<PAGE>
REGISTRATION STATEMENT AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ON JULY 31, 1998
FILE NO. 333-52687
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
UNITED STATES FINANCIAL GROUP, INCORPORATED
(Exact name of registrant as specified in charter)
110 WALL STREET, NEW YORK, NY 10005
(Address of Principal executive offices and
principal place of business)
TELEPHONE: (212) 785-4545
Copies To:
RONALD J. BRESCIA, ESQ.
DOROS & BRESCIA, P.C.
1140 AVENUE OF THE AMERICAS
NEW YORK, NY 10036
(Name and Address of Agent for Service)
DELAWARE 6749 13-3922249
State of Standard Industrial IRS Employer ID
Incorporation Classification Code No. Number
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this registration statement.
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CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares .................. 3,275,000 $15 $49,125,000 $14,537
Common Shares underlying
Underwriter's Warrant ......... 300,000 $15 $ 4,500,000 $ 1,328
-------
Total ........................ $15,865
=======
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</TABLE>
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THE REGISTRATION FEE FOR COMMON SHARES IS DETERMINED PURSUANT TO RULE
457(G) AND PURSUANT TO RULE 457(I) FOR THE UNDERWRITER'S WARRANT. 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>
CROSS REFERENCE SHEET
[S-K ITEM 501(B)]
<TABLE>
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ITEM NUMBER AND CAPTION CAPTION OR LOCATION IN PROSPECTUS
----------------------- ---------------------------------
<S> <C> <C>
1. Forepart of Registration Statement and Outside Cover Page
Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover of Inside Front Cover and Outside Back Cover
Prospectus of Prospectus
3. Summary Information; Risk Factors Prospectus Summary; Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Cover Page; Risk Factors; Underwriting
6. Dilution Dilution
7. Selling Security Holders Not Applicable
8. Plan of Distribution Cover Page; Cover Page Notes
9. Legal Proceedings Legal Proceedings
10. Directors, Executive Officers, Promoters Management
and Control Persons
11. Security Ownership of Beneficial Owners and Principal and Selling Shareholders
Management
12. Description of Securities to be Registered Cover Page; Description of Securities
13. Interest of Named Experts and Counsel Experts
14. Disclosure of Commission's Position Underwriting
on Indemnification for Securities
Act Liabilities
15. Information with Respect to the Registrant Prospectus Summary; Risk Factors; Dilution;
Management; Description of Securities;
Business; Executive Compensation
and Financial Statements
16. Management's Discussion and Analysis or Plan Management's Discussion and Analysis of
of Operation Financial Condition
and Results of Operations
17. Description of Property Property
18. Certain Relationships and Related Transactions Certain Transactions
19. Market for Common Equity and Related Outside Front Cover
Stockholder Matters
20. Executive Compensation Management--Executive Compensation
21. Financial Statements Consolidated Financial Statements
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BY 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 JULY , 1998
UNITED STATES FINANCIAL GROUP, INCORPORATED
110 WALL STREET
NEW YORK, NY 10005
TELEPHONE: (212) 785-4545
3,000,000 SHARES
OFFERING PRICE $15.00 PER SHARE
United States Financial Group, Incorporated ("USFG" or the "Company") is
offering 3,000,000 shares of its common stock (the "Common Stock" or "Shares"),
par value $.0001 per share, at a price of $15.00 per Share (the "Maximum
Offering"). A minimum of 666,667 Shares at a price per Share of $15 must be
sold in this offering before the offering may close (the "Minimum Offering").
This Prospectus also relates to the offering of 275,000 shares of Common Stock
by a selling stockholder (the "Selling Stockholder"). Until the Minimum
Offering is sold, investor funds will be placed in an escrow account. Upon
selling the Minimum Offering, the funds will be released from escrow to the
Company. The Offering is being made pursuant to Rule 415 and will close at such
time as the Maximun Offering is sold or earlier if determined by the Company
after the Minimum Offering is sold. If the Minimum Offering has not been sold
within six months from the date of this Prospectus, the offering will not close
and all investor funds will be returned. The Company has applied to have the
Common Stock listed on the NASDAQ National Market under the symbol . None of
the Selling Stockholder's shares will be sold until the Minimum Offering is
completed. Thereafter, sales of shares will be prorated between the Selling
Stockholder and the Company.
Based upon the number of shares of Common Stock that will be outstanding
upon completion of the Offering, officers and directors of the Company and
persons who may be deemed to be affiliates, as a group, will own beneficially
approximately 64 percent (79 percent if the Minimum Offering is sold) of the
Company's outstanding Common Stock. As a result, officers and directors of the
Company and their affiliates may be able to elect all members of the Board of
Directors and may retain the voting power to approve all matters requiring
approval by the shareholders of the Company, including a possible merger or
similar transaction which, if effected, would result in a premium to
shareholders.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND SHOULD NOT BE PURCHASED
BY ANYONE WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT (SEE
"INTRODUCTORY STATEMENTS AND RISK FACTORS").
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<CAPTION>
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UNDERWRITING
PRICE TO DISCOUNTS AND THE PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
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<S> <C> <C> <C>
Per Share ................. $ 15.00 $ 1.88 $ 13.12
Total (3):
Minimum Offering ......... $10,000,000 $1,250,000 $ 8,750,000
Maximum Offering ......... $45,000,000 $5,625,000 $39,375,000
- ------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) See "Underwriting" for indemnification arrangements with the Underwriter.
(2) These amounts represent the proceeds to the Company after underwriting
commissions and nonaccountable expenses but before deduction of
additional offering expenses of approximately $500,000 ($425,000 if the
Minimum Offering is sold) for legal and accounting fees, printing costs,
filing fees and miscellaneous expenses.
(3) Excludes shares being registered on behalf of the Selling Stockholder.
UNDERWRITER
KLEIN, MAUS & SHIRE, INC.
110 WALL STREET
NEW YORK, NY 10005
(212) 785-4545
The date of this Prospectus is , 1998.
<PAGE>
The Shares are offered by the Underwriter on a "best efforts all or none"
basis with respect to the Minimum Offering, and on a "best efforts" basis with
respect to the remainder subject to prior sale, acceptance of an offer to
purchase, and to withdrawal or cancellation of the Offering without notice.
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THE COMPANY, UPON COMPLETION OF THIS OFFERING, AND AT LEAST FOR THE
CURRENT FISCAL YEAR IN WHICH THE REGISTRATION STATEMENT BECOMES EFFECTIVE, WILL
BE REQUIRED TO FILE WITH THE SECURITIES AND EXCHANGE COMMISSION QUARTERLY
REPORTS ON FORM 10-Q PROVIDING SPECIFIED COMPARATIVE FINANCIAL DATA FOR EACH OF
THE FIRST THREE FISCAL QUARTERS OF EACH FISCAL YEAR: AN ANNUAL REPORT ON FORM
10-K CONTAINING A NARRATIVE DESCRIPTION OF THE COMPANY AS WELL AS AUDITED
FINANCIAL STATEMENTS AND INFORMATION REGARDING MANAGEMENT, CERTAIN
TRANSACTIONS, AND PRINCIPAL SHAREHOLDERS: AND PERIODIC REPORTS OF CERTAIN
SPECIFIED OR OTHER MATERIAL EVENTS AS THEY OCCUR. ALTHOUGH NOT SUBJECT TO THE
PROXY SOLICITATION RULES OF THE SECURITIES AND EXCHANGE COMMISSION, THE COMPANY
PROPOSES TO PROVIDE TO SHAREHOLDERS WITHIN A REASONABLE TIME FOLLOWING THE END
OF EACH FISCAL YEAR AN ANNUAL REPORT CONTAINING A GENERAL DESCRIPTION OF ITS
BUSINESS OPERATIONS AND FINANCIAL STATEMENTS WHICH HAVE BEEN EXAMINED AND
REPORTED ON, WITH AN OPINION EXPRESSED BY AN INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANT. HOWEVER, SUCH ANNUAL REPORT WITH FINANCIAL STATEMENTS WILL NOT
NECESSARILY DISCLOSE THE SAME INFORMATION REQUIRED TO BE DISCLOSED UNDER THE
PROXY SOLICITATION RULES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OR SOLICITATION WITH
RESPECT TO THESE SECURITIES BY THE COMPANY TO ANY PERSON WHO MAY BE CONSIDERED
TO BE AN UNDERWRITER: OR TO ANY PERSON IN ANY STATE IN WHICH SAID OFFERING OR
SOLICITATION IS NOT AUTHORIZED BY THE LAWS THEREOF OR IN WHICH THE PERSON
MAKING SAID OFFERING OR SOLICITATION IS NOT QUALIFIED TO ACT AS DEALER OR
BROKER OR OTHERWISE TO MAKE SUCH OFFERING OR SOLICITATION.
THE SECURITIES BEING SOLD PURSUANT TO THIS PROSPECTUS ARE HIGHLY
SPECULATIVE IN NATURE AND NO GUARANTEES OR OTHER WARRANTIES TO THE CONTRARY ARE
MADE BY THE ISSUER.
THE ISSUER MAY UNDERTAKE TO MAKE POST-EFFECTIVE AMENDMENT TO THE
REGISTRATION STATEMENT TO WHICH THIS PROSPECTUS RELATES AND TO REFLECT THEREIN
ANY FACTS OR EVENTS ARISING AFTER THE DATE HEREOF WHICH REPRESENT A FUNDAMENTAL
OR MATERIAL CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN SAID REGISTRATION
STATEMENT. ANY SUCH AMENDMENTS, WHICH RELATE TO THIS PROSPECTUS, WILL BE
DISSEMINATED TO STOCKHOLDERS AND WARRANT HOLDERS OF THE COMPANY AFTER THE
REQUIRED FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION HAVE BEEN MADE.
2
<PAGE>
PROSPECTUS SUMMARY
The following information is qualified in its entirety by the information
appearing elsewhere in this Prospectus.
THE COMPANY
United States Financial Group, Incorporated ("USFG" or the "Company") is a
diversified holding company, incorporated under the laws of the State of
Delaware. USFG's main business purpose is to acquire undervalued or reasonably
priced companies in industries well suited for roll up consolidation
transactions. These roll up or consolidation candidates operate in industry or
market niches that are well established, are served in a fragmented way and do
not compete directly with large competitors. Furthermore, these target
companies must have experienced management teams and do not require significant
expenditures for research and development. USFG has begun to implement this
strategy through the acquisition and/or establishment of four companies and has
assembled a management team that is experienced in mergers and acquisitions.
The Company has four subsidiaries, two of which are currently active.
Klein, Maus & Shire, Inc. ("KMS"), an investment banking firm and a
broker-dealer of securities duly registered with the Securities and Exchange
Commission (the "SEC" or "Commission") and is a member firm of the National
Association of Securities Dealers, Inc. (the "NASD"), Municipal Securities
Rulemaking Board (known as the "MSRB"), and Securities Insurance Protection
Corporation ("SIPC"). Sureal International, Inc. ("Sureal"), a sales and direct
marketing company that sells health and other consumer products in Russia and
other republics of the former Soviet Union through a network of independent
distributors was acquired in December 1997 in a pooling of interest
transaction.
The two inactive subsidiaries were formed for specific purposes. KMS Asset
Management Group, Incorporated will be an asset management and international
financial consultant and advisory company and will take advantage of USFG's
international contacts. US Military Resale Group, Incorporated ("Military
Resale Group") was established to acquire military commissaries and other
suppliers of consumer products to the Army and Air Force Exchange System.
KMS is an investment bank providing full service investment banking,
trading, research and advisory services to over 3,000 high net worth
individuals and institutions around the world. The key to KMS' current and
future success is its principal client base of high net worth international
investors and institutions. KMS' access to this client base through its senior
management puts it in a strong position to expand its investment banking
activities without reliance on cold calling, high pressure marketing
activities. KMS' growth plans are based on a corporate policy emphasizing
generating revenues at a non-retail level, and maintaining a small sales force
comprised of experienced financial consultants with impeccable records. KMS is
located at 110 Wall Street in New York where it occupies two floors totaling
14,000 square feet.
KMS Asset Management Group, Incorporated was formed to serve as an advisor
to institutions, individuals and governments. Its strategy will be to expand
its money management business by increasing assets under management and by
increasing its international consultancy business by becoming advisors to
institutions and governments of developing countries. It currently acts as an
advisor to several international corporations and individuals, as well as to
quasi-public entities in Grenada, South Korea and Pakistan. It will be acting
as an advisor to Grenadine government on its tourism and infrastructure
development project and to the Board of Investments in Pakistan which is
establishing the first "Technology Science Park" in Pakistan.
Military Resale Group was established for the purpose of effecting mergers
and acquisitions of military commissaries and other suppliers of consumer
products to the Army and Air Force Exchange System. USFG perceives this
marketplace as well suited for rollup transactions. Military Resale Group's
mission will be to provide the Military Resale Market with the widest variety
of products at below market prices. Military Resale Group will introduce new
consumer products to the military resale market and
3
<PAGE>
acquire companies serving the military resale market worldwide to expand
revenues. Military Resale Group has targeted several distributors of consumer
products to the military resale market for acquisition, although no formal
discussions will take place until after the completion of this Offering.
Sureal is a direct marketing company (that sells products directly to its
independent distributors) that was acquired by USFG in a pooling of interests
transaction completed in December 1997. Management believes that Sureal will
grow through acquisitions in addition to expanding its present revenues. Sureal
is a direct marketing company involved in the distribution and sale of high
quality nutritional and other products in Russia and other republics of the
former Soviet Union. It commenced its operations in July 1995 using a network
of 333 independent distributors in Russia. The number of distributors in the
network increased to in excess of 100,000 at May 31, 1997, respectively.
Monthly commissionable sales to these distributors rose from $20,000 in July
1995 to $5,009,000 in February 1997. Sureal is headquartered in Orem, Utah.
----------------
THE OFFERING
Securities offered by the
Company (1)................ 3,000,000 shares of common stock, par value
$.0001 (666,667 if the Minimum Offering is sold)
Common Stock outstanding
prior to the Offering (1).. 11,517,636 shares.
Common Stock to be
outstanding after the
Offering (1):..............
Maximum Offering............ 14,517,636 shares
Minimum Offering............ 12,184,303 shares
Trading symbol for Common
Shares.....................
Use of proceeds............. The net proceeds of this Offering will be used
to develop and expand Sureal's operations, open
an office for KMS in Bahrain, commence the
operations of the KMS Asset Management Group,
make acquisitions, expand KMS' proprietary
trading operations and acquire a seat for KMS on
the New York Stock Exchange
- --------------
(1) Assumes the conversion of 813,000 shares of Preferred Stock (including
the portion that was issued by KMS) into 813,000 shares of Common Stock
and includes the issuance of 750,000 shares of Common Stock to effect the
Sureal Merger and the 2 for 1 reverse stock split effected December 8,
1997.
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following summary financial data is qualified in its entirety by, and
should be read in conjunction with, the Company's Consolidated Financial
Statements and the Notes thereto included elsewhere in this Prospectus and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition." The summary financial data presented below as of December 31, 1997
and 1996 and for each of the three fiscal periods in the period ended December
31, 1997 are derived from the audited Consolidated Financial Statements of the
Company, which Consolidated Financial Statements have been reported upon by
independent certified public accountants, and are included elsewhere in this
Prospectus. The consolidated financial data for April 30, 1998 and 1997 and the
four month periods then ended has been extracted from the Company's unaudited
consolidated financial statements. Such amounts include all adjustments
considered necessary by management for a fair presentation. Results for interim
periods are not necessarily indicative of amounts to be realized for a full
year. All amounts give retroactive effect to the (i) acquisition of Sureal in
December 1997 in a transaction accounted for as a pooling of interests and (ii)
the two for one reverse stock split effected December 8, 1997.
<TABLE>
<CAPTION>
AUGUST 10, 1995 FOR THE YEAR ENDED FOUR MONTHS
(INCEPTION) DECEMBER 31, ENDED APRIL 30,
TO ------------------------------- ---------------------------------
DECEMBER 31, 1995 1996 1997 1997 1998
------------------ -------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Commissionable sales .............. $ 995,670 $21,594,562 $31,720,456 $16,909,372 $ 340,082
Other brokerage commissions,
trading income and other ......... $ 37,500 $ 314,250 $2,935,059 $1,363,553 $ 877,152
Net Income (loss) ................. $ (80,992) $ (863,564) $ (914,098) $ 460,856 $ (402,609)
Basic Income (Loss) per share ..... $ (.01) $ (.08) $ (.09) $ .04 $ (.04)
Weighted average number of
shares outstanding ............... 10,694,634 10,694,634 10,694,634 10,694,634 10,704,636
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF 4/30/98 AS OF 4/30/98
4/30/98 AS ADJUSTED(1) AS ADJUSTED(1)
ACTUAL MAXIMUM MINIMUM
------------- ---------------- ---------------
<S> <C> <C> <C>
Balance Sheet Data:
Total assets ................. $2,273,969 $39,060,469 $9,510,469
Liabilities .................. 1,834,269 854,731 854,731
Stockholders' equity ......... 438,960 38,313,960 8,763,960
</TABLE>
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(1) Adjusted to give effect to the sale of Securities offered by the Company
hereby and the application of the estimated net proceeds therefrom,
including the repayment of $488,500 in loans due by Sureal ($210,000 of
which are due to related parties).
5
<PAGE>
RISK FACTORS
Any person contemplating an investment in the securities offered herein
should be aware of the risk factors of the Offering and should consider those
factors set forth below. An investment in the Shares involves significant
risks.
RISKS RELATED TO THE COMPANY
Limited Operating History and Losses, Operations as a Holding Company
The Company and each of its subsidiaries have operating histories of less
than three years and has incurred operating losses. In addition, each
subsidiary intends to change and expand its operations upon the completion of
the Offering. As such, past history and performance are not necessarily an
indication of future performance.
The Company operates as a holding company and, accordingly, is dependent
on the operations of its subsidiaries to generate profits and cash flow.
Management has broad discretion with respect to allocating Company resources to
individual subsidiaries. In addition, KMS, one of the Company's subsidiaries,
is subject to rules governing its net capital requirements. Such requirements
could limit the Company's ability to receive dividends from KMS.
Broad Discretion in Application of Proceeds
Management of the Company has broad discretion to adjust the application
and allocation of the net proceeds of the Offering in order to address changed
circumstances and opportunities. See "Use of Proceeds."
Substantial Control by Officers and Directors
Based upon the number of shares of Common Stock that will be outstanding
upon completion of the Offering, officers and directors of the Company and
persons who may be deemed to be affiliates, as a group, beneficially own
approximately 64 percent (79 percent if the Minimum Offering is sold) of the
Company's outstanding Common Stock. As a result, officers and directors of the
Company and their affiliates may be able to elect all members of the Board of
Directors and may retain the voting power to approve all matters requiring
approval by the shareholders of the Company, including a possible merger or
similar transaction which, if effected, would result in a premium to
shareholders.
Indemnification and Limits on Director Liability
The Company has provisions in its charter, by-laws, or other contracts
providing for the maximum indemnification of its officers and directors
permitted by law and allows the Company, among other things, to pay for the
expenses of an officer or director in connection with legal proceedings brought
about because of the person's position with the Company. This could have the
effect of making it more difficult for the shareholders to recover damages
against the officers and/or directors of the Company for alleged breaches of
fiduciary duties and other matters.
Competition
The Company, through its subsidiaries, will compete with numerous
companies worldwide. There are many large and financially stable competing
companies in the United States and the world with substantially greater
resources than has the Company. See "Competition."
Best Efforts, No Commitment by Underwriter to Purchase Shares
Under the terms of the Offering, the Shares are being sold on a "best
efforts--all or none" basis with respect to the Minimum Offering of
$10,000,000. The Underwriter has made no commitment to purchase any shares.
Unless the Minimum Offering is sold, no Shares will be issued, and the Offering
will be withdrawn.
6
<PAGE>
Arbitrary Nature of Offering Price
The offering price of the Shares being offered hereby was arbitrarily
determined by the Underwriter. In determining the offering price, the Company
and the Underwriter considered such factors as the financial resources of the
Company, the nature of the Company's assets, estimates of the business
potential of the Company, the amount of equity or control desired to be
retained by the Company's existing stockholders, the amount of dilution to
public investors and the general conditions of the securities markets. The
offering price has no relationship to the book value of the Company or any
other accepted criteria of value.
No Public Market for Common Stock
At present, no market exists for the Company's securities, and there is no
assurance that a regular trading market will develop at the conclusion of this
Offering or, if developed, that it will be sustained. A purchaser of the Shares
may, therefore, be unable to sell the Shares should such purchaser desire to do
so. Furthermore, it is unlikely that a lending institution will accept the
Company's Common Stock as pledged collateral for loans unless a regular trading
market develops.
Dependence Upon Key Personnel
The Company is substantially dependent upon the efforts and abilities of
Mohammad Ali Khan, its President, and Asim S. Kohli, its Executive Vice
President, as well as the senior management teams of each subsidiary. The loss
of the services of any of these officers or key employees would potentially and
materially adversely affect the operations and financial condition of the
Company. At present, the Company has no keyman life insurance on the life of
any key officer or employee. See "Management."
Immediate Significant Dilution and Benefits Realized by Original Stockholders
Each purchaser of Common Stock in this Offering will suffer immediate and
substantial dilution in the book value per share of Common Stock as compared to
the purchase price thereof. If the Company's future operations are
unsuccessful, the persons who purchase the Shares offered hereby will sustain
the principal losses of cash investment. See "Dilution." The public
shareholders purchasing shares of Common Stock in connection with this Offering
will be bearing the risk for the Company. If it is successful, the original
shareholders will benefit by the investment made by the public shareholders. If
the Company is not successful, the public shareholders' investment is
principally at risk.
Possible Rule 144 Sales
A total of 11,517,636 shares (including 813,000 shares issuable upon the
assumed conversion of 813,000 shares of preferred stock) have been issued by
the Company prior to this Offering and are held by persons who are officers,
directors, founders and others. These securities may be sold in compliance with
Rule 144 adopted under the Securities Act of 1933, as amended, which provides,
in essence, that officers, directors and others holding restricted securities
(such as those described above) may each sell in brokerage transactions an
amount equal to one percent of the Company's outstanding common stock every
three months. Rule 144 provides that restricted shares must not be sold until
they have been held for a period of one year from the date they were fully paid
for and no sooner than one year from the date of incorporation. Hence, the
possible sale of these restricted shares under Rule 144 may, in the future,
have a depressive effect on the price of the Company's common stock in the
over-the-counter market, if there is a market. Furthermore, persons holding
restricted securities for one year who are or become non-affiliates of the
Company may sell their securities pursuant to Rule 144 without limitation on
the number of shares sold. Shares of the Company's stock first become eligible
for Rule 144 Sales in one year from incorporation date.
The officers and directors of the Company and its subsidiaries have agreed
to hold their restricted shares of Common Stock for periods ranging from one to
two years after the effective date.
Board Can Issue Significant Number of Additional Shares
There are enough shares of the Company's common stock authorized that the
Board of Directors will have authority to issue a number of shares in excess of
those that will be outstanding if all shares offered
7
<PAGE>
hereby are sold. The issuance of any such shares to persons other than the
public would reduce the amount of control held by the public following the
Offering. There are presently no commitments, contracts or intentions other
than described herein to issue any additional stock to any other persons, but
such contracts or commitments may occur in the future.
No Dividends
The Company has paid no dividends to date and does not intend to pay cash
dividends in the foreseeable future. Management presently intends to retain any
earnings to help finance the development of the Company's business. Future
dividend policy will depend upon earnings (if any), expansion, capital
requirements and other factors.
RISK FACTORS RELATED TO KMS
Volatile Nature of KMS' Business and Associated Market Risks
KMS' securities business by its nature is subject to various risks,
particularly in volatile markets. These include the occurrence of losses from
trading and underwriting of securities, customer inability to meet commitments
(such as margin obligations), customer default and employee misconduct and
errors.
KMS' revenues, like those of other firms in the securities industry, will
be directly related to fluctuations in trading volume and price levels of
securities. Such fluctuations are directly affected by regional, national and
international economic, regulatory and political conditions, broad trends in
business and finance and interest rates. Low trading volume and lack of
increasing securities prices generally result in reduced commissions and
investment banking revenues for firms such as KMS. In the past, heavy trading
volume has caused clearing and processing problems for the securities industry
and may do so in the future. In periods of reduced volume or decreasing
securities prices, profitability for firms such as KMS may be adversely
affected since many costs other than commission compensation are relatively
fixed.
Participation in underwriting of securities will subject KMS to a risk of
loss if it is unable to resell the securities underwritten. In addition, in
connection with underwriting activities, KMS will be subject to risk of
liability and expense resulting from possible claims against the underwriter
under Federal and state securities laws. There can be no assurance that KMS
will not experience significant losses as a result of such activities.
The Company could incur significant market risks if it were to enter into
or invest in contracts or financial instruments that are linked to or fluctuate
with interest rates or other market indices or factors. To date, it has not
entered into such agreements or contracts. In addition, the Company has reduced
its market risk by selling substantially all trading securities before the end
of each market day. No assurances can be given that the Company will continue
to avoid market risks associated with the securities industry.
Industry Is Highly Competitive
All aspects of KMS' business are highly competitive. KMS competes or will
compete directly with numerous other securities brokers and dealers, investment
banking firms, life insurance sales agencies, investment advisors, leveraged
buyout firms, venture funds and, indirectly for investment funds, with
commercial banks. Many of KMS' competitors have substantially greater capital
and other resources than does KMS. Some commercial banks and thrift
institutions also offer securities brokerage services and many commercial banks
offer a variety of investment banking services. Competition among financial
services firms also exists for investment representatives and other personnel.
The securities industry has become considerably more concentrated and more
competitive in recent years as numerous securities firms have either ceased
operation or have been acquired by or merged into other firms. In addition,
companies not engaged primarily in the securities business, but having
substantial financial resources, have acquired leading securities firms. These
developments have increased competition from firms with greater capital
resources than those of KMS. Furthermore, numerous commercial
8
<PAGE>
banks have petitioned the Board of Governors of the Federal Reserve System for
permission to enter into various new business activities from which they are
currently barred, such as underwriting certain mortgage-backed and municipal
revenue securities and securities backed by consumer loans. Various legislative
proposals, if enacted, would also permit commercial banks to engage in such
activities. Ultimately, these developments or other developments of a similar
nature may lead to the creation of integrated financial service firms that
offer a broader range of financial services.
The securities industry has experienced substantial commission discounting
by broker/dealers competing for institutional and individual brokerage
business, including many offering deeply discounted rates on the Internet. In
addition, an increasing number of specialized firms now offer "discount"
services to individual customers. These firms generally effect transactions for
their customers on an "execution only" basis without offering other services
such as portfolio valuation, investment recommendations and research. The
continuation of such discounting and an increase in the number of new and
existing firms offering such discounts could adversely affect KMS' retail
business.
Risks of Principal Transactions
KMS' securities trading, market making and underwriting activities will
involve the purchase and sale of securities as a principal. These transactions
involve the risks of a change in the market price of such securities and of
decreases in the liquidity of markets, which can limit KMS' ability to sell
securities purchased or to purchase securities sold in such transactions.
Trading securities as a principal and underwriting corporate securities will
represent an important part of KMS' business and subject KMS' capital to
significant risk.
Industry Is Subject to Significant Regulation
KMS' business is, and the securities industry generally is, subject to
extensive regulation at both the Federal and state level by various regulatory
agencies which are charged with protecting the interests of customers.
Self-regulatory organizations such as the National Association of Securities
Dealers, Inc. (the "NASD") and state securities commissions require strict
compliance with their respective rules and regulations. Failure to comply with
any of these laws, rules and regulations could result in fines, suspension or
industry expulsion or criminal prosecution, which could have a material adverse
effect upon KMS.
Certain regulatory bodies perform audits or other procedures to ensure
compliance with their rules and regulations. The NASD completed an audit of KMS
in February 1998, at which time it issued a letter setting forth certain
alleged exceptions and areas of noncompliance noted during the performance of
its audit procedures, including alleged inconsistencies in the time stamping of
certain trading tickets and the making of markets for a greater number of
companies than permitted under its NASD restriction letter. Management of KMS,
based on its review of the letter, discussions with counsel and with the NASD
auditors, does not believe that the ultimate resolution of the matters set
forth in the letter from the NASD will have a material adverse effect on KMS'
results of operations or financial condition, although no assurances thereof
can be given.
Effect of Net Capital Requirements
The SEC's Net Capital Rule imposes minimum financial requirements for all
registered broker-dealers doing business with the public. KMS is subject to the
requirements of this rule. The Net Capital Rule places limits on certain of
KMS' operations, such as underwriting activities and market making and other
principal trading activities. A decrease below minimum net capital in the form
of a significant operating loss or any unusually large charge against KMS' net
capital could adversely affect the ability of KMS to expand or even maintain
its present levels of business.
Dependence Upon Key Personnel
KMS is dependent, in particular, upon the services of its President,
Mohammed Ali Khan, Asim S. Kohli and other key management members. See
"Management." If Mr. Khan or any of these management members are unable to
perform their duties for whatever reason, KMS' business could be adversely
affected.
9
<PAGE>
Personnel Retention and Recruitment
A substantial portion of KMS' revenue will be generated through the
activities of its securities traders and registered representatives. The
inability to recruit and retain traders or such representatives or the
inhibition of such customer contact by regulation or otherwise could have a
material adverse impact on KMS' business and financial condition. Similarly,
implementation of KMS' overall strategy will require it to identify, recruit
and retain professionals in the areas of corporate finance, research and
similar areas. No assurance can be given that KMS will be successful in these
undertakings.
Use of Proceeds for Venture Capital Investments
KMS may use a portion of the proceeds from the Offering to invest in late
stage venture capital opportunities and/or private placements. Such investment
decisions will be in the sole discretion of Management and the Board of
Directors. Prospective shareholders of the Company will have no control over
decisions to invest in any such capital venture opportunities, and no assurance
can be given as to the likelihood of success.
RISK FACTORS OF SUREAL
Reliance Upon Independent Distributors of Sureal
Sureal distributes its products exclusively through independent
distributors who have entered into agreements with Sureal. Sureal depends
exclusively on the efforts and success of its distributors in generating
revenue and growth for the Sureal. The agreement with the distributors allows
the distributor to terminate the relationship at any time. Sureal will
experience turnover in its distributors from year to year. This dependence
requires the continued sponsoring and training of new distributors to maintain
or increase the total number of distributors of Sureal. Sureal will experience
seasonal decreases in distributor sponsoring and product sales in countries
where it operates because of holidays and vacations recognized in those
countries as well as other factors. Additionally, Sureal will experience
fluctuations in the level of distributor sponsorship. Sureal, like other direct
marketing companies, has little or no control over the level of sponsorship of
new distributors. Sureal cannot predict the timing of these fluctuations or the
degree of the fluctuations. There can be no assurance that Sureal will attract
and retain a sufficient distributors to permit profitable operations because of
the number of direct sales opportunities that exist for potential dealers.
Potential Negative Impact of Distributor Actions
Sureal and its products can be negatively impacted by actions of
distributors. The publicity resulting from distributor activities such as
inappropriate earnings claims and product representations by distributors can
make the sponsoring and retaining of distributors more difficult, thereby
negatively impacting sales. There can be no assurance that distributor actions
will not have a material adverse effect on Sureal's business or results or
operations.
Government Regulation of Direct Selling Activities
Direct selling activities are regulated by various governmental agencies.
These laws and regulations are generally intended to prevent fraudulent or
deceptive schemes, often referred to as "pyramid" or "chain sales" schemes,
that promise quick rewards for little or no effort, require high entry costs,
use high pressure recruiting methods and/or do not involve legitimate products.
Sureal may receive inquiries from various government regulatory
authorities regarding the nature of its business and other issues such as
compliance with local business opportunity and securities laws. Such inquiries
may result in adverse publicity for Sureal.
Government Regulation of Products and Marketing
Sureal is subject to or affected by extensive governmental regulations not
specifically addressed to network or direct marketing. Such regulations govern,
among other things, (i) product formulation,
10
<PAGE>
labeling, packaging and importation, (ii) product claims and advertising,
whether made by Sureal or distributors, (iii) fair trade and distributor
practices, and (iv) taxes, transfer pricing and similar regulations that affect
foreign taxable income and customs duties.
Sureal cannot determine the effect, if any, that future governmental
regulations or administrative orders may have on the Company's business and
results of operations. Moreover, governmental regulations in countries where
Sureal plans to commence or expand operations may prevent, delay or limit
market entry of certain products or require the reformulation of such products.
Regulatory action, whether or not it results in a final determination adverse
to Sureal, has the potential to create negative publicity, with detrimental
effects on the motivation and recruitment of distributors and, consequently, on
Sureal's sales and earnings.
Reliance on Certain Distributors; Potential Divergence of Interests between
Distributors and Sureal
The Company's Global Compensation Plan allows distributors to sponsor new
distributors. The sponsoring of new distributors creates multiple distributor
levels in the network marketing structure. Sponsored distributors are referred
to as "down line" distributors within the sponsoring distributor's "down line
network". If down line distributors also sponsor new distributors, additional
levels of down line distributors are created, with the new down line
distributors also becoming part of the original sponsor's "down line network".
This structure may result in certain distributors developing large down line
organizations. The loss of such distributors and their down lines could
adversely affect sales and impair its ability to attract new distributors.
Entering New Markets
Sureal intends to sell its products in additional countries such as the
United States, Mexico, Canada and Japan, each of which represents a new market.
Each of the proposed new markets will present additional unique difficulties
and challenges. Modifications to product lines may be needed to accommodate the
market conditions in each country, while maintaining the integrity of Sureal's
products. No assurance can be given that Sureal will be able to reformulate its
product lines successfully in any of its new markets or make other adjustments
brought about by local customs or tastes to attract local consumers.
Change in Nature of Business and Current Reliance on and Concentration of
Outside Manufacturers
Until September 1997, Sureal's independent distributors were supplied with
branded products, which brands were not owned or controlled by Sureal. Until
such time, the revenue generated by the sales of those products was distributed
in an agreed upon manner among the supplier, shipper and Sureal pursuant to the
terms of a verbal agreement. In September 1997, Sureal decided to develop and
distribute its own branded products. Although the product line is similar to
that of the past, this change represents a significant change in the way in
which Sureal conducts its business and requires Sureal to increase its need for
working capital to acquire and hold inventory. Virtually all of Sureal's
branded products are sourced through and are produced by U.S. manufacturers
unaffiliated with Sureal. Sureal currently has little or no direct contact with
these manufacturers. Sureal's profit margins and its ability to deliver its
existing products on a timely basis are dependent upon the ability of outside
manufacturers to continue to supply products in a timely and cost-efficient
manner. Furthermore, Sureal's ability to enter new markets and sustain
satisfactory levels of sales in each market is dependent in part upon the
ability of suitable outside manufacturers to reformulate existing products, if
necessary, to comply with local regulations or market environments, for
introduction into such markets. Finally, the development of additional new
products in the future will likewise be dependent in part on the services of
suitable outside manufactures.
Sureal currently acquires products or ingredients from sole suppliers or
suppliers that are considered by Sureal to be the superior suppliers of such
ingredients. Sureal's management believes that, in the event that it is unable
to source any products or ingredients from its current suppliers, Sureal could
produce such products or replace such products or substitute ingredients
without a significant disruption to its operations or prohibitive increases in
the cost of goods sold. However, there can be no assurance that the
11
<PAGE>
loss of such a supplier would not have a material adverse effect on Sureal's
business and results of operations. Similarly, no assurances can be given that
Sureal's branded products will gain market acceptance.
Competition
The markets for personal care and nutritional products are large and
intensely competitive. Sureal competes directly with companies that manufacture
and market personal care and nutritional products in each of Sureal's product
lines. Sureal competes with other companies in the personal care and
nutritional products industry by emphasizing the value and premium quality of
the Company's products and the convenience of the company's distribution
system. Many of Sureal's competitors have much greater name recognition and
financial resources than does Sureal. In addition, personal care and
nutritional products can be purchased in a wide variety of channels of
distribution. While Sureal believes that consumers appreciate the convenience
of ordering products from home through a sales person or through a catalog, the
buying habits of many consumers accustomed to purchasing products through
traditional retail channels are difficult to change. Sureal's product offerings
in each product category are also relatively small compared to the wide variety
of products offered by many other personal care and nutritional product
companies. There can be no assurance that Sureal's business and results of
operations will not be affected materially by market conditions and competition
in the future.
Sureal also competes with other direct selling organizations, many of
which have longer operating histories and higher visibility name recognition
and financial resources. The leading network marketing company in Sureal's
markets is Amway Corporation and its affiliates. Sureal competes for new
distributors on the basis of its Global Compensation Plan and its premium
quality products. Management envisions the entry of many more direct selling
organizations into the marketplace as this channel of distribution expands over
the next several years. Sureal also believes that other large, well-financed
corporations may launch direct selling enterprises which will compete with
Sureal in certain of its product lines. There can be no assurance that Sureal
will be able to successfully meet the challenges posed by this increased
competition.
Sureal competes for the time, attention and commitment of its independent
distributor force. Given that the pool of individuals interested in the
business opportunities presented by direct selling tends to be limited in each
market, the potential pool of distributors for Sureal's products is reduced to
the extent other network marketing companies successfully recruit these
individuals into their businesses. Although management believes that Sureal
offers an attractive business opportunity, there can be no assurance that other
network marketing companies will not be able to recruit Sureal's existing
distributors or deplete the pool of potential distributors in a given market.
Operations Outside the United States; Currency and Political Risks
Sureal's operations are located, and most of its revenues are derived
from, operations outside the United States. Sureal's operations may be
materially and adversely affected by economic, political and social conditions
in the countries in which it operates. A material change in policies by any
government in Sureal's markets could adversely affect Sureal and its operations
through, among other things, changes in laws, rules or regulations, or the
interpretation thereof, confiscatory taxation, restrictions on currency
conversion, currency repatriation or imports, or the expropriation of private
enterprises. Although the general trend in these countries has been toward more
open markets and trade policies and the fostering of private business and
economic activity, no assurance can be given that the governments in these
countries will continue to pursue such policies or that such policies will not
be significantly altered in future periods. This could be especially true in
the event of a change of leadership, social or political disruption or
upheaval, or unforeseen circumstances affecting economic political or social
conditions or policies.
Political Risks Inherent in Russia
A favorable political climate in the Russian Market and the openness of
its markets to United States trade are important to the success of Sureal. The
Russian Federation appears to have embraced political
12
<PAGE>
reforms and market economies. However, there are no local procedures for such
vast changes; the region has known only totalitarianism and a centrally-planned
economy for most of this century. Any reversal in such perceived new political
and economic trends and policies, or in international trade policy generally,
could materially adversely affect Sureal's operations. Moreover, the political
situation in the Russian Federation, where Sureal expects to generate a
substantial portion of its revenues in the near future, remains in constant
transition. Since the arrival of the Yeltsin government in December 1991, the
Russian Federation has experienced a proliferation of political parties, an
increase of nationalist sentiment, and a fragmentation of its economic and
political institutions. In addition, there has been a dramatic increase in
crime, including organized crime which may target businesses in the Russian
Federation. The viability of the Russian government has been tested by various
political factions gaining strength and unsuccessful coup d'etats; there can be
no assurance that a coup d'etat will not again be attempted or that any future
attempts will not be successful. In addition, the privatization process in
other parts of the Russian Federation has been sporadic.
Because the Russian Federation is in the early stages of development of a
market economy, its commercial framework in still developing. New
market-oriented laws are being enacted, but their application is still
uncertain. Although Sureal believes that the Russian Federation has advanced in
the area of commercial law, Russian laws and courts are not well tested in
contract enforcement. Similarly, although Russian law regarding foreign
investment provides protection against nationalization and confiscation, there
is little or no judicial precedent in this area.
The various government institutions and the relations between them, as
well as the government's policies and the political leaders who formulate and
implement them, are subject to rapid and potentially violent change. The
Constitution of the Russian Federation (the "Russian Constitution") gives the
President of the Russian Federation substantial authority, and any major
changes in, or rejection of, current policies favoring political and economic
reform by the President may have a material adverse effect on Sureal.
The Russian Federation is constituted as a federation of republics,
territories, regions (one of which is an autonomous region), cities of federal
importance and autonomous areas, all of which are equal members of the Russian
Federation. The delineation of authority among the regions, the internal
republics and the federal governmental authorities is, in many instances,
uncertain, and in some instances, contested. In Chechnya, for example, regional
and local authorities openly defied the powers of the federal government,
resulting in a protracted military confrontation. Lack of consensus between
local and regional authorities and the federal government often results in the
enactment of conflicting legislation at various levels and may result in
political instability. This lack of consensus may have negative economic
effects, which could be material to Sureal.
Furthermore, the political and economic changes in Russia in recent years
have resulted in significant dislocations of authority, as previously existing
structures have collapsed and new structures are only beginning to take shape.
The local and international press have reported a significant rise in organized
criminal activity, particularly in large metropolitan centers. Moreover, the
combination of the sudden loss of the tight social control that was
characteristic of the Soviet Union, a large but poorly paid police force, an
increase in unemployment, an influx of unemployed persons from outlying areas
to metropolitan centers and a decline in real wages has led to a substantial
increase in property crime in large cities. In addition, the local and
international press have reported high levels of official corruption in the
Moscow Region, and elsewhere in the Russian Federation. In an effort to
decrease the levels of criminal activity and corruption, President Yeltsin has
issued a series of decrees granting the security forces very broad powers. It
has been acknowledged that many provisions of these anti-crime decrees violate
the Russian Constitution, as well as the Criminal Code of the Russian
Federation, and these decrees have been viewed by many as a threat to civil
rights. While the Sureal has not been adversely affected by these factors to
date, no assurance can be given that the depredations of organized or other
crime will not in the future have a material adverse effect on Sureal.
The failure of many state-controlled enterprises to pay full salaries on a
regular basis, and the failure of salaries and benefits generally to keep pace
with the rapidly increasing cost of living have led in the
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<PAGE>
past, and could lead, in the future, to labor and social unrest. Such labor and
social unrest may have political, social and economic consequences, such as
increased support for a renewal of centralized authority, increased nationalism
(with restrictions on foreign involvement in the economy of the Russian
Federation) and increased violence, any of which could have a material adverse
effect on Sureal.
The health of Russia's current president, Boris Yeltsin, has been reported
to be poor and, as a result, he could be forced to step down, could become
incapacitated or could die. In such event, under the Russian Constitution the
prime minister would become acting president and would be required to call new
presidential elections. This process could result in a period of political
instability that could have a material adverse effect on companies operating in
Russia.
Currency Risks Associated with Russia
The recent history of trading in the Russian rouble as against the U.S.
dollar has been characterized by significant declines in value and considerable
volatility. Although in recent months, the rouble has experienced relative
stability against the U.S. dollar, there is a risk of further declines in value
and continued volatility in the future. The rouble is generally not convertible
outside Russia. A market exists within Russia for the conversion of roubles
into other currencies, but it is limited in size and is subject to rules
limiting the purposes for which conversion may be effected. The limited
availability of other currencies may tend to inflate their values relative to
the rouble and there can be no assurance that such a market will continue to
exist indefinitely. Moreover, the banking system in Russia is not yet as
developed as its Western counterparts and considerable delays may occur in the
transfer of funds within, and the remittance of funds out of, Russia.
All of Sureal's invoices to its distributors are denominated in U.S.
dollars. To date, its distributors have always paid such invoices promptly.
However, any delay in these distributors' ability to (i) convert Russian
roubles into U.S. dollars or (ii) transfer such funds in order to make payments
could have a material adverse effect on Sureal.
Legal Risks Associated with Russia
Russia lacks a fully developed legal system. Russian law is evolving
rapidly and in ways that may not always coincide with market developments,
resulting in ambiguities, inconsistencies and anomalies, and ultimately in
investment risk that would not exist in more developed legal systems. For
example, the ability of a creditor both to obtain a lien or other similar
priority in payment and to enforce such priority is uncertain. Furthermore,
effective redress in Russian courts in respect of a breach of law and
regulation, or in an ownership dispute, may be difficult to obtain.
Risks associated with the Russian legal system include: (i) the untested
nature of the independence of the judiciary and its immunity from economic,
political or nationalistic influences; (ii) the relative inexperience of judges
and courts in commercial dispute resolution, and generally in interpreting
legal norms; (iii) inconsistencies among laws, presidential decrees and
governmental and ministerial orders and resolutions; (iv) oftentimes
conflicting local, regional and national laws, rules and regulations,
particularly in the Russian Federation; (v) the lack of judicial or
administrative guidance on interpreting the applicable rules; and (vi) a high
degree of discretion on the part of government authorities and arbitrary
decision making which increases, among other things, the risk of property
expropriation. The result has been considerable legal confusion, particularly
in areas such as company law, property, commercial and contract law, securities
law, foreign trade and investment law and tax law. No assurance can be given
that the uncertainties associated with the existing and future laws and
regulations of Russia will not have a material adverse effect on Sureal.
Furthermore, the relative infancy of business and legal cultures in Russia
is reflected in the inadequate commitment of local business people, government
officials and agencies, and the judicial system to honor legal rights and
agreements, and generally to uphold the rule of law. Accordingly, Sureal may,
from time to time, confront threats of, or actual, arbitrary or illegal
revision or cancellation of its licenses and agreements, and face uncertainty
or delays in obtaining legal redress, any of which could have a material
adverse effect on the results of Sureal's operations.
14
<PAGE>
Sureal is incorporated in the State of Delaware. However, a substantial
portion of its assets will be located in the Russian Federation. By reason of
the foregoing, it may not be possible for Sureal to effect service of process
within the United States upon key distributors or warehouse operators, or to
enforce in the United States or outside of the United States judgments obtained
against such entities or individuals. No treaty exists between the United
States and the Russian Federation for the reciprocal enforcement of foreign
court judgments.
Social Risks Inherent in Russia
The political and economic changes in Russia since the breakup of the
former Soviet Union have resulted in significant social dislocations, as
existing structures of authority have collapsed and new ones are only beginning
to take shape. The resulting broad decline in the standard of living has
resulted in substantial political pressure on the government to slow or even
reverse the economic reform policies currently being pursued.
In addition, the local and international press have reported significant
organized criminal activity, particularly in large metropolitan centers,
directed at revenue-generated businesses, and an increased integration of
Russian organized crime with major international criminal organizations. In
addition, a substantial increase in property crime in large cities has been
reported. Finally, the local and international press have reported high levels
of official corruption in the locations where Sureal operates. No assurance can
be given that organized or other crime or claims that Sureal's independent
distributors have been involved in official corruption will not, in the future,
have a material adverse effect on Sureal.
15
<PAGE>
DILUTION
Prior to selling any shares under this Offering, based on the Company's
Consolidated Financial Statements as of April 30, 1998, the Company has
11,517,636 shares of common stock issued and outstanding (including 813,000
shares issuable upon the assumed conversion of 813,000 shares of Preferred
Stock, including those preferred shares issued by KMS) with a net tangible book
value of $438,960 (or $.04 per share).
Assuming that the maximum number of 3,000,000 Shares is sold in this
Offering, there would be a total of 14,517,636 (12,184,303 if the Minimum
Offering is sold) shares issued and outstanding with a total net tangible book
value of $38,313,960 or $2.64 per share ($8,763,960 or $.72 per share if the
Minimum Offering is sold). The dilution to the public stockholders would be
$12.36 per share or 82% per share based on a purchase price of $15 per share
($14.28 or 95% if the Minimum Offering is sold). The public stockholders would
own 20.7% (5.5% if the Minimum Offering is sold) of the outstanding shares. The
present stockholders would benefit by an increase in net tangible book value of
$2.60 ($.68 if the Minimum Offering is sold) per share.
Net tangible book value per share is obtained by subtracting the total
liabilities from total tangible assets (total assets less intangible assets).
Dilution is the difference between the public offering price and the net
tangible book value of shares immediately after the Offering.
<TABLE>
<CAPTION>
MAXIMUM MINIMUM
----------- -----------
<S> <C> <C>
Public offering price per share ................................ $ 15.00 $ 15.00
-------- --------
Net tangible book value per share before Offering (2) .......... .04 .04
Increase per share attributable to public investors ............ 2.60 .68
-------- --------
Net tangible book value per share after Offering (2) ........... 2.64 .72
-------- --------
Dilution per share to public investors ......................... $ 12.36 $ 14.28
======== ========
</TABLE>
- ----------
(1) Before deduction of underwriting commissions and estimated expenses to be
paid by the Company.
(2) Gives effect to the issuance of 750,000 shares pursuant to the Share
Exchange Agreement associated with the acquisition of Sureal (see
"Business" and "Certain Transactions") and the two for one reverse stock
split effective December 8, 1997 and assumes the issuance of 813,000
Common Shares upon the conversion of Preferred Stock (see "Description of
Capital Stock").
The following table sets forth, after giving effect to the assumed
completion of the Offering, information relating to the number of shares
purchased from the Company, the total consideration paid and the average price
per share paid by existing shareholders and by the public participating in the
Offering.
<TABLE>
<CAPTION>
SHARES OWNED CONSIDERATION
------------------------ ------------------------- AVERAGE PRICE
NUMBER (1) PERCENT AMOUNT PERCENT PER SHARE
------------ --------- ------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Present Shareholders ......... 11,517,636 79.34 $ 3,569,441 7.35 $ .31
Public Investors:
Maximum Offering ............ 3,000,000 20.66 45,000,000 92.65 $ 15.00
---------- ------ ----------- ------
Total ....................... 14,517,636 100.00 $48,569,441 100.00
========== ====== =========== ======
</TABLE>
<TABLE>
<CAPTION>
SHARES OWNED CONSIDERATION
------------------------ ------------------------- AVERAGE PRICE
NUMBER (1) PERCENT AMOUNT PERCENT PER SHARE
------------ --------- ------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Present Shareholders ......... 11,517,636 94.53 $ 3,569,441 26.30 $ .31
Public Investors:
Minimum Offering ............ 666,667 5.47 10,000,000 73.70 $ 15.00
---------- ------ ----------- ------
Total ....................... 12,184,303 100.00 $13,569,441 100.00
========== ====== =========== ======
</TABLE>
- ----------
(1) Gives effect to the issuance of 750,000 shares pursuant to the Share
Exchange Agreement associated with the acquisition of
16
<PAGE>
Sureal (see "Business" and "Certain Transactions") and the two for one
reverse stock split effective December 8, 1997 and assumes the issuance of
813,000 Common Shares upon the conversion of 813,000 shares of Preferred
Stock (see "Description of Capital Stock").
USE OF PROCEEDS
The allocations set forth below are the estimates of management as to how
the net proceeds of the Offering (estimated to be $37,875,000 if the Maximun
Offering is sold and $8,325,000 if the Minimum Offering is sold) will be
allocated as set forth below. The determination of net proceeds assumes that
the Company will pay a total of 12.5 percent of gross proceeds to the
Underwriter in the form of commissions and expenses as well as incur expenses
of the offering of $500,000 ($425,000 if the Minimum Offering is sold). For the
purposes of this presentation, commissions and expenses that will be paid to
KMS, a subsidiary of the Company, are shown as expenses and treated as net
reductions of Offering proceeds. This table also excludes possible sales by the
Selling Shareholder because none of the proceeds from such sales will go to the
Company.
<TABLE>
<CAPTION>
MINIMUM MAXIMUM
OFFERING OFFERINMG
------------- ----------------
<S> <C> <C>
Develop Sureal's business (including repayment of $488,500 principal
amount of indebtedness) (1) ....................................... $3,000,000 $ 5,000,000
Purchase a seat on the New York Stock Exchange ..................... 1,500,000
Purchase a seat on the American Stock Exchange ..................... 500,000
Open brokerage office in Bahrain ................................... 4,000,000 4,000.000
Expand KMS' proprietary trading .................................... 7,000,000
Expand KMS Asset Management Group .................................. 725,000 6,400,000
Repay bridge loan .................................................. 600,000 600,000
Effect other acquisitions or strategic investments ................. 12,875,000
------------
Total .............................................................. $8,325,000 $ 37,875,000
========== ============
</TABLE>
- ----------
(1) This indebtedness ($488,500), the proceeds of which were used for working
capital, bears interest at the rate of 8 percent per annum and is payable
on demand.
