<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 23, 1998
REGISTRATION NO. 333-44747
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT #1
------------------------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------------------
ROSEDALE DECORATIVE PRODUCTS LTD.
(Name of Small Business Issuer as specified in its charter)
<TABLE>
<S> <C> <C>
ONTARIO, CANADA N/A 5110
(State or other jurisdiction of (I.R.S. Employer (Primary Standard Industrial
incorporation or organization) Identification Number) Classification Code Number)
</TABLE>
731 MILLWAY AVENUE
CONCORD, ONTARIO
CANADA L4K 3S8
(416) 593-4519
(Address and telephone number of principal executive offices)
ALAN FINE, CHIEF EXECUTIVE OFFICER
731 MILLWAY AVENUE
CONCORD, ONTARIO
CANADA L4K 3S8
(416) 593-4519
(Name, address and telephone number of agent for service)
COPIES OF ALL COMMUNICATIONS TO:
<TABLE>
<S> <C>
GREGORY SICHENZIA, ESQ. ROBERT E. ALTENBACH, P.C.
SICHENZIA ROSS & FRIEDMAN, L.L.P. 1 BUCKHEAD PLAZA
135 WEST 50TH STREET, 20TH FLOOR SUITE 400
NEW YORK, NEW YORK 10020 3060 PEACHTREE ROAD N.W.
TELEPHONE NO.: (212) ATLANTA, GEORGIA 30305
FACSIMILE NO.: (212) TELEPHONE NO. (404) 240-7602
FACSIMILE NO. (404) 262-1222
</TABLE>
------------------------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement
------------------------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
THE REGISTRANT HEREBY AMENDS THE REGISTRATION STATEMENT ON SUCH DATE AND
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
MAXIMUM
AMOUNT MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SECURITY(1) PRICE(1) FEE
<S> <C> <C> <C> <C>
Units, each consisting of two shares of Common Stock, no par
value per share, and two Class A Warrants(2)................... 718,750 $ 8.00 $ 5,750,000 $1,696.25
Common Stock, no par value per share, underlying Units........... 1,437,500
Class A Warrants underlying Units................................ 1,437,500
Common Stock, no par value per share, issuable upon exercise of
Class A Warrants(3)............................................ 1,437,500 4.50 6,468,750 $1,908.28
Underwriter's Unit purchase option............................... 1 10 $ 10 $ .01
Units, each consisting of two shares of Common Stock, no par
value per share, and two Class A Warrants, issuable upon
exercise of Underwriter's option............................... 62,500 9.60 $ 600,000 $ 177.00
Common Stock, no par value per share, underlying Underwriter's
Options........................................................ 125,000
Class A Redeemable Warrants issuable upon exercise of
Underwriter's Options(4)....................................... 125,000
Common Stock, no par value per share, issuable upon exercise of
Class A Warrants underlying Underwriter's options(5)........... 125,000 4.50 562,500.00 $ 165.94
Total...................................................... $ 13,381,260.00 $3,947.47
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(2) Includes up to 93,750 Units issuable upon exercise of the Underwriter's
over-allotment option.
(3) Represents shares of Common Stock issuable upon exercise of the Warrants
offered pursuant to this Registration Statement.
(4) Reserved for issuance upon exercise of the Underwriter's Option together
with such indeterminate number of Warrants and/or Common Stock as may be
issuable pursuant to anti-dilution provisions under the Underwriter's
Purchase Option or the Warrants.
(5) Reserved for issuance upon exercise of the Warrants obtained upon exercise
of the Underwriter's Purchase Option.
ii
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM SB-2 ITEM NUMBER AND CAPTION CAPTIONS IN PROSPECTUS
----------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Front of Registration Statement and Outside Front
Cover of Prospectus................................ Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Cover Page, Inside Cover Page, Outside Back Page
3. Summary Information and Risk Factors................. Prospectus Summary, Risk Factors
4. Use of Proceeds...................................... Use of Proceeds
5. Determination of Offering Price...................... Cover Page, Underwriting
6. Dilution............................................. Dilution
7. Selling Securityholders.............................. *
8. Plan of Distribution................................. Prospectus Summary, Underwriting
9. Legal Proceedings.................................... Business
10. Directors, Executive Officers, Promoters and Control
Persons............................................ Management, Principal Stockholders
11. Security Ownership of Certain Beneficial Owners and
Management......................................... Principal Stockholders
12. Description of Securities............................ Description of Securities
13. Interest of Named Experts and Counsel................ *
14. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities..................... Management
15. Organization Within Last Five Years.................. Prospectus Summary, Business
16. Description of Business.............................. Prospectus Summary, Business
17. Management's Discussion and Analysis or Plan of
Operation.......................................... Management's Discussion and Analysis of Financial
Condition and Results of Operations
18. Description of Property.............................. Business
19. Certain Relationships and Related Transactions....... Certain Transactions
20. Market for Common Equity and Related Shareholder
Matters............................................ Front Cover Page, Description of Securities
21. Executive Compensation............................... Management
22. Financial Statements................................. Financial Statements
23. Changes in and Disagreements with Accounts on
Accounting and Financial Disclosure................ *
</TABLE>
- ------------------------
* Not Applicable
iii
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 23 , 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
ROSEDALE DECORATIVE PRODUCTS LTD.
833,000 SHARES OF COMMON STOCK AND
833,000 CLASS A REDEEMABLE COMMON STOCK PURCHASE WARRANTS
Rosedale Decorative Products Ltd. (the "Company") is hereby offering to the
public 833,000 shares of common stock, no par value (the "Common Stock"), and
833,000 Class A redeemable common stock purchase warrants (the "Warrants"). The
Common Stock and the Warrants will be offered through J.P. Turner & Company,
L.L.C. (the "Underwriter"). The Shares and Warrants are being sold separately
and will be separately transferable immediately upon issuance. The offering of
the Shares and Warrants hereby is sometimes referred to as the "Offering"
herein.
Each Warrant entitles the holder to purchase one share of Common Stock at an
exercise price of $6.00 per share, subject to adjustment in certain events,
during the four year period commencing one year from the date of this Prospectus
(the "Effective Date"). The Warrants are subject to redemption by the Company at
$.10 per Warrant, at any time commencing one year from the Effective Date (or
earlier with the consent of the Underwriter) and prior to their expiration, on
not less than 30 days' written notice to the holders of the Warrants, provided
the closing bid price per share of Common Stock if traded on the Nasdaq SmallCap
Market, or the last sales price per share if listed on the Nasdaq National
Market or a national exchange has been at least 150% ($9.00 per share) of the
current Warrant exercise price, for a period of 10 consecutive business days
ending on the third day prior to the date upon which the notice of redemption is
given. The Warrants shall be exercisable until the close of the business date
preceding the date fixed for redemption. See "Description of
Securities--Warrants."
Prior to the Offering, there has been no market for the Units, Common Stock
or Warrants, and there can be no assurance that a market will develop for the
Company's securities in the future or that if developed, it will be sustained.
The Company is applying for quotation of the Common Stock and Warrants on the
Nasdaq SmallCap Market under the trading symbols "WALLF" and "WALLW",
respectively, and for listing on the Boston Stock Exchange under the symbols
"WAL" and "WALW", respectively.
The per share public offering price of the Units and the exercise price and
the other terms of the Warrants offered hereby were determined by negotiation
between the Company and the Underwriter and do not necessarily bear any direct
relationship to the Company's assets, earnings, book value per share or other
generally accepted criteria of value. See "Underwriting".
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK
AND IMMEDIATE AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING ON PAGE 9
AND "DILUTION" ON PAGE 16.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND
PRICE TO PUBLIC COMMISSIONS(1)
<S> <C> <C>
Per Share.............................................. $6.00 $.60
Per Warrant............................................ $.125 $.0125
Total................................................ $5,102,125 $570,212.50
<CAPTION>
PROCEEDS TO
THE COMPANY(2)
<S> <C>
Per Share.............................................. $5.40
Per Warrant............................................ $.1125
Total................................................ $4,591,912.50
</TABLE>
(1) Does not include additional consideration to be received by the Underwriter
in the form of (i) a non-accountable expense allowance equal to 3% of the
gross offering proceeds, (ii) any value attributable to the Underwriter's
Purchase Option ("Underwriter's Warrant") entitling the Underwriter to
purchase up to 83,300 Shares at a price per share equal to 120% of the
initial public offering price per Unit, and (iii) a financial consulting
agreement with the Underwriter for a period of twenty-four months for an
aggregate consideration of $48,000 payable in full on the closing of the
Offering. In addition, the Company has agreed to indemnify the Underwriter
against certain liabilities under the Securities Act of 1933, as amended
(the "Act"). See "Underwriting".
(2) After deducting discounts and commission payable to the Underwriter, but
before payment of the Underwriter's non-accountable expense allowance of
$153,065.75 (or $176,023.31 if the Over-Allotment Option, defined below, is
exercised in full) or the other expenses of the Offering, estimated at
$320,000 payable by the Company. See "Underwriting".
(3) The Company has granted the Underwriter an option, exercisable for 45 days
after the Effective Date to purchase up to an additional 124,950 Shares and
Warrants from the Company upon the same terms and conditions set forth
above, solely for the purpose of covering over-allotments, if any (the
"Over-Allotment Option"). If the Over-Allotment Option is exercised in full,
the total Price to the Public, Underwriting Discounts and Commissions,
Proceeds to the Company will be $5,867,443.75, $586,744.38 and $5,280,699.38
respectively. See "Underwriting."
The Shares and Warrants offered by the Prospectus are being offered by the
Underwriter on a "firm commitment" basis, when, as and if delivered to and
accepted by the Underwriter, subject to prior sale, and other conditions and
legal matters. The Underwriter reserves the right to withdraw, cancel or modify
the Offering and to reject orders, in whole or in part, for the purchase of any
of the securities offered notwithstanding tender by check or otherwise. It is
expected that delivery of the certificates representing the Units will be made
against payment therefor at the offices of the Underwriter, 3340 Peachtree Road,
Suite 450, Atlanta, Georgia 30326 on or about , 1998.
J.P. TURNER & COMPANY, L.L.C.
----------------
The date of this Prospectus is , 1998
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK AND
WARRANTS OFFERED HEREBY, INCLUDING PURCHASES OF THE COMMON STOCK OR WARRANTS TO
STABILIZE THEIR MARKET PRICE, PURCHASES OF THE COMMON STOCK OR WARRANTS TO COVER
SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK OR WARRANTS MAINTAINED BY
THE UNDERWRITER AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING".
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMPANY'S
COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. "SEE PLAN OF
DISTRIBUTION."
----------------------------
ENFORCEABILITY OF CIVIL LIABILITIES AGAINST FOREIGN PERSONS
The Company and its officers, directors and auditors are residents of Canada
and substantially all of the assets of the Company are or may be located outside
the United States. As a result, service of process may be effected upon the
Company through the offices of Sichenzia Ross & Friedman LLP in New York, but it
may be difficult for investors to effect service of process within the United
States upon non-resident officers and directors, or to enforce against them
judgments obtained in the United States courts predicated upon the civil
liability provision of the Securities Act or state securities laws. The Company
has been advised by its Canadian legal counsel, Torkin, Manes, Cohen & Arbus
that a judgment of a United States court predicated solely upon civil liability
under the Securities Act would probably be enforceable in Canada if the United
States court in which the judgment was obtained had a basis for jurisdiction in
the matter that was recognized by a Canadian court for such purposes. However,
there is uncertainty whether an action could be brought in Canada in the first
instance on the basis of liability predicated solely upon such laws. If
investors have questions with regard to these issues, they should seek the
advice of their individual counsel. The Company has also been advised by its
Canadian legal counsel Torkin, Manes, Cohen & Arbus that, pursuant to the
Currency Act (Canada), a judgment by a court in any Province of Canada may only
be awarded in Canadian currency. Pursuant to the provision of the Courts of
Justice Act (Ontario), however, a court in the Province of Ontario shall give
effect to the manner of conversion to Canadian currency of an amount in a
foreign currency, where such manner of conversion is provided for in an
obligation enforceable in Ontario.
EXCHANGE RATE DATA
The Company maintains its books of account in Canadian dollars, but has
provided the financial data in this Prospectus in United States dollars with its
audit conducted in accordance with generally accepted auditing standards in the
United States of America. All references to dollar amounts in this Prospectus,
unless otherwise indicated, are in United States dollars.
The following table sets forth, for the periods indicated, certain exchange
rates based on the noon buying rate in New York City for cable transfers in
Canadian dollars. Such rates are the number of United States dollars per one
Canadian dollar and are the inverse of rates quoted by the Federal Reserve Bank
of New York for Canadian dollars per US$1.00. The average exchange rate is based
on the average of the daily exchange rates during such periods. On January 7,
1998, the exchange rate was Cdn.$1.00 per US$.6994.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
<S> <C> <C> <C> <C>
1994 1995 1996 1997
--------- --------- --------- ---------
RATE AT END OF PERIOD............................. $ 0.7128 $ 0.7323 $ 0.7301 $ 0.6999
AVERAGE RATE DURING PERIOD........................ 0.7320 0.7288 0.7333 0.7222
HIGH.............................................. 0.7632 0.7527 0.7513 0.7487
LOW............................................... 0.7103 0.7023 0.7235 0.6945
</TABLE>
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
(INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE
CONTEXT OTHERWISE REQUIRES, THE TERM "COMPANY" REFERS TO ROSEDALE DECORATIVE
PRODUCTS LTD. AND ITS WHOLLY-OWNED SUBSIDIARIES ROSEDALE WALLCOVERINGS & FABRICS
INC. ("ROSEDALE") AND ONTARIO PAINT & WALLPAPER LTD. ("ONTARIO"). EXCEPT AS
OTHERWISE INDICATED HEREIN, THE INFORMATION CONTAINED IN THIS PROSPECTUS GIVES
NO EFFECT TO THE EXERCISE OF (I) THE OVER-ALLOTMENT OPTION, (II) THE
UNDERWRITER'S WARRANTS, (III) WARRANTS OFFERED HEREBY, OR (IV) OPTIONS GRANTED
UNDER THE COMPANY'S STOCK OPTION PLAN. ALL PER SHARE INFORMATION IN THIS
PROSPECTUS HAS BEEN ADJUSTED TO REFLECT A 10,417 FOR ONE STOCK SPLIT OF THE
COMPANY'S COMMON STOCK TO BE EFFECTED IMMEDIATELY PRIOR TO THIS OFFERING.
THE COMPANY
The Company, through its two wholly-owned subsidiaries, Ontario and
Rosedale, designs, markets and distributes high quality residential
wallcoverings and designer fabrics. The Company also operates a retail paint and
wallpaper store located in downtown Toronto, Canada which has been in continuous
operation since 1913. The Company's products include wallpaper and wallpaper
borders (which are collectively referred to as wallcoverings), designer fabrics
and paint.
The Company designs wallcovering and designer fabric collections that it
distributes under its own brand names. Wallcoverings and fabrics sold under
Company brand names are manufactured for the Company on an outsource basis by
third party manufacturers. In addition to selling its own brand name
wallcoverings and fabrics, the Company is also a wholesale distributor of
wallcoverings designed and manufactured by other manufacturers. Wholesale
distribution of other manufacturers' wallcoverings is done through the Company's
Ontario subsidiary. Design and distribution of Company brand wallcoverings is
accomplished mainly through the Rosedale subsidiary and to a lesser extent
through the Ontario subsidiary.
Sales of Company brand wallcoverings accounts for approximately 54% of the
Company's total revenues, and wholesale distribution of wallcoverings under
non-company brand names accounts for approximately 29% of the Company's total
revenues. Sales of designer fabrics accounts for approximately 12% of the
Company's revenues, and the Company's retail paint and wallpaper store generates
approximately 5% of the Company's annual revenues.
In 1996, the Company distributed approximately 26 Company brand wallcovering
and fabric collections to its customer base of wholesale distributors who sold
the Company's products to approximately 10,000 to 20,000 retail wallpaper and
paint stores and interior designers worldwide. In addition, the Company's
Ontario subsidiary distributed approximately 47 non-Company brand wallcovering
collections to approximately 1,700-2,000 home decorating stores in Canada in
1996.
The Company believes that its product mix of wallcoverings, designer fabrics
and paints, along with its newer offerings of floor coverings and ceiling tiles
presents significant cross marketing opportunities. Rosedale has recently
introduced wallcovering and fabric sample books that include coordinated carpets
and area rugs.
As part of the Company's growth strategy, its Rosedale subsidiary has
recently expanded its product lines to include coordinated products, namely
decorative fabrics, soft window treatments and Floor coverings. The Company's
decorative fabric products are sold under the Kingsway brand name and are
intended to be utilized by consumers for draperies, upholstery and bed
coverings.
The Company intends to expand the products offered by its Ontario subsidiary
to include a line of decorative ceiling tiles for commercial and residential
customers. The decorative ceiling tiles are designed to fit into standard
suspension ceiling frameworks and are embossed with designs that emulate
ceilings
3
<PAGE>
found in many turn of the century buildings. The Company believes that its
decorative ceiling tiles will be attractive to commercial users, such as
restaurants looking to recreate turn of the century decor.
The Company believes that offering a combination of wallcoverings,
decorative fabrics and floor coverings provides significant opportunities for
cross merchandising of the Company's products. For example, by offering
coordinated lines of wallcoverings, fabrics, and floor coverings, consumers
looking to purchase wallcoverings will be exposed to the Company's designer
fabric and floor covering lines. The end result being that the Company's
products are presented to a wider variety of retail stores and consumers
enabling the Company to diversify its customer base.
The Company's strategy is to continue to capitalize on the brand name
recognition enjoyed by many of its product lines and to utilize its distribution
network to distribute a greater variety of products manufactured by third
parties. The Company intends to increase the number of retail locations that
carry products that are either manufactured, designed or distributed by the
Company, to increase the amount of products carried by such stores and to
penetrate other geographic markets including the United States, with special
emphasis on foreign markets.
Rosedale Decorative Products Ltd., was formed under the laws of Ontario,
Canada on May 14, 1997, to consolidate the business of its two wholly-owned
operating subsidiaries, Ontario Paint & Wallpaper Ltd., a company organized
under the laws of the Province of Ontario, Canada ("Ontario"), and Rosedale
Wallcoverings & Fabrics, Inc., a Company organized under the laws of the
Province of Ontario, Canada ("Rosedale"). Unless the context otherwise requires,
the term "Company" refers to Rosedale Decorative Products Ltd. and its
wholly-owned subsidiaries Ontario and Rosedale.
The Company's principal offices are located at , 731 Millway Avenue,
Concord, Ontario, Canada L4K 3S8 and its telephone number is (416) 593-4519.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered.............. 833,000 Shares of Common Stock and 833,000 Warrants. Each
Warrant shall entitle the holder to purchase one share of
Common Stock at $6.00 per share. The Common Stock and
Warrants will be separately transferable immediately after
the closing of this Offering.
Common Stock Outstanding
Prior to Offering(1).......... 1,250,000
Common Stock to be Outstanding
After Offering(1)............. 2,083,000
Warrants Outstanding
Prior to Offering(1).......... 0
Warrants to be Outstanding
After Offering(1)............. 833,000. Each Warrant is exercisable at an exercise price
of $6.00 per share. The exercise price of the Warrants is
subject to adjustment in certain circumstances. The
Warrants are exercisable during the four year period
commencing one year from the date of the prospectus. The
Warrants are redeemable by the Company commencing one year
from the date of the prospectus (or earlier with the
consent of the Representative) at a price equal to 150% of
the offering price of the Common Stock on 30 days' prior
written notice provided the last sales price of the Common
Stock for 30 consecutive business days equals or exceeds
150% of the current Warrant exercise price. See
"Description of Securities", "Principal Stockholders" and
"Underwriting".
Use of Proceeds................. The net proceeds to the Company from the sale of the
Securities are estimated to be approximately $4,030,000
after deducting commissions and expenses of the Offering,
which expenses are estimated at $1,072,125. The Company
intends to use the net proceeds of this Offering for new
product development, sales and marketing, hiring
additional personnel, the repayment of certain
indebtedness and for working capital and general corporate
purposes including potential synergistic acquisitions. See
"Use of Proceeds."
Proposed Nasdaq SmallCap
Market Symbols(2):............ WALLF; WALLW
Proposed Boston Stock
Exchange Symbols(2):.......... WAL; WALW
Risk Factors.................... The securities offered hereby are speculative, involve a
high degree of risk and immediate substantial dilution,
and should be considered only by investors who can afford
to sustain a loss of their entire investment. See "Risk
Factors" and "Dilution."
</TABLE>
- ------------------------
(1) Does not include an aggregate of 1,166,200 shares which may be issued upon
exercise of (i) the Warrants offered hereby; (ii) the Underwriter's Option;
and (iii) the Underwriter's over-allotment option; (iv) other outstanding
options; and (v) 750,000 shares of Common Stock which may be issued pursuant
to an executive bonus plan. See "Management," "Description of Securities"
and "Underwriting."
(2) Notwithstanding quotation on the Nasdaq SmallCap Market and listing on the
Boston Stock Exchange, there can be no assurance that an active trading
market for the Company's securities will develop or, if developed, will be
sustained.
5
<PAGE>
SUMMARY COMBINED FINANCIAL INFORMATION
STATEMENT OF INCOME DATA:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Revenues........................................ $ 20,757,423 $ 18,927,369 $ 18,552,166
Gross Profit.................................... 7,407,390 6,625,768 6,946,170
Income from operations.......................... 1,306,002 912,617 429,435
Earnings (loss) per share(1).................... 0.64 0.34 (0.46)
Weighted average number of shares
outstanding(1)................................ 1,250,000 1,250,000 1,250,000
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------- DECEMBER 31,
AS ADJUSTED(2) ACTUAL 1996
----------------- ------------- -------------
<S> <C> <C> <C>
Working capital............................. $ 5,562,966 $ 1,532,966 $ 2,019,038
Total assets................................ 16,794,832 15,694,832 13,042,385
Long-term liabilities....................... 2,966,281 2,966,281 2,622,877
Total liabilities........................... 12,833,809 13,933,809 12,012,282
Total shareholders' equity.................. 5,791,023 1,761,023 1,030,103
</TABLE>
- ------------------------
(1) After giving effect to an approximate 1:10,417 stock split which increased
total shares outstanding from 120 to 1,250,000.
(2) Reflects the issuance of 833,000 shares of Common Stock and 833,000
Warrants, offered hereby and the application of the net proceeds therefrom.
6
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, IN
ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH INVESTMENTS IN THE SECURITIES OFFERED HEREBY. THIS PROSPECTUS CONTAINS
CERTAIN FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS. AN INVESTMENT IN THE SECURITIES
OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
1. UNCERTAINTY OF NEW PRODUCT DEVELOPMENT AND NO ASSURANCE OF MARKET
ACCEPTANCE. The perpetuation of the Company's success is dependent upon
continued name recognition and acceptance of the Company's existing and new
products. No assurances can be made that any or all products will achieve or
maintain consumer acceptance. Continued product development and
commercialization efforts are subject to all of the risks inherent in the
development of new products including achieving market acceptance, competition.
There is no assurance that the Company will be able to develop, manufacture and
distribute new products which achieve market acceptance. See "Business".
2. DEPENDENCE ON SUPPLIERS FOR WHOLESALE DISTRIBUTION. The Company is
dependent upon wallcovering suppliers for non-Company brand name wallcoverings
that the Company distributes for third parties. Wholesale distribution of
non-Company brand name wallcoverings accounts for a significant portion of the
Company's total revenues. Any disruption in the supply of wallcoverings could
have a significant adverse impact upon the Company.
3. DEPENDENCE ON THIRD PARTY MANUFACTURERS FOR COMPANY BRAND NAME
WALLCOVERINGS AND FABRICS. The Company is dependent upon third parties to
manufacture its Company Brand Name wallcovering and fabric collections. The
Company enters into agreements with wallcovering and fabric manufacturers for
each collection that it designs and maintains no long term agreements with its
manufacturers. It is the Company's intention to use current or additional third
parties to manufacture its Company Brand Name wallcoverings and fabrics. The
Company believes that it will be able to enter into arrangements with third
parties to manufacture its products, as needed, however, no assurance can be
given that it will be able to do so on reasonable terms or otherwise.
4. DEPENDENCE ON THIRD PARTY FREIGHT HAULERS. The Company is dependent on
one independent freight hauler to ship approximately 90% of the Company's
products to distribution facilities. The ability of the Company to control its
freight expenses is a significant factor in the Company's gross profit margin.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations." There is no assurance that the Company will be able to maintain
acceptable freight pricing and arrangements. Furthermore, a labor slowdown,
strike or other matters beyond management's control may adversely affect the
Company's ability to ship its products on a timely basis or at all. See
"Business."
5. DEPENDENCE ON MAJOR CUSTOMERS. Approximately 14% of the Company's
revenue is derived from sales to one customer, The Blonder Company. No other
customer accounts for more than 10% of the Company's revenues. There is no
assurance that the Company will maintain its relationship with The Blonder
Company. In the event The Blonder Company does not continue acquiring products
from the Company, the Company's business and results of operations would be
materially adversely effected.
6. UNCERTAINTY AS TO COMPANY'S ABILITY TO EXPAND INTO UNITED STATES AND
OTHER MARKETS. In order to further penetrate the U.S., European, Asian and
Southeast Asian markets, the Company will have to devote significant resources
to advertising and marketing in such countries in order to develop consumer
awareness of its products and to procure sufficient shelf space for its
products. There can be no assurance that the Company will be successful in its
efforts. The Company intends to devote a portion of the net proceeds of this
Offering toward the continued expansion into the U.S., Asian, Southeast Asian
and European. See "Business".
7
<PAGE>
7. INTENSE COMPETITION IN WALLCOVERING/FABRIC MARKET. The Company's
business is subject to significant competition. The Company's primary business
of designing and distributing wallcoverings and decorative fabrics is highly
competitive. The Company competes with other wholesale distributors of
wallcoverings and fabrics and with manufacturers of wallcoverings and fabrics
that maintain their own distribution network. All of the competitors that
manufacturer wallcoverings and fabrics have greater financial resources than the
Company and greater control over the products they distribute. Certain of the
Company's competitors that distribute wallcoverings and fabrics, but do not
manufacture, have greater financial resources than the Company.
The Company's Brand Name wallcoverings and fabrics, such as Concord-TM-,
Ridley Nash-TM-, Rosedale-TM-, Cambridge Studios-TM-, Hamilton House-TM-, and
Kingsway Fabrics-TM- compete with other brands of wallcoverings and fabrics
primarily on the basis of quality, design and color and are therefore subject to
consumers' tastes and preferences which may change at any time. In addition, the
Company Brand Name wallcoverings and fabrics compete against brands produced and
distributed by competitors that may have greater financial resources than the
Company.
The Company's major competitors in the United States are York Wallcoverings,
Eisenhart Wallcoverings and S.A. Maxwell & Co. and its major competitors in
Canada are Imperial Home Decor Group, Sunworthy Wallcoverings, Provincial
Wallcoverings and Decorlux. The company also competes with national and regional
retail distributors, many of which have greater financial and other resources of
the Company. See "Business--Competition".
8. UNCERTAINTIES OF GOVERNMENT REGULATION. The Company is subject to
various Canadian and United States regulations relating to health and safety
standards. Regulations in new markets and future changes in existing regulations
may adversely impact the Company by raising the cost of production. See
"Business-Government Regulation".
9. DEPENDENCE ON KEY PERSONNEL. The Company's future success will depend to
a significant extent on the efforts of key management personnel, Sidney Ackerman
its President, Alan Fine, its Chief Executive Officer. The Company is in the
process of entering into employment agreements with Sidney Ackerman and Alan
Fine. The loss of one or more of these key employees could have a material
adverse effect on the Company's business. The Company has acquired key-person
life insurance policies on Sidney Ackerman and Alan Fine. In addition, the
Company believes that its future success will depend in large part upon its
continued ability to attract and retain highly qualified management, technical
and sales personnel. There can be no assurance that the Company will be able to
attract and retain the qualified personnel necessary for its business. See
"Management".
10. POTENTIAL REVENUE CANADA TAX LIABILITY. In 1992, The Company's Rosedale
subsidiary formed a California corporation for the purpose of manufacturing
window blinds to be sold as an accompaniment to its existing wallcovering and
other products. The window blind company was sold in 1994, and in connection
therewith, Rosedale claimed a business loss deduction on their investment in
such company. Rosedale was subsequently informed by Revenue Canada that the
deduction which it claimed was being allowed as a capital loss and not as a
business loss deduction, and, as a result, Rosedale owed an additional $652,110
in taxes. The Company's Rosedale subsidiary has filed a formal notice of
objection contesting Revenue Canada's classification of its deduction. No
assurance can be given that Rosedale will be able to reach an agreement with the
tax authorities, that the tax authorities will not immediately seek payment of
the taxes, or that the tax authorities will not commence an action or file a
lien against Rosedale in order to recover the taxes. See "Business--Legal
Proceedings."
11. CONTROL BY EXISTING STOCKHOLDERS. Upon the completion of this Offering,
the Company's existing shareholders will collectively beneficially own
approximately 60% (57% if the Underwriters' Over-Allotment Option is exercised
in full) of the Company's outstanding Common Stock. Because of their beneficial
stock ownership, these stockholders will be in a position to continue to elect
the majority
8
<PAGE>
members of the Board of Directors and decide matters requiring stockholder
approval. In addition, Sidney Ackerman, Alan Fine, the Ackerman Family Trust and
454590 Ontario Limited entered into a Common Stock voting agreement which
provides that they agree to vote all of their Shares unanimously in respect of
any matter to be voted on at any meeting of the shareholders of the Company and
to withhold their votes or vote against any such matter regarding which they are
unable to vote their shares unanimously. See "Business-Voting Agreements." See
"Principal Stockholders."
12. NO PRIOR PUBLIC MARKET. Prior to this Offering, there has been no
public market for the Units, Common Stock and/or Warrants. Accordingly, there
can be no assurance that an active trading market will develop and be sustained
upon the completion of this Offering. The initial public offering price of the
Units has been determined by negotiations between the Company and the
Underwriter and does not necessarily bear any relation to the Company's asset
value, earnings or other objective criteria. See "Underwriting." The stock
market has, from time to time, experienced extreme price and volume fluctuations
which often have been unrelated to the operating performance of particular
companies. Although it has no obligation to do so, the Underwriter intends to
engage in market-making activities or solicited brokerage activities with
respect to the purchase or sale of the Units on the Nasdaq SmallCap Market.
However, no assurance can be given that the Underwriter will continue to
participate as a market-maker in the securities of the Company or that other
broker/ dealers will make a market in such securities which may adversely impact
the liquidity of the securities. Regulatory developments and economic and other
external factors, as well as period-to-period fluctuations in financial results,
may also have a significant impact on the market price of such securities. See
"Description of Securities."
13. NEED FOR ADDITIONAL FINANCING. The Company believes that the proceeds
of the Offering will, together with revenues from operations, be sufficient to
finance the Company's working capital requirements for a period of at least 24
months following the completion of the Offering. In addition, a part of the
Company's strategy is to expand its product mix, increase market share, and
develop markets in Europe and Southeast Asia. The continued expansion and
operation of the Company's business beyond such 24 month period and its ability
to expand its business may be dependent upon its ability to obtain additional
financing. There can be no assurance that additional financing will be available
on terms acceptable to the Company, or at all. In the event that the Company is
unable to obtain such additional financing as it becomes necessary, the Company
may not be able to achieve all of its business plans. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
14. IMMEDIATE AND SUBSTANTIAL DILUTION. This Offering involves an immediate
and substantial dilution to investors. Purchasers of Shares in the Offering will
incur an immediate dilution of $3.22 per Share in the net tangible book value of
their investment from the initial public offering price, which dilution amounts
to approximately 54% of the initial public offering price per Share. Investors
in the Offering will pay $6.00 per Share, excluding the value of the Warrants,
as compared with an average cash price of $1.41 per share of Common Stock paid
by existing stockholders. See "Dilution."
15. BROAD DISCRETION IN APPLICATION OF PROCEEDS BY
MANAGEMENT. Approximately 49.6% of the net proceeds of this offering will be
applied towards new product development and 9.4% of the net proceeds of this
Offering will be applied to working capital and general corporate purposes.
Accordingly, management of the Company will have broad discretion over the use
of proceeds. See "Use of Proceeds".
16. SHARES ELIGIBLE FOR FUTURE SALE. Of the 2,083,000 shares of Common
Stock of the Company to be outstanding upon completion of this Offering,
1,250,000 shares shall be "restricted securities," which are owned by
"affiliates" of the Company, as those terms are defined in Rule 144 promulgated
under the Act. Absent registration under the Act, the sale of such shares is
subject to Rule 144, as promulgated under the Act. All of the "restricted
securities" are eligible for resale under Rule 144. In general, under Rule 144,
subject to the satisfaction of certain other conditions, a person, including an
affiliate of the Company, who has beneficially owned restricted shares of Common
Stock for at least one year is permitted to sell in a brokerage transaction,
within any three-month period, a number of shares that does not exceed the
greater
9
<PAGE>
of 1% of the total number of outstanding shares of the same class, or if the
Common Stock is quoted on Nasdaq or a stock exchange, the average weekly trading
volume during the four calendar weeks preceding the sale. Rule 144 also permits
a person who presently is not and who has not been an affiliate of the Company
for at least three months immediately preceding the sale and who has
beneficially owned the shares of Common Stock for at least two years to sell
such shares without regard to any of the volume limitations as described above.
Holders of 1,250,000 shares of Common Stock are affiliates of the Company. All
of the Company's shareholders who are affiliates have agreed not to sell or
otherwise dispose of any of their shares of Common Stock now owned or issuable
upon the exercise of any option for a period of 18 months from the Effective
Date, without the prior written consent of the Underwriter. No prediction can be
made as to the effect, if any, that sales of shares of Common Stock or the
availability of such shares for sale will have on the market prices of the
Company's securities prevailing from time to time. The possibility that
substantial amounts of Common Stock may be sold under Rule 144 into the public
market may adversely affect prevailing market prices for the Common Stock and
Warrants and could impair the Company's ability to raise capital in the future
through the sale of equity securities. See "Shares Eligible for Future Sale".
17. NO DIVIDENDS AND NONE ANTICIPATED. To date, no dividends have been
declared or paid on the Common Stock, and the Company does not anticipate
declaring or paying any dividends in the foreseeable future, but rather intends
to reinvest profits, if any, in its business. Investors should, therefore, be
aware that it is unlikely that any dividends will be paid on the Common Stock in
the foreseeable future. See "Dividends".
18. RISK OF LOW PRICE STOCKS. The Company has applied to list the Units,
Common Stock and Warrants on the Boston Stock Exchange ("BSE") and expects to
list its securities on this exchange and it is anticipated that such securities
will also be traded on the Nasdaq SmallCap Market. If the Company's securities
are delisted from the BSE, they could become subject to Rule 15g-9 under the
Exchange Act, which imposes additional sales practice requirements on
broker-dealers which sell such securities to persons other than established
customers and accredited investors. For transactions in securities covered by
Rule 15g-9, a broker-dealer must make a special suitability determination for
the purchaser and have received the purchaser's written consent to the
transaction prior to the sale. Consequently, such rule may adversely affect the
ability of broker-dealers to sell the Company's securities and may adversely
affect the ability of purchasers in this Offering to sell in the secondary
market any of the Company's securities acquired hereby.
19. UNDERWRITER'S INFLUENCE ON THE MARKET. A significant amount of the
Units offered may be sold to customers of the Underwriter. Such customers
subsequently may engage in transactions for the sale or purchase of such Units
and may otherwise effect transactions in such securities. If they participate in
the market, the Underwriter may exert substantial influence on the market, if
one develops, for the Units, Common Stock and Warrants. Such market-making
activity may be discontinued at any time. The price and liquidity of the Units,
Common Stock and Warrants may be significantly affected by the degree, if any,
of the Underwriter's participation in such market. See "Underwriting."
