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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB/A
AMENDMENT NO. 2
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUER UNDER SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT
OF 1934
Enviro-Clean of America, Inc.
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(Name of Small Business Issuer)
Nevada 88-0386415
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
211 Park Ave, Hicksville, NY 11801
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(Address of principal (Zip Code)
executive officers)
Issuer's telephone number: (516) 931-4455
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Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
None None
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Securities to be registered under Section 12(g) of the Act:
Common Stock, par value $.001 per share
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(Title of class)
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(Title of class)
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ENVIRO-CLEAN OF AMERICA, INC.
INFORMATION REQUIRED IN REGISTRATION STATEMENT
PART I
Item 1. Description of Business.
(a) Business Development
Enviro-Clean of America, Inc. (the "Company") was incorporated in Nevada on
December 9, 1997 for the purposes of engaging in the marketing and distribution
of sanitary supplies and related paper products. Management of the Company
believed that, in addition to internal expansion, substantial opportunities
existed to expand the Company's business through strategic acquisitions.
Management at the time of incorporation had identified at least three companies,
including Kandel & Son, Inc. ("Kandel & Son") and Nissco/Sunline, Inc.
("NISSCO"), as potential acquisition targets.
In January of 1998, the Company initiated the due diligence review on
NISSCO and Kandel & Son. By mid-1998, the Company began negotiating in detail
the terms and conditions of the acquisitions of Kandel & Son and NISSCO. At the
same time, the Company began negotiations with several potential financing
sources. In late 1998, deposits were placed with the shareholders of Kandel &
Son and NISSCO as the first step in completing the acquisitions of these
companies.
As of January 15, 1999, the Company completed the acquisition of Kandel &
Son, a 48-year old New York-based sanitary supply distribution company. Prior
to the acquisition, Richard Kandel, who is the Chairman of the Board, Chief
Executive Officer and Treasurer of the Company, was also the president and sole
shareholder of Kandel & Son. (See "Item 7 - Certain Relationships and Related
Transactions"). Kandel & Son distributes approximately 1,000 janitorial and
sanitary products to customers in the New York metropolitan area.
As of January 15, 1999, the Company completed the acquisition of NISSCO, a
Florida-based marketing group which acts as sales agent for a buying group
consisting of over 170 sanitary/janitorial supply companies and NISSCO's NIPPCO
division, which is a buying group for over 100 paper products distributors
(NIPPCO and NISSCO are collectively referred to as "NISSCO"). Thomas B. Haines,
a former director of the Company, was the sole shareholder of NISSCO immediately
prior to the acquisition. (See "Item 7 - Certain Relationships and Related
Transactions").
NISSCO derives its revenues in the form of rebates from manufacturers of
products ordered by distributors who are members of the NISSCO buying program.
Manufacturers of cleaning products generally rebate 5% of the gross amount of
orders, to be divided between the buying agent (such as NISSCO) and the
distributor. Generally, NISSCO passes on an amount equal to 2% of the gross
orders to the distributors generating the order and retains 3% as
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NISSCO's commission. Members of the NISSCO group purchase approximately $45
million in products each year.
NISSCO and Kandel & Son are wholly owned subsidiaries of the Company. The
Company has not integrated the operations of NISSCO and Kandel & Son, nor does
the Company intend to do so in the foreseeable future, as they occupy different
niches in the marketplace. Prior to the acquisitions of Kandel & Son and
NISSCO, the Company was solely engaged in the strategic planning and development
activities described above. At that time, the Company sold no products or
services.
Following the acquisition of Kandel & Son and NISSCO, management of the
Company intended to continue to expand the revenue base represented by NISSCO
and Kandel & Son, and to further increase revenues rapidly through a series of
acquisitions identified by Company management.
To that end, effective August 1, 1999, the Company entered into definitive
agreements to acquire Cleaning Ideas, Inc. and its wholly owned subsidiary,
Sanivac, Inc., which does business under its own name, as well as under the
trade name "Davis Manufacturing Company" (collectively, "Cleaning Ideas"). The
Closing of the Cleaning Ideas acquisition was effected in August 1999. In
connection with the acquisition, Cleaning Ideas was merged into a wholly owned
subsidiary of the Company specifically formed for this purpose. The new
subsidiary has succeeded to the business of Cleaning Ideas and has been renamed
"Cleaning Ideas Corp." ("CIC").
CIC is a San Antonio, Texas based manufacturer and distributor of cleaning
supplies, with a particular focus on chemical-based products which has been in
business for over 70 years and gives the Company a geographic presence in the
Southwestern United States. Under the Davis Manufacturing name, CIC
manufactures over 300 products for distribution. CIC operates 12 retail
cleaning supplies stores that sell products bearing the "Cleaning Ideas" private
label brand name. The retail stores focus on selling industrial quality products
to consumers and small businesses. Prior to its acquisition, Cleaning Ideas was
owned by Randall K. Davis, President and Director of the Company, Charles H.
Davis, who is the father of Randall K. Davis, and Carolyn Davis, who is the
mother of Randall K. Davis. (See "Item 7 - Certain Relationships and Related
Transactions.")
On August 17, 1999, the Company completed the acquisition of Superior
Chemical & Supply, Inc. ("Superior"), a Bowling Green, Kentucky-based
distributor of cleaning supplies. Prior to its acquisition, Stephen Haynes,
who remains as the president of Superior, was the sole shareholder of Superior.
(See "Item 7 - Certain Relationships and Related Transactions"). Superior
operates three locations within the state of Kentucky and distributes over 1,000
product items to approximately 300 customers statewide.
The terms and conditions of the Cleaning Ideas and Superior acquisitions
are set forth in the Company's Current Report on Form 8-K filed with the
Commission on September 3, 1999.
On October 27, 1999, the Company entered into a definitive Stock Purchase
Agreement with June Supply-San Antonio, Inc., a Texas corporation ("June
Supply"), and June Supply Corp., a Nevada corporation, a wholly owned subsidiary
of the Company formed specifically for the
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purposes of effecting the acquisition of June Supply, and Michael Rose and Alan
Stafford as the only shareholders of June Supply. The closing of the acquisition
is to take place on a date not later than January 31, 2000. The Company
anticipates to close the June Supply acquisition on or about December 16, 1999.
Upon closing, Michael Rose and Alan Stafford will remain as the president and
the vice president of June Supply. June Supply sells janitorial goods to various
customers throughout the state of Texas.
The terms and conditions of the June Supply acquisition are set forth in
the Company's Current Report on Form 8-K filed with the Commission on November
10, 1999.
The Company continues to engage in extensive research on the cleaning
supplies industry, identifying and categorizing potential acquisition targets by
size of revenues, geographic market and products distributed. The Company uses
the results of this on-going research to further refine its business plan, rate
potential acquisition targets according to their potential fit with the
Company's plans and develop financial projections regarding the capital needs of
the Company. Management also identifies attractive acquisition targets through
advertising in trade publications, by word-of-mouth within its industry, by
attendance at industry trade shows and through additional research. Management
believes that the costs of identifying acquisition targets will not be material,
especially in light of the substantial overlap between the expenditures for
these activities and those of general marketing expenses. For example, trade
publication advertising and trade show attendance are also core marketing
activities and, as such, would also be included in the Company's basic marketing
budget.
The Company intends to focus its acquired companies on retaining their
existing customer base and, where possible, to utilize the broader and deeper
resources of the Company to assist the acquired companies to expand their market
share. The Company's focus on customer retention is highlighted by the fact
that in most instances, the Company intends to retain the name of the acquired
company and to enter into employment contracts with the principals of the
acquired companies. The Company also intends to structure the purchase price of
its acquisition agreements to provide "earn-outs," or incentives in which the
purchase price can be increased based on the performance of the acquired
companies following their acquisition. The Company intends to assist its
acquired companies to expand their market share by using the additional
marketing capabilities and resources of the Company to attract new customers and
by acquiring additional companies within the same geographic market. Where
appropriate, the Company intends to utilize acquired companies as regional
"hubs" around which additional consolidation can be effected within a geographic
market.
With respect to the products and services to be offered by acquired
companies, the Company does not intend to alter substantially the product mix of
acquired companies. Generally speaking, distributors tend to carry
substantially similar product lines and to source their products from a
relatively small number of master distributors.
While it is impossible to predict the effect that any acquisition will have
on the ability of the acquired company to retain its existing customers, the
Company believes it is taking all reasonable efforts to ensure that its acquired
companies can continue to compete for the business of their existing customer
base.
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As the Company believes that much of the competition in its industry tends
to focus on services, the Company intends to expand substantially the range of
services offered by its acquired companies. Central to this effort is the
Company's planned Internet-based ordering system that will link each acquired
company and selected customers directly with the Company's central Internet-
based ordering system. This system will allow the Company to place orders with
its master distributors electronically, eliminating paper, postage and fax costs
and allowing for instant ordering. The Company's initial system is currently in
the process of being implemented and is designed to expand modularly with the
addition of acquired companies. The Company also intends to distribute CD-ROM
based catalogs to its distributors and customers to enhance the ordering
capability of those who do not wish to order over the Internet. Management of
the Company believes that these efforts will lower its effective costs of sales
over traditional product and ordering systems that relied principally upon
printed catalogs and purchase orders or telephone orders.
(b) Business of Issuer
The Company is a holding company, the principal assets of which are all the
issued and outstanding capital stock of Kandel & Son, NISSCO, Cleaning Ideas and
Superior. Through these subsidiaries, the Company engages in the purchasing,
marketing and distribution of janitorial and sanitary supplies and related paper
products nationwide. The Company intends to use its current businesses as a
base from which to acquire profitable companies in the janitorial/sanitary
supplies business across the United States and to put into place management
controls and systems to enable the combination of these companies to realize
substantially greater growth and profitability than they are able to achieve
under current ownership and management. The Company may also consider
acquisition targets in Canada.
A. The Market for the Company's Products
The market for sanitary/janitorial supplies and services in the United
States is substantial. According to the International Sanitary Supply
Association's most recent survey in 1997, the sanitary/janitorial distribution
industry had $16.7 billion in sales. This figure represented a 10.4% increase
over the corresponding figures for 1995. According to the survey, the sale of
paper and plastics for 1997 was approximately $6.6 billion, followed by the sale
of chemical products (cleaners, degreasers, etc.) at $6.1 billion. Janitorial
supplies and accessories were the third largest segment of the market with sales
measured to be approximately $1.9 billion.
The Company believes that the market for janitorial products has grown
due to the growth of the economy in general and an increasing concern of
building owners and managers for health and safety. The Company also believes
that the overall market is growing due to increasing customer demands for a
greater variety of products and services, including contract cleaning, training
and education.
According to the same survey, industrial and manufacturing companies
account for the largest customer group for janitorial goods with $3.6 billion in
aggregate purchases, followed by commercial property owners and educational
institutions at nearly $2 billion each, and next followed by health care
companies at nearly $1.6 billion. Additional market opportunity exists with
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respect to sales to restaurants/clubs, retail establishments, residential
properties, government, recreational facilities, transportation companies,
hotels/motels, and religious facilities.
B. Industry Structure and Trend
The Company believes that the sanitary/janitorial supply industry is
undergoing a period of consolidation. The Company believes that due to the
large number of small companies in the industry, and the presence of only a few
large enterprises, there exists an opportunity to consolidate the market. There
are a few large companies engaged in the business of supplying and distributing
sanitary/janitorial supplies, but their consolidation efforts have been targeted
at relatively large companies with $50 million or more in annual revenues.
Despite this activity, the Company believes that there is currently no one
dominant player in the industry. See "Competition"
In this environment, management recognizes that there are a significant
number of small, profitable sanitary/janitorial supply companies that may be
desirable acquisition targets for consolidation. These small companies may be
receptive to acquisition offers because they are currently facing difficult
competition from the larger companies, as well as those companies that are
increasing in size through the on-going consolidation in the industry. Though
smaller in size, these companies can often successfully compete in their region
with the larger suppliers and service providers by offering greater levels of
service and niche products not offered by the larger competitors. However, the
Company believes that these smaller companies are increasingly feeling the
competitive pressure from companies who are able to offer lower prices and take
advantage of economies of scale. Additionally, many of these small companies
are family-owned businesses that lack the depth and breadth of management and
financing skills, marketing expertise, resources, and access to productivity
enhancing technology necessary to expand their companies further.
Management believes that consolidation in the janitorial/sanitary
supply industry will continue at a rapid rate for the foreseeable future due to
industry characteristics including: (i) economies of scale that drive
profitability, (ii) need for compliance with government regulations for safety
and the environment, (iii) advantages of vertical integration; and (iv) the
increased application of technology to monitor inventory, delivery schedules,
ordering and related activities.
(1) Economies of Scale
By consolidating businesses, the Company may be able to reduce its
costs by eliminating costly repetitive services and increase profit by obtaining
cheaper per unit costs. For example, delivery costs of janitorial supplies tend
to make up a substantial percentage of cost of goods sold. By consolidating
small companies, the Company can reduce delivery costs by shipping in bulk and
negotiating lower delivery fees or investing in a delivery system of its own. In
addition, the Company estimates that only 3% of the total cost of cleaning
service relates to the costs of materials sold; the rest is labor, sales,
marketing and delivery expenses. Thus, from the economic viewpoint of the
Company's current or potential customers, the suppliers' efficient delivery of
value-added service is becoming increasingly important, especially concerning
training and education to reduce the customers' labor costs.
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(2) Compliance with Government Regulations
There are a number of government agencies that set standards and
regulations on the use and handling of chemical products and for sanitary
conditions. Included in these agencies are the Occupational Safety and Health
Administration (OSHA) which regulates chemicals related to occupational safety,
the Environmental Protection Agency (EPA) chartered to protect land, air, and
water, and the Consumer Product Safety Commission (CPSC) which regulates the use
and labeling of chemicals and products. These agencies issue rulings that
directly affect the practices and purchases of the sanitary/janitorial
supplier's customers. Maintenance and distribution of many of the industry's
products are subject to extensive regulation at the federal, state and local
levels.
With the continuous change in the regulations being imposed upon the
janitorial and cleaning supplies industry, the individual companies in the
industry, in particular the small to mid-size companies, are likely to
experience an increase in costs in their compliance programs. The Company
believes that consolidation is being fueled in part by a consolidated company's
ability to finance such compliance programs and the reduction in expense through
allocation of the expense throughout the consolidated company. In addition, a
consolidated company may have the resources available to hire environmental
consultants in order to assist it in complying with the environmental laws and
regulations as they are continuously enacted.
(3) Advantages of Vertical Integration
The Company believes that the consolidation of the industry is also
being fueled by the push toward integrated supply. Distributors are looking to
simplify the purchasing process and reduce the number of suppliers with which
they must interact. This has two key effects. First, it provides opportunities
for distributors to reach geographically dispersed customers, thereby expanding
its markets and market share. Second, it fuels the acquisition trend as large
wholesale distributors look to expand their product lines. By acquiring a
manufacturing company, a distributor may increase the number of products it may
offer because, in addition to the large number of products manufacturer may
produce, many manufacturers carry unique products they have developed which are
not carried by other manufacturers.
(4) Application of Technology
The janitorial/sanitary supply industry, as is true with most
wholesale distributors, is just beginning to embrace the application of
technology to improve operations and service levels. The most notable
technology opportunities concern the Internet. Again, the Company believes that
the ability of a consolidated company to pool revenues to explore cutting edge
technologies available will spur such consolidation. The Company plans to
embrace the use of the Internet to better achieve its goals and to secure its
position as a competitive element in the janitorial/sanitary supply market.
The explosion of the Internet, as a low cost, ubiquitous
communications channel, has created significant opportunities for those willing
to embrace this new channel. It
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affords the opportunity to reach manufacturers and customers more efficiently
and streamline the acquisition process. The Company estimates that most of
sanitary supply manufacturers have Internet access, yet less than half of the
distributors are on-line. The Internet allows customers to keep up-to-date on
product offerings, order products more efficiently, and obtain valuable
information regarding product use and safety. The Company intends to implement a
company-wide, Internet based network linking all its distributors with the
Company. The Company also intends to reach retail customers through an
Internet-based electronic commerce program that would allow consumers to order
products through the Company's web site by using credit cards and receive
next-day delivery through a nationally recognized overnight carrier service.
In its initial efforts in this area, the Company entered into a letter
of intent with ResponseLogic, Inc., an Internet marketing and electronic
commerce company, to implement the Company's electronic distributor network and
"eCommerce" program. The letter of intent expired as of April 30, 1999 and the
parties have decided not to continue working together. Total expenditures by
the Company prior to the abandonment of this venture were approximately $11,000,
which was treated as an expense. The Company has no ongoing interest of any
kind in clickUP.com, Inc., the entity initially established to operationalize
the joint venture with ResponseLogic. To the best knowledge of the Company,
ResponseLogic retains 100% ownership of clickUP.com, Inc. The Company has no
knowledge of the current operations, if any, of clickUP.com, Inc.
The Company has entered into understandings with Telcom.net, an
Internet web site developer, and b2bstores.com, Inc. ("b2bstores"), a
California-based designer and producer of Internet-based electronic commerce
programs and on-line "stores." The Company and certain members of management of
the Company have invested in b2bstores. (See "Item 7 - Certain Relationships
and Related Transactions").
Telcom.net implemented the Company's initial informational web site
(http://www.evclean.com) in July of 1999 and b2bstores is currently in the
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process of implementing the Company's initial eCommerce web site
(http://www.b2bgoods.com). The Company's "b2bgoods.com" web site will eventually
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offer all of the Company's janitorial and sanitary products and other office
supply products for electronic purchases. The Company has entered into an
agreement with b2bstores, pursuant to which b2bstores provides the Company with
web site transaction processing and e-commerce services for its b2bgoods.com web
site through b2bstores' e-commerce backbone. For these services, b2bstores is to
receive from the Company a fee equal to the greater of (a) 10% of the Company's
revenues generated through e-commerce activities conducted through
www.b2bgoods.com or (b) 50% of the Company's gross profits generated through e-
commerce activities conducted at www.b2bgoods.com. Pursuant to the same
agreement, b2bstores will also host on-line stores at its web site
(http://www.b2bstores.com), through which the Company's products will be offered
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for electronic purchases. All of the Company's products purchased through
b2bstores' web site are to be distributed directly to b2bstores' customers by
the Company through its distributor network. The Company will charge b2bstores a
price for each product equal to its cost for the product and will receive 2-5%
of the gross payment that the end-users will pay on each product sold at such
on-line stores hosted on the b2bstores web site. As of December 1, 1999, the
Company's eCommerce program has not yet been implemented in full. The Company
intends to continue to work with b2bstores.com, Inc. to complete the work
necessary to
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implement its eCommerce program which, upon successful completion, will include
the following:
. an electronic auction site through which the Company's business
customers can sell their excess inventories to bidders; and
. interactive electronic customer service representative to whom the
customers can direct their questions and request for advice concerning
the Company's products.
services. When fully implemented, the Company's "b2bgoods.com" web site will not
be materially different from the on-line stores hosted by b2bstores, which offer
the Company's products. The costs of implementing the initial informational web
site and eCommerce program were not material and management of the Company does
not believe that ongoing costs of integrating new distributors will be material.
C. The Company's Products, Sales and Marketing
Kandel distributes approximately 1,000 janitorial/sanitary products to
customers in the New York City metropolitan area, where it has been in business
for 48 years. NISSCO serves as the purchasing agent for a marketing group
consisting of over 270-member sanitary/janitorial supply and related paper
products companies which account for over $45 million in annual purchases of
janitorial/sanitary supplies and related paper products. CIC is a San Antonio-
based regional manufacturer, distributor and retail vendor of cleaning supplies
to customers located within Southern Texas. Superior operates three
distribution centers within the State of Kentucky from which it distributes
cleaning products. The Company has not integrated the operations of these
subsidiaries, nor does the Company intend to do so in the foreseeable future, as
they occupy different geographic market niches.
The combined businesses of the Company represent distribution of over
1,200 products to over 1,000 customers directly in New York, Texas and Kentucky
and, through NISSCO, throughout all 50 states. The Company competes principally
on the basis of price and value-added services such as next-day delivery,
training, customer support and technological innovation in distribution.
Products distributed by the Company's subsidiaries are generally
shipped by truck or other common carriers to local distributors who keep an
inventory of the most popular products. Less commonly ordered products can be
shipped via UPS or other delivery service for next day delivery or by the same
common carriers for less time-sensitive deliveries. Products ordered by
customers over the Internet will be shipped to such customers directly by the
Company's master distributors, which maintain regional distribution centers
across the United States. The Company conducts its businesses with the master
distributors through customary purchase orders.
The Company purchases products, through master distributors, from a
wide variety of manufacturers. Master distributor refers to a large distributor
with national or regional distribution capabilities. Master distributors the
Company uses include Bunzl/Papercraft, TEC Products, Inc., La Gass Bros., Inc.
and Sweet Paper Company. The Company believes that virtually all of its products
are available from multiple sources and the loss of one or even several sources
would not have a material adverse effect on the Company's business. Similarly,
the Company sells to over 1,000 customers, none of which accounts for more than
3% of the Company's sales on an annual basis. Accordingly, the Company is not
overly dependent on any one or few customers. NISSCO acts as purchasing agent
for a nationwide network of distributors. NISSCO derives its revenues from a 5%
rebate from manufacturers on all purchases made by group members. NISSCO shares
this rebate with its distributors, passing on 2% of the aggregate rebates to the
distributors.
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D. Competition
The market for janitorial/sanitary supplies has only a few large,
well-capitalized competitors and consists of a large number of small companies
servicing local and regional markets. The larger suppliers in the industry
include:
Unisource Worldwide
W.W. Grainger
Corporate Express
ResourceNet International
Waxie Sanitary Supply
Most of these corporations have multiple divisions, with one of those
being in the sanitary/janitorial supply industry. The Company is not currently
a significant competitor in the industry in terms of annual sales and its market
share is negligible. However, the Company believes that, through an aggressive
plan of acquisitions, it can become a significant industry competitor within 18
months to two years. There can, of course, be no assurance that the Company
will be successful in identifying attractive acquisition targets, negotiating
advantageous acquisition terms or obtaining the financing necessary to sustain
growth through acquisitions. Failure of the Company to achieve any one of these
goals could force it to substantially curtail its acquisition plans. If the
Company were forced to do so, it would focus its activities on attempting to
foster internal sales growth and profitability, but such growth would be much
slower than under the Company's current plans and the Company's plan to become a
significant industry leader could be in jeopardy.
The Company believes that, while the larger distributors are the main
competition in the industry, many of the independent janitorial/sanitary supply
distributors still maintain a healthy and profitable local market share.
