<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 11, 1997
REGISTRATION NO. 333-26439
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SECURACOM, INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
7373
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
22-2817302
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
50 TICE BOULEVARD
WOODCLIFF LAKE, NEW JERSEY 07675
(201) 930-9500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
RONALD C. THOMAS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SECURACOM, INCORPORATED
50 TICE BOULEVARD
WOODCLIFF LAKE, NEW JERSEY 07675
(201) 930-9500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------
Copies to:
MICHAEL JOSEPH, ESQ.
DYER ELLIS & JOSEPH P.C.
600 NEW HAMPSHIRE AVE., N.W.
SUITE 1000
WASHINGTON, D.C. 20037
(202) 944-3000
THOMAS R. DENISON, ESQ.
GIBSON, DUNN & CRUTCHER LLP
1801 CALIFORNIA STREET
SUITE 4100
DENVER, COLORADO 80202
(303) 298-5700
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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. [ ]
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. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
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 September 11, 1997
PROSPECTUS
1,600,000 SHARES
LOGO
COMMON STOCK
------------------------
Of the 1,600,000 shares of Common Stock of the Company (the "Common Stock")
offered hereby, 1,400,000 shares are being issued and sold by Securacom,
Incorporated ("Securacom" or the "Company") and 200,000 are being sold by a
stockholder of the Company (the "Selling Stockholder"). See "Principal and
Selling Stockholders." The Company will not receive any of the proceeds from the
sale of shares by the Selling Stockholder.
Prior to this offering (the "Offering"), there has been no public market
for the Common Stock. It is currently estimated that the initial public offering
price will be between $6.50 and $8.50 per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. Application has been made to list the Common Stock on the
American Stock Exchange under the proposed symbol "SFT."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN RISKS THAT
SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK.
------------------------
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>
<CAPTION>
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING STOCKHOLDER
PUBLIC COMMISSIONS (1) COMPANY (2) (3)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share..... $ $ $ $
- --------------------------------------------------------------------------------------------------
Total (4)..... $ $ $ $
==================================================================================================
</TABLE>
(1) Excludes a non-accountable expense allowance payable by the Company and the
Selling Stockholder to the Representatives and issuance by the Company to
the Representatives for nominal consideration of three-year warrants to
purchase up to 140,000 shares of Common Stock issued by the Company at a
price per share equal to 120% of the Price to Public. In addition, the
Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $876,000,
including the Company's portion of the Representatives' non-accountable
expense allowance.
(3) Before deducting the Selling Stockholder's portion of the Representatives'
non-accountable expense allowance.
(4) The Selling Stockholder has granted the Underwriters an option, exercisable
within 45 days of the date hereof, to purchase up to an additional 240,000
shares of Common Stock solely to cover over-allotments, if any, at the Price
to Public less the Underwriting Discounts and Commissions. If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, Proceeds to Company, and Proceeds to Selling Stockholder will
be $ , $ , $ , and $ , respectively. See
"Underwriting."
------------------------
The shares of Common Stock are being offered severally by the Underwriters
named herein, subject to prior sale, when, as and if delivered to and accepted
by the Underwriters, and subject to other conditions. It is expected that
delivery of the certificates representing the shares of Common Stock will be
made against payment therefor at the offices of Cruttenden Roth Incorporated,
Irvine, California, on or about , 1997.
------------------------
CRUTTENDEN ROTH SCOTT & STRINGFELLOW, INC.
INCORPORATED
The date of this Prospectus is , 1997
<PAGE> 3
SECURACOM,
INCORPORATED
[Diagram of Services
Offered by Securacom]
SINGLE SOURCE SECURITY
THROUGH TECHNOLOGY
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR AND PURCHASE SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 4
Securacom, Incorporated is a fully integrated single source security company.
The Company provides consulting and planning, engineering and design, systems
integration, and maintenance and technical support services to commercial and
government clients worldwide. Securacom's capabilities enable it to provide
clients with single source turn-key solutions for medium and large scale complex
security projects. Securacom has completed security projects for airports,
corporations, utilities, prisons, universities, and federal, state and local
governments.
<TABLE>
<S> <C>
[Picture of New York City's [Picture of Tennessee Valley
World Trade Center] Authority Facility]
Federal, State and Local Utilities
Government
</TABLE>
<PAGE> 5
<TABLE>
<S> <C>
[Picture of NationsBank [Picture of Processing
Headquarters] Facility]
Corporations Process and Manufacturing
Facilities
</TABLE>
[Picture of Washington
Dulles International Airport]
Airports
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Except as otherwise indicated, all information in
this Prospectus assumes no exercise of the Underwriters' over-allotment option.
THE COMPANY
Securacom is a single-source provider of comprehensive technology-based
security solutions for medium and large commercial and government facilities in
the United States and abroad. The Company offers a broad range of services,
consisting of: (i) consulting and planning; (ii) engineering and design; (iii)
systems integration; and (iv) maintenance and technical support. The solutions
provided by the Company include integrated security systems comprised of a
command center managing one or more subsystems and components, primarily access
control systems, intrusion detection systems, closed circuit television systems,
critical condition monitoring systems and fire detection systems. The Company is
not aware of any other company providing this comprehensive range of services on
a national basis. The Company serves more than 40 clients including airports,
hospitals, prisons, corporations, utilities, universities and government
facilities. These clients include Washington Dulles International Airport,
Hewlett-Packard Company, EDS, United Airlines, Gillette Corporation, MCI
Communications Corporation and New York City's World Trade Center.
The Company believes that the multi-billion dollar market for
technology-based security solutions is growing rapidly due to the following
factors: (i) many existing security systems are becoming technologically
obsolete and inadequate or consist of internally incompatible subsystems,
creating a need for re-engineering, upgrading and integration; (ii)
technological advancements provide the opportunity to increase the scope and
cost-efficiency of many routine security tasks, such as the replacement of
guards with electronic surveillance; (iii) the proliferation of computers and
advanced communications systems has created a new and growing security need for
clients to prevent the misuse of proprietary information and other intellectual
property; and (iv) a number of highly publicized acts of terrorism have led to
legislation and corporate policies regarding the increased need for physical
safety.
The security industry is highly fragmented and consists of a broad array of
equipment manufacturers and distributors, consultants and engineers and systems
integrators, each of which provides only a portion of the services required to
deliver an integrated security solution. As a result, clients are frequently
required to coordinate the planning, design and implementation of a project
through multiple service providers and vendors. This approach causes client
frustration with project delays, cost inefficiencies, lack of vendor
accountability and incompatible subsystems. Securacom believes that as a
single-source provider of security solutions it can expedite project completion
and reduce its clients' manpower requirements and aggregate project costs. In
addition, the Company has the flexibility to respond to each of its client's
particular needs, whether the client requires only one of the services offered
by the Company, various services on an ongoing basis, or a comprehensive turnkey
security solution using all of the Company's areas of expertise and its national
network of offices.
Securacom's objective is to become the leading provider of comprehensive,
high-value-added, technology-based security solutions for medium and large
commercial and government facilities in the United States and abroad. The
Company's strategy focuses on developing long-term client relationships. These
relationships allow the Company to integrate itself into clients'
decision-making processes by identifying solutions for new security systems
upgrades and other ongoing security needs. Additional key elements of the
Company's strategy include: (i) capitalizing on its position as a national
single-source provider of security solutions; (ii) continuing to expand its
client base in targeted industries; (iii) maintaining its high level of
technological sophistication; (iv) enhancing its ability to pursue bidding
opportunities on larger projects; and (v) continuing to focus on providing
high-value-added services.
The Company began operations in 1987 in association with a large privately
held engineering firm. In 1992, the Company became independent from the
engineering firm in conjunction with a capital infusion from a private
investment group. At the same time, the Company hired new management with
extensive experience
3
<PAGE> 7
in the security industry. Since then, the Company has devoted a substantial
amount of resources and capital to enhancing its technical capability and
services offerings, hiring and training key personnel and expanding its client
base. As part of this effort, the Company has opened four regional offices in
the United States and one international office in Moscow, Russia. Securacom
believes that it now has in place the infrastructure and capabilities to
substantially increase revenues and profitability. As a result of these
initiatives, revenues have grown from $2.4 million in 1994 to $3.2 million in
1995 and $5.8 million in 1996. The Company achieved its first two profitable
quarters of operations during the six months ended June 30, 1997, with net
income of $0.4 million on revenues of $7.2 million. The Company's headquarters
are located at 50 Tice Boulevard, Woodcliff Lake, New Jersey 07675, and its
telephone number is (201) 930-9500.
RECENT DEVELOPMENTS
During the first six months of 1997, the Company contracted to provide
services to several new clients. The Company signed an agreement to provide a
broad range of services in connection with the upgrading of Amtrak's access
control systems at eight facilities in the northeast and California.
Additionally, it contracted to prepare and completed a security master plan for
Xerox Corporation's manufacturing and engineering facilities in Rochester, New
York. The Company also finalized an agreement to provide a comprehensive access
control system upgrade at the headquarters of Rostelecom, the primary Russian
long distance telephone service provider. This project expands Securacom's
Moscow client base which also includes Moscow Local Telephone System and US
WEST. In April, the Company signed a joint venture agreement with Ahmad N.
AlBinali & Sons Co., a large Saudi Arabian engineering and construction company,
to develop and conduct business in the Kingdom of Saudi Arabia.
4
<PAGE> 8
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.......... 1,400,000 shares
Common Stock offered by the Selling
Stockholder................................ 200,000 shares
Common Stock outstanding after the
Offering................................... 5,834,140 shares(1)
Use of Proceeds to the Company............... To repay certain indebtedness, to expand and
upgrade the Company's management information
systems, to further develop and document the
Company's command center integration software
and for working capital and general corporate
purposes. See "Use of Proceeds."
Proposed American Stock Exchange symbol...... SFT
</TABLE>
- ---------------
(1) Based upon the number of shares outstanding as of August 31, 1997. Does not
include 1,557,962 shares issuable upon the exercise of warrants outstanding
as of August 31, 1997, of which warrants to purchase 1,044,626 shares were
exercisable as of that date.
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- ----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Earned revenues................................... $ 2,395 $ 3,177 $ 5,824 $ 1,931 $7,240
Gross profit................................. 809 997 1,408 685 2,030
Selling, general and administrative expenses...... 2,670 2,871 3,701 1,941 1,381
Net income (loss)................................. (1,888) (1,768) (2,513) (1,331) 429
Net income (loss) per share....................... $ (0.54) $ (0.45) $ (0.58) $ (0.31) $ 0.09
Weighted average number of common shares
outstanding..................................... 3,493 3,909 4,368 4,256 4,532
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------
AS
ACTUAL ADJUSTED(1)
------- -------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................... $ 125 $ 3,507
Working capital............................................................. 838 4,219
Total assets................................................................ 7,354 12,735
Long-term debt, less current maturities..................................... 3,410 210
Total stockholders' equity (deficiency)..................................... (1,105) 7,477
</TABLE>
- ---------------
(1) As adjusted to give effect to the sale of Common Stock in the Offering by
the Company at an assumed offering price of $7.50 and the application of the
net proceeds therefrom. Does not give effect to the potential issuance of
1,557,962 shares issuable upon the exercise of warrants outstanding as of
August 31, 1997, of which warrants to purchase 1,044,626 shares were
exercisable as of that date.
5
<PAGE> 9
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be carefully considered in evaluating an investment in
the Common Stock offered hereby.
HISTORY OF LOSSES, ACCUMULATED DEFICIT AND NEGATIVE NET WORTH
The Company has incurred net losses in each year since inception. The
Company reported net losses of $1.9 million, $1.8 million and $2.5 million for
the years ended December 31, 1994, 1995 and 1996, respectively. The Company's
accumulated deficit through June 30, 1997 was $11.8 million and as of that date
it had negative net worth of $1.1 million. Although the Company reported net
income of $0.4 million for the six months ended June 30, 1997, its first two
quarters of profitable operations, there can be no assurance the Company will
maintain profitable operations in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
financial statements and the notes thereto.
RISKS ASSOCIATED WITH GROWTH STRATEGY
The Company's strategy envisions a period of rapid growth that may put a
strain on its administrative and operational resources. While the Company
believes that it has established a significant infrastructure to support growth,
its ability to effectively manage growth will require it to continue to expand
the capabilities of its operational and management systems and to attract,
train, manage and retain qualified project managers, engineers and technicians.
There can be no assurance that it will be able to do so. If the Company is
unable to successfully manage its growth, the Company's business, operating
results and financial condition could be adversely affected.
DEPENDENCE UPON MANAGEMENT
The Company is dependent upon the continued services of key members of its
management, including its President and Chief Executive Officer, Ronald C.
Thomas. The loss of one or more key members of management could have a material
adverse effect on the Company. The Company does not maintain key-man life
insurance policies on members of management. See "Management."
DEPENDENCE ON LIMITED NUMBER OF CLIENTS
For the year ended December 31, 1996 the Company's three largest clients,
New York City's World Trade Center, the Metropolitan Washington Airport
Authority and MCI Communications Corporation, in the aggregate, accounted for
64% of its revenues, and three additional clients together accounted for an
additional 18% of its revenues. The Company anticipates that its three largest
clients will continue to account for the majority of its revenues during 1997.
In the first six months of 1997, these three clients accounted for 57%, 22% and
6% of its revenues, respectively. The loss of any of the Company's major clients
could adversely affect the Company's business, operating results and financial
condition. Several of the projects for the Company's major clients, including
the World Trade Center project, will be substantially completed in 1997, and the
Company's future operating results will depend on its ability to develop future
sales prospects and generate orders from new and existing clients.
CANCELLATION OF CONTRACTS
A majority of the Company's contracts are subject to cancellation by the
Company's clients upon short notice. The Company's contracts with government
entities are subject to modification or termination for the convenience of the
government. Although these government contracts generally extend over several
years, such contracts are typically funded on an annual basis and may be
terminated prior to completion because of lack of funding. Contracts with
corporations also frequently permit the client to terminate the Company's
services for any reason, with limited notice to the Company. Although to date
none of the Company's contracts has been terminated prior to completion, there
can be no assurance that this will not occur in the future, resulting in a loss
of a significant portion of the Company's backlog with little warning.
6
<PAGE> 10
EXPOSURE TO PROFESSIONAL LIABILITY
In the event of a breach of a security system designed, installed,
maintained, or engineered by the Company, the Company may be subject to a claim
that an error or omission on the part of the Company contributed to the damages
resulting from such breach, which damages could be substantial. While the
Company maintains insurance covering such risk, there can be no assurance that
such coverage, currently limited to $1.0 million, will be adequate or that such
insurance will cover all such risks associated with the Company's services. Any
such claim, even if covered by insurance, could materially and adversely affect
the Company.
COMPETITION
The security industry is highly competitive. The Company competes on a
local, regional and national level with security equipment manufacturers,
systems integrators, consulting firms and engineering and design firms. Many of
its competitors have greater name recognition and financial resources than the
Company. The Company may also face competition from potential new entrants into
the security industry or increased competition from existing competitors that
may attempt to develop the ability to offer the full range of services offered
by the Company. The Company believes that competition is based primarily on the
ability to deliver solutions that meet a client's requirements and, to a lesser
extent, on price. While the Company believes its position as the only national,
single-source provider of comprehensive, technology-based security solutions
gives it a competitive advantage, there can be no assurance that the Company's
competitors will not expand the scope of their services or that other
participants in the security industry will not enter the markets served by the
Company. There can be no assurance that the Company will be able to compete
successfully in the future against existing or potential competitors.
OFFERING PROCEEDS TO BENEFIT AFFILIATED PARTIES
The Company will use approximately $3.4 million, or 39.1% of the net
proceeds of the Offering to the Company, to repay outstanding debentures held by
certain limited partners of the Company's largest stockholder. See "Use of
Proceeds" and "Certain Transactions."
CONTROL BY CURRENT STOCKHOLDERS
Upon completion of the Offering, approximately 41.5% of the outstanding
shares of the Common Stock will be owned by two limited partnerships, the
general partner of which is KuwAm Corporation ("KuwAm"). Wirt D. Walker, III,
the Company's Chairman, is the Managing Director of KuwAm. The individual
limited partners of such partnerships, including Mr. Walker, will own an
additional 19.8% of the outstanding Common Stock after the Offering.
Accordingly, Mr. Walker, acting through these partnerships, may have the ability
to control the Company's Board of Directors and, therefore, the business,
policies and affairs of the Company. Such control could preclude unsolicited
acquisitions of the Company and, consequently, adversely affect the market price
of the Common Stock. See "Principal and Selling Stockholders" and "Description
of Capital Stock."
MANAGEMENT'S BROAD DISCRETION IN APPLICATION OF PROCEEDS
Approximately $2.9 million, or 33.3%, of the estimated net proceeds of the
Offering to the Company have been allocated to working capital and general
corporate purposes. Accordingly, the Company will have broad discretion as to
the application of such proceeds. See "Use of Proceeds."
LENGTHY SALES CYCLE
The sale of the Company's services frequently involves a substantial
commitment of resources to evaluate a potential project and prepare a proposal.
In addition, approval of proposals often involves a lengthy process due to
clients' internal procedures and capital expenditure approval processes.
Accordingly, the sales cycle associated with the Company's services is typically
lengthy and subject to certain risks that are beyond the
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<PAGE> 11
Company's control, including risks relating to client's budgetary constraints
and internal priorities or procedures.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company's quarterly results have varied significantly in the past and
will likely continue to do so in the future due to a variety of factors,
including the timing and nature of projects from which revenues are recognized
during any particular quarter. Such fluctuations may contribute to volatility in
the market price for the Common Stock. In particular, the Company has only had
two profitable quarters to date. If the Company has one or more unprofitable
quarters in the future, the market price for the Common Stock could be adversely
affected.
ABSENCE OF TRADING MARKET; DETERMINATION OF OFFERING PRICE; VOLATILITY OF STOCK
PRICE
Prior to the Offering there has been no public market for the Common Stock.
Accordingly, there can be no assurance that an active or sufficiently large
trading market will develop or be sustained upon completion of the Offering or
that the market price of the Common Stock will not decline below the initial
public offering price. The initial public offering price of the Common Stock
will be determined by negotiations among the Company and the Representatives of
the Underwriters and may not be indicative of the prices that will prevail in
the public market. The trading prices of the Common Stock could be subject to
wide fluctuations in response to quarter-to-quarter variations in the Company's
operating results, material announcements by the Company, general conditions in
the security industry, or other events or factors, many of which are beyond the
Company's control. In addition, the stock market as a whole and individual
stocks have experienced extreme price and volume fluctuations, which have often
been unrelated to the performance of the related corporations. The Company's
operating results in future quarters may be below the expectations of securities
analysts and investors. In such event, the price of the Common Stock will likely
decline, perhaps substantially. See "Underwriting."
ANTI-TAKEOVER PROVISIONS; POTENTIAL FOR PREFERRED SHARE ISSUANCE
Certain provisions of the Company's Certificate of Incorporation and
certain provisions of the Delaware General Corporation Law may make it difficult
to change control of the Company and replace incumbent management. For example,
the Certificate of Incorporation permits the Board of Directors, without
stockholder approval, to issue additional shares of Common Stock or establish
one or more classes or series of Preferred Stock having such number of shares,
designations, relative voting rights, dividend rates, liquidation and other
rights, preferences and limitations as the Board of Directors may determine,
which issuance of Preferred Stock may adversely affect the voting power of the
holders of the Common Stock. In addition, the Company's Board of Directors has
adopted a stockholder rights plan that could further discourage attempts to
acquire control of the Company. See "Description of Capital Stock." The Company
has also entered into employment and consulting agreements with certain officers
which provide that upon the occurrence of certain events following certain
changes in control of the Company, such officers may be entitled to receive two
times their annual base salaries. See "Management -- Employment and Consulting
Agreements." The significant ownership position of certain stockholders may also
have the effect of deterring a change of control. See "Principal and Selling
Stockholders."
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of shares by existing security holders could have an adverse
effect on the market price of the Company's Common Stock or otherwise impair the
Company's ability to raise additional capital. Upon completion of this offering,
the Company will have outstanding 5,834,140 shares of Common Stock. Of these
shares, the 1,600,000 shares sold in the Offering will generally be freely
tradeable without restriction or further registration under the Securities Act
of 1933, as amended (the "Securities Act"). The remaining approximately
4,234,140 shares of Common Stock may be sold in the public market as follows:
(i) approximately 379,990 shares will be freely tradeable on the date of this
Prospectus, (ii) approximately 593,670 shares will be freely tradeable 120 days
from the date of this Prospectus upon the expiration of certain lock-up
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<PAGE> 12
agreements, and (iii) approximately 3,260,473 shares will be tradeable 270 days
from the date of this Prospectus upon the expiration of certain lock-up
agreements, subject in certain cases to the limitations of Rule 144 under the
Securities Act. In addition, approximately 1,557,962 shares issuable upon
exercise of warrants (of which 1,044,626 are currently vested) will be freely
tradeable upon the earlier of one year after the date such warrants are
exercised or the filing of a registration statement with respect to such shares.
Approximately 794,432 of such warrants are subject to lock-up agreements which
prohibit sales of such underlying shares for a period ending 270 days from the
date of this Prospectus. Certain existing stockholders, holding 3,413,683 shares
of Common Stock, have the right to include their shares in future registrations
of Common Stock and certain preferential rights that must be satisfied in
connection with future financings. See "Description of Capital Stock" and
"Shares Eligible for Future Sale."
DILUTION
Based on an assumed public offering price of $7.50 per share, purchasers of
the Common Stock offered hereby will incur an immediate and substantial dilution
of $6.22 per share in net tangible book value, or 82.9%, from the initial public
offering price. The Company has issued and outstanding warrants to purchase up
to 1,557,962 shares of Common Stock at exercise prices ranging from $1.00 to
$7.00 with a weighted average exercise price of $5.92 per share. The existence
of such warrants may hinder future financings by the Company and the exercise of
such warrants may further dilute the interests of all other stockholders. The
possible future resale of Common Stock issuable on the exercise of such warrants
could adversely affect the prevailing market price of the Common Stock. Further,
the holders of warrants may exercise them at a time when the Company would
otherwise be able to obtain equity capital on terms more favorable to the
Company. See "Dilution."
DIVIDENDS
The Company has never paid cash dividends on its Common Stock and does not
currently intend to pay cash dividends. It is not likely that any cash dividends
will be paid in the foreseeable future. See "Dividend Policy."
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain information and trend statements that are
forward-looking statements which involve risk and uncertainty, including those
risks discussed in the "Prospectus Summary," "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Actual results may differ materially from the results described in such
forward-looking statements. When used in this Prospectus, the words
"anticipate," "believe," "estimate," "expect," "intend" and other similar
expressions as they relate to the Company or its market, may be forward-looking
statements.
9
<PAGE> 13
USE OF PROCEEDS
The net proceeds to the Company of the Offering, after deducting expenses
payable by the Company and assuming an initial public offering price of $7.50
per share, will be approximately $8.7 million. The Company anticipates that it
will use the net proceeds as follows:
<TABLE>
<CAPTION>
APPROXIMATE
APPLICATION OF NET PROCEEDS DOLLAR AMOUNT % OF PROCEEDS
----------------------------------------------------------- ------------- -------------
<S> <C> <C>
Repay debentures........................................... $3.4 million 39.1%
Expand and upgrade management information systems.......... 1.0 million 11.5
Further develop and document command center software....... 1.0 million 11.5
Open two regional offices.................................. 0.4 million 4.6
Working capital and general corporate purposes............. 2.9 million 33.3
------------- ------
Total................................................. $8.7 million 100.0%
</TABLE>
The increase in working capital will enhance the Company's ability to obtain
performance bonding and thus enable it to bid on larger contracts as a primary
contractor. See "Business -- Marketing." The proceeds from the debentures, which
bear interest at 10% per annum and mature on December 31, 2000, were used for
working capital, except for $700,000 thereof which was invested in a limited
partnership interest in Special Situations Investment Holdings, Ltd. ("SSIH" or
the "Selling Stockholder"), the Company's largest stockholder. The Company and
SSIH have agreed that, immediately following the Offering, such limited
partnership interest will be redeemed at the greater of $700,000 or its market
value. See "Management -- Certain Transactions" and "Principal and Selling
Stockholders." The debentures to be repaid with proceeds of the Offering are
held by certain limited partners of SSIH.
Pending application of the net proceeds as described above, the Company
intends to invest the net proceeds in short-term, interest-bearing securities.
The Company will not receive any of the proceeds from the sale of shares by the
Selling Stockholder. However, the Selling Stockholder will use a portion of such
funds to redeem the limited partnership interest as described above. See
"Certain Transactions."
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain any earnings to finance the growth and development
of its business and does not anticipate paying cash dividends in the foreseeable
future. Any payment of cash dividends in the future will depend upon the
financial condition, capital requirements and earnings of the Company, as well
as other factors the Board of Directors may deem relevant.
10
<PAGE> 14
DILUTION
The Company's net tangible book value at June 30, 1997 was $(1,579,353) or
approximately $(0.36) per share. Net tangible book value per share represents
total assets, less intangible assets and total liabilities, divided by the
number of shares outstanding. After giving effect to the sale of the shares of
Common Stock offered by the Company hereby at an assumed initial offering price
of $7.50 per share and the application by the Company of the estimated net
proceeds therefrom as described in "Use of Proceeds," the net tangible book
value of the Company would have been $7.5 million, or $1.28 per share of Common
Stock. This represents an immediate increase in net tangible book value of $1.64
per share of Common Stock to existing stockholders and an immediate dilution in
net tangible book value of $6.22 per share of Common Stock to purchasers of
Common Stock in the Offering. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............................. $7.50
Net tangible book value per share before the Offering................... (0.36)
Increase in net tangible book value attributable to new investors....... $ 1.64
------
Net tangible book value per share after the Offering......................... $1.28
-----
Dilution per share to new investors.......................................... $6.22
=====
</TABLE>
The following table summarizes, as of June 30, 1997, the total shares of
Common Stock purchased and the total consideration and average price per share
paid by existing stockholders, and paid by the new investors purchasing the
shares offered hereby, assuming an initial public offering price of $7.50 per
share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...................... 4,434,140 76.0% $10,741,335 50.6% $2.42
New investors.............................. 1,400,000 24.0 10,500,000 49.4 7.50
--------- ------- ----------- ------ - -----
Total................................. 5,834,140 100.0% $21,241,335 100.0% $3.64
========= ======= =========== ======= =====
</TABLE>
The foregoing calculations do not give effect to the exercise of (i)
outstanding warrants to purchase 1,557,962 shares of Common Stock at a weighted
average exercise price of $5.92 per share outstanding at August 31, 1997, and
(ii) options to purchase an additional 500,000 shares of Common Stock available
for issuance under the Company's stock option plan, none of which are
outstanding.
11
<PAGE> 15
CAPITALIZATION
The following table sets forth the capitalization of the Company at June
30, 1997 and as adjusted to reflect the sale by the Company of the Common Stock
offered hereby, assuming an initial public offering price of $7.50 per share and
after deducting the applicable underwriting discount and estimated expenses
payable by the Company, and the application of the estimated net proceeds
therefrom as described under "Use of Proceeds." This table should be read in
conjunction with the Company's financial statements and the notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current maturities of long-term debt and capital lease obligations..... $ 44 $ 44
-------- -----------
Long-term debt and capital lease obligations, less current
maturities(1)........................................................ 3,410 210
-------- -----------
Stockholders' equity(2):
Preferred Stock, par value of $0.01 per share, 5,000,000 shares
authorized; no shares issued and outstanding..................... -- --
Common Stock, par value $0.01 per share, 20,000,000 shares
authorized; 4,434,140 shares issued and outstanding; 5,834,140
shares issued and outstanding as adjusted........................ 44 58
Additional paid-in capital........................................ 10,644 19,362
Accumulated deficit(1)............................................ (11,793) (11,943)
-------- -----------
Total stockholders' equity (deficiency)...................... (1,105) 7,477
-------- -----------
Total capitalization......................................... $ 2,349 $ 7,731
======== =========
</TABLE>
- ---------------
(1) The as adjusted amount reflects the payment of $3,350,000 face value of
subordinated debt. The difference between the face value and the recorded
value of $3,200,000 represents $150,000 of unamortized discount, which is
reflected as an adjustment to stockholders' deficiency.
(2) Does not include 1,557,962 shares issuable upon the exercise of warrants
outstanding as of June 30, 1997, of which warrants to purchase 1,044,626
shares were exercisable as of that date.
12
<PAGE> 16
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The statement of operations data set forth below for the years ended
December 31, 1994, 1995 and 1996, and the balance sheet data at December 31,
1995 and 1996 are derived from, and should be read in conjunction with, the
audited financial statements of the Company, and the notes thereto, included
elsewhere in this Prospectus. The statements of operations data set forth below
for the six months ended June 30, 1996 and 1997 and the actual balance sheet
data at June 30, 1997 are derived from, and should be read in conjunction with,
the unaudited financial statements of the Company, and the notes thereto,
included elsewhere in this Prospectus. The statement of operations data for the
years ended December 31, 1992 and 1993, and the balance sheet data at December
31, 1992, 1993 and 1994 are derived from audited financial statements not
included in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Earned revenues...................................... $ 6,776 $ 3,245 $ 2,395 $ 3,177 $ 5,824 $ 1,931 $ 7,240
Cost of earned revenues.............................. 6,394 2,904 1,586 2,180 4,416 1,246 5,210
------- ------- ------- ------- ------- ------- -------
Gross profit..................................... 382 341 809 997 1,408 685 2,030
Selling, general and administrative expenses......... 1,884 2,123 2,670 2,871 3,701 1,941 1,381
------- ------- ------- ------- ------- ------- -------
Operating income (loss).......................... (1,502) (1,782) (1,861) (1,874) (2,293) (1,256) 649
Interest and financing fees.......................... -- -- (34) (102) (242) (77) (232)
Interest and other income............................ -- -- 7 208 22 2 12
------- ------- ------- ------- ------- ------- -------
Net income (loss)................................ $(1,502) $(1,782) $(1,888) $(1,768) $(2,513) $(1,331) $ 429
======= ======= ======= ======= ======= ======= =======
Net income (loss) per share...................... $ (1.81) $ (0.60) $ (0.54) $ (0.45) $ (0.58) $ (0.31) $ 0.09
======= ======= ======= ======= ======= ======= =======
Weighted average number of shares outstanding.... 832 2,986 3,493 3,909 4,368 4,256 4,532
<CAPTION>
JUNE 30, 1997
DECEMBER 31, -----------------
----------------------------------------------- AS
1992 1993 1994 1995 1996 ACTUAL ADJUSTED(1)
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 232 $ 237 $ 266 $ 555 $ 609 $ 125 3,507
Working capital (deficit)............................ 105 683 (31) 696 151 838 4,219
Total assets......................................... 1,299 1,999 2,034 3,046 4,567 7,354 12,735
Long-term debt, less current maturities.............. -- 25 6 597 2,657 3,410 210
Total stockholders' equity (deficiency).............. 43 702 316 554 (1,596) (1,105) 7,477
</TABLE>
- ---------------
(1) As adjusted to give effect to the sale of Common Stock in the Offering by
the Company at an assumed offering price of $7.50 and the application of the
net proceeds therefrom. Does not give effect to the potential issuance of
1,557,962 shares issuable upon the exercise of warrants outstanding as of
August 31, 1997, of which warrants to purchase 1,044,626 shares were
exercisable as of that date.
13
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a single-source provider of comprehensive, technology-based
security solutions for medium and large commercial and government facilities in
the United States and abroad. The Company offers a broad range of services,
including: (i) consulting and planning; (ii) engineering and design; (iii)
systems integration; and (iv) maintenance and technical support.
The Company began operations in 1987 in association with a large privately
held engineering firm. As a start-up, the Company expended significant capital
on the development of the Company's business and infrastructure, and it
accumulated losses of approximately $2.8 million from 1987 through 1991 on
aggregate revenues of approximately $17.2 million. The Company's revenues from
1990 through 1994 were generated primarily by a contract to design and integrate
extensive security upgrades at three nuclear facilities for the Tennessee Valley
Authority (the "TVA"). In 1992, the Company became independent from the
engineering firm in conjunction with a capital infusion from a private investor
group. At the same time, the Company hired new management with extensive
expertise in the security industry. Since 1992, the Company has devoted a
substantial amount of resources and capital to enhancing its technical
capability and services offerings, hiring and training key personnel and
expanding its client base. As part of this effort, the Company opened four
regional offices in the United States and one international office in Moscow,
Russia.
The Company derives its revenues primarily from long-term, fixed-price
contracts. Earnings are recognized based upon the Company's estimates of the
cost and percentage of completion of individual contracts. Earned revenues equal
the project's total contract amount multiplied by the proportion that direct
project costs incurred on a project bear to estimated total project costs.
Project costs include direct labor and benefits, direct material, subcontract
costs, project related travel and other direct expenses.
Clients are invoiced based upon negotiated payment terms for each
individual contract. Terms usually include a 25% downpayment and the balance as
stages of the work are completed. Maintenance contracts are billed either in
advance, monthly, or quarterly. As a result, the Company records as an asset
costs and estimated earnings in excess of billings and as a liability billings
in excess of costs and estimated earnings.
RESULTS OF OPERATIONS
The following table sets forth the percentages of earned revenues
represented by certain items reflected in the Company's statements of
operations.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ---------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Earned revenues................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of earned revenues......................... 66.2 68.6 75.8 64.5 72.0
----- ----- ----- ----- -----
Gross profit............................... 33.8 31.4 24.2 35.5 28.0
Selling, general and administrative expenses.... 111.5 90.4 63.5 100.5 19.1
----- ----- ----- ----- -----
Operating income (loss).................... (77.7) (59.0) (39.3) (65.0) 8.9
Interest and financing fees..................... (1.4) (3.2) (4.2) (4.0) (3.2)
Interest and other income....................... 0.3 6.5 0.4 0.1 0.2
----- ----- ----- ----- -----
Net income (loss).......................... (78.8)% (55.7)% (43.1)% (68.9)% 5.9%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1996
Revenues increased by 275% from $1.9 million in the six months ended June
30, 1996 to $7.2 million in the six months ended June 30, 1997. The increase was
due to work completed for new clients and an increase
14
<PAGE> 18
in work completed on existing projects. Revenues from the World Trade Center
project, which commenced in October 1996, were $4.1 million in the first six
months of 1997. In addition, revenues from the Metropolitan Washington Airport
Authority increased from $0.4 million in the first six months of 1996 to $1.6
million in the first six months of 1997. In addition, $0.1 million of revenue
was recognized in the first six months of 1997 on a project for which all of the
costs were accrued during 1996.
Cost of earned revenues increased from $1.2 million in the six months ended
June 30, 1996 to $5.2 million in the six months ended June 30, 1997, primarily
due to the increase in revenues. Gross margin declined from 35.5% in the first
six months of 1996 to 28.0% in the first six months of 1997. The reason for the
decline in gross margin is that in the first six months of 1996 there was a
one-time adjustment of $0.2 million to the cost of earned revenues to reflect a
reduction in a subcontractor's costs upon the final closeout of the TVA project.
Net of this adjustment, gross margin was 23.1% in the first six months of 1996.
Selling, general and administrative expenses decreased by 28.9% from $1.9
million in the six months ended June 30, 1996 to $1.4 million in the six months
ended June 30, 1997, primarily due to a $0.4 million reduction in legal fees
relating to certain litigation.
Interest expense and financing fees increased 202.3% from $70,000 in the
six months ended June 30, 1996 to $0.2 million in the six months ended June 30,
1997 due to an increase in outstanding indebtedness resulting from the issuance
of $2.1 million of subordinated debentures during 1996 and $0.7 million of
subordinated debentures during the first six months of 1997.
Net income increased from a net loss of $1.3 million in the six months
ended June 30, 1996 to net income of $0.4 million in the six months ended June
30, 1997. This increase in net income was primarily due to the significant
increase in revenues and the decrease in selling, general and administrative
expenses.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Revenues increased by 83.4% from $3.2 million in 1995 to $5.8 million in
1996. In October 1996, the Company was awarded an $8.3 million contract as part
of the security upgrade at the World Trade Center. Revenues of $1.6 million were
recognized from this project in 1996. Work for the Metropolitan Washington
Airport Authority increased by $1.0 million from $0.2 million in 1995 to $1.2
million in 1996. Work for MCI Communications Corporation increased by $0.2
million from $0.6 million in 1995 to $0.8 million in 1996.
Cost of earned revenues increased by 102.6% from $2.2 million in 1995 to
$4.4 million in 1996 primarily due to the increase in revenues. Gross margin
declined from 31.4% in 1995 to 24.2% in 1996 as a result of a change in the mix
of work performed. In 1996, a greater proportion of the work performed involved
system integration projects, which historically have had lower margins than the
other services provided by the Company. The Company believes that its gross
margin will be less sensitive to changes in the mix of work performed in the
future because it recently has changed its pricing strategy to yield margins on
its systems integration projects consistent with its other work and has reduced
its material costs through volume discounts as the Company has achieved a
greater volume of sales.
Selling, general and administrative expenses increased by 28.9% from $2.9
million in 1995 to $3.7 million in 1996. The increase was due to increases in
legal fees of $0.4 million incurred in the successful defense of certain
litigation, increased staffing expense of $0.3 million and increased office
expenditures of $0.1 million. The increases in staffing and office expenditures
were due to the Company's investment in infrastructure and capabilities to
accommodate future growth in revenues.
Interest expense and financing fees increased 137.7% from $0.1 million in
1995 to $0.2 million in 1996 as a result of the issuance of $2.1 million of 10%
subordinated debentures during 1996.