20. POSSIBLE RESTRICTIONS IN MARKET-MAKING ACTIVITIES IN THE COMPANY'S
SECURITIES. The Underwriter has advised the Company that it intends to make a
market in the Company's securities. Regulation M, which was adopted to replace
Rule 10b-6 and certain other rules promulgated under the Exchange Act, may
prohibit the Underwriter from engaging in any market-making activities with
regard to the Company's securities for a period of five business days (or such
other applicable period as Regulation M may provide) prior to any solicitation
by the Underwriter of the exercise of Warrants until the latter of the
termination of such solicitation activity or the termination (by waiver or
otherwise) of any right that the Underwriter may have to receive a fee for the
exercise of the Warrants following such solicitation. As a result, the
Underwriter may not be able to provide a market for the Company's securities
during certain periods when
10
<PAGE>
the Warrants are exercisable. Any cessation of the Underwriter's market-making
activities could have an adverse effect on the market price of the Company's
securities. See "Underwriting."
21. POSSIBLE ADVERSE EFFECT OF PENNY STOCK REGULATIONS ON THE LIQUIDITY OF
THE COMPANY'S SECURITIES. The Company intends to apply for listing of its
securities on the Nasdaq SmallCap Market. In the absence of the Common Stock
being quoted on Nasdaq and if the Common Stock is not listed on an exchange,
trading in the Common Stock would be covered by Rule 15g-9 promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") if the Common
Stock is a "penny stock." Under such rule, broker-dealers who recommend such
securities to persons other than established customers and accredited investors
must make a special written suitability determination for the purchaser and
receive the purchaser's written agreement to a transaction prior to sale.
Securities are exempt from this rule if the market price is at least $5.00 per
share.
The Commission adopted regulations that generally define a penny stock to be
any equity security that has a market price of less than $5.00 per share,
subject to certain exceptions. Such exceptions include an equity security listed
on Nasdaq, and an equity security issued by an issuer that has (i) net tangible
assets of at least $2,000,000, if such issuer has been in continuous operation
for three years, (ii) net tangible assets of at least $5,000,000, if such issuer
has been in continuous operation for less than three years, or (iii) average
revenue of at least $6,000,000 for the preceding three years. Unless an
exception is available, the regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated therewith.
If the Company's Common Stock were to become subject to the regulations
applicable to penny stocks, the market liquidity for the Common Stock and
Warrants would be severely affected, limiting the ability of broker-dealers to
sell the Common Stock and Warrants and the ability of purchasers in this
Offering to sell their Common Stock and Warrants in the secondary market. There
is no assurance that trading in the Common Stock and Warrants will not be
subject to these or other regulations that would adversely affect the market for
such securities.
22. POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS. The Warrants
offered hereby are redeemable, in whole or in part, at a price of $.10 per
Warrant, commencing one year after the Effective Date (or earlier with the
consent of the Underwriter) and prior to their expiration; provided that (i)
prior notice of not less than 30 days is given to the Warrantholders; (ii) the
closing bid price of the Common Stock if traded on the Nasdaq SmallCap Market,
or the last sales price per share if listed on the Nasdaq National Market or a
national exchange, on each of the 10 consecutive business days ending on the
third business day prior to the date on which the Company gives notice of
redemption has been at least 250% ($11.25 per share) of the current Warrant
exercise price; and (iii) Warrantholders shall have exercise rights until the
close of the business day preceding the date fixed for redemption. Notice of
redemption of the Warrants could force the holders to exercise the Warrants and
pay the Exercise Price at a time when it may be disadvantageous for them to do
so, or to sell the Warrants at the current market price when they might
otherwise wish to hold them, or to accept the redemption price, which may be
substantially less than the market value of the Warrants at the time of
redemption. See "Description of Securities-Warrants."
23. ISSUANCE OF ADDITIONAL SECURITIES. The Board of Directors of the
Company will have authority to issue an unlimited number of Class A Special
Shares with voting liquidation, conversion and other rights without the consent
or vote of the shareholders of the Company. The issuance of additional Class A
Special Shares by the Company's Board of Directors may adversely dilute the
proportionate equity interest and voting power of holders of Common Shares,
including investors under this offering. See "Description of Securities; Class A
Special Shares."
24. REQUIREMENTS OF CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION IN
CONNECTION WITH THE EXERCISE OF THE WARRANTS. The Warrants offered hereby are
not exercisable unless, at the time of exercise, (i) there is a current
prospectus relating to the Common Stock issuable upon the exercise of the
Warrants under an
11
<PAGE>
effective registration statement filed with the Securities and Exchange
Commission, and (ii) such Common Stock is then qualified for sale or exempt
therefrom under applicable state securities laws in the jurisdictions in which
the various holders of Warrants reside. There can be no assurance, however, that
the Company will be successful in maintaining a current registration statement.
After a registration statement becomes effective, it may require updating by the
filing of a post-effective amendment. A post-effective amendment is required (i)
any time after nine months subsequent to the effective date when any information
contained in the prospectus is over sixteen months old, (ii) when facts or
events have occurred which represent a fundamental change in the information
contained in the registration statement, or (iii) when any material change
occurs in the information relating to the plan or distribution of the securities
registered by such registration statement. The Company anticipates that this
Registration Statement will remain effective for at least nine months following
the date of this Prospectus or until September , 1998 assuming a post
effective amendment is not filed by the Company. The Warrants will be separately
tradeable and separately transferable from the Common Stock offered hereby
immediately commencing on the Effective Date. The Company intends to qualify the
Warrants and the shares of Common Stock issuable upon exercise of the Warrants
in a limited number of states, although certain exemptions under state
securities ("blue sky") laws may permit the Warrants to be transferred to
purchasers in states other than those in which the Warrants were initially
qualified. The Company will be prevented, however, from issuing shares of Common
Stock upon exercise of the Warrants in those states where exemptions are
unavailable and the Company has failed to qualify the Common Stock issuable upon
exercise of the Warrants. The Company may decide not to seek, or may not be able
to obtain, qualification of the issuance of such Common Stock in all of the
states in which the holders of the Warrants reside. In such a case, the Warrants
of those holders will expire and have no value if such Warrants cannot be
exercised or sold. See "Description of Securities".
25. NON-REGISTRATION IN CERTAIN JURISDICTIONS OF SHARES UNDERLYING THE
WARRANTS. Although the Common Stock and the Warrants will not knowingly be sold
to purchasers in jurisdictions in which they are not registered or otherwise
qualified for sale, purchasers may buy the Common Stock or Warrants in the
aftermarket or may move to jurisdictions in which the shares of Common Stock
issuable upon exercise of the Warrants are not so registered or qualified during
the period that the Warrants are exercisable. In such event, the Company could
be unable to issue shares to those persons desiring to exercise their Warrants
unless and until the shares could be registered or qualified for sale in the
jurisdiction in which such purchasers reside, or an exemption to such
qualification exists or is granted in such jurisdiction. If the Company was
unable to register or qualify the shares in a particular state and no exemption
to such registration or qualification was available in such jurisdiction, in
order to realize any economic benefit from the purchase of the Warrants, a
holder might have to sell the Warrants rather than exercising them. No assurance
can be given, however, as to the ability of the Company to effect any required
registration or qualification of the Common Stock or Warrants in any
jurisdiction in which registration or qualification has not already been
completed. See "Description of Securities--Warrants."
26. NO FORMAL DISTRIBUTION AGREEMENT. The Company does not maintain formal
agreements with its distributors, as is the practice in the industry. Therefore,
there can be no assurance that the Company will be able to find distributors to
distribute its products under terms and conditions that are reasonable to the
Company. Any future inability to provide for distribution under terms and
conditions that are reasonable may have a material adverse impact on the
Company's profitability. See "Business-Marketing and Distribution."
12
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of Securities
offered hereby at public offering prices of $6.00 per Share and $.125 per
Warrant, after deducting underwriting commissions and offering expenses to be
paid by the Company, is estimated to be $4,030,000. The Company expects to apply
the net proceeds of the Offering as follows:
<TABLE>
<CAPTION>
APPROXIMATE PERCENTAGE OF
APPLICATION OF PROCEEDS AMOUNT NET PROCEEDS
- ------------------------------------------------------------------ ------------ ---------------
<S> <C> <C>
New Product Development(1)........................................ $ 2,000,000 49.6%
Sales and Marketing(2)............................................ 320,000 7.9%
Hire Additional Personnel(3)...................................... 180,000 4.5%
Payment of Financial Advisory Fee(4).............................. 50,000 1.3%
Repayment of Trade Payables(5).................................... 1,100,000 27.3%
Working Capital(6)................................................ 380,000 9.4%
------------ ---
Total....................................................... 4,030,000 100%
------------ ---
------------ ---
</TABLE>
- ------------------------
(1) The net proceeds allocated to new product development are expected to be
applied towards the development of new lines of wallcoverings and designer
fabrics as well as the development of new products such as decorative
ceiling tiles and floor coverings.
(2) The net proceeds allocated to marketing and sales are expected to be applied
towards the promotion of the Company's brands in their respective markets,
including North America, Europe and Southeast Asia, and expansion of the
Company's markets in the United States and Asia over the next 24 months. The
proceeds are expected to be applied to market research, distributor
incentive programs and sales person incentive programs.
(3) The Company anticipates hiring additional sales and operations employees and
has allocated these net proceeds to fund certain incremental costs over the
next 24 months.
(4) $50,000 will be paid to the Underwriter pursuant to a twelve month financial
advisory agreement, all of which is payable upon consummation of the
Offering.
(5) The net proceeds allocated to trade payables are expected to be applied
towards (i) payment of overdue accounts with certain suppliers which include
The Borden Company, and Zen Wallcoverings and (ii) payments required to
finance the increase in the Company's product inventories of Company brand
wallcoverings and designer fabrics as well as paints and, to a lesser
extent, non Company brand wallcoverings necessary to service the Company's
continued growth and expansion of its markets.
(6) The net proceeds allocated to working capital includes funds for general
corporate purposes such as financing accounts receivable and payment of
trade payables.
The foregoing represents the Company's estimate of the allocation of the net
proceeds of the Offering, based upon the current status of its operations and
anticipated business needs. It is possible, however, that the application of
funds will differ considerably from the estimates set forth herein due to
changes in the economic climate and/or the Company's planned business operations
or unanticipated complications, delays and expenses, as well as any potential
acquisitions that the Company may consummate, although no specific acquisition
has been identified. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Any reallocation of the net proceeds will
be at the discretion of the Board of Directors of the Company.
Any additional net proceeds realized from the exercise of the Over-Allotment
Option (up to approximately $665,827) will be added to the Company's working
capital.
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<PAGE>
Pending application, the net proceeds will be invested principally in
short-term certificates of deposit, money market funds or other short-term
interest-bearing investments.
The Company estimates that the net proceeds from this Offering will be
sufficient to meet the Company's liquidity and working capital requirements for
a period of 24 months from the completion of this Offering. In the event that
the Company consummates any acquisition, although no specific acquisition has
been identified, and no plans, proposals or arrangements currently exist in this
regard, such funds will be derived from the funds currently allocated to working
capital or from revenues generated from the Company's operations.
DIVIDEND POLICY
The Company has never paid or declared dividends on its Common Stock. The
payment of cash dividends, if any, in the future is within the discretion of the
Board of Directors and will depend upon the Company's earnings, its capital
requirements, financial condition and other relevant factors. The Company
intends, for the foreseeable future, to retain future earnings for use in the
Company's business.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997 and as adjusted to reflect the sale of 833,000 Shares of
Common Stock and 833,000 Warrants, offered hereby. The information provided
below should be read in conjunction with the other financial information
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
---------- -----------
Long-term liabilities, less current maturities...................... 2,966,281 2,966,281
Shareholders' equity:
Capital Stock, unlimited shares authorized: 1,250,000 issued and
outstanding(1); and 2,083,000 issued and outstanding as
adjusted.......................................................... 163 4,030,163
Foreign currency transaction adjustment............................. (175,205) (175,205)
Retained earnings................................................... 1,936,065 1,936,065
Total shareholders' equity........................................ 1,761,023 5,791,023
Total capitalization.............................................. 4,727,304 8,757,304
</TABLE>
- ------------------------
(1) Represents the rollover of 120 shares in the existing companies into
1,250,000 shares of Common Stock of the Company. Does not include 750,000
shares of Common Stock provided for issuance under the Company's Stock
Option Plan.
(2) Reflects the issuance of 833,000 shares of Common Stock by the Company in
connection with this Offering. Does not include 750,000 shares of Common
Stock provided for issuance under the Company's Stock Option Plan.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
<S> <C>
(3) Trade Payables............................................................................. $ 6,358,585
Repayment of trade payables from offering proceeds (see use of proceeds).................... (1,100,000)
-----------------
Balance..................................................................................... $ 5,258,585
-----------------
-----------------
</TABLE>
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<PAGE>
DILUTION
Dilution represents the difference between the initial public offering price
paid by the purchasers in the Offering and the net tangible book value per share
immediately after completion of the Offering. Net tangible book value per Share
represents the amount of the Company's total assets minus the amount of its
liabilities and intangible assets divided by the number of shares outstanding.
As of December 31, 1997, the net tangible book value of the Company's Common
Stock was $1,761,023 or $1.41 per share. Without taking into account any changes
in net tangible book value after December 31, 1997, other than to give effect to
the sale of the Units offered hereby and the receipt of the net proceeds of this
Offering, the pro forma net tangible book value of the Company as of December
31, 1997 would have been $5,791,0230 or $2.78 per share. Consequently, there
will be an immediate increase in net tangible book value of $1.37 per Share to
the existing shareholders and an immediate substantial dilution (i.e. the
difference between the offering price of $6.00 per share, assuming no value is
attributed to the Warrants, and the pro forma net tangible book value per Share
after the Offering) of $3.22 or 54% to new investors purchasing the Shares
offered hereby.
The following table illustrates, as of December 31, 1997, this per share
dilution:
<TABLE>
<S> <C> <C>
Public offering price per Share............................... $ 6.00
Net tangible book value before Offering(1).................. $ 1.41
Increase per Share attributable to new investors............ $ 1.37
Pro forma net tangible book value per Share after
Offering(1)................................................. $ 2.78
---------
Dilution per Share to new investors(1)........................ $ 3.22
---------
---------
</TABLE>
The following table summarizes, as of December 31, 1997, the total number of
shares of Common Stock purchased from the Company, the total consideration paid,
and the average price per share paid by the existing shareholders and by new
investors who purchase Units pursuant to this Offering. The computation excludes
any value ascribed to or proceeds relating to the Warrants.
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE AVERAGE
SHARES UNDERLYING OF TOTAL AGGREGATE OF TOTAL PRICE
UNITS PURCHASED(1) SHARES CONSIDERATION CONSIDERATION PER SHARE
------------------ ------------- ------------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
Existing
Shareholders...... 1,250,000 60% $ 1,761,023 26% 1.41
New Investors....... 833,000 40% $ 4,998,000 74% 6.00
---------- --- ------------- ---
Total......... 2,083,000 100% $ 6,759,023 100%
---------- --- ------------- ---
---------- --- ------------- ---
</TABLE>
- ------------------------
(1) This information does not include (i) 750,000 Shares that may be issued
under the Company's Stock Option Plan, (ii) 83,300 Shares issuable upon the
exercise of the Underwriters' Option and (iii) 124,950 Shares and Warrants
available from the Company under the over-allotment option.
16
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data and other
operation information of the Company. The selected historical financial data in
the table for the years ended December 31, 1997 and 1996 is derived from the
audited financial statements of the Company. The selected financial data set
forth below should be read in conjunction with the Company's financial
statements and notes thereto and with the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Total revenues...................................................... $ 20,757,423 $ 18,927,369 $ 18,552,166
Total costs and expenses............................................ 19,957,595 18,503,798 19,125,056
Net income (loss)................................................... 799,828 423,571 (572,890)
Net income (loss) per common share(1)............................... 0.64 0.34 (0.46)
Weighted average common shares outstanding(1)....................... 1,250,000 1,250,000 1,250,000
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------- DECEMBER 31,
AS ADJUSTED(2) ACTUAL 1996
-------------- ------------- -------------
<S> <C> <C> <C>
Working capital.................................................... $ 5,562,966 $ 1,532,966 $ 2,164,962
Total assets....................................................... 16,794,832 15,694,832 13,042,385
Total liabilities.................................................. 12,833,809 13,933,809 11,866,358
Total stockholders' equity......................................... 5,791,023 1,761,023 1,176,027
</TABLE>
- ------------------------
(1) Reflects the issuance of 1,250,000 shares of Common Stock of the Company in
exchange for all of the outstanding common stock of the predecessor
companies.
(2) Reflects the issuance of 833,000 shares of Common Stock and 833,000
Warrants, offered hereby and the application of the net proceeds therefrom.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The statements contained in this Prospectus that are not historical are
forward looking statements, including statements regarding the Company's
expectations, intentions, beliefs or strategies regarding the future. Forward
looking statements include the Company's statements regarding liquidity,
anticipated cash needs and availability and anticipated expense levels. All
forward looking statements included in this prospectus are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward looking statement. It is important to note
that the Company's actual results could differ materially from those in such
forward looking statements. Among the factors that could cause actual results to
differ materially are the factors detailed in the risks discussed in the " Risk
Factors" section included in this Prospectus at page 9.
The wallcoverings, decorative fabrics and paint markets are highly
competitive and consists of foreign and domestic manufacturers and distributors
most of whom are larger and have greater resources than the Company.
The Company's future success as a designer and distributor of high quality
wallcoverings and designer fabrics will be influenced by several factors
including the ability of the Company to efficiently meet the quality and design
requirements of its customers, management's ability to evaluate the public's
quality and design requirements and to achieve market acceptance of its
wallcoverings and designer fabrics collections. Further factors impacting the
Company's operations are increases in expenses associated with continued sales
growth, the ability of the Company to control costs, to develop products with
satisfactory profit margins and the ability to develop and manage the
introduction of new product lines and competition.
The Company's customer base is divided among national and regional wholesale
distributors, professional interior designers and large retail chains in the
United States and Canada. The Blonder Company accounts for 14 % of the Company's
sales. No other customer accounts for more than 10% of the Company's sales.
Approximately 21.54% of the Company's sales are to national distributors, 21.51%
are to regional distributors, 0.42% to interior designers and 16.22% to retail
chains. The remaining 40.31% are to independent retail stores.
The Company is not dependent upon any major customers for a significant
portion of its revenues. However approximately 12 customers account for 44% of
the Company's revenues. These include The Blonder Company, Color Your World, Key
Wallcoverings, Gardner Wallcoverings, Fashion Wallcoverings, Seabrook
Wallcoverings, Images Wallcoverings, Atlas Wallcoverings, G & W Wallcoverings,
Hunter & Co., Sears Canada and Walltrends.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO FISCAL YEAR ENDED DECEMBER
31, 1996.
Revenues for the fiscal year ended December 31, 1997 were $20,757,423, a
9.67% increase over year revenues of $18,927,369. This increase was due to
greater acceptance of product lines in the market, increased market share from
the independent retail stores, increase in residential real estate sales and
expansion of the export market coupled with the improving economic climate in
North America.
Gross profit for the Company for the fiscal year ended December 31, 1997 was
35.69% of sales, an improvement as compared to the fiscal year ended December
31, 1996 which was 35.00%. This positive change can be attributed to higher
prices, more efficient buying practices and a higher mix of sales to the
independents and an increase in sales to independent retail stores.
18
<PAGE>
Selling expenses for the Company decreased by 4.76% in the fiscal year ended
December 31, 1997 as compared to the fiscal year ended December 31, 1996. This
decrease is attributable primarily to a reduction in freight costs and warehouse
wages.
General and administrative expenses for the Company increased by 9.37% in
the fiscal year ended December 31, 1997 as compared to the fiscal year ended
December 31, 1996. In 1996, management payroll was reduced as part of a cost
reduction plan.
Rosedale develops wallpaper and fabric books which are created for each
collection and sold through distributors. The majority of expenditures for the
creation of these books are incurred in the quarter before the launch of the
collection. Some expenditure is incurred as early as six to eight months in
advance. Revenues generated from the sale of books are netted from the costs
incurred in the same period and the net amount is shown on the income statement.
Because expenditures are made in the quarter before the launch, there is not
always a matching of revenues and expenses e.g. costs for a January launch would
be recorded the last quarter of the fiscal year, whilst the revenue would be
recorded in the following year. The Company ensures that there are form orders
on hand from customers before significant expenditures are incurred to produce
the books. Therefore, there are no speculative risks in their production. Book
development costs for the fiscal year ended December 31, 1997 was $189,566
compared to a recovery of ($278,079) for the same period last year. This is
attributable to delays in the launching of certain collections during 1997.
Design studio expenses for the Company decreased $72,576 to $826,796 for the
fiscal year ended December 31, 1997 versus the same period last year. This
reduction is attributable lower staff requirements as a result of the
implementation of the CAD/CAM design computer system for the studio. Prior to
the implementation of the CAD system, all coloring of new designs and color
changes to existing designs as well as the creation of non sophisticated designs
were done manually. This process required approximately 10 designers (4 full
time and 6 free lance). With the CAD system, the whole process will be
computerized requiring only three designers (2 full time and 1 freelance).
Income from operations increased $393,385 to $1,306,002 for the fiscal year
ended December 31, 1997 versus the prior year. This increase in income from
operation is directly a result for continued sales growt5h and improved margins
coupled with strict cost control.. In addition, for fiscal 1997, the Company
revised its estimate of the useful lies for cylinders and related design costs
extending the amortization period to five years from three years on a straight-
line basis.
This change was necessary to more accurately reflect the estimated useful
lives of the cylinders and related design costs. As the result, the current
year's amortization charge was reduced by approximately $480,000.
Interest expense for the Company for the fiscal year ended December 31, 1997
decreased 10.84% to $209,403 from $234,865 for the fiscal year ended December
31, 1996. This decrease in interest expense is directly attributable to lower
interest rates and the offset of interest earned on the mortgages.
Insurance premiums on life insurance policies taken out by the Company on
the lives of three of its executives have been presented below operating income
because of the magnitude of the premiums. Premium expense for the fiscal year
ended December 31, 1997 decreased 1.50% to $188,963 from $191,845 reflecting an
increase in the capitalization of premiums to the cash surrender values of the
life insurance policies.
Net income for the fiscal year ended December 31, 1997 was $799,8288 as
compared to $423,571 for the fiscal year ended December 31, 1996 an increase of
$376,257 or 88.83%. $174,202 or 46.30% of this increase pertains to a cumulative
effect of a change in accounting principle for book development and design
costs. In 1997, the company changed the accounting principle for recognition of
book development and design costs from a full write-off to a deferral over three
years. The subsidy represent the discount between the costs of the sample books
and the price at which they are sold to major retailers. The company
19
<PAGE>
considers that it is more appropriate to recognize the production of sample
books of wallpaper as an asset, as there is enduring value which should be
recognized over the life of the collection. The balance of the increase in net
income of 53.70% is attributable mainly to the following factors:
- A change in the useful life for cylinders and related design costs from
three years to five years.
- deferral of expenses relating to book development, and design costs for
launches of collections in the following year.
- higher prices for product lines
- better mix of sales
- stricter cost control
FISCAL YEAR ENDED DECEMBER 31, 1996, COMPARED TO FISCAL YEAR ENDED DECEMBER
31, 1995
Revenues for the fiscal year December 31, 1996 were $18,927,369, a 2.02%
increase over the prior year revenues of $18,552,166. This marginal increase is
a direct result of a turnaround in the Canadian economy resulting in a larger
volume of sales to independent retail stores.
Gross profit for the Company for the fiscal year ended December 31, 1996 was
35%, a 2.44% decrease as compared to the prior year which was 37.44%. This
decrease is attributable to clearance sales of old collections and overstocks
and a reduction in sales to the United States in 1996 which are at higher
margins
Selling expenses for the Company decreased by 10.72% to $2,437,567 for the
fiscal year ended December 31, 1996 from $2,730,318 for the fiscal year ended
December 31, 1995. This decrease in selling expenses is attributable to stricter
cost control and consolidation of sales territories.
General and administrative expenses for the Company decreased by 15.91% from
$2,382,302 to $2,003,119 in the fiscal year ended December 31, 1996 as compared
to the fiscal year ended December 31, 1995. This significant decrease in general
and administrative expenses is attributable to a reduction in management payroll
as part of a cost reduction plan, a $441,200 reversal in unpaid management
bonuses from 1993 and stricter costs controls.
Book development recovery for the fiscal year ended December 31, 1996
provided income to the Company of $278,079, an increase of $97,840 in recoveries
over the same period for the prior year. This increase was due to increased
sales and improved timing and launches of collections.
Income from operations increased $483,182 in fiscal 1996 from $429,435 to
$912,617, an increase of 112%. As a percentage of sales, income improved to
4.82% as compared to 2.31% for 1996. The increase is as direct result of sales
growth and improved growth margin.
Interest expense decreased $523,795 in fiscal 1996 from $758,660 in fiscal
1995 to $234,865 in fiscal 1996. In 1995, approximately $519,000 was either paid
or accrued in the financial statements as interest expense on the loans taken
out with the Laurentian Bank of Canada to fund premiums on $22,000,000 of life
insurance taken out by the Company on the lives of three key executives. In
1996, the unutilized portion of these loans which were previously invested in
term deposits were collapsed and the proceeds used to pay down the loans. This
resulted in a significant reduction in interest expense.
Insurance premiums increased marginally by $1,258 from $190,587 to $191,845.
These premiums represent the estimated annual expense portion of the premiums on
the insurance policies on the lives of two executives and one shareholder.
Net income for 1996 was $423,571 compared to a loss of $572,890 for 1995.
This significant turnaround is directly attributable to increased sales
especially to independent retail stores resulting from an improved economic
climate in North America, high prices and more efficient buying practices. In
20
<PAGE>
addition, strict cost control and the reduction in interest expense assisted in
the Company being able to achieve this turnaround.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1995, the Company had a net increase in cash of $30,139 from
operations which represented the residual balance from bank borrowings. The
Company continued to acquire inventory in the amount of $1,183,734 financed
primarily from an add back of amortization of $595,176 and collections of
accounts receivable of $754,099. Bank indebtedness increased by $1,914,752,
which was used to purchase capital equipment of $902,570 and inventory of
$1,183,734 and to pay trade payables in the amount of $460,691.
In 1996, the Company used net cash in operating activities of $27,194. The
principal source cash was from net income of $423,571, a decrease in inventory
of $676,507 and an add-back of amortization of $651,143. The Company purchased
capital equipment of $871,703 which was financed primarily from loans from
directors of $510,298, long-term debt of $510,414 and proceeds from bank
indebtedness of $410,106. During the year the Company negotiated special payment
terms with certain major suppliers and implemented strict budgetary and
financial controls. As a result, the company was able to pay down suppliers in
the amount of $1,299,429. As a result although receivables increased $487,558,
the Company was able to increase cash by $464,297.
The Company used cash of $637,168 in operating activities for the fiscal
year ended December 31, 1997 as compared to the fiscal year ended December 31,
1996 when it generated cash of $464,297. Cash was used principally for product
costs, $572,655, accounts receivable, $964,145, inventory $1,222,626, property
plant and equipment, $945,933 and financing two mortgages in the amount of
$415,044 held by related companies. The principal source of cash was from net
income--$799,828, add-back of amortization, $572,655 and account payable,
$1,549,646. Net cash provided from financing activities fiscal 1996 was $833,533
which was provided by proceeds from bank indebtedness--$520,267, proceeds from
long-term debt, $134,616 and loans from the directors, $135,634.
The Company has secured credit arrangements with the National Bank of Canada
in the amount of Cdn.$7,910,000. Of this amount, Ontario has Cdn.$2,750,000 by
way of a demand operating loan and Cdn.$1,250,000 by way of line of credit and
Rosedale has Cdn.$3,500,000 by way of an operating loan and/ or letters of
credit on a revolving demand loan agreement and Cdn.$250,00,000 by way of an
operating loan bulge. The credit facilities bear interest at rates varying
between the bank's prime rate and prime plus 1.5%. All borrowings are
collaterized by the assets of the Company.
The Company will receive net proceeds of this Offering in an amount
estimated to be $4,030,000. The Company believes that the net proceeds of the
Offering, coupled with income from operations and the credit facilities of
Ontario and Rosedale will fulfill the Company's working capital needs for at
least the next two years. AS the Company continues to grow, bank borrowings, or
other debt placements and equity offerings may be considered, in part, or in
combination, as the situation warrants.
21
<PAGE>
BUSINESS
HISTORY OF THE COMPANY
The Company commenced operations as a single retail store, Ontario Paint &
Wallpaper Limited, in 1913 and has operated as a family owned business since its
inception. The focus of the business during its early years was the sale of
paint to homeowners and major contractors. The retail store is still in
operation in its original location and has become a Toronto landmark. In the
early 1970's, Ontario Paint & Wallpaper Limited diversified into wallpaper
distribution. In 1981, the Company's Rosedale subsidiary commenced operations
under the name Desart Wallcoverings Inc. In 1988, Desart Wallcoverings Inc.
changed its name to Rosedale Wallcoverings Inc. and in 1995 the name was changed
to Rosedale Wallcoverings & Fabrics Inc. Over the years, the Company has become
one of the largest independent wholesale wallpaper distributors in Canada. In
the early 1990's the Company continued to diversify by designing wallcovering
collections for distribution in Canada, the United States, Europe, South America
and Asia.
On May 14, 1997 the Company was formed by the shareholders of Rosedale and
Ontario for the purpose of consolidating the business of the two subsidiaries.
GENERAL
The Company, through its two wholly-owned subsidiaries, Ontario and
Rosedale, designs, markets and distributes residential wallcoverings and
designer fabrics. The Company also operates a retail paint and wallpaper store
located in downtown Toronto, Canada which has been in continuous operation since
1913. The Company's products include wallpaper and wallpaper borders (which are
collectively referred to as wallcoverings), designer fabrics and paint.
The Company designs wallcovering and designer fabric collections that it
distributes under its own brand names. Wallcoverings and fabrics sold under
Company brand names are manufactured for the Company on an outsource basis by
third party manufacturers. In addition to selling its own brand name
wallcoverings and fabrics, the Company is also a wholesale distributor of
wallcoverings designed and manufactured by other manufacturers. Wholesale
distribution of other manufacturers' wallcoverings is done through the Company's
Ontario subsidiary. Design and distribution of Company brand wallcoverings is
accomplished primarily through its Rosedale subsidiary and to a lesser extent
through its Ontario subsidiary.
The Company's Rosedale subsidiary has received a number of industry
recognized awards. Since 1994, the Rosedale subsidiary has been received the
"Estate Award for Excellence in Wallcovering Design" on four separate occasions.
This award is presented by a leading trade publications and is given in
recognition of wallcovering collections that exhibit outstanding design
characteristics. In addition, Rosedale has received the "Hot Line Elite" award
on numerous occasions which is presented by another leading trade publication to
the wallcovering producer whose collections have been cited by independent
retail stores throughout the United States as top sellers. Rosedale has also
twice been named "Supplier of the Year" by its largest distributor, The Blonder
Company, most recently in 1997. Rosedale achieved the honor of being The Blonder
Company's supplier of the year twice despite the fact that its collections
represent only approximately 5% of the total wallcovering collections offered by
The Blonder Company in each year.
Sales of Company Name Brand wallcoverings accounts for approximately 54% of
the Company's total revenues and wholesale distribution of wallcoverings under
non-company brand names accounts for approximately 29% of the Company's total
revenues. Sales of designer fabrics accounts for approximately 12% of the
Company's revenues and the Company's retail paint and wallpaper store generates
approximately 5% of the Company's annual revenues.
The Company distributed approximately 26 Company brand wallcovering and
fabric collections to approximately 10,000 to 20,000 retail wallpaper and paint
stores worldwide in 1996. In addition, the
22
<PAGE>
Company's Ontario subsidiary distributed approximately 47 non-Company brand
wallcovering collections to approximately 1,700-2,000 home decorating stores in
Canada in 1996.
The Company believes that its product mix of wallcoverings, designer fabrics
and paints, along with its newer offerings of floor coverings and ceiling tiles
presents significant cross marketing opportunities. Rosedale has recently
introduced wallcovering and fabric sample books that include coordinated carpets
and area rugs, a first in the industry.
COMPANY BRANDS
The Company designs and distributes approximately 10 different lines of
wallcoverings and fabrics sold under the Company's own brand names each year. A
variety of wallcovering and fabric collections are sold under each of the
Company's brand names. Each wallcovering collection sold by the Company consists
of a variety of coordinated wallpapers, borders and fabrics. Collections take
approximately twelve months to develop and are generally available in the
marketplace for a minimum of 2 years after launch. The Company's Rosedale
subsidiary designs and distributes 6 wallcovering collections and 2 fabric
programs per year, sold under 5 brand names, and the Ontario subsidiary designs
and distributes 2 wallcovering collections per year, sold under 2 brand names.
Such products are distributed to approximately 10,000 to 20,000 retail stores
and interior designers worldwide.
Wallcovering and designer fabric collections are developed by the Company's
design staff using a variety of color schemes to create thematically consistent
collections. Each collection is tailored to fit the particular target market for
the brand name for which the collection is being created. The Company's
management, design, marketing and sales staff approve collections for production
based upon their assessment of the commercial potential of those collections in
each of the Company's target markets.
Each of the Company's subsidiaries maintains its own design studio and
creative staff. Rosedale's design studio is located in its Concord, Ontario
facility. Recently, the Company's Rosedale subsidiary installed a state of the
art computer aided design (CAD) system, with two workstations, for the creation
and coloring of wallcovering and fabric designs. The system provides Rosedale's
design staff with the ability to produce a wide variety of designs and color
schemes and has reduced the time required for producing finished designs. The
Company's Ontario subsidiary maintains a design studio and staff in London,
England.
Company brand name wallcoverings and fabrics include; Rosedale, Cambridge
Studios, Hamilton House, Kingsway Fabrics, Concord and Ridley Nash. The
Company's brand name wallcoverings and fabrics are targeted for middle and upper
middle income consumers and to the high end interior designer market where the
Company's wallcoverings can compete based upon quality and design. The Company
does not design wallcovering and fabric collections for the lower end of the
market where competition is based primarily upon price.
The Company's Rosedale and Cambridge Studios brands were established in 1987
and 1993, respectively, and are designed and marketed by the Company's Rosedale
subsidiary. The Concord and Ridley Nash lines of wallcoverings were established
in 1992 and 1995, respectively, and are designed by the design staff of the
Company's Ontario subsidiary. The Company produces approximately 8 different
lines of wallcoverings under its Rosedale, Cambridge Studios, Concord and Ridley
Nash brands each year. Wallcovering collections sold under all four brand names
are targeted to middle to and upper middle income consumers.
The Company's Hamilton House brand, which was introduced in 1995 by the
Company's Rosedale subsidiary in order to provide the Company with a brand which
is specifically designed for the interior design market and decorator boutiques.
With the addition of the Hamilton House brand line of wallcoverings, Rosedale's
product mix was expanded to cover all major price categories from the middle
level market through to the high end interior designer market.
23
<PAGE>
The Concord and Ridley Nash brands were established by the Company's Ontario
subsidiary to provide Ontario with its own brand name of wallpaper products for
introduction into the United States market. Both brands are created in London,
England by the Company's design staff. The Company designs and distributes one
wallcovering collection per year under each brand name. Both lines of
wallcoverings are targeted for middle to upper income consumers.
The Company's various brands enable the Company to take advantage of the
changing nature of the North American wholesale distribution business, including
the growth of large national distributors as well as the trend towards
consolidation amongst the smaller regional distributors, and to broaden its
product mix to cover all major price categories with the market with the
exception of the low margin, mass merchant business.
DECORATIVE FABRICS AND FLOOR COVERINGS
As part of the Company's growth strategy, its Rosedale subsidiary has
recently expanded its product lines to include coordinated products, namely
decorative fabrics, soft window treatments and floor coverings. The Company's
decorative fabric products are sold under the Kingsway Fabrics brand name and
are intended to be utilized by consumers for draperies, upholstery and bed
coverings. The expansion into the coordinated fabric market has been undertaken
in order to take advantage of the tremendous trend towards coordinated selling
in the home decorating industry. These changes encompass the way that products
are introduced into the market as well as the nature of consumer buying habits.
Designer fabrics represent approximately 12% of Rosedale's annual revenues.
Rosedale designs and markets two fabric collections per year which are
coordinated with its wallcovering collections. Recently, Rosedale has added
coordinated area rugs and runners to compliment its wallcovering and fabric
offerings.