Competition is, however, forcing prices down and leaving the independently run
companies more vulnerable. With the market being serviced by what the
management considers only a few large competitors, most of the overall market,
based on total sales, is divided among a large number of smaller competitors.
The larger competitors have competitive advantages over the Company in
the economies of scale they realize through centralized purchasing, the ability
to carry extensive product lines to provide their customers with "one stop
shopping" for all their janitorial/sanitary supplies, their ability to provide
favorable payment terms to customers and their ability to realize broad-based
efficiencies through the strategic implementation of information technology.
Small companies tend to compete through provision of additional or superior
services such as personalized customer service. The combined
experiences of the Company's management in the industry has brought it to the
conclusion that, while customers are always looking for better pricing, they are
sometimes motivated in their purchase decisions by customer service and value-
added services. Management of CIC and Superior have indicated that their
experience is similar. Management believes that this is one of the key reasons
why the smaller, independent distributors are still a major force within the
industry. The relationships that exist and the service levels that can be
offered by the smaller distributors keep customers loyal. Often, the small
distributors provide a specialization or niche product that the larger
distributors will not spend the time to provide. In
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being closer to their customers, the small distributors can and must provide
value-added services, such as education and training, to maintain the needed
profit margins.
E. Acquisition Program
The Company's objective is to build a strong presence in the
janitorial/sanitary supplies distribution industry at a middle market level
through the implementation of the Company's acquisition program. In the first
stage of its acquisition program, the Company intends to acquire approximately
six to eight sanitary supply distributors, which fit the Company's profiles for
suitable acquisition targets. According to the Company's target profile, a
suitable acquisition target will:
. have annual revenue in the $2 million to $10 million range;
. have net pre-tax profits of at least 10% of gross revenue; and
. have management whose key members have expressed their
willingness to work for the Company on long term basis.
Management believes that this series of acquisitions can be completed
within the next six months, although there can be no assurance that all these
acquisitions will be completed on time or at all, or that historical results of
any acquired companies will be repeated under Company ownership. The first two
of such acquisitions were the CIC and Superior transactions which were completed
in August of 1999. The Company has also signed the definitive agreement for the
acquisition of June Supply, which acquisition the Company anticipates concluding
before January 31, 2000. In addition, five other candidates have provided the
Company with preliminary financial, commercial and organizational information
relative to the Company's analysis of these companies in acquisition
negotiations, though no contracts have been prepared. The Company continues to
investigate other potential target companies.
On June 1, 1999, in furtherance of the acquisition program, the
Company received aggregate proceeds of $3,000,000 from a private offering of 300
units at an offering price of $10,000 per unit. Each unit was comprised of a
12.75% Subordinated Promissory Note due April 1, 2002 in the principal amount of
$10,000 and 2,400 common stock purchase warrants. Each warrant is exercisable
for one share of the Company's Common Stock (as defined herein), at an exercise
price of $4.25 per share, at any time from six months from their date of
issuance to four years from that date. The Company used these proceeds to
acquire CIC and Superior and the balance will be used for working capital
purposes.
In December of 1999, the Company began a new private placement of a
minimum of 200 units and a maximum of 800 units at $10,000 per unit, each unit
consisting of 100 shares of Series B Cumulative Convertible Preferred Stock (the
"Series B Stock") and 1000 common stock purchase warrants. On December 15, 1999,
the Company sold an aggregate of 251.4 units to approximately 59 accredited
investors for aggregate proceeds to the Company of $2,514,000. The Company
expects to continue the private placement until December 31, 1999, or until all
of the remaining units are sold. (See "Description of Securities-Preferred
Stock") The Company will use the proceeds from this offering to acquire June
Supply and the balance will be used for working capital purposes.
There can be no assurance that the Company will obtain any additional
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financing on terms satisfactory to it. The failure of the Company to obtain
additional financing will have a materially adverse effect on its ability to
implement its acquisition strategy.
F. Corporate Structure, Strategic Planning and Integration of Acquisitions
The Company plans to maximize the revenue and profitability of its
acquired companies through the enhancement of core revenues, reductions in the
costs of goods sold, the emphasis of personalized customer service and the
implementation of industry technologies that allow centralized purchasing,
inventory management and supply.
For the short term following most acquisitions, the acquired companies
will be maintained as wholly owned subsidiaries of the Company. Each acquired
company will maintain a local manager and, at least initially, retain its name.
The Company will attempt to capitalize upon the acquired company's existing
market presence, to establish the Company as a recognized national industry
leader and to use this image of the Company to augment the acquired company's
image in the local or regional market. The Company intends, where practical, to
integrate operations of acquired companies and to implement a "best practices"
program through which advantageous business practices of an acquired company
will be implemented in other acquired companies. The Company intends to pursue
these activities in a manner designed to retain a high percentage of existing
accounts and does not burden local operations with excessive overhead. The
Company intends a strong focus on maintaining value-added levels of customer
service while attempting to realize improved economies of scale.
The Company then intends to utilize selected acquired companies as
regional distribution "hubs" to which additional revenues can be added through
incremental acquisitions of smaller local companies, each generating $750,000 to
$1,250,000 in annual revenues. Each hub company will be used to centralize
purchasing and administrative services such as payroll, insurance and accounting
for its region.
If the Company is successful in achieving aggregate annual revenues of
approximately $25 to $35 million, and regional hubs are in place, the Company
would begin the nationwide centralization of administrative services, such as
legal, accounting, systems integration and implementation, insurance purchasing
and auto and truck purchasing. The goal of this stage is to maximize cost
savings and profits. During this stage, the Company intends to introduce to its
business customers other value-added services such as education and training of
their employees on product usage and selection and consultation on health,
safety, and regulatory issues. Also, during this phase, the Company would
attempt to establish a national, private label brand of products to be sold
through the Company's distribution network. This consolidation would help build
economies of scale, enable the application of professional management
techniques, and expand its geographic reach. At the same time, where
practicable, the Company intends to retain local management to maintain customer
relationships.
Management's current business plan is highly dependent upon the
successful completion of a series of acquisition transactions and the ability of
the Company to attract the requisite financing on terms favorable to the
Company. Management believes that these plans are reasonable based upon the fact
that Management has already identified at least 5 companies in the United States
that
11
<PAGE>
fit the Company's acquisition profile and the initial success management has
achieved in acquiring financing for the Company. If for any reason the Company
is unable to obtain sufficient financing to complete its program or is
unsuccessful in identifying favorable acquisition targets, negotiating
acquisition transactions and completing its program, it is likely that the
Company would not be able to meet the revenue growth plans contained in its
current business plan. Should that occur, management would focus the Company's
efforts on internal growth and greater profitability through expanded marketing
programs and information technology and, in particular on its efforts to market
and sell its products through the Internet. Growth through these means would be
slower than that management believes is possible through acquisitions. Factors
external to the Company, including the performance of the stock markets and the
general availability of credit through banks and other sources could adversely
affect the ability of the Company to continue to effect acquisition
transactions.
G. Trademarks
The Company has no trademarks, patents or other licenses that are
material to the conduct of its business.
H. Research and Development
The Company has no material research and development expenses.
I. Employees
The Company, through its subsidiaries, currently employs approximately
sixty (60) full-time employees. Four of the Company's drivers and warehousemen
are members of various collective bargaining units, with contracts extending to
September 1, 2001. The Company has not experienced any work stoppages and
believes its relationships with its employees are satisfactory.
J. Governmental Regulations
There are a number of government agencies that set standards and
regulations on the use and handling of chemical products and for sanitary
conditions. Included in these agencies are the Occupational Safety and Health
Administration (OSHA) which regulates chemicals related to occupational safety,
the Environmental Protection Agency (EPA) chartered to protect land, air, and
water, and the Consumer Product Safety Commission (CPSC) which regulates use and
labeling of chemicals and products. These agencies issue rulings that directly
affect the practices and purchases of the sanitary/janitorial supplier's
customers.
Maintenance and distribution of many of the Company's products are
subject to extensive regulation at the federal, state and local levels. In
particular, the Company is subject to regulations involving storage of hazardous
materials promulgated by the Federal Environmental Protection Agency and the
Occupational Safety and Health Act. As such, the Company's business is
dependent upon continued compliance with governmental regulations regarding the
operations of the Company's facilities. The Company believes that it is in
substantial compliance with all such
12
<PAGE>
regulations that are applicable to its business. However, failure to maintain
and demonstrate compliance with all such regulations could result in the
preclusion of handling certain product lines, result in mandated clean up
expenditures, and could have a material adverse effect on the business and
prospects of the Company.
The costs to the Company of complying with environmental regulations
are not material.
Item 2. Management's Discussion and Analysis or Plan of Operation.
Plan of Operations
During the 12-month period following the date of this Amendment to Form 10-
SB, the Company intends to substantially expand its business through the
completion of several acquisition transactions. (See Item 1. Description of
Business). An acquisition program such as that being conducted by the Company
requires virtually constant access to capital in order to enable the Company to
purchase companies. Assuming the Company is successful in identifying
acquisition targets and completing acquisitions according to its plan, the
Company will require additional funding of approximately $2,000,000 prior to the
end of calendar 1999.
In December of 1999, the Company began a new private placement of a minimum
of 200 units and a maximum of 800 units at $10,000 per unit, each unit
consisting of 100 shares of Series B Cumulative Convertible Preferred Stock and
1000 common stock purchase warrants. On December 15, 1999, the Company sold an
aggregate of 251.4 units to approximately 59 accredited investors for aggregate
proceeds to the Company of $2,514,000. The Company expects to continue the
private placement until December 31, 1999, or until all of the remaining units
are sold. (See "Description of Securities-Preferred Stock")
If the Company continues to be successful in implementing its business
plan, there will be a need for additional capital sometime in the first six
months of calendar 2000. If the Company is not successful in completing
acquisitions according to the schedule contemplated by its current business
plan, the Company's need for additional capital will be reduced or delayed.
There can be no assurance that the Company will be successful in attracting
the requisite capital on terms favorable to the Company or at all. Failure to
attract such capital would seriously impair the Company's ability to grow
according to its current plans and to attain its revenue and profit targets.
13
<PAGE>
The Company has no material research and development expenditures nor does
it anticipate that it will have any such expenditures in the next 12 months.
The Company's additions to plant and equipment will be incident to the
acquisitions that have been previously discussed. If the Company is successful
in completing its acquisitions as planned, the number of employees of the
Company, including its subsidiaries, could expand to as many as approximately
250 by the end of calendar 2000.
Results of Operations
On January 15, 1999, Enviro-Clean of America, Inc. completed the
acquisition of Kandel & Son, which acquisition became effective as of January 1,
1999. Prior to the acquisition, Kandel & Son's fiscal year-end was August 31
and Enviro-Clean's year-end was December 31. Subsequent to the acquisition, the
Company adopted a December 31 year-end. As a result of the change in fiscal
year and the acquisition accounted for as a pooling of interest, the Company's
financial statements as of and for the periods ended December 31, 1998 and June
30, 1998 have been restated to retroactively combine Kandel & Son's results of
operations as if the acquisition had occurred at the beginning of the earliest
period presented.
The consolidated statements of operations, cash flows and stockholder's
equity/deficiency for the year ended December 31, 1998 reflect the results of
operations of Enviro-Clean for the period from December 9, 1997 (date of
inception) to December 31, 1998, combined with the results of operations of
Kandel & Son for the year ended September 30, 1998. The consolidated balance
sheet as of December 31, 1998 reflects the financial position of Enviro-Clean on
that date combined with the financial position of Kandel & Son as of September
30,1998. As a result of the companies having different fiscal years, Kandel &
Son's results of operations for the three-month period ended December 31, 1998
and for the one month period ended September 30, 1997 have been excluded from
the reported results of operations.
Results of operations for the six-month period ended June 30, 1999 and
1998:
The net sales increased $902,924 for the six-month period ended June 30,
1999 ("1999") as compared to the six-month period ended June 30, 1998 ("1998")
from $919,451 to $1,822,375. This increase is attributable to NISSCO being
consolidated with the Company in 1999. Net sales of Kandel & Son Subsidiary are
comparable for each period.
The gross profit percentage increased from 46% for 1998 to 53% for 1999.
This increase is attributable to the inclusion of NISSCO in 1999. NISSCO
averages a gross profit percentage of approximately 70% because it sells
services rather than products. The gross profit percentage for Kandel decreased
slightly from 1998 to 1999 due to competition in Kandel & Son's market; however,
NISSCO's gross profit percentage offsets this decrease.
The operating expense increased from $415,860 for 1998 to $977,245 for
1999, approximately 135%. The majority of this increase, approximately
$450,000, was due to the inclusion of NISCCO in 1999. Additionally, there was
an amortization of goodwill booked on the
14
<PAGE>
acquisition of NISSCO of approximately $149,000. Kandel & Son's expenses were
comparable between 1999 and 1998.
The Company had a net loss in 1999 of $76,052, or $.03 per share, as
compared to net income of $6,929, or $.00 per share in 1998. If the
amortization of goodwill, a non-cash expense, were eliminated in 1999, the
Company would have had a net income of approximately $73,000 in 1999.
Liquidity and Capital Resources
The Company's only activities in the year ended December 31, 1998 consisted
of extensive research, developing and refining of its business plan, sales of
its securities to raise initial capital, the placing of deposits for the NISSCO
acquisition and related administrative expenses, including professional fees.
The Company has funded its requirements for working capital and
acquisitions through a series of equity private placements and the issuance of
long-term debt. During the six-month period ended June 30, 1999, the Company
issued a total of 370,000 shares of Common Stock for $925,000. In addition, as
of June 1, 1999, the Company issued units consisting of 12.75% promissory notes
due April 1, 2002 and common stock purchase warrants in the aggregate amount of
$3,000,000. The Company's only significant use of cash was the balance of cash
paid for the NISSCO and Kandel acquisitions of $652,451.
For the six-month period ended June 30, 1999, the Company's cash flows
from operations was positive $331,721, as a result of a net loss of $76,052 and
adjustments to arrive at cash provided by operating activities of depreciation
of $22,556, amortization of goodwill of $148,861 and amortization of note
discount of $19,961, a decrease in accounts receivable of $36,961, a decrease in
inventory of $24,613 and increases in accounts payable and income taxes payable
of $176,550 and $3,102, respectively, offset by an increase in prepaid expenses
of $24,831.
The Company expects its capital requirements to increase for the remainder
of 1999 and for 2000 as it continues its acquisition program and invests in
expanded administrative and sales and marketing infrastructure to support
increasing sales volume. The Company's future liquidity and capital funding
requirements will depend on many factors, including the extent to which the
Company is successful in implementing its acquisition program, and the extent to
which the Company is able to raise additional funds through equity and debt
issuances.
The Company intends to structure its next financing transaction as a
private offering of convertible preferred stock. Until the terms of such
offering are set, it is not possible to determine the number of shares of the
Company's Common Stock that may be issuable upon conversion of the preferred
stock. It is also impossible currently to determine the number of shares of
Common Stock that will be issuable to Thomas B. Haines in connection with the
purchase by the Company of NISSCO. Under the terms of Mr. Haines' agreement
with the Company, the Company is obligated to issue additional shares of Common
Stock to Mr. Haines in the event that the bid price per share of the Company's
Common Stock is less than $5.00 for the ten (10) trading days immediately
15
<PAGE>
preceding January 15, 2001 (the "Average Bid Price Per Share"). The number of
shares to be issued is equal to the number of shares necessary so that the
dollar amount of additional shares, valued at the Average Bid Price Per Share,
issued to Mr. Haines on January 15, 2001, is equal to $2,500,000. The Company
is authorized to issue 20,000,000 shares of common stock, par value $.001 per
share ("Common Stock"), of which 4,401,000 shares are currently issued and
outstanding as of December 1, 1999.
Item 3. Description of Property.
(a) The Company's executive offices are located at 211 Park Avenue, Hicksville,
NY 11801, where Kandel & Son's offices are located. The Company also
maintains offices at the offices of CIC at 1023 Morales Street, San
Antonio, TX 78207. At this time the Company does not pay rent at either
location, as Kandel & Son and CIC are the lessees for the respective
premises. NISSCO and Kandel & Son currently lease their properties from
unrelated parties and CIC and Superior lease their facilities from their
former owners. Management of the Company believes that the rental rates
for each of these facilities is at least as favorable as market terms.
Combined rent expense for NISSCO, Kandel & Son, CIC and Superior is
estimated to be approximately $463,000 for the next 12 months.
(b) The Company does not invest in real estate, other than as incident to its
business.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
(a) Security Ownership of Certain Beneficial Owners
The following information relates to those persons known to the
Company to be the beneficial owner of more than 5% of the Common Stock, the only
class of voting securities of the Company outstanding, as of December 1, 1999.
<TABLE>
<CAPTION>
NAME AND AMOUNT AND
ADDRESS OF NATURE OF
BENEFICIAL OWNER BENEFICIAL OWNER % OF CLASS
- ---------------- ---------------- -------------
<S> <C> <C>
Richard Kandel
c/o Enviro-Clean of America, Inc. 2,850,400/1/ 57.57%
211 Park Avenue
Hicksville, NY 11801
</TABLE>
/1/ Includes 500,000 shares of Common Stock issuable pursuant to conversion
rights of Series A Stock (as defined herein), 24,000 shares of Common Stock
issuable upon exercise of warrants held by Kara Kandel, daughter of Richard
Kandel and 26,400 shares of Common Stock issuable upon exercise of warrants
held by Ross Kandel, son of Richard Kandel.
16
<PAGE>
<TABLE>
<CAPTION>
NAME AND AMOUNT AND
ADDRESS OF NATURE OF
BENEFICIAL OWNER BENEFICIAL OWNER % OF CLASS
- ---------------- ---------------- -----------
<S> <C> <C>
Steven C. Etra
c/o Manufacturers Corrugated Box Co., Inc. 455,554/2/ 9.82%
5830 57th Street
Maspeth, NY 11378
Randall K. Davis
c/o Enviro-Clean of America, Inc. 420,000/3/ 8.90%
1023 Morales Street
San Antonio, TX 78207
Thomas B. Haines
c/o Nissco/Sunline, Inc. 250,000/4/ 5.68%
14848 Old US 41
#13 Sunburst Center, Naples, FL 84110
</TABLE>
(b) Security Ownership of Management
As of December 1, 1999, the number of shares of Common Stock of the
Company owned by the directors and executive officers of the Company are as
follows:
<TABLE>
<CAPTION>
AMOUNT AND
NAME AND ADDRESS NATURE OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP % OF CLASS
- ------------------------------------ -------------------- -----------
<S> <C> <C>
Richard Kandel 2,850,400/5/ 57.57%
c/o Enviro-Clean of America, Inc.
211 Park Avenue
Hicksville, NY 11801
Steven C. Etra 455,554/6/ 9.82%
c/o Manufacturers Corrugated Box
Co., Inc.
5830 57th Street
Maspeth, NY 11378
</TABLE>
- --------------------
/2/ Includes 125,000 shares of Common Stock issuable upon exercise of options
granted to Mr. Etra; 70,000 shares of Common Stock issuable pursuant to
conversion rights of Series E Stock (as defined herein); 20,000 shares of
Common Stock held by, and 7,200 shares of Common Stock issuable upon
exercise of warrants held by, Lances Property Development Pension Plan, a
company 50% owned by Mr. Etra; 6,000 shares of Common Stock held by, and
2,400 shares of Common Stock issuable upon exercise of warrants held by
Blaire Etra, wife of Mr. Etra; 7,200 shares of Common Stock issuable upon
exercise of warrants held by Irving Etra Family Trust, which Mr. Etra is a
beneficiary; 118,500 shares of Common Stock held by SRK Associates, LLC, a
company controlled by Mr. Etra; and 25,000 shares of Common Stock issuable
upon exercise of options granted to SRK Associates LLC.
/3/ Includes 100,000 shares of Common Stock held by Colnic Investment
Corporation, which is controlled by Randall K. Davis; 250,000 shares of
Common Stock issuable pursuant to conversion rights Series D Stock (as
defined herein) held by Mr. Randall Davis; 70,000 shares of Common Stock
issuable pursuant to conversion rights of Series D Stock held by Charles H.
Davis, father of Randall K. Davis, which Randall K. Davis disclaims any
beneficial interest therein.
/4/ Excludes 250,000 shares of Common Stock to be issued on January 1, 2000 and
500,000 shares of Common Stock (subject to adjustment) to be issued on
January 1, 2001.
/5/ See FN 1 above.
17
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND
NAME AND ADDRESS NATURE OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP % OF CLASS
- ------------------------------------ -------------------- -----------
<S> <C> <C>
Randall K. Davis 420,000/7/ 8.90%
c/o Enviro-Clean of America, Inc.
1023 Morales Street
San Antonio, TX 78207
Thomas B. Haines 250,000/8/ 5.68%
c/o Nissco/Sunline, Inc.
14848 Old US 41
#13 Sunburst Center
Naples, FL 84110
Steven Haynes 50,000/9/ 1.14%
c/o Superior Chemical & Supply, Inc.
1038 West Main Street
Bowling Green, KY 42101
Barry J. Gordon 23,000/10/ .52%
c/o American Fund Advisors
1415 Kellum Place, Suite 205
Garden City, NY 11530
Gary C. Granoff 12,000/11/ .27%
c/o Ameritrans Capital Corp.
747 Third Avenue, Suite 4C
New York, NY 10017
All officers and directors 4,060,954 73.33%
As a group
</TABLE>
Item 5. Directors, Executive Officers, Promoters and Control Persons.
The following is biographical information regarding the executive officers
and directors of the Company. Directors of the Company serve for a term of one
year or until their successors are elected. Executive officers are appointed
by, and serve at the pleasure of, the Board.
- --------------------------------------------------------------------------------
/6/ See FN 2 above.
/7/ See FN 3 above.
/8/ See FN 4 above.
/9/ Represents 50,000 shares of Common Stock held in the escrow account and to
be granted in five annual installments, subject to adjustments.
/10/ Includes 18,000 shares of Common Stock issuable upon exercise of warrants.
/11/ Includes 6,000 shares of Common Stock to be issued upon exercise of
warrants held by Leslie Granoff, wife of Gary C. Granoff, and 6,000 shares
of Common Stock issuable upon exercise of warrants held by Dapary
Management Corp., a company controlled by Mr. Granoff.