The foregoing represents the Company's best estimate of its allocation of
the net proceeds of this Offering based upon the current state of its business
operations, its current plans and current economic and business conditions and
is subject to reapportionment among categories listed above or to new
categories. Future events, including the problems, expenses, complications and
delays frequently encountered by growing businesses, as well as changing
economic conditions, the regulatory environments confronting the Company's
subsidiaries, may make shifts in the allocation of funds necessary or
desirable.
The Company has identified the Direct Marketing and Military Resale
industries as offering attractive rollup opportunities. However, no formal
discussions have taken place with any potential acquiree and no such
discussions are anticipated until following the completion of this Offering.
The funds from the Offering will be invested in United States Treasury
Obligations or a similar instrument until needed for the purposes set forth
above.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.
Information set forth herein contains "forward-looking statements" which
can be identified by the use of forward-looking terminology such as "believes",
"expects", "may", "should" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy. No
assurance can be given that the future results covered by the forward-looking
statements will be achieved. The Company cautions readers that important
factors may affect the Company's actual results and could cause such results to
differ materially from forward-looking statements made by or on behalf of the
Company. Such factors include, but are not limited to, changing market
conditions, the impact of competitive products, pricing, acceptance of the
Company's products in development and other risks detailed herein. The Safe
Harbor provisions of the Private Securities Litigation Reform Act of 1995 do
not apply to initial public offerings.
RESULTS OF OPERATION
The Company
Year Ended December 31, 1997 and 1996
The Company was organized under the laws of the State of Delaware in
December 17, 1996. It had no operating activities in 1996. In 1997, it had no
direct revenues other than those of its operating subsidiaries, KMS and Sureal,
that are described individually in the sections that follow. Its expenses in
1997 consisted of:
<TABLE>
<S> <C>
Officers' compensation ............ $342,500
Start-up costs .................... 564,335
Office and administrative ......... 36,523
--------
Total ............................. $943,358
========
</TABLE>
The start-up costs relate principally to the costs of establishing a
brokerage firm in Bahrain to take advantage of KMS' contacts in the Middle
East. The Company is optimistic that all necessary approvals and authorizations
will be obtained, but no assurances thereof can be given.
KMS
Four Months Ended April 30, 1998 and 1997
<TABLE>
<CAPTION>
4/30/98 PERCENT 4/30/97 PERCENT DIFFERENCE
------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Revenue:
Commissions ........................... $ 48,904 4.51% $ 547,003 40.68% $ (498,099)
Trading ............................... 738,381 68.06% 631,105 46.94% 107,276
Other ................................. 297,646 27.43% 166,435 12.38% 131,211
Total ................................. 1,084,931 100.00% 1,344,543 100.00% (259,612)
Expenses:
Compensation and related .............. 354,985 32.72% 722,942 53.77% (367,957)
Clearance and floor brokerage ......... 33,835 3.12% 62,704 4.66% (28,869)
General and administrative ............ 324,134 29.88% 209,727 15.60% 114,407
Professional services ................. 161,971 14.93% 47,564 3.54% 114,407
Communications ........................ 56,703 5.23% 88,114 6.55% (31,411)
Regulatory ............................ 22,474 2.07% 53,657 3.99% (31,183)
Other ................................. 12,000 1.11% 0 0.00% 12,000
Total ................................. 966,102 89.05% 1,184,708 88.11% (218,606)
Net income (loss) ..................... 118,829 10.95% 159,835 11.89% (41,006)
Less intercompany revenues ............ 210,000 19.36% 0 0.00% 210,000
Net ................................... $(91,171) ( 8.40)% $ 159,835 11.89% $ (251,006)
</TABLE>
18
<PAGE>
The principal differences during the four months ended April 30, 1998
compared with the four months ended April 30, 1997 are:
o A significant decrease in commission income brought about by a
reduction in the number of brokers employed during the period and the
fact that the Company did not participate in public offerings during
the 1998 period.
o The decline in revenue was partially offset by a decline in
compensation and similar expenses.
o The intercompany revenue consists of the reversal of a portion of an
allowance established in 1997 that related to loans made by KMS to
the Company. A portion of such loans was repaid in 1998 from the
proceeds of bridge financing. The impact of this transaction is
eliminated in consolidation.
1997 Compared to 1996
<TABLE>
<CAPTION>
DESCRIPTION 12/31/97 PERCENT 12/31/96 PERCENT DIFFERENCE
- ----------- -------- ------- -------- ------- ----------
<S> <C> <C> <C> <C> <C>
Commissions and trading ................ $ 2,521,870 $ 243,097
Interest and other ..................... 392,327 5,892
Total .................................. 2,914,197 100.00% 248,989 100.00% $2,665,208
Expenses:
Compensation and related ............... 1,705,207 58.51% 481,678 193.45% 1,223,529
Clearance and floor brokerage .......... 158,184 5.43% 68,385 27.47% 89,799
Occupancy and administratine ........... 668,104 22.93% 525,427 211.02% 142,677
Professional services .................. 273,039 9.37% 310,032 124.52% (36,993)
Communications ......................... 317,447 10.89% 68,343 27.45% 249,104
Regulatory ............................. 93,919 3.22% 44,608 17.92% 49,311
Other .................................. 1,100,754 37.77% 1,100,754
Total .................................. 4,316,654 148.12% 1,498,473 601.82% 2,818,181
Net loss ............................... (1,402,457) (1,249,484)
Less--Intercompany expenses ............ 818,271 28.08%
Net .................................... $ (584,186) $ (1,249,484) $ 665,298
</TABLE>
The periods are not comparable because KMS activities were de minimis
prior to May 1996. Revenues increased as follows:
<TABLE>
<CAPTION>
1997 1996 DIFFERENCE
---- ---- ----------
<S> <C> <C> <C>
Commission income .............. $ 863,673 $ 355,795 $ 507,878
Trading income -- net .......... 1,658,197 (129,279) 1,789,476
Interest ....................... 37,656 5,892 31,674
Other .......................... 354,671 16,581 338,090
---------- ---------- ----------
Total ........................ $2,914,197 $ 248,989 $2,665,208
========== ========== ==========
</TABLE>
The increase in commission income reflects the (i) general increase in
KMS' activities during the period and (ii) the receipt in 1997 of commissions
of $333,755 associated with underwriting activities. The increase in trading
income reflects (i) the increase in resources available for trading and (ii)
the impact of net trading losses of approximately $165,000 during the last
three months of 1996. KMS' trading activities involve trading equity
securities, principally securities trading on the NASDAQ National Exchange.
KMS' policy is to sell all or substantially all of its investment positions at
the end of each trading day. Therefore, the carrying value of trading
securities is generally not material. Other revenues increased because of
significant increases in service and investment banking consulting fees.
The overall level of expenses increased in 1997 because of the increase in
sales and trading activities. Increases not related to increases in activity
included consulting and legal fee increases of approximately
19
<PAGE>
$215,000. In addition, KMS settled a dispute involving a guarantee of a
business transaction for a customer/preferred stockholder in the amount of
$282,483. The matter involved a dispute over whether a letter issued by KMS on
behalf of its customer constituted a guarantee of the customer's obligation by
KMS. The matter was litigated, and a court determined the language in such
letter to be deemed a guarantee thereby obligating KMS to pay when its customer
defaulted. Overall executive compensation also increased by approximately
$375,000.
The intercompany expense for 1997 is described in Note 4 to KMS' financial
statements.
No benefit has been recorded for KMS' net operating loss carryforwards
because of the uncertainty of utilizing such carryforwards.
SUREAL
Sureal was formed in August 1995, at which time it acted as the marketing,
sales and administrative arm for Eastern Europe for an existing direct
marketing company specializing in personal care and nutritional products. In
October 1997, it decided to change its strategic focus by developing its own
product line. These factors, taken as a whole, distort the comparability of the
data set forth below. Sureal commenced its operations in August 1995 using a
network of 333 independent distributors in Russia. The number of distributors
in the network increased to 4,972 at December 31, 1995; 94,307 at December 31,
1996; and 172,221 at May 31, 1997, Commissionable sales levels, to a large
extent, are a function of the number of distributors selling the product. On
the other hand, commissionable sales were impacted in the last quarter of 1997
while Sureal was developing its own branded product line. It lacked sufficient
inventory levels for its new products until January 1998.
The nature of Sureal's business is such that it can process significant
volumes of business without increasing administrative expenses. It has a highly
automated administrative function and receives data from the major independent
distributors in electronic form.
Four Months Ended April 30, 1998 and 1997
<TABLE>
<CAPTION>
4/30/98 PERCENT 4/30/97 PERCENT DIFFERENCE
------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Revenue: ............................
Commissionable sales ................ $ 340,082 $16,909,372 $ (16,569,290)
Cost of commissionable sales ........ 163,020 16,240,091 (16,077,071)
Net ................................. 177,062 669,281 (492,219)
Other ............................... 84 19,010
Total ............................... 177,146 100.00% 688,291 100.00% (511,145)
Expenses:
Compensation and related ............ 213,769 19.70% 152,415 11.34% 61,354
Occupancy and administrative ........ 122,708 11.31% 59,855 4.45% 62,853
Total ............................... 336,477 31.01% 212,270 15.79% 124,207
Net income (loss) ................... $ (159,331) (14.69)% $ 476,021 35.40% $ (635,352)
</TABLE>
The two periods are not comparable because during 1998 Sureal devoted the
significant portion of its time and resources to introducing its own product
line. During this period, Sureal did not have sufficient levels of inventory to
generate a significant volume of sales. Although sales levels will increase
somewhat in succeeding months, Sureal needs the proceeds from this Offering to
have sufficient working capital to generate the sales volume that its network
of distributors is capable of selling.
20
<PAGE>
1997 Compared to 1996
<TABLE>
<CAPTION>
1997 % 1996 % DIFFERENCE %
---- - ---- - ---------- -
<S> <C> <C> <C> <C> <C> <C>
Commissionable sales .................. $31,720,456 $21,594,562 $10,125,894 46.9%
Cost of commissionable sales .......... 30,459,297 20,720,459 9,738,838
Net ................................... 1,261,159 874,103 387,056
Other revenues ........................ 67,208 65,261 1,947 3.0%
Gross Margin .......................... 1,328,367 100.0% 939,364 100.0% 389,003 41.4%
Expenses:
Compensation and related .............. 463,693 34.9% 348,309 37.1% 115,384 33.1%
Occupancy and administrative .......... 251,227 18.9% 205,135 21.8% 46,092 22.5%
Total ................................. 714,920 53.8% 553,444 58.9% 161,476 29.2%
Income (loss) before taxes ............ 613,447 46.2% 385,920 41.1% 227,527 59.0%
Proforma income taxes ................. 229,000 17.2% 111,000 11.8% 118,000 106.3%
Proforma Net Income ................... 384,447 28.9% 274,920 29.3% 109,527 39.8%
</TABLE>
Commissionable sales increased because of the greater number of
independent distributors in 1997 compared with 1996. This increase was offset
because Sureal changed its focus in 1997 and decided to introduce its own
branded products. This decision offset the increase because it took several
months to begin obtaining a sufficient quantity of inventory to meet the demand
of the independent distributors and to complete the registration process for
its products. Management believes that this new strategy will result in
significantly higher margins on sales.
Administrative expenses increased principally because of increased office
salaries and related benefits. Facilities costs increased because Sureal
increased the size of its office space to accommodate the growth in office
personnel. No other expense category fluctuated significantly between periods.
Sureal was an S corporation during the periods covered. The pro forma
income tax provision reflected above represents the amounts that would have
been reported as a provision for income taxes if Sureal was filing a separate
return as a C corporation in each year.
1996 Compared to 1995
<TABLE>
<CAPTION>
1996 % 1995 % DIFFERENCE
---- - ---- - ----------
<S> <C> <C> <C> <C> <C>
Commissionable sales ...................... $21,594,562 $ 995,670 $20,598,892
Cost of commissionable sales .............. 20,720,459 977,173 19,743,286
Net ....................................... 874,103 93.1% 18,497 33.7% 855,606
Other revenue ............................. 65,261 6.9% 36,468 66.3% 28,793
Total ..................................... 939,364 100.0% 54,965 100.0% 884,399
Expenses:
Compensation and related expense .......... 348,309 37.1% 83,885 152.7% 264,424
Occupancy and administrative .............. 205,135 21.8% 52,574 95.6% 152,561
Total ..................................... 553,444 58.9% 136,459 248.3% 416,985
Income (loss) before taxes ................ 385,920 41.1% (81,494) (148.3)% 467,414
Proforma income taxes ..................... 111,000 11.8% -- 111,000
Proforma net income (loss) ................ 274,920 29.3% (81,494) (148.3)% 356,414
</TABLE>
Sureal began operations in August 1995 and was a start-up operation for
much of the period August 10, 1995 until December 31, 1995. Therefore, the two
periods are not comparable. Other revenues in 1995 consisted principally of
miscellaneous product sales outside the direct marketing network. The amount of
such sales decreased in each subsequent period as the direct marketing network
was put in place.
21
<PAGE>
INFLATION
The Company's business and operations have not been materially affected by
inflation during the periods ended December 31, 1997 and April 30, 1998.
However, KMS, by the nature of its business, would be impacted by a period of
inflation. Sureal could be affected to the extent that inflation in the Russian
Market causes its products to be sold at unattractive price points.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had stockholders equity of $540,679,
after giving effect to the merger with Sureal completed in December 1997 and
accounted for as a pooling of interests. Management of the Company believes
that the proceeds from the initial public offering will be sufficient to meet
its liquidity and capital needs for the forseeable future. The Company has not
entered into any material commitments regarding capital expenditures. However,
it will spend $4 million of proceeds from this Offering to open an office for
KMS in Bahrain, of which $2 million will be used as a required cash deposit as
specified by Bahraini authorities. Management believes, based on discussions
with counsel, that all necessary approvals will be received to open the office
in Bahrain within six months after the receipt of offering proceeds provided no
destabilizing political events occur in the Middle East. No assurances can be
given that such approvals will be received, however.
SEASONALITY
The demand for the Company's products and services generally declines
during the summer months.
New Accounting Pronouncements
The Financial Accounting Standards Board has issued Statements of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share"; No. 129,
"Disclosure of Information about Capital Structure"; No. 130, "Reporting
Comprehensive Income"; and No. 131, "Disclosure about Segments of an Enterprise
and Related Information." These new accounting pronouncements are not expected
to have a significant impact on the Company. SFAS No. 128 requires the
presentation of Basic Earnings Per Share that the Company believes will, in its
case, approximate the amounts reported as Primary Earning Per Share. The
disclosure requirements in SFAS No. 129 and 130 are not expected to impact the
Company's financial statements. The merger with Sureal results in the Company
being required to provide segment information in its consolidated financial
statements.
YEAR 2000 AND EUROPEAN CURRENCY
Neither the Company nor any of its subsidiaries anticipates incurring any
material costs to modify computer systems or software in the year 2000.
The European Community's conversion to a common monetary unit will not
have a material impact on any of the Company's operations.
22
<PAGE>
BUSINESS
The Company
United States Financial Group, Incorporated ("USFG" or the "Company") is a
diversified holding company, incorporated under the laws of the State of
Delaware. USFG's main business purpose is to acquire undervalued or reasonably
priced companies in industries well suited for roll up consolidation
transactions. These roll up or consolidation candidates operate in industry or
market niches that are well established, are served in a fragmented way and do
not compete directly with large competitors. Furthermore, these target
companies must have experienced management teams and do not require significant
expenditures for research and development. USFG has begun to implement this
strategy through the acquisition and/or establishment of four companies and has
assembled a management team that is experienced in all phases of mergers and
acquisitions.
The Company has four subsidiaries, two of which are currently active.
Klein, Maus & Shire, Inc. ("KMS"), an investment banking firm and a
broker-dealer of securities duly registered with the SEC and is a member firm
of the NASD, Municipal Securities Rulemaking Board (known as the "MSRB"), the
Securities Insurance Protection Corporation ("SIPC"). Sureal International,
Inc. ("Sureal"), a sales and direct marketing company that sells health and
other consumer products in Russia and other republics of the former Soviet
Union through a network of independent distributors was acquired in December
1997 in a pooling of interest transaction.
The two inactive subsidiaries were formed for specific purposes. KMS Asset
Management Group, Incorporated will be an asset management and international
financial consultant and advisory company and will take advantage of the
contacts of USFG's president. US Military Resale Group, Incorporated ("Military
Resale Group") was established to acquire military commissaries and other
suppliers of consumer products to the Army and Air Force Exchange System.
The Company acquired KMS through a share exchange effected on March 31,
1997 in which Mr. Khan exchanged 18,889,267 shares of KMS' common stock for
18,889,267 shares of the Company's common stock. On December 8, 1997, the
shares held by Mr. Khan became subject to a two for one reverse stock split,
thereby converting into 9,444,634 shares. On December 3, 1997, the Company
exchanged 750,000 shares of its common stock, subject to adjustment, for all of
the outstanding shares of common stock of Sureal. Both of these transactions
were accounted for as pooling of interest. KMS, as a broker-dealer and
investment bank, will be the vehicle to provide, directly or indirectly the
capital necessary to implement the overall strategy.
The Company's principal place of business is located at 110 Wall Street,
New York, New York 10005, and its telephone number is 212-785-4545.
Klein Maus & Shire, Inc.
KMS is a broker-dealer of securities duly registered with the SEC and a
member firm of the NASD, was incorporated under the laws of the State of
Indiana on August 15, 1994 under the name Comprehensive Financial Products,
Inc. It changed its name to "Khan, Edwards & Company" on December 9, 1994 and
adopted its current name on February 26, 1996.
KMS is an investment bank providing full service investment banking,
trading, research and advisory services to over 3,000 high net worth
individuals and institutions around the world. The key to KMS' current and
future success is its principal client base of high net worth international
investors and institutions. KMS' access to this client base through its senior
management puts it in a strong position to expand its investment banking
activities without reliance on cold calling, high pressure marketing
activities. KMS' growth plans are based on a corporate strategy emphasizing
generating revenues at a non-retail level, and maintaining a small sales force
comprised of experienced financial consultants with impeccable records. KMS is
located at 110 Wall Street in New York where it occupies two floors totaling
14,000 square feet.
To date, most of KMS' activities involve the retail trading and selling of
securities. KMS has also participated as a member of the selling group on seven
initial public offerings and one secondary public
23
<PAGE>
offering and has co-managed one initial public offering. Its clients are
located throughout the country and around the world and include institutional
investors.
KMS' goal is to continue providing full service investment banking
services, including research and advisory capabilities, to sophisticated high
net worth individuals and institutions. The key to building upon this goal is
the expansion of the KMS Asset Management Group, Incorporated that manages
funds for a fee (see below). KMS also intends to acquire a seat on the New York
Stock Exchange because its principal client base is and is likely to continue
being high net worth international investors and institutions. KMS access to
this client base through its senior management which puts it in a strong
position to expand its investment banking activities without reliance on cold
calling, high pressure sales activities.
KMS' principal strategy is to focus its resources on certain core
businesses where Management believes KMS can compete profitably and be among
the leading participants in each targeted market. In addition, KMS emphasizes
economic and investment research in the development of its business. Over the
next several years, KMS plans to expand significantly the scope of its business
activities and its customer base, both in the U.S. and internationally. This
strategy will allow KMS to establish strong positions in selected high-margin
activities, including equity and high-yield corporate securities underwriting.
Mr. Khan, KMS' President, currently manages investments for several
international institutional investors and has KMS poised to expand this aspect
of its business. KMS' ability to identify, recruit and retain experienced and
talented professionals is and will be the key element of its success in
implementing its expansion strategy. These professionals will augment the
capabilities of the existing officers and directors who have experience in
capital market transactions and mergers and acquisitions. No assurances can be
given that KMS will be successful in implementing its plans.
KMS conducts its business through several operating divisions, each of
which will become more distinctive as KMS expands its operations. These
divisions are (i) the Banking Group; (ii) the Capital Markets Group, which
includes the Fixed-Income, Institutional Equities, and other retail operations;
and the (iii) Money Management Group, which engages in the business of
providing fee-based advisory services to corporate and institutional customers.
The Capital Markets Group comprises substantially all of KMS' activities to
date.
THE BANKING GROUP has participated in raising capital and providing
financial and business advice to companies throughout the U.S. and anticipates
expanding its activities abroad. It also manages and underwrites public
offerings of securities, arranges private placements and provides advisory and
other services in connection with mergers, acquisitions, restructurings and
other financial transactions. In addition, it assists developing countries to
obtain project financing and the privatization of state-owned enterprises. It
was recently engaged as the investment banker by quasi-public entities in
Grenada, South Korea and Pakistan. The intermediate and long-term plans are to
invest KMS Asset Management Group funds in projects and financing arranged by
the Banking Group.
THE CAPITAL MARKETS GROUP provides a broad range of services, including
retail trading, research origination and distribution of equity and
fixed-income securities, private equity investments and late stage venture
capital. Its Fixed-Income Division will provide institutional and individual
clients with research, trading and sales services for a broad range of
fixed-income products, including high-yield corporate, investment grade, U.S.
government and asset-backed securities. The Institutional Equities Division
provides institutional clients with research, trading and sales services in
listed and over-the-counter equity securities.
The Capital Markets Group will also engage in proprietary trading. KMS
will manage its risks by limiting to nominal amounts the amount of securities
that will be held overnight in the trading portfolios.
KMS' retail customer accounts are carried on a "fully disclosed" basis by
Cowen & Co., members of the New York and other principle stock exchanges,
pursuant to a clearing agreement. This agreement provides, among other things,
that customer securities positions and credit balances are insured up to
$500,000 by the Securities Investors Protection Corp. ("SIPC") and
supplementary private insurance coverage of $49,500,000. All customer credit
balances are subject to immediate withdrawal from Cowen & Co., at the
discretion of the individual customer.
24
<PAGE>
The Company's trading and retail activities benefit from the utilization
of automated trading systems such as Selectnet, SOES and ACT. The company's
trading and retail activities will further benefit from the utilization of
other automated trading systems such as Instinet, BNET, and the automated
ticketless Brass trading program. The Brass system, which, in effect, makes
trading "paperless", enhances the ability of traders to focus on market
conditions by eliminating the prior administrative burden inherent in trading.
The Selectnet and Instinet networks link a company with trading partners
throughout the United States, including other brokerage firms, block trading
desks and specialists on the regional exchanges. These systems provide KMS with
access into every major securities exchange on a global basis. As it grows, KMS
will also employ an electronic volume monitoring system that will allow it to
determine the percentage of its relative trading volume in a specific security.
KMS is currently registered for retail distribution in the following
jurisdictions:
<TABLE>
<S> <C> <C>
Alabama Massachusetts South Dakota
Alaska Michigan Texas
Arizona Minnesota Utah
Arkansas Mississippi Vermont
California Montana Virginia
Colorado Nevada Washington, D.C.
Connecticut New Jersey Washington
Delaware New York West Virginia
Florida North Carolina Wisconsin
Georgia Ohio Wyoming
Illinois Oklahoma
Kansas Oregon Pending:
Kentucky Pennsylvania Indiana
Louisiana Rhode Island Maine
Maryland South Carolina Nebraska
</TABLE>
KMS' trading and retail operations are regulated by the NASD. The NASD
places various restrictions and limitations on the operations of member firms,
subject to revision based on the NASD's experience with each firm. KMS may make
markets in 15 NASDAQ securities and employ up to 55 registered representatives.
KMS is allowed to co-manage a best efforts or a firm commitment public offering
of securities. KMS does not and is not permitted to participate in transactions
involving penny stocks.
KMS ASSET MANAGEMENT GROUP, INCORPORATED was formed to serve as an advisor
to institutions, individuals and governments. Its strategy to expand its money
management business by increasing assets under management and increasing
international consultancy business. It currently acts as an advisor to
quasi-public entities in Grenada, South Korea and Pakistan. It will be acting
as an advisor to the Grenadine government on its tourism and infrastructure
development project and to Pakistan on establishing the first "Technology
Science Park" in Pakistan.
The minimum investment required for investors within KMS asset management
group is $250,000. Each account is insured up to $50 million by an "A" rated
insurance company, but is subject to normal market risks associated with
investing. KMS charges fees equal to one percent of the average assets under
management plus performance bonuses.
Government Regulation
The SEC is the Federal agency responsible for the administration of the
Federal securities laws. KMS is registered as a broker-dealer with the SEC.
Much of the regulation of broker-dealers has been delegated to self-regulated
organizations, principally the NASD and national securities exchanges such as
NASDAQ. These self-regulatory organizations adopt rules (subject to approval by
the SEC) that govern the industry and conduct periodic examinations of KMS'
operations. Securities firms are also subject to regulation by state securities
administrators in those states in which they conduct business. KMS is currently
registered as a broker/dealer in 47 states and the District of Columbia.
25
<PAGE>
Broker-dealers are subject to regulation covering all aspects of the
securities business, including sales method, trade practices among
broker-dealers, use and safekeeping of customers' funds and securities, capital
structure of securities firms, record-keeping and the conduct of directors,
officers and employees. Additional legislation, changes in rules promulgated by
the SEC and self-regulatory organizations, or changes in the interpretation or
enforcement of existing laws and rules may directly affect the mode of
operation and profitability of broker-dealers. The SEC, self-regulatory
organizations and state securities commissions may conduct administrative
proceedings which can result in censure, fine, the issuance of cease-and-desist
orders or the suspension or expulsion of a broker-dealer, its officers or
employees. The principal purpose of regulation and discipline of broker-dealers
is the protection of customers and the securities markets, rather than
protection of creditors and stockholders of broker-dealers.
Certain regulatory bodies perform audits or other procedures to ensure
compliance with their rules and regulations. The NASD completed an audit of KMS
in February 1998, at which time it issued a letter setting forth certain
alleged exceptions and areas of noncompliance noted during the performance of
its audit procedures, including alleged inconsistencies in the time stamping of
certain trading tickets and the making of markets for a greater number of
companies than permitted under its NASD restriction letter. Management of KMS,
based on its review of the letter, discussions with counsel and with the NASD
auditors, does not believe that the ultimate resolution of the matters set
forth in the letter from the NASD will have a material adverse effect on KMS'
results of operations or financial condition, although no assurances thereof
can be given.
The SEC's Net Capital Rule imposes minimum financial requirements for all
registered broker-dealers doing business with the public. KMS is subject to the
requirements of this rule. The Net Capital Rule places limits on certain of the
KMS' operations, such as underwriting activities, market making and other
principal trading activities. A decrease below minimum net capital in the form
of a significant operating loss or any unusually large charge against KMS' net
capital could adversely affect its ability to expand or even maintain its
present levels of business. See "Risk Factors."
Competition
All aspects of KMS' business are highly competitive. KMS competes or will
compete directly with numerous other securities brokers and dealers, investment
banking firms, life insurance sales agencies, investment advisors, leveraged
buyout firms, venture funds and, indirectly for investment funds, with
commercial banks. Many of KMS' competitors have substantially greater capital
and other resources than does KMS. Some commercial banks and thrift
institutions also offer securities brokerage services and many commercial banks
offer a variety of investment banking services. Competition among financial
services firms also exists for investment representatives and other personnel.
The securities industry has become considerably more concentrated and more
competitive in recent years as numerous securities firms have either ceased
operation or have been acquired by or merged into other firms. In addition,
companies not engaged primarily in the securities business, but having
substantial financial resources, have acquired leading securities firms. These
developments have increased competition from firms with greater capital
resources than those of KMS. Furthermore, numerous commercial banks have
petitioned the Board of Governors of the Federal Reserve System for permission
to enter into various new business activities from which they are currently
barred, such as underwriting certain mortgage-backed and municipal revenue
securities and securities backed by consumer loans. Various legislative
proposals, if enacted, would also permit commercial banks to engage in such
activities. Ultimately, these developments or other developments of a similar
nature may lead to the creation of integrated financial service firms that
offer a broader range of financial services.
The securities industry has experienced substantial commission discounting
by broker/dealers competing for institutional and individual brokerage
business, including many offering deeply discounted commission rates on the
Internet. In addition, an increasing number of specialized firms now offer
"discount" services to individual customers. These firms generally effect
transactions for their customers on an "execution only" basis without offering
other services such as portfolio valuation, investment recommendations and
research. The continuation of such discounting and an increase in the number of
new and existing firms offering such discounts could adversely affect KMS'
retail business.
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SUREAL
Sureal is a direct marketing company involved in the distribution and sale
of high quality nutritional and air purification products. Sureal was founded
as Legacy Export, Inc. ("Legacy") in 1995 by Richard Wogksch, R. Bret Jenkins,
and Glen Jensen for the purpose of creating, developing and expanding direct
marketing businesses internationally, with an emphasis on Russia and other
republics of the former Soviet Union. The founders had experience in the direct
marketing industry, including the international aspects thereof. Legacy
commenced its operations as the marketing, sales and administrative arm for
Eastern Europe for an existing direct marketing company specializing in
personal care and nutritional products. Legacy commenced its operations in
August 1995 using a network of 333 independent distributors in Russia. The
number of distributors in the network increased to in excess of 100,000 at May
31, 1997. Monthly commissionable sales to these distributors rose from $20,000
in July 1995 to $5,009,000 in February 1997. Sureal, which changed its name in
October 1997, is headquartered in Orem, Utah.
Sureal discontinued its relationship with other product companies in
September 1997, at which time it made a decision to introduce its own branded
products to be distributed through its sales network. Through September 1997,
the revenue generated by the sales of those products was distributed in an
agreed upon manner among the supplier, shipper and Sureal pursuant to the terms
of a verbal agreement. Sureal's product philosophy is to introduce its own
branded products based on researching the best that science and nature can
offer and produce, using contract manufacturers, innovative products that are
specifically designed for a network marketing distribution channel. Sureal
presently offers nutritional products and a line of air purification products.
It plans on expanding both of these lines, as well as introducing a personal
care line and other specialty products.
Nature of Direct Marketing
Sureal distributes its products through a system of direct or network
marketing. Under most network marketing systems, independent distributors
purchase products for retail sale or personal consumption. Direct marketing
involves the sale of products through a network of independent distributors who
enter into contract agreements or licenses with the direct marketer. Pursuant
to Sureal's Global Compensation Plan, products are sold exclusively to or
through independent distributors who are not employees of Sureal.
Direct marketing sales have increased rapidly in recent years. Many
products sold by direct marketers are characterized as having high margins.
Typically, distributor incentives and commissions represent the highest cost
for a direct marketer.
Network marketing is an effective vehicle to distribute Sureal's products
because (i) a consumer can be educated about a product in person by a
distributor, which is more direct than the use of television and print
advertisements; (ii) direct sales allow for actual product testing by a
potential consumer; (iii) the impact of distributor and consumer testimonials
is enhanced; and (iv) as compared to other distribution methods, distributors
can give customers higher levels of service and attention, by, among other
things, delivering products to a consumer's home and following up on sales to
ensure proper product usage, customer satisfaction, and to encourage repeat
purchases. Under most network marketing systems, independent distributors
purchase products either for resale or for personal consumption.
International direct selling as a distribution channel has been enhanced
in the past decade because of advances in communications, including
telecommunications, the Internet and World Wide Web, and the proliferation of
the use of videos, email and fax machines. Direct selling companies can now
produce or purchase high quality videos and web sites for use in product
education, demonstrations, and sponsoring sessions that project a desired image
for the company and product line. Sureal is committed to utilizing current and
future technological advances fully to enhance the effectiveness of its direct
selling program.
Sureal's management believes that the distributor incentive program is the
most integral factor in developing a strong distributor network. Sureal's
network marketing program is specifically designed for the needs of
international distributors and differs from the compensation plans of many
other network
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<PAGE>
marketing programs in several respects. First, Sureal's Global Compensation
Plan allows distributors to develop a seamless global network of down line
distributors (see below). Second, the Global Compensation Plan is among the
most financially rewarding plans offered to distributors by network marketing
companies, and can result in commissions to distributors aggregating up to a
maximum of 63% of a product's wholesale price.
Global Compensation Plan -- Sureal believes that the two principal
strengths of its Global Compensation Plan are (i) the potential level of
commissions and bonuses available to distributors and (ii) its seamless
integration across all markets in which Sureal products are sold. Sureal
believes that the Global Compensation Plan is potentially among the most
financially rewarding plans offered to distributors by network marketing
companies. There are two fundamental ways in which distributors can earn money
(i) through retail markups, for which Sureal recommends a range of
approximately 30% and (ii) through a series of commissions on each product sale
which can result in commissions to distributors aggregating up to a maximum of
63% of such product's wholesale price. However, Sureal believes the actual
commissions paid will be significantly less. Commissions have averaged from 40%
to 42% of revenue from commissionable sales since inception.
By entering into written distributor agreements with Sureal, distributors
are authorized to sponsor new distributors in each country where Sureal has
operations. This policy allows distributors to receive commissions for sales at
the same rate for sales in foreign countries as for sales in their home
country. This is a significant benefit to distributors because they are not
required to establish new distributorships or requalify for higher levels of
commissions within each new country in which they begin to operate. The
seamless integration of the Global Compensation Plan means that distributor
knowledge and experience can be used to rapidly build distributor leadership in
new markets.
Sureal's compensation plans for distributors also include:
o Permitting past ordering performance (during the period when Sureal
represented other direct marketers) to count in the new incentive
program;
o Establishing an investment program at a broker/dealer in which a
portion of bonuses may be retained and invested for the benefit of
distributors;
o Permitting distributors to represent more than one direct marketing
company;
o Providing products that management believes are needed in the
marketplace at price points that are realistic and attractive; and
o Continuing its distributor administrative program that includes
timely reporting and people who speak the local language fluently.
These programs, taken as a whole, are believed to be unique in the direct
marketing industry.
Sponsoring
Sureal relies solely on its existing distributor force to sponsor new
distributors. While Sureal provides product samples, brochures, and other sales
materials, distributors are primarily responsible for educating new
distributors with respect to products, the Global Compensation Plan, and how to
build a successful distributorship.
The sponsoring of new distributors creates multiple levels in the network
marketing structure. Persons whom a distributor sponsors are referred to as
"down line" distributors. If down line distributors also sponsor new
distributors, they create additional levels in the structure, but their down
line distributors remain part of the same down line network as their original
sponsoring distributor.
Sponsoring activities are not required of distributors. However, because
of the financial incentives provided to those who succeed in building a
distributor network, Sureal believes that most of its distributors attempt,
with varying degrees of effort and success, to sponsor additional distributors.
Generally, distributors invite friends, family members and acquaintances to
sales meeting where Sureal products are presented and where the Global
Compensation Plan is explained. Individuals are attracted
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<PAGE>
to become distributors after using Sureal products and becoming regular retail
customers. Once a person becomes a distributor, he or she is able to purchase
products directly from Sureal at wholesale prices for resale to consumers or
for personal consumption. The distributor is also entitled to sponsor other
distributors in order to build a network of distributors and product users.
Major distributors earn incentives or bonuses based on the sales volume of
their down lines.
A potential distributor must sign a distributor agreement with Sureal that
obligates the distributor to abide by Sureal's established policies and
procedures.
Russian Market
For the purpose of this section, the "Russian Market" incorporates the
markets of all of the republics of the former Soviet Union and several
countries in Eastern Europe. This market has a population in excess of 400
million people and is characterized by:
o Inadequate supplies of many basic consumer products at affordable
prices;
o Cumbersome and redundant government regulations and even corruption;
o Inadequate shipping services within a country; and
Many people seeking opportunities to benefit within the new capitalistic
framework.
To succeed in this environment a company, among other things, must:
o Establish an effective relationship with a reliable and influential
local business associate or "partner";
o Have a methodology for being paid in United States dollars on a
timely basis;
o Establish a system for warehousing, shipping and clearing customs in
a manner that minimizes delay and risk of loss through theft;
o Understand the needs of prospective dealers and customers; and
o Have a system in place to manage a business that is growing rapidly.
In addition, a direct marketing company, among other things, must:
o Have an effective system of accumulating information that gives rise
to distributor incentives;
o Have an effective program of distributor incentives tailored for
particular markets;
o Have key employees with knowledge of the language and culture of the
countries in which distributors operate;
o An efficient and fair means of resolving disputes and
misunderstandings on a timely basis; and
o An effective inventory control and distribution system.
Sureal believes that it has systems in place that accomplish each of the
foregoing requirements.
Sureal has developed relationships with reliable and influential local
collaberative distributors in Russia to help Sureal:
o Get products certified for sale through the appropriate governmental
authorities and required approval processes;
o Clear incoming products through customs; and
o Repatriate currency.
Substantially all of Sureal's commissionable sales have been made in the
Russian Market. All transactions involving Sureal are denominated in United
States dollars. Sureal does not assume any risk with respect to currency
fluctuations. Typically, products are shipped and billed (in United States
dollars) to a limited number of major distributors. These distributors have the
responsibility of getting shipments
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<PAGE>
through customs and into a warehouse, redistributing the products to smaller
distributors, collecting sales proceeds, converting currencies and remitting
payment to Sureal (see "Risk Factors").
Products
Substantially all of Sureal's products are manufactured from readily
available ingredients and materials. Management believes that if any source of
ingredients becomes unavailable, alternative sources of supply are available at
comparable prices and delivery schedules. In the event that Sureal were unable
to procure such alternate sources at competitive prices and on a timely basis
for its principal products, Sureal's operations would be materially adversely
affected. See "Risk Factors". Ingredients are stored by the contract
manufacturers. Finished products are shipped directly to foreign warehouses by
ship.
Sureal offers products in two distinct categories--nutritional supplement
products and air purification products. In addition to products, Sureal offers
a variety of sales aids to distributors, including starter kits, introductory
kits, brochures, and product catalogs. All sales aids and brochures are
targeted for the local markets and are written in the local language.
The following chart sets forth the Sureal branded products that are
available as of April 15, 1998.
<TABLE>
<CAPTION>
TOTAL
PRODUCTS
OFFERED
PRODUCT NAME BY SUREAL UNITED STATES RUSSIA
- ------------ --------- ------------- ------
<S> <C> <C> <C>
Classical Herbs .............. 6 6 6
Children's Nutrition ......... 1 1 1
Specialty .................... 4 4 4
Herbal Teas .................. 4 4 4
Preferred Pet ................ 2 2 2
Air Purification ............. 2 2 2
Total ........................ 19 19 19
</TABLE>
NUTRITIONAL SUPPLEMENTS PRODUCTS
The nutritional supplements product category is comprised of 17 products
in the following lines: classical herbs, children's nutrition, specialty,
herbal teas, and Preferred Pet. Sureal's nutritional supplements are designed
and marketed to promote a healthy, active lifestyle and general well being
through proper diet, exercise and nutrition.
Sureal believes that the nutritional supplement market is expanding in
Russia and the United States because of changing dietary patterns, a
health-conscious population and recent reports supporting the benefits of using
vitamin and mineral nutritional supplements. This product line is particularly
well suited to network marketing because the average consumer is often
uneducated regarding nutritional products. Sureal believes that network
marketing is a more efficient method than traditional retailing channels in
educating consumers regarding the benefits of nutritional products. Because of
the numerous over-the-counter vitamin and mineral supplements available in
Russia and the United States, Sureal believes that individual attention and
testimonials by distributors are effective methods of providing information to
a potential consumer.
CLASSICAL HERBS
ALFALFA -- Alfalfa is a medicinal plant known to improve general health.
This herb contains most of the necessary vitamins and minerals required by the
human body. It aids the immune system, helps the body protect itself from
disease, and cleanses the blood. Alfalfa is often used by people with
gastrointestinal problems, as well as by people seeking relief from achy
muscles and joints, coughs and colds.
BEE POLLEN -- Bee pollen is traditionally known to provide the body with
additional energy and relief from fatigue and also helps increase the body's
ability to heal and build resistance to disease. Bee pollen is often used by
individuals and athletes seeking to increase energy or stamina. Bee pollen is
also used to improve mental activity, facilitate sleep, and strengthen the
nerves.
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ECHINACEA -- Echinacea, sometimes referred to as the "King of Blood
Purifiers", and a natural infection fighter, increases the body's ability to
combat infection. Echinacea is used to ward off any infection and is especially
effective in minimizing the symptoms of the common cold.
GOTU-KOLA -- Gotu-kola is traditionally known as the "food for the brain."
Gotu-kola is used to increase mental and physical capacity, combat stress,
improve reflexes, and energize the cells of the brain. Gotu-Kola is also used
to promote relaxation and strengthen memory. This product is recommended to
relax the central nervous system or for those who may be in danger of nervous
breakdown. It is also used by individuals who are confined to a bed and by
women recovering from childbirth.
PASSIONFLOWER -- Passionflower is a naturally occurring relaxant, used to
soothe and calm muscles, nerves and joints. It also is used to relieve
headaches and calm nerves and anxiety. Passionflower is used for insomnia and
other sleep disorders; for the anxiety women experience during menses,
childbirth or menopause; and for restless children.
RED CLOVER -- Red clover is famous for its ability to purify the blood of
toxins. It is also used to relieve coughing, sore throats and skin irritations.
CHILDREN'S NUTRITION
LIL NIBBLES CHILDREN'S CHEWABLE VITAMIN AND MINERAL SUPPLEMENT -- Because
they are growing, children have unique nutritional needs for proper nutrients,
vitamins and minerals. Sureal's balanced formula features a combination of
multivitamins and minerals, including vitamin A, vitamin C, the B vitamins,
Folic and Pantothenic Acid, as well as providing anti-oxidant protection.
SPECIALTY
MIGHTY APHRODITE FEMALE FACTORS -- Mighty Aphrodite Female Factors
contains specific vitamins, minerals, and herbs that are used to resolve
typical female issues, fight fatigue and increase endurance. The principal
ingredient, Pau d'Arco Bark has been used for centuries in South America for
relief from female issues such as PMS, cramps and infections. It also includes
Siberian Ginseng, an herb that is used to relieve stress, mental fatigue and
weakness
HERCULES MALE FACTORS -- Hercules Male Factors contains a specialized
blend of botanicals, vitamins and minerals designed for men. The principal
ingredients are Saw Palmetto powder for the prostate and Vitamin E and Garlic
for the heart. It also features one of the most advanced known anti-oxidants,
Lipoic Acid that acts as a substitute for other vitamins. Chromium is also
included to help develop lean muscle mass.
CUPIDS ARROWS APHRODISIAC -- Cupids Arrows Aphrodisiac combines
traditional folk ingredients with supplements and is used by men and women to
enhance sexual desire, function, and performance. The principal ingredient,
Siberian Ginseng, is a naturally occurring aphrodisiac. The other featured
ingredient, Yohimbe Bark, is an aphrodisiac that increases desire and
performance. The product also includes Arginine, an herb used by men, and Green
Oats extract, an herb used by women, to stimulate the sex drive.
EARTH SUPERFOODS COMPLEX -- Earth Superfoods Complex contains land and sea
greens, anti-oxidants, vitamins, minerals, probiotic cultures, herbs, digestive
plant enzymes, cruciferous vegetables and fruits, and other beneficial
cofactors. It also contains phytonutrients, digestive enzymes such as vitamins
E, A, C and B and Probiotics (known as "friendly bacteria").
HERBAL TEAS
PURITEA CLEANSING TEA -- PURITea contains a blend of natural herbs helpful
for regulating the bowels and urinary tract. The formula helps to cleanse and
soothe rather than irritate. This mild, yet effective, formula aids in flushing
stored waste from the body. This tea features Senna Leaf, a cathartic that
serves as a laxative to cleanse the colon and Uva Ursi, an herb used for
centuries to cleanse the bladder and kidneys.
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ZESTEA ENERGY TEA -- ZESTea contains a blend of natural herbs that
stimulate the body to produce energy, overcome stress, fatigue and weakness.
The principal ingredients in this tea are Kola Nut and Yerba Mate. Kola Nut is
a natural stimulant to the body's circulatory and respiratory system. Yerba
mate has been used for centuries to eliminate fatigue and rejuvenate the body.
LESS-O-ME WEIGHT LOSS TEA -- Less-O-Me Weight Loss Tea contains a blend of
herbs that increase metabolism and burn body fat. These ingredients help block
fat and aid in appetite suppression. The principal ingredients in this tea,
gymnema sylvestra and garcinia cambogia, reduce the body's ability to absorb
fats and sugars, and help block the formation of fat cells. This tea is used as
a part of a weight management or general nutrition program.
TRANQUILITEA RELAXING TEA -- TRANQUILITea contains an assortment of medicinal
herbs used to quiet and soothe the nervous system and promote restful sleep.
The principal ingredients in this product are St. John's wart and Chamomile.
St. John's Wart is a natural anti-depressant that is used to promote deeper,
more restful sleep. Chamomile is used to relax nerves and relieve tension.
PREFERRED PET
DIGESTIVE AID -- Pet Digestive Aid assists pets in food digestion. Pet
Digestive Aid contains digestive enzymes that help pets digest processed food,
as well as absorb the essential vitamins, minerals, and phytonutrients they
need. The principal ingredient, Lacto Bacillius Sporogenes ("LBS"), is a
friendly bacteria that exists in the intestines and helps keep the intestinal
tract clean and free from disease.
ESSENTIAL GREENS -- Pet Essential Greens contains an assortment of vital
greens from the land and the sea. These greens contain important Phytonutrients
that provide pets with anti-oxidant protection and help to keep them safe from
the diseases and illnesses.
AIR PURIFICATION PRODUCTS
The air purification product category is comprised of two products that
use negative ions, ozonation, and germicidal UV light to deliver cleaner,
fresher and safer air.
Sureal believes that the air purification market is expanding in Russia
and the United States because of various reports ranking indoor air pollution
at or near the top of environmental health risks in the United States, and
findings that indoor air is, on the average, more polluted than outdoor air.
This product line is particularly well suited to network marketing because the
average consumer is generally uneducated regarding methods of air purification.
Sureal believes that network marketing is a more efficient method than
traditional retailing channels in educating consumers regarding the unique
benefits of air purification.
SUREAL AIR 2700 -- The Sureal Air 2700 is an air purification system uses
ozone and negative ions and adds the germicidal effects of UV light to purify
the air. The Sureal Air 2700 is designed for use in areas of 2700 square feet
or less.
SUREAL AIR 70 -- The Sureal Air 70 is designed for use in areas of 70
square feet or less, including cars and tables at restaurants.
Sales Aids
Sureal provides an assortment of sales aids to distributors. Sales aids
include audiocassette tapes, promotional clothing, pens, and other
miscellaneous items to help create consumer awareness of Sureal and its
products. Sales aids are priced at Sureal's approximate cost and are not
commissionable items (i.e., distributors do not receive commissions on
purchases of sales aids).
Product Guarantees
Sureal believes that it is among the most consumer protective companies in
the direct selling industry. Sureal's product return policy allows a retail
purchaser to return any product to the distributor from whom
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<PAGE>
the product was purchased for a full refund for a period of 30 days from the
date of purchase. After 30 days from the date of purchase, the return privilege
is at the discretion of the distributor. Because distributors may return unused
and resalable products to Sureal for a refund of 90% of the purchase price for
one year, they are encouraged to provide consumer refunds beyond 30 days. The
product returns policy is a material aspect of the success of distributors in
developing a retail customer base.
Product Development Philosophy
Sureal is committed to building its brand name and distributor and
customer loyalty by selling premium quality, innovative personal care and
nutritional products that appeal to broad markets. Sureal's product philosophy
is to combine the best of science and nature and to include in each of its
products the highest quality ingredients. This philosophy has also led to
Sureal's commitment to avoid any ingredients in nutritional supplements that
are reported or believed to have any long-term addictive or harmful effects,
even if short-term effects may be desirable. Independent distributors need to
have confidence that they are distributing the best products available in order
to have a sense of pride in their association with the Sureal and to have
products that are distinguishable from "off the shelf" products. Sureal is
committed to developing and providing quality products that can be sold at an
attractive retail price and allow Sureal to maintain reasonable profit margins.
Sureal is also committed to constantly improving its product formulations
to incorporate innovative and proven ingredients into its product line. Whereas
many consumer product companies develop a formula and stay with that formula
for years, and sometimes decades, Sureal believes that it must stay current
with product and ingredient evolution to maintain its reputation for innovation
to retain distributor and consumer attention and enthusiasm.
In addition, Sureal believes that timely and strategic product
introductions are critical to maintaining the growth of independent
distribution channels. Distributors become enthusiastic about new products and
are generally excited to share new products with their customer base. An
expanding product line helps to attract new distributors and generate
additional revenues.
Production
Virtually all Sureal's branded products are sourced through U.S. contract
manufacturers unaffiliated with Sureal. Sureal's profit margins and its ability
to deliver its existing products on a timely basis are dependent upon the
ability of Sureal's outside manufacturers to continue to supply products in a
timely and cost-efficient manner. Furthermore, Sureal's ability to enter new
markets and sustain satisfactory levels of sales in each market are dependent
in part upon the ability of suitable outside manufacturers to reformulate
existing products, if necessary to comply with local regulations or market
environments, for introduction into such markets. Finally, the future
development of new products will be dependent upon the services of suitable
outside manufacturers.
Sureal currently acquires products or ingredients from sole suppliers or
suppliers that are considered by Sureal to be the superior suppliers of such
ingredients. Sureal purchases its products and ingredients by placing purchase
orders pursuant to verbally negotiated agreements. No long-term contracts exist
with any supplier. Sureal believes that, in the event it is unable to source
any products or ingredients from its current suppliers, Sureal could replace
such suppliers or products or substitute ingredients without much difficulty or
prohibitive increases in the cost of goods sold. However, there can be no
assurance that the loss of such a supplier would not have a material adverse
effect on Sureal's business and results of operations.
Operating Strengths
Sureal believes that its success has been based upon its commitment to
providing high quality service and products together with a unique business
opportunity to its independent distributors. Sureal believes that it will
continue to be successful by providing high quality servicing to its
distributors and by providing premium quality, innovatively packaged products
and an appealing global business opportunity. Sureal is committed to building
its brand name and distributor and customer loyalty by selling premium quality,
innovative nutritional products that appeal to broad markets.
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<PAGE>
All products are manufactured in the United States and shipped to
warehouses in the Russian markets. Sureal has established procedures to ensure
that products pass through customs in a timely fashion and are shipped to
warehouses safely with a minimal amount of pilferage. Products are shipped by
truck from the warehouse to distribution points.
Growth Strategy
Sureal plans to develop a disciplined approach to opening new markets.
Each market opening will be preceded by a thorough analysis of economic and
political conditions, regulatory standards and other business, tax and legal
issues. Prior to a market opening, Sureal's management team will work to obtain
all necessary regulatory approvals and establish facilities capable of meeting
distributor needs. Sureal plans to consider a variety of options in opening new
markets. Sureal may decide to open the market, or contract with a partner, or
license the market.
Sureal plans to increase its growth by introducing new products, opening
new markets, attracting new distributors and through promotions.
Introduce New Products -- Sureal plans to introduce new products on a
continuing basis. The introduction of new products has a tendency to increase
the sales of existing distributors and helps attract new distributors.
Introduce New Markets -- Sureal will pursue attractive new market
opportunities. Japan, Mexico, Canada India and the Middle East are the next
markets Sureal plans to pursue.
Attract New Distributors -- Sureal plans to contract new distributors by
providing unique and exciting business building promotions. For example, it
offered a 10% volume incentive to distributors on each nutritional product
purchased through March 1998. Sureal intends to continue to create and maintain
a business climate to promote the growth in the number of active distributors
and to increase distributor retention, motivation and productivity. Sureal will
do this by continuing to enhance distributor recognition programs.
Competition
The markets for personal care and nutritional products are large and
highly competitive. Sureal competes directly with companies that manufacture
and market personal care and nutritional products in each of Sureal's product
lines. Sureal competes with other companies in the personal care and
nutritional products industry by emphasizing the value and premium quality of
the Company's products and the convenience of the company's distribution
system. Many of Sureal's competitors have much greater name recognition and
financial resources than does Sureal. In addition, personal care and
nutritional products can be purchased in a wide variety of channels of
distribution. While Sureal believes that consumers appreciate the convenience
of ordering products from home through a sales person or through a catalog, the
buying habits of many consumers accustomed to purchasing products through
traditional retail channels are difficult to change. Sureal's product offerings
in each product category are also relatively small compared to the wide variety
of products offered by many other personal care and nutritional product
companies. There can be no assurance that Sureal's business and results of
operations will not be affected materially by market conditions and competition
in the future.