The Company believes that offering a combination of wallcoverings,
decorative fabrics and floor coverings provides significant opportunities for
cross merchandising of the Company's products. This in turn opens other markets
for the Company's product lines. For example, by offering coordinated lines of
wallcoverings, fabrics, and floor coverings, consumers looking to purchase
wallcoverings will be exposed to the Company's designer fabric and floor
covering lines. The Company believes that it is now able to offer consumers a
complete home decorating package. The end result being that the Company's
products are saleable to a wider variety of retail stores and consumers.
THIRD PARTY MANUFACTURING
Company brand wallcoverings are manufactured for the Company by wallcovering
manufacturers in the United Kingdom, Canada and the United States. The Company's
Rosedale and Cambridge Studios lines of wallcoverings are manufactured in the
United Kingdom by Borden Wallcoverings Ltd. ("Borden") and Zen Wallcoverings
Ltd. ("Zen"). Borden manufacturers the majority of the Company's wallcoverings
and has been a contract manufacturer with the Company since 1985. The Company's
Hamilton House brand is manufactured in the United States by Hawthorne
Wallcoverings. The Company's wallcoverings are also manufactured in Canada by
Blue Mountain Wallcoverings Ltd. and Sunworthy Wallcoverings Inc.
Designer fabric collections designed by the Company and sold under the
Kingsway Fabrics brand name are manufactured in the United States by two
manufacturers, Santee Print Works Ltd. ("Santee") and New London Textiles, Inc.
("New London").
The Company generally enters into contracts with its manufacturers to
produce its designs to the Company's specifications on a "make and ship" basis
which means that the manufacturers hold no inventory of the Company's products.
The Company's products are manufactured on a pattern by pattern basis. The terms
and conditions of production are outlined by the Company in written instructions
provided to the manufacturers for each new design that the Company produces. The
Company maintains
24
<PAGE>
the exclusive copyrights to each of its designs and the manufacturers do not
have rights to sell the Company's designs unless permitted by the Company.
WHOLESALE DISTRIBUTION OF WALLCOVERINGS MANUFACTURED BY THIRD PARTIES
The Company, through its Ontario subsidiary is a wholesale distributor of
wallcoverings designed and produced by manufacturers located in the United
Kingdom and Canada. The Company markets wallcovering collections produced by
third party manufactures under each manufacturer's brand names. The Company has
distribution agreements with John Wilman Limited ("John Wilman") and Vymura
International PLC ("Vymura"), located in the United Kingdom, and with Norwall
Group Inc. ("Norwall"), located in Canada. The Company's distribution agreements
with John Wilman, Vymura and Norwall provide the Company with the exclusive
Canadian distribution rights for each manufacturers' wallcovering lines. The
Company believes that its position as one of the few remaining distributors not
owned by a manufacturing facility, makes it an attractive distributor to
manufacturers that do not want to sell their products to competitive
manufacturers for distribution.
NEW PRODUCTS
The Company intends to expand the products offered by its Ontario subsidiary
to include a line of retro art decorative ceiling tiles for commercial and
residential customers. The decorative ceiling tiles are designed to fit into
standard suspension ceiling frameworks and are embossed with designs that
emulate ceilings found in many turn of the century buildings. This provides
commercial and residential customers with the ability to add victorian style
ceilings to their decor. The Company believes that its decorative ceiling tiles
will be attractive to commercial users, such as restaurants looking to recreate
the look of the late 1800's.
RETAIL OPERATION
The Company's retail operation, Ontario Paint & Wallpaper, has been in
continuous operation since 1913 and the store has become a landmark in
metropolitan Toronto. The retail store sells Benjamin Moore paints and related
sundry products, including wallcoverings to customers ranging from individual
homeowners to large industrial accounts. The store offers a full line of
wallcoverings, include all brands distributed by the Company. The majority of
Ontario Paint & Wallpaper's paint sales are made to local movie studios for set
designs and to commercial customers for apartment and office buildings. Sales to
commercial customers have been growing steadily over the past two years. The
retail store is the largest single source distributor of Benjamin Moore Paints
in Canada.
The retail store offers special services to attract and maintain commercial
customers. The store maintains detailed records of paint purchases by commercial
customers. Commercial customers that have purchased paint in the past can order
additional paint simply by telephoning the store and indicating which area of
their building requires paint. The store manager then retrieves the stored
information about the building, selects the correct paint colors for the
commercial customer and then delivers the paint to the customer. In addition,
the Company has a portable paint scanner which provides retail store employees
with the ability to visit a building and scan the building's paints and return
to the store where the scanned information is transferred to a paint mixer which
then mixes matching paint colors.
The paint store is also the setting for a monthly home decorating television
show which is broadcast from the store. The television show is hosted by City
T.V., and provides practical advice on home painting and repairs. The television
show is taped from the store in front of a live audience. In June 1997, the
retail store also began presenting bi-monthly seminars for homeowners providing
elementary to advanced instruction on various painting techniques. The seminars
are conducted in conjunction with a local TV personality. The program has been
quite successful with all classes being oversold.
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<PAGE>
MARKETING AND DISTRIBUTION (COMPANY BRANDS)
The Company distributes its brand name wallcoverings and fabrics in the
United States and Canada through regional and national distributors. The Company
appoints a single distributor to a particular geographical area and their
territories generally do not overlap. The Company does not maintain formal
distribution agreements with its distributors, as is the custom in the industry.
It is understood and common practice in the industry that neither the
distributor nor the manufacturer is obligated to maintain a relationship other
than on a collection by collection basis. It is the Company's policy that each
of its distributors is obligated to purchase every collection the Company
markets or forfeit its right to be a Company distributor.
In addition the Company sells directly to selected large national and
regional retail chains and specialty stores that specialize in the sale of
wallcoverings and designer fabrics.
The Company markets and promotes its products through the distribution and
sale of sample books. The Company prepares a sample book for each of its Company
brand collections of wallcoverings and fabrics designs. The majority of the
sample books prepared by the Company contain partial sheets of wallpaper,
coordinated borders and fabrics. Recently, the Company has added coordinated
floor coverings to its sample books. In addition, sample books contain
photographs of model room settings demonstrating how the Company's
wallcoverings, coordinated designer fabrics and floor coverings look in
simulated home environments. By offering coordinated wallcoverings and fabric
collections in its sample books, the Company is able to have its entire product
line shown to a wider variety of end users. The Company also produces sample
books which contain only designer fabric samples which it distributes to fabric
wholesalers. In 1996, the Company distributed over 80,000 Company brand
wallcovering sample books and 12,000 Company brand designer fabric sample books.
The number of sample books that the Company prepares for any given
collection is determined based upon orders from the Company's distributors. The
distributors inform the Company how many books they will require for each
collection and the Company produces the sample books. The Company does not
produce sample books unless a distributor has requested them. The Sample books
are sold to distributors and the distributors, in turn, place the sample books
with retail and interior design customers who ultimately sell the Company's
products to consumers. In addition to purchasing the Company's sample books,
each distributor is also required to purchase inventory for each pattern in each
collection.
It takes between 10 to 12 months from the time that the Company approves
designs for a collection to the shipping of sample books for that collection.
Recently, the Company's Rosedale subsidiary began producing preview copies of
its sample books using its in house computer aided design ("CAD") system. This
allows Rosedale to preview its collections to distributors and to make changes
to its collections based upon feedback from distributors before the final
printing of sample books. This has resulted in a large cost saving to the
Company. Rosedale believes that this innovation will also allow it to more
specifically tailor its collections and sample books to consumer trends in the
markets on a more timely basis.
CANADIAN DISTRIBUTION
The Company sells approximately 45% of its wallcoverings and fabrics in
Canada through its Ontario subsidiary. The balance of its sales are through
regional distributors and national chains such as Color Your World and Sears
Canada. Regional distributors include Crown Wallcoverings, the largest
distributor to the Canadian interior design market, Images Wallcoverings and
Odyssey. Images Wallcoverings Ltd. and Odyssey Designs Inc., both are
distributors located on the west coast of Canada.
UNITED STATES DISTRIBUTION
Approximately 49% of the Company's wallcovering sales are made in the United
States. Distribution of the Company's wallcoverings in the United States is done
through sales to national and regional
26
<PAGE>
distributors as well as sales to large retail wallpaper chains. Regional
distributors in the United States include Walltrends, Hunter & Co., Key
Wallcoverings, G&W Distributors, Fashion Wallcoverings, Atlas Wallcoverings,
Eisenhardt Wallcoverings and Aztec. National distributors include The Blonder
Company, which distributes the Company's Cambridge Studios brand, and Seabrook
Wallcoverings, which distributes the Company's Hamilton House line of
wallcoverings.
The Company also sells directly to retail chains in the United States which
include Wallpapers to Go, Sherwin Williams, Gardener Wallcoverings, Horners and
Tretiaks.
In 1993, Rosedale embarked on the development of a separate distribution
network of wholesalers throughout North America for the purpose of distributing
its decorative fabrics. The Company designer fabrics are sold by approximately
ten independent salespersons who also sell products produced by other fabric
companies. The other fabrics sold by these salespersons generally do not compete
directly with the Company's designer fabrics in either look or price points. The
salespersons are compensated on a commission only basis. The Company does not
have contracts with any of these salespersons.
WALLCOVERING MARKET
Over two billion rolls of wallcoverings were sold worldwide in 1994, with
over 161 million rolls sold in Canada and the United States and over 500 million
rolls of residential wallcoverings were sold in Europe during the same period.
Sales of wallcoverings tend to have a direct relationship to the level of home
renovations and the economy in general, but have little relationship to new
housing starts.
The trend at the distribution level of the industry has been towards a
market characterized by fewer distributors with higher distribution volumes. The
Company has developed strong relationships with independent regional
distributors. The Company is also well positioned to take advantage of growth in
mass merchandising through its relationship with its national distributors and
large retail chains. In addition, the Company hopes to penetrate alternative
fabric markets such as apparel and soft goods industries.
PATENTS AND TRADEMARKS
The Company trademarks the names of each of its collections and brand names.
In addition, the Company copyrights designs created for its Company brand
wallcovering and fabrics.
GOVERNMENT REGULATION
The Company is subject to various Canadian regulations relating to health
and safety standards applicable warehouse operations. The Company must comply
with Canadian federal regulations administered by the Workman's Compensation
Board, relating to worker safety issues in its warehouse facility. Although the
cost of compliance with such regulations is not material, changes to existing
regulations may have a material adverse effect on the Company's business and
result of operations. The Company is also subject to U.S. Federal Regulations
relating to imports of goods and the North American Free Trade Agreement on its
products that it exports to the United States. Although the cost of compliance
with such regulations is not material, changes to existing regulations may have
a material adverse effect on the Company's business and result of operations.
EMPLOYEES
As of October 9, 1997, the Company employs 64 (62 on a full time basis)
persons, which includes 8 senior executives, 18 sales staff persons (16 full
time, 2 part time), 8 designers, 17 support staff persons and 13 warehouse
workers. The Company has no unionized employees and believes that its
relationship with its employees is satisfactory.
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<PAGE>
PROPERTIES AND FACILITIES
The Company leases facilities in Concord, Ontario for each of its
subsidiaries. The Company leases an approximately 78,000 square foot facility
for its Ontario subsidiary. The lease was amended July 13, 1995 and expires on
October 31, 2004 with an annual base rent of Cdn. $260,027. The building houses
Ontario's executive offices, warehouse and showroom. The Company leases a 47,000
square foot facility for its Rosedale subsidiary. The lease for the Rosedale
facility runs through October 31, 2004 and has a base annual rent of
Cdn.$176,640. The Rosedale subsidiary houses its design facilities, executive
offices, warehouse and showroom. Management believes that this space is adequate
for its design and warehouse needs in the foreseeable future. Management also
believes that there is ample room for expansion in the future.
The Company also leases space for its retail paint store, located in
downtown Toronto, from a company owned by Alan Fine, Chief Executive Officer of
the Company, and Sid Ackerman, the Company's President. The lease calls for
rental payments in the amount of Cdn. $24,000 per annum, plus general sales
taxes, payable in equal monthly instalments of Cdn. $2,000. The lease is for a
one year term, automatically renewable from year to year unless terminated in
writing by either the landlord or the tenant on 30 days written notice. See
"Certain Transactions."
LEGAL PROCEEDINGS
The Company is involved in legal proceedings with two former suppliers.
Economy Color Card, Co., Inc., a supplier of wallcovering sample books, filed a
claim against the Company's Rosedale subsidiary seeking payment of Cdn.
$83,715.04 for amounts allegedly due for certain wallcovering sample books. The
Company believes that it has a meritorious defense and intends to vigorously
contest the action. Ernst & Young, Inc. has filed a claim against each of the
Company's subsidiaries as receiver and manager of Cape Breton Wallcoverings, a
former wallcovering supplier. Ernst & Young, Inc. is seeking damages of
approximately Cdn$133,700 for amounts it claims were due Cape Breton
Wallcoverings from Rosedale and Ontario. The Company believes that it has a
meritorious defense and intends to vigorously contest the action.
The Company is involved in legal proceedings with Revenue Canada. The
Revenue Canada proceeding involves the Company's challenge to a Revenue Canada
decision to disallow a business loss deduction taken by Rosedale for losses it
incurred when attempting to create a startup company in California. Rosedale
started the California company in 1992 to make window blinds as an adjunct to
its wallcovering and fabric business. The California company's growth did not
meet the Company's expectations and subsequently was sold in 1994. Rosedale
claimed losses incurred during the operation of the California business as a
business loss deduction on its 1994 tax return. Revenue Canada allowed the
deduction as a capital loss only. Rosedale has filed a formal notice of
objection to Revenue Canada's classification of the deduction. In the event that
Revenue Canada's decision is upheld, Rosedale would be required to pay $652,110
plus interest to satisfy its tax obligation. The Company believes that it has a
meritorious defense and is working to try to settle the matter. The Company is
not aware of any other material legal proceedings pending or threatened against
the Company.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the Directors
and Executive Officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------- --- ---------------------------------------------------------
<S> <C> <C>
Alan Fine.................... 52 Chief Executive Officer and Chairman of the Board
Sidney Ackerman.............. 52 President and Director
Norman G. Maxwell............ 49 Chief Financial Officer, Operations Manager and Director
Sheldon Isenberg............. 54 Treasurer, Corporate Secretary and Director
</TABLE>
Set forth below is a biographical description of each director and executive
officer of the Company based on information supplied by each of them.
Alan Fine has served as the Chief Executive Officer and Chairman of the
Board of the Company since its inception in May 1997. In 1982, Mr. Fine founded
Rosedale Wallcoverings & Fabrics Inc. and since that time he has served as the
President of Rosedale Wallcovering & Fabrics, Inc. Mr. Fine has also served as
the Secretary and Treasurer for Ontario Paint & Wallpaper Ltd since 1978. From
1972 to 1977 Mr. Fine was the Manager of Wallpaper Distribution for Ontario
Paint & Wallpaper Ltd.
Sidney Ackerman has served as the President of the Company since its
inception in May 1997. In 1971, Mr. Ackerman was responsible for the development
of Ontario Wallcoverings which became the wallpaper distribution arm of Ontario
Paint & Wallpaper Ltd. In December 1978, Mr. Ackerman was elected Director and
Treasurer of Ontario Paint & Wallpaper Ltd. Since 1994, Mr. Ackerman has served
as the President of Ontario Paint & Wallpaper Ltd.
Norman G. Maxwell has been Chief Financial Officer and Operations Manager of
the Company since its inception in May 1997 and has served as a director of the
Company since May 1997. Prior thereto, since 1992, Mr. Maxwell has served as the
Vice President of Finance with Ontario. From 1989 to 1992, Mr. Maxwell served as
the Comptroller of Ontario. Mr. Maxwell has been in the wallcovering industry
for over 20 years and has been a Certified Management Accountant since 1977.
Sheldon Isenberg has served and the Company's Treasurer, Corporate Secretary
and Director since May, 1997. Prior thereto, from 1992 to 1997 Mr. Isenberg was
the General Manager, Wallpaper Manufacturing for the Company's Rosedale
subsidiary. Mr. Isenberg completed the Chartered Accounting Course at Queen's
University in 1964 and prior to joining the Company, he worked for a national
apparel manufacturer where he attained the position of Executive Vice President.
COMPENSATION OF DIRECTORS
The Company has not paid compensation to any director for acting in such
capacity. The Company is currently reviewing its policy on compensation of
outside directors and may pay outside directors in the future.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid by the Company during each of the last two fiscal years to the Company's
Chief Executive Officer and to each of the Company's executive officers who
earned in excess of $100,000.
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
OTHER
-------------------- ANNUAL
YEAR SALARY($) BONUS($) COMPENSATION
--------- --------- --------- -------------
<S> <C> <C> <C> <C>
NAME AND PRINCIPAL POSITION
- -------------------------------------------------
Alan Fine(1)..................................... 1997 173,360 -- 7,020
Chief Executive Officer 1996 41,068 121,003 8,582
1995 195,250 67,755 11,635
1994 163,994 -- 11,692
Sidney Ackerman(1)............................... 1997 173,360 -- 9,595
President 1996 41,068 121,003 8,621
1995 195,250 67,755 6,898
1994 163,994 -- 4,254
</TABLE>
- ------------------------
(1) Reflects total compensation received from both the Company's Ontario and
Rosedale subsidiaries.
EMPLOYMENT AGREEMENTS
On the Effective Date, Alan Fine and Sidney Ackerman will both have three
year employment agreements with the Company's Rosedale subsidiary and the
Company's Ontario subsidiary respectively. Alan Fine will be retained as Chief
Executive Officer of the Company at an annual salary of $160,000. Sidney
Ackerman will be retained as President of the Company at an annual salary of
$160,000.
The employment agreements with Alan Fine and Sidney Ackerman provide that
upon the death of any of the two employees that three years full salary will be
paid to the employee's estate in a lump sum payment. They also provide for
reimbursement of reasonable business expenses.
Alan Fine and Sidney Ackerman are entitled to bonuses of up to $10,000 each
based on achieving sales, profitability and good management goals as
predetermined by the Board of Directors or compensation committee and other
subjective criteria as determined by the Board of Directors or compensation
committee.
Alan Fine and Sidney Ackerman shall each receive $20,000 per year additional
compensation including car allowance, insurance and retirement savings matched
contributions by the Company and such other perquisites.
Upon the resignation, retirement upon reaching the age of 60 or based upon
any wrongful termination of either Alan Fine or Sidney Ackerman, the Company
shall pay the employee a lump sum resignation allowance of three years salary.
In the event that there is a change in control of the Company, through an
acquisition where any person acquires more than 50% of the shares of the
Company, an amalgamation, consolidation or merger with another corporation
resulting in at least 50% of the voting shares of the surviving corporation
being controlled by a new acquirer or the sale directly or otherwise of all of
the assets of the Company to a third party in a non-distress situation, then the
Company shall pay to Alan Fine and Sidney Ackerman a lump sum payment equal to
the sum of one and one-half times their respective annual salaries paid or
payable in respect of the most recently completed fiscal year.
STOCK OPTION PLAN
After the effective date of this Offering, the Company intends to adopt a
Stock Option Plan (the "1998 Plan"), pursuant to which 750,000 shares of Common
Stock are reserved for issuance.
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<PAGE>
The 1998 Plan will be administered by the compensation committee or the
board of directors, who determine among other things, those individuals who
shall receive options, the time period during which the options may be partially
or fully exercised, the number of shares of Common Stock issuable upon the
exercise of the options and the option exercise price.
The 1998 Plan will be for a period for ten years. Options may be granted to
officers, directors, consultants, key employees, advisors and similar parties
who provide their skills and expertise to the Company. Options granted under the
1998 Plan may be exercisable for up to ten years, may require vesting, and shall
be at an exercise price all as determined by the board. Options will be
non-transferable except to an option holder's personal holding company or
registered retirement savings plan and except by the laws of descent and
distribution or a change in control of the Company, as defined in the 1998 Plan,
and are exercisable only by the participant during his or her lifetime. Change
in control includes (i) the sale of substantially all of the assets of the
Company and merger or consolidation with another, or (ii) a majority of the
board changes other than by election by the shareholders pursuant to board
solicitation or by vacancies filled by the board caused by death or resignation
of such person.
If a participant ceases affiliation with the Company by reason of death,
permanent disability or retirement at or after age 70, the option remains
exercisable for three months from such occurrence but not beyond the option's
expiration date. Other termination gives the participant three months to
exercise, except for termination for cause which results in immediate
termination of the option.
Options granted under the 1998 Plan, at the discretion of the compensation
committee or the board, may be exercised either with cash, Common Stock having a
fair market equal to the cash exercise price, the participant's personal
recourse note, or with an assignment to the Company of sufficient proceeds from
the sale of the Common Stock acquired upon exercise of the Options with an
authorization to the broker or selling agent to pay that amount to the Company,
or any combination of the above.
The exercise price of an option may not be less than the fair market value
per share of Common Stock on the date that the option is granted in order to
receive certain tax benefits under the Income Tax Act of Canada (the "ITA"). The
exercise price of all future options will be at least 85% of the fair market
value of the Common Stock on the date of grant of the options. A benefit equal
to the amount by which the fair market value of the shares at the time the
employee acquires them exceeds the total of the amount paid for the shares or
the amount paid for the right to acquire the shares shall be deemed to be
received by the employee in the year the shares are acquired pursuant to
paragraph 7(1) of the ITA. Where the exercise price of the option is equal to
the fair market value of the shares at the time the option is granted, paragraph
110(1)(d) of the ITA allows a deduction from income equal to one quarter of the
benefit as calculated above. If the exercise price of the option is less than
the fair market value at the time it is granted, no deduction under paragraph
110(1)(d) is permitted. Options granted to any non-employees, whether directors
or consultants or otherwise will confer a tax benefit in contemplation of the
person becoming a shareholder pursuant to subsection 15(1) of the ITA.
Options under the 1998 Plan must be issued within ten years from the
effective date of the 1998 Plan.
Any unexercised options that expire or that terminate upon an employee's
ceasing to be employed by the Company become available again for issuance under
the 1998 Plan.
The 1998 Plan may be terminated or amended at any time by the board of
directors, except that the number of shares of Common Stock reserved for
issuance upon the exercise of options granted under the 1998 Plan may not be
increased without the consent of the shareholders of the Company.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The by-laws of the Company provide that the Company shall indemnify to the
fullest extent permitted by Canadian law directors and officers (and former
officers and directors) of the Company. Such indemnification includes all costs
and expenses and charges reasonably incurred in connection with the
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<PAGE>
defense of any civil, criminal or administrative action or proceeding to which
such person is made a party by reason of being or having been an officer or
director of the Company if such person was substantially successful on the
merits in his or her defense of the action and he or she acted honestly and in
good faith with a view to the best interests of the Company, and if a criminal
or administrative action that is enforced by a monetary penalty, such person had
reasonable grounds to believe his or her conduct was lawful.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriter against certain liabilities in connection with
this Offering, including liabilities under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
and the Underwriter pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses,
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person or by the Underwriter in connection with
the securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of whether such indemnification by it
is against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, as of the date hereof,
and as adjusted to give effect to the sale of 833,000 Units, each Unit
consisting of one shares of Common Stock and one Warrants, by the Company with
respect to the beneficial ownership of the Common Stock by each beneficial owner
of more than 5% of the outstanding shares thereof, by each director, each
nominee to become a director and each executive named in the Summary
Compensation Table and by all executive officers, directors and nominees to
become directors of the Company as a group, both before and after giving effect
to the Offering.
PERCENTAGE OF OUTSTANDING COMMON STOCK BENEFICIALLY OWNED
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED OFFERING OFFERING
- ----------------------------------------------------- ------------------- ----------- -----------
<S> <C> <C> <C>
Sidney Ackerman(2)................................... 312,500 25% 15%
Alan Fine(3)......................................... 468,750 37.5% 22.50%
Rosalyn Fine(4)...................................... 156,250 12.5% 7.50%
The Ackerman Family Trust(5)......................... 312,510 25% 15%
All Executive Officers and Directors as a Group(2)
persons............................................ 781,250 62.5% 37.5%
</TABLE>
- ------------------------
(1) Unless otherwise indicated, the address is c/o Rosedale Decorative Products
Ltd., 731 Millway Avenue, Concord, Ontario, Canada L4K 3S8.
(2) Does not include 312,500 shares of Common Stock held by the Ackerman Family
Trust. Includes 88,500 shares of Common Stock owned by 1274152 Ontario Inc.
of which Sidney Ackerman is a 25% owner.
(3) Includes 234,375 shares of Common Stock owned by 454590 Ontario Limited of
which Alan Fine is the sole shareholder and includes 66,375 shares of Common
Stock owned by 1274152 Ontario Inc. of which Alan Fine is a 18.75% owner.
(4) Includes 44,250 shares of Common Stock owned by 1274152 Ontario, Inc. of
which Rosalyn Fine is a 12.5% owner. Rosalyn Fine is the former wife of Alan
Fine and the sister of Sidney Ackerman.
(5) The Ackerman Family Trust owns 312,500 shares of Common Stock, including
88,500 shares of Common Stock owned by 1274152 Ontario, Inc. of which The
Ackerman Family Trust is a 25% owner, held in trust for the benefit of
Sidney Ackerman's wife and two minor children. Sheldon Shapiro and Fred
Stoppell are trustees of The Ackerman Family Trust. Under the terms of the
trust instrument, the trustees have the power to vote the shares.
VOTING AGREEMENT
Effective November 1997, Sidney Ackerman, Alan Fine, The Ackerman Family
Trust and 454590 Ontario Limited (the "Shareholders"), entered into a Common
Stock voting agreement. Pursuant to the terms of the voting agreement, each of
the Shareholders agrees to vote all of their Shares unanimously in respect of
any matter to be voted on at any meeting of the shareholders of the Company. In
the event the Shareholders cannot express unanimity or any of them abstains from
voting then the Shareholders agree to vote all of their Shares against such
matter or withhold all of their votes in respect of such matter as applicable
and to so instruct their proxies. The provisions of the voting agreement shall
apply to any shares in the capital stock of the Company to which voting rights
attach which may be issued to the Shareholders at any time during the term of
the voting agreement and any shares in the capital stock of the Company which
are issued in replacement of any shares or after acquired shares. The voting
agreement does not
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<PAGE>
apply to any shares that are sold or transferred to a Shareholder and does not
apply to any shares that are sold or transferred to a third party in an
arm's-length transaction.
The voting agreement terminates upon Sidney Ackerman or Alan Fine being no
longer employed by the Company or any of its subsidiaries or the date upon which
any Shareholder divests itself of all shares in an arm's-length transaction for
fair market consideration, whichever is earlier.
CERTAIN TRANSACTIONS
In 1995, Alan Fine, Chief Executive Officer of the Company and Sidney
Ackerman, President of the Company each loaned funds to the Company's Ontario
and Rosedale subsidiaries. As at December 31, 1997, the outstanding amounts of
loans made by Alan Fine to Ontario and Rosedale were $358,851 and $523,694,
respectively, and the outstanding amount of the loans made by Sidney Ackerman to
Ontario and Rosedale were $295,727 and $361,519, respectively. These loans are
secured by the real or personal property of Rosedale and Ontario and bear
interest at a rate equal to the prime rate of interest charged by the National
Bank of Canada plus 1.5% per annum and are payable on demand.
In 1995, 521305 Ontario Inc., which was the sole shareholder of Rosedale,
loaned funds to Rosedale and was granted a general security interest in the real
and personal property of Rosedale. As at December 31, 1997, the outstanding
balance of the loan was $238,945. The loan bears interest at a rate equal to the
prime rate of interest charged by the National Bank of Canada plus 1.5%. The
prime rate charged by the National Bank of Canada as of September 30, 1997 was
4.75%.
Alan Fine, Chief Executive Officer of the Company, and Sidney Ackerman,
President of the Company, own all of the issued and outstanding capital stock of
966578 Ontario Inc. and 976168 Ontario Inc. The Company leases space for its
retail store, located in downtown Toronto, from 966578 Ontario Inc. The lease
calls for rental payments in the amount of $16,800 per annum, plus general sales
taxes, payable in equal monthly instalments of $1,400. The lease is for a one
year term, automatically renewable from year to year unless terminated in
writing by either the landlord or the tenant on 30 days written notice.
In 1995, two related companies, 966578 Ontario Inc. and 976168 Ontario Inc.
were loaned funds by the Company. As of December 31, 1997, the Company had
outstanding loans receivable from 966578 Ontario Inc. and 976168 Ontario Inc. in
the amount of $12,409 and $24,475, respectively. The loans bear interest at a
rate equal to the prime rate of interest as charged by the National Bank of
Canada plus 1.5% and are payable on demand.
The Company has second mortgages from two related companies, 1216748 Ontario
Inc. and 1217576 Ontario Inc., both of which are 50% owned by Sidney Ackerman,
President and Alan Fine, Chief Executive Officer. The principal amount of the
loans from 1216748 Ontario Inc. and 1217576 Ontario Inc. are $208,344 and
$194,340, respectively. The mortgages are secured by land and buildings and bear
interest at 9% per annum and are payable on demand.
The Company has available credit facilities up to a maximum of $5,700,700
which bear interest at rates varying between the bank's prime rate and prime
plus 1.5%. The credit facilities are personally guaranteed, up to $723,000, by
each of Alan Fine and Sidney Ackerman, up to $1,445,000 by 521305 Ontario Inc.
and 1010037 Ontario Inc., and up to $595,000 by 1216748 Ontario Inc. and 1217576
Ontario Inc.
All future transactions and loans between the Company and its officers,
directors and 5% shareholders will be on terms no less favorable than could be
obtained from unaffiliated third parties and will be approved by a majority of
the independent, disinterested directors of the Company.
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<PAGE>
DESCRIPTION OF SECURITIES
The total authorized capital stock of the Company consists of an unlimited
number of shares of Common Stock, with no par value, and an unlimited number of
shares of Preferred Stock, with no par value per share. The following
descriptions contain all material terms and features of the Securities of the
Company, are qualified in all respects by reference to the Certificate of
Incorporation and By laws of the Company, copies of which are filed as Exhibits
to the Registration Statement of which this Prospectus is a part.
COMMON STOCK
The Company is authorized to issue an unlimited number of shares of Common
Stock, no par value per share, of which as of the date of this Prospectus
1,250,000 shares of Common Stock are outstanding, not including the Shares
offered herein.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. Holders of Common
Stock are entitled to receive ratably dividends as may be declared by the board
of directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, holders of the Common
Stock are entitled to share ratably in all assets remaining, if any, after
payment of liabilities. Holders of Common Stock have no preemptive rights and
have no rights to convert their Common Stock into any other securities.
Pursuant to the Business Corporation Act, Ontario ("BCA"), a shareholder of
an Ontario Corporation has the right to have the corporation pay the shareholder
the fair market value for his shares of the corporation in the event such
shareholder dissents to certain actions taken by the corporation such as
amalgamation or the sale of all or substantially all of the assets of the
corporation and such shareholder follows the procedures set forth in the BCA.
WARRANTS
Warrants will be issued pursuant to a Warrant Agreement between the Company
and Continental Stock Transfer & Trust Co. (the "Transfer and Warrant Agent")
and will be in registered form. Each Warrant entitles its holder to purchase,
during the four year period commencing on the date of this Prospectus, one share
of Common Stock at an exercise price of $6.00 per share, subject to adjustment
in accordance with the anti-dilution and other provision referred to below.
The Warrants may be redeemed by the Company at any time commencing one year
from the date of this Prospectus (or earlier with the consent of the
Representative) and prior to their expiration, at a redemption price equal to
150% of the offering price of the Common Stock per Warrant, on not less than 30
days' prior written notice to the holders of such Warrants, provided that the
closing bid price of the Common Stock if traded on the Nasdaq SmallCap Market,
or the last sale price per share of the Common Stock, if listed on the Nasdaq
National Market or on a national exchange, is at least 150% ($9.00 per share,
subject to adjustment) of the exercise price of the Warrants for a period of 10
consecutive business days ending on the third day prior to the date the notice
of redemption is given. Holders of Warrants shall have exercise rights until the
close of the business day preceding the date fixed for redemption.
The exercise price and the number of shares of Common Stock purchasable upon
the exercise of the Warrants are subject to adjustment upon the occurrence of
certain events, including stock dividends, stock splits, combinations or
classification of the Common Stock. The Warrants do not confer upon holders any
voting or any other rights of shareholders of the Company.
No Warrant will be exercisable unless at the time of exercise the Company
has filed with the Commission a current prospectus covering the issuance of
Common Stock issuable upon the exercise of the Warrant and the issuance of
shares has been registered or qualified or is deemed to be exempt from
registration or qualification under the securities laws of the state of
residence of the holder of the Warrant.
35
<PAGE>
The Company has undertaken to use its best efforts to maintain a current
prospectus relating to the issuance of shares of Common Stock upon the exercise
of the Warrants until the expiration of the Warrants, subject to the terms of
the Warrant Agreement. While it is the Company's intention to maintain a current
prospectus, there is no assurance that it will be able to do so. See "Risk
Factors-Requirements of Current Prospectus and State Blue Sky Registration in
Connection with the Exercise Warrants".
CLASS A SPECIAL SHARES
The Company's Articles of Incorporation authorize the issuance of an
unlimited number of shares of Class A Special Shares with designations, rights
and preferences determined from time to time by its Board of Directors.
Accordingly, the Company's Board of Directors is empowered, without stockholder
approval, to issue Class A Special Shares with voting, liquidation, conversion,
or other rights that could adversely affect the rights of the holders of the
Common Stock. Although the Company has no present intention to issue any shares
of its Class A Special Shares, there can be no assurance that it will not do so
in the future.
TRANSFER AGENT, REGISTRAR AND REDEEMABLE WARRANT AGENT
The transfer agent, registrar and warrant agent for the Common Stock and
Warrants is Continental Stock Transfer & Trust Co., New York, New York.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this Offering, the Company will have 2,083,000
shares of Common Stock outstanding. In addition, the Company has reserved for
issuance 750,000 shares upon the exercise of options eligible for grant under
the Company's Stock Option Plan. Of the shares to be issued and outstanding
after this Offering, the 833,000 Shares offered hereby (plus any additional
Shares sold upon exercise of Warrants offered hereby and exercise of the
Over-Allotment Option) will be freely tradeable without restriction or further
registration under the Act, except for any shares purchased or held by an
"affiliate" of the Company (in general, a person who has a control relationship
with the Company) which will be subject to the limitations of Rule 144 adopted
under the Act ("Rule 144"). In general, under Rule 144, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company, who has beneficially owned restricted shares of Common Stock for at
least one year is permitted to sell in a brokerage transaction, within any
three-month period, a number of shares that does not exceed the greater of 1% of
the total number of outstanding shares of the same class, or if the Common Stock
is quoted on Nasdaq or a stock exchange, the average weekly trading volume
during the four calendar weeks preceding the sale. Rule 144 also permits a
person who presently is not and who has not been an affiliate of the Company for
at least three months immediately preceding the sale and who has beneficially
owned the shares of Common Stock for at least two years to sell such shares
without regard to any of the volume limitations as described above. The
remaining 1,250,000 shares of Common Stock are "restricted securities" as that
term is defined under Rule 144, and may not be sold unless registered under the
Act or exempted therefrom. Of the 1,250,000 restricted shares, all will be
eligible to be sold in accordance with the exemptive provisions and the volume
limitations of Rule 144 90 days after the Effective Date, however, the Company's
directors and executive officers, (who hold in the aggregate 781,250 shares),
have agreed not to sell, offer to sell or otherwise dispose of the their shares
of the Company's Common Stock until 24 months from the Effective Date, except
pursuant to gifts or pledges in which the donee or pledgee agrees to be bound by
such restrictions, without the prior written consent of the Underwriter.
Further, officers and directors whose compensation exceeds $100,000 per year or
who own 5% or more of the Company's outstanding common stock shall enter into 3
to 5 year lock-up agreements subject to a 20% per year lock out provision. These
agreements are enforceable only by the parties thereto, and are subject to
rescission or amendment at any time without approval of other stockholders.
Sales of the Company's Common Stock by certain of the present stockholders
in the future, under Rule 144, may have a depressive effect on the price of the
Company's Common Stock.
