or liability resulted
primarily and directly from the willful misfeasance or gross negligence of such
Indemnified Party.
2. An Indemnified Party shall have the right to retain separate legal
counsel of its own choice to conduct the defense and all related matters in
connection with any such litigation, proceeding or other action. The Company
shall pay the fees and expenses of such legal counsel, and such legal counsel
shall to the fullest extent consistent with its professional responsibilities
cooperate with the Company and any legal counsel designated by the Company. The
Company agrees to consult in advance with Consultant with respect to the terms
of any proposed waiver, release or settlement of any claim, liability,
proceeding or other action against the Company to which an Indemnified Party may
also be subject, and to use its best efforts to afford Consultant and/or any
such Indemnified Party the opportunity to join in such waiver, release or
settlement.
3. In the event that the Indemnity provided for in paragraphs 1 and 2
hereof is unavailable or insufficient to hold any Indemnified Party harmless,
then the Company shall contribute to amounts paid or payable by an Indemnified
Party in respect of such Indemnified Party's losses, claims, damages and
liabilities as to which the indemnity provided for in paragraphs 1 and 2 hereof
is unavailable or insufficient (i) in such proportion as appropriately reflects
the relative benefits received by the Company, on the one hand, and Consultant,
on the other hand, in connection with the matters as to which such losses,
claims, damages or liabilities relate, or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in
<PAGE>
such proportion as appropriately reflects not only the relative benefits
referred to in clause (i) but also the relative fault of the Company, on the one
hand, and Consultant, on the other hand, as well as any other equitable
consideration. The amounts paid or payable by a party in respect of losses,
claims, damages and liabilities referred to above shall be deemed to include any
legal or other fees and expenses incurred in defending any litigation,
proceeding or other action or claim. Notwithstanding the provisions hereof,
Consultant's share of the liability hereunder shall not be in excess of the
amount of fees actually received by Consultant under the Agreement (excluding
any amounts received as reimbursement of expenses incurred by Consultant).
4. It is understood and agreed that, in connection with Consultant's
engagement by the Company, Consultant may also be engaged to act for the Company
in one or more additional capacities, and that the terms of any such additional
engagement may be embodied in one or more separate written agreements. These
Indemnification Provisions shall apply to the engagement under the Agreement and
to any such additional engagement and any modification of such additional
engagement; provided, however, that in the event that the Company engages
Consultant to provide additional services (other than as indicated in the
Agreement), such further engagement may be subject to separate indemnification
and contribution provisions as may be mutually agreed upon.
5. These Indemnification Provisions shall remain in full force and
effect whether or not any of the transactions contemplated by the Agreement are
consummated and shall survive the expiration of the Agreement, and shall be in
addition to any liability that the Company might otherwise have to any
Indemnified Party under the Agreement or otherwise.
Very truly yours,
SYSCOMM INTERNATIONAL CORPORATION
By: _____________________________________
John H. Spielberger
Chairman of the Board, President and
Chief Executive Officer
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
SYSCOMM INTERNATIONAL CORPORATION
The undersigned, John H. Spielberger and Dennis R. Wilson, being the
President and Secretary, respectively, of SYSCOMM INTERNATIONAL CORPORATION, a
Delaware corporation (the "Corporation"), hereby certify as follows:
1. The date of filing of the original Certificate of Incorporation of
the Corporation with the Secretary of State of the State of Delaware was
September 30, 1987. The original name of the Corporation was "Syscomm
International Corporation."
2. This Amended and Restated Certificate of Incorporation has been duly
adopted in accordance with the applicable provisions of Section 242 and 245 of
the General Corporation Law of the State of Delaware.
3. The text of the Amended and Restated Certificate of Incorporation of
the Corporation as amended and restated shall read in its entirety as follows:
FIRST: The name of the Corporation is SysComm International
Corporation.
SECOND: The address of its registered office in the State of
Delaware is No. 1209 Orange Street, Corporation Trust Center, in the City of
Wilmington, County of New Castle. The name of its registered agent at such
address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any
lawful act or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
FOURTH: The total number of shares which the Corporation shall
have authority to issue is Forty-One Million (41,000,000), consisting of Forty
Million (40,000,000) shares of common stock, all of par value of one cent ($.01)
each, and One Million (1,000,000) shares of preferred stock, all of par value of
one cent ($.01) each.
A. Preferred Stock
1. The preferred stock of the Corporation may be
issued from time to time in one or more series of any number of shares, provided
that the aggregate number of shares issued and not cancelled in any and all such
series shall not exceed the total number of shares of preferred stock
hereinabove authorized.
1
<PAGE>
2. Authority is hereby vested in the Board of
Directors from time to time to authorize the issuance of one or more series of
preferred stock and, in connection with the creation of such series, to fix by
resolution or resolutions providing for the issuance of shares thereof the
characteristics of each such series including, without limitation, the
following:
(a) the maximum number of shares to constitute such
series, which may subsequently be increased or decreased (but
not below the number of shares of that series then
outstanding) by resolution of the Board of Directors, the
distinctive designation thereof and the stated value thereof
if different than the par value thereof;
(b) whether the shares of such series shall have
voting powers, full or limited, together with any other series
of preferred stock or common stock, or as a separate class, or
no voting powers, and if any, the terms of such voting powers;
(c) the dividend rate, if any, on the shares of such
series, the conditions and dates upon which such dividends
shall be payable, the preference or relation which such
dividends shall bear to the dividends payable on any other
class or classes or on any other series of capital stock and
whether such dividend shall be cumulative or noncumulative;
(d) whether the shares of such series shall be
subject to redemption by the Corporation, and, if made subject
to redemption, the times, prices and other terms, limitations,
restrictions or conditions of such redemption;
(e) the relative amounts, and the relative rights or
preference, if any, of payment in respect of shares of such
series, which the holders of shares of such series shall be
entitled to receive upon the liquidation, dissolution or
winding-up of the Corporation;
(f) whether or not the shares of such series shall be
subject to the operation of a retirement or sinking fund and,
if so, the extent to and manner in which any such retirement
or sinking fund shall be applied to the purchase or redemption
of the shares of such series for retirement or to other
corporate purposes and the terms and provisions relative to
the operation thereof;
(g) whether or not the shares of such series shall be
convertible into, or exchangeable for, shares of any other
2
<PAGE>
class, classes or series, or other securities, whether or not
issued by the Corporation, and if so convertible or
exchangeable, the price or prices or the rate or rates of
conversion or exchange and the method, if any, of adjusting
same;
(h) the limitations and restrictions, if any, to be
effective while any shares of such series are outstanding upon
the payment of dividends or the making of other distributions
on, and upon the purchase, redemption or other acquisition by
the Corporation of, the Common Stock (as defined below) or any
other class or classes of stock of the Corporation ranking
junior to the shares of such series either as to dividends or
upon liquidation, dissolution or winding-up;
(i) the conditions or restrictions, if any, upon the
creation of indebtedness of the Corporation or upon the
issuance of any additional stock (including additional shares
of such series or of any other series or of any other class)
ranking on a parity with or prior to the shares of such series
as to dividends or distributions of assets upon liquidation,
dissolution or winding-up; and
(j) any other preference and relative, participating,
optional or other special rights, and the qualifications,
limitations or restrictions thereof, as shall not be
inconsistent with law, this Article Fourth or any resolution
of the Board of Directors pursuant hereto.
B. Common Stock
1. The common stock of the Corporation may be issued
from time to time in any number of shares, provided that the aggregate number of
shares issued and not cancelled shall not exceed the total number of shares of
common stock hereinabove authorized ("Common Stock").
2. Unless expressly provided by the Board of
Directors of the Corporation in fixing the voting rights of any series of
Preferred Stock, the holders of the outstanding shares of Common Stock shall
exclusively possess all voting power for the election of directors and for all
other purposes, each holder of record of shares of Common Stock being entitled
to one vote for each share of such stock standing in his name on the books of
the Corporation.
3. Subject to the prior rights of the holders of
Preferred Stock now or hereafter granted pursuant to Article Fourth, the holders
of Common Stock shall be entitled to receive, when and as declared by the Board
of Directors, out of funds legally available for that purpose, dividends payable
either in cash, stock or otherwise.
4. In the event of any liquidation, dissolution or
winding-up of the Corporation, either voluntary or involuntary, after payment
shall be made in full to the holders of Preferred Stock of any amounts to which
they may be entitled, the holders of Common Stock shall be entitled to the
exclusion of the holders of Preferred Stock of any and all series to share,
ratably according to the number of shares of Common Stock held by them, in all
remaining assets of the Corporation available for distribution to its
stockholders.
3
<PAGE>
FIFTH: The name and mailing address of the sole incorporator
is as follows:
Name Mailing Address
---- ---------------
Robert B. Smith Wilson & Smith
25 Kingston Street
Boston, Massachusetts 02111
SIXTH: The Corporation is to have perpetual existence.
SEVENTH: The private property of the stockholders shall not be
subject to the payment of the Corporation's debts to any extent whatever.
EIGHTH: The following provisions are inserted for the
management of the business and for the conduct of the affairs of the Corporation
and for defining and regulating the powers of the Corporation and its directors
and stockholders and are in furtherance and not in limitation of the powers
conferred upon the Corporation by statute:
A. 1. The business and affairs of the Corporation shall be
managed by or under the direction of a Board of Directors consisting of such
number of directors as is determined from time to time by resolution adopted by
affirmative vote of a majority of the entire Board of Directors; provided,
however, that in no event shall the number of directors be less than three. The
directors shall be divided into three classes, designated Class I, Class II and
Class III. Each class shall consist, as nearly as may be possible, of one-third
(1/3) of the total number of directors constituting the entire Board of
Directors. By unanimous written consent of the Board of Directors, the initial
classes shall be elected as follows: Class I directors shall be elected for a
one-year term, Class II directors for a two-year term and Class III directors
for a three-year term. At each succeeding annual meeting of stockholders,
successors to the class of directors whose terms expires at that annual meeting
shall be elected for three-year terms. If the number of directors is changed,
any increase or decrease shall be apportioned among the classes so as to
maintain the number of directors in each class as nearly equal as possible, and
any additional director of any class elected to fill a vacancy resulting from an
increase in such class shall hold office for a term that shall coincide with the
remaining term of that class, but in no case will a decrease in the number of
directors shorten the term of any incumbent director. A director shall hold
office until the annual meeting for the year in which his or her term expires
and until his or her successor shall be elected and shall qualify, subject,
however, to prior death, resignation, retirement, disqualification or removal
from office. Except as otherwise required by law, any vacancy on the Board of
Directors that results from an increase in the number of directors and any other
vacancy occurring in the Board of Directors shall be filled by a majority of the
directors then in office, even if less than a quorum, or by a sole remaining
director. Any director elected to fill a vacancy not resulting from an increase
in the number of directors shall have the same remaining term as that of his or
her predecessor.
2. Any director, or the entire Board of Directors,
may be removed from office only for cause and only by the affirmative vote of
not less than two-thirds (2/3) of the votes entitled to be cast by the holders
of all of the then outstanding shares of Voting Stock (as defined in Article
Tenth, Section C), voting together as one class; provided, however, that if a
proposal to remove a director is made by or on behalf of an Interested Person
(as defined in Article Tenth, Section C) or a director who is not an Independent
Director (as defined in Article Tenth,
4
<PAGE>
Section C), then such removal shall also require the affirmative vote of not
less than a majority of the votes entitled to be cast by the holders of all of
the then outstanding shares of Voting Stock, voting together as one class,
excluding Voting Stock beneficially owned by such Interested Person.
3. Notwithstanding the foregoing, whenever the
holders of any one or more classes or series of stock issued by the Corporation
shall have the right, voting separately by class or series, to elect directors,
the election, term of office, filling of vacancies and other features of such
directorships shall be governed by the terms of this Amended and Restated
Certificate of Incorporation applicable thereto, as amended, and such directors
so elected shall not be divided into classes pursuant to Article Ninth, Section
A unless expressly provided by such terms.
B. In furtherance and not limitation of the powers conferred
by statute, the Board of Directors is expressly authorized:
1. To make, alter, amend or repeal the By-Laws of the
Corporation. The holders of shares of Voting Stock shall, to the extent such
power is at the time conferred on them by applicable law, also have the power to
make, alter, amend or repeal the By-Laws of the Corporation, provided that any
proposal by or on behalf of an Interested Person or a director who is not an
Independent Director to make, alter, amend or repeal the By-Laws shall require
approval by the affirmative vote described in Article Tenth, Section A, unless
either (a) such action has been approved by a majority of the Board of Directors
prior to such Interested Person first becoming an Interested Person; or (b)
prior to such Interested Person first becoming an Interested Person, a majority
of the Board of Directors has approved such Interested Person becoming an
Interested Person and, subsequently, a majority of the Independent Directors has
approved such action.
2. To set apart out of any of the funds of the
Corporation available for dividends a reserve or reserves for any proper purpose
and to abolish any such reserve in the manner in which it was created.
3. By a majority of the whole Board of Directors, to
designate one or more committees, each committee to consist of one or more of
the directors of the Corporation. The Board of Directors may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. The By-Laws may provide
that in the absence or disqualification of a member of a committee, the member
or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, amy unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member. Any such committee, to the extent
provided in the resolution of the Board of Directors, or in the By-Laws of the
Corporation, shall have and may exercise all the powers and authority of the
Board of Directors in the management of the business and affairs of the
Corporation, and may authorize the seal of the Corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to amending the Certificate of Incorporation (except that
a committee may, to the extent authorized
5
<PAGE>
in the resolution or resolutions providing for the issuance of shares of stock
adopted by the Board of Directors as provided in Article Fourth hereof, fix the
designations and any of the preferences or rights of such shares relating to
dividends, redemption, dissolution, any distribution of assets of the
Corporation or the conversion into, or the exchange of such shares for, shares
of any other class or classes or any other series of the same or any other class
or classes of stock of the Corporation or fix the number of shares of any series
of stock or authorize the increase or decrease of the shares of any series),
adopting an agreement of merger or consolidation, recommending to the
stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, recommending to the stockholders a
dissolution of the Corporation or a revocation of a dissolution, or amending the
By-Laws of the Corporation; and, unless the resolution or By-Laws expressly so
provide, no such committee shall have the power or authority to declare a
dividend, to authorize the issuance of stock or to adopt a certificate of
ownership and merger pursuant to Section 253 of the General Corporation Law of
the State of Delaware.
4. When and as authorized by the stockholders in
accordance with statute, to sell, lease or exchange all or substantially all of
the property and assets of the Corporation, including its goodwill and its
corporate franchises, upon such terms and conditions and for such consideration,
which may consist in whole or in part of money or property including shares of
stock in, and/or other securities of, any other corporation or corporations, as
the Board of Directors shall deem expedient and for the best interests of the
Corporation.
5. To the full extent permitted or not prohibited by
law, and without the consent of or other action by the stockholders, to
authorize or create mortgages, pledges or other liens or encumbrances upon any
or all of the assets, real, personal or mixed, and franchises of the
Corporation, including after-acquired property, and to exercise all of the
powers of the Corporation in connection therewith.
C. In addition to any other considerations which the Board of
Directors may lawfully take into account, in determining whether to take or to
refrain from taking corporate action on any matter, including proposing any
matter to the stockholders of the Corporation, the Board of Directors may take
into account the long-term as well as the short-term interests of the
Corporation and its stockholders (including the possibility that these interests
may be best served by the continued independence of the Corporation), customers,
employees and other constituencies of the Corporation and its subsidiaries,
including the effect upon communities in which the Corporation and its
subsidiaries do business. In so evaluating any such determination, the Board of
Directors shall be deemed to be performing their duties and acting in good faith
and in the best interests of the Corporation within the meaning of Section 145
of the General Corporation Law of the State of Delaware, or any successor
provision.
D. Subject to the rights of holders of any class or series of
stock having a preference over the Common Stock as to dividends or upon
liquidation, dissolution or winding-up, nominations for the election of
directors may be made by the Board of Directors or by any stockholder entitled
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to vote in the election of directors generally. However, any stockholder
entitled to vote in the election of directors generally may nominate one or more
persons for election as directors at an annual meeting only pursuant to the
Corporation's notice of such meeting or if written notice of such stockholder's
intent to make such nomination or nominations has been received by the Secretary
of the Corporation not less than sixty nor more than ninety days prior to the
first anniversary of the preceding year's annual meeting; provided, however,
that in the event that the date of the annual meeting is advanced by more than
thirty (30) days or delayed by more than sixty (60) days from such anniversary,
notice by the stockholder to be timely must be so received not earlier than the
ninetieth day prior to such annual meeting and not later than the close of
business on the later of (1) the sixtieth day prior to such annual meeting; or
(2) the tenth day following the day on which notice of the day of the annual
meeting was mailed or public disclosure thereof was made by the Corporation,
whichever first occurs. For purposes of calculating the first such notice period
following adoption of this Amended and Restated Certificate of Incorporation,
the first anniversary of the 1997 annual meeting shall be deemed to be the last
day of the twelfth month following the consummation of the initial public
offering of the Corporation's Common Stock. Each such notice shall set forth:
(a) the name and address of the stockholder who intends to make the nomination
and of the person or person to be nominated; (b) a representation that the
stockholder is a holder of record of stock of the Corporation entitled to vote
at such meeting and intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice; (c) a description of all
arrangements or understandings between the stockholder and each nominee and any
other person or persons (naming such person or persons) relating to the
nomination or nominations; (d) the class and number of shares of the Corporation
which are beneficially owned by such stockholder and the person to be nominated
as of the date of such stockholder's notice and by any other stockholders known
by such stockholder to be supporting such nominees as of the date of such
stockholder's notice; (e) such other information regarding each nominee proposed
by such stockholder as would be required to be included in a proxy statement
filed pursuant to the proxy rules of the Securities and Exchange Commission; and
(f) the consent of each nominee to serve as a director of the Corporation if so
elected.
In addition, in the event the Corporation calls a
special meeting of stockholders for the purpose of electing one or more
directors, any stockholder entitled to vote in the election of directors
generally may nominate one or more persons for election as directors at a
special meeting only pursuant to the Corporation's notice of meeting or if
written notice of such stockholder's intent to make such nomination or
nominations, setting forth the information and complying with the form described
in the immediately preceding paragraph, has been received by the Secretary of
the Corporation not earlier than the ninetieth day prior to such special meeting
and not later than the close of business on the later of (i) the sixtieth day
prior to such meeting; or (ii) the tenth day following the day on which notice
of the date of the special meeting was mailed or public disclosure thereof was
made by the Corporation, whichever comes first.
No person shall be eligible for election as a
director of the Corporation unless nominated in accordance with the procedures
set forth in Article Eighth, Section D. The presiding officer of the meeting
shall, if the facts warrant, determine and declare to the meeting that
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nomination was not made in accordance with the procedures prescribed by Article
Eighth, Section D, and if he or she should so determine, the defective
nomination shall be disregarded.
Elections of directors need not be by written ballot
unless the By-Laws of the Corporation shall so provide.
NINTH:
A. Meetings of the stockholders may be held within or without
the State of Delaware, as the By-Laws may provide. Commencing with the date of
the consummation of the initial public offering of the Corporation's Common
Stock, any action required or permitted to be taken by the stockholders of the
Corporation must be effected at a duly called annual or special meeting of such
stockholders and may not be effected by a consent in writing by any such
holders. Subject to the rights of holders of any class or series of stock having
preference over the Common Stock as to dividends or upon liquidation,
dissolution or winding-up, special meetings of the stockholders of the
Corporation may be called only by the holders of a majority of the outstanding
shares of Common Stock or by a majority of the Board of Directors.
Except as otherwise required by law or by this Amended and
Restated Certificate of Incorporation, the holders of not less than a majority
in voting power of the shares entitled to vote at any meeting of stockholders,
present in person or by proxy, shall constitute a quorum, and the act of the
holders of a majority in voting power of the shares present in person or by
proxy and entitled to vote on the subject matter shall be deemed the act of the
stockholders. If a quorum shall fail to attend any meeting, the presiding
officer may adjourn the meeting to another place, date or time. If a notice of
any adjourned special meeting of stockholders is sent to all stockholders
entitled to vote thereat, stating that it will be held with one-third (1/3) in
voting power of the shares entitled to vote thereat constituting a quorum, then
except as otherwise required by law, one-third (1/3) in voting power of the
shares entitled to vote at such adjourned meeting, present in person or by
proxy, shall constitute a quorum, and, except as otherwise required by law or
this Amended and Restated Certificate of Incorporation, all matters shall be
determined by the holders of a majority in voting power of the shares present in
person or by proxy and entitled to vote on the subject matter.
B. At any meeting of the stockholders, only such business
shall be conducted as shall have been properly bought before such meeting. To be
properly bought before an annual meeting, business must be (1) specified in the
notice of meeting (or any supplement thereto) given by or at the direction of
the Board of Directors; (2) otherwise properly brought before the meeting by or
at the direction of the Board of Directors; or (3) otherwise properly brought
before the meeting by a stockholder. For business to be properly brought before
an annual meeting by a stockholder, the stockholders must have given timely
notice thereof in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice must be received not less than sixty (60) days nor more
than ninety days prior to the first anniversary of the preceding year's annual
meeting; provided, however, that in the event that the date of the annual
meeting is advanced by more than thirty (30) days or
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delayed by more than sixty (60) days from such anniversary, notice by the
stockholder to be timely must be so received not earlier than the ninetieth day
prior to such annual meeting and not later than the close of business on the
later of (1) the sixtieth day prior to such annual meeting; or (2) the tenth day
following the date on which notice of the date of the annual meeting was mailed
or public disclosure thereof was made, whichever first occurs. For purposes of
calculating the first such notice period following adoption of this Amended and
Restated Certificate of Incorporation, the first anniversary of the 1997 annual
meeting shall be deemed to be the last day of the twelfth month following the
consummation of the initial public offering of the Corporation's Common Stock.
Each such notice shall set forth as to each matter the stockholder proposes to
bring before the annual meeting: (a) a brief description of the business desired
to be brought before the annual meeting and the reasons for conducting such
business at the meeting; (b) the name and address, as they appear on the
Corporation's books, of the stockholder proposing such business; (c) the class,
series and number of shares of the Corporation which are beneficially owned by
the stockholder; and (d) and material interest of the stockholder in such
business. To be properly brought before a special meeting (or any supplement
thereto) given by or at the direction of the Board of Directors.
No business shall be conducted at any meeting of the
stockholders except in accordance with the procedures set forth in Article
Ninth, Section B. The presiding officer of the meeting shall, if the facts
warrant, determine and declare to the meeting that business was not properly
bought before the meeting and in accordance with the provisions of Article
Ninth, Section B, and if he or she should so determine, any such business not
properly brought before the meeting shall not be transacted. Nothing herein
shall be deemed to affect the Corporation's proxy statement pursuant to Section
14(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 14a-8
thereunder.
The books of the Corporation may be kept outside of
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.
TENTH:
A. In addition to any affirmative vote required by law or this
Amended and Restated Certificate of Incorporation or the Amended and Restated
By-Laws of the Corporation, and except as otherwise expressly provided in
Section B of Article Tenth, a Business Transaction (as hereinafter defined)
with, or proposed by or on behalf of, any Interested Person (as hereinafter
defined) or any Affiliate (as hereinafter defined) of any Interested Person or
any person who thereafter would be an Affiliate of such Interested Person shall
require approval by the affirmative vote of not less than two-thirds (2/3) of
the votes entitled to be cast by holders of all the then outstanding Voting
Stock, voting together as one class, excluding Voting Stock beneficially owned
by such Interested Person. Such affirmative vote shall be required
notwithstanding the fact that no vote may be required, or that a lesser
percentage may be specified, by law or in any agreement with any national
securities exchange or otherwise.
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B. The provisions of Article Tenth, Section A, shall not be
applicable to any particular Business Transaction, and such Business Transaction
shall require only such affirmative vote, if any, as is required by law or by
any other provision of this Amended and Restated Certificate of Incorporation or
the Amended and Restated By-Laws of the Corporation, or any agreement with any
national securities exchange, if either (1) the Business Transaction shall have
been approved by a majority of the Board of Directors prior to such Interested
Person first becoming an Interested Person or (2) prior to such Interested
Person first becoming an Interested Person, a majority of the Board of Directors
shall have approved such Interested Person becoming an Interested Person and,
subsequently, a majority of the Independent Directors (as hereinafter defined)
shall have approved the Business Transaction.
C. The following definitions shall apply with respect to
Article Tenth.
1. The term "Affiliate" shall mean a person that
directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, a specified person.
2. A person shall be a "beneficial owner" of any
Capital Stock (a) which such person or any of its Affiliates beneficially owns,
directly or indirectly; (b) which such person or any of its Affiliates has,
directly or indirectly, (i) the right to acquire (whether such right is
exercisable immediately or subject only to the passage of time or the occurrence
of one or more events), pursuant to any agreement, arrangement or understanding
or upon the exercise of conversion rights, exchange rights, warrants or options,
or otherwise, or (ii) the right to vote pursuant to any agreement, arrangement
or understanding; provided, however, that a person shall not be deemed the
beneficial owner of any security if the agreement, arrangement or understanding
to vote such security arises solely from a revocable proxy or consent
solicitation made pursuant to and in accordance with the Exchange Act, and is
not also then reportable on Schedule 13D under the Exchange Act (or a comparable
or successor report); or (c) which is beneficially owned, directly or
indirectly, by any other person with which such person or any of its Affiliates
has any agreement, arrangement or understanding for the purpose of acquiring,
holding, voting or disposing of any shares of Capital Stock (except to the
extent permitted by the proviso of clause (b)(ii) above). For the purposes of
determining whether a person is an Interested Person pursuant to paragraph (7)
of this Section C, the number of shares of Capital Stock deemed to be
outstanding shall include shares deemed beneficially owned by such person
through application of this paragraph (2) of Section C, but shall not include
any other shares of Capital Stock that may be issuable pursuant to any
agreement, arrangement or understanding, or upon exercise of conversion rights,
warrants or options, or otherwise.
3. The term "Business Transaction" shall mean any of
the following transactions when entered into by the Corporation or a subsidiary
of the Corporation with, or upon a proposal by or on behalf of, any Interested
Person or any Affiliate of any Interested Person:
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(a) any merger or consolidation of the Corporation or
any subsidiary with (i) any Interested Person or (ii) any
other corporation which is, or after such merger or
consolidation would be, an Affiliate of an Interested Person;
(b) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition (in one transaction or a series
of transactions), except proportionately as a stockholder of
the Corporation, to or with the Interested Person of assets of
the Corporation (other than Capital Stock (as hereinafter
defined)) or of any subsidiary of the Corporation which assets
have an aggregate market value equal to ten percent (10%) or
more of the aggregate market value of all the outstanding
stock of the Corporation;
(c) any transaction that results in the issuance of
shares or the transfer of treasury shares by the Corporation
or by any subsidiary of the Corporation of any Capital Stock
or any capital stock of such subsidiary to the Interested
Person, except (i) pursuant to the exercise, exchange or
conversion of securities exercisable for, exchangeable for or
convertible into stock of the Corporation or any such
subsidiary which securities were outstanding prior to the time
that the Interested Person became such, (ii) pursuant to a
dividend or distribution paid or made, or the exercise,
exchange or conversion of securities exercisable for,
exchangeable for or convertible into stock of the Corporation
or any such subsidiary which security is distributed, pro rata
to all holders of a class or series of stock of the
Corporation subsequent to the time the Interested Person
became such, (iii) pursuant to an exchange offer by the
Corporation to purchase stock made on the same terms to all
holders of said stock, (iv) any issuance of shares or transfer
of treasury shares of Capital Stock by the Corporation,
provided, however, that in the case of each of clauses (ii)
through (iv) above there shall be no increase of more than one
percent (1%) in the Interested Person's proportionate share of
the Capital Stock of any class or series or of the Voting
Stock or (v) pursuant to a public offering or private
placement by the Corporation to an Institutional Investor;
(d) any reclassification of securities,
recapitalization or other transaction involving the
Corporation or any subsidiary of the Corporation which has the
effect, directly or indirectly, of (i) increasing the
proportionate share of the stock of any class or series, or
securities convertible into the stock of any
class or series, of the Corporation or of any such subsidiary
which is owned by the Interested Person, except as a result of
immaterial changes due to fractional share adjustments or as a
result of any purchase or redemption of any shares of stock
not caused, directly or indirectly, by the Interested Person
or (ii) increasing the voting power, whether or not then
exercisable, of an Interested Person in any class or series of
stock of the Corporation or any subsidiary of the Corporation;
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(e) the adoption of any plan or proposal by or on
behalf of an Interested Person for the liquidation or
dissolution of the Corporation; or
(f) any receipt by the Interested Person of the
benefit, directly or indirectly (except proportionately as a
stockholder of the Corporation), of any loans, advances,
guarantees, pledges, tax benefits or other financial benefits
(other than those expressly permitted in subparagraphs (a)
through (e) above) provided by or through the Corporation or
any subsidiary.
4. The term "Capital Stock" shall mean all capital
stock of the Corporation authorized to be issued from time to time under Article
Fourth of this Amended and Restated Certificate of Incorporation.
5. The term "Independent Directors" shall mean the
members of the Board of Directors who are not Affiliates or representatives of,
or associated with, an Interested Person and who were either directors of the
Corporation prior to any person becoming an Interested Person or were
recommended for election or elected to succeed such directors by a vote which
includes the affirmative vote of a majority of the Independent Directors.