Sureal also competes with other direct selling organizations, some of
which have longer operating histories and greater name recognition and
financial resources. The leading network marketing company in Sureal's markets
is Amway Corporation and its affiliates. Sureal competes for new distributors
on the basis of its Global Compensation Plan and premium quality products.
Management envisions the entry of more direct selling organizations into the
marketplace as this channel of distribution expands over the next several
years. Sureal also believes that other large, well-financed corporations may
launch direct selling enterprises that will compete with Sureal in certain
product lines. There can be no assurance that Sureal will be able to
successfully meet the challenges posed by this increased competition.
Sureal competes for the time, attention and commitment of its independent
distributors. Given that the pool of individuals interested the business
opportunities presented by direct selling tends to be limited
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in each market, the potential pool of distributors for Sureal's products is
reduced to the extent other network marketing companies successfully recruit
these individuals into their businesses. Although management believes that
Sureal offers an attractive business opportunity, there can be no assurance
that other network marketing companies will not be able to recruit Sureal's
existing distributors or deplete the pool of potential distributors in a given
market.
EMPLOYEES
At June 30, 1998, KMS had 46 employees, of which 41 were registered with
the NASD. Sureal had 11 employees at such date. None of these employees is
covered by a collective bargaining agreement.
FACILITIES
KMS leases 14,000 square feet of office space at 110 Wall Street, New
York, NY subject to an agreement expiring on August 31, 2002 with minimum
annual rent increasing from $310,000 to $315,000.
Sureal rents a 4,080 square foot facility in Orem, Utah subject to a lease
calling for minimum annual rentals of $55,000.
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CAPITALIZATION
The following table sets forth the capitalization of the Company as of
April 30, 1998 and as adjusted to reflect the sale of the 3,000,000 of Common
Stock offered by the Company hereby (666,667 Shares if only the Minimum
Offering is sold) and the application of the estimated net proceeds therefrom.
This table should be read in conjunction with the Company's Consolidated
Financial Statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS ADJUSTED
------------------------------------
ACTUAL MINIMUM OFFERING MAXIMUM OFFERING
--------------- ------------------ -----------------
<S> <C> <C> <C>
Indebtedness ........................ $ 979,538 -- --
------------ ------------ ------------
Minority interest ................... 740 -- --
------------ ------------ ------------
Stockholders' Equity:
Preferred stock ..................... 4
Common stock ........................ 1,070 $ 1,165 $ 1,399
Additional paid-in capital .......... 3,617,657 11,944,896 41,494,130
Retained earnings ................... (3,179,771) (3,179,771) (3,179,771)
------------ ------------ ------------
Total stockholders' equity ......... 438,960 8,763,960 38,313,960
------------ ------------ ------------
Total Capitalization ................ $ 1,419,238 $ 8,763,960 $ 38,313,960
============ ============ ============
</TABLE>
- ----------
(1) Gives effect to the issuance of 750,000 shares of Common Stock pursuant
to the Share Exchange Agreement associated with the acquisition of Sureal
(see "Business" and "Certain Transactions") and the two for one reverse
stock split effective December 8, 1997 (see "Description of Capital
Stock").
36
<PAGE>
MANAGEMENT
Executive Officers and Directors
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
<S> <C> <C>
Mohammad Ali Khan ........... 31 Chairman of the Board, President, Chief Executive Officer
Asim S. Kohli ............... 32 Executive Vice President, Chief Operating Officer, Director
A. Rushdi Siddiqui .......... 33 Vice President of Business Development for KMS, Director
Edward A. Heil .............. 46 Consultant and Director
R. Bret Jenkins ............. 39 President of Sureal and Director
Maurice Gross ............... 62 Consultant and Director
Steven Jacobson ............. 54 Consultant and Director
William Walling ............. 65 Chief Investment Advisor
William Triebel ............. 46 Chief Financial Officer
Joseph Antonini ............. 56 Director
Jamil Asghar ................ 39 Director
Leonard Yablon .............. 68 Director
Jaffer Naqvi ................ 52 Director
</TABLE>
All Directors hold office until the next annual meeting of shareholders of
the Company or until their successors have been elected. All officers are
appointed annually by the Board of Directors and, subject to existing
employment agreements, serve at the discretion of the Board.
Outside (nonexecutive) directors shall receive $15,000 and 10,000 shares
of Common Stock per year as compensation for serving on the Board of Directors.
All Directors are reimbursed by the Company for any expenses incurred in
attending Directors' meetings and receive $500 for attending committee
meetings. The Company also intends to obtain Officers and Directors liability
insurance, although no assurances can be given that such coverage will be
obtained.
Background of Executive Officers and Directors
MOHAMMAD ALI KHAN is the founder of the Company and serves as the Chairman
of the Board, President and CEO. He has also been the President of KMS since
1995. Mr. Khan started his career in the financial industry as a financial
consultant at Prudential Securities in 1990. Mr. Khan has served in a variety
of sales management and corporate finance positions with other investment
banks. In addition, he has been a member of the New Jersey State Governor's
counsel since 1997. Mr. Khan holds a Bachelors Degree in Physics and
Mathematics from Karachi University in Pakistan and a Bachelor of Arts Degree
in Finance from Rutgers University.
ASIM S. KOHLI was Director of Operations for Hardees Corporation from July
1991 to May 1992; Regional Sales Manager for Birov, Incorporated from September
1992 to February 1993; Senior Real Estate Appraiser for Appraisal Network
Associates from September 1993 to January 1994; Senior Real Estate Appraiser
for Lin Holz Associates from January 1994 to May 1995; Director of Operations
for The Rose Group from May 1995 to August 1995; and Director of Operations for
CFS Management, Incorporated from August 1995 until December 1995. He joined
KMS in January 1996. Mr. Kohli holds a Bachelor of Business Administration
degree from Northern Illinois University.
A. RUSHDI SIDDIQUI founded and was a principal in Siddiqui Rose &
Associates, a marketing consulting firm, from 1992 to 1993. From 1993 to 1996,
he was Chief Operating Officer of Welsh Technologies, Inc., which is engaged in
the alternate fuel vehicle conversion industry. He served as a Marketing
Officer for Mashreq Bank in 1996 and became Director of Business Development
for KMS in 1997. Mr. Siddiqui holds a Bachelor of Science degree from New York
University, a Master of Business Administration degree from Baruch College and
a Juris Doctorate from Albany Law School of Union University.
37
<PAGE>
EDWARD A. HEIL is a certified public accountant and a managing director,
since January 1992, in Independent Network Group, Inc., a financial consulting
firm. From 1984 through December 1991 he was a partner in the accounting firm,
Deloitte & Touche, LLP. From 1973 to 1984 he was employed in various
professional capacities by Deloitte & Touche, LLP. Mr. Heil, who is also a
director of Thermo-Mizer Environmental Corp. (a New Jersey-based public
company), holds Bachelor of Arts and Master of Business Administration degrees
from New York University.
R. BRET JENKINS has been Chairman of Sureal since its inception. He has
also been a shareholder in the law firm Boyack, Ashton & Jenkins, P.C. since
1994 and practiced law with several law firms prior thereto. Mr. Jenkins holds
a Bachelor of Arts and Juris Doctorate degrees from the University of Utah.
MAURICE GROSS has been a principal in the consulting firm of Maurice Gross
& Co. Prior thereto he was a Senior Vice President at Gruntal & Co.
STEVEN R. JACOBSON is a founder and principal of Steven R. Jacobson & Co.,
a broker/dealer specializing in restricted security lending, venture capital
and investment banking. He is also a partner in SRJ Financial Group which is
engaged in a variety of corporate financing activities, and is a member of the
Board of Directors of Enhance Reinsurance Company. Mr. Jacobson holds a
Bachelor of Business Administration degree from Iona College.
WILLIAM WALLING became Vice President of Investments for KMS in July 1996.
Prior thereto, from 1992, he held supervisory roles with RAS Securities. Mr.
Walling, who has received numerous awards and citations for his research
reports and other writings, holds a Bachelor of Arts degree from Michigan State
University and a Master of Business Administration from New York University.
WILLIAM TRIEBEL became KMS' Chief Financial Officer in July 1997. He also
serves as Chief Financial Officer of USFG. Prior thereto, he was a senior
accountant for Gettenberg Consulting Group from June 1996 to June 1997. Mr.
Triebel was the manager for financial operations of Prime Capital Services,
which was located in Poughkeepsie, NY, from March 1984 to May 1996. Mr. Triebel
is a graduate of Marist College.
JOSEPH E. ANTONINI has more than 30 years of experience managing one of
America's largest retailing chains. He is the former Chairman, President, and
CEO of Kmart Corporation, one of the world's largest retailers. Mr. Antonini
also directed the expansion of Kmart's specialty retail group, which included
Borders Bookstores, Payless Drug Stores, Office Max, Sports Authority and
Builders Square. Since then, Mr. Antonini has served as a director and advisor
to various enterprises. He is currently the President of JEA Enterprises, an
investment firm which he founded, and serves as a director of American Speedy
Printing Centers, Inc., Ziebart, Inc., Shell Oil Company, Andretti Wine Group,
LTD., NAMS Net and numerous civic and charitable organizations. He holds a
Bachelor of Science degree from West Virginia University.
SYED JAMIL ASGHAR was President of National Telecommunication, a long
distance telephone company, from 1991 until 1993. Since then, he has been
President of Laser Dimension Graphics & Printing, Inc. Mr. Asghar holds a
Bachelor of Science degree from Southern Illinois University.
LEONARD YABLON has been employed by Forbes Company since 1963 and
currently serves as Executive Vice President and Chief Financial Officer. In
addition, he is also the President of Sangre de Cristo Ranches, Forbes
Trinchera, Fiji Forbes and Forbes Europe. He is also the Vico President of
Forbes investors Advisory Institute and Secretary and Treasurer of the Forbes
Foundation. Mr. Yablon holds a Bachelor of Science degree from Long Island
University and a Master of Business Administration in Taxation from City
College in New York.
JEFF A. NAQVI is the Founder and President of Interactive Network for
Continuing Education, which conducts educational seminars for physicians
throughout the United States on behalf of major pharmaceutical companies as
part of their effort to launch new drugs. Prior thereto, Mr. Naqvi was a
director of The Medicine Group, Ltd. of Abbingtton, England. Mr. Naqvi has been
in the pharmaceutical industry for over 30 years holding high level management
positions at major companies. He holds a Master of Business Administration
degree from New York University.
38
<PAGE>
Remuneration
The following officers received compensation in excess of $100,000 in 1997
or 1996. The Board of Directors intends to establish a compensation committee
comprised of outside directors to review compensation matters and any new
employment contracts. The Company will not enter into any new employment
contracts until after the Offering is completed.
The Company has or plans to adopt a health and disability plan and a
401(k) plan for its employees.
Committees
The Board of Directors will create Audit and Compensation Committees
comprised of independent members.
Summary Compensation Table
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------------ -------------------------- -----------------------
OTHER
NAME AND SALARY ANNUAL RESTRICTED ALL TIP
PRINCIPAL POSITION YEAR COMPEN. BONUS COMPEN. STOCK AWARDS OPTIONS PAYOUTS OTHER
- ------------------------- ------ ----------- ------- --------- -------------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
KMS:
M. Ali Khan ............. 1997 $617,839
Asim S. Kohli ........... 1997 $103,700
Sureal:
R. Bret Jenkins ......... 1997 $ 82,923 $8,000 $208,424
1996 $ 80,500 $8,000 $ 97,533
Richard Wogksch ......... 1997 $ 82,923 $8,000 $208,424
1996 $ 80,500 $8,000 $ 97,533
Glen Jensen ............. 1997 $ 82,923 $8,000 $208,424
1996 $ 80,500 $8,000 $ 97,533
</TABLE>
- ----------
Notes--The Other Payout amounts paid to Messrs. Jenkins, Wogksch and Jensen
were S corporation distribtions made to permit the recipients to pay their
personal income tax liabilities.
Other annual compensation relates to the estimated costs of health insurance
and automobiles provided by Sureal.
Employment Agreements
The Company has entered into employment agreements with Messrs. Khan and
Kohli under which it has agreed to pay them annual salaries of $350,000 and
$250,000 through 2003. The contracts, which contain two three-year renewal
clauses, provide for additional bonuses based at the discretion of the Board of
Directors.
Sureal has entered into employment agreements with Messrs. Jenkins,
Wogksch and Jensen providing that each receive annual compensation of $120,000
through 2003. These contracts provide for additional compensation linked to
Sureal's performance.
Sureal and the Company have also entered into a consulting arrangement
with a firm associated with Mr. Heil under which they have agreed to pay
minimum annual fees of $120,000, subject to upward adjustment based on work
performed. The agreement also provides for performance fees with respect to
certain types of transactions.
Stock Option Plan
The United States Financial Group, Incorporated 1998 Stock Incentive Plan
(the "Plan"), which expires ten years from the date adopted, enables the
Company to grant incentive stock options, nonqualified options and stock
appreciation rights ("SARs") for up to 1,000,000 shares of the Company's
39
<PAGE>
Common Stock. Incentive stock options granted under the Plan must conform to
applicable Federal income tax regulations and have an exercise price not less
than the fair market value of shares at the date of grant (110% of fair market
value for ten percent or more stockholders). Other options and SARs may be
granted on terms determined by a committee of the Board of Directors. As of
June 30, 1998, no options were outstanding under the Plan.
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Company's Common Stock at the date of
this Prospectus by (i) each person known by the Company to own, directly or
beneficially, more than 5% of the Company's Common Stock, (ii) each of the
Company's directors, and (iii) all officers and directors of the Company as a
group. Except as otherwise indicated, the Company believes that the beneficial
owners of the Common Stock listed below, based on information furnished by such
owners, have sole investment and voting power with respect to such shares,
subject to community property laws, where applicable.
<TABLE>
<CAPTION>
SHARES OF COMMON
SHARES OF COMMON STOCK
STOCK OWNED OWNED
BEFORE OFFERING AFTER OFFERING
----------------------------------- ------------------------------------------
PERCENT OF PERCENT OF
NAME AND ADDRESS OF NUMBER OF PERCENT OF SHARES OWNED-- SHARES OWNED--
BENEFICIAL OWNER (1) SHARES OWNED SHARES OWNED (1) MAXIMUM OFFERING (2) MINIMUM OFFERING
- ---------------------------------- -------------- ------------------ ---------------------- -----------------
<S> <C> <C> <C> <C>
Mohammad Ali Khan (3) ............ 9,444,634 82.00 63.16 77.52
Asim S. Kohli .................... -- -- -- --
A. Rushdi Siddiqui ............... -- -- -- --
Edward A. Heil ................... 18,750 .16 .13 .15
R. Bret Jenkins .................. 133,333 1.16 .92 1.09
Maurice Gross .................... -- -- -- --
Steven Jacobson .................. -- -- -- --
Joseph Antonini .................. -- -- -- --
Leonard Yablon ................... -- -- -- --
Jamil Asghar ..................... -- -- -- --
Jaffer Naqvi .....................
Directors and Officers
as a Group (11 persons) ......... 9,596,717 83.32 64.21 78.76
</TABLE>
- ----------
(1) The address for each officer and director is c/o Klein, Maus & Shire,
Inc., 110 Wall Street, New York, NY 10005.
(2) Assumes that Mr. Khan, the Selling Stockholder, sells 275,000 shares as
part of the Maximum Offering.
(3) Mr. Khan plans on contributing 1,000,000 shares to a charitable
foundation following the closing of the Offering. He will exercise no
control over such shares after making the contribution.
40
<PAGE>
CERTAIN TRANSACTIONS
Merger with Sureal
On December 3, 1997, the Company exchanged 750,000 shares of its common
stock for all of the outstanding shares of common stock of Sureal. This
transaction was accounted for as a pooling of interests in accordance with
Opinion No. 16 of the Accounting Principles Board.
Bridge Financing
From January through March 1998, the Company sold 12 units of Bridge
Financing. Each Unit consists of (i) a 10 percent Promissory Note in the
principal amount of $50,000 due one year from the date of issuance and (ii)
1,667 shares of the Company's Common Stock. The holders of such shares have
certain registration rights. For financial reporting purposes, a portion of the
net proceeds of $575,000 was allocated to the value of the Common Stock. The
resulting debt discount of $150,030 (which was determined based on a fair value
estimate of $15 per share) is being amortized to expense over the term of the
Promissory Notes.
Other
Ronald J. Brescia, a principal in the law firm of Doros & Brescia, P.C.
("D&B"), counsel to the Company, shall receive as partial compensation for
services rendered and to be rendered by D&B to the Company as Company counsel,
10,000 shares of the Company's Common Stock per year for a minimum of three
years or as long as D&B serves as Company counsel, whichever is longer, at a
price per share of $.01.
41
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement"), a copy of which is filed as an Exhibit to this
Registration Statement, between the Company and (referred to in this
section as the "Underwriter"), the Company is offering a minimum of 666,667
shares of its Common Stock (the "Minimum Offering") and a maximum of 3,000,000
shares of its Common Stock (the "Maximum Offering") at a price of $15 per
share. The Company has agreed to pay the Underwriter a commission equal to 10%
of the gross proceeds from the sale of the Shares offered hereby. The
Underwriter has made no commitment to sell any of the Shares offered hereby,
and no assurance can be given that any of the Shares will be sold. The
Underwriter has agreed to use its "best efforts" to sell the Shares. The
Underwriter has a material association or relationship to the Issuer by virtue
of being a subsidiary thereof.
The Underwriter has the option to utilize other broker-dealers that are
member of the NASD (the "Selected Participating Dealers") to assist in the sale
of the Shares. At the date hereof, the Underwriter has not reached any
agreement with any Selected Participating Dealers to conduct selling efforts
with respect to the Shares being offered hereby. In the event that any
agreement is reached between the Underwriter and any Selected Participating
Dealers, the Underwriter intends to reallow to such Selected Participating
Dealers up to percentage points of the full 10% underwriting commission.
The Underwriter has informed the Company that it does not intend to
confirm sales to any accounts over which it exercises discretionary authority.
The proceeds from the sale of the Shares will be held in an escrow account
at The Chase Manhattan Bank, New York, New York (the "escrow Account"), until a
minimum of 666,667 shares of Common Stock have been sold and $10,000,000 is
deposited in the Escrow Account. If at least 666,667 shares of Common Stock are
not sold by six months from the date of this Prospectus, the proceeds received
from investors will be refunded promptly to the investors in full without
interest thereon and/or deduction of any kind therefrom. Until the proceeds
from the sale of at least 666,667 Shares have been deposited in the Escrow
Account, investors will not be stockholders nor able to demand the return of
their subscription proceeds. None of the Selling Stockholder's shares will be
sold until the Minimum Offering has been completed. Thereafter, sales of Shares
will be prorated between the Company and the Selling Stockholder.
All purchaser checks should be made payable to "United States Financial
Group, Incorporated--Escrow Account." Certificates evidencing the Shares will
be issued to the purchasers only if the proceeds from the sale of at least
666,667 shares of Common Stock are actually deposited in the Escrow Account and
released to the Company pursuant to the terms of the Escrow Agreement. Until
such time as the proceeds are actually received by the Company and the
certificates delivered to the purchasers thereof, such purchasers will be
deemed subscribers and not stockholders of the Company. During the selling
period, purchasers will have no right to demand the return of their
subscription proceeds. If the Minimum Offering is successfully sold, the
Offering will continue until the maximum period of the Offering has elapsed or
until the Offering is terminated by the Company and the Underwriter, whichever
occurs first.
The Underwriting Agreement also provides that the Company will pay a
non-accountable expense allowance equal to 2.5 percent of the gross proceeds of
the Offering to the Underwriter ($250,000 if the Minimum Offering is sold and
$1,125,000 if the Maximum Offering is sold). The Company has also agreed to pay
all expenses in qualifying the Shares offered hereby for sale under the laws of
such states as the Underwriter may designate, including fees and expenses of
counsel retained for such purposes.
The Company has agreed to sell warrants to the Underwriter (the
"Underwriter's Warrants") at a purchase price of $0.0001 per Underwriter's
Warrant to acquire an aggregate of 300,000 shares of Common Stock, subject to
adjustment in the event that the Maximum Offering is not sold, for a period of
four years commencing one year from the date of this Prospectus, at an exercise
price equal to 160% of the price of the Common Stock to the public in this
Offering (or $18 per share). The Underwriter's Warrants grant the holder
thereof certain demand and "piggy-back" registration rights for a period of
five years from the date of this Prospectus with respect to the Shares issuable
upon the exercise of the Underwriter's Warrants.
42
<PAGE>
The offering price of $15.00 per Share was arbitrarily determined by
management of the Company and the Underwriter and was selected because the
Company and Underwriter believe the Shares can best be sold at that price. The
price has no relationship to the value of the Issuer or its assets. In
determining the price, the Company and Underwriter considered such factors as
the amount of equity and control desired to be retained by existing
stockholders, dilution to public investors and the general marketability of the
shares.
The Underwriting Agreement provides for reciprocal covenants of indemnity
against liabilities in certain instances under the Securities Act of 1933, as
amended. To the extent that the Underwriting Agreement may purport to provide
exculpation from possible liabilities arising from the Federal securities laws,
it is the opinion of the SEC that such indemnification is contrary to public
policy and unenforceable.
The foregoing does not purport to be a complete statement of the terms and
conditions of the Underwriting Agreement, a copies of which have been filed as
an Exhibit to this Registration Statement and are on file at the offices of the
Company and the Underwriter.
43
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company is presently authorized to issue 40,000,000 Shares of its
$.0001 par value common stock, of which 11,507,634 Shares are presently issued
and outstanding or subscribed. A total of 3,000,000 Shares are offered for sale
hereby.
Preferred Stock
The Company is authorized to issue up to 2,000,000 shares of preferred
stock. Shares of preferred stock have no voting rights and are not entitled to
receive dividends unless voted by the Board of Directors. Such shares are
convertible into shares of Common Stock and receive preferences in the event of
Company liquidation.
Common Stock
All Shares of Common Stock, when issued, will be fully-paid and
non-assessable. All Shares are equal to each other with respect to voting,
liquidation and dividend rights. Holders of Shares of Common Stock are entitled
to one vote for each Share they own at any stockholders' meeting. Holders of
Shares of Common Stock are entitled to receive such dividends as may be
declared by the Board of Directors out of funds legally available therefor, and
upon liquidation are entitled to participate pro rata in a distribution of
assets available for such a distribution to stockholders. There are no
conversion, preemptive, redemption, or other rights or privileges with respect
to any Shares. Reference is made to the Company's Articles of Incorporation and
its by-laws as well as to the applicable status of the State of Delaware for a
more complete description of the rights and liabilities of holders of Common
Stock. The Company hereby undertakes to provide any stockholder at any time
with a copy (at a nominal charge) of its articles of incorporation and by-laws.
Also these documents are on public record as exhibits to the Registration
Statement on file with the Securities and Exchange Commission. The Common Stock
of the Company does not have cumulative voting rights which means that the
holders of more than 50% of the Shares voting for the election of directors may
elect all of the directors if they choose to do so. In such event, the holders
of the remaining Shares aggregating less than 50% will not be able to elect any
directors.
Market For Shares
Application will be made to list the Shares of Common Stock on NASDAQ's
National Market System, if it meets the applicable entry standards. There is no
assurance the Company will be accepted by NASDAQ's National Market System or
that the Company will have sufficient income, assets, shareholders publicly
held shares and market makers to meet the requisite standards for initial
inclusion. If the Company qualifies and is included on NASDAQ's National Market
System, it will use its best efforts to maintain the listing. If the Company
fails to achieve or maintain its eligibility for listing on NASDAQ's National
Market System, the liquidity of the shares purchased by investors may be
reduced.
44
<PAGE>
DIVIDENDS
The Company can give no assurance that it will generate earnings from
which cash dividends can be paid. However, Management may follow a policy of
retaining all such earnings to finance the development of its business. Such a
policy could be maintained so long as necessary to provide working capital for
the Company's operations. Any dividends that may be paid in the future will be
dependent upon the financial requirements of the Company and all other relevant
factors.
REPORTS TO SHAREHOLDERS
The Company will furnish annual reports to its shareholders that will
include audited financial statements and such other interim reports as
management deems appropriate.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock and
Warrants is American Stock Transfer and Trust Company, 40 Wall Street, New
York, New York 10005.
LEGAL PROCEEDINGS
Legality of the Shares of Common Stock being offered hereunder and certain
other matters have been passed upon for the Issuer by Doros & Brescia, P.C.
1140 Avenue of the Americas, New York, NY 10036.
KMS was a co-defendant in a legal action in which the plaintiff alleged
that KMS and certain of its representatives sold securities to the plaintiff
through fraudulent sales practices, misrepresentations and omissions and that
certain trades were unauthorized. The complaint demanded compensatory damages
of $254,000, rescission damages of $100,000, unspecified punitive damages and
attorneys' fees and other legal costs. The matter was resolved in April 1998
when KMS agreed to repurchase the preferred shares for $110,000, payable in
five equal monthly installments commencing April 1998.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1997 and 1996, and for each of the three fiscal periods in the period ended
December 31, 1997, included herein, have been included in this Prospectus in
reliance upon the report of Eichler Bergsman & Co., LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing. The financial statements of KMS as
of December 31, 1996 and 1995 and for each of the years then ended, included
herein, have been included in this Prospectus in reliance upon the separate
reports of Lilling & Company and Hagan & Burns CPAs, PC, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firms as experts in accounting and auditing.
INDEMNIFICATION
The Company has provisions in its charter, by-laws, or other contracts
providing for indemnification of its officers and directors which allows, the
Company, among other things, to pay for the expenses of an officer of director
in connection with legal proceedings brought about because of the person's
position with the Company.
FURTHER INFORMATION
The Company has filed with the Washington D.C. Office of the Securities
and Exchange Commission, a Registration Statement on form S-1 under the
Securities Act of 1933, as amended, with respect to the Common Shares to which
this Prospectus relates. As permitted by the Rules and Regulations of the SEC,
this Prospectus does not contain all of the information set forth in the
Registration Statement. For further information with respect to the Company and
the Shares offered hereby, reference is made to the Registration Statement,
including exhibits thereto, which may be reviewed and copies obtained from the
Public Reference Branch, Securities and Exchange Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549. The Commission also maintains a site on the World
Wide Web that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The URL address of such site is http://www.sec.gov.
45
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
AUDITED FINANCIAL STATEMENTS:
UNITED STATES FINANCIAL GROUP, INCORPORATED:
Independent Auditors' Report .......................................................... F-2
Consolidated Balance Sheets at December 31, 1996 and 1997 ............................. F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997 ..................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997 ..................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997 ..................................................... F-6
Notes to Consolidated Financial Statements ............................................ F-7
SUREAL INTERNATIONAL, INC.:
Independent Auditors' Report .......................................................... F-15
Balance Sheets at December 31, 1996 and 1997 .......................................... F-16
Statements of Operations for the period August 10, 1995 (inception) to
December 31, 1995 and the Years ended December 31, 1996 and 1997 ..................... F-17
Statements of Stockholders' Equity for the period August 10, 1995 (inception) to
December 31, 1995 and the Years ended December 31, 1996 and 1997 ..................... F-18
Statements of Cash Flows for the period August 10, 1995 (inception) to
December 31, 1995 and the Years ended December 31, 1996 and 1997 ..................... F-19
Notes to Financial Statements ......................................................... F-20
KLEIN, MAUS & SHIRE, INC.:
Independent Auditors' Reports ......................................................... F-23
Balance Sheets at December 31, 1996 and 1997 .......................................... F-26
Statements of Operations for the Years Ended December 31, 1995, 1996 and 1997 ......... F-27
Statements of Stockholders' Equity for the Years Ended December 31, 1995, 1996 and
1997 ................................................................................. F-28
Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997 ......... F-29
Notes to Financial Statements ......................................................... F-30
UNAUDITED FINANCIAL STATEMENTS:
UNITED STATES FINANCIAL GROUP, INCORPORATED:
Consolidated Balance Sheet, April 30, 1998 ............................................ F-35
Consolidated Statements of Operations for the Four Months Ended April 30, 1998 and
1997 ................................................................................. F-36
Consolidated Statements of Stockholders' Equity for the Four Months Ended April 30,
1998 ................................................................................. F-37
Consolidated Statements of Cash Flows for the Four Months Ended April 30, 1998 and
1997 ................................................................................. F-38
Notes to Consolidated Financial Statements ............................................ F-39
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
United States Financial Group, Incorporated
New York, NY
We have audited the consolidated balance sheets of United States Financial
Group, Incorporated and subsidiaries as of December 31, 1996 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the three years ended December 31, 1995, 1996, and 1997. 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 did not audit the financial statements of Klein Maus & Shire,
Inc , a wholly-owned subsidiary, which statements reflect total assets of
$1,960 and $932,837 as of December 31, 1995 and 1996, respectively, and total
revenues of $1,031 and $248,989 for the years then ended. Those statements were
audited by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to the amounts included for Klein Maus & Shire,
Inc., is based solely on the reports of the other auditors.
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 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 audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of United States Financial Group,
Incorporated and subsidiaries as of December 31, 1996 and 1997, and the results
of their operations, stockholders' equity, and their cash flows for the three
years ended December 31, 1995, 1996, and 1997 in conformity with generally
accepted accounting principles.
Eichler Bergsman & Co., LLP
New York, New York
March 9, 1998, except for
Note 4 which is as of April 10, 1998
and Note 7 and the first paragraph of
Note 12 which are as of July 23, 1998
F-2
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1996 1997
--------------- ---------------
<S> <C> <C>
ASSETS
Cash and cash equivalents (Note 2) ..................................... $ 56,120 $ 394,493
Deposit at clearing broker (Note 5) .................................... 255,651 103,285
Securities owned at market value (Notes 2f and h) ...................... 361,506 99,729
Accounts receivable .................................................... 149,662 4,231
Inventories (Note 2e) .................................................. -- 118,554
Fixed assets at cost, net of accumulated depreciation and amortization
(Notes 2g and 6) ...................................................... 116,780 317,457
Other assets (Note 7) .................................................. 202,121 400,954
------------ ------------
Total Assets ........................................................ $ 1,141,840 $ 1,438,703
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Due to clearing broker (Note 5) ....................................... $ -- $ 32,250
Accounts payable ...................................................... 77,931 93,016
Accrued expenses, and other ........................................... 165,396 263,404
Securities sold, not yet purchased at market value (Notes 2f and 8).... 1,113 1,575
Notes payable to officers/stockholders (Note 9) ....................... -- 210,000
Long-term capitalized lease obligations (Note 10) ..................... -- 46,179
------------ ------------
Total Liabilities ................................................... 244,440 646,424
------------ ------------
Minority interest (Note 11) ............................................ 504 773
------------ ------------
Commitments and contingencies (Note 12)
Stockholders' equity (Notes 1, 3, and 11):
Preferred stock, $.0001 par value; 10,000,000 shares authorized;
40,000 (1997) shares issued and outstanding ......................... -- 4
Common stock, $.0001 par value; 30,000,000 shares authorized;
10,694,634 (1997) shares issued and outstanding ..................... -- 1,069
Paid-in capital ....................................................... 2,134,687 3,567,595
Deficit ............................................................... (1,237,791) (2,777,162)
------------ ------------
Total stockholders' equity .......................................... 896,896 791,506
------------ ------------
Total liabilities and stockholders' equity .......................... $ 1,141,840 $ 1,438,703
============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-3
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Commissionable sales (Notes 2h and 3) ................. $ 995,670 $21,594,562 $31,720,456
Cost of commissionable sales .......................... 977,173 20,720,459 30,459,297
---------- ----------- -----------
Commissions ........................................... 18,497 874,103 1,261,159
Commissions on brokerage trades ....................... -- 243,097 863,673
Trading income (Notes 2f and h) ....................... -- -- 1,658,197
Other income .......................................... 37,500 71,153 413,189
---------- ----------- -----------
Total revenue ....................................... 55,997 1,188,353 4,196,218
---------- ----------- -----------
Expenses:
Officers' compensation ................................ 65,250 234,173 975,155
Compensation and related expenses ..................... 18,635 595,814 1,536,246
Clearance and floor brokerage ......................... -- 272,035 158,184
Occupancy, office, and administrative expense ......... 53,104 526,912 955,854
Professional fees ..................................... -- 310,032 273,039
Communications ........................................ -- 68,343 317,447
Regulatory fees and expenses .......................... -- 44,608 93,919
Other expenses (Note 13) .............................. -- -- 800,472
---------- ----------- -----------
Total expenses ...................................... 136,989 2,051,917 5,110,316
---------- ----------- -----------
Net loss ............................................... $ (80,992) $ (863,564) $ (914,098)
========== =========== ===========
Basic loss per share ................................... $ (.01) $ (.08) $ (.09)
========== =========== ===========
Weighted average number of shares outstanding .......... 10,694,634 10,694,634 10,694,634
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
----------------------- ------------------------
PAR VALUE NUMBER PAR VALUE
NUMBER OF $.0001 OF $.0001 PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
----------- ----------- ------------- ---------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance--
January 1, 1995 ............ -- $ -- -- $ $ 9,890 $ (635) $ 9,255
--
Capital contributions ....... -- -- -- -- 166,808 -- 166,808
Distributions ............... (9,890) (9,890)
Net loss .................... -- -- -- -- -- (80,992) (80,992)
-- ---- -- -------- ---------- ------------ ----------
Balance--
December 31, 1995 .......... -- -- -- -- 166,808 (81,627) 85,181
Issuance of shares .......... -- -- -- -- 1,965,101 -- 1,965,101
Capital contributions ....... -- -- -- -- 2,778 -- 2,778
Net loss .................... -- -- -- -- -- (863,564) (863,564)
Distributions ............... -- -- -- -- -- (292,600) (292,600)
-- ---- -- -------- ---------- ------------ ----------
Balance--
December 31, 1996 .......... -- -- -- -- 2,134,687 (1,237,791) 896,896
Issuance of shares .......... 40,000 4 10,694,634 1,069 1,432,908 -- 1,433,981
Net loss .................... -- -- -- -- -- (914,098) (914,098)
Distributions ............... -- -- -- -- -- (625,273) (625,273)
------ ---- ---------- -------- ---------- ------------ ----------
Balance--
December 31, 1997 .......... 40,000 $ 4 10,694,634 $1,069 $3,567,595 $ (2,777,162) $ 791,506
====== ==== ========== ======== ========== ============ ==========
</TABLE>
Note--The information above gives retroactive effect to the one for two reverse
stock split declared on December 8, 1997.
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................................ $ (80,992) $ (863,564) $ (914,098)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization ......................... 1,780 15,911 49,894
(Increase) in deposit at clearing broker .............. -- -- (103,285)
(Increase) decrease in securities owned ............... -- (361,506) 261,777
(Increase) decrease in accounts receivable ............ -- (149,662) 145,431
(Increase) in inventories ............................. -- -- (118,554)
(Increase) decrease in other assets ................... (12,203) (189,917) 52,742
Increase (decrease) in due to clearing brokers,
net .................................................. -- (255,651) 287,901
Increase (decrease) in accounts payable ............... 11,706 (3,212) 84,522
Increase in accrued expenses .......................... 8,305 226,527 28,572
Increase in securities sold, not yet purchased ........ -- 1,113 462
Increase in notes payable to officers/stockholders..... -- -- 210,000
--------- ------------ ----------
Total adjustments .................................... 9,588 (716,397) 899,462
--------- ------------ ----------
Net cash used by operating activities .............. (71,404) (1,579,961) (14,636)
--------- ------------ ----------
Cash flows from investing activities: ....................
Purchase of furniture, equipment, and leasehold
improvements .......................................... (7,117) (127,354) (250,570)
--------- ------------ ----------
Cash flows from financing activities:
Increase in capitalized lease obligation, net ........... -- -- 46,179
Capital contributions, including from preferred
shareholders .......................................... 166,808 1,968,383 1,433,500
Distributions and loans to officers/stockholders ........ (9,890) (292,600) (876,100)
--------- ------------ ----------
Net cash provided by financing activities .......... 156,918 1,675,783 603,579
--------- ------------ ----------
Net increase (decrease) in cash .......................... 78,397 (31,532) 338,373
Cash--beginning of year .................................. 9,255 87,652 56,120
--------- ------------ ----------
Cash--end of year ........................................ $ 87,652 $ 56,120 $ 394,493
========= ============ ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense ...................................... $ -- $ 5,417 $ 21,110
========= ============ ==========
Income taxes .......................................... $ -- $ -- $ 2,800
========= ============ ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
United States Financial Group, Incorporated ("USFG or the "Company") is a
holding company, incorporated under the laws of the State of Delaware in
December 1996. USFG's main business purpose is to acquire undervalued or
reasonably priced companies in diversified, well-established industries.
The Company has four subsidiaries, two of which are currently active.
Klein, Maus & Shire, Inc. ("KMS") is an investment banking firm, a member of
the National Association of Securities Dealers, Inc. (the "NASD") and
registered with the Securities and Exchange Commission (the "SEC"). Sureal
International, Inc. ("Sureal") is a direct marketing company that distributes
personal care and nutritional products in Russia and other republics of the
former Soviet Union through a network of independent distributors.
The two inactive subsidiaries were formed for specific purposes. KMS Asset
Management Group, Incorporated was formed to be an asset management and
international financial consultancy company. U.S. Military Resale Group,
Incorporated was established to acquire military commissaries and other
suppliers of consumer products to the Army and Air Force Exchange System.
The Company acquired KMS through a share exchange effected on March 31,
1997 in which KMS' sole common shareholder exchanged 18,889,267 shares of KMS'
common stock (representing 100% of the total outstanding common shares of KMS)
for 18,889,267 shares of the Company's Common Stock. This merger involving two
entities under common control was accounted for as a pooling of interests. On
December 8, 1997 the Company effected a one for two reverse stock split
affecting all shares outstanding prior to December 3, 1997. Thus, 18,889,267
shares affected by the reverse split were converted into 9,444,634 shares.
On December 3, 1997 the Company entered into an exchange agreement with
Sureal and its stockholders to exchange all outstanding common shares of Sureal
for newly-issued Common Shares of USFG, which shares will have a market value
of $11,250,000 (see Note 3). KMS, as a broker-dealer and investment bank, will
be the entity responsible for obtaining and providing the capital necessary to
complete the transaction.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
POLICIES
A summary of the Company's significant accounting and reporting policies
is as follows:
a. Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of
the Company and its subsidiaries. Intercompany accounts and transactions have
been eliminated in consolidation.
b. Use of Estimates
The preparation of these consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Significant estimates include determining the
need for reserves and accruals for product returns, outcome of contingencies,
obsolete inventory and taxes. Actual results could differ from these estimates.
c. Credit Risks
KMS maintains its cash accounts primarily with one bank. At December 31,
1997, KMS had an amount on deposit with such bank that exceeded the balance
insured by the Federal Deposit Insurance Corporation in the amount by $257,070.
F-7
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
POLICIES (CONTINUED)
KMS executes, as agent, securities transactions on behalf of its
customers. If either a customer or a counterparty fails to perform, KMS may
sustain a loss if the market value of the security is different from the
contract value of the transaction. KMS as a nonclearing broker does not handle
any customer funds or securities. The responsibility for processing customer
activities resides with KMS' clearing agent, Cowen & Company. KMS' customers
are located throughout the United States as well as in foreign countries.
d. Cash and Cash Equivalents
For the purposes of reporting cash flows, cash and cash equivalents
include cash due from banks and brokerage accounts, certificates of deposit and
highly liquid instruments with original maturities of 90 days or less.
e. Inventories
Inventories consist of merchandise purchased by Sureal for resale and are
stated at the lower of cost or market using the first-in, first-out cost flow
assumption.
f. Fair Value of Financial Instruments
The carrying amounts reflected in the balance sheet for cash, cash
equivalents, receivables and payables approximate their respective fair values
because of the short maturities of these instruments. The fair values of
securities owned and securities sold, not yet purchased are recorded primarily
at quoted prices for those or similar instruments. Changes in the market value
of these securities are reflected currently in the results of operations for
the year.
g. Fixed Assets
Fixed Assets are recorded at cost less accumulated depreciation or
amortization. Depreciation is calculated using the straight-line method over
the estimated useful lives of such assets. At December 31, 1997 and 1996, all
such assets had an estimated useful life of five years. Leasehold improvements
are amortized over the lesser of their estimated useful lives or the remaining
terms of their respective leases. Expenditures for maintenance and repairs are
charged to expense as incurred.
h. Revenue Recognition
Commissions on product sales are recognized when products are shipped and
title passes to independent distributors.
Securities transaction and related revenue are recorded on a trade date
basis. Managers' fees, underwriters' fees, and other underwriting revenues are
recognized at the time the related underwriting is completed.
i. Income Taxes
The Company uses the liability method in compliance with Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes." Under
this method, deferred tax assets and liabilities are determined based on the
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Prior to its merger with the Company, Sureal had elected to be taxed as an
S corporation whereby the Federal and state income tax effects of Sureal's
activities accrued directly to its stockholders. There are no pro forma
Federal, state and local income tax provisions for any of the three years in
the period ended December 31, 1997 because on a consolidated basis net losses
were incurred in each of those years.
F-8
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
POLICIES (CONTINUED)
USFG intends to file a consolidated Federal corporation income tax return
for the year ended December 31, 1997. Net operating loss carrryforwards amount
to approximately $2,740,000 expiring in 2011 and 2012. No deferred tax assets
have been established for the potential benefits associated with these
carryforwards because of the uncertainty in utilizing net operating loss
carryforwards.
j. Loss Per Share
The loss per share is based on 10,694,634 common outstanding shares, for
each year presented which gives retroactive effect to the (i) two-for-one
reverse split effected on December 3, 1997 and (ii) the 750,000 shares of
common stock to be issued in connection with the Sureal merger (see Note 3).
The calculation does not assume the conversion of Preferred Stock because the
impact of such conversions would be anti-dilutive.
k. Restatement and Reclassification for Reverse Stock Splits
On December 8, 1997, the Company ratified a one-for-two reverse stock
split of common stock. All share and per share amounts affecting net loss per
share, weighted average number of common and common equivalent shares
outstanding, common stock and preferred stock issued and outstanding,
additional paid-in-capital and all other stock transactions presented in these
financial statements have been restated to reflect the one-for-two-reverse
stock split.
l. Industry Segment and Geographic Area
KMS operates as a broker-dealer of securities. Its customers are located
throughout the United States as well as internationally.
Sureal operates in a single industry, which is the direct marketing of
personal care and nutritional products, and in a single geographic area, which
is Russia and the republics of the former Soviet Union. In 1998 and subsequent
years, Sureal expects to operate in additional countries, including the United
States.
NOTE 3 -- MERGER WITH SUREAL
Sureal International, Inc. ("Sureal"), a Delaware corporation established
on August 10, 1995 as Legacy Export, Inc., changed its name in October 1997,
and is headquartered in Orem, Utah.
Through December 31, 1997 Sureal's income was primarily earned from
commissions. At the end of 1997 the nature of Sureal's business changed. Sureal
beginning in November 1997 began to buy its products directly from
manufacturers and sell such products in January 1998 directly through a network
of independent distributors.
On December 3, 1997 Sureal agreed to exchange all of its outstanding
shares of common stock for 750,000 shares of USFG Common Stock. The
accompanying financial statements have been prepared on the basis that the
750,000 Common Shares of USFG have been issued to the Shareholders of Sureal in
exchange for all their common shares. USFG accounted for the foregoing
transaction, which resulted in Sureal becoming a wholly-owned subsidiary of
USFG, as a pooling of interests in conformity with Opinion Number 16 of the
Accounting Principles Board. Accordingly, the results of Sureal's operations
are included for all periods presented.
F-9
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- REGULATORY MATTERS
KMS
KMS is subject to the Securities and Exchange Commission's uniform net
capital rule (Rule 15c3-1) which requires the maintenance of minimum net
capital, as defined, and also requires that the ratio of aggregate indebtedness
to aggregate net capital shall not exceed 15 to 1. Dividends may not be paid
nor capital withdrawn if such action results in the ratio of aggregate
indebtedness to aggregate net capital exceeding 10 to 1. At December 31, 1997,
KMS' aggregate net capital as defined was $234,481 (compared to a requirement
of $100,000) and its ratio of aggregate indebtedness to aggregate net capital
was 1.40 to 1 (compared to a requirement of not more than 15 to 1).
KMS is subject to the rules and regulations promulgated by various
Federal, state and industry regulatory and governmental agencies, including the
SEC and the NASD. Failure to comply with rules and regulations of these
organizations could result in fine, suspension or other civil or criminal
remedies. Certain of these regulatory bodies perform audits or other procedures
to ensure compliance with their rules and regulations. The NASD completed an
audit of KMS in February 1998, at which time it issued a preliminary letter of
audit findings in which it set forth certain alleged exceptions and areas of
noncompliance noted during the performance of its audit procedures, including
alleged inconsistencies in the time stamping of certain trading tickets and the
making of markets for a greater number of companies than permitted under its
NASD restriction letter. Based on a review of the letter and discussions with
the NASD auditors, management of KMS and its counsel do not believe that the
ultimate resolution of the matters described in such letter will have a
material adverse effect on KMS' financial position or results of operations.
However, the ultimate outcome of this matter cannot be determined at this time.
As of April 10, 1998, the NASD has not issued any further correspondence to KMS
or had further discussions with KMS' management concerning its audit.
SUREAL
Sureal is subject to governmental regulations pertaining to product
formulation, labeling and packaging, product claims and advertising and to
Sureal's direct selling system. Although management believes that Sureal is in
compliance, in all material respects, with the statutes, laws, rules and
regulations of every jurisdiction in which it operates, no assurance can be
given that Sureal's compliance with applicable statutes, laws, rules and
regulations will not be challenged by domestic or foreign authorities or that
such challenges will not have a material adverse effect on Sureal's future
financial position or results of operations or cash flows.
NOTE 5 -- RECEIVABLE FROM AND PAYABLE TO BROKER-DEALER AND CLEARING
ORGANIZATIONS
KMS introduces all customer transactions in securities traded on U.S.
securities markets to its clearing broker on a fully disclosed basis. The
agreement between KMS and its clearing broker provides that KMS is obligated to
assume any exposure related to nonperformance by customers or counterparties.
KMS monitors clearance and settlement of all customer transaction on a daily
basis. In accordance with the clearing agreement, KMS deposited $100,000 in a
standby money reserve fund with Cowen & Company. Such deposit earns interest at
a rate defined in the agreement.
The exposure to credit risk associated with the nonperformance of customer
and counterparties in fulfilling their contractual obligations pursuant to
these securities transactions can be directly impacted by volatile trading
markets which may impair the customers's or counterparty's ability to satisfy
their obligations to KMS. In the event of nonperformance, KMS may be required
to purchase or sell financial instruments at unfavorable market prices
resulting in a loss. Management does not anticipate material instances of
nonperformance by customers and counterparties in the above situations.
F-10
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
---------- -----------
<S> <C> <C>
Furniture and fixtures ................................. $ 63,372 $161,335
Equipment .............................................. 71,099 191,403
Leasehold improvements ................................. -- 32,302
-------- --------
Total .................................................. 134,471 385,040
Less accumulated depreciation and amortization ......... 17,691 67,583
-------- --------
Fixed assets -- net .................................... $116,780 $317,457
======== ========
</TABLE>
NOTE 7 -- OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
----------- ----------
<S> <C> <C>
Employee and broker receivables ........................ $106,128 $ 46,082
Prepaid expenses and miscellaneous receivables ......... 94,604 68,647
Due from officers/stockholders ......................... -- 250,827
Deposits ............................................... 1,389 35,398
-------- --------
Total .................................................. $202,121 $400,954
======== ========
</TABLE>
The employee and broker receivables relate principally to advances and
expenses in excess of commission earnings and inventory losses charged to
registered representatives. The amount due from officers/stockholders
represents the excess of cash distributions made by Sureal over its reported
earnings and has no specified terms but is expected to be repaid in periods
beyond 1998.
NOTE 8 -- TRADING AND INVESTMENT SECURITIES
Trading securities and securities sold, not yet purchased, represent the
market value of securities held long and short by KMS.
NOTE 9 -- NOTES PAYABLE TO OFFICERS/STOCKHOLDERS
At December 31, 1997, Sureal is obligated under the term of 8% demand
notes payable in the aggregate principal amount of $210,000 due to three
officers/stockholders. The proceeds of such notes were principally used to
purchase inventory.
F-11
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- CAPITALIZED LEASE OBLIGATIONS
Included in fixed assets are the following assets held under capital
leases at December 31, 1997:
<TABLE>
<S> <C>
Equipment ........................................... $52,003
Less accumulated depreciation ....................... 5,200
-------
$46,803
=======
</TABLE>
Future minimum lease payments for assets under capital leases are as
follows:
<TABLE>
<S> <C>
1998 ................................................ $16,304
1999 ................................................ 16,304
2000 ................................................ 16,304
2001 ................................................ 16,304
2002 ................................................ 3,682
-------
Total minimum lease payments ........................ 68,898
Less amount representing interest ................... 22,719
-------
Present value of net minimum lease payments ......... $46,179
=======
</TABLE>
There were no such assets at December 31, 1996.
NOTE 11 -- CAPITAL STRUCTURE
USFG is a Delaware corporation with its principal offices located at 110
Wall Street, New York, New York. It is authorized to issue up to 30,000,000
shares of Common Stock and 10,000,000 shares of Preferred Stock. Each share of
Common Stock entitles the holder thereof to one vote. There are no cumulative
voting rights or privileges. The Preferred Shares are nonvoting and do not have
a stated dividend rate. Holders of the preferred shares do receive preference
over holders of common shares in the event of liquidation. In 1997, USFG
received $200,000 from the issuance of 40,000 Preferred Shares.
KMS issued 773,275 shares of Series A convertible preferred stock and
raised an aggregate of $2,744,500 in 1996 and 1997 pursuant to a private
placement offering memorandum dated April 15, 1996. Each such share was
convertible into one share of KMS' common stock. The conversion feature remains
in effect for a period of three years from the date of issuance. The preferred
share agreement was amended to permit the holders of each preferred share to
convert such share into a Common Share of USFG. The par value of the KMS
preferred shares is shown as minority interest in the accompanying consolidated
balance sheets.
From January to March 1998, the Company sold 12 Units of Bridge Financing
for an aggregate of $600,000 resulting in net proceeds of approximately
$575,000. Each Unit consists of (i) a 10% Promissory Note in the principal
amount of $50,000 due one year from the date of issuance and (ii) 1,667 shares
of the Company's Common Stock. The holders of such shares of Common Stock have
certain registration rights. For financial reporting purposes, a portion of the
net proceeds will be allocated to the value of the Common Stock. The resulting
debt discount will be amortized to operations over the term of the Promissory
Notes.
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
Litigation
KMS was a co-defendant in a legal action in which the plaintiff alleged
that KMS and certain of its representatives sold securities to the plaintiff
through fraudulent sales practices, misrepresentations and
F-12
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
omissions and that certain trades were unauthorized. The complaint demanded
compensatory damages of $254,000, rescission damages of $100,000, unspecified
punitive damages and attorneys' fees and other legal costs. The matter was
resolved in April 1998 when KMS agreed to repurchase the preferred shares for
$110,000 payable in five equal monthly installments commencing April 1998.
Lease Agreements
The Company leases office space under noncancelable long-term operating
leases having minimum future operating lease obligations as follows at
December 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------ ------
<S> <C>
1998 .............. $366,000
1999 .............. 370,000
2000 .............. 348,000
2001 .............. 315,000
2002 .............. 210,000
</TABLE>
Rental expense for operating leases totaled $8,000, $146,000, and $295,000
for the years ended December 31, 1995, 1996, and 1997, respectively.
Employment Agreements
USFG has entered into employment agreements with two officers under which
it has agreed to pay such officers annual aggregate salaries of $600,000
through 2003. Sureal has entered into employment agreements with three officers
under which it has agreed to pay such officers annual aggregate salaries of
$360,000 through 2003. Sureal has also entered into a consulting agreement with
a member of the Board of Directors calling for the annual payment of $75,000,
subject to adjustment based on actual work performed, through 2001.
NOTE 13 -- OTHER EXPENSES
Other expenses for the year ended December 31, 1997 consist of:
<TABLE>
<S> <C>
Settlement of customer guarantee ..................... $282,483
Preoperating costs for office in Bahrain (a) ......... 517,989
--------
Total ............................................... $800,472
========
</TABLE>
- ----------
(a) The Company has incurred such costs to open an office of a broker-dealer in
Bahrain. Although the Company anticipates that all necessary approvals for
this branch will be obtained, no assurances thereof can be given.