The net loss increased 42.2% from $1.8 million in 1995 to $2.5 million in
1996 as a result of lower project margins, higher selling, general and
administrative expenses, increased financing fees, and proceeds from a
litigation settlement of $0.2 million which was recognized in 1995.
15
<PAGE> 19
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
Revenues increased by 32.6% from $2.4 million in 1994 to $3.2 million in
1995. Contract revenue from the TVA project in 1994 was $1.6 million as compared
with $1.3 million in 1995. Revenue from work completed for MCI was $0.1 million
in 1994 as compared with $0.6 million in 1995. In 1995, the Company also
initiated and completed work on the Baltimore Correctional Intake Facility,
resulting in revenue of $0.4 million during that year. The Company's first major
preventive maintenance contract for Dulles Airport (Metropolitan Washington
Airport Authority) was also initiated in 1995 and generated revenue of $0.3
million.
Cost of earned revenues increased by 37.4% from $1.6 million in 1994 to
$2.2 million in 1995 due primarily to the increase in revenue. Gross margin on
projects declined from 33.8% in 1994 to 31.4% in 1995 as a result of a change in
the mix of work performed to include a greater proportion of system integration
projects in 1995.
Selling, general and administrative expenses increased 7.5% from $2.7
million in 1994 to $2.9 million in 1995. The increase was due to an increase in
staffing and office rents.
Interest expense and financing fees increased 197.6% from $0.03 million in
1994 to $0.1 million in 1995.
The net loss of $1.8 million represents a $0.1 million improvement from the
net loss of $1.9 million in 1994 as the higher volume of work and the proceeds
of a litigation settlement more than offset the impact of lower margins and
higher spending for selling, general and administrative expenses and interest
expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash have been the proceeds from private
placements of Common Stock and notes from 1992 through 1995 and of subordinated
debentures and warrants during 1995 and 1996. During each of those years, the
Company's operations had negative cash flows as the Company increased its
marketing efforts, opened new offices and hired additional staff to support
anticipated growth. The net use of cash from operations in 1994, 1995 and 1996
was $1.9 million, $1.9 million and $1.6 million, respectively.
From 1992 through 1995, members of the KuwAm private investor group
purchased an aggregate of 3.6 million shares of Common Stock at a total purchase
price of $8.3 million, generating net proceeds to the Company of $8.0 million,
and $0.5 million aggregate principal amount of 10% demand notes, generating an
equal amount of net proceeds to the Company. The demand notes were converted in
1995 into 103,000 shares of Common Stock.
In addition, from 1995 through March 31, 1997, members of the same investor
group purchased $3.4 million aggregate principal amount of 10% subordinated
debentures, together with warrants to purchase 478,580 shares of Common Stock at
an exercise price of $7.00 per share, generating net proceeds to the Company of
$3.2 million. In 1996, an additional $0.2 million was raised through the
exercise of warrants by members of the Board of Directors.
The Company's anticipated capital requirements include approximately $0.4
million to open two new regional offices during 1997, $1.0 million to expand and
upgrade its management information systems, $1.0 million to further develop and
document its command center integration software and $3.4 million to repay
outstanding subordinated debentures. The Company intends to fund these
requirements with its net proceeds from the Offering and other available working
capital. See "Use of Proceeds."
The Company has in the past experienced cash flow shortages. The Company
believes that the net proceeds of the Offering and cash generated from future
operations will enable it to meet its cash requirements for the foreseeable
future and enable it to pursue its current plans for expansion.
16
<PAGE> 20
BUSINESS
GENERAL
Securacom is a single-source provider of comprehensive technology-based
security solutions for medium and large commercial and government facilities in
the United States and abroad. The Company offers a broad range of services,
including: (i) consulting and planning; (ii) engineering and design; (iii)
systems integration; and (iv) maintenance and technical support. This full range
of capabilities enables the Company to provide its clients with any combination
of these services or complete turnkey solutions for complex security projects.
The solutions provided by the Company include integrated security systems
comprised of a command center managing one or more subsystems or components,
primarily access control systems, intrusion detection systems, closed circuit
television systems, critical condition monitoring systems and fire detection
systems. The Company is not aware of any other company providing this
comprehensive range of services on a national basis. The Company serves more
than 40 clients including airports, hospitals, prisons, corporations, utilities,
universities and government facilities. These clients include Washington Dulles
International Airport, Hewlett-Packard Company, EDS, United Airlines, Gillette
Corporation, MCI Communications Corporation and New York City's World Trade
Center.
The Company began operations in 1987 in association with a large privately
held engineering firm. In 1992, the Company became independent from the
engineering firm in conjunction with a capital infusion from a private
investment group. At that time, the Company also hired new management, including
its current Chief Executive Officer, who was formerly Vice President, Integrated
Systems of ADT Security Systems, Inc. and has over 20 years of experience in
security system engineering and design and project planning. Since 1992, the
Company has devoted a substantial amount of resources and capital to enhancing
its technical capability and services offerings, hiring and training key
personnel and expanding its client base. As part of this effort, the Company has
opened four regional offices in the United States and one international office
in Moscow, Russia. The Company currently plans to open additional regional
offices in Boston and Chicago in 1997.
INDUSTRY OVERVIEW
The Company believes that the multi-billion dollar market for
technology-based security solutions is growing rapidly due to the following
factors: (i) many existing security systems are becoming technologically
obsolete and inadequate or consist of internally incompatible subsystems,
creating the need for their re-engineering, upgrading and integration; (ii)
technological advancements provide the opportunity to increase the scope and
cost-efficiency of many routine security tasks, such as the replacement of
guards with electronic surveillance; (iii) the proliferation of computers and
advanced communications systems has created a new and growing security need to
prevent the misuse of proprietary information and other intellectual property;
and (iv) a number of highly publicized acts of terrorism have led to legislation
and corporate policies regarding the increased need for physical safety.
The security industry is highly fragmented and consists of a broad array of
equipment manufacturers and distributors, consultants and engineers and systems
integrators, each of which provides only a portion of the services required to
deliver an integrated security solution. Due to the lack of single-source
providers, the implementation of a medium or large scale security project has
traditionally been performed by a number of different parties. A company
interested in establishing or enhancing a security system typically retains a
consulting firm to define objectives, analyze requirements, and prepare
engineering and design specifications. The security specifications are then
distributed to systems integrators to obtain proposals to implement the project.
The systems integrator in turn, engages software and hardware manufacturers and
installation contractors to perform the components of the project. In addition,
companies seeking to implement security systems at multiple locations may have
to purchase separate systems for each location from different vendors. This
approach causes client frustration with project delays, cost inefficiencies,
lack of vendor accountability and incompatible subsystems. In addition, the
Company believes that as security systems are becoming more technologically
advanced, clients are recognizing that in-house personnel lack the skills and
time necessary to coordinate security projects and that outsourcing such
responsibilities offers significant cost and efficiency advantages.
17
<PAGE> 21
THE SECURACOM SOLUTION
The Company believes that as a single-source provider of comprehensive
technology-based security solutions it can expedite project completion and
reduce its client's manpower requirements and aggregate project costs. The
Company has the flexibility to respond to its clients' particular needs, whether
the client requires only one of the services offered by the Company, various
services on an ongoing basis, or a comprehensive turnkey security solution which
capitalizes on all of the Company's expertise and its national network of
offices.
The continually evolving security requirements of commercial and government
entities, together with rapidly advancing technology, provide numerous
opportunities for the Company to assist its clients with their security needs.
The services required throughout this process are generally divided into the
following four phases:
[PHASE CHART]
A client's security requirements at any particular time may involve services in
only one phase of this cycle or may necessitate a complete solution. The Company
is able to begin a new client relationship during any phase; however, new
relationships typically begin with a consulting or maintenance contract. The
following key attributes of Securacom enable it to provide comprehensive
solutions:
Experience and Expertise. The Company has a wide range of experience,
having provided security solutions to airports, hospitals, prisons,
corporations, utilities, universities and government facilities. The Company's
senior managers have an average of 17 years experience in security systems and
related industries, and its technical and engineering employees have an average
of 11 years of security industry experience. The Company applies this
specialized industry expertise to effectively manage the entire security
solution process.
Network of Regional Offices. The Company's network of regional offices
enables it to provide a consistently high level of service to its national
clients with geographically dispersed facilities. Securacom believes that
clients value the access to company personnel and timely service made possible
by the close proximity of its offices. Additionally, the Company believes that
the regional offices allow it to capitalize on local marketing opportunities.
Technological Sophistication. Securacom and its personnel have expertise
in the design, development and implementation of advanced security system
technology. The Company emphasizes continuing education and training and
recruits skilled engineers and technicians. The Company believes that its
expertise enables it to offer its clients technologically advanced security
solutions, which enhance system effectiveness and reduce operating costs. For
example, the Company has developed its Engineered Maintenance System ("EMS"), a
database system used by the Company to effectively manage a security system's
components, maintenance planning and scheduling, and costs.
18
<PAGE> 22
Independence from Vendors. The Company has made a strategic decision not
to represent any equipment manufacturer exclusively, thereby maintaining
objectivity and flexibility in equipment selection. This independence allows the
Company to offer solutions utilizing components that best meet its clients'
needs. In addition, the Company believes that this objectivity generates trust
because clients understand that equipment selection is based upon their needs
and not the Company's relationship with any particular manufacturer.
Quality Control. Securacom has implemented a company-wide system of
quality control policies and procedures designed to ensure that all of its
services are of consistently high quality. All engineering and design work is
reviewed by senior members of the technical staff, and all work is subject to
periodic review and inspection by senior management.
STRATEGY
Securacom's objective is to become the leading provider of comprehensive,
high-value-added, technology-based security solutions for medium and large
commercial and government facilities in the United States and abroad. The
Company's strategy is focused on the following elements:
Maintain and Develop Long-Term Relationships. The Company focuses on
pursuing and maintaining long-term client relationships. These long-term
relationships allow the Company to integrate itself into the client's
decision-making process by identifying solutions for new security requirements,
system upgrades and other ongoing security needs. The Company believes that the
demand by large commercial or governmental clients for security services is
growing. Demand is generated whenever a client identifies new security
requirements, requires changes in existing systems to accommodate changes in its
operations and facilities, upgrades its existing systems, or needs ongoing
maintenance of such systems. The Company seeks to establish long-term
relationships that provide such recurring revenue opportunities and has found
that clients that initially retain the Company in a limited capacity frequently
engage it to provide a broader range of services as the relationship develops.
For example, the Company's relationship with MCI started with an initial
consulting contract at a single location and has grown into a relationship in
which the Company has provided design, project management and maintenance
services to over 90 MCI facilities.
Focus on High-Value-Added Services. The Company focuses on providing
services that require a high degree of technical skill and expertise, such as
engineering, design and project management. The Company subcontracts services
requiring lower skill levels and intermittent use of personnel for short
periods, such as wire installation and basic construction. By concentrating on
high-value-added services, the Company believes that it will face less
competition, improve its gross margin and be in a position to leverage its
resources to effectively and efficiently manage a greater number of projects.
Capitalize on Position as a National Single-Source Provider of Security
Solutions. To become a national provider of comprehensive security solutions,
Securacom has expanded its capabilities and its geographic presence from two to
five domestic locations since 1992. Each regional office has the capability to
offer the full range of security services, either directly or by utilizing the
resources of the Company's other offices. The Company's centralized financial
management and design and engineering staffs support the regional operations.
The Company believes that its national presence enables it to provide effective
and timely service to large clients with multiple locations. The Company intends
to utilize this national infrastructure to expand its client base.
Continue to Expand Client Base in Targeted Industries. The Company intends
to target several key industries and facility types that it believes have
substantial and increasing requirements for security services. These include
facilities for which security systems are required by regulation such as
airports and nuclear power plants, as well as facilities of telecommunication
and technology companies. The Company believes that the expertise it has
developed in providing services to such facilities and industries will enable it
to effectively compete for and service additional clients with similar
requirements.
Enhance Ability to Pursue Bidding Opportunities. Many large projects
require prime contractors to furnish performance bonds in amounts that the
Company has not had sufficient financial strength to obtain. As
19
<PAGE> 23
a result, the Company currently participates in such projects as a subcontractor
or through joint ventures, which are generally less profitable than those
projects in which it is the prime contractor. The proceeds of the Offering will
enable the Company to obtain performance bonds necessary to pursue substantial
new projects as a prime contractor.
Maintain High Level of Technological Sophistication. Securacom maintains a
high level of technological sophistication in an industry that is increasingly
dependent upon advanced technology. The Company believes that it has been a
leader in applying advanced technology to meet clients' needs in a
cost-effective manner. The Company is developing proprietary command center
integration software to effectively manage the various subsystems of a single
site or the systems at multiple sites. The Company intends to maintain a high
level of technical expertise in its employees by emphasizing continuing
education and training and by recruiting additional highly skilled engineers and
technicians.
INTEGRATED SECURITY SYSTEMS
Integrated security systems are comprised of one or more subsystems and
components that perform a variety of security functions for a facility or group
of facilities under the direction of a single command center. The command center
consists of a central processor, a common database and software that enable
various subsystems and components to communicate with each other and integrate
the subsystems and components into a single system. Subsystems and components
consist primarily of the following:
- Access control systems, which are designed to exclude unauthorized
personnel from specified areas and provide access control that is
typically card-activated. Entry and exit activity can be monitored or
recorded and may be controlled on the basis of time and authority level.
- Intrusion detection systems, which incorporate ultrasonic, infrared,
microwave and other sensors to detect unauthorized door and window
openings, glass breakage, vibration, motion and noise, and alarms and
other peripheral equipment.
- Closed circuit television systems, which monitor and record entry and
exit activity or provide surveillance of designated areas. These systems
can deter theft and vandalism and support other access control systems.
They can be monitored either by a video recorder or by a monitoring
screen.
- Critical condition monitoring systems, which provide supervision of
various systems and processes such as sprinkler systems, heating and
refrigeration systems, power levels, water levels and general
manufacturing processes.
- Fire detection systems, which incorporate heat, ionization, smoke and
flame sensing devices, manual pull stations, evacuation sounders and
systems, sprinkler systems and elevator controls.
SERVICES
The Company offers a full range of security services, consisting of: (i)
consulting and planning; (ii) engineering and design; (iii) systems integration;
and (iv) maintenance and technical support. At the beginning of each new client
relationship, the Company designates one of its professional staff as the client
service contact. This individual is the focal point for communications between
the Company and the client and often acts as the client's project manager for
all of its security needs. The Company's engagement may include one or more of
the elements described below.
20
<PAGE> 24
Consulting and Planning. Security consulting and planning are the initial
phases of determining a security solution for a project. The Company has
developed a planning process that identifies all systems, policies and
procedures that are required for the successful operation of a security system
that will both meet a client's current needs and accommodate its projected
future requirements. The Company's consulting and planning process includes the
following steps:
- Identify the client's objectives and security system requirements
- Review the existing security system plan
- Survey the site, including inventory of physical components and
software and evaluation of client's existing infrastructure and
security system
- Identify and prioritize the client's vulnerabilities
- Develop and evaluate system alternatives
- Recommend a conceptual security plan design
- Estimate the cost of implementing the conceptual plan
- Develop a preliminary implementation schedule
As a result of this process, the Company provides the client with a master
plan for security services which recommends an effective security solution that
addresses routine operating needs as well as emergency situations. The Company
believes that its comprehensive planning process enables its clients to budget
for their security requirements on a long-term basis, identify opportunities for
cost reduction and prepare for future risks.
Engineering and Design. The engineering and design process involves
preparation of detailed project specifications and working drawings by a team of
the Company's engineers, systems designers and computer-aided design system
operators. These specifications and drawings detail the instrument sensitivity
requirements, layout of the control center, placement of equipment and
electrical requirements. Throughout the engineering and design process, the
Company utilizes its expertise in advanced technologies and its understanding of
its client's operational preferences to design a system that is functional,
cost-effective and accommodates the client's present and future requirements. In
addition, the Company attempts to incorporate its client's existing personnel,
equipment and other physical resources into the system design.
When retained as a single-source provider for turnkey security solutions,
the Company also selects the system components required under the specifications
and drawings it has prepared. To the extent possible, the Company uses
off-the-shelf equipment to minimize the cost of developing custom equipment. The
Company has made a strategic decision not to represent any equipment
manufacturer exclusively, thereby maintaining objectivity and flexibility in
equipment selection. The Company believes that its technical proficiency with
the products of a wide range of manufacturers enables it to select components
that will best meet a project's requirements.
Systems Integration. Systems integration involves (i) equipment
procurement; (ii) custom systems modeling and fabrication; (iii) facility
installation; (iv) hardware, software and network integration; and (v) system
validation and testing. In addition to these basic integration services, the
Company provides engineering services to enhance the compatibility of the
client's subsystems. The Company prepares technical documentation of the system
and operations manuals and provides on-site training to client personnel.
Under the supervision of a project manager, the Company's technicians
conduct hardware installation, hardware and software integration, system
validation and testing. The aspects of systems integration that do not require a
high level of technical expertise, such as wire installation and basic
construction, are typically performed by the Company's subcontractors.
Maintenance and Technical Support. The Company provides maintenance and
technical support services on a scheduled, on-call, or emergency basis. These
services include developing and implementing maintenance programs both for
security systems designed, engineered, or integrated by the Company and for
existing systems.
21
<PAGE> 25
Maintenance services offered by the Company include its EMS, a database
used by the Company to effectively manage a security system's components,
maintenance planning and scheduling, and costs. The system configuration
function monitors system activity and capacity, and identifies the need to
reconfigure or expand the system. The system maintenance function schedules and
records maintenance activity, and identifies equipment replacement and upgrading
requirements.
MARKETING
The Company's marketing activities are conducted on both national and
regional levels. The Company obtains engagements through direct negotiation with
clients, competitive bid processes and referrals. At the national level, the
Company conducts analyses of various industries and targets those with
significant potential demand for security solutions. At a regional level, under
the supervision of senior management, each office develops and implements a
marketing plan for its region. The plan identifies prospective clients within
the region and sets forth a strategy for developing relationships with them.
Each regional office works with the headquarters office in expanding
relationships with existing national clients to include facilities within the
region.
The Company has identified several key industries or facility types that it
believes have substantial and increasing requirements for security services,
including telecommunication and technology companies, corporate complexes and
industries and facilities for which security systems are required by regulation.
The Company has developed expertise in the security regulations applicable to
airports, pharmaceutical companies, prisons and nuclear utilities. See
"-- Clients" and "Management."
The Company's marketing strategy emphasizes developing long-term
relationships with clients so that the Company can provide additional services
as the clients' security requirements evolve. The Company undertakes significant
preassessment of a prospective client's needs before an initial contact is made.
A long-term relationship typically begins with an engagement to provide
consulting and planning or maintenance and technical support services.
Consulting and planning assignments place the Company in an advantageous
position, often as the client's project manager, to be engaged to implement the
plan ultimately adopted by the client. Engagements for maintenance and technical
support enable the Company to identify new requirements as they arise and to
offer its solutions to such requirements.
The Company employs a variety of pricing strategies for its services.
Proposals for consulting services are priced based on an estimate of hours
multiplied by standard rates. Systems integration engagements are priced based
upon the estimated cost of the components of the engagement, including
subcontractors and equipment, plus a profit margin. Pricing for engineering and
maintenance services vary widely depending on the scope of the specific project
and the length of engagement. All proposals are reviewed by the Company's senior
management.
Many projects require that the primary contractor obtain a performance bond
in the amount of the contract. The amount of bonding that the Company is able to
obtain depends upon the level of its working capital and net worth. The Company
believes that its ability to compete for larger projects as a primary or
independent contractor, rather than through a joint venture or subcontract
arrangement, has been constrained by its inability to obtain adequate bonding.
The Company believes that the proceeds of the Offering will enable it to obtain
bonding of between approximately $50 million and $75 million and thus enhance
its ability to bid for larger projects as a primary contractor which is
generally more profitable than participation as a subcontractor or through a
joint venture.
The Company currently conducts limited international operations from its
Moscow office from which it has provided services to several clients in Moscow.
In April 1997, the Company signed a joint venture agreement with Ahmad N.
AlBinali & Sons Co., a Saudi Arabian engineering and consulting company, to
develop and conduct business in the Kingdom of Saudi Arabia. The Company is
evaluating several additional opportunities to expand its international
operations, which it anticipates it will initially undertake through joint
ventures or partnerships with local and international companies.
22
<PAGE> 26
CLIENTS
During the past three years the Company has provided services to
approximately 50 clients, including airports, hospitals, prisons, corporations,
utilities, universities and government facilities. The Company's clients have
included the following:
<TABLE>
<CAPTION>
AIRPORTS AND AVIATION CORPORATIONS
- ---------------------------------------- -----------------------------------
<S> <C>
Fresno Airport EDS
United Airlines Gillette Corporation
Washington-Dulles International Airport Hewlett-Packard Company
Washington National Airport Lazard Freres
Yuma International Airport Mary Kay Cosmetics
MCI Communications Corporation
Mobil Corporation
NationsBank
US WEST
GOVERNMENT OTHER
- ---------------------------------------- -----------------------------------
Los Alamos National Laboratory City of Baltimore Central
Sandia National Laboratory Booking and Intake Facility
Tennessee Valley Authority Moscow Local Telephone System
U.S. Department of Energy New York City's World Trade Center
U.S. Navy Rostelecom
Rowan County (N.C.) Prison
University of Texas
</TABLE>
Although in some cases the Company serves as a subcontractor and does not
have a direct contractual relationship with its clients, it is typically
selected or approved by the client and develops a close working relationship
with the client.
During 1996, the World Trade Center, the Metropolitan Washington Airport
Authority (operator of both Washington National and Washington Dulles airports),
and MCI accounted for 28%, 22% and 14% of the Company's revenues, respectively.
In the first six months of 1997, these three clients accounted for 57%, 22% and
6% of its revenues, respectively. The loss of any of these clients could have a
material adverse effect upon the Company's business, operating results and
financial condition. Although these clients each accounted for a substantial
portion of the Company's revenues, work performed for them was comprised of
multiple projects and, in the case of MCI, was performed for multiple
facilities. Several of the projects for the Company's major clients, including
the World Trade Center project, will be substantially completed in 1997, and its
future operating results will depend upon its ability to develop future sales
prospects and generate orders from new and existing clients. The Company plans
to diversify its client base by pursuing new clients regionally, nationally and
internationally.
COMPETITION
The security industry is highly competitive. The Company competes on a
local, regional and national basis with systems integrators, consulting firms
and engineering and design firms. The Company believes that it is the only
provider offering its comprehensive range of services on a national basis. As a
result, the Company competes with different companies depending upon the nature
of the project and the services being offered. For example, the Company has
competed with Johnson Controls, Science Applications International Corporation
and Sensormatic for systems integration work, and Lockwood Greene and Holmes &
Narver for consulting and planning and engineering and design work. Many of its
competitors have greater name recognition and financial resources than the
Company. The Company's competitors also include equipment manufacturers and
vendors that also provide security services. The Company may face future
competition from potential new entrants into the security industry and increased
competition from existing competitors that may attempt to develop the ability to
offer the full range of services offered by the Company. The
23
<PAGE> 27
Company believes that competition is based primarily on the ability to deliver
solutions that effectively meet a client's requirements and, to a lesser extent
and primarily in competitive bid situations, on price. There can be no assurance
that the Company will be able to compete successfully in the future against
existing or potential competitors.
The Company's ability to compete for larger projects as a primary
contractor has been constrained by its inability to obtain adequate bonding. The
Company believes that the proceeds of the Offering will substantially improve
its ability to obtain bonding and thus enhance its ability to compete for larger
projects. See "-- Marketing."
BACKLOG
The Company's backlog consists of confirmed orders, including the balance
of projects in process. The backlog also includes projects for which the Company
has been notified it is the successful bidder even though a binding agreement
has not been executed. Projects for which a binding contract has not been
executed may be canceled at any time. Binding contracts may also be subject to
cancellation or postponement, although cancellation generally obligates the
client to pay the costs incurred by the Company. During the last two years none
of the Company's contracts were canceled prior to completion. Long-term
maintenance contracts may be canceled without cause. As of December 31, 1995 and
1996, the Company's backlog was approximately $1.3 million and $8.3 million,
respectively. Backlog as of December 31, 1996 includes projects having a value
of approximately $0.5 million for which binding contracts have not been executed
and includes $1.2 million in projects that are not expected to be completed
during 1997. Backlog orders as of any particular date may not be indicative of
actual operating results for any fiscal period. There can be no assurance that
any amount of backlog will be realized.
EMPLOYEES
As of August 31, 1997, the Company had 61 employees, of which 18 were based
in the Company's headquarters office in New Jersey and the balance in its four
regional offices and its office in Moscow. Three of the Company's employees are
engaged exclusively in marketing and sales, 49 in engineering, project
management and technical functions and nine in administration. Most members of
senior management, project managers and technical staff devote a portion of
their time to marketing activities. Approximately 57% of the Company's employees
have degrees in engineering or other technical fields. None of the Company's
employees are represented by a labor union, and the Company believes that its
employee relations are good.
INTELLECTUAL PROPERTY
In addition to the Engineered Maintenance System, the Company is developing
command center software that permits the integration of multi-vendor security
systems into a unified, integrated system. The Company intends to utilize a
portion of the proceeds of the Offering to complete development and
documentation of this software.
The Company relies on a combination of various methods to establish and
protect its proprietary rights. In addition, it limits access to and
distribution of its proprietary information. These measures afford limited
protection, and there can be no assurance that the steps the Company takes to
protect its proprietary rights will be adequate to prevent misappropriation of
its intellectual property or the independent development by others of similar
technology.
INSURANCE
The Company maintains in force commercial umbrella liability insurance with
coverage of $10 million per occurrence and $10 million in the aggregate, with a
$10,000 deductible. The Company also maintains a $1.0 million insurance policy
to cover any error or omission by the Company that may result in a breach of a
security system designed, installed, maintained, or engineered by the Company.
There is no assurance that the amount of insurance carried by the Company would
be sufficient to protect it fully in the event of a significant liability claim;
however the Company believes that the amounts and coverages of its insurance are
reasonable
24
<PAGE> 28
and appropriate for its business operations. There is no assurance that such
insurance will continue to be available on commercially reasonable terms, and
the Company may elect not to retain liability insurance at any time.
FACILITIES
The Company's headquarters office is located in Woodcliff Lake, New Jersey,
where the Company leases approximately 7,600 square feet of office space under a
lease that expires in 2000. In addition, the Company leases between
approximately 2,000 and 4,000 square feet of office space in each of the
Atlanta, Dallas, San Francisco and Washington, D.C. metropolitan areas to
support its regional operations. The Company believes that its facilities are
adequate and suitable for its current operations, and that additional space is
readily available if needed to support future growth.
LEGAL PROCEEDINGS
Although the Company is a defendant in certain suits arising from the
normal conduct of its business, management does not believe that the resolution
of this litigation will have a material adverse effect on the Company's
financial position, results of operations, or cash flows. This litigation
includes SecuraComm Consulting, Inc. v. Securacom, Incorporated, pending in the
U.S. District Court for the District of New Jersey (Civil No. 95-5393). In this
action, filed in October 1995, plaintiff, a consulting company, seeks injunctive
relief and damages for alleged confusion in the marketplace and lost business
resulting from the Company's alleged infringement of plaintiff's claimed service
mark. Based upon discussions with its counsel, the Company believes the claim is
completely without merit and has filed counterclaims alleging that the plaintiff
has infringed the Company's service mark. Trial is scheduled for October 1997.
25
<PAGE> 29
MANAGEMENT
The directors and executive officers of the Company are:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- --------------------------------------------------
<S> <C> <C>
Wirt D. Walker, III....................... 51 Chairman and Director
Ronald C. Thomas.......................... 52 President, Chief Executive Officer and Director
Larry M. Weaver........................... 47 Executive Vice President, Chief Operating Officer
and Chief Financial Officer
Charles C. Sander......................... 48 Senior Vice President
Franklin M. Sterling...................... 64 Senior Vice President
Albert A. Weinstein....................... 66 Vice President
Matthew V. Wharton........................ 35 Vice President
Michael V. Toto........................... 52 Vice President
Jon W. Balakian........................... 39 Vice President
R. Michael Lagow.......................... 39 Vice President
Mishal Yousef Saud Al Sabah............... 36 Director
Marvin P. Bush(1)......................... 40 Director
Robert B. Smith, Jr.(1)................... 60 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee and Audit Committee.
WIRT D. WALKER, III has served as a director of the Company since 1987, and
as Chairman since 1992. Mr. Walker is a director and the Managing Director of
KuwAm, a private investment firm founded in 1982. He has also served as Chairman
of Commander Aircraft Company and Advanced Laser Graphics, Inc. since 1991.
RONALD C. THOMAS has served as President, Chief Executive Officer and
director since 1992. Prior to joining the Company, Mr. Thomas was employed for
16 years by ADT Security Systems Inc., a subsidiary of ADT Ltd., the world's
largest electronic security protection company. During his tenure at ADT, he
held a variety of management positions involving systems engineering and design,
project planning and marketing and business unit management, and was Vice
President, Integrated Systems from 1988 to 1992. Mr. Thomas is Chairman of the
Standing Committee on Physical Security of the American Society for Industrial
Security ("ASIS"), a member of the Board of Directors of the Closed Circuit
Television Manufacturers Association, a member of the Institute of Electrical
and Electronic Engineers ("IEEE"), a member of the National Society of
Professional Engineers and a member of the National Fire Protection Association
("NFPA"). He is a past member of the Nuclear Standards Subcommittee of the IEEE,
the Proprietary Fire Systems Subcommittee of NFPA and the Architect/Engineer
Subcommittee of ASIS.
LARRY M. WEAVER has served as Executive Vice President, Chief Operating
Officer and Chief Financial Officer since June 1996. Prior to joining the
Company, Mr. Weaver was employed by The Conduit and Foundation Corporation, most
recently as its Chief Financial Officer from July 1995 to June 1996. Previously,
Mr. Weaver was employed, from 1988 to 1995, as Group Vice President of Finance
at William Bowman Associates, Inc., a residential real estate site development
company, and from 1980 to 1988, as Partner and Finance Manager at Skelly and
Loy, an energy and environmental consulting and engineering firm. Mr. Weaver has
also served as Assistant Controller at Buell Division of Envirotech and was a
Senior Accountant at Price Waterhouse.
CHARLES C. SANDER has served as Senior Vice President for the Mid-Atlantic
Region since 1993. From 1988 to 1992 Mr. Sander was president of his own
aviation consulting firm which he sold to Ogden Services Corporation in 1992.
From 1992 to 1993 Mr. Sander was employed as President of the Technical and
Maintenance Services Division of Ogden. Prior to starting his own company, Mr.
Sander had been employed
26
<PAGE> 30
since 1972 by Baltimore/Washington International Airport, where he served in a
variety of positions, most recently as Deputy Chief, Airport Operations.
FRANKLIN M. STERLING has served as Senior Vice President for the Western
Region since August 1995. Prior to joining the Company, Mr. Sterling served as
President of Franklin M. Sterling and Assoc., Inc., an engineering consulting
firm specialized in integrated building control systems, which he founded in
1987. Previously, Mr. Sterling was employed by the Bechtel Corporation for
sixteen years, most recently as a project manager for a Bechtel subsidiary, and
has held positions with ITT Data Services and the RCA Corporation. Mr. Sterling
presently serves as Chairman of the Airport Consultants Council Security System
Standards Committee and is a member of the Federal Aviation Administration's
Advisory Committee on Security System Standards. He is a senior member of the
IEEE, the IEEE Control System Society, the American Society for Industrial
Security, the National Fire Protection Association, the Construction
Specification Institute and the National and California Societies of
Professional Engineers.
ALBERT M. WEINSTEIN has served as Vice President overseeing corporate
engineering and design since 1989. Prior to joining the Company, Mr. Weinstein
was Vice President and General Manager of the Electronic Security Systems
Division of Stoller Company, a nuclear consulting company, for 17 years.
MATTHEW V. WHARTON has served as Vice President for the Southwest Region
since 1994. From 1993 to 1994 he served as Manager of Consulting Engineering for
the Company. Prior to joining the Company, Mr. Wharton worked from 1992 to 1993
as Director of Sales and Marketing for Integrated Security Control Systems, a
California security company.
MICHAEL V. TOTO has served as Vice President for the Northeast Region since
1994. Prior to joining the Company, Mr. Toto served as a communications engineer
with ADT Security Systems, Inc. for two years.
JON W. BALAKIAN has served as Vice President for the Southeast Region since
1996. Prior to joining the Company, Mr. Balakian was a senior manager of the
national physical security program for MCI Communications since 1990.
R. MICHAEL LAGOW has served as Vice President for Business Development
since August 1993. Prior to joining the Company, Mr. Lagow was employed as
National Sales Manager of Control Systems International, a security systems
company, since 1991.
MISHAL YOUSEF SAUD AL SABAH has served as a director of the Company since
1987. Since 1982, Mr. Al Sabah has been the Chairman of the Board of Directors
of KuwAm. He has also served as a director of Advanced Laser Graphics, Inc. and
Commander Aircraft Company since 1991.
MARVIN P. BUSH has served as a director of the Company since 1993. Mr. Bush
is a director of the Winston Partners Group, Inc., a private investment firm he
founded in 1994, and has been a member of the Board of Directors of Kerrco Inc.,
an oil and gas company, since 1989. Prior to founding the Winston Group, Mr.
Bush was a partner at John Stewart Darrell & Company, an investment advisory
firm, and was employed by Shearson Lehman Brothers as a Vice President/Financial
Consultant.
ROBERT B. SMITH, JR. has served as a director of the Company since 1995.
Mr. Smith has been a private investor since 1984, and has been a director of
Sunshine Mining Company, a New York Stock Exchange listed silver mining company,
since 1993. He has been a trustee for the Dalkon Shield Claimants Trust, a
public interest trust created to compensate those damaged by the Dalkon Shield,
since 1989. Mr. Smith was formerly Chief Counsel and Staff Director of the
Senate Government Operations Committee.
The Company's Certificate of Incorporation and By-Laws provide that members
of the Company's Board of Directors are elected annually and hold office until
their successors are elected.
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<PAGE> 31
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established a Compensation Committee and an
Audit Committee. The Compensation Committee reviews on behalf of, and makes
recommendations to, the Board of Directors with respect to the compensation of
executive officers and administers the Company's option plans and makes
recommendations to the Board of Directors with respect to the plans and the
grant of options to persons eligible under the plans. The Audit Committee's
functions include recommending to the Board of Directors the engagement of the
Company's independent public accountants, reviewing with such accountants the
plans for and the results and scope of their auditing engagement and certain
other matters relating to their services provided to the Company, including the
independence of such accountants.
DIRECTOR COMPENSATION
All members of the Board of Directors, including the Company's officers who
are also Board members, receive a fee of $10,000 per year. In addition, each
director is granted options annually to purchase 15,000 shares of Common Stock
at an exercise price equal to the fair market value of such stock on the date of
grant, which vest in annual increments of one-third. All directors are
reimbursed for out-of-pocket expenses incurred in attending meetings of the
Board of Directors or committees thereof and for other expenses incurred in
their capacities as directors.
EMPLOYMENT AND CONSULTING AGREEMENTS
The Company has entered into employment agreements with Messrs. Thomas and
Weaver, to serve in their respective current positions until March 31, 2002 and
2000, respectively, at annual base salaries of $165,000 and $125,000,
respectively. Both agreements provide for annual bonuses, periodic salary
increases and grants of stock options in the sole discretion of the Board of
Directors. In the event either executive's employment is terminated without
cause, he is entitled to continue to receive the salary and certain other
benefits provided for in such agreement for the remainder of its term. If such
termination occurs following a "change in control" of the Company, he is
entitled to receive an additional payment equal to two times his annual base
salary in effect at the time of such change in control. For purposes of the
employment agreements, a change in control occurs upon certain changes in the
stock ownership of the Company or upon certain changes in the membership of the
Board of Directors of the Company. A termination following a change in control
of the Company includes certain reductions of the executive's duties and
responsibilities, reductions in the salary paid to the executive, changes in the
location of the executive's office or a failure by the Company to obtain the
written assumption of the employment agreements by any successor of the Company.
The Company has also entered into a consulting agreement with Mr. Walker, to
provide strategic and corporate development services through March 31, 2002 for
an annual fee of $140,000. The consulting agreement also contains provisions
parallel to those of the executive employment agreements.
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<PAGE> 32
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned in the year ended
December 31, 1996 by the Chief Executive Officer and each of the most highly
compensated executive officers whose individual remuneration exceeded $100,000
for the fiscal year (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------------
OTHER
NAME AND PRINCIPAL ANNUAL ALL OTHER
POSITION SALARY BONUSES COMPENSATION COMPENSATION
- ---------------------------------------------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Ronald C. Thomas.............................. $136,078 $35,000 $ 10,000(1) $ 28,000(2)
President and CEO
Charles C. Sander............................. $131,090 $25,000 $ 10,000(1) $ --
Senior Vice President
</TABLE>
- ---------------
(1) Consists of director fees.
(2) In May 1996 Mr. Thomas acquired 53,320 shares of Common Stock upon the
exercise of options, for which the Company waived the exercise price of
$0.53 per share. This amount equals the aggregate exercise price of such
options.