6. The term "Institutional Investor" shall mean a
person that (a) has acquired, or will acquire, all of its securities of the
Corporation in the ordinary course of its business and not with the purpose nor
with the effect of changing or influencing the control of the Corporation, nor
in connection with or as a participant in any transaction having such purpose or
effect, including any transaction subject to Section 13 of the Exchange Act and
Rule 13d-3(b) thereunder, and (b) is a registered broker dealer; a bank as
defined in Section 3(a)(6) of the Exchange Act; an insurance company as defined
in, or an investment company registered under, the Investment Company Act of
1940; an investment advisor registered under the Investment Advisors Act of
1940; an employee benefit plan or pension fund subject to the Employee
Retirement Income Security Act of 1974 or an endowment fund; a parent holding
company, provided that the aggregate amount held directly by the parent and
directly and indirectly by its subsidiaries which are not persons specified in
the foregoing subclauses of this clause (b) does not exceed one percent (1%) of
the securities of the subject class; or a group, provided that all the members
are persons specified in the foregoing subclauses of this clause (b).
7. The term "Interested Person" shall mean any person
(other than the Corporation, any subsidiary, any Permitted Holder, any
profit-sharing, employee stock ownership or other employee benefit plan of the
Corporation or any subsidiary or any trustee of or fiduciary with respect to any
such plan when acting in such capacity) who (a) is the beneficial owner of
Voting Stock representing ten percent (10%) or more of the votes entitled to be
cast by the holders of all of the then outstanding shares of Voting Stock; (b)
has stated in a filing with any governmental agency or press release or
otherwise publicly disclosed a plan or intention to become or consider becoming
the beneficial owner of Voting Stock representing ten percent (10%) or more of
the votes entitled to be cast by the holders of all then outstanding shares of
Voting Stock and has not expressly
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abandoned such plan, intention or consideration more than two years prior to the
date in question; or (c) is an Affiliate of the Corporation and at any time
within the two-year period immediately prior to the date in question was the
beneficial owner of Voting Stock representing ten percent (10%) or more of the
votes entitled to be cast by holders of all then outstanding shares of Voting
Stock.
8. The term "Permitted Holder" shall mean John H.
Spielberger or any trust or nominee account in which he has effective control or
beneficial interest. The term "person" shall mean individual, corporation,
partnership, unincorporated association, trust or other entity.
9. The term "person" shall mean individual,
corporation, partnership, unincorporated association, trust or other entity.
10. The term "subsidiary" means any company of which
a majority of the voting securities are owned, directly or indirectly, by the
Corporation.
11. The term "Voting Stock" shall mean Capital Stock
of any class or series entitled to vote in the election of directors generally.
D. A majority of the Independent Directors shall have the
power and duty to determine, on the basis of information known to them after
reasonable inquiry, for the purposes of (1) Article Tenth, all questions arising
under Article Tenth including, without limitation (a) whether a person is an
Interested Person, (b) the number of shares of Capital Stock or other securities
beneficially owned by any person; and (c) whether a person is an Affiliate of
another; and (2) this Amended and Restated Certificate of Incorporation, the
question of whether a person is an Interested Person. Any such determination
made in good faith shall be binding and conclusive on all parties.
E. Nothing contained in Article Tenth shall be construed to
relieve any Interested Person from any fiduciary obligation imposed by law.
ELEVENTH: Whenever a compromise or arrangement is proposed
between the Corporation and its creditors or any class of them and/or between
the Corporation and its stockholders or any class of them, any court of
equitable jurisdiction within the State of Delaware may, on the application in a
summary way of the Corporation or of any creditor or stockholder thereof or on
the application of any receiver or receivers appointed for this
corporation under the provisions of Section 291 of Title 8 of the Delaware Code
or on the application of trustees in dissolution or of any receiver or receivers
appointed for the Corporation under the provisions of Section 279 of Title 8 of
the Delaware Code order a meeting of the creditors or class of creditors, and/or
of the stockholders or class of stockholders of the Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of the
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of the Corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to
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which the said application has been made, be binding on all the creditors or
class of creditors, and/or on all the stockholders or class of stockholders, of
the Corporation, as the case may be, and also on the Corporation.
TWELFTH: The Corporation shall, to the fullest extent
permitted by the provisions of ss.145 of the General Corporation Law of the
State of Delaware, as the same may be amended and supplemented, indemnify any
and all persons whom it shall have power to indemnify under said section from
and against any and all of the expenses, liabilities or other matters referred
to in or covered by said section, and the indemnification provided for herein
shall not be deemed exclusive of any other rights to which those indemnified may
be entitled under any By-Law, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as to a
person who has ceased to be a director, officer, employee, or agent and shall
inure to the benefit of the heirs, executors and administrators of such a
person.
The Board of Directors of the Corporation may, in its
discretion, authorize the Corporation to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liabilities asserted against him
or incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power to indemnity him against
such liability under the foregoing paragraph of this Article Eleventh.
THIRTEENTH: No director of the Corporation shall be personally
liable to the Corporation or any stockholder of the Corporation for monetary
damages for breach of fiduciary duty as a director, provided that this Article
Thirteenth shall not eliminate or limit the liability of a director (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 Title 8 of
the Delaware Code, or (iv) for any transaction from which the director derived
an improper personal benefit. No amendment to or repeal of this Article
Thirteenth shall apply to or have an effect on the liability or alleged
liability of any director of the Corporation for or with respect to any acts or
omissions of such director occurring prior to the effective date of such
amendment or repeal.
FOURTEENTH: The Corporation reserves the right to amend,
alter, change or repeal any provisions contained in this 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.
IN WITNESS WHEREOF, Syscomm International Corporation has caused this
Certificate to be signed by John H. Spielberger, President and by Dennis R.
Wilson, Secretary, this 21st day of April, 1997.
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SYSCOMM INTERNATIONAL CORPORATION
By: \s\ JOHN H. SPIELBERGER
-----------------------------
JOHN H. SPIELBERGER, President
By: \s\ DENNIS R. WILSON
-----------------------------
DENNIS R. WILSON, Secretary
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AMENDED AND RESTATED BY-LAWS
SYSCOMM INTERNATIONAL CORPORATION
ARTICLE I
Offices
SECTION 1. Registered Office and Agent. The registered office
and the registered agent of the Corporation shall be located at such place as
the Board of Directors may from time to time designate.
SECTION 2. Other Offices. The Corporation may also have
offices at such other places both within and without the State of Delaware as
the Board of Directors may from time to time determine or the business of the
Corporation may require.
ARTICLE II
Stockholders
SECTION 1. Annual Meeting. The annual meeting of the
stockholders of the Corporation shall be held on such date, at such time and at
such place within or without the State of Delaware as may be designated by the
Board of Directors, for the purpose of electing Directors and for the
transaction of such other business as may be properly bought before the meeting.
SECTION 2. Special Meetings. Special meetings of the
stockholders, for any purpose or purposes, unless otherwise prescribed by
statute or the Amended and Restated Certificate of Incorporation, may be called
by the President or the Board of Directors. Any special meeting of the
stockholders shall be held on such date, at such time and at such place within
or without the State of Delaware as the President or Board of Directors may
designate.
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SECTION 3. Notice of Meetings. Except as otherwise provided in
these Amended and Restated By-Laws or by law, a written notice of each meeting
of the stockholders shall be given, either personally or by mail, not less than
ten (10) nor more than sixty (60) calendar days before the date of the meeting,
to each stockholder of the Corporation entitled to vote at such meeting at such
stockholder's address as it appears on the books and records of the Corporation.
The notice shall state the place, date and hour of the meeting and, in the case
of a special meeting, the purpose for which the meeting is called.
SECTION 4. Adjourned Meetings. When a meeting is adjourned to
another time or place, notice need not be given of the adjourned meeting if the
time and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting, the stockholders, or the holder of any class of
stock entitled to vote separately as a class, as the case may be, may transact
any business which might have been transacted by them at the original meeting.
If the adjournment is for more than thirty (30) calendar days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the adjourned meeting.
SECTION 5. Organization. The President shall act as chairman
of all meetings of the stockholders. In the absence of the President, any Vice
President designated by the Board or, in the absence of any such officer, any
person designated by the holders of a majority in number of the shares of stock
of the Corporation present in person or represented by proxy and entitled to
vote at such meeting shall act as chairman of the meeting.
The Secretary of the Corporation shall act as secretary of all
meetings of the stockholders, but, in the absence of the Secretary, the chairman
of the meeting may appoint any
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person to act as secretary of the meeting. It shall be the duty of the Secretary
to prepare and make, at least ten (10) calendar days before every meeting of
stockholders, a complete list of stockholders entitled to vote at such meeting,
arranged in alphabetical order and showing the address of each stockholder and
the number of shares registered in the name of each stockholder. Such list shall
be open, either at the offices of the Corporation or at the place where the
meeting is to be held, for the ten (10) calendar days next preceding the
meeting, to the examination of any stockholder, for any purpose germane to the
meeting, during ordinary business hours, and shall be produced and kept at the
time and place of the meeting during the whole time thereof and subject to the
inspection of any stockholder who may be present.
SECTION 6. Quorum. The holders of a majority of the shares of
stock issued and outstanding and entitled to vote, represented in person or by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business, except as otherwise provided by statute or by the
Amended and Restated Certificate of Incorporation. If, however, such quorum
shall not be present or represented at any meeting of the stockholders, the
stockholders present in person or represented by proxy shall have the power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified.
SECTION 7. Voting. Except as otherwise provided in the Amended
and Restated Certificate of Incorporation or by law, each stockholder shall be
entitled to one vote for each share of the capital stock of the Corporation
registered in the name of such stockholder upon the books of the Corporation.
Each stockholder entitled to vote at a meeting of stockholders may authorize
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another person or persons to act for such stockholder by proxy, but such proxy
shall not be voted or acted upon after three (3) years from its date, unless the
proxy provides for a longer period. When directed by the presiding officer or
upon the demand of any stockholder, the vote upon any matter before a meeting of
stockholders shall be by ballot. Except as otherwise provided by law or by the
Amended and Restated Certificate of Incorporation, (a) each Director shall be
elected by a plurality of the votes cast at a meeting of stockholders by the
stockholders entitled to vote in the election; and (b) whenever any corporate
action other than the election of Directors is to be taken, it shall be
authorized by a majority of the votes cast at a meeting of stockholders by the
stockholders entitled to vote thereon.
Shares of the capital stock of the Corporation belonging to
the Corporation or to another corporation, if a majority of the shares entitled
to vote in the election of directors of such other corporation is held, directly
or indirectly, by the Corporation, shall neither be entitled to vote nor be
counted for quorum purposes.
SECTION 8. Procedure. At each meeting of stockholders, the
chairman of the meeting shall fix and announce the date and time of the opening
and the closing of the polls for each matter upon which the stockholders will
vote at the meeting and shall determine the order of business and other matters
of procedure. Except to the extent inconsistent with any such rules and
regulations as adopted by the Board of Directors, the chairman of the meeting
may establish rules, which need not be in writing, to maintain order and safety
and for the conduct of the meeting. Without limiting the foregoing, he or she
may:
(a) restrict attendance at any time to bona fide
stockholders of record and their proxies and other persons in attendance at the
invitation of the chairman;
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(b) restrict dissemination of solicitation materials
and use of audio or visual recording devices at the meeting;
(c) establish seating arrangements;
(d) adjourn the meeting without a vote of the
stockholders, whether or not there is a quorum present; and
(e) make rules governing speeches and debate
including time limits and access to microphones.
The chairman of the meeting acts in his or her absolute
discretion and his or her rulings are not subject to appeal.
SECTION 9. Inspectors. The Board of Directors by resolution
shall, in advance of any meeting of stockholders, appoint one or more
inspectors, which inspector or inspectors may include individuals who serve the
Corporation in other capacities, including, without limitation, as officers,
employees, agents or representatives of the Corporation, to act at the meeting
and make a written report thereof. One or more persons may be designated by the
Board of Directors as alternate inspectors to replace any inspector who fails to
act. If an inspector or alternate is not able to act at a meeting of
stockholders, the chairman of the meeting shall, appoint one or more inspectors
to act at the meeting. Each inspector, before discharging his or her duties,
shall take and sign an oath faithfully to execute the duties of inspector with
strict impartiality and according to the best of his or her ability. The
inspectors shall have the duties prescribed by the General Corporation Law of
the State of Delaware.
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ARTICLE III
Directors
SECTION 1. Number. The Board of Directors shall consist of
such number of directors, not less than three nor more than ten, as shall be
fixed by the Board of Directors in accordance with Article Eighth of the Amended
and Restated Certificate of Incorporation. A director need not be a stockholder.
SECTION 2. Vacancies. Any vacancy occurring in the Board of
Directors shall be filled by the Board of Directors in accordance with the
provisions of Article Eighth of the Amended and Restated Certificate of
Incorporation.
SECTION 3. Removal. Directors may only be removed as provided
for in the Corporation's Amended and Restated Certificate of Incorporation.
SECTION 4. Powers. The business affairs of the Corporation
shall be managed by its Board of Directors which may exercise all such powers of
the Corporation and do all such lawful acts and things as are not by statute or
by the Amended and Restated Certificate of Incorporation or by these Amended and
Restated By-laws directed or required to be exercised or done by the
stockholders.
ARTICLE IV
Meetings of the Board of Directors
SECTION 1. Place of Meeting. The Board of Directors may hold
its meetings in such place or places in the State of Delaware or outside the
State of Delaware as the Board of Directors from time to time shall determine.
SECTION 2. Regular Meetings. Regular meetings of the Board of
Directors shall be held at such times and places as the Board of Directors from
time to time by resolution shall determine. No notice shall be required for any
regular meeting of the Board of Directors, but a copy of every resolution fixing
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or changing the time or place of regular meetings shall be mailed to every
Director at least five (5) calendar days before the first meeting held in
pursuance thereof.
SECTION 3. Special Meetings. Special Meetings of the Board of
Directors may be called by the President on ten (10) days notice to each
Director; Special Meetings shall be called by the President or Secretary in like
manner and on like notice on the written request of two Directors. Notice need
not be given to any Director who signs a waiver of notice, whether before or
after the meeting.
Notice of the day, hour and place of holding of each special
meeting shall be given (i) by mailing the same at least four (4) calendar days
before the meeting; or (ii) by causing the same to be transmitted by telecopier,
telegraph or cable (A) at least twenty-four (24) hours before the meeting; or
(B) in the case of meeting held in accordance with Section 7 of this Article IV,
at least six (6) hours before the meeting, in each case to each Director. Unless
otherwise indicated in the notice thereof, any and all business, other than an
amendment of these Amended and Restated By-Laws, may be transacted at any
special meeting, and an amendment of these Amended and Restated By-Laws may be
acted upon if the notice of the meeting shall have stated that the amendment of
these Amended and Restated By-Laws is one of the purposes of the meeting. At any
meeting at which every Director shall be present, even though without any
notice, any business may be transacted, including the amendment of these Amended
and Restated By-Laws.
SECTION 4. Quorum. A majority of the members of the Board of
Directors in office (but in no case less than two (2) Directors) shall
constitute a quorum for the transaction of business, and, except as otherwise
provided in the Amended and Restated Certificate of Incorporation, the vote of
the majority of the Directors present at any meeting of the Board of Directors
at which a quorum is present shall be the act of the Board of Directors. If at
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any meeting of the Board of Directors there is less than a quorum present, a
majority of those present may adjourn the meeting from time to time.
SECTION 5. Organization. The President shall act as chairman
and preside at all meetings of the Board of Directors. In the absence of the
President, any Vice Chairman or Vice President shall act as chairman of the
meeting. The Secretary of the Corporation shall act as secretary of all meetings
of the Board of Directors, but, in the absence of the Secretary, the chairman of
the meeting may appoint any person to act as secretary of the meeting.
SECTION 6. Committees. The Board of Directors, by resolution
adopted by a majority of the number of Directors then in office, may designate
one or more Directors to constitute an executive committee, which committee, to
the extent provided in such resolution, shall have and exercise all of the
authority of the Board of Directors in the management of the Corporation, except
as otherwise required by law. Vacancies in the membership of the committee shall
be filled by the Board of Directors at a regular or special meeting of the Board
of Directors. The executive committee shall keep regular minutes of its
proceeding and report the same to the Board when required.
SECTION 7. Conference Telephone Meetings. Unless otherwise
restricted by the Amended and Restated Certificate of Incorporation or by these
Amended and Restated By-Laws, the members of the Board of Directors or any
committee designated by the Board of Directors may participate in a meeting of
the Board of Directors or such committee, as the case may be, by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and such participation
shall constitute being present in person at such meeting.
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SECTION 8. Consent of Directors or Committee in Lieu of
Meeting. Unless otherwise restricted by the Amended and Restated Certificate of
Incorporation or by these Amended and Restated By-Laws, any action required or
permitted to be taken at any meeting of the Board of Directors, or of any
committee thereof, may be taken without a meeting if all members of the Board of
Directors or committee, as the case may be, consent thereto in writing and the
writing or writings are filed with the minutes of proceedings of the Board of
Directors or committee, as the case may be.
SECTION 9. Compensation. For their services as Directors or as
members of committees, every Director shall receive such compensation,
attendance fees and other allowances as determined by resolution of the Board of
Directors.
ARTICLE V
Officers
SECTION 1. Officers. The officers of the Corporation shall be
a Chief Executive Officer, President, one or more Vice Presidents who are
specifically designated as officers and who may be designated Executive Vice
Presidents or Senior Vice Presidents, a Secretary, Chief Financial Officer, and
such additional officers, if any, as shall be elected by the Board of Directors
pursuant to the provisions of Section 2 of this Article V. The Chief Executive
Officer, the President, one or more Vice Presidents, the Secretary, the Chief
Financial Officer shall be elected by the Board of Directors at its first
meeting after such annual meeting of the stockholders. The failure to hold such
election shall not of itself terminate the term of office of any officer. All
officers shall hold their offices for such terms and shall exercise such powers
and perform such duties as shall be determined from time to time by the Board of
Directors or as shall be confirmed or required by law or these Amended and
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Restated By-Laws or as shall be incidental to the office. Any officer may resign
at any time upon written notice to the Corporation. Officers may, but need not,
be Directors. Any number of offices may be held by the same person. Any officer
may be removed with or without cause at any time by the affirmative vote of a
majority of the Board of Directors. Any vacancy caused by the death of any
officer, his or her resignation, his or her removal, or otherwise, may be filled
by the Board of Directors, and any officer so elected shall hold office at the
pleasure of the Board of Directors.
SECTION 2. Additional Officers. The Board of Directors may
from time to time elect such other officers (who may, but need not, be
Directors), including, but not limited to, Treasurer, Controller, Assistant
Treasurers, Assistant Secretaries and Assistant Controllers, as the Board may
deem advisable, and such officers shall have such authority and shall perform
such duties as may from time to time be assigned to them by the Board of
Directors, the President or as shall be conferred or required by law or these
Amended and Restated By-Laws or as shall be incidental to the office.
ARTICLE VI
Stock, Seal and Fiscal Year
SECTION 1. Certificates for Shares. The shares of the
Corporation shall be represented by certificates signed by the President or a
Vice President and by the Chief Financial Officer or the Secretary or an
Assistant Secretary of the Corporation, and may be sealed with the seal of the
Corporation or a facsimile thereof.
When the Corporation is authorized to issue shares of more
than one class, there shall be set forth upon the face or back of the
certificate, or the certificate shall have a statement that the Corporation will
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furnish to any stockholder upon request and without charge, a full statement of
the designations, preferences, limitations and relative rights of the shares of
each class authorized to be issued and, if the Corporation is authorized to
issue any preferred or special class in series, the variations in the relative
rights and preferences between the shares of each such series so far as the same
have been fixed and determined and the authority of the Board of Directors to
fix and determine the relative rights and preferences of subsequent series.
The signatures of the officers of the Corporation upon a
certificate may be facsimiles if the certificate is countersigned by a transfer
agent, or registered by a registrar, other than the Corporation itself or an
employee of the Corporation. In case any officer who has signed or whose
facsimile signature has been placed upon such certificate shall have ceased to
be such officer before such certificate is issued, it may be issued by the
Corporation with the same effect as if he were such officer at the date of its
issue.
SECTION 2. Lost Certificates. The Board of Directors may
direct a new certificate to be issued in place of any certificate theretofore
issued by the Corporation alleged to have been lost or destroyed. When
authorizing such issue of a new certificate, the Board of Directors, in its
discretion and as a condition precedent to the issuance thereof, may prescribe
such terms and conditions as it deems expedient, and may require such
indemnities as it deems adequate, to protect the Corporation from any claim that
may be made against it with respect to any such certificate alleged to have been
lost or destroyed.
SECTION 3. Transfer of Shares. Shares of stock of the
Corporation shall be transferred on the books of the Corporation by the
recordholder thereof, in person or by such holder's attorney duly authorized in
writing upon surrender to the Corporation or the transfer agent of the
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Corporation of a certificate representing shares duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer. Upon such
surrender, a new certificate shall be issued to the person entitled thereto, and
the old certificate cancelled and the transaction recorded upon the books of the
Corporation, except as otherwise required by law.
SECTION 4. Regulations. The Board of Directors, the President
or the Secretary shall have power and authority to make such rules and
regulations as it or such officer may deem expedient concerning the issue,
transfer, registration or replacement of certificates for shares of stock of the
Corporation.
SECTION 5. Record Date. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversation or exchange of stock
or for the purpose of any other lawful action, as the case may be, the Board of
Directors may fix, in advance, a record date which shall be not more than sixty
(60) calendar days nor less than ten (10) calendar days before the date of such
meeting, nor more than sixty (60) calendar days prior to any other action.
If no record date is fixed, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given, or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held, and the record date for
determining stockholders for any other purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto. A determination of stockholders of record entitled to notice of or to
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vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
SECTION 6. Registered Stockholders. The Corporation shall be
entitled to recognize the exclusive right of a person registered on its books as
the owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the owner
of shares, and shall not be bound to recognize any equitable or other claim to
or interest in such shares or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by the laws of the State of Delaware.
SECTION 7. Dividends. Subject to the provisions of the Amended
and Restated Certificate of Incorporation, the Board of Directors shall have
power to declare and pay dividends upon shares of stock of the Corporation, but
only out of funds available for the payment of dividends as provided by law.
Subject to the provisions of the Amended and Restated
Certificate of Incorporation, any dividends declared upon the stock of the
Corporation shall be payable on such date or dates as the Board of Directors
shall determine. If the day fixed for the payment of any dividend shall in any
year fall upon a legal holiday, then the dividend payable on such date shall be
paid on the next day not a legal holiday.
SECTION 8. Corporate Seal. The Corporation shall have a
suitable seal, containing the name of the Corporation. The Secretary shall have
custody of the seal, but he or she may authorize others to keep and use a
duplicate seal.
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SECTION 9. Checks. 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.
SECTION 10. Fiscal Year. The fiscal year of the Corporation
shall be such fiscal year as the Board of Directors from time to time by
resolution shall determine.
ARTICLE VII
Miscellaneous Provisions
SECTION 1. Waivers of Notice. Whenever any notice whatever is
required to be given by law, by the Amended and Restated Certificate of
Incorporation or by these Amended and Restated By-Laws to any person or persons,
a waiver thereof in writing, signed by the person or persons entitled to the
notice, whether before or after the time stated therein, shall be deemed
equivalent thereto. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting at the beginning of the meeting to the
transaction of any business because the meeting is not lawfully called or
convened.
SECTION 2. Indemnification. The Corporation shall, to the
maximum extent permitted from time to time under the law of the State of
Delaware, indemnify and upon request may advance expenses to any person who is
or was a party to any threatened, pending or completed action, suit, proceeding
or claim, whether civil, criminal, administrative or investigative, by reason of
the fact that he or she is or was or has agreed to be a trustee, director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a trustee, director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
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against expenses (including attorneys' fees and expenses), judgment, fines,
penalties and amounts paid in settlement incurred in connection with the
investigation, preparation to defend or defense of any such action, suit,
proceeding or claim. Such indemnification shall not be exclusive of other
indemnification rights arising under any by-law, agreement, vote of directors or
stockholders or otherwise and shall inure to the benefit of the heirs and legal
representatives of such person.
The Corporation may purchase and maintain insurance
on any person who is or was a trustee, director, officer, employee or agent of
the Corporation or is or was serving at the request of the Corporation as a
trustee, director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against any liability
incurred by him in any such position or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him against
such liability under this Article VII, Section 2.
SECTION 3. Amendments. These Amended and Restated By-Laws may
be altered, amended, or repealed or new By-Laws may be adopted by the
affirmative vote of a majority of the Board of Directors at any regular or
Special Meeting of the Board of Directors, subject to any provision in the
Amended and Restated Certificate of Incorporation reserving to the stockholders
the power to adopt, amend, or repeal By-Laws, but By-Laws made by the Board of
Directors may be altered or repealed and new By-Laws made by the stockholders.
The stockholders may prescribe that any By-Law made by them shall not be altered
or repealed by the Board of Directors.
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================================================================================
STOCK PURCHASE WARRANT
To Purchase Common Stock of
SYSCOMM INTERNATIONAL CORPORATION
================================================================================
<PAGE>
Void after 5:00 p.m. New York Time, on ___________, 2002
Warrant to Purchase 160,000 Shares of Common Stock
WARRANT TO PURCHASE COMMON STOCK
OF
SYSCOMM INTERNATIONAL CORPORATION
This is to Certify That, FOR VALUE RECEIVED, Commonwealth Associates,
or assigns ("Holder"), is entitled to purchase, subject to the provisions of
this Warrant, from SysComm International Corporation, a Delaware corporation
("Company"), One Hundred Sixty Thousand (160,000) fully paid, validly issued and
nonassessable shares of Common Stock, par value $.01 per share, of the Company
("Common Stock") at a price of $______ per share at any time or from time to
time during the period from , 1998 to ______________, 2002, but not later
than 5:00 p.m. New York City Time, on , 2002. The number of shares of Common
Stock to be received upon the exercise of this Warrant and the price to be paid
for each share of Common Stock may be adjusted from time to time as hereinafter
set forth. The shares of Common Stock deliverable upon such exercise, and as
adjusted from time to time, are hereinafter sometimes referred to as "Warrant
Shares" and the exercise price of a share of Common Stock in effect at any time
and as adjusted from time to time is hereinafter sometimes referred to as the
"Exercise Price". This Warrant, together with warrants of like tenor,
constituting in the aggregate warrants (the "Warrants") to purchase One Hundred
and Sixty Thousand (160,000) shares of Common Stock, was originally issued
pursuant to an underwriting agreement between the Company and Commonwealth
Associates ("Commonwealth"), in connection with a public offering through
Commonwealth of One Million Six Hundred Thousand (1,600,000) shares of Common
Stock, in consideration of $160 received for the Warrants.
(a) EXERCISE OF WARRANT.
(1) This Warrant may be exercised in whole or in part at any
time or from time to time on or after _______________, 1998 and until
_______________, 2002 (the "Exercise Period"); provided, however, that (i) if
either such day is a day on which banking institutions in the State of New York
are authorized by law to close, then on the next succeeding day which shall not
be such a day, and (ii) in the event of any merger, consolidation or sale of
substantially all the assets of the Company as an entirety, resulting in any
distribution to the Company's stockholders, prior to _______________, 2002, the
Holder shall have the right to exercise this Warrant commencing at such time
through _____________, 2002 into the kind and amount of shares of stock and
other securities and property (including cash) receivable by a holder of the
number of shares of Common Stock into which this Warrant might have been
exercisable immediately prior thereto. This Warrant may be exercised by
presentation and
<PAGE>
surrender hereof to the Company at its principal office, or at the office of its
stock transfer agent, if any, with the Purchase Form annexed hereto duly
executed and accompanied by payment of the Exercise Price for the number of
Warrant Shares specified in such form. As soon as practicable after each such
exercise of the warrants, but not later than seven (7) days from the date of
such exercise, the Company shall issue and deliver to the Holder a certificate
or certificate for the Warrant Shares issuable upon such exercise, registered in
the name of the Holder or its designee. If this Warrant should be exercised in
part only, the Company shall, upon surrender of this Warrant for cancellation,
execute and deliver a new Warrant evidencing the rights of the Holder thereof to
purchase the balance of the Warrant Shares purchasable thereunder. Upon receipt
by the Company of this Warrant at its office, or by the stock transfer agent of
the Company at its office, in proper form for exercise, the Holder shall be
deemed to be the holder of record of the shares of Common Stock issuable upon
such exercise, notwithstanding that the stock transfer books of the Company
shall then be closed or that certificates representing such shares of Common
Stock shall not then be physically delivered to the Holder.
(2) At any time during the Exercise Period, the Holder may, at
its option, exchange this Warrant, in whole or in part (a "Warrant Exchange"),
into the number of Warrant Shares determined in accordance with this Section
(a)(2), by surrendering this Warrant at the principal office of the Company or
at the office of its stock transfer agent, accompanied by a notice stating such
Holder's intent to effect such exchange, the number of Warrant Shares to be
exchanged and the date on which the Holder requests that such Warrant Exchange
occur (the "Notice of Exchange"). The Warrant Exchange shall take place on the
date specified in the Notice of Exchange or, if later, the date the Notice of
Exchange is received by the Company (the "Exchange Date"). Certificates for the
shares issuable upon such Warrant Exchange and, if applicable, a new warrant of
like tenor evidencing the balance of the shares remaining subject to this
Warrant, shall be issued as of the Exchange Date and delivered to the Holder
within seven (7) days following the Exchange Date. In connection with any
Warrant Exchange, this Warrant shall represent the right to subscribe for and
acquire the number of Warrant Shares (rounded to the next highest integer) equal
to (i) the number of Warrant Shares specified by the Holder in its Notice of
Exchange (the "Total Number") less (ii) the number of Warrant Shares equal to
the quotient obtained by dividing (A) the product of the Total Number and the
existing Exercise Price by (B) the current market value of a share of Common
Stock. Current market value shall have the meaning set forth Section (c) below,
except that for purposes hereof, the date of exercise, as used in such Section
(c), shall mean the Exchange Date.