Therefore, all such costs have been charged to operations as incurred.
F-13
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 -- SEGMENT REPORTING
The Company's operations are now reported in two segments. KMS is a
broker-dealer of securities and Sureal is a direct marketing company involved
in the distribution of personal care and nutritional products in Russia and
other republics of the former Soviet Union.
Identifiable assets are those assets used exclusively in the operations of
each business segment. Corporate assets are principally cash and investments.
A summary of segment data follows:
<TABLE>
<CAPTION>
1997 SUREAL KMS CORPORATE ELIMINATIONS TOTAL
- ---- ------ --- --------- ------------ -----
<S> <C> <C> <C> <C> <C>
Net revenues ..................... $1,328,367 $ 2,914,197 $ -- $ 46,346 $4,196,218
Operating profits (losses) ....... 613,447 (1,402,457) (914,098) 789,010 (914,098)
Identifiable assets .............. 232,501 878,712 541,452 (464,789) 1,187,876
1996
- ----
Net revenues ..................... $ 939,364 $ 248,989 $ -- $ -- $1,188,353
Operating profits (losses) ....... 385,920 (1,249,484) -- -- (863,564)
Identifiable assets .............. 209,002 932,838 -- -- 1,141,840
1995
- ----
Net revenues ..................... $ 54,965 $ 1,032 $ -- $ -- $ 55,997
Operating profits (losses) ....... (81,494) 502 -- -- (80,992)
Identifiable assets .............. 103,232 1,960 -- -- 105,192
</TABLE>
Capital expenditures and depreciation expense were not significant during
the periods presented.
F-14
<PAGE>
INDEPENDENT AUDITORS' REPORT
Sureal International, Inc.
Orem, Utah
We have audited the accompanying balance sheets of Sureal International,
Inc. as of December 31, 1996 and 1997, and the related statements of
operations, stockholders' equity, and cash flows for the period August 10, 1995
(date of inception) through December 31, 1995 and for the two years ended
December 31, 1996 and 1997. 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 audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 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 Sureal International, Inc.
as of December 31, 1996 and 1997, and the results of its operations,
stockholders' equity, and its cash flows for the period August 10, 1995 (date
of inception) through December 31, 1995 and for the two years ended December
31, 1996 and 1997 in conformity with generally accepted accounting principles.
Eichler Bergsman & Co., LLP
New York, New York
March 9, 1998
(except for the first
paragraph of Note 5 for
which the date is July 23, 1998)
F-15
<PAGE>
SUREAL INTERNATIONAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 2b) .............................. $ 38,659 $ 29,750
Accounts receivable .............................................. 149,662 4,231
Inventories (Note 2d) ............................................ -- 118,554
Due from employees ............................................... 3,984 --
Prepaid expenses and other current assets ........................ 1,650 24,141
-------- --------
Total current assets ........................................... 193,995 176,676
Furniture and equipment, net of accumulated
depreciation (Notes 2f and 4) .................................... 13,658 50,536
Due from officers/stockholders (Note 5) ........................... -- 250,827
Deposits .......................................................... 1,389 5,289
-------- --------
$209,002 $483,328
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................. $ 8,494 $ 93,016
Accrued expenses ................................................. 21,189 12,820
Notes payable to officers/stockholders (Note 5) .................. -- 210,000
-------- --------
Total current liabilities ...................................... 29,683 315,836
-------- --------
Commitments and contingencies (Notes 1, 3, and 6)
Stockholders' equity (Note 1):
Preferred stock, 5,000 shares authorized ......................... -- --
Common stock, $1 par value; 10,000 shares authorized; 9,000 shares
issued and outstanding ......................................... 9,000 9,000
Paid-in capital .................................................. 158,492 158,492
(Deficit) retained earnings ...................................... 11,827 --
-------- --------
Total stockholders' equity ..................................... 179,319 167,492
-------- --------
Total liabilities and stockholders' equity ..................... $209,002 $483,328
======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
F-16
<PAGE>
SUREAL INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 10, 1995
TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
---------------- -----------------------------
1995 1996 1997
---------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
Commissionable sales (Notes 1 and 2f) ....................... $ 995,670 $21,594,562 $31,720,456
Cost of commissionable sales ................................ 977,173 20,720,459 30,459,297
--------- ----------- -----------
18,497 874,103 1,261,159
Other income ................................................ 36,468 65,261 67,208
--------- ----------- -----------
Total revenue ............................................. 54,965 939,364 1,328,367
--------- ----------- -----------
Expenses:
Officers' compensation ...................................... 65,250 234,173 253,615
Compensation and related expenses ........................... 18,635 114,136 210,078
Occupancy, office, and administrative expense ............... 52,574 205,135 251,227
--------- ----------- -----------
Total expenses ............................................ 136,459 553,444 714,920
--------- ----------- -----------
Net income (loss) ............................................ $ (81,494) $ 385,920 $ 613,447
========= =========== ===========
Pro forma data (Note 2h):
Income (loss) before pro forma income tax provision ......... $ (81,494) $ 385,920 $ 613,447
Pro forma income tax provision .............................. -- 111,000 229,000
--------- ----------- -----------
Pro forma net income (loss) ................................. $ (81,494) $ 274,920 $ 384,447
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-17
<PAGE>
SUREAL INTERNATIONAL, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
PERIODS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK
-------------------
NUMBER RETAINED TOTAL
OF PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
-------- -------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Balance--August 10, 1995 ........... -- $ -- $ -- $ -- $ --
Issuance of shares ................. 9,000 9,000 155,714 -- 164,714
Net loss ........................... -- -- -- (81,493) (81,493)
----- ------ -------- ---------- ----------
Balance--December 31, 1995 ......... 9,000 9,000 155,714 (81,493) 83,221
Capital contribution ............... -- -- 2,778 -- 2,778
Net income ......................... -- -- -- 385,920 385,920
Distributions ...................... -- -- -- (292,600) (292,600)
----- ------ -------- ---------- ----------
Balance--December 31, 1996 ......... 9,000 9,000 158,492 11,827 179,319
Net income ......................... -- -- -- 613,446 613,446
Distributions ...................... -- -- (625,273) (625,273)
----- ------ ---------- ----------
Balance--December 31, 1997 ......... 9,000 $9,000 $158,492 $ -- $ 167,492
===== ====== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-18
<PAGE>
SUREAL INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 10, 1995
TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
---------------- ---------------------------
1995 1996 1997
---------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ......................................... $ (81,493) $ 385,920 $ 613,447
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation ............................................ 1,780 5,000 8,700
(Increase) decrease in accounts receivable .............. -- (149,662) 145,431
(Increase) in inventories ............................... -- -- (118,554)
(Increase) decrease in other assets ..................... (12,203) 5,180 (22,408)
Increase (decrease) in accounts payable ................. 11,706 (3,212) 84,522
Increase (decrease) in accrued expenses ................. 8,305 12,884 (8,369)
Increase in notes payable to officers/stockholders ...... -- -- 210,000
--------- ---------- ----------
Total adjustments ...................................... 9,588 (129,810) 299,322
--------- ---------- ----------
Net cash used by operating activities ................ (71,905) 256,110 912,769
--------- ---------- ----------
Cash flows from investing activities:
Purchase of fixed assets .................................. (7,117) (13,321) (45,578)
--------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock .................... 164,714 2,778 --
Distributions and loans to stockholders ................... -- (292,600) (876,100)
--------- ---------- ----------
Net cash (used) provided by financing activities ..... 164,714 (289,822) (876,100)
--------- ---------- ----------
Net increase (decrease) in cash ............................ 85,692 (47,033) (8,909)
Cash--beginning of period .................................. -- 85,692 38,659
--------- ---------- ----------
Cash--end of period ........................................ $ 85,692 $ 38,659 $ 29,750
========= ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense ........................................ $ -- $ 904 $ 727
========= ========== ==========
Income taxes ............................................ $ -- $ -- $ --
========= ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-19
<PAGE>
SUREAL INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
Sureal International, Inc. ("Sureal" or the "Company"), a Delaware
corporation established on August 10, 1995 as Legacy Export, Inc., is a direct
marketing company involved in the distribution of personal care and nutritional
products in Russia and other republics of the former Soviet Union. Sureal
changed its name in October 1997 and is headquartered in Orem, Utah.
Through December 31, 1997 Sureal's income was primarily earned from
commissions. At the end of 1997 the nature of Sureal's business changed. Sureal
beginning in November 1997 began to buy its products directly from
manufacturers and sell such products in January 1998 directly through a network
of independent distributors.
On December 3, 1997, Sureal agreed to exchange all of its outstanding
shares of Common Stock for 750,000 shares of common stock of United States
Financial Group, Incorporated ("USFG").
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
A summary of the Company's significant financial accounting and reporting
policies is as follows.
a. Use of Estimates
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Significant estimates include reserves for product returns,
outcome of contingencies, obsolete inventory and taxes. Actual results could
differ from these estimates.
b. Cash and Cash Equivalents
For the purpose of the Statement of Cash Flows, cash equivalents are
short-term, highly liquid instruments with original maturities of 90 days or
less.
c. Inventories
Inventories consist of merchandise purchased for resale and are stated at
the lower of cost or market using the first-in, first-out method.
d. Fair Value of Financial Instruments
The carrying amounts reflected in the balance sheet for cash, cash
equivalents, receivables and payables approximate their respective values due
to the short maturities of these instruments.
e. Fixed Assets
Fixed assets are recorded at cost less accumulated depreciation or
amortization. Depreciation is calculated using the straight-line method over
the estimated useful lives of such assets. At December 31, 1996 and 1997, all
such assets had an estimated useful life of five years. Expenditure for
maintenance and repairs are charged to expense as incurred.
f. Revenue Recognition
Commissions on product sales are recognized when products are shipped and
title passes to independent distributors.
g. Income Taxes
The Company complies with Statement of Financial Accounting Standards No.
109 ("SFAS 109"), "Accounting for Income Taxes." Under SFAS 109, the liability
method is used in accounting for income
F-20
<PAGE>
SUREAL INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING (CONTINUED)
taxes. Under this method, deferred tax assets and liabilities are determined
based on the differences between financial reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse.
Prior to its merger with USFG, Sureal elected to be taxed as an S
corporation whereby the Federal and state income tax effects of Sureal's
activities accrued directly to its stockholders. The pro forma income tax
amounts reflect the amount of income tax provisions that would have been
recorded if Sureal had been a C corporation utilizing a net operating loss
carryover during all periods presented.
NOTE 3 -- REGULATORY MATTERS
Sureal is subject to governmental regulations pertaining to product
formulation, labeling and packaging, product claims and advertising and to
Sureal's direct selling system. Although management believes that Sureal is in
compliance, in all material respects, with the statutes, laws, rules, and
regulations of every jurisdiction in which it operates, no assurance can be
given that Sureal's compliance with applicable statutes, laws, rules and
regulations will not be challenged by domestic or foreign authorities or that
such challenges will not have a material adverse effect on Sureal's future
financial position or results of operations or cash flows.
NOTE 4 -- FIXED ASSETS
Fixed assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997
--------- ---------
<S> <C> <C>
Furniture and fixtures ................ $ 6,666 $ 7,090
Equipment ............................. 13,772 58,926
------- -------
20,438 66,016
Less accumulated depreciation ......... 6,780 15,480
------- -------
$13,658 $50,536
======= =======
</TABLE>
NOTE 5 -- NOTES RECEIVABLE FROM AND PAYABLE TO OFFICERS/STOCKHOLDERS
The amount due from officers at December 31, 1997 represents the excess of
cash distributions made over reported earnings. Such amount has no specified
maturity date but is expected to be repaid in periods beyond 1998.
At December 31, 1997, Sureal is obligated under the terms of 8% demand
notes payable in the aggregate principal amount of $210,000 due to three
officers/stockholders. The proceeds of such notes were principally used to
purchase inventory.
F-21
<PAGE>
SUREAL INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6 -- COMMITMENTS AND CONTINGENCIES
Lease Agreements
The Company leases office space, under noncancelable long-term operating
leases having minimum future operating lease obligations as follows at
December 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ------------------------ ------
<S> <C>
1998 .................... $55,000
1999 .................... $55,000
2000 .................... $32,000
</TABLE>
Rental expense for operating leases totaled $8,000 for the period August
10 (inception) through December 31, 1995 and $19,000 and $36,000 for the years
ended December 31, 1996 and 1997, respectively.
Employment Agreements
Sureal has entered into employment agreements with three officers under
which it has agreed to pay such officers annual aggregate salaries of $360,000
through 2003. Sureal has also entered into a consulting agreement with a member
of the USFG Board of Directors calling for the annual payment of $75,000,
subject to adjustment based on actual work performed, through 2003.
F-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
Klein Maus & Shire, Inc.
New York, NY
We have audited the accompanying statement of financial condition of Klein
Maus & Shire, Inc. as of December 31, 1997 and the related statements of
operations, stockholders' equity, 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. The financial statements of Klein Maus & Shire, Inc. as of December
31, 1995 and 1996 were audited by other auditors whose reports dated April 5,
1996 and February 5, 1997, respectively, expressed unqualified opinions on
those statements.
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 Klein Maus & Shire, Inc. as
of December 31, 1997, and the results of its operations, stockholders' equity,
and cash flows for the year then ended in conformity with generally accepted
accounting principles.
Eichler Bergsman & Co., LLP
New York, New York
March 9, 1998, except for
Note 3 as of April 10, 1998
and the first paragraph
of Note 10 as of July 23, 1998
F-23
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Klein Maus & Shire Inc.
New York, New York
We have audited the accompanying statement of financial condition of Klein
Maus & Shire, Inc. as of December 31, 1996 and the related statements of
operations, cash flows and stockholders' equity 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 Klein Maus & Shire, Inc. as
of December 31, 1996, and the results of its operations, cash flows and
stockholders' equity for the year then ended in conformity with generally
accepted accounting principles.
Lilling & Company
Great Neck, New York
February 5, 1997
F-24
<PAGE>
INDEPENDENT AUDITORS' REPORT
KHAN, EDWARDS & COMPANY
New York, New York
We have audited the accompanying statement of financial condition of KHAN,
EDWARDS & COMPANY as of December 31, 1995 and the related statements of
operations, changes in shareholders' equity, 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 KHAN, EDWARDS & COMPANY as
of December 31, 1995, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting
principles.
Hagan & Burns CPA's, P.C.
New York, New York
April 5, 1996
F-25
<PAGE>
KLEIN MAUS & SHIRE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1996 1997
---- ----
<S> <C> <C>
ASSETS
Cash (Note 2) ........................................................ $ 17,461 $ 359,130
Deposit at clearing broker (Note 5) .................................. -- 103,285
Due from clearing broker ............................................. 255,651 --
Securities owned at market value (Note 7) ............................ 361,506 99,729
Fixed assets--at cost, less accumulated depreciation and
amortization [Notes 2(c) and 8] ..................................... 103,122 197,621
Other assets (Note 6) ................................................ 195,098 118,947
------------ ------------
Total Assets ...................................................... $ 932,838 $ 878,712
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued expenses .................................................... $ 213,644 $ 250,584
Due to clearing broker (Note 5) ..................................... -- 32,250
Securities sold, not yet purchased at market value (Note 7) ......... 1,113 1,575
Capitalized lease obligations (Note 9) .............................. -- 46,179
------------ ------------
Total Liabilities ................................................. 214,757 330,588
------------ ------------
Commitments and cotingencies (Note 10)
Stockholders' equity:
Preferred stock, $.001 par value; 3,333,400 shares authorized;
504,009 (1996) and 773,275 (1997) shares issued and
outstanding ....................................................... 504 773
Common stock, $.001 par value; 22,222,667 shares authorized;
18,889,267 shares issued and outstanding .......................... -- 18,889
Paid-in capital ..................................................... 1,967,195 3,180,537
Deficit ............................................................. (1,249,618) (2,652,075)
------------ ------------
Total stockholders' equity ........................................ 718,081 548,124
------------ ------------
Total liabilities and stockholders' equity ........................ $ 932,838 $ 878,712
============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-26
<PAGE>
KLEIN MAUS & SHIRE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1995 1996* 1997
---- ----- ----
<S> <C> <C> <C>
Revenues:
Commissions on customer trades ........................ $ -- $ 243,097 $ 863,673
Trading income [Notes 2(a) and (b)] ................... -- 5,892 1,658,197
Other income .......................................... 1,031 -- 354,671
Interest income--net .................................. -- -- 37,656
------ ------------ ------------
Total revenue ....................................... 1,031 248,989 2,914,197
------ ------------ ------------
Expenses:
Officers' compensation ................................ -- -- 379,039
Compensation and related expenses ..................... -- 481,678 1,326,168
Clearance and floor brokerage ......................... -- 68,385 158,184
Occupancy, office, and administrative expense ......... 530 525,427 668,104
Professional fees ..................................... -- 310,032 273,039
Communications ........................................ -- 68,343 317,447
Regulatory fees and expenses .......................... -- 44,608 93,919
Other expenses (Notes 4 and 11) ....................... -- -- 1,100,754
------ ------------ ------------
Total expenses ...................................... 530 1,498,473 4,316,654
------ ------------ ------------
Net income (loss) ...................................... $ 501 $ (1,249,484) $ (1,402,457)
====== ============ ============
</TABLE>
- ----------
* Amounts from 1996 have been reclassified to conform with the 1997
presentation.
The accompanying notes are an integral part of this statement.
F-27
<PAGE>
KLEIN MAUS & SHIRE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
-------------------- -------------------------
NUMBER OF NUMBER OF PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
----------- -------- ------------- ----------- ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance--
January 1, 1995 ......... -- $ -- -- $ 9,890 $ -- $ (635) $ 9,255
Capital contribution ..... -- -- -- 2,094 -- 2,094
Distribution ............. -- -- -- (9,890) -- -- (9,890)
Net income ............... -- -- -- -- -- 501 501
-- ---- -- -------- ---------- ------------ ------------
Balance--
December 31, 1995 ....... -- -- -- -- 2,094 (134) 1,960
Issuance of shares ....... 504,009 504 -- -- 1,965,101 -- 1,965,605
Net loss ................. -- -- -- -- -- (1,249,484) (1,249,484)
------- ---- -- -------- ---------- ------------ ------------
Balance--
December 31, 1996 ....... 504,009 $504 -- $ -- $1,967,195 $ (1,249,618) $ 718,081
Issuance of shares ....... 269,266 269 18,889,267 18,889 1,213,342 -- 1,232,500
Net loss ................. -- -- -- -- -- (1,402,457) (1,402,457)
------- ---- ---------- -------- ---------- ------------ ------------
Balance--
December 31, 1997 ....... 773,275 $773 18,889,267 $ 18,889 $3,180,537 $ (2,652,075) $ 548,124
======= ==== ========== ======== ========== ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-28
<PAGE>
KLEIN MAUS & SHIRE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ........................................ $ 501 $ (1,249,484) $ (1,402,457)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization .......................... -- 10,911 33,493
Increase in deposit at clearing broker ................. -- -- (103,285)
(Increase) decrease in securities owned ................ -- (361,506) 261,777
(Increase) decrease in other assets .................... -- (195,097) 76,150
(Increase) decrease in due from/to clearing
brokers, net .......................................... -- (255,651) 287,901
Increase in securities sold, not yet purchased ......... -- 1,113 462
Increase in accrued expenses ........................... -- 213,643 36,941
-------- ------------ ------------
Total adjustments ..................................... -- (586,587) 593,439
-------- ------------ ------------
Net cash used by operating activities ............... 501 (1,836,071) (809,018)
-------- ------------ ------------
Cash flows from investing activities:
Purchase of furniture, equipment, and leasehold
improvements ........................................... -- (114,033) (127,992)
-------- ------------ ------------
Cash flows from financing activities:
Increase in capitalized lease obligation, net ............ -- -- 46,179
Proceeds from issuance of preferred and common
stock .................................................. 2,094 1,965,605 1,232,500
Distribution to stockholder .............................. (9,890) -- --
-------- ------------ ------------
Net cash (used) provided by financing
activities ......................................... (7,796) 1,965,605 1,278,679
-------- ------------ ------------
Net increase (decrease) in cash ........................... (7,295) 15,501 341,669
Cash--beginning of year ................................... 9,255 1,960 17,461
-------- ------------ ------------
Cash--end of year ......................................... $ 1,960 $ 17,461 $ 359,130
======== ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense ....................................... $ -- $ 4,513 $ 20,383
======== ============ ============
Income taxes ........................................... $ -- $ -- $ 2,800
======== ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-29
<PAGE>
KLEIN MAUS & SHIRE, INC
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
Klein, Maus & Shire, Inc. ("KMS") is a registered broker-dealer of
securities under the Securities and Exchange Act of 1934, as amended. It became
a subsidiary of United States Financial Group, Incorporated ("USFG") in March
1997 when its then sole stockholder exchanged all of KMS' outstanding common
stock for 18,889,267 shares of USFG's common stock. KMS services institutional,
corporate, government and individual clients and conducts business in
securities underwriting, sales and trading of securities for its own account
and that of clients. KMS has entered into a clearing arrangement with another
broker-dealer under which that broker-dealer clears KMS' securities
transactions on a fully disclosed basis.
KMS is an Indiana corporation with its principal offices located at 110
Wall Street, New York, New York. It is authorized to issue up to 22,222,667
shares of common stock and 3,333,400 shares of preferred stock. Each share of
Common Stock entitles the holder thereof to one vote. There are no cumulative
voting rights or privileges. The preferred shares are nonvoting and do not have
a stated dividend rate. Holders of the preferred shares do receive preference
over holders of common shares in the event of liquidation.
KMS issued 773,275 shares of Series A Convertible Preferred Stock in 1996
and 1997 pursuant to a Private Placement Offering memorandum dated April 15,
1996. Each such share is convertible into one share of Common Stock. The
conversion feature remains in effect for a period of three years from the date
of issuance. The preferred share agreement will be amended to permit the
holders of Preferred Shares to convert such shares into an equal number of
Common Shares of USFG.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
A summary of KMS' significant financial accounting and reporting policies
follows.
a. Revenue Recognition
Securities transactions and related revenue are recorded on a trade date
basis. Managers' fees, underwriters' fees, and other underwriting revenues are
recognized at the time the underwriting is completed.
b. Fair Value of Financial Instruments
The carrying amounts reflected in the balance sheet for cash, cash
equivalents, receivables and payables approximate their respective values due
to the short maturities of these instruments. The fair values of securities
owned and securities sold, not yet purchased are recorded primarily at quoted
market prices. Changes in the market value of these securities are recorded
currently in the results of operations for the year.
c. Fixed Assets
Fixed assets are stated at cost less accumulated depreciation or
amortization. Depreciation of furniture, fixtures, and equipment is computed
generally by the straight-line method over their estimated useful lives of five
years. Leasehold improvements are amortized over the lesser of their estimated
useful life or the remaining lives of their respective leases.
d. Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
cash due from banks and brokerage accounts, certificates of deposit and highly
liquid debt instruments purchased with a maturity of three months or less.
F-30
<PAGE>
KLEIN MAUS & SHIRE, INC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING (CONTINUED)
e. Income Taxes
KMS and USFG intend to file a consolidated Federal corporation income tax
return for the year ended December 31, 1997. No deferred tax asset has been
established by KMS because of the uncertainty in utilizing net operating loss
carryforwards. Net operating loss carryforwards amount to approximately
$1,800,000 expiring in 2011 and 2012.
f. Credit Risks
KMS maintains its cash accounts primarily with one bank. KMS had on
deposit with such bank at December 31, 1997 an amount that exceeded the balance
insured by the FDIC in the amount of $257,070.
KMS executes, as agent, securities transactions on behalf of its
customers. KMS as a nonclearing broker does not handle any customer funds or
securities. The responsibility for processing customer activities resides with
KMS' clearing agent, Cowen & Company. KMS' customers are located throughout the
United States as well as in foreign countries.
g. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
NOTE 3 -- REGULATORY MATTERS
KMS is subject to the Securities and Exchange Commission's uniform net
capital rule (Rule 15c3-1) which requires the maintenance of minimum net
capital, as defined, and also requires that the ratio of aggregate indebtedness
to aggregate net capital shall not exceed 15 to 1. Dividends may not be paid
nor capital withdrawn if such action results in the ratio of aggregate
indebtedness to aggregate net capital exceeds 10 to 1. At December 31, 1997,
KMS' aggregate net capital as defined was $234,481 (compared to a requirement
of $100,000) and its ratio of aggregate indebtedness to aggregate net capital
was 1.40 to 1 (compared to a requirement of 15 to 1).
KMS is subject to the rules and regulations promulgated by various
Federal, state and industry regulatory and governmental agencies, including the
Securities and Exchange Commission and the National Association of Securities
Dealers, Inc. (the "NASD"). Failure to comply with rules and regulations of
these organizations could result in fine, suspension or other civil or criminal
remedies. Certain of these regulatory bodies perform audits or other procedures
to ensure compliance with their rules and regulations. The NASD completed an
audit of KMS in February 1998, at which time it issued a preliminary letter of
audit findings in which it set forth certain alleged exceptions and areas of
noncompliance noted during the performance of its audit procedures, including
alleged inconsistencies in the time stamping of certain trading tickets and the
making of markets for a greater number of companies than permitted under its
NASD restriction letter. Based on the review of the letter and on discussions
with the NASD auditors, the management of KMS and its counsel do not believe
that the ultimate resolution of the matters described in such letter will have
a material adverse effect on KMS' financial position or operations. However,
the ultimate outcome of this matter cannot be determined at this time. As of
April 10, 1998, the NASD has not issued any further correspondence to KMS or
had further discussions with KMS' management concerning its audit.
NOTE 4 -- WRITE-OFF OF ADVANCES TO USFG
At December 31, 1997, USFG was obligated to KMS in the amount of $818,271
representing net advances made to USFG for various purposes. These advances are
unsecured, have no specified maturity dates and bear interest at 8%. Interest
income includes $46,346 of interest earned on advances to USFG.
F-31
<PAGE>
KLEIN MAUS & SHIRE, INC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- WRITE-OFF OF ADVANCES TO USFG (CONTINUED)
USFG utilized the funds advanced from KMS and $200,000 it raised from
issuing its Preferred Stock principally to pay legal, travel, and related
expenses connected with filing an application for an investment banking license
in Bahrain, for compensation paid on behalf of its officer/stockholder and to
purchase fixed assets.
USFG intends to repay such advances from the proceeds of an initial public
offering of its common stock. Accordingly, it will file a Registration
Statement on Form S-1 with the Securities and Exchange Commission. However, no
assurances can be given that such public offering will be successful. An
allowance for the net advances of $818,271, including interest was recorded by
KMS at December 31, 1997 (see Note 11).
NOTE 5 -- RECEIVABLE FROM AND PAYABLE TO BROKER-DEALERS AND CLEARING
ORGANIZATIONS
KMS introduces all customer transactions in securities traded on U.S.
securities markets to its clearing broker on a fully-disclosed basis. The
agreement between KMS and its clearing broker provides that KMS is obligated to
assume any exposure related to nonperformance by customers or counterparties.
KMS monitors clearance and settlement of all customer transactions on a daily
basis. In accordance with the clearing agreement, KMS deposited with Cowen &
Company $100,000 in a standby money reserve fund which earns interest at a rate
defined in the agreement.
The exposure to credit risk associated with the nonperformance of
customers and counterparties in fulfilling their contractual obligations
pursuant to these securities transactions can be directly impacted by volatile
trading markets which may impair the customer's or counterparty's ability to
satisfy their obligations to KMS. In the event of nonperformance, KMS may be
required to purchase or sell financial instruments at unfavorable market prices
resulting in a loss. Management does not anticipate material instances of
nonperformance by customers and counterparties in the above situations.
NOTE 6 -- OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
----------- ----------
<S> <C> <C>
Employee and broker receivables ......... $102,144 $ 44,341
Prepaid expenses ........................ 92,954 44,497
Deposits ................................ -- 30,109
-------- --------
$195,098 $118,947
======== ========
</TABLE>
The employee and broker receivables relate principally to advances and
expenses in excess of commission earnings and inventory losses charged to
registered representatives.
NOTE 7 -- TRADING AND INVESTMENT SECURITIES
Trading securities and securities sold, not yet purchased, represent the
market value of securities held long and short by KMS. The cost of such
securities was $1,200 (1996) and $1,659 (1997).
F-32
<PAGE>
KLEIN MAUS & SHIRE, INC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
Furniture and fixtures .......... $ 56,706 $ 77,245
Equipment ....................... 57,327 132,478
Leasehold improvements .......... -- 32,302
-------- --------
114,033 242,025
Less accumulated depreciation and
amortization ........................... 10,911 44,404
-------- --------
$103,122 $197,621
======== ========
</TABLE>
NOTE 9 -- CAPITALIZED LEASE OBLIGATIONS
Included in fixed assets are the following assets held under capital
leases:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997
-------- ----------
<S> <C> <C>
Equipment ........................ $ -- $52,003
Accumulated depreciation ......... -- 5,200
----- -------
$ -- $46,803
===== =======
</TABLE>
Future minimum lease payments for assets under capital leases are as
follows:
<TABLE>
<S> <C>
1998 ............................................... $16,304
1999 ............................................... 16,304
2000 ............................................... 16,304
2001 ............................................... 16,304
2002 ............................................... 3,682
-------
Total minimum lease payments ....................... 68,898
Less amount representing interest .................. 22,719
-------
Present value of net minimum lease payments ........ $46,179
=======
</TABLE>
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
a. Litigation
KMS was a co-defendant in a legal action in which the plaintiff alleged
that KMS and certain of its representatives sold securities to the plaintiff
through fraudulent sales practices, misrepresentations and omissions and that
certain trades were unauthorized. The complaint demanded compensatory damages
of $254,000, rescission damages of $100,000, unspecified punitive damages and
attorneys' fees and other legal costs. The matter was resolved in April 1998
when KMS agreed to repurchase the preferred shares for $110,000 payable in five
equal monthly installments commencing April 1998.
F-33
<PAGE>
KLEIN MAUS & SHIRE, INC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
b. Lease Agreements
KMS is obligated under certain noncancelable operating lease agreements
for office space. Future minimum cash payments, by year and in the aggregate,
required by such leases with initial or remaining terms of one year or more
consist of the following:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ------------------------ ------
<S> <C>
1998 .................... $310,000
1999 .................... $315,000
2000 .................... $315,000
2001 .................... $315,000
2002 .................... $210,000
</TABLE>
Rent expense charged to operations amounted to $ -0-, $127,000, and
$269,000 for the years ended December 31, 1995, 1996, and 1997, respectively.
KMS recognizes rent expense on a straight-line basis over the lease terms
of its two operating leases for office space. During the initial six month
periods of each lease, monthly payments were substantially reduced pursuant to
each lease. Accordingly, KMS recorded an accrued liability during these periods
which is amortized in subsequent periods by the excess of the monthly payments
over the monthly expense during the remainder of the leases' terms.
NOTE 11 -- OTHER -- EXPENSES
Other expenses for the year ended December 31, 1997 consist of:
<TABLE>
<S> <C>
Settlement of third-party guarantee ......... $ 282,483
Provision for write-off of amount due from
USFG (Note 4) ............................. 818,271
----------
Total ..................................... $1,100,754
==========
</TABLE>
F-34
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
APRIL 30, 1998
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents .............................................. $ 615,769
Deposit at clearing broker ............................................. 128,441
Securities owned at market value ....................................... 26,405
Accounts receivable .................................................... 185,189
Inventories ............................................................ 313,487
Fixed assets at cost, net of accumulated depreciation and amortization . 338,341
Due from officers/stockholders ......................................... 250,827
Other assets (including deferred offering costs of $135,000) ........... 415,510
------------
Total Assets .......................................................... $ 2,273,969
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Bridge financing payable, net of discount of $108,962.................. $ 491,038
Notes payable to officers/stockholders and others ..................... 488,500
Accounts payable ...................................................... 396,639
Accrued expenses, and other ........................................... 390,560
Securities sold, not yet purchased at market value .................... 2,384
Long-term capitalized lease obligations ............................... 65,148
------------
Total Liabilities ................................................... 1,834,269
------------
Minority interest ...................................................... 740
------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.0001 par value; 10,000,000 shares authorized;
40,000 shares issued and outstanding ................................ 4
Common stock, $.0001 par value; 30,000,000 shares authorized;
10,704,638 shares issued and outstanding ............................ 1,070
Paid-in capital ....................................................... 3,617,657
Deficit ............................................................... (3,179,771)
------------
Total stockholders' equity .......................................... 438,960
------------
Total liabilities and stockholders' equity .......................... $ 2,273,969
============
</TABLE>
See Notes to Unaudited Interim Consolidated Financial statements.
F-35
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
FOUR MONTHS ENDED
APRIL 30,
---------------------------------
1997 1998
---------------- --------------
<S> <C> <C>
Revenues:
Commissionable sales ....................................... $ 16,909,372 $ 340,082
Cost of commissionable sales ............................... 16,240,091 163,020
------------ -----------
Net ......................................................... 669,281 177,062
------------ -----------
Commissions on brokerage trades ............................ 547,003 48,904
Trading income ............................................. 631,105 738,381
Other income ............................................... 185,445 89,867
------------ -----------
Total revenue .............................................. 2,032,834 1,054,214
------------ -----------
Expenses:
Officers' compensation ..................................... 220,258 222,747
Compensation and related expenses .......................... 655,099 373,007
Clearance and floor brokerage .............................. 62,704 33,835
Occupancy, office, and administrative expense .............. 269,582 508,909
Professional fees .......................................... 47,564 227,147
Communications ............................................. 88,114 56,703
Regulatory fees and expenses ............................... 53,657 22,475
Other expenses ............................................. -- 12,000
------------ -----------
Total expenses ........................................... 1,396,978 1,456,823
------------ -----------
Net income (loss) ........................................... $ 635,856 $ (402,609)
============ ===========
Pro Forma Data
Income (Loss) Before Pro Forma Income Tax Provision ......... $ 635,856 $ (402,609)
Pro Forma Income Tax Provision (1) ......................... 175,000 --
------------ -----------
Pro Forma Net Income (Loss) ................................ $ 460,856 $ (402,609)
============ ===========
Pro Forma Basic Income (Loss) Per Share ..................... $ .04 $ (.04)
============ ===========
Weighted Average Shares Issued and Outstanding .............. 10,694,634 10,704,636
============ ===========
</TABLE>
- ----------
(1) Reflects pro forma provision for income taxes for Sureal International,
Inc., an S corporation in 1997. The pro forma provision was calculated as
if it had been a C corporation.
See Notes to Unaudited Interim Consolidated Financial statements.
F-36
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE FOUR MONTHS ENDED APRIL 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
----------------------- -----------------------
PAR VALUE NUMBER PAR VALUE
NUMBER OF $.0001 OF $.0001 PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
----------- ----------- ------------ ---------- ------------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance--
December 31, 1997 ......... 40,000 $4 10,694,634 $1,069 $3,567,595 $ (2,777,162) $ 791,506
Issuance of shares .......... 10,002 1 150,029 150,030
Net loss .................... (402,609) (402,609)
Retirement of subsidiary's
preferred shares ........... (99,967) (99,967)
---------- ----------
Balance--
April 30, 1998 ............ 40,000 $4 10,704,636 $1,070 $3,617,657 $ (3,179,771) $ 438,960
====== == ========== ====== ========== ============ ==========
</TABLE>
See Notes to Unaudited Interim Consolidated Financial statements.
F-37
<PAGE>
HUNITED STATES FINANCIAL GROUP, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
FOUR MONTHS ENDED APRIL 30,
------------------------------
1997 1998
------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................... $ 635,856 $ (402,609)
---------- ----------
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization ................................. 13,153 66,967
(Increase) in deposit at clearing broker ...................... (462,884) (25,156)
Decrease in securities owned .................................. 42,914 73,324
(Increase) decrease in accounts receivable .................... 85,539 (180,958)
Increase in inventories ....................................... -- (194,933)
(Increase) in other assets .................................... (35,594) (265,383)
Increase in notes receivable .................................. (123,000) --
(Decrease) in due to clearing brokers, net .................... -- (32,185)
Increase (decrease) in accounts payable ....................... (17,493) 303,623
Increase in accrued expenses .................................. 229,781 127,091
Increase in securities sold, not yet purchased ................ 261,402 809
Increase in notes payable ..................................... -- 278,500
---------- ----------
Total adjustments ............................................ (6,182) 151,699
---------- ----------
Net cash provided by operating activities .................. 629,674 250,910
---------- ----------
Cash flows from investing activities:
Purchase of fixed assets ........................................ (78,086) (46,783)
---------- ----------
Cash flows from financing activities:
Bridge loan financing, net ...................................... -- 449,970
Increase in capitalized lease obligation, net ................... 50,222 18,969
Capital contributions, including from minority interest ......... 220,000 150,030
Retirement of preferred shares of subsidiary .................... -- (100,000)
Distributions to stockholders ................................... (429,314) --
---------- ----------
Net cash provided by financing activities .................. (159,092) 518,969
---------- ----------
Net increase in cash ............................................. 392,496 221,276
Cash--beginning of period ........................................ 56,120 394,493
---------- ----------
Cash--end of period .............................................. $ 448,616 $ 615,769
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest expense .............................................. $ 7,217 $ 7,105
========== ==========
Income taxes .................................................. $ 2,752 $ 5,175
========== ==========
</TABLE>
See Notes to Unaudited Interim Consolidated Financial statements.
F-38
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997 AND 1998 (UNAUDITED)
NOTE 1
In the opinion of management of United States Financial Group,
Incorporated and subsidiaries (the "Company"), the accompanying unaudited
condensed consolidated financial statements as of April 30, 1998 and for the
four months ended April 30, 1997 and 1998 include all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation. The
statements should be read in conjunction with the consolidated financial
statements and the related notes included elsewhere in this Prospectus. The
results of operations for the four months ended April 30, 1997 and 1998 are not
necessarily indicative of the results to be expected for the full year.
NOTE 2 -- SEGMENT INFORMATION
The Company's operations are now reported in two segments. KMS is a
broker-dealer of securities and Sureal is a direct marketing company involved
in the distribution of personal care and nutritional products in Russia and
other republics of the former Soviet Union.
Identifiable assets are those assets used exclusively in the operations of
each business segment. Corporate assets are principally cash and other assets.
Corporate assets include prepaid and deferred expenses of approximately
$300,000 at April 30, 1998.
A summary of segment data for the four months ended April 30, 1997 and
1998 follows:
<TABLE>
<CAPTION>
APRIL 30, 1997 SUREAL KMS CORPORATE ELIMINATIONS TOTAL
- -------------- ------ --- --------- ------------ -----
<S> <C> <C> <C> <C> <C>
Net revenues ................. $ 688,291 $1,344,543 -- -- $2,032,834
Operating profits ............ 476,021 159,835 -- -- 635,856
Identifiable assets .......... 261,906 1,830,388 -- -- 2,092,294
APRIL 30, 1998
- -------------------------------
Net revenues ................. $ 177,146 $1,084,931 $ 2,137 $ 210,000 $1,054,214
Operating profits (losses) ... (159,332) 118,829 (152,106) (210,000) (402,609)
Identifiable assets .......... 1,113,200 914,547 497,049 -- 2,273,969
</TABLE>
Capital expenditures and depreciation expense were not significant during
the periods presented.
NOTE 3 -- BRIDGE FINANCING
From January through March 1998, the Company sold 12 units of Bridge
Financing. Each Unit consists of (i) a 10 percent Promissory Note in the
principal amount of $50,000 due one year from the date of issuance and (ii)
1,667 shares of the Company's Common Stock. The holders of such shares have
certain registration rights. For financial reporting purposes, a portion of the
net proceeds was allocated to the value of the Common Stock. The resulting debt
discount of $150,030 (which was determined based on fair value estimate of $15
per share) is being amortized to expenses over the term of the Promissory
Notes. Expenses for the four months ended April 30, 1998 include $41,068 of
such amortization.
NOTE 4 -- LEGAL MATTERS
KMS was a co-defendant in a legal action in which the plaintiff alleged
that KMS and certain of its representatives sold securities to the plaintiff
through fraudulent sales practices, misrepresentations and omissions and that
certain trades were unauthorized. The complaint demanded compensatory damages
of $254,000, rescission damages of $100,000, unspecified punitive damages and
attorneys' fees and other legal costs. The matter was resolved in April 1998
when KMS agreed to repurchase the preferred shares for $110,000 payable in five
equal monthly installments commencing April 1998.
F-39
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1997 AND 1998 (UNAUDITED)
NOTE 5 -- STOCK OPTION PLAN
The United States Financial Group, Incorporated 1998 Stock Incentive Plan
(the "Plan"), which expires ten years from the date adopted, enables the
Company to grant incentive stock options, nonqualified options and stock
appreciation rights ("SARs") for up to 1,000,000 shares of the Company's Common
Stock. Incentive stock options granted under the Plan must conform to
applicable Federal income tax regulations and have an exercise price not less
than the fair market value of shares at the date of grant (110% of fair market
value for ten percent or more stockholders). Other options and SARs may be
granted on terms determined by a committee of the Board of Directors. As of
April 30, 1998, no options were outstanding under the Plan.
F-40
<PAGE>
===============================================================================
NO DEALER, SALESMAN, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED
HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATES AS OF WHICH SUCH INFORMATION IS FURNISHED.
-----------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Cover Page .............................................................. 1
Prospectus Summary ...................................................... 3
Summary Financial Information ........................................... 5
Risk Factors ............................................................ 6
Dilution ................................................................ 16
Use of Proceeds ......................................................... 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations ........................................................ 18
Business ................................................................ 23
Capitalization .......................................................... 36
Management .............................................................. 37
Principal and Selling Shareholders ...................................... 40
Certain Transactions .................................................... 41
Underwriting ............................................................ 42
Description of Capital Stock ............................................ 44
Dividends ............................................................... 45
Reports to Shareholders ................................................. 45
Transfer Agent and Registrar ............................................ 45
Legal Proceedings ....................................................... 45
Experts ................................................................. 45
Indemnification ......................................................... 45
Further Information ..................................................... 45
Consolidated Financial Statements ....................................... F-1
</TABLE>
===============================================================================
===============================================================================
3,000,000 SHARES MAXIMUM
666,667 SHARES MINIMUM
UNITED STATES FINANCIAL GROUP, INCORPORATED
COMMON STOCK
----------------
PROSPECTUS
----------------
KLEIN, MAUS & SHIRE, INC.
July , 1998
===============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 22. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company has a provision in its charter, by-laws, or other contracts
providing for indemnification of its officers and directors.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors officers and controlling
persons of the Company 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 Company
of expenses incurred or paid by a director, officer or controlling person of
the registrant in the successful defense of any such 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.
ITEM 23. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Estimated expenses payable by the Registrant other than underwriting
commissions payable to the Underwriter in connection with the registration and
distribution of the Common Stock registered hereby are as follows:
<TABLE>
<S> <C>
Registration fee ................................... $ 14,537
"Blue sky" filing fees and expenses (est.) ......... $ 15,000
Printing Expenses (estimated) ...................... $ 50,000
Transfer agent and registrar's fees (est.) ......... $ 10,000
Legal fees and expenses ............................ $ 125,000
Accounting and other professional fees ............. $ 125,000
Miscellaneous (estimated) .......................... $ 160,463
---------
TOTAL .............................................. $ 500,000
=========
</TABLE>
ITEM 24. RECENT SALES OF UNREGISTERED SECURITIES.
The following common shares have been issued and are outstanding:
<TABLE>
<S> <C>
Shares issue to effect the merger with Klein, Maus & Share, Inc. ...... 9,444,634
Shares issued to effect the merger with Sureal Inc. ................... 750,000
Shares issued with bridge financing ................................... 10,002
Shares reserved for conversion of preferred shares .................... 813,000
</TABLE>
ITEM 25. EXHIBITS.
The following exhibits can be found as exhibits to the filings listed.
<TABLE>
<S> <C>
1 Form of Underwriting Agreement*
1.1 Form of Escrow Agreement*
1.2 Form of Underwriter's Warrant Agreement*
3.1 Articles of Incorporation
3.2 By-Laws
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C>
5 Opinion of Doros & Brescia, P.C.*
10.1 Employment Agreement -- Mohammad Ali Khan
10.2 Employment Agreement -- Asim S. Kohli
10.3 Employment Agreement -- R. Bret Jenkins
10.4 Employment Agreement -- Richard Wogksch
10.5 Employment Agreement -- Glen Jensen
10.6 Consulting Agreement with EH Associates
10.7 Stock Option Plan*
10.8 Lease Agreement -- 110 Wall Street, New York
10.9 Lease Agreement -- Orem, Utah
10.10 Clearing Agreement with Cowen & Company
10.11 Share Exchange Agreement between United States Financial Group,
Incorporated and Sureal International, Inc.*
22.1 Consent of Eichler, Bergsman & Co., LLP*
22.2 Consent of Lilling & Company*
22.3 Consent of Hagan & Burns CPAs, PC*
22.4 Consent of Doros & Brescia, P.C.
</TABLE>
- ----------
* Filed with Pre-Effective Amendment No. 1
ITEM 26. UNDERTAKINGS.
Subject to the terms and conditions of Section 15(d) of the Securities and
Exchange Act of 1934, the undersigned registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission hereto before or hereafter duly adopted pursuant
to authority conferred in that section.
The undersigned registrant hereby undertakes to provide to the Underwriter
at the closing specified in the Underwriting agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each Purchaser.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
The Registrant further undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end
II-2
<PAGE>
of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b). If, in the
aggregate, the changes in volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this S-1 Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York, State of
New York, on the 30th day of July, 1998.
UNITED STATES FINANCIAL GROUP,
INCORPORATED
By /s/ Mohammad Ali Khan
------------------------------------
Mohammad Ali Khan, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Mohammad Ali Khan President and Director July 29, 1998
- ------------------------------- (Principal Executive Officer)
Mohammad Ali Khan
/s/ William Triebel Principal Financial July 29, 1998
- ------------------------------- Officer
William Triebel
/s/ Asim S. Kohli Director July 29, 1998
- -------------------------------
Asim S. Kohli
/s/ A. Rushdi Siddiqui Director July 29, 1998
- -------------------------------
A. Rushdi Siddiqui
/s/ Edward A. Heil Director July 29, 1998
- -------------------------------
Edward A. Heil
Director July , 1998
- -------------------------------
R. Bret Jenkins
/s/ Maurice Gross Director July 29, 1998
- -------------------------------
Maurice Gross
/s/ Steven Jacobson Director July 29, 1998
- -------------------------------
Steven Jacobson
/s/ Joseph Antonini Director July 29, 1998
- -------------------------------
Joseph Antonini
/s/ Jamil Asghar Director July 29, 1998
- -------------------------------
Jamil Asghar
/s/ Leonard Yablon Director July 29, 1998
- -------------------------------
Leonard Yablon
/s/ Jaffer Naqvi Director July 29, 1998
- -------------------------------
Jaffer Naqvi
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
1 Form of Underwriting Agreement*
1.1 Form of Escrow Agreement*
1.2 Form of Underwriter's Warrant Agreement*
3.1 Articles of Incorporation
3.2 By-Laws
5 Opinion of Doros & Brescia, P.C.*
10.1 Employment Agreement -- Mohammad Ali Khan
10.2 Employment Agreement -- Asim S. Kohli
10.3 Employment Agreement -- R. Bret Jenkins
10.4 Employment Agreement -- Richard Wogksch
10.5 Employment Agreement -- Glen Jensen
10.6 Consulting Agreement with EH Associates
10.7 Stock Option Plan*
10.8 Lease Agreement -- 110 Wall Street, New York
10.9 Lease Agreement -- Orem, Utah
10.10 Clearing Agreement with Cowen & Company
10.11 Share Exchange Agreement between United States Financial Group,
Incorporated and Sureal International, Inc.*
22.1 Consent of Eichler, Bergsman & Co., LLP*
22.2 Consent of Lilling & Company*
22.3 Consent of Hagan & Burns CPAs, PC*
22.4 Consent of Doros & Brescia, P.C.
- ----------
* Filed with Pre-Effective Amendment No. 1
<PAGE>
Form of Underwriting Agreement
---------------------------------------------------
3,000,000 SHARES OF SERIES A PREFERRED STOCK
---------------------------------------------------
UNITED STATES FINANCIAL GROUP, INCORPORATED
UNDERWRITING AGREEMENT
New York, New York
______________, 1998
Klein Maus and Shire, Inc.
110 Wall Street
New York, New York 10005
Ladies and Gentlemen:
United States Financial Group, Incorporated, a Delaware corporation
(the "COMPANY"), confirms its agreement with Klein Maus and Shire, Inc.,
("YOU", the "UNDERWRITER" or "KMS") as follows: The Company retains KMS as its
exclusive agent to sell (the "OFFERING"), on a best efforts basis, a minimum of
666,667 shares (the "SHARES") of the Company's common stock, $.0001 par value
per share (the "COMMON STOCK" or the "SECURITIES") and a maximum of 3,000,000
shares of Common Stock, at a price to the public of $15.00 per share of Common
Stock during an offering period commencing on the date hereof and expiring on
_______________________, 199__, (the "OFFERING PERIOD"). The Company also
proposes to issue and sell to you warrants (the "UNDERWRITER'S WARRANTS") at a
purchase price of $.0001 per
<PAGE>
Underwriter's Warrant pursuant to the Underwriter's Warrant Agreement entitling
the holder to purchase an aggregate of 3,000,000 shares of Common Stock
exercisable for a period of four years from ______________, 199___ until
___________________, 200__ at an initial exercise price of $24.00 per share,
subject to adjustment in amount pro rata in the event all of the Common Stock
is not sold in the Offering. The Underwriter's Warrants and the Common Stock
issuable upon exercise of the Underwriter's Warrants are hereinafter referred
to as the "Underwriter's Securities." The Underwriter's Securities are more
fully described in the Registration Statement and the Prospectus referred to
below.
1. REPRESENTATIONS AND WARRANTIES. (a) The Company, a Delaware
corporation, which has one wholly-owned subsidiary, Klein Maus and Shire, Inc.,
an Indian corporation (the "SUBSIDIARY"), represents and warrants to, and
agrees with, the Underwriter as of the date hereof, and as of the Closing Date
(hereinafter defined) and the Option Closing Date (hereinafter defined), if
any, as follows:
(i) The Company has prepared and filed with the Securities
and Exchange Commission (the "COMMISSION") a registration statement, and an
amendment or amendments thereto, on Form S-1 (No. 333-52687), including any
related preliminary prospectus ("PRELIMINARY PROSPECTUS"), for the registration
of the Shares of Common Stock and the Underwriter's Securities under the
Securities Act of 1933, as amended (the "ACT"), which registration statement
and amendment or amendments have been prepared by the Company in conformity
with the requirements of the Act, and the Rules and Regulations of the
Commission thereunder. The Company will promptly file a further amendment to
said registration statement in the form heretofore delivered to the Underwriter
and will not file any other amendment thereto to which the Underwriter shall
have objected in writing after having been furnished with a copy thereof.
Except as the context
<PAGE>
may otherwise require, such registration statement, as amended, on file with
the Commission at the time the registration statement becomes effective
(including the Prospectus, financial statements, schedules, exhibits and all
other documents or information incorporated by reference therein and all
information deemed to be a part thereof as of such time pursuant to paragraph
(b) of Rule 430(A) of the rules and regulations), is hereinafter called the
"REGISTRATION STATEMENT", and the form of prospectus in the form first filed
with the Commission pursuant to Rule 424(b) of the rules and regulations, is
hereinafter called the "PROSPECTUS". For purposes hereof, "RULES AND
REGULATIONS" mean the rules and regulations adopted by the Commission under
either the Act or the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT"), as applicable.
(ii) Neither the Commission nor any state regulatory
authority has issued any order preventing or suspending the use of any
Preliminary Prospectus, the Registration Statement or Prospectus or any part of
any thereof and no proceedings for a stop order suspending the effectiveness of
the Registration Statement or any of the Company's securities have been
instituted or are pending or threatened. Each of the Preliminary Prospectus,
the Registration Statement and Prospectus at the time of filing thereof
conformed with the requirements of the Act and the Rules and Regulations, and
none of the Preliminary Prospectuses, the Registration Statement or Prospectus
at the time of filing thereof contained an untrue statement of a material fact
or omitted to state a material fact required to be stated therein and necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading, except that this representation and warranty does
not apply to statements made in reliance upon and in conformity with written
information furnished to the Company with respect to the Underwriter by or on
behalf of the Underwriter expressly for use in such Preliminary Prospectus,
Registration Statement or Prospectus or any amendment or supplement thereto.