18
<PAGE>
The executive officers and directors of the Company are:
Name Age Position
Richard Kandel 47 Chairman, CEO, and Treasurer
Randall K. Davis 36 President and Director
Steven C. Etra 51 Secretary and Director
Barry J. Gordon 54 Director
Gary C. Granoff 51 Director
Richard Kandel, 47, has served as the Chairman and Chief Executive Officer
of the Company from September 1999 to the present. Mr. Kandel has served as
the Company's Treasurer since September of 1999. Since July of 1999, Mr. Kandel
has served as Chairman of the Board of b2bstores.com, Inc., a business to
business full service eCommerce mail mall on the Internet. He graduated in 1974
from Michigan State University with a Bachelor of Science Degree. From 1974
until 1998, Mr. Kandel was the owner and president of Kandel & Son, a sanitary
supply distributor in the New York metropolitan region. In January of 1999, Mr.
Kandel sold Kandel & Son to the Company. Mr. Kandel is also an owner/director
of Camp Pontiac LLC, an eight-week summer sports camp for over 400 boys and
girls. In addition, Mr. Kandel is the founder and chairman of No Small Affair,
a New York/Florida-based all volunteer organization. This foundation provides
events, parties, and outings for thousands of homeless, physically or
emotionally challenged.
Randall K. Davis, 36, has served as a Director and President of the Company
from September 1999 to the present. From March 1999 to August 1999, Mr. Davis
served as Vice President of the Company. Mr. Davis graduated from the
University of Texas in Austin in 1985 with a Bachelor of Arts Degree. From May
of 1985 until 1999, Mr. Davis was the co-owner and President/CEO of Davis
Manufacturing Company, whose holdings included Sanivac, Inc., and Cleaning Ideas
Inc. Davis Manufacturing Company was one of the largest manufacturers of
commercial cleaning products in South Texas and had been in operation since
1929. In August of 1999, Mr. Davis, along with family members, sold the Davis
family of companies to the Company. Mr. Davis is also the managing partner of
Colnic Investment Corp., a private investment company, that invests in private
and publicly traded companies. Mr. Davis also serves on the boards of The Texas
Manufacturers Assistance Center, Cystic Fibrosis Foundation and Oakwell Farms
Association. Mr. Davis spends about 80% of his working hours in fulfilling his
duties at the Company
Steven C. Etra, 51, has served as a Director of the Company from March 1999
to the present. Mr. Etra has served as the Company Secretary from September
1999 to the present. Mr. Etra has been the Sales Manager of Manufacturers
Corrugated Box Company since September of 1970, a company owned by Mr. Etra's
family for more than 75 years. Additionally, Mr. Etra has been a director of
Elk Associates Funding Company ("Elk") since November of 1995. Elk is a
publicly traded NASDAQ company under the symbol of "EKFG", with an investment
portfolio totaling $45 million. Since June 1996, Mr. Etra has also been a
director of Gemini Capital, an automobile finance company.
19
<PAGE>
Barry J. Gordon, 54, has served as a Director of the Company from September
1999 to the present. Mr. Gordon has over 28 years of investment experience.
After several years with New York Hanseatic Corporation as a Senior Security
Analyst specializing in aviation and technology, Mr. Gordon joined National
Aviation & Technology Corporation as a Portfolio Manager in 1973. He was
instrumental in the formation of American Fund Advisors in 1979 and is now
Chairman and President. Mr. Gordon is also President of John Hancock Global
Technology Fund. In addition, he is Chairman and Managing Partner of the New
Jersey Cardinals, a Class A affiliate of the St. Louis Cardinals and Chairman
and Managing Partner of the Norwich Navigators, a Class AA affiliate of the New
York Yankees. Mr. Gordon serves as a Director of Robocom Systems, Inc. and
Winfield Capital Corp., is a shareholder of the General Partnership that
operates a hotel, and won the 1992 Long Island Entrepreneur of the Year Award
for Financial Services. Mr. Gordon has been featured in both televisions and
print mediums including Good Morning America, Forbes Magazine, CNBC, The Wall
Street Journal, The Chicago Tribune, Fortune, and Newsday. Mr. Gordon has also
appeared on the CBS, ABC, and NBC Evening News. Mr. Gordon holds an MBA in
Finance from Hofstra University and a BBA in Marketing from the University of
Miami.
Gary C. Granoff, 51, has served as a Director of the Company from September
1999 to the present. Mr. Granoff is a Chairman of the Board and President of
Ameritrans, a Business Development Company under the Investment Company Act of
1940 (in formation) since 1998, as well as Elk Associates Funding Corporation
("Elk"), a Small Business Investment Company, licensed by the U.S. Small
Business Administration since July 1979, where he has served as President since
its incorporation in 1979, as its chairman of the board since December 1995.
Elk is also a Business Development Corporation and is registered as an
Investment Company under the Investment Company Act of 1940. Mr. Granoff has
been a practicing attorney for the past twenty-six years and is presently an
officer and stockholder in the law firm of Granoff, Walker & Forlenza, P.C. Mr.
Granoff is a member of the bar of the State of New York and the State of Florida
and is admitted to the United States District Court of the Southern District of
New York. Since 1983, Mr. Granoff is also sole stockholder and President of GCG
Associates, Inc., an investment consulting firm. He has served as the President
and is the sole stockholder of Seacrest Associates, Inc., a hotel operator,
since August 1994. Mr. Granoff has also been a director and President since
June 1996 of Gemini Capital Corporation, a company primarily engaged in the
business of making consumer loans. In February 1998, Mr. Granoff was elected to
and is presently serving as a trustee of the Board of Trustees of The George
Washington University. Mr. Granoff holds a Bachelor of Business Administration
degree in Accounting and a Juris Doctor degree (with honors) from The George
Washington University.
Thomas B. Haines and Robert W. Moehler, formerly directors of the Company,
resigned effective July 12, 1999 and June 30, 1999, respectively, so that board
seats might be freed up for those who will be more intimately involved in the
Company's ongoing growth and financial activities.
Item 6. Executive Compensation.
The Company has entered into an employment agreement (the "Kandel
Agreement") with Richard Kandel ("Kandel") for a term of three years, whereby
Kandel's salary for the year ending December 31, 1999, is $100,000 per annum,
and shall increase by $100,000 per annum on
20
<PAGE>
January 1, 2000 and January 1, 2001. The employment period shall automatically
renew annually for a new three-year term unless prior to the end of the first
year of each three-year term, either the Company or Kandel provides notice to
the other party to the Kandel Agreement of its intention not to extend the
employment period beyond the then current three-year term. Such notice shall be
provided not later than 30 days prior to the end of such one-year period.
In addition to the base compensation, the Kandel Agreement provides for an
annual bonus plan whereby the Company agrees to pay Kandel an annual bonus
payment for each of the fiscal years during the time of employment equal to
fifteen thousand ($15,000) dollars upon the occurrence of each of the following
events:
(a) listing of the Company's shares on NASDAQ, a comparable inter-dealer
automated quotation system, or a recognized exchange;
(b) the Company achieves revenues, as defined in the agreement, for any
monthly period that would, if annualized, equal $50 million or more in
revenues;
(c) the Company achieves revenues for any monthly period that would, if
annualized, equal $75 million or more in revenues;
(d) the Company achieves revenues for any monthly period that would, if
annualized, equal $100 million or more in revenues.
Kandel's agreement may terminate upon various occurrences listed in the
Kandel Agreement. If the Company terminates Kandel's employment without cause or
for reason other than as provided in the Kandel Agreement, or if such employment
is terminated by Kandel for "Good Reason" as defined in the Kandel Agreement,
then the Company shall pay Kandel his full salary, bonus and benefits through
the date of termination, or, in lieu of salary payments, the Company must pay as
severance pay an amount equal to the remainder of the salary, bonus and value of
fringe benefits which Kandel would be entitled to receive for the remaining
employment period. "Good Reason" is defined as when there is a change in control
of the Company and one or more of the following events occurs:
(a) the assignment to Kandel of any duties inconsistent with his status as
Chief Executive Officer of the Company, his removal from the position
of Chief Executive Officer of the Company, or a substantial alteration
in the nature or status of his responsibilities from those in effect
immediately prior to the Change in Control;
(b) a reduction by the Company of Kandel's annual base salary in effect on
the date immediately prior to the change in control;
(c) the relocation by the Company's principal executive offices to a
location more than twenty-five miles from its present location or a
requirement that Kandel shall be based anywhere other than the
Company's principal executive offices except for required travel on
the Company's business to an extent substantially consistent with his
business travel obligations prior to the change in control;
21
<PAGE>
(d) the failure by the Company to continue in effect any bonus plan in
which Kandel was participating immediately prior to the change in
control; or
(e) the failure by the Company to continue to provide Kandel with benefits
at least as favorable as those enjoyed by him under any of the
Company's pension, life insurance, medical, health and accident,
disability, deferred compensation or savings plans in which he was
participating at the time of the change in control, the taking of any
action by the Company which would directly or indirectly materially
reduce any of such benefits or deprive him of any material fringe
benefit enjoyed by him at the time of the change in control, or the
failure by the Company to provide Kandel with the number of paid
vacation days to which he was entitled at the time of the change in
control.
The Company entered into an employment agreement with Randall K. Davis
("Davis") for a term of three years whereby Davis' salary for the year ending
December 31, 1999 is $50,000 and shall increase by $100,000 per annum on January
1, 2000 and January 1, 2001. The employment period shall automatically renew for
one year unless prior to the end of the three-year term, or any renewal periods,
either the Company or Davis provides notice to the other party to the agreement
of its intention not to exceed the employment period beyond the then current
three-year term. Such notice shall be provided not later than 90 days prior to
the end of such three-year term or one-year renewal period, as the case may be.
In addition to the base compensation, the Company agrees to pay Davis an
annual bonus payment for each of the fiscal years during the employment period
equal to ten thousand ($10,000) dollars upon the occurrence of the same events
as described in the bonus description of Kandel's employment agreement.
If Davis is terminated without cause, or outside the termination provisions
of the agreement, Davis shall be entitled to the full salary, bonus, and
benefits through the date of termination of the agreement.
Davis has also entered into an employment agreement with CIC for a term of
five years at an annual salary of $50,000. Under the terms of this agreement,
Davis is eligible for annual bonuses to be determined by the board of directors
of CIC. If Davis' employment is terminated without cause, Davis is entitled to
severance pay equal to the amount of salary and bonuses for a period of six
weeks to twelve months, depending on Davis' length of employment at the
termination.
Steven C. Etra, a Director and Secretary of the Company, entered into a
consulting agreement with the Company dated March 1, 1999, for a term of one (1)
year. The agreement shall automatically be renewed for successive periods of one
(1) year unless either party gives written notice to the other of its intention
not to renew the agreement. Such notice shall be given at least sixty (60) days
prior to the end of the initial term or any renewal term thereof. Under the
consulting agreement, Mr. Etra is to receive a monthly fee of $2,000 for
financial public relations services.
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The annual base compensation for each of Messrs. Kandel, Davis, Gorelick,
Haines and Haynes are:
Richard Kandel $100,000
Randall K. Davis $100,000 (includes $50,000 in his capacity as
President of CIC)
Irwin Gorelick $ 90,000 (in his capacity as President of Kandel &
Son)
Thomas B. Haines $ 75,000 (in his capacity as President of NISSCO)
Stephen Haynes $ 40,000 (in his capacity as President of
Superior)
Neither Kandel, Davis, nor Mr. Haines received any compensation from the
Company during the year ended December 31, 1998. Kandel received a yearly
salary of $100,000 from Kandel & Son in his prior capacity as its president.
The Company intends to implement a stock incentive plan for its executive
management and employees in the future, but the terms and conditions of such
plan have not yet been determined. However, certain members of management of
the Company hold options to purchase Common Stock, which were not issued
pursuant to any option plan.
Item 7. Certain Relationships and Related Transactions.
The Company was founded on December 9, 1997. At the time of its founding,
The Strateia Group, Inc. ("Strateia") received 250,000 shares of Common Stock at
a price of $.01 per share. Kandel, Chairman, Chief Executive Officer and
Treasurer of the Company, received 2,300,000 shares of Common Stock at a price
of $.01 per share. Of Kandel's shares, 1.5 million shares were initially held
in the name of the Palmetto Group, Inc. pursuant to certain proposed financing
arrangements. When the Company was able to arrange financing on more favorable
terms than initially planned, the proposed financing was abandoned and such 1.5
million shares were returned to Kandel.
On January 26, 1998, Steven C. Etra, a Director and the Secretary of the
Company and SRK Associates, LLC, a company controlled by Steven C. Etra,
purchased 10,000 and 50,000 shares of Common Stock, respectively, for $.50 per
share in an offering in which 42 other investors also purchased Common Stock
upon the same terms.
On December 22, 1998, Steven C. Etra, a Director and the Secretary of the
Company purchased 70,000 shares of the Company's Series E Convertible Redeemable
Preferred Stock (the "Series E Stock") for $175,000. The Series E Stock were
created specifically for the purposes of Mr. Etra's investment and (i) have a
stated value of $2.50 per share, (ii) pay an annual dividend equal to 3% of the
stated value, (iii) are convertible into shares of Common Stock, par value $.001
per share, of the Company at a conversion price of $2.50 per share and (iv) may
be redeemed by the Company at any time after December, 2000, at a redemption
price of $3.50 per Series E Stock so redeemed. These conversion and redemption
prices are subject to adjustment in the event of recapitalization, stock splits
and other enumerated extraordinary corporate events.
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Kandel, Chairman, Chief Executive Officer and Treasurer of the Company, was
formerly President and the principal stockholder of Kandel & Son, a company
which is currently a principal subsidiary of the Company. Thomas B. Haines, a
former Director of the Company, was formerly Chairman of NISSCO which is also
currently a principal subsidiary of the Company, and its NIPPCO division. The
terms of the Kandel & Son and NISSCO acquisitions were negotiated between
Messrs. Kandel and Haines and the Board of Directors of the Company, which at
the time was comprised of Robert W. Moehler and Mary Magourik.
The Company signed preliminary agreements to acquire all the issued and
outstanding capital stock of Kandel & Son in September of 1998 and of NISSCO in
October of 1998. Additional negotiations for both companies were finalized on
January 15, 1999. Pursuant to the agreements, the Company assumed $665,596 of
debt of Kandel & Son, consisting of amounts due and owing in respect of
principal and interest to (i) Citibank, N.A. of $99,914, (ii) miscellaneous
other debt of $183,329, and (iii) shareholder loans from Kandel totaling
$382,353 which the Company has paid. Kandel, as sole shareholder of Kandel &
Son, received (1) $684,404 (including prior deposits) in the form of cash and a
promissory note, and (2) 500,000 shares of Series A Convertible Preferred Stock
(the "Series A Stock"), a class of securities created specifically for the
Kandel & Son transaction. The promissory note described in (1) above has been
paid in full by the Company and no longer remains outstanding. The Series A
Stock (a) bear an annual dividend of 4%, and (b) are convertible into shares of
Common Stock of the Company at a conversion price of $5.00 per share.
Originally, the Series A Stock were redeemable by the Company at Kandel's option
at a redemption price of $5.00 per share at any time after January 15, 2001 and
the conversion price was $2.50 per share. However, Kandel, as the sole holder
of the Series A Stock, and the Company entered into an agreement effective on
September 30, 1999, in which the certificate of designation for the Series A
Stock would be amended to remove Kandel's ability to put the Series A Stock to
the Company and increased the conversion price from $2.50 to $5.00 per
share.
Thomas B. Haines, as sole shareholder of NISSCO, received $500,000 in cash,
and 250,000 shares of Common Stock in connection with the sale of NISSCO to the
Company. In addition, Mr. Haines is to receive an aggregate of an additional
750,000 (subject to adjustment as described below) shares of Common Stock in
installments of 250,000 on January 15 of 2000, and 500,000 shares of Common
Stock on January 15, 2001. If on January 15, 2001, the average closing bid
price of the Company's Common Stock for the ten trading days immediately
preceding January 15, 2001 (the "Average Bid Price Per Share") is not at least
$5.00 per share, the Company shall issue additional shares of Common Stock to
Mr. Haines such that the aggregate value of the shares issued on January 15,
2001, calculated based on the Average Bid Price Per Share, shall be
$2,500,000.
Strateia is an investment banking and management consulting firm that
specializes in initiating consolidation opportunities in fragmented industries.
Messrs. Kandel and Haines have invested, and may continue to invest, in
opportunities generated by Strateia, other than the Company.
Steven C. Etra, Director and Secretary of the Company, has entered into a
consulting agreement with the Company dated March 1, 1999 for a period of one
year pursuant to which Mr. Etra receives a monthly fee of $2,000 for financial
public relations services which includes
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assisting the Company in communicating with investment bankers, financial
analysts and potential investors.
The Company does not have a stock option plan, but has granted options to
several of its current and former Board members in consideration for their past
and present services. On April 15, 1999, the Company granted 125,000 options to
purchase shares of Common Stock to Steven C. Etra, a Board member, exercisable
immediately, at an exercise price of $3.50 per share; such options are to expire
after the sixth anniversary of the date of their grant.
On April 15, 1999, the Company granted 25,000 options to purchase Common
Stock, exercisable immediately, at an exercise price of $3.50 to SRK Associates,
LLC, a company controlled by Steven C. Etra, a Board member; such options are to
expire on the sixth anniversary of the date of their grant.
On April 15, 1999, the Company granted 25,000 options to purchase Common
Stock, exercisable immediately, at an exercise price of $4.25 per share to
Robert W. Moehler, a former Director of the Company; such options are to expire
on the third anniversary of the date of their grant.
In April and June of 1999, Colnic Investment Corp., a private investment
Company controlled by Davis, President of the Company and President of CIC,
purchased an aggregate of 100,000 shares of the Company's Common Stock at a
purchase price of $2.50 per share for an aggregate investment of $250,000. The
investments were made in two purchases of $125,000 each.
On June 1, 1999, Blair Etra, the wife of Steven C. Etra, Director and
Secretary of the Company, purchased one unit, consisting of one 12.75%
Subordinated Promissory Note in the principal amount of $10,000 and 2,400 common
stock warrants at an exercise price of $4.25 per share, in a private
placement.
In July, 1999, the Company sold 10,000 shares of Common Stock to SRK
Associates, LLC, a company controlled by Steven C. Etra, a Director of the
Company, at a price of $2.50 per share for aggregate proceeds of $25,000.
In July, 1999, the Company sold 6,000 shares of Common Stock to Blair Etra,
wife of Steven C. Etra, a Director of the Company, at a price of $2.50 per share
for aggregate proceeds of $15,000.
On July 13, 1999, the Company issued 25,000 shares of Common Stock to
Harrington, Ocko & Monk, LLP, an outside counsel to the Company, at a price of
$5.00 per share in consideration for legal services rendered.
Effective August 1, 1999, the Company acquired CIC. Prior to its
acquisition by the Company, CIC was owned by Davis, President of the Company,
and his parents, Charles H. Davis and Carolyn Davis. According to the purchase
agreement, the consideration for the merger included: (a) $500,000 in cash; (b)
a secured promissory note in the original principal amount of $900,000 (the
"Davis Note") payable to Charles H. Davis; and (c) 320,000 shares of the Series
D
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Cumulative Convertible Preferred Stock (the "Series D Stock"), a class of
securities created specifically for the transaction of which 250,000 shares are
held by Davis and 70,000 shares are held by Charles H. Davis. In connection
with the merger, the Company entered into a Pledge and Security Agreement to
secure the payment of the Davis Note. Furthermore, the Company granted
piggyback registration rights for the shares of Common Stock into which the
Series D Stock is convertible.
In connection with the acquisition of CIC, CIC subsequently entered into
employment agreements for a period of five years beginning August 1, 1999 with
Davis, President of the Company, with an annual salary of $50,000 per year, and
with Charles H. Davis, father of Davis, with an annual salary of $15,000 per
year.
In connection with the purchase of CIC in August of 1999, CIC entered into
four leases to rent parcels of real estate. These leases include:
(a) a 5-year triple net lease for 1023 Morales Street in San Antonio,
Texas, for the administrative offices and manufacturing facilities at
an annual rental of $70,872, by and between CIC and Charles H.
Davis;
(b) a 5-year triple net lease for 724 Perez Street in San Antonio, Texas,
for a warehouse and distribution facility at an annual rental of
$21,060, by and between CIC and Charles H. Davis;
(c) a 5-year triple net lease for 723 Perez Street in San Antonio, Texas,
for a warehouse at an annual rental of $29,592, by and between CIC and
Charles H. Davis; and
(d) a 5-year triple net lease for 401 Main Street in Kerrville, Texas, for
a Cleaning Ideas store at an annual rental of $60,000, by and among
CIC, Davis and his father, Charles H. Davis.
In August of 1999, the Company acquired Superior pursuant to a stock
purchase agreement with Stephen Haynes, the current President of Superior. The
acquisition documents provide that Mr. Haynes was to receive the following: (a)
$400,000 in cash; (b) a promissory note (the "Haynes Note") in the original
principal amount of $1,200,000, and bearing interest at a rate of 8% per annum,
and (c) escrowed consideration of 50,000 shares of Common Stock, to be issued in
five annual installments of 10,000 shares; each installment subject to
adjustments for not meeting annual financial thresholds.
The issuance of the escrowed shares are contingent upon Superior's ability
to achieve an earnings goal referred to as the "Target Amount" which is defined
as the pre-tax earnings of Superior amounting to $250,000 per annum, pro rated
for any period of less than one full year and increased by 5% for each year. If
this Target Amount is not met, the number of shares to be delivered to Mr.
Haynes will be equal to the product of (x) 10,000 multiplied by (y) a fraction,
the numerator which will be Superior's pre-tax income for the year and the
denominator which will be the Target Amount for the year. If Superior does not
meet the Target Amount in one year and exceeds the Target Amount in the
following year, an amount equal to the excess over the Target Amount may be
applied to the prior year's Target Amount, in which case a proportionate amount
of
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shares withheld in the prior year would be released to Mr. Haynes. However, in
no event will the aggregate number of shares in any two year period exceed
20,000.
Mr. Haynes is also to be paid an earn-out bonus for the years 1999
(partial), 2000, 2001 2002, 2003, and 2004 (partial) which is based on a portion
of the pre-tax earnings of Superior above the annual, increasing thresholds. The
Company will pay Mr. Haynes an amount equal to 25% of (i) the excess of the
Company's pre-tax earnings over the product of (x) $300,000 multiplied by (y)
a fraction, the numerator being the number of days from the closing date, August
17, 1999, to the end of the calendar year, and the denominator being 365, for
the year 1999; (ii) the excess of the Company's pre-tax earnings over $315,000
in the year 2000; (iii) the excess of the Company's pre-tax earnings over
$330,750 in the year 2001; (iv) the excess of the Company's pre-tax earnings
over $347,288 in the year 2002; (v) the excess of the Company's pre-tax earnings
over $364,652 for the year 2003; and (vi) the excess of the Company's pre-tax
earnings over the product of (x) $382,884.60 and (y) a fraction, the numerator
being the number of days from the beginning of the calendar year to the fifth
anniversary of the closing date, August 17, 2004, and the denominator being 365,
for the year 2004.