(b) RESERVATION OF SHARES. The Company shall at all times reserve for
issuance and/or delivery upon exercise of this Warrant such number of shares of
its Common Stock as shall be required for issuance and delivery upon exercise of
the Warrants.
(c) FRACTIONAL SHARES. No fractional shares or script representing
fractional shares shall be issued upon the exercise of this Warrant. With
respect to any fraction of a share called for upon any exercise hereof, the
Company shall pay to the Holder an amount in cash equal to such fraction
multiplied by the current market value of a share, determined as follows:
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(1) If the Common Stock is listed on a national securities
exchange or admitted to unlisted trading privileges on such exchange or listed
for trading on the Nasdaq National Market, the current market value shall be the
last reported sale price of the Common Stock on such exchange or market on the
last business day prior to the date of exercise of this Warrant or if no such
sale is made on such day, the average closing bid and asked prices for such day
on such exchange or market; or
(2) If the Common Stock is not so listed or admitted to
unlisted trading privileges, but is traded on the Nasdaq Small Cap Market, the
current Market Value shall be the average of the closing bid and asked prices
for such day on such market and if the Common Stock is not so traded, the
current market value shall be the mean of the last reported bid and asked prices
reported by the National Quotation Bureau, Inc. on the last business day prior
to the date of the exercise of this Warrant; or
(3) If the Common Stock is not so listed or admitted to
unlisted trading privileges and bid and asked prices are not so reported, the
current market value shall be an amount, not less than book value thereof as at
the end of the most recent fiscal year of the Company ending prior to the date
of the exercise of the Warrant, determined in such reasonable manner as may be
prescribed by the Board of Directors of the Company.
(d) EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. This Warrant is
exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company or at the office of its stock transfer
agent, if any, for other warrants of different denominations entitling the
holder thereof to purchase in the aggregate the same number of shares of Common
Stock purchasable hereunder. This Warrant is not transferable (other than by
will or pursuant to the laws of descent and distribution and except in the event
of any merger, consolidation or sale of substantially all of the assets of the
Company as an entirety as provided under Subsection (a)(1)(ii) hereof) and may
not be assigned or hypothecated for a period of one year from ,199__ except to
and among the officers of Commonwealth, any member of the selling group, or to
and among the officers of any member of the selling group. Upon surrender of
this Warrant to the Company at its principal office or at the office of its
stock transfer agent, if any, with the Assignment Form annexed hereto duly
executed and funds sufficient to pay any transfer tax, the Company shall,
without charge, execute and deliver a new Warrant in the name of the assignee
named in such instrument of assignment and this Warrant shall promptly be
cancelled. This Warrant may be divided or combined with other warrants which
carry the same rights upon presentation hereof at the principal office of the
Company or at the office of its stock transfer agent, if any, together with a
written notice specifying the names and denominations in which new Warrants are
to be issued and signed by the Holder hereof. The term "Warrant" as used herein
includes any Warrants into which this Warrant may be divided or exchanged. Upon
receipt by the Company of evidence satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of loss, theft or
destruction) of reasonably satisfactory indemnification, and upon surrender and
cancellation of this Warrant, if mutilated, the Company will execute and deliver
a new Warrant of like tenor and date.
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Any such new Warrant executed and delivered shall constitute an additional
contractual obligation on the part of the Company, whether or not this Warrant
so lost, stolen, destroyed, or mutilated shall be at any time enforceable by
anyone.
(e) RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be
entitled to any rights of a shareholder in the Company, either at law or equity,
and the rights of the Holder are limited to those expressed in the Warrant and
are not enforceable against the Company except to the extent set forth herein.
(f) ANTI-DILUTION PROVISIONS. The Exercise Price in effect at any time
and the number and kind of securities purchasable upon the exercise of the
Warrants shall be subject to adjustment from time to time upon the happening of
certain events as follows:
(1) In case the Company shall (i) declare a dividend or make a
distribution on its outstanding shares of Common Stock in Common Stock
of the Company, (ii) subdivide or reclassify its outstanding shares of
Common Stock into a greater number of shares, or (iii) combine or
reclassify its outstanding shares of Common Stock into a smaller number
of shares, the Exercise Price in effect at the time of the record date
for such dividend or distribution or of the effective date of such
subdivision, combination or reclassification shall be adjusted so that
it shall equal the price determined by multiplying the Exercise Price
by a fraction, the denominator of which shall be the number of shares
of Common Stock outstanding after giving effect to such action, and the
numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to such action. Such adjustment shall be
made successively whenever any event listed above shall occur.
(2) In case the Company shall hereafter distribute to the
holders of its Common Stock evidences of its indebtedness or assets
(excluding cash dividends or distributions and dividends or
distributions referred to in Subsection (1) above) or subscription
rights or warrants, then in each such case the Exercise Price in effect
thereafter shall be determined by multiplying the Exercise Price in
effect immediately prior thereto by a fraction, the numerator of which
shall be the total number of shares of Common Stock outstanding
multiplied by the current market price per share of Common Stock (as
defined in Subsection (4) below), less the fair market value (as
determined by the Company's Board of Directors) of said assets or
evidences of indebtedness so distributed or of such rights or warrants,
and the denominator of which shall be the total number of shares of
Common Stock outstanding multiplied by such current market price per
share of Common Stock. Such adjustment shall be made successively
whenever such a record date is fixed. Such adjustment shall be made
whenever any such distribution is made and shall become effective
immediately after the record date for the determination of shareholders
entitled to receive such distribution.
(3) Whenever the Exercise Price payable upon exercise of each
Warrant is adjusted pursuant to Subsections (1) and (2) above, the
number of Shares purchasable upon exercise of this Warrant shall
simultaneously be adjusted by multiplying the number of Shares
initially issuable upon exercise of this Warrant by the Exercise Price
in effect on the date hereof and dividing the product so obtained by
the Exercise Price, as adjusted.
(4) For the purpose of any computation under Subsection (2)
above, the current market price per share of Common Stock at any date
shall be deemed to be the average of the daily closing prices for 30
consecutive business days before such date. 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 Stock is admitted to
trading or listed, or if not listed or admitted to trading on such
exchange, the average of the highest reported bid and lowest reported
asked prices as reported 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.
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(5) No adjustment in the Exercise Price shall be required
unless such adjustment would require an increase or decrease of at
least five cents ($0.05) in such price; provided, however, that any
adjustments which by reason of this Subsection (3) are not required to
be made shall be carried forward and taken into account in any
subsequent adjustment required to be made hereunder. All calculations
under this Section (f) shall be made to the nearest cent or to the
nearest one-hundredth of a share, as the case may be. Anything in this
Section (f) to the contrary notwithstanding, the Company shall be
entitled, but shall not be required, to make such changes in the
Exercise Price, in addition to those required by this Section (f), as
it shall determine, in its sole discretion, to be advisable in order
that any dividend or distribution in shares of Common Stock, or any
subdivision, reclassification or combination of Common Stock, hereafter
made by the Company shall not result in any Federal Income tax
liability to the holders of Common Stock or securities convertible into
Common Stock (including Warrants).
(6) Whenever the Exercise Price is adjusted, as herein
provided, the Company shall promptly but no later than 10 days after
any request for such an adjustment by the Holder, cause a notice
setting forth the adjusted Exercise Price and adjusted number of Shares
issuable upon exercise of each Warrant, and, if requested, information
describing the transactions giving rise to such adjustments, to be
mailed to the Holders at their last addresses appearing in the Warrant
Register, and shall cause a certified copy thereof to be mailed to its
transfer agent, if any.
(7) In the event that at any time, as a result of an
adjustment made pursuant to Subsection (1) above, the Holder of this
Warrant thereafter shall become entitled to receive any shares of the
Company, other than Common Stock, thereafter the number of such other
shares so receivable upon exercise of this 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
Stock contained in Subsections (1) to (3), inclusive above.
(8) Irrespective of any adjustments in the Exercise Price or
the number or kind of shares purchasable upon exercise of this Warrant,
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.
(g) OFFICER'S CERTIFICATE. Whenever the Exercise Price shall be
adjusted as required by the provisions of the foregoing Section, 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 shares of Common Stock, 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 the holder or any
holder of a Warrant executed and delivered pursuant to Section (a) and the
Company shall, forthwith after each such adjustment, mail a copy by certified
mail of such certificate to the Holder or any such holder.
(h) NOTICES TO WARRANT HOLDERS. So long as this Warrant shall be
outstanding, (i) if the Company shall pay any dividend or make any distribution
upon the Common Stock or (ii) if the Company shall offer to the holders of
Common Stock, for subscription or purchase by them, any share of any class or
any other rights or (iii) if any capital reorganization of the Company,
reclassification of the capital stock of the Company, consolidation or merger of
the Company with or into another corporation, sale, 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,
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then in any such case, the Company shall cause to be mailed by certified mail to
the Holder, at least fifteen days prior the date specified in (x) or (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 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 is to be fixed,
as of which the holders of Common Stock or other securities shall receive cash
or other property deliverable upon such reclassification, reorganization,
consolidation, merger, conveyance, dissolution, liquidation or winding up.
(i) RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the Company, 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 shares of Common Stock 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 at any time
prior to the expiration of the 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 by a holder of the number of shares of Common Stock
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 Section (i) shall similarly apply to
successive reclassifications, capital reorganizations and changes of shares of
Common Stock and to successive consolidations, mergers, sales or conveyances. In
the event that in connection with any such capital reorganization or
reclassification, consolidation, merger, sale or conveyance, additional shares
of Common Stock shall be issued in exchange, conversion, substitution or
payment, in whole or in part, for a security of the Company other than Common
Stock, any such issue shall be treated as an issue of Common Stock covered by
the provisions of Subsection (1) of Section (f) hereof.
(j) REGISTRATION UNDER THE SECURITIES ACT OF 1933.
(1) The Company shall advise the Holder of this Warrant or of
the Warrant Shares or any then holder of Warrants or Warrant Shares
(such persons being collectively referred to herein as "holders") by
written notice at least four weeks prior to the filing of any
post-effective amendment to the Company's Registration Statement No.
333-___ on Form S-1 ("Registration Statement"), declared effective by
the Securities and Exchange Commission on _____________, 1997 or of any
new registration statement or post-effective amendment thereto under
the Securities Act of 1933 (the "Act") covering
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securities of the Company and will for a period of four years,
commencing one year from the effective date of the Registration
Statement, upon the request of any such holder, include in any such
post-effective amendment or registration statement such information as
may be required to permit a public offering of the Warrants or the
Warrant Shares. The Company shall supply prospectuses and other
documents as the Holder may reasonably request in order to facilitate
the public sale or other disposition of the Warrants or Warrant Shares,
qualify the Warrants and the Warrant Shares for sale in such states as
any such holder designates and do any and all other acts and things
which may be necessary or desirable to enable such Holders to
consummate the public sale or other disposition of the Warrants or
Warrant Shares, and furnish indemnification in the manner as set forth
in Subsection (3)(C) of this Section (j). Such holders shall furnish
information and indemnification as set forth in Subsection (3)(C) of
this Section (j), except that the maximum amount which may be recovered
from the Holder shall be limited to the amount of proceeds received by
the Holder from the sale of the Warrants or Warrant Shares.
(2) If any majority holder (as defined in Subsection (4) of
this Section (j) below) shall give notice to the Company at any time
during the four year period commencing one year from the effective date
of the Registration Statement to the effect that such holder
contemplates (i) the transfer of all or any part of his or its Warrants
and/or Warrant Shares, or (ii) the exercise and/or conversion of all or
any part of his or its Warrants and the transfer of all or any part of
the Warrants and/or Warrant Shares under such circumstances that a
public offering (within the meaning of the Act) of Warrants and/or
Warrant Shares will be involved, and desires to register under the Act,
the Warrants and/or the Warrant Shares, then the Company shall, within
three weeks after receipt of such notice, file a post-effective
amendment to the Registration Statement or a new registration statement
on Form S-1 or such other form as the holder requests, pursuant to the
Act, to the end that the Warrants and/or Warrant Shares may be sold
under the Act as promptly as practicable thereafter and the Company
will use its best efforts to cause such registration to become
effective and continue to be effective (current) (including the taking
of such steps as are necessary to obtain the removal of any stop order)
until the holder has advised that all of the Warrants and/or Warrant
Shares have been sold; provided that such holder shall furnish the
Company with appropriate information (relating to the intentions of
such holders) in connection therewith as the Company shall reasonably
request in writing. In the event the registration statement is not
declared effective under the Act prior to __, 2002, or upon notice by a
majority holder pursuant to this Subsection (2) within 20 days of
receipt of notice provided for herein, the Company does not file a
registration statement then, the Company shall purchase the Warrants
(and/or underlying Common Stock) from the holders for a per share price
equal to, in the case of the Warrants, the fair market value of the
Common Stock less the per share Exercise Price and, in the case of the
underlying Common Stock, at the fair market value of the Common Stock.
The holder may, at its option, request the registration of the Warrants
and/or Warrant Shares in a registration statement made by the Company
as contemplated by Subsection (1) of this Section (j) or in connection
with a request made pursuant to Subsection (2) of this Section (j)
prior to the acquisition of the Warrant Shares upon exercise of the
Warrants and even though the holder has not given notice of exercise of
the Warrants. If the Company determines to include securities to be
sold by it in any registration statement originally requested pursuant
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to this Subsection (2) of this Section such registration shall instead
be deemed to have been a registration under subsection (1) of this
Section (j) and not under Subsection (2) of this Subsection (j). The
holder may thereafter at its option, 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 Warrant Shares were included.
(3) The following provision of this Section (j) shall also be
applicable:
(A) Within ten days after receiving any such notice
pursuant to Subsection (2) of this Section (j), the Company
shall give notice to the other holders of Warrants and Warrant
Shares, advising that the Company is proceeding with such
post-effective amendment or registration statement and
offering to include therein Warrants and/or Warrant Shares of
such other holders, provided that they shall furnish the
Company with such appropriate information (relating to the
intentions of such holders) in connection therewith 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 owner
of Warrants and/or Warrant Shares forthwith supply such a
number of prospectuses meeting the requirements of the Act, as
shall be requested by such owner to permit such holder to make
a public offering of all Warrants and/or Warrant Shares from
time to time offered or sold to such holder, provided that
such holder shall from time to time furnish the Company with
such appropriate information (relating to the intentions of
such holder) in connection therewith as the Company shall
request in writing. The Company shall also use its best
efforts to qualify the Warrant Shares for sale in such states
as such majority holder shall designate.
(B) The Company shall bear the entire cost and
expense of any registration of securities initiated by it
under Subsection (1) of this Section (j) notwithstanding that
Warrants and/or Warrant Shares subject to this Warrant may be
included in any such registration. The Company shall also
comply with one request for registration made by the majority
holder pursuant to Subsection (2) of this Section (j) at its
own expense and without charge to any holder of any Warrants
and/or Warrant Shares. Any holder whose Warrants and/or
Warrant Shares are included in any such registration statement
pursuant to this Section (j) shall, however, bear the fees of
his own counsel and any registration fees, transfer taxes or
underwriting discounts or commissions applicable to the
Warrant Shares sold by him pursuant thereto.
(C) The Company shall indemnify and hold harmless
each such holder and each underwriter, within the meaning of
the Act, who may purchase from or sell for any such holder any
Warrants and/or Warrant Shares from and against any and all
losses, claims, damages and liabilities caused by any untrue
statement or alleged untrue statement of a material fact
contained in the Registration
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<PAGE>
Statement or any post-effective amendment thereto or any
registration statement under the Act or any prospectus
included therein required to be filed or furnished by reason
of this Section (j) or caused by any omission or alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, except insofar as such losses, claims, damages or
liabilities are caused by any such untrue statement or alleged
untrue statement or omission or alleged omission based upon
information furnished or required to be furnished in writing
to the Company by such holder or underwriter expressly for use
therein, which indemnification shall include each person, if
any, who controls any such underwriter within the meaning of
such Act 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 Holder or any other
Holder, specifically for use in the preparation thereof.
(D) Neither the giving of any notice by any such
majority holder nor the making of any request for prospectuses
shall impose any upon such majority holder or owner making
such request any obligation to sell any Warrants and/or
Warrant Shares, or exercise any Warrants.
(4) The term "majority holder" as used in this Section (j)
shall include any owner or combination of owners of Warrants or Warrant
Shares in any combination if the holdings of the aggregate amount of:
(i) the Warrants held by him or among them, plus
(ii) the Warrants which he or they would be holding
if the Warrants for the Warrant Shares owned by him or among
them had not been exercised,
would constitute a majority of the Warrants originally issued.
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The Company's agreements with respect to Warrants or Warrant Shares in
this Section (j) shall continue in effect regardless of the exercise and
surrender of this Warrant.
SYSCOMM INTERNATIONAL CORPORATION
By: _____________________________
[SEAL]
Dated: __________________, 1997
Attest:
__________________________
Secretary
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PURCHASE FORM
Dated _______________, 19__
The undersigned hereby irrevocably elects to exercise the within
Warrant to the extent of purchasing _______ shares of Common Stock and hereby
makes payment of _______________ in payment of the actual exercise price
thereof.
INSTRUCTIONS FOR REGISTRATION OF STOCK
Name: _______________________________________
(Please typewrite or print in block letters)
Address: ____________________________________
Signature: __________________________________
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<PAGE>
ASSIGNMENT FORM
FOR VALUE RECEIVED, _________________________ hereby sells, assigns and
transfers unto
Name ______________________________________
(Please typewrite or print in block letters)
Address ___________________________________
the right to purchase Common Stock represented by this Warrant to the extent of
___________ shares as to which such right is exercisable and does hereby
irrevocably constitute and appoint ____________________________ as attorney, to
transfer the same on the books of the Company with full power of substitution in
the premises.
Date _______________, 199___
Signature _________________________
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SYSCOMM INTERNATIONAL CORPORATION
1988 STOCK OPTION PLAN
1. PURPOSE; RESTRICTIONS ON AMOUNT AVAILABLE UNDER THE PLAN
This 1988 Stock Option Plan ("Plan") is intended to encourage stock
ownership by employees of ("Corporation"), its divisions and Subsidiary
Corporations, so that they may acquire or increase their proprietary interest in
the Corporation, and to encourage such employees and directors to remain in the
employ of the Corporation, and to put forth maximum efforts for the success of
the business. It is further intended that options granted by the Committee
pursuant to Section 422A of the Internal Revenue Code of 1986, as thereafter
amended, and the regulations issued thereunder ("Code") and options granted by
the Committee pursuant to Section 7 of this Plan shall constitute non-qualified
stock options ("Non-qualified Stock Options"). Options granted under the Plan
("Options") may be accompanied by either stock appreciation rights ("Rights") or
limited stock appreciation rights ("Limited Rights"), or both, as hereinafter
set forth.
2. DEFINITIONS
As used in this Plan, the following words and phrases shall
have the meanings indicated:
(a) "DISABILITY" shall mean an Optionee's inability to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment that can be expected to result in death or that
has lasted or can be expected to last for a continuous period of not less than
twelve (12) months.
(b) "FAIR MARKET VALUE" per share as of a particular date
shall mean (i) the closing sales price per share of Common Stock on a national
securities exchange for the last preceding date on which there was a sale of
such Common Stock on such exchange, or (ii) if the shares of Common Stock are
then traded on an over-the-counter market for the last preceding date on which
there was a sale of such Common Stock in such market, or (iii) if the shares of
Common Stock are not then listed on a national securities exchange or traded in
an over-the-counter market, such value as the Committee in its discretion may
determine.
(c) "PARENT CORPORATION" shall mean any corporation (other
than the Corporation) in an unbroken chain of corporation ending with the
employer corporation if, at the time granting an Option, each of the corporation
other than the employer corporation owns stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
(d) "SUBSIDIARY CORPORATION" shall mean any corporation (other
than the Corporation) in an unbroken chain of corporation beginning with the
employer corporation if, at the time of granting an Option, each of the
corporation other than the last corporation in the unbroken chain owns stock
possessing fifty percent (50%) or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.
(e) "TEN PERCENT STOCKHOLDER" shall mean an Optionee who, at
the time an Incentive Stock Option is granted, owns stock possessing more than
ten percent (10%) of the total combined voting power of all classes of stock of
the Corporation or of its Parent or Subsidiary Corporations.
3. ADMINISTRATION
<PAGE>
The plan shall be administered by the Stock Option and
Compensation Committee (the "Committee"), consisting of not less than three
members of the Board of Directors of the Corporation (the "Board"), none of whom
are or shall have been for at least one year prior to such appointment eligible
to participate in the Plan or any other plan of the Corporation or any of its
affiliates entitling the participants therein to acquire stock, stock options or
stock appreciation rights of the Corporation or any of its affiliates.
The Committee shall have the authority in its discretion,
subject to and not inconsistent with the express provisions of the Plan, to
administer the Plan and to exercise all the powers and authorities either
specifically granted to it under the Plan or necessary or advisable in the
administration of the Plan, including, without limitation, the authority to
grant Options; to determine which Options shall constitute incentive Stock
Options and which Options shall constitute Non-qualified Stock Options; to
determine which Options if any) shall be accompanied by Rights or Limited
Rights; to determine the purchase price of the shares of Common Stock covered by
each Option (the "Option Price"); to determine the persons to whom, and the time
or times at which, Options shall be granted; to determine the number of shares
to be covered by each Option; to interpret the Plan; to prescribe, amend and
rescind rules and regulations relating to the Plan; to determine the terms and
provisions of the Option Agreements (which need not be identical) entered into
in connection with Options granted under the Plan; and to make all other
determinations deemed necessary or advisable for the administration of the Plan.
The Committee may delegate to one or more of its members or to one or more
agents such administrative duties as it may deem advisable, and the Committee or
any person to whom it has delegated duties as aforesaid may employ one or more
persons to render advice with respect to any responsibility the Committee or
such person may have under the Plan.
The Board shall fill all vacancies, however caused, in the
Committee. The Board may from time to time appoint additional members to the
Committee, and may at any time remove one or more Committee members and
substitute others. One member of the Committee shall be selected by the Board as
chairman. The Committee shall hold its meetings at such times and places as it
shall deem advisable. All determinations of the Committee shall be made by a
majority of its members either present in person or participating by conference
telephone at any meeting or by written consent. The Committee may appoint a
secretary and make such rules and regulations for the conduct of its business as
it shall deem advisable, and shall keep minutes of its meetings.
No member of the Board or Committee shall be liable for any
action taken or determination made in good faith with respect to the Plan or any
Option, Right or Limited Right granted hereunder.
4. ELIGIBILITY
Options may be granted to employees (including, without
limitation, officers and directors who are employees) of the Corporation or its
present or future divisions and Subsidiary Corporations. In determining the
persons to whom Options shall be granted and the number of shares to be covered
by each Option and any accompanying Rights or Limited Rights, the Committee
shall take into account the duties of the respective persons, their present and
potential contributions to the success of the Corporation and such other factors
as the Committee shall deem relevant in connection with accomplishing the
purpose of the Plan. A person to whom an Option has been granted hereunder is
sometimes referred to herein as an "Optionee".
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<PAGE>
An Optionee shall be eligible to receive more than one grant
of an Option during the term of the Plan, but only on the terms and subject to
the restrictions hereinafter set forth.
5. STOCK
The stock subject to Options, Rights and Limited Rights
hereunder shall be shares of the Corporation's Common Stock, par value of $1.00
per share ("Common Stock"). Such shares may, in whole or in part, be authorized
but unissued shares or shares that shall have been or that may be reacquired by
the Corporation. The aggregate number of shares of Common Stock as to which
Options, Rights and Limited Rights may be granted from time to time under the
Plan shall not exceed 200,000. The limitation established by the preceding
sentence shall be subject to adjustment as provided In Section 8(1) hereof.
In the event that any outstanding Option under the Plan for
any reason expires or is terminated without having been exercised in full or
surrendered in full in connection with the exercise of a Right or Limited Right,
the shares of Common Stock allocable to the unexercised portion of such Option
shall (unless the Plan shall have been terminated) become available for
subsequent grants of Options, Rights and Limited Rights under the Plan.
6. INCENTIVE STOCK OPTIONS
Options granted pursuant to this Section 6 are intended to
constitute Incentive Stock Options and shall be subject to the following special
terms and conditions, in addition to the general terms and conditions specified
in Section 8 hereof.
(a) VALUE OF SHARES. The aggregate Fair Market Value
(determined as of the date the Incentive Stock Option is granted) of the shares
of Common Stock with respect to which Options granted under this Plan and all
other plans of the Corporation and any Subsidiary Corporation become exercisable
for the first time by an Optionee during any calendar year shall not exceed
$100,000.
(b) TEN PERCENT STOCKHOLDER. In the case of an Incentive Stock
Option granted to a Ten Percent Stockholder, (i) the Option Price shall not be
less than one hundred ten percent (110%) of the Fair Market Value of the shares
of Common Stock of the Corporation on the date of grant of such Incentive Stock
Option, and (ii) the exercise period shall not exceed five (5) years from the
date of grant of such Incentive Stock Option.
7. NON-QUALIFIED STOCK OPTIONS.
Options granted pursuant to this Section 7 are intended to
constitute Non-qualified Stock Options and shall be subject only to the general
terms and conditions specified in Section 8 hereof.
8. TERMS AND CONDITIONS OF OPTIONS.
Each Option granted pursuant to the Plan shall be evidenced by
a written Option Agreement between the Corporation and the Optionee, which
agreement shall comply with and be subject to the following terms and
conditions:
(a) NUMBER OF SHARES. Each Option Agreement shall state the
number of shares of Common Stock to which the Option relates.
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<PAGE>
(b) TYPE OF OPTION. Each Option Agreement shall specifically
identify the portion, if any of the Option which constitutes and Incentive Stock
Option and the portion, if any, which constitutes a Non-qualified Stock Option.
(c) OPTION PRICE. Each Option Agreement shall state the Option
Price, which, in the case of Incentive Stock Options, shall be not less than one
hundred percent (100%) of the Fair Market Value of the shares of Common Stock of
the Corporation on the date of grant of the Option. The Option Price shall be
subject to adjustment as provided in Section 8(1) hereof. The date on which the
Committee adopts a resolution expressly granting an Option shall be considered
the day on which such Option is granted.
(d) MEDIUM AND TIME OF PAYMENT. The Option Price shall be paid
in full, at the time of exercise, in cash or in shares of Common Stock, having a
Fair Market Value equal to such Option Price or in a combination of cash and
such shares, and may be effected in whole or in part (i) with monies received
from the Corporation at the time of exercise as a compensatory cash payment, or
(ii) with monies borrowed from the Corporation pursuant to repayment terms and
conditions as shall be determined from time to time by the Committee, in its
discretion, separately with respect to each exercise of Options and each
Optionee; provided, however, that each such method and time for payment and each
such borrowing and terms and conditions of repayment shall be permitted by and
be in compliance with applicable law, and provided, further, in the event the
Option Price is paid with monies borrowed from the Corporation, such fact shall
be noted conspicuously on the certificate for such shares in accordance with
applicable law.
(e) TERM AND EXERCISE OF OPTIONS. Options shall be exercisable
over the exercise period as and at the times and upon the conditions that the
Committee may determine, as reflected in the Option Agreement; provided,
however, that the Committee shall have the authority to accelerate the
exercisability of any outstanding Option at such time and under such
circumstances as it, in its sole discretion, deems appropriate. The exercise
period shall be determined by the Committee; provided, however that in the case
of an Incentive Stock Option such exercise period shall not exceed ten (10)
years from the date of grant of such Option. The exercise period shall be
subject to earlier termination as provided in Sections 8(f) and 8(g) hereof. An
Option may be exercised, as to any or all full shares of Common Stock as to
which the Option has become exercisable, by giving written notice of such
exercise to the Committee; provided, however, that an Option may not be
exercised at any one time as to fewer than 100 shares (or such number of shares
as to which the Option is then exercisable if such number of shares is less than
100).
(f) TERMINATION. Except as provided in this Section 8(f) and
in Section 8(g) hereof, an Option may not be exercised unless the Optionee is
then in the employ of the Corporation or a division or Subsidiary Corporation
thereof (or a corporation or a Parent or Subsidiary Corporation of such
corporation issuing or assuming the Option in a transaction to which Section
425(a) of the Code applies), and unless the Optionee has remained continuously
so employed since the date of grant of the Option. In the event that the
employment of an Optionee shall terminate (other than by reason of death,
disability or retirement), all Options of such Optionee that are exercisable at
the time of such termination may, unless earlier terminated in accordance with
their terms, be exercised within three (3) months after such termination;
provided, however, that if the employment of an Optionee shall terminate for
cause, all Options theretofore granted to
4
<PAGE>
such Optionee shall, to the extent not theretofore exercised, terminate
forthwith. Nothing in the Plan or in any Option granted pursuant hereto shall
confer upon an individual any right to continue in the employ of the Corporation
or any of its division or Subsidiary Corporations or interfere in any way with
the right of the Corporation or any such division or Subsidiary Corporation to
terminate such employment.