<PAGE>
(iii) When the Registration Statement becomes effective and
at all times subsequent thereto up to the Closing Date (hereinafter defined)
and each Option Closing Date (hereinafter defined), if any, and during such
longer period as the Prospectus may be required to be delivered in connection
with sales by the Underwriter or a dealer, the Registration Statement and the
Prospectus will contain all statements which are required to be stated therein
in accordance with the Act and the Rules and Regulations, and will conform to
the requirements of the Act and the Rules and Regulations; neither the
Registration Statement nor the Prospectus, nor any amendment or supplement
thereto, contains or will contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein and necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading, PROVIDED, HOWEVER, that this representation and
warranty does not apply to statements made or statements omitted in reliance
upon and in conformity with information furnished to the Company in writing by
or on behalf of the Underwriter (as set forth in paragraph 1(a)(ii) hereof)
expressly for use in the Preliminary Prospectus, Registration Statement or
Prospectus or any amendment thereof or supplement thereto.
(iv) The Subsidiary is a wholly-owned subsidiary of the
Company. Each of the Company and the Subsidiary has been duly organized and is
validly existing as a corporation in good standing under the laws of the state
of its incorporation. Except as set forth in the Prospectus, neither the
Company nor the Subsidiary own an equity interest in any corporation,
partnership, trust, joint venture or other business entity. Each of the Company
and the Subsidiary is duly qualified and licensed and in good standing as a
foreign corporation in each jurisdiction in which its ownership or leasing of
any properties or the character of its operations require such qualification or
licensing except where the failure(s) to be so qualified, licensed and in good
standing, individually or in the aggregate, would not materially and adversely
affect the condition,
<PAGE>
financial or otherwise, or the earnings, business affairs, position, prospects,
value, operation, properties, business or results of operations of the Company
and the Subsidiary. Each of the Company and the Subsidiary has all requisite
power and authority (corporate and other), and has obtained any and all
authorizations, approvals, orders, licenses, certificates, franchises and
permits of and from all governmental or regulatory officials and bodies
(including, without limitation, those having jurisdiction over environmental or
similar matters), necessary to own or lease its properties and conduct its
business as described in the Prospectus, or is subject to no material liability
or disability by reason of the failure to obtain such authorizations,
approvals, orders, licenses, certificates, franchises and permits; each of the
Company and the Subsidiary is and has been doing business in compliance with
all such authorizations, approvals, orders, licenses, certificates, franchises
and permits and all federal, state, local and foreign laws, rules and
regulations and neither the Company nor the Subsidiary have received any notice
of proceedings relating to the revocation or modification of any such
authorization, approval, order, license, certificate, franchise, or permit
which, singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would materially and adversely affect the condition,
financial or otherwise, or the earnings, business affairs, position, prospects,
value, operations, properties, business, or results of operations of the
Company and the Subsidiary. The disclosures in the Registration Statement
concerning the effects of federal, state, local, and foreign laws, rules and
regulations on the business of the Company and the Subsidiary as currently
conducted and as contemplated are correct in all material respects and do not
omit to state a material fact necessary to make the statements contained
therein not misleading in light of the circumstances in which they were made.
(v) The Company has a duly authorized, issued and
outstanding capitalization as set forth in the Prospectus, and will have the
adjusted capitalization set forth therein
<PAGE>
on the Closing Date (hereinafter defined) and the Option Closing Date
(hereinafter defined), if any, based upon the assumptions set forth therein,
and the Company is not a party to or bound by any instrument, agreement or
other arrangement providing for it to issue any capital stock, rights,
warrants, options or other securities, except for this Agreement and as
described in the Prospectus. The Common Stock, the Underwriter's Warrants and
the Common Stock into which the Underwriter's Warrants are exercisable
(collectively, hereinafter sometimes referred to as the "IPO SECURITIES") and
all other securities issued or issuable by the Company conform or, when issued
and paid for, will conform, in all material respects to all statements with
respect thereto contained in the Registration Statement and the Prospectus. All
issued and outstanding securities of the Company and its Subsidiary have been
duly authorized and validly issued and are fully paid and non-assessable and
the holders thereof have no rights of rescission with respect thereto except as
disclosed in the Registration Statement, and are not subject to personal
liability by reason of being such holders; and none of such securities were
issued in violation of the preemptive rights of any holders of any security of
the Company or the Subsidiary or similar contractual rights granted by the
Company or the Subsidiary. The IPO Securities are not and will not be subject
to any preemptive or other similar rights of any stockholder, have been duly
authorized and, when issued, paid for and delivered in accordance with the
terms hereof, will be validly issued, fully paid and non-assessable and will
conform to the description thereof contained in the Prospectus; the holders
thereof will not be subject to any liability solely as such holders; all
corporate action required to be taken for the authorization, issue and sale of
the IPO Securities has been duly and validly taken; and the certificates
representing the IPO Securities are in due and proper form. Upon the issuance
and delivery pursuant to the terms hereof of the IPO Securities to be sold by
the Underwriter hereunder, the purchasers of the IPO Securities will acquire
good and marketable title to such IPO Securities free and clear of any lien,
<PAGE>
charge, claim, encumbrance, pledge, security interest, defect or other
restriction or equity of any kind whatsoever.
(vi) The financial statements of the Company together with
the related notes and schedules thereto, included in the Registration
Statement, each Preliminary Prospectus and the Prospectus fairly present the
financial position, income, changes in cash flow, changes in stockholders'
equity and the results of operations of the Company and the Subsidiary at the
respective dates and for the respective periods to which they apply and the pro
forma financial information included in the Registration Statement, each
Preliminary Prospectus and the Prospectus presents fairly on a basis consistent
with that of the audited financial statements included therein, the Company's
and the Subsidiary's pro forma net income or loss per share, as the case may
be, pro forma net tangible book value, and the pro forma capitalization and
such financial statements have been prepared in conformity with generally
accepted accounting principles and the Rules and Regulations, consistently
applied throughout the periods involved. There has been no material adverse
change or development involving a material change in the condition, financial
or otherwise, or in the earnings, business affairs, position, prospects, value,
operation, properties, business or results of operation of the Company or the
Subsidiary whether or not arising in the ordinary course of business, since the
date of the financial statements included in the Registration Statement and the
Prospectus, and the outstanding debt, the property, both tangible and
intangible, and the business of the Company and the Subsidiary conforms in all
material respects to the descriptions thereof contained in the Registration
Statement and the Prospectus.
(vii) The Company and its Subsidiary (A) has paid
all federal, state, local,
and foreign taxes for which it is liable, including, but not limited to,
withholding taxes and amounts payable under Chapters 21 through 24 of the
Internal Revenue Code of 1986, as amended (the
<PAGE>
"CODE"), and has furnished all information returns it is required to furnish
pursuant to the Code, (B) has established adequate reserves for such taxes
which are not due and payable, and (C) does not have any tax deficiency or
claims outstanding, proposed or assessed against it.
(viii) No transfer tax, stamp duty or other similar tax is
payable by or on behalf of the purchasers of the IPO Securities in connection
with (A) the purchase of and the issuance and transfer by the Company of the
IPO Securities and (B) the consummation by the Company of any of its
obligations under this Agreement.
(ix) The Company and its Subsidiary each maintains
insurance policies, including, but not limited to, general liability, product
liability if applicable and property insurance, which insures the Company and
its Subsidiary and their employees, against such losses and risks generally
insured against by comparable businesses. The Company and its Subsidiary (A)
have not failed to give notice or present any insurance claim with respect to
any matter, including but not limited to the Company's or the Subsidiary's
business, property or employees, under the insurance policy or surety bond in a
due and timely manner, (B) does not have any disputes or claims against any
underwriter of such insurance policies or surety bonds or has not failed to pay
any premiums due and payable thereunder, and (C) has not failed to comply with
all conditions contained in such insurance policies and surety bonds. To the
Company's knowledge there are no facts or circumstances under any such
insurance policy or surety bond which would relieve any insurer of its
obligation to satisfy in full any valid claim of the Company and/or its
Subsidiary.
(x) There is no action, suit, proceeding, inquiry,
arbitration, investigation, litigation or governmental proceeding (including,
without limitation, those having jurisdiction over environmental or similar
matters), domestic or foreign, pending or threatened against (or circumstances
that may give rise to the same), or involving the properties or business of the
<PAGE>
Company or its Subsidiary which (A) questions the validity of the capital stock
of the Company, its Subsidiary or this Agreement, or of any action taken or to
be taken by the Company pursuant to or in connection with this Agreement or the
Underwriter's Warrant Agreement, (B) is required to be disclosed in the
Registration Statement which is not so disclosed (and such proceedings as are
summarized in the Registration Statement are accurately summarized in all
material respects), or (C) if adversely determined, might materially and
adversely affect the condition, financial or otherwise, or the business affairs
or business prospects, earnings, liabilities, prospects, stockholders' equity,
value, properties, business or assets of the Company and its Subsidiary.
(xi) The Company has full legal right, power and authority
to authorize, issue, deliver and sell the IPO Securities, enter into this
Agreement and the Underwriter's Warrant Agreement and to consummate the
transactions provided for herein and therein; and each of this Agreement and
the Underwriter's Warrant Agreement have been duly and properly authorized,
executed and delivered by the Company. This Agreement and the Underwriter's
Warrant Agreement each constitute a legal, valid and binding agreement of the
Company enforceable against the Company in accordance with its terms, and
neither the Company's issue and sale of the IPO Securities or execution or
delivery of this Agreement and the Underwriter's Warrant Agreement or its
performance hereunder and thereunder, its consummation of the transactions
contemplated herein and therein, or the conduct of its business as described in
the Registration Statement, the Prospectus, and any amendments or supplements
thereto, conflicts with or will conflict with or results or will result in any
breach or violation of any of the terms or provisions of, or constitutes or
will constitute a default under, or result in the creation or imposition of any
lien, charge, claim, encumbrance, pledge, security interest, defect or other
restriction or equity of any kind whatsoever upon, any property or assets
(tangible or intangible) of the Company or its Subsidiary pursuant to the terms
of,
<PAGE>
(A) the certificate of incorporation or by-laws of the Company or its
Subsidiary (B) any license, contract, indenture, mortgage, deed of trust,
voting trust agreement, stockholders agreement, note, loan or credit agreement
or any other agreement or instrument to which the Company or its Subsidiary is
a party or by which it is or may be bound or by which its properties or assets
(tangible or intangible) are or may be subject, or any indebtedness, or (C) any
statute, judgment, decree, order, rule or regulation applicable to the Company
or its Subsidiary by any arbitrator, court, regulatory body or administrative
agency or other governmental agency or body (including, without limitation,
those having jurisdiction over environmental or similar matters), domestic or
foreign, having jurisdiction over the Company or its Subsidiary or any of their
activities or properties, in each case except as described in the Prospectuses
and except for conflicts, breaches, violations, defaults, creations or
impositions which do not and would not have a material adverse effect on the
condition, financial or otherwise, or the earnings, business affairs, position,
shareholder's equity, value, operation, properties, business or results of
operations of the Company and its Subsidiary.
(xii) No consent, approval, authorization or order of, and
no filing with, any court, regulatory body, government agency or other body,
domestic or foreign which has not theretofore been obtained, is required for
the issuance of the IPO Securities pursuant to the Prospectus and the
Registration Statement, the issuance of the Underwriter's Warrants, the
execution, delivery or performance of this Agreement, the Underwriter's Warrant
Agreement and the transactions contemplated hereby and thereby, including,
without limitation, any waiver of any preemptive, first refusal or other rights
that any entity or person may have for the issue and/or sale of any of the IPO
Securities, except such as have been or may be obtained under the Act or may be
required under state securities or Blue Sky laws in connection with the
purchase and distribution of the IPO Securities and the Underwriter's purchase
of the Underwriter's Warrants to be sold by the
<PAGE>
Company hereunder and thereunder.
(xiii) All executed agreements, contracts or other
documents or copies of executed agreements, contracts or other documents filed
as exhibits to the Registration Statement to which the Company and/or its
Subsidiary is a party or by which it may be bound or to which its assets,
properties or business may be subject have been duly and validly authorized,
executed and delivered by the Company and/or its Subsidiary and constitute the
legal, valid and binding agreement of the Company and its Subsidiary,
enforceable against the Company and its Subsidiary, in accordance with its
terms. The descriptions in the Registration Statement of agreements, contracts
and other documents and statutes and regulations are accurate and fairly
present the information required to be shown with respect thereto by Form S-1,
and there are no contracts or other documents which are required by the Act to
be described in the Registration Statement or filed as exhibits to the
Registration Statement which are not described or filed as required, and the
exhibits which have been filed are complete and correct copies of the documents
of which they purport to be copies.
(xiv) Subsequent to the respective dates as of which
information is set forth in the Registration Statement and Prospectus, and
except as may otherwise be indicated or contemplated herein or therein, the
Company nor its Subsidiary have (A) issued any securities or incurred any
liability or obligation, direct or contingent, for borrowed money, (B) entered
into any transaction other than in the ordinary course of business, or (C)
declared or paid any dividend or made any other distribution on or in respect
of its capital stock of any class, and there has not been any change in the
capital stock, or any change in the debt (long or short term) or liabilities or
material change in or affecting the business affairs or prospects, management,
stockholders' equity, properties, business, financial operations or assets of
the Company and its Subsidiary.
(xv) Except as described in the final Prospectus no default
exists in the due
<PAGE>
performance and observance of any term, covenant or condition of any license,
contract, indenture, mortgage, installment sale agreement, lease, deed of
trust, voting trust agreement, stockholders agreement, partnership agreement,
note, loan or credit agreement, purchase order, or any other material agreement
or instrument evidencing an obligation for borrowed money, or any other
material agreement or instrument to which the Company or its Subsidiary is a
party or by which the Company or its Subsidiary may be bound or to which the
property or assets (tangible or intangible) of the Company or its Subsidiary is
subject or affected, which default would have a material adverse effect on the
condition, financial or otherwise, earnings, business affairs, position,
stockholder's equity, value, operation, properties, business or results of
operations of the Company and the Subsidiary.
(xvi) Each of the Company and its Subsidiary has generally
enjoyed a satisfactory employer-employee relationship with its employees and is
in compliance in all material respects with all federal, state, local, and
foreign laws and regulations respecting employment and employment practices,
terms and conditions of employment and wages and hours. There are no pending
investigations involving the Company or the Subsidiary by the U.S. Department
of Labor, or any other governmental agency responsible for the enforcement of
such federal, state, local, or foreign laws and regulations. There is no unfair
labor practice charge or complaint against the Company or the Subsidiary
pending before the National Labor Relations Board or any strike, picketing,
boycott, dispute, slowdown or stoppage pending or threatened against or
involving the Company or the Subsidiary, or any predecessor entity, and none
has ever occurred. No representation question exists respecting the employees
of the Company or the Subsidiary and no collective bargaining agreement or
modification thereof is currently being negotiated by the Company or its
Subsidiary. No grievance or arbitration proceeding is pending under any expired
or
<PAGE>
existing collective bargaining agreements of the Company or its Subsidiary.
No labor dispute with the employees of the Company or its Subsidiary exists,
or, to the knowledge of the Company is imminent.
(xvii) Except as described in the Prospectus, each of the
Company and its Subsidiary does not maintain, sponsor or contribute to any
program or arrangement that is an "employee pension benefit plan", an "employee
welfare benefit plan" or a "multi employer plan" as such terms are defined in
Sections 3(2), 3(1) and 3(37), respectively, of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") ("ERISA PLANS"). The Company and/or
its Subsidiary does not maintain or contribute, now or at any time previously,
to a defined benefit plan, as defined in Section 3(35) of ERISA. No ERISA Plan
(or any trust created thereunder) has engaged in a "prohibited transaction"
within the meaning of Section 406 of ERISA or Section 4975 of the Code, which
could subject the Company or the Subsidiary to any tax penalty on prohibited
transactions and which has not adequately been corrected. Each ERISA Plan is in
compliance with all material reporting, disclosure and other requirements of
the Code and ERISA as they relate to any such ERISA Plan. Determination letters
have been received from the Internal Revenue Service with respect to each ERISA
Plan which is intended to comply with Code Section 401(a), stating that such
ERISA Plan and the attendant trust are qualified thereunder. Neither the
Company or the Subsidiary has never completely or partially withdrawn from a
"multi employer plan".
(xviii) The Company and its Subsidiary have not taken and
will not take, directly or indirectly, and the Company and its Subsidiary will
use their best efforts to ensure that any of their employees, directors,
stockholders or affiliates (within the meaning of the Rules and Regulations) of
any of the foregoing has not taken or will not take, directly or indirectly,
any action designed to or which has constituted or which might be expected to
cause or result in, under the
<PAGE>
Exchange Act, or otherwise, stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the IPO Securities
or otherwise.
(xix) None of the patents, patent applications, trademarks,
service marks, trade names and copyrights, and licenses and rights to the
foregoing presently owned or held by the Company or its Subsidiary are in
dispute, to the Company's knowledge, or are in any conflict with the right of
any other person or entity. The Company and its Subsidiary (i) own or have the
license or other right to use, free and clear of all liens, charges, claims,
encumbrances, pledges, security interests, defects or other restrictions or
equities of any kind whatsoever, all patents, trademarks, service marks, trade
names and copyrights, technology and licenses and rights with respect to the
foregoing, used in the conduct of their business as now conducted or proposed
to be conducted without infringing upon or otherwise acting adversely to the
right or claimed right of any person, corporation or other entity under or with
respect to any of the foregoing, except as set forth in the Prospectuses and
(ii) except as set forth in the Prospectus, are not obligated or under any
liability whatsoever to make any payments by way of royalties, fees or
otherwise to any owner or licensee of, or other claimant to, any patent,
trademark, service mark, tradename, copyright, know-how, technology or other
intangible asset, with respect to the use thereof or in connection with the
conduct of their business or otherwise.
(xx) Neither the Company nor its Subsidiary have received
any notice of infringement of or conflict with asserted rights of others with
respect to any trademark, service mark, trade name or copyright or other
intangible asset used or held for use by it in connection with the conduct of
its business 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, or the business affairs, position,
properties, results of operations or net worth of the Company and its
<PAGE>
Subsidiary.
(xxi) The Company and its Subsidiary have good and
marketable title to, or valid and enforceable leasehold estates in, all items
of real and personal property stated in the Prospectus, to be owned or leased
by it free and clear of all liens, charges, claims, encumbrances, pledges,
security interests, defects, or other restrictions or equities of any kind
whatsoever, other than those referred to in the Prospectus and liens for taxes
not yet due and payable.
(xxii) The Company has caused to be duly executed legally
binding and enforceable agreements pursuant to which each of its officers,
directors or any person or entity deemed to be an affiliate of the Company and
any stockholders, noteholders and any other parties holding, or in the future
holding, securities, instruments or contract rights convertible into common
shares or preferred shares and/or any other securities of the Company,
including common shares issued pursuant to the Company's Stock Option Plan, has
agreed, or shall agree prior to issuance as the case may be, not to, directly
or indirectly, offer to sell, sell, grant any option for the sale of, assign,
transfer, pledge, hypothecate or otherwise encumber or dispose of any
securities issued by the Company (either pursuant to Rule 144 of the Rules and
Regulations or otherwise) or dispose of any beneficial interest therein for a
period of not less than 24 months following the effective date of the
Registration Statement without the prior written consent of the Underwriter,
and that for a period of 2 years following the Effective Date of the
Registration Statement any such security which has been issued and is
outstanding on the effective date of the Registration Statement and is to be
sold or otherwise disposed of pursuant to such Rule 144 with the consent of the
Underwriter shall only be sold or otherwise disposed of through the
Underwriter. The Company will cause the Transfer Agent, as defined below, to
mark an appropriate legend on the face of stock certificates representing all
of such securities and to place "stop transfer" orders on the Company's stock
ledgers.
<PAGE>
(xxiii) The Company has caused to be duly executed binding
and enforceable agreements with respect to all of the outstanding loans made to
the Company from time to time from affiliated persons wherein the Company and
each such lender has agreed that the Company will not make payment of principal
or accumulated interest thereon for an eighteen (18) month period from the
completion of the Offering except that three (3) Bridge Loans in the aggregate
principal sum of $600,000 plus accumulated interest thereon which are being
repaid to the Bridge Lenders out of the proceeds of the Offering.
(xxiv) There are no claims, payments, issuances,
arrangements or understandings, whether oral or written, for services in the
nature of a finder's or origination fee with respect to the sale of the IPO
Securities hereunder or any other arrangements, agreements, understandings,
payments or issuance with respect to the Company, the Subsidiary or any of
their officers, directors, stockholders, partners, employees or affiliates that
may affect the Underwriter's compensation, as determined by the National
Association of Securities Dealers, Inc. ("NASD") and the Company is aware that
the Underwriter shall compensate any of its personnel who may have acted in
such capacities as they shall determine in their sole discretion.
(xxv) The Common Stock has been approved for quotation on
the Nasdaq Small Cap Market and upon notice of issuance, listing on the Boston
Stock Exchange ("BSE").
(xxvi) Neither the Company, the Subsidiary nor any of their
respective officers, employees, agents or any other person acting on behalf of
the Company or the Subsidiary has, directly or indirectly, given or agreed to
give any money, gift or similar benefit (other than legal price concessions to
customers in the ordinary course of business) to any customer, supplier,
employee or agent of a customer or supplier, or official or employee of any
governmental agency (domestic or foreign) or instrumentality of any government
(domestic or foreign) or any political
<PAGE>
party or candidate for office (domestic or foreign) or other person who was,
is, or may be in a position to help or hinder the business of the Company or
the Subsidiary (or assist the Company or the Subsidiary in connection with any
actual or proposed transaction) which (A) might subject the Company or the
Subsidiary, or any other such person to any damage or penalty in any civil,
criminal or governmental litigation or proceeding (domestic or foreign), (B) if
not given in the past, might have had a materially adverse effect on the
assets, business or operations of the Company or the Subsidiary, or (C) if not
continued in the future, might adversely affect the assets, business,
operations or prospects of the Company or the Subsidiary. The Company's and the
Subsidiary's internal accounting controls are sufficient to cause the Company
to comply with the Foreign Corrupt Practices Act of 1977, as amended.
(xxvii) Except as set forth in the Prospectus, no officer,
director, or stockholder of the Company or the Subsidiary, or any "affiliate"
or "associate" (as these terms are defined in Rule 405 promulgated under the
Rules and Regulations) of any of the foregoing persons or entities has or has
had, either directly or indirectly, (A) an interest in any person or entity
which (1) furnishes or sells services or products which are furnished or sold
or are proposed to be furnished or sold by the Company or the Subsidiary, or
(2) purchases from or sells or furnishes to the Company or the Subsidiary any
goods or services, or (B) a beneficiary interest in any contract or agreement
to which the Company or the Subsidiary is a party or by which it may be bound
or affected. Except as set forth in the Prospectus under "Certain
Transactions", there are no existing agreements, arrangements, understandings
or transactions, or proposed agreements, arrangements, understandings or
transactions, between or among the Company or the Subsidiary, and any officer,
director, and 5% or more stockholders (as such term is defined in the
Prospectus) of the Company or the Subsidiary, or any partner, affiliate or
associate of any of the foregoing persons or entities.
<PAGE>
(xxviii) Any certificate signed by any officer of the
Company and delivered to the Underwriter or to Underwriter's Counsel (as
defined herein) shall be deemed a representation and warranty by the Company to
the Underwriter as to the matters covered thereby.
(xxix) The minute books of the Company and the Subsidiary
have been made available to the Underwriter and contains a complete summary of
all meetings and actions of the directors and stockholders of the Company and
the Subsidiary since the time of its incorporation, and reflects all
transactions referred to in such minutes accurately in all material respects.
(xxx) Except and to the extent described in the Prospectus,
no holders of any securities of the Company or the Subsidiary or of any
options, warrants or other convertible or exchangeable securities of the
Company or the Subsidiary have the right to include any securities issued by
the Company or the Subsidiary in the Registration Statement or any registration
statement under the Act and no person or entity holds any anti-dilution rights
with respect to any securities of the Company or the Subsidiary.
(xxxi) The Company has as of the effective date of the
Registration Statement (a) entered into employment agreements with its
President, Mohammad Ali Khan and its Chief Operating Officer, Asim S. Kohli, on
terms and conditions satisfactory to the Underwriter, and (ii) purchased
"Key-Man" insurance on the life of Mohammad Ali Khan in the sum of $1,000,000
which names the Company as the sole beneficiary on terms and conditions
satisfactory to the Underwriter.
(xxxii) The Company has entered into an Underwriter's
Warrant Agreement with respect to the Underwriter's Warrants substantially in
the form filed as Exhibit _______ to the Registration Statement, with American
Stock Transfer and Trust Company in form and substance satisfactory to the
Underwriter.
<PAGE>
(xxxiii) Immediately prior to the effective date of the
Registration Statement there shall be no more than an aggregate of ____________
shares of Common Stock issued and outstanding (including any and all (a)
securities with equivalent rights as the Common Stock or Common Stock, (b)
Common Stock, or such equivalent securities, issuable upon the exercise of
options, warrants and other contract rights, and (c) Securities convertible
directly or indirectly into Common Stock or such equivalent securities, but
excluding a maximum of ___________ shares of Common Stock which are issuable
upon exercise of options which may be granted pursuant to the Company's Stock
Option Plan.
(xxxiv) Subsequent to the date hereof and prior to any
Closing Date or Option Closing Date except as otherwise described in or
contemplated by the Prospectuses, the Company will not issue or acquire any
debt or equity securities.
(xxxv) Except for fair market value the Company shall not
issue any common shares, options, warrants or any other equity or debt security
within three (3) years following the Effective Date of the Registration
Statement without the express written consent of the Underwriter except for a
maximum of _____________ shares of common stock which may be issued pursuant to
the Company's Stock Option Plan nor shall the Company, during such three (3)
year period, effect a reverse split or reclassification of shares of its
capital stock without the express written consent of the Underwriter.
(xxxvi) Services currently being provided to the Company by
affiliated companies, if any, shall continue to be provided to the Company
without charge except for reasonable disbursements incurred on behalf of the
Company.
2. Purchase, Sale and Delivery of the Securities.
(a) On the basis of the warranties, representations and
agreements herein
<PAGE>
contained, and subject to the satisfaction of all the terms and conditions of
this Agreement, the Company agrees to engage the Underwriter, and the
Underwriter agrees to serve as the Company's exclusive agent to sell, on a best
efforts basis, a minimum of 666,667 shares of Common Stock (the "MINIMUM
OFFERING") and a maximum of 3,000,000 shares of Common Stock (the "MAXIMUM
OFFERING"), less, in the case of each such security, an underwriting commission
of ten percent (10%) of the gross sale price of each such security sold in the
Offering by deduction from the proceeds of the Offering. The Underwriter may
allow a concession not exceeding $_______ per share of Common Stock to Selected
Dealers who are members of the NASD, and to certain foreign dealers, and such
dealers may reallow to NASD members and to certain foreign dealers a concession
not exceeding $_____ per share of Common Stock.
(b) The proceeds from the sale of the Securities shall be
deposited by the Underwriter upon receipt thereof in an escrow account (the
"ESCROW ACCOUNT") at The Chase Manhattan Bank, a New York state charted bank
with offices at 450 West 33rd Street, New York, New York 10001 until the
Minimum Offering amount of 666,667 shares of Common Stock is deposited in the
Escrow Account. If the Minimum Offering amount is not sold and the proceeds
thereof deposited into the Escrow Account prior to the expiration of the
Offering Period, the Offering proceeds received from investors will be promptly
refunded to the investors in full without
interest thereon and/or deduction of any kind therefrom.
(c) Delivery of the Securities and payment therefore shall
be made at 10:00 a.m., New York time on each Closing Date and Option Closing
Date, if any, as hereinafter defined, at the offices of the Underwriter or such
other location as may be agreed upon by you and the Company. Delivery of
certificates for the Common Stock (in definitive form and registered in such
names and in such denominations as you shall request by written notice to the
Company
<PAGE>
delivered at least four business days' prior to the Closing Date or Option
Closing Date, if any), shall be made to you for the account of the purchasers
of the Securities against payment of the purchase price therefor by certified
or bank check or wire transfer payable in New York Clearing House funds to the
order of the Company. The Company will make such certificates available for
inspection at least one business day prior to the Closing Date and Option
Closing Date, if any, at such place as you shall designate.
3. Closing Date
The "Closing Date" shall be not later than the fourth
business day following receipt of the Minimum Offering amount in cleared funds
and thereafter as additional funds are received up to the Maximum Offering
amount at such times as you shall determine (the "OPTION CLOSING DATE") and
advise the Company by at least three full business days' notice.
4. Covenants and Agreements of the Company. The Company
covenants and agrees with the Underwriter as follows:
(a) The Company shall use its best efforts to cause the
Registration Statement and any amendments thereto to become effective as
promptly as practicable (such Registration Statement to be in form and
substance satisfactory to the Underwriter and its counsel) and will not at any
time, whether before or after the effective date of the Registration Statement,
file any amendment to the Registration Statement or supplement to the
Prospectus or file any document under the Act or Exchange Act before
termination of the Offering of the Securities by the Underwriter of which the
Underwriter shall not previously have been advised and furnished with a copy,
or to which the Underwriter shall have objected unless required under the Act,
the Exchange Act or the Rules and Regulations thereunder or which is not in
compliance with the Act, the Exchange Act or the Rules and Regulations.
<PAGE>
(b) As soon as the Company is advised or obtains knowledge
thereof, the Company will advise the Underwriter and confirm the notice in
writing, (i) when the Registration Statement, as amended, becomes effective, if
the provisions of Rule 430A promulgated under the Act will be relied upon, when
the Prospectus has been filed in accordance with said Rule 430A and when any
post-effective amendment to the Registration Statement becomes effective, (ii)
of the issuance by the Commission of any stop order or of the initiation, or
the threatening, of any proceeding, suspending the effectiveness of the
Registration Statement or any order preventing or suspending the use of the
Preliminary Prospectus or the Prospectus, or any amendment or supplement
thereto, or the institution of proceedings for that purpose (iii) of the
issuance by the Commission or by any state securities commission of any
proceedings for the suspension of the qualification of any of the Securities
for offering or sale in any jurisdiction or of the initiation, or the
threatening, of any proceeding for that purpose, (iv) of the receipt of any
comments from the Commission; and (v) of any request by the Commission for any
amendment to the Registration Statement or any amendment or supplement to the
Prospectus or for additional information. If the Commission or any state
securities commission authority shall enter a stop order or suspend such
qualification at any time, the Company will make every effort to obtain
promptly the lifting of such order.
(c) The Company shall file the Prospectus (in form and
substance satisfactory to the Underwriter and its counsel) or transmit the
Prospectus by a means reasonably calculated to result in filing with the
Commission pursuant to Rule 424 (b) (or, if applicable and if consented to by
the Underwriter, pursuant to Rule 424 (b)(47).
(d) The Company will give the Underwriter notice of its
intention to file or prepare any amendment to the Registration Statement
(including any post-effective amendment)
<PAGE>
or any amendment or supplement to the Prospectus (including any revised
prospectus which the Company proposes for use by the Underwriter in connection
with the Offering of the IPO Securities which differs from the corresponding
prospectus on file at the Commission at the time the Registration Statement
becomes effective, whether or not such revised prospectus is required to be
filed pursuant to Rule 424(b) of the Rules and Regulations), and will furnish
the Underwriter with copies of any such amendment or supplement a reasonable
amount of time prior to such proposed filing or use, as the case may be, and
will not file any such prospectus to which the Underwriter or Doros & Brescia,
P.C. ("UNDERWRITER'S COUNSEL"), shall reasonably object unless required under
the Act or the Rules and Regulations thereunder.
(e) The Company shall take all action, in cooperation with
the Underwriter, at or prior to the time the Registration Statement becomes
effective, to qualify the IPO Securities for offering and sale under the
securities laws of such jurisdictions as the Underwriter may designate to
permit the continuance of sales and dealings therein for as long as may be
necessary to complete the distribution, and shall make such applications, file
such documents and furnish such information as may be required for such
purpose; PROVIDED, HOWEVER, the Company shall not be required to qualify as a
foreign corporation or file a general or limited consent to service of process
in any such jurisdiction. In each jurisdiction where such qualification shall
be effected, the Company will, unless the Underwriter agrees that such action
is not at the time necessary or advisable, use all reasonable efforts to file
and make such statements or reports at such times as are or may reasonably be
required by the laws of such jurisdiction to continue such qualification. It is
agreed that Underwriter's Counsel (or its designees) shall perform all such
required Blue Sky legal services.
(f) During the time when a prospectus is required to be
delivered under the Act, the Company shall use all reasonable efforts to comply
with all requirements imposed upon
<PAGE>
it by the Act and the Exchange Act, as now and hereafter amended and by the
Rules and Regulations, as from time to time in force, so far as necessary to
permit the continuance of sales of or dealings in the IPO Securities in
accordance with the provisions hereof and the Prospectus, or any amendments or
supplements thereto. If at any time when a prospectus relating to the IPO
Securities is required to be delivered under the Act, any event shall have
occurred as a result of which, in the reasonable opinion of counsel for the
Company or Underwriter's Counsel, the Prospectus, as then amended or
supplemented, includes an untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if it is necessary at any time to amend the Prospectus
to comply with the Act and the Rules and Regulations, the Company will notify
the Underwriter promptly and prepare and file with the Commission an
appropriate amendment or supplement in accordance with Section 10 of the Act,
each such amendment or supplement to be reasonably satisfactory to
Underwriter's Counsel, and the Company will furnish to the Underwriter copies
of such amendment or supplement as soon as available and in such quantities as
the Underwriter may reasonably request.
(g) During the time when a prospectus relating to the IPO
Securities is required to be delivered under the Act, the Company will use its
best efforts to comply with all requirements imposed upon it by the Act and the
Securities Exchange Act of 1934 (the "EXCHANGE ACT"), as now and hereafter
amended and by the Regulations, as from time to time in force, as necessary to
permit the continuance of sales of or dealings in the IPO Securities in
accordance with the provisions hereof and the Prospectus and the Company shall
use its best efforts to keep the Registration Statement current and effective
so long as a Prospectus is required to be delivered in connection with the sale
of the IPO Securities by the Underwriter or by dealers effecting transactions
<PAGE>
therein in connection with the initial public offering thereof. If at any time
when a prospectus relating to the IPO Securities is required to be delivered
under the Act, any event shall have occurred as a result of which, in the
reasonable opinion of counsel for the Company or counsel for the Underwriter,
the Prospectus as then amended or supplemented (or the prospectus contained in
a new registration statement filed by the Company pursuant to Paragraph 4(x),
includes an untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading,
or if, in the reasonable opinion of either such counsel, it is necessary at any
time to amend the Prospectus (or the prospectus contained in such new
registration statement) to comply with the Act, the Company will notify you
promptly and prepare and file with the Commission an appropriate amendment or
supplement in accordance with Section 10 of the Act and will furnish to you
copies thereof.
(h) The Company will reserve and keep available for issuance
that maximum number of its authorized but unissued shares of Common Stock which
are issuable upon exercise of the Underwriter's Warrants (including the
underlying securities) outstanding from time to time.
(i) The Company will timely prepare and file at its sole cost
and expense one or more post-effective amendments to the Registration Statement
or a new registration statement as required by law as will permit holders of
the Underwriter's Warrants to be furnished with a current prospectus in the
event and at such time as the Underwriter's Warrants are exercised, and the
Company will use its best efforts and due diligence to have the same be
declared effective (with the intent that the same be declared effective as soon
as the Underwriter's Warrants become exercisable) and to keep the same
effective so long as the Underwriter's Warrants are outstanding. The Company
<PAGE>
will deliver a draft of each such post-effective amendment or new registration
statement to the Underwriter at least ten days prior to the filing of such
post-effective amendment or registration statement.
(j) So long as any of the Underwriter's Warrants remain
outstanding, the Company will timely deliver and supply to its Warrant Agent
sufficient copies of the Company's current Prospectus, as will enable such
Warrant agent to deliver a copy of such Prospectus to any holder of the
Underwriter's Warrants where such Prospectus delivery is by law required to be
made.
(k) So long as any of the Underwriter's Warrants remain
outstanding, the Company shall continue to employ the services of a firm of
independent certified public accountants reasonably acceptable to the
Underwriter in connection with the preparation of the financial statements to
be included in any registration statement to be filed by the Company hereunder,
or any amendment or supplement thereto. During the same period, the Company
shall employ the services of a law firm(s) reasonably acceptable to the
Underwriter in connection with all legal work of the Company, including the
preparation of a registration statement to be filed by the Company hereunder,
or any amendment or supplement thereto.
(l) So long as any of the Underwriter's Warrants remain
outstanding, the Company shall continue to appoint a Warrant Agent for the
Underwriter's Warrants, who shall be reasonably acceptable to the Underwriter.
(m) As soon as practicable, but in any event not later than
45 days after the end of the 12-month period beginning on the day after the end
of the fiscal quarter of the Company during which the effective date of the
Registration Statement occurs (90 days in the event that the end of such fiscal
quarter is the end of the Company's fiscal year), the Company shall make
generally available to its security holders, in the manner specified in Rule
158(b) of the Rules and
<PAGE>
Regulations, and to the Underwriter, an earnings statement which will be in the
detail required by, and will otherwise comply with, the provisions of Section
11(a) of the Act and Rule 158(a) of the Rules and Regulations, which statement
need not be audited unless required by the Act, covering a period of at least
12 consecutive months after the effective date of the Registration Statement.
(n) During a period of seven years after the date hereof, the
Company will furnish to its stockholders, as soon as practicable, annual
reports (including financial statements audited by independent public
accountants) and unaudited quarterly reports of earnings, and will deliver to
the Underwriter:
(i) concurrently with furnishing such quarterly reports to
its stockholders, statements of income of the Company for each quarter in the
form filed on Form 10-Q with the Commission and certified by the Company's
principal financial or accounting officer;
(ii) concurrently with furnishing such annual reports to
its stockholders, a balance sheet of the Company as at the end of the preceding
fiscal year, together with statements of operations, stockholders' equity, and
cash flows of the Company for such fiscal year, accompanied by a copy of the
certificate thereon of independent certified public accountants;
(iii) as soon as they are available, copies of all reports
(financial or other) mailed to stockholders;
(iv) as soon as they are available, copies of all reports
and financial statements furnished to or filed with the Commission, the NASD or
any securities exchange;
(v) every press release and every material news item or
article of interest to the financial community in respect of the Company or its
affairs which was released or prepared by or on behalf of the Company; and
<PAGE>
(vi) any additional information of a public nature
concerning the Company (and any future subsidiaries) or its businesses which
the Underwriter may reasonably request.
During such seven-year period, if the Company has active subsidiaries,
the foregoing financial statements will be on a consolidated basis to the
extent that the accounts of the Company and its subsidiaries are consolidated,
and will be accompanied by similar financial statements for any significant
subsidiary which is not so consolidated.
(o) The Company will maintain American Stock Transfer and
Trust Company as its Transfer Agent and Registrant (the "TRANSFER AGENT") and
counsel, accounting firm and financial printer for its Common Stock, all of
whom shall be reasonably acceptable to the Underwriter. Such Transfer Agent
shall, for a period of two years following the Closing Date, deliver to the
Underwriter the daily securities position of the Company's stockholders of
record and for a period of three (3) years thereafter the monthly securities
position.
(p) The Company will furnish to the Underwriter or on the
Underwriter's order, without charge, at such place as the Underwriter may
designate, copies of each Preliminary Prospectus, the Registration Statement,
any pre-effective or post-effective amendments thereto (two of which copies
will be signed and will include all financial statements and exhibits), the
Prospectus, and all amendments and supplements thereto, including any
Prospectus prepared after the effective date of the Registration Statement, in
each case as soon as available and in such quantities as the Underwriter may
reasonably request.
(q) On or before the effective date of the Registration
Statement, the Company shall provide the Underwriter with true copies of duly
executed, legally binding and enforceable agreements pursuant to which for a
period of not less than 24 months after the effective
<PAGE>
date of the Registration Statement, (except for 275,000 shares of Common Stock
being offered by an affiliated selling stockholder) each holder of securities
issued by the Company and outstanding at the effective date of the Registration
Statement (including securities convertible into Common Stock or Common Stock
of the Company) agrees that it or he or she will not, directly or indirectly,
issue, offer to sell, sell, grant an option for the sale of, assign, transfer,
pledge, hypothecate or otherwise encumber or dispose of any of such securities
(either pursuant to Rule 144 of the Rules and Regulations or otherwise) or
dispose of any beneficial interest therein without the prior written consent of
the Underwriter (collectively, the "LOCK-UP AGREEMENTS"). During the two (2)
year period commencing with the effective date of the Registration Statement,
the Company shall not issue any securities under Regulation S and will not,
without the prior written consent of the Underwriter, sell, contract or offer
to sell, issue, transfer, assign, pledge, distribute, or otherwise dispose of,
directly or indirectly, any debt security of the Company or any shares of
Common Stock or any options, rights or warrants with respect to any shares of
Common Stock (other than upon exercise of options or warrants referred to in
the Registration Statement, or with respect to transactions between the Company
and its lenders and purchasers of mortgage backed securities). On or before the
Closing Date, the Company shall deliver instructions to the Transfer Agent
authorizing it to place appropriate legends on the certificates representing
the securities subject to the Lock-up Agreements and to place appropriate stop
transfer orders on the Company's ledgers.
(r) The Company has not taken and will not take, directly or
indirectly, and the Company will use their its efforts to ensure that any of
its employees, officers, directors, stockholders or affiliates (within the
meaning of the Rules and Regulations) will take, directly or indirectly, any
action designed to, or which might in the future reasonably be expected to
cause or result in, stabilization or manipulation of the price of any
securities of the Company.
<PAGE>
(s) The Company shall apply the net proceeds from the sale of
the IPO Securities in the manner, and subject to the conditions, set forth
under "Use of Proceeds" in the Prospectus. No portion of the net proceeds will
be used, directly or indirectly, to acquire any securities issued by the
Company except as described in the Prospectuses.
(t) The Company shall timely file all such reports, forms or
other documents as may be required (including, but not limited to, a Form SR as
may be required pursuant to Rule 463 under the Act) from time to time, under
the Act, the Exchange Act and the Rules and Regulations, and all such reports,
forms and documents filed will comply as to form and substance with the
applicable requirements under the Act, the Exchange Act and the Rules and
Regulations.
(u) The Company shall furnish to the Underwriter as early as
practicable prior to each of the date hereof, the Closing Date and each Option
Closing Date, if any, but no later than two (2) full business days prior
thereto, a copy of the latest available unaudited interim financial statements
of the Company (which in no event shall be as of a date more than thirty (30)
days prior to the date of the Registration Statement) which have been read by
the Company's independent public accountants, as stated in their letters to be
furnished pursuant to Section 6(j) hereof.
(v) The Company shall cause the Common Stock to be listed on
the Nasdaq Small Cap Market and on the BSE, and for a period of seven (7) years
from the date hereof, use its best efforts to maintain such listings of the
Common Stock to the extent outstanding.
(w) For a period of five (5) years from the Closing Date, the
Company shall furnish to the Underwriter at the Underwriter's request and at
the Company's sole expense, (i) the list of holders of all of the Company's
securities, (ii) a Blue Sky "Trading Survey" for secondary sales of the
Company's securities prepared by counsel to the Company, and (iii) daily
consolidated transfer sheets relating to the Common Stock but not more than six
(6) times per year.
<PAGE>
(x) As soon as practicable, (i) but in no event more than
five business days before the effective date of the Registration Statement,
file a Form 8-A with the Commission providing for the registration under the
Exchange Act of the Securities and (ii) but in no event more than 30 days from
the effective date of the Registration Statement, take all necessary and
appropriate actions to be included in Standard and Poor's Corporation Records
Service in order to satisfy the requirements for "manual exemption" in those
states where available and to maintain such inclusion for as long as the IPO
Securities are outstanding.
(y) Until the completion of the distribution of the IPO
Securities, the Company shall not without the prior written consent of the
Underwriter and Underwriter's Counsel, issue, directly or indirectly any press
release or other communication or hold any press conference with respect to the
Company or its activities or the offering contemplated hereby, other than trade
releases issued in the ordinary course of the Company's business consistent
with past practices with respect to the Company's operations.
(z) For a period of three (3) years after the effective date
of the Registration Statement, the Underwriter shall have the right to
designate, one (1) individual for election to the Company's Board of Directors
("Board") and the Company shall cause such individual to be elected to the
Board. In the event the Underwriter shall not have designated such individual
at the time of any meeting of the Board or such person is unavailable to serve,
the Company shall notify the Underwriter of each meeting of the Board and an
individual designated by the Underwriter shall be permitted to attend all
meetings of the Board and to receive all notices and other correspondence and
communications sent by the Company to members of the Board. Such individual
shall be reimbursed for all out-of-pocket expenses incurred in connection with
his or her service on, or attendance at meetings of, the Board. The Company
shall provide its outside directors
<PAGE>
with compensation in the form of cash and/or options on its Common Stock as
deemed appropriate and similar for similar companies.
(aa) The Company hereby grants to the Underwriter a right of
first refusal on the terms and subject to the conditions set forth in this
paragraph, for a period of three years from the effective date of the
Registration Statement, to purchase for its account or to sell for the account
of the Company or its present or future subsidiaries, any securities of the
Company or any of its present or future subsidiaries, with respect to which the
Company or any of its present or future subsidiaries may seek a public or
private sale. The Company, for a period of five years from the effective date
of the Registration Statement, will consult, and will cause such present or
future subsidiaries to consult with the Underwriter with regard to any such
offering or placement and will offer, or cause any of its present or future
subsidiaries to offer, to the Underwriter the opportunity, on terms not more
favorable to the Company or such present or future subsidiary than they can
secure elsewhere, to purchase or sell any such securities. If the Underwriter
fails to accept in writing such proposal made by the Company or any of its
present or future subsidiaries within fifteen business days after receipt of a
notice containing such proposal, then the Underwriter shall have no further
claim or right with respect to the proposal contained in such notice. If,
thereafter, such proposal is materially modified, the Company shall again
consult, and cause each present or future subsidiary to consult, with the
Underwriter in connection with such modification and shall in all respects have
the same obligations and adopt the same procedures with respect to such
proposal as are provided hereinabove with respect to the original proposal.
(bb) For a period equal to the lesser of (i) seven (7) years
from the date hereof, and (ii) the date of the sale to the public of the
securities issuable upon exercise of the Underwriter's Warrants, the Company
will not take any action or actions which may prevent or
<PAGE>
disqualify the Company's use of Form S-1 for the registration under the Act of
the securities issuable upon exercise of the Underwriter's Warrants.
(cc) On or before the effective date of the Registration
Statement, the Company shall have retained a financial public relations firm
reasonably satisfactory to the Underwriter, which shall be continuously engaged
from such engagement date to a date twelve (12) months from the Closing Date.
5. Payment of Expenses.
(a) The Company hereby agrees to pay on each of the Closing
Date and the Option Closing Date (to the extent not paid at the Closing Date)
all expenses and fees (other than fees of Underwriter's Counsel, except as
provided in (iv) below) upon presentation of an itemized schedule of expenses
incident to the performance of the obligations of the Company under this
Agreement and the Underwriter's Warrant Agreement including, without
limitation, (i) the fees and expenses of accountants and counsel for the
Company, (ii) all costs and expenses incurred in connection with the
preparation, duplication, printing, (including mailing and handling charges)
filing, delivery and mailing (including the payment of postage with respect
thereto) of the Registration Statement and the Prospectus and any amendments
and supplements thereto and the printing, mailing (including the payment of
postage with respect thereto) and delivery of this Agreement and the
Underwriter's Warrant Agreement and related documents, including the cost of
all copies thereof and of the Preliminary Prospectuses and of the Prospectus
and any amendments thereof or supplements thereto supplied to the Underwriter
and such dealers as the Underwriter may reasonably request, in quantities as
hereinabove stated, (iii) the printing, engraving, issuance and delivery of the
IPO Securities, including, but not limited to, (x) the purchase by the
Underwriter of
<PAGE>
the Underwriter's Warrants from the Company, (y) the consummation by the
Company of any of its obligations under this Agreement and the Underwriter's
Warrant Agreement and (z) the sale of the IPO Securities by the Underwriter in
connection with the distribution contemplated hereby to the extent that
expenses relate to the printing, engraving, issuance and delivery of the IPO
Securities, (iv) the qualification of the IPO Securities under state or foreign
securities or "Blue Sky" laws and determination of the status of such
securities under legal investment laws, including the costs of printing and
mailing the "Preliminary Blue Sky Memorandum", the "Supplemental Blue Sky
Memorandum" and "Legal Investments Survey", if any, and legal fees of counsel
Doros & Brescia, P.C., of $125,000 plus disbursements incurred by them in
connection therewith, (v) advertising costs and expenses, including but not
limited to costs and expenses in connection with the "road show", information
meetings and presentations, bound volumes and prospectus memorabilia and
"tombstone" advertisement expenses (not to exceed $5,000), (vi) costs, fees and
expenses in connection with due diligence investigations, including but not
limited to the costs of background checks on key management and/or personnel of
the Company, (vii) fees and expenses of the transfer agent, and registrar,
(viii) applications for assignments of a rating of the IPO Securities by
qualified rating agencies, (ix) the fees payable to the Commission, and the
NASD, and (x) the fees and expenses incurred in connection with the listing of
the IPO Securities on the NASD Electronic Bulletin Board, the BSE and any other
exchange.
(b) If this Agreement is terminated by the Underwriter in
accordance with the provisions of Section 6, Section 10(a) or Section 12, the
Company shall reimburse and indemnify the Underwriter for all of its actual
out-of-pocket expenses, including the fees and disbursements of Underwriters'
Counsel (and in addition to fees and expenses of Underwriter's Counsel incurred
pursuant to Section 5(a)(iv) above for which the Company shall remain liable)
less any amounts
<PAGE>
previously paid, provided, however, that in the event of a termination pursuant
to Section 10(a) hereof such obligation of the Company shall not exceed
$50,000.
(c) The Company further agrees that, in addition to the
expenses payable pursuant to subsection (a) of this Section 5, it will pay to
the Underwriter by certified or bank cashier's check or, at the election of the
Underwriter, by deduction from the proceeds of the Offering on the initial
Closing Date and each Option Closing Date a non-accountable expense allowance
equal to two and one-half percent (2.5%) of the gross proceeds of the Offering.
(d) The Underwriter shall not be responsible for any expense
of the Company or others or for any charge or claim related to the Offering in
the event that the sale of the IPO Securities as contemplated hereunder is not
consummated.
6. Conditions of the Underwriter's Obligations. The obligations of the
Underwriter hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company and its Subsidiary herein as of
the date hereof and as of the Closing Date and each Option Closing Date, if
any, as if they had been made on and as of the Closing Date or each Option
Closing Date, as the case may be; the accuracy on and as of the Closing Date or
Option Closing Date, if any, of the statements of the officers of the Company
made pursuant to the provisions hereof; and the performance by the Company on
and as of the Closing Date and each Option Closing Date, if any, of its
covenants and obligations hereunder and to the following further conditions:
(a) The Registration Statement, which shall be in form and
substance satisfactory to Underwriter's Counsel, shall have become effective no
later than 12:00 p.m., New York time, on the date of this Agreement or such
later date and time as shall be consented to in writing by the Underwriter,
and, at the Closing Date and each Option Closing Date, if any, no stop
<PAGE>
order suspending the effectiveness of the Registration Statement shall have
been issued and no proceedings for that purpose shall have been instituted or
shall be pending or contemplated by the Commission and any request on the part
of the Commission for additional information shall have been complied with to
the reasonable satisfaction of Underwriter's Counsel. If the Company has
elected to rely upon Rule 430A of the Rules and Regulations, the price of the
IPO Securities and any price-related information previously omitted from the
effective Registration Statement pursuant to such Rule 430A shall have been
transmitted to the Commission for filing pursuant to Rule 424(b) of the Rules
and Regulations within the prescribed time period, and prior to the Closing
Date the Company shall have provided evidence satisfactory to the Underwriter
of such timely filing, or a post-effective amendment providing such information
shall have been promptly filed and declared effective in accordance with the
requirements of Rule 430A of the Rules and Regulations.