Mr. Haynes is also entitled to a yearly payment for five years beginning in
the year 2000 for 25% of the net, after tax profits for the five fiscal years
(including 1999) from sales of janitorial products similar to those sold by
Superior prior to its acquisition, made by the Company through its eCommerce
program, to customers located within a 60-mile radius of any of Superior's three
Kentucky locations.
The Haynes Note is payable in 12 equal installments of $100,000 and,
default of the note without cure during the 30-day cure period, permits Mr.
Haynes to exercise upon the collateral and causes the noncompetition provisions
contained in Mr. Haynes' employment contract to become void. The Haynes note is
secured by the accounts receivable and inventory of Superior, but is
subordinated to any bank, equipment finance company or other senior lender of
the Company or Superior and the Haynes Note is subject to prepayment by the
Company at any time.
Upon the acquisition of Superior, the Company, through Superior, came into
possession of certain real property located at 1038 West Main Street, Bowling
Green, Kentucky pursuant to a lease. This real property is held by ACH
Holdings, Inc., of which Stephen Haynes, President of Superior, owns an
interest. The property is leased by Superior for a five-year duration, which
expires on March 31, 2004, and may be extended an additional five years by
Superior. The annual rent of the premises is $30,000, payable in equal monthly
installments of $2,500.
On December 15, 1999, Steven C. Etra, Director and Secretary of the
Company, purchased six units, each unit consisting of 100 Shares of Series B
Stock and 1000 common stock purchase warrants at an exercise price of $5.00 per
share, in a private placement under Rule 506 of Regulation D.
On December 15, 1999, Blair Etra, the wife of Steven C. Etra, Director and
Secretary of the Company, purchased thirteen units, each unit consisting of 100
Shares of Series B Stock and 1000 common stock purchase warrants at an exercise
price of $5.00 per share, in a private placement under Rule 506 of Regulation D.
On December 15, 1999, Lances Property Development Pension Plan, a company
owned 50% by Steven C. Etra, Director and Secretary of the Company, purchased
four units, each unit consisting of 100 Shares of Series B Stock and 1000 common
stock purchase warrants at an exercise price of $5.00 per share, in a private
placement under Rule 506 of Regulation D.
On December 15, 1999, Irving Etra Family Trust, of which Steven C. Etra,
Director and Secretary of the Company, is a beneficiary, purchased five units,
each unit consisting of 100 Shares of Series B Stock and 1000 common stock
purchase warrants at an exercise price of $5.00 per share, in a private
placement under Rule 506 of Regulation D.
On December 15, 1999, Gary Granoff, Director of the Company, purchased five
units, each unit consisting of 100 Shares of Series B Stock and 1000 common
stock purchase warrants at an exercise price of $5.00 per share, in a private
placement under Rule 506 of Regulation D.
The Company, Kandel, Davis and Mr. Etra are the principal stockholders of
b2bstores. Since its inception in June 1999, b2bstores' working capital
requirements had been satisfied through capital contributions made by the
Company, Kandel, Davis and Mr. Etra and loans made to it by the Company. In
June 1999, the Company, Kandel, Davis, Mr. Etra, and others purchased an
aggregate of 3,666,667 shares of b2bstores common stock for $27,500 in the form
of $11,000 in cash and the transfer to b2bstores of all of rights and interest
in www.b2bstores.com and all related assets, including intellectual
property.
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In June, July and November 1999, the Company made loans to b2bstores in the
aggregate principal amount of approximately $529,836. These loans bear interest
at the rate of 8% per annum and are repayable on the earlier of (a) December 31,
1999 and (b) the date of the initial public offering by b2bstores. In August
1999, b2bstores consummated a financing in which it raised proceeds of $625,000
through the sale of 333,333 shares of its common stock to Kandel, Mr. Etra and
Mr. Etra's affiliates.
As of December 1, 1999, the Company owns 2,000,000 shares of the b2bstores
common stock, constituting approximately 49.7 % of the total outstanding
b2bstores common stock while Kandel, Davis and Steven C. Etra each owns
additional 1,233,333 shares (30.7%), 333,333 shares (8.3%) and 169,334 shares
(4.2%) of b2bstores common stock, respectively. Richard Kandel, the Chairman and
Chief Executive Officer of the Company, serves as the chairman of the board of
b2bstores.com, Inc.
The Company anticipates that Richard Kandel will enter into a three-year
employment agreement with b2bstores effective January of 2000. Pursuant to the
terms of such agreement, Mr. Kandel will be required to devote 50% of his
business time to the operations of b2bstores. There could be conflicts of
interest as a result of Mr. Kandel's positions with the Company and b2bstores
and his fiduciary responsibilities arising from such positions.
Pursuant to the agreement dated October 1, 1999 (the "b2b Agreement")
between the Company and b2bstores, b2bstores is currently in the process of
implementing the Company's initial eCommerce web site
(http://www.b2bgoods.com). The Company's "b2bgoods.com" web
----------------------------------------
site will eventually offer all of the Company's janitorial and sanitary products
and other office supply products for electronic purchases. B2bstores will also
provide the Company with web site transaction processing and e-commerce services
for its b2bgoods.com web site through b2bstores' e-commerce backbone. For these
services, b2bstores is to receive from the Company a fee equal to the greater of
(a) 10% of the Company's revenues generated through e-commerce activities
conducted through www.b2bgoods.com or (b) 50% of the Company's gross profits
generated through e-commerce activities conducted at www.b2bgoods.com.
The b2b Agreement also provides that b2bstores will host on-line stores at
its web site (http://www.b2bstores.com), through which the Company's products
------------------------
will be offered for electronic purchases. All of the Company's products
purchased through b2bstores' web site are to be distributed directly to
b2bstores' customers by the Company through its distributor network. The Company
will charge b2bstores a price for each product equal to its cost for the product
and will receive 2-5% of the gross payment that the end-users will make for each
product sold at such on-line stores hosted on the b2bstores web site.
Effective on September 30, 1999, the Company entered into an agreement with
Kandel, Chairman, Chief Executive Officer and Treasurer of the Company, pursuant
to which Kandel, as sole holder of the Series A Stock, consented to the
amendment of the Certificate of Designation for the Series A Stock to remove the
ability of the holder of the Series A Stock to put the Series A Stock to the
Company at any date after January 15, 2001 and to increase the conversion price
of the Series A Stock from $2.50 to $5.00.
Item 8. Description of Securities.
Common Stock
The Company is authorized to issue up to 20,000,000 shares of Common Stock,
par value $.001 per share, of which 4,401,000 shares are outstanding as of
December 1, 1999. Holders of Common Stock are entitled to one vote for each
share held of record on each matter submitted to a
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vote of stockholders. There is no cumulative voting for election of directors.
Subject to the prior rights of any series of preferred stock which may from time
to time be outstanding, if any, holders of Common Stock are entitled to receive
ratably, dividends when, as, and if declared by the Board of Directors out of
funds legally available therefor and, upon the liquidation, dissolution, or
winding up of the Company, are entitled to share ratably in all assets remaining
after payment of liabilities and payment of accrued dividends and liquidation
preferences on the preferred stock, if any. Holders of Common Stock have no
preemptive rights and have no rights to convert their Common Stock into any
other securities. The outstanding Common Stock is validly authorized and issued,
fully paid, and nonassessable.
Holders of Common Stock are not entitled to accumulate their votes for the
election of directors or otherwise. Accordingly, the holders of a majority of
the Common Stock present at a meeting of shareholders will be able to elect all
of the directors of the Company and the minority shareholders will not be able
to elect a representative to the Company's Board of Directors. Since the Board
of Directors elects officers and effectively controls the day to day operations
through control of the Company management, current management is effectively
able to control the outcome of all matters submitted to the Company's
shareholders for approval, including extraordinary transitions such as mergers
or sale of all or substantially all the assets of the Company.
As of December 1, 1999, the Company has reserved an additional 4,935,000
shares of Common Stock, 4,185,000 of which underlie outstanding convertible
preferred stock, options, and warrants, and 750,000 of which are reserved for
contractual obligations.
(a) The underlying shares are reserved pursuant to the following:
(1) 500,000 shares reserved for the conversion of the Series A
Convertible Preferred Stock;
(2) 70,000 shares reserved for the conversion of the Series E
Convertible Redeemable Preferred Stock;
(3) 320,000 shares reserved for the conversion of the Series D
Cumulative Convertible Preferred Stock;
(4) 720,000 shares reserved for exercise of warrants sold as part of
a unit offering in March 1999;
(5) 150,000 shares reserved for options granted in April 1999 to
Steven C. Etra (125,000), SRK Associates, LLC (25,000), and
Robert Moehler (25,000).
(6) 1,600,000 shares reserved for the conversion of the Series B
Cumulative Convertible Preferred Stock; * and
(7) 800,000 shares reserved for the exercise of warrants. *
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* The 1,600,000 shares and 800,000 shares described in (6) and (7) have
been reserved for issuance of units in a private placement, which has
not yet been closed.
(b) The Company has reserved 750,000 shares due to contractual obligations
in connection with the acquisition of NISSCO. These shares are consideration to
Thomas B. Haines, who was the sole shareholder of NISSCO before the
acquisition.
Preferred Stock
Under the Company's Articles of Incorporation, the Board of Directors of
the Company is authorized to designate, and cause the Company to issue, up to
five million (5,000,000) shares of preferred stock of any class or series,
having such rights, preferences, powers and limitations as the Board shall
determine.
The Company's Board of Directors has authorized and issued 500,000 shares
of its Series A Stock to Kandel in conjunction with the acquisition of Kandel &
Son; authorized and issued 70,000 shares of its Series E Stock to Steven C. Etra
in consideration of his investment of $175,000 in the Company; and authorized
320,000 shares of its Series D Stock, of which 70,000 shares were issued to
Charles Davis and 250,000 shares were issued to Davis, in connection with the
acquisition of Cleaning Ideas.
In October of 1999, the Company also authorized issuance of up to 80,000
shares of Series B Cumulative Convertible Preferred Stock (the "Series B Stock")
in connection with the private placement of securities in December 1999. On
December 15, 1999, the Company sold an aggregate of 251.4 units, each unit
consisting of 100 shares of Series B Stock and 1000 common stock purchase
warrants, to approximately 59 accredited investors for aggregate proceeds to the
Company of $2,514,000. The Company expects to continue this private placement
until December 31, 1999, or until up to 800 such units are sold.
The Series B Stock has a stated value of $100, is entitled to dividends at
a rate of 10% per annum, and has a maturity of five years from the issuance.
The Series B Stock is convertible into Common Stock by the holder at a
conversion price of $5.00 exercisable any time after issuance. The Company may
convert the Series B Stock upon the occurrence of certain events, including the
Company's Common Stock trading at a price of at least $7.50 for 20 consecutive
trading days. The Series B Stock is entitled to "piggyback" registration rights
and is senior to all prior series of preferred stock with the exception of the
Series D Cumulative Convertible Preferred Stock.
The Series A Stock (i) pay an annual dividend of 4%, and (ii) are
convertible into Common Stock at a conversion price of $5.00 per share of Common
Stock.
The Series E Stock (i) pay an annual dividend of 3%, (ii) are convertible
into Common Stock at a conversion price of $5.00 per share of Common Stock and
(iii) may be redeemed at the option of the Company at any time after December
15, 2000 at a redemption price of $3.50 per share.
The Series D Stock (i) pay an annual dividend of 8.75%, (ii) are
convertible into Common Stock at a conversion price of $5.00 per share of Common
Stock and (iii) may be redeemed at the option of the Company at any time at a
redemption price of $5.00, plus any accrued and unpaid dividends per share.
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The Series A and D Stock are convertible based on a conversion price of
$5.00 per share of Common Stock. The stated price of the Series A and D Stock
is $5.00 per share, thereby converting each Series on a one to one basis.
The Series E stock has a conversion price of $2.50 per share of Common
Stock and a stated price of $2.50 per share of Series E stock, thereby
converting such Preferred Stock on a one to one basis.
The Series B stock has a conversion price of $5.00 per share of Common
Stock and a stated price of $100 per share of Series B stock, thereby converting
such Preferred Stock on a twenty to one basis.
The Series A, E, D and B stock all have basic anti-dilution provisions, of
which the circumstances and mechanisms of dilution are as follows:
(1) If the Company, at any time while any shares of preferred stock are
outstanding, (a) shall pay a stock dividend or otherwise make any
distributions on shares of its junior securities payable in shares of
its capital stock (whether payable in shares of its Common Stock or of
capital stock of any class), (b) subdivide outstanding shares of
Common Stock into a larger number of shares, or (c) combine
outstanding shares of Common Stock into a smaller number of shares,
the conversion price shall be multiplied by a fraction of which the
numerator shall be the number of shares of Common Stock of the Company
outstanding before such event and of which the denominator shall be
the number of shares of Common Stock outstanding after such event.
(2) If the Company, at any time while shares of Preferred Stock are
outstanding, shall distribute to all holders of Common Stock (and not
to Holders of Preferred Stock) evidences of its indebtedness or assets
or rights or warrants to subscribe for or purchase any security
(excluding those referred to in other provisions of the Certificates
of Designation), then in each such case the Conversion Price at which
each share of Preferred Stock shall thereafter be convertible shall be
determined by multiplying the Conversion Price in effect immediately
prior to the record date fixed for determination of stockholders
entitled to receive such distribution by a fraction of which the
denominator shall be the conversion price per share of Common Stock,
and of which the numerator shall be such conversion price per share of
the Common Stock on such record date less the then fair market value
at such record date of the portion of such assets or evidences of
indebtedness so distributed applicable to one outstanding share of
Common Stock as determined by the Board of Directors in good faith;
provided, however, that in the event of a distribution exceeding ten
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percent (10%) of the assets of the Company, such fair market value
shall be determined by a nationally recognized or major regional
investment banking firm or firm of independent certified public
accountants of recognized standing, such process defined in the
certificates of designation.
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The Board could, in the future, authorize and cause the Company to issue up
to an additional 4,030,000 shares of preferred stock of one or more series or
classes, having rights, preferences and powers as determined by the Board, which
could be senior to those of the Common Stock, including the right to receive
dividends and/or preferences upon liquidation, dissolution or winding-up of the
Company in excess of, or prior to, the rights of the holders of the Common
Stock. This could have the effect of materially impairing the rights of the
holders of the Common Stock to receive such dividends or preferential payments
and/or of reducing, or eliminating, the amounts that would otherwise have been
available for payment to the holders of the Common Stock.
Provisions in the Company's articles of incorporation and bylaws may have
the effect of delaying or preventing a change of control or changes in the
Company's management that a stockholder might consider favorable. These
provisions include, among others:
. the right of the board to elect a director to fill a space created by
the expansion of the board;
. the ability of the board to alter the Company's bylaws; and
. the ability of the board to issue series of preferred stock without
stockholder approval.
PART II
Item 1. Market for Common Equity and Related Stockholder Matters.
(a) Market Information
The Company's Common Stock was approved for quotation on the NASD OTC
Bulletin Board under the symbol "EVCL" and began trading on May 21, 1998.
Pursuant to the amended NASD Rule 6530 and 6540, which became effective on
January 4, 1999, the Company's Common Stock was de-listed from NASD OTC
Bulletin Board effective on November 18, 1999, due to the Company's failure to
clear with the Securities and Exchange Commission ("SEC") all of its outstanding
comments regarding this registration statement by the "phase-in" deadline of
November 17, 1999, as set by the NASD OTC Compliance Unit. Upon de-listing from
the OTC Bulletin Board, the Company's Common Stock became eligible for trading
in the "pink sheets" published by the National Quotation Bureau, Inc. ("Pink
Sheets").
There is currently a limited trading market for the Common Stock. The
high and low closing bid prices for the shares of the Company's Common Stock, as
reported by National Quotation Bureau, LLC are listed in the following chart.
These prices are between dealers and do not include retail markups, markdowns or
other fees and commissions, and may not represent actual transactions.
32
<PAGE>
<TABLE>
<CAPTION>
1998 High Low
<S> <C> <C>
May 21 - June 30 $ 3.25 $ .25
July 1 - September 30 $ 3.75 $1.50
October 1 - December 31 $ 4.25 $2.50
1999 High Low
January 1 - March 31 $5.625 $3.50
April 1 -June 30 $ 5 $3.25
July 1- September 30 $ 6.25 $ 5
</TABLE>
The closing bid and asking price on December 10, 1999 was $2.00 and $7.00
per share, respectively.
(b) Holders
There were approximately 69 beneficial owners of the Company's Common Stock
as of December 1, 1999, after broker inquiry.
(c) Dividends
The Company has paid no dividends on its Common Stock to date, nor does it
anticipate doing so in the foreseeable future. Any future determination to pay
dividends will be at the discretion of the Board of Directors and will be
dependent upon there being sufficient capital and surplus as required by the
Nevada Statutes, the Company's financial condition, results of operations,
capital requirements and such other factors as the Board of Directors deems
relevant. There can be no assurance that the Company will ever choose to
declare such a dividend or that if it did that such funds would be legally
available for payment of such dividends.
Item 2. Legal Proceedings.
The Company is not a party to any litigation, nor is it aware of any
threatened litigation or similar proceeding that would, if initiated and
resolved against the Company, have a material adverse effect on the Company, its
properties or its prospects.
Item 3. Changes in and Disagreements With Accountants.
None
33
<PAGE>
Item 4. Recent Sales of Unregistered Securities.
(1) The Company was incorporated in December of 1997. At that time, an
aggregate of 3,000,000 shares of Common Stock were issued to five founding
shareholders; Kandel (800,000), The Palmeto Group, Inc. (1,500,000), Delta
Financial Resources, Inc. (250,000), Barry Bendett (200,000) and Strateia
(250,000), at a price of $.01 per share in reliance upon the exemption for
offerings not involving a public offering pursuant to Section 4(2) of the
Securities Act and analogous state exemptions for isolated, non-public
transactions. The Palmeto Group, Inc., an affiliate of Kandel, later
transferred 1,500,000 shares of Common Stock to Kandel. (See "Certain
Relationships and Related Transactions").
(2) In December of 1997 and January of 1998, the Company offered and sold an
aggregate of 390,000 shares of Common Stock to approximately 43 investors
at an offering price of $.50 per share, for aggregate offering proceeds of
$195,000 in reliance upon the exemption from registration provided by Rule
504 of Regulation D.
. At the time of this offering, the Company was a development stage
company with a specific business plan and such plan included:
(i) Consolidation of sanitary and janitorial supplies industry;
(ii) Specific, identifiable acquisition targets such as Kandel & Son,
NISSCO and Air Reactor, Inc., a New York corporation among
others; and
(iii) Electronic commerce program.
. The total offering proceeds was $195,000, less than $1,000,000 limit
of Rule 504(b)(2).
. All of the investors received an offering memorandum disclosing
material information relating to the Company's businesses and risk
factors.
(3) In December of 1998, the Company sold an aggregate of 300,000 shares of
Common Stock to approximately 11 investors, at an offering price of $2.50
per share for aggregate proceeds of $750,000, in reliance upon the
exemption from registration provided by Rule 504 of Regulation D.
. All of the 11 investors were "accredited investors" as defined in Rule
501.
. The total offering proceed was $750,000, less than $1,000,000 limit.
. All of the investors received an offering memorandum disclosing
material information relating to the Company's businesses and risk
factors.
34
<PAGE>
. All of the investors have represented and warranted that:
(i) they understood that the securities being purchased are not
registered under the Securities Act of 1933;
(ii) the securities are being offered under an exemption from
registration as provided by Rule 504 of Regulation D;
(iii) the securities are being acquired solely for the investor's own
account, for investment purposes only, and are nor being
purchased with a view to or in connection with, any resale,
distribution, subdivision or fractionalization thereof;
(iv) they had no agreement or other arrangement, formal or informal,
with any person to sell, transfer or pledge any of the
securities being purchased or which would guarantee to the
investor any profit, or to protect the investor against any loss
with respect to the securities, and the investor has no plans to
enter into any such agreement or arrangement;
(v) they understood that they should bear the economic risk of the
investment for an indefinite period of time due to the lack of
trading market for the securities and the securities cannot be
resold or otherwise transferred unless applicable state
securities laws are complied with or exemption therefrom are
available;
(vi) they understood that the securities cannot be sold or assigned
without registration and/or qualification under any applicable
state securities laws or exemptions from such laws;
(vii) they understood that the Company has no obligation to register
the securities under the Securities Act of 1933 or to register
or qualify the securities under any state securities laws, or to
take any action, through the establishment of exemption(s) or
otherwise, to permit the transfer thereof.
(4) In December of 1998, the Company sold 70,000 shares of Series E Stock to
Steven C. Etra, a Director for the Company, in a negotiated private
transaction, for proceeds to the Company of $175,000, in an isolated
private transaction in reliance upon the exemption from registration
provided by Rule 506 of Regulation D.
(5) In January of 1999, the Company sold 70,000 shares of Common Stock to a
single accredited investor at a price of $2.50 per share for aggregate
proceeds to the Company of $175,000. The transaction was effected in
reliance upon the exemption from registration provided by Rule 506 of
Regulation D.
35
<PAGE>
(6) In January of 1999, the Company issued 500,000 shares of its Series A Stock
to Kandel, Chairman and CEO of the Company, in connection with the
acquisition of Kandel & Son. The issuance was made in reliance upon an
exemption from registration under Section 4(2) of the Securities Act.
(7) In January of 1999, the Company undertook to issue to Thomas B. Haines, a
former Director of the Company, an aggregate of 1,000,000 shares of Common
Stock, subject to adjustment, as partial consideration for the acquisition
of NISSCO. In connection with the sale, the Company issued 250,000 shares
of Common Stock to Mr. Haines at the closing of the acquisition, and
250,000 shares are to be issued to Mr. Haines on January 1, 2000. In
addition, pursuant to the acquisition agreement, an undetermined number of
shares, but in no case less than 500,000 shares of Common Stock, are to be
issued by the Company on January 15, 2001. (See "Certain Relationships and
Related Transactions.") These issuances are made in reliance on the
exemption from registration under Section 4(2) of the Securities Act.
(8) In March of 1999, the Company sold an aggregate of 100,000 shares of Common
Stock to an accredited investor at a price of $2.50 per share for aggregate
proceeds of $250,000 in a transaction in reliance upon the exemption from
registration provided by Rule 506 of Regulation D.