36
<PAGE>
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following describes the principal United States federal income tax
consequences of the purchase, ownership and disposition of the Common Stock and
the Warrants and upon the exercise, redemption or expiration of the Warrants by
a Warrant holder, that is a citizen or resident of the United States or a United
States domestic corporation or that otherwise will be subject to United States
federal income tax (a "U.S. Holder"). This summary is based on the United States
Internal Revenue Code of 1986, as amended (the "Code"), administrative
pronouncements, judicial decisions and existing and proposed Treasury
Regulations, changes to any of which subsequent to the date of this Prospectus
may affect the tax consequences described herein. This summary discusses only
the principal United States federal income tax consequences to those beneficial
owners holding the securities as capital assets within the meaning of Section
1221 of the Code and does not address the tax treatment of a beneficial owner
that owns 10% or more of the Common Stock. It does not address the consequences
applicable to certain specialized classes of taxpayers such as certain financial
institutions, insurance companies, dealers in securities or foreign currencies,
or United States persons whose functional currency (as defined in Section 985 of
the Code) is not the United States dollar. Persons considering the purchase of
these securities should consult their tax advisors with regard to the
application of the United States and other income tax laws to their particular
situations. In particular, a U.S. Holder should consult his tax advisor with
regard to the application of the United States federal income tax laws to his
situation.
COMMON STOCK
A U.S. Holder generally will realize, to the extent of the Company's current
and accumulated earnings and profits, foreign source ordinary income on the
receipt of cash dividends, if any, on the Common Stock equal to the United
States dollar value of such dividends determined by reference to the exchange
rate in effect on the day they are received by the U.S. Holder (with the value
of such dividends computed before any reduction for any Canadian withholding
tax). U.S. Holders should consult their own tax advisors regarding the treatment
of foreign currency gain or loss, if any, on any dividends received which are
converted into United States dollars on a date subsequent to receipt. Subject to
the requirements and limitations imposed by the Code, a U.S. Holder may elect to
claim Canadian tax withheld or paid with respect to dividends on the Common
Stock as a foreign credit against the United States federal income tax liability
of such holder. Dividends on the Common Stock generally will constitute "passive
income" or, in the case of certain U.S. Holders, "financial services income" for
United States foreign tax credit purposes. U.S. Holders who do not elect to
claim any foreign tax credits may claim a deduction for Canadian income tax
withheld. Dividends paid on the Common Stock will not be eligible for the
dividends received deduction available in certain cases to United States
corporations.
Upon a sale or exchange of a share of Common Stock, a U.S. Holder will
recognize gain or loss equal to the difference between the amount realized on
such sale or exchange and the tax basis of such Common Stock. Any such gain or
loss will be capital gain or loss, and will be long term capital gain or loss if
at the time of sale or exchange the Common Stock has been held for more than one
year.
WARRANTS
No gain or loss will be recognized by the holder of a Warrant upon the
exercise of the Warrant. The cost basis of the Common Stock acquired upon such
exercise will be the cost basis of the Warrant plus any additional amount paid
upon the exercise of the Warrant. Gain or loss will be recognized upon the
subsequent sale or exchange of the Common Stock acquired by the exercise of the
Warrant, measured by the difference between the amount realized upon the sale or
exchange and the cost basis of the Common Stock so acquired.
37
<PAGE>
If a Warrant is not exercised, but is sold or exchanged (whether pursuant to
redemption or otherwise), gain or loss will be recognized upon such event,
measured by the difference between the amount realized by the holder of the
Warrant as a result of sale, exchange or redemption and the cost basis of the
Warrant.
If a Warrant is not exercised and is allowed to expire, the Warrants will be
deemed to be sold or exchanged on the date of expiration. In such event, the
holder of the Warrant will recognize a loss to the extent of the cost basis of
the Warrant.
Generally, any gain or loss recognized as a result of the foregoing will be
a capital gain or loss and will either be long-term or short-term depending upon
the period of time the Common Stock sold or exchanged or the Warrant sold,
exchanged, redeemed, or allowed to expire, as the case may be, was held. A
holding period of more than one year results in long-term gain or loss
treatment. If a Warrant is exercised, the holding period of the Common Stock so
acquired will not include the period during which the Warrant was held.
THIS SUMMARY IS OF GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, AND SHOULD NOT
BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PROSPECTIVE INVESTOR AND NO
REPRESENTATION WITH RESPECT TO THE TAX CONSEQUENCES TO ANY PARTICULAR INVESTOR
IS MADE.
38
<PAGE>
INVESTMENT CANADA ACT
The Investment Canada Act is a Federal Canadian statute which regulates the
acquisition of control of existing Canadian businesses and the establishment of
new Canadian businesses by an entity that is a "non-Canadian" as that term is
defined in the Investment Canada Act.
The Company believes that it is not currently a "non-Canadian" for purposes
of the Investment Canada Act. Generally, a company will be deemed to be
"non-Canadian under the Investment Canada Act if control of the Company is held
by non-Canadian residents. If the Company were to become a "non-Canadian" in the
future, acquisitions of control of Canadian businesses by the Company would
become subject to the Investment Canada Act. Generally, the direct acquisition
by a "non-Canadian" of an existing Canadian business with gross assets of
$5,000,000 or more is reviewable under the Investment Canada Act, with a
threshold of $168 million for 1996 for "NAFTA investors" as defined under the
Investment Canada Act.
Indirect acquisitions of existing Canadian businesses (with gross assets
over certain threshold levels) as well as acquisitions of businesses related to
Canada's cultural heritage or national identity (regardless of the value of
assets involved) may also be reviewable under the Investment Canada Act. In
addition, acquisitions of control of existing investments to establish new,
unrelated businesses are not generally reviewable but do require that a notice
of the investment be given under the Investment Canada Act. An investment in a
new business that is related to the non-Canadian's existing business in Canada
is not notifiable under the Investment Canada Act unless such investment relates
to Canada's cultural heritage or national identity.
Investments which are reviewable under the Investment Canada Act are
reviewed by the Minister, designated as being responsible for the administration
of the Investment Canada Act. Reviewable investments may not be implemented
prior to the Minister determining that the investment is likely to be of "net
benefit to Canada" based on the criteria set out in the Investment Canada Act.
39
<PAGE>
UNDERWRITING
The Company has agreed to sell, and the Underwriter has agreed, subject to
the terms and conditions of the Underwriting Agreement, to purchase from the
Company on a firm commitment basis, the respective number of Shares and Warrants
set forth opposite their names below.
The Underwriter has advised the Company that it proposes to offer the Shares
and Warrants to the public at the public offering price set forth on the cover
page of this Prospectus and that they may allow to selected dealers who are
members of the NASD, concessions of not in excess of $. per Share and $
per Warrant, of which not more than $. per Share and $ per Warrant may
be re-allowed to certain other dealers who are members of the NASD. After the
public offering, the public prices, concessions and reallowances may be changed
by the Underwriter.
The Underwriting Agreement further provides that the Underwriter will
receive from the Company a non-accountable expense allowance of 3% of the
aggregate public offering price of the Shares and Warrants sold (including any
Shares and Warrants sold pursuant to the Underwriters' Over-Allotment Option),
which allowance amounts to $153,063.75 (or $176,023.31 if the Underwriter's
Over-Allotment Option is exercised in full).
The Company has granted to the Underwriter the Over-Allotment Option, which
is exercisable for a period of 45 days after the Closing, to purchase up to an
aggregate additional (up to 15% of the Units being offered) at the public
offering price, less underwriting discounts and commissions, solely to cover
over-allotments, if any.
The Underwriter has informed the Company that the Underwriter will not make
sales of the Units offered by this Prospectus to accounts over which they
exercise discretionary authority.
The Company has agreed to sell to the Underwriter for a price of $.01 per
Warrant the Underwriter's Option to purchase 83,300 Shares of Common Stock and
83,300 Warrants exclusive of the Over-Allotment Option. The Underwriter's Option
will be nonexercisable for one year after the date of this Prospectus.
Thereafter, for a period of four years, the Underwriter's Option will be
exercisable at $7.20 per Share and $.15 per Warrant. The Underwriter's Option is
not transferable for a period of one year after the date of this Prospectus,
except to officers and stockholders of the Underwriter and to members of the
selling group and their officers and partners. The Warrants underlying the
Underwriter's Option shall have an exercise price of $6.00 per share of Common
Stock.
For the life of the Underwriter's Option, the holders thereof are given, at
nominal costs, the opportunity to profit from a rise in the market price of the
Company's securities with a resulting dilution in the interest of other
shareholders. Further, the holders may be expected to exercise the Underwriters'
Option at a time when the Company would in all likelihood be able to obtain
equity capital on terms more favorable than those provided in the Underwriters'
Option.
The Company has agreed that upon closing of this Offering, it will for a
period of not less than three years, invite a designee of the Underwriter to
attend all meetings of the board of directors. Such designee will be entitled to
the same notices and communications sent by the Company to its directors and to
attend directors meetings, but will not be entitled to vote or be compensated
therefor.
The Company has agreed to retain the Underwriter as a financial consultant
for a period of twenty-four months to commence on the closing of this Offering,
at a monthly fee of $2,000 all of which ($48,000) shall be payable in advance on
the closing of the Offering. Pursuant to this agreement, the Underwriter will be
obligated to provide general financial advisory services to the Company on an
"as needed" basis with respect to possible future financing or acquisitions by
the Company and related matters. The agreement does not require the Underwriter
to provide any minimum number of hours of consulting services to the Company.
40
<PAGE>
The public offering price of the Shares and Warrants offered hereby and the
exercise price and other terms of the Warrants have been determined by
negotiation between the Company and the Underwriter. Factors considered in
determining the offering price of the Shares and Warrants offered hereby and the
exercise price of the Warrants included the business in which the Company is
engaged, the Company's financial condition, an assessment of the Company's
management, the general condition of the securities markets and the demand for
similar securities of comparable companies.
The Company has agreed, for a period of two years from the date of this
Prospectus not to issue any shares of Common Stock, in any public underwritten
offering without first providing the Underwriter with the right of first refusal
to underwrite and manage such offering.
In connection with this Offering, the Underwriter and selling group members
and their respective affiliates may engage in transactions that stabilize,
maintain or otherwise affect the market price of the Common Stock and Warrants.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock or Warrants for the purpose of stabilizing their
respective market prices. The Underwriter also may create a short position for
the account of the Underwriter by selling more shares of Common Stock or
Warrants in connection with the Offering than they are committed to purchase
from the Company, and in such case may purchase shares of Common Stock or
Warrants in the open market following completion of the Offering to cover all or
a portion of such short position. The Underwriter may also cover all or a
portion of such short position by exercising the Over-Allotment Option. In
addition, the Underwriter may impose "penalty bids" under contractual
arrangements with the Underwriter whereby it may reclaim from an Underwriter (or
dealer participating in the Offering) for the account of other Underwriter, the
selling concession with respect to Shares and Warrants that are distributed in
the Offering but subsequently purchased for the account of the Underwriter in
the open market. Any of the transactions described in this paragraph may result
in the maintenance of the price of the Common Stock and Warrants at a level
above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken they may be discontinued at any time.
Commencing one year after the date of this Prospectus, the Company will pay
the Underwriter a fee of 5% of the exercise price of each Warrant exercised,
provided (i) the market price of the Common Stock on the date the Warrant was
exercised was greater than the Warrant exercise price on that date; (ii) the
exercise price of the Warrant was solicited by a member of the NASD; (iii) the
Warrant was not held in discretionary account; (iv) the disclosure of
compensation arrangements was made both at the time of this Offering and at the
time of exercise of the Warrant; (v) the solicitation of the exercise of the
Warrant was not a violation of Regulation M promulgated under the Exchange Act;
and (vi) the Warrant holder designates in writing which broker-dealer made the
solicitation. The Underwriter and any other soliciting broker-dealers may be
prohibited from engaging in any market-making activities or solicited brokerage
activities with regard to the Company's securities during the periods prescribed
by Regulation M, five business days (or other applicable period as Regulation M
may provide) before the solicitation of the exercise of any Warrant until the
later of the termination of such solicitation activity or the termination of any
right the Underwriters and any other soliciting broker/dealer may have to
receive a fee for the solicitation of the exercise of the Warrants.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriter against certain liabilities in connection with
this Offering, including liabilities under the Securities Act.
The foregoing is a summary of the material terms of the Underwriting
Agreement, the Underwriter's Option and the Consulting Agreement. Reference is
made to the copies of the Underwriting Agreement, the Underwriter's Option and
the Consulting Agreement, which are filed as exhibits to the Registration
Statement of which this Prospectus forms a part.
41
<PAGE>
LEGAL MATTERS
Certain legal matters relating to Ontario law, including the validity of the
issuance of the Common Stock and Warrants offered herein, will be passed upon
for the Company by Torkin, Manes, Cohen & Arbus. Certain legal matters in
connection with the Offering will be passed upon for the Company by its United
States counsel, Sichenzia Ross & Friedman, L.L.P., 135 West 50th Street, 20th
Floor, New York, New York 10020. Sichenzia Ross & Friedman, L.L.P. has served,
and continues to serve, as counsel to the Underwriter in matters unrelated to
this Offering. Certain legal matters will be passed upon for the Underwriter by
Robert E. Altenbach, Esq.
EXPERTS
The combined financial statements of Ontario Wallcoverings Ltd. and Rosedale
Wallcoverings & Fabrics Inc. for each of the fiscal years ended December 31,
1997 and 1996, appearing in this Prospectus and Registration Statement have been
audited by Schwartz Levitsky Feldman, Chartered Accountants, as set forth in
their reports thereon appearing elsewhere herein and in the Registration
Statement, and are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement under the
Act with respect to the Securities offered hereby. This Prospectus omits certain
information contained in the Registration Statement and the exhibits thereto,
and reference is made to the Registration Statement and the exhibits thereto for
further information with respect to the Company and the Securities offered
hereby. Each such statement is qualified in its entirety by such reference. The
Registration Statement, including exhibits and schedules filed therewith, may be
inspected without charge at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549 and at the regional offices of the Commission located at 7 World
Trade Center, Suite 1300, New York, New York 10048, and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such materials may be obtained from the Public Reference Section of the
Commission, Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549, and its public reference facilities in New York, New York and Chicago,
Illinois upon payment of the prescribed fees. Electronic registration statements
filed through the Electronic Data Gathering, Analysis, and Retrieval System are
publicly available through the Commission's Website (http://www.sec.gov). At the
date hereof, the Company was not a reporting company under the Securities
Exchange Act of 1934, as amended.
42
<PAGE>
ONTARIO PAINT & WALLPAPER LIMITED AND
ROSEDALE WALLCOVERINGS AND FABRICS INC.
COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, AND DECEMBER 31, 1996
TOGETHER WITH AUDITORS' REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Auditors......................................................................... F-2
Combined Balance Sheets as of December 31, 1997 and December 31, 1996.................................. F-3
Combined Statements of Income for the years ended December 31, 1997
December 31, 1996 and December 31, 1995.............................................................. F-4
Combined Statements of Cash Flows for the years ended December 31, 1997
December 31, 1996 and December 1, 1995............................................................... F-5
Combined Statements of Stockholders' Equity for the years ended December 31, 1997, 1996, 1995 and
1994................................................................................................. F-6
Notes to Combined Financial Statements................................................................. F-7-F-19
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Ontario Paint & Wallpaper Limited and
Rosedale Wallcoverings and Fabrics Inc.
We have audited the accompanying combined balance sheets of Ontario Paint &
Wallpaper Limited and Rosedale Wallcoverings and Fabrics Inc. (incorporated in
Canada) as of December 31, 1997 and 1996 and the related combined statements of
income, cash flows and changes in stockholders' equity for the years ended
December 31, 1997, 1996 and 1995. These combined financial statements are the
responsibility of the management of Ontario Paint & Wallpaper Limited and
Rosedale Wallcoverings and Fabrics Inc. Our responsibility is to express an
opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. 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 provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Ontario Paint &
Wallpaper Limited and Rosedale Wallcoverings and Fabrics Inc. as of December 31,
1997 and 1996 and the results of their operations and their cash flows for the
years ended December 31, 1997, 1996 and 1995, in conformity with generally
accepted accounting principles in the United States of America.
Toronto, Ontario Schwartz Levitsky Feldman
April 16, 1998 Chartered Accountants
F-2
<PAGE>
ONTARIO PAINT & WALLPAPER LIMITED AND
ROSEDALE WALLCOVERINGS AND FABRICS INC.
COMBINED BALANCE SHEETS
AS OF DECEMBER 31,
(AMOUNTS EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash............................................................................. $ 442,655 $ 1,079,823
Accounts receivable (note 2)..................................................... 4,683,912 3,914,762
Inventory (note 3)............................................................... 7,193,831 6,277,999
Prepaid expenses and sundry assets............................................... 180,096 135,859
------------- -------------
12,500,494 11,408,443
LOANS RECEIVABLE FROM AFFILIATED COMPANIES (note 4)................................ 36,884 64,545
DEFERRED PRODUCT COSTS (note 5).................................................... 641,028 --
DEFERRED POLICY COSTS (note 6)..................................................... 182,873 126,369
MORTGAGES RECEIVABLE (note 7)...................................................... 402,684 --
PROPERTY, PLANT AND EQUIPMENT (note 8)............................................. 1,930,869 1,443,028
------------- -------------
15,694,832 13,042,385
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness (note 9)....................................................... 3,970,943 3,598,780
Accounts payable and accrued expenses (note 10).................................. 6,741,431 5,470,806
Income taxes payable............................................................. 172,538 200,429
Current portion of long-term debt (note 11)...................................... 82,616 119,390
------------- -------------
10,967,528 9,389,405
LONG-TERM DEBT (note 11)........................................................... 996,981 871,418
LOANS PAYABLE TO STOCKHOLDERS (note 12)............................................ 238,945 252,209
ADVANCES FROM DIRECTORS (note 13).................................................. 1,539,791 1,470,066
DEFERRED INCOME TAXES.............................................................. 190,564 29,184
------------- -------------
13,933,809 12,012,282
------------- -------------
STOCKHOLDERS' EQUITY
CAPITAL STOCK (note 14)............................................................ 163 163
CUMULATIVE TRANSLATION ADJUSTMENT.................................................. (175,205) (106,297)
RETAINED EARNINGS (note 16)........................................................ 1,936,065 1,136,237
------------- -------------
1,761,023 1,030,103
------------- -------------
15,694,832 13,042,385
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
ONTARIO PAINT & WALLPAPER LIMITED AND
ROSEDALE WALLCOVERINGS AND FABRICS INC.
COMBINED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
(AMOUNTS EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
SALES................................................. $20,757,423 $18,927,369 $18,552,166
COST OF SALES......................................... 13,350,033 12,301,621 11,605,996
---------- ---------- ----------
GROSS PROFIT.......................................... 7,407,390 6,625,748 6,946,170
---------- ---------- ----------
OPERATING EXPENSES
Selling............................................. 2,321,585 2,437,576 2,730,318
General and administrative.......................... 2,190,786 2,003,119 2,382,302
Book development costs (recovery)................... 189,566 (278,079) (180,239)
Design studio....................................... 826,796 899,372 988,638
Amortization........................................ 572,655 651,143 595,716
---------- ---------- ----------
TOTAL OPERATING EXPENSES.............................. 6,101,388 5,713,131 6,516,735
---------- ---------- ----------
OPERATING INCOME...................................... 1,306,002 912,617 429,435
Interest expense.................................... 209,403 234,865 758,660
Insurance premiums.................................. 188,963 191,845 190,587
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES..................... 907,636 485,907 (519,812)
Income taxes (note 15).............................. 282,010 62,336 53,078
---------- ---------- ----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE................................ 625,626 423,571 (572,890)
Cumulative effect of change in accounting principle
[note 1 -C-]...................................... 174,202 -- --
---------- ---------- ----------
NET INCOME (LOSS)..................................... 799,828 423,571 (572,890)
---------- ---------- ----------
---------- ---------- ----------
EARNINGS PER SHARE [note 14 (e)]
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
ONTARIO PAINT & WALLPAPER LIMITED AND
ROSEDALE WALLCOVERINGS AND FABRICS INC.
COMBINED STATEMENTS OF CASH FLOWS
(AMOUNTS EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................. $ 799,828 $ 423,571 $ (572,890)
------------- ------------- -------------
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Amortization....................................................... 572,655 651,143 595,716
Increase in deferred product costs................................. (658,762) -- --
Increase in accounts receivable.................................... (964,145) (487,558) 754,099
(Increase) decrease in inventory................................... (1,222,626) 676,507 (1,183,734)
Increase in prepaid expenses and sundry assets..................... (51,588) (51,405) (60,055)
(Decrease) increase in accounts payable and accrued expenses....... 1,549,646 (1,299,429) (460,691)
Increase (decrease) in income taxes payable........................ (20,144) 30,642 (10,121)
Increase in deferred income taxes.................................. 168,015 29,335 --
------------- ------------- -------------
Total adjustments................................................ (626,949) (450,765) (364,786)
------------- ------------- -------------
Net cash provided by (used in) operating activities................ 172,879 (27,194) (937,676)
------------- ------------- -------------
Cash flows from investing activities:
Increase in deferred policy costs.................................. (63,854) (25,227) (22,148)
Purchases of property, plant and equipment......................... (945,933) (871,703) (902,570)
Increase in mortgages receivable................................... (415,044) -- --
------------- ------------- -------------
Net cash used in investing activities.............................. (1,424,831) (896,930) (924,718)
------------- ------------- -------------
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from bank indebtedness.................................... 540,267 410,106 1,914,752
(Repayment of) proceeds from loans with affiliated companies....... 25,789 (37,034) (25,501)
Proceeds from long-term debt....................................... 134,616 510,414 212,735
Repayment of stockholders' loans................................... (2,793) -- --
Proceeds from loans with directors................................. 135,654 510,298 (225,764)
------------- ------------- -------------
Net cash provided by financing activities.......................... 833,533 1,393,784 1,876,222
------------- ------------- -------------
Effect of foreign currency exchange rate changes................... (218,749) (5,363) 16,311
------------- ------------- -------------
Net (decrease) increase in cash and cash equivalents............... (637,168) 464,297 30,139
Cash and cash equivalents Beginning of year........................ 1,079,823 615,526 585,387
------------- ------------- -------------
End of year........................................................ 442,655 1,079,823 615,526
------------- ------------- -------------
------------- ------------- -------------
Income taxes paid.................................................. 135,302 59,553 45,146
------------- ------------- -------------
------------- ------------- -------------
Interest paid...................................................... 299,421 358,756 452,972
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
ONTARIO PAINT & WALLPAPER LIMITED AND
ROSEDALE WALLCOVERINGS AND FABRICS INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
COMMON
CLASS A STOCK CUMULATIVE
NUMBER OF NUMBER OF RETAINED TRANSLATION
SHARES SHARES AMOUNT EARNINGS ADJUSTMENTS
------------- ------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1994..................... 20 220 $ 163 $ 1,432,227 $ (133,610)
Foreign currency translation...................... -- -- -- -- 32,381
Net loss for the year............................. -- -- -- (572,890) --
--- --- ----- ------------ -----------
Balance as of December 31, 1995..................... 20 220 163 859,337 (101,229)
Adjustment due to prior years' income tax
reassessments (note 16)......................... -- -- -- (146,671) --
--- --- ----- ------------ -----------
As restated....................................... 20 220 163 712,666 (101,229)
Foreign currency translation...................... -- -- -- -- (5,068)
Net income for the year........................... -- -- -- 423,571 --
--- --- ----- ------------ -----------
Balance as of December 31, 1996..................... 20 220 163 1,136,237 (106,297)
Foreign currency translation...................... -- -- -- -- (68,910)
Net income for the year........................... -- -- -- 799,828 --
--- --- ----- ------------ -----------
Balance as of December 31, 1997..................... 20 220 163 1,936,065 (175,205)
--- --- ----- ------------ -----------
--- --- ----- ------------ -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
ONTARIO PAINT & WALLPAPER LIMITED AND
ROSEDALE WALLCOVERINGS AND FABRICS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN US DOLLARS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) BASIS OF PRESENTATION
The combined financial statements of Ontario Paint & Wallpaper Limited
("Ontario") and Rosedale Wallcoverings and Fabrics Inc. ("Rosedale") combine the
accounts of the following companies as at their respective year ends:
<TABLE>
<S> <C>
Ontario Paint & Wallpaper Limited............... December 31, 1997 and 1996
Rosedale Wallcoverings and Fabrics Inc.......... December 31, 1997 and 1996
</TABLE>
All material inter-company accounts and transactions have been eliminated.
B) PRINCIPAL ACTIVITIES
The companies, Ontario Paint and Wallpaper Limited and Rosedale
Wallcoverings and Fabrics Inc. were incorporated in Canada on December 3, 1971
and April 7, 1981 respectively. The companies are principally engaged in the
designing, manufacturing and marketing of wallpapers and decorative fabrics in
Canada, U.S. and Europe.
C) DEFERRED PRODUCT COSTS
Expenditures relating to the design and distribution of wallpaper and fabric
sample catalogues consisting of book development and design costs relating to
collections that have not been launched are deferred and amortized over a
three-year period on a straight-line basis. Proceeds from the sale of sample
catalogues are offset against the book development costs when received.
The deferral of a portion of book development and design costs represents a
change in accounting principle from a full write-off to a deferral over three
years.
D) CASH AND CASH EQUIVALENTS (BANK INDEBTEDNESS)
Cash and cash equivalents (bank indebtedness) includes cash on hand, amounts
due from and to banks, and any other highly liquid investments purchased with a
maturity of three months or less. The carrying amounts approximate fair values
because of the short maturity of those instruments.
E) OTHER CURRENT FINANCIAL INSTRUMENTS
The carrying amount of the companies' accounts receivable and payable
approximates fair value because of the short maturity of these instruments.
F) LONG-TERM FINANCIAL INSTRUMENTS
The fair value of each of the companies' long-term financial assets and debt
instruments is based on the amount of future cash flows associated with each
instrument discounted using an estimate of what the companies' current borrowing
rate for similar instruments of comparable maturity would be.
F-7
<PAGE>
ONTARIO PAINT & WALLPAPER LIMITED AND
ROSEDALE WALLCOVERINGS AND FABRICS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS EXPRESSED IN US DOLLARS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G) INVENTORY
Inventory is valued at the lower of cost and fair market value. Cost is
determined on the first-in, first-out basis.
H) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and are amortized on the
basis of their estimated useful lives at the undernoted rates and methods:
<TABLE>
<S> <C> <C>
Leasehold improvements 10% Straight-line
Cylinders and related design costs 5 years Straight-line
Equipment furniture and fixtures 20% Declining balance
Computer equipment 30% and 20% Declining balance
Automobile 30% Declining balance
</TABLE>
Amortization for assets acquired during the year are recorded at one- half
of the indicated rates, which approximate when they were put into use.
The amortization period for cylinders and related design costs was extended
from a period of three years to a five year period to more accurately reflect
their estimated useful lives. This change resulted in a reduction in the
amortization charge by approximately $480,000.
I) INCOME TAXES
The companies account for income tax under the provisions of Statement of
Financial Accounting Standards No. 109 , which requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Deferred
income taxes are provided using the liability method. Under the liability
method, deferred income taxes are recognized for all significant temporary
differences between the tax and financial statement bases of assets and
liabilities.
J) FOREIGN CURRENCY TRANSLATION
The companies maintain their books and records in Canadian dollars. Foreign
currency transactions are translated using the temporal method. Under this
method, all monetary items are translated into Canadian funds at the rate of
exchange prevailing at balance sheet date. Non- monetary items are translated at
historical rates. Income and expenses are translated at the rate in effect on
the transaction dates. Transaction gains and losses are included in the
determination of earnings for the year.
The translation of the financial statements from Canadian dollars ("CDN $")
into United States dollars is performed for the convenience of the reader.
Balance sheet accounts are translated using closing exchange rates in effect at
the balance sheet date and income and expense accounts are translated using an
average exchange rate prevailing during each reporting period. No representation
is made that the Canadian dollar amounts could have been, or could be, converted
into United Sates dollars at the rates on the respective dates and or at any
other certain rates. Adjustments resulting from the translation are included in
the cumulative translation adjustments in stockholders' equity.
F-8
<PAGE>
ONTARIO PAINT & WALLPAPER LIMITED AND
ROSEDALE WALLCOVERINGS AND FABRICS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS EXPRESSED IN US DOLLARS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
K) SALES
Sales represents the invoiced value of goods supplied to customers. Sales
are recognized upon delivery of goods and passage of title to customers.
L) NET INCOME PER WEIGHTED AVERAGE COMMON STOCK
Net income per common stock is computed by dividing net income for the year
by the weighted average number of common stock outstanding as presented on a
pro-forma basis as explained in note 14 (d).
M) USE OF ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect certain reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
N) ACCOUNTING CHANGES
On January 1, 1996, the companies adopted the provisions of SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to
be Disposed Of. SFAS No. 121 requires that long-lived assets to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. SFAS No. 121 is effective for financial statements for fiscal years
beginning after December 15, 1995. Adoption of SFAS No. 121 did not have a
material impact on the companies' result of operations.
In December 1995, SFAS No. 123, Accounting for Stock-Based Compensation, was
issued. It introduced the use of a fair value-based method of accounting for
stock-based compensation. It encourages, but does not require, companies to
recognize compensation expense for stock- based compensation to employees based
on the new fair value accounting rules. Companies that choose not to adopt the
new rules will continue to apply the existing accounting rules contained in
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. However, SFAS No. 123 requires companies that choose not to adopt the
new fair value accounting rules to disclose pro forma net income and earnings
per share under the new method. SFAS No. 123 is effective for financial
statements for fiscal years beginning after December 15, 1995. The companies
have adopted the disclosure provisions of SFAS No. 123.
2. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Accounts receivable................................................................... $ 4,788,725 $ 4,799,124
Less: Allowance for doubtful accounts................................................. 104,813 884,362
------------ ------------
Accounts receivable, net.............................................................. 4,683,912 3,914,762
------------ ------------
------------ ------------
</TABLE>
F-9
<PAGE>
ONTARIO PAINT & WALLPAPER LIMITED AND
ROSEDALE WALLCOVERINGS AND FABRICS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS EXPRESSED IN US DOLLARS)
2. ACCOUNTS RECEIVABLE (CONTINUED)
During 1997, two accounts receivable amounting to approximately $780,000,
previously provided for were written off against the allowance for doubtful
accounts.
3. INVENTORY
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Inventory comprised the following:
Raw materials......................................................................... $ 41,678 $ 140,035
Finished goods........................................................................ 7,152,153 6,137,964
------------ ------------
7,193,831 6,277,999
------------ ------------
------------ ------------
</TABLE>
4. LOANS RECEIVABLE FROM AFFILIATED COMPANIES
The loans receivable from affiliated companies which are related through
common ownership bear interest at prime plus 1.5%, have no specific repayment
terms, and are not expected to be repaid prior to January 1, 1999.
5. DEFERRED PRODUCT COSTS
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Book development costs.................................................................... $ 848,996 $ --
Deferred software costs................................................................... 62,915 --
---------- ----------
Cost...................................................................................... 911,911 --
---------- ----------
---------- ----------
Less: Accumulated amortization............................................................
Book development costs.................................................................. 208,299 --
Deferred software costs................................................................. 12,584 --
---------- ----------
270,883 --
---------- ----------
Net Deferred Product Costs................................................................ 641,028 --
---------- ----------
---------- ----------
</TABLE>
6. DEFERRED POLICY COSTS
Deferred policy costs represents the prepaid portion of premiums on the life
insurance policies referred to in note 21.
F-10
<PAGE>
ONTARIO PAINT & WALLPAPER LIMITED AND
ROSEDALE WALLCOVERINGS AND FABRICS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS EXPRESSED IN US DOLLARS)
7. MORTGAGES RECEIVABLE
Second mortgages from companies related through common ownership, secured by
land and buildings, bear interest at 9% and are payable on demand. No repayments
are expected prior to January 1, 1999.
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
1216748 Ontario Inc....................................................................... $ 209,073 $ --
1217576 Ontario Inc....................................................................... 193,611 --
---------- ----------
402,684 --
---------- ----------
---------- ----------
</TABLE>
The fair value of the mortgages receivable is estimated to be $350,000.
8. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Leasehold improvements................................................................ $ 31,331 $ 32,700
Automobile............................................................................ 20,057 20,933
Equipment and furniture............................................................... 255,335 266,346
Furniture and fixtures................................................................ 301,585 297,688
Computer and equipment................................................................ 335,796 308,867
Cylinders and related design costs.................................................... 3,057,727 2,277,325
------------ ------------
Cost.................................................................................. 4,001,831 3,203,859
------------ ------------
Less: Accumulated amortization
Leasehold improvements.............................................................. $ 10,448 $ 7,635
Automobile.......................................................................... 16,485 15,608
Equipment and furniture............................................................. 184,572 174,174
Furniture and fixtures.............................................................. 196,837 177,847
Computer and equipment.............................................................. 228,903 209,073
Cylinders and related design costs.................................................. 1,433,717 1,176,494
------------ ------------
2,070,962 1,760,831
------------ ------------
Net Assets............................................................................ 1,930,869 1,443,028
------------ ------------
------------ ------------
</TABLE>
9. BANK INDEBTEDNESS
The companies have available credit facilities up to a maximum of $5,700,000
($7,910,000 Canadian), which bear interest at rates varying between the bank's
prime rate and prime plus 1.5%. The indebtedness is secured by general
assignments of book debts, pledge of inventory under Section 427 of the Bank Act
of Canada, general security agreements providing a first floating charge over
all assets, guarantees and postponement of claims to a maximum of $722,000 each
from two officers, guarantees and postponement of claims to a maximum of
$1,450,000 from the parent companies, guarantees from affiliated companies up
F-11
<PAGE>
ONTARIO PAINT & WALLPAPER LIMITED AND
ROSEDALE WALLCOVERINGS AND FABRICS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS EXPRESSED IN US DOLLARS)
9. BANK INDEBTEDNESS (CONTINUED)
to $595,000, assignment of life insurance of $1,450,000 on the lives of two key
officers and assignment of fire insurance.
10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Accounts payable and accrued expenses is comprised of the following:
Trade payables...................................................................... $ 6,358,585 $ 5,201,663
Accrued expenses.................................................................... 382,846 269,143
------------ ------------
6,741,431 5,470,806
------------ ------------
------------ ------------
</TABLE>
11. LONG-TERM DEBT
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C> <C>
a) Settlement Payable
Subsequent to December 31, 1997, Rosedale agreed to a $290,733 settlement of a
claim initiated by a third party. The terms of payments are as follows:
$18,248 monthly for January to March, 1997, $7,242 monthly thereafter. The fair
value of the settlement payable is estimated to be $158,000....................... $ 165,231 $ 291,843
------------ -----------
b) Insurance Loan
Amount in excess of cash surrender values of life insurance policies (note 21)
which is payable on demand but is expected to become due for payment in the year
2004. The loan bears interest at prime plus 1.5% and is secured by letters of
guarantee from a major Canadian Chartered Bank and a second collateral mortgage on
the assets of the companies....................................................... 914,366 698,965
------------ -----------
1,079,597 990,808
Less: Current portion............................................................. (82,616) (119,390)
------------ -----------
Long-term portion................................................................. 996,981 871,418
------------ -----------
------------ -----------
</TABLE>
12. LOANS PAYABLE TO STOCKHOLDERS
Stockholder's advances are secured by general security agreements, bears
interest at prime plus 1.5%, have no specific repayment terms, and the
stockholders are not expected to demand repayment prior to January 1, 1999.
F-12
<PAGE>
ONTARIO PAINT & WALLPAPER LIMITED AND
ROSEDALE WALLCOVERINGS AND FABRICS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS EXPRESSED IN US DOLLARS)
13. ADVANCES FROM DIRECTORS
Advances from directors are secured by general security agreements, bears
interest at prime plus 1.5%, have no specific repayment terms, and the directors
are not expected to demand repayment prior to January 1, 1999.
14. CAPITAL STOCK
A) ONTARIO PAINT & WALLPAPER LIMITED
AUTHORIZED
<TABLE>
<S> <C>
500,020 Class A Preference shares, 8% non-cumulative, non-voting,
redeemable at $12,500 per share
25,000 Class B Preference shares, 8% non-cumulative, non-voting,
redeemable at paid upamount
249,980 Common shares
</TABLE>
ISSUED
<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C> <C>
20 Class A Preference shares............................................ $ 1 $ 1
20 Common shares........................................................ 2 2
-- --
3 3
-- --
-- --
</TABLE>
B) ROSEDALE WALLCOVERINGS AND FABRICS INC.