OPTION GRANTS IN FISCAL YEAR 1996
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE
------------------------------------------------------ VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF
NUMBER OF TOTAL OPTIONS STOCK PRICE
SHARES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM(1)
OPTIONS IN FISCAL YEAR PRICE EXPIRATION ------------------
NAME GRANTED 1996 PER SHARE DATE 5% 10%
- --------------------------------- --------- -------------- --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Ronald C. Thomas................. 25,000 7.9 $7.00 2/5/99 $42,055 $74,563
Charles C. Sander................ 25,000 7.9 $7.00 2/5/99 $42,055 $74,563
</TABLE>
- ---------------
(1) Based upon an estimated initial public offering price of $7.50 per share and
on annual appreciation of such value minus the option exercise price,
through the expiration date of such options, at the stated rates. These
amounts represent assumed rates of appreciation only and may not necessarily
be achieved. Actual gains, if any, depend on the future performance of the
Common Stock, as well as the continued employment of the Named Executive
Officers for the full term of the options.
AGGREGATED OPTION EXERCISES IN 1996
AND OPTION VALUES AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES WARRANTS/OPTIONS AT WARRANTS/OPTIONS AT
ACQUIRED DECEMBER 31, 1996 DECEMBER 31, 1996(1)
ON VALUE ---------------------------- ----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- --------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ronald C. Thomas.......... 53,320 $399,900 159,382 25,000 $ 1,035,983 $12,500
Charles C. Sander......... -- -- 58,333 41,667 $ 145,833 $54,167
</TABLE>
- ---------------
(1) Represents an amount equal to the difference between an estimated initial
public offering price of $7.50 per share of the Company's Common Stock minus
the option exercise price, multiplied by the number of unexercised options
at December 31, 1996.
29
<PAGE> 33
1997 STOCK OPTION PLAN
The Company has reserved 500,000 shares of Common Stock for issuance upon
the exercise of options under its 1997 Stock Option Plan (the "Stock Option
Plan").
The Stock Option Plan provides for the granting to eligible participants of
options to purchase Common Stock of two types: those that qualify as "incentive
stock options" within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), and those that do not qualify as incentive stock
options, or "non-qualified options." Key employees, officers, directors and
consultants of the Company are eligible to participate in the Stock Option Plan.
The Stock Option Plan is administered by the Board of Directors, which
determines the persons who are to receive options, the terms and number of
shares subject to each option and whether the option is an incentive stock
option or a non-qualified option.
Incentive stock options and non-qualified options may not be granted at a
purchase price less than the fair market value of the Common Stock on the date
of the grant or, for an incentive stock option granted to a person holding more
than 10% of the Company's voting stock, at less than 110% of fair market value.
Aside from the maximum number of shares of Common Stock reserved under the Stock
Option Plan, there is no minimum or maximum number of shares that may be subject
to options. However, the aggregate fair market value of the stock subject to
incentive stock options granted to any optionee that are exercisable for the
first time by an optionee during any calendar year may not exceed $100,000.
Options generally expire three months after the optionee is no longer an
employee of the Company. Options may not be transferred other than by will or
the laws of descent and distribution, and during the lifetime of an optionee may
be exercised only by the optionee. The term of each option, which is fixed by
the Board of Directors at the time of grant, may not exceed ten years from the
date the option is granted (except that according to Section 422(a) of the Code
an incentive stock option granted to a person holding more than 10% of the
Company's voting stock may be exercisable only for five years).
As of August 31, 1997, the Company had granted no options under the Stock
Option Plan.
30
<PAGE> 34
CERTAIN TRANSACTIONS
The following information relates to certain transactions since January 1,
1994 in which executive officers, directors, stockholders and other related
persons had an interest. All of such transactions were on terms that the Company
believes were no less favorable to the Company than could have been obtained
from unaffiliated third parties, and such transactions were approved by the
independent members of the Board of Directors who did not have an interest in
such transactions.
In 1996, the Company purchased a 114B aircraft from Commander Aircraft
Company ("Commander") for $335,000, the list price of the aircraft, which is the
price at which Commander typically sells to retail customers. KuwAm is the
general partner of two stockholders of the Company that currently own in the
aggregate approximately 59% of the outstanding common stock of Commander, and
Wirt Walker, III, the Chairman of the Company, is the Chairman of Commander and
the Managing Director of KuwAm.
During the years 1993 through 1996, the Company paid investment banking
fees to KuwAm of 5% of the capital raised from the private sale of Common Stock
and subordinated debentures to SSIH and affiliated entities. The Company paid
approximately $79,000, $77,000, $103,000 and $35,000 of investment banking fees
under the agreements during 1994, 1995, 1996 and 1997 respectively, which have
been recorded as a reduction of proceeds from sales of equity securities and
interest and financing fees for sales of subordinated debentures.
From time to time, the Company has issued securities to certain of its
officers and directors in private transactions. During 1994, the Company sold an
aggregate of 316,000 shares of Common Stock to SSIH and certain of its limited
partners at a purchase price of $5.00 per share. Also during 1994, the Company
issued promissory notes having an aggregate principal amount of $515,000 to SSIH
for an equal amount of cash proceeds. The notes, which bore interest at an
annual rate of 10%, were converted into 103,000 shares of Common Stock in June
1995. In 1995, the Company issued an aggregate of 247,500 shares of Common Stock
to KuwAm, SSIH, Special Situations Investment Holdings, L.P. II ("SSIH II") and
certain of their limited partners at a purchase price of $5.00 per share and an
aggregate of 35,294 shares to such entities and persons at a purchase price of
$8.50 per share. In March 1996, KuwAm, Fifth Floor Company for General Trading
and Contracting, a stockholder of the Company, and Mr. Walker acquired 53,320,
186,620 and 133,300 shares of Common Stock, respectively, upon exercise of
previously outstanding warrants at an exercise price of $0.53 per share. In May
1996, Ronald C. Thomas acquired 53,320 shares of Common Stock upon the exercise
of options, for which the Company waived the $0.53 per share exercise price, and
Marvin P. Bush, through Andrews-Bush, Inc., of which he is president, acquired
53,897 shares of Common Stock upon exercise of previously outstanding warrants
at an exercise price of $0.52 per share.
The Company borrowed $75,000 from SSIH II in September 1995 and $125,000
from KuwAm in October 1995. These borrowings were evidenced by 10% demand notes
which were repaid in 1996.
During 1995, 1996 and 1997 the Company sold $3.4 million aggregate
principal amount of 10% subordinated debentures (the "Debentures"), together
with warrants to purchase 478,580 shares of Common Stock at an exercise price of
$7.00 per share to certain limited partners of SSIH. The net proceeds from the
sale of the Debentures, after deduction of the 5% investment banking fee payable
to KuwAm and other expenses, were $3.2 million. The Debentures, all of which
will be repaid with proceeds from the Offering, bear interest at 10% per annum
and provide for repayment of the principal as follows: $837,500 on December 31,
1998, $837,500 on December 31, 1999 and the balance on December 31, 2000.
Between January 1 and March 10, 1997, an aggregate of $700,000 of the
proceeds from the Debentures was invested in limited partnership interests of
SSIH. At the end of each year, the Company has the option of requiring SSIH to
redeem the limited partnership interests at their then fair market value less a
liquidation fee of up to 1%. The proceeds of such redemption are payable, at
SSIH's option, in cash or portfolio securities of SSIH. Because the assets of
SSIH include both publicly traded and privately held securities, the value of
the SSIH portfolio may be materially different than the cost of the Company's
investment. KuwAm, of which Mr. Walker is the Managing Director and Mr. Al Sabah
is Chairman, is the general partner of SSIH. Under the terms of the limited
partnership subscription agreement, KuwAm received 3% of the amount of the
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<PAGE> 35
Company's investment as reimbursement for accounting, legal and administrative
expenses related to the organization and operation of the partnership. In
addition, pursuant to SSIH's limited partnership agreement, KuwAm receives (i)
an annual administration fee equal to 2% of SSIH's assets and (ii) an annual
capital appreciation fee equal to 10% of the increase in the value of SSIH's
assets in each year. The Company and SSIH have agreed that, immediately
following the Offering, the Company's limited partnership interest in SSIH will
be redeemed at the greater of $700,000 or its market value. The Company does not
intend to make such investments in related parties in the future.
All future material affiliated transactions and loans will be made or
entered into on terms that are no less favorable to the Company than those that
can be obtained from unaffiliated third parties, and all future material
affiliated transactions and loans, and any forgiveness of loans, must be
approved by a majority of the independent outside members of the Board of
Directors who do not have an interest in the transaction.
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of the date hereof, and as adjusted to reflect
the sale of the shares offered hereby, by (i) each person who is known by the
Company to be the beneficial owner of 5% or more of the outstanding Common
Stock, (ii) each director, (iii) each named executive officer and (iv) all
directors and executive officers as a group. The Company believes that the
individuals listed below each have sole voting and investment power with respect
to such shares, except as otherwise indicated in the footnotes to the table.
Unless otherwise indicated below, the business address of each person listed is:
c/o Securacom, Incorporated, 50 Tice Boulevard, Woodcliff Lake, New Jersey
07675.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO OFFERING(1) SHARES TO BE OFFERING(1)
NAME AND ADDRESS -------------------- SOLD IN --------------------
OF BENEFICIAL OWNER NUMBER PERCENT OFFERING NUMBER PERCENT
- ------------------------------------------- --------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
KuwAm Corporation.......................... 2,622,127 59.1% -- 2,422,127 41.5%
2600 Virginia Avenue, N.W.
Washington, DC 20037(2)
Special Situation Investment Holdings,
Ltd. .................................... 2,464,333 55.6% 200,000 2,264,333 38.8%
c/o KuwAm Corporation
2600 Virginia Avenue, N.W.
Washington, D.C. 20037(2)
Special Situation Investment Holdings, L.P.
II....................................... 157,794 3.6% -- 157,794 2.7%
c/o KuwAm Corporation
2600 Virginia Avenue, N.W.
Washington, DC. 20037(2)
Fifth Floor Company for General Trading and
Contracting.............................. 366,707 8.3% -- 366,707 6.3%
Wirt D. Walker, III(2)(3).................. 2,941,822 66.2% -- 2,741,822 46.9%
Ronald C. Thomas........................... 246,035 5.3% -- 246,035 4.1%
Marvin P. Bush(4).......................... 62,230 1.4% -- 62,230 1.1%
Mishal Yousef Saud Al Sabah(2)(5).......... 3,000,227 67.5% -- 2,800,227 47.9%
Franklin M. Sterling....................... 63,333 1.4% -- 63,333 1.1%
Charles C. Sander.......................... 75,000 1.7% -- 75,000 1.3%
Larry M. Weaver............................ 8,333 * -- 8,333 *
Robert B. Smith, Jr........................ 16,667 * -- 16,667 *
All officers and directors as a group (8
persons)................................. 3,791,520 79.6% -- 3,591,520 58.3%
</TABLE>
- ---------------
* Represents beneficial ownership of less than one percent of the outstanding
Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission, and includes voting power and investment power with respect to
shares. Shares issuable upon the exercise of outstanding warrants that are
currently exercisable or become exercisable within 60 days from the date
hereof are
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<PAGE> 36
considered outstanding for the purpose of calculating the percentage of
Common Stock owned by such person but not for the purpose of calculating the
percentage of Common Stock owned by any other person. The number of warrants
that are exercisable within 60 days of the date hereof is as follows: Mr.
Walker, 8,333; Mr. Thomas, 167,715; Mr. Weaver, 8,333; Mr. Bush, 8,333; Mr.
Smith, 16,667; Mr. Al Sabah, 8,333; Mr. Sterling, 38,333; and Mr. Sander,
75,000.
(2) KuwAm is the general partner of SSIH and SSIH II. The stockholders of KuwAm
include Wirt D. Walker, III and Mishal Yousef Saud Al Sabah. Mr. Walker is
also the Managing Director and Mr. Al Sabah is the Chairman of KuwAm. Shares
beneficially owned by KuwAm consist of 2,464,333 shares held by SSIH
(2,264,333 shares after the Offering) and 157,794 shares held by SSIH II.
(3) Consists of 2,464,333 shares held by SSIH (2,264,333 shares after the
Offering), 157,794 shares held by SSIH II, 248,302 shares held by Mr.
Walker, 13,060 shares held by Mr. Walker's son, 50,000 shares held by a
trust for the benefit of Mr. Walker's son and options to purchase 8,333
shares held by Mr. Walker.
(4) Consists of 53,897 shares held by Andrews-Bush, Inc., and options to
purchase 8,333 shares held by Mr. Bush.
(5) Consists of 2,464,333 shares held by SSIH (2,264,333 shares after the
Offering), 157,794 shares held by SSIH II, 366,707 shares held by Fifth
Floor Company for General Trading and Contracting, of which Mr. Al Sabah is
Chairman, 3,060 shares held by Mr. Al Sabah's son and options to purchase
8,333 shares held by Mr. Al Sabah.
DESCRIPTION OF CAPITAL STOCK
Upon consummation of the Offering, the authorized capital stock of the
Company will consist of 20,000,000 shares of Common Stock, $0.01 par value per
share, of which 5,834,140 shares will be issued and outstanding, and 5,000,000
shares of Preferred Stock, $0.01 par value per share, none of which will be
issued and outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters to be voted on by the stockholders. There is no cumulative
voting with respect to the election of Directors, with the result that the
holders of a majority of the shares of Common Stock voting for the election of
Directors can elect all of the Directors then up for election. The holders of
Common Stock are entitled to receive dividends when, as, and if declared by the
Board of Directors out of funds legally available therefor. In the event of
liquidation, dissolution, or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining which are available
for distribution to them after payment of liabilities and after provision has
been made for each class of stock having preference over the Common Stock.
Holders of shares of Common Stock, as such, have no conversion, preemptive, or
other subscription rights, and there are no redemption provisions applicable to
the Common Stock. All of the outstanding shares of Common Stock are fully paid
and nonassessable.
PREFERRED STOCK
The Board of Directors is authorized, without further approval or action by
the stockholders, to issue shares of Preferred Stock in one or more series and
to determine the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and number of shares
constituting any series of Preferred Stock or the designation of such series.
The rights of the holders of Common Stock will generally be subject to the
prior rights of the holders of any outstanding shares of Preferred Stock with
respect to dividends, liquidation preferences and other matters. Among other
things, the Preferred Stock could be issued by the Company to raise capital or
finance acquisitions. The Preferred Stock could have certain anti-takeover
effects under certain circumstances. The issuance of shares of Preferred Stock
could enable the Board of Directors to render more difficult or
33
<PAGE> 37
discourage an attempt to obtain control of the Company by means of a merger,
tender offer, or other business combination transaction directed at the Company
by, among other things, placing shares of Preferred Stock with investors who
might align themselves with the Board of Directors, issuing new shares to dilute
stock ownership of a person or entity seeking control of the Company, or
creating a class or series of Preferred Stock with class voting rights.
The Company has no current plans to issue any shares of its Preferred
Stock.
The Board of Directors may, without shareholder approval, issue preferred
stock with voting or conversion rights that may adversely affect the voting
power of the holders of the Common Stock. Any such issuance must be approved by
a majority of the independent and disinterested directors.
DELAWARE ANTI-TAKEOVER LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. Section 203 provides, with certain exceptions, that a
Delaware corporation may not engage in certain business combinations with a
person or affiliate or associate of such person who is an "interested
stockholder" for a period of three years from the date such person became an
interested stockholder unless: (i) the transaction resulting in the acquiring
person's becoming an interested stockholder, or the business combination, is
approved by the board of directors of the corporation before the person becomes
an interested stockholder; (ii) the interested stockholder acquires 85% or more
of the outstanding voting stock of the corporation in the same transaction that
makes it an interested stockholder (excluding shares owned by directors who are
also officers, and excluding certain employee stock option plans); and (iii) on
or after the date the person becomes an interested stockholder, the business
combination is approved by the corporation's board of directors and by the
holders of at least two-thirds of the corporation's outstanding voting stock at
an annual or special meeting, excluding shares owned by the interested
stockholder. Except as otherwise specified in Section 203, an "interested
stockholder" is defined as (a) any person that is the owner of 15% or more of
the outstanding voting stock of the corporation, (b) any person that is an
affiliate or associate of the corporation and was the owner of 15% or more of
the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder, or (c) the
affiliates and associates of any such person. By restricting the ability of the
Company to engage in business combinations with an interested person, the
application of Section 203 to the Company may provide a barrier to hostile or
unwanted takeovers. Under Delaware law, the Company could have opted out of
Section 203 but elected to be subject to its provisions.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BY-LAWS
Requirements for Advance Notification of Stockholder Nomination and
Proposals. The Company's By-Laws require 60 to 90 days' notice to the Company
with regard to stockholder proposals and the nomination, other than by or at the
direction of the Board of Directors or a committee thereof, of candidates for
election as directors. Such notice must provide specified information, including
information regarding the ownership of Common Stock by the person giving the
notice, information regarding the proposal or the nominees and information
regarding the interest of the proponent in the proposal or the nominations.
Special Meetings of Stockholders; Actions by Written Consent. The
Company's Certificate of Incorporation and By-Laws provide that special meetings
of stockholders of the Company may only be called by the Chairman of the Board,
the President, or a majority of the then authorized number of Directors. This
provision precludes stockholders from calling a special meeting and taking
actions opposed by the Board of Directors. The Certificate of Incorporation also
provides that stockholder action cannot be taken by written consent in lieu of a
meeting.
Limitation of Director Liability. The Company's Certificate of
Incorporation limits the liability of Directors to the Company and its
stockholders to the fullest extent permitted by Delaware law. Specifically,
under current Delaware law, a director will not be personally liable for
monetary damages for breach of the director's fiduciary duty as a director,
except liability (i) for a breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions by a director not in
good faith or which involve
34
<PAGE> 38
intentional misconduct or a knowing violation of law, (iii) for liability
arising under Section 174 of the Delaware General Corporation Law (relating to
the declaration of dividends and purchase or redemption of shares in violation
of the Delaware General Corporation Law), or (iv) for any transaction from which
the director derived an improper personal benefit. The inclusion of this
provision in the Company's Certificate of Incorporation may have the effect of
reducing the likelihood of derivative litigation against directors and may
discourage or deter stockholders or management from bringing a lawsuit against
directors for breach of their duty of care.
Supermajority Provisions. The Company's Certificate of Incorporation
provides that the vote of the Board of Directors or the affirmative vote of at
least two-thirds of the then outstanding shares of capital stock entitled to
vote generally in the election of Directors, voting as a single class, is
required to amend, repeal, or alter any of the Company's By-Laws or the
foregoing provisions contained in the Company's Certificate of Incorporation.
RIGHTS PLAN
Prior to the consummation of the Offering, there will be a dividend
distribution of one right (a "Right") for each outstanding share of Common Stock
of the Company to stockholders of record at the close of business on the date
that the Offering is completed (the "Record Date"). The Board of Directors will
further authorize the issuance of one right for each share of Common Stock that
shall become outstanding between the Record Date and the earlier of the Final
Expiration Date (as defined herein) and the date the Rights are redeemed. Except
as described below, each Right, when exercisable, entitles the registered holder
thereof to purchase from the Company one one-thousandth of a share of Special
Preferred Stock, par value $0.01 per share (the "Special Preferred Shares"), at
a price of $80.00 (the "Purchase Price"), subject to adjustment. Therefore, the
dividend will have no significant initial value and no significant impact on the
financial statements of the Company. The description and terms of the Rights are
set forth in the Rights Agreement (the "Rights Agreement") between the Company
and American Securities Transfer & Trust, Inc., as Rights Agent. A copy of a
form of the Rights Agreement has been filed with the Commission as an exhibit to
the registration statement of which this Prospectus is a part. This summary of
certain provisions of the Rights Agreement and the Rights does not purport to be
complete and is qualified in its entirety by reference to the Rights Agreement.
Initially, the Rights will be evidenced by Common Stock certificates
representing shares then outstanding, and no separate certificates evidencing
the Rights will be distributed. Until the earlier to occur of (i) 10 days
following a public announcement that a person or group of affiliated or
associated persons, with certain limited exceptions (an "Acquiring Person"), has
acquired, or obtained the right to acquire, beneficial ownership of capital
stock of the Company representing 15% or more of the voting power of the Company
(the "Shares Acquisition Date") or (ii) 10 business days (or such later date as
may be determined by action of the Board of Directors prior to the time that any
person becomes an Acquiring Person) following the commencement of (or a public
announcement of an intention to make) a tender or exchange offer if, upon
consummation thereof, such person or group would be the beneficial owner of
capital stock of the Company representing 15% or more of the voting power of the
Company (such date being called the "Distribution Date"), the Rights will be
evidenced by the Common Stock certificates and not by separate certificates.
The Rights Agreement provides that, until the Distribution Date, the Rights
will be transferred with, and only with, the Common Stock. Until the
Distribution Date (or earlier redemption, expiration, or termination of the
Rights), the transfer of any Common Stock certificates will also constitute the
transfer of the Rights associated with the Common Stock represented by such
certificates. As soon as practicable following the Distribution Date, separate
certificates evidencing the Rights ("Right Certificates") will be mailed to
holders of record of the Common Stock as of the close of business on the
Distribution Date and, thereafter, such separate Right Certificates alone will
evidence the Rights.
The Rights are not exercisable until the Distribution Date, and will expire
upon the earliest of (i) the close of business on the tenth anniversary of the
date of the Rights Agreement (the "Final Expiration Date"),
35
<PAGE> 39
(ii) the redemption of the Rights by the Company as described below, or (iii)
the exchange of all Rights for Special Preferred Shares as described below.
A person will not become an Acquiring Person under the Rights Agreement if
such person is the Company or an affiliate of the Company or obtained 15% or
more of the voting power of the Company through (i) an issuance of Common Stock
by the Company directly to such person (for example, in a private placement or
an acquisition by the Company in which Common Stock is used as consideration) or
(ii) a repurchase by the Company of Common Stock.
In the event that any person or group becomes an Acquiring Person, each
holder of a Right will thereafter have the right to receive, upon exercise at
the then current exercise price of the Right, shares of Common Stock (or, in
certain circumstances, cash, property or other securities of the Company) having
a value equal to two times the exercise price of the Right.
In the event that, at any time following a Shares Acquisition Date, the
Company is acquired by the Acquiring Person in a merger or other business
combination transaction or 50% or more of the Company's assets or earning power
are sold to the Acquiring Person, proper provision will be made so that each
holder of a Right will thereafter have the right to receive, upon exercise at
the then current exercise price of the Right, common stock of the acquiring or
surviving company having a value equal to two times the exercise price of the
Right.
Notwithstanding the foregoing, following the occurrence of any of the
events set forth in the preceding two paragraphs (the "Triggering Events"), any
Rights that are, or (under certain circumstances specified in the Rights
Agreement) were, beneficially owned by any Acquiring Person will immediately
become null and void.
The Purchase Price payable, the number of Special Preferred Shares, shares
of Common Stock or other securities or property issuable upon exercise of the
Rights and the number of Rights outstanding, are subject to adjustment from time
to time to prevent dilution, among other circumstances, in the event of a stock
dividend on, or a subdivision, split, reverse split, combination, consolidation
or reclassification of, the Special Preferred Shares or the Common Stock.
With certain exceptions, no adjustment to the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% to
the Purchase Price. Upon the exercise of a Right, the Company will not be
required to issue fractional Special Preferred Shares or fractional shares of
Common Stock (other than fractions in multiples of one one-hundredth of a
Special Preferred Share) and, in lieu thereof, an adjustment in cash may be made
based on the market price of the Special Preferred Shares or Common Stock on the
last trading date prior to the date of exercise.
At any time after a person or group becomes an Acquiring Person and prior
to the acquisition by such person or group of capital stock of the Company
representing 50% or more of the voting power of the Company, the Board of
Directors may exchange the Rights (other than Rights owned by such person or
group, which will become void), in whole or in part, at an exchange ratio of one
share of Common Stock per Right (subject to adjustment).
At any time after the date of the Rights Agreement until the earlier of the
time that a person becomes an Acquiring Person or the Final Expiration Date, the
Board of Directors may redeem the Rights in whole, but not in part, at a price
of $0.01 per Right (the "Redemption Price"), which may (at the option of the
Company) be paid in cash, shares of Common Stock, or other consideration deemed
appropriate by the Board of Directors. Upon the effectiveness of any action of
the Board of Directors ordering redemption of the Rights, the Rights will
terminate and the only right of the holders of Rights will be to receive the
Redemption Price.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends.
36
<PAGE> 40
The provisions of the Rights Agreement may be amended by the Company,
except that any amendment adopted after the time that a person becomes an
Acquiring Person may not adversely affect the interests of holders of Rights.
Upon consummation of the Offering, each outstanding share of Common Stock
will receive one Right.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
without conditioning the offer on the Rights being redeemed or a substantial
number of Rights being acquired by the Acquiring Person. Under certain
circumstances the Rights beneficially owned by such a person or group may become
void. The Rights should not interfere with any merger or other business
combination approved by the Board of Directors because, if the Rights would
become exercisable as a result of such merger or business combination, the Board
of Directors may, at its option, at any time prior to the time that any person
or entity becomes an Acquiring Person, redeem all (but not less than all) of the
then outstanding Rights at the Redemption Price.
CERTAIN AGREEMENTS WITH STOCKHOLDERS
The Company and certain stockholders who will hold 3,897,251 shares of
Common Stock following the offering are parties to stock purchase agreements
which give them certain rights of refusal, "tagalong" rights and registration
rights. The rights of refusal give the stockholders certain first rights to
purchase securities of the Company that the Company proposes to issue and sell.
The tagalong rights require a stockholder who proposes to sell a majority of the
shares of capital stock of the Company to arrange for the purchase of all the
remaining shares of the Company's capital stock held by the remaining
shareholders at a price and on terms as favorable as those applicable to the
sale of the offeror's shares. For a description of the registration rights, see
"Shares Eligible for Future Sale."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American
Securities Transfer & Trust, Inc.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no public market for the Common
Stock of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect market prices prevailing from time to time.
Furthermore, since only a limited number of shares will be available for sale
shortly after this Offering because of certain contractual and legal
restrictions on resale described below, sales of substantial amounts of Common
Stock of the Company in the public market after the restrictions lapse could
adversely affect the prevailing market price and the ability of the Company to
raise equity capital in the future.
Upon completion of this Offering, the Company will have outstanding
5,834,140 shares of Common Stock. Of these shares, the 1,600,000 shares sold in
the Offering will generally be freely tradeable without restriction or further
registration under the Securities Act. The remaining approximately 4,234,140
shares of Common Stock may be sold in the public market as follows: (i)
approximately 379,990 shares will be freely tradeable on the date of this
Prospectus, (ii) approximately 593,670 shares will be freely tradeable 120 days
from the date of this Prospectus upon the expiration of certain lock-up
agreements, and (iii) approximately 3,260,473 shares will be tradeable 270 days
from the date of this Prospectus upon the expiration of certain lock-up
agreements, subject in certain cases to the limitations of Rule 144. In
addition, approximately 1,557,962 shares issuable upon exercise of warrants (of
which 1,044,626 are currently vested) will be freely tradeable upon the earlier
of one year after the date such warrants are exercised or the filing of a
registration statement with respect to such shares. Approximately 794,432 of
such warrants are subject to lock-up agreements which prohibit sales of such
underlying shares for a period ending 270 days from the date of this Prospectus.
37
<PAGE> 41
The Company's officers, directors and certain stockholders have agreed that
they will not, without the prior written consent of Cruttenden Roth
Incorporated, directly or indirectly offer, sell, contract to sell or otherwise
dispose of approximately 3,260,473 shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock during the
270-day period commencing on the Effective Date. The Company has agreed that it
will not, without the prior written consent of Cruttenden Roth Incorporated,
directly or indirectly offer, sell, contract to sell or otherwise dispose of any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock during such 270-day period except for the sale of
the shares of Common Stock in this offering, the issuance of options and shares
of Common Stock pursuant to employee benefit plans set forth in this Prospectus,
and the issuance of shares of Common Stock upon exercise of warrants presently
outstanding. Any shares subject to the lock-up agreements may be released at any
time without notice by Cruttenden Roth Incorporated.
In general, under Rule 144 as currently in effect, beginning 90 days after
the Effective Date, an affiliate of the Company, or person (or persons whose
shares are aggregated) who has beneficially owned Restricted Shares for at least
one year will be entitled to sell in any three-month period a number of shares
that does not exceed greater of (i) one percent of the then outstanding shares
of the Company's Common Stock or (ii) the average weekly trading volume of the
Company's Common Stock in the American Stock Exchange during the four calendar
weeks immediately preceding the date on which notice of the sale is filed with
the Securities and Exchange Commission. Sales pursuant to Rule 144 are subject
to certain requirements relating to manner of sale, notice, and the availability
of current public information about the Company. A person (or persons whose
shares are aggregated) who is not deemed to have been an affiliate of the
Company at any time during the 90 days immediately preceding the sale and who
has beneficially owned Restricted Shares for at least two years is entitled to
sell such shares under Rule 144(k) without regard to the limitations described
above.
An employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 under the Securities Act, which permits affiliates and
non-affiliates to sell their Rule 701 shares without having to comply with Rule
144's holding period restrictions, in each case commencing 90 days after the
date of this Prospectus. In addition, non-affiliates may sell Rule 701 shares
without complying with the public information, volume and notice provisions of
Rule 144.
Upon completion of the Offering, certain holders will have "piggyback"
registration rights with respect to 3,513,683 shares of Common Stock held by
them or issuable to them, which rights allow them to require the Company,
subject to certain conditions, to include their shares in certain future
registration statements filed by the Company. In addition, the Company intends
to file a registration statement covering 500,000 shares of Common Stock
reserved for issuance under the Company's stock option plans.
38
<PAGE> 42
UNDERWRITING
The Underwriters named below, for whom Cruttenden Roth Incorporated and
Scott & Stringfellow, Inc. are acting as Representatives, have severally agreed,
subject to the terms and conditions of the Underwriting Agreement, to purchase
from the Company and the Selling Stockholder the number of shares of Common
Stock set forth opposite their respective names below at the price to public
less underwriting discounts and commissions set forth on the cover page of this
Prospectus. The nature of the Underwriters' obligations is such that if any such
shares are purchased, all must be purchased.
<TABLE>
<CAPTION>
UNDERWRITERS PARTICIPATION
---------------------------------------------------------------- -------------
<S> <C>
Cruttenden Roth Incorporated....................................
Scott & Stringfellow, Inc. .....................................
</TABLE>
The several Underwriters propose to offer the shares of Common Stock in
part directly to the public at the price to public set forth on the cover page
of this Prospectus, and in part to certain dealers who are members of the
National Association of Securities Dealers, Inc. (the "NASD"), at the price to
public less a concession not exceeding $ per share. The Underwriters may
allow, and such dealers may reallow, a concession not exceeding $ per
share. After the shares of Common Stock are released for sale to the public, the
Representatives may change the initial price to public and other selling terms.
No change in such terms shall change the amount of proceeds to be received by
the Company as set forth on the cover page of this Prospectus.
The Selling Stockholder has granted the Underwriters an option, exercisable
for 45 days after the date of this Prospectus, to purchase up to 240,000
additional shares of Common Stock at the price to public less the underwriting
discount set forth on the cover page of this Prospectus. The Underwriters may
exercise the option solely to cover over-allotments, if any. To the extent the
Underwriters exercise the over-allotment option, each Underwriter will be
committed, subject to certain conditions, to purchase that number of additional
shares which is proportionate to such Underwriter's initial commitment.
The Company and the Selling Stockholder have also agreed to pay the
Representatives a non-accountable expense allowance equal to 2.5% of the gross
proceeds of the Offering (including any over-allotment shares), and to sell to
the Representatives or their designees, for nominal consideration, certain
warrants (the "Representatives' Warrants") to purchase up to 140,000 shares of
Common Stock (subject to certain antidilution adjustments). The Representatives'
Warrants will be exercisable for a period of three years commencing one year
after the effective date of the Registration Statement of which this Prospectus
forms a part, and cannot be transferred for a period of one year from the date
of issuance except to the Underwriters, selling group members and their officers
or partners. The exercise price per share for the Representatives' Warrants is
equal to 120% of the initial price to public and may be paid in cash or on a
cashless net issuance basis by foregoing receipt of a number of shares otherwise
issuable upon exercise having a fair market value equal to the aggregate
exercise price. During the exercise period, holders of the Representatives'
Warrants are entitled to certain demand and incidental registration rights with
respect to the securities issuable upon exercise. The Company has agreed for a
period of two years after the Offering to grant Cruttenden Roth Incorporated a
right of first refusal to manage any public or private offerings of debt or
equity securities by the Company or its principal stockholders.
Except in connection with acquisitions or pursuant to the exercise of
options granted under outstanding warrants to purchase Common Stock, the Company
has agreed, for a period of nine months from the consummation of this Offering,
not to issue, sell or purchase any equity securities without the prior written
consent of Cruttenden Roth Incorporated. In addition, the Company's officers,
directors and certain
39
<PAGE> 43
stockholders have agreed not to transfer any equity securities of the Company
for a period of nine months after the consummation of this Offering without the
prior written consent of Cruttenden Roth Incorporated.
Prior to this Offering, there has not been a public market for the Common
Stock. The public offering price of the Common Stock has been determined by
arms-length negotiation between the Company and the Representatives. There is no
direct relation between the offering price of the Common Stock and the assets,
book value or net worth of the Company. Among the factors considered by the
Company and the Representatives in pricing the Common Stock were the Company's
results of operations, the current financial condition and future prospects of
the Company, the experience of management, the amount of ownership to be
retained by pre-offering stockholders, the general condition of the economy and
the securities markets, the rights, preferences, privileges and restrictions of
the Common Stock, and the demand for similar securities of companies considered
comparable to the Company.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in respect thereof.
In connection with the Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with the Securities Exchange Act of 1934 pursuant to which such persons may bid
for or purchase Common Stock for the purpose of stabilizing its market price.
The Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the offering than
they are committed to purchase from the Company, and in such case may purchase
Common Stock in the open market following completion of the Offering to cover
all or a portion of such shares of Common Stock or may exercise the
Underwriters' over-allotment option referred to above. In addition, the
Representatives, on behalf of the Underwriters, may impose "penalty bids" under
contractual arrangements with the Underwriters whereby they may reclaim from an
Underwriters (or dealers participating in the Offering), for the account of the
other Underwriters, the selling concession with respect to Common Stock that is
distributed in the Offering but subsequently purchased for the account of the
Underwriters in stabilization or syndicate covering transactions or otherwise.
Any of these activities may stabilize or maintain the price of the Common Stock
at a level above that which might otherwise prevail in the open market. None of
the transactions described in this paragraph is required, and if they are
undertaken they may be discontinued at any time.
The Representatives have advised the Company that the Underwriters do not
expect to confirm any sales to accounts over which they exercise discretionary
authority.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Dyer Ellis &
Joseph PC, Washington, D.C. Certain legal matters will be passed upon for the
Underwriters by Gibson, Dunn & Crutcher LLP, Denver, Colorado.
EXPERTS
The financial statements and schedule of the Company as of December 31,
1996, included in this Prospectus and elsewhere in the Registration Statement
have been audited by Grant Thornton LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports. The
financial statements and schedule of the Company as of December 31, 1994 and
1995 included in this Prospectus have been audited by Amper, Politziner &
Mattia, independent public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said reports.
On January 30, 1997, the Company engaged Grant Thornton LLP as its
principal accountants, and dismissed its former accountants, Amper Politziner &
Mattia. The Company decided to change accountants in
40
<PAGE> 44
anticipation of the Offering. The decision to change accountants was ratified by
the Company's Board of Directors. In connection with the audits for the years
ended December 31, 1994 and 1995 and through January 30, 1997, there were no
disagreements with Amper, Politziner & Mattia on any matters of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure which disagreements if not resolved to the satisfaction of Amper,
Politziner & Mattia would have caused them to make reference thereto in their
report on the financial statements for such years. During the years ended
December 31, 1994 and 1995 and through January 30, 1997 there were no reportable
events (as defined in Item 304 (A)(1)(v) of Regulation S-K) with Amper,
Politziner & Mattia. Amper, Politziner & Mattia rendered unqualified opinions
with respect to the Company's financial statements for the years ended December
31, 1994 and 1995.
ADDITIONAL INFORMATION
A Registration Statement on Form S-1 including amendments thereto relating
to the Common Stock offered hereby has been filed by the Company with the
Securities and Exchange Commission, Washington, D.C. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. Statements contained in this 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
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement, exhibits, and schedules. A copy
of the Registration Statement may be inspected without charge at the Securities
and Exchange Commission's principal office located at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, the New York Regional Office located at 7
World Trade Center, Suite 1300, New York, New York 10048, and the Chicago
Regional Office located at Northwestern Atrium Center, 500 West Madison Street,
Chicago, Illinois 60661-2511 and copies of all or any part thereof may be
obtained from the Public Reference Section of the Securities and Exchange
Commission upon the payment of certain fees prescribed by the Securities and
Exchange Commission. The Registration Statement may also be obtained from the
Web site that the Commission maintains at http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements certified by an independent public
accounting firm and quarterly reports for each of the first three quarters of
each fiscal year containing unaudited financial information.
41
<PAGE> 45
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of independent certified public accountants -- Grant Thornton LLP.............. F-2
Report of independent certified public accountants -- Amper, Politziner & Mattia...... F-3
Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997..................... F-4
Statements of Operations for the years ended December 31, 1994, 1995, and 1996 and the
six months ended June 30, 1996 and 1997............................................. F-5
Statement of Stockholders' Equity (Deficiency) for the years ended December 31, 1994,
1995, and 1996 and the six months ended June 30, 1997............................... F-6
Statements of Cash Flows for the years ended December 31, 1994, 1995, and 1996 and the
six months ended June 30, 1996 and 1997............................................. F-7
Notes to Financial Statements......................................................... F-8
</TABLE>
F-1
<PAGE> 46
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
SECURACOM, INCORPORATED
We have audited the accompanying balance sheet of Securacom, Incorporated
as of December 31, 1996, and the related statements of operations, stockholders'
equity (deficiency), and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Securacom, Incorporated as
of December 31, 1996, and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
We have also audited Schedule II of Securacom, Incorporated for the year
ended December 31, 1996. In our opinion, this schedule presents fairly, in all
material respects, the information required to be set forth therein.