(g) DEATH, DISABILITY OR RETIREMENT OF OPTIONEE. If an
Optionee shall die while employed by the Corporation or a Subsidiary
Corporation, or within three (3) months after termination of such Optionee's
employment, other than for cause, or if the Optionee's employment shall
terminate by reason of Disability or Retirement, all Options theretofore granted
to such Optionee (to the extent otherwise exercisable) may, unless earlier
terminated in accordance with their terms, be exercised by the Optionee or by
the Optionee's estate or by a person who acquired the right to exercise such
Option by bequest or inheritance or otherwise by reason of the death or
Disability of the Optionee, at any time within one year after the date of death,
Disability or retirement of the Optionee.
(h) NON-TRANSFERABILITY OF OPTIONS. Options granted under the
Plan shall not be transferable otherwise than by will or by the laws of descent
and distribution, and Options may be exercised, during the lifetime of the
Optionee, only by the Optionee or by his guardian or legal representative.
(i) EFFECT OF CERTAIN CHANGES. (1) If there is any change in
the number of shares of Common Stock through the declaration of stock dividends,
or through recapitalization resulting in stock splits or combinations or
exchanges of such shares covered by outstanding Options, Rights and Limited
Rights, and the price per share of such Options or the applicable market value
of Rights or Limited Rights, shall be proportionately adjusted by the Committee
to reflect any increase or decrease in the number if issued shares of Common
Stock; provided, however, that any fractional shares resulting from such
adjustment shall be eliminated.
(2) In the event of the proposed dissolution or
liquidation of the Corporation, in the event of any corporate separation or
division, including, but not limited to, split-up, spin-off or spin-off, or in
the event of a merger or consolidation of the Corporation with another
corporation, the Committee may provide the holder of each Option then
exercisable shall have the right to exercise such Option (at its then Option
Price) solely for the kind and amount of shares of stock and other securities,
property, cash or any combination thereof receivable upon such dissolution,
liquidation or corporate separation or division, or merger or consolation by a
holder of the number of shares of Common Stock for which such Option might have
been exercised immediately prior to such dissolution, liquidation, or corporate
separation or division, or merger or consolidation; or the Committee may
provide, in the alternative, that each Option granted under the Plan shall
terminate as of a date to be fixed by the Committee; provided, however, that not
less than thirty (30) days' written notice of the date so fixed shall be given
to each Optionee. who shall have the right, during the period of thirty (30)
days preceding such termination, to exercise the Options as to all or any part
of the share of Common Stock covered thereby, including shares as to which such
Options would not otherwise be exercisable; provided, further, that failure to
provide such notice shall not invalidate or affect the action with respect to
which such notice was required.
(3) If while unexercised Options remain outstanding
under the Plan:
(i) any corporation, person or other entity
(other than the Corporation) makes a tender or exchange offer for shares of the
Corporation's Common Stock pursuant to which purchases are made ("Offer"), or
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(ii) The stockholders of the Corporation
approve a definitive agreement to merge or consolidate the Corporation with or
into another corporation or to sell or otherwise dispose of all or substantially
all of its assets, or adopt a plan of liquidation, or
(iii) the "beneficial ownership" (as defined
in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") of securities representing more than 30% of the combined voting
power of the Corporation is acquired by any "person" as defined in sections
13(d) and 14(d) of the Exchange Act, or
(iv) during any period of two consecutive
years, individuals who at the beginning of such period were members of the Board
cease for any reason to constitute at least a majority thereof (unless the
election, or the nomination for election by the Corporation's stockholders, of
each new director was approved by a vote of at least two-thirds of the directors
then still in office who were directors at the beginning of such period).
Then from and after the date of the first purchase of Common
Stock pursuant to such Offer, or the date of any such stockholder approval or
adoption, or the date on which public announcement of the acquisition of such
percentage shall have been made, or the date on which the change in the
composition of the Board set forth above shall have occurred, whichever is
applicable (the applicable date being referred to herein as the "Acceleration
Date"), all Options shall be exercisable in full, whether or not otherwise
exercisable, but subject, however, to the discretion of the Committee. Following
the Acceleration Date, (a) the Committee shall in the case of a merger,
consolidation or sale or disposition of assets, promptly make an appropriate
adjustment to the number and class of shares of Common Stock available for
Options and to the amount and kind of shares or other securities or property
receivable upon exercise of any outstanding Options after the effective date of
such transaction and the price thereof, and (b) the Committee may, in its
discretion, permit the cancellation of outstanding Options in exchange for a
cash payment in an amount per share subject to any such Option equal to the
amount that would be payable pursuant to Section 10(b) hereof upon exercise of a
Limited Right under those circumstances.
(4) Paragraphs (2) and (3) of the Section 8(1) shall not apply
to a merger or consolidation in which the Corporation is the surviving
corporation and shares of Common Stock are not converted into or exchanged for
stock, securities of any other corporation, cash or any other thing of value.
Notwithstanding the preceding sentence, in case of any consolidation or merger
of another corporation into the Corporation in which the Corporation is the
surviving corporation and in which there is a reclassification or change
(including a change to the right to receive cash or other property) of the
shares of Common Stock (other than a change in par value, or from par value to
no par value, or as a result of a subdivision or combination, but including any
change in such shares into two or more classes or series of shares), the
Committee may provide that the holder of each Option then exercisable shall have
the right to exercise such Option solely for the kind and amount of shares of
stock and other securities (including those of any new direct or indirect parent
of the Corporation), property cash or any combination thereof receivable upon
such reclassification, change, consolidation or merger by the holder of the
number of shares of Common Stock for which such Option might have been
exercised.
(5) In the event of a change in the Common Stock of the
Corporation as presently constituted, which is limited to a change of all of its
authorized shares with par value into the same number of shares with a different
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par value or without par value, the shares resulting from any such change shall
be deemed to be the Common Stock within the meaning of the Plan.
(6) To the extent that the foregoing adjustments relate to
stock or securities of the Corporation, such adjustments shall be made by the
Committee, whose determination in that respect shall be final, binding and
conclusive, provided that each Incentive Stock Option granted pursuant to this
Plan shall not be adjusted in a manner that causes such option to fail to
continue to qualify as an Incentive Stock Option within the meaning of Section
422A of the Code.
(7) Except as here-in-before expressly provided In this
Section 8(1), the Optionee shall have no rights by reason of any subdivision or
consolidation of shares of stock of any class or the payment of any stock
dividend or any other increase or decrease in the number of shares of stock of
any class or by reason of any dissolution, liquidation, merger, or consolidation
or spin-off of assets or stock of another corporation; and any issue by the
Corporation of shares of stock of any class, or securities convertible into
shares of stock of any class, shall not affect, and no adjustment by reason
thereof shall be made with respect to, the number or price of shares of Common
Stock subject to the Option. The grant of an Option pursuant to the Plan shall
not affect in any way the right or power of the Corporation to make adjustments,
reclassification, reorganizations or changes of its capital or business
structures or to merge or to consolidate or to dissolve, liquidate or sell, or
transfer all or part of its business or assets.
(j) RIGHTS AS STOCKHOLDER. An Optionee or a transferee of an
Option shall have no rights as a stockholder with respect to any shares covered
by the Option until the date of the issuance of a stock certificate to him for
such shares. No adjustment shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property) or distribution of
other rights for which the record date is prior to the date such stock
certificate is issued, except as provided in Section 8(1) hereof.
(k) OTHER PROVISIONS. The Option Agreements authorized under
the Plan shall contain such other provisions, including, without limitation, (i)
the granting of either Rights of Limited Rights, or both (ii) the imposition of
restrictions upon the exercise of an Option, and (iii) in the case of an
Incentive Stock Option. The inclusion of any condition not inconsistent with
such Option qualifying as an Incentive Stock Option as the Committee shall deem
advisable.
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9. STOCK APPRECIATION RIGHTS
(a) The Committee shall have the authority to grant Rights to
the holder of any Option granted under the Plan (the "Related SAR Option") with
respect to all or some of the shares of Stock covered by such Related SAR
Option. A Right may be granted either at the time of the grant of the Related
SAR Option or any time thereafter during its term (except as otherwise provided
in Section 12 hereof). Each Right shall be exercisable only if, and to the
extent that, the Related SAR Option is exercisable and, in the case of Rights
granted in respect of Incentive Stock Options, only when the Fair Market Value
per share of Common Stock exceeds the Option Price per share. Upon the exercise
of a Right, the Related SAR Option is exercisable and, in the case of Rights
granted in respect of Incentive Stock Options, only when the Fair Market Value
per share of Common Stock exceeds the Option Price per share. Upon the exercise
of a Right, the Related SAR Option shall cease to be exercisable to the extent
of the shares of Common Stock with respect to which such Right is exercised, but
shall be considered to have been exercised to that extent for purposes of
determining the number of shares available for the grant of further Options,
Rights and Limited Rights pursuant to the Plan. Upon the exercise or termination
of a Related SAR Option, the Right with respect to such Related SAR Option shall
terminate to the extent of the shares of Common Stock with respect to which the
Related SAR Option was exercised or terminated.
(b) Upon the exercise of a Right, the holder thereof, subject
to paragraph (e) of this Section 9, shall be entitled at the holder's election
to receive either:
(i) That number of shares of Common Stock equal to
the quotient computed by dividing the Spread (as defined in paragraph (c)
hereof) by the Fair Market Value per share of Common Stock on the date of
exercise of the Right; provided, however, that in lieu of fractional shares, the
Corporation shall pay cash equal to the same fraction of the Fair Market Value
per share of Common Stock on the date of exercise of the Right, or
(ii) an amount in cash equal to the Spread, or
(iii) a combination of cash and a number of shares
calculated as provided in clause (a) or this paragraph (b) (after reducing the
Spread by such cash amount), plus cash in lieu of any fractional shares as above
provided.
(c) The term "Spread" as used in this Section 9 shall mean an
amount equal to the product computed by multiplying (i) the excess of (A) the
Fair Market Value per share of Common Stock on the date the Right is exercised
over (B) the Option Price per share at which the Related SAR Option is
exercisable, by (ii) the number of shares with respect to which such Right is
exercised.
(d) The term "Merger Spread" as used in this Section 10 shall
mean an amount equal to the product computed by multiplying (i) the excess of
(A) the Merger Price per Share over (B) the Option Price per share of Common
Stock at which the Related SAR Option is exercisable, by (ii) the number of
shares of Common Stock with respect to which such Limited Right is being
exercised.
(e) The term "Acquisition Price per Share" as used in this
Section 10 shall mean, with respect to the exercise of any Limited Right by
reason of an acquisition of Common Stock described in Section 8(i)(3)(iii), the
greater of (i) the highest price per share shown on the Statement of Schedule
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13D or amendment thereto filed by the holder of 30% or more of the Corporation's
Common Stock which gives rise to the exercise of such Limited Right, and (ii)
the highest Fair Market Value per share of Common Stock during the sixty-day
period ending on the date the Limited Right is exercised.
(f) The term "Spread" as used in this Section shall mean, with
respect to the exercise of any Limited Right by reason of a change in the
composition of the Board described In Section 8(i)(3)(iv), an amount equal to
the product computed by multiplying (i) the excess of (A) the highest Fair
Market Value per share of Common Stock during the sixty-day period ending on the
date the Limited Right is exercised over (B) the Option Price per share of
Common Stock of which the Related SAR Option is exercisable, by (ii) the number
of shares of Common Stock with respect to which the Limited Right is being
exercised.
(g) A Limited Right shall not be transferrable except by will
or by laws of descent and distribution. During the lifetime of an Optionee, the
Limited Right shall be exercisable only by such Optionee or by the Optionee's
guardian or legal representative.
(h) Each Limited Right shall be granted on such terms and
conditions not inconsistent with the Plan as the Committee may determine.
(i) To exercise a Limited Right, the Optionee shall (i) give
written notice thereof to the Committee in form satisfactory to the Committee
specIfying the number of shares of Common Stock with respect to which the
Limited Right is being exercised, and (ii) if requested by the Committee,
deliver the Option Agreement to the Committee who shall endorse thereon a
notation of such exercise and return the Option agreement to the Optionee. The
date of exercise of a Limited Right that is validly exercised shall be deemed to
be the date on which there shall have been delivered the instruments referred to
in the first sentence of this Paragraph (i).
(j) The Corporation intends that this Section 10 shall comply
with the requirements of the Rule during the term of the Plan. Should any
provision of this Section 10 not be necessary to comply with the requirements of
the Rule, the Board may amend the Plan to add to or modify the provisions of the
Plan accordingly.
10. AGREEMENT BY OPTIONEE REGARDING WITHHOLDING TAXES.
If the Committee shall so require, as a condition of exercise,
each Optionee shall agree that:
(a) no later than the date of exercise of any Option, Right or
Limited Right granted hereunder, the Optionee will pay to the Corporation or
make arrangements satisfactory to the Committee regarding payment of any
federal, state or local taxes of any kind required by law to be withheld upon
the exercise of such Option, Right or Limited Right, and
(b) the Corporation shall, to the extent permitted or required
by law, have the right to deduct federal, state and local taxes of any kind
required by law to be withheld upon the exercise of such Option, Right or
Limited Right from any payment of any kind otherwise due to the Optionee.
9
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11. TERM OF PLAN.
Options, Rights and Limited Rights may be granted pursuant to
the Plan from time to time within a period of ten (10) years from the date the
Plan is adopted by the Board, or the date the Plan is approved by the
stockholders of the Corporation, whichever is earlier.
12. AMENDMENT AND TERMINATION OF THE PLAN.
The Board at any time and from time to time may suspend,
terminate, modify or amend the Plan; provided, however, that any amendment that
would materially increase the aggregate number of shares of Common Stock as to
which Options, Rights and Limited Rights may be granted under the Plan or
materially increase the benefits accruing to participants under the Plan or
materially modify the requirements as to eligibility for participation in the
Plan shall be subject to the approval of the holders of a majority of the Common
Stock issued and outstanding, except that any such increase or modification that
may result from adjustments authorized by Section 8(i) hereof shall not require
such approval. Except as provided in Section 8 hereof, no suspension,
termination, modification or amendment of the Plan may adversely affect any
Option, Right or Limited Right previously granted, unless the written consent of
the Optionee is obtained.
13. APPROVAL OF STOCKHOLDERS.
The Plan shall take effect upon its adoption by the Board of
Directors but shall be subject to the approval of the holders of a majority of
the issued and outstanding shares of Common Stock of the Corporation, which
approval must occur within twelve months after the date the Plan is adopted by
the Board.
14. EFFECT OF HEADINGS.
The section and subsection headings contained herein are for
convenience only and shall not affect the construction hereof.
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Table of Contents
INVENTORY AND WORKING CAPITAL
FINANCING AGREEMENT
Section 1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . .3
1.1. Special Definitions . . . . . . . . . . . . . . . . . .3
1.2. Other Defined Terms . . . . . . . . . . . . . . . . . . 11
1.3. Attachments . . . . . . . . . . . . . . . . . . . . . . 11
Section 2. CREDIT LINE/FINANCE CHARGES/OTHER CHARGES . . . . . . . 11
2.1. Credit Line . . . . . . . . . . . . . . . . . . . . . . 11
2.2. Product Advances . . . . . . . . . . . . . . . . . . . . 11
2.3. A/R Advances . . . . . . . . . . . . . . . . . . . . . . 13
2.4. Finance and Other Charges . . . . . . . . . . . . . . . 14
2.5. Statements Regarding Customer's Account. . . . . . . . . 15
2.6. Shortfall. . . . . . . . . . . . . . . . . . . . . . . . 15
2.7. Application of Payments. . . . . . . . . . . . . . . . . 15
2.8. Prepayment and Reborrowing By Customer . . . . . . . . . 16
Section 3. CREDIT LINE/ADDITIONAL PROVISIONS . . . . . . . . . . . 16
3.1. Ineligible Accounts. . . . . . . . . . . . . . . . . . . 16
3.2. Reimbursement for Charges. . . . . . . . . . . . . . . . 18
3.3. Lockbox and Special Account. . . . . . . . . . . . . . . 18
3.4. Collections. . . . . . . . . . . . . . . . . . . . . . . 18
3.5. Application of Remittances and Credits . . . . . . . . . 19
3.6. Power of Attorney. . . . . . . . . . . . . . . . . . . . 19
Section 4. SECURITY -- COLLATERAL. . . . . . . . . . . . . . . . . 20
4.1. Grant. . . . . . . . . . . . . . . . . . . . . . . . . . 20
4.2. Further Assurances . . . . . . . . . . . . . . . . . . . 21
Section 5. CONDITIONS PRECEDENT. . . . . . . . . . . . . . . . . . 21
5.1. Conditions Precedent to the Effectiveness of
This Agreement . . . . . . . . . . . . . . . . . . . . 21
5.2. Conditions Precedent to Each Advance . . . . . . . . . . 22
Section 6. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . 23
6.1. Organization and Qualifications. . . . . . . . . . . . . 23
<PAGE>
6.2. Rights in Collateral; Priority of Liens. . . . . . . . . 23
6.3. No Conflicts . . . . . . . . . . . . . . . . . . . . . . 23
6.4. Enforceability . . . . . . . . . . . . . . . . . . . . . 24
6.5. Locations of Offices, Records and Inventory. . . . . . . 24
6.6. Fictitious Business Names. . . . . . . . . . . . . . . . 24
6.7. Organization . . . . . . . . . . . . . . . . . . . . . . 24
6.8. No Judgments or Litigation . . . . . . . . . . . . . . . 24
6.9. No Defaults. . . . . . . . . . . . . . . . . . . . . . . 24
6.10. Labor Matters . . . . . . . . . . . . . . . . . . . . . 25
6.11. Compliance with Law . . . . . . . . . . . . . . . . . . 25
6.12. ERISA . . . . . . . . . . . . . . . . . . . . . . . . . 25
6.13. Compliance with Environmental Laws . . . . . . . . . . . 25
6.14. Intellectual Property . . . . . . . . . . . . . . . . . 26
6.15. Licenses and Permits . . . . . . . . . . . . . . . . . . 26
6.16. Investment Company . . . . . . . . . . . . . . . . . . . 26
6.17. Taxes and Tax Returns . . . . . . . . . . . . . . . . . 26
6.18. Status of Accounts . . . . . . . . . . . . . . . . . . . 27
6.19. Affiliate/Subsidiary Transactions . . . . . . . . . . . 27
6.20. Accuracy and Completeness of Information . . . . . . . . 27
6.21. Recording Taxes . . . . . . . . . . . . . . . . . . . . 27
6.22. Indebtedness . . . . . . . . . . . . . . . . . . . . . . 27
Section 7. AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . 27
7.1. Financial and Other Information. . . . . . . . . . . . . 27
7.2. Location of Collateral . . . . . . . . . . . . . . . . . 30
7.3. Changes in Customer. . . . . . . . . . . . . . . . . . . 30
7.4. Corporate Existence . . . . . . . . . . . . . . . . . . 31
7.5. ERISA . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.6. Environmental Matters . . . . . . . . . . . . . . . . . 31
7.7. Collateral Books and Records/Collateral Audit . . . . . 32
7.8. Insurance; Casualty Loss . . . . . . . . . . . . . . . . 32
7.9. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 33
7.10. Compliance With Laws . . . . . . . . . . . . . . . . . . 33
7.11. Fiscal Year. . . . . . . . . . . . . . . . . . . . . . . 33
7.12. Intellectual Property . . . . . . . . . . . . . . . . . 33
7.13. Maintenance of Property . . . . . . . . . . . . . . . . 34
7.14. Collateral . . . . . . . . . . . . . . . . . . . . . . . 34
7.15. Subsidiaries . . . . . . . . . . . . . . . . . . . . . . 35
7.16 Financial Covenants; Additional Covenants . . . . . . . 35
Section 8. NEGATIVE COVENANTS. . . . . . . . . . . . . . . . . . . 35
<PAGE>
8.1. Liens . . . . . . . . . . . . . . . . . . . . . . . . . 35
8.2. Disposition of Assets . . . . . . . . . . . . . . . . . 36
8.3. Corporate Changes . . . . . . . . . . . . . . . . . . . 36
8.4. Guaranties. . . . . . . . . . . . . . . . . . . . . . . 36
8.5. Restricted Payments . . . . . . . . . . . . . . . . . . 36
8.6. Investments . . . . . . . . . . . . . . . . . . . . . . 36
8.7. Affiliate/Subsidiary Transactions . . . . . . . . . . . 37
8.8. ERISA . . . . . . . . . . . . . . . . . . . . . . . . . 37
8.9. Additional Negative Pledges . . . . . . . . . . . . . . 37
8.10. Storage of Collateral with Bailees and Warehousemen . . 38
8.11. Use of Proceeds . . . . . . . . . . . . . . . . . . . . 38
8.12. Accounts . . . . . . . . . . . . . . . . . . . . . . . 38
8.13. Indebtedness. . . . . . . . . . . . . . . . . . . . . . 38
8.14. Loans . . . . . . . . . . . . . . . . . . . . . . . . . 38
Section 9. DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . 38
9.1. Event of Default. . . . . . . . . . . . . . . . . . . . 38
9.2. Acceleration. . . . . . . . . . . . . . . . . . . . . . 40
9.3. Remedies. . . . . . . . . . . . . . . . . . . . . . . . 40
9.4. Waiver. . . . . . . . . . . . . . . . . . . . . . . . . 42
Section 10. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . 42
10.1. Term; Termination . . . . . . . . . . . . . . . . . . .42
10.2. Indemnification . . . . . . . . . . . . . . . . . . . . 43
10.3. Additional Obligations . . . . . . . . . . . . . . . . 43
10.4. Limitation of Liability . . . . . . . . . . . . . . . . 43
10.5. Alteration/Waiver . . . . . . . . . . . . . . . . . . . 44
10.6. Severability . . . . . . . . . . . . . . . . . . . . . 44
10.7. One Loan . . . . . . . . . . . . . . . . . . . . . . . 44
10.8. Additional Collateral . . . . . . . . . . . . . . . . . 44
10.9. No Merger or Novations. . . . . . . . . . . . . . . . . 45
10.10. Paragraph Titles . . . . . . . . . . . . . . . . . . . 45
10.11. Binding Effect; Assignment . . . . . . . . . . . . . . 45
10.12. Notices . . . . . . . . . . . . . . . . . . . . . . . . 45
10.13. Counterparts . . . . . . . . . . . . . . . . . . . . . 46
10.14. Attachment A modifications . . . . . . . . . . . . . . 46
10.15. Submission and Consent to Jurisdiction and
Choice of Law . . . . . . . . . . . . . . . . . . . . 46
10.16. Jury Trial Waiver . . . . . . . . . . . . . . . . . . . 47
<PAGE>
INVENTORY AND WORKING CAPITAL
FINANCING AGREEMENT
This INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT (as amended, supplemented
or otherwise modified from time to time, this "Agreement") amends and restates
that Agreement for Wholesale Financing dated November 26, 1985 and May 7, 1992
(as amended from time to time, the "Financing Agreement") and is hereby made
this __ day of __________, 1996, by and between IBM Credit Corporation with a
place of business at 1500 RiverEdge Parkway, Atlanta GA 30328, a Delaware
corporation, ("IBM Credit"), and Information Technology Services, Inc. with a
place of business at 275 Marcus Blvd., Hauppauge, NY 11788-2022, a New York
corporation, ("Customer").
WITNESSETH
WHEREAS, IBM Credit and Customer are parties to that certain Financing
Agreement pursuant to which IBM Credit finances Customer's acquisition of
inventory and equipment;
WHEREAS, in the course of Customer's operations, Customer intends to
purchase from Persons approved in writing by IBM Credit for the purposes of this
Agreement (the "Authorized Suppliers") computer hardware and software products
manufactured or distributed by or bearing any trademark or trade name of such
Authorized Suppliers for distribution throughout the United States (the
"Products") (as of the date hereof the Authorized Suppliers are as set forth on
Attachment E hereto);
WHEREAS, Customer has requested that IBM Credit finance its purchase of
Products from such Authorized Suppliers and its working capital requirements,
and IBM Credit is willing to provide such financing to Customer subject to the
terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
<PAGE>
acknowledged, the parties hereby agree that the Financing Agreement is hereby
amended and restated in its entirety as follows:
Section 1. DEFINITIONS; ATTACHMENTS
1.1 Special Definitions. The following terms shall have the
following respective meaning in this Agreement:
"A/R Advance": any loan or advance of funds made by IBM Credit to or on behalf
of Customer pursuant to Section 2.3 of this Agreement, including, as the context
may require, a WCO Advance, a PRO Advance and a Takeout Advance.
"A/R Advance Date": the Business Day on which IBM Credit makes an A/R Advance
under this Agreement.
"A/R Advance Term": shall be the collective or individual reference, as the
context may require, to a PRO Advance Term and a WCO Advance Term.
"A/R Finance Charges": as defined on Attachment A.
"Accounts": as defined in the U.C.C.
"Advance": any loan or other extension of credit by IBM Credit to or on behalf
of Customer pursuant to this Agreement including, without limitation, (i)
Product Advances and (ii) A/R Advances.
"Affiliate": with respect to the Customer, any Person meeting one of the
following: (i) at least 10% of such Person's equity is owned, directly or
indirectly, by Customer; (ii) at least 10% of Customer's equity is owned,
directly or indirectly, by such Person; or (iii) at least 10% of Customer's
equity and at least 10% of such Person's equity is owned, directly or
indirectly, by the same Person or Persons. All of Customer's officers,
directors, joint venturers, and partners shall also be deemed to be Affiliates
of Customer for purposes of this Agreement.
"Agreement": as defined in the caption.
<PAGE>
"Auditors": Albrecht, Viggiano, Zurech & Co., PC, or a nationally recognized
firm of independent certified public accountants selected by Customer and
satisfactory to IBM Credit.
"Available Credit": at any time, (1) the Maximum Advance Amount less (2) the
Outstanding Advances at such time.
"Average Daily Balance": the sum of the Outstanding Product Advances or
Outstanding A/R Advances, as the case may be, as of the end of each day during a
calendar month, divided by the number of days in the calendar month.
"Borrowing Base": as defined in Attachment A.
"Business Day": any day other than a Saturday, Sunday or other day on which
commercial banks in New York, New York are generally closed or on which IBM
Credit is closed.
"Closing Date": the date on which the conditions precedent to the effectiveness
of this Agreement set forth in Section 5.1 hereof are satisfied or waived in
writing by IBM Credit.
"Code": the Internal Revenue Code of 1986, as amended or any successor statute.
"Collateral": as defined in Section 4.1.
"Collateral Management Report": a report to be delivered by Customer to IBM
Credit from time to time, as provided herein, signed by the chief executive
officer or chief financial officer of Customer, in the form of Attachment F
hereto, detailing and certifying, among other items: a summary of Customer's
inventory on hand financed by IBM Credit and Customer's Eligible Accounts, the
amounts and aging of all of Customer's Accounts, Customer's inventory on hand
financed by IBM Credit by quantity, type, model, Authorized Supplier's invoice
price to Customer and the total of the line item values for all inventory listed
on the report, the amounts and aging of Customer's accounts payable as of a
specified date, all of Customer's IBM Credit borrowing activity during a
specified period and the total amount of
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Customer's Borrowing Base as well as Customer's Outstanding A/R Advances,
Outstanding Product Advances, Available Credit and any Shortfall Amount as of a
specified date.
"Common Due Date": (1) the fifth day of a calendar month if the Product
Financing Period or A/R Advance Term, whichever is applicable, expires on the
first through tenth of such calendar month; (2) the fifteenth day of a calendar
month if the Product Financing Period or A/R Advance Term, whichever is
applicable, expires on the eleventh through twentieth of such calendar month;
and (3) the twenty-fifth day of a calendar month if the Product Financing Period
or A/R Advance Term, whichever is applicable, expires on the twenty-first
through the last day of such calendar month.
"Compliance Certificate": a certificate substantially in the form of
Attachment C.
"Credit Line": as defined in Section 2.1.
"Customer": as defined in the caption.
"Default": either (1) an Event of Default or (2) any event or condition which,
but for the requirement that notice be given or time lapse or both, would be an
Event of Default.
"Delinquency Fee Rate": as defined on Attachment A.
"Eligible Accounts": as defined in Section 3.1.
"Environmental Laws": all statutes, laws, judicial decisions, regulations,
ordinances, and other governmental restrictions relating to pollution, the
protection of the environment, occupational health and safety, or to emissions,
discharges or release of pollutants, contaminants, hazardous substances or
wastes into the environment.
"Environmental Liability": any claim, demand, obligation, cause of action,
allegation, order, violation, injury, judgment, penalty or fine, cost or
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expense, resulting from the violation or alleged violation of any Environmental
Laws or the imposition of any Lien pursuant to any Environmental Laws.
"ERISA": the Employee Retirement Income Security Act of 1974, as amended, or any
successor statutes.
"Event of Default": as defined in Section 9.1.
"Financial Statements": the consolidated and consolidating balance sheets,
statements of operations, statements of cash flows and statements of changes in
shareholder's equity of Customer and its Subsidiaries for the period specified,
prepared in accordance with GAAP and consistent with prior practices.
"Floor Plan Lender": any Person who now or hereinafter provides inventory
financing to Customer, provided that such Person executes an Intercreditor
Agreement (as defined in Section 5.1 of this Agreement) or a subordination
agreement with IBM Credit in form and substance satisfactory to IBM Credit.