AUTHORIZED
<TABLE>
<S> <C>
3,600 Preference shares, 9% non-cumulative, non-voting, redeemable at the
amount paid up plus a premium of 10%
4,000 Common shares
</TABLE>
ISSUED
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C> <C>
100 Common shares $ 160 $ 160
--------- ---------
</TABLE>
F-13
<PAGE>
ONTARIO PAINT & WALLPAPER LIMITED AND
ROSEDALE WALLCOVERINGS AND FABRICS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS EXPRESSED IN US DOLLARS)
14. CAPITAL STOCK (CONTINUED)
C) ISSUED--COMBINED
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C> <C>
20 Class A Preference shares $ 1 $ 1
120 Common shares 162 162
--------- ---------
163 163
--------- ---------
--------- ---------
</TABLE>
D) WEIGHTED AVERAGE NUMBER OF COMMON SHARES
On May 14, 1997, a newly incorporated holding company, Rosedale Decorative
Products Ltd. (the "Registrant"), was formed by the shareholders of the
companies for the purpose of consolidating and reorganizing their 100% ownership
interests in anticipation of an initial public offering. This reorganization
will be carried out using the pooling of interests method.
For the purpose of determining earnings per share, the weighted average
number of common shares has been presented on a pro-forma basis, on the
assumption that the reorganisation was completed as at December 31, 1997.
This reorganization will result in the transfer of all the outstanding
common shares of the parent companies of Ontario and Rosedale currently held by
the Fine and Ackerman families to the Registrant in exchange for 1,250,000
common shares of the Registrant.
After giving effect to the above transaction, there will be 1,250,000 issued
common shares of the Registrant. Accordingly, the earnings per share data
presented are based on the total weighted average number of common shares on a
pro-forma basis of 1,250,000.
E) EARNINGS PER SHARE
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Pro-forma earnings per share before impact of change in accounting
principle.......................................................... 0.50 0.34 (0.46)
--------- --------- ---------
--------- --------- ---------
Pro-forma earnings per share after impact of change in accounting
principle.......................................................... 0.64 0.34 (0.46)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-14
<PAGE>
ONTARIO PAINT & WALLPAPER LIMITED AND
ROSEDALE WALLCOVERINGS AND FABRICS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS EXPRESSED IN US DOLLARS)
15. INCOME TAXES
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C> <C>
a) Current.......................................................................... 113,995 33,152
Deferred......................................................................... 168,015 29,184
---------- ----------
282,010 62,336
---------- ----------
---------- ----------
b) Current income taxes comprised as follows:
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C> <C>
Amount calculated at basic Canadian federal and provincial rates................. $ 371,806 $ 213,800
Increase (decrease) representing from:
Timing differences............................................................... (168,015) (29,184)
Adjustment to prior year taxes................................................... 40,497 --
Non-deductible expenses.......................................................... 90,400 91,189
Application of losses carry-forward.............................................. (220,693) (242,653)
---------- ----------
113,995 33,152
---------- ----------
---------- ----------
</TABLE>
c) Deferred income taxes represented the tax charges derived from temporary
differences between amortization of property, plant and equipment and
amounts deducted from taxable income.
d) Rosedale has operating losses of approximately $770,000 which is expected
to he used to reduce future taxable income. The potential tax benefit
relating to the losses have been recognized in the accounts to the extent
that they reduce deferred taxes. The deductibility of these losses if
available expires as follows:
<TABLE>
<S> <C>
2001.............................................................. $ 432,000
2002.............................................................. 312,000
2004.............................................................. 26,000
---------
$ 770,000
---------
---------
</TABLE>
Rosedale has been reassessed by Revenue Canada and the Province of Ontario for
fiscal year ended December 31, 1993 and December 31, 1994 in the amount of
approximately $665,000 [see note 19 (b)]. Should the assessments be upheld,
the benefits of these losses may not be realized.
16. INCOME TAX REASSESSMENTS
Retained earnings at the beginning of 1995 and 1996 previously reported as
$1,432,227 and $859,337, respectively, have been restated to $1,285,556 and
$712,666, respectively to reflect a correction resulting from prior years'
income tax reassessments for fiscal years 1994 and prior. The comparative 1996
figures have also been restated.
F-15
<PAGE>
ONTARIO PAINT & WALLPAPER LIMITED AND
NOTES TO COMBINED FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN US DOLLARS)
17. RELATED PARTY TRANSACTIONS
Amounts due from or paid to companies which are related through common
ownership.
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Loan -- 966578 Ontario Inc................................................................. $ 10,345 $ --
Loan -- 976168 Ontario Inc................................................................. 24,467 27,699
Mortgage receivable -- 1216748 Ontario Inc................................................. 192,640 --
Mortgage receivable -- 1217576 Ontario Inc................................................. 178,544 --
Rent paid -- 966578 Ontario Inc............................................................ 17,648 20,534
</TABLE>
18. SEGMENTED INFORMATION
Rosedale is engaged primarily in the design, manufacturing, marketing, and
distribution whilst Ontario is engaged primarily in the marketing and
distribution of wallpaper and designer fabrics.
a) The breakdown of sales by geographic area is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------------
<S> <C> <C> <C>
ONTARIO ROSEDALE TOTAL
------------ ------------- -------------
United States of America............................................. $ 747,267 $ 9,133,266 $ 9,880,533
Canada............................................................... 7,472,673 1,712,487 9,185,160
Other................................................................ 1,120,901 570,829 1,691,730
------------ ------------- -------------
9,340,841 11,416,582 20,757,423
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------
<S> <C> <C> <C>
ONTARIO ROSEDALE TOTAL
------------ ------------- -------------
United States of America............................................. $ 1,166,573 $ 9,233,118 $ 10,399,691
Canada............................................................... 6,067,758 1,530,499 7,598,257
Other................................................................ 113,887 815,534 929,421
------------ ------------- -------------
7,348,218 11,579,151 18,927,369
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------------
<S> <C> <C> <C>
ONTARIO ROSEDALE TOTAL
------------ ------------- -------------
United States of America............................................. $ 1,739,101 $ 9,478,947 $ 11,218,048
Canada............................................................... 5,086,322 1,335,491 6,421,813
Other................................................................ 157,391 754,914 912,305
------------ ------------- -------------
6,982,814 11,569,352 18,552,166
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
F-16
<PAGE>
ONTARIO PAINT & WALLPAPER LIMITED AND
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS EXPRESSED IN US DOLLARS)
18. SEGMENTED INFORMATION (CONTINUED)
b) The companies' accounting records do not readily provide information on
net income by geographic area. Management is of the opinion that the proportion
of net income based principally on sales, presented below, would fairly present
the results of operations by geographic area.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------
<S> <C> <C> <C>
ONTARIO ROSEDALE TOTAL
---------- ---------- ----------
United States of America..................................................... $ 24,524 $ 255,256 $ 279,780
Canada....................................................................... 245,245 49,775 295,020
Other........................................................................ 36,787 14,039 50,826
---------- ---------- ----------
306,556 319,070 625,626
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------
<S> <C> <C> <C>
ONTARIO ROSEDALE TOTAL
---------- ---------- ----------
United States of America..................................................... $ 18,298 $ 238,089 $ 256,387
Canada....................................................................... 94,922 46,381 141,303
Other........................................................................ 1,144 24,737 25,881
---------- ---------- ----------
114,364 309,207 423,571
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------
<S> <C> <C> <C>
ONTARIO$ ROSEDALE TOTAL
---------- ----------- -----------
United States of America................................................... $ 35,805 $ (551,406) $ (515,601)
Canada..................................................................... 91,762 (107,417) (15,755)
Other...................................................................... 15,755 (57,289) (41,534)
---------- ----------- -----------
125,701 (508,004) (572,890)
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
c) The breakdown of identifiable assets by geographic area is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-----------------------------------------
<S> <C> <C> <C>
ONTARIO ROSEDALE TOTAL
------------ ------------ -------------
United States of America.............................................. $ -- $ 1,149,550 $ 1,149,550
Canada................................................................ 5,920,090 7,213,301 13,133,391
Other................................................................. 514,791 897,100 1,411,891
------------ ------------ -------------
6,434,881 9,259,951 15,694,832
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
F-17
<PAGE>
ONTARIO PAINT & WALLPAPER LIMITED AND
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS EXPRESSED IN US DOLLARS)
18. SEGMENTED INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------
ONTARIO ROSEDALE TOTAL
------------ ------------ -------------
<S> <C> <C> <C>
United States of America.............................................. $ -- $ 1,053,006 $ 1,053,006
Canada................................................................ 5,077,164 6,023,127 11,100,291
Other................................................................. 305,455 583,633 889,088
------------ ------------ -------------
5,382,619 7,659,766 13,042,385
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
d) Sales to major customers are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ -------------
<S> <C> <C> <C>
Sales................................................................. $ 2,890,783 $ 1,968,456 $ 2,313,870
% of total sales...................................................... 14% 10% 12%
Amounts included in accounts receivable............................... $ 298,595 $ 365,794 $ 148,372
</TABLE>
e) Purchases from major suppliers are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ -------------
<S> <C> <C> <C>
Purchases............................................................. $ 8,070,027 $ 6,101,860 $ 6,859,565
% of total purchases.................................................. 52% 49% 53%
Amounts included in accounts payable.................................. $ 3,101,539 $ 2,480,178 $ 1,792,158
</TABLE>
19. CONTINGENCIES
a) The company is contingently liable under contested lawsuits amounting to
approximately $31,000. Management is of the opinion that the company's defence
is meritorious and the lawsuit will result in no material loss. Accordingly, no
provision is included in the accounts for possible related losses. Should any
expenditures be incurred by the company for resolution of these lawsuits, it
will be charged to the operations of the year in which such expenditures are
incurred.
b) Rosedale has been re-assessed by Revenue Canada and the Province of
Ontario for fiscal years ended December 31, 1993 and December 31, 1994 for
additional taxes estimated to be $664,000 ($950,000 Canadian). The company has
objected to these re-assessments and has no obligation to pay the portion
relating to Revenue Canada in the amount of $440,000 ($617,000 Canadian) until
the objections have been processed. No provision has been made in the accounts
for the additional taxes.
F-18
<PAGE>
ONTARIO PAINT & WALLPAPER LIMITED AND
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS EXPRESSED IN US DOLLARS)
20. COMMITMENTS
Minimum payments under operating leases for premises amount to approximately
$330,000 per annum, exclusive of insurance and other occupancy charges. The
leases expires on October 31, 2004. The future minimum lease payments over the
next four years are as follows:
<TABLE>
<CAPTION>
1997
------------
<S> <C>
Payable during the following periods:
Within one year................................................................................... $ 329,787
Over one year but not exceeding two years......................................................... 329,787
Over two years but not exceeding three years...................................................... 329,787
Over three years but not exceeding four years..................................................... 329,787
Over four years but not exceeding five years...................................................... 329,787
Thereafter........................................................................................ 661,065
------------
$ 2,310,000
</TABLE>
21. LIFE INSURANCE POLICIES
The companies are the beneficiaries of life insurance policies with The
Prudential of America Life Insurance Company (Canada) ("PruCan") taken out on
the lives of three of the officers for a total insured value of $22 million. In
consideration for this benefit, the companies agreed to fund the premiums
payable on the policies. Funding is being provided by advances from the
Laurentian Bank of Canada ("Laurentian").
The Laurentian has a legal right of set-off of the cash surrender values of
the life insurance policies against the debt owing to it by the companies.
Accordingly the related assets and liabilities have been offset in the financial
statements.
The amounts offset were as follows:
<TABLE>
<S> <C>
Cash surrender value of life insurance policies................................. $2,030,532
Advances........................................................................ $(2,030,532)
</TABLE>
The amount in excess of the cash surrender value of the life insurance
policies is included in long-term debt (see note 11).
The advances from Laurentian are payable on demand but are expected to
become due for payment in the year 2004. The companies are liable for the
interest on the advances. Security is provided by first charges on the insurance
policies, letters of credit from a major Canadian chartered bank and general
security agreements creating a second over all corporate assets.
F-19
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The by-laws of the Company provide that the Company shall indemnify
directors and officers of the Company. The pertinent section of Canadian law is
set forth below in full. In addition, upon effectiveness of this registration
statement, management intends to obtain officers and directors liability
insurance.
See the second and third paragraphs of Item 28 below for information
regarding the position of the Securities and Exchange Commission (the
"Commission") with respect to the effect of any indemnification for liabilities
arising under the Securities Act of 1933, as amended (the "Securities Act").
Section 136 of the Canadian Business Corporation Act provides as follows:
(1) INDEMNIFICATION OF DIRECTORS--A corporation may indemnify a director
or officer of the corporation, a former director or officer of the
corporation or a person who acts or acted at the corporation's request as a
director or officer of a body corporate of which the corporation is or was a
shareholder or creditor, and his or her heirs and legal representatives,
against all costs, charges and expenses, including an amount paid to settle
an action or satisfy a judgment, reasonably incurred by him or her in
respect of any civil, criminal or administrative action or proceeding to
which he or she is a party by reason of being or having been a director or
officer of such corporation or body corporate, if,
(a) he or she acted honestly and in good faith with a view to the
best interests of the corporation; and
(b) in the case of a criminal or administrative action or proceeding
that is enforced by a monetary penalty, he or she has reasonable grounds
for believing that his or her conduct was lawful.
(2) INDEM.--A corporation may, with the approval of the court, indemnify
a person referred to in subsection (1) in respect of an action by or behalf
of the corporation or body corporate to procure a judgment n its favor, to
which the person is made a party by reason of being or having been a
director or an officer of the corporation or body corporate, against all
costs, charges and expenses reasonably incurred by the person in connection
with such action if he or she fulfills the conditions set out in clauses
(1)(a) and (b).
(3) IDEM.--Despite anything in this section, a person referred to in
subsection (1) is entitled to indemnity from the corporation in respect of
all costs, charges and expenses reasonably incurred by him in connection
with the defense of any civil, criminal or administrative action or
proceeding to which he or she is made a party by reason of being or having
been a director or officer of the corporation or body corporate, if the
person seeking indemnity;
(a) was substantially successful on the merits in his or her defense
of the action or proceeding; and
(b) fulfills the conditions set out in clauses (1)(a) and (b).
(4) LIABILITY INSURANCE--A corporation may purchase and maintain
insurance for the benefit of any person referred to in subsection (1)
against any liability incurred by the person,
(a) in his or her capacity as a director or officer of the
corporation, except where the liability relates to the person's failure
to act honestly and in good faith with a view to the best interests of
the corporation; or
(b) in his or her capacity as a director or officer of another body
corporate where the person acts or acted in that capacity at the
corporation's request, except where the liability relates to the
II-1
<PAGE>
person's failure to act honestly and in good faith with a view to the
best interests of the body corporate.
(5) APPLICATION TO COURT--A Corporation or a person referred to in
subsection 91) may apply to the court for an order approving an indemnity
under this section and the court may so order and make any further order it
thinks fit.
(6) IDEM--Upon application under subsection (5), the court may order
notice to be given to any interested person and such person is entitled to
appear and be heard in person or by counsel.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection with the
issuance and distribution of the securities offered hereby.
<TABLE>
<S> <C>
SEC registration fee........................................... $ 3,603.64
NASD registration fee.......................................... 1,721.49
Nasdaq SmallCap Market listing fee............................. 15,000.00
Boston Stock Exchange listing fee.............................. 7,500.00
Printing and engraving......................................... 90,000
Accountants' fees and expenses................................. 25,000.00
Legal fees..................................................... 157,000
Transfer agent's and warrant agent's fees and expenses......... 5,000.00
Blue Sky fees and expenses..................................... 52,500.00
Underwriter's non-accountable expense allowance................ 153,063.75
Underwriter's consulting agreement............................. 48,000
Miscellaneous.................................................. 3,523.62
----------
Total.................................................... $561,912.50
----------
----------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In the past three years the Company has issued securities to a limited
number of persons as described below. Except as indicated, there were no
underwriters involved in the transactions and there were no underwriting
discounts or commissions paid in connection therewith:
In , the Company issued an aggregate of 1,250,000 shares of
its common stock to Sidney Ackerman, Alan Fine, Rosalyn Fine, The Ackerman
Family Trust and various other companies under their control, collectively or
individually, in exchange for their shares in 521305 Ontario Inc. and 1010037
Ontario Inc.
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement
1.2 Form of Selected Dealers Agreement
1.3 Form of Agreement Among Underwriters*
3.1(a) Articles of Incorporation of Registrant
3.1(b) Articles of Amendment
3.2 By-Laws of Registrant
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<S> <C>
4.1 Form of Underwriters' Purchase Option
4.2 Form of Warrant Agreement
4.3 Specimen Common Stock Certificate*
4.4 Specimen Class A Redeemable Common Stock Purchase Warrant*
5.1 Opinion of Singer Zamansky LLP*
9.1 Form of Voting Agreement*
10.1 Form of Financial Advisory Agreement with Underwriters
10.2 1998 Stock Option Plan*
10.3 Leases of Company's Facilities*
10.4 Employment Agreement with Alan Fine*
10.5 Employment Agreement with Sidney Ackerman*
10.6 National Bank of Canada Demand Loan with Rosedale*
10.7 National Bank of Canada Demand Loan with Ontario*
10.7 National Bank of Canada Demand Credit Facility with Rosedale*
10.8 National Bank of Canada Demand Credit Facility with Ontario*
21.1 List of Subsidiaries of Registrant*
23.1 Consent of Schwartz Levitsky Feldman, the Company's Independent Auditors
23.2 Consent of Singer Zamansky LLP (incorporated into Exhibit 5.1)*
23.3 Consent of Torkin, Manes, Cohen & Arbus*
25.1 Powers of Attorney (see Page II-5)*
</TABLE>
- ------------------------
(*) To be filed by amendment
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to any charter provision, by-law, contract arrangements,
statute, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the small business issuer in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the small business issuer
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned small business issuer hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement: (i) To include
any Prospectus required by section 10(a)(3) of the Act; (ii) To reflect in
the Prospectus any facts or events arising after the effective date of the
registration
II-3
<PAGE>
statement (or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change in the
information set forth in the registration statement; (iii) To include any
material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the Offering of
such securities at that time shall be deemed to be the initial bona fide
Offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the Offering.
(4) For determining any liability under the Act, treat the information
omitted from the form of Prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of Prospectus
filed by the small business issuer under Rule 424(b)(1), or (4) or 497(h),
under the Act as part of this registration statement as of the time the
Commission declared it effective.
(5) For determining any liability under the Act, treat each
post-effective amendment that contains a form of Prospectus as a new
registration statement at that time as the initial bona fide Offering of
those securities.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Act, the Registrant certifies that it
has reasonable grounds to believe that it meets all of the requirement for
filing on Form SB-2 and has duly caused this Amendment No. 1 to its Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Province of Ontario, Canada on April , 1998.
<TABLE>
<S> <C> <C> <C> <C> <C>
ROSEDALE DECORATIVE PRODUCTS LTD.
By: /s/ ALAN FINE By: /s/ SIDNEY ACKERMAN
----------------------------------- -----------------------------------
Alan Fine Sidney Ackerman
</TABLE>
Pursuant to the requirements of the Act, this Amendment No. 1 to the
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
We, the undersigned officers and directors of ROSEDALE DECORATIVE PRODUCTS
LTD. hereby severally constitute and appoint Sidney Ackerman and Alan Fine, our
true and lawful attorneys-in-fact and agents with full power of substitution for
us and in our stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement and all
documents relating thereto, and to file the same, with all exhibits thereto and
other documents in connection therewith with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing necessary or advisable
to be done in and about the premises, as fully to all intents and purposes as
they might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or their substitutes, may lawfully do or cause to
be done by virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- --------------------------------------------- -------------------
<C> <S> <C>
/s/ ALAN FINE
------------------------------------ Chairman of the Board of Directors and Chief April , 1998
Alan Fine Executive Officer
/s/ SIDNEY ACKERMAN
------------------------------------ President and Director April , 1998
Sidney Ackerman
/s/ NORMAN MAXWELL
------------------------------------ Chief Financial Officer/Principal Accounting April , 1998
Norman Maxwell Officer, Operations Manager and Director
/s/ SHELDON ISENBERG
------------------------------------ Treasurer, Corporate Secretary and Director April , 1998
Sheldon Isenberg
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------------------------------------- ---------
<S> <C> <C>
1.1 Form of Underwriting Agreement
1.2 Form of Selected Dealers Agreement*
1.3 Form of Agreement Among Underwriters*
3.1(a) Articles of Incorporation of Registrant**
3.1(b) Articles of Amendment**
3.2 By-Laws of Registrant**
4.1 Form of Underwriters' Purchase Option*
4.2 Form of Warrant Agreement
4.3 Specimen Common Stock Certificate*
4.4 Specimen Class A Redeemable Common Stock Purchase Warrant*
5.1 Opinion of Singer Zamansky LLP*
9.1 Form of Voting Agreement*
10.1 Form of Financial Advisory Agreement with Underwriters*
10.2 1998 Stock Option Plan*
10.3 Leases of Company's Facilities*
10.4 Employment Agreement with Alan Fine*
10.5 Employment Agreement with Sidney Ackerman*
10.6 National Bank of Canada Demand Loan with Rosedale*
10.7 National Bank of Canada Demand Loan with Ontario*
10.7 National Bank of Canada Demand Credit Facility with Rosedale*
10.8 National Bank of Canada Demand Credit Facility with Ontario*
21.1 List of Subsidiaries of Registrant*
23.1 Consent of Schwartz Levitsky Feldman, the Company's Independent Auditors
23.2 Consent of Singer Zamansky LLP (incorporated into Exhibit 5.1)*
23.3 Consent of Torkin, Manes, Cohen & Arbus*
25.1 Powers of Attorney (see Page II-5)*
</TABLE>
- ------------------------
( *) To be filed by amendment
(**) Previously filed
<PAGE>
EXHIBIT 1.1
833,000 Shares of Common Stock
and
833,000 Redeemable Common Stock Purchase Warrants
of
ROSEDALE DECORATIVE PRODUCTS LTD.
UNDERWRITING AGREEMENT
Atlanta, Georgia
_______________, 1998
J.P. Turner & Company, L.L.C.
3340 Peachtree Road, N.E., Suite 450
Atlanta, Georgia 30326
Gentlemen:
Rosedale Decorative Products Ltd.,a corporation organized under the laws of
the Province of Ontario, Canada (the "COMPANY"), confirms its agreement with
J.P. Turner & Company, L.L.C. ("J.P. TURNER"), and each of the other
underwriters named in Schedule I hereto (collectively, the "UNDERWRITERS" which
term shall also include any underwriter substituted as hereinafter provided in
SECTION 11), for whom J.P. Turner is acting as representative (in such capacity,
J.P. Turner shall hereinafter be referred to as the "REPRESENTATIVE"), with
respect to the sale by the Company, and the purchase by the Underwriters, acting
severally and not jointly, of Eight Hundred Thirty-Three Thousand (833,000)
shares (the "SHARES") of the Company's common stock, no par value per share (the
"COMMON STOCK"), and Eight Hundred Thirty-Three Thousand (833,000) Redeemable
Common Stock Purchase Warrants (the "REDEEMABLE WARRANTS") ("FIRM SECURITIES"),
each of the Redeemable Warrants entitles the holder thereof to purchase one
share of Common Stock at an exercise price of $______ per share pursuant to a
warrant agreement (the "WARRANT AGREEMENT") between the Company and the warrant
agent, set forth in Schedule II, and with respect to the grant by the Company to
the Underwriters, acting severally and not jointly, of the option described in
SECTION 2(b) hereof to purchase all or any part of 124,950 additional Shares and
124,950 Redeemable Warrants (the "ADDITIONAL SECURITIES") for the purpose of
covering over-allotments, if any. The aforesaid Firm Securities together with
all or any part of the Additional Securities are hereinafter collectively
referred to as the "SECURITIES." The Company also proposes to issue and sell to
the Underwriters for an approximate price of $_____ ($0.001 per warrant), non-
callable warrants entitling the Underwriters' to purchase from the Company an
Underwriters' Warrant (the "UNDERWRITERS' WARRANT") for the purchase of an
aggregate of 833,000 Shares (the "UNDERWRITERS' SHARES") and 833,000 Redeemable
Common Stock Purchase Warrants (the "UNDERWRITERS' WARRANTS"). The shares of
Common Stock issuable upon exercise of the Redeemable Warrants and the
Underwriters' Warrants are hereinafter sometimes referred to as the "WARRANT
SHARES." The Shares, the Redeemable Warrants, the Common Stock and
Underwriters'
Page 1
<PAGE>
Shares, Underwriters' Warrants, and the Warrant Shares are more fully described
in the Registration Statement (as defined in Subsection 1(a) hereof) and the
Prospectus (as defined in Subsection 1(a) hereof) referred to below. Unless the
context otherwise requires, all references to the "Company" shall include all
subsidiaries (as defined in Subsection 1(e) hereof) referred to below and
identified in the Prospectus, as if separately stated herein. All
representations, warranties and opinions of counsel shall cover such
subsidiaries.
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to and agrees with each of the Underwriters as of the date hereof,
and as of the Closing Date and any Option Closing Date, (as defined in
Subsection 2 (c) hereof), if any, as follows:
(a) The Company has prepared and filed with the Securities and
Exchange Commission (the "COMMISSION") in accordance with the provisions of the
Securities Act of 1933, as amended, and the rules and regulations of the
Commission thereunder (collectively, the "ACT"), a registration statement, and
an amendment or amendments thereto, on Form SB-2 (File No. 333-_______) under
the Act (the "REGISTRATION STATEMENT"), including a prospectus subject to
completion relating to the Shares and Redeemable Warrants which registration
statement and any amendment or amendments have been prepared by the Company in
material compliance with the requirements of the Act and the rules and
regulations of the Commission under the Act. The term "Registration Statement"
as used in this Agreement means the registration statement (including all
financial schedules and exhibits), as amended at the time it becomes effective,
or, if the registration statement became effective prior to the execution of
this Agreement, as supplemented or amended prior to the execution of this
Agreement. If it is contemplated, at the time this Agreement is executed, that
a post-effective amendment to the registration statement will be filed and must
be declared effective before the offering of the Shares may commence, the term
"Registration Statement" as used in this Agreement means the registration
statement as amended by said post-effective amendment. If an abbreviated
registration statement is prepared and filed with the Commission in accordance
with Rule 462(b) under the Act (an "Abbreviated Registration Statement"), the
term "Registration Statement" as used in this Agreement includes the Abbreviated
Registration Statement. The term "Prospectus" as used in this Agreement means
the prospectus in the form included in the Registration Statement, or, if the
prospectus included in the Registration Statement omits information in reliance
on Rule 430A under the Act and such information is included in a prospectus
filed with the Commission pursuant to Rule 424(b) under the Act, the term
"Prospectus" as used in this Agreement means the prospectus in the form included
in the Registration Statement as supplemented by the addition of the Rule 430A
information contained in the prospectus filed with the Commission pursuant to
Rule 424(b). The term "Preliminary Prospectus" as used in this Agreement means
the prospectus subject to completion in the form included in the registration
statement at the time of the initial filing of the registration statement with
the Commission, and as such prospectus shall have been amended from time to time
prior to the date of the Prospectus.
(b) Neither the Commission nor any state regulatory authority has
issued any order preventing or suspending the use of any Preliminary Prospectus,
the Registration Statement or Prospectus or any part thereof and no proceedings
for a stop order have been instituted or are pending or, to the best knowledge
of the Company, threatened. Each of the Preliminary Prospectus, the
Registration Statement and Prospectus at the time of filing thereof conformed in
all material respects with the requirements of the Act and the Rules and
Regulations, and neither the Preliminary
Page 2
<PAGE>
Prospectus, 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 or statements omitted in reliance upon and in conformity with
written information furnished to the Company with respect to the Underwriters by
or on behalf of the Underwriters expressly for use in such Preliminary
Prospectus, Registration Statement or Prospectus.
(c) When the Registration Statement becomes effective and at all
times subsequent thereto up to the Closing Date and each Option Closing Date and
during such longer period as the Prospectus may be required to be delivered in
connection with sales by the Underwriters or a dealer, the Registration
Statement and the Prospectus will contain all material statements which are
required to be stated therein in material compliance with the Act and the Rules
and Regulations, and will in all material respects conform to the requirements
of the Act and the Rules and Regulations; neither the Registration Statement,
nor any amendment thereto, at the time the Registration Statement or such
amendment is declared effective under the Act, will contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, and the
Prospectus at the time the Registration Statement becomes effective, at the
Closing Date and at any Option Closing Date, will not contain an untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements therein, in the 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 supplied to the Company in writing by or
on behalf of the Underwriters expressly for use in the Registration Statement or
Prospectus or any amendment thereof or supplement thereto.
(d) The Company has been duly organized and is now, and at the
Closing Date and any Option Closing Date will be, validly existing as a
corporation in good standing under the laws of the Province of Ontario, Canada
Other than the Company's Subsidiaries (as defined in Section (e)), the Company
does not own, directly or indirectly, an interest in any corporation,
partnership, trust, joint venture or other business entity; provided, that the
foregoing shall not be applicable to the investment of the net proceeds from the
sale of the Securities in short-term, low-risk investments as set forth under
"Use of Proceeds" in the Prospectus. The Company is duly qualified and licensed
and in good standing as a foreign corporation in each jurisdiction in which its
ownership or leasing of its properties or the character of its operations
require such qualification or licensing, except where the failure to so register
or qualify does not have a material adverse effect on the condition (financial
or other), business, properties, net worth or results of operations of the
Company and the subsidiaries taken as a whole (a "MATERIAL ADVERSE EFFECT").
The Company has all requisite power and authority (corporate and other), and has
obtained any and all necessary material applications, approvals, orders,
licenses, certificates, franchises and permits of and from all governmental or
regulatory officials and bodies (including, without limitation, those having
jurisdiction over environmental or similar matters), to own or lease its
properties and conduct its business as described in the Prospectus; the Company
is and has been doing business in compliance with all such authorizations,
approvals, orders, licenses, certificates, franchises and permits and all
material federal, state, local and foreign laws, rules and regulations; and the
Company has not received any notice of proceedings relating to the revocation or
modification of any such authorization, approval, order, license, certificate,
franchise, or permit which, singly or in the
Page 3
<PAGE>
aggregate, would have a Material Adverse Effect. The disclosures in the
Registration Statement concerning the effects of federal, state, local, and
foreign laws, rules and regulations on the Company's business as currently
conducted and as contemplated are correct in all material respects and do not
omit to state a material fact necessary to make the statements contained therein
not misleading in light of the circumstances in which they were made.
(e) The Company's subsidiaries (collectively, the "SUBSIDIARIES")
include Rosedale Wallcoverings & Fabrics, Inc. and Ontario Paint & Wallpaper
Ltd. Each Subsidiary is a corporation duly organized, validly existing and in
good standing in the jurisdiction of its incorporation, with full corporate
power and authority to own, lease and operate its properties and to conduct its
business, and is duly registered and qualified to conduct its business and is in
good standing in each jurisdiction or place where the nature of its properties
or the conduct of its business requires such registration or qualification,
except where the failure so to register or qualify does not, singly or in the
aggregate, have a Material Adverse Effect; all of the outstanding shares of
capital stock of each of the Subsidiaries, have been duly authorized and validly
issued, are fully paid and nonassessable, and are owned by the Company directly,
or indirectly through one of the other Subsidiaries, free and clear of any lien,
adverse claim, security interest, equity or other encumbrance.
(f) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus under "Capitalization" and will
have the adjusted capitalization set forth therein on the Closing Date and the
Option Closing Date, if any, based upon the assumptions set forth therein, and
the Company is not a party to or bound by any instrument, agreement or other
arrangement providing for the Company to issue any capital stock, rights,
warrants, options or other securities, except for this Agreement and as
otherwise described in the Prospectus. The Securities, the Additional
Securities, Underwriters Shares, the Underwriter's Warrants, and the Warrant
Shares 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 have been duly
authorized and validly issued and are fully paid and non-assessable; the holders
thereof have no rights of rescission with respect thereto, and are not subject
to personal liability by reason of being such holders; and none of such
securities were issued in violation of the preemptive rights of any holders of
any security of the Company, or similar contractual rights granted by the
Company. The Securities, the Additional Securities, the Underwriters' Shares,
and the Underwriter's Warrants to be issued and sold by the Company hereunder,
and the Warrant Shares issuable upon exercise of the Redeemable Warrants and the
Underwriter's Warrants and payment therefor, 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 and thereof, will be validly issued, fully paid and non-assessable and
will conform in all material respects to the descriptions 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 Securities, the Additional Securities, the
Underwriters' Shares, and the Underwriter's Warrants, and the Warrant Shares has
been duly and validly taken; and the certificates representing the Securities,
the Underwriter's Warrants, and the Warrant Shares will be in due and proper
form. Upon the issuance and delivery pursuant to the terms hereof of the
Securities to be sold by the Company hereunder, the Underwriters will acquire
good and marketable
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title to such Securities free and clear of any lien, charge, claim, encumbrance,
pledge, security interest, defect or other restriction or equity of any kind
whatsoever.
(g) The financial statements of the Company, together with the
related notes and schedules thereto, included in the Registration Statement, the
Preliminary Prospectus and the Prospectus fairly present the financial position
and the results of operations of the Company at the respective dates and for the
respective periods to which they apply; and such financial statements have been
prepared in conformity with generally accepted accounting principles,
consistently applied throughout the periods involved. There has been no
material adverse change or development involving a prospective 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, whether or not arising in the ordinary course of
business, since the dates of the financial statements included in the
Registration Statement and the Prospectus and the outstanding debt, the
property, both tangible and intangible, and the business of the Company,
conforms in all material respects to the descriptions thereof contained in the
Registration Statement and in the Prospectus.
(h) Schwartz Levitsky Feldman, Chartered Accountants, whose report is
filed with the Commission as a part of the Registration Statement, are
independent certified public accountants as required by the Act.
(i) The Company (i) has paid all federal, state, local, and foreign
taxes for which it is liable, including, but not limited to, withholding taxes
and taxes payable under Chapters 21 through 24 of the Internal Revenue Code of
1986 (the "CODE"), (ii) has furnished all tax and information returns it is
required to furnish pursuant to the Code, and has established adequate reserves
for such taxes which are not due and payable, and (iii) does not have knowledge
of any tax deficiency or claims outstanding, proposed or assessed against it
(other than certain state or local tax returns, as to which the failure to file,
singly or in the aggregate, would not have a Material Adverse Effect.)
(j) The Company maintains insurance, which is in full force and
effect, of the types and in the amounts which it reasonably believes to be
necessary for its business, including, but not limited to, personal and product
liability insurance covering all personal and real property owned or leased by
the Company against fire, theft, damage and all risks customarily insured
against.
(k) There is no action, suit, proceeding, inquiry, investigation,
litigation or governmental proceeding (including, without limitation, those
having jurisdiction over environmental or similar matters), domestic or foreign,
pending (to the knowledge of the Company) or threatened against (or
circumstances known to the Company that may give rise to the same), or involving
the properties or business of the Company which: (i) 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); or (ii) singly or in the aggregate would have a Material Adverse
Effect.
(l) The Company has full legal right, power and authority to enter
into this Agreement, the Underwriters' Warrant and the Warrant Agreement and to
consummate the transactions provided for in such agreements; and this Agreement,
the Underwriters' Warrant and the Warrant Agreement have each been duly and
properly authorized, executed and delivered by the
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Company. Each of this Agreement, the Underwriters' Warrant and the Warrant
Agreement, constitutes a legal, valid and binding agreement of the Company,
subject to due authorization, execution and delivery by the Representative
and/or the Underwriters, 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). Neither the
Company's execution or delivery of this Agreement, the Underwriters' Warrant,
and the Warrant Agreement, its performance hereunder and thereunder, its
consummation of the transactions contemplated herein and therein, nor 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
pursuant to the terms of: (i) the Articles of Incorporation or By-Laws of the
Company; (ii) any material license, contract, indenture, mortgage, deed of
trust, voting trust agreement, stockholders agreement, note, loan or credit
agreement or any other agreement or instrument to which the Company is a party
or by which the Company is bound or to which any of its properties or assets
(tangible or intangible) is or may be subject, other than conflicts that, singly
or in the aggregate, will not have a Material Adverse Effect; or (iii) any
statute, judgment, decree, order, rule or regulation applicable to the Company
of any arbitrator, court, regulatory body or administrative agency or other
governmental agency or body (including, without limitation, those having
jurisdiction over environmental or similar matters), domestic or foreign, having
jurisdiction over the Company or any of its activities or properties.