GRANT THORNTON LLP
Parsippany, New Jersey
March 12, 1997
F-2
<PAGE> 47
REPORT OF INDEPENDENT AUDITORS
Board of Directors
SECURACOM, INCORPORATED
We have audited the accompanying balance sheet of Securacom, Incorporated
at December 31, 1995, and the related statements of operations, stockholders'
equity and cash flows for each of the two years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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 financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
accounting 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 financial statements referred to above present fairly,
in all material respects, the financial position of Securacom, Incorporated at
December 31, 1995 and the results of its operations and its cash flows for each
of the two years then ended in conformity with generally accepted accounting
principles.
We have also audited Schedule II of Securacom, Incorporated for the years
ended December 31, 1995 and 1994. In our opinion, this schedule presents fairly,
in all material respects, the information required to be set forth therein.
AMPER, POLITZINER & MATTIA
June 3, 1996
Edison, New Jersey
F-3
<PAGE> 48
SECURACOM, INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- JUNE 30,
1995 1996 1997
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (including $22,500 of
restricted cash at June 30, 1997)............ $ 555,345 $ 609,342 $ 125,200
Accounts receivable, net of allowance for
doubtful accounts of $120,000 in 1995 and
$42,000 in 1996 and 1997..................... 1,155,173 1,777,456 2,489,559
Costs and estimated earnings in excess of
billings on uncompleted contracts............ 780,391 1,148,560 2,471,415
Prepaid expenses and other..................... 100,006 120,937 100,296
Investment in SSIH, Ltd. ...................... 700,000
----------- ------------ ------------
Total current assets...................... 2,590,915 3,656,295 5,886,470
Plant and equipment, net............................ 261,139 714,989 783,518
Deferred registration costs......................... -- -- 474,566
Other assets........................................ 193,888 195,803 209,201
----------- ------------ ------------
$ 3,045,942 $ 4,567,087 $ 7,353,755
========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Notes payable-stockholder...................... $ 200,000 $ -- $ --
Current maturities of capital lease
obligations.................................. 6,290 21,454 44,293
Accounts payable............................... 817,980 2,739,271 4,140,576
Billings in excess of costs and estimated
earnings on uncompleted contracts............ 442,059 103,184 101,050
Accrued expenses and other..................... 428,507 641,506 762,553
----------- ------------ ------------
Total current liabilities................. 1,894,836 3,505,415 5,048,472
Long-term liabilities:
Notes payable.................................. 597,000 2,541,000 3,200,000
Capital lease obligations, less current
maturities................................... -- 116,399 210,070
Stockholders' equity (deficiency):
Common stock, $0.01 par value per share;
authorized; 10,000,000 shares; issued and
outstanding, 3,953,683 shares in 1995 and
4,434,140 shares in 1996 and 1997............ 39,536 44,341 44,341
Additional paid-in capital..................... 10,224,002 10,582,197 10,644,197
Accumulated deficit............................ (9,709,432) (12,222,265) (11,793,325)
----------- ------------ ------------
554,106 (1,595,727) (1,104,787)
----------- ------------ ------------
$ 3,045,942 $ 4,567,087 $ 7,353,755
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 49
SECURACOM, INCORPORATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Earned revenues................. $ 2,395,254 $ 3,176,523 $ 5,824,448 $ 1,930,470 $7,240,240
Cost of earned revenues......... 1,586,315 2,179,964 4,416,386 1,245,583 5,210,176
----------- ----------- ----------- ----------- ----------
Gross profit............... 808,939 996,559 1,408,062 684,887 2,030,064
Selling, general and
administrative expenses....... 2,670,092 2,870,570 3,700,698 1,940,679 1,380,514
----------- ----------- ----------- ----------- ----------
Operating income (loss)......... (1,861,153) (1,874,011) (2,292,636) (1,255,792) 649,550
Interest and financing fees..... (34,181) (101,707) (241,716) (76,683) (231,778)
Interest and other income....... 7,617 208,026 21,519 1,682 11,168
----------- ----------- ----------- ----------- ----------
Net income (loss).......... $(1,887,717) $(1,767,692) $(2,512,833) $(1,330,793) $ 428,940
========== ========== ========== ========== =========
Net income (loss) per share..... $ (0.54) $ (0.45) $ (0.58) $ (0.31) $ 0.09
========== ========== ========== ========== =========
Weighted average shares
outstanding................... 3,493,000 3,909,000 4,368,000 4,256,000 4,532,000
========== ========== ========== ========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 50
SECURACOM, INCORPORATED
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIENCY)
--------- ------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994......... 3,226,889 $32,269 $ 6,724,201 $ (6,054,023) $ 702,447
Net loss........................... (1,887,717) (1,887,717)
Proceeds from issuance of common
stock............................ 316,000 3,160 1,576,780 1,579,940
Common stock issuance costs........ (78,997) (78,997)
--------- ------- ----------- ------------ -----------
Balance at December 31, 1994....... 3,542,889 35,429 8,221,984 (7,941,740) 315,673
Net loss........................... (1,767,692) (1,767,692)
Proceeds from issuance of common
stock............................ 410,794 4,107 2,075,818 2,079,925
Common stock issuance costs........ (76,800) (76,800)
Issuance of warrants............... 3,000 3,000
--------- ------- ----------- ------------ -----------
Balance at December 31, 1995....... 3,953,683 39,536 10,224,002 (9,709,432) 554,106
Net loss........................... (2,512,833) (2,512,833)
Exercise of warrants............... 480,457 4,805 247,195 252,000
Issuance of warrants............... 111,000 111,000
--------- ------- ----------- ------------ -----------
Balance at December 31, 1996....... 4,434,140 44,341 10,582,197 (12,222,265) (1,595,727)
Net income (unaudited)............. 428,940 428,940
Issuance of warrants (unaudited)... 62,000 62,000
--------- ------- ----------- ------------ -----------
Balance at June 30, 1997
(unaudited)...................... 4,434,140 $44,341 $10,644,197 $(11,793,325) $(1,104,787)
======== ======= ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE> 51
SECURACOM, INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------- --------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................ $(1,887,717) $(1,767,692) $(2,512,833) $(1,330,793) $ 428,940
----------- ----------- ----------- ----------- -----------
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization........... 47,503 62,457 91,859 31,737 63,205
Noncash compensation.................... 27,500 28,000 28,000
Amortization of debt discount........... 5,000 3,000 21,000
Changes in operating assets and liabilities:
Accounts receivable..................... 183,225 (767,135) (622,283) 174,213 (712,103)
Costs and estimated earnings in excess
of billings on uncompleted
contracts............................. (700,481) 177,124 (368,169) 147,951 (1,322,855)
Prepaid expenses and other.............. 209,311 (30,043) (20,931) (23,988) 20,641
Other assets............................ 13,361 (146,978) (1,915) (1,172) (13,398)
Accounts payable........................ 153,897 115,265 1,921,291 345,131 1,401,305
Billings in excess of costs and
estimated earnings on uncompleted
contracts............................. 192,213 249,846 (338,875) (288,064) (2,134)
Accrued expenses and other.............. (119,646) 145,620 212,999 174,710 121,047
----------- ----------- ----------- ----------- -----------
Total adjustments....................... (20,617) (166,344) 906,976 591,518 (423,292)
----------- ----------- ----------- ----------- -----------
Net cash from operating activities ..... (1,908,334) (1,934,036) (1,605,857) (739,275) 5,648
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in SSIH, Ltd...................... (700,000)
Acquisition of plant and equipment........... (63,661) (17,868) (396,460) (7,331)
----------- ----------- ----------- ----------- -----------
Net cash used by investing activities........ (63,661) (17,868) (396,460) (7,331) (700,000)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable.................. 515,000 800,000 2,050,000 600,000 700,000
Principal payments on notes
payable -- stockholder..................... (200,000) (200,000)
Principal payments of capital lease
obligations................................ (15,235) (19,068) (17,686) (10,349) (15,224)
Deferred registration costs.................. (474,566)
Proceeds from issuance of common stock and
exercise of warrants....................... 1,579,940 1,537,425 224,000 224,000
Common stock issuance costs.................. (78,997) (76,800)
----------- ----------- ----------- ----------- -----------
Net cash provided by financing activities
........................................... 2,000,708 2,241,557 2,056,314 613,651 210,210
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents.................................... 28,713 289,653 53,997 (132,955) (484,142)
Cash and cash equivalents at beginning of
period......................................... 236,979 265,692 555,345 555,345 609,342
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period....... $ 265,692 $ 555,345 $ 609,342 $ 422,390 $ 125,200
============ ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period
Interest and financing fees............. $ 23,000 $ 97,000 $ 165,000 $ 56,000 $ 161,000
Income taxes............................ 2,000 2,000 7,000 5,000 6,000
</TABLE>
During the first six months of 1997, the Company acquired equipment totaling
approximately $132,000 through capital lease transactions.
During 1996, the Company acquired equipment totaling approximately $149,000
through capital lease transactions.
During 1995, the Company issued 103,000 shares of common stock in payment of
notes payable totaling $515,000.
The accompanying notes are an integral part of these statements.
F-7
<PAGE> 52
SECURACOM, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
NOTE A -- BUSINESS AND SUMMARY OF ACCOUNTING POLICIES
Securacom, Incorporated (the "Company") is a single-source provider of
comprehensive technology-based security solutions primarily for medium and large
commercial and government facilities in the United States and abroad. At
December 31, 1996, the Company was approximately 90% owned by KuwAm Corporation,
two private investment partnerships of which KuwAm serves as general partner,
Special Situations Investment Holdings, Ltd. and Special Situations Investment
Holdings L.P. II, and certain individual limited partners of the investment
partnerships (the "KuwAm Group").
A summary of the significant accounting policies applied in the preparation
of the accompanying financial statements follows:
1. REVENUE RECOGNITION
The Company derives its revenues principally from long-term contracts which
are generally on a fixed price basis. Earnings are recognized on the basis of
the Company's estimates of the percentage of completion of individual contracts,
whereby total estimated income is earned based upon the proportion that costs
incurred bear to the Company's estimate of total contract costs.
The percentage of completion of individual contracts includes management's
best estimates of the amounts expected to be realized on these contracts. It is
at least reasonably possible that the amounts the Company will ultimately
realize could differ materially in the near term from the amounts estimated in
arriving at the earned revenue and costs and earnings in excess of billings on
uncompleted contracts.
Contract costs include all direct material, direct labor and subcontract
costs. Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Changes in job performance, job
conditions and estimated profitability, including those arising from contract
revisions and final contract settlements may result in revisions to costs and
income and are recognized in the period in which the revisions are determined.
The asset "Costs and estimated earnings in excess of billings on
uncompleted contracts" represents revenues recognized in excess of amounts
billed to clients. The liability "Billings in excess of costs and estimated
earnings on uncompleted contracts" represents billings in excess of revenues
recognized.
2. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
3. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income
Taxes." SFAS No. 109 requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax assets
and liabilities are determined based on the temporary differences between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
F-8
<PAGE> 53
SECURACOM, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1996
NOTE A -- BUSINESS AND SUMMARY OF ACCOUNTING POLICIES -- (CONTINUED)
4. PLANT AND EQUIPMENT
Plant and equipment are stated at cost. Depreciation is provided using the
straight-line method based on the estimated useful lives of the related assets.
Leasehold improvements are amortized over the shorter of the economic life of
the improvements or the lease term.
5. USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements as
well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. In addition to the
estimates of revenues earned on contracts as described in Note A-1, the Company
estimates an allowance for doubtful accounts based on the creditworthiness of
its clients, as well as general economic conditions. Consequently, an adverse
change in those factors could affect the Company's estimate.
6. CONCENTRATIONS OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash, money market funds and trade accounts
receivable. The Company places its cash and money market funds with high credit
quality institutions. In general, such investments exceed the FDIC insurance
limit.
The Company provides credit to its clients in the normal course of
business. The Company routinely assesses the financial strength of its clients
and, as a consequence, believes that its trade accounts receivable exposure is
limited.
The carrying value of financial instruments potentially subject to
valuation risk (principally consisting of cash, accounts receivable, long-term
debt and accounts payable) approximates fair market value due to their
short-term nature or market interest rates.
7. INCOME (LOSS) PER SHARE
Net income (loss) per common share is calculated by dividing the net income
(loss) by the weighted average number of shares of common stock outstanding.
Except as noted in the following paragraph, stock warrants have not been
included in the calculation as their inclusion would be antidilutive.
Warrants issued for the purchase of shares of Common Stock at an exercise
price below the estimated initial public offering price of $7.50 per share
during the 12 months preceding the date of the Company's initial filing of a
registration statement with the Securities and Exchange Commission have been
included in the number of weighted average shares outstanding for all periods
presented calculated based on the treasury stock method.
The Company believes that the implementation of Statement of Financial
Accounting Standards 128, Earnings Per Share, will not have a material impact on
the calculation of earnings per share.
8. INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The unaudited balance sheet as of June 30, 1997 and the unaudited
statements of operations, stockholders' equity and statements of cash flows for
the six months ended June 30, 1996 and 1997 are condensed financial statements
in accordance with the rules and regulations of the Securities and Exchange
F-9
<PAGE> 54
SECURACOM, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1996
NOTE A -- BUSINESS AND SUMMARY OF ACCOUNTING POLICIES -- (CONTINUED)
8. INTERIM FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Commission. Accordingly, they omit certain information included in complete
financial statements and should be read in connection with the information for
the years ended December 31, 1994, 1995 and 1996.
In the opinion of the Company, the unaudited financial statements at June
30, 1997 and for the six months ended June 30, 1996 and 1997, include all
adjustments, consisting only of normal recurring adjustments necessary for a
fair presentation of the financial position and results of operations for such
periods. Results of operations for the six months ended June 30, 1997 are not
necessarily indicative of results to be expected for the full year.
In April 1997, the Board of Directors approved an increase in the number of
shares of Common Stock authorized to 20,000,000 shares.
In June 1997, the Company placed $22,500 in an interest bearing money
market fund as collateral for a stand-by letter of credit issued in the same
amount to guarantee shipment of equipment for a project in Russia.
During the six months ended June 30, 1997, one client accounted for 56.8%
of the earned revenue and 49.8% of the gross profit.
The Company entered into an agreement with an underwriter pursuant to which
the Company intends to prepare and file with the Securities and Exchange
Commission a registration statement for the initial public offering of 1,400,000
shares to be issued by the Company and 200,000 shares by an existing
stockholder.
At June 30, 1997, the Company had $474,566 of deferred registration costs
which will be netted against the Offering proceeds, if successful. Otherwise,
they will be expensed.
Of the total $3,350,000 proceeds received from the issuance of notes
payable, the Company invested $700,000 in a limited partnership interest of
Special Situations Investment Holdings, Ltd. ("SSIH") recorded at cost which is
deemed to be equivalent to fair market value. At the end of each year, the
Company has the option of requiring SSIH to redeem the limited partnership
interest at their then fair market value less a liquidation fee of up to 1%. The
proceeds of such redemption are payable, at SSIH's option, in cash or portfolio
securities of SSIH. Because the assets of SSIH include both publicly traded and
privately held securities, the value of the SSIH portfolio may be materially
different than the cost of the Company's investment. Under the terms of the
governing agreements KuwAm receives 3% of the amount of the Company's investment
as reimbursement for accounting, legal and administrative expenses, an annual
fee equal to 2% of the assets and an annual capital appreciation fee equal to
10% of the increases in the value of SSIH's assets each year. The Company and
SSIH have agreed that, immediately following the Offering, such limited
partnership interest will be redeemed at the greater of $700,000 or its market
value.
NOTE B -- LIQUIDITY
As shown in the accompanying financial statements, Securacom, Incorporated
has incurred recurring operating losses and has an accumulated deficit of
$12,222,265 at December 31, 1996. In addition, the Company has been dependent on
its principal stockholders for the financing of ongoing operations. In these
circumstances, the Company's continued existence is dependent upon its ability
to generate profitable operations and secure financing to fund future
operations. Management is addressing these matters by implementing a
comprehensive business strategy. The Company anticipates that it will generate
sufficient cash flow from 1997 operations to meet its working capital needs. The
Company has, in the past, been able to
F-10
<PAGE> 55
SECURACOM, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1996
NOTE B -- LIQUIDITY -- (CONTINUED)
secure additional financing to meet its operating requirements, although there
can be no assurance that it will be able to continue to do so.
NOTE C -- COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts at December 31, 1995
and 1996 and June 30, 1997 which are expected to be collected within one year
are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1997
1995 1996 (UNAUDITED)
----------- ----------- -------------
<S> <C> <C> <C>
Costs incurred on contracts................... $28,205,341 $32,222,489 $ 9,621,226
Estimated earnings............................ 2,701,352 3,889,963 3,188,287
----------- ----------- -------------
30,906,693 36,112,452 12,809,513
Less billings to date......................... 30,568,361 35,067,076 10,439,148
----------- ----------- -------------
$ 338,332 $ 1,045,376 $ 2,370,365
========== ========== ==========
</TABLE>
In addition, included in accounts receivable and accounts payable at
December 31, 1996 were retainages of $76,983 and $111,278, respectively. At June
30, 1997 retainages included in accounts receivable were $409,225 and in
accounts payable $240,795 (unaudited). The Company anticipates that retainages
will be collected and paid within one year. There were no such amounts at
December 31, 1995.
In February 1996, the Company negotiated a final settlement on a major
contract with the Tennessee Valley Authority. As a result, the Company wrote off
approximately $238,000 of amounts owed to a subcontractor and reduced cost of
earned revenues.
NOTE D -- PLANT AND EQUIPMENT
Plant and equipment are summarized as follows:
<TABLE>
<CAPTION>
USEFUL
1995 1996 LIFE
-------- -------- --------
<S> <C> <C> <C>
Computer equipment..................................... $232,599 $275,110 5 years
Equipment and fixtures................................. 214,158 328,885 10 years
Aircraft (a)........................................... 335,000 10 years
Leasehold improvements................................. 53,471 5 years
-------- --------
446,757 992,466
Accumulated depreciation and amortization.............. 185,618 277,477
-------- --------
$261,139 $714,989
======== ========
</TABLE>
- ---------------
(a) The aircraft was purchased from a firm whose principal stockholders are the
same as those of the Company.
NOTE E -- NOTES PAYABLE
During the years ended December 31, 1995 and 1996, the Company issued
subordinated debentures to the KuwAm Group totaling $600,000 and $2,050,000,
respectively, and 85,716 and 292,862, respectively, of warrants to purchase
common stock of the Company at $7.00 per share. The debentures bear interest at
10% and the principal is payable as follows: $663,000 on December 31, 1998,
$663,000 on December 31, 1999 and
F-11
<PAGE> 56
SECURACOM, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1996
NOTE E -- NOTES PAYABLE -- (CONTINUED)
the balance on December 31, 2000. The value of the warrants, $3,000 and $111,000
at December 31, 1995 and 1996, respectively, was determined based upon an
appraisal of the securities by an independent firm and was recorded as
additional paid-in capital and reduction of notes payable. All 378,578 warrants
are outstanding at December 31, 1996.
Interest expense on these notes amounted to approximately $37,000 and
$125,000 (including $5,000 of amortization of debt discount) for the years ended
December 31, 1995 and 1996, respectively.
At December 31, 1995, the Company had $200,000 of notes payable to
stockholders which were repaid in 1996.
NOTE F -- ACCRUED EXPENSES
Accrued expenses and other are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
-------- --------
<S> <C> <C>
Payroll......................................................... $225,979 $237,515
Employee expense reimbursements................................. 16,735 107,236
Professional fees............................................... 73,656 87,875
Deferred rent obligation........................................ 81,915 74,295
Other........................................................... 30,222 134,585
-------- --------
$428,507 $641,506
======== ========
</TABLE>
NOTE G -- OBLIGATIONS UNDER CAPITAL LEASE AGREEMENTS
The Company has entered into various capital lease agreements for equipment
with a cost of $48,646 and $197,895 at December 31, 1995 and 1996, respectively.
The leases expire at various times through 2001. Accumulated amortization
amounted to $10,372 and $29,447 at December 31, 1995 and 1996, respectively. The
related future minimum lease payments, as of December 31, 1996, are as follows:
<TABLE>
<CAPTION>
CAPITAL
FISCAL YEAR LEASES
-------------------------------------------------------------------------- --------
<S> <C>
1997...................................................................... $ 48,713
1998...................................................................... 48,713
1999...................................................................... 45,144
2000...................................................................... 46,544
2001...................................................................... 28,531
--------
Net minimum lease payments................................................ 217,645
Amount representing interest.............................................. (79,792)
--------
$137,853
========
</TABLE>
NOTE H -- RELATED PARTY TRANSACTIONS
The Company had agreements (the "Agreements") with KuwAm Corporation
whereby the Company paid a fee of five percent of the capital raised from the
private sale of common stock and subordinated debentures under the Agreements.
The Company incurred approximately $79,000, $77,000 and $103,000, of investment
banking fees under the Agreements during 1994, 1995 and 1996, respectively,
which have been
F-12
<PAGE> 57
SECURACOM, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1996
NOTE H -- RELATED PARTY TRANSACTIONS -- (CONTINUED)
recorded as a reduction of proceeds from sales of equity securities and interest
and financing fees for sales of subordinated debentures.
NOTE I -- EMPLOYEE STOCK WARRANTS
From time to time the Company has granted warrants for the purchase of its
common stock to employees and directors. The Company has elected to follow
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations in measuring compensation expense for
its stock warrants. Under APB No. 25, because the exercise price of the
Company's employee stock warrants is not less than the fair market value of the
underlying stock on the date of grant, no compensation expense is recognized.
However, SFAS No. 123, "Accounting for Stock-Based Compensation," requires
presentation of pro forma net income and earnings per share as if the Company
had accounted for its employee stock warrants granted subsequent to December 31,
1994, under the fair value method of that statement. For purposes of pro forma
disclosure, the estimated fair value of the warrants is amortized to expense
over the vesting period. Under the fair value method, the Company's net loss and
loss per share would not have had a material change.
Because SFAS No. 123 is applicable only to options and warrants granted
subsequent to December 31, 1994, and the warrants have a three-year vesting
period, its pro forma effect will not be fully reflected until 1998.
The weighted average fair value of the individual warrants granted during
both 1995 and 1996 is estimated as $0.04 on the date of grant. The fair values
were determined using a Black-Scholes option-pricing model with the following
assumptions:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Dividend yield..................................................... -- --
Volatility......................................................... 50% 50%
Risk-free interest rate............................................ 6.70 6.06
Forfeiture rate.................................................... -- --
Expected life...................................................... 3 years 3 years
</TABLE>
Stock warrant activity during 1994-1996 is summarized below:
<TABLE>
<CAPTION>
SHARES OF WEIGHTED
COMMON STOCK AVERAGE
ATTRIBUTABLE EXERCISE PRICE
TO WARRANTS OF WARRANTS
------------ --------------
<S> <C> <C>
Unexercised at December 31, 1993............................ 785,634 $ 1.91
Granted..................................................... 33,260 0.53
Expired..................................................... 16,667 5.00
------------
Unexercised at December 31, 1994............................ 802,227 1.78
Granted..................................................... 245,148 4.63
Exercised................................................... -- --
Expired..................................................... 35,000 5.00
------------
</TABLE>
F-13
<PAGE> 58
SECURACOM, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1996
NOTE I -- EMPLOYEE STOCK WARRANTS -- (CONTINUED)
<TABLE>
<CAPTION>
SHARES OF WEIGHTED
COMMON STOCK AVERAGE
ATTRIBUTABLE EXERCISE PRICE
TO WARRANTS OF WARRANTS
------------ --------------
<S> <C> <C>
Unexercised at December 31, 1995............................ 1,012,375 2.36
Granted..................................................... 400,797 6.58
Exercised................................................... 480,457 0.53
Expired..................................................... 48,333 5.41
------------
Unexercised at December 31, 1996............................ 884,382 5.10
==========
</TABLE>
The following table summarizes information concerning outstanding and
exercisable warrants at December 31, 1996:
<TABLE>
<CAPTION>
WARRANTS OUTSTANDING
---------------------------------
WEIGHTED-AVERAGE
EXERCISE NUMBER REMAINING WARRANTS
PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
- -------- ----------- ----------------- -----------
<S> <C> <C> <C>
$1 159,382 0.7 159,382
5 360,000 1.1 209,998
7 365,000 2.2 --
</TABLE>
Warrants exercisable at December 31, 1994, 1995 and 1996, were 562,639,
689,248 and 369,382, respectively. Reference is made to Note E relating to
outstanding warrants issued relating to notes payable.
During the year ended December 31, 1996, the President of the Company
exercised warrants for the purchase of 53,320 shares of common stock at an
exercise price of $0.53 per share. Since no amount was paid upon exercise of the
warrants, the Company recorded compensation expense of $28,000.
NOTE J -- INCOME TAXES
Deferred tax attributes resulting from differences between financial
accounting amounts and tax bases of assets and liabilities at December 31, 1995
and 1996 follow:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Current assets and liabilities
Allowance for doubtful accounts............................... $ 29,000 $ 17,000
Accrued vacation pay.......................................... 15,000 38,000
Deferred rent obligation...................................... 19,000 --
----------- -----------
63,000 55,000
Valuation allowance................................................ (63,000) (55,000)
----------- -----------
Net current deferred tax asset (liability)......................... $ -- $ --
========== ==========
Noncurrent assets and liabilities:
Depreciation.................................................. $ (26,000) $ (58,000)
Net operating loss carryforward............................... 2,250,000 4,744,000
----------- -----------
2,224,000 4,686,000
Valuation allowance................................................ (2,224,000) (4,686,000)
----------- -----------
Noncurrent deferred tax asset (liability).......................... $ -- $ --
========== ==========
</TABLE>
F-14
<PAGE> 59
SECURACOM, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1996
NOTE J -- INCOME TAXES -- (CONTINUED)
The valuation allowance has been established for those loss carryforwards
and deductible temporary differences which are not presently considered more
likely than not to be realized.
The provision for income taxes differs from the effective tax rate used in
the financial statements as a result of current year net operating losses, the
benefit of which has not been recognized in the current year.
As of December 31, 1996, the Company had net operating loss carryforwards
of approximately $12,200,000, which expire in 2002 through 2011.
In 1992, a major stockholder of the Company significantly increased its
ownership of the Company. As a result of a complex set of rules limiting the
utilization of net operating loss carryforwards in tax years following a
corporate ownership change (enacted in the Tax Reform Act of 1986), the ability
of the Company to utilize net operating losses of approximately $3.5 million may
be limited.
Also, the shares issued in connection with the Offering are expected to
create an ownership change. However, based on the expected value of the Company
immediately before such ownership change and the resulting limitation as
defined, the Company expects to be able to utilize its net operating losses of
approximately $8.7 million incurred after August 1992.
NOTE K -- EMPLOYEE BENEFIT ARRANGEMENTS
The Company established a contributory employee savings plan under Section
401(k) of the Internal Revenue Code. The Company contributes amounts to
individual participant accounts based on specific provisions of the plan. The
cost to the Company for the employer match under the plan was $8,111, $8,238 and
$12,728, for the years ended December 31, 1994, 1995 and 1996, respectively.
The Company had an employee profit-sharing plan providing for the provision
of an amount equal to 10% of the Company's income before income taxes. The
Company did not make a contribution to the plan for the years ended December 31,
1994, 1995 or 1996.
NOTE L -- COMMITMENTS AND CONTINGENCIES
Leases
The Company conducts all of its operations from leased facilities
consisting of its corporate headquarters and branch office locations. All
facility leases are classified as operating leases with terms ranging from one
to five years.
The following is a schedule by years of approximate future minimum rental
payments required under operating leases that have initial or remaining
noncancelable lease terms in excess of one year as of December 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------------------------------------------------ --------
<S> <C>
1997.............................................................. $269,000
1998.............................................................. 260,000
1999.............................................................. 253,000
2000.............................................................. 152,000
2001.............................................................. 32,000
--------
$966,000
========
</TABLE>
F-15
<PAGE> 60
SECURACOM, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1996
NOTE L -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
Rent expense for the years ended December 31, 1994, 1995 and 1996 was
$279,000, $236,000 and $286,000, respectively.
Contingencies
The Company is a party in certain legal actions arising from the normal
conduct of its business. While the outcome of such actions is not presently
determinable, in the opinion of management, based on discussions with legal
counsel, the resolution of these actions will not have a material adverse effect
on the Company's financial position, results of operations, or cash flows.
NOTE M -- INTEREST AND OTHER INCOME
Included in interest and other income for the year ended December 31, 1995
is a gain on settlement of litigation, net of expenses and fees of $205,179.
NOTE N -- ACQUISITION
Effective August 1, 1995, Securacom, Incorporated acquired the assets and
certain liabilities of Franklin M. Sterling & Associates, Inc. in exchange for
issuing 25,000 shares of common stock to, and employment of, Franklin M.
Sterling, P.E. as Senior Vice President in charge of Securacom's West Coast
offices. The Company recorded compensation expense of $27,500 in 1995 relating
to the issuance of these shares of common stock.
NOTE O -- SIGNIFICANT CLIENTS
During the year ended December 31, 1994, one client accounted for
approximately 67% of earned revenue.
During the year ended December 31, 1995 contracts with three clients
accounted for approximately 41%, 18% and 13% of earned revenue.
During the year ended December 31, 1996, contracts with four clients
accounted for approximately 28%, 22%, 14% and 11% of earned revenue.
NOTE P -- SUBSEQUENT EVENTS
Issuance of Notes Payable
Through March 10, 1997, the Company issued $700,000 of subordinated
debentures to the KuwAm Group with warrants to purchase 100,002 shares of the
Company's common stock at an exercise price of $7.00 per share. The debentures
bear interest at 10% and the principal is payable as follows: $175,000 on
December 31, 1998, $175,000 on December 31, 1999 and the balance on December 31,
2000. The warrants were valued at $62,000 based upon an appraisal of the
securities by an independent firm and were recorded as additional paid-in
capital and a reduction of notes payable.
Common Stock and Warrants
In January and February 1997, the Company issued to employees and directors
195,000 warrants to purchase shares of the Company's common stock at $7.00 per
share.
Employment and Consulting Agreements
In 1997, the Company entered into employment agreements with its President
and Chief Financial Officer that provide for annual base salaries of $165,000
and $125,000, respectively, through March 31, 2002
F-16
<PAGE> 61
SECURACOM, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1995 AND 1996
NOTE P -- SUBSEQUENT EVENTS -- (CONTINUED)
and 2000, respectively. The agreements provide for an additional payment equal
to two times the annual base salary if the executive is terminated without cause
following a change in control as defined in the agreement. The Company also
entered into a consulting agreement with the Chairman of the Company (and
managing partner of KuwAm Corporation) that provides for an annual consulting
fee of $140,000 through March 31, 2002.
Stock Option Plan
In 1997, the Board of Directors approved the adoption of the 1997 Stock
Option Plan. The 1997 Stock Option Plan provides for the grant of options to
purchase up to 500,000 shares of the Company's Common Stock. Options may be
granted to employees, officers, directors and consultants of the Company for the
purchase of Common Stock of the Company at a price not less than the fair market
value of the Common Stock on the date of the grant.
F-17
<PAGE> 62
SECURACOM,
INCORPORATED
[Diagram of Services
Offered by Securacom]
SINGLE SOURCE SECURITY
THROUGH TECHNOLOGY
<PAGE> 63
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 6
Use of Proceeds........................ 10
Dividend Policy........................ 10
Dilution............................... 11
Capitalization......................... 12
Selected Financial Data................ 13
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 14
Business............................... 17
Management............................. 26
Certain Transactions................... 31
Principal and Selling Stockholders..... 32
Description of Capital Stock........... 33
Shares Eligible for Future Sale........ 37
Underwriting........................... 39
Legal Matters.......................... 40
Experts................................ 40
Additional Information................. 41
Index to Financial Statements.......... F-1
</TABLE>
------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
1,600,000 SHARES
[SECURACOM LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
CRUTTENDEN ROTH
INCORPORATED
SCOTT & STRINGFELLOW, INC.
, 1997
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 64
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth certain expenses payable in connection with
the registration of the Common Stock that is the subject of this Registration
Statement, all of which shall be borne by the Company. In addition, $37,500 of
the Representative's non-accountable expense allowance will be paid by the
Selling Stockholder. All the amounts shown are estimates except for the
registration fee, the Nasdaq SmallCap Market listing fee, and the NASD filing
fee.
<TABLE>
<CAPTION>
TO BE PAID BY
REGISTRANT
-------------
<S> <C>
Securities and Exchange Commission registration fee............ $ 6,970
Nasdaq listing fee............................................. 10,000
National Association of Securities Dealers filing fee.......... 2,800
Printing and engraving expenses................................ 100,000
Legal fees and expenses........................................ 210,000
Accounting fees and expenses................................... 170,000
Blue sky filing fees........................................... 13,730
Representatives' non-accountable expense allowance............. 262,500
Miscellaneous.................................................. 100,000
-----------
Total..................................................... $ 876,000
===========
</TABLE>
- ---------------
* To be supplied by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Certificate of Incorporation and By-Laws provide for
indemnification of directors, officers, agents, and employees of the Company to
the fullest extent permitted by law. Under Delaware law, a corporation may
indemnify any person who was or is a party or is threatened to be made a party
to an action (other than an action by or in the right of the corporation) by
reason of his service as a director or officer of the corporation, or his
service, at the corporation's request, as a director, officer, employee or agent
of another corporation or other enterprise, against expenses (including
attorneys' fees) that are actually and reasonably incurred by him ("Expenses"),
and judgments, fines and amounts paid in settlement that are actually and
reasonably incurred by him, in connection with the defense or settlement of such
action, provided that he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the corporation's best interests and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
that his conduct was unlawful. Although Delaware law permits a corporation to
indemnify any person referred to above against Expenses in connection with the
defense or settlement of an action by or in the right of the corporation,
provided that he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the corporation's best interests, if such person has
been judged liable to the corporation, indemnification is only permitted to the
extent that the Court of Chancery (or the court in which the action was brought)
determines that, despite the adjudication of liability, such person is entitled
to indemnity for such Expenses as the court deems proper. The determination as
to whether a person seeking indemnification has met the required standard of
conduct is to be made (1) by a majority vote of a quorum of disinterested
members of the board of directors, or (2) by independent legal counsel in a
written opinion, if such a quorum does not exist or if the disinterested
directors so direct, or (3) by the stockholders. The General Corporation Law of
the State of Delaware also provides for mandatory indemnification of any
director, officer, employee or agent against Expenses to the extent such person
has been successful in any proceeding covered by the statute. In addition, the
General Corporation Law of the State of Delaware provides the general
authorization of advancement of a director's or officer's litigation expenses in
lieu of requiring the authorization of such advancement by the board of
directors in specific cases, and that indemnification and advancement of
II-1
<PAGE> 65
expenses provided by the statute shall not be deemed exclusive of any other
rights to which those seeking indemnification or advancement of expenses may be
entitled under any bylaw, agreement or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since January 1, 1994, the Registrant has sold or issued the following
unregistered securities:
During 1994, the Company issued an aggregate of 316,000 shares of Common
Stock to eight individuals and five entities at a purchase price of $5.00 per
share. Also during 1994, the Company issued $515,000 aggregate principal amount
of promissory notes to one entity at a purchase price equal to the principal
amount of the promissory notes.
From January 1995 through June 1995, the Company issued an aggregate of
247,500 shares of Common Stock to three individuals and three entities at a
purchase price of $5.00 per share. In June 1995, $515,000 aggregate principal
amount of promissory notes held by one entity was converted into 103,000 shares
of Common Stock at a conversion price of $5.00 per share.
During July and August 1995, the Company issued an aggregate of 35,294
shares of Common Stock to one entity at a purchase price of $8.50 per share. In
August 1995, the Company issued 25,000 shares of Common Stock to one individual
in connection with the acquisition of the assets and certain liabilities of a
security consulting business.
In March and May 1996, two entities and three directors and/or officers
exercised warrants to purchase an aggregate of 480,457 shares of Common Stock at
an exercise price of $0.53 per share.
From October 1995 through March 1997 the Company issued $3,350,000
aggregate principal amount of 10% subordinated debentures and warrants to
purchase 478,580 shares of Common Stock at an exercise price of $7.00 per share
to nine entities and 19 individuals at a purchase price equal to the principal
amount of the debentures.
The issuances of securities in the above transactions were deemed to be
exempt from registration under the Act in reliance on Section 4(2) thereof as
transactions not involving a public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following is a list of exhibits furnished:
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement
1.2 Form of Underwriter's Warrant
3.1+ Form of Restated Certificate of Incorporation of Securacom, Incorporated
3.2+ Form of Bylaws of Securacom, Incorporated
4+ Form of Rights Agreement
5+ Opinion of Counsel
10.1+ Stock Option Plan
10.2+ Employment Agreement with Ronald C. Thomas
10.3+ Employment Agreement with Larry M. Weaver
10.4+ Consulting Agreement with Wirt D. Walker, III
10.5+ Agreement and Certificate of Limited Partnership for Special Situation Investment
Holdings, Ltd.