(9) In April of 1999, the Company sold an aggregate of 50,000 shares of Common
Stock to Colnic Investment Corporation ("Colnic"), a private investment
company controlled by Davis, President of the Company, at a price of $2.50
per share for aggregate proceeds of $125,000 in a transaction in reliance
upon the exemption from registration provided by Rule 506 of Regulation D.
(10) In April of 1999, Steven C. Etra, the Director and Secretary of the
Company, was granted options for 125,000 shares of the Common Stock and SRK
Associates, LLC was granted options for 25,000 shares of the Common Stock,
both at an exercise price of $3.50. Robert Moehler, the former president
of the Company, was granted options for 25,000 shares of the Common Stock
at an exercise price of $4.25. All of these grants were made in
consideration for past and on-going consulting services rendered to the
Company. These are the only stock options thus far granted by the Company.
These transactions were done in reliance upon the exemption from
registration under Section 4(2) of the Securities Act.
(11) In May of 1999, the Company sold an aggregate of 100,000 shares of Common
Stock to an accredited investor at a price of $2.50 per share for aggregate
proceeds of $250,000 in a transaction in reliance upon the exemption from
registration provided by Rule 506 of Regulation D.
(12) In June of 1999, the Company sold an aggregate of 300 units, each unit
consisting of a 12.75% Subordinated Promissory Note due April 1, 2002 in
the principal amount of $10,000 and 2,400 common stock purchase warrants.
These units were sold to a total of 59 accredited investors and two
sophisticated investors. The units were sold for $10,000 per unit
36
<PAGE>
for aggregate offering proceeds of $3,000,000 in reliance upon the
exemption from registration provided by Rule 506 of Regulation D.
(13) In June of 1999, the Company sold an additional 50,000 shares of Common
Stock to Colnic at a price of $2.50 per share for aggregate proceeds of
$125,000 in a transaction in reliance upon the exemption from registration
provided by Rule 506 of Regulation D.
(14) In July of 1999, the Company sold an additional 10,000 shares of Common
Stock to SRK Associates, LLC, a company controlled by Steven C. Etra, a
Director of the Company, at a price of $2.50 per share for aggregate
proceeds of $25,000 in a transaction in reliance upon the exemption from
registration provided by Rule 506 of Regulation D.
(15) In July of 1999, the Company sold an additional 6,000 shares of Common
Stock to Blair Etra, wife of Steven C. Etra, a Director of the Company, at
a price of $2.50 per share for aggregate proceeds of $15,000 in a
transaction in reliance upon the exemption from registration provided by
Rule 506 of Regulation D.
(16) In July of 1999, the Company issued 25,000 shares of Common Stock to
Harrington, Ocko & Monk, LLP, the former outside counsel to the Company, at
a price of $5.00 per share in consideration for legal services rendered, in
a transaction in reliance upon the exemption from registration under
Section 4(2) of the Securities Act.
(17) In August of 1999, the Company, in connection with the purchase of CIC,
issued, as partial consideration for CIC, 320,000 shares of Series D Stock
to Davis, President of the Company, and Charles H. Davis, his father, in a
transaction in reliance upon the exemption from registration under Section
4(2) of the Securities Act.
(18) In August of 1999, in connection with the purchase of Superior, the Company
issued 50,000 shares of Common Stock to Stephen Haynes, President of
Superior, as partial consideration for Superior in a transaction in
reliance upon the exemption from registration under Section 4(2) of the
Securities Act.
(19) On December 15, 1999, the Company sold an aggregate of 251.4 units, each
unit consisting of a 100 Shares of Series B Cumulative Convertible
Preferred Stock and 1000 Common Stock Purchase Warrants. These units were
sold to a total of 59 accredited investors at $10,000 per unit for
aggregate offering proceeds of $2,514,000 in reliance upon the exemption
from registration provided by Rule 506 of Regulation D.
All sales of securities in transactions Nos. 4, 5, 8, 9, 11, 12, 13, 14,
15 and 19 listed above were made pursuant to subscription agreements and
investor questionnaire containing representations and warranties, and eliciting
information intended to enable the Company to establish the facts and
circumstances entitling the Company to rely upon the exemptions from the
registration requirements of the Securities Act under Rule 506 of Regulation D.
All of the investors in those transactions have represented and warranted that:
. there was reasonable opportunity to ask questions and receive answers
from the Company concerning the offering;
. all questions were answered to full satisfaction;
. the Investor is capable of evaluating the merit and risks of the
investment;
37
<PAGE>
. the investor is relying only on independently gathered information to
invest;
. the securities are being acquired for investment purposes only;
. the investor is an "accredited investor" as defined in Regulation D
(except for one sophisticated investor in the June 199 unit
offering);
. the securities are not registered under the Securities Act;
. the securities are "restricted securities" as defined in Rule
144;
. the securities cannot be sold or otherwise transferred unless they
have first been registered under the Securities Act and all applicable
state securities laws are complied with, or the securities qualify for
exemption from such registration; and
. the certificates representing the securities purchased bear
restrictive legends.
In addition, none of such Rule 506 offerings involved general solicitation
or advertising and all of the certificates issued bore restrictive legend as
described in the subscription agreements.
Item 5. Indemnification of Directors and Officers.
Under the Nevada Revised Statutes (the "Statutes"), the Company shall have
the power to eliminate the personal liability of the directors and officers of
the Company for monetary damages to the fullest extent possible under the
Statutes or other applicable law. These provisions eliminate the liability of
directors or officers to the Company and its shareholders for monetary damages
arising out of any violation of a director of his fiduciary duty of due care.
Under the Statutes, the Company may, by a majority of its disinterested
directors, shareholders, or in some cases by independent legal counsel,
indemnify any officer or director against expenses actually and reasonably
incurred, if such person acted in good faith in a manner reasonably believed to
be in the best interests of the Company, and in the case of any criminal action
or proceeding, if such person had no reasonable cause to believe his conduct was
unlawful. The Company may indemnify any officer or director against expenses
and amounts actually paid or incurred in settlement not exceeding, in the
judgement of the Board of Directors, estimated expenses of litigation.
Indemnification and/or advancement of expenses provided by the Statutes are not
exclusive and the Company may make any further advancement or payment of
expenses. However, no indemnification and/or advancement will be made to any
officer or director if such person shall have been adjudged to be liable,
unless, upon application and determination of the court that in view of the
circumstances in the case, such person is fairly and reasonably entitled to
indemnification.
38
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. & SUBSIDIARIES
================================================================================
FINANCIAL STATEMENTS
The Company's Consolidated Financial Statements as of and for the year
ended December 31, 1998, and accompanying notes which are an integral part
thereof, and the independent auditor's report of Goldstein Golub Kessler LLP,
independent certified public accountants, with respect thereto, appear on pages
F-16 to F-26 of this Amendment No. 2 to Form 10-SB. The Company's Unaudited
Consolidated Financial Statements as of June 30, 1999 and for the six months
ended June 30, 1999 and 1998, and accompanying notes which are an integral part
thereof, appear on pages F-8 to F-15 of this Amendment No. 2 to Form 10-SB. The
Company's financial statements as of and for the year ended August 31, 1997, and
accompanying notes which are an integral part thereof, and the independent
auditor's report of Kirschner & Pasternack, LLP, independent certified public
accountants, with respect thereto, appear on pages F-27 to F-32 of this
Amendment No. 2 to Form 10-SB. Nissco/Sunline, Inc. and its subsidiaries'
financial statements as of December 31, 1998 and 1997, and for the years then-
ended, and accompanying notes which are an integral part thereof, and the
independent auditor's report of Kirschner & Pasternack, LLP, independent
certified public accountants, with respect thereto, appear on pages F-33 to F-50
of this Amendment No. 2 to Form 10-SB. These financial statements are
incorporated by reference herein by reference thereto.
F-1
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. & SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
Pro Forma:
<S> <C>
Unaudited Pro Forma Consolidated Financial Statements F-4
Unaudited Pro Forma Consolidated Statement of Operations for the Year
Ended December 31, 1998 F-5
Notes to Unaudited Pro Forma Consolidated Statement of Operations F-6 - F-7
Historical:
Enviro-Clean of America, Inc. & Subsidiaries:
Unaudited Consolidated Balance Sheet as of June 30, 1999 F-8
Unaudited Consolidated Statement of Operations for the Six-Month Period Ended
June 30, 1998 and 1999 F-9
Unaudited Consolidated Statement of Cash Flows for the Six-Month Period Ended
June 30, 1998 and 1999 F-10
Notes to Consolidated Financial Statements F-11 - F-15
Independent Auditor's Report F-16
Consolidated Balance Sheet as of December 31, 1998 F-17
Consolidated Statement of Operations for the Year Ended December 31, 1998 F-18
Consolidated Statement of Stockholders' Equity for the Year Ended December 31, 1998 F-19
Consolidated Statement of Cash Flows for the Year Ended December 31, 1998 F-20
Notes to Consolidated Financial Statements F-21 - F-26
Independent Auditor's Report F-27
Balance Sheet as of August 31, 1997 F-28
Statement of Earnings and Retained Earnings for the Year Ended August 31, 1997 F-29
Statement of Cash Flows for the Year Ended August 31, 1997 F-30
Notes to Consolidated Financial Statements F-31 - F-32
</TABLE>
F-2
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. & SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
NISSCO, Inc. & Subsidiaries:
<S> <C>
Independent Auditor's Report F-33
Balance Sheet as of December 31, 1998 F-34
Statement of Income for the Year Ended December 31, 1998 F-35
Statement of Changes In Retained Earnings for the Year Ended
December 31, 1998 F-36
Statement of Cash Flows for the Year Ended December 31, 1998 F-37
Notes to Consolidated Financial Statements F-38 - F-39
Independent Auditor's Report F-40
Balance Sheet as of December 31, 1997 F-41
Statement of Income for the Year Ended December 31, 1997 F-42
Statement of Changes In Retained Earnings for the Year Ended
December 31, 1997 F-43
Statement of Cash Flows for the Year Ended December 31, 1997 F-44
Notes to Consolidated Financial Statements F-45 - F-46
</TABLE>
F-3
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. & SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
In January 1999, Enviro-Clean of America, Inc. ("the Company") merged with
Kandel & Son, Inc. ("Kandel") a wholesale distributor of sanitary maintenance
supplies and paper products. This merger has been accounted for in a manner
similar to a pooling of interests because Richard Kandel, the sole stockholder
of Kandel, is the majority stockholder of the Company. The historical financial
statements of Kandel have been retroactively restated as if the Companies had
always been combined. The December 31, 1998 historical consolidated financial
statements of the Company combine the balance sheet as of December 31, 1998 and
statements of operations, and cash flows of Enviro-Clean of America, Inc. for
the year ended December 31, 1998 and the balance sheet of Kandel and Son, Inc.
as of September 30, 1998 and the statements of operations, and cash flows for
the year ended September 30, 1998, pursuant to regulation SX rule 3 A-02, b.
The results of operations of Kandel for the period from October 1, 1998 through
December 31, 1998 has not been included in the December 31, 1998 results of
operations of the Company.
Additionally, in January 1999 the Company acquired all of the outstanding common
stock of NISSCO/Sunline, Inc. ("NISSCO"), a Florida-based company engaged in
group marketing of sanitary/janitorial supplies, in exchange for $500,000 cash
and 1,000,000 shares of the Company's common stock.
The accompanying unaudited pro forma consolidated statement of operations for
the year ended December 31, 1998 presents the results of operations of the
Company as if the NISSCO acquisition had occurred on January 1, 1998.
The adjustments to the historical financial statements and certain assumptions
are described in Note 3. This statement does not purport to be indicative of
the consolidated results of operations of the Company that might have occurred
had the acquisition actually taken place as described above nor are they
indicative of future results. Furthermore, this pro forma consolidated
financial statement does not reflect changes which may occur as a result of
post-acquisition activities and other matters.
The unaudited pro forma consolidated statement of operations should be read in
conjunction with (i) the unaudited historical consolidated financial statements
of Enviro-Clean of America, Inc. and Subsidiaries as of June 30, 1999 and for
the six-month period ended June 30, 1999, (ii) the historical financial
statements of Enviro-Clean of America, Inc. as of December 31, 1998 and for the
year then ended, and (iii) the historical financial statements of NISSCO for the
years ended December 31, 1998 and 1997.
F-4
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. & SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
Historical Historical
Enviro-Clean NISSCO Pro Forma
December 31, 1998 December 31, 1998 Adjustments Pro Forma
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $1,793,817 $1,789,202 - $3,583,019
Cost of goods 973,497 231,611 - 1,205,108
- -----------------------------------------------------------------------------------------------------
Gross profit 820,320 1,557,591 - 2,377,911
- -----------------------------------------------------------------------------------------------------
Operating expenses:
Salaries 242,298 547,763 $75,000 (b) 935,061
- - 70,000 (c) -
Professional fees 121,372 29,496 - 150,868
Depreciation 36,605 4,462 - 41,067
Amortization - - 297,700 (a) 297,700
Marketing 123,998 111,085 - 235,083
Rent 39,076 28,488 - 67,564
Interest 63,925 7,953 - 71,878
Other 335,251 378,356 - 713,607
- -----------------------------------------------------------------------------------------------------
Total operating expenses 962,525 1,107,603 442,700 2,512,828
- -----------------------------------------------------------------------------------------------------
Income (loss) before provision for
income taxes (142,205) 449,988 (442,700) (134,917)
Provision for income taxes 4,577 102,000 - 106,577
- -----------------------------------------------------------------------------------------------------
Net income (loss) $ (146,782) $ 347,988 $(442,700) $ (241,494)
=====================================================================================================
</TABLE>
F-5
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. & SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED STATEMENT OF OPERATIONS
================================================================================
The following notes set forth the explanations and assumptions used in preparing
the unaudited pro forma consolidated statement of operations for the year ended
December 31, 1998.
The adjustments to the historical financial statements and certain assumptions
are described in Note 3. This statement does not purport to be indicative of
the consolidated results of operations of the Company that might have occurred
had the acquisition actually taken place as described above nor are they
indicative of future results. Furthermore, this pro forma consolidated
financial statement does not reflect changes which may occur as a result of
post-acquisition activities and other matters.
The unaudited pro forma consolidated statement of operations should be read in
conjunction with (i) the unaudited historical consolidated financial statements
of Enviro-Clean of America, Inc. and Subsidiaries as of June 30, 1999 and for
the six-month period ended June 30, 1999, (ii) the historical financial
statements of Enviro-Clean of America, Inc. as of December 31, 1998 and for the
year then ended, and (iii) the historical financial statements of NISSCO for the
years ended December 31, 1998 and 1997.
<TABLE>
<S> <C>
1. BACKGROUND: In January 1999, Enviro-Clean of America, Inc.
("the Company") merged with Kandel & Son, Inc.
("Kandel") a wholesale distributor of sanitary
maintenance supplies and paper products. This
merger has been accounted for in a manner similar
to a pooling of interests, because Richard Kandel,
the sole stockholder of Kandel, is the majority
stockholder of the Company. The historical
financial statements of Kandel have been
retroactively restated as if the Company and
Kandel had always been combined. The December 31,
1998 historical consolidated financial statements
of the Company combine the balance sheet as of
December 31, 1998 and the statements of
operations, and cash flows of Enviro-Clean of
America, Inc. for the year ended December 31, 1998
and the balance sheet of Kandel and Son, Inc. as
of September 30, 1998 and the statements of
operations, and cash flows for the year ended
September 30, 1998, pursuant to regulation SX rule
3 A-02, b. The results of operations of Kandel for
the period from October 1, 1998 through December
31, 1998 have not been included in the December
31, 1998 results of operations of the Company.
Additionally, in January 1999 the Company acquired
all of the outstanding common stock of
NISSCO/Sunline, Inc. ("NISSCO"), a Florida-based
company engaged in group marketing of
sanitary/janitorial supplies, in exchange for
$500,000 cash and 1,000,000 shares of the
Company's common stock. This acquisition has been
accounted for as a purchase.
2. PRESENTATION: The accompanying unaudited pro forma consolidated
statement of operations for the year ended
December 31, 1998 presents the results of
operations of the Company as if the NISSCO
acquisition had occurred on January 1, 1998.
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
ENVIRO-CLEAN OF AMERICA, INC. & SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED STATEMENT OF OPERATIONS
================================================================================
<S> <C>
3. ADJUSTMENTS The unaudited pro forma consolidated statement of
AND operations reflect the following pro forma
ASSUMPTIONS: adjustments:
(a) Adjustment to reflect the amortization of
goodwill of approximately $2,977,000,
resulting from the acquisition of NISSCO, over
10 years.
(b) Adjustment to reflect employment agreement for
T. Haines upon the acquisition of NISSCO.
(c) Adjustment to reflect the difference between
R. Kandel's salary per his employment
agreement with the Company and the actual
amount of his salary paid by Kandel prior to
its combination with the Company on January 1,
1999. ($100,000 employment agreement, $30,000
Kandel salary).
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
ENVIRO-CLEAN OF AMERICA, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(unaudited)
================================================================================
June 30, 1999
- -------------------------------------------------------------------------------
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,220,995
Accounts receivable 670,428
Merchandise inventory 125,500
Prepaid expenses and other 85,569
- -------------------------------------------------------------------------------
Total current assets 4,102,492
- -------------------------------------------------------------------------------
Property, Plant and Equipment - at cost 488,468
Less accumulated depreciation 305,490
- -------------------------------------------------------------------------------
182,978
- -------------------------------------------------------------------------------
Other Assets:
Goodwill 2,828,352
Other 5,775
- -------------------------------------------------------------------------------
2,834,127
- -------------------------------------------------------------------------------
Total Assets $ 7,119,597
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 713,919
Loans payable 7,329
- -------------------------------------------------------------------------------
Total current liabilities 721,248
- -------------------------------------------------------------------------------
Long-term Liabilities:
Notes payable - subordinated 2,341,289
- -------------------------------------------------------------------------------
Redeemable Preferred Stock Series A:
$.001 par value; stated value $5.00; authorized, issued and
outstanding 500,000 shares 2,500,000
- -------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock Series E-$.001 par value; stated value $2.50;
authorized, issued and outstanding 70,000 shares 175,000
Common stock - $.001 par value; authorized 20,000,000 shares,
issued and outstanding 4,310,000 shares 4,310
Additional paid-in capital 3,107,377
Retained earnings (deficit) (3,604,627)
Common stock to be issued 1,875,000
- -------------------------------------------------------------------------------
Stockholders' equity 1,557,060
- -------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 7,119,597
===============================================================================
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
ENVIRO-CLEAN OF AMERICA, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
================================================================================
Six-month period ended June 30, 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Net sales $1,822,375 $ 919,451
Cost of sales 856,609 495,662
- --------------------------------------------------------------------------------
Gross profit 965,766 423,789
- --------------------------------------------------------------------------------
Operating expenses:
Salaries 291,866 77,507
Professional fees 135,878 24,775
Depreciation 22,557 17,492
Amortization of goodwill 148,860 -
Marketing 14,684 4,816
Rent 34,356 19,409
Other 329,044 271,861
- --------------------------------------------------------------------------------
Total operating expenses 977,245 415,860
- --------------------------------------------------------------------------------
Operating income (loss) (11,479) 7,929
Interest expense (66,782) -
Other income (expenses) 7,609 (1,000)
- --------------------------------------------------------------------------------
Income (loss) before provision for income taxes (70,652) 6,929
Provision for income taxes 5,400 -
- --------------------------------------------------------------------------------
Net income (loss) (76,052) 6,929
Preferred stock dividends (52,625) -
- --------------------------------------------------------------------------------
Net income (loss) attributable to common
stockholders $ (128,677) $ 6,929
================================================================================
Net loss per share - basic $ (.03) $ - 0 -
================================================================================
Weighted average number of shares outstanding 3,882,147 3,400,000
================================================================================
</TABLE>
F-9
<PAGE>
<TABLE>
<CAPTION>
ENVIRO-CLEAN OF AMERICA, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
================================================================================
Six-month period ended June 30, 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (76,052) $ 6,929
- --------------------------------------------------------------------------------
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation 22,556 17,492
Amortization 148,861 -
Amortization of note discount 19,961 -
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 36,961 (44,837)
Increase in prepaid expenses (24,831) (29,254)
(Increase) decrease in inventories 24,613 (10,000)
Increase in other assets - (20,000)
Increase in accounts payable 176,550 42,818
Increase in income taxes payable 3,102 -
- --------------------------------------------------------------------------------
Total adjustments 407,773 (43,781)
- --------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities 331,721 (36,852)
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of fixed assets - (5,646)
Cash paid for acquisitions (652,451) -
Cash acquired from subsidiaries 68,046 -
- --------------------------------------------------------------------------------
Net cash used in investing activities (584,405) (5,646)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Loans receivable 21,320 -
Net cash received (paid) on notes payable 1,671,441 (37,906)
Common stock issued 925,000 67,015
Warrants issued 678,672
- --------------------------------------------------------------------------------
Net cash provided by financing activities 3,296,433 29,109
- --------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 3,043,749 (13,389)
Cash and cash equivalents at beginning of period 177,246 39,919
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $3,220,995 $ 26,530
================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 15,259 $ 22,015
================================================================================
Taxes $ 2,298 $ - 0 -
================================================================================
</TABLE>
F-10
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The consolidated financial statements included herein have been prepared without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The accompanying consolidated financial statements reflect all
adjustments that are, in the opinion of management, necessary to a fair
statement of the results for the interim periods presented. Such adjustments
are of a normal recurring nature. The unaudited interim financial statements
should be read in conjunction with the Company's year-end audited financial
statements included elsewhere herein.
1. PRINCIPAL BUSINESS The accompanying consolidated financial statements
ACTIVITY AND include the accounts of Enviro-Clean of America,
SUMMARY OF SIGNIFICANT Inc. and its Subsidiaries (collectively the
ACCOUNTING POLICIES: "Company"). All significant intercompany balances
and transactions have been eliminated in
consolidation.
The principal business activity of the Company is
the wholesale distribution of sanitary maintenance
supplies and paper products.
The Company also provides buying services and
group discounts to wholesale distributors of
sanitary maintenance supplies, paper goods and
related products.
The Company considers all highly liquid
instruments purchased with a maturity of three
months or less to be cash equivalents.
Property and equipment are recorded at cost.
Depreciation is provided for by the straight-line
method over the estimated useful lives of the
property and equipment.
Inventories consisting of finished goods are
valued at the lower of cost or market. Cost is
determined using the first-in, first-out method.
The preparation of financial statements in
accordance with generally accepted accounting
principles requires the use of estimates by
management. Actual results could differ from
these estimates.
At each balance sheet date, the Company evaluates
the period of amortization of intangible assets.