"Free Financing Period": for each Product Advance, the period, if any, in which
IBM Credit does not charge Customer a financing charge. IBM Credit shall
calculate the Customer's Free Financing Period utilizing a methodology that is
consistent with the methodologies used for similarly situated customers of IBM
Credit. The Customer understands that IBM Credit may not offer or may cease to
offer a Free Financing Period for the Customer's purchases of Products.
"Free Financing Period Exclusion Fee": as defined in Attachment A.
"GAAP": generally accepted accounting principles in the United States as in
effect from time to time.
"Governmental Authority": any nation or government, any state or other political
subdivision thereof, and any entity exercising executive, legislative, judicial,
regulatory or administrative functions of or pertaining to government, and any
corporation or other entity owned or controlled (through stock or capital
ownership or otherwise) by any of the foregoing.
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"Hazardous Substances": all substances, wastes or materials, to the extent
subject to regulation as "hazardous substances" or "hazardous waste" under any
Environmental Laws.
"IBM Credit": as defined in the caption.
"Indebtedness": with respect to any Person, (1) all obligations of such Person
for borrowed money or for the deferred purchase price of property or services
(other than trade liabilities incurred in the ordinary course of business and
payable in accordance with customary practices) or which is evidenced by a note,
bond, debenture or similar instrument, (2) all obligations of such Person under
capital leases, (3) all obligations of such Person in respect of letters of
credit, banker's acceptances or similar obligations issued or created for the
account of such Person, (4) liabilities arising under any interest rate
protection, future, option swap, cap or hedge agreement or arrangement under
which such Person is a party or beneficiary, (5) all obligations under
guaranties of such Person and (6) all liabilities secured by any Lien on any
property owned by such Person even though such Person has not assumed or
otherwise become liable for the payment thereof.
"Investment": with respect to any Person (the "Investor"), (1) any investment by
the Investor in any other Person, whether by means of share purchase, capital
contribution, purchase or other acquisition of a partnership or joint venture
interest, loan, time deposit, demand deposit or otherwise, and (2) any guaranty
by the Investor of any Indebtedness or other obligation of any other Person.
"Lien(s)": any lien, claim, charge, pledge, security interest, deed of trust,
mortgage, other encumbrance or other arrangement having the practical effect of
the foregoing, including the interest of a vendor or lessor under any
conditional sale agreement, capital lease or other title retention agreement.
"Material Adverse Effect": a material adverse effect (1) on the business,
operations, results of operations, assets, or financial condition of the
Customer, (2) on the aggregate value of the
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Collateral or the aggregate amount which IBM Credit would be likely to receive
(after giving consideration to reasonably likely delays in payment and
reasonable costs of enforcement) in the liquidation of such Collateral to
recover the Obligations in full, or (3) on the rights and remedies of IBM Credit
under this Agreement.
"Maximum Advance Amount": at any time, the lesser of (1) the Credit Line and (2)
the Borrowing Base at such time.
"Obligations": all covenants, agreements, warranties, duties, representations,
loans, advances, interest (including interest accruing on or after the filing of
any petition in bankruptcy, or the commencement of any insolvency,
reorganization or like proceeding, relating to Customer, whether or not a claim
for post-filing or post-petition interest is allowed in such proceeding), fees,
reasonable expenses, indemnities, liabilities and Indebtedness of any kind and
nature whatsoever now or hereafter arising, owing, due or payable from Customer
to IBM Credit.
"Other Documents": all security agreements, mortgages, leases, instruments,
documents, guarantees, schedules of assignment, contracts and similar agreements
executed by Customer and delivered to IBM Credit, pursuant to this Agreement or
otherwise, and all amendments, supplements and other modifications to the
foregoing from time to time.
"Other Charges": as set forth in Attachment A.
"Outstanding Advances": at any time of determination, the sum of (1) the unpaid
principal amount of all Advances made by IBM Credit under this Agreement, and
(2) any finance charge, fee, expense or other amount related to Advances charged
to Customer's account with IBM Credit.
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"Outstanding A/R Advances": at any time of determination, the sum of (1) the
unpaid principal amount of all A/R Advances made by IBM Credit under this
Agreement; and (2) any finance charge, fee, expense or other amount related to
A/R Advances charged to Customer's account with IBM Credit.
"Outstanding Product Advances": at any time of determination, the sum of (1) the
unpaid principal amount of all Product Advances made by IBM Credit under this
Agreement; and (2) any finance charge, fee, expense or other amount related to
Product Advances charged to Customer's account with IBM Credit.
"Payment Dates": the fifth, fifteenth and twenty-fifth day of each calendar
month.
"Permitted Indebtedness": any of the following:
(1) Indebtedness to IBM Credit;
(2) Indebtedness described in Section VII of Attachment B;
(3) Indebtedness to any Floor Plan Lender;
(4) Purchase Money Indebtedness;
(5) guaranties in favor of IBM Credit; and
(6) other Indebtedness consented to by IBM Credit in writing prior to incurring
such Indebtedness.
"Permitted Liens": any of the following:
(1) Liens which are the subject of an Intercreditor Agreement, in effect from
time to time between IBM Credit and any other secured creditor;
(2) Purchase Money Security Interests;
(3) Liens described in Section I of Attachment B;
(4) Liens of warehousemen, mechanics, materialmen, workers, repairmen, common
carriers, landlords and other similar Liens arising by operation of law or
otherwise, not waived in connection herewith, for amounts that are not yet due
and payable or being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted if an adequate
<PAGE>
reserve or other appropriate provisions shall have been made therefor as
required to be in conformity with GAAP and an adverse determination in such
proceedings could not reasonably be expected to have a Material Adverse Effect;
(5) attachment or judgment Liens individually or in the aggregate not in excess
of $50,000.00 (exclusive of (A) any amounts that are duly bonded to the
satisfaction of IBM Credit or (B) any amount fully covered by insurance as to
which the insurance company has acknowledged its obligation to pay such judgment
in full);
(6) easements, rights-of-way, restrictions and other similar encumbrances
incurred in the ordinary course of business which, in the aggregate, are not
substantial in amount and which do not materially detract from the value of the
property subject thereto or materially interfere with the ordinary conduct of
the business of Customer;
(7) extensions and renewals of the foregoing permitted Liens; provided that (A)
the aggregate amount of such extended or renewed Liens do not exceed the
original principal amount of the Indebtedness for which it secures, (B) such
Liens do not extend to any property other than property already previously
subject to the Lien and (C) such extended or renewed Liens are on terms and
conditions no more restrictive than the terms and conditions of the Liens being
extended or renewed;
(8) Liens arising from deposits or pledges to secure bids, tenders, contracts,
leases, surety and appeal bonds and other obligations of like nature arising in
the ordinary course of the Customer's business;
(9) Liens for taxes, assessments or governmental charges not delinquent or being
contested, in good faith, by appropriate proceedings promptly instituted and
diligently conducted if an adequate reserve or other appropriate provisions
shall have been made therefor as required in order to be in conformity with GAAP
and an adverse determination in such proceedings could not reasonably be
expected to have a Material Adverse Effect;
<PAGE>
(10) Liens arising out of deposits in connection with workers' compensation,
unemployment insurance or other social security or similar legislation;
(11) Liens arising pursuant to this Agreement; and
(12) other Liens consented to by IBM Credit in writing prior to incurring such
Lien.
"Person": any individual, association, firm, corporation, partnership, trust,
unincorporated organization or other entity whatsoever.
"Policies": all policies of insurance required to be maintained by Customer
under this Agreement or any of the Other Documents.
"Prime Rate": as of the date of determination, the average of the rates of
interest announced by Citibank, N.A., The Chase Manhattan Bank, N.A. and Bank of
America National Trust & Savings Association as their prime or base rate, as of
the last Business Day of the calendar month immediately preceding the date of
determination, whether or not such announced rates are the actual rates charged
by such banking institutions to their most credit-worthy borrowers.
"PRO Advance": an A/R Advance, with a PRO Advance Term, made by IBM Credit to
itself on behalf of Customer to repay all or a portion of a Product Advance that
is due and payable.
"PRO Advance Term": for each PRO Advance, a period, in increments of ten days as
specified by Customer in the Request for A/R Advance with respect to such PRO
Advance, but in no event in excess of thirty days, commencing on the A/R Advance
Date for such PRO Advance.
"Product Advance": any advance of funds made or committed to be made by IBM
Credit for the account of Customer to an Authorized Supplier in respect of an
invoice delivered by such Authorized Supplier to IBM Credit describing Products
purchased by Customer, including any such advance made or committed to be made
as of the
<PAGE>
date hereof pursuant to the Financing Agreement.
"Product Financing Charge": as defined on Attachment A.
"Product Financing Period": for each Product Advance, a period of days equal to
that set forth in Attachment A from time to time, commencing on the invoice date
of such Product Advance.
"Purchase Money Indebtedness": any Indebtedness (including capital leases)
incurred to finance the acquisition of assets (other than assets manufactured or
distributed by or bearing any trademark or trade name of any Authorized
Supplier) to be used in the Customer's business not to exceed the lesser of (1)
the purchase price or acquisition cost of such asset and (2) the fair market
value of such asset.
"Purchase Money Security Interest": any security interest securing Purchase
Money Indebtedness, which security interest applies solely to the particular
asset acquired with the Purchase Money Indebtedness.
"Request for A/R Advance": as defined in Section 2.3.
"Requirement of Law": as to any Person, the articles of incorporation and
by-laws of such Person, and any law, treaty, rule or regulation or determination
of an arbitrator or a court or other governmental authority, in each case
applicable to or binding upon such Person or any of its property or to which
such Person or any of its property is subject.
"Shortfall Amount": as defined in Section 2.6.
"Shortfall Transaction Fee": as defined in Attachment A.
"Subsidiary": with respect to any Person, any corporation or other entity of
which securities or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other Persons performing similar
functions are at the time directly or indirectly owned by such Person.
<PAGE>
"Takeout Advance": an A/R Advance made to existing creditors of Customer on
behalf of Customer, in an amount sufficient to discharge Customer's indebtedness
to such creditor.
"Termination Date": shall mean the date, after the first anniversary of the date
of this Agreement, specified in a written notice by IBM Credit to Customer that
IBM Credit intends to terminate thie Agreement which date shall be no less than
ninety (90) days following date of such notice.
"Voting Stock": securities, the holders of which are ordinarily, in the absence
of contingencies, entitled to elect the corporate directors (or persons
performing similar functions).
"WCO Advance": an A/R Advance, with a WCO Advance Term.
"WCO Advance Term": for each WCO Advance, a period of one hundred eighty (180)
days commencing on the A/R Advance Date for such WCO Advance.
1.2. Other Defined Terms. Terms not otherwise defined in this Agreement which
are defined in the Uniform Commercial Code as in effect in the State of New York
(the "U.C.C.") shall have the meanings assigned to them therein.
1.3. Attachments. All attachments, exhibits, schedules and other addenda hereto,
including, without limitation, Attachment A and Attachment B, are specifically
incorporated herein and made a part of this Agreement.
Section 2. CREDIT LINE/FINANCE CHARGES/OTHER CHARGES
2.1. Credit Line. Subject to the terms and conditions set forth in this
Agreement, on and after the Closing Date to but not including the date that is
the earlier of (x) the date on which this Agreement is terminated pursuant to
Section 10. and (y) the date on which IBM Credit terminates the Credit Line
pursuant to Section 9., IBM Credit agrees to extend to the Customer a credit
line ("Credit Line") in the amount set forth in Attachment A pursuant to which
IBM Credit will make to the Customer, from time to time, Advances in an
aggregate amount
<PAGE>
at any one time outstanding not to exceed the Maximum Advance Amount.
Notwithstanding any other term or provision of this Agreement, IBM Credit may,
at any time and from time to time, in its sole discretion (x) temporarily
increase the amount of the Credit Line above the amount set forth in Attachment
A and decrease the amount of the Credit Line back to the amount of the Credit
Line set forth in Attachment A, in each case upon notice to the Customer and (y)
make Advances pursuant to this Agreement upon the request of Customer in an
aggregate amount at any one time outstanding in excess of the Credit Line.
2.2. Product Advances. (A) Subject to the terms and conditions of this
Agreement, IBM Credit shall make Product Advances in connection with Customer's
purchase of Products from Authorized Suppliers. Customer hereby authorizes and
directs IBM Credit to pay the proceeds of Product Advances directly to the
applicable Authorized Supplier in respect of invoices delivered to IBM Credit
for such Products by such Authorized Supplier and acknowledges that each such
Product Advance constitutes a loan by IBM Credit to Customer pursuant to this
Agreement as if the Customer received the proceeds of the Product Advance
directly from IBM Credit.
(B) No finance charge shall accrue on any Product Advance during the Free
Financing Period, if any, applicable to such Product Advance. Customer shall
repay each Product Advance no later than the Common Due Date for such Product
Advance. Customer may, at its option, repay each Product Advance by requesting
IBM Credit to apply all or any part of the principal amount of an A/R Advance to
the Outstanding Product Advances. Customer's request for such application shall
be made in accordance with Section 2. When so requested and subject to the terms
and conditions of this Agreement, IBM Credit shall apply the amount so requested
to the amounts due in respect of the Outstanding Product Advances. Nothing
contained herein shall relieve Customer of its obligation to repay Product
Advances when due. Each Product Advance shall accrue a finance charge on the
Average Daily Balance thereof from the end of the Free Financing Period, if any,
for such Product Advance, or if no such Free Financing Period shall be in
effect, from the date of invoice for such Product Advance, in each case,
<PAGE>
until such Product Advance shall become due and payable in accordance with the
terms of this Agreement, at a per annum rate equal to the lesser of (a) the
finance charge set forth in Attachment A to this Agreement as the "Product
Financing Charge" and (b) the highest rate from time to time permitted by
applicable law.
In addition, for any Product Advance with respect to which a Free Financing
Period shall not be in effect, Customer shall pay a Free Financing Period
Exclusion Fee. Such fee shall be due and payable on the Common Due Date for such
Product Advance. If it is determined that amounts received from Customer were in
excess of the highest rate permitted by law, then the amount representing such
excess shall be considered reductions to principal of Advances.
(C) Customer acknowledges that IBM Credit does not warrant the Collateral.
Customer shall be obligated to pay IBM Credit in full even if the Collateral is
defective or fails to conform to the warranties extended by the Authorized
Supplier. The Obligations of Customer shall not be affected by any dispute
Customer may have with any manufacturer, distributor or Authorized Supplier.
Customer will not assert any claim or defense which it may have against any
manufacturer, distributor or Authorized Supplier against IBM Credit.
(D) Customer hereby authorizes IBM Credit to collect directly from any
Authorized Supplier any credits, rebates, bonuses or discounts owed by such
Authorized Supplier to Customer ("Supplier Credits"). Any Supplier Credits
received by IBM Credit may be applied by IBM Credit to the Outstanding Advances.
Any Supplier Credits collected by IBM Credit shall in no way reduce Customer's
debt to IBM Credit in respect of the Outstanding Advances until such Supplier
Credits are applied by IBM Credit. Nothing in the Agreement affects Customer's
right to negotiate and resolve issues concerning Supplier Credits with
Authorized Sellers.
(E) IBM Credit may apply any payments and Supplier Credits received by IBM
Credit to reduce finance charges first and then to principal amounts of Advances
owed by Customer. IBM Credit may apply principal payments to the oldest
(earliest) invoices (and related Product Advances) first, but, in any case, all
principal payments will be applied in respect of the Outstanding
<PAGE>
Product Advances made for Products which have been sold, lost, stolen,
destroyed, damaged or otherwise disposed of prior to any other application
thereof.
(F) Customer will indemnify and hold IBM Credit harmless from and against
any claims or demands asserted by any Person relating to or arising from the
Collateral for any reason whatsoever, including, without limitation, the
condition of the Collateral, any misrepresentation made about the Collateral by
any representative of Customer, or any act or failure to act by Customer except
to the extent such claims or demands are directly attributable to IBM Credit's
gross negligence or willful misconduct. Nothing contained in the foregoing shall
impair any rights or claims which the Customer may have against any
manufacturer, distributor or Authorized Supplier.
2.3. A/R Advances. (A) Whenever Customer shall desire IBM Credit to provide an
A/R Advance, Customer shall deliver to IBM Credit written notice of Customer's
request for such an Advance ("Request for A/R Advance"). For any requested A/R
Advance pursuant to which monies will be disbursed to Customer or any Person
other than IBM Credit, a Request for A/R Advance shall be delivered to IBM
Credit on or prior to 1:00 p.m. (Stamford, CT time) one Business Day prior to
the requested A/R Advance Date. The Request for A/R Advance shall specify (i)
the requested A/R Advance Date;
(ii) the amount of the requested A/R Advance; (iii) whether such A/R Advance is
a WCO Advance or a PRO Advance; (iv) if applicable, the PRO Advance Term for
such A/R Advance; (v) for each PRO Advance, the month, day and year of the
Common Due Date, as set forth in Customer's applicable billing statement from
IBM Credit, for the Product Advance to which the PRO Advance is to be applied;
and (vi) if applicable, the amount of the requested A/R Advance that should be
applied to the Outstanding Product Advances (provided that all PRO Advances
shall be applied to Outstanding Product Advances). Customer may deliver a
Request for A/R Advance via facsimile. Any Request for A/R Advance delivered to
IBM Credit shall be irrevocable. Notwithstanding any other provision of this
Agreement, Customer shall not (i)
<PAGE>
request more than one PRO Advance in respect of any Product Advance; and (ii)
request a PRO Advance for any Common Due Date on which Customer will take a
discount offered by IBM Credit for invoice amounts paid in full within fifteen
days of the invoice date under IBM Credit's High Turnover Option ("HTO")
Program.
(B) Subject to the terms and conditions of this Agreement, on the A/R
Advance Date specified in a Request for A/R Advance, IBM Credit shall make the
principal amount of each A/R Advance available to the Customer in immediately
available funds to an account maintained by Customer (or in the case of a
Takeout Advance, as directed by Customer). If IBM Credit is making an A/R
Advance hereunder on a day on which Customer is to repay all or any part of an
Outstanding Advance (or any other amount owing hereunder), IBM Credit shall
apply the proceeds of the A/R Advance to such repayment and only an amount equal
to the difference, if any, between the amount of the A/R Advance and the amount
being repaid shall be made available to Customer as provided in the immediately
preceding sentence.
(C) Each A/R Advance shall accrue a finance charge on the unpaid principal
amount thereof, at a per annum rate equal to the lesser of (a) the finance
charge set forth in Attachment A to this Agreement under the caption "A/R
Finance Charge" for such type of A/R Advance, and (b) the highest rate from time
to time permitted by applicable law. If it is determined that amounts received
from the Customer were in excess of such highest rate, then the amount
representing such excess shall be considered reductions to principal of
Advances.
(D) Unless otherwise due and payable at an earlier date, the unpaid
principal amount of each A/R Advance, other than a Takeout Advance, shall be due
and payable on the applicable Common Due Date. Unless otherwise notified by
Customer in writing prior to the day the principal amount of any WCO Advance
becomes due and payable, the Customer shall be deemed to have provided IBM
Credit with a Request for A/R Advance requesting a WCO Advance on the day such
principal amount is due and payable in an amount equal to the unpaid principal
amount of the WCO Advance so due. Subject to the terms and conditions of this
<PAGE>
Agreement, the principal amount of such WCO Advance shall automatically renew
for an additional WCO Advance Term. Notwithstanding any other provision of this
Agreement, a Takeout Advance may only be requested on the Closing Date and such
Takeout Advance shall be limited to an amount sufficient to discharge the
indebtedness that is the subject of a Takeout Advance.
Unless otherwise agreed in writing, a Takeout Advance shall be due pursuant to
the Schedule of Repayments in Attachment D to this Agreement.
2.4. Finance and Other Charges. (A) Finance charges shall be calculated by
multiplying the applicable Delinquency Fee Rate, Product Financing Charge or A/R
Finance Charge provided for in this Agreement by Customer's applicable Average
Daily Balance. The Delinquency Fee Rate, the Product Financing Charge and the
various A/R Finance Charges provided for in this Agreement are each computed on
the basis of an actual day, 360 day year.
(B) The Customer hereby agrees to pay to IBM Credit the charges set forth
as "Other Charges" in Attachment A. The Customer also agrees to pay IBM Credit
additional charges for any returned items of payment received by Customer. The
Customer hereby acknowledges that any such charges are not interest but that
such charges, if unpaid, will constitute part of the Outstanding Advances.
(C) The finance charges and Other Charges owed under this Agreement, and
any charges hereafter agreed to in writing by the parties, are payable monthly
on receipt of IBM Credit's bill or statement therefor or IBM Credit may, in its
sole discretion, add unpaid finance charges and Other Charges to the Customer's
outstanding Advances.
(D) If any amount owed under this Agreement, including, without limitation,
any Advance, is not paid when due (whether at maturity, by acceleration or
otherwise), the unpaid amount thereof will bear a late charge from and including
its due date to but not including the date IBM Credit receives payment
<PAGE>
thereof, at a per annum rate equal to the lesser of (a) the amount set forth in
Attachment A to this Agreement as the "Delinquency Fee Rate" and (b) the highest
rate from time to time permitted by applicable law. In addition, if any
Shortfall Amount shall not be paid when due pursuant to Section 2.6 hereof,
Customer shall pay IBM Credit a Shortfall Transaction Fee. If it is determined
that amounts received from Customer were in excess of such highest rate, then
the amount representing such excess shall be considered reductions to principal
of Advances.
2.5. Statements Regarding Customer's Account. IBM Credit will send statements of
each transaction hereunder as well as monthly billing statements to Customer
with respect to Advances and other charges due on Customer's account with IBM
Credit. Each statement of transaction and monthly billing statement shall be
deemed, absent manifest error, to be correct and shall constitute an account
stated with respect to each transaction or amount described therein unless
within seven (7) calendar days after such statement of transaction or billing
statement is received by Customer, Customer provides IBM Credit written notice
objecting that such amount or transaction is incorrectly described therein and
specifying the error(s), if any, contained therein. IBM Credit may at any time
adjust such statements of transaction or billing statements to comply with
applicable law and this Agreement.
2.6. Shortfall. If, on any date, the Outstanding Advances shall exceed the
Maximum Advance Amount (such excess, the "Shortfall Amount"), then the Customer
shall on such date prepay the Outstanding Advances in an amount equal to such
Shortfall Amount.
2.7. Application of Payments. (A) The Customer hereby agrees that IBM Credit may
from time to time (x) apply any and all monies, reserves and proceeds received
or collected by IBM Credit with respect to Accounts and other Goods or property
of Customer in the possession of IBM Credit at any time or times hereafter,
including without limitation any and all funds collected from the lockboxes, to
pay or prepay, as the case may be, in the following order (i) any Finance
Charges or fees, (ii) any
<PAGE>
Takeout Advance due and payable, (iii) any WCO and PRO Advances outstanding, in
order of maturity, whether or not such advantages are then due and payable, (iv)
any Product Advances outstanding, in order of maturity, whether or not such
advances are then due and payable, including prior to the conclusion of any
applicable No-Charge Financing Days and (v) any other amounts owing by Customer
to IBM Credit or (y) in IBM Credit's sole and absolute discretion, disburse any
and all such monies, reserves and proceeds to Customer.
(B) Customer agrees that IBM Credit may, but shall not be obligated to,
cause funds collected from the lockboxes to be swept on a daily basis; provided,
however, that such funds shall be swept no less than once each week.
2.8. Prepayment and Reborrowing By Customer. (A) Customer may at any time
prepay, without notice or penalty, in whole or in part amounts owed under this
Agreement. IBM Credit may apply payments made to it (whether by the Customer or
otherwise) to pay finance charges and other amounts owing under this Agreement
first and then to the principal amount owed by the Customer.
(B) Subject to the terms and conditions of this Agreement, any amount
prepaid or repaid to IBM Credit in respect to the Outstanding Advances may be
reborrowed by Customer in accordance with the provisions of this Agreement.
Section 3. CREDIT LINE ADDITIONAL PROVISIONS
3.1. Ineligible Accounts. IBM Credit and Customer agree that IBM Credit shall
have the sole right to determine eligibility of Accounts from an Account debtor
for purposes of determining the Borrowing Base; however, without limiting such
right, the following Accounts will be deemed to be ineligible for purposes of
determining the Borrowing Base:
(A) Accounts created from the sale of goods and/or performance of services
on non-standard terms or that allow for payment to be made more than thirty (30)
days from the date of such sale or performance of services, except for those
<PAGE>
Accounts agreed to in writing by IBM Credit;
(B) Accounts unpaid more than ninety (90) days from date of invoice, except
for those Accounts agreed to in writing by IBM Credit;
(C) Accounts payable by an Account debtor if fifty percent (50%) or more of
the aggregate outstanding balance of all such Accounts remain unpaid for more
than ninety (90) days from the date of invoice;
(D) Accounts payable by an Account debtor that is an Affiliate of Customer,
or an officer, employee, agent, guarantor, stockholder of Customer or an
Affiliate of Customer, or is related to or has common shareholders, officers or
directors with Customer;
(E) Accounts arising from consignment sales;
(F) Except for state, local and United States government institutions and
public educational institutions, Accounts with respect to which the payment by
the Account debtor is or may be conditional;
(G) Except for state, local and United States government institutions and
public educational institutions, Accounts with respect to which:
(i) the Account debtor is not a commercial entity, or
(ii) the Account debtor is not a resident of the United
States;
(H) Accounts payable by any Account debtor to which Customer is or may
become liable for goods sold or services rendered by such Account debtor to
Customer;
(I) Accounts arising from the sale or lease of goods purchased for a
personal, family or household purpose;
(J) Accounts arising from the sale or other disposition of goods that has
been used for demonstration purposes or loaned or
<PAGE>
leased by the Customer to another party, except for those Accounts agreed to in
writing by IBM Credit;
(K) Accounts which are progress payment accounts or contra accounts;
(L) Accounts upon which IBM Credit does not have a valid, perfected, first
priority security interest;
(M) Accounts payable by an Account debtor that is or Customer knows will
become, subject to proceedings under United States Bankruptcy Law or other law
for the relief of debtors;
(N) Accounts that are not payable in US dollars;
(O) Accounts payable by any Account debtor that is a remarketer of computer
hardware and software products and whose purchases of such products from
Customer have been financed by another person, other than IBM Credit, who pays
the proceeds of such financing directly to Customer on behalf of such debtor;
(P) Accounts arising from the sale or lease of goods which are billed to
any Account debtor but have not yet been shipped by Customer;
(Q) Accounts with respect to which Customer has permitted or agreed to any
extension, compromise or settlement, or made any change or modification of any
kind or nature, including, but not limited to, any change or modification to the
terms relating thereto, except for those Accounts agreed to in writing by IBM
Credit;
(R) Accounts that do not arise from undisputed bona fide transactions
completed in accordance with the terms and conditions contained in the invoices,
purchase orders and contracts relating thereto;
(S) Accounts that are discounted for the full payment term specified in
Customer's terms and conditions with its account debtors, or for any longer
period of time;
<PAGE>
(T) Accounts on cash on delivery (C.O.D.) terms;
(U) Accounts arising from maintenance or service contracts that are billed
in advance of full performance of service;
(V) Accounts arising from bartered transactions;
(W) Accounts arising from incentive payments, rebates, discounts, credits,
and refunds from a supplier; and
(X) Any and all other Accounts that IBM Credit deems, in its sole and
absolute discretion, to be ineligible.
The aggregate of all Accounts that are not ineligible Accounts shall hereinafter
be referred to as "Eligible Accounts".
3.2. Reimbursement for Charges. Customer agrees to pay for all costs and
expenses of Customer's bank in respect to collection of checks and other items
of payment, all fees relating to the use and maintenance of the Lockbox and the
Special Account (each as defined in Section 3.3) and with respect to remittances
of proceeds of the Advances hereunder.
3.3. Lockbox and Special Account. Customer shall establish and maintain
lockbox(es) (each, a "Lockbox") at the address(es) set forth in Attachment A
with the financial institution(s) listed in Attachment A (each, a "Bank")
pursuant to an agreement between the Customer and each Bank in form and
substance satisfactory to IBM Credit. Customer shall also establish and maintain
a deposit account which shall contain only proceeds of Customer's Accounts
("Special Account") with each Bank. Customer shall enter into and maintain a
blocked account agreement with each Bank for the benefit of IBM Credit in form
and substance satisfactory to IBM Credit pursuant to which, among other things,
such Bank shall agree that, upon notice from IBM Credit, disbursements from the
Special Account shall be made only as IBM Credit shall direct.
3.4. Collections. Customer shall instruct all Account debtors to remit payments
directly to a Lockbox. In addition, Customer
<PAGE>
shall have such instruction printed in conspicuous type on all invoices.
Customer shall instruct such Bank to deposit all remittances to such Bank's
Lockbox into its Special Account. Customer further agrees that it shall not
deposit or permit any deposits of funds other than remittances paid in respect
of the Accounts into the Special Account(s) or permit any commingling of funds
with such remittances in any Lockbox or Special Account. Without limiting the
Customer's foregoing obligations, if, at any time, Customer receives a
remittance directly from an account debtor, then Customer shall make entries on
its books and records in a manner that shall reasonably identify such
remittances and shall keep a separate account on its record books of all
remittances so received and deposit the same into a Special Account. Until so
deposited into the Special Account, Customer shall keep all remittances received
in respect of Accounts separate and apart from Customer's other property so that
they are capable of identification as the proceeds of Accounts in which IBM
Credit has a security interest.