(b) The Underwriter shall not have advised the Company that
the Registration Statement, or any amendment thereto, contains an untrue
statement of fact which, in the Underwriter's opinion, is material, or omits to
state a fact which, in the Underwriter's opinion, is material and is required
to be stated therein or is necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading, or that the
Prospectus, or any supplement thereto, contains an untrue statement of fact
which, in the Underwriter's opinion, is material and is required to be stated
therein or is necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(c) On or prior to the Closing Date, the Underwriter shall
have received from Underwriter's Counsel, such opinion or opinions with respect
to the organization of the Company and its Subsidiary, the validity of the IPO
Securities, the Underwriter's Warrants, the Registration Statement, the
Prospectus and other related matters as the Underwriter may request and
<PAGE>
Underwriter's Counsel shall have received such papers and information as they
request to enable them to pass upon such matters.
(d) At the Closing Date, the Underwriter shall have received
the favorable opinion of ___________________________, counsel to the Company,
dated as of the Closing Date, addressed to the Underwriter and in form and
substance satisfactory to Underwriter's Counsel, to the effect that:
(i) each of the Company and the Subsidiary (A) has been
duly organized and is validly existing as a corporation in good standing under
the laws of its jurisdiction; (B) to such counsel's knowledge has all requisite
corporate power and authority to own or lease its properties and conduct its
business as described in the Prospectus; (C) to such counsel's knowledge is
duly qualified and licensed and in good standing as a foreign corporation in
each jurisdiction in which its ownership or leasing of any properties or the
character of its operations requires such qualification or licensing; and (D)
to such counsel's knowledge, has not received any notice of proceedings
relating to the revocation or modification of any such authorization, approval,
order, license, certificate, franchise, or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, would
materially adversely affect the business, operations, condition, financial or
otherwise, or the earnings, business affairs or prospects, properties,
business, assets or results of operations of the Company and the Subsidiary
taken as a whole. To the knowledge of such counsel the disclosures in the
Registration Statement concerning the effects of federal, state and local laws,
rules and regulations on the Company's or the Subsidiary's business as
currently conducted and as contemplated are correct in all material respects
and do not omit to state a fact necessary to make the statements contained
therein not misleading in light of the circumstances in which they were made:
<PAGE>
(ii) to such counsel's knowledge, except as set forth in
the Prospectus, the Company nor the Subsidiary does not own an equity interest
in any other corporation, partnership, joint venture, trust or other business
entity;
(iii) to such counsel's knowledge the Company has a duly
authorized, issued and outstanding capitalization as set forth in the
Prospectus, and any amendment or supplement thereto, under "Capitalization",
and, to such counsel's knowledge, the Company nor the Subsidiary is not a party
to or bound by any instrument, agreement or other arrangement providing for it
to issue any capital stock, rights, warrants, options or other securities,
except for this Agreement and the Underwriter's Warrant Agreement and as
described in the Prospectus. The IPO Securities, and all other securities
issued or issuable by the Company, conform in all material respects to all
statements with respect thereto contained in the Registration Statement and the
Prospectus. To the knowledge of such counsel all issued and outstanding
securities of the Company and the Subsidiary have been duly authorized and
validly issued and are fully paid and non-assessable; the holders thereof have
no contractual rights of rescission with respect thereto, and are not subject
to personal liability under the laws of the State of Nevada as currently in
effect by reason of being such holders; and none of such securities were issued
in violation of the preemptive rights of any holders of any security of the
Company. The IPO Securities to be sold by the Company hereunder and under the
Underwriter's Warrant Agreement are not and will not be subject to any
preemptive or other similar rights of any stockholder, have been duly
authorized and, when issued, paid for and delivered in accordance with the
terms hereof, will be validly issued, fully paid and non-assessable and conform
to the description thereof contained in the Prospectus; the holders thereof
will not be subject to any liability solely as such holders; all corporate
action required to be taken for the authorization, issue and sale of the IPO
Securities when issued will be duly and validly taken;
<PAGE>
and the certificates representing the IPO Securities are in due and proper
form. The Underwriter's Warrants constitute valid and binding obligations of
the Company to issue and sell, upon exercise thereof and payment therefore the
number and type of securities of the Company called for thereby. Upon payment
the issuance and delivery pursuant to this Agreement of the IPO Securities to
be sold by the Company hereunder, the purchasers thereof, will acquire good and
marketable title to the IPO Securities free and clear of any pledge, lien,
charge, claim, encumbrance, pledge, security interest, or other restriction or
equity of any kind whatsoever;
(iv) the Registration Statement is effective under the Act,
and, if applicable, filing of all pricing information has been timely made in
the appropriate form under Rule 430A, and, to such counsel's knowledge, no stop
order suspending the use of the Preliminary Prospectus, the Registration
Statement or Prospectus or any part of any thereof or suspending the
effectiveness of the Registration Statement has been issued and no proceedings
for that purpose have been instituted or are pending, threatened or
contemplated under the Act;
(v) each of the Preliminary Prospectus, the Registration
Statement, and the Prospectus and any amendments or supplement thereto (other
than the financial statements and other financial and statistical data included
therein, as to which no opinion need be rendered) comply as to form in all
material respects with the requirements of the Act and the Rules and
Regulations;
(vi) to the best of such counsel's knowledge, (A) there
are no agreements, contracts or other documents required by the Act to be
described in the Registration Statement and the Prospectus and filed as
exhibits to the Registration Statement other than those described in the
Registration Statement (or required to be filed under the Exchange Act if upon
such filing they would be incorporated, in whole or in part, by reference
therein) and the Prospectus and
<PAGE>
filed as exhibits thereto, and the exhibits which have been filed are
substantially correct copies of the documents of which they purport to be
copies; (B) the descriptions in the Registration Statement and the Prospectus
and any supplement or amendment thereto of contracts and other documents to
which the Company or the Subsidiary is a party or by which it is bound,
including any document to which the Company or the Subsidiary is a party or by
which it is bound, incorporated by reference into the Prospectus and any
supplement or amendment thereto, are accurate in all material respects and
fairly represent the information required to be shown by Form S-1; (C) there is
not pending or threatened against the Company or the Subsidiary any action,
arbitration, suit, proceeding, inquiry, investigation, litigation, governmental
or other proceeding (including, without limitation, those having jurisdiction
over environmental or similar matters), domestic or foreign, pending or
threatened against (or circumstances that may give rise to the same), or
involving the properties or business of the Company or the Subsidiary which (1)
is required to be disclosed in the Registration Statement which is not so
disclosed (and such proceedings as are summarized in the Registration Statement
are accurately summarized in all respects), (2) questions the validity of the
capital stock of the Company or the Subsidiary or this Agreement or the
Underwriter's Warrant Agreement or of any action taken or to be taken by the
Company pursuant to or in connection with any of the foregoing; (D) no statute
or regulation or legal or governmental proceeding required to be described in
the Prospectus is not described as required; and (E) except as disclosed in the
Prospectus, there is no action, suit or proceeding pending, or threatened,
against or affecting the Company or the Subsidiary before any court or
arbitrator or governmental body, agency or official (or any basis thereof known
to such counsel) in which an adverse decision which may result in a material
adverse change in the condition, financial or otherwise, or the earnings,
position, prospects, stockholders' equity, value, operation, properties,
business or results of operations of the Company and the
<PAGE>
Subsidiary taken as a whole, which could adversely affect the present or
prospective ability of the Company to perform its obligations under this
Agreement or the Underwriter 's Warrant Agreement or which in any manner draws
into question the validity or enforceability of this Agreement or the
Underwriter's Warrant Agreement;
(vii) the Company has full legal right, power and
authority to enter into this Agreement and the Underwriter's Warrant Agreement
and to consummate the transactions provided for herein and therein; and this
Agreement and the Underwriter's Warrant Agreement has been duly authorized,
executed and delivered by the Company. Each of this Agreement and the
Underwriter's Warrant Agreement assuming due authorization, execution and
delivery by each other party hereto constitutes a legal, valid and binding
agreement of the Company enforceable against the Company in accordance with its
terms (except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
relating to or affecting enforcement of creditors' rights and the application
of equitable principles in any action, legal or equitable, and except as rights
to indemnity or contribution may be limited by applicable law), and neither the
Company's execution or delivery of this Agreement and the Underwriter's Warrant
Agreement, its performance hereunder or thereunder, its consummation of the
transactions contemplated herein or therein, or the conduct of its business as
described in the Registration Statement, the Prospectus, and any amendments or
supplements thereto, conflicts with or will conflict with or results or will
result in any breach or violation of any of the terms or provisions of, or
constitutes or will constitute a default under, or result in the creation or
imposition of any lien, charge, claim, encumbrance, pledge, security interest,
defect or other restriction or equity of any kind whatsoever upon, any property
or assets (tangible or intangible) of the Company or the Subsidiary pursuant to
the terms of, (A) the certificate of incorporation or by-laws of the Company or
the
<PAGE>
Subsidiary, (B) any license, contract, indenture, mortgage, deed of trust,
voting trust agreement, stockholders agreement, note, loan or credit agreement
or any other agreement or instrument to known to such counsel which the Company
or the Subsidiary is a party or by which it is or may be bound or to which any
of its properties or assets (tangible or intangible) is or may be subject, or
any indebtedness, or (C) any statute, judgment, decree, order, rule or
regulation applicable to the Company or the Subsidiary of any arbitrator,
court, regulatory body or administrative agency or other governmental agency or
body domestic or foreign, having jurisdiction over the Company or the
Subsidiary or any of its activities or properties, except for conflicts,
breaches, violations, defaults, creations or impositions which do not and would
not have a material adverse effect on the condition, financial or otherwise, or
the earnings, business affairs, position, shareholder's equity, value,
operations, properties, business or results of operations of the Company and
the Subsidiary taken as a whole;
(viii) except as described in the Prospectus, no consent,
approval, authorization or order, and no filing with, any court, regulatory
body, government agency or other body (other than such as may be required under
Blue Sky laws, as to which no opinion need be rendered) is required in
connection with the issuance of the IPO Securities pursuant to the Prospectus
and the Registration Statement, the issuance of the Underwriter's Warrants, the
performance of this Agreement and the Underwriter's Warrant Agreement and the
transactions contemplated hereby and thereby;
(ix) the properties and business of the Company and the
Subsidiary conform to the description thereof contained in the Registration
Statement and the Prospectus;
(x) to such counsel's knowledge and except as described in
the
<PAGE>
Prospectus neither the Company nor the Subsidiary is in breach of, or in
default under, any term or provision of any license, contract, indenture,
mortgage, installment sale agreement, deed of trust, lease, voting trust
agreement, stockholders' agreement, partnership agreement, note, loan or credit
agreement or any other agreement or instrument evidencing an obligation for
borrowed money, or any other agreement or instrument to which the Company or
the Subsidiary is a party or by which the Company or the Subsidiary may be
bound or to which the property or assets (tangible or intangible) of the
Company or the Subsidiary is subject or affected, which could materially
adversely affect the Company or of the Subsidiary; and neither the Company nor
the Subsidiary is in violation of any term or provision of its Certificate of
Incorporation or By-Laws, or in violation of any franchise, license, permit,
judgment, decree, order, statute, rule or regulation the result of which would
materially and adversely affect the condition, financial or otherwise, or the
earnings, business affairs, position, shareholders' equity, value, operation,
properties, business or results of operations of the Company and the Subsidiary
taken as a whole;
(xi) to the knowledge of such counsel and except as
described in the Prospectus the Company and the Subsidiary owns or possesses,
free and clear of all liens or encumbrances and rights thereto or therein by
third parties, the requisite licenses or other rights to use all trademarks,
service marks, copyrights, service names, trade names, patents, patent
applications and licenses necessary to conduct its business (including, without
limitation any such licenses or rights described in the Prospectus as being
owned or possessed by the Company or the Subsidiary), and to the best of such
counsel's knowledge after reasonable investigation, there is no claim or action
by any person pertaining to, or proceeding, pending, or threatened, which
challenges the exclusive rights of the Company or the Subsidiary with respect
to any trademarks, service marks, copyrights, service names, trade names,
patents, patent applications and licenses used in the conduct
<PAGE>
of the Company's or the Subsidiary's business (including, without limitations,
any such licenses or rights described in the Prospectus as being owned or
possessed by the Company or the Subsidiary);
(xii) the IPO Securities have been approved for listing on
the Nasdaq Small Cap Market and the Company's Registration Statement on Form
8-A under the Exchange Act has become effective;
(xiii) to such counsel's knowledge, the persons listed
under the caption "PRINCIPAL STOCKHOLDERS" in the Prospectus are the respective
"beneficial owners" (as such phrase is defined in Regulation 13d-3 under the
Exchange Act) of the securities set forth opposite their respective names
thereunder as and to the extent set forth therein;
(xiv) to such counsel's knowledge, except as described in
the Prospectus, no person, corporation, trust, partnership, association or
other entity has the right to include and/or register any securities of the
Company in the Registration Statement, require the Company to file any
registration statement or, if filed, to include any security in such
registration statement;
(xv) to such counsel's knowledge, except as described in
the Prospectus, there are no claims, payments, issuances, arrangements or
understandings for services in the nature of a finder's or origination fee with
respect to the sale of the IPO Securities hereunder or the financial consulting
arrangement or any other arrangements, agreements, understandings, payments or
issuances that may affect the Underwriter's compensation, as determined by the
NASD;
(xvi) the Lock-up Agreements are legal, valid and binding
obligations of the parties thereto, enforceable against each such party and any
subsequent holder of the securities subject thereto in accordance with its
terms (except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general
<PAGE>
application relating to or affecting enforcement of creditors' rights and the
application of equitable principles in any action, legal or equitable); and
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance satisfactory to Underwriter's Counsel) of
other counsel acceptable to Underwriter's Counsel, familiar with the applicable
laws; (B) as to matters of fact, to the extent they deem proper, on
certificates and written statements of responsible officers of the Company and
certificates or other written statements of officers of departments of various
jurisdictions having custody of documents respecting the corporate existence or
good standing of the Company or the Subsidiary, provided that copies of any
such statements or certificates shall be delivered to Underwriter's Counsel if
requested. The opinion of such counsel for the Company shall state that the
opinion of any such other counsel is in form satisfactory to such counsel.
At each Option Closing Date, if any, the Underwriter shall have
received an opinion letter from ____________________________, counsel to the
Company, dated the Option Closing Date, addressed to the Underwriter and in
form and substance satisfactory to Underwriter's Counsel confirming as of such
Option Closing Date the statements made in its opinion delivered on the Closing
Date.
(e) On or prior to each of the Closing Date and the Option Closing
Date, if any, Underwriter's Counsel shall have been furnished such documents,
certificates and opinions as they may reasonably require for the purpose of
enabling them to review or pass upon the matters referred to in subsection (c)
of this Section 6, or in order to evidence the accuracy, completeness or
<PAGE>
satisfaction of any of the representations, warranties or conditions of the
Company and its Subsidiary, or herein contained.
(f) Prior to each Closing Date and each Option Closing Date, if any,
(i) there shall have been no adverse change nor development involving a
prospective change in the condition, financial or otherwise, prospects,
stockholders' equity or the business activities of the Company and the
Subsidiary taken as a whole, whether or not in the ordinary course of business,
from the latest dates as of which such condition is set forth in the
Registration Statement and Prospectus; (ii) there shall have been no
transaction, not in the ordinary course of business, entered into by the
Company or the Subsidiary, (iii) neither the Company nor the Subsidiary shall
be in default under any provision of any instrument relating to any outstanding
indebtedness; (iv) neither the Company nor the Subsidiary shall have issued any
securities (other than the IPO Securities and the Underwriter's Warrants) or
declared or paid any dividend or made any distribution in respect of its
capital stock of any class and there has not been any change in the capital or
any change in the debt (long or short term) or liabilities or obligations of
the Company or the Subsidiary (contingent or otherwise); (v) no material amount
of the assets of the Company or the Subsidiary shall have been pledged or
mortgaged, except as set forth in the Registration Statement and Prospectus;
(vi) no action, suit or proceeding, at law or in equity, shall have been
pending or threatened (or circumstances giving rise to same) against the
Company or any Subsidiary, or affecting any of its properties or business
before or by any court or federal, state or foreign commission, board or other
administrative agency wherein an unfavorable decision, ruling or finding may
adversely affect the business, operations, management prospects or financial
condition or assets of the Company or the Subsidiary taken as a whole, except
as set forth in the Registration Statement and Prospectus: and (vii) no stop
order shall have been issued under the Act and no proceedings therefor shall
have been initiated, threatened or
<PAGE>
contemplated by the Commission.
(g) At each of the Closing Date and each Option Closing Date, if any,
the Underwriter shall have received a certificate of the principal executive
officer and the chief financial or chief accounting officer of the Company,
dated the Closing Date or Option Closing Date, as the case may be, to the
effect that each of such persons has carefully examined the Registration
Statement, the Prospectus and this Agreement, and that:
(i) The representations and warranties in this Agreement of
the Company and its Subsidiary are true and correct, as if made on and as of
the Closing Date or the Option Closing Date, as the case may be, and the
Company and its Subsidiary have complied with all agreements and covenants and
satisfied all conditions contained in this Agreement on their part to be
performed or satisfied at or prior to such Closing Date or Option Closing Date,
as the case may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued, and no proceedings
for that purpose have been instituted or are pending or are contemplated or
threatened under the Act;
(iii) The Registration Statement and the Prospectus and, if
any, each amendment and each supplement thereto, contain all statements and
information required to be included therein, and none of the Registration
Statement, the Prospectus nor any amendment or supplement thereto includes any
untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading and neither the Preliminary Prospectus or any supplement thereto
included any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; and
<PAGE>
(iv) Since the dates as of which information is given in the
Registration Statement and the Prospectus, (A) there must not have been any
material change in the shares of Common Stock, Common Stock or liabilities of
the Company or the Subsidiary except as set forth in or contemplated by the
Prospectus; (B) there must not have been any material adverse change in the
general affairs, management, business, financial condition or results of
operations of the Company or the Subsidiary, whether or not arising from
transactions in the ordinary course of business, as set forth in or
contemplated by the Prospectus; (C) the Company and the Subsidiary must not
have sustained any material loss or interference with its business from any
court or from legislative or other governmental action, order or decree,
whether foreign or domestic, or from any other occurrence, not described in the
Registration Statement and Prospectus; (D) there must not have occurred any
event that makes untrue or incorrect in any material respect any statement or
information contained in the Registration Statement or Prospectus or that is
not reflected in the Registration Statement or Prospectus but should be
reflected therein in order to make the statements or information therein, in
light of the circumstances in which they were made, not misleading in any
material respect; (E) the Company and the Subsidiary must not have incurred up
to and including the Closing Date or the Option Closing Date, as the case may
be, other than in the ordinary course of its business, any material liabilities
or obligations, direct or contingent; (F) the Company and the Subsidiary must
not have paid or declared any dividends or other distributions on its capital
stock; (G) the Company and the Subsidiary must not have entered into any
transactions not in the ordinary course of business; (H) there has not been any
change in the capital stock or long-term debt or any increase in the short-term
borrowings (other than any increase in the short-term borrowings in the
ordinary course of business) of the Company or the Subsidiary; (i) the Company
and the Subsidiary must not have sustained any material loss or damage to its
property or assets, whether or not insured;
<PAGE>
and (J) there has occurred no event required to be set forth in an amended or
supplemented Prospectus which has not been set forth.
References to the Registration Statement and the Prospectus in this
subsection (g) are to such documents as amended and supplemented at the date of
such certificate.
(h) By the Closing Date, the Underwriter will have received clearance
from the NASD as to the amount of compensation allowable or payable to the
Underwriter, as described in the Registration Statement.
(i) At the time this Agreement is executed, the Underwriter shall have
received a letter, dated such date, addressed to the Underwriter in form and
substance satisfactory (including the non-material nature of the changes or
decreases, if any, referred to in clause (iii) below) in all respects to the
Underwriter and Underwriter's Counsel, from ____________:
(i) confirming that they are independent accountants with
respect to the Company and the Subsidiary within the meaning of the Act and the
applicable Rules and Regulations;
(ii) stating that it is their opinion that the financial
statements of the Company and the Subsidiary included in the Registration
Statement comply as to form in all material respects with the applicable
accounting requirements of the Act and the Rules and Regulations thereunder and
that the Underwriter may rely upon the opinion of ________________ with respect
to the financial statements and supporting schedules included in the
Registration Statement;
(iii) stating that, on the basis of a limited review which
included a reading of the latest available unaudited interim financial
statements of the Company and the Subsidiary (with an indication of the date of
the latest available unaudited interim financial statements), a reading of the
latest available minutes of the stockholders and board of directors and the
various
1
<PAGE>
committees of the boards of directors of the Company and the Subsidiary,
consultations with officers and other employees of the Company and the
Subsidiary responsible for financial and accounting matters and other specified
procedures and inquiries, nothing has come to their attention which would lead
them to believe that (A) the unaudited financial statements, if any, of the
Company and the Subsidiary included in the Registration Statement do not comply
as to form in all material respects with the applicable accounting requirements
of the Act and the Rules and Regulations or are not fairly presented in
conformity with generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial statements of the
Company and the Subsidiary included in the Registration Statement, or (B) at a
specified date not more than five (5) days prior to the effective date of the
Registration Statement, there has been any change in the capital stock or
long-term debt of the Company and the Subsidiary, or any decrease in the
stockholders' equity or net current assets or net assets of the Company and the
Subsidiary as compared with amounts shown in the ________________, 19__ balance
sheet included in the Registration Statement, other than as set forth in or
contemplated by the Registration Statement, or, if there was any change or
decrease, setting forth the amount of such change or decrease;
(iv) setting forth, at a date not later than five (5) days
prior to the date of the Registration Statement, the amount of liabilities of
the Company and the Subsidiary (including a breakdown of commercial paper and
notes payable to banks) ;
(v) stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, statements and other
financial information pertaining to the Company and the Subsidiary set forth in
the Prospectus in each case to the extent that such amounts, numbers,
percentages, statements and information may be derived from the general
accounting records, including work sheets, of the Company and the Subsidiary
and excluding any
2
<PAGE>
questions requiring an interpretation by legal counsel, with the results
obtained from the application of specified readings, inquiries and other
appropriate procedures (which procedures do not constitute an examination in
accordance with generally accepted auditing standards) set forth in the letter
and found them to be in agreement;
(vi) stating that they have in addition carried out certain
specified procedures, not constituting an audit, with respect to certain pro
forma financial information which is included in the Registration Statement and
the Prospectus and that nothing has come to their attention as a result of such
procedures that caused them to believe such unaudited pro forma financial
information does not comply in form in all respects with the applicable
accounting requirements of Rule 11-02 of Regulation S-X or that the pro forma
adjustments have not been properly applied to the historical amounts in the
compilation of that information;
(vii) stating that they have not during the immediately
preceding five (5) year period brought to the attention of any of the Company's
management any "weakness", as defined in Statement of Auditing Standard No. 60
"Communication of Internal Control Structure Related Matters Noted in an
Audit", in any of the Company's internal controls; and
(viii) statements as to such other matters incident to the
transaction contemplated hereby as the Underwriter may reasonably request.
(j) At the Closing Date and each Option Closing Date, if any, the
Underwriter shall have received from _____________________, a letter, dated as
of the Closing Date or the Option Closing Date, as the case may be, to the
effect that they reaffirm the statements made in the letter furnished pursuant
to subsection (i) of this Section, except that the specified date in the
referred to letter shall be a date not more than five days prior to the Closing
Date or the Option Closing Date, as the case may be, and, if the Company has
elected to rely on Rule 430A of the Rules and
<PAGE>
Regulations, to the further effect that they have carried out procedures as
specified in clause (v) of subsection (i) of this Section with respect to
certain amounts, percentages and financial information as specified by the
Underwriter and deemed to be a part of the Registration Statement pursuant to
Rule 430A(b) and have found such amounts, percentages and financial information
to be in agreement with the records specified in such clause (v).
(k) On each of the Closing Date and Option Closing Date, if any, there
shall have been duly tendered to the Underwriter the appropriate number of IPO
Securities.
(l) No order suspending the sale of the IPO Securities in any
jurisdiction designated by the Underwriter pursuant to subsection (e) of
Section 4 hereof shall have been issued on either the Closing Date or the
Option Closing Date, if any, and no proceedings for that purpose shall have
been instituted or shall be contemplated.
(m) On or before the Closing Date, the Common Stock shall have been
approved for quotation on the Nasdaq Small Cap Market and shall have been
authorized upon official notice of issuance for trading on the BSE.
(n) On or before the Closing Date, there shall have been delivered to
the Underwriter the Lock-up Agreements, in form and substance satisfactory to
Underwriter's Counsel.
(o) On or before the Closing Date, the Company shall have executed and
delivered to the Underwriter, (i) the Underwriter's Warrant Agreement
substantially in the form filed as Exhibit _____ to the Registration Statement
in final form and substance satisfactory to the Underwriter, and (ii) the
Underwriter's Warrants in such denominations and to such designees as shall
have been provided to the Company.
If any condition to the Underwriter's obligations hereunder to be
fulfilled prior to or at the Closing Date or the relevant Option Closing Date,
as the case may be, is not so fulfilled, the
<PAGE>
Underwriter may terminate this Agreement or, if the Underwriter so elects, it
may waive any such conditions which have not been fulfilled or extend the time
for their fulfillment.
7. Indemnification.
(a) The Company and its Subsidiary, jointly and severally,
agrees to indemnify and hold harmless the Underwriter (for purposes of this
Section 7 "Underwriter" shall include the officers, directors, partners,
employees, agents and counsel of the Underwriter, and each person, if any, who
controls the Underwriter ("CONTROLLING PERSON") within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act, from and against any and
all losses, claims, damages, expenses or liabilities, joint or several (and
actions in respect thereof), whatsoever (including but not limited to any and
all expenses whatsoever reasonably incurred in investigating, preparing or
defending against any litigation, commenced or threatened, or any claim
whatsoever), as such are incurred, to which the Underwriter or such controlling
person may become subject under the Act, the Exchange Act, or any other statute
or at common law or otherwise or under the laws of foreign countries, arising
out of or based upon any untrue statement or alleged untrue statement of a
material fact contained (i) in any Preliminary Prospectus, the Registration
Statement or the Prospectus (as from time to time amended and supplemented);
(ii) in any post-effective amendment or amendments or any time new registration
statement and prospectus in which is included securities of the Company issued
or issuable upon exercise of the IPO Securities; or (iii) in any application or
other document or written communication (in this Section 7 collectively called
"APPLICATION") executed by the Company or based upon written information
furnished by the Company in any jurisdiction in order to qualify the IPO
Securities under the securities laws thereof or filed with the Commission, any
securities commission or agency, the NASD, the BSE or any securities exchange;
or the omission or alleged omission therefrom of a material fact required to be
stated therein or
<PAGE>
necessary to make the statements therein not misleading (in the case of the
Prospectus, in the light of the circumstances under which they were made),
unless such statement or omission was made in reliance upon and in conformity
with written information furnished to the Company with respect to the
Underwriter by or on behalf of such Underwriter expressly for use in any
Preliminary Prospectus, the Registration Statement or Prospectus, or any
amendment thereof or supplement thereto, or in any Application, as the case may
be.
The indemnity agreement in this subsection (a) shall be in addition to
any liability which the Company may have at common law or otherwise.
(b) The Underwriter agrees to indemnify and hold harmless the
Company, each of its directors, each of its officers who has signed the
Registration Statement, and each other person, if any, who controls the Company
within the meaning of the Act, to the same extent as the foregoing indemnity
from the Company to the Underwriter but only with respect to statements or
omissions, if any, made in any Preliminary Prospectus, the Registration
Statement or Prospectus or any amendment thereof or supplement thereto or in
any Application made in reliance upon, and in strict conformity with, written
information furnished to the Company with respect to the Underwriter by such
Underwriter expressly for use in such Preliminary Prospectus, the Registration
Statement or Prospectus or any amendment thereof or supplement thereto or in
any such Application, provided that such written information or omissions only
pertain to disclosures in the Preliminary Prospectus, the Registration
Statement or Prospectus directly relating to the transactions effected by the
Underwriter in connection with this offering. The Company acknowledges that the
statements with respect to the public offering of the IPO Securities set forth
under the heading "Plan of Distribution" and the stabilization legend in the
Prospectus have been furnished by the Underwriter expressly for use therein.
<PAGE>
(c) Promptly after receipt by an indemnified party under this
Section 7 of notice of the commencement of any action, suit or proceeding, such
indemnified party shall, if a claim in respect thereof is to be made against
one or more indemnifying parties under this Section 7, notify each party
against whom indemnification is to be sought in writing of the commencement
thereof (but the failure so to notify an indemnifying party shall not relieve
it from any liability which it may have under this Section 7 except to the
extent that it has been prejudiced in any material respect by such failure or
from any liability which it may have otherwise). In case any such action
is brought against any indemnified party, and it notifies an indemnifying party
or parties of the commencement thereof, the indemnifying party or parties will
be entitled to participate therein, and to the extent it may elect by written
notice delivered to the indemnified party promptly after receiving the
aforesaid notice from such indemnified party, to assume the defense thereof
with counsel reasonably satisfactory to such indemnified party. Notwithstanding
the foregoing, the indemnified party or parties shall have the right to employ
its or their own counsel in any such case but the fees and expenses of such
counsel shall be at the expense of such indemnified party or parties unless (i)
the employment of such counsel shall have been authorized in writing by the
indemnifying parties in connection with the defense of such action at the
expense of the indemnifying party, (ii) the indemnifying parties shall not have
employed counsel reasonably satisfactory to such indemnified party to have
charge of the defense of such action within a reasonable time after notice of
commencement of the action, or (iii) such indemnified party or parties shall
have reasonably concluded that there may be defenses available to it or them
which are different from or additional to those available to one or all of the
indemnifying parties (in which case the indemnifying parties shall not have the
right to direct the defense of such action on behalf of the indemnified party
or parties), in any of which events such fees and expenses of one additional
counsel shall be borne by
<PAGE>
the indemnifying parties. In no event shall the indemnifying parties be liable
for fees and expenses of more than one counsel (in addition to any local
counsel) separate from their own counsel for all indemnified parties in
connection with any one action or separate but similar or related actions in
the same jurisdiction arising out of the same general allegations or
circumstances. Anything in this Section 7 to the contrary notwithstanding, an
indemnifying party shall not be liable for any settlement of any claim or
action effected without its written consent; provided, however, that such
consent was not unreasonably withheld.
(d) In order to provide for just and equitable contribution
in any case in which (i) an indemnified party makes claim for indemnification
pursuant to this Section 7, but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the
expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the fact
that the express provisions of this Section 7 provide for indemnification in
such case, or (ii) contribution under the Act may be required on the part of
any indemnified party, then each indemnifying party shall contribute to the
amount paid as a result of such losses, claims, damages, expenses or
liabilities (or actions in respect thereof) (A) in such proportion as is
appropriate to reflect the relative benefits received by each of the
contributing parties, on the one hand, and the party to be indemnified on the
other hand, from the offering of the IPO Securities or (B) if the allocation
provided by clause (A) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each of the contributing
parties, on the one hand, and the party to be indemnified on the other hand in
connection with the statements or omissions that resulted in such losses,
claims, damages, expenses or liabilities, as well as any other relevant
equitable
<PAGE>
considerations. In any case where the Company is a contributing party and the
Underwriter is the indemnified party, the relative benefits received by the
Company, on the one hand, and the Underwriter, on the other, shall be deemed to
be in the same proportion as the total net proceeds from the offering of the
Securities (before deducting expenses) bear to the total underwriting discounts
received by the Underwriter hereunder, in each case as set forth in the
Prospectus. Relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or
the omission or alleged omission to state a material fact necessary to make the
statements made, in light o the circumstances under which they were made, not
misleading relates to information supplied by the Company, or by the
Underwriter, and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such untrue statement or omission. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, expenses or liabilities (or actions in respect thereof)
referred to above in this subdivision (d) shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any such action or claim. Notwithstanding the
provisions of this subdivision (d) the Underwriter shall not be required to
contribute any amount in excess of the underwriting discount applicable to the
IPO Securities sold by the Underwriter hereunder. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 7, each person, if
any, who controls the Company within the meaning of the Act, each officer of
the Company who has signed the Registration Statement, and each director of the
Company shall have the same rights to contribution as the Company, subject in
each case to this subparagraph (d), Any party entitled to contribution will,
promptly after receipt of notice of commencement of any action, suit or
proceeding against such
<PAGE>
party in respect to which a claim for contribution may be made against another
party or parties under this subparagraph (d), notify such party or parties from
whom contribution may be sought, but the omission so to notify such party or
parties shall not relieve the party or parties from whom contribution may be
sought from any obligation it or they may have hereunder or otherwise than
under this subparagraph (d), or to the extent that such party or parties were
not adversely affected by such omission. The contribution agreement set forth
above shall be in addition to any liabilities which any indemnifying party may
have at common law or otherwise.
8. Representations and Agreements to Survive Delivery. All
representations, warranties and agreements contained in this Agreement or
contained in certificates of officers of the Company submitted pursuant hereto,
shall be deemed to be representations, warranties and agreements at the Closing
Date and any Option Closing Date, as the case may be, and such representations,
warranties and agreements of the Company and its Subsidiaries and the
respective indemnity agreements contained in Section 7 hereof, shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of the Underwriter, the Company, any controlling person of the
Underwriter or the Company, and shall survive termination of this Agreement or
the issuance and delivery of the IPO Securities to the Underwriter.
9. Effective Date. This Agreement shall become effective at 10:00
a.m., New York City time, on the first full business day following the day on
which the Registration Statement becomes effective.
10. Termination.
<PAGE>
(a) Subject to subsection (b) of this Section 10, the
Underwriter shall have the right to terminate this Agreement, (i) if any
domestic or international event or act or occurrence has materially disrupted,
or in the Underwriter's opinion will in the immediate future materially disrupt
the financial markets; or (ii) any material adverse change in the financial
markets shall have occurred; or (iii) if trading on the New York Stock
Exchange, the American Stock Exchange, or in the over-the-counter market shall
have been suspended, or minimum or maximum prices for trading shall have been
fixed, or maximum ranges for prices for securities shall have been required on
the over-the-counter market by the NASD or by order of the Commission or any
other government authority having jurisdiction; or (iv) if the United States
shall have become involved in a war or major hostilities, or if there shall
have been an escalation in an existing war or major hostilities or a national
emergency shall have been declared in the United States; or (v) if a banking
moratorium has been declared by a state or federal authority; or (vi) if a
moratorium in foreign exchange trading has been declared; or (vii) if the
Company and/or any of its Subsidiaries, shall have sustained a loss material or
substantial to the Company by fire, flood, accident, hurricane, earthquake,
theft, sabotage or other calamity or malicious act which, whether or not such
loss shall have been insured, will, in the Underwriter's opinion, make it
inadvisable to proceed with the delivery of the IPO Securities; or (vii) if
there shall have been such a material adverse change in the condition
(financial or otherwise), business affairs or prospects of the Company and/or
any of its Subsidiaries, whether or not arising in the ordinary course of
business, which would render, in the Underwriter's judgment, either of such
parties unable to perform satisfactorily its respective obligations as
contemplated by this Agreement or the Registration Statement, or such material
adverse change in the general market, political or economic conditions, in the
United States or elsewhere as in the Underwriter's judgment would make it
inadvisable to proceed with the offering,
<PAGE>
sale and/or delivery of the IPO Securities.
(b) If this Agreement is terminated by the Underwriter in
accordance with the provisions of Section 10(a), the Company shall promptly
reimburse and indemnify the Underwriter for all of its actual out-of-pocket
expenses, including the fees and disbursements of counsel for the Underwriter
in an amount not to exceed $50,000 (less amounts previously paid pursuant to
Section 5(c) above). Notwithstanding any contrary provision contained in this
Agreement, if this Agreement shall not be carried out within the time specified
herein, or any extension thereof granted to the Underwriter, by reason of any
failure on the part of the Company to perform any undertaking or satisfy any
condition of this Agreement by it to be performed or satisfied (including,
without limitation, pursuant to Section 6 or Section 12) then, the Company
shall promptly reimburse and indemnify the Underwriter for all of their actual
out-of-pocket expenses, including the fees and disbursements of counsel for the
Underwriter (less amounts previously paid pursuant to Section 5 (c) above). In
addition, the Company shall remain liable for all Blue Sky counsel fees and
expenses and Blue Sky filing fees. Notwithstanding any contrary provision
contained in this Agreement, any election hereunder or any termination of this
Agreement (including, without limitation, pursuant to Sections 6 and 10
hereof), and whether or not this Agreement is otherwise carried out, the
provisions of Section 5 and Section 7 shall not be in any way affected by such
election or termination or failure to carry out the terms of this Agreement or
any part hereof.
11. Notices. All notices and communications hereunder, except as
herein otherwise specifically provided, shall be in writing and shall be deemed
to have been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriter shall be directed to the
Underwriter at 110 Wall Street, New York, New York 10005, Attention: Mohammad
Ali Khan, President, with a copy to Doros & Brescia, P.C., 1140 Avenue of the
<PAGE>
Americas, New York, New York 10036, Attention: Ronald J. Brescia, Esq. Notices
to the Company shall be directed to the Company at 110 Wall Street, New York,
New York 10005, Attention: Mohammad Ali Khan, President, with a copy to
___________________________, Attention: _____________________.
12. Parties. This Agreement shall inure solely to the benefit of and
shall be binding upon, the Underwriter, the Company and the controlling
persons, directors and officers referred to in Section 7 hereof, and their
respective successors, legal Underwriters and assigns and no other person shall
have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Agreement or any provisions herein
contained. No purchaser of Securities from the Underwriter shall be deemed to
be a successor by reason merely of such purchase.
13. Construction. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of _____________ without
giving effect to the choice of law or conflict of laws principles.
14. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
15. Entire Agreement; Amendments. This Agreement, the Underwriter's
Warrant Agreement and the Warrant Agreement constitute the entire agreement of
the parties hereto and supersede all prior written or oral agreements,
understandings and negotiations with respect to the subject matter hereof. This
Agreement may not be amended except in a writing, signed by the Underwriter and
the Company.
If the foregoing correctly sets forth the understanding between the
Underwriter and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
us.
Very truly yours,
UNITED STATES FINANCIAL GROUP,
INCORPORATED
By:
-------------------------------
Name: Mohammad Ali Khan
Title: President
Confirmed and accepted as of
the date first above written
KLEIN MAUS & SHIRE, INC.
By:
--------------------------------
Name: Mohammad Ali Khan
Title: President
<PAGE>
ESCROW AGREEMENT
Escrow Agreement dated as of ____________, 1998 by and among
THE CHASE MANHATTAN BANK, a New York state chartered bank with offices at 450
West 33rd Street, New York, New York 10001, United States Financial Group,
Incorporated, a Delaware corporation with offices at 110 Wall Street, New York,
New York 10005 and Klein Maus and Shire, Inc., an Indiana corporation with
offices at 110 Wall Street, New York, New York 10005.
W I T N E S S E T H:
WHEREAS, United States Financial Group, Incorporated (the
"ISSUER-CORPORATION") has filed a registration statement on Form S- 1 under the
Securities Act of 1933, as amended, with the Securities and Exchange
Commission, File No. 333-52687 (the "REGISTRATION STATEMENT"), relating to the
subscription for and sale of a maximum of 3,275,000 shares (the "SHARES") of
common stock, par value $.0001 per share (the "COMMON STOCK") in the
Issuer-Corporation, with a minimum investment required of 666,667 shares of
Common Stock at a price of $15.00 per Share; and
WHEREAS, Klein Maus and Shire, Inc. (the "DEPOSITOR-
AGENT") has been named as the Underwriter in connection with the
proposed offering of the Common Stock in accordance with the terms
<PAGE>
of the Underwriting Agreement dated as of _____________, 1998 among the
Issuer-Corporation and the Depositor-Agent (the "UNDERWRITING AGREEMENT"); and
WHEREAS, in compliance with Rule 15c2-4 under the Securities
Exchange Act of 1934, as amended, the Issuer-Corporation and the
Depositor-Agent propose to establish an escrow fund with The Chase Manhattan
Bank (the "BANK-ESCROWEE"); and
WHEREAS, the offering of Preferred Stock will terminate no
later than six (6) months (the "OFFERING TERMINATION DATE") of the date the
Registration Statement is declared effective (the "EFFECTIVE DATE") by the
Securities and Exchange Commission. If subscriptions for at least 666,667
shares of Common Stock ($10,000,005) have not been received by the Offering
Termination Date, no Common Stock will be sold; and
WHEREAS, the Bank-Escrowee has agreed to act as escrow
agent in connection with the proposed fund;
NOW, THEREFORE, it is agreed as follows:
1. For a period commencing on the Effective Date and
terminating at the latest of the Offering Termination Date, Closing Date or the
Option Closing Date, as the latter two terms are
-2-
<PAGE>
defined in the Underwriting Agreement and as the same is set forth in the
Registration Statement of the Issuer-Corporation, the Bank- Escrowee shall act
as escrow agent and agrees to receive and disburse the proceeds from the sale
of the Common Stock in accordance herewith. The Depositor-Agent and the Issuer-
Corporation agree to notify the Bank-Escrowee (a) promptly after the
Registration Statement has been declared effective by the Securities and
Exchange Commission, (b) of the Offering Termination Date and (c) of the
Closing Date and each Option Closing Date.
2. All moneys received by the Depositor-Agent and the
Issuer-Corporation in connection with the sale of the Common Stock shall be
deposited by the Depositor-Agent and the Issuer- Corporation in a non-interest
escrow account to be established for this purpose by the Bank-Escrowee.
3. If at least 666,667 shares of Common Stock have been
subscribed for and any funds remain in the escrow account on the later of the
Closing Date, Option Closing Date or the Offering Termination Date, such funds
will be promptly paid to or credited to the account of, or otherwise
transferred to the Issuer- Corporation less expenses (as specified in written
instructions from the Issuer-Corporation and the Depositor-Agent, signing
jointly).
4. Upon receipt by the Bank-Escrowee of appropriate
-3-
<PAGE>
written instructions at the Closing Date and Option Closing Date as the case
may be, from the Issuer-Corporation and the Depositor- Agent, jointly, giving
notice of the events described herein, the Bank-Escrowee shall pay to or credit
to the account of, or otherwise transfer (as specified in such instructions)
to, the Issuer-Corporation and other instructed parties such portion of the
deposited funds then held in escrow as specified in such instructions.
5. If at least 666,667 shares of Common Stock have not been
subscribed for by the Offering Termination Date, then the Depositor-Agent and
the Issuer-Corporation promptly shall so advise the Bank-Escrowee, shall
furnish to the Bank-Escrowee a list containing the name and address of, the
amount received from each subscriber whose funds have been deposited and shall
authorize the Bank-Escrowee to return the subscription funds theretofore
received, without interest, to the subscribers as named.
6. In the event of either (a) the occurrence of all the
events contemplated by Sections 3 and 4 hereof, or (b) at least 666,667 shares
of Common Stock not having been subscribed for by the Offering Termination Date
and the repayment to the subscribers of the amounts provided in Section 5
hereof, the Bank-Escrowee shall be relieved of all liabilities in connection
with the escrow deposits provided for herein.
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<PAGE>
7. The Issuer-Corporation hereby agrees to (i) pay the
Bank-Escrowee upon execution of this Agreement reasonable compensation for the
services to be rendered hereunder, as described on Schedule I attached hereto,
and (ii) pay or reimburse the Bank-Escrowee upon request for all expenses,
disbursements and advances, including reasonable attorney's fees, incurred or
made by it in connection with this agreement.
8. It is understood and agreed, further, that the Bank-
Escrowee shall:
(a) be under no duty to enforce payment of any
subscription which is to be paid to and held by it
hereunder;
(b) be under no duty to accept funds, checks, drafts
or instructions for the payment of money from anyone other
than the Depositor-Agent and the Issuer- Corporation or to
give any receipt therefor except to the Depositor-Agent and
the Issuer-Corporation;
(c) be protected in acting under any notice,
request, certificate, approval, consent or other paper
believed by it to be genuine, signed by the proper party or
parties and in accordance with the terms of this Agreement;
-5-
<PAGE>
(d) be deemed conclusively to have given and
delivered any notice required to be given or delivered
hereunder if the same is in writing, signed by any one of its
authorized officers, and mailed by registered or certified
mail, or delivered by hand, to the Depositor- Agent, 110 Wall
Street, New York, New York 10005, Attn: Asim S. Kohli and the
Issuer-Corporation, 110 Wall Street, New York, New York
10005, Attn.: Mohammad Ali Khan with a copy to Doros &
Brescia, P.C., 1140 Avenue of the Americas, New York, New
York 10036, Attn.: Ronald J. Brescia and be deemed
conclusively to have received any notice required to be given
or delivered hereunder if the same is in writing, signed by
any one of the authorized officers of the Depositary-Agent
and the Issuer- Corporation, and mailed, by registered or
certified mail, or delivered by hand, to the Bank-Escrowee's
Corporate Trust Department, 450 West 33rd Street, New York,
New York 10001, Attn.: Escrow Administration: 15th Floor.
(e) be indemnified by the Depositor-Agent and the
Issuer-Corporation against any claim made against it by
reason of its action or failing to act in connection with any
of the transactions contemplated hereby and against any loss
it may sustain in carrying out the terms of this Agreement,
except such claims which are occasioned by its
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<PAGE>
bad faith, gross negligence or willful misconduct. Anything
in this agreement to the contrary notwitstanding, in no event
shall the Bank-Escrowee be liable for special, indirect or
consequential loss or damage of any kind whatsoever
(including but not limited to lost profits), even if the
Bank-Escrowee has been advised of the likelihood of such loss
or damage and regardless of the form of action;
(f) promptly notify the Depositor-Agent and the
Issuer-Corporation of any discrepancy between the amounts set
forth on any statement delivered by the Depositor- Agent or
the Issuer-Corporation, as the case may be, and the sum or
sums delivered to the Bank-Escrowee therewith;
(g) have no duty to inquire into the terms and
conditions of this Agreement, such duties being purely
ministerial in nature;
(h) be permitted to consult with counsel of its
choice, including in-house counsel, and shall not be liable
for any action taken, suffered or omitted by it in accordance
with the advice of such counsel, provided, however that
nothing in this subsection (h), nor any action taken by the
Bank-Escrowee, or suffered or omitted by it in accordance
with the advice of any counsel, shall relieve the
Bank-Escrowee from liability for any claims
-7-
<PAGE>
that are occasioned by its bad faith, gross negligence or
willful misconduct, all as provided in subsection (e) above;
(i) not be bound by any modification, amendment,
termination, cancellation, recision or supersession of this
Agreement, unless the same shall be in writing and signed by
all parties hereto;
(j) have no liability for following the instructions
herein or expressly provided for, or written instructions
given by the Depositor-Agent or the Issuer- Corporation; and
(k) have the right, at any time, to resign hereunder
by given written notice of its resignation to take effect,
and upon the effective date of such resignation all cash and
other payments and all other property then held by the
Bank-Escrowee hereunder shall be delivered by it to such
person as may be designated in writing by the other parties
executing this Agreement, whereupon the Bank-Escrowee's
obligations hereunder shall cease and terminate. If no such
person has been designated by such date, all obligations of
the Bank- Escrowee hereunder shall, nevertheless, cease and
terminate. The Bank-Escrowee's sole responsibility
-8-
<PAGE>
thereafter shall be to keep safely all property then held by
it and to deliver the same to a person designated by the
other parties executing this Agreement or in accordance with
the directions of a final order or judgment of a court of
competent jurisdiction.
9. If any checks or other instruments deposited in the escrow
account established hereunder prove uncollectible, the Issuer-Corporation shall
deliver the returned checks or other instruments to the Issuer-Corporation.
10. Nothing in this Agreement is intended to or shall confer
upon anyone other than the parties hereto any legal right, remedy or claim.
This Agreement shall be construed in accordance with the laws of the State of
New York and may be modified only in writing.
11. (a) In the event funds transfer instructions are given
(other than in writing at the time of execution of the Agreement), whether in
writing, by telecopier or otherwise the Bank-Escrowee is authorized to seek
confirmation of such instructions by telephone call-back to person or persons
designed on Schedule 1 hereto, and the Bank-Escrowee may rely upon the
confirmations of anyone purporting to be the person or persons so designated.
The persons and telephone numbers for call-backs may be changed only in a
writing actually received and acknowledged by the Bank-Escrowee. The parties to
this Agreement acknowledge that
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<PAGE>
such security procedure is commercially reasonable.
(b) It is understood that the Bank-Escrowee and the
beneficiary's bank in any funds transfer may rely solely upon any account
numbers or similar identifying number provided by either of the other parties
hereto identify (i) the beneficiary, (ii) the beneficiary's bank, or (iii) an
intermediary bank. The Bank- Escrowee may apply any of the escrowed funds for
any payment order it executes using any such identifying number, even where its
use may result in a person other than the beneficiary being paid, or the
transfer of funds to a bank other than the beneficiary's bank or an
intermediary bank designated.
IN WITNESS WHEREOF, the parties hereto have duly executed
this Agreement as of the day and year first above written.
THE CHASE MANHATTAN BANK
By:
-----------------------------
UNITED STATES FINANCIAL GROUP,
INCORPORATED
By:
-----------------------------
Mohammad Ali Khan, President
KLEIN MAUS AND SHIRE, INC.
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<PAGE>
By:
-----------------------------
Mohammad Ali Khan, President
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<PAGE>
Schedule 1
o $2,500 per annum, or any part thereof, without proration
for partial years.
o $5.00 per check.
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<PAGE>
Schedule 2
Telephone Number(s) for Call-Backs and
Person(s) Designated to Confirm Funds Transfer Instructions
IF TO ISSUER-CORPORATION:
NAME TELEPHONE NUMBER
- ------------------------------------- ----------------------------------
1. Mohammad Ali Khan 212-785-4545
2. Asim S. Kohli 212-785-4545
IF TO DEPOSITOR-AGENT:
NAME TELEPHONE NUMBER
- ------------------------------------- ----------------------------------
1. Mohammad Ali Khan 212-785-4545
2. Asim S. Kohli 212-785-4545
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<PAGE>
UNDERWRITER'S WARRANT AGREEMENT dated as of __________, 1998
between UNITED STATES FINANCIAL GROUP, INCORPORATED, a Delaware corporation
(the "COMPANY") and KLEIN MAUS AND SHIRE, INC., its successors, designees and
assigns (hereinafter referred to as the "UNDERWRITER").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to Klein Maus and
Shire, Inc. warrants (the "UNDERWRITER'S WARRANTS") entitling the holder to
purchase up to an aggregate of 300,000 shares of the Company's common stock,
$.0001 par value per share (the "COMMON STOCK"), at a purchase price of $.0001
per Underwriter's Warrant (the Underwriter's Warrants and the underlying Common
Stock being collectively referred to as the "WARRANT SECURITIES"); and
WHEREAS, the Underwriter has agreed pursuant to the
underwriting agreement (the "UNDERWRITING AGREEMENT") dated as of the date
hereof among the Underwriter and the Company to act as to act as the exclusive
agent for the Company, on a best efforts basis, in connection with the
Company's proposed public offering of up to 500,000 shares of Common Stock at a
public offering price of $15.00 per share of Common Stock (the "PUBLIC
OFFERING"); and
WHEREAS, the Underwriter's Warrants to be issued pursuant to
this Agreement will be issued on the Closing Date and Option Closing Date (s)
(as such term's are defined in the Underwriting Agreement) by the Company to
the Underwriter in consideration for, and as part of
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<PAGE>
the Underwriter's compensation in connection with, and pursuant to the
Underwriting Agreement;
NOW, THEREFORE, in consideration of the premises, the payment
by the Underwriter to the Company of an aggregate thirty dollars ($30.00), the
agreements herein set forth and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Grant. The Underwriter is hereby granted the right to
purchase, at any time from ____________, 1999 until 5:00 P.M., New York time,
on _______________, 2003, up to an aggregate of 300,000 shares of Common Stock
(the "SHARES") at an initial exercise price (subject to adjustment as provided
in Section 8 hereof) of $24.00 per share of Common Stock subject to the terms
and conditions of this Agreement. Except as set forth herein, the Shares
issuable upon exercise of the Underwriter's Warrants are in all respects
identical to the shares of Common Stock being sold by the Underwriter to the
public pursuant to the terms and provisions of the Underwriting Agreement.