10.6+ Form of Stock Purchase Agreement
10.7 Agreement to Redeem Limited Partnership Interest
11+ Computation of Net Income (Loss) Per Share
16+ Letter from Amper, Politziner & Mattia
23.1 Consent of Grant Thornton LLP
23.2 Consent of Amper, Politziner & Mattia
23.3+ Consent of Counsel (included as part of Exhibit 5)
24+ Power of Attorney
27 Financial Data Schedule
</TABLE>
- ---------------
+ Previously filed
II-2
<PAGE> 66
(b) The following is a list of the financial statement schedule furnished:
Schedule II -- Valuation and Qualifying Accounts.
Schedules not listed above have been omitted because they are not
applicable or because required information is included in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in such
names as required by the Underwriters to permit prompt delivery to each
purchaser.
(2) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and 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 issue.
(3) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of the registration
statement as of the time it was declared effective.
(4) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
<PAGE> 67
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Woodcliff Lake and State
of New Jersey on the 11th day of September, 1997.
SECURACOM, INCORPORATED
By: *
------------------------------------
Ronald C. Thomas
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- -------------------------------- -------------------
<S> <C> <C>
* President, Chief Executive September 11, 1997
- ---------------------------------------- Officer, and Director
Ronald C. Thomas (Principal Executive Officer)
* Executive Vice President, September 11, 1997
- ---------------------------------------- Chief Operating Officer and
Larry M. Weaver Chief Financial Officer
(Principal Financial and
Accounting Officer)
* Chairman and Director September 11, 1997
- ----------------------------------------
Wirt D. Walker, III
* Director September 11, 1997
- ----------------------------------------
Mishal Yousef Saud Al Sabah
* Director September 11, 1997
- ----------------------------------------
Marvin Bush
* Director September 11, 1997
- ----------------------------------------
Robert B. Smith, Jr.
By: /s/ MICHAEL JOSEPH
- ----------------------------------------
Michael Joseph
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 68
SECURACOM, INCORPORATED
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------ ---------- ------------------------- ------------- -----------
ADDITIONS
-------------------------
(1) (2)
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS -- DEDUCTIONS -- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- ------------------------------------ ---------- ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994
Allowance for doubtful accounts... $ 97,000 $ 97,000
======== ========
Year ended December 31, 1995
Allowance for doubtful accounts... $ 97,000 $ 23,000 $ 120,000
======== ======== ========
Year ended December 31, 1996
Allowance for doubtful accounts... $ 120,000 $78,000(a) $ 42,000
======== =========== ========
</TABLE>
- ---------------
(a) Uncollectible accounts written off
S-1
<PAGE> 1
EXHIBIT 1.1
1,600,000 SHARES(1)
SECURACOM, INCORPORATED
COMMON STOCK
UNDERWRITING AGREEMENT
September __, 1997
CRUTTENDEN ROTH INCORPORATED
SCOTT & STRINGFELLOW, INC.
As Representatives of the several Underwriters
18301 Von Karman, Suite 100
Irvine, California 92715
Dear Sirs:
Securacom, Incorporated., a Delaware corporation (the "COMPANY"), and
the Stockholder named on Schedule B address you as the Representatives of each
of the parties listed in Schedule A hereto (herein collectively called the
"UNDERWRITERS") and hereby confirm their agreements with the several
Underwriters as follows:
1. Description of Shares. The Company proposes to issue and sell
1,400,000 shares of its authorized and unissued Common Stock, par value $0.01
per share (the "COMPANY FIRM SHARES"), to the several Underwriters. Moreover,
a certain stockholder of the Company named in Schedule B hereto (the "SELLING
STOCKHOLDER") proposes to sell to the several Underwriters 200,000 shares of
the Company's Common Stock, par value $0.01 per share (the "STOCKHOLDER FIRM
SHARES"). The Company Firm Shares and the Stockholder Firm Shares are
hereinafter collectively referred to as the "Firm Shares." The Selling
Stockholder also proposes to grant to the several Underwriters an option to
purchase up to 240,000 additional shares of the Company's Common Stock, par
value $0.01 per share (the "OPTION SHARES"), as provided in Section 7. The
Company also proposes to sell to the Representatives, at a purchase price of
$0.001 per warrant, warrants exercisable for a period of three years commencing
one year after the effective date of the Registration Statement (as defined
below) to purchase up to an aggregate of 140,000 shares of Common Stock at a
price of $[price x 120%] per share (the "REPRESENTATIVES' WARRANTS"),
- ----------------------------------
(1) Plus an option to purchase up to 240,000 additional shares from the
Selling Shareholder to cover over-allotments.
<PAGE> 2
which exercise and purchase shall be effected in accordance with the
Representatives' Warrant Agreement in the form attached hereto as Exhibit A and
entered into between the Company and you concurrently herewith (the
"REPRESENTATIVES' WARRANT AGREEMENT"). As used in this Agreement, the term
"SHARES" shall include the Firm Shares and the Option Shares. All shares of
Common Stock, par value $0.01 per share, of the Company, including the Shares,
are hereinafter referred to as "COMMON STOCK."
2. Representations, Warranties and Agreements. The Selling
Stockholder represents and warrants to and agrees with each Underwriter that:
(a) the Selling Stockholder now has valid marketable
title to such number of shares of the Common Stock as are to be sold by the
Selling Stockholder pursuant to this Agreement (the "Stockholder Shares"), and
on each Closing Date on which the Selling Stockholder will sell Common Stock
will have valid and marketable title to the Stockholder Shares free and clear
of any security interests, claims, liens, equities and other encumbrances, (b)
the Stockholder Shares, when delivered, will have been duly authorized and will
be validly issued, fully paid and nonassessable, (c) the Selling Stockholder
now has, and on each Closing Date on which the Selling Stockholder will sell
Common Stock, will have, the legal right and power, and all consents, approvals
and authorizations required by law, to enter into this Agreement and to sell,
transfer and deliver the Stockholder Shares in the manner provided in this
Agreement and that no such action will contravene any provision of applicable
law or, if the Selling Stockholder is a partnership, the partnership agreement
or any other agreement or other instrument binding upon the Selling
Stockholder, (d) all information furnished in writing by or on behalf of such
Selling Stockholder expressly for use in the Registration Statement and
Prospectus is, and on each Closing Date will be, true, correct and complete,
and does not, and on each Closing Date will not, contain any untrue statement
of a material fact or omit to state any material fact necessary to make such
information not misleading, (e) this Agreement has been duly and validly
authorized, executed and delivered by the Selling Stockholder and constitutes a
legal, valid and binding agreement of the Selling Stockholder, enforceable
against it in accordance with its terms, and (f) all transactions between the
Company and the Selling Stockholder have been (i) on terms which were fair to
and in the best interest of the Company, (ii) approved by a majority of the
Company's directors who did not have an interest in such transaction and (iii)
disclosed in the Prospectus to the extent required under the Act or the Rules
and Regulations.
The Company represents and warrants to and agrees with each
Underwriter that:
(a) A registration statement on Form S-1 (File No.
333-26439) with respect to the Shares, including a prospectus, has been
prepared by the Company in material conformity with the requirements of the
Securities Act of 1933, as amended (the "ACT"), and the applicable rules and
regulations (the "RULES AND REGULATIONS") of the Securities and Exchange
Commission (the "COMMISSION") under the Act and has been filed with the
Commission; such amendments to such registration statement, such amended
prospectuses and such abbreviated registration statements pursuant to Rule
462(b) of the Rules and Regulations as may have been required prior to the date
hereof have been similarly prepared and filed with the Commission; and the
Company will file such additional amendments to such registration statement,
such amended prospectuses and such abbreviated registration statements as may
hereafter be required. Copies of such registration
2
<PAGE> 3
statement and amendments together with each exhibit filed therewith, of each
related prospectus (the "PRELIMINARY PROSPECTUSES") and of any abbreviated
registration statement pursuant to Rule 462(b) of the Rules and Regulations
have been delivered to you.
If the registration statement relating to the Shares has been
declared effective under the Act by the Commission, the Company will prepare
and promptly file with the Commission, pursuant to Rule 424(b) of the Rules and
Regulations or as part of a post-effective amendment to the registration
statement (including a final form of prospectus), the information omitted from
the registration statement pursuant to Rule 430A(a) of the Rules and
Regulations or, if Cruttenden Roth Incorporated, on behalf of the several
Underwriters, shall agree to the utilization of Rule 434 of the Rules and
Regulations, the information required to be included in any term sheet filed
pursuant to Rule 434(b) or (c), as applicable, of the Rules and Regulations.
If the registration statement relating to the Shares has not been declared
effective under the Act by the Commission, the Company will prepare and
promptly file an amendment to the registration statement, including a final
form of prospectus, or, if Cruttenden Roth Incorporated, on behalf of the
several Underwriters, shall agree to the utilization of Rule 434 of the Rules
and Regulations, the information required to be included in any term sheet
filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and
Regulations.
The term "REGISTRATION STATEMENT" as used in this Agreement
shall mean such registration statement, including financial statements,
schedules and exhibits (including exhibits incorporated by reference), in the
form in which it became or becomes, as the case may be, effective (including,
if the Company omitted information from the registration statement pursuant to
Rule 430A(a) of the Rules and Regulations or files a term sheet pursuant to
Rule 434 of the Rules and Regulations, the information deemed to be a part of
the registration statement at the time it became effective pursuant to Rule
430A(b) or Rule 434(d) of the Rules and Regulations) and, in the event of any
amendment thereto or the filing of any abbreviated registration statement
pursuant to Rule 462(b) of the Rules and Regulations relating thereto after the
effective date of such registration statement, shall also mean (from and after
the effectiveness of such amendment or the filing of such abbreviated
registration statement) such registration statement as so amended, together
with any such abbreviated registration statement. The term "PROSPECTUS" as
used in this Agreement shall mean the prospectus relating to the Shares as
included in such Registration Statement at the time it becomes effective
(including, if the Company omitted information from the Registration Statement
pursuant to Rule 430A(a) of the Rules and Regulations, the information deemed
to be a part of the Registration Statement at the time it became effective
pursuant to Rule 430A(b) of the Rules and Regulations); provided, however, that
if in reliance on Rule 434 of the Rules and Regulations and with the consent of
Cruttenden Roth Incorporated, on behalf of the several Underwriters, the
Company shall have provided to the Underwriters a term sheet pursuant to Rule
434(b) or (c), as applicable, prior to the time that a confirmation is sent or
given for purposes of Section 2(10)(a) of the Act, the term "Prospectus" shall
mean the "prospectus subject to completion" (as defined in Rule 434(g) of the
Rules and Regulations) last provided to the Underwriters by
3
<PAGE> 4
the Company and circulated by the Underwriters to all prospective purchasers of
the Shares and the information deemed to be a part of the Registration
Statement at the time it became effective pursuant to Rule 434(d) of the Rules
and Regulations, and such Prospectus will not be materially different from such
prospectus subject to completion. Notwithstanding the foregoing, if any
revised prospectus shall be provided to the Underwriters by the Company for use
in connection with the offering of the Shares that differs from the prospectus
referred to in the immediately preceding sentence (whether or not such revised
prospectus is required to be filed with the Commission pursuant to Rule 424(b)
of the Rules and Regulations), the term "Prospectus" shall refer to such
revised prospectus from and after the time it is first provided to the
Underwriters for such use.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus or instituted proceedings for
that purpose, and each such Preliminary Prospectus has conformed in all
material respects to the requirements of the Act and the Rules and Regulations
and, as of its date, has not included any untrue statement of a material fact
or omitted to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading;
and at the time the Registration Statement became or becomes, as the case may
be, effective and at all times subsequent thereto up to and on the Closing Date
(hereinafter defined) and on any later date on which Option Shares are to be
purchased, (i) the Registration Statement and the Prospectus, and any
amendments or supplements thereto, contained and will contain all material
information required to be included therein by the Act and the Rules and
Regulations and will in all material respects conform to the requirements of
the Act and the Rules and Regulations, (ii) the Registration Statement, and any
amendments or supplements thereto, did not and will not include any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
(iii) the Prospectus, and any amendments or supplements thereto, did not and
will not include any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
that none of the representations and warranties contained in this subparagraph
(b) shall apply to information contained in or omitted from the Registration
Statement or Prospectus, or any amendment or supplement thereto, in reliance
upon, and in conformity with, written information relating to any Underwriter
furnished to the Company by such Underwriter specifically for use in the
preparation thereof.
(c) The Company is duly incorporated and validly existing
as a corporation in good standing under the laws of the State of Delaware. The
Company has full power and authority (corporate and other) to own, lease and
operate its properties and conduct its business as described in the
Registration Statement and the Prospectus; the Company is duly qualified to do
business as foreign corporations and is in good standing in each jurisdiction
in which the ownership or leasing of its properties or the conduct of its
business requires such qualification, except where the failure to be so
qualified or be in good standing would not have a material adverse effect on
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company; no proceeding has been instituted in any
such jurisdiction revoking, limiting or curtailing, or seeking to revoke, limit
or curtail, such power and authority or qualification; the Company is in
possession of and operating in compliance with all authorizations, licenses,
certificates, consents, orders and permits from state, federal and other
regulatory authorities that are material to the conduct of its business, all of
which are valid and in full force and effect; the Company is not in violation
of or in breach of or in default under (nor has any event occurred that with
notice, lapse of time or both would constitute a breach of or default under)
its charter or bylaws or any material obligation, agreement, covenant or
condition contained in any material bond, debenture, note or other evidence of
indebtedness, or in any
4
<PAGE> 5
material lease, contract, indenture, mortgage, deed of trust, loan agreement,
joint venture or other agreement or instrument to which it is a party or by
which its properties may be bound; and the Company is not in material violation
of any law, order, rule, regulation, writ, injunction, judgment or decree of
any court, government or governmental agency or body, domestic or foreign,
having jurisdiction over it or its properties. The Company does not directly
or indirectly own beneficially or of record any equity interest in or
securities of, or control, any corporation, partnership association or other
entity.
(d) The Company has full legal right, power and authority
to enter into this Agreement and the Representatives' Warrant Agreement and
perform the transactions contemplated hereby and thereby. This Agreement and
the Representatives' Warrant Agreement have been duly authorized, executed and
delivered by the Company and are valid and binding agreements on the part of
the Company, enforceable in accordance with their respective terms, except as
rights to indemnification hereunder may be limited by applicable law and except
as the enforcement hereof or thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles; the
making and performance of this Agreement and the Representatives' Warrant
Agreement by the Company and the consummation of the transactions herein and
therein contemplated will not result in a breach or violation of any of the
terms and provisions of, or constitute a default under, (i) any bond,
debenture, note or other evidence of indebtedness, or under any lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument to which the Company is a party or by which its
properties may be bound, (ii) the charter or bylaws of the Company or (iii) any
law, order, rule, regulation, writ, injunction, judgment or decree of any
court, administrative agency, regulatory body, government or governmental
agency or body, domestic or foreign, having jurisdiction over the Company or
its properties. No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or body,
domestic or foreign, having jurisdiction over the Company or its properties is
required for the execution and delivery of this Agreement and the consummation
by the Company of the transactions herein contemplated, except such as may be
required under the Act, by the NASD Regulation, Inc. (the "NASDR"), the rules
of the American Stock Exchange ("AMEX"), or under state or other securities or
Blue Sky laws, all of which requirements have been satisfied in all material
respects.
(e) There is not pending, threatened, or to the Company's
knowledge, contemplated, any action, suit, claim or proceeding against the
Company, any of its officers, directors, employees, or agents or any of its
properties or assets or rights, at law or in equity, before any court,
administrative agency, regulatory body, government or governmental agency or
body, domestic or foreign, which (i) might, individually or in the aggregate,
result in any material adverse change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
or might materially and adversely affect the properties, assets or rights of
the Company, (ii) might prevent consummation of the transactions contemplated
hereby or (iii) is required to be disclosed in the Registration Statement or
Prospectus and is not so disclosed; and there are no agreements, contracts,
leases or documents of the Company of a character required to be described or
referred to in the Registration Statement or Prospectus or to be filed as an
exhibit to the Registration Statement by the Act or the Rules and Regulations
which have not been accurately described in all material respects in the
Registration Statement or Prospectus
5
<PAGE> 6
or filed as exhibits to the Registration Statement. The Company is not a party
or subject to the provisions of any injunction, judgment, decree or order of
any court, regulatory body, administrative agency, government or governmental
agency or body domestic or foreign, that could result in a material adverse
change in the condition (financial or other), earnings, operations, business or
business prospects of the Company.
(f) All outstanding shares of capital stock of the
Company have been duly authorized and validly issued and are fully paid and
nonassessable, have been issued in compliance with all federal and state
securities laws, were not issued in violation of or subject to any preemptive
rights or other rights to subscribe for or purchase securities, and the
authorized and outstanding capital stock of the Company is as set forth in the
Prospectus under the caption "CAPITALIZATION" and conforms in all material
respects to the statements relating thereto contained in the Registration
Statement and the Prospectus (and such statements correctly state the substance
of the instruments defining the capitalization of the Company); the capital
stock of the Company, including the Shares, conforms in all material respects
to the description thereof contained in the Registration Statement and the
Prospectus; the Shares and the Representatives' Warrants and the shares of
Common Stock issuable upon exercise of the Representatives' Warrants have been
duly authorized for issuance and sale to the Underwriters pursuant to this
Agreement, and, when issued and delivered by the Company against payment
therefor in accordance with the terms of this Agreement or the Representatives'
Warrant Agreement, as the case may be, will be duly and validly issued and
fully paid and nonassessable, and will be sold free and clear of any pledge,
lien, security interest, encumbrance, claim or equitable interest; no
preemptive right, co-sale right, registration right, right of first refusal or
other similar right of stockholders exists with respect to any of the Shares or
the issuance and sale thereof or the Representatives' Warrants or the Common
Stock issuable upon exercise thereof; and the certificates for the Shares are
in due and proper form and the holders of the Shares and the Representatives'
Warrants and the Common Stock issuable upon exercise thereof, after making
payment therefor will not be subject to personal liability by reason of being
such holders. No further approval or authorization of any stockholder, the
Board of Directors of the Company or others is required for the issuance and
sale or transfer of the Shares or the Representatives' Warrants or the Common
Stock issuable upon exercise thereof except as may be required under the Act or
under state or other securities or Blue Sky laws. Except as disclosed in the
Registration Statement, Prospectus and the financial statements of the Company,
and the related notes thereto included in the Prospectus, the Company has no
outstanding options to purchase, or any preemptive rights or other rights to
subscribe for or to purchase, any securities or obligations convertible into,
or any contracts or commitments to issue or sell, shares of its capital stock
or any such options, rights, convertible securities or obligations. The
description of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted and exercised thereunder,
set forth in the Prospectus fairly and accurately presents the information
required to be shown with respect to such plans, arrangements, options and
rights.
(g) Grant Thorton LLP and Amper, Politziner & Mattia,
whose reports on the financial statements of the Company are included in the
Registration Statement and the Prospectus, are independent accountants within
the meaning of the Act and the Rules and Regulations; the audited financial
statements of the Company, together with the related schedules and notes, and
the unaudited financial information, forming part of the Registration Statement
and
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Prospectus, fairly present the financial position and the results of operations
and cash flows of the Company at the respective dates and for the respective
periods to which they apply and have been prepared in accordance with generally
accepted accounting principles consistently applied throughout the periods
involved. The selected and summary financial and statistical data included in
the Registration Statement present fairly the information shown therein and
have been compiled on a basis consistent with the audited financial statements
presented therein. No other financial statements or schedules are required to
be included in the Registration Statement.
(h) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, there has
not been any (i) material adverse change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company, (ii) transaction that is material to the Company, except transactions
entered into in the ordinary course of business consistent with past practices,
(iii) obligation, direct or contingent, that is material to the Company,
incurred by the Company, except obligations incurred in the ordinary course of
business consistent with past practices, (iv) change in the capital stock of
the Company, (v) change in the outstanding indebtedness of the Company that is
either material to the Company or is out of the ordinary course of business of
the Company, (vi) dividend or distribution of any kind declared, paid or made
on the capital stock of the Company, (vii) default in the payment of principal
of or interest on any outstanding debt obligations, or (viii) loss or damage
(whether or not insured) to the property of the Company which has been
sustained or will have been sustained which has a material adverse effect on
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company.
(i) The Company has good and marketable title to all
properties and assets described in the Registration Statement and Prospectus as
owned by it, and valid and subsisting interests in all of the real property
described in the Registration Statement and Prospectus as leased by it, in each
case free and clear of any pledge, lien, security interest, encumbrance, claim
or equitable interest, other than as set forth in the Registration Statement
and Prospectus. The agreements to which the Company is a party described in,
or filed as exhibits to, the Registration Statement and Prospectus are valid
agreements, enforceable by the Company, except as the enforcement thereof may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles and, to the Company's knowledge, the other
contracting party or parties thereto are not in material breach or material
default under any of such agreements, and the Company has valid and enforceable
leases for all properties described in the Registration Statement and
Prospectus as leased by it, except as the enforcement thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles. Except as set forth in the Registration Statement and
Prospectus, the Company owns or leases all such properties as are necessary to
its operations as now conducted or as proposed to be conducted (subject to
additional properties and assets as may be required in connection with
expansion of the Company's operations), and all such properties are free of
contractual or legal restrictions that would impair the use by the Company of
such properties in its business for the purposes described in the Registration
Statement and the Prospectus.
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(j) The Company has correctly and timely filed all
necessary federal, state and foreign income and franchise tax returns and has
paid all taxes shown thereon as due and all assessments received by it to the
extent that the same have become due. Neither the Company nor any of its
officers has any knowledge of any tax deficiency of the Company or any tax
proceeding or action pending or threatened against the Company. There are no
liens for taxes on the assets of the Company, except for taxes not yet due.
There are no audits pending of the Company's tax returns (federal, state, local
or foreign), and there are no claims which have been or, to the best of the
Company's knowledge, may be asserted relating to any such tax returns which, if
determined adversely, would result in the assertion by any governmental agency
of any deficiency material to the Company. There have been no waivers of any
statute of limitations by the Company relating to tax returns (federal, state,
local and foreign). The Internal Revenue Service has not asserted or
threatened to assert any assessment, claim or liability for taxes due or to
become due in connection with any review or examination of the tax returns of
the Company for any year.
(k) The Company maintains insurance with insurers of
recognized financial responsibility of the types and in the amounts prudent for
its business, including, but not limited to, insurance covering real and
personal property owned or leased by the Company against theft, damage,
destruction, acts of vandalism, errors and omissions, and all other risks
customarily insured against, all of which insurance is in full force and
effect; the Company has not been refused any insurance coverage sought or
applied for other than refusal of certain insurance coverages that were
discontinued by the carriers thereof; and the Company does not have any reason
to believe that it will not be able to renew its existing insurance coverage as
and when such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business at a cost that would not
materially and adversely affect the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company.
(l) The Company is in compliance in all material respects
with all federal, state and local laws and regulations respecting the
employment of its employees and employment practices, terms and conditions of
employment and wages and hours relating thereto. There are no pending
investigations involving the Company by the United States Department of Labor
or any other governmental agency responsible for the enforcement of such
federal, state or local laws and regulations. There is no labor strike,
dispute or work stoppage or lockout pending, or, to the knowledge of the
Company, threatened, against or affecting the Company, and no such labor
strike, dispute, work stoppage or lockout has occurred with respect to any
employees of the Company, during the two years prior to the date of this
Agreement. No union organization activity is in progress with respect to the
employees of the Company, and no question concerning representation exists with
respect to such employees. No unfair labor practice charge or complaint
against the Company is pending or, to the knowledge of the Company, threatened,
before the National Labor Relations Board or similar foreign authorities, and
no such charge or complaint against the Company has been filed during the past
two years. There is no pending, or, to the knowledge of the Company,
threatened, grievance that, if adversely decided, would have a material adverse
effect on the business, results of operations, prospects or financial condition
of the Company. No charges with respect to or relating to the Company are
pending before the Equal Employment Opportunity Commission or any similar
state, local or foreign agency
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<PAGE> 9
responsible for the prevention of unlawful employment practices, and no such
charges have been filed with respect to the Company.
(m) The Company owns or possesses rights to use all
know-how necessary to conduct its business as now conducted and as described in
the Registration Statement and Prospectus; no patent rights, or copyrights are
utilized in the business of the Company; the Company has not received any
notice of, and has no knowledge of, any infringement of or conflict with
asserted rights of the Company by others with respect to any patent, patent
rights, inventions, trade secrets, know-how, trademarks, service marks, trade
names or copyrights; and the Company has not received any notice of, and has no
knowledge of, any infringement of or conflict with asserted rights of others by
the Company with respect to any patent, patent rights, inventions, trade
secrets, know-how, trademarks, service marks, trade names or copyrights which,
singly or in the aggregate, if the subject of an unfavorable decision, ruling
or finding, might have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company.
(n) The Common Stock is registered pursuant to Section
12(g) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"),
and is approved for quotation on the AMEX, and the Company has taken no action
designed to, or likely to have the effect of, terminating the registration of
the Common Stock under the Exchange Act or delisting the Common Stock from the
AMEX, nor has the Company received any notification that the Commission or the
NASD is contemplating terminating such registration or listing.
(o) The Company has been advised concerning the
Investment Company Act of 1940, as amended (the "1940 ACT"), and the rules and
regulations thereunder, and the Company has in the past conducted, and the
Company intends in the future to conduct, its affairs in such a manner as to
ensure that it is not and will not become an "investment company" or a company
"controlled" by an "investment company" within the meaning of the 1940 Act and
such rules and regulations.
(p) The Company has not distributed and will not
distribute prior to the later of (i) the Closing Date, or any date on which
Option Shares are to be purchased, as the case may be, and (ii) completion of
the distribution of the Shares, any offering material in connection with the
offering and sale of the Shares other than any Preliminary Prospectuses, the
Prospectus, the Registration Statement and other materials, if any, permitted
by the Act.
(q) None of the Company, or its officers, directors,
employees or agents has at any time during the last five (5) years made (i) any
unlawful contribution to any candidate for foreign office or failed to disclose
fully any contribution in violation of law, or (ii) any payment to any federal
or state governmental officer or official, or other person charged with similar
public or quasi-public duties, other than payments required or permitted by the
laws of the United States or any jurisdiction thereof, or (iii) any other
payment of funds of the Company prohibited by law, and no funds of the Company
have been set aside for any payment prohibited by law.
(r) Other than the over-allotment option granted to the
Underwriters, the Company has not taken and will not take, directly or
indirectly, any action designed to or that
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<PAGE> 10
might reasonably be expected to cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale or resale
of the Shares (except for any action taken by the Underwriters).
(s) Except as otherwise set forth in the Registration
Statement and the Prospectus, each of the Company's officer, director and
stockholder's who own 1% or more of the outstanding Common Stock has agreed in
writing that such person will not, except as described below, for a period of
nine months from the date of the final Prospectus (the "LOCK-UP PERIOD"), sell,
offer to sell, solicit an offer to buy, contract to sell, loan, pledge, grant
any option to purchase, or otherwise transfer or dispose of (collectively, a
"DISPOSITION"), any shares of Common Stock, or any securities convertible into
or exercisable or exchangeable for Common Stock (collectively, "SECURITIES"),
now owned or hereafter acquired by such person or with respect to which such
person has or hereafter acquires the power of disposition otherwise than on
exercise (on a cash or cashless basis not resulting in any public sale of
Common Stock) of Common Stock options outstanding, it being understood,
however, that the shares of Common Stock received (net of shares delivered to
the Company in a traditional cashless exercise thereof) by such person shall be
subject to the terms of the Lock-Up Agreement (as defined below). The
foregoing restriction has been expressly agreed to preclude the holder of the
Securities from engaging in any hedging, pledge or other transaction which is
designed to or may reasonably be expected to lead to or result in a Disposition
by any stockholder or any other person of any Securities, whether or not owned
by a stockholder, during the Lock-up Period, even if such Securities would be
disposed of by someone other than such stockholder. Such prohibited hedging,
pledge or other transactions would include, without limitation, any short sale
(whether or not against the box), any pledge of shares covering an obligation
that matures, or could reasonably mature during the Lock-Up Period, or any
purchase, sale or grant of any right (including, without limitation, any put or
call option) with respect to any Securities or with respect to any security
(other than a broad-based market basket or index) that includes, relates to or
derives any significant part of its value from Securities. Furthermore, each
such person has also agreed and consented to the entry of stop transfer
instructions with the Company's transfer agent against the transfer of the
Securities held by such person except in compliance with this restriction. The
Company has provided to counsel for the Underwriters a complete and accurate
list of all securityholders of the Company as of the Closing Date and the
number and type of securities held by each securityholder. The Company has
provided to counsel for the Underwriters true, accurate and complete copies of
all of the agreements pursuant to which its officers, directors and
stockholders have agreed to such or similar restrictions (the "LOCK-UP
AGREEMENTS") presently in effect. The Company hereby represents and warrants
that it will not purport to release any of its officers, directors or other
stockholders from any Lock-up Agreements currently existing or hereafter
effected without the prior written consent of Cruttenden Roth Incorporated.
(t) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorizations,
(ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets, (iii) access to assets is permitted only in
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accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(u) There are no outstanding loans, advances (except
normal advances for business expenses in the ordinary course of business) or
guarantees of indebtedness by the Company to or for the benefit of any of the
officers, directors, employees, or consultants of the Company or any of the
members of the families of any of them, except as disclosed in the Registration
Statement and the Prospectus.
(v) Other than Cruttenden Roth Incorporated, on behalf of
the several Underwriters, no person is or will be owed any finders fee or
commission or similar payment in connection with the transactions contemplated
by this Agreement.
(w) There are no persons with registration or other
similar rights to have any securities registered pursuant to the Registration
Statement or otherwise registered by the Company under the Act, except (i) as
described in the Registration Statement and the Prospectus and (ii) that the
Underwriters have registration rights with respect to the Representatives'
Warrants and the underlying Common Stock as described in the Representatives'
Warrant Agreement.
(x) The Company has conducted and is conducting its
business and operations in compliance with all applicable federal, state, local
and foreign statutes, laws, rules, regulations, ordinances, codes, decisions,
decrees, directives and orders.
(y) The Company has complied with all provisions of
Florida H.B. 1771, codified as Section 517.075 of the Florida statutes, and all
regulations promulgated thereunder relating to issuers doing business with
Cuba.
(z) Except as described in the Prospectus, to the
Company's knowledge, there are no rulemaking or similar proceedings before any
federal, state, local or foreign government or regulatory bodies which involve
or affect the Company which, if the subject of an action unfavorable to the
Company would have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company.
(aa) To the knowledge of the Company, no officer,
director, employee, or consultant of the Company is in violation of any
non-competition, non-disclosure, confidentiality or other similar agreement
with any party other than the Company, and no such person is expected to be in
violation thereof as a result of the business conducted or expected to be
conducted by the Company as described in the Prospectus or such person's
performance of his obligations to the Company.
(bb) The Company has not violated any foreign, federal,
state or local law or regulation relating to the protection of human health and
safety, the environment or hazardous or toxic substances or wastes, pollutants
or contaminants ("ENVIRONMENTAL LAWS"), and the Company does not anticipate
incurring any material costs or liabilities (including without
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limitation any capital or operating expenditures) in connection with any
clean-up or remediation of hazardous or toxic substances or wastes, pollutants
or contaminants, related closure of properties or compliance with Environmental
Laws, or any federal or state law relating to discrimination in the hiring,
promotion or pay of employees or any applicable federal or state wages and
hours laws, or any provisions of the Employee Retirement Income Security Act or
the rules and regulations promulgated thereunder, which in each case might
result in any material adverse effect on the properties, assets, operations,
business, business prospects or condition (financial or other) of the Company.
(cc) The Company has such permits, licenses, franchises
and authorizations of governmental or regulatory authorities ("permits"),
including without limitation under any applicable Environmental Laws, as are
necessary to own, lease and operate its properties and to conduct its business;
the Company has fulfilled and performed all of its material obligations with
respect to such permits and no event has occurred which allows, or after notice
or lapse of time would allow, revocation or termination thereof or results in
any other material impairment of the rights of the holder of any such permit;
and such permits contain no restrictions that are materially burdensome to the
Company.
(dd) All transactions during the Company's current fiscal
year and last three (3) full fiscal years between the Company and any person
who is or was during such period an officer, director or 5% or greater
stockholder of the Company have been (i) on terms which were fair to and in the
best interest of the Company, (ii) approved by a majority of the Company's
directors who did not have an interest in such transactions and (iii) disclosed
in the Prospectus to the extent required under the Act or the Rules and
Regulations.
(ee) The Company is not required to register as a "broker"
or "dealer" in accordance with the provisions of the Exchange Act or the rules
or regulations promulgated thereunder.
(ff) The Company is in compliance with the Foreign Corrupt
Trade Practices Act.
3. Purchase, Sale and Delivery of Shares. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company the Company Firm Shares and the Selling Stockholder
agrees to sell to the Underwriters, and each Underwriter agrees, severally and
not jointly, to purchase from the Selling Stockholder the Stockholder Firm
Shares, at a purchase price of $[PRICE LESS DISCOUNT] per share, the respective
number of Firm Shares set forth opposite the name of such Underwriter in
Schedule A hereto (subject to adjustment as provided in Section 10).
Delivery of definitive certificates for the Firm Shares to be
purchased by the several Underwriters pursuant to this Section 3 shall be made
against payment of the purchase price therefor by the several Underwriters by
wire transfer, certified or official bank check or checks drawn in same day
funds, payable to the order of the Company, at the offices of Gibson, Dunn &
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Crutcher LLP, 1801 California Street, Suite 4100, Denver, Colorado 80202 (or at
such other place as may be agreed upon between the Representatives and the
Company), at 8:00 a.m. Colorado time, (a) on the third (3rd) full business day
following the first day that Shares are traded or (b) if this Agreement is
executed and delivered after 2:30 p.m. Colorado time, the fourth (4th) full
business day following the day that this Agreement is executed and delivered or
(c) at such other time and date not later than seven (7) full business days
following the first day that Shares are traded as the Representatives and the
Company may determine (or at such time and date to which payment and delivery
shall have been postponed pursuant to Section 10), such time and date of
payment and delivery being herein called the "CLOSING DATE"; provided, however,
that if the Company has not made available to the Representatives copies of the
Prospectus within the time provided in Section 4(d), the Representatives may,
in its sole discretion, postpone the Closing Date until no later than two (2)
full business days following delivery of copies of the Prospectus to the
Representatives.
The certificates for the Firm Shares to be so delivered will be made
available to you at such office or such other location including, without
limitation, in New York City, as you may reasonably request for checking at
least one (1) full business day prior to the Closing Date and will be in such
names and denominations as you shall specify at least two (2) full business
days prior to the Closing Date. If the Representatives so elect, delivery of
the Firm Shares may be made by credit through full fast transfer to the
accounts at The Depository Trust Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated
to) make payment of the purchase price on behalf of any Underwriter or
Underwriters whose check or checks shall not have been received by you prior to
the Closing Date for the Firm Shares to be purchased by such Underwriter or
Underwriters. Any such payment by you shall not relieve any such Underwriter
or Underwriters of any of its or their obligations hereunder.
The Underwriters intend to make a public offering (as described in
Section 11) of the Firm Shares at the public offering price of $[PRICE TO
PUBLIC] per share. After the public offering the Underwriters may from time to
time, in their discretion, vary the public offering price.
The information set forth on the inside front cover page of the
Prospectus (insofar as such information relates to the Underwriters) concerning
stabilization, syndicate short covering transactions and penalty bids, and
under the first (including the table listing the Underwriters), second, third,
eighth and ninth paragraphs under the caption "Underwriting" in the Prospectus
constitutes the only information furnished by the Underwriters to the Company
for inclusion in any Preliminary Prospectus, the Prospectus or the Registration
Statement, and you, on behalf of the respective Underwriters, represent and
warrant to the Company that the statements made therein do not include any
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
4. Further Agreements of the Company and the Selling Stockholder.
The Company and the Selling Stockholder agree with the several Underwriters
that:
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(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the time
and date that this Agreement is executed and delivered by the parties hereto,
to become effective as promptly as possible; the Company will use its best
efforts to cause any abbreviated registration statement pursuant to Rule 462(b)
of the Rules and Regulations as may be required subsequent to the date the
Registration Statement is declared effective to become effective as promptly as
possible; the Company will notify you, promptly after it shall receive notice
thereof, of the time when the Registration Statement, any subsequent amendment
to the Registration Statement or any abbreviated registration statement has
become effective or any supplement to the Prospectus has been filed; if the
Company omitted information from the Registration Statement at the time it was
originally declared effective in reliance upon Rule 430A(a) of the Rules and
Regulations, the Company will provide evidence satisfactory to you that the
Prospectus contains such information and has been filed, within the time period
prescribed, with the Commission pursuant to Rule 424(b) of the Rules and
Regulations or as part of a post-effective amendment to such Registration
Statement as originally declared effective which is declared effective by the
Commission; if the Company files a term sheet pursuant to Rule 434 of the Rules
and Regulations, the Company will provide evidence satisfactory to you that the
Prospectus and term sheet meeting the requirements of Rule 434(b) or (c), as
applicable, of the Rules and Regulations have been filed, within the time
period prescribed, with the Commission pursuant to Rule 424(b) of the Rules and
Regulations; if for any reason the filing of the final form of Prospectus is
required under Rule 424(b)(3) of the Rules and Regulations, it will provide
evidence satisfactory to you that the Prospectus contains such information and
has been filed with the Commission within the time period prescribed; it will
notify you promptly of any request by the Commission for the amending or
supplementing of the Registration Statement or the Prospectus or for additional
information; promptly upon your request, it will prepare and file with the
Commission any amendments or supplements to the Registration Statement or
Prospectus which, in the opinion of counsel for the several Underwriters
("UNDERWRITERS' COUNSEL"), may be necessary or advisable in connection with the
distribution of the Shares by the Underwriters; it will promptly prepare and
file with the Commission, and promptly notify you of the filing of, and provide
you with copies of, any amendments or supplements to the Registration Statement
or Prospectus which may be necessary to correct any statements or omissions,
if, at any time when a prospectus relating to the Shares is required to be
delivered under the Act, any event shall have occurred as a result of which the
Prospectus or any other prospectus relating to the Shares as then in effect
would include any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; in case any
Underwriter is required to deliver a prospectus nine (9) months or more after
the effective date of the Registration Statement in connection with the sale of
the Shares, it will prepare promptly upon request, but at the expense of such
Underwriter, such amendment or amendments to the Registration Statement and
such prospectus or prospectuses as may be necessary to permit compliance with
the requirements of Section 10(a)(3) of the Act; and it will file no amendment
or supplement to the Registration Statement or Prospectus which shall not
previously have been submitted to you a reasonable time prior to the proposed
filing thereof or to which you shall reasonably object in writing, subject,
however, to compliance with the Act and the Rules and Regulations and the
provisions of this Agreement.