3.5. Application of Remittances and Credits. Customer shall apply all
remittances against the aggregate of Customer's outstanding Accounts no later
than the end of the Business Day on which such remittances are deposited into
the Special Account. Customer also agrees to apply each remittance against its
respective Account no later than three (3) Business Days from the date such
remittance is deposited into the Special Account. In addition, Customer shall
promptly apply any credits owing in respect to any Account when due.
3.6. Power of Attorney. Customer hereby irrevocably appoints IBM Credit, with
full power of substitution, as its true and lawful attorney-in-fact with full
power, in good faith and in compliance with commercially reasonable standards,
in the discretion of IBM Credit, to:
(A) sign the name of Customer on any document or instrument that IBM Credit
shall deem necessary or appropriate to perfect and maintain perfected the
security interest in the Collateral contemplated under this Agreement and the
Other Documents;
<PAGE>
(B) endorse the name of Customer upon any of the items of payment of
proceeds and deposit the same in the account of IBM Credit for application to
the Obligation; and
upon the occurrence and during the continuance of an Event of Default as defined
in Section 9.1 hereof:
(C) demand payment, enforce payment and otherwise exercise all Customer's
rights and remedies with respect to the collection of any Accounts;
(D) settle, adjust, compromise, extend or renew any
Accounts;
(E) settle, adjust or compromise any legal proceedings
brought to collect any Accounts;
(F) sell or assign any Accounts upon such terms, for such amounts and at
such time or times as IBM Credit may deem advisable;
(G) discharge and release any Accounts;
(H) prepare, file and sign Customer's name on any Proof of Claim in
Bankruptcy or similar document against any Account debtor;
(I) prepare, file and sign Customer's name on any notice of lien, claim of
mechanic's lien, assignment or satisfaction of lien or mechanic's lien, or
similar document in connection with any Accounts;
(J) endorse the name of Customer upon any chattel paper, document,
instrument, invoice, freight bill, bill of lading or similar document or
agreement relating to any Account or goods pertaining thereto;
(K) endorse the name of Customer upon any of the items of payment of
proceeds and deposit the same in the account of IBM Credit for application to
the Obligation;
<PAGE>
(L) sign the name of Customer to requests for verification of Accounts and
notices thereof to Account debtors;
(M) sign the name of Customer on any document or instrument that IBM Credit
shall deem necessary or appropriate to enforce any and all remedies it may have
under this Agreement, at law or otherwise; and
(N) make, settle and adjust claims under the Policies with respect to the
Collateral and endorse Customer's name on any check, draft, instrument or other
item of payment of the proceeds of the Policies with respect to the Collateral;
and
(O) take control in any manner of any term of payment or proceeds and for
such purpose to notify the postal authorities to change the address for delivery
of mail addressed to Customer to such address as IBM Credit may designate.
The power of attorney granted by this Section is for value and coupled with an
interest and is irrevocable so long as this Agreement is in effect or any
Obligations remain outstanding. Nothing done by IBM Credit pursuant to such
power of attorney will reduce any of Customer's Obligations other than
Customer's payment Obligations to the extent IBM Credit has received monies.
Section 4. SECURITY -- COLLATERAL
4.1. Grant. To secure Customer's full and punctual payment and performance of
the Obligations when due (whether at the stated maturity, by acceleration or
otherwise), Customer hereby grants IBM Credit a security interest in all of
Customer's right, title and interest in and to the following property, whether
now owned or hereafter acquired or existing and wherever located:
(A) all inventory and equipment, and all parts thereof, attachments,
accessories and accessions thereto, products thereof and documents therefor;
(B) all accounts, contract rights, chattel paper, instruments, deposit
accounts, obligations of any kind owing to
<PAGE>
Customer, whether or not arising out of or in connection with the sale or lease
of goods or the rendering of services and all books, invoices, documents and
other records in any form evidencing or relating to any of the foregoing;
(C) general intangibles;
(D) all rights now or hereafter existing in and to all mortgages, security
agreements, leases or other contracts securing or otherwise relating to any of
the foregoing; and
(E) all substitutions and replacements for all of the foregoing, all
proceeds of all of the foregoing and, to the extent not otherwise included, all
payments under insurance or any indemnity, warranty or guaranty, payable by
reason of loss or damage to or otherwise with respect to any of the foregoing.
All of the above assets shall be collectively defined herein as the
"Collateral".
Customer covenants and agrees with IBM Credit that: (a) the security constituted
to by this Agreement is in addition to any other security from time to time held
by IBM Credit and (b) the security hereby created is a continuing security
interest and will cover and secure the payment of all Obligations both present
and future of Customer to IBM Credit.
4.2. Further Assurances. Customer shall, from time to time upon the request of
IBM Credit, execute and deliver to IBM Credit, or cause to be executed and
delivered, at such time or times as IBM Credit may request such other and
further documents, certificates and instruments that IBM Credit may deem
necessary to perfect and maintain perfected IBM Credit's security interests in
the Collateral and in order to fully consummate all of the transactions
contemplated under this Agreement and the Other Documents. Customer shall make
appropriate entries on its books and records disclosing IBM Credit's security
interests in the Collateral.
<PAGE>
Section 5. CONDITIONS PRECEDENT
5.1. Conditions Precedent to the Effectiveness of This Agreement. The
effectiveness of this Agreement is subject to the receipt by IBM Credit of, or
waiver in writing by IBM Credit of compliance with, the following conditions
precedent:
(A) this Agreement executed and delivered by Customer and
IBM Credit;
(B) (i) copies of the resolutions of the Board of Directors of Customer
certified by the secretary or assistant secretary of Customer authorizing the
execution, delivery and performance of this Agreement and each Other Document
executed and delivered in connection herewith, (ii) a certificate of the
secretary or an assistant secretary of Customer, in form and substance
satisfactory to IBM Credit, certifying the names and true signatures of the
officers of Customer authorized to sign this Agreement and the Other Documents
and (iii) copies of the articles of incorporation and by-laws of Customer
certified by the secretary or assistant secretary of Customer;
(C) certificates dated as of a recent date from the Secretary of State or
other appropriate authority evidencing the good standing of Customer in the
jurisdiction of its organization and in each other jurisdiction where the
ownership or lease of its property or the conduct of its business requires it to
qualify to do business;
(D) copies of all approvals and consents from any Person, in each case in
form and substance satisfactory to IBM Credit, which are required to enable
Customer to authorize, or required in connection with, (a) the execution,
delivery or performance of this Agreement and each of the Other Documents, and
(b) the legality, validity, binding effect or enforceability of this Agreement
and each of the Other Documents;
(E) a lockbox agreement executed by Customer and each Bank, in form and
substance satisfactory to IBM Credit;
(F) a contingent blocked account agreement executed by Customer and each
Bank in form and substance satisfactory to IBM Credit;
<PAGE>
(G) intercreditor agreements ("Intercreditor Agreement"), in form and
substance satisfactory to IBM Credit, executed by each other secured creditor of
Customer as set forth in Attachment A;
(H) a favorable opinion of counsel for Customer in substantially the form
of Attachment I;
(I) UCC-1 financing statements for each jurisdiction reasonably requested
by IBM Credit executed by Customer and each guarantor whose guaranty to IBM
Credit is intended to be secured by a pledge of its assets;
(J) the statements, certificates, documents, instruments, financing
statements, agreements and information set forth in Attachment A and Attachment
B; and
(K) all such other statements, certificates, documents, instruments,
financing statements, agreements and other information with respect to the
matters contemplated by this Agreement as IBM Credit shall have reasonably
requested.
5.2. Conditions Precedent to Each Advance. No Advance will be required to be
made or renewed by IBM Credit under this Agreement unless, on and as of the date
of such Advance, the following statements shall be true to the satisfaction of
IBM Credit:
(A) The representations and warranties contained in this Agreement or in
any document, instrument or agreement executed in connection herewith, are true
and correct in all material respects on and as of the date of such Advance as
though made on and as of such date;
(B) No event has occurred and is continuing or after giving effect to such
Advance or the application of the proceeds thereof would result which would
constitute a Default;
(C) No event has occurred and is continuing which could reasonably be
<PAGE>
expected to have a Material Adverse Effect;
(D) Both before and after giving effect to the making of such Advance, no
Shortfall Amount exists.
Except as Customer has otherwise disclosed to IBM Credit in writing prior to
each request, each request (or deemed request pursuant to Section 2.3 (D)) for
an Advance hereunder and the receipt (or deemed receipt) by the Customer of the
proceeds of any Advance hereunder shall be deemed to be a representation and
warranty by Customer that, as of and on the date of such Advance, the statements
set forth in (A) through (D) above are true statements. No such disclosures by
Customer to IBM Credit shall in any manner be deemed to satisfy the conditions
precedent to each Advance that are set forth in this Section 5.2.
Section 6. REPRESENTATIONS AND WARRANTIES
To induce IBM Credit to enter into this Agreement, Customer represents and
warrants to IBM Credit as follows:
6.1. Organization and Qualifications. Customer and each of its Subsidiaries (i)
is a corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation, (ii) has the power and authority
to own its properties and assets and to transact the businesses in which it
presently is engaged and (iii) is duly qualified and is authorized to do
business and is in good standing in each jurisdiction where it presently is
engaged in business and is required to be so qualified.
6.2. Rights in Collateral; Priority of Liens. Customer and each of its
Subsidiaries owns the property granted by it respectively as Collateral to IBM
Credit, free and clear of any and all Liens in favor of third parties except for
the Liens otherwise permitted pursuant to Section 8.1. The Liens granted by the
Customer and each of its Subsidiaries pursuant to this Agreement, the Guaranties
and the Other Documents in the Collateral constitute the valid and enforceable
first, prior and perfected Liens on the Collateral, except to the extent any
<PAGE>
Liens that are prior to IBM Credit's Liens are (i) the subject of an
Intercreditor Agreement or (ii) Purchase Money Security Interests in product of
a brand that is not financed by IBM Credit.
6.3. No Conflicts. The execution, delivery and performance by Customer of this
Agreement and each of the Other Documents (i) are within its corporate power;
(ii) are duly authorized by all necessary corporate action; (iii) are not in
contravention in any respect of any Requirement of Law or any indenture,
contract, lease, agreement, instrument or other commitment to which it is a
party or by which it or any of its properties are bound; (iv) do not require the
consent, registration or approval of any Governmental Authority or any other
Person (except such as have been duly obtained, made or given, and are in full
force and effect); and (v) will not, except as contemplated herein, result in
the imposition of any Liens upon any of its properties.
6.4. Enforceability. This Agreement and all of the other documents executed and
delivered by the Customer in connection herewith are the legal, valid and
binding obligations of Customer, and are enforceable in accordance with their
terms, except as such enforceability may be limited by the effect of any
applicable bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium or similar laws affecting creditors' rights generally or the general
equitable principles relating thereto.
6.5. Locations of Offices, Records and Inventory. The address of the principal
place of business and chief executive office of Customer is as set forth on
Attachment B or on any notice provided by Customer to IBM Credit pursuant to
Section 7.7(C) of this Agreement. The books and records of Customer, and all of
its chattel paper (other than the chattel paper delivered to IBM Credit pursuant
to Section 7.14(E)) and records of Accounts, are maintained exclusively at such
location. There is no jurisdiction in which Customer has any assets, equipment
or inventory (except for vehicles and inventory in transit for processing) other
than those jurisdictions identified on Attachment B or on any notice provided by
<PAGE>
Customer to IBM Credit pursuant to Section 7.7(C) of this Agreement. Attachment
B, as amended from time to time by any notice provided by Customer to IBM Credit
in accordance with Section 7.7(C) of this Agreement, also contains a complete
list of the legal names and addresses of each warehouse at which the Customer's
inventory is stored. None of the receipts received by Customer from any
warehouseman states that the goods covered thereby are to be delivered to bearer
or to the order of a named person or to a named person and such named person's
assigns.
6.6. Fictitious Business Names. Customer has not used any corporate or
fictitious name during the five (5) years preceding the date of this Agreement,
other than those listed on Attachment B.
6.7. Organization. All of the outstanding capital stock of Customer has been
validly issued, is fully paid and nonassessable.
6.8. No Judgments or Litigation. Except as set forth on Attachment B, no
judgments, orders, writs or decrees are outstanding against Customer nor is
there now pending or, to the best of Customer's knowledge after due inquiry,
threatened, any litigation, contested claim, investigation, arbitration, or
governmental proceeding by or against Customer.
6.9. No Defaults. The Customer is not in default under any term of any
indenture, contract, lease, agreement, instrument or other commitment to which
it is a party or by which it, or any of its properties are bound. Customer has
no knowledge of any dispute regarding any such indenture, contract, lease,
agreement, instrument or other commitment. No Default or Event of Default has
occurred and is continuing.
6.10. Labor Matters. Except as set forth on any notice provided by Customer to
IBM Credit pursuant to Section 7.1(G) of this Agreement, the Customer is not a
party to any labor dispute. There are no strikes or walkouts or labor
controversies pending or threatened against the Customer which could reasonably
be expected to have a Material Adverse Effect.
<PAGE>
6.11. Compliance with Law. Customer has not violated or failed
to comply with any Requirement of Law or any requirement of any
self regulatory organization.
6.12. ERISA. Each "employee benefit plan", "employee pension benefit plan",
"defined benefit plan", or "multi-employer benefit plan", which Customer has
established, maintained, or to which it is required to contribute (collectively,
the "Plans") is in compliance with all applicable provisions of ERISA and the
Code and the rules and regulations thereunder as well as the Plan's terms and
conditions. There have been no "prohibited transactions" and no "reportable
event" has occurred within the last 60 months with respect to any Plan. Customer
has no "multi-employer benefit plan". As used in this Agreement the terms
"employee benefit plan", "employee pension benefit plan", "defined benefit
plan", and "multi-employer benefit plan" have the respective meanings assigned
to them in Section 3 of ERISA and any applicable rules and regulations
thereunder. The Customer has not incurred any "accumulated funding deficiency"
within the meaning of ERISA or incurred any liability to the Pension Benefit
Guaranty Corporation (the "PBGC") in connection with a Plan (other than for
premiums due in the ordinary course).
6.13. Compliance with Environmental Laws. Except as otherwise disclosed in
Attachment B:
(A) The Customer has obtained all government approvals required with
respect to the operation of their businesses under any Environmental Law.
(B) (i) the Customer has not generated, transported or disposed of any
Hazardous Substances; (ii) the Customer is not currently generating,
transporting or disposing of any Hazardous Substances; (iii) the Customer has no
knowledge that (a) any of its real property (whether owned, leased, or otherwise
directly or indirectly controlled) has been used for the disposal of or has been
contaminated by any Hazardous Substances, or (b) any of its business operations
have contaminated lands or waters of others with any Hazardous Substances; (iv)
the Customer and its respective assets are not subject to any Environmental
Liability and, to the best of the Customer's knowledge, any threatened
<PAGE>
Environmental Liability; (v) the Customer has not received any notice of or
otherwise learned of any governmental investigation evaluating whether any
remedial action is necessary to respond to a release or threatened release of
any Hazardous Substances for which the Customer may be liable; (vi) the Customer
is not in violation of any Environmental Law;
(vii) there are no proceedings or investigations pending against Customer with
respect to any violation or alleged violation of any Environmental Law; provided
however, that the parties acknowledge that any generation, transportation, use,
storage and disposal of certain such Hazardous Substances in Customer's or its
Subsidiaries' business shall be excluded from representations (i) and (ii)
above, provided, further, that Customer is at all times generating,
transporting, utilizing, storing and disposing such Hazardous Substances in
accordance with all applicable Environmental Laws and in a manner designed to
minimize the risk of any spill, contamination, release or discharge of Hazardous
Substances other than as authorized by Environmental Laws.
6.14. Intellectual Property. Customer possesses such assets, licenses, patents,
patent applications, copyrights, service marks, trademarks, trade names and
trade secrets and all rights and other property relating thereto or arising
therefrom ("Intellectual Property") as are necessary or advisable to continue to
conduct its present and proposed business activities.
6.15. Licenses and Permits. Customer has obtained and holds in full force and
effect all franchises, licenses, leases, permits, certificates, authorizations,
qualifications, easements, rights of way and other rights and approvals which
are necessary for the operation of its businesses as presently conducted.
Customer is not in violation of the terms of any such franchise, license, lease,
permit, certificate, authorization, qualification, easement, right of way, right
or approval.
6.16. Investment Company. The Customer is not (i) an investment company or a
company controlled by an investment company within the meaning of the Investment
<PAGE>
Company Act of 1940, as amended, (ii) a holding company or a subsidiary of a
holding company, or an Affiliate of a holding company or of a subsidiary of a
holding company, within the meaning of the Public Utility Holding Company Act of
1935, as amended, or (iii) subject to any other law which purports to regulate
or restrict its ability to borrow money or to consummate the transactions
contemplated by this Agreement or the Other Documents or to perform its
obligations hereunder or thereunder.
6.17. Taxes and Tax Returns. Customer has timely filed all federal, state, and
local tax returns and other reports which it is required by law to file, and has
either duly paid all taxes, fees and other governmental charges indicated to be
due on the basis of such reports and returns or pursuant to any assessment
received by the Customer, or made provision for the payment thereof in
accordance with GAAP. The charges and reserves on the books of the Customer in
respect of taxes or other governmental charges are in accordance with GAAP. No
tax liens have been filed against Customer or any of its property.
6.18. Status of Accounts. Each Account is based on an actual and bona fide sale
and delivery of goods or rendition of services to customers, made by Customer,
in the ordinary course of its business; the goods and inventory being sold and
the Accounts created are its exclusive property and are not and shall not be
subject to any Lien, consignment arrangement, encumbrance, security interest or
financing statement whatsoever (other than Permitted Liens). The Customer's
customers have accepted goods or services and owe and are obligated to pay the
full amounts stated in the invoices according to their terms. There are no
proceedings or actions known to Customer which are pending or threatened against
any Material Account Obligor (as defined in Section 7.14(B) of this Agreement)
of any of the Accounts which could reasonably be expected to result in a
material adverse effect on the debtor's ability to pay the full amounts due to
Customer.
6.19. Affiliate/Subsidiary Transactions. Customer is not a party to or bound by
any agreement or arrangement (whether oral or written) to which any Affiliate or
<PAGE>
Subsidiary of the Customer is a party except (i) in the ordinary course of and
pursuant to the reasonable requirements of Customer's business and (ii) upon
fair and reasonable terms no less favorable to Customer than it could obtain in
a comparable arm's-length transaction with an unaffiliated Person.
6.20. Accuracy and Completeness of Information. All factual information
furnished by or on behalf of the Customer to IBM Credit or the Auditors for
purposes of or in connection with this Agreement or any Other Document, or any
transaction contemplated hereby or thereby is or will be true and accurate in
all material respects on the date as of which such information is dated or
certified and not incomplete by omitting to state any material fact necessary to
make such information not misleading at such time.
6.21. Recording Taxes. All recording taxes, recording fees, filing fees and
other charges payable in connection with the filing and recording of this
Agreement have either been paid in full by Customer or arrangements for the
payment of such amounts by Customer have been made to the satisfaction of IBM
Credit.
6.22. Indebtedness. Customer (i) has no Indebtedness, other than Permitted
Indebtedness; and (ii) has not guaranteed the obligations of any other Person
(except as permitted by Section 8.4).
Section 7. AFFIRMATIVE COVENANTS
Until termination of this Agreement and the indefeasible payment and
satisfaction of all Obligations:
7.1. Financial and Other Information. Customer shall cause to be furnished to
IBM Credit the following information within the following time periods:
(A) as soon as available and in any event within ninety (90) days after the
end of each fiscal year of Customer (i) audited Financial Statements (provided
<PAGE>
that, to the extent not otherwise audited by the Auditors, the consolidating
Financial Statements may be unaudited) as of the close of the fiscal year and
for the fiscal year, together with a comparison to the Financial Statements for
the prior year, in each case accompanied by (a) either an opinion of the
Auditors without a "going concern" or like qualification or exception, or
qualification arising out of the scope of the audit or, if so qualified, an
opinion which shall be in scope and substance reasonably satisfactory to IBM
Credit, (b) such Auditors' "Management Letter" to Customer, if any, (c) a
written statement signed by the Auditors stating that in the course of the
regular audit of the business of Customer and its consolidated Subsidiaries,
which audit was conducted by the Auditors in accordance with generally accepted
auditing standards, the Auditors have not obtained any knowledge of the
existence of any Default under any provision of this Agreement, or, if such
Auditors shall have obtained from such examination any such knowledge, they
shall disclose in such written statement the existence of the Default and the
nature thereof, it being understood that such Auditors shall have no liability,
directly or indirectly, to anyone for failure to obtain knowledge of any such
Default; (ii) if composed, a narrative discussion of the consolidated financial
condition and results of operations and the consolidated liquidity and capital
resources of Customer and its Subsidiaries for such fiscal year prepared by the
chief executive officer or chief financial officer of Customer; and (iii) a
Compliance Certificate along with a schedule, in substantially the form of
Attachment C hereto, of the calculations used in determining, as of the end of
such fiscal year, whether Customer is in compliance with the financial covenants
set forth in Attachment A;
(B) as soon as available and in any event within forty-five (45) days after
the end of each fiscal quarter of Customer (i) Financial Statements as of the
end of such period and for the fiscal year to date, together with a comparison
to the Financial Statements for the same periods in the prior year, all in
reasonable detail and duly certified (subject to normal year-end audit
adjustments and except for the absence of footnotes) by the chief executive
officer or chief financial officer of Customer as having been prepared in
accordance with GAAP; (ii) if composed, a narrative discussion of the
<PAGE>
consolidated financial condition and results of operations and the consolidated
liquidity and capital resources of Customer and its Subsidiaries for such period
and for the fiscal year to date prepared by the chief executive officer or chief
financial officer of Customer; and (iii) a Compliance Certificate along with a
schedule, in substantially the form of Attachment C hereto, of the calculations
used in determining, as of the end of such fiscal quarter, whether Customer is
in compliance with the financial covenants set forth in Attachment A;
(C) as soon as available and in any event within thirty (30) days after the
end of each fiscal month of Customer (i) Financial Statements as of the end of
such period and for the fiscal year to date, together with a comparison to the
Financial Statements for the same periods in the prior year, all in reasonable
detail and duly certified (subject to normal year-end audit adjustments and
except for the absence of footnotes) by the chief executive officer or chief
financial officer of Customer as having been prepared in accordance with GAAP;
(ii) if composed, a narrative discussion of the consolidated financial condition
and results of operations and the consolidated liquidity and capital resources
of Customer and its Subsidiaries for such period and for the fiscal year to date
prepared by the chief executive officer or chief financial officer of Customer;
and (iii) a Compliance Certificate along with a schedule, in substantially the
form of Attachment C hereto, of the calculations used in determining, as of the
end of such fiscal month, whether Customer is in compliance with the financial
covenants set forth in Attachment A;
(D) as soon as available and in any event within sixty (60) days after the
end of each fiscal year of Customer (i) projected Financial Statements, broken
down by quarter, for the then current fiscal year; and (ii) if composed, a
narrative discussion relating to such projected Financial Statements;
(E) promptly after Customer obtains knowledge of (i) the occurrence of a
Default or Event of Default, or (ii) the existence of any condition or event
which would result in the Customer's failure to satisfy the conditions precedent
to Advances set forth in Section 5, a certificate of the chief executive officer
<PAGE>
or chief financial officer of Customer specifying the nature thereof and the
Customer's proposed response thereto, each in reasonable detail;
(F) promptly after Customer obtains knowledge of (i) any proceeding(s)
being instituted or threatened to be instituted by or against Customer in any
federal, state, local or foreign court or before any commission or other
regulatory body (federal, state, local or foreign), or (ii) any actual or
prospective change, development or event which, in any such case, has had or
could reasonably be expected to have a Material Adverse Effect, a certificate of
the chief executive officer or chief financial officer of Customer specifying
the nature thereof and the Customer's proposed response thereto, each in
reasonable detail;
(G) promptly after Customer obtains knowledge that (i) any order, judgment
or decree in excess of $50,000.00 shall have been entered against Customer or
any of its properties or assets, or (ii) it has received any notification of a
material violation of any Requirement of Law from any Governmental Authority, a
certificate of the chief executive officer or chief financial officer of
Customer specifying the nature thereof and the Customer's proposed response
thereto, each in reasonable detail;
(H) promptly after Customer learns of any material labor dispute to which
Customer may become a party, any strikes or walkouts relating to any of its
plants or other facilities, and the expiration of any labor contract to which
Customer is a party or by which it is bound, a certificate of the chief
executive officer or chief financial officer of Customer specifying the nature
thereof and the Customer's proposed response thereto, each in reasonable detail;
(I) within five (5) Business Days after request by IBM Credit, any written
certificates, schedules and reports together with all supporting documents as
IBM Credit may reasonably request relating to the Collateral or the Customer's
or any guarantor's business affairs and financial condition;
(J) by the fifth (5th) day of each month, or as otherwise agreed in
<PAGE>
writing, a Collateral Management Report as of a date no earlier than the last
day of the immediately preceding month;
(K) along with the Financial Statements set forth in Section 7.1(A) and
(B), the name, address and phone number of each of its account debtors' primary
contacts for each Account on the Accounts aging report contained in its most
recent Collateral Management Report; and
(L) within five (5) days after the same are sent, copies of all financial
statements and reports which Customer sends to its stockholders, and within five
(5) days after the same are filed, copies of all financial statements and
reports which Customer may make to, or file with, the Securities and Exchange
Commission or any successor or analogous governmental authority.
Each certificate, schedule and report provided by Customer to IBM Credit shall
be signed by an authorized officer of Customer, and which signature shall be
deemed a representation and warranty that the information contained in such
certificate, schedule or report is true and accurate in all material respects on
the date as of which such certificate, schedule or report is made and does not
omit to state a material fact necessary in order to make the statements
contained therein not misleading at such time. Each financial statement
delivered pursuant to this Section 7.1 shall be prepared in accordance with GAAP
applied consistently throughout the periods reflected therein and with prior
periods.
7.2. Location of Collateral. The inventory, equipment and other tangible
Collateral shall be kept or sold at the addresses as set forth on Attachment B
or on any notice provided by Customer to IBM Credit in accordance with Section
7.7(C). Such locations shall be certified quarterly to IBM Credit substantially
in the form of Attachment G.
7.3. Changes in Customer. Customer shall provide thirty (30) days prior written
notice to IBM Credit of any change in Customer's name, chief executive office
and principal place of business, organization, form of ownership or corporate
structure; provided, however, that Customer's compliance with this covenant
shall not relieve it of any of its other obligations or any other provisions
<PAGE>
under this Agreement or any Other Document limiting actions of the type
described in this Section.
7.4. Corporate Existence. Customer shall (A) maintain its corporate existence,
maintain in full force and effect all licenses, bonds, franchises, leases and
qualifications to do business, and all contracts and other rights necessary to
the profitable conduct of its business, (B) continue in, and limit its
operations to, the same general lines of business as presently conducted by it
unless otherwise permitted in writing by IBM Credit and (C) comply with all
Requirements of Law.
7.5. ERISA. Customer shall promptly notify IBM Credit in writing after it learns
of the occurrence of any event which would constitute a "reportable event" under
ERISA or any regulations thereunder with respect to any Plan, or that the PBGC
has instituted or will institute proceedings to terminate any Plan.
Notwithstanding the foregoing, the Customer shall have no obligation to notify
IBM Credit as to any "reportable event" as to which the 30-day notice
requirement of Section 4043(b) has been waived by the PBGC, until such time as
such Customer is required to notify the PBGC of such reportable event. Such
notification shall include a certificate of the chief financial officer of
Customer setting forth details as to such "reportable event" and the action
which Customer proposes to take with respect thereto, together with a copy of
any notice of such "reportable event" which may be required to be filed with the
PBGC, or any notice delivered by the PBGC evidencing its intent to institute
such proceedings. Upon request of IBM Credit, Customer shall furnish, or cause
the plan administrator to furnish, to IBM Credit the most recently filed annual
report for each Plan.
7.6. Environmental Matters. (A) Customer and any other Person under Customer's
control (including, without limitation, agents and Affiliates under such
control) shall (i) comply with all Environmental Laws in all material respects,
and (ii) undertake to use commercially reasonable efforts to prevent any
unlawful release of any Hazardous Substance by Customer or such Person into,
<PAGE>
upon, over or under any property now or hereinafter owned, leased or otherwise
controlled (directly or indirectly) by Customer.
(B) Customer shall notify IBM Credit, promptly upon its obtaining knowledge
of (i) any non-routine proceeding or investigation by any Governmental Authority
with respect to the presence of any Hazardous Substances on or in any property
now or hereinafter owned, leased or otherwise controlled (directly or
indirectly) by Customer, (ii) all claims made or threatened by any Person or
Governmental Authority against Customer or any of Customer's assets relating to
any loss or injury resulting from any Hazardous Substance, (iii) Customer's
discovery of evidence of unlawful disposal of or environmental contamination by
any Hazardous Substance on any property now or hereinafter owned, leased or
otherwise controlled (directly or indirectly) by Customer, and (iv) any
occurrence or condition which could constitute a violation of any Environmental
Law.
7.7. Collateral Books and Records/Collateral Audit. (A) Customer agrees to
maintain books and records pertaining to the Collateral in such detail, form and
scope as is consistent with good business practice, and agrees that such books
and records will reflect IBM Credit's interest in the Accounts.