(m) No consent, approval, authorization or order of, and no filing
with, any court, regulatory body, government agency or other body, domestic or
foreign, is required for the issuance of the Securities pursuant to the
Prospectus and the Registration Statement, the performance of this Agreement and
the transactions contemplated hereby, 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 (i) the Underwriters' purchase and distribution of the
Securities to be sold by the Company hereunder; or (ii) the issuance and
delivery of the Underwriters' Warrant, the Underwriters' Shares, the
Underwriter's Warrants, the Redeemable Warrants or the Warrant Shares.
(n) All executed agreements or copies of executed agreements filed as
exhibits to the Registration Statement to which the Company is a party or by
which the Company may be bound or to which any of its assets, properties or
businesses may be subject have been duly and validly authorized, executed and
delivered by the Company, and constitute the legal, valid and binding agreements
of the Company, enforceable against it in accordance with its respective terms.
The descriptions contained in the Registration Statement of contracts and other
documents are accurate in all material respects and fairly present the
information required to be shown with respect thereto by the Act and the Rules
and Regulations and there are no material contracts or other documents which are
required by the Act or the Rules and Regulations 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.
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<PAGE>
(o) 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 has not: (i) issued
any securities or incurred any liability or obligation, direct or contingent,
for borrowed money in any material amount; (ii) entered into any transaction
other than in the ordinary course of business; (iii) declared or paid any
dividend or made any other distribution on or in respect of its capital stock;
or (iv) made any changes in capital stock, material changes in debt (long or
short term) or liabilities other than in the ordinary course of business,
material changes in or affecting the general affairs, management, financial
operations, stockholders equity or results of operations of the Company.
(p) 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, no default exists in the due
performance and observance of any material term, covenant or condition of any
license, contract, indenture, mortgage, installment sales agreement, lease, deed
of trust, voting trust agreement, stockholders agreement, note, loan or credit
agreement, or any other agreement or instrument evidencing an obligation for
borrowed money, or any other agreement or instrument to which the Company is a
party or by which the Company may be bound or to which any of the property or
assets (tangible or intangible) of the Company is subject or affected.
(q) To the best knowledge of the Company, the Company 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.
(r) To the best knowledge of the Company, since its inception, the
Company has not incurred any liability arising under or as a result of the
application of the provisions of the Act.
(s) 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 does not presently
maintain, sponsor or contribute to, and never has maintained, sponsored or
contributed 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(l) and 3(37) respectively of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") ("ERISA PLANS").
The Company does not maintain or contribute, now or at any time previously, to a
defined benefit plan, as defined in Section 3(35) of ERISA.
(t) The Company is not in violation in any material respect of any
domestic or foreign laws, ordinances or governmental rules or regulations to
which it is subject, except to the extent that any such violation would not,
singly or in the aggregate, have a Material Adverse Effect.
(u) No holders of any securities of the Company or of any options,
warrants or other convertible or exchangeable securities of the Company
exercisable for or convertible or exchangeable for securities of the Company
have the right to include any securities issued by the Company in the
Registration Statement or any registration statement to be filed by the Company
within twelve (12) months of the date hereof or to require the Company to file a
registration
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<PAGE>
statement under the Act during such twelve (12) month period, except such
registration rights as have been waived or disclosed in the Prospectus.
(v) Neither the Company, nor, to the Company's best knowledge, any of
its employees, directors, principal stockholders or affiliates (within the
meaning of the Rules and Regulations) has taken, directly or indirectly, any
action designed to or which has constituted or which might reasonably be
expected to cause or result in, under the Exchange Act, or otherwise,
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities or otherwise.
(w) Except as described in the Prospectus, to the best of the
Company's knowledge, none of the patents, patent applications, trademarks,
service marks, trade names and copyrights, or licenses and rights to the
foregoing presently owned or held by the Company is in dispute or are in any
conflict with the right of any other person or entity within the Company's
current area of operations nor has the Company received notice of any of the
foregoing. To the best of the Company's knowledge, the Company: (i) owns or has
the 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 its 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; and (ii) except as set forth in the Prospectus, is 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, trade name, copyright, know-how, technology or other
intangible asset, with respect to the use thereof or in connection with the
conduct of its business or otherwise.
(x) Except as described in the Prospectus, to the best of the
Company's knowledge, the Company owns and has the unrestricted right to use all
material trade secrets, trademarks, trade names, know-how (including all other
unpatented and/or unpatentable proprietary or confidential information, systems
or procedures), inventions, designs, processes, works of authorship, computer
programs and technical data and information (collectively herein "INTELLECTUAL
PROPERTY") required for or incident to the development, manufacture, operation
and sale of all products and services sold or proposed to be sold by the
Company, free and clear of and without violating any right, lien, or claim of
others, including without limitation, former employers of its employees;
provided, however, that the possibility exists that other persons or entities,
completely independently of the Company, or employees or agents, could have
developed trade secrets or items of technical information similar or identical
to those of the Company.
(y) The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property 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 or assessments not yet due and payable.
(z) The Company has obtained such duly executed legally binding and
enforceable agreements as required by the Representative pursuant to which the
Company's President and certain
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Directors and affiliates described in the Prospectus, have agreed not to,
directly or indirectly, offer to sell, sell, grant any option for the sale of,
assign, transfer, pledge, hypothecate or otherwise encumber any of their shares
of Common Stock or other securities of the Company (either pursuant to Rule 144
of the Rules and Regulations or otherwise) or dispose of any beneficial interest
therein for certain periods of up to 60 months subject to earlier release upon
the Company's achievement of certain performance thresholds, following the
effective date of the Registration Statement without the prior written consent
of the Representative. 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 shares of Common Stock and other securities of the
Company.
(aa) Except as disclosed in the Prospectus, the Company has not
incurred any liability and there are no arrangements or understandings for
services in the nature of a finder's or origination fee with respect to the sale
of the Securities or any other arrangements, agreements, understandings,
payments or issuances with respect to the Company or any of its officers,
directors, employees or affiliates that may adversely affect the Underwriters'
compensation, as determined by the NASD.
(bb) The Securities have been approved for quotation on the Nasdaq
SmallCap Market of the Nasdaq Stock Market, Inc., subject to official notice of
issuance.
(cc) Neither the Company nor to the Company's best knowledge any of
its respective officers, employees, agents or any other person acting on behalf
of the Company, has, directly or indirectly, given or agreed to give any money,
gift or similar benefit (other than legal price concessions to customers in the
ordinary course of business) to any customer, supplier, employee or agent of a
customer or supplier, or official or employee of any governmental agency
(domestic or foreign) or instrumentality of any government (domestic or foreign)
or any political party or candidate for office (domestic or foreign) or other
person who was, is, or may be in a position to help or hinder the business of
the Company (or assist the Company in connection with any actual or proposed
transaction) which: (a) might subject the Company, or any other such person to
any damage or penalty in any civil, criminal or governmental litigation or
proceeding (domestic or foreign); (b) if not given in the past, might have had a
materially adverse effect on the assets, business or operations of the Company;
or (c) if not continued in the future, might adversely affect the assets,
business, operations or prospects of the Company. The Company's internal
accounting controls are sufficient to cause the Company to comply with the
Foreign Corrupt Practices Act 1977, as amended.
(dd) Except as set forth in the Prospectus, and to the best knowledge
of the Company, no officer, director or principal stockholder of the Company, or
any "affiliate" or "associate" (as these terms are defined in Rule 405
promulgated under the Rules and Regulations) of any such person or entity or the
Company, has or has had, either directly or indirectly, (i) an interest in any
person or entity which (A) furnishes or sells services or products which are
furnished or sold or are proposed to be furnished or sold by the Company, or (B)
purchases from or sells or furnishes to the Company any goods or services,
except with respect to the beneficial ownership of not more than 1% of the
outstanding shares of capital stock of any publicly-held entity; or (ii) a
beneficial interest in any contract or agreement to which the Company is a party
or by which it may be bound or affected. Except as set forth in the Prospectus
under "Certain Relationships and Related Transactions," there are no existing
agreements, arrangements, understandings or transactions, or
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proposed agreements, arrangements, understandings or transactions, between or
among the Company, and any officer, director, or principal stockholder of the
Company, or any affiliate or associate of any such person or entity, which is
required to be disclosed pursuant to Rule 404 of Regulation S-B.
(ee) Any certificate signed by any officer of the Company and
delivered to the Underwriters or to the Underwriters' Counsel shall be deemed a
representation and warranty by the Company to the Underwriters as to the matters
covered thereby.
(ff) The Company has entered into an employment agreements with Alan
Fine and Sidney Ackerman as described in the Prospectus. Unless waived by the
Representative, the Company shall use its reasonable efforts at reasonable cost
to obtain key-man life insurance policies in the amount of not less than
$1,000,000 on the life of Mr. Fine and Mr. Ackerman, which policies shall be
owned by the Company and shall name the Company as the sole beneficiary
thereunder.
(gg) No securities of the Company have been sold by the Company since
its date of incorporation, except as disclosed in Part II of the Registration
Statement.
(hh) The minute books of the Company have been made available to
Underwriter's Counsel and contain a complete summary of all meetings and actions
of the Board of Directors and Shareholders of the Company since the date of its
incorporation.
2. PURCHASE, SALE AND DELIVERY OF THE SECURITIES, ADDITIONAL SECURITIES
AND AGREEMENT TO ISSUE UNDERWRITERS' WARRANT.
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to each Underwriter, and each Underwriter,
severally and not jointly, agree to purchase from the Company at the price per
share and the price per warrant set forth below, that proportion of the number
of Common Stock and Redeemable Warrants set forth in Schedule I opposite the
name of such Underwriter that such number of Common Stock and Redeemable
Warrants bears to the total number of shares of Common Stock and Redeemable
Warrants, respectively, subject to such adjustment as the Underwriters in their
discretion shall make to eliminate any sales or purchases of fractional
Securities, plus any additional numbers of Securities which such Underwriter may
become obligated to purchase pursuant to the provisions of SECTION 11 hereof.
(b) In addition, on the basis of the representations, warranties,
covenants and agreements, herein contained, but subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
Underwriters, severally and not jointly, to purchase up to an additional 124,950
Shares from the Company and 124,950 Redeemable Warrants at the prices set forth
below. The option granted hereby will expire 45 days after the date of this
Agreement, and may be exercised in whole or in part from time to time only for
the purpose of covering over-allotments which may be made in connection with the
offering and distribution of the Additional Securities upon notice by the
Representative to the Company setting forth the number of Additional Securities
as to which the Underwriters are then exercising the option and the time and
date of payment and delivery for such Additional Securities. Any such time and
date of delivery shall be determined by the Underwriters, but shall not be later
than seven full business days after
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the exercise of said option, nor in any event prior to the Closing Date, as
defined in paragraph (c) below, unless otherwise agreed to between the
Representative and the Company. In the event such option is exercised, each of
the Underwriters, acting severally and not jointly, shall purchase such number
of Additional Securities then being purchased which shall have been allocated to
such Underwriter by the Representative, and which such Underwriter shall have
agreed to purchase, subject in each case to such adjustments as the Underwriters
in their discretion shall make to eliminate any sales or purchases of fractional
Securities. Nothing herein contained shall obligate the Underwriters to make
any over-allotments. No Additional Securities shall be delivered unless the
Firm Securities shall be simultaneously delivered or shall theretofore have been
delivered as herein provided.
(c) Payment of the purchase price for, and delivery of certificates
for, the Firm Securities shall be made at the offices of counsel to the
Representative in Atlanta, Georgia, or at such other place as shall be agreed
upon by the Underwriters and the Company. Such delivery and payment shall be
made at 10:00 a.m. (New York City time) on ___________, 1998 or at such other
time and date as shall be designated by the Representative but not less than
three (3) nor more than five (5) business days after the effective date of the
Registration Statement (such time and date of payment and delivery being
hereafter called "CLOSING DATE"). In addition, in the event that any or all of
the Additional Securities are purchased by the Underwriters, payment of the
purchase price for, and delivery of certificates for such Additional Securities
shall be made at the above-mentioned office or at such other place and at such
time (such time and date of payment and delivery being hereinafter called
"OPTION CLOSING DATE") as shall be agreed upon by the Representative and the
Company on each Option Closing Date as specified in the notice from the
Representative to the Company. Delivery of the certificates for the Firm
Securities and the Additional Securities, if any, shall be made to the
Underwriters against payment by the Underwriters of the purchase price for the
Firm Securities and the Additional Securities, if any, to the order of the
Company as the case may be by certified check in New York Clearing House funds
or, at the election of the Representative, all or a portion of the funds may be
paid by Bank wire transfer of funds or by Representative's commercial check.
Certificates for the Firm Securities and the Additional Securities, if any,
shall be in definitive, fully registered form, shall bear no restrictive legends
and shall be in such denominations and registered in such names as the
Underwriters may request in writing at least two (2) business days prior to
Closing Date or the relevant Option Closing Date, as the case may be. The
certificates or the Depository Trust Corporation electronic notifications, as
the case may be, for the Securities and the Additional Securities, if any, shall
be made available to the Underwriters at the above-mentioned office or such
other place as the Underwriters may designate for inspection, checking and
packaging no later than 9:30 a.m. on the last business day prior to Closing Date
or the relevant Option Closing Date, as the case may be.
The purchase price of the Common Stock and Redeemable Warrants to
be paid by each of the Underwriters, severally and not jointly, to the Company
for the Securities purchased under Clauses (a) and (b) above will be $______ per
Share and $______ per Redeemable Warrant (which price is net of the
Underwriters' discount and commissions). The Company shall not be obligated to
sell any Securities hereunder unless all Firm Securities to be sold by the
Company are purchased hereunder. The Company agrees to issue and sell 833,000
shares of the Common Stock and the Company agrees to issue and sell 833,000
Redeemable Warrants to the Underwriters in accordance herewith.
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(d) On the Closing Date, the Company shall issue and sell to the
Underwriters the Underwriters' Warrant at a purchase price of $________, which
warrant shall entitle the holders thereof to purchase an aggregate of 833,000
Shares and 833,000 Warrants. The Underwriters' Warrant shall be exercisable for
a period of four (4) years commencing one (1) year from the closing date of the
Registration Statement at an initial exercise price equal to one hundred fifty
percent (150%) of the initial public offering price of the Shares and Redeemable
Warrants. The Underwriter's Warrant shall be substantially in the form filed as
an Exhibit to the Registration Statement. Payment for the Underwriters' Warrant
shall be made on Closing Date. The Company has reserved and shall continue to
reserve a sufficient number of Shares for issuance upon exercise of the
Underwriters' Warrant.
3. PUBLIC OFFERING OF THE SECURITIES. As soon after the Registration
Statement becomes effective and as the Representative deems advisable, but in no
event more than three (3) business days after such effective date, the
Underwriters shall make a public offering of the securities (other than to
residents of or in any jurisdiction in which qualification of the Securities is
required and has not become effective) at the price and upon the other terms set
forth in the Prospectus. The Underwriters may allow such concessions and
discounts upon sales to other dealers as set forth in the Prospectus.
4. COVENANTS OF THE COMPANY. The Company covenants and agrees with each
of the Underwriters as follows:
(a) The Company shall use its best efforts to cause the Registration
Statement and any amendments thereto to become effective as promptly as
practicable and will not at any time, whether before or after the effective date
of the Registration Statement, file any amendment to the Registration Statement
or supplement to the Prospectus or file any document under the Exchange Act (i)
before termination of the offering of the Securities by the Underwriters, which
the Underwriters shall not previously have been advised and furnished with a
copy, or (ii) to which the Underwriters shall have objected or (iii) which is
not in compliance with the Act, the Exchange Act or the Rules and Regulations.
(b) As soon as the Company is advised or obtains knowledge thereof,
the Company will advise the Underwriters and confirm by 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 or proceeding for that purpose; (iii) of the issuance by any state
securities commission of any proceedings for the suspension of the qualification
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 or regulatory 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.
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(c) The Company shall file the Prospectus (in form and substance
satisfactory to the Underwriters) or transmit the Prospectus by a means
reasonably calculated to result in filing with the Commission pursuant to Rule
424(b)(1) (or, if applicable and if consented to by the Underwriters pursuant to
Rule 424(b)(4)) not later than the Commission's close of business on the earlier
of (i) the second business day following the execution and delivery of this
Agreement and (ii) the fifth business day after the effective date of the
Registration Statement.
(d) The Company will give the Underwriters notice of its intention to
file or prepare any amendment to the Registration Statement (including any
post-effective amendment) or any amendment or supplement to the Prospectus
(including any revised prospectus which the Company proposes for use by the
Underwriters in connection with the offering of the 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),
will furnish the Underwriters 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 Underwriters or Robert E.
Altenbach, P.C. ("UNDERWRITERS' COUNSEL") shall reasonably object.
(e) The Company shall cooperate in good faith with the Underwriters,
and Underwriters' Counsel, at or prior to the time the Registration Statement
becomes effective, in endeavoring to qualify the Securities for offering and
sale under the securities laws of such jurisdictions as the Underwriters may
reasonably designate, and shall cooperate with the Underwriters and
Underwriters' Counsel in the making of such applications, and filing such
documents and shall furnish such information as may be required for such
purpose; PROVIDED, HOWEVER, the Company shall not be required to: (i) qualify as
a foreign corporation or file a general consent to service of process in any
such jurisdiction; or (ii) qualify or "blue sky" in any state which requires a
lock-up of inside securities for a period greater than five (5) years (or such
earlier date if the Representative has exercised the Underwriters' Warrant). In
each jurisdiction where such qualification shall be effected, the Company will,
unless the Underwriters agree that such action is not at the time necessary or
advisable, use all reasonable efforts to file and make such statements or
reports at such times as are or may reasonably be required by the laws of such
jurisdiction to continue such qualification.
(f) During the time when the Prospectus is required to be delivered
under the Act, the Company shall use all reasonable efforts to comply with all
requirements imposed upon it by the Act 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 Securities in accordance with the provisions hereof and the Prospectus, or
any amendments or supplements thereto. If at any time when the Prospectus
relating to the Securities is required to be delivered under the Act, any event
shall have occurred as a result of which, in the opinion of counsel for the
Company or Underwriters' Counsel, the Prospectus, as then amended or
supplemented, includes an untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if it is necessary at any time to amend the Prospectus
to comply with the Act, the Company will notify the Underwriters 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
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Underwriters' Counsel, and the Company will furnish to the Underwriters a
reasonable number of copies of such amendment or supplement.
(g) As soon as practicable, but in any event not later than 45 days
after the end of the 12-month period commencing 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 Regulations, and to the Underwriters, an earnings
statement which will be in such form and 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.
(h) During a period of five (5) years after the date hereof and
provided that the Company is required to file reports with the Commission under
Section 12 of the Exchange Act, the Company will provide the Representative's
director Designee or Attendee, as defined herein, copies of the below described
documents prior to release where applicable and will furnish to its stockholders
and to the Underwriter as soon as practicable, annual reports (including
financial statements audited by independent public accountants):
(i) as soon as they are available, copies of all reports
(financial or other) mailed to stockholders;
(ii) 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;
(iii) every press release and every material news item or
article of interest to the financial community in respect of the Company and any
future subsidiaries or their affairs which was released or prepared by the
Company;
(iv) any additional information of a public nature concerning
the Company and any future subsidiaries or their respective businesses which the
Underwriters may reasonably request;
(v) a copy of any Schedule 13D, 13G, 14D-1, 13E-3 or 13E-4
received or filed by the Company from time to time;
(vi) such other information as may be requested with reference
to the property, business, stockholders and affairs of the Company and its
subsidiaries.
During such five-year period, if the Company has active subsidiaries,
the foregoing financial statements will be on a consolidated basis to the extent
that the accounts of the Company and its subsidiaries are consolidated, and will
be accompanied by similar financial statements for any significant subsidiary
which is not so consolidated.
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(i) For as long as the Company is required to file reports with the
Commission under Section 12 of the Exchange Act, the Company will maintain a
Transfer Agent and a Warrant Agent, which may be the same entity, and, if
necessary under the jurisdiction of incorporation of the Company, a Registrar
(which may be the same entity as the Transfer and Warrant Agent) for its Common
Stock and Redeemable Warrants.
(j) The Company will furnish to the Underwriters or pursuant to the
Underwriters' direction, without charge, at such place as the Underwriters may
designate, copies of each Preliminary Prospectus, the Registration Statement and
any pre-effective or post-effective amendments thereto (two of which copies will
be signed and will include all financial statements and exhibits), 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 Underwriters may reasonably
request.
(k) Neither the Company, nor its officers or directors, nor
affiliates of any of them (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.
(1) The Company shall apply the net proceeds from the sale of the
Securities in substantially the manner, and subject to the provisions, set forth
under "Use of Proceeds" in the Prospectus. Except for the redemption of the
Company's outstanding Convertible Preferred Stock as disclosed in the
Prospectus, no portion of the net proceeds will be used directly or indirectly
to acquire any securities issued by the Company.
(m) 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.
(n) The Company shall furnish to the Underwriters 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 internally prepared financial statements
of the Company.
(o) For a period of five (5) years from the Closing Date (or such
earlier date if the Representative has exercised the Underwriters' Warrant), the
Company shall furnish to the Underwriters at the Company's sole expense, (i)
daily consolidated transfer sheets relating to the Securities upon the
Representative's reasonable request; (ii) a list of holders of Securities upon
the Representative's reasonable request; (iii) a list of, if any, the securities
positions of participants in the Depository Trust Company upon the
Representative's reasonable request.
(p) For a period of five (5) years after the effective date of the
Registration Statement (or such earlier date if the Representative has exercised
the Underwriters' Warrant), the Company shall use its best efforts to cause one
(1) individual (the "DESIGNEE") selected by the Representative to be elected to
the Board of Directors of the Company (the "BOARD"), if requested
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by the Representative. Alternatively, the Representative shall be entitled to
appoint an individual who shall be permitted to attend all meetings of the Board
(the "ADVISOR") and to receive all notices and other correspondence and
communications sent by the Company to members of the Board. Upon election to
the Board, the Designee shall be entitled to call special meetings of the Board
and to serve on the Audit and Compensation Committees. The Designee may be
removed by the Board only for "justifiable cause" as that term is defined in the
Employment Contracts between the Company and Alan Fine and Sidney Ackerman. The
Company shall reimburse the Representative's Designee or Advisor for his or her
out-of-pocket expenses reasonably incurred and authorized in advance by the
Company in connection with his or her attendance of the Board meetings and a fee
equal to the amount paid to the other outside directors of the Company. The
Designee or Advisor shall also be entitled to participate in any Stock Option
Plans of the Company for non-employees. To the extent permitted by law, the
Company agrees to indemnify and hold the Designee (as a director or Advisor) and
the Representative harmless against any and all claims, actions, awards and
judgements arising out of his or her service as a director or Advisor and in the
event the Company maintains a liability insurance policy affording coverage for
the action of its officer and directors, to include such Designee and the
Representative as an insured under such policy.
(q) For a period equal to the lesser of (i) five (5) years from the
date hereof, or (ii) the sale to the public of the Warrant Shares, the Company
will use its best efforts not to take any action or actions which may prevent or
disqualify the Company's use of Forms S-1 or, if applicable, S-2 and S-3 (or
other appropriate form) for the registration under the Act of the Warrant
Shares.
(r) For a period of five (5) years from the date hereof, the Company
shall use its best efforts at its cost and expense to maintain the listing of
the Securities on the Nasdaq SmallCap Market or NASDAQ National Market System if
the Company meets all of the requirements and qualifications promulgated by the
NASD.
(s) On or before the effective date of the Registration Statement,
the Company shall retain or make arrangements to retain a financial public
relations firm and a publicist reasonably satisfactory to the Representative
which shall be continuously engaged from such engagement date to a date 24
months from the effective date of the Registration Statement. Upon the
expiration of such two (2) year period, such engagement shall continue until the
expiration of any lock-up period provided for in the Lock-Up Agreement(s) with
certain officers and directors of the Company subject to the Company's right to
terminate any such firm with the consent of the Underwriter's director Designee.
Further, the Company shall engage for a period of two years at least three firms
(one of which shall be the Representative and one of which shall be Standard &
Poor's Stock Reports Professional Edition) which are reasonably acceptable to
the Representative to provide industry research and advice to the Company. Upon
the expiration of such two-year period, such engagement shall continue until the
expiration of any lock-up period provided hereunder, subject to the Company's
right to terminate any such firm with the consent of the Underwriters' director
designee.
(t) The Company shall (i) file a Form 8-A with the Commission
providing for the registration under the Exchange Act of the Securities and (ii)
promptly take all necessary and appropriate actions to be included in Standard
and Poor's Corporation Descriptions and/or Moody's OTC Manual and to continue
such inclusion for a period of not less than five (5) years, as soon as
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practicable, but in no event more than five (5) business days' after the
effective date of the Registration Statement.
(u) Following the Effective Date of the Registration Statement and
for a period of five (5) years thereafter (or such earlier date if the
Representative has exercised the Underwriters' Warrant), the Company shall, at
its sole cost and expense, prepare and file such blue sky trading applications
with such jurisdictions as the Representative may reasonably request after
consultation with the Company, and on the Representative's request, furnish the
Underwriters with a secondary trading survey prepared by securities counsel to
the Company.
(v) The Company shall not amend or alter any term of any written
employment agreement nor Lock-Up Agreement between the Company and any executive
officer, director or affiliate, during the term thereof, in a manner more
favorable to such employee or entity, without the express written consent of the
Representative until such time as the Underwriters' Warrant has been exercised
in full.
(w) Until the completion of the distribution of the Securities, the
Company shall not, without the prior written consent of the Representative and
Underwriters' Counsel, which consent shall not be unreasonably withheld, 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.
(x) Commencing one (1) year from the date hereof, upon the exercise
of any Warrant, the exercise of which was solicited by the Underwriters in
accordance with the applicable rules and regulations of the NASD prevailing at
the time of such solicitation, the Company shall pay to the soliciting
Underwriter a fee of 5% of the aggregate exercise price of such Warrant (the
"WARRANT SOLICITATION FEE") within five (5) business days of such exercise, so
long as the Underwriters provided bona fide services in exchange for the Warrant
Solicitation Fee and the Underwriters have been specifically designated in
writing by the holders of the Warrants as the broker. The Company further
agrees that it will not solicit the exercise of any Warrant other than through
the Underwriters, unless either: (i) the Underwriters cannot legally solicit the
exercise of the Warrants at the time of such solicitation; (ii) the
Representative declines, in writing, to solicit the exercise of the Warrants
within five (5) business days of such a written request by the Company; or (iii)
the Representative consents to the solicitation of the exercise of the Warrants
by the Company or another entity.
(y) The Company will use its best efforts to maintain its
registration under the Exchange Act in effect for a period of five (5) years
from the Closing Date.
(z) For a period of twenty-four (24) months commencing on the
Effective Date (or such earlier date if the Representative has exercised the
Underwriters' Warrant), except with the written consent of the Underwriters,
which consent shall not be unreasonably withheld, the Company will not issue or
sell, directly or indirectly, any shares of its capital stock, or sell or grant
options, or warrants or rights to purchase any shares of its capital stock,
except pursuant to (i) this Agreement, (ii) the Underwriters' Warrants, (iii)
warrants and options of the Company heretofore issued and described in the
Prospectus, and (iv) the grant of options and the issuance of shares issued
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upon exercise of options issued or to be issued under a stock option plan to be
adopted in the future by the Company with terms that are reasonable for a public
entity the size of the Company which is described in the Prospectus; except
that, during such period, the Company may issue up to ______ shares pursuant to
certain employee stock options as is described in the Prospectus, and issue
securities in connection with an acquisition, merger or similar transaction,
provided that such securities are not publicly registered or issued pursuant to
Regulation S of the Act, and the acquirer of the securities is not granted
registration rights with respect thereto which are effective prior to 24 months
after the Effective Date and until the Underwriters' Warrant is exercised, the
Underwriter grants its consent. Notwithstanding anything to the contrary set
forth in the prior sentence, the Company may not issue any class or series of
Preferred Stock for a period of 24 months from the Effective Date without the
unanimous vote or consent of all members of the Board of Directors of the
Company. Prior to the Effective Date, the Company will not issue any options or
warrants without the prior written consent of the Underwriters.
(aa) The Company will not file any registration statement relating to
the offer or sale of any of the Company's securities, including any registration
statement on Form S-8, during the 12 months following the Closing Date without
the Underwriters' prior written consent.
(bb) Subsequent to the dates as of which information is given in the
Registration Statement and Prospectus and prior to the Closing Dates, except as
disclosed in or contemplated by the Registration Statement and Prospectus, (i)
the Company will not have incurred any liabilities or obligations, direct or
contingent, or entered into any material transactions other than in the ordinary
course of business; (ii) there shall not have been any change in the capital
stock, funded debt (other than regular repayments of principal and interest on
existing indebtedness) or other securities of the Company, any adverse change in
the condition (financial or other), business, operations, income, net worth or
properties, including any loss or damage to the properties of the Company
(whether or not such loss is insured against), which could adversely affect the
condition (financial or other), business, operations, income, net worth or
properties of the Company; and (iii) the Company shall not pay or declare any
dividend or other distribution on its Common Stock or its other securities or
redeem or repurchase any of its Common Stock or other securities.
(cc) The Company, for a period of twenty-four (24) months following
the Effective Date (or such earlier date if the Representative has exercised the
Underwriters' Warrant), shall not redeem any of its securities, except as
disclosed in the Registration Statement, and shall not pay any dividends or make
any other cash distribution in respect of its securities in excess of the amount
of the Company's current or retained earnings derived after the Effective Date
without obtaining the Underwriters' prior written consent, which consent shall
not be unreasonably withheld. The Underwriters shall either approve or
disapprove such contemplated redemption of securities or dividend payment or
distribution within five (5) business days from the date the Underwriters
receive written notice of the Company's proposal with respect thereto; a failure
of the Underwriters to respond within the five (5) business day period shall be
deemed approval of the transaction.
(dd) The Company maintains and will continue to maintain a system of
internal accounting controls sufficient to provide reasonable assurance that:
(i) transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary in order to
permit preparation of financial statements in accordance with generally accepted
accounting principles and to maintain accountability for assets; (iii) access to
assets is
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permitted only in accordance with management's general or specific
authorization; (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences, and (v) all quarterly reports filed on Form 10-Q
shall be reviewed by the Company's accountant in accordance with SAS 71.
(ee) The Company, for a period of twenty-four (24) months following
the Effective Date (or such earlier date if the Representative has exercised the
Underwriters' Warrant), shall implement the following procedures:
(i) Thirty days prior to fiscal year end, the President will
present to the Board of Directors a business plan to be adopted by the Board of
Directors at fiscal year end. The business plan will include the following:
a) quarterly projections - including balance sheet,
profit/loss statement and cash flow statements with underlying
assumptions
b) upon board approval, this document becomes the
annual budget
(ii) No later than the 20th day of each month, the Company
will provide the Board with comparative financial statements for the previous
month showing actual balance sheet, profit/loss and cash flow vs. budget with
written explanations for deviation in excess of $50,000 or 10% of line item
presented.
(iii) Monthly Board meetings (which may be by telephone) by the
25th of each month to include discussion of the Monthly Report and approval of
any changes to the business plan based on change of circumstances.
(iv) Implementation of a compensation committee, which will be
headed by an outside director and include one of the Underwriters' Designee
Directors, to make recommendations to the Board for compensation for all outside
consultants, officers and outside directors.
(v) Implementation of an audit committee which will have as
its members the Underwriter's Designee Director and one outside Director.
If the Company fails to comply with or breaches any provisions of this
Section 4 of this Agreement, after 30 days written notice from the
Representative of such default or breach, the Underwriters may cause the Company
to retain one or more consultants, accountants or other professionals to assist
the Company in curing the breach or failure and the Company will reimburse such
third party directly for costs and expenses incurred.
(ff) Financial Advisory Agreement. On the Closing Date, the Company
shall execute a Financial Advisory Agreement with you for services, which shall
include without limitation (i) advising the Company in connection with possible
acquisitions (ii) facilitating shareholder communications and relations,
including the preparation of the Company's annual report and (iii) advising and
assisting the Company with long-term financial planning, corporate
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reorganization, expansion and capital structure and other financial matters.
Such agreement shall have a term of two years and provide for compensation of
$2,000 per month which amount shall be prepaid in full on the Closing Date. The
Financial Advisory Agreement shall further provide that during the term of such
agreement, in the event that you (i) introduce, negotiate or arrange on the
Company's behalf a non-public equity financing or (ii) arrange on the Company's
behalf a non-public debt financing or (iii) arrange for the purchase or sale of
assets, or for a merger acquisition or joint venture for the Company, then the
Company will compensate you (based on the Transaction Value, as defined below)
for such services in an amount equal to:
5% on the first $1,000,000 of the Transaction Value;
4% on the amount from $1,000,001 to $2,000,000;
3% on the amount from $2,000,001 to $3,000,000;
2% on the amount from $3,000,001 to $4,000,000;
1% on the amount from $4,000,001 to $5,000,000;
1% on the amount in excess of $5,000,000.
"TRANSACTION VALUE" shall mean the aggregate value of all cash,
securities and other property (i) paid to the Company, its affiliates or their
shareholders in connection with any transaction referred to above involving any
investment in or acquisition of the Company or any affiliates (or the assets of
either), (ii) paid by the Company or any affiliate in any such transaction
involving an investment in or acquisition of another party or its equity
holdings by the Company or any affiliate, or (iii) paid or contributed by the
Company or any affiliate and by the other party or parties in the event of any
such transaction involving a merger, consolidation, joint venture or similar
joint enterprise or undertaking. The value of any such securities (whether debt
or equity) or other property shall be the fair market value thereof as
determined by mutual agreement of the Company and the Underwriters or by an
independent appraiser jointly selected by the Company and the Underwriters.
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 Underwriters' Counsel, except as provided
in (iv) below) incident to the performance of the obligations of the Company
under this Agreement, including, without limitation: (i) the fees and expenses
of accountants and counsel for the Company; (ii) all costs and expenses incurred
in connection with the preparation, duplication, printing, filing, delivery and
mailing (including the payment of postage with respect thereto) of the
Registration Statement and the Prospectus and any amendments and supplements
thereto and the printing, mailing and delivery of this Agreement, the Selected
Dealer Agreements, the Agreement Among Underwriters, Underwriters
Questionnaires, Powers of Attorney and related documents, including the cost of
all copies thereof and of the Preliminary Prospectuses and of the Prospectus and
any amendments thereof or supplements thereto supplied to the Underwriters in
quantities as hereinabove stated; (iii) the printing, engraving, issuance and
delivery of the Securities including any transfer or other taxes payable
thereon; (iv) disbursements and fees of Underwriters' Counsel in connection with
the qualification of the 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
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Investments Survey," if any, which Underwriters' Counsel blue sky fees
(exclusive of filing fees and disbursements) shall be $1,000 for each state in
which application for registration or qualification is made up to an aggregate
of $15,000 for all states which Underwriter's Counsel files and inclusive of the
Blue Sky Memorandum described above; (v) fees and expenses of the transfer
agent; (vi) the fees payable to the NASD; (vii) the fees and expenses incurred
in connection with the listing of the Securities on the Nasdaq SmallCap Market
and any other fees for application and admission to a registered Stock Exchange
for which the Underwriter requires the Company to register its Securities;
(viii) fees and expenses for any tombstone advertisements reasonably requested
by the Representative; (ix) Closing Binders; and (x) Lucite cubes containing a
miniature definite Prospectus. All fees and expenses payable to the
Underwriters shall be payable at the Closing Date or Option Closing Date, as
applicable.
(b) If this Agreement is terminated by the Underwriters in accordance
with the provisions of SECTION 6, SECTION 10(A) or SECTION 12, the Company shall
reimburse and indemnify the Underwriters for all of their out-of-pocket expenses
reasonably incurred in connection with the transactions contemplated hereby.