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(b) The Company will advise you, promptly after it shall
receive notice or obtain knowledge, of the issuance of any stop order by the
Commission suspending the effectiveness of the Registration Statement, or
suspension of the qualification of the Shares for sale in any jurisdiction, or
of the initiation or threat of any proceeding for any such purpose; and it will
promptly use its best efforts to prevent the issuance of any stop order or to
obtain its withdrawal at the earliest possible moment if such stop order should
be issued.
(c) The Company will use its best efforts (including by
providing full cooperation with your counsel, whose services in this matter are
required and which you and the Company will seek to expedite) to qualify the
Shares for offering and sale under the securities laws of such jurisdictions as
you may designate and to continue such qualifications in effect for so long as
may be required for purposes of the distribution of the Shares, except that the
Company shall not be required in connection therewith or as a condition thereof
to qualify as a foreign corporation or to execute a general consent to service
of process in any jurisdiction in which it is not otherwise required to be so
qualified or to so execute a general consent to service of process. In each
jurisdiction in which the Shares shall have been qualified as above provided,
the Company will make and file such statements and reports in each year as are
or may be required by the laws of such jurisdiction for such purpose.
(d) The Company will furnish to you, as soon as
available, and, in the case of the Prospectus and any term sheet or abbreviated
term sheet under Rule 434, in no event later than the first full business day
following the first day that Shares are traded, copies of the Registration
Statement (two of which will be signed and which will include all exhibits),
each Preliminary Prospectus, the Prospectus and any amendments or supplements
to such documents, including any prospectus prepared to permit compliance with
Section 10(a)(3) of the Act, all in such quantities as you may from time to
time reasonably request. Notwithstanding the foregoing, if Cruttenden Roth
Incorporated, on behalf of the several Underwriters, shall agree to the
utilization of Rule 434 of the Rules and Regulations, the Company shall provide
to you copies of a Preliminary Prospectus updated in all respects through the
date specified by you in such quantities as you may from time to time
reasonably request.
(e) The Company will make generally available to its
securityholders as soon as practicable, but in any event not later than the
forty-fifth (45th) day following the end of the fiscal quarter first occurring
after the first anniversary of the effective date of the Registration
Statement, an earnings statement (which will be in reasonable detail but need
not be audited) complying with the provisions of Section 11(a) of the Act and
covering a twelve (12) month period beginning after the effective date of the
Registration Statement.
(f) During a period of five (5) years after the date
hereof, the Company will furnish to its stockholders as soon as practicable
after the end of each respective period, annual reports (including financial
statements audited by independent certified public accountants) and, upon
request by a stockholder, unaudited quarterly reports of operations for each of
the first three quarters of the fiscal year, and will furnish to you and the
other several Underwriters hereunder, upon request (i) concurrently with
furnishing such reports to its stockholders, statements of operations of the
Company for each of the first three (3) quarters in the form furnished to the
Company's stockholders, (ii) concurrently with furnishing to its stockholders,
a balance sheet of
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the Company as of the end of such fiscal year, together with statements of
operations, of stockholders' equity, and of cash flows of the Company for such
fiscal year, accompanied by a copy of the certificate or report thereon of
independent certified public accountants, (iii) as soon as they are available,
copies of all reports (financial or other) mailed to stockholders, (iv) as soon
as they are available, copies of all reports and financial statements furnished
to or filed with the Commission, any securities exchange or the NASD, (v) every
material press release and every material news item or article in respect of
the Company or its affairs which was generally released to stockholders or
prepared by the Company, and (vi) any additional information of a public nature
concerning the Company, or its business which you may reasonably request.
During such five (5) year period, if the Company shall have active
subsidiaries, the foregoing financial statements shall be on a consolidated
basis to the extent that the accounts of the Company and such subsidiaries are
consolidated, and shall be accompanied by similar financial statements for any
significant subsidiary which is not so consolidated.
(g) The Company will apply the net proceeds from the sale
of the Shares being sold by it in the manner set forth under the caption "Use
of Proceeds" in the Prospectus.
(h) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a registrar
(which may be the same entity as the transfer agent) for its Common Stock.
(i) The terms of Section 10 of that certain Letter
Agreement dated August 21, 1997 between you and the Company (the "LETTER
AGREEMENT") are hereby incorporated by reference and made obligations of the
Company and Cruttenden Roth Incorporated as part of this Agreement
notwithstanding that the Letter Agreement shall have ceased to be of full force
or effect for any other purpose. If the transactions contemplated hereby are
not consummated by reason of any failure, refusal or inability on the part of
the Company to perform any agreement on its part to be performed hereunder or
to fulfill any condition of the Underwriters' obligations hereunder, or if the
Company shall terminate this Agreement pursuant to Section 11(a), or if the
Underwriters shall terminate this Agreement pursuant to Section 11(a) or 11(b),
then the provisions of Section 10 of the Letter Agreement shall govern payment
and reimbursement obligations of the parties notwithstanding that the Letter
Agreement shall have ceased to be in full force or effect for any other
purpose.
(j) If at any time during the ninety (90) day period
after the Registration Statement becomes effective, any rumor, publication or
event relating to or affecting the Company shall occur as a result of which in
your opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
after written notice from you advising the Company to the effect set forth
above, forthwith prepare, consult with you concerning the substance of and
disseminate a press release or other public statement, reasonably satisfactory
to you, responding to or commenting on such rumor, publication or event.
(k) During the Lock-up Period, the Company will not,
without the prior written consent of Cruttenden Roth Incorporated, effect the
Disposition of, directly or indirectly,
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any Securities other than the sale of the Firm Shares and the Option Shares
hereunder and the Company's issuance of options or Common Stock under the
Company's presently authorized stock option and stock purchase plans described
in the Registration Statement and the Prospectus.
(l) The Company and the Selling Stockholder shall pay to
Cruttenden Roth Incorporated a nonaccountable expense allowance equal to two
and one-half percent (2.5%) of the total Price to Public with respect to Shares
sold by each of them as shown on the front cover of the Prospectus, including,
if exercised, with respect to the over-allotment option. Cruttenden Roth
Incorporated acknowledges that $30,000 of the amount payable by the Company
pursuant to this paragraph has already been paid.
(m) The Company will use its best efforts to cause the
Shares to be listed on the AMEX.
(n) The Company will refrain from investing the proceeds
of the sale of the Shares in such a manner as to cause the Company to become an
"investment company" within the meaning of the 1940 Act.
(o) The Company will furnish to you as early as
practicable before the Closing Date and any later date on which Option Shares
are to be purchased, as the case may be, but not later than two business days
prior thereto, a copy of the latest available unaudited interim consolidated
financial statements, if any, of the Company that have been read by the
Company's independent certified public accountants as stated in their letters
to be furnished pursuant to Section 6(f).
(p) On the Closing Date, the Company will sell the
Representatives' Warrants to the Representatives.
(q) The Company agrees to take, or refrain from taking,
any and all actions necessary so that any shares of Common Stock issuable upon
the exercise of warrants or options to purchase Common Stock shall not become
freely trade during the Lock-Up Period. Without limiting the foregoing, the
Company shall not change the terms of any outstanding warrants to provide for a
cashless exercise, register any such shares under the Act, or set the vesting
schedule of any newly issued options or warrants so that such options or
warrants (or any portion thereof) vest before the expiration of the Lock-Up
Period.
(r) For a period of two years after the Closing Date or
until an offering occurs which Cruttenden Roth Incorporated ("Cruttenden") has
declined to exercise its rights under this Section, the Company shall notify
Cruttenden in writing at least ten (10) days before (i) the proposed private or
public offering of any debt or equity securities (other than bank debt or
similar financing) by the Company or by any of its majority owned or controlled
subsidiaries (collectively referred to herein as the Company) or (ii) the
proposed public offering of any equity securities by any of its stockholders
owning at least five percent of the Company's Common Stock ("PRINCIPAL
SHAREHOLDERS") so that Cruttenden or, at its option, a group of associated
investment bankers shall have the right of first refusal to manage or co-manage
the offering. Cruttenden agrees to notify the Company of Cruttenden's
intention to exercise the right of first refusal within
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<PAGE> 18
ten (10) days of receipt by Cruttenden of such notice from the Company. If
Cruttenden fails to exercise the right of first refusal within the ten-day
period and the terms of the proposed subsequent financings thereafter are
altered in any material respect, the Company shall again offer to Cruttenden
the right of first refusal to manage or co-manage subsequent financings upon
such altered terms and Cruttenden shall have ten (10) days from the date of
receipt to notify the Company of its acceptance.
5. Expenses.
(a) The Company agrees with each Underwriter that:
(i) The Company will pay and bear all costs and
expenses in connection with the preparation, printing and filing of the
Registration Statement (including financial statements, schedules and
exhibits), Preliminary Prospectuses and the Prospectus and any amendments or
supplements thereto; the printing of this Agreement, the Representatives'
Warrant Agreement, the Agreement Among Underwriters, the Selected Dealer
Agreement, the Preliminary Blue Sky Survey and any Supplemental Blue Sky
Survey, the Underwriters' Questionnaire and Power of Attorney, and any
instruments related to any of the foregoing; the issuance and delivery of the
Shares hereunder to the several Underwriters, including transfer taxes, if any;
the cost of all certificates representing the Shares and transfer agents' and
registrars' fees; the fees and disbursements of counsel for the Company; all
fees and other charges of the Company's independent certified public
accountants; the cost of furnishing to the several Underwriters copies of the
Registration Statement (including appropriate exhibits), Preliminary Prospectus
and the Prospectus, and any amendments or supplements to any of the foregoing;
NASDR filing fees and the cost of qualifying the Shares under the laws of such
jurisdictions as you may designate (including fees and disbursements of
Underwriters' Counsel and filing fees in connection with such NASDR filings and
Blue Sky qualifications); the cost of any listing of the Shares on any
securities exchange or qualification of the Shares for inclusion in the AMEX;
registration and other fees payable to the Commission; the cost of preparing
bound volumes of the public offering documents for the Representatives and
Underwriters' Counsel; the Company's road show expenses; and all other expenses
directly incurred by the Company in connection with the performance of its
obligations hereunder. The provisions of this Section 5(a)(i) are intended to
relieve the Underwriters from the payment of the expenses and costs which the
Company hereby agrees to pay.
(ii) In addition to its other obligations under
Section 8(a), the Company agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
described in Section 8(a), it will reimburse the Underwriters on a monthly
basis for all reasonable legal or other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Company's obligation to reimburse the
Underwriters for such expenses and the possibility that such payments might
later be held to have been improper by a court of competent jurisdiction. To
the extent that any such interim reimbursement payment is so held to have been
improper, the Underwriters shall promptly return such payment to the Company
together with interest, compounded daily, determined on the basis of the prime
rate (or other commercial lending rate for borrowers of the
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<PAGE> 19
highest credit standing) listed from time to time in The Wall Street Journal
which represents the base rate on corporate loans posted by a substantial
majority of the nation's thirty (30) largest banks (the "PRIME RATE"). Any
such interim reimbursement payments which are not made to the Underwriters
within thirty (30) days of a request for reimbursement shall bear interest at
the Prime Rate from the date of such request.
(b) In addition to their other obligations under Section
8(b), the Underwriters severally and not jointly agree that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding described in Section 8(b), they will reimburse the Company on
a monthly basis for all reasonable legal or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company shall
promptly return such payment to the Underwriters together with interest,
compounded daily, determined on the basis of the Prime Rate. Any such interim
reimbursement payments which are not made to the Company within thirty (30)
days of a request for reimbursement shall bear interest at the Prime Rate from
the date of such request.
(c) In addition to its other obligations under Section
8(c), the Selling Stockholder agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
described in Section 8(c), it will reimburse the Underwriters on a monthly
basis for all reasonable legal or other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Selling Stockholder's obligation to
reimburse the Underwriters for such expenses and the possibility that such
payments might later be held to have been improper by a court of competent
jurisdiction. To the extent that any such interim reimbursement payment is so
held to have been improper, the Underwriters shall promptly return such payment
to the Selling Stockholder together with interest, compounded daily, determined
on the basis of the Prime Rate. Any such interim reimbursement payments which
are not made to the Underwriters within thirty (30) days of a request for
reimbursement shall bear interest at the Prime Rate from the date of such
request.
(d) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in Sections
5(a)(ii), 5(b) and 5(c), including the amounts of any requested reimbursement
payments, the method of determining such amounts and the basis on which such
amounts shall be apportioned among the reimbursing parties, shall be settled by
arbitration conducted under the provisions of the Constitution and Rules of the
Board of Governors of the New York Stock Exchange, Inc. or pursuant to the Code
of Arbitration Procedure of the NASDR. Any such arbitration must be commenced
by service of a written demand for arbitration or a written notice of intention
to arbitrate, therein electing the arbitration tribunal. In the event the
party demanding arbitration does not make such designation of an arbitration
tribunal in such demand or notice, then the party responding to said demand or
notice is authorized to do so. Any such arbitration will be limited to the
operation of the interim reimbursement provisions contained in Sections
5(a)(ii), 5(b) and 5(c) and will not resolve the
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<PAGE> 20
ultimate propriety or enforceability of the obligation to indemnify for
expenses that is created by the provisions of Sections 8(a), 8(b) and 8(c) or
the obligation to contribute to expenses that is created by the provisions of
Section 8(e).
6. Conditions of Underwriters' Obligations. The obligations of
the several Underwriters to purchase and pay for the Shares as provided herein
shall be subject to the accuracy, as of the date hereof and the Closing Date
and any later date on which Option Shares are to be purchased, as the case may
be, of the representations and warranties of the Company herein, to the
performance by the Company of its obligations hereunder, and to the following
additional conditions:
(a) The Registration Statement shall have become
effective not later than 5:00 p.m., New York time, on the date following the
date of execution and delivery of this Agreement, or such later date and time
as shall be consented to in writing by you; and no stop order suspending the
effectiveness thereof shall have been issued, no suspension of the
qualification of the Shares for sale in any jurisdiction shall have occurred,
and no proceedings for any such purpose shall have been initiated or, to the
knowledge of the Company or any Underwriter, threatened by the Commission or
any other regulatory authority of appropriate jurisdiction, and any request of
the Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise) shall have been complied with to the
satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in
connection with this Agreement, the form of Registration Statement and the
Prospectus, and the registration, authorization, issue, sale and delivery of
the Shares, shall have been reasonably satisfactory to the Underwriters'
Counsel, and such counsel shall have been furnished with such papers and
information as they may reasonably have requested to enable them to pass upon
the matters referred to in this Section.
(c) Subsequent to the execution and delivery of this
Agreement and prior to the Closing Date, or any later date on which Option
Shares are to be purchased, as the case may be, there shall not have been any
(i) change in the condition (financial or otherwise), earnings, operations,
properties, assets, business or business prospects of the Company from that set
forth in the Registration Statement or Prospectus, which, in your sole
judgment, is material and adverse to the Company and that makes it, in your
sole judgment, impracticable or inadvisable to proceed with the public offering
of the Shares as contemplated by the Prospectus; (ii) any transaction that is
material to the Company entered into or committed to by the Company other than
as described in the Registration Statement and the Prospectus; or (iii) any
material obligation, contingent or otherwise, directly or indirectly, incurred
by the Company other than as described in the Registration Statement and the
Prospectus.
(d) You shall have received on the Closing Date and on
any later date on which Option Shares are to be purchased, as the case may be,
the following opinion of Dyer, Ellis & Joseph, P.C., counsel for the Company,
dated the Closing Date or such later date on which Option Shares are to be
purchased addressed to the Underwriters and with reproduced copies or signed
counterparts thereof for each of the Underwriters, to the effect that:
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<PAGE> 21
(i) The Company has been duly organized and is
validly existing as a corporation in good standing under the laws of
the jurisdiction of its organization, with full corporate power and
authority to own or lease its properties and conduct its business as
described in the Registration Statement and the Prospectus, and is
duly qualified to do business and is in good standing as a foreign
corporation in each jurisdiction in which the character of the
business conducted by it or the location of the properties owned or
leased by it makes such qualification necessary, except to the extent
that the failure to be so qualified or be in good standing would not
have a material adverse change in the condition (financial or
otherwise), earnings, operations, properties, assets, business or
business prospects of the Company;
(ii) The Company has all requisite corporate power
and authority and, to such counsel's knowledge, all necessary
authorizations, approvals, consents, orders, licenses, certificates
and permits required to own, lease and license its assets and
properties and to conduct its business as now being conducted and as
described in the Registration Statement and the Prospectus. The
Company has all requisite corporate power and authority and all
necessary authorizations, approvals, consents, orders, licenses,
certificates and permits to enter into, deliver and perform this
Agreement, and, to issue and sell the Shares and the Representatives'
Warrants, other than those authorizations, approvals, consents, orders
licenses, certificates and permits required under state and foreign
securities laws. To such counsel's knowledge, the Company does not
control, directly or indirectly, any corporation, partnership, joint
venture, association or other business organization.
(iii) The Company had authorized, issued and
outstanding capital stock as of June 30, 1997 as described under the
caption "Capitalization" in the Prospectus and the Common Stock, the
Representatives' Warrants, and the rights issued under the shareholder
rights plan conform to the descriptions thereof contained under the
caption "Description of Capital Stock" in the Prospectus. The
outstanding shares of the Company's capital stock have been, and the
Shares, the Representatives' Warrants, the Common Stock underlying the
Representatives' Warrants (the "Warrant Shares") and the shares of
Common Stock to be issued upon the exercise of the warrants and
options described in the Prospectus, upon issuance, delivery and
payment therefor in the manner herein described, will be, duly
authorized, validly issued, fully paid and non-assessable. The
certificates for the Shares, the Representatives' Warrants and the
Warrant Shares, are in due and proper form under the corporations law
of the State of the Company's organization. There are no preemptive
or other rights to subscribe for or to purchase, or any restriction
upon the voting or transfer of, any shares of the Company's capital
stock pursuant to the Company's certificate of incorporation, bylaws,
other governing documents or any agreements or other instruments to
which the Company is a party or by which any of them is bound, other
than certain rights pursuant to stock purchase agreements entered into
between the Company and certain of its current stockholders that have
been waived or satisfied in connection with the offering or sale of
the Shares contemplated by this Agreement; and to such counsel's
knowledge, after conducting a reasonable investigation, neither the
filing of the Registration Statement nor the offering or sale of the
Shares as contemplated by this Agreement gives rise to any rights,
which have
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<PAGE> 22
not been waived or satisfied, for or relating to the registration of
any shares of the Company's capital stock. All corporate action
required to be taken on the part of the Company for the authorization,
issuance and sale of the Shares, the Representatives' Warrants and the
Warrant Shares by the Company has been duly and validly taken;
(iv) The Registration Statement and all
post-effective amendments thereto have become effective under the Act
and, to such counsel's knowledge, after conducting a reasonable
investigation, such counsel has reasonable grounds to believe and does
believe that no stop order proceedings with respect thereto have been
instituted or are pending before or threatened by the Commission and
any and all filings required by Rule 424 and Rule 430A of the Rules
and Regulations have been made;
(v) The Registration Statement and the Prospectus
and any amendment or supplement thereto, as of their respective
effective dates comply as to form in all material respects with the
requirements of the Act and the Rules and Regulations (except that
counsel need express no opinion on the financial statements or other
financial data);
(vi) The Company is not, or with the giving of
notice or lapse of time or both will not be, in violation of or in
default under, nor will the execution or delivery hereof or
consummation of the transactions contemplated hereby result in a
violation of, or constitute a default under, the certificate of
incorporation, bylaws or other governing documents of the Company, or
any agreement, indenture or other instrument to which the Company is a
party or by which it is bound, or to which any of their properties are
subject and of which such counsel is aware or which has been filed as
an Exhibit to the Registration Statement, nor will the performance by
the Company of its obligations hereunder violate any law, rule or
regulation of any governmental agency or body having jurisdiction over
the Company, or its properties, or result in the creation or
imposition of any lien, charge, claim or encumbrance upon any property
or assets of the Company. Except for permits and similar
authorizations required under the Act, the NASDR, and the securities
or Blue Sky laws of certain jurisdictions and for such permits and
authorizations which have been obtained, no consent, approval,
authorization or order of any court, governmental agency or body or
financial institution is required in connection with execution and
delivery of this Agreement or the consummation of the transactions
contemplated by this Agreement;
(vii) The descriptions of matters in the
Registration Statement and Prospectus under the headings "Description
of Capital Stock" and "Shares Eligible for Future Sale" are accurate
and fairly present the information required to be shown; and such
counsel, after conducting a reasonable investigation, do not know of
or believe that 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, nor after conducting
a reasonable investigation do such counsel know of or believe that
there is any pending or threatened litigation or any governmental
proceeding, statute or regulation, disclosed by the Act, the Exchange
Act and the respective rules and regulations thereunder. All
descriptions in the Prospectus of statutes, regulations, legal or
governmental proceedings, contracts and other documents, insofar as
such statements
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<PAGE> 23
constitute a summary of the legal matters, documents or proceeding
referred to therein are accurate and fairly present the information
required to be shown; and such counsel, after conducting a reasonable
investigation, do not know of or believe that 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, nor after conducting a reasonable
investigation do such counsel know of or believe that there is any
pending or threatened litigation or any governmental proceeding,
statute or regulation required to be described in the Prospectus which
is not so described;
(viii) The Underwriting Agreement and the
Representatives' Warrant Agreement have been duly authorized, executed
and delivered by the Company, and each constitutes a valid and binding
obligation of the Company enforceable in accordance with its terms,
except insofar as indemnification provisions may be limited by Federal
or State securities laws and except as enforceability may be limited
by bankruptcy, insolvency, reorganization, moratorium or similar laws
relating to or affecting creditors' rights generally or by general
equitable principles (regardless of whether such enforceability is
considered in a proceeding at law or in equity) including principles
of commercial reasonableness or conscionability and an implied
covenant of good faith and fair dealing.
(ix) The Company is not an "investment company" or
an entity "controlled" by an "investment company," as such terms are
defined in the Investment Company Act of 1940, as amended;
(x) To such counsel's knowledge, the Company is
in compliance with the Foreign Corrupt Trade Practices Act; and
(xi) To such counsel's knowledge after conducting
a reasonable investigation, there are no persons with registration or
other similar rights to have any securities registered pursuant to the
Registration Statement or otherwise registered by the Company under
the Securities Act, except as waived or disclosed in the Registration
Statement and the Prospectus.
In addition, such counsel shall state that such counsel has
acted as outside corporate legal counsel to the Company and participated in
conferences with officials and other representatives of the Company, the
Representatives, Underwriters' Counsel and the independent certified public
accountants of the Company, at which such conferences the contents of the
Registration Statement and Prospectus and related matters were discussed, and
although they have not verified the accuracy or completeness of the statements
contained in the Registration Statement or the Prospectus, nothing has come to
the attention of such counsel which leads such counsel to believe that, at the
time the Registration Statement became effective and at all times subsequent
thereto up to and on the Closing Date and on any later date on which Option
Shares are to be purchased, the Registration Statement and any amendment or
supplement thereto (other than the financial statements including supporting
schedules and other financial information derived therefrom, as to which such
counsel need express no opinion) contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or at the Closing Date
or any later date
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<PAGE> 24
on which the Option Shares are to be purchased, as the case may be, the
Registration Statement, the Prospectus and any amendment or supplement thereto
(except as aforesaid) contained any untrue statement of a material fact or
omitted to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
To the extent deemed advisable by such counsel, they may rely
as to matters of fact on certificates of officers of the Company and public
officials and on the opinions of other counsel satisfactory to the Underwriters
as to matters which are governed by laws other than the Federal laws of the
United States and the Delaware General Corporation Law; provided that such
counsel shall state that they believe that they and the Underwriters are
justified in relying on such certificates and other opinions. Copies of such
certificates and other opinions shall be furnished upon request to the
Underwriters and counsel for the Underwriters.
(e) You shall have received on the Closing Date an
opinion of Dyer, Ellis & Joseph, P.C., counsel for the Selling Stockholder,
dated the Closing Date, to the effect that:
(i) This Agreement has been duly authorized,
executed and delivered by or on behalf of the Selling Stockholder and
constitutes a legal, valid and binding agreement of Selling
Stockholder and is enforceable against the Selling Stockholder in
accordance with its terms, except as the right to indemnity under this
Agreement may be limited by Federal or state securities laws and
except as (i) may be limited by bankruptcy, insolvency, reorganization
or other similar laws affecting creditors' rights generally and (ii)
is subject to general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law);
(ii) The execution, delivery and performance of
this Agreement by the Selling Stockholder will not contravene, any
provision of applicable law, (ii) the certificates of incorporation,
bylaws or other governing documents of the Selling Stockholder that is
a corporation, or the articles of partnership of the Selling
Stockholder that is a limited partnership, or the trust agreement of
the Selling Stockholder that is a trust or (iii) any agreement or
other instrument known to such counsel to be binding upon the Selling
Stockholder, no consent, approval or authorization of any governmental
body is required for the performance of this Agreement by the Selling
Stockholder, except such as are specified and have been obtained and
except such as may be required by federal securities laws and state
securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters;
(iii) The Selling Stockholder has valid marketable
title to the Shares to be sold by the Selling Stockholder and has the
legal right and power, and all authorization and approval required by
law, to enter into this Agreement and to sell, transfer and deliver
the Shares to be sold by the Selling Stockholder;
(iv) The Custody Agreement signed by the Selling
Stockholder and the Custodian relating to the deposit of the Shares to
be sold by the Selling Stockholder, and the Power-of-Attorney
appointing certain individuals as the Selling Stockholder's
attorneys-in-fact to the extent set forth therein, relating to the
transactions contemplated
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<PAGE> 25
hereby and by the Registration Statement, have been duly authorized,
executed and delivered by the Selling Stockholder and are valid and
binding agreements of the Selling Stockholder enforceable against the
Selling Stockholder in accordance with their terms, except as (i) may
be limited by bankruptcy, insolvency, reorganization or other similar
laws affecting creditors' rights generally and (ii) is subject to
general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law); and
(v) Delivery of the certificates for the Shares
to be sold by the Selling Stockholder pursuant to this Agreement to
each of the several Underwriters (who such counsel may assume have
purchased the Shares in good faith and without notice of any adverse
claim) will pass to each such Underwriter marketable title to such
Shares free and clear of any security interests, claims, liens,
equities and other encumbrances.
With respect to all of paragraph (e) above, counsel may rely,
to the extent such counsel deems appropriate, as to matters of fact upon the
representations of the Selling Stockholder contained herein and in the
aforementioned Custody Agreements and Powers of Attorney and in other documents
and instruments and opinions of local counsel; provided however, that copies of
such Custody Agreements and Powers of Attorney and of such other documents and
instruments shall be delivered to the Underwriters and shall be reasonably
satisfactory to your counsel and, in the case of local counsel, such local
counsel shall be reasonably satisfactory to your counsel, (a) a copy of each
opinion from local counsel so relied upon shall be delivered to you and shall
be reasonably satisfactory to your counsel and (b) counsel for each Selling
Stockholder shall state that they have no reason to believe that they are not
justified in relying thereon. With respect to all of paragraph (e) above,
counsel may assume the legal capacity and the absence of any legal disability
to contract as to each Selling Stockholder that is a natural person. The
opinions as to all of paragraph (e) above shall state that such opinions may be
relied upon by the Custodian and the attorneys-in-fact appointed under the
Powers of Attorney executed by the Selling Stockholder.
(f) You shall have received on the Closing Date and on
any later date on which Option Shares are to be purchased, as the case may be,
an opinion of Gibson, Dunn & Crutcher LLP, in form and substance reasonably
satisfactory to you, with respect to the sufficiency of all such corporate
proceedings and other legal matters relating to this Agreement and the
transactions contemplated hereby as you may reasonably require, and the Company
shall have furnished to such counsel such documents as they may have requested
for the purpose of enabling them to pass upon such matters.
(g) You shall have received on the Closing Date and on
any later date on which Option Shares are to be purchased, as the case may be,
letters from Grant Thornton LLP, ("Grant") and Amper Politziner & Mattia
("Amper"), Independent Auditors ("ACCOUNTANTS"), addressed to the Underwriters,
dated the Closing Date or such later date on which Option Shares are to be
purchased, as the case may be (in each case, the "BRING DOWN LETTERS"),
confirming that they are independent certified public accountants with respect
to the Company within the meaning of the Act and the applicable published Rules
and Regulations and based upon the procedures described in a letter delivered
to you concurrently with the execution of this
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Agreement (herein called the "ORIGINAL LETTERS"), but carried out to a date not
more than five (5) business days prior to the Closing Date or such later date
on which Option Shares are to be purchased, as the case may be, (i) confirming,
to the extent true, that the statements and conclusions set forth in the
Original Letters are accurate as of the Closing Date or such later date on
which Option Shares are to be purchased, as the case may be, and (ii) setting
forth any revisions and additions to the statements and conclusions set forth
in the Original Letters that are necessary to reflect any changes in the facts
described in the Original Letters since its date, or to reflect the
availability of more recent financial statements, data or information. The
Bring Down Letters shall not disclose any change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
from that set forth in the Registration Statement or Prospectus, which, in your
sole judgment, is material and adverse and that makes it, in your sole
judgment, impracticable or inadvisable to proceed with the public offering of
the Shares as contemplated by the Prospectus. The Original Letter from Grant
shall be addressed to or for the use of the Underwriters in form and substance
satisfactory to the Underwriters and shall (i) represent, to the extent true,
that they are independent certified public accountants with respect to the
Company within the meaning of the Act and the applicable published Rules and
Regulations, (ii) set forth their opinion with respect to their examination of
the balance sheet of the Company as of December 31, 1996 and related combined
statements of operations, equity and cash flows for the twelve (12) months
ended December 31, 1996, (iii) state that Grant has performed the procedures
set out in Statement of Accounting Standards No. 71 ("SAS 71") for a review of
interim financial information and providing the report of Grant as described in
SAS 71 on the financial statements for the six-month period ended June 30, 1997
(the "QUARTERLY FINANCIAL STATEMENTS"), (iv) state that in the course of such
review, nothing came to their attention that leads them to believe that any
material modifications need to be made to any of the Quarterly Financial
Statements in order for them to be in compliance with generally accepted
accounting principles consistently applied across the periods presented, (v)
state that nothing came to their attention that caused them to believe that the
financial statements included in the Registration Statement and Prospectus do
not comply as to form in all material respects with the applicable accounting
requirements of the Rules and Regulations and that any adjustments thereto have
not been properly applied to the historical amounts in the compilation of such
statements, and (vi) address other matters agreed upon by Grant and you. The
Original Letter from Amper shall be addressed to or for the use of the
Underwriters in form and substance satisfactory to the Underwriters and shall
(i) represent, to the extent true, that they are independent certified public
accountants with respect to the Company within the meaning of the Act and the
applicable published Rules and Regulations, (ii) set forth their opinion with
respect to their examination of the balance sheet of the Company as of December
31, 1995 and related combined statements of operations, equity and cash flows
for each of the two years ended December 31, 1995, (iii) state that nothing
came to their attention that caused them to believe that the financial
statements included in the Registration Statement and Prospectus do not comply
as to form in all material respects with the applicable accounting requirements
of the Rules and Regulations and that any adjustments thereto have not been
properly applied to the historical amounts in the compilation of such
statements, and (iv) address other matters agreed upon by Amper and you.
(h) You shall have received on the Closing Date and on
any later date on which Option Shares are to be purchased, as the case may be,
a certificate of the Company, dated
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<PAGE> 27
the Closing Date or such later date on which Option Shares are to be purchased,
as the case may be, signed by the Chief Executive Officer and Chief Financial
Officer of the Company, to the effect that, and you shall be satisfied that:
(i) The representations and warranties of the
Company in this Agreement and the Representatives' Warrant Agreement
are true and correct, as if made on and as of the Closing Date or any
later date on which Option Shares are to be purchased, as the case may
be, and the Company has complied with all the agreements and satisfied
all the conditions on its part to be performed or satisfied at or
prior to the Closing Date or any later date on which Option Shares are
to be purchased, as the case may be;
(ii) No stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or threatened under the
Act;
(iii) When the Registration Statement became
effective and at all times subsequent thereto up to the delivery of
such certificate, the Registration Statement and the Prospectus, and
any amendments or supplements thereto, contained all material
information required to be included therein by the Act and the Rules
and Regulations, and in all material respects conformed to the
requirements of the Act and the Rules and Regulations, the
Registration Statement, and any amendment or supplement thereto, did
not and does not include any untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, the
Prospectus, and any amendment or supplement thereto, did not and does
not include any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, and,
since the effective date of the Registration Statement, there has
occurred no event required to be set forth in an amended or
supplemented Prospectus which has not been so set forth; and
(iv) Subsequent to the respective dates as of
which information is given in the Registration Statement and
Prospectus, there has not been any (A) material adverse change in the
condition (financial or otherwise), earnings, operations, business or
business prospects of the Company, (B) transaction that is material to
the Company, except transactions entered into in the ordinary course
of business consistent with past practices, (C) obligation, direct or
contingent, that is material to the Company, incurred by the Company,
except obligations incurred in the ordinary course of business
consistent with past practices, (D) change in the capital stock of the
Company, (E) change in the outstanding indebtedness of the Company
that is material to the Company or is out of the ordinary course of
business of the Company, (F) dividend or distribution of any kind
declared, paid or made on the capital stock of the Company, (G)
default in the payment of principal of or interest on any outstanding
debt obligations, or (H) loss or damage (whether or not insured) to
the property of the Company which has been sustained or will have been
sustained which has a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company.
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<PAGE> 28
(i) The Company shall have obtained and delivered to you
an agreement from each officer, director and 1% stockholder of the Company in
writing prior to the date hereof that such person will not, except as described
below, during the Lock-up Period, effect the Disposition of any Securities now
owned or hereafter acquired by such person or with respect to which such person
has or hereafter acquires the power of disposition, otherwise than on exercise
(on a cash or cashless basis not resulting in any public sale of Common Stock)
of Common Stock Options outstanding, it being understood, however, that the
shares of Common Stock received (net of shares delivered to the Company in a
traditional cashless exercise thereof) by such person upon exercise thereof
shall be subject to the terms of the Lock-Up Agreement. The foregoing
restriction shall have been expressly agreed to preclude the holder of the
Securities from engaging in any hedging, pledge or other transaction which is
designed to or may reasonably be expected to lead to or result in a Disposition
by any stockholder or any other person of any Securities, whether or not owned
by a stockholder, during the Lock-Up Period, even if such Securities would be
disposed of by someone other than such holder. Such prohibited hedging, pledge
or other transactions would include, without limitation, any short sale
(whether or not against the box), any pledge of shares covering an obligation
that matures or could reasonably mature during the Lock-Up Period, or any
purchase, sale or grant of any right (including, without limitation, any put or
call option) with respect to any Securities or with respect to any security
(other than a broad-based market basket or index) that includes, relates to or
derives any significant part of its value from Securities. Furthermore, such
person will have also agreed and consented to the entry of stop transfer
instructions with the Company's transfer agent against the transfer of the
Securities held by such person except in compliance with this restriction.
(j) The Shares have been approved for listing on the
AMEX.
(k) The Company shall have executed and delivered the
Representatives' Warrant Agreement and shall have tendered to the
Representatives the Representatives' Warrants.
(l) The Company shall have furnished to you such further
certificates and documents as you shall reasonably request (including
certificates of officers of the Company) as to the accuracy of the
representations and warranties of the Company herein, as to the performance by
the Company of its obligations hereunder and as to the other conditions
concurrent and precedent to the obligations of the Underwriters hereunder.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel. The Company will furnish you with such number of
conformed copies of such opinions, certificates, letters and documents as you
shall reasonably request.
7. Option Shares.
(a) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Selling Stockholder hereby grants to the several Underwriters, for
the purpose of covering over-allotments in connection with the distribution and
sale of the Firm Shares only, a nontransferable option to purchase up to an
aggregate of 240,000 Option Shares at the purchase price per share for the Firm
Shares set forth
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<PAGE> 29
in Section 3. Such option may be exercised by the Representatives on behalf of
the several Underwriters on one (1) or more occasions in whole or in part
during the period of forty-five (45) days after the date on which the Firm
Shares are initially offered to the public by giving written notice (the
"OPTION NOTICE") to the Company. The number of Option Shares to be purchased
by each Underwriter upon the exercise of such option shall be the same
proportion of the total number of Option Shares to be purchased by the several
Underwriters pursuant to the exercise of such option as the number of Firm
Shares purchased by such Underwriter (set forth in Schedule A hereto) bears to
the total number of Firm Shares purchased by the several Underwriters (set
forth in Schedule A hereto), adjusted by the Representatives in such manner as
to avoid fractional shares.