(B) Customer agrees that IBM Credit or its agents may enter upon the
premises of Customer at any time and from time to time, during normal business
hours and upon reasonable notice under the circumstances, and at any time at all
on and after the occurrence and during the continuance of an Event of Default
for the purposes of (i) inspecting the Collateral, (ii) inspecting and/or
copying (at Customer's expense) any and all records pertaining thereto, (iii)
discussing the affairs, finances and business of Customer with any officers,
employees and directors of Customer or with the Auditors and (iv) verifying
Eligible Accounts and other Collateral. Customer also agrees to provide IBM
Credit with such reasonable information and documentation that IBM Credit deems
necessary to conduct the foregoing activities, including, without limitation,
reasonably requested samplings of purchase orders, invoices and evidences of
<PAGE>
delivery or other performance.
Upon the occurrence and during the continuance of an Event of Default which has
not been waived by IBM Credit in writing, IBM Credit may conduct any of the
foregoing activities in any manner that IBM Credit deems reasonably necessary.
(C) Customer shall give IBM Credit thirty (30) days prior written notice of
any change in the location of any Collateral, the location of its books and
records or in the location of its chief executive office or place of business
from the locations specified in Attachment B, and will execute in advance of
such change and cause to be filed and/or delivered to IBM Credit any financing
statements, landlord or other lien waivers, or other documents reasonably
required by IBM Credit, all in form and substance reasonably satisfactory to IBM
Credit.
(D) Customer agrees to advise IBM Credit promptly, in reasonably sufficient
detail, of any substantial change relating to the type, quantity or quality of
the Collateral, or any event which could reasonably be expected to have a
Material Adverse Effect on the value of the Collateral or on the security
interests granted to IBM Credit therein.
7.8. Insurance; Casualty Loss. (A) Customer agrees to maintain with financially
sound and reputable insurance companies: (i) insurance on its properties, (ii)
public liability insurance against claims for personal injury or death as a
result of the use of any products sold by it and (iii) insurance coverage
against other business risks, in each case, in at least such amounts and against
at least such risks as are usually and prudently insured against in the same
general geographical area by companies of established repute engaged in the same
or a similar business. Customer will furnish to IBM Credit, upon its written
request, the insurance certificates with respect to such insurance. In addition,
all Policies so maintained are to name IBM Credit as an additional insured as
its interest may appear.
(B) Without limiting the generality of the foregoing, Customer shall keep
and maintain, at its sole expense, the Collateral insured for an amount not less
<PAGE>
than the amount set forth on Attachment A from time to time opposite the caption
"Collateral Insurance Amount" against all loss or damage under an "all risk"
Policy with companies mutually acceptable to IBM Credit and Customer, with a
lender's loss payable endorsement or mortgagee clause in form and substance
reasonably satisfactory to IBM Credit designating that any loss payable
thereunder with respect to such Collateral shall be payable to IBM Credit. Upon
receipt of proceeds by IBM Credit the same shall be applied on account of the
Customer's Outstanding Product Advances first, then to the Outstanding A/R
Advances. Customer agrees to instruct each insurer to give IBM Credit, by
endorsement upon the Policy issued by it or by independent instruments furnished
to IBM Credit, at least ten (10) days written notice before any Policy shall be
altered or cancelled and that no act or default of Customer or any other person
shall affect the right of IBM Credit to recover under the Policies. Customer
hereby agrees to direct all insurers under the Policies to pay all proceeds with
respect to the Collateral directly to IBM Credit.
If Customer fails to pay any cost, charges or premiums, or if Customer fails to
insure the Collateral, IBM Credit may pay such costs, charges or premiums. Any
amounts paid by IBM Credit hereunder shall be considered an additional debt owed
by Customer to IBM Credit and are due and payable immediately upon receipt of an
invoice by IBM Credit.
7.9. Taxes. Customer agrees to pay, when due, all taxes lawfully levied or
assessed against Customer or any of the Collateral before any penalty or
interest accrues thereon unless such taxes are being contested, in good faith,
by appropriate proceedings promptly instituted and diligently conducted and an
adequate reserve or other appropriate provisions have been made therefor as
required in order to be in conformity with GAAP and an adverse determination in
such proceedings could not reasonably be expected to have a Material Adverse
Effect.
7.10. Compliance With Laws. Customer agrees to comply with all
Requirements of Law applicable to the Collateral or any part
thereof, or to the operation of its business.
<PAGE>
7.11. Fiscal Year. Customer agrees to maintain its fiscal year ending September
30 unless Customer provides IBM Credit at least thirty (30) days prior written
notice of any change thereof.
7.12. Intellectual Property. Customer shall do and cause to be done all things
necessary to preserve and keep in full force and effect all registrations of
Intellectual Property which the failure to do or cause to be done could
reasonably be expected to have a Material Adverse Effect.
7.13. Maintenance of Property. Customer shall maintain all of its material
properties (business and otherwise) in good condition and repair (ordinary wear
and tear excepted) and pay and discharge all costs of repair and maintenance
thereof and all rental and mortgage payments and related charges pertaining
thereto and not commit or permit any waste with respect to any of its material
properties.
7.14. Collateral. Customer shall:
(A) from time to time upon request of IBM Credit, provide IBM Credit with
access to copies of all invoices, delivery evidences and other such documents
relating to each Account;
(B) promptly upon Customer's obtaining knowledge thereof, furnish to and
inform IBM Credit of all material adverse information relating to the financial
condition of any Account debtor whose outstanding obligations to Customer
constitute two percent (2%) or more of the Accounts at such time (a "Material
Account Debtor");
(C) promptly upon Customer's learning thereof, notify IBM Credit in writing
of any event which could reasonably be expected to cause any obligation of a
Material Account Debtor to become an Ineligible Account;
(D) keep all goods rejected or returned by any Account debtor and all goods
repossessed or stopped in transit by Customer from any account debtor segregated
from other property of Customer, holding the same in trust for IBM Credit until
<PAGE>
Customer applies a credit against such Account debtor's outstanding obligations
to Customer or sells such goods in the ordinary course of business, whichever
occurs earlier;
(E) stamp or otherwise mark chattel paper and instruments now owned or
hereafter acquired by it in conspicuous type to show that the same are subject
to IBM Credit's security interest and immediately thereafter deliver or cause
such chattel paper and instruments to be delivered to IBM Credit or any agent
designated by IBM Credit with appropriate endorsements and assignments to vest
title and possession in IBM Credit;
(F) use commercially reasonable efforts to collect all Accounts owed;
(G) promptly notify IBM Credit of any loss, theft or destruction of or
damage to any of the Collateral. Customer shall diligently file and prosecute
its claim for any award or payment in connection with any such loss, theft,
destruction of or damage to Collateral. Customer shall, upon demand of IBM
Credit, make, execute and deliver any assignments and other instruments
sufficient for the purpose of assigning any such award or payment to IBM Credit,
free of any encumbrances of any kind whatsoever;
(H) consistent with reasonable commercial practice, observe and perform all
matters and things necessary or expedient to be observed or performed under or
by virtue of any lease, license, concession or franchise forming part of the
Collateral in order to preserve, protect and maintain all the rights of IBM
Credit thereunder;
(I) consistent with reasonable commercial practice, maintain, use and
operate the Collateral and carry on and conduct its business in a proper and
efficient manner so as to preserve and protect the Collateral and the earnings,
incomes, rents, issues and profits thereof; and
(J) at any time and from time to time, upon the request of IBM Credit, and
at the sole expense of Customer, Customer will promptly and duly execute and
<PAGE>
deliver such further instruments and documents and take such further action as
IBM Credit may reasonably request for the purpose of obtaining or preserving the
full benefits of this Agreement and of the rights and powers herein granted,
including, without limitation, the filing of any financing or continuation
statements under the Uniform Commercial Code in effect in any jurisdiction with
respect to the security interests granted herein and the payment of any and all
recording taxes and filing fees in connection therewith.
7.15. Subsidiaries. IBM Credit may require that any Subsidiaries of Customer
become parties to this Agreement or any other agreement executed in connection
with this Agreement as guarantors or sureties. Customer will comply, and cause
all Subsidiaries of Customer to comply with Sections 7 and 8 of this Agreement,
as if such sections applied directly to such Subsidiaries.
7.16. Financial Covenants; Additional Covenants. Customer acknowledges
and agrees that Customer shall at all times maintain the financial
covenants and other covenants set forth in the attachments, exhibits and
other addenda incorporated in this Agreement.
Section 8. NEGATIVE COVENANTS
Until termination of this Agreement and the indefeasible payment and
satisfaction of all Obligations due hereunder:
8.1. Liens. The Customer will not, directly or indirectly mortgage, assign,
pledge, transfer, create, incur, assume, permit to exist or otherwise permit any
Lien or judgment to exist on any of its property, assets, revenues or goods,
whether real, personal or mixed, whether now owned or hereafter acquired, except
for Permitted Liens.
8.2. Disposition of Assets. The Customer will not, directly or indirectly, sell,
lease, assign, transfer or otherwise dispose of any assets other than (i) sales
of inventory in the ordinary course of business and short term rental of
inventory as demonstrations in amounts not material to Customer, and (ii)
<PAGE>
voluntary dispositions of individual assets and obsolete or worn out property in
the ordinary course of business, provided, that the aggregate book value of all
such assets and property so sold or disposed of under this section 8.2 (ii) in
any fiscal year shall not exceed 5% of the consolidated assets of the Customer
as of the beginning of such fiscal year.
8.3. Corporate Changes. The Customer will not, without the prior written consent
of IBM Credit, directly or indirectly, merge, consolidate, liquidate, dissolve
or enter into or engage in any operation or activity materially different from
that presently being conducted by Customer, or Syscomm International
Corporation, other than the initial public offering contemplated by Customer, or
Syscomm International Corporation, and anticipated to occur prior to December
31, 1996.
8.4. Guaranties. The Customer will not, directly or indirectly, assume,
guaranty, endorse, or otherwise become liable upon the obligations of any other
Person, except (i) by the endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of business, (ii) by
the giving of indemnities in connection with the sale of inventory or other
asset dispositions permitted hereunder, and (iii) for guaranties in favor of IBM
Credit.
8.5. Restricted Payments. The Customer will not, directly or indirectly: (i)
declare or pay any distribution, if such declaration or payment would cause
Customer to be in violation of its financial covenants or reasonably be expected
to have a Material Adverse Effect with IBM Credit, or make any payment on
account of, or set apart assets for a sinking or other analogous fund for, the
purchase, redemption, defeasance, retirement or other acquisition of, any shares
of any class of capital stock of Customer or any warrants, options or rights to
purchase any such capital stock, whether now or hereafter outstanding, or make
any other distribution in respect thereof, either directly or indirectly,
whether in cash or property or in obligations of Customer; or (ii) make any
optional payment or prepayment on or redemption (including, without limitation,
<PAGE>
by making payments to a sinking or analogous fund) or repurchase of any
Indebtedness (other than the Obligations).
8.6. Investments. The Customer will not, directly or indirectly, make, maintain
or acquire any Investment in any Person other than:
(A) interest bearing deposit accounts (including certificates of deposit)
which are insured by the Federal Deposit Insurance Corporation ("FDIC") or a
similar federal insurance program;
(B) direct obligations of the government of the United States of America or
any agency or instrumentality thereof or obligations guaranteed as to principal
and interest by the United States of America or any agency thereof;
(C) stock or obligations issued to Customer in settlement of claims against
others by reason of an event of bankruptcy or a composition or the readjustment
of debt or a reorganization of any debtor of Customer; and
(D) commercial paper of any corporation organized under the laws of any
State of the United States or any bank organized or licensed to conduct a
banking business under the laws of the United States or any State thereof having
the short-term highest rating then given by Moody's Investor's Services, Inc. or
Standard & Poor's Corporation.
Investments that do not have a Material Adverse Effect on Customer's financial
condition, and do not cause a violation of the financial covenants established
by IBM Credit for Customer, will be considered by IBM Credit when presented in
writing by Customer.
8.7. Affiliate/Subsidiary Transactions. The Customer will not, directly or
indirectly, enter into any transaction with any Affiliate or Subsidiary,
including, without limitation, the purchase, sale or exchange of property or the
rendering of any service to any Affiliate or Subsidiary of Customer except in
the ordinary course of business and pursuant to the reasonable requirements of
<PAGE>
Customer's business upon fair and reasonable terms no less favorable to Customer
than could be obtained in a comparable arm's-length transaction with an
unaffiliated Person.
8.8. ERISA. The Customer will not (A) terminate any Plan so as to incur a
material liability to the PBGC, (B) permit any "prohibited transaction"
involving any Plan (other than a "multi-employer benefit plan") which would
subject the Customer to a material tax or penalty on "prohibited transactions"
under the Code or ERISA, (C) fail to pay to any Plan any contribution which they
are obligated to pay under the terms of such Plan, if such failure would result
in a material "accumulated funding deficiency", whether or not waived, (D) allow
or suffer to exist any occurrence and during the continuance of a "reportable
event" or any other event or condition, which presents a material risk of
termination by the PBGC of any Plan (other than a "multi-employer benefit
plan"), or (E) fail to notify IBM Credit as required in Section 7.5. As used in
this Agreement, the terms "accumulated funding deficiency" and "reportable
event" shall have the respective meanings assigned to them in ERISA, and the
term "prohibited transaction" shall have the meaning assigned to it in the Code
and ERISA. For purposes of this Section 8.8, the terms material liability, tax,
penalty, accumulated funding deficiency and risk of termination shall mean a
liability, tax, penalty, accumulated funding deficiency or risk of termination
which could reasonably be expected to have a Material Adverse Effect.
8.9. Additional Negative Pledges. Customer will not, directly or indirectly,
create or otherwise cause or permit to exist or become effective any contractual
obligation which may restrict or inhibit IBM Credit's rights or ability to sell
or otherwise dispose of the Collateral or any part thereof after the occurrence
and during the continuance of an Event of Default.
8.10. Storage of Collateral with Bailees and Warehousemen. Collateral shall not
be stored with a bailee, warehouseman or similar party without the prior written
consent of IBM Credit unless Customer will, concurrently with the delivery of
such Collateral to such party, cause such party to issue and deliver to IBM
<PAGE>
Credit, warehouse receipts in the name of IBM Credit evidencing the storage of
such Collateral. Inventory stored in a location controlled by International
Business Machines Corporation shall not be a violation of this Negative
Covenant.
8.11. Use of Proceeds. The Customer shall not use any portion of the proceeds of
any Advances other than to acquire Products from Authorized Suppliers and for
its general working capital requirements.
8.12. Accounts. The Customer shall not permit or agree to any extension,
compromise or settlement or make any change or modification of any kind or
nature with respect to any Account, including any of the terms relating thereto,
which would adversely affect IBM Credit's ability to collect payment on any
Account in whole or in part, except for such extensions, compromises or
settlements made by Customer in the ordinary course of its business, provided,
however, that the aggregate amount of such extensions, compromises or
settlements does not exceed five percent (5%) of the Customer's Accounts at any
time.
8.13. Indebtedness. The Customer will not create, incur, assume or permit to
exist any Indebtedness, except for Permitted Indebtedness.
8.14. Loans. The Customer will not make any loans, advances, contributions or
payments of money or goods to any Subsidiary, Affiliate or parent corporation or
to any officer, director or stockholder of Customer or of any such corporation
(except for compensation for personal services actually rendered), except for
transactions expressly authorized in this Agreement.
Section 9. DEFAULT
9.1. Event of Default. Any one or more of the following events
shall constitute an Event of Default by the Customer under this
Agreement and the Other Documents:
(A) The failure to make timely payment of the Obligations or
any part thereof when due and payable;
<PAGE>
(B) Customer fails to comply with or observe any term, covenant or
agreement contained in this Agreement or any Other Documents which could
reasonably be expected to have a Material Adverse Effect;
(C) Any representation, warranty, statement, report or certificate made or
delivered by or on behalf of Customer or any of its officers, employees or
agents or by or on behalf of any guarantor to IBM Credit was false in any
material respect at the time when made or deemed made which could reasonably be
expected to have a Material Adverse Effect;
(D) The occurrence of any event or circumstance which could reasonably be
expected to have a Material Adverse Effect;
(E) Customer, any Subsidiary or any guarantor shall generally not pay its
debts as such debts become due, become or otherwise declare itself insolvent,
file a voluntary petition for bankruptcy protection, have filed against it any
involuntary bankruptcy petition, cease to do business as a going concern, make
any assignment for the benefit of creditors, or a custodian, receiver, trustee,
liquidator, administrator or person with similar powers shall be appointed for
Customer, any Subsidiary or any guarantor or any of its respective properties or
have any of its respective properties seized or attached, or take any action to
authorize, or for the purpose of effectuating, the foregoing, provided, however,
that Customer, any Subsidiary or any guarantor shall have a period of forty-five
(45) days within which to discharge any involuntary petition for bankruptcy or
similar proceeding;
(F) The use of any funds borrowed from IBM Credit under this Agreement for
any purpose other than as provided in this Agreement;
(G) The entry of any judgment against Customer or any guarantor in an
amount in excess of $50,000.00 and such judgment is not satisfied, dismissed,
stayed or superseded by bond within thirty (30) days after the day of entry
thereof (and in the event of a stay or supersedeas bond, such judgment is not
discharged within thirty (30) days after termination of any such stay or bond)
<PAGE>
or such judgment is not fully covered by insurance as to which the insurance
company has acknowledged its obligation to pay such judgment in full;
(H) The dissolution or liquidation of Customer or any guarantor, or
Customer or any guarantor or its directors or stockholders shall take any action
to dissolve or liquidate Customer or any guarantor;
(I) Any "going concern" or like qualification or exception, or
qualification arising out of the scope of an audit by an Auditor of his opinion
relative to any Financial Statement delivered to IBM Credit under this
Agreement;
(J) There issues a warrant of distress for any rent or taxes with respect
to any premises occupied by Customer in or upon which the Collateral, or any
part thereof, may at any time be situated and such warrant shall continue for a
period of ten (10) Business Days from the date such warrant is issued;
(K) Customer suspends business;
(L) The occurrence of any event or condition which enables the holder of
any Indebtedness arising in one or more related or unrelated transactions to
accelerate the maturity thereof or the failure of Customer to pay when due any
such Indebtedness;
(M) Any guaranty of any or all of the Customer's Obligations executed by
any guarantor in favor of IBM Credit, shall at any time for any reason cease to
be in full force and effect or shall be declared to be null and void by a court
of competent jurisdiction or the validity or enforceability thereof shall be
contested or denied by any such guarantor, or any such guarantor shall deny that
it has any further liability or obligation thereunder or any such guarantor
shall fail to comply with or observe any of the terms, provisions or conditions
contained in any such guaranty;
(N) Customer is in default under the material terms of any of the Other
Documents after the expiration of any applicable cure periods;
<PAGE>
(O) There shall occur a "reportable event" with respect to any Plan, or any
Plan shall be subject to termination proceedings (whether voluntary or
involuntary) and there shall result from such "reportable event" or termination
proceedings a liability of Customer to the PBGC which in the reasonable opinion
of IBM Credit will have a Material Adverse Effect;
(P) Any "person" (as defined in Section 13(d)(3) of the Securities Exchange
Act of 1934, as amended) acquires a beneficial interest in 50% or more of the
Voting Stock of Customer.
9.2. Acceleration. Upon the occurrence and during the continuance of an Event of
Default which has not been waived in writing by IBM Credit, IBM Credit may, in
its sole discretion, take any or all of the following actions, without prejudice
to any other rights it may have at law or under this Agreement to enforce its
claims against the Customer: (a) declare all Obligations to be immediately due
and payable (except with respect to any Event of Default set forth in Section
9.1(E) hereof, in which case all Obligations shall automatically become
immediately due and payable without the necessity of any notice or other demand)
without presentment, demand, protest or any other action or obligation of IBM
Credit; and
(b) immediately terminate the Credit Line hereunder.
9.3. Remedies. (A) Upon the occurrence and during the continuance of any Event
of Default which has not been waived in writing by IBM Credit, IBM Credit may
exercise all rights and remedies of a secured party under the U.C.C. Without
limiting the generality of the foregoing, IBM Credit may: (i) remove from any
premises where same may be located any and all documents, instruments, files and
records (including the copying of any computer records), and any receptacles or
cabinets containing same, relating to the Accounts, or IBM Credit may use (at
the expense of the Customer) such of the supplies or space of the Customer at
Customer's place of business or otherwise, as may be necessary to properly
<PAGE>
administer and control the Accounts or the handling of collections and
realizations thereon; (ii) bring suit, in the name of the Customer or IBM Credit
and generally shall have all other rights respecting said Accounts, including
without limitation the right to accelerate or extend the time of payment,
settle, compromise, release in whole or in part any amounts owing on any
Accounts and issue credits in the name of the Customer or IBM Credit; (iii)
sell, assign and deliver the Accounts and any returned, reclaimed or repossessed
merchandise, with or without advertisement, at public or private sale, for cash,
on credit or otherwise, at IBM Credit's sole option and discretion, and IBM
Credit may bid or become a purchaser at any such sale; and (iv) foreclose the
security interests created pursuant to this Agreement by any available judicial
procedure, or to take possession of any or all of the Collateral without
judicial process and to enter any premises where any Collateral may be located
for the purpose of taking possession of or removing the same.
(B) Upon the occurrence and during the continuance of any Event of Default
which has not been waived in writing by IBM Credit, IBM Credit shall have the
right to sell, lease, or otherwise dispose of all or any part of the Collateral,
whether in its then condition or after further preparation or processing, in the
name of Customer or IBM Credit, or in the name of such other party as IBM Credit
may designate, either at public or private sale or at any broker's board, in
lots or in bulk, for cash or for credit, with or without warranties or
representations, and upon such other terms and conditions as IBM Credit in its
sole discretion may deem advisable, and IBM Credit shall have the right to
purchase at any such sale. If IBM Credit, in its sole discretion determines that
any of the Collateral requires rebuilding, repairing, maintenance or
preparation, IBM Credit shall have the right, at its option, to do such of the
aforesaid as it deems necessary for the purpose of putting such Collateral in
such saleable form as IBM Credit shall deem appropriate. The Customer hereby
agrees that any disposition by IBM Credit of any Collateral pursuant to and in
accordance with the terms of a repurchase agreement between IBM Credit and the
manufacturer or any supplier (including any Authorized Supplier) of such
<PAGE>
Collateral constitutes a commercially reasonable sale. The Customer agrees, at
the request of IBM Credit, to assemble the Collateral and to make it available
to IBM Credit at places which IBM Credit shall select, whether at the premises
of the Customer or elsewhere, and to make available to IBM Credit the premises
and facilities of the Customer for the purpose of IBM Credit's taking possession
of, removing or putting such Collateral in saleable form. If notice of intended
disposition of any Collateral is required by law, it is agreed that ten (10)
Business Days notice shall constitute reasonable notification.
(C) Unless expressly prohibited by the licensor thereof, if any, IBM Credit
is hereby granted, upon the occurrence and during the continuance of any Event
of Default which has not been waived in writing by IBM Credit, an irrevocable,
non-exclusive license to use, assign, license or sublicense all computer
software programs, data bases, processes and materials used by the Customer in
its businesses or in connection with any of the Collateral.
(D) The net cash proceeds resulting from IBM Credit's exercise of any of
the foregoing rights (after deducting all charges, costs and expenses, including
reasonable attorneys' fees) shall be applied by IBM Credit to the payment of
Customer's Obligations, whether due or to become due, in such order as IBM
Credit may in it sole discretion elect. Customer shall remain liable to IBM
Credit for any deficiencies, and IBM Credit in turn agrees to remit to Customer
or its successors or assigns, any surplus resulting therefrom.
(E) The enumeration of the foregoing rights is not intended to be
exhaustive and the exercise of any right shall not preclude the exercise of any
other rights, all of which shall be cumulative.
9.4. Waiver. If IBM Credit seeks to take possession of any of the Collateral by
any court process Customer hereby irrevocably waives to the extent permitted by
applicable law any bonds, surety and security relating thereto required by any
statute, court rule or otherwise as an incident to such possession and any
<PAGE>
demand for possession of the Collateral prior to the commencement of any suit or
action to recover possession thereof. In addition, Customer waives to the extent
permitted by applicable law all rights of set-off it may have against IBM
Credit. Customer further waives to the extent permitted by applicable law
presentment, demand and protest, and notices of non-payment, non-performance,
any right of contribution, dishonor, and any other demands, and notices required
by law.
Section 10. MISCELLANEOUS
10.1. Term; Termination. (A) This Agreement shall remain in force until the
earlier of (i) the Termination Date, (ii) the date specified in a written notice
by the Customer that Customer intends to terminate this Agreement which date
shall be no less than ninety (90) days following the receipt by IBM Credit of
such written notice, and (iii) termination by IBM Credit after the occurrence
and during the continuance of an Event of Default. Upon the date that this
Agreement is terminated, all of Customer's Obligations shall be immediately due
and payable in their entirety, even if they are not yet due under their terms.
(B) Until the indefeasible payment in full of all of Customer's
Obligations, no termination of this Agreement or any of the Other Documents
shall in any way affect or impair (i) Customer's Obligations to IBM Credit
including, without limitation, any transaction or event occurring prior to such
termination, or (ii) IBM Credit's rights hereunder, including, without
limitation IBM Credit's security interest in the Collateral.
10.2. Indemnification. The Customer hereby agrees to indemnify and hold harmless
IBM Credit and each of its officers, directors, agents and assigns
(collectively, the "Indemnified Persons") against all losses, claims, damages,
liabilities or other expenses (including reasonable attorneys' fees and court
costs now or hereinafter arising from the enforcement of this Agreement, the
"Losses") to which any of them may become subject insofar as such Losses arise
out of or are based upon any event, circumstance or condition (a) occurring or
existing on or before the date of this Agreement relating to any financing
<PAGE>
arrangements IBM Credit may from time to time have with (i) Customer, (ii) any
Person that shall be acquired by Customer or (iii) any Person that Customer may
acquire all or substantially all of the assets of, or (b) directly or
indirectly, relating to the execution, delivery or performance of this Agreement
or the consummation of the transactions contemplated hereby or thereby or to any
of the Collateral or to any act or omission of the Customer in connection
therewith. Notwithstanding the foregoing, the Customer shall not be obligated to
indemnify IBM Credit for any Losses incurred by IBM Credit which are a result of
IBM Credit's gross negligence or willful misconduct. The indemnity provided
herein shall survive the termination of this Agreement.
10.3. Additional Obligations. IBM Credit, without waiving or releasing any
Obligation or Default of the Customer, may perform any Obligations of the
Customer that the Customer shall fail or refuse to perform and IBM Credit may,
at any time or times hereafter, but shall be under no obligation so to do, pay,
acquire or accept any assignment of any security interest, lien, encumbrance or
claim against the Collateral asserted by any person. All sums paid by IBM Credit
in performing in satisfaction or on account of the foregoing and any expenses,
including reasonable attorney's fees, court costs, and other charges relating
thereto, shall be a part of the Obligations, payable on demand and secured by
the Collateral.
10.4. LIMITATION OF LIABILITY. NEITHER IBM CREDIT NOR ANY OTHER INDEMNIFIED
PERSON SHALL HAVE ANY LIABILITY WITH RESPECT TO ANY SPECIAL, INDIRECT OR
CONSEQUENTIAL DAMAGES SUFFERED BY CUSTOMER IN CONNECTION WITH THIS AGREEMENT,
ANY OTHER AGREEMENT OR ANY CLAIMS IN ANY MANNER RELATED THERETO. NOR SHALL IBM
CREDIT OR ANY OTHER INDEMNIFIED PERSON HAVE ANY LIABILITY TO CUSTOMER OR ANY
OTHER PERSON FOR ANY ACTION TAKEN OR OMITTED TO BE TAKEN BY IT OR THEM
HEREUNDER, EXCEPT FOR ITS OR THEIR OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.
10.5. Alteration/Waiver. This Agreement and the Other Documents may not be
altered or amended except by an agreement in writing signed by the Customer and
by IBM Credit. No delay or omission of IBM Credit to exercise any right or
<PAGE>
remedy hereunder, whether before or after the occurrence of any Event of
Default, shall impair any such right or remedy or shall operate as a waiver
thereof or as a waiver of any such Event of Default. In the event that IBM
Credit at any time or from time to time dispenses with any one or more of the
requirements specified in this Agreement or any of the Other Documents, such
dispensation may be revoked by IBM Credit at any time and shall not be deemed to
constitute a waiver of any such requirement subsequent thereto. IBM Credit's
failure at any time or times to require strict compliance and performance by the
Customer of any undertakings, agreements, covenants, warranties and
representations of this Agreement or any Other Document shall not waive, affect
or diminish any right of IBM Credit thereafter to demand strict compliance and
performance thereof. Any waiver by IBM Credit of any Default by the Customer
under this Agreement or any of the Other Documents shall not waive or affect any
other Default by the Customer under this Agreement or any of the Other
Documents, whether such Default is prior or subsequent to such other Default and
whether of the same or a different type. None of the undertakings, agreements,
warranties, covenants, and representations of the Customer contained in this
Agreement or the Other Documents and no Default by the Customer shall be deemed
waived by IBM Credit unless such waiver is in writing signed by an authorized
representative of IBM Credit.