(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
Underwriters a non-accountable expense allowance equal to three percent (3%) of
the gross proceeds received by the Company from the sale of the Securities, none
of which has been paid to date to the Underwriters. The Company will pay the
remainder of the non-accountable expense allowance on the Closing Date by direct
payment to third parties for fees and expenses including, but not limited to,
fees and expenses of Underwriter's Counsel and the balance by deduction from the
proceeds of the offering contemplated herein. In the event the Underwriters
elect to exercise the over-allotment option described in Section 2(b) hereof,
the Company further agrees to pay to the Underwriters on the Option Closing Date
(by deduction from the proceeds of the offering) a non-accountable expense
allowance equal to three percent (3%) of the gross proceeds received by the
Company from the sale of the Additional Securities.
6. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of the
Underwriters hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company herein as of the Closing Date and
each Option Closing Date, if any, as if they had been made on and as of the
Closing Date or each Option Closing Date, as the case may be; the accuracy on
and as of the Closing Date or Option Closing Date, if any, of the statements of
officers of the Company made pursuant to the provisions hereof; and the
performance by the Company on and as of the Closing Date and each Option Closing
Date, if any, of each of its covenants and obligations hereunder and to the
following further conditions:
(a) The Registration Statement shall have become effective not later
than 5:00 P.M., New York City time, on the date of this Agreement or such later
date and time as shall be consented to in writing by the Underwriters, and, at
Closing Date and each Option Closing Date, if any, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or shall be pending or
contemplated by the Commission and any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of Underwriter and Underwriters' Counsel. If the Company has
elected to rely upon Rule 430A of the Rules and Regulations, the price of the
Securities and any price-related information previously omitted from
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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 Underwriters 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 Underwriters shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Underwriters' opinion, is material or omits to state a
fact which, in the Underwriters' opinion, is material and is required to be
stated therein or is necessary to make the statements therein not misleading, or
that the Prospectus, or any supplement thereto, contains an untrue statement of
fact which, in the Underwriters' reasonable opinion, is material, or omits to
state a fact which, in the Underwriters' reasonable opinion, is material and is
required to be stated therein or is necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
(c) On or prior to the Closing Date and each Option Closing Date, as
the case may be, the Underwriters shall have received from Underwriters'
Counsel, such opinion or opinions with respect to the organization of the
Company the validity of the Securities, the Registration Statement, the
Prospectus and other related matters as the Underwriters reasonably may request
and such counsel shall have received such papers and information as they request
to enable them to pass upon such matters.
(d) At the Closing Date and the Option Closing Date the Underwriters
shall have received an opinion of Gregory Sichenzia, Esq., counsel to the
Company, dated the Closing Date, or Option Closing Date, as the case may be,
addressed to the Underwriter and in form and substance satisfactory to
Underwriters' Counsel, to the effect that:
(i) The Company: (A) has been duly organized and is validly
existing as a corporation in good standing under the laws of the Province of
Ontario, Canada with full corporate power and authority to own and operate its
properties and to carry on its business as set forth in the Registration
Statement and Prospectus; (B) to the best knowledge of such counsel, the Company
is duly registered or qualified as a foreign corporation in all jurisdictions in
which by reason of maintaining an office in such jurisdiction or by owning or
leasing real property in such jurisdiction it is required to be so registered or
qualified except where failure to register or qualify does not have, singly or
in the aggregate, a Material Adverse Effect; and (C) to the best knowledge of
such counsel, the Company has not received any notice of proceedings relating to
the revocation or modification of any such registration or qualification.
(ii) The Registration Statement, each Preliminary Prospectus
that has been circulated and the Prospectus and any post-effective amendments or
supplements thereto (other than the financial statements, schedules 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 Regulations and the conditions for use of a registration statement
on Form SB-2 have been satisfied by the Company. Such counsel shall state that
such counsel has participated in conferences with officers and other
representatives of the Company, representatives of the
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independent public accountants for the Company and representatives of the
Underwriters at which the contents of the Registration Statement, the Prospectus
and related matters were discussed and, although such counsel is not passing
upon and does not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement and
Prospectus, on the basis of the foregoing, no facts have come to the attention
of such counsel which lead them to believe that either the Registration
Statement or any amendment thereto at the time such Registration Statement or
amendment became effective or the Prospectus as of the date thereof contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or to make the statements therein in light of the
circumstances under which they were made, not misleading (it being understood
that such counsel need express no opinion with respect to the financial
statements and schedules and other financial and statistical data included in
the Registration Statement or Prospectus or with respect to statements or
omissions made therein in reliance upon information furnished in writing to the
Company on behalf of any Underwriter expressly for use in the Registration
Statement or the Prospectus).
(iii) To the best of such counsel's knowledge, the Company has
a duly authorized, issued and outstanding capitalization as set forth in the
Prospectus as of the date indicated therein, under "Capitalization." The
Shares, Redeemable Warrants, the Underwriters' Warrants, and the Warrant Shares
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 have been duly authorized and validly
issued and are fully paid and non-assessable; the holders thereof, to counsel's
best knowledge, are not subject to personal liability by reason of being such
holders, and none of such securities were issued in violation of the preemptive
rights of any holder of any security of the Company.
(iv) The issuance of the Shares, Redeemable Warrants and the
Warrant Shares have been duly authorized and when issued and paid for in
accordance with this Agreement and the Warrant Agreement, respectively, will be
validly issued, fully paid and non-assessable securities of the Company. The
holders of the Securities when issued and paid for, will not be subject to
personal liability by reason of being such holders. To the best of such
counsel's knowledge, the Securities are not and will not be subject to the
preemptive or similar contractual rights of any shareholder of the Company. All
corporate action required to be taken for the authorization, issuance and sale
of the Securities has been duly and validly taken. The certificates representing
the Shares and Redeemable Warrants are in due and proper form.
(v) Based solely on telephonic, verbal confirmation provided
to such counsel by the staff of the Commission, the Registration Statement and
all post-effective amendments, if any, have become 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 the best of such counsel's knowledge,
no stop order suspending the effectiveness of the Registration Statement has
been issued and to the best of such counsel's knowledge, no proceedings for that
purpose have been instituted or are pending or threatened or contemplated under
the Act; and any required filing of the Prospectus pursuant to Rule 424(b) has
been made.
(vi) To the best of such counsel's knowledge, (A) there are no
material contracts or other documents required to be described in the
Registration Statement and the Prospectus and filed as exhibits to the
Registration Statement other than those described in the
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Registration Statement and the Prospectus and filed as exhibits thereto, and (B)
the descriptions in the Registration Statement and the Prospectus and any
supplement or amendment thereto regarding such material contracts or other
documents to which the Company is a party or by which it is bound, are accurate
in all material respects and fairly represent the information required to be
shown by Form SB-2 and the Rules and Regulations.
(vii) This Agreement, the Underwriters' Warrant, the Warrant
Agreement, and the Financial Advisory Agreement have each been duly and validly
authorized, executed and delivered by the Company, and assuming that it is a
valid and binding agreement of the Underwriters, so as the case may be,
constitutes a legal, valid and binding agreement of the Company enforceable as
against the Company in accordance with its respective terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting enforcement of creditors rights and the application of equitable
principles in any action, legal or equitable, and except as rights to indemnity
or contribution may be limited by applicable law or pursuant to public policy).
(viii) Neither the execution or delivery by the Company of this
Agreement, the Underwriters' Warrant, and the Warrant Agreement, nor its
performance hereunder or thereunder, nor its consummation of the transactions
contemplated herein or therein, nor the conduct of its business as described in
the Registration Statement, the Prospectus, and any amendments or supplements
thereto, nor the issuance of the securities 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 material default under, or
result in the creation or imposition of any material lien, charge, claim,
encumbrance, pledge, security interest, defect or other restriction or equity of
any kind whatsoever upon any property or assets (tangible or intangible) of the
Company pursuant to the terms of (A) the Articles of Incorporation of the
Company, or (B) to the best knowledge of such counsel, and except to the extent
it would not have a Material Adverse Effect on the Company, any statute,
judgment, decree, order, rule or regulation applicable to the Company of any
arbitrator, court, regulatory body or administrative agency or other
governmental agency or body, having jurisdiction over the Company or any of its
respective activities or properties.
(ix) 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 state securities laws, as to which no opinion
need be rendered) is required in connection with the issuance by the Company of
the Securities pursuant to the Prospectus and the Registration Statement, the
performance of this Agreement, the Underwriters' Warrant, the Financial Advisory
Agreement and the Warrant Agreement by the Company, and the taking of any action
by the Company contemplated hereby or thereby, which has not been obtained.
(x) To the best of such counsel's knowledge, except as
described in the Prospectus, no person, corporation, trust, partnership,
association or other entity holding securities of the Company has the
contractual 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
for twelve months from the date hereof.
(xi) After the public offering, the Securities will be
eligible for listing on the Nasdaq SmallCap Market.
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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, the
corporate laws of the Province of Ontario, Canada 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
in substance reasonably satisfactory to Underwriters' Counsel) of other counsel
reasonably acceptable to Underwriters' Counsel, familiar with the applicable
laws, and (B) as to matters of fact, to the extent they deem proper, on
certificates and written statements of responsible officers of the Company and
certificates or other written statements of officers of departments of various
jurisdictions having custody of documents respecting the corporate existence or
good standing of the Company; PROVIDED, that copies of any such statements or
certificates shall be delivered to Underwriters' Counsel if requested. The
opinion of such counsel for the Company shall state that the opinion of any such
other counsel is in form satisfactory to such counsel and, in their opinion, the
Underwriters and they are justified in relying thereon.
(e) At each Option Closing Date, if any, the Underwriters shall have
received the an opinion of counsel to the Company, each dated the Option Closing
Date, addressed to the Underwriters and in form and substance satisfactory to
Underwriters' Counsel confirming as of Option Closing Date the statements made
by such firm, in their opinion, delivered on the Closing Date.
(f) On or prior to each of the Closing Date and the Option Closing
Date, Underwriters' Counsel shall have been furnished such documents,
certificates and opinions as they may reasonably require for the purpose of
enabling them to review or pass upon the matters referred to in subsection (c)
of this SECTION 6, or in order to evidence the accuracy, completeness or
satisfaction of any of the representations, warranties or conditions herein
contained.
(g) Prior to the Closing Date and each Option Closing Date, if any:
(i) there shall have been no material adverse change nor development involving a
prospective change in the condition, financial or otherwise, prospects or the
business activities of the Company, whether or not in the ordinary course of
business, from the latest dates as of which such condition is set forth in the
Registration Statement and Prospectus; (ii) there shall have been no
transaction, not in the ordinary course of business, entered into by the
Company, from the latest date as of which the financial condition of the Company
is set forth in the Registration Statement and Prospectus which is materially
adverse to the Company; (iii) the Company shall not be in material default under
any provision of any instrument relating to any outstanding indebtedness; (iv)
no material amount of the assets of the Company shall have been pledged or
mortgaged, except as set forth in the Registration Statement and Prospectus; (v)
no action, suit or proceeding, at law or in equity, shall have been pending or
to its knowledge threatened against the Company, or affecting any of its
properties or businesses before or by any court or federal, state or foreign
commission, board or other administrative agency wherein an unfavorable
decision, ruling or finding may materially adversely affect the business,
operations, prospects or financial condition or income of the Company, except as
set forth in the Registration Statement and Prospectus; and (vi) no stop order
shall have been issued under the Act and no proceedings therefor shall have been
initiated, threatened or contemplated by the Commission.
(h) At the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received a certificate of the Company signed by the
principal executive officer and by the
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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:
(i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing Date or the
Option Closing Date, as the case may be, and the Company has complied with all
agreements and covenants and satisfied all conditions contained in this
Agreement on its part to be performed or satisfied at or prior to such Closing
Date or Option Closing Date, as the case may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for that purpose have
been instituted or are pending or, to the best of each of such person's
knowledge, 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, in light of
the circumstances under which they were made, not misleading and neither the
Preliminary Prospectus nor any 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, in light of the
circumstances under which they were made, not misleading; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus and except
as otherwise contemplated therein: (A) the Company has not incurred up to and
including the Closing Date or the Option Closing Date as the case may be, other
than in the ordinary course of its business, any material liabilities or
obligations, direct or contingent; (B) the Company has not paid or declared any
dividends or other distributions on its capital stock; (C) the Company has not
entered into any transactions not in the ordinary course of business; (D) there
has not been any change in the capital stock or any increase in long-term debt
or any increase in the short-term borrowings (other than any increase in the
short term borrowings in the ordinary course of business) of the Company; (E)
the Company has not sustained any material loss or damage to its property or
assets, whether or not insured; (F) there is no litigation which is pending or
threatened against the Company which is required to be set forth in an amended
or supplemented Prospectus which has not been set forth;
(v) Neither the Company nor any of its officers or affiliates
shall have taken, and the Company, its officers and affiliates will not take,
directly or indirectly, any action designed to, or which might reasonably be
expected to, cause or result in the stabilization or manipulation of the price
of the Company's securities to facilitate the sale or resale of the Shares.
References to the Registration Statement and the Prospectus in this
subsection (i) are to such documents as amended and supplemented at the date of
such certificate.
(i) By the Closing Date, the Underwriters shall have received
clearance from NASD as to the amount of compensation allowable or payable to the
Underwriters, as described in the Registration Statement.
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(j) At the time this Agreement is executed, the Representative shall
have received a letter, dated such date, addressed to the Representative in form
and substance satisfactory in all respects (including the non-material nature of
the changes or decreases, if any, referred to in clause (iii) below) to the
Underwriters, from Schwartz Levitsky Feldman, Chartered Accountants:
(i) confirming that they are independent public accountants
with respect to the Company within the meaning of the Act and the applicable
Rules and Regulations;
(ii) stating that it is their opinion that the consolidated
financial statements and supporting schedules of the Company included in the
Registration Statement comply as to form in all material respects with the
applicable accounting requirements of the Act and the Rules and Regulations
thereunder and that the Underwriters may rely upon the opinion of Schwartz
Levitsky Feldman, Chartered Accountants 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 consolidated
financial statements of the Company (with an indication of the date of the
latest available unaudited interim consolidated financial statements), a reading
of the latest available minutes of the stockholders and board of directors and
the various committees of the boards of directors of the Company, consultations
with officers and other employees of the Company responsible for financial and
accounting matters and other specified procedures and inquiries, nothing has
come to their attention which would lead them to believe that (A) the unaudited
consolidated financial statements of the Company included in the Registration
Statement do not comply as to form in all material respects with the applicable
accounting requirements of the Act and the 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
consolidated financial statements of the Company included in the Registration
Statement, or (B) at a specified date not more than five (5) days prior to the
effective date of the Registration Statement, there has been any change in the
capital stock, or any increase in total borrowings of the Company, or any
decrease in the stockholders' equity or working capital of the Company as
compared with amounts shown in the financial statements 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, and (C) during the period from December
27, 1997 to a specified date not more than five (5) days prior to the effective
date of the Registration Statement, there was any decrease in revenue, net
earnings or increase in net income or earnings per common share of the Company,
in each case as compared with the corresponding period of the prior year other
than as set forth in or contemplated by the Registration Statement, or, if there
was any such decrease, setting forth the amount of such decrease;
(iv) stating that they have compared specific dollar amounts,
numbers of Securities, percentages of revenue and earnings, statements and other
financial information pertaining to the Company set forth in the Prospectus in
each case to the extent that such amounts, numbers, percentages, statements and
information may be derived from the general accounting records, including work
sheets, of the Company and excluding any questions requiring an interpretation
by legal counsel, with the results obtained from the application of specified
readings, inquiries and other appropriate procedures (which procedures did not
constitute an examination in
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accordance with generally accepted auditing standards) set forth in the letter
and found them to be in agreement; and
(v) statements as to such other matters incident to the
transaction contemplated hereby as the Underwriters may reasonably request.
(k) At the Closing Date and each Option Closing Date, the
Underwriters shall have received from Schwartz Levitsky Feldman, Chartered
Accountants, a letter, dated as of the Closing Date, or Option Closing Date, as
the case may be, to the effect that they reaffirm that statements made in the
letter furnished pursuant to SUBSECTION (j) of this Section, except that the
specified date referred to shall be a date not more than five days prior to the
Closing Date and, if the Company has elected to rely on Rule 430A of the Rules
and Regulations, to the further effect that they have carried out procedures as
specified in clause (iii) of subsection (j) of this Section with respect to
certain amounts, percentages and financial information as specified by the
Underwriters 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 (iii).
(l) On each of the Closing Date and the Option Closing Date, if any,
there shall have been duly tendered to the Underwriters for the several
Underwriters' accounts the appropriate number of Securities.
(m) No order suspending the sale of the Securities in any
jurisdiction designated by the Underwriters 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 to its knowledge or that of the Company shall be contemplated.
If any condition to the Underwriters' obligations hereunder to be
fulfilled prior to or at the Closing Date or the relevant Option Closing Date,
as the case may be, is not so fulfilled, the Underwriters may terminate this
Agreement or, if the Underwriters so elect, it may waive any such conditions
which have not been fulfilled or extend the time for their fulfillment.
7. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each of the
Underwriters, including specifically each person who may be substituted for an
Underwriter as provided in SECTION 11 hereof and each person, if any, who
controls any Underwriter ("CONTROLLING PERSON") within the meaning of Section 15
of the Act or Section 20(a) of the Exchange Act, 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 such Underwriter or such controlling person may become
subject under the Act, the Exchange Act or any other federal or state statutory
laws or regulations 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 (except
that the indemnification contained in this paragraph with respect to any
preliminary prospectus shall not inure to the benefit of the Underwriter or to
the benefit of
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any person controlling the Underwriter on account of any loss, claim, damage,
liability or expense arising from the sale of the Securities by the Underwriter
to any person if a copy of the Prospectus, as amended or supplemented, shall not
have been delivered or sent to such person within the time required by the Act,
and the untrue statement or alleged untrue statement or omission or alleged
omission of a material fact contained in such Preliminary Prospectus was
corrected in the Prospectus, as amended and supplemented, and such correction
would have eliminated the loss, claim, damage, liability or expense), the
Registration Statement or the Prospectus (as from time to time amended and
supplemented); (ii) in any post-effective amendment or amendments or any new
registration statement and prospectus in which is included securities of the
Company issued or issuable upon exercise of the Underwriters' Warrant; or (iii)
in any application or other document or written communication (in this SECTION 8
collectively called "application") executed by the Company or based upon written
information furnished by the Company in any jurisdiction in order to qualify the
Securities under the securities laws thereof or filed with the Commission, any
state securities commission or agency, Nasdaq Stock Market, Inc. or any other
securities exchange; or the omission or alleged omission therefrom of a material
fact required to be stated therein or necessary to make the statements therein
not misleading (in the case of the Prospectus, in the light of the circumstances
under which they were made), unless such statement or omission was made in
reliance upon and in conformity with written information furnished to the
Company with respect to any Underwriter by or on behalf of such Underwriter
expressly for use in any Preliminary Prospectus, the Registration Statement or
Prospectus, or any amendment thereof or supplement thereto, in any
post-effective amendment, new registration statement or prospectus or in any
application, as the case may be, or (iv) any failure of the Company to comply
with any provision of this Underwriting Agreement resulting in a claim or loss
to the Underwriters.
The indemnity agreement in this subsection (a) shall be in addition to
any liability which the Company may have at common law or otherwise.
(b) Each of the Underwriters agrees severally, but not jointly, to
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the Registration Statement, and each other person, if
any, who controls the Company within the meaning of Section 20 of the Act or
Section 20 of the Exchange Act to the same extent as the foregoing indemnity
from the Company to the Underwriters but only with respect to statements or
omissions, if any, made in any Preliminary Prospectus, the Registration
Statement or Prospectus or any amendment thereof or supplement thereto in any
post-effective amendment, new registration statement or prospectus, or in any
blue sky application or any other such application made in reliance upon, and in
strict conformity with, written information furnished to the Company with
respect to any 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 post-effective amendment, new
registration statement or prospectus, 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 or any
amendment thereof or supplement thereto, in any post-effective amendment, new
registration statement or prospectus or in any such application, provided,
further, that the liability of each Underwriter to the Company shall be limited
to the amount of the net proceeds of the Offering received by the Company. The
Company acknowledges that the statements with respect to the public offering of
the Securities set forth under the heading "Underwriting" and the stabilization
legend and the last paragraph of the cover page in the Prospectus have been
furnished by the Underwriters expressly for use therein and any
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information furnished by or on behalf of the Underwriter filed in any
jurisdiction in order to qualify the Securities under State Securities laws or
filed with the Commission, the NASD or any securities exchange constitute the
only information furnished in writing by or on behalf of the Underwriters for
inclusion in the Prospectus and the Underwriters hereby confirm that such
statements and information are true and correct.
(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 avoided). 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 indemnifying 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 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 in lieu of indemnifying such
indemnified party shall contribute to the amount paid or payable by such
indemnified party 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
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one hand, and the party to be indemnified on the other hand from the offering of
the 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 (A) above but also the relative
fault of each of the contributing parties, on the one hand, and the party to be
indemnified on the other hand in connection with the statements or omissions
that resulted in such losses, claims, damages, expenses or liabilities, as well
as any other relevant equitable considerations. In any case where the Company
is the contributing party and the Underwriters are the indemnified party the
relative benefits received by the Company on the one hand, and the Underwriters,
on the other, shall be deemed to be in the same proportion as the total net
proceeds from the offering of the Securities (before deducting expenses) bear to
the total underwriting discounts and commissions received by the Underwriters
hereunder, in each case as set forth in the table on the Cover Page of the
Prospectus. Relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages, expenses or liabilities (or
actions in respect thereof) referred to above in this subdivision (d) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this subdivision (d), the
Underwriters shall not be required to contribute any amount in excess of the
amount of the net proceeds of the Offering received by the Company. 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 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 the Option Closing Date, as the case may be, and such representations,
warranties and agreements of the Company and the 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 any Underwriter, the
Company, or any controlling person, and shall survive termination of this
Agreement or the issuance and delivery of the Securities to the Underwriters.
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9. EFFECTIVE DATE. This Agreement shall become effective: (i) upon the
execution and delivery hereof by the parties hereto; or (ii) if, at any time
this Agreement is executed and delivered, it is necessary for the Registration
Statement or a post-effective amendment thereto to be declared effective before
the offering of the Shares may commence, when notification of the effectiveness
of the Registration Statement or such post-effective amendment has been released
by the Commission and communicated to the Company and Representative. Until
such time as this Agreement shall have become effective, it may be terminated by
the Company, by notifying you, or by you, as Representatives of the several
Underwriters, by notifying the Company.
10. TERMINATION.
(a) The Underwriters shall have the right to terminate this Agreement
(i) if any calamitous domestic or international event or act or occurrence has
materially disrupted, or in the Underwriters' opinion will in the immediate
future materially disrupt general securities markets in the United States; or
(ii) if trading on the New York Stock Exchange, the American Stock Exchange, the
Nasdaq National Market, 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 (iii) if the United States shall
have become involved in a war or major hostilities; or (iv) if a banking
moratorium has been declared by a New York State or federal authority; or (v) if
a moratorium in foreign exchange trading has been declared; or (vi) if the
Company shall have sustained a material adverse loss, whether or not insured, by
reason of fire, flood, accident or other calamity that materially impairs the
investment quality of the Securities; or (vii) if there shall have been such
material adverse change in the conditions or prospects of the Company, involving
a change not contemplated by the Registration Statement.
(b) Notwithstanding any contrary provision contained in this
Agreement, any election hereunder or any termination of this Agreement
(including, without limitation, pursuant to SECTIONS 9 and 10 hereof), and
whether or not this Agreement is otherwise carried out, the provisions of
SECTION 5 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. SUBSTITUTION OF THE UNDERWRITERS. If one or more of the Underwriters
shall fail (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of SECTION 6, SECTION 10 or SECTION 12
hereof) to purchase the Securities which it or they are obligated to purchase on
such date under this Agreement (the "DEFAULTED SECURITIES"), the Underwriters
shall have the right, within 24 hours thereafter, to make arrangements for one
or more of the non-defaulting Underwriters, or any other Underwriters, to
purchase all, but not less than all, of the Defaulted Securities in such amounts
as may be agreed upon and upon the terms herein set forth; if, however, the
Underwriters shall not have completed such arrangements within such 24-hour
period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the
total number of Firm Securities to be purchased on such date, the non-defaulting
Underwriters shall be obligated to purchase the full amount thereof in the
proportions that their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting Underwriters; or
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(b) if the number of Defaulted Securities exceeds 10% of the total
number of Firm Securities, this Agreement shall terminate without liability on
the part of any non-defaulting Underwriters.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of any default by such Underwriter under
this Agreement.
In the event of any such default which does not result in a
termination of this Agreement, the Underwriters shall have the right to postpone
the Closing Date for a period not exceeding seven days in order to effect any
required changes in the Registration Statement or Prospectus or in any other
documents or arrangements.
12. DEFAULT BY THE COMPANY. If the Company shall fail at the Closing Date
or any Option Closing Date, as applicable, to sell and deliver the number of
Securities which it is obligated to sell hereunder on such date, then this
Agreement shall terminate (or, if such default shall occur with respect to any
Option Securities to be purchased on an Option Closing Date, the Underwriters
may at the Underwriters option, by notice from the Underwriters to the Company,
terminate the Underwriters' several obligations to purchase Securities from the
Company on such date) without any liability on the part of any non-defaulting
party other than pursuant to SECTION 5 and SECTION 7 hereof. No action taken
pursuant to this Section shall relieve the Company from liability, if any, in
respect of such default.
13. NOTICES. All notices and communications hereunder, except as herein
otherwise specifically provided, shall be in writing and shall be deemed to have
been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriters shall be directed to the
Representative at J.P. Turner & Company, L.L.C., 3340 Peachtree Road, Suite 450,
Atlanta, Georgia 30326, with a copy to Robert E. Altenbach, P.C., One Buckhead
Plaza, 3060 Peachtree Road, N.W., Suite 400, Atlanta, Georgia 30305, Attention:
Robert E. Altenbach, Esq. Notices to the Company shall be directed to the
Company at the address on the signature page.
14. PARTIES. This Agreement shall inure solely to the benefit of and
shall be binding upon, the Underwriters, the Company and the controlling
persons, directors and officers referred to in SECTION 7 hereof, and their
respective successors, legal representatives and assigns, and their respective
heirs and legal representatives 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 any Underwriter shall be deemed to be a successor by reason
merely of such purchase.
15. CONSTRUCTION. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Georgia without giving
effect to the choice of law or conflict of laws principles.
16. 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.
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If the foregoing correctly sets forth the understanding between the
Underwriters and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
us.
Very truly yours,
ROSEDALE DECORATIVE PRODUCTS LTD.
731 Millway Avenue, Concord,
Ontario, Canada L4K 3S8
By:
----------------------------------------
Sidney Ackerman, President
CONFIRMED AND ACCEPTED AS OF THE DATE FIRST ABOVE WRITTEN
ON BEHALF OF THEMSELVES AND THE OTHER SEVERAL UNDERWRITERS
NAMED IN SCHEDULE I HERETO:
J.P. Turner & Company, L.L.C., as
Representative of the Several Underwriters
By:
-----------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
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SCHEDULE I
UNDERWRITER NUMBER OF SECURITIES
- ----------- --------------------
J.P. Turner & Company, L.L.C. 833,000 Shares of Common Stock
833,000 Redeemable Common Stock
Purchase Warrants
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SCHEDULE II
Warrant Agent: Continental Stock Transfer & Trust Corporation
New York, NY
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EXHIBIT 4.2
WARRANT AGREEMENT
WARRANT AGREEMENT dated as of_______________,1998 (and effective as of
______________, 1998) between Rosedale Decorative Products Ltd., a corporation
organized under the laws of the Province of Ontario, Canada (the "COMPANY"), and
Continental Stock Transfer & Trust Company (the "WARRANT AGENT").
W I T N E S S E T H :
WHEREAS, the Company proposes to issue and sell to the public in a
secondary public offering (the "SECONDARY OFFERING") 833,000 shares of the
Company's Common Stock at $6.00 per share, no par value (the "SHARES"), and
833,000 Redeemable Common Stock Purchase Warrants (the "PUBLIC WARRANTS");
WHEREAS, the Company also proposes to issue and sell to J.P. Turner &
Company, L.L.C. ("J.P. TURNER"), and each of the other underwriters named in
Schedule I hereto (collectively, the "UNDERWRITERS"), for whom J.P. Turner is
acting as representative (in such capacity, J.P. Turner shall hereinafter be
referred to as the "REPRESENTATIVE") in the Secondary Offering Eight Hundred
Thirty-Three Thousand (833,000) shares (the "SHARES") of the Company's common
stock, no par value (the "COMMON STOCK"), and Eight Hundred Thirty-Three
Thousand (833,000) Redeemable Common Stock Purchase Warrants (the "REDEEMABLE
WARRANTS") ("FIRM SECURITIES"), each of the Redeemable Warrants entitles the
holder thereof to purchase one share of Common Stock at an exercise price of
$______ per share pursuant to a warrant agreement (the "WARRANT AGREEMENT")
between the Company and the warrant agent, set forth in Schedule II, and with
respect to the grant by the Company to the Underwriters, acting severally and
not jointly, to purchase all or any part of 124,950 additional Shares and
124,950 Redeemable Warrants (the "ADDITIONAL SECURITIES") for the purpose of
covering over-allotments, if any. The aforesaid Firm Securities together with
all or any part of the Additional Securities are hereinafter collectively
referred to as the "SECURITIES." The Company also proposes to issue and sell to
the Underwriters for an approximate price of $_____ ($0.001 per warrant), non-
callable warrants entitling the Underwriters' to purchase from the Company an
Underwriters' Warrant (the "UNDERWRITERS' WARRANT") for the purchase of an
aggregate of 833,000 Shares (the "UNDERWRITERS' SHARES") and 833,000 Redeemable
Common Stock Purchase Warrants (the "UNDERWRITERS' WARRANTS"). The shares of
Common Stock issuable upon exercise of the Redeemable Warrants and the
Underwriters' Warrants are hereinafter sometimes referred to as the "WARRANT
SHARES."
WHEREAS, the Public Warrants shall be evidenced by certificates
substantially in the form of Exhibit A annexed hereto (the "WARRANT
CERTIFICATE"), each Warrant entitling the holder thereof to purchase one share
of Common Stock;
WHEREAS, the Public Warrants will have an exercise price of $___________
per share of Common Stock, subject to certain adjustments (the "PUBLIC WARRANT
PRICE"), will be exercisable commencing on the first anniversary of the date of
the Final Prospectus dated__________, 1998 ("FIRST EXERCISE DATE") until a date
which is the fifth anniversary of the date of the Final Prospectus
<PAGE>
dated __________, 1998 ("LAST EXERCISE DATE"), unless extended by the Company,
and, except for the Underwriter's Warrants, will be exercisable during any
period of time fixed for that Warrant's redemption in a Redemption Notice
(hereinafter defined in Section 2.03), which period of time will terminate on a
stated Redemption Date (hereinafter defined in Section 2.03);
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act in connection with the
issuance, registration, transfer, exchange and replacement of the Warrant
Certificates and exercise of the Public Warrants; and
WHEREAS, the Company and the Warrant Agent desire to set forth in this
Agreement the terms and conditions upon which the Warrant Certificates shall be
issued, transferred, exchanged and placed and the Public Warrants exercised, and
to provide for the rights of the holders of the Public Warrants;
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and the respective undertakings herein below set forth, the
Company and the Warrant Agent agree as follows:
ARTICLE I
ISSUANCE AND EXECUTION OF WARRANTS
SECTION 1.01. The Company hereby appoints the Warrant Agent to act on
behalf of the Company in accordance with the terms and conditions herein set
forth, and the Warrant Agent hereby accepts such appointment and agrees to
perform the same in accordance with such provisions.
SECTION 1.02. The Warrant Certificates for the Public Warrants shall be
issued in registered form only. The text of the Warrant Certificate, including
the form of assignment and subscription printed on the reverse side thereof,
shall be substantially in the form of Exhibit A annexed hereto, which text is
hereby incorporated in this Agreement by reference as though fully set forth
herein and to whose terms and conditions the Company and the Warrant Agent
hereby agree. Each Warrant Certificate shall evidence the right, subject to the
provisions of this Agreement and of such Warrant Certificate, to purchase the
number of validly issued, fully paid and non-assessable shares of Common Stock,
as that term is defined in Section 1.05 of this Agreement, stated therein, free
of preemptive rights, subject to adjustment as provided in Article III of this
Agreement.
SECTION 1.03. Upon the written order of the Company, signed by the
President or any Vice President, and the Secretary, Treasurer, Assistant
Secretary or Assistant Treasurer of the Company, the Warrant Agent shall issue
and register Public Warrants in the names and denominations specified in that
order, and will countersign and deliver Warrant Certificates evidencing the same
in accordance with that order. Each Warrant Certificate shall be dated the date
of its countersignature. Each Warrant Certificate shall be executed on behalf
of the Company by the
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manual or facsimile signature of the President of the Company, under its
corporate seal, affixed or facsimile, attested by the manual or facsimile
signature of the Secretary of the Company and shall be countersigned manually by
the Warrant Agent. The Warrant Certificates shall not be valid for any purpose
unless so countersigned. In case any officer whose facsimile signature has been
placed upon any Warrant Certificate shall have ceased to be such before such
Warrant Certificate is issued, it may be issued with the same effect as if such
officer had not ceased to be such on the date of issuance.
SECTION 1.04. Except as otherwise expressly stated herein, all terms used
in the Warrant Certificate have the meanings provided in this Agreement.
SECTION 1.05. As used herein, the term "COMMON STOCK" shall mean the
aggregate number of shares that the Company, by its Certificate of
Incorporation, as from time to time amended, is authorized to issue, which are
not limited by its Certificate of Incorporation to a fixed sum or percentage of
the book value in respect of the rights of the holders thereof to participate in
dividends or in distribution of assets upon the voluntary or involuntary
liquidation, dissolution, or winding up the Company.
SECTION 1.06. The Warrant Agent understands and agrees that the Public
Warrants and shares of Common Stock are being sold separately in the Secondary
Offering and that the Shares and the Public Warrants will be traded separately
immediately upon the closing of the Secondary Offering.
ARTICLE II
PUBLIC WARRANT PRICE, DURATION AND EXERCISE OF WARRANTS,
CALL OF WARRANTS AND TRADING OF WARRANTS
SECTION 2.01. (a) Each Public Warrant shall entitle the person in whose
name at the time the Public Warrant shall be registered upon the books to be
maintained by the Warrant Agent for that purpose (the "WARRANT HOLDER"), subject
to the provisions of the Warrant Certificates and of this Agreement, to purchase
from the Company any time on or after the First Exercise Date but at or before
the Last Exercise Date, up to the number of shares of Common Stock stated
therein, as adjusted, at the Public Warrant Price in effect at such date,
payable in full at the time of purchase in the manner provided in Section 2.02
of this Agreement.
(b) Each Public Warrant shall be exercisable in accordance with the
terms herein and in the Warrant Certificate which, among other things, contains
certain terms as to the Public Warrant Price.
SECTION 2.02. (a) The Warrant Holder may exercise a Public Warrant, in
whole or in part, by surrender of the Warrant Certificate, with the form of
subscription thereon duly executed by the Warrant Agent at its corporate office,
together with the Public Warrant Price for
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each share of Common Stock to be purchased in lawful money of the United States,
or by certified check, bank draft, or postal or express money order payable in
United States Dollars to the order of the Company.
(b) Upon receipt of a Warrant Certificate with the form of election
to purchase thereon duly executed and accompanied by payment of the aggregate
Public Warrant Price for the shares of Common Stock for which the Public Warrant
is then being exercised, the Warrant Agent shall requisition from the transfer
agent certificates for the total number of the shares of Common Stock for which
the Public Warrant is being exercised in such names and denominations as are
required for delivery to the Warrant Holder, and the Warrant Agent shall
thereupon deliver such certificates to or in accordance with the instructions of
the Warrant Holder. The Company covenants and agrees that it has duly
authorized and directed its transfer agent (and will authorize and direct all
its future transfer agents) to comply with all such requests of the Warrant
Agent.