2. Warrant Certificates. The warrant certificates (the
"WARRANT CERTIFICATES") delivered and to be delivered pursuant to this
Agreement shall be in the form set forth in Exhibit A, attached hereto and made
a part hereof, with such appropriate insertions, omissions, substitutions, and
other variations as required or permitted by this Agreement.
3. Exercise of Warrant.
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<PAGE>
3.1 Method of Exercise. The Underwriter's Warrants initially
are exercisable at an aggregate initial exercise price (subject to adjustment
as provided in Section 8 hereof) per share of Common Stock set forth in Section
6 hereof payable by certified or official bank check in New York Clearing House
funds, subject to adjustment as provided in Section 8 hereof. Upon surrender of
a Warrant Certificate with the annexed Form of Election to Purchase duly
executed, together with payment of the Exercise Price (as hereinafter defined)
for the Warrant Securities purchased at the Company's principal offices
(presently located at 110 Wall Street, New York, New York 10005) the registered
holder of a Warrant Certificate ("HOLDER" or "HOLDERS") shall be entitled to
receive a certificate or certificates for the shares of Common Stock so
purchased. The purchase rights represented by each Warrant Certificate are
exercisable at the option of the Holders thereof, in whole or part (but not as
to fractional shares of the Common Stock). In the case of the purchase of less
than all of the Common Stock purchasable under any Warrant Certificate, the
Company shall cancel said Warrant Certificate upon the surrender thereof and
shall execute and deliver a new Warrant Certificate of like tenor for the
balance of the Warrant Securities purchasable thereunder.
3.2 Exercise by Surrender of Warrant. In addition to the
method of payment set forth in Section 3.1 and in lieu of any cash payment
required thereunder, the Holder(s) of the Underwriter's Warrants shall have the
right at any time and from time to time to exercise the Underwriter's Warrants
in full or in part by surrendering the Warrant Certificate in the manner
specified in Section 3.1. The number of shares of Common Stock to be issued
pursuant to this Section 3.2 shall be equal to the difference between (a) the
number of shares of Common Stock in respect of which the Underwriter's Warrants
are exercised and (b) a fraction, the numerator of which shall be the number of
shares of Common Stock in respect of which the Underwriter's Warrants are
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<PAGE>
exercised multiplied by the Exercise Price (as hereinafter defined) and the
denominator of which shall be the Market Price.
3.3 Definition of Market Price. As used herein, the phrase
"Market Price" at any date shall be deemed to be (i) when referring to the
Common Stock, the last reported sale price, or, in case no such reported sale
takes place on such day, the average of the last reported sale prices for the
last three (3) trading days, in either case as officially reported by the
principal securities exchange on which the Common Stock is listed or admitted
to trading or by the Nasdaq National Market ("NNM"), or, if the Common Stock is
not listed or admitted to trading on any national securities exchange or quoted
by NNM, the average closing bid price as furnished by the National Association
of Securities Dealers, Inc. ("NASD") through Nasdaq or similar organization
including the NASD Electronic Bulletin Board if Nasdaq is no longer reporting
such information, or if the Common Stock is not quoted on Nasdaq, or such
similar organization as determined in good faith by resolution of the Board of
Directors of the Company, based on the best information available to it.
Notwithstanding the foregoing, for purposes of Section 8, the Market Price of a
share of Common Stock shall be determined by reference to the relevant
information set forth above during the thirty (30) trading days immediately
preceding the date of the event requiring the determination of the Market Price
(except that, in the event of a public offering of shares of Common Stock, the
Market Price of a share of Common Stock shall be determined by reference to the
trading day immediately preceding the effective date of the public offering and
not such thirty (30) trading day period).
4. Issuance of Certificates. Upon the exercise of the
Underwriter's Warrants, the issuance of certificates for shares of Common Stock
and/or other securities, properties or rights
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<PAGE>
underlying such Underwriter's Warrants, shall be made forthwith (and in any
event within five (5) business days thereafter) without charge to the Holder
thereof including, without limitation, any tax which may be payable in respect
of the issuance thereof, and such certificates shall (subject to the provisions
of Sections 5 and 7 hereof) be issued in the name of, or in such names as may
be directed by, the Holder thereof; provided, however, that the Company shall
not be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any such certificates in a name other
than that of the Holder and the Company shall not be required to issue or
deliver such certificates unless or until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been
paid.
The Warrant Certificates and the certificates representing
the Shares (and/or other securities, property or rights issuable upon the
exercise of the Underwriter's Warrants) shall be executed on behalf of the
Company by the manual or facsimile signature of the then present Chairman or
Vice Chairman of the Board of Directors or President or Vice President of the
Company under its corporate seal reproduced thereon, attested to by the manual
or facsimile signature of the then present Secretary or Assistant Secretary of
the Company. Warrant Certificates shall be dated the date of execution by the
Company upon initial issuance, division, exchange, substitution or transfer.
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<PAGE>
5. Restriction On Transfer of Warrants. The Holder of a
Warrant Certificate, by its acceptance thereof, covenants and agrees that the
Underwriter's Warrants are being acquired as an investment and not with a view
to the distribution thereof; that the Underwriter's Warrants may not be sold,
transferred, assigned, hypothecated or otherwise disposed of, in whole or in
part, for a period of one (1) year from the date hereof, except to officers or
partners of the Underwriters and members of the selling group and/or their
officers or partners.
6. Exercise Price.
6.1 Initial and Adjusted Exercise Price. Except as otherwise
provided in Section 8 hereof, the initial exercise price of each Underwriter
Warrant shall be $24.00 per share of Common Stock. The adjusted exercise price
shall be the price which shall result from time to time from any and all
adjustments of the initial exercise price in accordance with the provisions of
Section 8 hereof.
6.2 Exercise Price. The term "Exercise Price" herein shall
mean the initial exercise price or the adjusted exercise price, depending upon
the context.
7. Registration Rights.
7.1 Current Registration Under the Securities Act of 1933.
The Underwriter's Warrants and the Shares of Common Stock issuable upon
exercise of the Underwriter's Warrants have been registered under the
Securities Act of 1933, as amended (the "ACT"), pursuant to the
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<PAGE>
Company's Registration Statement on Form S-1 (Registration No. 333-48165) (the
"REGISTRATION STATEMENT"). The Company covenants and agrees to use its best
efforts to maintain the effectiveness of the Registration Statement for a
period of five (5) years from its effective date.
7.2 Contingent Registration Rights. In the event that, for
any reason whatsoever, the Company shall fail to maintain the effectiveness of
the Registration Statement for a period of five (5) years from its effective
date and, in any event, from and after the fifth (5th) anniversary of the
effective date of the Registration Statement, the Underwriter and other Holders
shall have, commencing the date of any such occasion, the contingent
registration rights ("REGISTRATION RIGHTS") set forth in Sections 7.3 and 7.4
hereof.
7.3 Piggyback Registration. (1) If, at any time commencing
after the effective date of the Registration Statement and expiring on the
seventh (7th) anniversary of the effective date of the Registration Statement,
the Company proposes to register any of its securities under the Act, either
for its own account or the account of any other security holder or holders of
the Company possessing registration rights ("OTHER STOCKHOLDERS") (other than
pursuant to Form S-4, Form S-8 or comparable registration statement), it shall
give written notice, at least thirty (30) days prior to the filing of each such
registration statement, to the Underwriter and to all other Holders of
Underwriter's Warrants and/or Shares of Common Stock issuable upon exercise of
the Underwriter's Warrants (collectively the "REGISTRABLE SECURITIES") of its
intention to do so. If the Underwriter or other Holders of Registrable
Securities notify the Company within twenty-one (21) days after the receipt of
any such notice of its or their desire to include any such securities in such
proposed registration statement, the Company shall afford the Underwriter and
such other Holders of such securities the opportunity to have any such
securities registered under such registration statement.
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<PAGE>
(2) If the registration of which the Company
gives notice is for a registered public offering involving an underwriting,
the Company shall so advise the Underwriter and such other Holders as part
of the written notice given pursuant to Section 7.3(a) hereof. The
right of the Underwriter or any such other Holders to registration pursuant to
this Section 7.3 shall be conditioned upon their participation in such
underwriting and the inclusion of their Registrable Securities in the
underwriting to the extent hereinafter provided. The Underwriter and all other
Holders proposing to distribute their securities through such underwriting
shall (together with the Company and any officers, directors or other
Stockholders distributing their securities through such underwriting) enter
into an underwriting agreement in customary form with the Underwriter of the
underwriter or underwriters selected by the Company. Notwithstanding any other
provision of this Section 7.3, if the Underwriter of the underwriter or
underwriters advises the Company in writing that marketing factors require a
limitation or elimination of the number of shares of Common Stock or other
securities to be underwritten, the Underwriter may limit the number of shares
of Common Stock or other securities to be included in the registration and
underwriting. The Company shall so advise the Underwriter and all other Holders
of Registrable Securities requesting registration, and the number of shares of
Common Stock or other securities that are entitled to be included in the
registration and underwriting shall be allocated among the Underwriter and
other Holders requesting registration, in each case, in proportion, as nearly
as practicable, to the respective amounts of securities which they had
requested to be included in such registration at the time of filing the
registration statement.
(3) Notwithstanding the provisions of this
Section 7.3, the Company shall have the right at any time after it
shall have given written notice pursuant to Section 7.3(a) hereof (irrespective
of whether a written request for inclusion of any such securities shall have
been made)
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<PAGE>
to elect not to file any such proposed registration statement, or to
withdraw the same after the filing but prior to the effective date thereof.
7.4 Demand Registration. (1) At any time commencing after the
effective date of the Registration Statement and ending on the fifth (5th)
anniversary of the effective date of the Registration Statement, the Holders of
Registrable Securities representing a "Majority" (as hereinafter defined) of
such securities (assuming the exercise of all of the Underwriter's Warrants)
(the "INITIATING HOLDERS") shall have the right (which right is in addition to
the registration rights under Section 7.3 hereof), exercisable by written
notice to the Company, to have the Company prepare and file with the
Commission, on one occasion, a registration statement and such other documents,
including a prospectus, as may be necessary in the opinion of both counsel for
the Company and counsel for the Holders, in order to comply with the provisions
of the Act, so as to permit a public offering and sale of their respective
Registrable Securities for up to two hundred and seventy (270) days by such
Holders and any other Holders of Registrable Securities, as well as any other
security holders possessing similar registration rights, who notify the Company
within twenty-one (21) days after receiving notice from the Company of such
request.
(2) The Company covenants and agrees to give
written notice of any registration request under this Section 7.4 by any Holder
or Holders to all other registered Holders of Registrable Securities, as well
as any other security holders possessing similar registration rights, within
ten (10) days after the date of the receipt of any such registration request.
(3) If the Initiating Holders intend to
distribute the Registrable Securities covered by their request by means of an
underwriting, they shall so advise the Company as a part of their request made
pursuant to Section 7.4(a) hereof. The right of any Holder to registration
pursuant
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<PAGE>
to this Section 7.4 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent and subject to the
limitations provided herein. A Holder may elect to include in such
underwriting all or a part of the Registrable Securities it holds.
(4) The Company shall (together with all
Holders, officers, directors and other stockholders proposing to distribute
their securities through such underwriting) enter into an underwriting
agreement in customary form with the Underwriter of the underwriters selected
for such underwriting by the Initiating Holders, which underwriter(s) shall be
reasonably acceptable to the Underwriter. Notwithstanding any other provision
of this Section 7.4, if the Underwriter of the underwriter or underwriters
advises the Initiating Holders in writing that marketing factors require a
limitation or elimination of the number of shares of Common Stock or other
securities to be underwritten, the Underwriter may limit the number of shares
of Preferred Stock or other securities to be included in the registration and
underwriting. The Company shall so advise the Underwriter and all Holders of
Registrable Securities requesting registration, and the number of shares of
Common Stock or other securities that are entitled to be included in the
registration and underwriting shall be allocated among the Underwriter and
other Holders requesting registration, in each case, in proportion, as nearly
as practicable, to the respective amounts of securities which they had
requested to be included in such registration at the time of filing the
registration statement. If the Company or any Holder of Registrable Securities
who has requested inclusion in such registration as provided above disapproves
of the terms of any such underwriting, such person may elect to withdraw its
securities therefrom by written notice to the Company, the underwriter and the
Initiating Holders. Any securities so excluded shall be withdrawn from such
registration. No securities excluded from such registration by reason of such
underwriters' marketing limitations shall be included in such
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<PAGE>
registration. To facilitate the allocation of shares in accordance with this
Section 7.4(d), the Company or underwriter or underwriters selected as provided
above may round the number of securities of any holder which may be included in
such registration to the nearest 100 shares.
(5) In the event that the Initiating Holders
are unable to sell all of the Registrable Securities for which they have
requested registration due to the provisions of Section 7.4(d) hereof and if,
at that time, the Initiating Holders are not permitted to sell Registrable
Securities under Rule 144(k), the Initiating Holders shall be entitled to
require the Company to afford the Initiating Holders an opportunity to effect
one additional demand registration under this Section 7.4.
(6) In addition to the registration rights
under Section 7.3 and subsection (a) of Section 7.4 hereof, at any time
commencing on the date hereof and expiring five (5) years thereafter any Holder
of Registrable Securities shall have the right, exercisable by written request
to the Company, to have the Company prepare and file, on one occasion, with the
Commission a registration statement so as to permit a public offering and sale
for 270 days by any such Holder of its Registrable Securities provided,
however, that the provisions of Section 7.5(b) hereof, shall not apply to any
such registration request and registration and all costs incident thereto shall
be at the expense of the Holder or Holder's making such request.
(7) Notwithstanding anything to the contrary
contained herein, if the Company shall not have filed a registration statement
for the Registrable Securities of the Initiating Holders or the Holder(s)
referred to in Section 7.5(f) above (the "PAYING HOLDERS"), within the time
period specified in Section 7.5(a) below, the Company shall upon the written
notice of election of the Initiating Holders or the Paying Holders, as the case
may be, repurchase (i) any and all Shares of Common Stock at the higher of the
Market Price per share of Common Stock on (x) the date of the notice sent to
the Company under Section 7.4(a) or (f), as the case may be, or (y) the
expiration
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of the period specified in Section 7.5(a) and (ii) any and all Warrants at such
Market Price less the Exercise Price of such Warrant. Such repurchase shall be
in immediately available funds and shall close within five (5) business days
after the expiration of the period specified in Section 7.5(a).
7.5 Covenants of the Company With Respect to Registration. In
connection with any registration under Sections 7.3 and 7.4 hereof, the Company
covenants and agrees as follows:
(1) The Company shall use its best efforts to
file a registration statement within sixty (60) days of receipt of any demand
therefor, shall use its best efforts to have any registration statements
declared effective at the earliest possible time, and shall furnish each Holder
desiring to sell Registrable Securities such number of prospectuses as shall
reasonably be requested.
(2) The Company shall pay all costs (excluding
fees and expenses of Holder(s)' counsel and any underwriting or selling
commissions), fees and expenses in connection with all registration statements
filed pursuant to Sections 7.3 and 7.4 hereof including, without limitation,
the Company's legal and accounting fees, printing expenses, blue sky fees and
expenses. If the Company shall fail to comply with the provisions of Section
7.5(a), the Company shall, in addition to any other equitable or other relief
available to the Holder(s), extend the exercise period of the Underwriter's
Warrants by such number of days as shall equal the delay caused by the
Company's failure.
(3) The Company will take all necessary action
which may be required in qualifying or registering the Registrable Securities
included in a registration statement for offering and sale under the securities
or blue sky laws of such states as reasonably are requested by the Holder(s);
provided that the Company shall not be obligated to execute or file any general
consent to service of process or to qualify as a foreign corporation to do
business under the laws of any such
- 12 -
<PAGE>
jurisdiction.
(4) The Company shall indemnify the Holder(s)
of the Registrable Securities to be sold pursuant to any registration statement
and each person, if any, who controls such Holders within the meaning of
Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934,
as amended ("EXCHANGE ACT"), against all loss, claim, damage, expense or
liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which any of them may
become subject under the Act, the Exchange Act or otherwise, arising from such
registration statement but only to the same extent and with the same effect as
the provisions pursuant to which the Company has agreed to indemnify the
Underwriter contained in Section 7 of the Underwriting Agreement.
(5) The Holder(s) of the Registrable Securities
to be sold pursuant to a registration statement, and their successors and
assigns, shall severally, and not jointly, indemnify the Company, its officers
and directors and each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against
all loss, claim, damage or expense or liability (including all expenses
reasonably incurred in investigating, preparing or defending against any claim
whatsoever) to which they may become subject under the Act, the exchange Act or
otherwise, arising from information furnished by or on behalf of such Holders,
or their successors or assigns, for specific inclusion in such registration
statement to the same extent and with the same effect as the provisions
contained in Section 7 of the Underwriting Agreement pursuant to which the
Underwriter has agreed to indemnify the Company.
(6) For a period of one hundred eighty (180)
days after the effectiveness of any registration statement filed pursuant to
Section 7.4 hereof, the Company shall not permit any other registration
statement (other than (1) a registration statement relating to the securities
for which
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the Company has granted demand registration rights, as described in the
Prospectus included in the Registration Statement, (2) a registration statement
relating to the securities for which the Company has granted piggyback
registration rights, as described in the Prospectus included in the
Registration Statement and (3) a registration statement filed on Forms S-4 or
S-8 to be or remain effective during the effectiveness of a registration
statement filed pursuant to Section 7.4 hereof, without the prior written
consent of the Holders of the Registrable Securities representing a Majority of
such securities.
(7) The Company shall furnish upon request to
each Holder participating in the offering and to each underwriter, if any, a
signed counterpart, addressed to such Holder or underwriter, of (i) an opinion
of counsel to the Company, dated the effective date of such registration
statement (and, if such registration includes an underwritten public offering,
an opinion dated the date of the closing under the underwriting agreement), and
(ii) a "cold comfort" letter dated the effective date of such registration
statement (and, if such registration includes an underwritten public offering,
a letter dated the date of the closing under the underwriting agreement) signed
by the independent public accountants who have issued a report on the Company's
financial statements included in such registration statement, in each case
covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) and, in the case of such
accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions of issuer's
counsel and in accountants' letters delivered to underwriters in underwritten
public offerings of securities.
(8) The Company shall as soon as practicable
after the effective date of any registration statement filed pursuant to
Sections 7.3 and 7.4 hereof, and in any event within 15 months thereafter, make
"generally available to its security holders" (within the meaning of Rule 158
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under the Act) an earnings statement (which need not be audited) complying with
Section 11(a) of the Act and covering a period of at least 12 consecutive
months beginning after the effective date of the registration statement.
(9) The Company shall deliver promptly to
each Holder participating in the offering requesting the correspondence and
memoranda described below and to the managing underwriters, copies of all
written correspondence between the Commission and the Company, its counsel or
auditors and all memoranda relating to discussions with the Commission or its
staff with respect to the registration statement and permit each Holder and
underwriters to do such investigation, upon reasonable advance notice, with
respect to information contained in or omitted from the registration statement
as it deems reasonably necessary to comply with applicable securities laws or
rules of the NASD. Such investigation shall include access to books, records
and properties and opportunities to discuss the business of the Company with
its officers and independent auditors, all to such reasonable extent and at
such reasonable times and as often as any such Holder or underwriter shall
reasonably request.
(10) With respect to any registration unde
Section 7.4 hereof, the Company shall enter into an underwriting agreement with
the managing underwriter selected for such underwriting by the Initiating
Holders or the Paying Holders, as the case may be. Such agreement shall be
satisfactory in form and substance to the Company, each Holder and such
managing underwriters, and shall contain such representations, warranties and
covenants by the Company and such other terms as are customarily contained in
agreements of that type used by the managing underwriter. The Holders shall be
parties to any underwriting agreement relating to an underwritten sale of their
Registrable Securities and may, at their option, require that any or all the
representations, warranties and covenants of the Company to or for the benefit
of such underwriters
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shall also be made to and for the benefit of such Holders. Such Holders shall
not be required to make any representations or warranties to or agreements with
the Company or the underwriters, except as they may relate to such Holders
and their intended methods of distribution.
(11) For purposes of this Agreement, the term
"Majority" in reference to the Holders of Registrable Securities, shall mean in
excess of fifty percent (50%) of the then outstanding Underwriter's Warrants
and/or Shares of Common Stock issued upon exercise of the Underwriter's
Warrants that (i) are not held by the Company, an affiliate, officer, creditor,
employee or agent thereof or any of their respective affiliates, members of
their family, persons acting as nominees or in conjunction therewith and (ii)
have not been resold to the public pursuant to a registration statement filed
with the Commission under the Act.
(12) Nothing contained in this Agreement shall
be construed as requiring the Holder(s) to exercise their Underwriter's
Warrants prior to the initial filing of any registration statement or the
effectiveness thereof.
(13) In addition to the Registrable Securities,
upon the written request therefor, by any Holder(s), the Company shall include
in the registration statement any other securities of the Company held by such
Holder(s) as of the date of filing of such registration statement, including
without limitation restricted shares of Common Stock, options, warrants or any
other securities convertible into shares of Common Stock.
7.6 Restrictive Legends. In the event that the Company fails
to maintain the effectiveness of the Registration Statement, such that the
exercise, in part or in whole, of the Underwriter's Warrants are not, at the
time of such exercise, registered under the Act, any certificates representing
the Shares underlying the Underwriter's Warrants, the Underlying Warrants and
any of
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the other securities issuable upon exercise of the Underwriter's Warrants shall
bear the following restrictive legend:
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended ("ACT"), and may not be
offered or sold except pursuant to (i) an effective registration statement
under the Act, (ii) to the extent applicable, Rule 144 under the Act (or any
similar rule under such Act relating to the disposition of securities), or
(iii) an opinion of counsel, if such opinion shall be reasonably satisfactory
to counsel to the issuer, that an exemption from registration under such Act is
available.
8. Adjustments to Exercise Price and Number of
Securities.
8.1 Computation of Adjusted Exercise Price. Except as
hereinafter provided, in the event the Company shall at any time after the date
hereof issue or sell any shares of Common Stock (other than the issuances or
sales referred to in Section 8.7 hereof), including shares held in the
Company's treasury and shares of Common Stock issued upon the exercise of any
options, rights or warrants to subscribe for shares of Common Stock and shares
of Preferred Stock issued upon the direct or indirect conversion or exchange of
securities for shares of Common Stock, for a consideration per share less than
the Market Price in effect immediately prior to the issuance or sale of such
shares, or without consideration, then forthwith upon such issuance or sale,
the Exercise Price shall (until another such issuance or sale) be reduced to
the price (calculated to the nearest full cent) equal to the quotient derived
by dividing (i) an amount equal to the sum of (a) the total number of shares of
Common Stock outstanding immediately prior to the issuance or sale of such
shares, multiplied by the Exercise Price in effect immediately prior to such
issuance or sale, and (b) the aggregate of the amount of all consideration, if
any, received by the Company upon such issuance
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or sale, by (ii) the total number of shares of Common Stock outstanding
immediately after such issuance or sale; provided, however, that in no event
shall the Exercise Price be adjusted pursuant to this computation to an amount
in excess of the Exercise Price in effect immediately prior to such
computation, except in the case of a combination of outstanding shares of
Common Stock, as provided by Section 8.3 hereof.
For the purposes of this Section 8 the term Exercise Price
shall mean the Exercise Price per share of Common Stock set forth in Section 6
hereof, as adjusted from time to time pursuant to the provisions of this
Section 8.
For the purposes of any computation to be made in accordance
with this Section 8.1, the following provisions shall be applicable:
(i) In case of the issuance or sale of shares of
Common Stock for a consideration part or all of which shall be cash, the amount
of the cash consideration therefor shall be deemed to be the amount of cash
received by the Company for such shares (or, if shares of Common Stock are
offered by the Company for subscription, the subscription price, or, if either
of such securities shall be sold to underwriters or dealers for public offering
without a subscription offering, the initial public offering price) before
deducting therefrom any compensation paid or discount allowed in the sale,
underwriting or purchase thereof by underwriters or dealers or other performing
similar services, or any expenses incurred in connection therewith.
(ii) In case of the issuance or sale (other than as
a dividend or other distribution on any stock of the Company) of shares of
Common Stock for a consideration part or all of which shall be other than cash,
the amount of the consideration therefor other than cash shall be deemed to be
the value of such consideration as determined in good faith by the Board of
Directors of the Company and shall include any amounts payable to security
holders or any affiliates
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thereof, including without limitation, pursuant to any employment agreement,
royalty, consulting agreement, covenant not to compete, earnout or contingent
payment right or similar arrangement, agreement or understanding, whether oral
or written; all such amounts being valued for the purposes hereof at the
aggregate amount payable thereunder, whether such payments are absolute or
contingent, and irrespective of the period or uncertainty of payment, the rate
of interest, if any, or the contingent nature thereof; provided, however, that
if any Holder(s) does not agree with such evaluation, a mutually acceptable
independent appraiser shall make such evaluation, the cost of which shall be
borne by the Company.
(iii) Shares of Common Stock issuable by way of
dividend or other distribution on any stock of the Company shall be deemed to
have been issued immediately after the opening of business on the day following
the record date for the determination of stockholders entitled to receive such
dividend or other distribution and shall be deemed to have been issued without
consideration.
(iv) The reclassification of securities of the
Company other than shares of Common Stock into securities including shares of
Common Stock shall be deemed to involve the issuance of such shares of Common
Stock for a consideration other than cash immediately prior to the close of
business on the date fixed for the determination of security holders entitled
to receive such shares, and the value of the consideration allocable to such
shares of Common Stock shall be determined as provided in subsection (ii) of
this Section 8.1.
(v) The number of shares of Common Stock at any
one time outstanding shall include the aggregate number of shares issued or
issuable (subject to readjustment upon the actual issuance thereof) upon the
exercise of options, rights, warrants and upon the conversion or exchange of
convertible or exchangeable securities.
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8.2 Options, Rights, Warrants and Convertible and
Exchangeable Securities. In case the Company shall at any time after the date
hereof issue options, rights or warrants to subscribe for shares of Common
Stock, or issue any securities convertible into or exchangeable for shares of
Common Stock, for a consideration per share less than the Market Price in
effect immediately prior to the issuance of such options, rights or warrants,
or such convertible or exchangeable securities, or without consideration, the
Exercise Price in effect immediately prior to the issuance of such options,
rights or warrants, or such convertible or exchangeable securities, as the case
may be, shall be reduced to a price determined by making a computation in
accordance with the provisions of Section 8.1 hereof, provided that:
(1) The aggregate maximum number of shares of
Common Stock, as the case may be, issuable under such options, rights or
warrants shall be deemed to be issued and outstanding at the time such options,
rights or warrants were issued, and for a consideration equal to the minimum
purchase price per share provided for in such options, rights or warrants at
the time of issuance, plus the consideration (determined in the same manner as
consideration received on the issue or sale of shares in accordance with the
terms of the Underwriter's's Warrants), if any, received by the Company for
such options, rights or warrants.
(2) The aggregate maximum number of shares of
Common Stock issuable upon conversion or exchange of any convertible or
exchangeable securities shall be deemed to be issued and outstanding at the
time of issuance of such securities, and for a consideration equal to the
consideration (determined in the same manner as consideration received on the
issue or sale of shares of Common Stock in accordance with the terms of the
Underwriter's Warrants) received by the
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Company for such securities, plus the minimum consideration, if
any, receivable by the Company upon the conversion or exchange thereof.
(3) If any change shall occur in the price per
share provided for in any of the options, rights or warrants referred to in
subsection (a) of this Section 8.2, or in the price per share at which the
securities referred to in subsection (b) of this Section 8.2 are convertible or
exchangeable, such options, rights or warrants or conversion or exchange
rights, as the case may be, shall be deemed to have expired or terminated on
the date when such price change became effective in respect of shares not
theretofore issued pursuant to the exercise or conversion or exchange thereof,
and the Company shall be deemed to have issued upon such date new options,
rights or warrants or convertible or exchangeable securities at the new price
in respect of the number of shares issuable upon the exercise of such options,
rights or warrants or the conversion or exchange of such convertible or
exchangeable securities.
8.3 Subdivision and Combination. In case the Company shall at
any time subdivide or combine the outstanding shares of Common Stock, the
Exercise Price shall forthwith be proportionately decreased in the case of
subdivision or increased in the case of combination.
8.4 Adjustment in Number of Securities. Upon each adjustment
of the Exercise Price pursuant to the provisions of this Section 8, the number
of Warrant Securities issuable upon the exercise at the adjusted exercise price
of each Underwriter's Warrant shall be adjusted to the nearest full amount by
multiplying a number equal to the Exercise Price in effect immediately prior to
such adjustment by the number of Warrant Securities issuable upon exercise of
the Underwriter's Warrants immediately prior to such adjustment and dividing
the product so obtained by the adjusted
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Exercise Price.
8.5 Definition of Common Stock. For the purpose of this
Agreement, the term "COMMON STOCK" shall mean (i) the class of designated as
Common Stock in the Certification of Incorporation of the Company as may be
amended as of the date hereof, or, (ii) any other class of stock resulting from
successive changes or reclassifications of Common Stock consisting solely of
changes in par value, or from par value to no par value, or from no par value
to par value. In that event that the Company shall after the date hereof issue
securities with greater or superior voting rights than the shares of Common
Stock outstanding as of the date hereof, the Holder, at its option, may receive
upon exercise of any Underwriter's Warrant either shares of Common Stock or a
like number of such securities with greater or superior voting rights.
8.6 Merger or Consolidation. In case of any consolidation of
the Company with, or merger of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger which does not result
in any reclassification or change of the outstanding Common Stock), the
corporation formed by such consolidation or merger shall execute and deliver to
the Holder a supplemental warrant agreement providing that the holder of each
Underwriter's Warrant then outstanding or to be outstanding shall have the
right thereafter (until the expiration of such Underwriter's Warrant) to
receive, upon exercise of such warrant, the kind and amount of shares of stock
and other securities and property receivable upon such consolidation or merger,
by a holder of the number of shares of Common Stock of the Company for which
such Underwriter's Warrant might have been exercised immediately prior to such
consolidation, merger, sale or transfer. Such supplemental warrant agreement
shall provide for adjustments which shall be identical to the
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adjustments provided in Section 8. The above provision of this subsection shall
similarly apply to successive consolidations or mergers.
8.7 No Adjustment of Exercise Price in Certain Cases.
No adjustment of the Exercise Price shall be made:
(1) Upon the issuance or sale of the
Underwriter's Warrants or the shares of Common Stock issuable upon the
exercise of the Underwriter's Warrants; or
(2) If the amount of said adjustment shall be less
than two cents (2(cent)) per Warrant Security, provided, however, that in such
case any adjustment that would otherwise be required then to be made shall be
carried forward and shall be made at the time of and together with the next
subsequent adjustment which, together with any adjustment so carried forward,
shall amount to at least two cents (2(cent)) per Warrant Security.
8.8 Dividends and Other Distributions. In the event that the
Company shall at any time prior to the exercise of all Underwriter's Warrants
declare a dividend (other than a dividend consisting solely of shares of Common
Stock) or otherwise distribute to its stockholders any assets, property,
rights, evidences of indebtedness, securities (other than shares of Preferred
Stock), whether issued by the Company or by another, or any other thing of
value, the Holders of the unexercised Underwriter's Warrants shall thereafter
be entitled, in addition to the shares of Common Stock or other securities and
property receivable upon the exercise thereof, to receive, upon the exercise of
such Underwriter's Warrants, the same property, assets, rights, evidences of
indebtedness, securities or any other thing of value that they would have been
entitled to receive at the time of such dividend or distribution as if the
Underwriter's Warrants had been exercised immediately prior to such dividend or
distribution. At the time of any such dividend or distribution, the Company
shall make
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appropriate reserves to ensure the timely performance of the provisions of this
subsection 8.8.
9. Exchange and Replacement of Warrant Certificates. Each
Warrant Certificate is exchangeable without expense, upon the surrender thereof
by the registered Holder at the principal executive office of the Company, for
a new Warrant Certificate of like tenor and date representing in the aggregate
the right to purchase the same number of Warrant Securities in such
denominations as shall be designated by the Holder thereof at the time of such
surrender.
Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of any Warrant
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it, and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
the Underwriter's Warrants, if mutilated, the Company will make and deliver a
new Warrant Certificate of like tenor, in lieu thereof.
10. Elimination of Fractional Interests. The Company shall
not be required to issue fractional shares of Common Stock upon the exercise of
Underwriter's Warrants. Underwriter's Warrants may only be exercised in such
multiples as are required to permit the issuance by the Company of one or more
whole shares of Common Stock. If one or more Underwriter's Warrants shall be
presented for exercise in full at the same time by the same Holder, the number
of whole shares of Common Stock which shall be issuable upon such exercise
thereof shall be computed on the basis of the aggregate number of shares of
Common Stock purchasable on exercise of the Underwriter's Warrants so
presented. If any fraction of a share of Common Stock would, except for the
provisions provided herein, be issuable on the exercise of any Underwriter's
Warrant (or specified portion thereof), the Company shall pay an amount in cash
equal to such
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fraction multiplied by the then current market value of a share of Preferred
Stock, determined as follows:
(1) If the Common Stock is listed or admitted to unlisted
trading privileges on the NYSE or the AMEX, or is traded on the NNM, the
current market value of a share of Common Stock shall be the closing sale price
of the Common Stock at the end of the regular trading session on the last
business day prior to the date of exercise of the Underwriter's Warrants on
whichever of such exchanges or NNM had the highest average daily trading volume
for the Common Stock on such day; or
(2) If the Common Stock is not listed or admitted to unlisted
trading privileges, on either the NYSE or the AMEX and is not traded on NNM,
but is quoted or reported on Nasdaq, the current market value of a share of
Common Stock, shall be the average of the Underwriter closing bid and asked
prices (or the last sale price, if then reported by Nasdaq) of the Common Stock
at the end of the regular trading session on the last business day prior to the
date of exercise of the Underwriter's Warrants as quoted or reported on Nasdaq,
as the case may be; or
(3) If the Common Stock is not listed, or admitted to
unlisted trading privileges, on either of the NYSE or the AMEX, and is not
traded on NNM or quoted or reported on Nasdaq, but is listed or admitted to
unlisted trading privileges on the BSE or another national securities exchange
(other than the NYSE or the AMEX), the current market value of a share of
Common Stock shall be the closing sale price of the Common Stock at the end of
the regular trading session on the last business day prior to the date of
exercise of the Underwriter's Warrants on whichever of such exchanges has the
highest average daily trading volume for the Common Stock on such day; or
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(4) If the Common Stock is not listed or admitted to unlisted
trading privileges on any national securities exchange, or listed for trading
on NNM or quoted or reported on Nasdaq, but is traded in the over-the-counter
market, the current market value of a share of Common Stock shall be the
average of the last reported bid and asked prices of the Preferred Stock
reported by the National Quotation Bureau, Inc. on the last business day prior
to the date of exercise of the Underwriter's Warrants; or
(5) If the Common Stock is not listed, admitted to unlisted
trading privileges on any national securities exchange, or listed for trading
on NNM or quoted or reported on Nasdaq, and bid and asked prices of the Common
Stock are not reported by the National Quotation Bureau, Inc., the current
market value of a share of Common Stock shall be an amount, not less than the
book value thereof as of the end of the most recently completed fiscal quarter
of the Company ending prior to the date of exercise, determined in accordance
with generally acceptable accounting principles, consistently applied.
11. Reservation and Listing of Securities. The Company shall
at all times reserve and keep available out of its authorized shares of Common
Stock, solely for the purpose of issuance upon the exercise of the
Underwriter's Warrants, such number of shares of Preferred Stock or other
securities, properties or rights as shall be issuable upon the exercise
thereof. The Company covenants and agrees that, upon exercise of the
Underwriter's Warrants and payment of the Exercise Price therefor, all shares
of Common Stock and other securities, if any, issuable upon such exercise shall
be duly and validly issued, fully paid, non-assessable and not subject to the
preemptive rights of any stockholder. As long as the Underwriter's Warrants
shall be outstanding, the Company shall use its best efforts to cause all
shares of Common Stock issuable upon the exercise of the
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Underwriter's Warrants to be listed (subject to official notice of issuance) on
all securities exchanges on which the Common Stock issued to the public in
connection herewith may then be listed and/or quoted.
12. Notices to Warrant Holders. Nothing contained in this
Agreement shall be construed as conferring upon the Holders the right to vote
or to consent or to receive notice as a stockholder in respect of any meetings
of stockholders for the election of directors or any other matter, or as having
any rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Underwriter's Warrants and their exercise, any
of the following events shall occur:
(1) the Company shall take a record of the holders of its
shares of Preferred Stock for the purpose of entitling them to receive a
dividend or distribution payable other than in cash, or a cash dividend or
distribution payable other than out of current or retained earnings, as
indicated by the accounting treatment of such dividend or distribution on the
books of the Company; or
(2) the Company shall offer to all the holders of its Common
Stock any additional shares of capital stock of the Company or securities
convertible into or exchangeable for shares of capital stock of the Company, or
any option, right or warrant to subscribe therefor; or
(3) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business as an entirety shall be
proposed; then, in any one or more of said events, the Company shall give
written notice of such event at least fifteen (15) days prior to the date fixed
as a record date or the date of closing the transfer books for the
determination of the stockholders entitled to such
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dividend, distribution, convertible or exchangeable securities or subscription
rights, or entitled to vote on such proposed dissolution, liquidation, winding
up or sale. Such notice shall specify such record date or the date of closing
the transfer book, as the case may be. Failure to give such notice or any
defect therein shall not affect the validity of any action taken in connection
with the declaration or payment of any such dividend, or the issuance of any
convertible or exchangeable securities, or subscription rights, options or
warrants, or any proposed dissolution, liquidation, winding up or sale.
13. Underwriter's Warrants.
The form of the certificate representing Underwriter's
Warrants (and the form of election to purchase shares of Common Stock upon the
exercise of Underwriter's Warrants and the form of assignment printed on the
reverse thereof) shall be substantially as set forth in Exhibit "A" to the
Warrant Agreement. Each Underwriter's Warrant shall entitle the Holder to
purchase one fully paid and non-assessable share of Common Stock at an initial
purchase price of $24.00 per share from ______________, 1999 until 5:00 P.M.
New York time on _____________, 2003 at which time the Underwriter's Warrants
shall expire. The exercise price of the Underwriter's Warrants and the number
of shares of Common Stock issuable upon the exercise of the Underwriter's
Warrants are subject to adjustment, whether or not the Underwriter's Warrants
have been exercised, in the manner and upon the occurrence of the events set
forth in Section 8 of the Warrant Agreement, which is hereby incorporated
herein by reference and made a part hereof as if set forth in its entirety
herein. Subject to the provisions of this Agreement and upon issuance of the
Underwriter's Warrants, each registered holder of such Underwriter's Warrant
shall have the right to purchase from the Company (and the Company shall issue
to such registered holders) up to the number of fully paid
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and non-assessable shares of Common Stock (subject to adjustment as provided
herein and in the Warrant Agreement), free and clear of all preemptive rights
of stockholders, provided that such registered holder complies with the terms
governing exercise of the Underwriter's Warrant set forth in the Warrant
Agreement, and pays the applicable exercise price, determined in accordance
with the terms of the Warrant Agreement. Upon exercise of the Underwriter's
Warrants, the Company shall forthwith issue to the registered holder of any
such Underwriter's Warrant in his name or in such name as may be directed by
him, certificates for the number of shares of Common Stock so purchased. Except
as otherwise provided herein and in Section 6.1 hereof, the Underwriter's
Warrants shall be governed in all respects by the terms of the Warrant
Agreement. The Underwriter's Warrants shall be transferable in the manner
provided in the Warrant Agreement, and upon any such transfer, a new
Underwriter's Warrant Certificate shall be issued promptly to the transferee.
The Company covenants to, and agrees with, the Holder(s) that without the prior
written consent of the Holder(s), which will not be unreasonably withheld, the
Warrant Agreement will not be modified, amended, canceled, altered or
superseded, and that the Company will send to each Holder, irrespective of
whether or not the Underwriter's Warrants have been exercised, any and all
notices required by the Warrant Agreement to be sent to holders of the
Underwriter's Warrants.
14. Notices.
All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made and
sent when delivered, or mailed by registered or certified mail, return receipt
requested:
(1) If to the registered Holder of the Underwriter's
Warrants, to the address of such Holder as shown on the books of the Company;
or
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(2) If to the Company, to the address set forth in Section 3
hereof or to such other address as the Company may designate by notice to the
Holders.
15. Supplements and Amendments. The Company and the
Underwriter may from time to time supplement or amend this Agreement without
the approval of any Holders of Warrant Certificates in order to cure any
ambiguity, to correct or supplement any provision contained herein which may be
defective or inconsistent with any provisions herein, or to make any other
provisions in regard to matters or questions arising hereunder which the
Company and the Underwriter may deem necessary or desirable and which the
Company and the Underwriter deem shall not adversely affect the interests of
the Holders of Warrant Certificates.
16. Successors. All the covenants and provisions of this
Agreement shall be binding upon and inure to the benefit of the Company, the
Holders and their respective successors and assigns hereunder.
17. Termination. This Agreement shall terminate at the close
of business on ___________, 2003. Notwithstanding the foregoing, the
indemnification provisions of Section 7 shall survive such termination until
the close of business on ___________, 2008.
18. Governing Law; Submission to Jurisdiction. This Agreement
and each Warrant Certificate issued hereunder shall be deemed to be a contract
made under the laws of the State of ____________ and for all purposes shall be
construed in accordance with the laws of said State of __________________
without giving effect to the rules of said State of New York governing the
conflicts of laws.
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The Company, the Underwriter and any other registered Holders
hereby agree that any action, proceeding or claim against it arising out of, or
relating in any way to, this Agreement shall be brought and enforced in the
courts of the State of ________________ or of the United States of America for
the __________________, and irrevocably submits to such jurisdiction, which
jurisdiction shall be exclusive. The Company, the Underwriter and any other
registered Holders hereby irrevocably waive any objection to such exclusive
jurisdiction or inconvenient forum. Any such process or summons to be served
upon any of the Company, the Underwriter and the Holders (at the option of the
party bringing such action, proceeding or claim) may be served by transmitting
a copy thereof, by registered or certified mail, return receipt requested,
postage prepaid, addressed to it at the address set forth in Section 14 hereof.
Such mailing shall be deemed personal service and shall be legal and binding
upon the party so served in any action, proceeding or claim. The Company, the
Underwriter and any other registered Holders agree that the prevailing
party(ies) in any such action or proceeding shall be entitled to recover from
the other party(ies) all of its their reasonable legal costs and expenses
relating to such action or proceeding and/or incurred in connection with the
preparation therefor.
19. Entire Agreement; Modification. This Agreement (including
the Underwriting Agreement and the Warrant Agreement to the extent portions
thereof are referred to herein) contains the entire understanding between the
parties hereto with respect to the subject matter hereof and may not be
modified or amended except by a writing duly signed by the party against whom
enforcement of the modification or amendment is sought.
20. Severability. If any provision of this Agreement shall be
held to be invalid
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<PAGE>
or unenforceable, such invalidity or unenforceability shall not affect any
other provision of this Agreement.
21. Captions. The caption headings of the Sections of this
Agreement are for convenience of reference only and are not intended, nor
should they be construed as, a part of this Agreement and shall be given no
substantive effect.
22. Benefits of this Agreement. Nothing in this Agreement
shall be construed to give to any person or corporation other than the Company
and the Underwriter and any other registered Holder(s) of the Warrant
Certificates or Warrants Securities any legal or equitable right, remedy or
claim under this Agreement; and this Agreement shall be for the sole benefit of
the Company and the Underwriter and any other registered Holders of Warrant
Certificates or Warrant Securities.
23. Counterparts. This Agreement may be executed in any
number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and such counterparts shall together constitute but
one and the same instrument.
- 32 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.
[SEAL] UNITED STATES FINANCIAL GROUP,
INCORPORATED
By:
------------------------------
Mohammad Ali Khan, President
ATTEST:
----------------------------
Asim S. Kohli, Secretary
KLEIN MAUS AND SHIRE, INC.
By:
---------------------------------
Mohammed Ali Khan, President
- 33 -
<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE
EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT
RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF
SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT
AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:00 P.M., NEW YORK TIME, _______________, 2003
No. RW-101 Warrants to Purchase
300,000 Shares of Common Stock
- 34 -
<PAGE>
WARRANT CERTIFICATE
This Warrant Certificate certifies that Klein Maus and Shire,
Inc., or registered assigns, is the registered holder of Warrants to purchase
initially, at any time from _________, 1999 until 5:00 p.m. New York time on
___________, 2003 (the "EXPIRATION DATE"), up to 300,000 fully-paid and
non-assessable shares of Common Stock, $.0001 par value per share ("COMMON
STOCK") of United States Financial Group, Incorporated, a Delaware corporation
(the "COMPANY"), at the initial exercise price, subject to adjustment in
certain events (the "EXERCISE PRICE"), of $24.00 per share of Common Stock upon
surrender of this Warrant Certificate and payment of the Exercise Price at an
office or agency of the Company, but subject to the conditions set forth herein
and in the Underwriter's Warrant Agreement dated as of ________________, 1998
between the Company and Klein Maus and Shire, Inc. (the "UNDERWRITER'S WARRANT
AGREEMENT"). Payment of the Exercise Price shall be made by certified or
official bank check in New York Clearing House funds payable to the order of
the Company or by surrender of this Warrant Certificate.
No Warrant may be exercised after 5:00 p.m., New York time,
on the Expiration Date, at which time all Warrants evidenced hereby, unless
exercised prior thereto, hereby shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part
of a duly authorized issue of Warrants issued pursuant to the Underwriter's
Warrant Agreement, which Underwriter's Warrant Agreement is hereby incorporated
by reference in and made a part of this instrument and is hereby referred to
for a description of the rights, limitation of rights, obligations, duties and
immunities thereunder of the Company and the holders (the words "holders" or
"holder" meaning the registered holders or registered holder) of the Warrants.
The Underwriter's Warrant Agreement provides that upon the
occurrence of certain events the Exercise Price and the type and/or number of
the Company's securities issuable thereupon may, subject to certain conditions,
be adjusted. In such event, the Company will, at the request of the holder,
issue a new Warrant Certificate evidencing the adjustment in the Exercise Price
and the number and/or type of securities issuable upon the exercise of the
Warrants; provided, however, that the failure of the Company to issue such new
Warrant Certificates shall not in any way change, alter, or otherwise impair,
the rights of the holder as set forth in the Underwriter's Warrant Agreement.
Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Underwriter's Warrant Agreement, without any charge except
for any tax or other governmental charge imposed in connection with such
transfer.
Upon the exercise of less than all of the Warrants evidenced
by this Warrant Certificate, the Company shall forthwith issue to the holder
hereof a new Warrant Certificate representing such numbered unexercised
Warrants.
- 35 -
<PAGE>
The Company may deem and treat the registered holder(s)
hereof as the absolute owner(s) of this Warrant Certificate (notwithstanding
any notation of ownership or other writing hereon made by anyone), for the
purpose of any exercise hereof, and of any distribution to the holder(s)
hereof, and for all other purposes, and the Company shall not be affected by
any notice to the contrary.
All terms used in this Warrant Certificate which are defined
in the Underwriter's Warrant Agreement shall have the meanings assigned to them
in the Underwriter's Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated as of ____________, 1998
[SEAL] UNITED STATES FINANCIAL GROUP,
INCORPORATED
By:
--------------------------------
Mohammad Ali Khan, President
ATTEST:
- -----------------------------------------
Asim S. Kohli, Secretary
- 36 -
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.1]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase:
Warrant Securities
--------
and herewith tenders in payment for such securities a certified or official
bank check payable in New York Clearing House Funds to the order of United
States Financial Group, Incorporated in the amount of $ , all in accordance
with the terms of Section 3.1 of the Underwriter's Warrant Agreement dated as
of ___________________, 1998 between United States Financial Group,
Incorporated and Klein Maus and Shire, Inc. The undersigned request that a
certificate for such Warrant Securities be registered in the name of whose
address is and that such Certificate be delivered to whose address is .
Signature
------------------------------------------
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant Certificate)
--------------------------------------------------
(Insert Social Security or Other Identifying Number of Holder)
- 37 -
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED _________________________ hereby sells, assigns and
__________ unto
_____________________________________
(Please print name and address of transferee)
_______ Warrant Certificate, together with all right, title and interest
therein, and does hereby reasonably constitute and appoint ________________, as
Attorney, to transfer the within Warrant Certificate on the books of the
within-named Company, with full power of substitution.
Date: _____________________ Signature: _________________________
(Signature must conform in all respects to name
of holder as specified on the face of the
Warrant Certificate)
________________________________
(Insert Social Security or Other Identifying
Number of Assignee)
- 38 -
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
AND
KLEIN MAUS AND SHIRE, INC.
____________________________________
UNDERWRITER'S
WARRANT AGREEMENT
DATED AS OF _______________, 1998
- 39 -
<PAGE>
[LETTERHEAD OF DOROS & BRESCIA, P.C.]
July 28, 1998
To the Board of Directors of
United States Financial Group, Incorporated
110 Wall Street
New York, New York 10005
Dear Sirs:
We refer to the Registration Statement on Form S-1 (the "REGISTRATION
STATEMENT"), to be filed by United States Financial Group, Incorporated (the
"COMPANY") with the Securities Exchange Commission under the Securities Act of
1933, as amended, relating to 3,000,000 shares of Common Stock (the "SHARES")
to be sold on behalf of the Company and 275,000 Shares to be sold on behalf of
the selling stockholder named in the Registration Statement.
As counsel for the Company, we have examined such corporate records,
documents and such questions of law as we have considered necessary or
appropriate for purposes of this opinion and, upon the basis of such
examination, advise you that in our opinion the Shares to be sold by the
Company and the selling stockholder have been duly and validly authorized and
are legally issued, fully paid and non-assessable.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and the reference to this firm under the caption "Legal
Matters" in the prospectus contained therein and elsewhere in the Registration
Statement and prospectus. This consent is not to be construed as an admission
that we are a party whose consent is required to be filed with the Registration
Statement under the provisions of the Securities Act of 1933, as amended.
Very truly yours,
/s/Doros & Brescia, P.C.
----------------------------
Doros & Brescia, P.C.
<PAGE>
UNITED STATES FINANCIAL GROUP, INCORPORATED
1998 STOCK INCENTIVE PLAN
1. Purpose.
The purpose of this Plan is to enable United States Financial
Group, Incorporated and its subsidiaries and affiliates to recruit and retain
capable employees, consultants and advisors for the successful conduct of its
business and to provide an additional incentive to directors, officers and
other eligible key employees, consultants and advisors upon whom rest major
responsibilities for the successful operation and management of the Company and
its affiliates.
2. Definitions.
For purposes of the Plan:
2.1 "Adjusted Fair Market Value" means, in the event of a Change
in Control, the greater of (i) the highest price per Share of Common Stock paid
to holders of the Shares of Common Stock in any transaction (or series of
transactions) constituting or resulting in a Change in Control or (ii) the
highest Fair Market Value of a Share during the ninety (90) day period ending
on the date of a Change in Control.
2.2 "Affiliate Corporation" or "Affiliate" shall mean any
corporation, directly or indirectly, through one of more intermediaries,
controlling, controlled by or under common control with the Company.
2.3 "Agreement" means the written agreement between the Company
and an Optionee evidencing the grant of an Award.
2.4 "Award" means an Incentive Stock Option, Nonqualified Stock
Option or Stock Appreciation Right granted or to be granted pursuant to the
Plan.
2.5 "Board" means the Board of Directors of the Company.
2.6 "Cause" means:
<PAGE>
(a) Solely with respect to Nonemployee Directors, the
commission of an act of fraud or an act of embezzlement, misappropriation or
conversion of assets or opportunities of the Company or any Affiliate, and
(b) For all other purposes, unless otherwise defined in the
Agreement evidencing a particular Award, an Optionee (other than a Nonemployee
Director) (i) intentional failure to perform reasonably assigned duties, (ii)
dishonesty or willful misconduct in the performance of duties, (iii)
involvement in a transaction in connection with the performance of duties to
the Company which transaction is adverse to the interests of the Company and
which is engaged in for personal profit, or (iv) willful violation of any law,
rule or regulation in connection with the performance of duties (other than
traffic violations or similar offenses).