The factors used in evaluating the period of
amortization include: (i) current operating
results, (ii) projected future operating results,
and (iii) any other material factors that effect
the continuity of the business.
Preferred stock dividends in arrears which
represent dividends owed, but undeclared at June
30, 1999, totals $52,625. All dividends in
arrears were paid by July 1, 1999.
F-11
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Earnings per share ("EPS") is computed by dividing
net income or loss by the weighted-average number
of common shares outstanding for the year.
Diluted EPS is not presented because the Company
had no dilutive securities outstanding at December
31, 1998. At June 30, 1999 there were 750,000
shares of common stock to be issued in connection
with the NISSCO acquisition (see Note 2) and
various warrants and options to acquire shares of
common stock outstanding. These amounts have not
been taken into account in the computation of
earnings per share because the effect would be
anti-dilutive.
Management does not believe that any recently
issued, but not yet effective, accounting
standards, if currently adopted, would have a
material effect on the accompanying financial
statements.
2. ACQUISITIONS: On January 15, 1999 the Company completed an
agreement whereby, effective January 1, 1999, the
Company purchased all of the stock of
NISSCO/Sunline, Inc. ("NISSCO"), a Florida-based
company engaged in group marketing of
sanitary/janitorial supplies. The aggregate
purchase price for this acquisition is $3,000,000,
consisting of $500,000 in cash and 1,000,000 shares
of the Company's common stock valued at $2.50 per
share. The stock value has been determined based on
the selling price of common stock to unrelated
third parties. The common stock will be issued to
the seller in installments, as defined in the
agreement. This acquisition is accounted for as a
purchase.
Assets and liabilities acquired, at historical
cost, include:
<TABLE>
<S> <C>
Cash $ 17,259
Accounts receivable 507,331
Property and equipment 57,487
Other assets 2,001
-------------------------------------------------
Total assets $584,078
=================================================
Accounts payable and accrued expenses $321,670
Due to stockholder 141,621
Taxes payable 98,000
-------------------------------------------------
$561,291
=================================================
</TABLE>
The fair value of net assets acquired amounted to approximately
$23,000, which resulted in an excess of cost over the fair
value of the net assets acquired (goodwill) of approximately
$2,977,000 which is being amortized over 10 years.
The operations of NISSCO are included in the consolidated
financial statements from January 1, 1999, the date of
acquisition.
F-12
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The seller received 250,000 shares on January 15, 1999 and will
receive 250,000 shares on January 15, 2000, and 500,000 shares
on January 15, 2001. All shares have been valued at $2.50, the
fair market value of the Company's common stock on January 1,
1999. If on January 15, 2001 the Company's Average Bid Price
Per Share for the ten days preceding January 15, 2001 is not at
least $5.00, the Company shall issue additional shares of
common stock to the seller such that the aggregate value of all
shares issued shall be $2,500,000. The value of any
contingently issuable shares has not been accounted for in the
valuation of the NISSCO acquisition.
<TABLE>
<CAPTION>
3. PROPERTY AND Property and equipment, at cost, consists of:
EQUIPMENT:
Depreciation
Period
--------------------------------------------------------------
<S> <C> <C>
Furniture and fixtures $319,884 5 years
Transportation equipment 168,584 5 years
--------------------------------------------------------------
488,468
Less accumulated
depreciation 305,490
--------------------------------------------------------------
$182,978
==============================================================
</TABLE>
4. NOTES PAYABLE: On June 1, 1999, the Company received $3,000,000 in exchange
for 300 units. Each unit is comprised of a $10,000 face value
note. The notes are due April 1, 2002 and pay interest in
arrears quarterly on the face amount, at a rate of 12.75% per
annum. Issued along with each unit were warrants to purchase
2,400 shares of common stock (720,000 shares in aggregate) of
the Company. The warrants are exercisable at any time after
November 27, 1999 through June 1, 2003 at an exercise price of
$4.25 per share. Based upon the fair value of the warrants on
the date of issue, the Company has discounted the carrying
value of the notes by $678,672, which represents the fair
value of the warrants on the date of issue. The discount is
being amortized as additional interest over the term of the
notes. One of the units was sold to the wife of a director of
the Company.
5. COMMITMENTS: The Company leases certain office and warehouse facilities
under operating leases expiring in 2000.
Minimum annual rental commitments under the leases are
summarized as follows:
Year ending June 30,
1999 $23,931
2000 46,499
----------------------------------------------------
Rent expense charged to earnings was $34,356 and $19,409 for
the six-month periods ended June 30, 1999 and June 30, 1998,
respectively.
F-13
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
6. STOCKHOLDERS' In January 1999, the Company issued 70,000 shares of common
EQUITY: stock for an aggregate price of $175,000.
In March 1999, the Company issued 100,000 shares of common
stock for an aggregate price of $250,000.
In April 1999, the Company issued 50,000 shares of common stock
for an aggregate price of $125,000. These shares were sold to
the entity controlled by the Company's President.
In May 1999, the Company issued 100,000 shares of common stock
for an aggregate price of $250,000.
In June 1999, the Company issued 50,000 shares of common stock
for an aggregate price of $125,000. These shares were sold to
the entity controlled by the Company's President.
7. SEGMENT Prior to the Company's acquisition of NISSCO in January 1999,
INFORMATION: the Company operated in one industry segment. Subsequent to the
NISSCO acquisition, the Company operated in two segments, the
wholesale distribution of sanitary maintenance products and
providing buying services and group discounts to wholesalers.
Summarized financial information by business segment is as
follows:
<TABLE>
<S> <C>
Revenue:
Products $ 879,115
Services 943,260
------------------------------------------------------
$1,822,375
======================================================
Profit:
Products $ 52,430
Services 256,007
------------------------------------------------------
$ 308,437
======================================================
Total Assets:
Products $ 545,679
Services 605,604
------------------------------------------------------
$1,151,283
======================================================
</TABLE>
The difference between the Company's segment profit and
consolidated reported loss is related to unallocated corporate
overhead expenses and the amortization of goodwill. The
difference between assets by segment and consolidated assets is
related to corporate overhead assets.
F-14
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
8. SUBSEQUENT In July 1999, the Company issued 16,000 shares of common stock
EVENTS: for an aggregate purchase price of $40,000.
In July 1999, the Company issued 25,000 shares of common stock
to the Company's former legal counsel.
On August 1, 1999, the Company acquired Cleaning Ideas, Inc. and
Subsidiary (collectively "Cleaning Ideas"). The acquisition was
accomplished by a merger into a subsidiary of Enviro-Clean
established for the acquisition. Terms of the acquisition to the
Company shareholders were:
1. $500,000 in cash,
2. 320,000 shares of Enviro-Clean Series D preferred stock, and
3. Secured promissory note of $900,000 payable in quarterly
installments of $112,500 plus interest at 8.75% per annum.
Effective on August 17, 1999, Superior Chemical & Supply, Inc.
was purchased by Enviro-Clean in consideration for $400,000 in
cash, $1,200,000 in a note payable over three years, and 50,000
shares of common stock of Enviro-Clean which were placed in
escrow.
In October of 1999, the Company authorized the issuance of op to
80,000 shares of Series B Cumulative Convertible Preferred
Stock (the "Series B Stock"). The Series B Stock has a stated
value of $100, bears a dividend at a rate of 10% per annum and
has a maturity of five years from the date of issuance. The
Series B Stock is convertible into common stock at a conversion
price of $5.
The Company sold an aggregate of 251.4 units, each unit
consisting of 100 shares of Series B Stock and 1000 common stock
purchase warrants, to approximately 59 accredited investors for
aggregate proceeds to the Company of $2,514,000. The Company
expects to continue this private placement until December 31,
1999, or until up to 800 such units are sold.
On December 15, 1999, Steven C. Etra, Director and Secretary of
the Company, purchased six units, each unit consisting of 100
Shares of Series B Stock and 1000 common stock purchase warrants
at an exercise price of $5.00 per share, in a private placement
under Rule 506 of Regulation D.
On December 15, 1999, Blair Etra, the wife of Steven C. Etra,
Director and Secretary of the Company, purchased thirteen
units, each unit consisting of 100 Shares of Series B Stock and
1000 common stock purchase warrants at an exercise price of
$5.00 per share, in a private placement under Rule 506 of
Regulation D.
On December 15, 1999, Lances Property Development Pension Plan,
a company owned 50% by Steven C. Etra, Director and Secretary of
the Company, purchased four units, each unit consisting of 100
Shares of Series B Stock and 1000 common stock purchase warrants
at an exercise price of $5.00 per share, in a private placement
under Rule 506 of Regulation D.
On December 15, 1999, Irving Etra Family Trust, of which Steven
C. Etra, Director and Secretary of the Company, is a
beneficiary, purchased five units, each unit consisting of 100
Shares of Series B Stock and 1000 common stock purchase warrants
at an exercise price of $5.00 per share, in a private placement
under Rule 506 of Regulation D.
On December 15, 1999, Gary Granoff, Director of the Company,
purchased five units, each unit consisting of 100 Shares of
Series B Stock and 1000 common stock purchase warrants at an
exercise price of $5.00 per share, in a private placement under
Rule 506 of Regulation D.
F-15
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. AND SUBSIDIARIES
================================================================================
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Enviro-Clean of America, Inc.
We have audited the accompanying balance sheet of Enviro-Clean of America, Inc.
and Subsidiaries as of December 31, 1998, and the related statements of
operations, stockholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Enviro-Clean of America, Inc.
and Subsidiaries as of December 31, 1998, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
December 1, 1999
F-16
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
================================================================================
<TABLE>
<CAPTION>
December 31, 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Current Assets:
Cash $ 120,610
Accounts receivable, net of allowance for doubtful accounts of $49,006 179,088
Inventory 118,898
Notes receivable 28,320
Acquisition deposits 500,000
Prepaid expenses and other current assets 65,337
- ---------------------------------------------------------------------------------------------------------------
Total current assets 1,012,253
Property and Equipment - at cost, net of accumulated depreciation of $120,702 128,823
Deferred Income Tax Asset, net of valuation allowance of $20,000 -
- ---------------------------------------------------------------------------------------------------------------
Total Assets $ 1,141,076
===============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 227,746
Notes payable 97,140
Subscriptions received in advance for preferred stock 175,000
Income taxes payable 4,977
Line of credit 98,918
- ---------------------------------------------------------------------------------------------------------------
Total current liabilities 603,781
- ---------------------------------------------------------------------------------------------------------------
Notes Payable 388,631
- ---------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Common stock - $.001 par value; authorized 20,000,000 shares,
issued and outstanding 3,690,000 shares 3,690
Additional paid-in capital 879,325
Accumulated deficit (734,351)
- ---------------------------------------------------------------------------------------------------------------
Stockholders' equity 148,664
- ---------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 1,141,076
===============================================================================================================
</TABLE>
F-17
<PAGE>
<TABLE>
<CAPTION>
ENVIRO-CLEAN OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
- ---------------------------------------------------------------------------------------------------------------
Year ended December 31, 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
Sales $1,793,817
Cost of sales 973,497
- ---------------------------------------------------------------------------------------------------------------
Gross profit 820,320
- ---------------------------------------------------------------------------------------------------------------
Operating expenses:
Salaries 242,298
Professional fees 121,372
Depreciation 36,605
Marketing 123,998
Rent 39,076
Interest 63,925
Other 335,251
- ---------------------------------------------------------------------------------------------------------------
Total operating expenses 962,525
- ---------------------------------------------------------------------------------------------------------------
Loss before income tax expense (142,205)
Income tax expense 4,577
- ---------------------------------------------------------------------------------------------------------------
Net loss $ (146,782)
===============================================================================================================
Basic loss per common share $ (.05)
===============================================================================================================
Weighted-average number of common shares outstanding 3,196,546
===============================================================================================================
</TABLE>
F-18
<PAGE>
<TABLE>
<CAPTION>
ENVIRO-CLEAN OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock Additional
Number Paid-in Accumulated Stockholders'
of Shares Amount Capital Deficit Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Period from December 9, 1997 (date of inception) to December 31, 1998:
Issuance of common stock for cash at $.01 per share 3,000,000 $3,000 - - $ 3,000
Issuance of common stock for cash at $.50 per share 179,000 179 $ 89,321 - 89,500
Issuance of common stock for cash at $.50 per share 211,000 211 105,289 - 105,500
Issuance of common stock for cash at $2.50 per share 300,000 300 684,715 - 685,015
Kandel & Son, Inc. accumulated deficit - - - $ (32,070) (32,070)
Distribution to stockholder - - - (555,499) (555,499)
Net loss - - - (146,782) (146,782)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 3,690,000 $3,690 $879,325 $(734,351) $ 148,664
===================================================================================================================================
</TABLE>
F-19
<PAGE>
<TABLE>
<CAPTION>
ENVIRO-CLEAN OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------
Year ended December 31, 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
Cash flows from operating activities:
Net loss $ (146,782)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 36,605
Increase in allowance for doubtful accounts 34,984
Changes in operating assets and liabilities:
Increase in accounts receivable (9,429)
Decrease in inventory 14,302
Increase in prepaid expenses and other current assets (44,277)
Decrease in other assets 5,775
Increase in accounts payable and accrued expenses 123,575
Increase in income taxes payable 4,977
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 19,730
- ---------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition deposits (800,000)
Purchase of property and equipment (20,708)
Increase in notes receivable (28,320)
- ---------------------------------------------------------------------------------------------------------------
Cash used in investing activities (849,028)
- ---------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 883,015
Proceeds from subscriptions received in advance for preferred stock 175,000
Repayment of long-term debt (111,338)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 946,677
- ---------------------------------------------------------------------------------------------------------------
Net increase in cash 117,379
Cash at beginning of year 3,231
- ---------------------------------------------------------------------------------------------------------------
Cash at end of year $ 120,610
===============================================================================================================
</TABLE>
F-20
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. PRINCIPAL The accompanying consolidated financial statements
BUSINESS include the accounts of Enviro-Clean of America,
ACTIVITY AND Inc. and its Subsidiaries (collectively the
SUMMARY OF "Company"). All significant intercompany
SIGNIFICANT transactions, balances and profits have been
ACCOUNTING eliminated in consolidation. The consolidated
POLICIES: statements give retroactive effect to the merger
with Kandel and Son, Inc. ("Kandel").
On January 15, 1999 the Company completed a
transaction whereby effective January 1, 1999,
Enviro-Clean of America, Inc. ("Enviro-Clean")
merged with Kandel. Thereafter Kandel became a
wholly owned subsidiary of Enviro-Clean. Prior to
the merger Kandel's fiscal year-end was August 31
and Enviro-Clean's was December 31. Subsequent to
the merger, the Company adopted a calendar
year-end. As a result of the change in fiscal year
and the merger accounted for as a pooling of
interests, the Company's 1998 financial statements
have been recast to a 12-month period ending
December 31, 1998. The financial statements have
been restated to retroactively combine Kandel's
financial statements as if the merger had occurred
at the beginning of the earliest period presented.
The consolidated statements of operations, cash
flows, and stockholders' deficiency for the year
ended December 31, 1998 reflect the results of
operations and cash flows for Enviro-Clean for the
period from December 9, 1997 (date of inception)
to December 31, 1998 combined with Kandel for the
year ended September 30, 1998. The consolidated
balance sheet as of December 31, 1998 reflects the
financial position of Enviro-Clean on that date
combined with the financial position of Kandel as
of September 30, 1998. As a result of Enviro-Clean
and Kandel having different fiscal years and the
change in the Company's fiscal year, Kandel's
results of operations for the three-month period
ended December 31, 1998 have been excluded from
the reported results of operations. Additionally,
Kandel's results of operations for the month of
September 1997 has been excluded from the reported
results of operations. There were no intervening
events that materially affect the financial
position or results of operations of the
companies.
The principal business activity of the Company is
the consolidation of companies in the sanitary
supply and chemical industry. Additionally, the
Company distributes products in the sanitary
supply and chemical industry.
The Company recognizes revenue when products are
shipped.
The Company considers all highly liquid
instruments purchased with a maturity of three
months or less to be cash equivalents.
The Company maintains cash in bank deposit
accounts which, at times, may exceed federally
insured limits. The Company has not experienced
any losses in such accounts. The Company believes
it is not exposed to any significant credit risk
on cash.
Merchandise inventories, consisting of finished
goods, are valued at the lower of cost or market.
Cost is determined using the first-in, first-out
methods.
F-21
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Property and equipment are recorded at cost.
Depreciation and amortization of property and
equipment is provided for by the straight-line
method over the estimated useful lives of the
respective assets. Leasehold improvements are
amortized over the shorter of the economic life of
the improvement or the lease term.
The Company identifies and records impairment on
long-lived assets when events and circumstances
indicate that such assets have been impaired. The
Company periodically evaluates the recoverability
of its long-lived assets based on expected
nondiscounted cash flows and recognizes
impairment, if any, based on expected discounted
cash flows.
The preparation of financial statements in
accordance with generally accepted accounting
principles requires the use of estimates by
management. Actual results could differ from these
estimates.
The estimated fair values of the notes receivable,
line of credit and notes payable approximate their
carrying amounts due to the short-term nature of
the instruments.
Earnings per share ("EPS") is computed by dividing
net income or loss by the weighted-average number
of common shares outstanding for the year. Diluted
EPS is not presented because the Company had no
dilutive securities outstanding at December 31,
1998.
Management does not believe that any recently
issued, but not yet effective, accounting
standards, if currently adopted, would have a
material effect on the accompanying financial
statements.
2. ACQUISITION Acquisition deposit consists of $500,000 of cash
DEPOSITS: paid in advance of closing for NISSCO acquired in
January 1999. Such amount was a good faith advance
payment on the acquisition.
3. PROPERTY AND Property and equipment, at cost, consists of:
EQUIPMENT:
<TABLE>
<CAPTION>
Depreciation
Period
---------------------------------------------------------------------------------
<S> <C> <C>
Furniture, fixtures and equipment $ 51,861 5 years
Leasehold improvements 24,328 5 years
Transportation and delivery equipment 169,848 5 years
Computer hardware 3,488 3 years
---------------------------------------------------------------------------------
249,525
Less accumulated depreciation 120,702
=================================================================================
$128,823
=================================================================================
</TABLE>
F-22
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
4. COMMITMENTS AND The Company leases office and warehouse facilities
CONTINGENCIES: under a noncancelable operating lease expiring
December 31, 2000.
The lease contains escalation clauses relating to
operating expenses and real estate taxes. Total
rent expense for the operating lease was
approximately $37,000 for the year ended September
30, 1998.
Future minimum lease payments under these leases
are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
1999 $37,863
2000 38,999
---------------------------------------------------------------------------------
$76,862
=================================================================================
</TABLE>
5. INCOME TAXES: The difference between the income tax provision
(benefit) computed at the federal statutory rate
and the actual tax provision (benefit) is
accounted for as follows:
<TABLE>
<S> <C>
Taxes (benefit) computed at the federal statutory rate $(50,000)
Taxes computed at a rate below the federal statutory rate 30,000
Valuation allowance 20,000
---------------------------------------------------------------------------------
$ - 0 -
=================================================================================
</TABLE>
The tax effects of loss carryforwards and the
valuation allowance that give rise to the deferred
income tax asset at December 31, 1998 are as
follows:
<TABLE>
<S> <C>
Net operating losses $ 20,000
Less valuation allowance 20,000)
---------------------------------------------------------------------------------
Deferred income tax asset $ - 0 -
=================================================================================
</TABLE>
As of December 31, 1998, the Company had net
operating loss carryforwards available to offset
future taxable income of approximately $152,000
which expire through 2013. Between December 1997
and December 1998, the Company completed offerings
of securities. Under Section 382 of the Internal
Revenue Code, these activities effect an ownership
change and thus may severely limit, on an annual
basis, the Company's ability to utilize its net
operating loss carryforwards. The Company uses the
lowest marginal U.S. corporate tax of 15% to
F-23
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
determine deferred tax amounts and the related
valuation allowance because the Company had no
taxable earnings through December 31, 1998.
6. NOTES PAYABLE: Long term-debt consists of the following at
December 31, 1998:
<TABLE>
<S> <C>
8.05% stockholder loan, payable in 120 monthly installments of
$4,085, due March 1, 2007 $301,084
8.22% stockholder loan, payable in 120 monthly installments of
$4,899, due June 1, 2003 227,250
Other stockholder advances, noninterest-bearing (71,983)
Various transportation and delivery equipment loans payable in
monthly installments through December 1998 including interest
at varied rates 29,420
---------------------------------------------------------------------------------
485,771
Less current maturities (97,140)
---------------------------------------------------------------------------------
$388,631
=================================================================================
</TABLE>
Total interest charged against earnings was
$63,925.
7. RETIREMENT Kandel (a subsidiary) has both defined benefit and
PLANS: defined contribution plans. All nonunion employees
are eligible for participation following
completion of 6 months of service and attainment
of age 20-1/2. Participants begin to vest after
two years of service and are fully vested after
six years. The contributions made during the year
were approximately $20,000.
Effective September 1, 1998, the Company
terminated the defined benefit plan and
consolidated the assets with those of the defined
contribution plan. Both plans are in compliance
with Internal Revenue Code and regulations and are
properly funded.
8. STOCKHOLDERS' In December 1997, the Company received net
EQUITY: proceeds of $3,000 from the issuance of 3,000,000
shares of stock to the Company's founders.
In December 1997, the Company received net
proceeds of $89,500 from the issuance of 179,000
shares of common stock in connection with a
private placement.
F-24
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
During 1998, the Company received net proceeds of
$790,515 from the issuance 511,000 shares of
common stock in connection with private
placements.
In December 1998, the Company received a
subscription to preferred stock in advance in the
amount of $175,000.
9. RELATED PARTY During 1998, stockholders advanced various amounts
TRANSACTIONS: to the Company for the payment of expenses. Such
advances totaled less than $25,000. All such
amounts were noninterest-bearing and were repaid
during the period.
The Company has loans payable to a stockholder
(see Note 6).
10. SUBSEQUENT EVENTS: In 1999, the Company authorized up to 500,000
shares of Series A convertible redeemable
preferred stock with a par value of $.001 and a
stated value of $5 per share. The Series A
preferred stock pays cumulative cash dividends of
4% per year. The dividend is payable quarterly in
arrears, on the last day of each calendar quarter.
The first dividend payment date is June 30, 1999.
Upon any liquidation, dissolution, or winding up
of the Company, the holders of Series A preferred
stock shall be entitled to receive $5 per share of
preferred stock plus any unpaid dividends, prior
to any payments or distributions to holders of any
junior securities, as defined. Each share of
preferred stock is convertible into shares of
common stock at the conversion price of initially
$2.50 per share at the option of the holder. On
the fifth anniversary of the issue date, for each
share of preferred stock not previously converted,
such share will automatically be convertible into
shares of common stock at the then-applicable
Conversion Price. The Company will, at any time
after January 15, 2001, have the right to redeem
any or all shares of Series A preferred stock for
$5 per share plus any unpaid dividends.