10.6. Severability. If any provision of this Agreement or the Other Documents or
the application thereof to any Person or circumstance is held invalid or
unenforceable, the remainder of this Agreement and the Other Documents and the
application of such provision to other Persons or circumstances will not be
affected thereby, the provisions of this Agreement and the Other Documents being
severable in any such instance.
10.7. One Loan. All Advances heretofore, now or at any time or times hereafter
made by IBM Credit to the Customer under this Agreement or the Other Documents
shall constitute one loan secured by IBM Credit's security interests in the
Collateral and by all other security interests, liens and encumbrances
<PAGE>
heretofore, now or from time to time hereafter granted by the Customer to IBM
Credit or any assignor of IBM Credit.
10.8. Additional Collateral. All monies, reserves and proceeds received or
collected by IBM Credit with respect to Accounts and other property of the
Customer in possession of IBM Credit at any time or times hereafter are hereby
pledged by Customer to IBM Credit as security for the payment of Customer's
Obligations and shall be applied promptly by IBM Credit on account of the
Customer's Obligations; provided, however, IBM Credit may release to the
Customer such portions of such monies, reserves and proceeds as IBM Credit may
from time to time determine, in its sole discretion.
10.9. No Merger or Novations. (A) Notwithstanding anything contained in any
document to the contrary, it is understood and agreed by the Customer and IBM
Credit that the claims of IBM Credit arising hereunder and existing as of the
date hereof constitute continuing claims arising out of the Obligations of
Customer under the Financing Agreement and any Other Document. Customer
acknowledges and agrees that such Obligations outstanding as of the date hereof
have not been satisfied or discharged and that this Agreement is not intended to
effect a novation of the Customer's Obligations under the Financing Agreement or
any Other Document.
(B) Neither the obtaining of any judgment nor the exercise of any power of
seizure or sale shall operate to extinguish the Obligations of the Customer to
IBM Credit secured by this Agreement and shall not operate as a merger of any
covenant in this Agreement, and the acceptance of any payment or alternate
security shall not constitute or create a novation and the obtaining of a
judgment or judgments under a covenant herein contained shall not operate as a
merger of that covenant or affect IBM Credit's rights under this Agreement.
10.10. Paragraph Titles. The Section titles used in this Agreement and the Other
Documents are for convenience only and do not define or limit the contents of
any Section.
10.11. Binding Effect; Assignment. This Agreement and the Other Documents shall
<PAGE>
be binding upon and inure to the benefit of IBM Credit and the Customer and
their respective successors and assigns; provided, that the Customer shall have
no right to assign this Agreement or any of the Other Documents without the
prior written consent of IBM Credit.
10.12. Notices. Except as otherwise expressly provided in this Agreement, any
notice required or desired to be served, given or delivered hereunder shall be
in writing, and shall be deemed to have been validly served, given or delivered
(A) upon receipt if deposited in the United States mails, first class mail, with
proper postage prepaid, (B) upon receipt of confirmation or answerback if sent
by telecopy, or other similar facsimile transmission, (C) one Business Day after
deposit with a reputable overnight courier with all charges prepaid, or (D) when
delivered, if hand-delivered by messenger, all of which shall be properly
addressed to the party to be notified and sent to the address or number
indicated as follows:
(i) If to IBM Credit at:
IBM Credit Corporation
1500 RiverEdge Parkway
Atlanta, GA 30328
Attention: Remarketer Finance Center Manager
Telecopy: (770) 644-4826
(ii) If to Information Technology Services, Inc. at:
Information Technology Services, Inc.
275 Marcus Blvd.
Hauppauge, NY 11788-2022
Attention: Chief Financial Officer
Telecopy: (516) 273-3681
or to such other address or number as each party designates to the other in the
manner prescribed herein.
<PAGE>
10.13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto were upon the same instrument.
10.14. ATTACHMENT A MODIFICATIONS. IBM Credit may modify the Product Financing
Period set forth in Attachment A from time to time if on at least two occasions
during any three-month period a Shortfall Amount has become due and payable and
may modify the Collateral Insurance Amount set forth in Attachment A from time
to time, in each case, by providing Customer with a new Attachment A. Any such
new Attachment A shall be effective as of the date specified in the new
Attachment A.
10.15. SUBMISSION AND CONSENT TO JURISDICTION AND CHOICE OF LAW. TO INDUCE IBM
CREDIT TO ACCEPT THIS AGREEMENT AND THE OTHER DOCUMENTS, THE CUSTOMER HEREBY
IRREVOCABLY AND UNCONDITIONALLY:
(A) SUBMITS ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING
RELATING TO THIS AGREEMENT AND ANY OTHER DOCUMENT, OR FOR THE RECOGNITION AND
ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL
JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND ANY FEDERAL DISTRICT
COURT IN NEW YORK.
(B) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH
COURTS AND WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREINAFTER HAVE TO THE VENUE
OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR
PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM
THE SAME.
(C) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE
EFFECTED BY DELIVERING SUCH PROCESS BY A PROCESS SERVER OR CERTIFIED MAIL (OR
ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO CUSTOMER AT ITS
ADDRESS SET FORTH IN SECTION 10.12 OR AT SUCH OTHER ADDRESS OF WHICH IBM CREDIT
SHALL HAVE BEEN NOTIFIED PURSUANT THERETO;
(D) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF
<PAGE>
PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN
ANY OTHER JURISDICTION.
(E) AGREES THAT THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS
AGREEMENT SHALL BE GOVERNED BY THE LAWS (WITHOUT GIVING EFFECT TO CONFLICT OF
LAW PROVISIONS) OF THE STATE OF NEW YORK.
10.16. JURY TRIAL WAIVER. EACH OF IBM CREDIT AND THE CUSTOMER HEREBY IRREVOCABLY
WAIVES THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING (INCLUDING ANY
COUNTERCLAIM) OF ANY TYPE IN WHICH IBM CREDIT AND THE CUSTOMER ARE PARTIES AS TO
ALL MATTERS ARISING DIRECTLY OR INDIRECTLY OUT OF THIS AGREEMENT OR ANY
DOCUMENT, INSTRUMENT OR AGREEMENT EXECUTED IN CONNECTION HEREWITH.
IN WITNESS WHEREOF, the Customer has read this entire Agreement, and has caused
its authorized representatives to execute this Agreement and has caused its
corporate seal to be affixed hereto as of the date first written above.
INFORMATION TECHNOLOGY SERVICES, INC.
By:_____________________________
Print Name:_____________________
Title:__________________________
ACCEPTED this_________day of___________________, 1996.
IBM CREDIT CORPORATION
By:___________________________
Print Name: __________________
Title: _______________________
<PAGE>
ATTACHMENT A, EFFECTIVE DATE September 24, 1996 ("IWCF ATTACHMENT A") TO
INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT ("IWCF AGREEMENT") DATED
SEPTEMBER 24, 1996
Customer: Information Technology Services, Inc.
I. Fees, Rates and Repayment Terms:
(A) Credit Line:Twenty Seven Million Five Hundred Thousand
($27,500,000.00);
(B) Borrowing Base:
(i) 85% of the amount of the Customer's Eligible Accounts as of the date
of determination as reflected in the Customer's most recent Collateral
Management Report, including A/R from Chase Manhattan Bank aged 90-120
days old; plus
(ii) Upon verification to IBM Credit's satisfaction and Notwithstanding
Section 3.1 of the IWCF, 85% on amounts of Deutsche Bank Accounts over 90
days, through 12/31/96; s to
(iii)100% of the Customer's inventory in the Customer's possession as of
the date of determination as reflected in the Customer's most recent
Collateral Management Report constituting Products (other than service
parts) financed through a Product Advance by IBM Credit. The value to be
assigned to such inventory shall be based upon the Authorized Supplier's
invoice price to Customer for Financed Products net of all applicable
price reduction credits.
<PAGE>
(C) Product Financing Charge: Prime Rate plus 1.375%
(D) Product Financing Period: 90 days
(E) Collateral Insurance Amount: Seven Million Dollars ($7,000,000.00)
(F) A/R Finance Charge:
(i) PRO Advance Charge: Prime Rate plus 1.625%
(ii) WCO Advance Charge: Prime Rate plus 1.625%
(G) Delinquency Fee Rate: Prime Rate plus 6.500%
(H) Shortfall Transaction Fee: Shortfall Amount multiplied by 0.30%
(I) Free Financing Period Exclusion Fee: Product Advance multiplied by
0.40%
(J) Other Charges:
(i) Application Processing Fee: N/A
(ii) Monthly Service Fee: $1,500.00
IWCF ATTACHMENT A TO INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT ("IWCF
AGREEMENT")
II. Bank Account
(A) Customer's Lockbox(es) and Special Account(s) will be maintained at the
following Bank(s):
Name of Bank: ___________________________________________________________
Address: ________________________________________________________________
<PAGE>
_________________________________________________________________________
Phone: __________________________________________________________________
Lockbox Address: ________________________________________________________
Special Account #: ______________________________________________________
Name of Bank: ___________________________________________________________
Address: ________________________________________________________________
_________________________________________________________________________
Phone: __________________________________________________________________
Lockbox Address: ________________________________________________________
Special Account #: ______________________________________________________
Name of Bank: ___________________________________________________________
Address: ________________________________________________________________
_________________________________________________________________________
Phone: __________________________________________________________________
Lockbox Address: ________________________________________________________
Special Account #: ______________________________________________________
Name of Bank: ___________________________________________________________
Address: ________________________________________________________________
_________________________________________________________________________
Phone: __________________________________________________________________
<PAGE>
Lockbox Address: ________________________________________________________
Special Account #: ______________________________________________________
IWCF ATTACHMENT A TO INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT ("IWCF
AGREEMENT")
III. Financial Covenants:
Definitions: The following terms shall have the following respective meanings in
this Attachment A. All amounts shall be determined in accordance with generally
accepted accounting principles (GAAP).
Current shall mean within the on-going twelve month period.
Current Assets shall mean assets that are cash or expected to become cash
within the on-going twelve months.
Current Liabilities shall mean payment obligations resulting from past or
current transactions that require settlement within the on-going twelve
month period. All indebtedness to IBM Credit shall be considered a Current
Liability for purposes of determining compliance with the Financial
Covenants.
Long Term shall mean beyond the on-going twelve month period.
Long Term Assets shall mean assets that take longer than a year to be
converted to cash. They are divided into four categories: tangible assets,
investments, intangibles and other.
Long Term Debt shall mean payment obligations of indebtedness which mature
more than twelve months from the date of determination, or mature within
twelve months from such date but are renewable or extendible at the option
of the debtor to a date more than twelve months from the date of
determination.
<PAGE>
Net Profit after Tax shall mean Revenue plus all other income, minus all
costs, including applicable taxes.
Revenue shall mean the monetary expression of the aggregate of products or
services transferred by an enterprise to its customers for which said
customers have paid or are obligated to pay, plus other income as allowed.
Subordinated Debt shall mean Customer's indebtedness to officers or owners
as evidenced by an executed Notes Payable Subordination Agreement in favor
of IBM Credit.
IWCF ATTACHMENT A TO INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT ("IWCF
AGREEMENT")
III. Financial Covenants (continued):
Tangible Net Worth shall mean:
Total Net Worth minus;
(a) goodwill, organizational expenses, pre-paid expenses,
deferred charges, research and development expenses, software
development costs, leasehold expenses, trademarks, trade
names, copyrights, patents, patent applications, privileges,
franchises, licenses and rights in any thereof, and other
similar intangibles (but not including contract rights) and
other current and non-current assets;
(b) all accounts receivable from employees, officers,
directors, stockholders and affiliates; and
(c) all callable/redeemable preferred stock.
Total Assets shall mean the total of Current Assets and Long Term Assets.
<PAGE>
Total Liabilities shall mean the Current Liabilities and Long Term Debt
less Subordinated Debt, resulting from past or current transactions, that
require settlement in the future.
Total Net Worth (the amount of owner's or stockholder's ownership in an
enterprise) is equal to Total Assets minus Total Liabilities.
Working Capital shall mean Current Assets minus Current
Liabilities.
IWCF ATTACHMENT A TO INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT ("IWCF
AGREEMENT")
III. Financial Covenants (continued):
Customer will be required to maintain the following financial
ratios and amounts "AT ALL TIMES:"
a) Revenue on an annual basis (i.e., the current fiscal
year-to-date Revenue annualized) to Working Capital ratio
greater than zero and equal to or less than 37.00:1.0;
b) Net Profit after Tax to Revenue ratio equal to or
greater than 0.50 Percent;
d) Total Liabilities to Tangible Net Worth ratio greater
than zero and equal to or less than 9.8:1.0;
IWCF ATTACHMENT A TO INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT ("IWCF
AGREEMENT")
<PAGE>
IV. Additional Conditions Precedent Pursuant to Section 5.1 (K) of the
Agreement:
. Executed Contingent Blocked Account Amendment;
. Executed Blocked Account Amendment;
. Executed Collateralized Guaranty of Syscom International, Inc.;
. Executed Notarized Personal Guaranty of John Spielberger;
. Executed Notarized Agreement from Non-Guaranteeing Spouse,
Catherine Spielberger;
. Executed guaranty of any shareholder(s) owning ten (10) percent
or more of the equity of Customer;
. Listing of all creditors providing accounts receivable financing
to Customer;
. A Collateral Management Report in the form of Attachment F as of
the Closing Date;
. A Compliance Certificate as to Customer's compliance with the financial
covenants set forth in Attachment A as of the last fiscal month of Customer
for which financial statements have been published;
. A Certificate of Location of Collateral whereby the Customer
certifies where Customer presently keeps or sells inventory,
equipment and other tangible Collateral;
. An Opinion of Counsel whereby the Customer's counsel states his or
her opinion about the execution, delivery and performance of the
Agreement and other documents by the Customer;
. Subordination or Intercreditor Agreements from all creditors having a lien
which is superior to IBM Credit in any assets that IBM Credit relies on to
satisfy Customer's obligations to IBM Credit;
<PAGE>
IWCF ATTACHMENT A TO INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT ("IWCF
AGREEMENT")
IV. Additional Conditions Precedent Pursuant to Section 5.1 (K) of the
Agreement (continued):
A copy of an all-risk insurance certificate pursuant to Section 7.8
(B) of the Agreement.
IWCF ATTACHMENT B TO INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT ("IWCF
AGREEMENT")
I. Liens.
II. Locations of Offices, Records and Inventory.
(A) Principal Place of Business and Chief Executive Office
(B) Locations of Assets, Inventory and Equipment (including warehouses)
Location Leased (Y/N)
<PAGE>
III. Fictitious Names.
IV. Organization.
(A) Subsidiaries
Name Jurisdiction Owner Percent
Owned
IWCF ATTACHMENT B TO INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT ("IWCF
AGREEMENT")
(B) Affiliates
Name Capacity
V. Judgments or Litigation.
<PAGE>
VI. Environmental Matters.
VII. Indebtedness.
IWCF ATTACHMENT C
INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT ("IWCF AGREEMENT")
COMPLIANCE CERTIFICATE
TO: IBM CREDIT CORPORATION
(INSERT RFC ADDRESS)
The undersigned authorized officers of ____________________________
("________________"), hereby certify on behalf of the Customer, with respect to
the Inventory and Working Capital Financing Agreement executed by and between
____________ and IBM Credit Corporation ("IBM Credit") on ______________, 19__,
as amended from time to time (the "Agreement"), that (A) ___________ has been in
compliance for the period from ______________, 19__ to _________ ____, 19__ with
the financial covenants set forth in Attachment A to the Agreement, as
demonstrated below, and (B) no Default has occurred and is continuing as of the
date hereof, except, in either case, as set forth below. All capitalized terms
used herein and not otherwise defined shall have the meanings assigned to them
in the Agreement.
I. Financial Covenants.
FINANCIAL COVENANTS REQUIRED ACTUAL
<PAGE>
Annualized Revenue
to Working Capital
Current Assets to
Current Liabilities
Net Profit After
Tax to Revenue
Total Liabilities
to Tangible Net
Worth
Tangible Net Worth
IWCF ATTACHMENT C
INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT ("IWCF AGREEMENT")
II. Calculation of Tangible Net Worth.
Total Assets MINUS Total Liabilities _______________________
LESS:
goodwill _______________________
organizational expenses _______________________
<PAGE>
pre-paid expenses _______________________
deferred charges, etc. _______________________
leasehold expenses _______________________
all other _______________________
callable/redeemable preferred stock _______________________
officer, employee, director, stockholder _______________________
and affiliate receivables
Total Tangible Net Worth
=======================
Attached hereto are Financial Statements as of and for the end of the
fiscal _____________ ended on the applicable date, as required by Section 7.1 of
the Inventory and Working Capital Financing Agreement.
Submitted by:
- -----------------------------------------
(Customer Name)
By:______________________________________
Print Name:______________________________
Title:___________________________________
IWCF ATTACHMENT E TO
INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT ("IWCF AGREEMENT")
<PAGE>
AUTHORIZED SUPPLIERS
IWCF ATTACHMENT F TO
INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT ("IWCF AGREEMENT')
(Customer Name)
COLLATERAL MANAGEMENT REPORT
FOR THE MONTH ENDING ______________
GROSS NET
COLLATERAL ADVANCE COLLATERAL
VALUE RATE VALUE
--------- ------- ----------
1. TOTAL INVENTORY
- IBM Credit Financed Attach. A $0.00
- In-Transit 0.00
(Obtain from IBM Credit)
- Returned Inventory 0.00
---------
TOTAL INVENTORY $0.00 ___% $0.00
(Attach Inventory Report (A))
<PAGE>
2. ELIGIBLE A/R Attach. B
- Gross Receivables $0.00
- Less Ineligibles:
A/R over 90 days 0.00
50% over 90 days 0.00
Other 0.00
---------
ELIGIBLE A/R $0.00 ___% $0.00
(Attach A/R Aging Report (B)) __________
3. TOTAL IBM CREDIT COLLATERAL $0.00
4. LESS NET IBM CREDIT OUTSTANDINGS $0.00
(Obtain from IBM Credit) __________
5. EXCESS COLLATERAL $0.00
(Total Collateral - Net Outstanding (greater) 0)
6. SHORTFALL $0.00
(Total Collateral - Net Outstanding (less than) 0)
(Attach Payment & Remittance Advice)
Signature _________________________________________ Date ___________
Title _________________________________________
IWCF ATTACHMENT G TO
INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT ("IWCF AGREEMENT')
CERTIFICATE OF LOCATION OF COLLATERAL
The undersigned, the (insert title of office held) of (insert Customer's
Name) ("insert abbreviated name"), hereby certifies with reference to the
Inventory and Working Capital Financing Agreement, dated (insert date Agreement
<PAGE>
signed), between (insert Customer's abbreviated name) and IBM Credit Corporation
as follows:
(a) The following are all the locations where (insert abbreviated name)
presently keeps or sells inventory, equipment or other tangible Collateral:
LOCATION LEASE (YES/NO)
IN WITNESS WHEREOF, I have hereunto set my hand this day of_________
_____________, 19__ .
_____________________________
(Customer Name)
By:__________________________
Title:_______________________
ATTACHMENT I
{LETTERHEAD OF CUSTOMER'S COUNSEL}
{DATE}
IBM Credit Corporation
_______________________
_______________________
<PAGE>
Re: ___________________________
Ladies and Gentlemen:
We have acted as counsel for __________________________, a
____________ corporation (the "Borrower") in connection with (A) the execution
and delivery of that certain Inventory and Working Capital Financing Agreement,
dated as of ________________, 19___ (the "Financing Agreement"), by and among
the Borrower and IBM Credit Corporation ("IBM Credit"), and the other
agreements, instruments, and documents executed and delivered by the Borrower in
connection with the Financing Agreement. Unless otherwise defined herein,
capitalized terms used herein shall have the meanings ascribed to such terms in
the Financing Agreement.
In this connection, we have examined the following documents:
(i) The Certificate of Incorporation and the By-laws of the
Borrower, each as amended to date;
(ii) The records of the proceedings taken by the Board of Directors of the
Borrower in connection with the execution, delivery, and performance of the
Financing Documents to which they are a party (as defined below);
(iii) The Financing Agreement;
(iv) The Contingent Blocked Account Amendment;
(v) Acknowledgement copies of the UCC-1 Financing Statements listed on
Exhibit A hereto (the "Financing Statements") executed by the Borrower naming it
as Debtor and IBM Credit as Secured Party and filed in the offices set forth on
Exhibit A;
(vi) {Additional Documents if necessary}
The documents referred to in clauses (iii) through (vi) above are
hereinafter referred to as the Financing Documents.
<PAGE>
In our examination, we have assumed the genuineness of all signatures,
the legal capacity of natural persons, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified or photostatic copies, and the
authenticity of the originals of such latter documents, and, regarding documents
executed by parties other than the Borrower, that those parties had the power
and the capacity to enter into, execute, deliver and perform all obligations
under such documents, the due authorization of all requisite action with respect
to such documents, and the validity and binding effect of such documents upon
such other parties.
As to any facts material to this opinion, we have relied upon the
representations and warranties of the Borrower contained in each of of the
Financing Documents, and in certificates delivered by the Borrower pursuant to
each of the Financing Documents, statements, and representations of officers and
other representatives of the Borrower, and, as to the matters addressed therein,
certificates or correspondence from public officials. For purposes of the
opinion set forth in Paragraph 4, the term "Material Contracts" means the
agreements and instruments to which the Borrower is subject which have been
identified to us by officers of the Borrower and set forth on Exhibit B hereto
as the agreements and instruments which are material to the business or
financial condition of the Borrower; and the term "Material Orders" means those
orders and decrees to which the Borrower is subject which have been identified
to us by officers of the Borrower and set forth in Exhibit C hereto as the
orders and decrees, agreements, and instruments which are material to the
business or financial condition of the Borrower.
As used herein, the term "UCC" refers to the Uniform commercial Code
as in effect in the State of New York.
We are members of the bar in the State of ______________ and express
no opinion as to the laws of any other jurisdiction except the General
Corporation Law of the State of ____________ and the federal laws of the United
States of America.
Based on the foregoing, and subject to the assumptions and
qualifications set forth herein, we are of the opinion that:
<PAGE>
1. Borrower is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation and is
duly qualified and authorized to do business and in good standing as a foreign
corporation in each jurisdiction where, to our knowledge, it presently is
engaged in business and is required to be qualified.
2. Borrower has all requisite corporate power and authority (a) to
own, lease, and operate its properties and assets and to carry on its business
as now being conducted; and (b) to execute, delivery, and performance of the
Financing Documents to which it is a party.
3. All corporate action on the part of the Borrower requisite for the
execution, delivery, and performance of the Financing Documents to which it is a
party has been duly taken.
4. The execution, delivery, and performance by the Borrower of the
Financing Documents to which it is a party will not (a) violate, be in conflict
with, result in the breach of, or constitute (with due notice or lapse of time,
or both) a default under (i) the Certificate of Incorporation or By-laws of
Borrower or any resolution of its Board Directors or any committee thereof, (ii)
any Material Contract, or (iii) any federal or state law (including, without
limitation, environmental or occupational health, and safety law), regulation,
rule, Material Order, or legal requirement of any federal, state, or public
authority or agency applicable to Borrower; or (b) result in the creation or
imposition of a lien of any nature whatsoever upon any of the Borrower's
property or assets other than as represented by the Financing Documents.
5. Borrower has obtained any and all consents, approvals, or other
authorizations required to be obtained pursuant to its Certificate of
Incorporation and By-laws in connection with the execution, delivery, and
performance of the Financing Documents. No consent, approval, or authorization
of or by any court, administrative agency, other governmental authority, or any
other Person is required in connection with the execution, delivery, and
performance by the Borrower of the Financing Documents that has not already been
obtained.
6. To our knowledge, there are no actions, proceedings, or
investigations pending or threatened against the Borrower which question the
validity of the
<PAGE>
Financing Documents to which it is a party or relating the transactions
contemplated thereby.
7. Each of the Financing Documents has been duly executed and delivered by
duly authorized officer of the Borrower and constitutes the legal, valid, and
binding obligation of the Borrower, enforceable against the Borrower in
accordance with its terms, except that, in each case, (i) enforcement may be
subject to and limited by applicable bankruptcy, insolvency, reorganization,
moratorium, or other laws now or hereafter in effect relating to creditors'
rights generally, (ii) 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, and
(iii) certain of the remedial provisions including waivers with respect to the
exercise of remedies against the Collateral contained in the Financing Documents
may be unenforceable in whole or in part, but the inclusion of such provisions
does not affect the validity of the Financing Documents, each taken as a whole
and, the Financing Documents, each taken as a whole, contain adequate remedial
provisions for the practical realization of the security purported to be
afforded thereby.
8. The Financing Agreement is effective to create in favor of IBM Credit a
valid security interest within the meaning of the UCC in the Collateral as
security for the obligations purported to be secured thereby; and (ii) the
Financing Statements are in appropriate form and have been duly filed resulting
in a perfected security interest (as such term is defined in Section 9-303 of
the UCC) of IBM Credit in the Collateral in which security interests to which
Article 9 of the UCC applies.
9. Borrower is not an "investment company" or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.
This opinion is rendered solely to and for the benefit of IBM Credit in
connection with the execution and delivery of the Financing Documents and may
not be relied upon by any other person, firm, or corporation without our prior
written consent, except that it may be furnished to any prospective purchaser of
a participation in the rights of IBM Credit and may be furnished to and relied
upon by any Person which hereafter acquires such a participation.
<PAGE>
This opinion is limited to laws as currently in effect on the date hereto
and to the facts as they currently exist. We assume no obligation to revise,
supplement or otherwise update this opinion.
Very truly yours,
EXHIBIT A
UCC-1 FINANCING STATEMENT
EXHIBIT B
MATERIAL CONTRACTS
EXHIBIT C
MATERIAL ORDERS
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
Information Technology Services, Inc., a New York Corporation.
<PAGE>
To the Board of Directors
SysComm International Corporation and Subsidiaries
Hauppauge, New York
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
ALBRECHT, VIGGIANO, ZURECK & COMPANY, P.C.
Hauppauge, New York
April 21, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001037417
<NAME> SYSCOMM INTERNATIONAL CORPORATION
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-1-1996
<PERIOD-END> MAR-31-1997
<CASH> 672,227
<SECURITIES> 206,400
<RECEIVABLES> 13,986,108
<ALLOWANCES> (151,516)
<INVENTORY> 8,703,014
<CURRENT-ASSETS> 23,626,941
<PP&E> 1,540,742
<DEPRECIATION> (817,594)
<TOTAL-ASSETS> 24,543,969
<CURRENT-LIABILITIES> 19,409,821
<BONDS> 0
0
0
<COMMON> 36,322
<OTHER-SE> 5,012,670
<TOTAL-LIABILITY-AND-EQUITY> 24,543,969
<SALES> 39,158,875
<TOTAL-REVENUES> 39,158,875
<CGS> 33,890,028
<TOTAL-COSTS> 33,890,028
<OTHER-EXPENSES> 2,957,149
<LOSS-PROVISION> 95,000
<INTEREST-EXPENSE> 552,143
<INCOME-PRETAX> 1,817,115
<INCOME-TAX> 766,800
<INCOME-CONTINUING> 1,050,315
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,050,315
<EPS-PRIMARY> .29
<EPS-DILUTED> 0
</TABLE>
<PAGE>
COMBINED CONSENT AND REPORT OF
INDEPENDENT ACCOUNTANTS ON SCHEDULE
To the Board of Directors
SysComm International Corporation and Subsidiaries
Hauppauge, New York
The audits referred to in our report on page F-2 included the related financial
statement schedule on page S-2 as of September 30, 1996, and for each of the
years in the three-year period ended September 30, 1996, included in this Form
S-1. This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
ALBRECHT, VIGGIANO, ZURECK & COMPANY, P.C.
Hauppauge, New York
April 21, 1997
S-1
<PAGE>
SYSCOMM INTERNATIONAL CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
--------------------------
Balance at (1) Charged (2) Charged Balance
Beginning to Costs and to Other at End
Deducted from Assets of Period Expenses Accounts Deductions of Period
- -------------------------------------------------- ---------- ------------ ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year ended September 30, 1994 $ 103,000 $ 271,457 $ -0- $ 374,457(a) $ -0-
Year ended September 30, 1995 -0- 50,000 -0- -0- 50,000
Year ended September 30, 1996 50,000 107,273 -0- 93,427(a) 63,846
Six months ended March 31, 1997 (unaudited) 63,846 95,000 -0- 44,719(a) 114,127
Allowance for Sales Returns:
Year ended September 30, 1994 $ -0- $ -0- $ -0- $ -0- $ -0-
Year ended September 30, 1995 -0- 125,000 -0- -0- 125,000
Year ended September 30, 1996 125,000 -0- -0- 87,611(a) 37,389
Six months ended March 31, 1997 (unaudited) 37,389 -0- -0- -0- 37,389
Allowance for Net Unrealized Losses
on Marketable Equity Securities:
Year ended September 30, 1994 $ -0- $ -0- $ 382,500(b) $ -0- $ 382,500
Year ended September 30, 1995 382,500 -0- 337,500(b) -0- 720,000
Year ended September 30, 1996 720,000 -0- 123,750(b) -0- 843,750
Six months ended March 31, 1997 (unaudited) 843,750 -0- -0- 90(c) 843,660
</TABLE>
(a) Amounts written off, net of recoveries.
(b) Net unrealized loss on marketable equity securities recorded in
stockholders' equity.
(c) Net unrealized gain on marketable equity securities recorded in
stockholders' equity.
S-2