2.7 "Change in Capitalization" means any increase or reduction
in the Number of Shares, or any change (including, but not limited to, a change
in value) in the Shares or exchange of Shares for a different number or kind of
shares or other securities of the Company, by reason of a reclassification,
recapitalization, merger, consolidation, reorganization, spin-off, split-up,
issuance of warrants or rights or debentures, stock dividend, stock split or
reverse stock split, combination or exchange of shares, repurchase of shares,
change in corporate structure or otherwise.
2.8 A "Change in Control" shall mean the occurrence during the
term of the Plan of either of any "person" (as such term is used in Section
13(c) and 14(d) of the Exchange Act), other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Company or a
corporation owned directly or indirectly by the stockholders of the Company, is
or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of Securities of the Company representing 50% or
more of the total voting power represented by the Company's then outstanding
voting securities.
2.9 "Code" means the Internal Revenue Code of 1986, as amended.
2.10 "Committee" means a committee, as described in Section 3.1,
appointed by the Board to administer the Plan and to perform the functions set
forth herein.
2
<PAGE>
2.11 "Company" means United States Financial Group, Incorporated
(including any and all subsidiaries currently existing or hereafter acquired or
established).
2.12 "Director Option" means an Option for Shares or Stock
Appreciation Rights granted pursuant to Section 6.
2.13 "Disability" means a physical or mental infirmity which
impairs an Optionee's ability to perform substantially his or her duties for a
period of one hundred eighty (180) consecutive days.
2.14 "Disinterested Director" means a director of the Company
who is "disinterested" within the meaning of Rule 16b-3 under the Exchange Act.
2.15 "Eligible Individual" means any director (other than a
Nonemployee Director), officer or employee of, or consultant or advisor to, the
Company or an Affiliate who is receiving cash compensation and who is
designated by the Committee as eligible to receive Awards subject to the
conditions set forth herein.
2.16 "Employee Option" means an option granted pursuant to
Section 5.
2.17 "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
2.18 "Fair Market Value" on any date means the average of the
high and low sales prices of the Shares on such date on the principal
securities exchange on which such Shares are listed, or if such Shares are not
so listed or admitted to trading, the arithmetic mean of the per Share closing
bid price and closing asked price per Share on such date as quoted on the
quotation system of the Nasdaq Stock Market, Inc. or such other market in which
such prices are regularly quoted, or, if there have been no published bid or
asked quotations with respect to Shares on such date, the Fair Market Value as
established by the Board in good faith and, in the case of an Incentive Stock
Option, in accordance with Section 422 of the Code.
3
<PAGE>
2.19 "Incentive Stock Option" means an Option satisfying the
requirements of Section 422 of the Code and designated by the Committee as an
Incentive Stock Option.
2.20 "Nonemployee Director" means a director of the Company who
is not an employee of the Company or an Affiliate.
2.21 "Nonqualified Stock Option" means an Option which is not an
Incentive Stock Option.
2.22 "Option" means a Nonqualified Stock Option, an Incentive
Stock Option, a Director Option, an Employee Option or any or all of them.
2.23 "Optionee" means a person to whom an Option is being
granted under the Plan.
2.24 "Outside Director" means a director of the Company who is
an "outside director" within the meaning of Section 162(m) of the Code and the
regulations promulgated thereunder.
2.25 "Parent" means any corporation which is a parent
corporation (within the meaning of Section 424(e) of the Code) with respect to
the Company.
2.26 "Plan" means the Thermo-Mizer Environmental Corp. 1996
Stock Option Plan.
2.27 "Pooling Transaction" means an acquisition of the Company
in a transaction which is intended to be treated as a "pooling of interests"
under generally accepted accounting principles as defined in Opinion No. 16 of
the Accounting Principles Board.
2.28 "Shares" means the common stock, par value $.0001 per
share, of the Company and any securities or other consideration issuable in
respect of Shares in connection with a Change in Capitalization or Change in
Control.
2.29 "Stock Appreciation Right" or "SARs" means a right to
receive all or some portion of the increase in the value of the Shares as
provided in Section 8 hereof.
4
<PAGE>
2.30 "Subsidiary" means any corporation which is a subsidiary
corporation (within the meaning of Section 424(f) of the Code) with respect to
the Company.
2.31 "Successor Corporation" means a corporation, or a parent or
subsidiary thereof within the meaning of 424(a) of the Code, which issues or
assumes a stock option in a transaction to which Section 424(a) of the Code
applies.
2.32 "Ten Percent Stockholder" means an Eligible Individual,
who, at the time an Incentive Stock Option is to be granted to him or her owns
(within the meaning of Section 422(b) (6) of the Code) stock possessing more
than ten percent (10%) of the total combined voting power of all classes of
stock of the Company, or of a Parent or a Subsidiary thereof.
3. Administration.
3.1 The Plan shall be administered by the Committee which shall
hold meetings at such times as may be necessary for the proper administration
of the Plan. The Committee shall keep minutes of its meetings. A quorum shall
consist of not fewer than two (2) members of the Committee and a majority of a
quorum may authorize any action. Any decision or determination reduced to
writing and signed by a majority of all of the members shall be as fully
effective as if made by a majority vote at a meeting duly called and held. The
Committee shall consist of at least two (2) directors of the Company each of
whom shall be a Disinterested Director and an Outside Director. No member of
the Committee shall be liable for any action, failure to act, determination or
interpretation made in good faith with respect to this Plan or any transaction
hereunder, except for liability arising from his or her own willful
misfeasance, gross negligence or reckless disregard of his or her duties. The
Company hereby agrees to indemnify each member of the Committee for all costs
and expenses and, to the extent permitted by applicable law, any liability
incurred in connection with defending against, responding to, negotiating for
the settlement of or otherwise dealing with any claim, cause of action or
dispute of any kind arising in connection with any actions in administering
this Plan or in authorizing or denying authorization to any transaction
hereunder.
5
<PAGE>
3.2 Subject to the express terms and conditions set forth
herein, the Committee shall have the power from time to time to:
(a) determine those Eligible Individuals to whom Employee
Options shall be granted under the Plan and the number of Employee Options to
be granted and to prescribe the terms and conditions (which need not be
identical) of each such Employee Option, including the purchase price per Share
subject to each Employee Option, and make any amendment or modification to any
Option Agreement consistent with the terms of this Plan;
(b) construe and interpret the Plan and the Options granted
hereunder and to establish, amend and revoke rules and regulations for the
administration of the Plan, including, but not limited to, correcting any
defect or supplying any omission, or reconciling any inconsistency in the Plan
or in any Agreement, in the manner and to the extent it shall deem necessary or
advisable so that the Plan complies with applicable law, including Rule 16b-3
under the Exchange Act and the Code to the extent applicable, and otherwise to
make the Plan fully effective. All decisions and determinations by the
Committee or the exercise of this power shall be final, binding and conclusive
upon the Company, its Affiliate Corporations, the Options, and all other
persons having any interest therein;
(c) determine the duration and purposes for leaves of
absence which may be granted to an Optionee on an individual basis without
constituting a termination of employment or service for purposes of this Plan;
(d) exercise its discretion with respect to the powers and
rights granted to it as set forth in the Plan; and
(e) exercise such powers and perform such acts as it deems
necessary or advisable to promote the best interests of the Company with
respect to the Plan.
4. Stock Subject to the Plan.
4.1 The maximum number of Shares that may be made the subject of
Options granted under the Plan is 500,000. Upon a Change in Capitalization the
maximum number of Shares shall be adjusted in number and kind pursuant to
Section 11. The Company shall reserve for purposes of the Plan, out of its
authorized but
6
<PAGE>
unissued Shares or out of Shares held in the Company's treasury, or partly out
of each, such number of Shares as shall be determined by the Board.
4.2 Upon the granting of an Option, the number of Shares
available under Section 4.1 for the granting of further Options shall be
reduced by the number of shares subject to such Option granted. Whenever any
outstanding Option or portion thereof expires, is canceled or is otherwise
terminated for any reason without having been exercised or payment having been
made in respect of the entire Option, the Shares allocable to the expired,
canceled or otherwise terminated portion of the Option may again be the subject
of Options granted hereunder.
5. Option Grants for Eligible Individuals.
5.1 Authority of Committee. Subject to the provisions of the
Plan, the Committee shall have full and final authority to select those
Eligible Individuals who will receive Employee Options, the terms and
conditions of which shall be set forth in an Agreement.
5.2 Purchase Price. The purchase price or the manner in which
the purchase price is to be determined for Shares under each Employee Option
shall be determined by the Committee and set forth in the Agreement; provided,
however, that the purchase price per Share under each Incentive Stock Option
shall not be less than 100% of the Fair Market Value of a Share on the date the
Incentive Stock Option is granted (110% in the case of an Incentive Stock
Option granted to a Ten-Percent Stockholder).
5.3 Maximum Duration. Employee Options granted hereunder shall
be for such term as the Committee shall determine, provided that an Incentive
Stock Option granted hereunder shall not be exercisable after the expiration of
ten (10) years from the date it is granted (five (5) years in the case of an
Incentive Stock Option granted to a Ten-Percent Stockholder), and a
Nonqualified Stock Option shall not be exercisable after the expiration of ten
(10) years from the date it is granted. The Committee may, subsequent to the
granting of any Employee Option, extend the term thereof but in no event shall
the term as so extended exceed the maximum term provided for in the preceding
sentence.
7
<PAGE>
5.4 Vesting. Subject to Section 7.5 hereof, each Employee Option
shall become exercisable in such installments (which need not be equal) and at
such times as may be designated by the Committee and set forth in the
Agreement. To the extent not exercised, installments shall accumulate and be
exercisable, in whole or in part, at any time after becoming exercisable, but
not later than the date the Employee Option expires. The Committee may
accelerate the exercisability of any Option or portion thereof at any time.
5.5 Modification. No modification of an Employee Option shall
adversely alter or impair any rights or obligations under the Employee Option
without the Optionee's consent.
6. Option Grants for Nonemployee Directors.
6.1 Purchase Price. The purchase price for Shares or SARs under
each Director Option shall be not less than to 100% of the Fair Market Value of
such Shares on the date immediately preceding the date of the grant unless
specifically determined to be otherwise by the Committee.
6.2 Vesting. Subject to Sections 6.3 and 7.5 each Director
Option shall become exercisable within four (4) equal annual installments
beginning on the date of grant; provided, however, that the Optionee continues
to serve as a Director as of such dates. If an Optionee ceases to serve as a
Director for any reason, the Optionee shall have no rights with respect to that
portion of a Director Option which has not then vested pursuant to the
preceding sentence and the Optionee shall automatically forfeit that portion of
the Director Option which remains unvested.
6.3 Limitations on Amendment. The provisions in this Section 6
and Section 7.1 shall not be amended more than once every six (6) months, other
than to comport with changes in the Code or the rules and regulations
thereunder.
7. Terms and Conditions Applicable to All Options.
7.1 Duration. Each Option shall terminate on the date which is
the tenth anniversary of the grant date, unless terminated earlier as follows:
8
<PAGE>
(a) If an Optionee's employment or service terminates for
any reason other than Disability, death or Cause, the Optionee may for a period
of three (3) months after such termination exercise his or her Option to the
extent, and only to the extent, such Option or portion thereof was vested and
exercisable as of the date of the Optionee's employment or service terminated,
after which time the Option shall automatically terminate in full.
(b) If an Optionee's employment or service terminates by
reason of the Optionee's Disability, the Optionee may, for a period of one (1)
year after such termination, exercise his or her Option to the extent, and only
to the extent, such Option or portion thereof was vested and exercisable as of
the date the Optionee's employment or service terminated, after which time the
Option shall automatically terminate in full.
(c) If an Optionee's employment or service terminates for
Cause, the Option granted to the Optionee hereunder shall immediately terminate
in full and no rights thereunder may be exercised.
(d) If an Optionee dies while employed or in the service of
the Company or an Affiliate or within the three (3) month or twelve (12) month
period described in clause (a) or (b), respectively, of this Section 7.1 the
Option granted to the Optionee may be exercised at any time within twelve (12)
months after the Optionee's death by the person or persons to whom such rights
under the Option shall pass by will, or by the laws of descent and
distribution, after which time the Option shall terminate in full; provided,
however, that an Option may be exercised to the extent, and only to the extent,
such Option or portion thereof was exercisable on the date of death or earlier
termination of the Optionee's services as a Director.
Notwithstanding clauses (a) through (d) above, the Agreement evidencing the
grant of an Employee Option may, in the Committee's sole and absolute
discretion, set forth additional or different terms and conditions applicable
to Employee Options upon a termination or change in status of the employment or
service of an Eligible Individual. Such terms and conditions may be determined
at the time the Employee Option is granted or thereafter.
9
<PAGE>
7.2 Non-transferability. No Option granted hereunder shall be
transferable by the Optionee to whom granted except by will or the laws of
descent and distribution, and an Option may be exercised during the lifetime of
such Optionee only by the Optionee or his or her guardian or legal
representative. The terms of such Option shall be final, binding and conclusive
upon the beneficiaries, executors, administrators, heirs and successors of the
Optionee.
7.3 Method of Exercise. The exercise of an option shall be made
only by a written notice delivered in person or by mail to the Secretary or
Chief Financial Officer of the Company at the Company's principal executive
office, specifying the number of Shares to be purchased and accompanied by
payment therefor and otherwise in accordance with the Agreement pursuant to
which the Option was granted. The purchase price for any Shares purchased
pursuant to the exercise of an Option shall be paid in full in cash upon such
exercise. Notwithstanding the foregoing, the Committee shall have discretion to
determine at the time of grant of each Employee Option or at any later date (up
to and including the date of exercise) that the form of payment acceptable in
respect of the exercise of such Employee Option may consist of either of the
following (or any combination thereof): (i) cash or (ii) the transfer of Shares
to the Company upon such terms and conditions as determined by the Committee.
The Optionee shall deliver the Agreement evidencing the Option to the Secretary
or Chief Financial Officer of the Company who shall endorse thereon a notation
of such exercise and return such Agreement to the Optionee. No fractional
Shares (or cash in lieu thereof) shall be issued upon exercise of an Option and
the number of Shares that may be purchased upon exercise shall be rounded to
the nearest number of whole Shares.
7.4 Rights of Optionees. No Optionee shall be deemed for any
purpose to be the owner of any Shares subject to any Option unless and until
(i) the Option shall have been exercised pursuant to the terms thereof, (ii)
the Company shall have issued and delivered the Shares to the Optionee and
(iii) the Optionee's name shall have been entered as a stockholder of record on
the books of the Company. Thereupon, the Optionee shall have full voting,
dividend and other ownership rights with respect to such Shares, subject to
such terms and conditions as may be set forth in the applicable Agreement.
10
<PAGE>
7.5 Effect of Change in Control. In the event of a Change in
Control, all Options outstanding on the date of such Change in Control shall
become immediately and fully vested and exercisable. In addition, to the extent
set forth in an Agreement evidencing the grant of an Employee Option, an
Optionee will be permitted to surrender for cancellation within sixty (60) days
after such Change in Control, any Employee Option or portion of an Employee
Option to the extent not yet exercised and the Optionee will be entitled to
receive a cash payment in an amount equal to the excess, if any of (x) (A) in
the case of a Nonqualified Stock Option, the greater of (1) the Fair Market
Value, on the date preceding the date of surrender, of the Shares subject to
the Employee Option or portion thereof surrendered or (2) the Adjusted Fair
Market Value of the Shares subject to the Employee Option or portion thereof
surrendered or (B) in the case of an Incentive Stock Option, the Fair Market
Value, on the date preceding the date of surrender, of the Shares subject to
the Employee Option or portion thereof surrendered, over (y) the aggregate
purchase price for such Shares under the Employee Option or portion thereof
surrendered; provided, however, that in the case of an Employee Option granted
within six (6) months prior to the Change in Control to any Optionee who may be
subject to liability under Section 16(b) of the Exchange Act, such Optionee
shall be entitled to surrender for cancellation his or her Option during the
sixty (60) day period commencing upon the expiration of six (6) months from the
date of grant of any such Employee Option. In the event an Optionee's
employment or service with the Company is terminated by the Company following a
Change in Control, each Option held by the Optionee that was exercisable as of
the date of termination of the Optionee's employment or service shall remain
exercisable for a period ending not before the earlier of the first anniversary
of the termination of the Optionee's employment or service or the expiration of
the stated term of the Option.
8. Stock Appreciation Rights. The Committee may, in its discretion,
either alone or in connection with the grant of an Employee Option, grant Stock
Appreciation Rights in accordance with the Plan, the terms and conditions of
which shall be set forth in an Agreement. If granted in connection with an
Option, a Stock Appreciation Right shall cover the same Shares covered by the
Option (or such lesser number of Shares as the Committee may determine) and
shall, except as provided in this Section 8, be subject to the same terms.
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8.1 Time of Grant. A Stock Appreciation Right may be granted (i)
at any time if unrelated to an Option, or (ii) if related to an Option, either
at the time of grant, or at any time thereafter during the term of the Option.
8.2 Stock Appreciation Right Related to an Option.
(a) Exercise. Subject to Section 8.8, a Stock Appreciation
Right granted in connection with an Option shall be exercisable at such time or
times and only to the extent that the related Options are exercisable, and will
not be transferable except to the extent the related Option may be
transferable. A Stock Appreciation Right granted in connection with an
Incentive Stock Option shall be exercisable only if the Fair Market Value of a
Share on the date of exercise exceeds the purchase price specified in the
related Incentive Stock Option Agreement.
(b) Amount Payable. Upon the exercise of a Stock
Appreciation Right related to an Option, the holder shall be entitled to
receive an amount determined by multiplying (A) the excess of the Fair Market
Value of a Share on the date preceding the date of exercise of such Stock
Appreciation Right over the per Share purchase price under the related Option,
by (B) the number of Shares as to which such Stock Appreciation Right is being
exercised. Notwithstanding the foregoing, the Committee may limit, in any
manner, the amount payable with respect to any Stock Appreciation Right by
including such a limit in the Agreement evidencing the Stock Appreciation Right
at the time it is granted.
(c) Treatment of Related Options and Stock Appreciation
Rights Upon Exercise. Upon the exercise of a Stock Appreciation Right granted
in connection with an Option, the Option shall be canceled to the extent of the
number of Shares as to which the Stock Appreciation Right is exercised, and
upon the exercise of an Option granted in connection with a Stock Appreciation
Right or the surrender of such Option pursuant to Section 7.3, the Stock
Appreciation Right shall be canceled to the extent of the number of Shares as
to which the Option is exercised or surrendered.
8.3 Stock Appreciation Right Unrelated to an Option. The
Committee may grant to Eligible Individuals Stock Appreciation Rights unrelated
to Options. Stock Appreciation Rights unrelated to Options shall contain such
terms and conditions as to exercisability (subject to Section 8.8), vesting and
duration as the Committee shall determine, but, in no event, shall they have a
term of greater
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than ten (10) years. Upon exercise of a Stock Appreciation Right unrelated to
an Option, the holder shall be entitled to receive an amount determined by
multiplying (A) the excess of the Fair Market Value of a Share on the date
preceding the date of exercise of such Stock Appreciation Right over the Fair
Market Value of a Share on the date the Stock Appreciation Right was granted,
by (B) the number of Shares as to which the Stock Appreciation Right is being
exercised. Notwithstanding the foregoing, the Committee may limit, in any
manner, the amount payable with respect to any Stock Appreciation Right by
including such a limit in the Agreement evidencing the same Stock Appreciation
Right at the time it is granted.
8.4 Method of Exercise. Stock Appreciation Rights shall be
exercised by a holder only by a written notice delivered in person or by mail
to the Secretary or Chief Financial Officer of the Company at the Company's
principal executive office, specifying the number of Shares with respect to
which the Stock Appreciation Right is being exercised. If requested by the
Committee, the holder shall deliver the Agreement evidencing the Stock
Appreciation Right being exercised and the Agreement evidencing any related
Option to the Secretary or Chief Financial Officer of the Company who shall
endorse thereon a notation of such exercise and return such Agreement to the
holder.
8.5 Form of Payment. Payment of the amount determined under
Sections 8.2(b) or 8.3 may be made in the discretion of the Committee, solely
in whole Shares in a number determined at their Fair Market Value in the date
preceding the date of exercise of the Stock Appreciation Right, or solely in
cash, or in a combination of cash and Shares. If the Committee decides to make
full payment in Shares and the amount payable results in a fractional Share,
payment for the fractional Share will be made in cash. Notwithstanding the
foregoing, no payment in the form of cash may be made upon the exercise of a
Stock Appreciation Right pursuant to Sections 8.2(b) or 8.3 to an officer of
the Company who is subject to liability under Section 16(b) of the Exchange
Act, unless the exercise of such Stock Appreciation Right is made either (i)
during the period beginning on the third business day and ending on the twelfth
business day following the date of release for publication of the Company's
quarterly or annual statements of earnings (the "Window Period") or (ii)
pursuant to an irrevocable election to receive cash made at least six (6)
months prior to the exercise of such Stock Appreciation Right.
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8.6 Restrictions. No Stock Appreciation Right may be exercised
before a date three (3) months after the date on which it is granted.
8.7 Modification. No modification of an Award shall adversely
alter or impair any rights or obligations under the Agreement without the
holder's consent.
8.8 Effect of Change in Control. In the event of a Change in
Control but subject to Section 8.6, all Stock Appreciation Rights shall become
immediately and fully exercisable. In addition, to the extent set forth in an
Agreement evidencing the grant of a Stock Appreciation Right, a holder will be
entitled to receive a payment in cash or stock, in either case, with a value
equal to the excess, if any, of (A) the greater of (x) the Fair Market Value,
on the date preceding the date of exercise, of the underlying Shares subject to
the Stock Appreciation Right or portion thereof exercised and (y) the Adjusted
Fair Market Value, on the date preceding the date of exercise, of the Shared
over (B) the aggregate Fair Market Value, on the date the Stock Appreciation
Right was granted, of the Shares subject to the Stock Appreciation Right or
portion thereof exercised; provided, however, that in the case of a Stock
Appreciation Right granted within six (6) months of the Change in Control to
any holder who may be subject to liability under Section 15(b) of the Exchange
Act, such holder shall be entitled to exercise his or her Stock Appreciation
Right during the sixty (60) day period commencing upon the expiration of six
months from the date of grant of any such Stock Appreciation Right. In the
event of a holder's employment or service with the Company is terminated by the
Company following a Change in Control, each Stock Appreciation Right held by
the holder that was exercisable as of the date of termination of the holder's
employment or service shall remain exercisable for a period ending but not
before the earlier of the first anniversary of the termination of the holder's
employment or service or the expiration of the stated term of the Stock
Appreciation Right.
9. Adjustment Upon Changes n Capitalization.
(a) In the event of a Change in Capitalization, the
Committee shall conclusively determine the appropriate adjustments, if any, to
the (i) maximum number of Shares with respect to which Options may be granted
under the Plan, (ii)
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maximum number of Shares with respect to which Options may be granted to any
Eligible Individual during the term of the Plan, (iii) the number of Shares
which are subject to outstanding Options granted under the Plan, and the
purchase price therefor, if applicable, and (iv) the number of Shares in
respect of which Director Options are to be granted under Section 6.
(b) Any such adjustment in the Shares subject to Incentive
Stock Options (including any adjustments in the purchase price) shall be made
in such manner as not to constitute a modification as defined by Section
424(h)(3) of the Code and only to the extent otherwise permitted by Sections
422 and 424 of the Code.
(c) If, by reason of a Change of Capitalization, an
Optionee shall be entitled to exercise an Option with respect to new,
additional or different shares of stock, such new, additional or different
shares shall thereupon be subject to all of the conditions, restrictions and
performance criteria which were applicable to the Shares subject to the Option,
prior to such Change in Capitalization.
10. Effect of Certain Transactions. Subject to Sections 7.5 and 8.8
or as otherwise provided in an Agreement, in the event of (i) the liquidation
or dissolution of the Company or (ii) a merger or consolidation of the Company,
the Plan and the Options issued hereunder shall continue in effect in
accordance with their respective terms.
11. Interpretation.
(a) The Plan is intended to comply with Rule 16b-3
promulgated under the Exchange Act and the Committee shall interpret and
administer the provisions of the Plan or any Agreement in a manner consistent
therewith. Any provisions inconsistent with such Rule shall be inoperative and
shall not affect the validity of the Plan.
(b) The Director Options described in Section 6 are
intended to qualify as formula awards under Rule 16b-3 promulgated under the
Exchange Act (thereby preserving the disinterested status of Nonemployee
Directors receiving such Awards) and the Committee shall interpret and
administer the provisions of the Plan or any Agreement in a manner consistent
therewith. Any provisions inconsistent with the foregoing intent
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shall be inoperative and shall interpret and administer the provisions of the
Plan or any Agreement in a manner consistent therewith. Any provisions
inconsistent with the foregoing intent shall be inoperative and shall not
affect the validity of the Plan.
(c) Unless otherwise expressly stated in the relevant
Agreement, each Option granted under the Plan is intended to be
performance-based compensation within the meaning of Section 162(m)(4)(C) of
the Code. The Committee shall not be entitled to exercise any discretion
otherwise authorized hereunder with respect to such Options if the ability to
exercise such discretion or the exercise of such discretion itself would cause
the compensation attributable to such Options to fail to qualify as
performance-based compensation.
12. Pooling Transactions.
Notwithstanding anything contained in the Plan or any Agreement to
the contrary, in the event of a Change in Control which is also intended to
constitute a Pooling Transaction, the Committee shall take such actions, if
any, which are specifically recommended by an independent public accounting
firm engaged by the Company to the extent reasonably necessary in order to
assure that the Pooling Transaction will qualify as such, including but not
limited to (i) deferring the vesting, exercise, payment or settlement in
respect of any Option, (ii) providing that the payment or settlement in respect
of any Option be made in the form of cash, Shares or securities of a successor
or acquiree of the Company, or a combination of the foregoing, and (iii)
providing for the extension of term of any Option to the extent necessary to
accommodate the foregoing, but not beyond the maximum term permitted for any
Option.
13. Termination and Amendment of the Plan.
The Plan shall terminate on the preceding the tenth anniversary of
the date of its adoption by the Company, and no Option may be granted
thereafter. Subject to Section 6.5, the Board may sooner terminate the Plan,
and the Board may at any time and from time to time amend, modify or suspend
the Plan; provided, however, that:
(a) No such amendment, modification, suspension or
termination shall impair or adversely alter any Award already
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granted under the Plan, except with the consent of the Optionee or holder of an
SAR nor shall any amendment, modification or termination deprive any Optionee
or holder of an SAR of any Shares which he or she may have acquired through or
as a result of the Plan; and
(b) To the extent necessary under Section 16(b) of the
Exchange Act and the rules and regulations promulgated thereunder or other
applicable law, no amendment shall be effective unless approved by the
stockholders of the Company in accordance with applicable law and regulations.
14. Non-Exclusivity of the Plan.
The adoption of the Plan by the Board shall not be construed as
amending, modifying or rescinding any previously approved incentive arrangement
or as creating any limitations on the power of the Board to adopt such other
incentive arrangements as it may deem desirable, including, without limitation,
the granting of stock options otherwise than under the Plan, and such
arrangements may be either applicable generally or only in specific cases.
15. Limitation of Liability.
As illustrative of the limitations of liability of the Company, but
not intended to be exhaustive thereof, nothing in the Plan shall be construed
to:
(a) give any person any right to be granted an Option other
than at the sole discretion of the Committee;
(b) give any person any rights whatsoever with respect to
Shares except as specifically provided in the Plan;
(c) limit in any way the right of the Company to terminate
the employment of any person at any time; or
(d) be evidence of any agreement or understanding,
expressed or implied, that the Company will employ any person at any particular
rate of compensation or for any particular period of time.
16. Regulations and Other Approvals; Governing Law.
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16.1 Except as to matters of Federal law, this Plan and the
rights of all persons claiming hereunder shall be construed and determined in
accordance with the laws of the State of New York.
16.2 The obligation of the Company to sell or deliver Shares
with respect to Options granted under the Plan shall be subject to all
applicable laws, rules and regulations, including all applicable Federal and
state securities laws, and the obtaining of all such approvals by governmental
agencies as may be deemed necessary or appropriate by the Committee.
16.3 The Board may make such changes as may be necessary or
appropriate to comply with the rules and regulations of any government
authority, or to obtain for Eligible Individuals granted Incentive Stock
Options the tax benefits under the applicable provisions of the Code and
regulations promulgated thereunder.
16.4 Each Option is subject to the requirement that, if at any
time the Committee determines, in its discretion, that the listing,
registration or qualification of Shares issuable pursuant to the Plan is
required by any securities exchange or under any state or federal law, or the
consent or approval or any governmental regulatory body is necessary or
desirable as a condition of, or in connection with, the grant of an Option or
the issuance of Shares, no Options shall be granted or payment made or Shares
issued, in whole or in part, unless listing, registration, qualification,
consent or approval has been effected or obtained free of any conditions as
acceptable to the Committee.
16.5 Notwithstanding anything contained in the Plan or any
Agreement to the contrary, in the event that the disposition of Shares acquired
pursuant to the Plan is not covered by a then current registration statement
under the Securities Act of 1933, as amended (the "Securities Act"), and is not
otherwise exempt from such registration, such Shares shall be restricted
against transfer to the extent required by the Securities Act and Rule 144 or
other regulations thereunder. The Committee may require an individual receiving
Shares pursuant to an Award granted under the Plan, as a condition precedent to
receipt of such Shares, to represent and warrant to the Company in writing that
the Shares acquired by such individual are acquired without a view to any
distribution thereof and will not be sold or transferred other
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than pursuant to an exemption applicable under the Securities Act as amended,
or the rules and regulations promulgated thereunder. The certificates
evidencing any of such Shares shall be appropriately amended to reflect their
status as restricted securities as aforesaid.
17. Miscellaneous.
17.1 Multiple Agreements. The terms of each Award granted to an
Eligible Individual may differ from other Awards granted under the Plan at the
same time, or at some other time. The Committee may also grant more than one
Award to a given Eligible Individual during the term of the Plan, either in
addition to, or in substitution for, one or more Awards previously granted to
that Eligible Individual.
17.2 Withholding of Taxes.
(a) At such times as an Optionee or holder of an SAR
recognizes taxable income in connection with the receipt of Shares or cash
hereunder (a "Taxable Event"), the Optionee or holder shall pay other amounts
as may be required by law to be withheld by the Company in issuance or release
from escrow of such Shares or the payment of such cash. The Company shall have
the right to deduct from any payment of cash to an Optionee or holder an amount
equal to the Withholding Taxes in satisfaction of the obligation to pay
Withholding Taxes. In satisfaction of the obligation to pay Withholding Taxes
to the Company, the Optionee or holder may make a written election (the "Tax
Election"), which may be accepted or rejected in the discretion of the
Committee to have withheld a portion of the Shares then issuable to him or her
having an aggregate Fair Market Value, on the date preceding the date of such
issuance, equal to the Withholding Taxes, provided that in respect of an
Optionee or holder who may be subject to liability under Section 16(b) of the
Exchange Act either; (i)(A) the Tax Election is made at least six (6) months
prior to the date of the Taxable Event and (B) the Tax Election is irrevocable
with respect to all Taxable Events of a similar nature occurring prior to the
expiration of six (6) months following a revocation of the Tax Election; or
(ii)(A) the Tax Election is made at least six (6) months after the date the
Award was granted, (B) the Award is exercised during the Window Period and (C)
the Tax Election is made during the Window Period in which the related Award is
exercised or prior to such Window Period and subsequent to the immediately
preceding Window Period.
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Notwithstanding the foregoing, the Committee may, by the adoption of rules or
otherwise, (i) modify this Section 17.2 (other than as regards Director
Options) or impose such other restrictions or limitations on Tax Elections to
be made at such times and subject to such other conditions as the Committee
determines will constitute exempt transactions under Section 16(b) of the
Exchange Act.
(b) If an Optionee makes a disposition, within the meaning
of Section 424 (c) of the Code and regulations promulgated thereunder, of any
Share or Shares issued to such Optionee pursuant to the exercise of an
Incentive Stock Option within the two-year period commencing on the day after
the date of the grant or within the one-year period commencing on the day after
the date of transfer of such Share or Shares to the Optionee pursuant to such
exercise, the Optionee shall, within ten (10) days of such disposition, notify
the Company thereof, by delivery of written notice to the Company at its
principal executive office.
17.3 Effective Date. The effective date of the Plan shall be as
determined by the Board.
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EXCHANGE AGREEMENT
EXCHANGE AGREEMENT, dated as of the 3rd day of December, 1997, by
and between Sureal International, Inc. (formerly known as Legacy Export, Inc.
prior to adopting its current style) ("SUREAL"), a Delaware corporation with
offices at 829 South 220 East, Orem, Utah 84058, R. Bret Jenkins with an office
at 829 South 220 East, Orem, Utah 84058 ("JENKINS"), Richard Wogksch with an
office at 829 South 220 East, Orem, Utah 84058 ("WOGKSCH"), Glen Jensen with an
office at 829 South 220 East, Orem, Utah 84058 ("JENSEN"), Edward A. Heil with
an office at c/o Independent Network Group, Inc., Atrium Executive Center, 80
Orville Drive, Bohemia, New York 11716 ("HEIL"), John Dello-Iacono with an
office at c/o Independent Network Group, Inc., Atrium Executive Center, 80
Orville Drive, Bohemia, New York 11716 ("DELLO-IACONO), and Ronald J. Brescia
with offices at c/o Doros & Brescia, P.C., 1140 Avenue of the Americas
("BRESCIA") (Jenkins, Wogksch, Jensen, Heil, and Dello-Iacono, and Brescia
being collectively referred to as the "SUREAL SHAREHOLDERS") and United States
Financial Group, Incorporated ("USFG"), a Delaware corporation with offices at
110 Wall Street, New York, N.Y.
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W I T N E S S E T H
WHEREAS, Sureal is a corporation duly organized and in good
standing under the laws of the State of Delaware having been incorporated on
August 10, 1995; and,
WHEREAS, the number of authorized shares of capital stock of Sureal
is fifteen thousand (15,000), consisting of ten thousand (10,000) shares of
common stock (the "SUREAL COMMON SHARES") and five thousand (5,000) shares of
preferred stock, of which three thousand (3,000) shares of Sureal Common Shares
(the "SUREAL OUTSTANDING COMMON SHARES") are presently issued and outstanding;
and,
WHEREAS, USFG is a corporation duly organized and in good standing
under the laws of the State of Delaware having been incorporated on December
17, 1996; and,
WHEREAS, the number of authorized shares of capital stock of USFG
is forty million (40,000,000), consisting of (i) thirty million (30,000,000)
shares of common stock, par value $.0001 per share (the "USFG COMMON SHARES"),
of which 19,889,267 USFG Common Shares (the "USFG OUTSTANDING COMMON SHARES")
are presently issued and outstanding and (ii) ten million (10,000,000) shares
of "blank check" preferred stock, par value $.0001 per share (the "USFG
PREFERRED SHARES"); and,
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WHEREAS, the Sureal Shareholders collectively own all three
thousand (3,000) shares of Sureal Common Shares which are issued and
outstanding; and,
WHEREAS, it is the desire of each of the parties hereto that after
the consummation of the transactions contemplated herein USFG become the parent
of Sureal with Sureal as a wholly-owned subsidiary of USFG; and,
WHEREAS, the Sureal Shareholders desire to exchange their three
thousand (3,000) Sureal Common Shares for the number of USFG Common Shares
determined by a formula set forth herein so that after the consummation of such
share exchange USFG will own three thousand (3,000) Sureal Common Shares
constituting all of the issued and outstanding shares of capital stock of
Sureal, USFG will be the parent of Sureal with Sureal as a wholly-owned
subsidiary of USFG and the Sureal Shareholders will own the number of USFG
Common Shares having an aggregate market valuation of $11,250,000 immediately
upon the completion of the public offering of USFG's securities (the
"OFFERING") contemplated by the parties to this Exchange Agreement. The parties
agree that the Offering will be completed as soon as possible.
NOW, THEREFORE, in consideration of the above premises and the
agreements set forth below, the parties hereto hereby agree
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as follows:
ARTICLE I
EXCHANGE OF SECURITIES
1.1 Exchange of Securities. In reliance on the representations and
warranties contained herein, and subject to the terms and conditions
hereinafter set forth, the Sureal Shareholders hereby agrees to deliver to USFG
three thousand (3,000) shares of Sureal Common Shares on a date to be
determined by the parties, which date shall be December 17, 1997, (the "CLOSING
DATE") and USFG hereby agrees to accept delivery on the Closing Date of three
thousand (3,000) Sureal Common Shares owned by the Sureal Shareholders
constituting all of the issued and outstanding shares of the capital stock of
Sureal for and against delivery on the Closing Date concurrently therewith of
750,000 shares of USFG's Common Stock. The parties to this Exchange Agreement
agree that the USFG shares held by the Sureal Shareholders and Officers and
Directors of USFG after the closing of this Agreement, shall be subject to
certain lock up provisions. The Shareholders effected thereby agree to take the
necessary actions to insure that a lock up agreement will be entered into that
will set forth the specific terms of the agreement. The terms of the lock up
agreement shall include, but not be limited to, a provision that all
shareholders of USFG shares will not transfer, hypothecate, sell or pledge any
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USFG shares for periods ranging from one to two years from the date of this
Exchange Agreement without the prior written consent of the Sureal Shareholders
and a majority of the board of directors of USFG.
1.2 Initial Public Offering. It is intended by the parties hereto
that immediately after the closing of this Exchange Agreement, the parties will
begin the preparation of a Registration Statement on Form S-1 (or other
appropriate Form prescribed by the Securities and Exchange Commission) to be
filed with the Securities and Exchange Commission to offer for sale USFG
securities. The gross proceeds of the Offering will not be less than $10
million. Concurrent with the closing of the Offering, USFG will transfer $2.5
million from the proceeds to Sureal, without reduction, and an additional
deposit of $2.5 million, without reduction, will be placed in an escrow account
to be released to Sureal as soon as Sureal has reported three consecutive
months in which sales of Sureal products are not less $1 million per month.
1.3 Other Matters. Effective upon the Closing of the Exchange
Contemplated hereby, USFG shall cause Jenkins and Heil to be appointed to its
Board of Directors and to be set forth as Directors in the Registration
Statement associated with the Offering.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF USFG
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USFG hereby represents and warrants to the Sureal Shareholders as follows:
2.1 Organization and Good Standing. USFG is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware.
2.2 Authorization. (a) The issuance of USFG's Common Shares to the
Sureal Shareholders is in accordance with the provisions of this Agreement and
has been duly authorized by all necessary corporate action of USFG. USFG's
Common Shares, when issued to the Sureal Shareholders in accordance with the
provisions hereof, will be duly authorized and validly issued, fully paid and
nonassessable.
(b) USFG has full corporate power and authority to enter
into this Agreement and to perform all of its obligations hereunder. The
execution, delivery and performance of this Agreement by USFG has been duly
authorized by all necessary corporate action, and this Agreement constitutes a
legal, valid and binding obligation of USFG, enforceable against USFG in
accordance with its terms, subject to the effect of equitable principles and
applicable bankruptcy, insolvency, reorganization, moratorium and other laws of
general application relating to or affecting the enforcement of creditors'
rights.
2.3 Capitalization. The authorized capital stock of USFG consists
of thirty million (30,000,000) shares of USFG's common
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stock, $.0001 par value per share and ten million (10,000,000) shares of "blank
check" preferred stock, of which 19,889,267 USFG Common Shares are presently
issued and outstanding. All of the outstanding USFG Common Shares are duly
authorized, have been validly issued and are fully paid and nonassessable.
2.4 Securities Law. USFG's Common Shares and Sureal's Common Shares
being exchanged as provided in this Agreement are not being registered under
the Securities Act of 1933, as amended (the "Act"), or any other securities
laws but are being exchanged in reliance upon certain exemptions from the
registration requirements of the Act and such laws. USFG's reliance upon such
exemptions is predicated in large part upon the representations of the
Stockholder to USFG contained in Article III hereof.
2.5 Tax Free Reorganization. The transactions contemplated herein
are intended by the parties hereof as a tax free plan of reorganization
pursuant to the Internal Revenue Code of 1986, as amended.
2.6 Knowledge: Access to Information. USFG has knowledge of
Sureal's activities, financial condition, plans and prospects, and has
carefully reviewed the risks of, and other considerations relating to, the
transactions contemplated herein. USFG has been given an opportunity to ask
questions of and to receive answers from representatives of Sureal concerning
the terms and conditions of the transactions contemplated herein and has
received all
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information that USFG has requested from Sureal. Notwithstanding the foregoing,
the only information upon which USFG has relied is USFG's independent
investigation and that no representations or warranties of any kind have been
made by Sureal or its representatives or agents relating to such decisions
except as expressly set forth herein.
2.7 Officers and Directors of USFG. Prior to the closing of the
Exchange contemplated hereby, the Officers and Directors of USFG are as
follows: Ali Khan, President and Director
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SUREAL SHAREHOLDERS
The Sureal Shareholders represent and warrant to USFG as follows:
3.1 Ownership and Conveyance. The Sureal Shareholders are the sole
beneficial and record owners of three thousand (3,000) Sureal Common Shares
and each has the full right, and is duly authorized, to exchange such shares
which, upon conveyance, will be transferred to USFG free and clear of any and
all liens, claims, pledges, security interests or other encumbrance of any
kind.
3.2 Capitalization. The three thousand (3,000) shares of common
stock of Sureal owned by the Sureal Shareholders constitute all of the issued
and outstanding shares of capital stock of Sureal. All of the three thousand
(3,000) Sureal Common Shares
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owned by the Sureal Shareholders are duly authorized, have been validly issued
and are fully paid and nonassessable. There are no outstanding options,
warrants, rights (including preemptive rights and rights to demand registration
under the Act), calls, commitments, conversion rights, plans or other
agreements of any character providing for the purchase or issuance of any
shares of the capital stock of Sureal or any agreements or understandings to
issue any of the foregoing.
3.3 Purchase for Own Account. USFG's Common Shares are being
acquired by the Sureal Shareholders for each of such Shareholder's own account,
for investment and without any view to the distribution, assignment or resale
to others or fractionalization in whole or in part. The Stockholders agree not
to assign or in any way transfer such Shareholder's rights to USFG's Common
Shares or any interest therein. The Sureal Shareholders agree not to sell,
hypothecate or otherwise transfer USFG's common stock unless USFG's common
stock is registered under Federal and applicable state securities laws or
unless, in the opinion of counsel acceptable to USFG, an exemption from such
laws is available.
3.4 Accredited Investor. Each of the Sureal Shareholders is an
"Accredited Investor" as that term is defined in Regulation D promulgated under
the Securities Act of 1933, as amended ("THE ACT").
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3.5 Knowledge: Access to Information. The Sureal Shareholders have
knowledge of USFG's activities, financial condition, plans and prospects, and
have carefully reviewed the risks of, and other considerations relating to, the
transactions contemplated herein. The Sureal Shareholders have been given an
opportunity to ask questions of and to receive answers from representatives of
USFG concerning the terms and conditions of the transactions contemplated
herein and have received all information that the Sureal Shareholders have
requested from USFG. Notwithstanding the foregoing, the only information upon
which the Sureal Shareholders have relied is the Sureal Shareholders'
independent investigation and that no representations or warranties of any kind
have been made by USFG or its representatives or agents relating to such
decisions except as expressly set forth herein.
3.6 Risk of the Sureal Shareholders. The Sureal Shareholders,
either individually or together with the representative on which the Sureal
Shareholders have relied, has such knowledge and experience in financial and
business matters that the Sureal Shareholders are capable of evaluating the
merits and risks of an investment in USFG's Common Shares.
3.7 Securities Law. USFG's Common Shares are not being registered
under the Act, or any other securities laws but are being sold in reliance upon
certain exemptions from the registration requirements of the Act and such laws.
USFG's
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reliance upon such exemptions is predicated in large part upon the
representations of the Sureal Shareholders to USFG contained in Article III
hereof.
3.8 Restriction on Transfer. The Sureal Shareholders understand
that USFG's Common Shares have not been registered under the Act nor under any
other applicable securities laws in reliance on the representations and
warranties made by the Sureal Shareholders herein and that no securities
administrator of any state or jurisdiction or of the Federal government has
made any finding or determination relating to USFG's common stock. The Sureal
Shareholders further understand that, upon issuance hereunder, USFG's Common
Stock will constitute "restricted securities" within the meaning of Rule 144
under the Act and will be subject to a lock up agreement as more fully
described in paragraph 1.1. The Sureal Shareholders understand that USFG's
Common Shares may not be sold or otherwise transferred unless subsequently
registered under the Act or, in the opinion of counsel acceptable to USFG, an
exemption from registration is available; that, except pursuant to subsection
(k) of Rule 144, any routine sales of USFG's common stock made in reliance on
Rule 144 can only be made if current information about USFG is publicly
available and then only in limited amounts in accordance with that Rule; and
that there is presently neither any public market for USFG's Common Shares nor
current information publicly available with respect to
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USFG.
3.9 Restrictive Legends. Until such time as USFG's Common Shares
have been registered under the Act or until such time as USFG is provided by
the Sureal Shareholders with an opinion of counsel acceptable to USFG to the
effect that the transfer of USFG's Common Shares may be made without
registration, the certificates representing USFG's Common Shares shall be
imprinted with a legend in substantially the following form: "The shares
represented by this certificate have not been registered under the Securities
Act of 1933. These shares have been acquired for investment and not with a view
to distribution or resale and may not be mortgaged, pledged, hypothecated or
otherwise transferred without an effective registration statement for such
shares under the Act or an opinion of counsel for the corporation that
registration is not required under such Act."
3.10 Officers and Directors of Sureal. The existing Officers and
Directors of Sureal (the "Existing Sureal Directors") are as follows:
o R. Bret Jenkins, Chairman of the Board of Directors
o Richard Wogksch, President and Director
o Glen Jensen, CEO and Director.
Effective upon the Closing of the Exchange Agreement, USFG shall
have the right to designate three (3) members to the Sureal Board of Directors
(the "Sureal Directors") who shall serve as such
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Board Members at the sole discretion of USFG and may be substituted from time
to time by USFG. The Existing Sureal Board shall have the right to maintain
their Board membership as long as they are employed by Sureal. It is agreed
that a seventh member of the Sureal Board shall be elected, which member shall
be mutually agreeable to USFG and the Existing Sureal Board.
3.11 Authorization. Sureal has full power and authority to enter
into this Agreement and to fully perform the terms of this Agreement. The
execution, delivery and performance of this Agreement by Sureal and the Sureal
Shareholders have been duly authorized by all necessary action of Sureal and
the Sureal Shareholders, and this Agreement constitutes the legal, valid and
binding obligation of Sureal and the Sureal Shareholders, enforceable in
accordance with its terms, and the execution and delivery of this Agreement and
the receipt of USFG's Common Shares contemplated hereby by the Sureal
Shareholders will not violate any applicable law, regulation or rule or any
agreement or other document to which Sureal and the Sureal Shareholders are
bound.
ARTICLE IV
MANAGEMENT OF SUREAL
4.1 Management of Sureal. The parties agree that the existing
officers of Sureal (consisting of Messrs. Jenkins, Wogksch
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and Jensen), because of their experience in the industry, shall be employed to
supervise, direct and manage the entire operations of Sureal. Each will receive
a salary of $10,000 per month and will share in a bonus pool that will be
determined as 10% of Sureal's pretax income(determined in accordance with
accounting principles generally accepted in the United States of America and
before intercompany allocations of costs or fees) up to a maximum amount equal
to their base salaries and receive other benefits commensurate with the offices
held. Such other benefits shall include medical and dental insurance and a car
allowance or lease as has been provided previously. When the profitability of
the Sureal reaches levels where the 10% pool regularly exceeds the base salary
levels, such amount will be renegotiated based on Sureal's performance.
4.2 Financial Reports. Sureal shall provide financial information
and reports to USFG in the manner and format as shall reasonably be determined
by USFG's Board of Directors and in a manner consistent with the requirements
of a public company.
ARTICLE V
MISCELLANEOUS
5.1 Entire Agreement. This Agreement constitutes the entire
agreement between USFG, Sureal and the Sureal Shareholders with respect to the
subject matter hereof. There are no
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representations, warranties, covenants or undertakings with respect to the
subject matter hereof other than those expressly set forth herein. This
Agreement supersedes all prior agreements between the parties with respect to
the shares of common stock being exchanged hereunder and the subject matter
hereof.
5.2 Governing Law. This Agreement shall be construed and enforced
in accordance with and governed by the internal laws of the State of New York.
5.3 Notices. All notices, requests, demands and other
communications called for or contemplated hereunder shall be in writing and
shall be deemed duly given three (3) days from the date such notice is
deposited in the United States mail, postage-paid, or immediately if by hand
delivery or facsimile transmission addressed to the proper parties at the
addresses set forth in the first paragraph of this Agreement, or at such other
address as the parties may designate by written notice in the manner aforesaid,
with a copy in each case to Ronald J. Brescia, Esq., Doros & Brescia, P.C.,
1140 Avenue of the Americas, New York, New York 10036.
5.4 Survival of Representations and Warranties. All agreements,
representations and warranties contained herein shall survive the execution and
delivery of this Agreement.
5.5 Amendments and Waivers. Neither this Agreement nor any
provision hereof may be modified, changed, discharged, waived
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or terminated except by an instrument in writing signed by the party against
whom the enforcement of any such modification, change, discharge, waiver or
termination is sought.
5.6 Severability. If any provision of this Agreement or the
application thereof to any party or circumstance shall be held invalid or
unenforceable to any extent, the remainder of this Agreement and the
application of such provision to the other party or circumstances shall not be
affected thereby and shall be enforced to the greatest extent permitted by
applicable law.
5.7 Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective legal
successors, assigns, heirs, executors and administrators, but may not be
assigned by the Sureal Shareholders without the express written consent of
USFG. Nothing contained herein, expressed or implied, is intended to confer
upon any person or entity other than the parties hereto and their legal
successors, any rights or remedies under or by reason of this Agreement unless
so stated herein to the contrary.
5.8 Further Actions. At any time and from time to time, each party
agrees at its expense, to take all actions and to execute and deliver all
documents as may be necessary to effectuate the purposes of this Agreement.
5.9 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original,
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and all of which together shall constitute one and the same.
5.10 Headings. The headings in the Agreement are for reference
purposes only and shall not be deemed to have any substantive effect. 5.11
Facsimile Signatures. A facsimile signature on this Agreement shall be binding
as if the signature were the original.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first written above.
SUREAL INTERNATIONAL, INC. UNITED STATES FINANCIAL GROUP, INC.
BY:
--------------------- BY:-----------------------
ITS:
--------------------- ITS:----------------------
- ----------------------
R. BRET JENKINS
- ----------------------
RICHARD WOGKSCH
- ----------------------
GLEN JENSEN
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EXHIBIT 22.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation in this Registration Statement on Form S-1
of our report dated March 9, 1998, on our audits of the consolidated financial
statements of United States Financial Group, Incorporated and subsidiaries as
of December 31, 1997 and 1996 and for each of the three years in the period
ended December 31, 1997. We also consent to the reference to our firm under the
caption "Experts."
EICHLER BERGSMAN & CO., LLP
New York, New York
July 29, 1998
<PAGE>
EXHIBIT 22.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation in this Registration Statement on Form S-1
of our report dated February 5, 1997, on our audit of the financial statements
of Klein, Maus & Shire, Inc, as of December 31, 1996 and for the year period
then ended. We also consent to the reference to our firm under the caption
"Experts."
LILLING AND COMPANY
Great Neck, New York
July 29, 1998
<PAGE>
EXHIBIT 22.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation in this Registration Statement on Form S-1
of our report dated April 5, 1996, on our audit of the financial statements of
Klein, Maus & Shire, Inc (formerly Khan, Edwards & Company) as of December 31,
1995 and for year then ended. We also consent to the reference to our firm
under the caption "Experts."
HAGAN & BURNS CPAs, PC
New York, New York
July 29, 1998