In 1999, the Company authorized and issued 70,000
shares of Series E convertible redeemable
preferred stock with a par value of $.001 and
stated value of $2.50 per share. The Series E
preferred stock pays cumulative cash dividends of
3% per year. The dividend is payable quarterly in
arrears, on the last day of each calendar quarter.
The first dividend payment date is June 30, 1999.
Upon liquidation, dissolution, or winding up of
the Company, the holders of Series E preferred
stock shall be entitled to receive $2.50 per share
of preferred stock plus any unpaid dividends,
prior to any payments or distributions to holders
of any junior securities, as defined. Each share
of preferred stock is convertible into shares of
common stock at the conversion price of initially
$2.50 per share at the option of the holder. On
the fifth anniversary of the issue date, for each
share of preferred stock not previously converted,
such share will automatically be convertible into
shares of common stock at the then applicable
Conversion Price. The Company will, at any time
after two years from the issue date, have the
right to redeem any or all shares of Series E
preferred stock for $3.50 per share plus any
unpaid dividends.
On January 15, 1999, the Company entered into an
agreement to purchase all of the stock of
NISSCO/Sunline, Inc., a Florida-based company
engaged in group
F-25
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
marketing of sanitary/janitorial supplies. The
aggregate purchase price for this acquisition is
$3,000,000, consisting of $500,000 in cash and
1,000,000 shares of the Company's common stock.
The common stock will be issued to the seller in
installments, as defined in the agreement. This
acquisition will be accounted for as a purchase.
In January 1999, the Company issued 70,000 shares
of common stock for an aggregate price of
$175,000.
In March 1999, the Company issued 100,000 shares
of common stock for an aggregate price of
$250,000.
In April 1999, the Company issued 50,000 shares of
common stock for an aggregate purchase price of
$125,000.
In May 1999, the Company issued 100,000 shares of
common stock for an aggregate purchase price of
$250,000.
In June 1999, the Company issued 50,000 shares of
common stock for an aggregate purchase price of
$125,000.
In June 1999, the Company issued 300 units, which
consist of warrants and notes payable, for an
aggregate purchase price of $3,000,000. In July
1999, the Company issued 16,000 shares of common
stock for an aggregate purchase price of $40,000.
On August 1, 1999, the Company acquired Cleaning
Ideas, Inc. and Subsidiary (collectively "Cleaning
Ideas"). The acquisition was accomplished by a
merger into a subsidiary of Enviro-Clean
established for the acquisition. Terms of the
acquisition to the Company shareholders were:
1. $500,000 in cash,
2. 320,000 shares of Enviro-Clean Series D
preferred stock, and
3. Secured promissory note of $900,000 payable
in quarterly installments of $112,500 plus
interest at 8.75% per annum.
Effective on August 19, 1999, Superior Chemical &
Supply, Inc. was purchased by Enviro-Clean in
consideration for $400,000 in cash, $1,200,000 in
a note payable over three years, and 50,000 shares
of common stock of Enviro-Clean which were placed
in escrow.
F-26
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Enviro-Clean of America, Inc.
We have audited the accompanying balance sheet of Enviro-Clean of America, Inc.
and Subsidiaries as of August 31, 1997, and the related statements of income,
retained earnings, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Enviro-Clean of America, Inc.
and Subsidiaries as of August 31, 1997, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
KIRSCHNER & PASTERNACK, LLP
Great Neck, New York
April 12, 1999
F-27
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. AND SUBSIDIARIES
BALANCE SHEET
================================================================================
August 31, 1997
- --------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 3,231
Accounts receivable 204,643
Merchandise inventory 133,200
Prepaid expenses and other 21,060
- --------------------------------------------------------------------------------
Total current assets 362,134
- --------------------------------------------------------------------------------
Property, Plant and Equipment - at cost 228,817
Less accumulated depreciation (77,789)
- --------------------------------------------------------------------------------
151,028
- --------------------------------------------------------------------------------
Other Assets 5,775
================================================================================
Total Assets $ 518,937
================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable and accrued expenses $ 104,171
Loans payable 98,918
Current maturities of long-term debt 113,657
- --------------------------------------------------------------------------------
Total current liabilities 316,746
- --------------------------------------------------------------------------------
Long-term Liabilities - long-term debt, less current maturities 514,350
- --------------------------------------------------------------------------------
Stockholders' Deficiency:
Common stock 3,000
Retained earnings 60,505
Cost of Treasury Stock (375,664)
- --------------------------------------------------------------------------------
Stockholders' deficiency (312,159)
- --------------------------------------------------------------------------------
Total Liabilities and Stockholders' Deficiency $ 518,937
================================================================================
F-28
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. AND SUBSIDIARIES
STATEMENT OF EARNINGS AND RETAINED EARNINGS
================================================================================
Year ended August 31, 1997
- --------------------------------------------------------------------------------
Net sales $1,803,946
Cost of sales 878,795
- --------------------------------------------------------------------------------
Gross profit 925,151
- --------------------------------------------------------------------------------
Operating expenses:
Salaries 326,788
Professional fees 15,225
Rent 36,505
Marketing 1,508
Depreciation 26,067
Other 419,396
- --------------------------------------------------------------------------------
825,489
- --------------------------------------------------------------------------------
Operating income 99,662
Interest expense 65,298
- --------------------------------------------------------------------------------
Earnings before income taxes 34,364
Income taxes 3,072
- --------------------------------------------------------------------------------
Net earnings 31,292
Retained earnings at September 1 29,213
- --------------------------------------------------------------------------------
Retained earnings at August 31 $ 60,505
================================================================================
F-29
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
================================================================================
Year ended August 31, 1997
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 31,293
- --------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 26,067
Increase in accounts receivable (7,469)
Decrease in prepaid expenses 11,093
Decrease in inventories 7,900
Decrease in accounts payable (27,931)
- --------------------------------------------------------------------------------
Total adjustments 9,660
- --------------------------------------------------------------------------------
Net cash provided by operating activities 40,953
- --------------------------------------------------------------------------------
Cash flows used in investing activities - purchase of fixed assets (96,909)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings on line of credit 98,918
Principal payments on debt (43,930)
- --------------------------------------------------------------------------------
Net cash provided by financing activities 54,988
- --------------------------------------------------------------------------------
Net decrease in cash and equivalents (968)
Cash and equivalents at September 1, 1996 4,199
- --------------------------------------------------------------------------------
Cash and equivalents at August 31, 1997 $ 3,231
================================================================================
Supplemental Data:
Cash paid during the year:
Interest expense $ 64,340
================================================================================
Income taxes $ 980
================================================================================
F-30
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. BUSINESS AND In January 1999, Enviro-Clean of America, Inc.
SUMMARY OF ("Enviro-Clean") merged with Kandel and Son Inc.
ACCOUNTING ("Kandel") in a combination accounted for as a
POLICIES: pooling of interests. The historic results of
operation of Kandel have been restated as if the
two companies had always been combined. For the
year ended August 31, 1997, the results of
operations of the Company include only the
historic results of Kandel as Enviro-Clean did not
yet exist.
Enviro-Clean and Subsidiaries (collectively the
"Company") is primarily engaged in the wholesale
distribution of sanitary maintenance supplies and
paper products.
Assets and liabilities and revenue and expenses
are recognized on the accrual basis of accounting.
Inventories, consisting of finished goods, are
valued at the lower of cost or market. Cost is
determined using the first-in, first-out
method.
Depreciation of property, plant and equipment is
provided for by the straight-line method over the
estimated useful lives of the assets. Leasehold
improvements are amortized over the shorter of the
economic life of the improvement or the lease
term.
Deferred taxes, if any, are not material.
Property, plant and equipment is comprised of the
following at cost:
Furniture and equipment $ 48,141
Leasehold improvements 24,328
Transportation and delivery equipment 156,348
-------------------------------------------------
228,817
Less accumulated depreciation (77,789)
-------------------------------------------------
$151,028
=================================================
Expense charged to earnings $ 26,067
=================================================
Accounts receivable are reported net of an
allowance for doubtful accounts of $14,022.
Income taxes are provided for the tax effect of
transactions reported in the financial statements
and consist of taxes currently due plus deferred
taxes for operating losses that are available to
offset future taxable income.
The Company has loss carryforwards totaling
$77,570 available to offset future taxable income.
In preparing financial statements in conformity
with generally accepted accounting principles,
management is required too make estimates and
assumptions that affect the reported amounts of
assets and liabilities and
F-31
<PAGE>
ENVIRO-CLEAN OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
disclosure of contingent assets and liabilities at
the date of the financial statements, as well as
the reported amounts of revenue and expenses
during the reporting period. Actual results could
differ from those estimates. The Company estimates
an allowance for doubtful accounts based on the
creditworthiness of its customers, as well as
general economic conditions. Consequently, an
adverse change in those factors could affect the
Company's estimate.
2. LOANS PAYABLE: The Company has a $100,000 line of credit facility
with Citibank, N.A. The outstanding balance is
$98,918 payable in minimum monthly installments of
interest only at prime, currently at 8.5% per
annum.
Long-term debt consists of the following at August
31, 1997:
Stockholder loan payable in monthly
installments of $8,985 including
interest at approximately 8% $ 558,944
Various transportation and delivery
equipment loans payable in monthly
installments of $3,655 through December
1998 including interest of varying rates 69,063
--------------------------------------------------
628,007
Less current maturities (113,657)
--------------------------------------------------
$ 514,350
==================================================
Total interest charged against earnings
was $ 65,298
==================================================
3. COMMITMENTS The Company leases certain office and warehouse
AND facilities in Hicksville, NY under a lease
CONTINGENCIES: expiring December 31, 2000. Minimum rental
commitments under the lease aggregates $125,519.
Rent expense charged to earnings was $36,505.
4. RETIREMENT The Company has both defined benefit and defined
PLANS: contribution plans. All non-union employees are
eligible for participation following completion of
6 months of service and attainment of age 20-1/2.
Participants begin to vest after two years of
service and are fully vested after six years. The
contributions made during the year were $44,895.
5. COMMON STOCK: Shares authorized $20,000
Issued and outstanding 5,000
Stated value 3,000
-------------------------------------------------
F-32
<PAGE>
NISSCO, INC. & SUBSIDIARIES
================================================================================
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
NISSCO, Inc. & Subsidiaries
14848 Old U.S. 41
#1 Sunburst Center
Naples, FL 34110
We have audited the accompanying balance sheet of NISSCO, Inc. & Subsidiaries (a
Florida corporation) as of December 31, 1998, and the related statements of
income, retained earnings, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The accompanying statements were prepared to present the net assets and
continuing operations of NISSCO, Inc. & Subsidiaries sold to Enviro-Clean of
America, Inc. pursuant to the purchase agreement described in Note 4. It is not
intended to be complete presentations of NISSCO, Inc. & Subsidiaries' assets and
liabilities or operations.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of NISSCO, Inc. & Subsidiaries as
of December 31, 1998 and the results of their operations and their cash flows
for the year then ended in conformity with generally accepted accounting
principles.
KIRSCHNER & PASTERNACK LLP
Great Neck, New York
April 12, 1999
F-33
<PAGE>
NISSCO, INC. & SUBSIDIARIES
BALANCE SHEET
================================================================================
December 31, 1998
- --------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 17,259
Accounts receivable 507,331
Prepaid expenses 2,001
- --------------------------------------------------------------------------------
Total current assets 526,591
Fixed Assets 57,487
- --------------------------------------------------------------------------------
Total Assets $ 584,078
================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable and accruals $ 321,670
Due to stockholder 141,621
Taxes payable 98,000
- --------------------------------------------------------------------------------
Total liabilities 561,291
- --------------------------------------------------------------------------------
Stockholder's Equity:
Common stock - $1 par value, issued 110 shares 1,100
Retained earnings 21,687
- --------------------------------------------------------------------------------
Total stockholder's equity 22,787
- --------------------------------------------------------------------------------
Total Liabilities and Stockholder's Equity $ 584,078
================================================================================
F-34
<PAGE>
NISSCO, INC. & SUBSIDIARIES
STATEMENT OF INCOME
================================================================================
Year ended December 31, 1998
- --------------------------------------------------------------------------------
Revenue $1,789,202
Cost of sales and services 231,611
- --------------------------------------------------------------------------------
Gross profit 1,557,591
- --------------------------------------------------------------------------------
Operating expenses:
Salaries 547,763
Professional fees 29,496
Rent 28,488
Marketing 111,085
Depreciation 4,462
Other 378,356
- --------------------------------------------------------------------------------
1,099,650
- --------------------------------------------------------------------------------
Operating income 457,941
Interest expense 7,953
- --------------------------------------------------------------------------------
Income before income taxes 449,988
Income taxes 102,000
- --------------------------------------------------------------------------------
Net income $ 347,988
================================================================================
F-35
<PAGE>
NISSCO, INC. & SUBSIDIARIES
STATEMENT OF CHANGES IN RETAINED EARNINGS
================================================================================
Year ended December 31, 1998
- --------------------------------------------------------------------------------
Retained earnings at January 1, 1998 $ 10,320
Net earnings for year 347,988
Dividends paid or accrued (336,621)
- --------------------------------------------------------------------------------
Retained earnings at December 31, 1998 $ 21,687
================================================================================
F-36
<PAGE>
NISSCO, INC. & SUBSIDIARIES
STATEMENT OF CASH FLOWS
================================================================================
Year ended December 31, 1998
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 347,988
- --------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 7,727
Increase in accounts receivable (3,199)
Increase in prepaid expenses (841)
Decrease in stockholder loan receivable 159,070
Decrease in accounts payable (322,164)
Increase in dividends due stockholder and other accruals 141,621
Increase in income taxes payable 12,374
- --------------------------------------------------------------------------------
Total adjustments (5,412)
- --------------------------------------------------------------------------------
Net cash provided by operating activities 342,576
- --------------------------------------------------------------------------------
Cash flows from investing activity - cash payments for the
purchase of equipment (33,659)
- --------------------------------------------------------------------------------
Cash flows from financing activity - dividends paid or accrued (336,621)
- --------------------------------------------------------------------------------
Net decrease in cash and equivalents (27,704)
Cash and cash equivalents, January 1 44,963
- --------------------------------------------------------------------------------
Cash and cash equivalents, December 31 $ 17,259
================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Taxes $ 35,962
================================================================================
Interest $ 7,953
================================================================================
F-37
<PAGE>
NISSCO, INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. BUSINESS NISSCO Inc. & Subsidiaries (collectively the
AND SUMMARY OF "Company") is primarily engaged in providing
ACCOUNTING POLICIES: buying services and group discounts to wholesale
distributors of sanitary maintenance supplies,
paper goods and related products. The Company's
services are provided to various entities located
in the eastern United States.
Assets and liabilities and revenue and expenses
are recognized on the accrual basis of accounting.
Service income is based primarily on percentages
applied to member-customer's purchases from
suppliers. Income is recognized when substantially
all events relative to the underlying purchase
have been completed. Collections are normally
received in 30 to 180 days. An estimated allowance
is provided for uncollectible accounts.
Depreciation of property, plant and equipment is
provided by the straight-line method over the
estimated useful lives of the assets. Leasehold
improvements are amortized over the shorter of the
economic life of the improvement or the lease
term. Deferred taxes, if any are not material.
Assets are comprised of the following:
Furniture, fixtures and equipment $ 208,507
Improvements 5,690
Less accumulated depreciation (156,710)
--------------------------------------------------
Net fixed assets $ 57,487
==================================================
Receivables are reported net of an allowance for
doubtful accounts of $26,692.
Income taxes are provided for the tax effects of
transactions currently reported in the financial
statements. Differences between financial and
income tax earnings do not give rise to material
deferrals.
In preparing financial statements in conformity
with generally accepted accounting principles,
management is required to make estimates and
assumptions that affect the reported amounts of
assets and liabilities and disclosure of
contingent assets and liabilities at the date of
the financial statements, as well as the reported
amounts of revenues and expenses during the
reporting period. Actual results could differ from
those estimates. The Company estimates an
allowance for doubtful accounts based on the
creditworthiness of their customers, as well as
general economic conditions. Consequently, an
adverse change in those factors could affect the
Company's estimate.
F-38
<PAGE>
NISSCO, INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
================================================================================
2. COMMITMENT The Company leases certain office and warehouse
AND facilities in Naples, Florida, under a lease
CONTINGENCIES expiring September 30, 2000.
Year ending December 31,
1999 $10,000
2000 7,500
--------------------------------------------------
$17,500
==================================================
Rent expense charged to earnings was $28,488.
3. RETIREMENT PLANS: The Company adopted a Savings Incentive Match Plan
("SIMPLE" IRA) for all eligible employees
effective February 4, 1998. The employer matches
employee salary deferrals up to a maximum of 3% of
compensation.
4. SUBSEQUENT EVENTS: Effective January 1, 1999, the sole stockholder
sold all of his shares to Enviro- Clean of
America, Inc. ("EVCL"). The purchase price is
$500,000 plus 250,000 shares of EVCL per year each
January for four years commencing in 1999. The
first two years' stock is restricted by contract
for two years from the date of issuance. The last
two years' stock is restricted by contract for one
year from the date of issuance. Additionally,
there are consulting and/or employment contracts
with the stockholder that run for the term of the
agreement. A deposit of $484,000 was paid to the
shareholder in October 1998.
The nonacquired assets and nonassumed liabilities
were removed from the Companies' reports in 1997
and 1998. The excess net asset value of 1997 over
1998 is reflected as a stockholder receivable at
December 31, 1997. This amount was settled and
reduced to $-0 - in 1998.
5. CONSOLIDATED From 1996 through 1999, changes of corporate
STATEMENTS: entities have taken place. However, the companies
have effectively operated as one during that
period of time through common ownership and
management. Sunline Partners, Inc. was merged into
NISSCO Inc. December 31, 1996. NISSCO/Sunline Inc.
was incorporated in September 1998 and became the
parent company of NISSCO Inc. NISSCO Inc. (New)
continues as an unrelated company owned by the
former stockholder. NISSCO/Sunline, Inc. is the
entity acquired by Enviro-Clean of America, Inc.
(see Note 4).
F-39
<PAGE>
NISSCO, INC. & SUBSIDIARIES
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
NISSCO, Inc. & Subsidiaries
14848 Old U.S. 41
#1 Sunburst Center
Naples, FL 34110
We have audited the accompanying balance sheet of NISSCO, Inc. & Subsidiaries (a
Florida corporation) as of December 31, 1997, and the related statements of
income, retained earnings, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The accompanying statements were prepared to present the net assets and
continuing operations of NISSCO, Inc. & Subsidiaries sold to Enviro-Clean of
America, Inc. pursuant to the purchase agreement described in Note 4. It is not
intended to be complete presentations of NISSCO, Inc. & Subsidiaries assets and
liabilities or operations.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of NISSCO, Inc. & Subsidiaries as
of December 31, 1997 and the results of their operations and their cash flows
for the year then ended in conformity with generally accepted accounting
principles.
KIRSCHNER & PASTERNACK LLP
Great Neck, NY
April 12, 1999
F-40
<PAGE>
<TABLE>
<CAPTION>
NISSCO INC. & SUBSIDIARIES
BALANCE SHEET
===============================================================================
December 31, 1997
- -------------------------------------------------------------------------------
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 44,963
Accounts receivable 504,132
Prepaid expenses 1,160
Advances to stockholders 159,070
- -------------------------------------------------------------------------------
Total current assets 709,325
Fixed Assets 31,555
- -------------------------------------------------------------------------------
Total Assets $740,880
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accruals $643,834
Taxes payable 85,626
- -------------------------------------------------------------------------------
Total liabilities 729,460
- -------------------------------------------------------------------------------
Stockholders' equity:
Common stock - $1 par value; issued 1,100 shares 1,100
Retained earnings 10,320
- -------------------------------------------------------------------------------
Total stockholders' equity 11,420
- -------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $740,880
===============================================================================
</TABLE>
F-41
<PAGE>
NISSCO INC. & SUBSIDIARIES
STATEMENT OF INCOME
================================================================================
Year ended December 31, 1997
- --------------------------------------------------------------------------------
Revenue $2,535,888
Cost of sales and services 739,210
- --------------------------------------------------------------------------------
Gross profit 1,796,678
- --------------------------------------------------------------------------------
Operating expenses:
Salaries 509,334
Professional fees 21,809
Rent 29,576
Marketing 94,022
Depreciation 3,899
Other 529,570
- --------------------------------------------------------------------------------
Total operating expenses 1,188,210
- --------------------------------------------------------------------------------
Operating income 608,468
Interest expense 13,374
- --------------------------------------------------------------------------------
Income before income taxes 595,094
Income taxes 85,626
- --------------------------------------------------------------------------------
Net income $ 509,468
================================================================================
F-42
<PAGE>
NISSCO INC. & SUBSIDIARIES
STATEMENT OF CHANGES IN RETAINED EARNINGS
================================================================================
Year ended December 31, 1997
- --------------------------------------------------------------------------------
Retained earnings at January 1 $ 398,903
Net earnings for year 509,468
Distribution of nonacquired assets (898,051)
- --------------------------------------------------------------------------------
Retained earnings at December 31 $ 10,320
================================================================================
F-43
<PAGE>
NISSCO INC. & SUBSIDIARIES
STATEMENT OF CASH FLOWS
================================================================================
Year ended December 31, 1997
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 509,468
- --------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 4,328
Increase in accounts receivable (261,743)
Increase in loans receivable - shareholders (159,070)
Decrease in accounts payable (50,467)
Decrease in income taxes payable (41,152)
- --------------------------------------------------------------------------------
Total adjustments (508,104)
- --------------------------------------------------------------------------------
Net cash provided by operating activities 1,364
Cash flows from investing activity - cash payments for the
purchase of equipment (13,281)
- --------------------------------------------------------------------------------
Net decrease in cash and equivalents (11,917)
Cash and cash equivalents at January 1 56,880
- --------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $ 44,963
================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Taxes $ 126,497
================================================================================
Interest $ 13,374
================================================================================
F-44
<PAGE>
NISSCO INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. BUSINESS SUMMARY AND NISSCO Inc. & Subsidiaries (the "Company") is
ACCOUNTING POLICIES: primarily engaged in providing buying services and
group discounts to wholesale distributors of
sanitary maintenance supplies, paper goods and
related products. The Company's services are
provided to various entities located in the
eastern United States.
Assets and liabilities and revenue and expenses
are recognized on the accrual basis of accounting.