Delivery of definitive certificates for the Option Shares to
be purchased by the several Underwriters pursuant to the exercise of the option
granted by this Section 7 shall be made against payment of the purchase price
therefor by the several Underwriters by certified or official bank check or
checks drawn in same-day funds, payable to the order of the Company. In the
event of any breach of such definitive certificate delivery obligations, the
Company shall reimburse the Underwriters for the interest lost and any other
expenses borne by them by reason of such breach. Such delivery and payment
shall take place at the offices of Gibson, Dunn & Crutcher LLP, 1801 California
Street, Suite 4100, Denver, Colorado or at such other place as may be agreed
upon between the Representatives and the Company (i) on the Closing Date, if
written notice of the exercise of such option is received by the Company at
least two (2) full business days prior to the Closing Date, or (ii) on a date
which shall not be later than the third (3rd) full business day following the
date the Company receives written notice of the exercise of such option, if
such notice is received by the Company after the date two (2) full business
days prior to the Closing Date. The certificates for the Option Shares to be
so delivered will be made available to you at such office or such other
location including, without limitation, in New York City, as you may reasonably
request for checking at least one (1) full business day prior to the date of
payment and delivery and will be in such names and denominations as you shall
specify at least two (2) full business days prior to such date of payment and
delivery. If the Representatives so elect, delivery of the Option Shares may
be made by credit through full fast transfer to the accounts at The Depository
Trust Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated
to) make payment of the purchase price on behalf of any Underwriter or
Underwriters whose check or checks shall not have been received by you prior to
the date of payment and delivery for the Option Shares to be purchased by such
Underwriter or Underwriters. Any such payment by you shall not relieve any
such Underwriter or Underwriters of any of its or their obligations hereunder.
(b) Upon exercise of any option provided for in Section
7(a), the obligations of the several Underwriters to purchase such Option
Shares will be subject (as of the date hereof and as of the date of payment and
delivery for such Option Shares) to the accuracy of and compliance with the
representations, warranties and agreements of the Company herein, to the
accuracy of the statements of the Company and officers of the Company made
pursuant to the provisions
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<PAGE> 30
hereof, to the performance by the Company of its obligations hereunder, to the
conditions set forth in Section 6, and to the condition that all proceedings
taken at or prior to the payment date in connection with the sale and transfer
of such Option Shares shall be satisfactory in form and substance to you and to
Underwriters' Counsel, and you shall have been furnished with all such
documents, certificates and opinions as you may request in order to evidence
the accuracy and completeness of any of the representations, warranties or
statements, the performance of any of the covenants or agreements of the
Company or the satisfaction of any of the conditions herein contained.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless
each Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject (including, without
limitation, in its capacity as an Underwriter or as a "qualified independent
underwriter" within the meaning of Section 2720 of the Conduct Rules of the
NASDR), under the Act, the Exchange Act or otherwise, specifically including,
but not limited to, losses, claims, damages, judgments, liabilities and
expenses (including the fees and expenses of counsel and other expenses in
connection with investigating, defending or settling any such action or claim)
(or actions in respect thereof), as they are incurred and regardless of whether
the Indemnitee is a party to the litigation, if any, arising out of or based
upon (i) any breach of any representation, warranty, agreement or covenant of
the Company herein contained, (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (iii) any untrue statement or alleged
untrue statement of any material fact contained in any Preliminary Prospectus
or the Prospectus or any amendment or supplement thereto, or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, and agrees to reimburse each
Underwriter for any legal or other expenses reasonably incurred by it in
connection with investigating or defending any such loss, claim, damage,
liability or action as such expenses are incurred; provided, however, that the
Company shall not be liable in any such case to the extent that any such loss,
claim, damage, liability or action arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
the Registration Statement, such Preliminary Prospectus or the Prospectus, or
any such amendment or supplement thereto, in reliance upon, and in conformity
with, written information relating to any Underwriter furnished to the Company
by such Underwriter, directly or through you, specifically for use in the
preparation thereof and, provided further, that the indemnity agreement
provided in this Section 8(a) with respect to any Preliminary Prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting any
losses, claims, damages, liabilities or actions based upon any untrue statement
or alleged untrue statement of material fact or omission or alleged omission to
state therein a material fact purchased Shares, if a copy of the Prospectus in
which such untrue statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent or given to such person within the
time required by the Act and the Rules and Regulations, unless such failure is
the result of noncompliance by the Company with Section 4(d).
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<PAGE> 31
The indemnity agreement in this Section 8(a) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter within the meaning of the Act or
the Exchange Act and each of the agents, employees, officers and directors of
each Underwriter and person who so controls any Underwriter. This indemnity
agreement shall be in addition to any liabilities which the Company may
otherwise have.
(b) Each Underwriter, severally and not jointly, agrees
to indemnify and hold harmless the Company against any losses, claims, damages
or liabilities, joint or several, to which the Company may become subject under
the Act or otherwise, specifically including, but not limited to, losses,
claims, damages, judgments liabilities and expenses (including the fees and
expenses of counsel and other expenses in connection with investigating,
defending or settling any such action or claim) (or actions in respect
thereof), as they are incurred and regardless of whether the Indemnitee is a
party to the litigation, if any, arising out of or based upon (i) any breach
of any representation, warranty, agreement or covenant of such Underwriter
herein contained, (ii) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (iii) any untrue statement or alleged untrue
statement of any material fact contained in any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, in the case of subparagraphs (ii) and (iii) of this Section 8(b) to
the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in reliance upon and
in conformity with written information furnished to the Company by such
Underwriter, directly or through you, specifically for use in the preparation
thereof, and agrees to reimburse the Company for any legal or other expenses
reasonably incurred by the Company in connection with investigating or
defending any such loss, claim, damage, liability or action as such expenses
are incurred.
The indemnity agreement in this Section 8(b) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
officer of the Company who signed the Registration Statement and each director
of the Company, and each person, if any, who controls the Company within the
meaning of the Act or the Exchange Act. This indemnity agreement shall be in
addition to any liabilities which each Underwriter may otherwise have.
(c) The Selling Stockholder agrees to indemnify and hold
harmless each Underwriter against any losses, claims, damages or liabilities,
joint or several, to which such Underwriter may become subject (including,
without limitation, in its capacity as an Underwriter or as a "qualified
independent underwriter" within the meaning of Section 2720 of the Conduct
Rules of the NASDR), under the Act, the Exchange Act or otherwise, specifically
including, but not limited to, losses, claims, damages, judgments, liabilities
and expenses (including the fees and expenses of counsel and other expenses in
connection with investigating, defending or settling any such action or claim)
(or actions in respect thereof), as they are incurred and regardless of whether
the Indemnitee is a party to the litigation, if any, arising out of or based
upon (i) any breach of any representation, warranty, agreement or covenant of
the Selling Stockholder herein contained, (ii) any untrue statement or alleged
untrue statement of any material fact contained in
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<PAGE> 32
the Registration Statement or any amendment or supplement thereto, or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
(iii) any untrue statement or alleged untrue statement of any material fact
contained in any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, and agrees to reimburse each Underwriter for any legal or other
expenses reasonably incurred by it in connection with investigating or
defending any such loss, claim, damage, liability or action as such expenses
are incurred; provided, however, that the Selling Stockholder shall not be
liable in any such case to the extent that any such loss, claim, damage,
liability or action arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement, such Preliminary Prospectus or the Prospectus, or any
such amendment or supplement thereto, in reliance upon, and in conformity with,
written information relating to any Underwriter furnished to the Company by
such Underwriter, directly or through you, specifically for use in the
preparation thereof and, provided further, that the indemnity agreement
provided in this Section 8(c) with respect to any Preliminary Prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting any
losses, claims, damages, liabilities or actions based upon any untrue statement
or alleged untrue statement of material fact or omission or alleged omission to
state therein a material fact purchased Shares, if a copy of the Prospectus in
which such untrue statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent or given to such person within the
time required by the Act and the Rules and Regulations, unless such failure is
the result of noncompliance by the Company with Section 4(d).
The indemnity agreement in this Section 8(c) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter within the meaning of the Act or
the Exchange Act and each of the agents, employees, officers and directors of
each Underwriter and person who so controls any Underwriter. This indemnity
agreement shall be in addition to any liabilities which the Selling Stockholder
may otherwise have.
(d) Promptly after receipt by an indemnified party under
this Section 8 of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against any
indemnifying party under this Section 8, notify the indemnifying party in
writing 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 8 except to the extent
that it has been prejudiced by such omission. In case any such action is
brought against any indemnified party, and it notified the indemnifying party
of the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it shall elect by written notice
delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof, with counsel
reasonably satisfactory to such indemnified party; provided, however, that if
the defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be legal defenses available to it which are different from or
additional to those available to the indemnifying party, the indemnified party
or parties shall have the right to select separate counsel to assume such legal
defenses and to otherwise participate in the defense of such action on behalf
of such indemnified
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<PAGE> 33
party or parties. Upon receipt of notice from the indemnifying party to such
indemnified party of the indemnifying party's election so to assume the defense
of such action and approval by the indemnified party of counsel, the
indemnifying party will not be liable to such indemnified party hereunder for
any legal or other expenses subsequently incurred by such indemnified party in
connection with the defense thereof unless (i) the indemnified party shall have
employed separate counsel in accordance with the proviso to the next preceding
sentence (it being understood, however, that the indemnifying party shall not
be liable for the expenses of more than one separate counsel (together with
appropriate local counsel) approved by the indemnifying party representing all
the indemnified parties under Section 8(a), 8(b) or 8(c) hereof who are parties
to such action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of commencement of the action or (iii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party. In no event shall any
indemnifying party be liable in respect of any amounts paid in settlement of
any action unless the indemnifying party shall have approved the terms of such
settlement; provided that such consent shall not be unreasonably withheld. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in respect
of which any indemnified party is or could have been a party and
indemnification could have been sought hereunder by such indemnified party,
unless such settlement includes an unconditional release of such indemnified
party from all liability on all claims that are the subject matter of such
proceeding.
(e) In order to provide for just and equitable
contribution in any action in which a claim for indemnification is made
pursuant to this Section 8 but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the
expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the fact
that this Section 8 provides for indemnification in such case, all the parties
hereto shall contribute to the aggregate losses, claims, damages or liabilities
to which they may be subject (after contribution from others) in such
proportion so that the Underwriters severally and not jointly are responsible
pro rata for the portion represented by the percentage that the underwriting
discount bears to the public offering price, and the Company is responsible for
the remaining portion, provided, however, that (i) no Underwriter shall be
required to contribute any amount in excess of the amount by which the
underwriting discount applicable to the Shares purchased by such Underwriter
exceeds the amount of damages which such Underwriter has otherwise been
required to pay and (ii) 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. The contribution agreement in this Section 8(e) shall
extend upon the same terms and conditions to, and shall inure to the benefit
of, each person, if any, who controls any Underwriter or the Company within the
meaning of the Act or the Exchange Act and each officer of the Company who
signed the Registration Statement and each director of the Company.
(f) The parties to this Agreement hereby acknowledge that
they are sophisticated business persons who were represented by counsel during
the negotiations regarding the provisions hereof including, without limitation,
the provisions of this Section 8, and are fully informed regarding said
provisions. They further acknowledge that the provisions of this
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<PAGE> 34
Section 8 fairly allocate the risks in light of the ability of the parties to
investigate the Company and its business in order to assure that adequate
disclosure is made in the Registration Statement and Prospectus as required by
the Act and the Exchange Act.
9. Representations, Warranties, Covenants and Agreements to
Survive Delivery. All representations, warranties, covenants and agreements of
the Company, the Selling Stockholder and the Underwriters herein or in
certificates delivered pursuant hereto, and the indemnity and contribution
agreements contained in Section 8 shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any Underwriter
or any person controlling any Underwriter within the meaning of the Act or the
Exchange Act, or by or on behalf of the Company, or any of its officers,
directors or controlling persons within the meaning of the Act or the Exchange
Act, and shall survive the delivery of the Shares to the several Underwriters
hereunder or termination of this Agreement.
10. Substitution of Underwriters. If any Underwriter or
Underwriters shall fail to take up and pay for the number of Firm Shares agreed
by such Underwriter or Underwriters to be purchased hereunder upon tender of
such Firm Shares in accordance with the terms hereof, and if the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters so
agreed but failed to purchase does not exceed 10% of the Firm Shares, the
remaining Underwriters shall be obligated, severally in proportion to their
respective commitments hereunder, to take up and pay for the Firm Shares of
such defaulting Underwriter or Underwriters.
If any Underwriter or Underwriters so defaults and the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters agreed
but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for
twenty-four (24) hours to allow the several Underwriters the privilege of
substituting within twenty-four (24) hours (including non-business hours)
another underwriter or underwriters (which may include any nondefaulting
Underwriter) satisfactory to the Company. If no such underwriter or
underwriters shall have been substituted as aforesaid by such postponed Closing
Date, the Closing Date may, at the option of the Company, be postponed for a
further twenty-four (24) hours, if necessary, to allow the Company the
privilege of finding another underwriter or underwriters, satisfactory to you,
to purchase the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase. If it shall be arranged for the remaining
Underwriters or substituted underwriter or underwriters to take up the Firm
Shares of the defaulting Underwriter or Underwriters as provided in this
Section 10, (i) the Company shall have the right to postpone the time of
delivery for a period of not more than seven (7) full 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,
supplements to the Prospectus or other such documents which may thereby be made
necessary, and (ii) the respective number of Firm Shares to be purchased by the
remaining Underwriters and substituted
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<PAGE> 35
underwriter or underwriters shall be taken as the basis of their underwriting
obligation. If the remaining Underwriters shall not take up and pay for all
such Firm Shares so agreed to be purchased by the defaulting Underwriter or
Underwriters or substitute another underwriter or underwriters as aforesaid and
the Company shall not find or shall not elect to seek another underwriter or
underwriters for such Firm Shares as aforesaid, then this Agreement shall
terminate.
In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 10, then, other than as set forth in the
Letter Agreement, the Company shall not be liable to any Underwriter (except as
provided in Sections 5 and 8 hereof) nor shall any Underwriter (other than an
Underwriter who shall have failed, otherwise than for some reason permitted
under this Agreement, to purchase the number of Firm Shares agreed by such
Underwriter to be purchased hereunder, which Underwriter shall remain liable to
the Company and the other Underwriters for damages, if any, resulting from such
default) be liable to the Company (except to the extent provided in Sections 5
and 8 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 10.
11. Effective Date of this Agreement and Termination.
(a) This Agreement shall become effective at the earlier
of (i) 6:30 A.M., California time, on the first full business day following the
effective date of the Registration Statement, or (ii) the time of the public
offering of any of the Shares by the Underwriters after the Registration
Statement becomes effective. The time of the public offering shall mean the
time of the release by you, for publication, of the first newspaper
advertisement relating to the Shares, or the time at which the Shares are first
generally offered by the Underwriters to the public by letter, telephone,
telegram or telecopy, whichever shall first occur. By giving notice as set
forth in Section 12 before the time this Agreement becomes effective, you, as
Representatives of the several Underwriters, or the Company, may prevent this
Agreement from becoming effective without liability of any party to any other
party, except as provided in Sections 4(i) and 8.
(b) You, as Representatives of the several Underwriters,
shall have the right to terminate this Agreement by giving notice as
hereinafter specified at any time on or prior to the Closing Date or on or
prior to any later date on which Option Shares are to be purchased, as the case
may be, (i) if the Company shall have failed, refused or been unable to perform
any agreement on its part to be performed, or because any other condition of
the Underwriters' obligations hereunder required to be fulfilled is not
fulfilled, including, without limitation, any change in the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company from that set forth in the Registration Statement or Prospectus,
which, in your sole judgment, is material and adverse, or (ii) if additional
governmental restrictions, not in force and effect on the date hereof, shall
have been imposed upon trading in securities generally or minimum or maximum
prices shall have been generally established on the New York Stock Exchange or
on the American Stock Exchange or in the over the counter market by The Nasdaq
Stock Market, Inc., or trading in securities generally shall have been
suspended on either such exchange or in the over the counter market by The
Nasdaq Stock Market, Inc., or if a banking
35
<PAGE> 36
moratorium shall have been declared by federal, New York or California
authorities, or (iii) if the Company shall have sustained a loss by strike,
fire, flood, earthquake, accident or other calamity of such character as to
interfere materially with the conduct of the business and operations of the
Company regardless of whether or not such loss shall have been insured, or (iv)
if there shall have been a material adverse change in the general political or
economic conditions or financial markets as in your judgment makes it
inadvisable or impracticable to proceed with the offering, sale and delivery of
the Shares, or (v) if there shall have been an outbreak or escalation of
hostilities or of any other insurrection or armed conflict or the declaration
by the United States of a national emergency which, in the opinion of the
Representatives, makes it impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus. In the event
of termination pursuant to subparagraph (i) above, the Company shall remain
obligated to pay costs and expenses pursuant to Sections 4(i), 5 and 8. Any
termination pursuant to any of subparagraphs (ii) through (v) above shall be
without liability of any party to any other party except as provided in
Sections 4(i) and 8.
If you elect to prevent this Agreement from becoming effective
or to terminate this Agreement as provided in this Section 11, you shall
promptly notify the Company by telephone, telecopy or telegram, in each case
confirmed by letter. If the Company shall elect to prevent this Agreement from
becoming effective, the Company shall promptly notify you by telephone,
telecopy or telegram, in each case, confirmed by letter.
12. Notices. All notices or communications hereunder, except as
herein otherwise specifically provided, shall be in writing and if sent to you
shall be mailed, delivered, telegraphed (and confirmed by letter) or telecopied
(and confirmed by letter) to you c/o Cruttenden Roth Incorporated, 18301 Von
Karman, Suite 100, Irvine, California 92715, telecopier number (714) 852-9603,
Attention: General Counsel; if sent to the Company, such notice shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to 13470 Washington Blvd., Suite 300, Marina del Rey,
California 90292, telecopier number (310) 301-1569, Attention: Chief Executive
Officer.
13. Parties. This Agreement shall inure to the benefit of
and be binding upon the several Underwriters and the Company and their
respective executors, administrators, successors and assigns. Nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any person or entity, other than the parties hereto and their respective
executors, administrators, successors and assigns, and the controlling persons
within the meaning of the Act or the Exchange Act, officers and directors
referred to in Section 8, any legal or equitable right, remedy or claim in
respect of this Agreement or any provisions herein contained, this Agreement
and all conditions and provisions hereof being intended to be and being for the
sole and exclusive benefit of the parties hereto and their respective
executors, administrators, successors and assigns and said controlling persons
and said officers and directors, and for the benefit of no other person or
entity. No purchaser of any of the Shares from any Underwriter shall be
construed a successor or assign by reason merely of such purchase.
In all dealings with the Company under this Agreement, you shall act
on behalf of each of the several Underwriters, and the Company shall be
entitled to act and rely upon any statement,
36
<PAGE> 37
request, notice or agreement made or given by you jointly or by Cruttenden Roth
Incorporated on behalf of you.
14. Applicable Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California.
15. Counterparts. This Agreement may be signed in several
counterparts, each of which will constitute an original.
If the foregoing correctly sets forth the understanding among the
Company and the several Underwriters, please so indicate in the space provided
below for that purpose, whereupon this letter shall constitute a binding
agreement between the Company and the several Underwriters.
Very truly yours,
SECURACOM, INCORPORATED
By:
------------------------
Name:
-----------------------
Title:
----------------------
Accepted as of the date first above written:
CRUTTENDEN ROTH INCORPORATED
SCOTT & STRINGFELLOW, INC.
On their behalf and on behalf of each of the
several Underwriters named in Schedule A hereto.
By CRUTTENDEN ROTH INCORPORATED
By:
----------------------------------------------
Name:
----------------------------------------------
Title:
----------------------------------------------
37
<PAGE> 38
SCHEDULE A
<TABLE>
<CAPTION>
Number of Firm Shares
Underwriters to be Purchased
<S> <C>
Cruttenden Roth Incorporated
Scott & Stringfellow, Inc. =========================================
Total
</TABLE>
EA972380.066/1+
38
<PAGE> 1
EXHIBIT 1.2
WARRANT AGREEMENT
This WARRANT AGREEMENT (this "AGREEMENT") is entered into as of
__________, 1997 by and among Securacom, Incorporated, a Delaware corporation
(the "COMPANY"), and Cruttenden Roth Incorporated ("CRUTTENDEN") and Scott &
Stringfellow, Inc. ("SCOTT" and together with Cruttenden, the
"REPRESENTATIVES").
A. The Representatives have agreed to act as the Representatives
of the several underwriters in connection with the proposed public offering by
the Company pursuant to that certain Underwriting Agreement with the Company
dated _______________, 1997 (the "UNDERWRITING AGREEMENT") of up to 1,600,000
shares in the aggregate of its Common Stock, par value $0.01 per share (the
"COMMON STOCK"), including 240,000 of such shares covered by an over-allotment
option (the "PUBLIC OFFERING"); and
B. Pursuant to Section 4(p) of the Underwriting Agreement and as
part of the Representatives' compensation in connection with the Public
Offering, the Company has agreed to sell to the Representatives, at a price of
$0.01 per warrant, warrants (the "WARRANTS") to purchase, at a price of
$______ per share, up to an aggregate of 140,000 shares of Common Stock
(hereinafter, and as the number thereof may be adjusted as set forth herein,
the "WARRANT SHARES").
In consideration of the foregoing premises and the mutual agreements
herein and in the Underwriting Agreement and for other good and valuable
consideration, the parties hereto agree as follows:
1. Issuance of Warrants: Form of Warrant Certificate. The
Company shall issue to each of the Representatives, on the Closing Date
referred to in the Underwriting Agreement, that number of Warrants set forth
opposite such Representative's name on Schedule 1. Certificates representing
the Warrants in substantially the form of Exhibit A (the "WARRANT
CERTIFICATES") shall be executed on behalf of the Company by the manual or
facsimile signature of the present or any future Chairman of the Board, Chief
Executive Officer or Vice President of the Company, attested by the manual or
facsimile signature of the Secretary or an Assistant Secretary of the Company,
and delivered to the Representatives on the Closing Date referred to in the
Underwriting Agreement, and thereafter to successive registered Holders (as
defined below). Warrant Certificates bearing the manual or facsimile
signatures of individuals who were at any time the proper officers of the
Company shall bind the Company, notwithstanding that such individuals or any
one of them shall have ceased to hold such offices prior to the delivery of
such Warrant Certificates or did not hold such offices on the date of this
Agreement. Warrant Certificates shall be dated as of the date of execution
thereof by the Company either upon initial issuance or upon division, exchange,
substitution or transfer.
2. Term and Exercise of Warrants.
2.1 Each Warrant entitles the registered owner thereof to
purchase one share of Common Stock (subject to adjustment as set forth herein)
at any time from 10:00 a.m.,
<PAGE> 2
California time, on ______________, 1998 (the "INITIATION DATE") until 6:00
p.m., California time, on _______________, 2001 (the "EXPIRATION DATE") at a
purchase price of $_______ (subject to adjustment as set forth herein) (the
"WARRANT PRICE"). Subject to the provisions of this Agreement, each registered
Holder (as defined below) of Warrants shall have the right to exercise the
Warrants and purchase the underlying Warrant shares, either in their entirety
or from time to time, effective as of any date specified by the Holder from and
after the Initiation Date and on or before the Expiration Date in the manner
set forth in the Warrant Certificate. Payment of the aggregate Warrant Price
for all Warrant Shares for which Warrants are exercised shall be made, in the
discretion of the Holder, in cash or by certified or official bank check or by
net issuance, or a combination thereof. Exercise by net issuance shall be
effected without payment by the Holder of any cash or other consideration by
the Company's withholding from the Warrant Shares that would otherwise be
issued upon exercise if the exercise price were paid in cash, that number of
Warrant Shares which, when multiplied by the Closing Price for the day
immediately preceding the date of exercise, equals the aggregate Warrant Price
for the Warrants so exercised.
2.2 Notwithstanding the foregoing, if at 6:00 p.m.,
California time on the Expiration Date, any Holder of Warrants has not
exercised its Warrants and has not notified the Company that it waives
automatic issuance pursuant to this Section 2.2, then all such unexercised
Warrants shall be automatically converted into a number of shares of Common
Stock of the Company equal to: (A) the number of shares of Common Stock then
issuable upon exercise of all such unexercised Warrants minus (B) a number of
shares of Common Stock equal to the quotient obtained by dividing the aggregate
Warrant Price for all such unexercised Warrants by the Closing Price (as
defined in Section 11.1(c) below) for the Common Stock on the Expiration Date.
2.3 Upon exercise of Warrants and payment of the
applicable Warrant Price, the Company shall issue and cause to be delivered
with all reasonable dispatch to or upon the written order of the registered
Holder of such Warrants and in such name or names as such registered Holder may
designate, a certificate or certificates for the number of full Warrant Shares
so purchased upon the exercise of such Warrants (net of any Warrant Shares
withheld in payment of the Warrant Price, if paid by net issuance), together
with cash, as provided in Section 12, in respect of any fraction of a share
otherwise issuable upon such exercise and, if the number of Warrants
represented by a Warrant Certificate shall not be exercised in full, a new
Warrant Certificate for the number of Warrants represented by the Warrant
Certificate surrendered but not exercised. Any person(s) designated by the
exercising Holder as the holder of the Warrant Shares issuable upon exercise
shall be deemed to have become a holder of record of such shares as of the date
of the surrender of such Warrants and payment of the Warrant Price, or such
later date as the exercising Holder may specify, notwithstanding that the stock
transfer books of the Company may then be closed or that certificates
representing the Warrant Shares have not been delivered.
3. Registration. The Warrant Certificates shall be numbered and
shall be registered on the books of the Company (the "WARRANT REGISTER") as
they are issued. The Company shall be entitled to treat the registered holder
of any Warrant Certificate (notwithstanding any notation of ownership or other
writing made on the Warrant Certificate made by anyone) on the Warrant Register
(the "HOLDER") as the owner in fact thereof and of the Warrants represented
thereby for all purposes and shall not be bound to recognize any equitable or
other claim to or interest in such Warrant Certificate or the Warrants
represented thereby on the part of any other person, and shall
2
<PAGE> 3
not be liable for any registration or transfer of Warrants registered in the
name of a fiduciary or the nominee of a fiduciary. The Warrant Certificates
shall be registered initially in the names of each of the Representatives and
in the denominations set forth for each Representative on Schedule 1, or in
such other denominations as any Representative may request in writing to the
Company with respect to the Warrants to be issued to such Representative.
4. Transfers.
4.1 Until ________________, 1998, the Warrants will not
be sold, transferred, assigned or hypothecated except to (a) bona fide officers
or partners of the Representatives; (b) a successor to the Holder in a merger
or consolidation; (c) a purchaser of all or substantially all of the Holder's
assets; (d) any person receiving the Warrants from a permitted transferee at
death pursuant to will, trust or the laws of intestate succession; (e) any
other underwriter or selling group member that participated in the Public
Offering and is a member of the NASD, or bona fide officers or partners
thereof; or (f) any person by operation of law, provided that any such transfer
shall be contingent upon the transferee's agreement in writing to be bound by
the terms hereof.
4.2 The Warrants shall be transferable only on the
Warrant Register upon delivery thereof duly endorsed by the Holder or by the
Holder's duly authorized attorney or representatives, or accompanied by proper
evidence of succession, assignment or authority to transfer. In all cases of
transfer by an attorney, the original power of attorney, duly approved, or an
official copy thereof, duly certified, shall be deposited with the Company. In
case of transfer by executors, administrators, guardians or other legal
representatives, duly authenticated evidence of their authority shall be
produced and may be required to be deposited with the Company in its
discretion. Upon any registration of transfer, the Company shall deliver a new
Warrant Certificate or Warrant Certificates to the person entitled thereto.
4.3 The Company shall not be required to recognize any
transfer of the Warrants or the Warrant Shares unless (a) such transfer is made
pursuant to an effective registration statement under the Securities Act of
1933, as amended (the "ACT"), including a post-effective amendment to the
Registration Statement, or (b) counsel reasonably satisfactory to the Company
provides an opinion that the transfer may be made without registration pursuant
to Rule 144 under the Act or otherwise.
4.4 The Company may stop transfer of the Warrants and the
Warrant Shares to enforce the transfer restrictions set forth herein. The
Warrant Certificates shall bear the following legend:
TRANSFER OF THE SECURITIES REPRESENTED HEREBY IS RESTRICTED AS
DESCRIBED IN THE WARRANT AGREEMENT DESCRIBED HEREIN.
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE COMMON
STOCK ISSUABLE UPON EXERCISE OF SUCH WARRANTS MAY NOT BE OFFERED OR
SOLD EXCEPT PURSUANT TO (i) A POST-EFFECTIVE AMENDMENT TO THE
REGISTRATION
3
<PAGE> 4
STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, PURSUANT TO
WHICH SUCH SECURITIES WERE ORIGINALLY REGISTERED IN CONNECTION WITH
ORIGINAL ISSUANCE OF THE WARRANTS REPRESENTED HEREBY, OR (ii) A
SEPARATE REGISTRATION STATEMENT UNDER SUCH ACT, OR (iii) AN EXEMPTION
FROM REGISTRATION UNDER SUCH ACT.
The Warrant Shares or other securities issued upon exercise of the
Warrants shall bear the following legend, if applicable:
THE SHARES OR OTHER SECURITIES REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY STATE SECURITIES LAW. SAID SECURITIES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM UNDER SAID ACT.
5. Compliance with Government Regulations. If any shares of
Common Stock required to be reserved for purposes of exercise or conversion of
Warrants require, under any federal or state law or applicable governing rule
or regulation of any national securities exchange or market system,
registration with or approval of any governmental authority, or listing on any
such national securities exchange or market system before such shares may be
issued upon exercise, the Company will in good faith and as expeditiously as
possible endeavor to cause such shares to be duly registered, approved or
listed. The Company shall keep current in filing all reports, statements and
other materials required to be filed with the Securities and Exchange
Commission to permit Holders to sell the Warrants and the Warrant Shares under
Rule 144.
6. Payment of Taxes. The Company shall pay any taxes due in
connection with the issuance or exercise of the Warrants other than transfer
taxes payable in connection with secondary transfers of any Warrants or
issuance of Warrant Shares to any person other than the registered Holder of
such Warrants.
7. Exchange of Warrant Certificates. Holders of Warrant
Certificates may exchange them for another certificate or certificates
representing the right of the Holder thereof to purchase a like aggregate
number of Warrant Shares as the Warrant Certificate or Certificates surrendered
by delivering the Warrant Certificates to be exchanged to the Company, properly
endorsed or accompanied by a properly executed instrument of transfer, together
with a written request for transfer, whereupon the Company shall execute and
deliver to the person entitled thereto a new Warrant Certificate or
Certificates, as the case may be, as so requested.
8. Mutilated or Missing Warrant Certificates. In case any of the
Warrant Certificates shall be mutilated, lost, stolen or destroyed, the Company
shall issue and deliver in exchange and substitution for and upon cancellation
of the mutilated Warrant Certificate, or in lieu of and substitution for the
Warrant Certificate lost, stolen or destroyed, a new Warrant Certificate of
like tenor and representing an equivalent right or interest, subject to the
provision to the Company by the Holder thereof of evidence reasonably
satisfactory to the Company of such loss, theft or
4
<PAGE> 5
destruction of such Warrant Certificate and, if requested, indemnity or bond
also reasonably satisfactory to the Company, provided that no such bond shall
be required from any of the initial Holders of the Warrants.
9. Reservation of Warrant Shares; Authorization and Valid
Issuance. The Company shall at all times reserve and keep available out of its
authorized and unissued shares of Common Stock a number of shares sufficient to
provide for the exercise of the rights of purchase represented by the Warrants,
and the transfer agent for the Common Stock or any other securities issuable
upon the exercise of any of the rights of purchase aforesaid ("TRANSFER AGENT")
is hereby irrevocably authorized and directed at all times until the Expiration
Date to reserve such number of authorized and unissued shares or other
securities as shall be required for such purpose. The Company will keep a copy
of this Agreement on file with the Transfer Agent and will supply such Transfer
Agent with duly executed stock certificates for such purposes and will itself
provide or otherwise make available any cash which may be issuable as provided
in Section 12. The Company will furnish to such Transfer Agent a copy of all
notices of adjustments, and certificates related thereto, transmitted to each
Holder pursuant to Section 11.2. All Warrant Certificates surrendered in the
exercise of the rights thereby evidenced shall be cancelled. The Company
represents that the Warrant Shares are duly authorized and covenants that, upon
receipt by the Company of the full payment therefor, the Warrant Shares will be
validly issued, fully paid, nonassessable, and not issued in violation of any
preemptive rights.
10. Obtaining Stock Exchange Listings. The Company will from time
to time take all action which may be necessary so that the Warrant Shares,
immediately upon their issuance upon the exercise of Warrants, will be listed
and/or included for trading on the principal securities exchanges and markets
within the United States of America, if any, on which other shares of Common
Stock are then listed or included for trading.
11. Adjustment of Warrant Price and Number of Warrant Shares. For
purposes of this Section 11, "Common Stock" means shares now or hereafter
authorized of any class of Common Stock of the Company and any other stock of
the Company, however designated, that has the right (subject to any prior
rights of any class or series of preferred stock) to participate in any
distribution of the assets or earnings of the Company without limit as to per
share amount.
11.1 Mechanical Adjustments. The number and kind of
securities purchasable upon the exercise of each Warrant and the Warrant Price
shall be subject to adjustment from time to time as follows:
(a) In case the Company shall (i) pay a dividend in
shares of Common Stock or make a distribution in shares of Common Stock, (ii)
subdivide its outstanding shares of Common Stock, (iii) combine its outstanding
shares of Common Stock or (iv) issue by reclassification of its shares of
Common Stock other securities of the Company (including any such
reclassification in connection with a consolidation or merger in which the
Company is the surviving corporation), the number of Warrant Shares purchasable
upon exercise of each Warrant without giving effect thereto shall be adjusted
so that the Holder of each Warrant shall be entitled to receive the kind and
number of Warrant Shares or other securities of the Company which such Holder
would have owned or would have been entitled to receive after the happening of
any of the events described
5
<PAGE> 6
above, had such Warrants been exercised immediately prior to the happening of
such event or any record date with respect thereto. An adjustment made
pursuant to this paragraph (a) shall become effective immediately after the
effective date of such event retroactive to the record date, if any, for such
event. Such adjustment shall be made successively whenever any event listed
above shall occur.
(b) In case the Company shall distribute to all holders
of its shares of Common Stock (including any such distribution made in
connection with a consolidation or merger in which the Company is the surviving
corporation) evidences of its indebtedness or assets (excluding cash dividends
or distributions payable out of consolidated earnings or earned surplus and in
compliance with applicable law and dividends or distributions referred to in
paragraph (a) above or in the paragraph immediately following this paragraph),
or rights, options or warrants, or convertible or exchangeable securities
containing the right to subscribe for or purchase shares of Common Stock, then
in each case the number of Warrant Shares thereafter purchasable upon the
exercise of each Warrant shall be determined by multiplying the number of
Warrant Shares purchasable upon the exercise of each Warrant without giving
effect thereto by a fraction, the numerator of which shall be the current
market price per share of Common Stock (as defined in paragraph (c) below) as
of the record date for such distribution or, if there is no record date with
respect thereto then as of the date of such distribution, and the denominator
of which shall be the current market price per share of Common Stock as of such
date, less the fair value (as reasonably determined by the Board of Directors
of the Company) of the portion of the assets or evidences of indebtedness so
distributed or of such subscription rights, options or warrants, or of such
convertible or exchangeable securities applicable to one share of Common Stock.
Such adjustment shall be made whenever any such distribution is made and shall
become effective on the date of distribution retroactive to the record date for
the determination of stockholders entitled to receive such distribution.
Notwithstanding the foregoing, however, no adjustment in the number of Warrant
Shares purchasable upon the exercise of each Warrant need be made under this
paragraph if the Company issues or distributes to each Holder of Warrants the
rights, options, warrants or convertible or exchangeable securities, or
evidences of indebtedness or assets referred to in those paragraphs which each
Holder of Warrants would have been entitled to receive had the Warrants been
exercised prior to the happening of such event or the record date with respect
thereto. No adjustment need be made for a change in the par value of the
Warrant Shares.
In the event of a distribution by the Company to all holders
of its shares of Common Stock or of the stock of a subsidiary of securities
convertible into or exercisable for such stock (other than as described in
subparagraph (a)(iv) above), then in lieu of an adjustment in the number of
Warrant Shares purchasable upon the exercise of each Warrant, the Holder of
each Warrant, upon the exercise thereof at any time after such distribution,
shall be entitled to receive from the Company, such subsidiary or both, as the
Company shall determine, the stock or other securities to which such Holder
would have been entitled if such Holder had exercised such Warrant immediately
prior thereto, all subject to further adjustment as provided in this Section
11.1; provided, however, that no adjustment in respect of dividends or interest
on such stock or other securities shall be made during the term of a Warrant or
upon the exercise of a Warrant.