(c) In case any Warrant Holder shall exercise his Public Warrant with
respect to less than all of the shares of Common Stock that may be purchased
under the Public Warrant, a new Public Warrant Certificate for the balance shall
be countersigned and delivered to or upon the order of the Warrant Holder.
(d) The Company covenants and agrees that it will pay when due and
payable any and all taxes which may be payable in respect to the issuance of
Warrants, or the issuance of any shares of Common Stock upon the exercise of
Warrants. However, neither the Company nor the Warrant Agent shall be required
to issue or deliver any Warrant Certificate or shares of Common Stock in a name
other than that of the Warrant Holder at the time of surrender if any tax is
payable in respect of such transfer until the person requesting the same has
paid to the Company the amount of such tax or has established to the Company's
satisfaction that such tax has been paid or shall not be due and payable. In
the event that any transfer tax is due and payable, the Warrant Agent shall be
under no obligation to issue or deliver any Warrant Certificate or shares of
Common Stock in a name other than that of the Warrant Holder until the Company
has notified the Warrant Agent that the transfer tax, if any, has been paid, or
in the alternative, that no transfer tax is due and payable by reason of an
exemption.
(e) The Warrant Agent shall account promptly to the Company with
respect to Warrants exercised and concurrently account to the Company for all
moneys received by the Warrant Agent for the purchase of shares of Common Stock
upon the exercise of Warrants.
(f) The Warrant Agent covenants and agrees that upon the exercise of
any of the Warrants, the Warrant Agent shall provide written notice to the
Company at 731 Millway Avenue, Concord, Ontario, Canada L4K 3S8, and to the
Underwriter at its office at 3340 Peachtree Street, NE, Suite 450, Atlanta,
Georgia 30326, the expense of which notice shall be borne by the Company. Each
notice shall contain the name of the exercising Warrant Holder, the number of
shares of Common Stock that the Warrant Holder has elected to purchase, the
purchase price paid on a per share basis and the cumulative number of Public
Warrants exercised by all of the Warrant Holders
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as of the date of the transaction which is the subject of the aforesaid notice.
Such notice shall be made on the date of the exercise of the Public Warrant.
Nothing contained herein shall be construed so as to prevent the Warrant Agent
from providing the information required in this Section 2.02 (f) in a
consolidated or tabular form, provided that all other provisions of this Section
are complied with.
(g) The Warrant Agent covenants and agrees that it shall provide a
list of each and every holder of the Public Warrants to the Company and the
Underwriter at such time or from time to time as shall be required by the
Company or the Underwriter, but in no event shall such a list be provided less
frequently than once per annum at a date as shall be determined by the Company.
SECTION 2.03. (a) Commencing on the first anniversary of the effective
date of the Secondary Offering, the Company may, subject to the conditions set
forth herein, redeem all, but not less than all, the Public Warrants then
outstanding at a redemption price of $.001 per Public Warrant upon not less than
thirty (30) days prior written notice (the "REDEMPTION NOTICE") to the holders
thereof provided that the average closing price of the Common Stock for the 20
consecutive trading days ending three (3) days prior to the date of the
Redemption Notice is at least $________per share, subject to adjustment for
stock dividends, stock splits and other anti-dilution provisions as provided for
under Article III herein. For purposes of this Section 2.03, "closing price" at
any date shall be deemed to be: (i) the last sale price regular way as reported
on the principal national securities exchange on which the Common Stock is
listed or admitted to trading, or (ii) if the Common Stock is not listed or
admitted to trading on any national securities exchange, the average of the
closing bid and asked prices regular way for the Common Stock as reported by the
Nasdaq National Market or Nasdaq Small Cap Market of the Nasdaq Stock Market,
Inc. ("NASDAQ") or (iii) if the Common Stock is not listed or admitted for
trading on any national securities exchange, and is not reported by NASDAQ, the
average of the closing bid and asked prices in the over-the-counter market as
furnished by the National Quotation Bureau, Inc. or if no such quotation is
available, the fair market value of the Common Stock as determined in good faith
by the Board of Directors of the Company. The Redemption Notice shall be deemed
effective upon mailing and the time of mailing is the "EFFECTIVE DATE OF THE
NOTICE". The Redemption Notice shall state a redemption date not less than
thirty (30) days from the Effective Date of the Notice (the "REDEMPTION DATE").
No Redemption Notice shall be mailed unless all funds necessary to pay for
redemption of all Warrants then outstanding shall have first been set aside by
the Company in trust with the Warrant Agent for the benefit of all Warrant
Holders so as to be and continue to be available therefor. The redemption price
to be paid to the Warrant Holders will be $0.01 for each share of the Common
Stock of the Company to which the Warrant Holder would then be entitled upon
exercise of the Public Warrant being redeemed, as adjusted from time to time as
provided herein (the "REDEMPTION PRICE"). In the event the number of shares of
Common Stock issuable upon exercise of the Public Warrant being redeemed are
adjusted pursuant to Article III hereof, then upon each such adjustment the
Redemption Price will be adjusted by multiplying the Redemption Price in effect
immediately prior to such adjustment by a fraction, the numerator of which is
the number of shares of Common Stock issuable upon exercise of the Public
Warrant being redeemed immediately prior to such adjustment and the denominator
of which is the number of shares of Common Stock
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<PAGE>
issuable upon exercise of such Public Warrant being redeemed immediately after
such adjustment. The Public Warrants may only be redeemed if the Company has in
effect a current Registration Statement or post-effective amendment covering the
shares underlying the Public Warrants. The Warrant Holders may exercise their
Public Warrants between the Effective Date of the Notice and the Redemption
Date, such exercise being effective if done in accordance with Section 2.02 (a),
and if the Warrant Certificate, with form of election to purchase duly executed
and the Public Warrant Price, as applicable for such Public Warrant subject to
redemption for each share of Common Stock to be purchased is actually received
by the Warrant Agent at its office located at 2 Broadway, New York, New York
10004, no later than 5:00 P.M. New York time on the Redemption Date.
(b) If any Warrant Holder does not wish to exercise any Warrant being
redeemed, the Warrant Holder should mail such Public Warrant to the Warrant
Agent at its office located at 2 Broadway, New York, New York 10004, after
receiving the Redemption Notice required by this Section. If such Redemption
Notice shall have been so mailed, and if on or before the Effective Date of the
Notice all funds necessary to pay for redemption of all Public Warrants then
outstanding shall have been set aside by the Company in trust with the Warrant
Agent for the benefit of all Warrant Holders so as to be and continue to be
available therefor, then, on and after said Redemption Date, notwithstanding
that any Public Warrant subject to redemption shall not have been surrendered
for redemption, the obligation evidenced by all Public Warrants not surrendered
for redemption or effectively exercised shall be deemed no longer outstanding,
and all rights with respect thereto shall forthwith cease and terminate, except
only the right of the holder of each Public Warrant subject to redemption to
receive the Redemption Price for each share of Common Stock to which he would be
entitled if he exercised the Public Warrant upon receiving the Redemption Notice
of the Public Warrant subject to redemption held by the Holder hereof.
(c) Notwithstanding anything contained in this Article II, the
Underwriter's Warrants shall not be eligible for redemption by the Company.
ARTICLE III
ADJUSTMENT OF SHARES OF COMMON STOCK
PURCHASABLE AND OF PUBLIC WARRANT PRICE
SECTION 3.01. In case the Company shall at any time after the date of this
Agreement (i) declare a dividend on the outstanding Common Stock in shares of
its capital stock, (ii) subdivide the outstanding Common Stock, (iii) combine
the outstanding Common Stock into a smaller number of shares, or (iv) issue any
shares of its capital stock by reclassification of the Common Stock (including
any such reclassification in connection with a consolidation or merger in which
the Company is the continuing corporation), then, in each case, the Public
Warrant Price, and the number and kind of shares of Common Stock receivable upon
exercise, in effect at the time of the record date for such dividend or of the
effective date of such subdivision, combination, or reclassification shall be
proportionately adjusted so that the holder of any Public Warrant exercised
after such time shall be entitled to receive the aggregate number and kind of
shares which if such
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Public Warrant had been exercised immediately prior to such time, he would have
owned upon such exercise and been entitled to receive by virtue of such
dividend, subdivision, combination, or reclassification. Such adjustment shall
be made successively whenever any event listed above shall occur.
SECTION 3.02. In case the Company after the date hereof shall issue
rights, options, or warrants to all holders of Common Stock entitling them to
subscribe for or purchase Common Stock (or securities convertible into or
exchangeable for Common Stock) at a price per share (or having a conversion
price per share, if a security convertible into or exchangeable for Common
Stock) less than the "current market price" (as defined in Section 3.04 hereof)
per share of Common Stock on the record date established for the issuance of
such rights, options or warrants, then, in such case, the Public Warrant Price
shall be adjusted by multiplying the Public Warrant Price in effect on the
record date of such issuance by a fraction, of which the numerator shall be the
number of shares of Common Stock outstanding on the record date for such
issuance plus the number of shares of Common Stock which the aggregate offering
price of the total number of shares of Common Stock so to be issued (or the
aggregate initial conversion price of the convertible securities to be issued or
sold) would purchase at such "current market price" and of which the denominator
shall be the number of shares of Common Stock outstanding on the record date for
such issuance plus the number of additional shares of Common Stock to be issued
(or into which the convertible or exchangeable securities to be issued or sold
are initially convertible or exchangeable). Such adjustment shall become
effective at the close of business on such record date; provided, however, that,
to the extent the shares of Common Stock (or securities convertible to or
exchangeable for shares of Common Stock) are not delivered, the Public Warrant
Price shall be readjusted after the expiration of such rights, options, or
warrants (but only with respect to Warrants exercised after such expiration), to
the Public Warrant Price which would then be in effect had the adjustments made
upon the issuance of such rights or warrants been made upon the basis of
delivery of only the number of shares of Common Stock or securities convertible
into or exchangeable for shares of Common Stock actually issued. In case any
subscription price may be paid in a consideration part or all of which shall be
in a form other than cash, the value of such consideration shall be as
determined in good faith by the board of directors of the Company, whose
determination shall be conclusive absent manifest error. Shares of Common Stock
owned by or held for the account of the Company or any majority-owned subsidiary
shall not be deemed outstanding for the purpose of any such computation.
Notwithstanding the foregoing, no adjustment in the Public Warrant Price or
the number of shares of Common Stock issuable upon exercise of the Public
Warrants shall be made upon (i) the issuance of options (or upon exercise
thereof) by the Company pursuant to its Stock Option Plans, (ii) the issuance of
the Underwriter's Warrants, or (iii) any other options and warrants outstanding
as of the date hereof.
SECTION 3.03. In case the Company shall distribute to all holders of
Common Stock (including any such distribution made to the stockholders of the
Company in connection with a consolidation or merger in which the Company is the
continuing corporation) evidences of its
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indebtedness or assets (other than cash dividends distributions and dividends
payable in shares of Common Stock), subscription rights, options, or warrants or
convertible or exchangeable securities containing the right to subscribe for or
purchase shares of Common Stock (excluding those referred to in Section 3.02
hereof), then, in each case, the Public Warrant Price shall be adjusted by
multiplying the Public Warrant Price in effect immediately prior to the record
date for the determination of stockholders entitled to receive such distribution
by a fraction of which the numerator shall be the "current market price" per
share of Common Stock on such record date, less the fair market value (as
determined in good faith by the board of directors of the Company, whose
determination shall be conclusive absent manifest error) of the portion of the
evidences of indebtedness or assets so to be distributed, or of such
subscription rights, options, or warrants, convertible or exchangeable
securities containing the right to subscribe for or purchase shares of Common
Stock, applicable to the share, and of which the denominator shall be such
"current market price" per share of Common Stock. Such adjustment shall be made
whenever any such distribution is made, and shall become effective on the date
of such distribution retroactive to the record date for the determination of
stockholders entitled to receive such distribution.
SECTION 3.04. For the purpose of any computation under sections 3.02 and
3.03 hereof, the "current market price" per share of Common Stock on any date
shall be deemed to be the average of the daily closing prices for the 20
consecutive trading days ending three (3) days prior to such date. The closing
price for each day shall be the last reported sales price regular way or, in
case no such reported sale takes place on such day, the closing bid price
regular way, in either case on the principal national securities exchange on
which the Common Stock is listed or admitted to trading or, if the Common Stock
is not listed or admitted to trading on any national securities exchange, the
highest reported bid price as furnished by NASDAQ. If on any such date the
Common Stock is not quoted on NASDAQ or any such organization, the closing price
shall be deemed to be the average of the closing bid and asked prices in the
over-the-counter market as reported by the National Quotation Bureau or if no
such quotation is available, the fair value of the Common Stock on such date, as
determined in good faith by the board of directors of the Company, whose
determination shall be conclusive absent manifest error.
SECTION 3.05. No adjustment in the Public Warrant Price shall be required
if such adjustment is less than $0.01; provided, however, that any adjustments
which by reason of this Section 3.05 are not required to be made shall be
carried forward and taken into account in any subsequent adjustment. All
calculations under this Article III shall be made to the nearest cent or to the
nearest one-thousandth of a share, as the case may be.
SECTION 3.06. In any case in which this Article III shall require that an
adjustment in the Public Warrant Price be made effective as of a record date for
a specified event, the Company may elect to defer, until the occurrence of such
event, issuing to the holder of any Warrant exercised after such record date,
the shares, if any, issuable upon such exercise over and above the shares, if
any, issuable upon such exercise on the basis of the Public Warrant Price in
effect prior to such adjustment; provided, however, that the Company shall
deliver to such holder a due bill or other
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appropriate instrument evidencing such holder's right to receive such additional
shares upon the occurrence of the event requiring such adjustment.
SECTION 3.07. Upon each adjustment of the Public Warrant Price as a result
of the calculations made in Section 3.01, 3.02, or 3.03 hereof, each Warrant
outstanding prior to the making of the adjustment in the Public Warrant Price
shall thereafter evidence the right to purchase, at the adjusted Public Warrant
Price, that number of shares (calculated to the nearest thousandth) obtained by
dividing (A) the product obtained by multiplying the number of shares
purchasable upon exercise of a Warrant prior to adjustment of the number of
shares by the Public Warrant Price in effect prior to adjustment of the Public
Warrant Price by (B) the Public Warrant Price in effect after such adjustment of
the Public Warrant Price.
SECTION 3.08. In case of any capital reorganization of the Company, or of
any reclassification of the Common Stock (other than a reclassification of the
Common Stock referred to in Section 3.01 hereof), or in the case of the
consolidation of the Company with or the merger of the Company into any other
corporation or of the sale, transfer, or lease of the properties and assets of
the Company as, or substantially as, an entirety to any other corporation or
other entity, each Public Warrant shall after such capital reorganization,
reclassification of Common Stock, consolidation, merger, sale, transfer, or
lease, be exercisable, on the same terms and conditions specified in this
Agreement, for the number of shares of stock or other securities, assets, or
cash to which a holder of the number of shares purchasable (at the time of such
capital reorganization, reclassification of Common Stock, consolidation, merger,
sale, transfer, or lease) upon exercise of such Public Warrant would have been
entitled upon such capital reorganization, reclassification of Common Stock,
consolidation, merger, sale, transfer, or lease; and in any such case, if
necessary, the provisions set forth in this Article III with respect to the
rights and interests thereafter of the holders of the Public Warrants shall be
appropriately adjusted so as to be applicable, as nearly as may reasonably be,
to any shares of stock, other securities, assets, or cash thereafter deliverable
on the exercise of the Public Warrants. The subdivision or combination of
shares of Common Stock at any time outstanding into a greater or lesser number
of shares shall not be deemed to be a reclassification of the Common Stock for
the purposes of this subsection. The Company shall not effect any such
consolidation, merger, transfer, or lease, unless prior to or simultaneously
with the consummation thereof, the successor corporation (if other than the
Company) resulting from such consolidation or merger or the Corporation
purchasing, receiving, or leasing such assets or other appropriate corporation
or entity shall expressly assume, by written instrument in form satisfactory to
the Underwriter, the obligation to deliver to the holder of each Public Warrant
such shares of stock, securities, or assets as, in accordance with the foregoing
provisions, such holders may be entitled to purchase and to perform the other
obligations of the Company under this Agreement.
SECTION 3.09. The Company may make such reductions in the Public Warrant
Price, in addition to those required by this Article III, as it shall, in it
sole discretion, determine to be advisable.
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ARTICLE IV
OTHER PROVISIONS RELATING TO RIGHTS OF
WARRANT HOLDERS
SECTION 4.01. No Warrant Holder, as such, shall be entitled to vote or
receive dividends or be deemed the holder of shares of Common Stock for any
purposes, nor shall anything contained in any Warrant Certificate be construed
to confer upon any Warrant Holder, as such, any of the rights of a shareholder
of the Company or any right to vote, give or withhold consent to any action by
the Company, whether upon any recapitalization, issue of stock, reclassification
of stock, consolidation, merger, conveyance or otherwise, receive dividends or
subscription rights, or otherwise, until in connection with the exercise of any
Public Warrant, such Public Warrant shall have been surrendered and the purchase
price or the shares of Common Stock for which such Public Warrant is being
exercised shall have been received by the Warrant Agent; provided, however, that
any such surrender and payment on any date when the stock transfer books of the
Company shall be closed shall constitute the person or persons in whose name or
names the certificate or certificates for those shares of Common Stock are to be
issued as the record holder or holders thereof for all purposes at the opening
of business on the next succeeding day on which such stock transfer books are
open and the Public Warrant surrendered shall not be deemed to have been
exercised, in whole or in part, as the case maybe, until such next succeeding
day on which stock transfer books are open.
SECTION 4.02. The Company covenants and agrees that it shall
contemporaneously provide to all Warrant Holders of record any publication,
mailing or notice of an event which it shall provide to all of its shareholders
of record and which event shall result in the adjustment to the Public Warrant
Price as provided in Article III hereof. For purposes of this Section 4.02, the
Warrant Holders of record shall be those Warrant Holders who are of record on a
date even with the date chosen by the Company for the purpose of determining the
shareholders of record who shall be entitled to receive such publication,
mailing or notice.
SECTION 4.03. If any Warrant Certificate is lost, stolen, mutilated or
destroyed, the Company and the Warrant Agent may, on such terms as to indemnity
or otherwise as they may in their discretion reasonably impose, which shall, in
the case of a mutilated Warrant Certificate, include the surrender thereof,
issue a new Warrant Certificate of like denomination and tenor as, and in
substitution for, the Warrant Certificate so lost, stolen mutilated or
destroyed.
SECTION 4.04. (a) The Company covenants and agrees that at all times it
shall reserve and keep available for the exercise of outstanding Warrants such
number of authorized shares of Common Stock and the aggregate number and kind of
any other securities which the Warrants are exercisable for, pursuant to the
provisions of Article III hereof, as are sufficient to permit the exercise in
full of such Warrants and that it will make available to the Warrant Agent from
time to time a number of duly executed certificates representing shares of
Common Stock and other securities, sufficient therefor.
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(b) The Company shall use its best efforts to secure the listing,
upon official notice of issuance, of the shares of Common Stock issuable upon
exercise of Warrants upon any securities exchange upon which the Common Stock
becomes listed.
(c) The Company covenants that all shares of Common Stock issued on
exercise of Warrants shall be validly issued, fully paid, non-assessable and
free of preemptive rights.
(d) The Company has filed with the Securities and Exchange Commission
a Registration Statement on Form SB-2 (Registration No. 333-24145) for the
registration of, among other things, the sale of the Public Warrants and the
shares of Common Stock issuable upon exercise thereof under the Securities Act
of 1933, as amended (the "ACT") which was declared effective by the Securities
and Exchange Commission at 5:15 p.m. Eastern Daylight Time on______________,
199__. The "EFFECTIVE DATE" of the Registration Statement for purposes of this
Agreement is____________, 199__. The Company has undertaken to register or
qualify the Common Stock, Warrants and shares of Common Stock underlying the
Public Warrants under the laws of any states in which the sale of the Warrants
and shares of Common Stock was registered or qualified at the time of the
Secondary Offering and shall use its reasonable good faith efforts to register
and qualify such Common Stock, Warrants and shares of Common Stock underlying
the Warrants in such additional states and jurisdictions as may be appropriate.
The Company further agrees to use its best efforts to maintain the effectiveness
of such Registration Statement and such state qualifications, as aforesaid, by
the filing of any and all amendments to the Registration Statement and such
state qualifications as may be required from time to time under the Act or the
laws of the various states until the expiration or termination of all the
Warrants in accordance herewith.
(e) The Company will furnish to the Warrant Agent, upon request, an
opinion of counsel satisfactory to the Warrant Agent to the effect that (i) a
Registration Statement under the Act is then in effect with respect to the
Warrants and shares of Common Stock issuable upon the exercise of the Warrants
and that the prospectus included therein complies as to form in all material
respects, (except as to financial statements, including schedules, and other
accounting and financial data, as to which such counsel need express no
opinion), with the requirements of the Act and the rules and regulations of the
Commission thereunder; or a Registration Statement under the Act with respect to
said Warrants and shares of Common Stock is not required. In the event that
said opinion states that such a Registration Statement is in effect, the Company
will from time to time furnish the Warrant Agent with current prospectuses
meeting the requirements of the Act and such rules and regulations in sufficient
quantity to permit the Warrant Agent to deliver a prospectus ("PROSPECTUS") to
each Warrant Holder upon exercise thereof. The Company further agrees to pay
all fees, costs and expenses in connection with the preparation and delivery to
the Warrant Agent of the foregoing opinions and Prospectuses and the above
mentioned registrations and other actions, and to immediately notify the Warrant
Agent in the event that (i) the Commission shall have issued or threatened to
issue any order preventing or suspending the use of any Prospectus; (ii) at any
time any Prospectus shall contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading; or (iii) for
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any reason it shall be necessary to amend or supplement any Prospectus in order
to comply with the Act.
SECTION 4.05. If the number of shares purchasable upon the exercise of
each Public Warrant is adjusted pursuant to Section 3.07 hereof, the Company
shall not be required to issue fractions of shares upon exercise of the Public
Warrants or to distribute share certificates which evidence fractional shares.
In lieu of fractional shares, the Company, in its sole discretion, may pay to
the registered holders of Warrant Certificates at the time such Public Warrants
are exercised as herein provided an amount in cash equal to the same fraction of
the current market value of a share. For purposes of this Section 4.05, the
current market value of a share issuable upon the exercise of a Public Warrant
shall be the closing price of a share of Common Stock, as determined pursuant to
the second and third sentences of Section 3.04, for the trading day immediately
prior to the date of such exercise.
ARTICLE V
TREATMENT OF WARRANT HOLDERS
SECTION 5.01. Prior to due presentment for registration of transfer of any
Public Warrant, the Company and the Warrant Agent may deem and treat the Warrant
Holder as the absolute owner of such warrant, notwithstanding any notation of
ownership or other writing thereon, for the purpose of any exercise thereof and
for all other purposes, and neither the Company nor the Warrant Agent shall be
affected by any notice to the contrary.
ARTICLE VI
CONCERNING THE WARRANT AGENT
AND OTHER MATTERS
SECTION 6.01. The Company will from time to time promptly pay, subject to
the provisions of Section 2.02 (d) of this Agreement, all taxes and charges that
may be imposed upon the Company or the Warrant Agent in respect of the issuance
or delivery of shares of Common Stock upon the exercise of Public Warrants.
SECTION 6.02. (a) The Warrant Agent may resign and be discharged from its
duties under this Agreement upon sixty (60) days notice in writing, mailed to
the Company by registered or certified mail, and to each Warrant Holder. The
Company may remove the Warrant Agent or any successor warrant agent upon sixty
(60) days notice in writing, mailed to the Warrant Agent or successor Warrant
Agent, as the case may be, by registered or certified mail, and to each Warrant
Holder; provided, however, the Company shall appoint a new Warrant Agent as
hereinafter provided and such removal shall not become effective until a
successor Warrant Agent has been appointed and has accepted such appointment.
If the Warrant Agent shall resign or shall otherwise become capable of acting,
the Company shall appoint a successor to the Warrant Agent. If the
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Company shall fail to make such appointment within a period of sixty (60) days
after it has been notified in writing of such resignation or incapability by the
Warrant Agent by a Warrant Holder, who shall, with such notice, submit his
Warrant Certificate for inspection by the Company, then any Warrant Holder may
apply to any court of competent jurisdiction or the appointment of a successor
to the Warrant Agent. Any successor Warrant Agent, whether appointed by the
Company or by such a court shall be a registered transfer agent, bank or trust
company, subject to the terms and conditions of this Section 6.02, in good
standing and incorporated under the laws of any State of the United States,
having its principal office in the United States of America. After appointment,
the successor Warrant Agent shall be vested with the same powers, rights, duties
and responsibilities as if it had been originally named as Warrant Agent without
further act or deed. The former Warrant Agent shall deliver and transfer to the
successor Warrant Agent any property at the time held by it hereunder and
execute and deliver any further assurance, conveyance, act or deed necessary for
the purpose. Failure to give any notice provided for in this Section, however,
or any defect therein, shall not affect the legality or validity of the
resignation or removal of the Warrant Agent or the appointment of the successor
Warrant Agent, as the case may be.
(b) Any corporation into which the Warrant Agent may be merged or
with which it may be consolidated, or any corporation resulting from any merger
or consolidation to which the Warrant Agent shall be a party, or any corporation
succeeding to the corporate trust business of the Warrant Agent, shall be the
successor to the Warrant Agent hereunder without the execution or filing of any
paper or any further act on the part of any of the parties hereto. In case at
the time such successor to the Warrant Agent shall succeed to the agency created
by this Agreement, any of the Warrant Certificates shall have been countersigned
but not delivered, any such successor to the Warrant Agent may adopt the
countersignature of the original Warrant Agent and deliver such Warrant
Certificates so countersigned, and in case at that time any of the Warrant
Certificates shall not have been countersigned, any successor to the Warrant
Agent may countersign such Warrant Certificate in its own name or in the name of
the successor Warrant Agent; and in all such cases such Warrant Certificates
shall have the full force provided in the Warrant Certificates and this
Agreement.
In case at any time the name of the Warrant Agent shall be
changed and at such time any of the Warrant Certificates shall have been
countersigned but not delivered, the Warrant Agent may adopt the
countersignature under this prior name and deliver Warrant Certificates so
countersigned; and in case at that time any of the Warrant Certificates shall
not have been countersigned, the Warrant Agent may countersign such Warrant
Certificates either in its prior name or in its changed name; and in all such
cases such Warrant Certificates shall have the full force provided in the
Warrant Certificates and in this Agreement.
SECTION 6.03. The Company agrees to pay the Warrant Agent a reasonable fee
for all services rendered by it hereunder. The Company also agrees to indemnify
the Warrant Agent for, and to hold it harmless against, any loss, liability or
expense, incurred without gross negligence, willful misconduct or bad faith on
the part of the Warrant Agent, arising out of or in connection with
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the acceptance and administration of this Agreement, including the costs and
expenses of defending against any claim of liability in the premises.
SECTION 6.04. The Company covenants and agrees that it shall, at the
Company's expense, provide to the Warrant Agent copies of its current
prospectus, if any, in such quantity as to enable the Warrant Agent to deliver
one copy of such current prospectus to such Warrant Holder who shall exercise
his rights under a Warrant. Notwithstanding anything else contained in this
Section 6.04, the Company shall not be obligated to provide copies of its
current prospectus for the purpose of allowing the Warrant Agent to deliver such
copies to any Warrant Holder who delivers all of his redeemable warrants for
redemption pursuant to Section 2.03 or who shall notice the Company of his
intent to permit redemption of all of his Warrants pursuant to Section 2.03
herein or to any person who shall hold any Warrant subject to the terms of this
Agreement after the earlier of the Redemption Date or the Last Exercise Date of
the Warrants.
SECTION 6.05. The Warrant Agent undertakes the duties and obligations
imposed by this Agreement upon the following terms and conditions, by all of
which the Company and the holders of Warrant certificates, by their acceptance
thereof, shall be bound:
(a) Whenever in the performance of its duties under this Agreement
the Warrant Agent shall deem it necessary or desirable that any fact or matter
be proved or established by the Company prior to taking or suffering any action
hereunder, that fact or matter, unless other evidence in respect thereof be
herein specifically prescribed, may be deemed to be conclusively proved and
established by a certificate signed by the President or the Secretary of the
Company and delivered to the Warrant Agent. That certificate shall be full
authorization to the Warrant Agent for any action taken or suffered in good
faith by it under the provisions of this Agreement in reliance upon that
certificate.
(b) The Warrant Agent shall be liable hereunder only for its own
gross negligence, willful misconduct or bad faith.
(c) The Warrant Agent shall not be liable for or by reason of any of
the statements of fact or recitals contained in this Agreement or in the Warrant
Certificates, except its countersignature thereof, or be required to verify the
same, but all such statements and recitals are and shall be deemed to have been
made by the Company only.
(d) The Warrant Agent shall not be under any responsibility in
respect of the validity of this Agreement or the execution and delivery hereof,
except the due execution hereof by the Warrant Agent, or in respect of the
validity or execution of any Warrant Certificate, except its countersignature
thereof; nor shall it be responsible for any Warrant Certificate; nor shall it
be responsible for the adjustment of the Public Warrant Price or the making of
any change in the number of shares of Common Stock required under the provisions
of Article III of this Agreement or responsible for the manner, method or amount
of any such change or the ascertaining of the existence of facts that would
require any such adjustment or change except with respect to the
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exercise of Warrant Certificates after actual notice of any adjustment of the
Public Warrant Price; nor shall it by any act under this Agreement be deemed to
make any representation or warranty as to the authorization or reservation of
any shares of Common Stock to be issued pursuant to this Agreement or any
Warrant Certificate or as to whether any share of Common Stock will when issued
be validly issued, fully paid, non-assessable and free of preemptive rights.
(e) The Warrant Agent and any shareholder, director, officer or
employee of the Warrant Agent may buy, sell or deal in any of the Warrant
Certificates or other securities of the Company to retain a pecuniary interest
in any transaction in which the Company may be interested or contract with or
lend money to or otherwise act as fully and freely as though it was not the
Warrant Agent or subject to this Agreement. Nothing herein shall preclude the
Warrant Agent from acting in any other capacity for the Company or for any other
legal entity.
(f) The Warrant Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from any
officer or assistant officer of the Company, and to apply to any such officer or
assistant officer for advice or instructions in connection with its duties, and
shall not be liable for any action taken or suffered to be taken by it in good
faith in accordance with instructions of any such officer or assistant officer.
(g) The Warrant Agent may consult with its counsel or other counsel
satisfactory to it, including counsel for the Company, and the opinion of such
counsel shall be full and complete authorization and protection in respect of
any action taken, offered, or omitted by it hereunder in good faith and in
accordance with the opinion of such counsel.
(h) The Warrant Agent shall incur no liability to the Company or to
any holder of any Warrant for any action taken by it in reliance upon any
Warrant Certificate or certificate for Common Stock, instrument of assignment or
transfer, power of attorney, endorsement, affidavit, letter, notice, direction,
consent, certificate, statement, or other paper or document believed by it to be
genuine and to be signed, executed, and where necessary, certified or
acknowledged, by the proper person or persons.
SECTION 6.06. The Warrant Agent may, without the consent or concurrence of
the Warrant Holders, by supplemental agreement or otherwise, concur with the
Company in making any changes or corrections in this Agreement that (i) it shall
have been advised by counsel, who may be counsel for the Company, are required
to cure any ambiguity or to correct any defective or inconsistent provision or
clerical omission or mistake or manifest error herein contained, or (ii) as
provided in Section 3.09, the Company deems necessary of advisable and which
shall not be inconsistent with the provisions of the Warrant Certificates,
provided such changes or corrections do not adversely affect the privileges or
immunities of the Warrant Holders.
SECTION 6.07. All the covenants and provisions of this Agreement by or for
the benefit of the Company or the Warrant Agent shall bind and inure to the
benefit of their respective successors and assigns hereunder.
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SECTION 6.08. Forthwith upon the appointment after the date thereof of any
transfer agent for the Common Stock, or of any subsequent transfer agent for the
Common Stock, the Company will file with the Warrant Agent a statement setting
forth the name and address of such transfer agent.
SECTION 6.09. Notice or demand pursuant to this Agreement to be given or
made by the Warrant Agent or by any Warrant Holder to or on the Company shall be
sufficiently given or made and effective on the third business day after posting
thereof, unless otherwise provided in this Agreement, if sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing by
the Company with the Warrant Agent) as follows:
Rosedale Decorative Products Ltd.
731 Millway Avenue
Concord, Ontario
Canada L4K 3S8
notice or demand pursuant to this Agreement to be given or made by the Company
or any Warrant Holder to or on the Warrant Agent shall be sufficiently given or
made and effective on the third business day after posting thereof, unless
otherwise provided in this Agreement, if sent by first-class mail, postage
prepaid, addressed (until another address is filed in writing by the Warrant
Agent with the Company) as follows:
Continental Stock Transfer & Trust Company
2 Broadway
New York, New York 10004
notice or demand pursuant to this Agreement to be given or made by the Company
or the Warrant Agent to or on the Underwriter shall be sufficiently given or
made and effective on the third business day after posting thereof, unless
otherwise provided in this Agreement, if sent by first-class mail, postage
prepaid, addressed (until another address is filed in writing by the Underwriter
with the Company) as follows:
J.P. Turner & Company, L.L.C.
3340 Peachtree Street, Suite 450
Atlanta, Georgia 30326
Attn: William L. Mello
notice or demand pursuant to this Agreement to be given or made by the Company
or the Warrant Agent to or on any Warrant Holder shall be sufficiently given or
made and effective on the third business day after posting thereof, unless
otherwise provided in this Agreement, if sent by first-class mail, postage
prepaid, addressed to such Warrant Holder at his last known address as it shall
appear in the records of the Company, if such notice shall be given by the
Company, or, if such notice shall be given by the Warrant Agent, as it shall
appear on the register maintained by the Warrant Agent.
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A copy of any Notice or demand given or made pursuant to this Agreement on
the Warrant Agent, Company or Underwriter shall be promptly forwarded by the
recipient thereof to each of the Company, Warrant Agent or Underwriter who shall
not have received or made such demand or Notice.
SECTION 6.10. The validity, interpretation and performance of this
Agreement and the Warrants shall be governed by the law of the State of
____________.
SECTION 6.11. Nothing in this Agreement shall be construed to give to any
person or corporation other than the parties hereto and the Warrant Holders any
right, remedy or claim under promise or agreement hereof. All covenants,
conditions, stipulations, promises and agreements contained in this Agreement
shall be for the sole and exclusive benefit of the Company and the Warrant Agent
and their successors and of the Warrant Holders, and their heirs,
representatives, successors, assigns and transferees.
SECTION 6.12. A copy of this Agreement shall be available for inspection
by any Warrant Holder during the regular business hours and at the corporate
office of the Warrant Agent in New York, New York, at which time the Warrant
Agent may require any Warrant Holder to submit his Warrant Certificate for
inspection by it.
SECTION 6.13. This Agreement shall terminate on the Last Exercise Date, or
such earlier date upon which all Warrants have been exercised or redeemed,
except that the Warrant Agent shall account to the Company pursuant to Section
2.02 (e) of this Agreement for all cash held by it. The provisions of Section
6.03 and 6.04 of this Agreement shall survive such termination.
SECTION 6.14. The Article headings in this Agreement are for convenience
only and are not part of this Agreement and shall not affect the interpretation
thereof.
SECTION 6.15. This Agreement may be executed in any number counterparts,
each of which is so executed shall be deemed to be an original, and all such
counterparts shall together constitute but one and the same agreement.
ROSEDALE DECORATIVE PRODUCTS, LTD.
By:
------------------------------
ATTEST: Sidney Ackerman, President
---------------------
Secretary
CONTINENTAL STOCK TRANSFER & TRUST CO.
By:
---------------------------
ATTEST: Name:
--------------------- -------------------------
Secretary Title:
------------------------
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EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated April 16, 1998 in the Registration Statement on Form
SB-2 and related prospectus of Rosedale Decorative Products Ltd. for the
registration of 833,000 shares of common stock and 833,000 warrants.
Schwartz Levitsky Feldman
Chartered Accountants
Toronto, Ontario, Canada
April 22, 1998