6
<PAGE> 7
(c) For the purpose of any computation under paragraph
(b) of this Section, the current market price per share of Common Stock as of
any date shall be the average of the daily Closing Prices for 20 consecutive
trading days on which such Common Stock actually was traded commencing 30
trading days before the date of such computation. The "CLOSING PRICE" for any
day shall be the last such reported sales price regular way for a share of
Common Stock on that day on the principal national securities exchange or
national market system on which the shares of Common Stock are listed or
admitted to trading or, if not so listed or admitted to trading, the average of
the closing bid and asked prices of the Common Stock in the over-the counter
market or if not approved for such trading, the average of the closing bid and
asked prices as furnished by two members of the National Association of
Securities Dealers, Inc. selected from time to time by the Company for that
purpose.
(d) No adjustment in the number of Warrant Shares
purchasable hereunder shall be required unless such adjustment would require an
increase or decrease of at least one percent (1%) in the number of Warrant
Shares purchasable upon the exercise of each Warrant; provided, however, that
any adjustments which by reason of this paragraph (d) are not required to be
made shall be carried forward and taken into account in any subsequent
adjustment. All calculations shall be made to the nearest one-thousandth of a
share.
(e) Whenever the number of Warrant Shares purchasable
upon the exercise of each Warrant is adjusted, as herein provided, the Warrant
Price per share payable upon exercise of each Warrant shall be appropriately
and proportionately adjusted.
(f) If at any time, as a result of an adjustment made
pursuant to paragraph (a) above, the Holders shall become entitled to purchase
any securities of the Company other than shares of Common Stock, thereafter the
number of such other shares so purchasable upon exercise of each Warrant and
the Warrant Price of such shares 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 Warrant Shares contained in this Section 11, and
the other provisions of this Agreement, with respect to the Warrant and Warrant
Shares, shall apply as nearly equivalent as practicable on like terms to such
other securities.
(g) Upon the expiration of any rights, options, warrants
or conversion or exchange privileges for which an adjustment was made
hereunder, if any thereof shall not have been exercised, the Warrant Price per
share and the number of shares of Common Stock purchasable upon the exercise of
each Warrant shall, upon such expiration, be readjusted and shall thereafter be
such as they would have been had they been originally adjusted (or had the
original adjustment not been required, as the case may be) as if (i) the only
shares of Common Stock so issued were the shares of Common Stock, if any,
actually issued or sold upon the exercise of such rights, options, warrants or
conversion or exchange rights and (ii) such shares of Common Stock, if any,
were issued or sold for the consideration actually received by the Company upon
such exercise plus the aggregate consideration, if any, actually received by
the Company for the issuance, sale or grant of all such rights, options,
warrants or conversion or exchange rights whether or not exercised; provided,
however, that no such readjustment shall have the effect of increasing the
Warrant Price per share or decreasing the number of shares of Common Stock
purchasable upon the exercise of each Warrant by an amount in excess of the
amount of the
7
<PAGE> 8
adjustment initially made in respect to the issuance, sale or grant of such
rights, options, warrants or conversion or exchange rights.
11.2 Notice of Adjustment. Whenever the Company proposes
any action that would result in an adjustment of the number of Warrant Shares
purchasable upon the exercise of Warrants or the Warrant Price per share as
herein provided, the Company shall, at least 10 days prior to the date of such
action or, if earlier, the record date therefor, mail by first class, postage
prepaid, to each Holder notice of such adjustment or adjustments, the proposed
date and, if applicable, record date therefor, and a certificate of a firm of
independent public accountants selected by the board of directors of the
Company (who may be the regular accountants employed by the Company) setting
forth the number of Warrant Shares to be purchasable upon the exercise of each
Warrant and the Warrant Price per share after such adjustment, setting forth a
brief statement of the facts requiring such adjustment and setting forth the
computation by which such adjustment was made.
11.3 No Adjustment for Dividends. Except as provided in
Section 11.1, no adjustments in respect of any dividends shall be made during
the term of a Warrant or upon the exercise of a Warrant.
11.4 Preservation of Purchase Rights Upon Merger,
Consolidation etc. In case of any consolidation of the Company with or merger
of the Company into another corporation or in case of any sale, transfer or
lease to another corporation of all or substantially all the property of the
Company, the Company or such successor or purchasing corporation, as the case
may be, shall execute with each Holder an agreement (and shall not effect any
such transaction in the absence of such an agreement) that each Holder shall
have the right thereafter upon payment of the Warrant Price in effect
immediately prior to such action to purchase upon exercise of each Warrant the
kind and amount of shares and other securities, cash and property which such
Holder would have owned or would have been entitled to receive in connection
with the happening of such consolidation, merger, sale, transfer or lease and
as a result of subsequent transactions had such Warrant been exercised
immediately prior to such action and such consideration been held until such
exercise; provided, however, that no adjustment in respect of dividends,
interest or other income on or from such shares or other securities, cash and
property shall be made during the term of a Warrant or upon the exercise of a
Warrant. Such agreement shall provide for adjustments, which shall be as
nearly equivalent as may be practicable to the adjustments provided for in this
Section 11. The provisions of this Section 11.4 shall similarly apply to
successive consolidations, mergers, sales transfer or leases.
11.5 Statements on Warrants. Irrespective of any
adjustments in the Warrant Price per share or the number or kind of shares
purchasable upon the exercise of the Warrants, Warrant Certificates theretofore
or thereafter issued may continue to express the same price and number and kind
of shares as are stated in the Warrants initially issuable pursuant to this
Agreement.
12. Fractional Interests. The Company shall not be required to
issue fractional Warrant Shares on the exercise of Warrants. If more than one
Warrant shall be exercised at the same time by the same holder, the number of
full Warrant Shares which shall be issuable upon the
8
<PAGE> 9
exercise thereof shall be computed on the basis of the aggregate number of
Warrant Shares purchasable on exercise of the Warrants so exercised. If any
fraction of a Warrant Share would, except for the provisions of this Section
12, be issuable on the exercise of any Warrant (or specified portion thereof),
the Company shall pay the exercising Holder in lieu thereof an amount in cash
equal to the Closing Price for one share of the Common Stock, on the day
immediately preceding the exercise date of the Warrant, multiplied by such
faction.
13. Registration Rights.
13.1 Demand Registration Rights. Within 60 days after
receipt of a written request from Holders of at least 50% in interest of the
aggregate of Warrants and/or Warrant Shares that the Representatives or such
Holders of the Warrants and/or Warrant Shares desire and intend to transfer
more than 25% in interest of the aggregate number of the Warrants and/or
Warrant Shares under such circumstances that a public offering, within the
meaning of the Act, will be involved, the Company shall (subject to the last
sentence of this paragraph) notify all Holders of such request and file a
registration statement (and use its reasonable best efforts to cause such
registration statement to become effective under the Act) with respect to the
offering and sale or other disposition of the Warrants and/or Warrant Shares
requested to be included by the requesting Holders and any other Holders who
request inclusion of Warrants or Warrant Shares within 20 days after the
Company has given them notice of the registration (the "OFFERED SECURITIES");
provided, however, that the Company shall not be obligated to comply with the
foregoing provisions of this Section 13.1 if in the opinion of counsel to the
Company reasonably acceptable to the Holder or Holders from whom such written
requests have been received, registration under the Act is not required for the
transfer of the Offered Securities in the manner proposed by such person or
persons, or a post-effective amendment to an existing registration statement
would be legally sufficient for such transfer (in which latter event the
Company shall promptly file such post-effective amendment (and use its best
efforts to cause such amendment to become effective under the Act)).
Notwithstanding the foregoing, however, the Company shall not be obligated to
provide more than one effective registration statement meeting the requirements
hereof pursuant to this Section 13.1.
The Company may defer the preparation and filing of a registration
statement for up to 90 days after the request for registration is made if the
Company's board of directors determines in good faith that (i) such
registration or post-effective amendment would materially adversely affect or
otherwise materially interfere with a proposed or pending material transaction
by the Company, including without limitation a financing or a corporate
reorganization, or (ii) the Company is in possession of material inside
information concerning the Company or its securities, disclosure of which would
be illegal or have a material adverse effect upon the Company.
The Company shall not be obligated to honor any request to register
Warrant Shares pursuant to this Section 13.1 received later than four (4) years
from the effective date of the Company's Registration Statement on Form S-1
(File No. 333-26439) (the "EFFECTIVE DATE"). The Company shall not be required
(i) to maintain the effectiveness of the registration statement beyond the
earlier to occur of 120 days after the effective date of the registration
statement or the date on which all of the Offered Securities have been sold
(the "TERMINATION DATE"); provided, however, that if at the Termination Date
the Offered Securities are covered by a registration
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<PAGE> 10
statement which also covers other securities and which is required to remain in
effect beyond the Termination Date, the Company shall maintain in effect such
registration statement as it relates to Offered Securities for so long as such
registration statement (or any substitute registration statement) remains or is
required to remain in effect for any such other securities, or (ii) to cause
any registration statement with respect to the Warrant Shares to become
effective prior to the Initiation Date. All expenses of registration pursuant
to this Section 13.1 shall be borne by the Company (excluding underwriting
discounts and commissions on securities not sold by the Company).
The Company shall be obligated pursuant to this Section 13.1 to
include in the registration statement Warrant Shares that have not yet been
purchased by a Holder of Warrants so long as such Holder of Warrants submits an
undertaking to the Company that such Holder intends to exercise Warrants
representing the number of Warrant Shares to be included in such registration
statement prior to the consummation of the public offering with respect to such
Warrant Shares. In addition, such Holder of Warrants is permitted to pay the
Company the Warrant Price for such Warrant Shares upon the consummation of the
public offering with respect to such Warrant Shares.
13.2 Piggy-back Registration Rights. In the event the
Company proposes to file (for its own offer and sale or offer and sale by
selling security holders) a registration statement under the Act at any time on
or before ______________, 2000 (the third anniversary of the Effective Date)
with respect to any class of security (other than in connection with an
exchange offer, a non-cash offer or a registration statement on Form S-4 or
Form S-8 or any successor registration statement form) which becomes or which
should be expected to become effective at any time after the Initiation Date
then the Company shall in each case give written notice of such proposed filing
to the Holders of Warrants and Warrant Shares at least 30 days before the
proposed filing date and such notice shall offer to such Holders the
opportunity to include in such registration statement such number of Warrant
Shares as they may request, unless, in the opinion of counsel to the Company
reasonably acceptable to any such holder of Warrants or Warrant Shares who
wishes to have Warrant Shares included in such registration statement,
registration under the Act is not required for the transfer of such Warrants
and/or Warrant Shares in the manner proposed by such Holders. The Company
shall not be obligated to honor any request to register any such Warrant Shares
if the Company is not notified in writing of any such request pursuant to this
Section 13.2 within 20 days after the Company has given notice to the Holders
of the filing. The Company shall permit, or shall cause the managing
underwriter of a proposed offering to permit, the Holders of Warrant Shares
requested to be included in the registration (the "PIGGY-BACK SHARES") to
include such Piggy-back Shares in the proposed offering on the same terms and
conditions as applicable to securities of the Company included therein or as
applicable to securities of any person other than the Company and the Holders
of Piggy-back Shares if the securities of any such person are included therein.
Notwithstanding the foregoing, if any such managing underwriter shall advise
the Company in writing that it believes that the distribution of all or a
portion of the Piggy-back Shares requested to be included in the registration
statement concurrently with the securities being registered by the Company
would materially adversely affect the distribution of such securities by the
Company for its own account, then the Holders of such Piggy-back Shares shall
delay their offering and sale of Piggyback Shares (or the portion thereof so
designated by such managing underwriter) for such period, not to exceed 120
days, as
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<PAGE> 11
the managing underwriter shall request provided that no such delay shall be
required as to Piggy-back Shares if any securities of the Company are included
in such registration statement for the account of any person other than the
Company and the Holders of Piggy-back Shares. In the event of such delay, the
Company shall file such supplements, post-effective amendments or separate
registration statement, and take any such other steps as may be necessary to
permit such Holders to make their proposed offering and sale for a period of 90
days immediately following the end of such period of delay ("PIGGY-BACK
TERMINATION DATE"); provided, however, that if at the Piggy-back Termination
Date the Piggyback Shares are covered by a registration statement which is, or
is required to remain, in effect beyond the Piggy-back Termination Date, the
Company shall maintain in effect the registration statement as it relates to
the Piggy-back Shares for so long as such registration statement remains or is
required to remain in effect for any of such other securities.
The Company shall be obligated pursuant to this Section 13.2 to
include in the registration Warrant Shares that have not yet been purchased by
a holder of Warrants so long as such Holder of Warrants submits an undertaking
to the Company that such Holder intends to exercise Warrants representing the
number of Warrant Shares to be included in such registration prior to the
consummation of the offering made pursuant thereto. In addition, such Holder
of Warrants is permitted to pay the Company the Warrant Price for such Warrant
Shares upon the consummation of the public offering with respect to such
Warrant Shares.
If the Company decides not to proceed with a registration and offering
in which Piggy-back Shares are included, the Company has no obligation to
proceed with the offering of the Piggy-back Shares, unless the Holders of the
Warrants and/or Warrant Shares otherwise comply with the provisions of Section
13.1 hereof (without regard to the 60 days' written request required thereby).
13.3 In connection with the registration of securities in
accordance with Sections 13.1 and 13.2 above, the Company shall:
(a) Use its reasonable best efforts to register or
qualify the securities for offer or sale under the state securities or Blue Sky
laws of such states which the Holders of such Warrant Shares shall designate;
provided, however, that in no event shall the Company be obligated to qualify
to do business in any jurisdiction where it is not then so qualified or to take
any action which would subject it to general service of process in any
jurisdiction where it is not then so subject or to register or get a license as
a broker or dealer in securities in any jurisdiction where it is not so
registered or licensed.
(b) Pay all costs, other than fees and disbursements of
counsel for the Holders and underwriting discounts and commissions, if any, in
respect of securities held by the Holders.
(c) Furnish to each Holder such number of copies of the
registration statement and of each amendment and supplement thereto (in each
case, including all exhibits), such reasonable number of copies of each
prospectus contained in such registration statement and each supplement or
amendment thereto (including each preliminary prospectus), all of which shall
conform to the requirements of the Act and the rules and regulations
thereunder, and such other
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<PAGE> 12
documents, as any Holder may reasonably request to facilitate the disposition
of the securities included in such registration.
(d) If an opinion of counsel for the Company is delivered
to any underwriter in connection with the registration, such opinion to each
Holder participating in the registration.
(e) Enter into a cross-indemnity agreement and a
contribution agreement, each in customary form, with each underwriter, if any,
and, if requested, enter into an underwriting agreement containing conventional
representations, warranties, allocation of expenses and customary closing
conditions, including, without limitation, opinions of counsel and accountants'
cold comfort letters, with any underwriter who acquires any securities included
by a Holder in the registration.
13.4 (a) The Company shall indemnify and hold harmless
each Holder participating in any registration hereunder against any losses,
claims, damages or liabilities, joint or several, to which such Holder may
become subject under the Act, the Securities Exchange Act of 1934, as amended
(the "EXCHANGE ACT") or otherwise, specifically including, but not limited to,
losses, claims, damages, judgments, liabilities and expenses (including the
fees and expenses of counsel and other expenses in connection with
investigating, defending or settling any such action or claim) (or actions in
respect thereof), as they are incurred and regardless of whether the indemnitee
is a party to the litigation, if any, arising out of or based upon (i) any
breach of any representation, warranty, agreement or covenant of the Company
herein contained, (ii) any untrue statement or alleged untrue statement of any
material fact contained in any registration statement filed by the Company or
any amendment or supplement thereto, or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, or (iii) any untrue statement or
alleged untrue statement of any material fact contained in any preliminary
prospectus or final prospectus included in any registration statement filed by
the Company or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, and agrees to reimburse each such
Holder for any legal or other expenses reasonably incurred by it in connection
with investigating or defending any such loss, claim, damage, liability or
action as such expenses are incurred; provided, however, that the Company shall
not be liable in any such case to the extent that any such loss, claim, damage,
liability or action arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in any such
registration statement, preliminary prospectus or final prospectus, or any such
amendment or supplement thereto, in reliance upon, and in conformity with,
written information relating to any Holder furnished to the Company by such
Holder specifically for use in the preparation thereof and, provided further,
that the indemnity agreement provided in this Section 13.4(a) with respect to
any preliminary prospectus shall not inure to the benefit of any Holder from
whom the person asserting any losses, claims, damages, liabilities or actions
based upon any untrue statement or alleged untrue statement of material fact or
omission or alleged omission to state therein a material fact purchased
securities, if adequate copies of the applicable final prospectus in which
such untrue statement or alleged untrue statement or omission or alleged
omission was corrected were provided by the Company to the Holder or its
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<PAGE> 13
representatives and the Holder or its representatives did not deliver such
final prospectus to such person.
The indemnity agreement in this Section 13.4(a) shall extend
upon the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Holder within the meaning of the Act or the
Exchange Act and each of the agents, employees, officers and directors of each
Holder and person who so controls any Holder. This indemnity agreement shall
be in addition to any liabilities which the Company may otherwise have.
(b) Each Holder, severally and not jointly, agrees to
indemnify and hold harmless the Company against any losses, claims, damages or
liabilities, joint or several, to which the Company may become subject under
the Act or otherwise, specifically including, but not limited to, losses,
claims, damages, judgments liabilities and expenses (including the fees and
expenses of counsel and other expenses in connection with investigating,
defending or settling any such action or claim) (or actions in respect
thereof), as they are incurred and regardless of whether the indemnitee is a
party to the litigation, if any, arising out of or based upon (i) any breach
of any representation, warranty, agreement or covenant of such Holder herein
contained, (ii) any untrue statement or alleged untrue statement of any
material fact contained in any registration statement filed by the Company or
any amendment or supplement thereto, or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, or (iii) any untrue statement or
alleged untrue statement of any material fact contained in any preliminary
prospectus or final prospectus or any amendment or supplement thereto, or the
omission or alleged omission to state therein a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, in the case of subparagraphs (ii) and (iii) of this
Section 13.4(b) to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company by such Holder specifically for use in the preparation thereof, and
agrees to reimburse the Company for any legal or other expenses reasonably
incurred by the Company in connection with investigating or defending any such
loss, claim, damage, liability or action as such expenses are incurred.
The indemnity agreement in this Section 13.4(b) shall extend
upon the same terms and conditions to, and shall inure to the benefit of, each
officer of the Company who signed such registration statement and each director
of the Company, and each person, if any, who controls the Company within the
meaning of the Act or the Exchange Act. This indemnity agreement shall be in
addition to any liabilities which each Holder may otherwise have.
(c) Promptly after receipt by an indemnified party under
this Section 13.4 of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against any
indemnifying party under this Section 13.4, notify the indemnifying party in
writing 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 13.4 except to the
extent that it has been prejudiced by such omission. In case any such action
is brought against any indemnified party, and it notified the indemnifying
party of the commencement thereof, the indemnifying party will be entitled to
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<PAGE> 14
participate therein and, to the extent that it shall elect by written notice
delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof, with counsel
reasonably satisfactory to such indemnified party; provided, however, that if
the defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be legal defenses available to it which are different from or
additional to those available to the indemnifying party, the indemnified party
or parties shall have the right to select separate counsel to assume such legal
defenses and to otherwise participate in the defense of such action on behalf
of such indemnified party or parties. Upon receipt of notice from the
indemnifying party to such indemnified party of the indemnifying party's
election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party hereunder for any legal or other expenses subsequently
incurred by such indemnified party in connection with the defense thereof
unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being
understood, however, that the indemnifying party shall not be liable for the
expenses of more than one separate counsel (together with appropriate local
counsel) approved by the indemnifying party representing all the indemnified
parties under Section 13.4(a) or 13.4(b) hereof who are parties to such
action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of commencement of the action or (iii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party. In no event shall any
indemnifying party be liable in respect of any amounts paid in settlement of
any action unless the indemnifying party shall have approved the terms of such
settlement; provided that such consent shall not be unreasonably withheld. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in respect
of which any indemnified party is or could have been a party and
indemnification could have been sought hereunder by such indemnified party,
unless such settlement includes an unconditional release of such indemnified
party from all liability on all claims that are the subject matter of such
proceeding.
(d) To provide for just and equitable contribution, if
(i) an indemnified party makes a claim for indemnification pursuant to Section
13.4(a) or 13.4(b) (subject to the limitations thereof) but it is found in a
final judicial determination, not subject to further appeal, that such
indemnification may not be enforced in such case, even though this Agreement
expressly provides for indemnification in such case, or (ii) any indemnified or
indemnifying party seeks contribution under the Act, the Exchange Act or
otherwise, then the Company (including for this purpose any contribution made
by or on behalf of any director of the Company, any officer of the Company who
signed any such registration statement, any controlling person of the Company,
and its or their respective counsel), as one entity, and the affected Holders
of the securities included in such registration in the aggregate (including for
this purpose any contribution by or on behalf of an indemnified party), as a
second entity, shall contribute to the losses, liabilities, claims, damages and
expenses whatsoever to which any of them may be subject, on the basis of
relevant equitable considerations such as the relative fault of the Company and
such Holders in connection with the facts which resulted in such losses,
liabilities, claims, damages and expenses. The relative fault, in the case of
an untrue statement, alleged untrue statement, omission or alleged omission,
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<PAGE> 15
shall be determined by, among other things, whether such statement, alleged
statement, omission or alleged omission relates to information supplied by the
Company or by such Holders, and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement, alleged
statement, omission or alleged omission. The Company and the Holders agree
that it would be unjust and inequitable if the respective obligations of the
Company and the Holders for contribution were determined by pro rata or per
capita allocation of the aggregate losses, liabilities, claims, damages and
expenses (even if the Holder and the other indemnified parties were treated as
one entity for such purpose) or by any other method of allocation that does not
reflect the equitable considerations referred to in this Section 13.4(c). In
no case shall any Holder be responsible for a portion of the contribution
obligation imposed on all Holders in excess of its pro rata share based on the
number of shares of Common Stock (or other successor securities) owned (or
which would be owned upon exercise of all Warrants) by it and included in such
registration as compared to the number of shares of Common Stock (or other
successor securities) owned (or which would be owned upon exercise of all
Warrants) by all Holders and included in such registration. 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. For purposes of this Section 13.4(c), each
person, if any, who controls any Holder within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act and each officer, director, partner,
employee, agent and counsel of each such Holder or control person shall have
the same rights to contribution as such Holder or control person and each
person, if any, who controls the Company within the meaning of Section 15 of
the Act or Section 20(a) of the Exchange Act, each officer of the Company who
shall have signed any such registration statement, each director of the Company
and its or their respective counsel shall have the same rights to contribution
as the Company, subject in each case to the provisions of this Section 13.4(c).
Anything in this Section 13.4(c) to the contrary notwithstanding, no party
shall be liable for contribution with respect to the settlement of any claim or
action effected without its written consent. This Section 13.4(c) is intended
to supersede any right to contribution under the Act, the Exchange Act or
otherwise.
14. No Rights as Stockholder; Notices to Holders. Nothing
contained in this Agreement or in any of the Warrant Certificates shall be
construed as conferring upon the Holders or their transferee(s) the right to
vote or to consent to or receive notice as stockholders in respect of any
meeting of stockholders for the election of directors of the Company or any
other matter or any rights whatsoever as stockholders of the Company. If,
however, at any time prior to the expiration of the Warrants and prior to their
exercise, any of the following events shall occur:
(a) the Company shall declare any dividend payable in any
securities upon its shares of Common Stock or make any distribution
(other than a cash dividend) to the holders of its shares of Common
Stock; or
(b) the Company shall offer to the holders of its shares
of Common Stock any additional shares of Common Stock or securities
convertible into or exchangeable for shares of Common Stock or any
right to subscribe to or purchase any thereof; or
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<PAGE> 16
(c) a dissolution, liquidation or winding up of the
Company (other than in connection with a consolidation, merger, sale,
transfer or lease of all or substantially all of its property, assets
and business as an entirety) shall be proposed,
then in any one or more of said events the Company shall (i) give notice in
writing of such event to the Holders, as provided in Section 16 hereof and (ii)
if there are more than 100 Holders, cause notice of such event to be published
once in The Wall Street Journal (national edition), such giving of notice and
publication to be completed at least 10 days prior to the date fixed as a
record date or the date of closing the transfer books for the determination of
the stockholders entitled to such dividend, distribution or subscription
rights, or for the determination of stockholders entitled to vote on such
proposed dissolution, liquidation or winding up. Such notice shall specify
such record date or the date of closing the transfer books, as the case may be.
Failure to publish, mail or receive such notice or any defect therein or in the
publication or mailing thereof shall not affect the validity of any action
taken in connection with such dividend, distribution or subscription rights, or
such proposed dissolution, liquidation or winding up.
15. Attorney's Fees. In the event of any action, suit,
counterclaim, appeal, arbitration, mediation, or other proceeding (an "ACTION")
between any Holder and the Company arising out of or in connection with this
Agreement or the Warrants, in addition to any damages and costs to which the
prevailing party would otherwise be entitled, the losing party in any such
Action shall pay to the prevailing party the attorneys' fees and costs incurred
by the prevailing party in connection with such Action and/or enforcing any
judgment, order, ruling, or award (collectively, a "DECISION") granted therein,
all of which shall be paid whether or not such Action is prosecuted to a
Decision. Any Decision entered in an Action shall contain a specific provision
providing for the recovery of attorneys' fees and costs incurred in enforcing
such Decision. Attorneys' fees shall include, but not be limited to, fees
incurred in the following: (1) post judgment motions and collection actions;
(2) contempt proceedings; (3) garnishment, levy, and debtor and third party
examinations; (4) discovery, and (5) bankruptcy. "Prevailing party" within the
meaning of this section includes, without limitation, a party who agrees to
dismiss an Action on the other party's payment of the sum allegedly due or
performance of the covenants allegedly breached, or who obtains substantially
the relief sought. If there are multiple claims, the prevailing party shall be
determined with respect to each claim separately. The prevailing party shall
be the party who has obtained the greater relief in connection with any
particular claim, although with respect to any claim, it may be determined by
the court or arbitrator before which the Action is brought that there is no
prevailing party.
16. Notices. Any notice pursuant to this Agreement to be given or
made by the registered Holder of any Warrant to or on the Company shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed as follows:
Securacom, Incorporated
50 Tice Boulevard
Woodcliff Lake, New Jersey 07675
Attn: Chief Executive Officer
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<PAGE> 17
Notices or demands authorized by this Agreement to be given or made by the
Company to the registered Holder of any Warrant shall be sufficiently given or
made (except as otherwise provided in this Agreement) if sent by first-class
mail, postage prepaid, addressed to such Holder at the address of such Holder
as shown on the Warrant Register.
17. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California without giving
effect to principles of conflicts of laws.
18. Supplements and Amendments. The Company and the
Representatives owning at least a majority of the outstanding Warrants may from
time to time supplement or amend this Agreement in order to cure any ambiguity
or to correct or supplement any provision contained herein which may be
defective or inconsistent with any other provision herein, or to make any other
provisions in regard to matters or questions arising hereunder which the
Company and the Representatives may deem necessary or desirable and which shall
not be inconsistent with the provisions of the Warrant Certificates and which
shall not adversely affect the interests of the Holders. This Agreement may
also be supplemented or amended from time to time by a writing executed by or
on behalf of the Company and all of the Holders.
19. Successor. All the covenants and provisions of this Agreement
by or for the benefit of the Company or the Holders shall bind and inure to the
benefit of their respective successors and assigns hereunder. Assignments by
the Holders of their rights hereunder shall be made in accordance with Section
4.
20. Merger or Consolidation of the Company. So long as Warrants
remain outstanding, the Company will not merge or consolidate with or into, or
sell, transfer or lease all or substantially all of its property to, any other
corporation unless the successor or purchasing corporation, as the case may be
(if not the Company), shall expressly assume, by supplemental agreement
executed and delivered to the Holders, the due and punctual performance and
observance of each and every covenant and condition of this Agreement to be
performed and observed by the Company.
21. Benefits of this Agreement. Nothing in this Agreement shall
be construed to give to any person or corporation other than the Company and
the Holders, any legal or equitable right, remedy or claim under this
Agreement, but this Agreement shall be for the sole and exclusive benefit of
the Company and the Holders of the Warrants and Warrant Shares.
22. Captions; References. The captions of the sections and
subsections of this Agreement have been inserted for convenience only and shall
have no substantive effect. References herein to Sections, Schedules and
Exhibits are, unless otherwise specified, references to the referenced section,
schedule or exhibit hereof or hereto.
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<PAGE> 18
23. Counterparts. This Agreement may be executed in any number of
counterparts each of which when so executed shall be deemed to be an original;
but such counterparts together shall constitute but one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day, month and year first above written.
SECURACOM, INCORPORATED CRUTTENDEN ROTH INCORPORATED
By: By:
--------------------------------- ---------------------------------
Name: Name:
------------------------------- -------------------------------
Title: Title:
------------------------------ ------------------------------
SCOTT & STRINGFELLOW
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
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Schedule 1 to
Warrant Agreement
Representative Number of Warrants
Cruttenden Roth Incorporated
Scott & Stringfellow, Inc.
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<PAGE> 20
EXHIBIT A
Exhibit A to
Warrant Agreement
[Form of Warrant Certificate]
TRANSFER OF THE SECURITIES REPRESENTED HEREBY IS RESTRICTED AS
DESCRIBED IN THE WARRANT AGREEMENT DESCRIBED HEREIN.
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE CLASS A COMMON
STOCK ISSUABLE UPON EXERCISE OF SUCH WARRANTS MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO (i) A POST-EFFECTIVE AMENDMENT TO THE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, PURSUANT TO WHICH SUCH SECURITIES WERE
ORIGINALLY REGISTERED IN CONNECTION WITH ORIGINAL ISSUANCE OF THE WARRANTS
REPRESENTED HEREBY, OR (ii) A SEPARATE REGISTRATION STATEMENT UNDER SUCH ACT,
OR (iii) AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT.
EXERCISABLE ON OR BEFORE ___________, 2001
No. _______ Warrants
Warrant Certificate
SECURACOM INCORPORATED
This Warrant Certificate certifies that [Cruttenden Roth
Incorporated], or registered assigns (the "HOLDER"), is the registered holder
of __________ Warrants (the "WARRANTS") to purchase Common Stock, $0.01 par
value per share (the "COMMON STOCK"), of Securacom, Incorporated, a Delaware
corporation (the "COMPANY"). Each Warrant entitles the registered Holder
thereof to purchase one share of Common Stock (subject to adjustment as set
forth in the Warrant Agreement (as defined below), at any time from 10:00 a.m.,
California time, on ____________, 1998 (the "INITIATION DATE") until 6:00 p.m.,
California time, on ____________, 2001 (the "EXPIRATION DATE") at a purchase
price of $________ (the "WARRANT PRICE").
Subject to the provisions of the Warrant Agreement, the Holder shall
have the right to exercise the Warrants and purchase the underlying Warrant
Shares, either in their entirety or from time to time, effective as of any date
specified by the Holder from and after the Initiation Date and on or before the
Expiration Date. Exercise shall be effected by surrendering this Warrant
Certificate, with the form of election to purchase set forth hereon properly
completed and executed, together with payment of the Warrant Price or
designation of net issuance at the office of the Company designated for such
purpose. If upon any exercise of Warrants evidenced hereby the number of
Warrants exercised shall be less than the total number of Warrants evidenced
hereby, there shall be issued to the Holder or such Holder's assignee a new
Warrant Certificate
20
<PAGE> 21
evidencing the number of Warrants not exercised. No adjustment shall be made
for any dividends on any Common Stock issuable upon exercise of this Warrant.
Payment of the aggregate Warrant Price for all Warrant Shares for
which Warrants are exercised shall be made, in the discretion of the Holder, by
certified or official bank check or by net issuance, or a combination thereof.
Exercise by net issuance shall be effected without payment by the Holder of any
cash or other consideration by the Company's withholding from the Warrant
Shares that would otherwise be issued upon exercise if the exercise price were
paid in cash, that number of Warrant Shares which, when multiplied by the
Closing Price for the day immediately preceding the date of exercise, equals
the aggregate Warrant Price for the Warrants so exercised.
Notwithstanding the foregoing, if at 6:00 p.m., California time on the
Expiration Date, the Holder has not exercised its Warrants and has not notified
the Company that it waives automatic issuance, then all such unexercised
Warrants shall be automatically converted into a number of shares of Common
Stock of the Company equal to: (A) the number of shares of Common Stock then
issuable upon exercise of all such unexercised Warrants minus (B) a number of
shares of Common Stock equal to the quotient obtained by dividing the aggregate
Warrant Price for all such unexercised Warrants by the Closing Price (as
defined in Section 11.1(c) of the Warrant Agreement) for the Common Stock on
the Expiration Date.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to a Warrant Agreement, dated as
of _________, 1997 (the "WARRANT AGREEMENT"), duly executed and delivered by
the Company, which Warrant Agreement is hereby incorporated by reference in and
made a part of this instrument and is hereby referred to for a description of
the rights, limitation of rights, obligations, duties and immunities thereunder
of the Company and the holders of the Warrants. A copy of the Warrant
Agreement may be obtained by the Holder hereof upon written request to the
Company.
The Warrant Price and number of Warrant Shares issuable upon exercise
of the Warrants are subject to adjustment upon the occurrence of certain events
set forth in the Warrant Agreement. No fractions of a share of Common Stock
will be issued upon the exercise of any Warrants but the Company will pay the
cash value thereof determined as provided in the Warrant Agreement.
The Holder is entitled to certain registration rights with respect to
the Common Stock purchasable upon exercise thereof as set forth in the Warrant
Agreement.
Warrant Certificates may be exchanged, in the manner and subject to
the limitations provided in the Warrant Agreement, but without payment of any
service charge, for another Warrant Certificate or Warrant Certificates of like
tenor evidencing in the aggregate a like number of Warrants.
The Company may deem and treat the registered Holder of this Warrant
Certificate (notwithstanding any notation of ownership or other writing hereon
made by anyone) as the
21
<PAGE> 22
owner in fact hereof and of the Warrants represented hereby for all purposes,
and the Company shall not be affected by any notice to the contrary.
Neither the Warrants nor this Warrant Certificate entitles the Holder
to any rights of a stockholder of the Company.
This Warrant Certificate shall not be valid unless countersigned by
the Company.
IN WITNESS WHEREOF, Securacom, Incorporated has caused this Warrant
Certificate to be signed by its Chief Executive Officer and by its Secretary.
Dated: , 1997 SECURACOM, INCORPORATED
-------------
By:
-------------------------
Chief Executive Officer
Attest:
-------------------------------------
Secretary
22
<PAGE> 23
[Form of Election to Purchase]
(To be Executed upon Exercise of Warrant)
The undersigned hereby irrevocably elects, effective as of
____________, to exercise the right, represented by this Warrant Certificate,
to receive ___________ shares of Common Stock, par value $0.01 per share, of
Securacom, Incorporated and elects to pay the Exercise Price as indicated
below:
[ ] Payment in cash in the amount of $_______ per share, for a
total aggregate Exercise Price payment of $________; check
payable to Securacom, Incorporated in the amount of such
aggregate Exercise Price.
[ ] Payment on a cashless, net issuance basis by foregoing receipt
of that number of shares of Common Stock otherwise issuable
upon this exercise as has an aggregate value, at the Closing
Price, equal to the aggregate Exercise Price.
The undersigned requests that a certificate for such shares be
registered in the name of _____________________________, whose address is
___________________________________________________ and that such shares be
delivered to ____________________________ whose address is
________________________________. If said number of shares is less than all of
the shares of Common Stock purchasable hereunder, the undersigned requests that
a new Warrant certificate representing the remaining balance of such shares be
registered in the name of ________________________________, whose address is
_________________________, and that such Warrant certificate be delivered to
_______________________, whose address is _________________________________.
Signature:
Date:
Signature Guaranteed:
23
<PAGE> 1
EXHIBIT 10.7
[KUWAM CORPORATION LETTERHEAD]
September 10, 1997
Securacom, Incorporated
50 Tice Boulevard
Woodcliff Lake, NJ 07675
Gentlemen:
This is to confirm that Special Situation Investment Holdings, Ltd.
("SSIH") has agreed to redeem the limited partnership interest of Securacom,
Incorporated ("Securacom") in SSIH immediately following completion of the
initial public offering of common stock of Securacom for cash in an amount equal
to the greater of $700,000 or the market value of such interest
SPECIAL SITUATION INVESTMENT
HOLDINGS, LTD.
By: KuwAm Corporation
General Partner
By: /s/ WIRT D. WALKER, III
--------------------------
Wirt D. Walker, III
Managing Director
<PAGE> 1
Exhibit 23.1
We have issued our report dated March 12, 1997 accompanying the financial
statements and schedule of Securacom, Incorporated contained in the
Registration Statement on Form S-1 (File No. 333-26439) and Prospectus. We
consent to the use of the aforementioned report in the Registration Statement
and Prospectus, and to the use of our name as it appears under the caption
"Experts."
GRANT THORNTON LLP
Parisppany, New Jersey
September 11, 1997
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation of our report dated June 3, 1996 on the
financial statements of Securacom, Incorporated as of December 31, 1995 and
for each of the two years then ended which is included in this Registration
Statement No. 333-26439 on Form S-1 Amendment Number 4 of Securacom,
Incorporated, and to the reference of our Firm under the caption "Experts" in
the Form S-1 Amendment Number 4 which is expected to be filed on or about
September 11, 1997.
AMPER, POLITZINER & MATTIA
September 11, 1997
Edison, New Jersey
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
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