Service income is based primarily on percentages
applied to member-customer's purchases from
suppliers. Income is recognized when substantially
all events relative to the underlying purchase
have been completed. Collections are normally
received in 30 to 180 days. An estimated allowance
is provided for uncollectible accounts.
Depreciation of property, plant and equipment is
provided for by the straight-line method over the
estimated useful lives of the assets. Leasehold
improvements are amortized over the shorter of the
economic life of the improvement or the lease
term. Deferred taxes, if any, are not
material.
Assets are comprised of the following:
Furniture, fixtures and equipment $180,538
Less accumulated depreciation 148,983
--------------------------------------------------
Net fixed assets $ 31,555
==================================================
Receivables are reported net of an allowance for
doubtful accounts of $49,423.
Income taxes are provided for the tax effects of
transactions currently reported in the financial
statements. Differences between financial and
income tax earnings do not give rise to material
deferrals.
In preparing financial statements in conformity
with generally accepted accounting principles,
management is required to make estimates and
assumptions that affect the reported amounts of
assets and liabilities and disclosure of
contingent assets and liabilities at the date of
the financial statements, as well as the reported
amounts of revenues and expenses during the
reporting period. Actual results could differ from
those estimates. The Company estimates an
allowance for doubtful accounts based on the
creditworthiness of their customers, as well as
general economic conditions. Consequently, an
adverse change in those factors could affect the
Company's estimate.
F-45
<PAGE>
NISSCO INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
2. COMMITMENT The Company leases certain office and warehouse
AND facilities in Naples, Florida, under a lease
CONTINGENCIES expiring September 30, 2000.
Minimum annual rental commitments under the leases
are summarized as follows:
1998 $10,000
1999 10,000
2000 7,500
--------------------------------------------------
$27,500
==================================================
Rent expense charged to earnings was $29,576.
3. RETIREMENT PLANS: The Company adopted a Savings Incentive Match Plan
("SIMPLE" IRA) for all eligible employees
effective February 4, 1998. The employer matches
employee salary deferrals up to a maximum of three
per cent of compensation.
4. SUBSEQUENT EVENTS: Effective January 1, 1998, the sole stockholder
sold all of his shares to Enviro-Clean of America,
Inc. ("EVCL"). The purchase price is $500,000 plus
250 thousand shares of EVCL per year each January
for four years commencing in 1999. The first two
years stock is restricted by contract for two
years from the date of issuance. The last two
years stock is restricted by contract for one year
from the date of issuance. Additionally there are
consulting and or employment contracts with the
shareholder that run for the term of the
agreement. A deposit of $484,000 was paid to the
shareholder in October 1998.
The nonacquired assets and non-assumed liabilities
were removed from the companies' reports in 1997
and 1998. The excess net asset value of 1997 over
1998 is reflected as a shareholder receivable at
December 31,1997. This amount is settled and
reduced to $-0- in 1998.
5. CONSOLIDATED From 1996 through 1999, changes of corporate
STATEMENTS: entities have taken place. However, the companies
have effectively operated as one during that
period of time through common ownership and
management. Sunline Partners, Inc. was merged into
NISSCO Inc. December 31, 1996. NISSCO/Sunline Inc.
was incorporated in September 1998 and became the
parent company of NISSCO Inc. NISSCO Inc. (New)
continues as an unrelated company owned by the
former shareholder. NISSCO/Sunline, Inc. is the
entity acquired by Enviro-Clean of America, Inc.
(see Note 4).
F-46
<PAGE>
PART III
Item 1. Index to Exhibits.
Index Exhibit
2(i) Stock Purchase Agreement among Enviro-Clean of America, Inc., Enviroacq
I Co. and Kandel & Son dated as of January 1, 1999*
2(ii) Stock Purchase Agreement among Enviro-Clean of America, Inc. Enviroacq
II Co. and NISSCO/Sunline, Inc. dated as of January 1, 1999*
2(iii) Agreement & Plan of Merger of Cleaning Ideas, Inc.**
2(iv) Stock Purchase Agreement of Superior Chemical & Supply, Inc.**
2(v) Articles of Incorporation of the Company*
2(vi) By-Laws of the Company*
3(i) Certificate of Designation for the Company's Series A Stock*
3(ii) Certificate of Designation for the Company's Series E Stock*
3(iii) Subscription Agreement between the Company and Steven C. Etra regarding
the purchase and sale of the Series E Stock***
3(iv) Certificate of Designation for the Company's Series D Stock**
3(v) Certificate of Amendment to the Certificate of Designation for the
Company's Series A Stock***
3(vi) Form of 12.75% Subordinate Note***
3(vii) Form of the Warrant Certificate***
3(viii) Pledge and Security Agreement between the Company and Charles H.
Davis**
3(ix) Security Agreement between the Company and Stephen Haynes**
TX-39
<PAGE>
Index Exhibit
3(x) Registration Rights Agreement among the Company, Charles H. Davis and
Randall K. Davis**
3(xi) Certificate of Designation for the Company's Series B Stock
3(xii) Agreement between the Company and b2bstores.com, Inc.
3(xiii) Form of the Subscription Agreement for Series B Stock and Warrants
3(xiv) Form of the Warrant Certificate
3(xv) Registration Rights Agreement between the Company and purchasers of
Series B Stock and 1000 common stock warrants
3(xvi) Warrant Agreement
6(i) Employment Agreement between the Company and Richard Kandel***
6(ii) Employment Agreement between the Company and Randall K. Davis***
6(iii) Employment Agreement between CIC and Randall K. Davis**
6(iv) Employment Agreement between CIC and Charles H. Davis**
6(v) Employment Agreement between Superior and Stephen Haynes**
6(vi) Consulting Agreement between the Company and Steven C. Etra***
21 List of Subsidiaries of the Company*
- --------------------------
* Incorporated by reference to the Company's Form 10-SB filed with the
Commission on June 16, 1999.
** Incorporated by reference to the Company's Current Report on Form 8-K filed
with the Commission on September 3, 1999.
*** Incorporated by reference to the Company's Amendment No. 1 to Form 10-SB
filed with the Commission on October 22, 1999.
TX-40
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
ENVIRO-CLEAN OF AMERICA, INC.
By: /s/ RICHARD KANDEL
---------------------------------
Richard Kandel
Chairman of the Board and
Chief Executive Officer
Date: December 15, 1999
TX-41
<PAGE>
Exhibit 3(xi)
ENVIRO-CLEAN OF AMERICA, INC.
Certificate of Designation, Preferences and Rights of Preferred Stock
By Resolution of the Board of Directors
Providing for the Issue of 80,000 Shares of Preferred Stock Designated
Series B Cumulative Convertible Preferred Stock
The undersigned, Randall K. Davis and Steven Etra, President and Secretary
of Enviro-Clean of America, Inc., a Nevada corporation (the "Company"), in
accordance with the provisions of Section 78.195 of the Nevada Statutes, do
HEREBY CERTIFY:
That pursuant to authority conferred upon the Board of Directors by the
Articles of Incorporation of the Company (hereinafter referred to as the
"Articles of Incorporation"), said Board of Directors, acting by unanimous
written consent, adopted a resolution providing for the issuance of a series of
Preferred Stock, designated "Series B Cumulative Convertible Preferred Stock,"
which resolution is set forth as follows:
RESOLVED, that pursuant to the authority vested in the Board of
Directors of Enviro-Clean of America, Inc., a Nevada corporation (the
"Company"), by the Articles of Incorporation of the Company, the Board of
Directors does hereby provide for the issuance of a series of Preferred
Stock, par value $0.001 per share, of the Company as follows:
There is hereby created a series of preferred stock of the Corporation
to be designated the Series B Cumulative Convertible Preferred Stock
(hereinafter referred to as the "Series B Stock"), consisting of 80,000
shares, and the following is a statement of the voting powers, preferences,
and relative, optional and other special rights, and qualifications,
limitations or restrictions thereof, of the Series B Stock.
Section 1. Designation, Amount and Par Value. The series of Preferred Stock
---------------------------------
shall be designated as the Series B Cumulative Convertible Preferred Stock (the
"Preferred Stock"), and the number of shares so designated shall be 80,000. The
par value of each share of Preferred Stock shall be $.001. Each share of
Preferred Stock shall have a stated value of $100.00 per share (the "Stated
Value").
1
<PAGE>
Section 2. Dividends.
---------
a. Holders of outstanding shares of Preferred Stock shall be entitled to
receive, out of funds legally available therefor, and the Company
shall pay, cumulative cash dividends at the rate per share (as a
percentage of the Stated Value per share) equal to 10% per annum, in
cash or (as provided for herein) shares of Common Stock, payable
quarterly in arrears on the last day of each March, June, September
and December during the term of the Preferred Stock (each such date, a
"Dividend Payment Date"), provided, however, that the first Dividend
-------- -------
Payment Date shall be December 31, 1999. Any arrears in payment of
dividends with respect to any share of Preferred Stock shall be
payable on the Automatic Conversion Date (as defined in Section 5(c))
applicable to such share or earlier if so determined by the Company.
Dividends on shares of the Preferred Stock shall accrue daily
commencing on the Issue Date of such shares, shall be calculated based
on the actual number of days in such quarterly period in a 365-day
year and shall be deemed to accrue on such date whether or not earned
or declared and whether or not there are profits, surplus or other
funds of the Company legally available for the payment of dividends.
The party that holds the Preferred Stock on an applicable record date
for any dividend payment will be entitled to receive such dividend
payment and any other accrued and unpaid dividends which accrued prior
to such Dividend Payment Date, without regard to any sale or
disposition of such Preferred Stock subsequent to the prior Dividend
Payment Dates but prior to the applicable Dividend Payment Date. A
transfer of the right to receive payments hereunder shall be
transferable only through an appropriate entry in the register (the
"Register") to be maintained by the Company, in which shall be entered
the names and address of the registered holder of shares of Preferred
Stock and all transfers of such shares. References to the "Holder" or
"Holders" shall mean the Person(s) listed in the Register as the
registered holder of such shares. The ownership of such shares shall
be proved by the Register, absent manifest error. Except as otherwise
provided herein, if at any time the Company pays less than the total
amount of dividends then accrued on account of the Preferred Stock,
such payment shall be distributed ratably among the holders of
Preferred Stock based upon the number of shares held by each Holder.
Dividends due hereunder on a Dividend Payment Date may, if so
determined by a majority of the Company's entire Board of Directors,
be paid in shares of Common Stock calculated at a price per share of
Common Stock equal to $5.00. Other than payment of dividends in shares
of Common Stock all other amounts due hereunder at any time shall be
paid in immediately available funds.
b. Notwithstanding anything to the contrary contained herein, the Company
may not, without the prior written consent of each Holder, in each
instance, issue shares of Common Stock in payment of dividends (and
must deliver immediately available funds in respect thereof) on the
Preferred Stock if the number of shares of Common Stock at the time
authorized, unissued and unreserved for all purposes, or held as
treasury stock, is insufficient to issue such dividends to be paid in
shares of Common Stock.
2
<PAGE>
c. So long as any shares of Preferred Stock shall remain outstanding,
neither the Company nor any subsidiary thereof shall redeem, purchase
or otherwise acquire directly or indirectly any Junior Securities (as
defined in Section 6), nor shall the Company directly or indirectly
pay or declare any dividend or make any distribution (other than a
dividend or distribution described in Section 5) upon, nor shall any
distribution be made in respect of, any Junior Securities, nor shall
any monies be set aside for or applied to the purchase or redemption
(through a sinking fund or otherwise) of any Junior Securities, unless
in each case all dividends on the Preferred Stock for all past
dividend periods shall have been paid.
Section 3. Voting Rights. The Holders of the Preferred Stock shall have no
-------------
voting rights in such capacity, other than those that may be provided by law.
However, so long as any shares of Preferred Stock are outstanding, the Company
shall not, without the affirmative vote of the Holders of a majority in interest
of the shares of Preferred Stock then outstanding, alter or change adversely the
powers, preferences or rights given to the Preferred Stock.
Section 4. Liquidation. Upon any liquidation, dissolution or winding-up of
-----------
the Company, whether voluntary or involuntary (a "Liquidation"), the Holders of
shares of Preferred Stock shall be entitled to receive out of the assets of the
Company, available for distribution to its shareholders, after and subject to
the payment in full of all amounts required to be distributed to holders of
Senior Securities (as defined in Section 6), but before any payment shall be
made to holders of shares of Common Stock or any Junior Securities, for each
share of Preferred Stock an amount equal to $100.00 per share of Preferred
Stock, plus an amount equal to accrued but unpaid dividends per share, whether
declared or not, and if the assets of the Company shall be insufficient to pay
such amounts in full, then the entire assets of the Company to be distributed
shall be distributed among the Holders of Preferred Stock ratably in accordance
with the respective amounts that would be payable on such shares if all amounts
payable thereon were paid in full. A sale, conveyance or disposition of all or
substantially all of the assets of the Company or the effectuation by the
Company of a transaction or series of related transactions in which more than
33 1/3% of the voting power of the Company is disposed of, or a consolidation
or merger of the Company with or into any other company or companies or a
reclassification of the Common Stock shall not be treated as a Liquidation, but
instead shall be subject to the provisions of Section 5. The Company shall mail
written notice of any Liquidation, not less than 60 days prior to the payment
date stated therein, to each record Holder of Preferred Stock.
Section 5. Conversion
----------
a. Each share of Preferred Stock shall be convertible into shares of
Common Stock at the Conversion Price (as defined in Section 6), at the
option of the Holder in whole or in part at any time and from time to
time after the Issue Date of such share of Preferred Stock. The Holder
of the Preferred Stock shall effect conversions by surrendering the
certificate or certificates representing the shares of Preferred Stock
to be converted to the Company, together with the form of conversion
notice attached hereto as Exhibit 1 (the "Holder Conversion Notice").
---------
Each Holder Conversion Notice shall specify the number of shares of
Preferred Stock to be converted and the date on which such conversion
is to be effected,
3
<PAGE>
which date may not be prior to the date the Holder of Preferred Stock
delivers such Notice by facsimile (the "Holder Conversion Date"). If
no Holder Conversion Date is specified in a Holder Conversion Notice,
the Holder Conversion Date shall be the date that the Holder
Conversion Notice is deemed delivered pursuant to Section 5(k). Each
Holder Conversion Notice, once given, shall be irrevocable. If a
Holder is converting less than all shares of Preferred Stock
represented by the certificate or certificates tendered by such Holder
with the Holder Conversion Notice, or if a conversion hereunder cannot
be effected in full for any reason, the Company shall promptly deliver
to such Holder (in the manner and within the time set forth in Section
5(d)) a certificate for such number of shares of Preferred Stock as
have not been converted.
b. Each share of Preferred Stock shall be convertible into shares of
Common Stock at the Conversion Price, at the option of the Company in
whole or in part at any time and from time to time if (i) the closing
bid price of the Company's Common Stock on the trading market on which
it is then traded is at least $7.50 for 20 consecutive trading days
and, (ii) the daily trading volume for the Company's Common Stock for
such 20 trading days shall have been at least 25,000 shares. In
connection with such conversion, the Company shall deliver to the
Holders of such shares of Preferred Stock a written notice in the form
attached hereto as Exhibit 2 (the "Company Conversion Notice"). The
---------
Company Conversion Notice shall specify the number of shares of
Preferred Stock that will be subject to conversion on the Company
Conversion Date. The Company shall deliver or cause to be delivered
the Company Conversion Notice at least ten Business Days before the
Company Conversion Date. The Holders of the Preferred Stock shall
surrender the certificates representing such shares at the office of
the Company or the Transfer Agent not later than ten Business Days
after the Company Conversion Date. Failure of the Company to deliver
the Company Conversion Notice shall not effect the validity or
enforceability of the conversion on the Company Conversion Date and no
dividend shall accrue from that date forward and the Preferred Stock
shall from that date forward enjoy no dividend, liquidation or other
preference over the Common Stock.
c. On the fifth anniversary of the Issue Date (the "Automatic Conversion
Date") for each share of Preferred Stock that has not previously been
converted, such share of Preferred Stock shall be automatically
convertible into shares of Common Stock at the then applicable
Conversion Price; provided, however, that no shares of Preferred Stock
-------- -------
shall be converted unless the Company shall have duly reserved for
issuance to the Holder a sufficient number of shares of Common Stock
to issue upon such conversion. In connection with such conversion, the
Company shall deliver to the Holders of such shares of Preferred Stock
a written notice in the form attached hereto as Exhibit 3 (the
---------
"Automatic Conversion Notice"). The Automatic Conversion Notice shall
specify the number of shares of Preferred Stock that will be subject
to automatic conversion on the Automatic Conversion Date. The Company
shall deliver or cause to be delivered the Automatic Conversion Notice
at least ten Business Days before the Automatic Conversion Date. The
Holders of the Preferred Stock shall surrender the
4
<PAGE>
certificates representing such shares at the office of the Company or
the office of the agent assigned by the Company to accept such
transfers (the "Transfer Agent") not later than ten Business Days
after the Automatic Conversion Date. Failure of the Company to
delivery the Automatic Conversion Notice shall not effect the validity
or enforceability of the automatic conversion on the Automatic
Conversion Date and no dividends shall accrue from that date forward
and the Preferred Stock shall from that date forward enjoy no
dividend, liquidation or other preference over the Common Stock. Each
of a Holder Conversion Notice, Company Conversion Notice, and an
Automatic Conversion Notice is sometimes referred to herein as a
"Conversion Notice," and each of a "Holder Conversion Date", "Company
Conversion Date" and "Automatic Conversion Date" is sometimes referred
to herein as "Conversion Date."
d. Not later than ten trading days after the Conversion Date, the Company
will, or will cause the Transfer Agent to, deliver to the Holder of
Preferred Stock (i) a certificate or certificates representing the
number of shares of Common Stock being acquired upon the conversion of
shares of Preferred Stock, including certificates representing the
number of shares of Common Stock as equals the accrued but unpaid
dividends thereon divided by the Conversion Price and (ii) one or more
certificates representing the number of shares of Preferred Stock not
converted. If, at the time of any conversion of Preferred Stock, there
shall be an effective Registration Statement applicable to the shares
of Common Stock available for such conversion, any certificates
representing shares of Common Stock to be delivered upon such
conversion hereunder shall be free of restrictive legends and trading
restrictions on the stock transfer books of the Company. The Company
shall not be obligated to issue certificates evidencing the shares of
Common Stock issuable upon conversion of any shares of Preferred Stock
until certificates representing the shares of Preferred Stock to be
converted are either delivered for conversion to the Transfer Agent
for the Common Stock, or until the holder notifies the Company that
such certificates representing the shares of Preferred Stock have been
lost, stolen or destroyed and (if requested by the Company or the
Transfer Agent) provides a bond and other supporting documentation
reasonably satisfactory to the Company and the Transfer Agent (or
other adequate security reasonably acceptable to the Company and the
Transfer Agent) to indemnify the Company from any loss incurred by it
in connection therewith, provided that, if the Company or the Transfer
Agent receives the original certificates representing the shares of
Preferred Stock being converted on or prior to the time specified for
the delivery of such shares of Common Stock, the date of the Holder
Conversion Notice shall be deemed to be the date of delivery of such
original certificates representing the shares of Preferred Stock.
e.
i. If the Company, at any time while any shares of Preferred Stock
are outstanding, (a) shall pay a stock dividend or otherwise make
any distributions on shares of its Junior Securities payable in
shares of its capital stock (whether payable in shares of its
Common Stock or of capital
5
<PAGE>
stock of any class), (b) subdivide outstanding shares of Common
Stock into a larger number of shares, or (c) combine outstanding
shares of Common Stock into a smaller number of shares, the
Conversion Price shall be multiplied by a fraction of which the
numerator shall be the number of shares of Common Stock of the
Company outstanding before such event and of which the
denominator shall be the number of shares of Common Stock
outstanding after such event. Any adjustment made pursuant to
this Section 5(e)(i) shall become effective immediately upon the
record date for the determination of stockholders entitled to
receive such dividend or distribution and shall become effective
immediately after the effective date in the case of a subdivision
or combination.
ii. If the Company, at any time while shares of Preferred Stock are
outstanding, shall distribute to all holders of Common Stock (and
not to Holders of Preferred Stock) evidences of its indebtedness
or assets or rights or warrants to subscribe for or purchase any
security (excluding those referred to in Section 5(e)(i) above),
then in each such case the Conversion Price at which each share
of Preferred Stock shall thereafter be convertible shall be
determined by multiplying the Conversion Price in effect
immediately prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a fraction
of which the denominator shall be the Conversion Price per share
of Common Stock, and of which the numerator shall be such
Conversion Price per share of the Common Stock on such record
date less the then fair market value at such record date of the
portion of such assets or evidences of indebtedness so
distributed applicable to one outstanding share of Common Stock
as determined by the Board of Directors in good faith; provided,
--------
however, that in the event of a distribution exceeding ten
-------
percent (10%) of the assets of the Company, such fair market
value shall be determined by a nationally recognized or major
regional investment banking firm or firm of independent certified
public accountants of recognized standing (which may be the firm
that regularly examines the financial statements of the Company)
(an "Appraiser") selected in good faith by the Holders of a
majority in interest of the shares of Preferred Stock then
outstanding; and provided, further, that the Company, after
-------- -------
receipt of the determination by such Appraiser shall have the
right to select an additional Appraiser, in which case the fair
market value shall be equal to the average of the determinations
by each such Appraiser. In either case the adjustments shall be
described in a statement provided to the Holders of Preferred
Stock explaining the portion of assets or evidences of
indebtedness so distributed or such subscription rights
applicable to one share of Common Stock. Such adjustment shall be
made whenever any such distribution is made and shall become
effective immediately after the record date mentioned above.
iii. All calculations under this Section 5 shall be made to the
nearest one- cent ($.01) or the nearest 1/100th of a share, as
the case may be.
6
<PAGE>
iv. Whenever the Conversion Price is adjusted pursuant to Section
5(e)(i) or (ii), the Company shall promptly mail to the Holders
of Preferred Stock a notice setting forth the Conversion Price
after such adjustment and setting forth a brief statement of the
facts requiring such adjustment.
v. In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another
person pursuant to which the Company will not be the surviving
entity, the sale or transfer of all or substantially all of the
assets of the Company or any compulsory share exchange pursuant
to which the Common Stock is converted into other securities,
cash or property, the Holders of the Preferred Stock then
outstanding shall have the right thereafter to convert such
shares into the shares of stock and other securities, cash and
property receivable upon or deemed to be held by holders of
Common Stock following such reclassification, consolidation,
merger, sale, transfer or share exchange, and the Holders of the
Preferred Stock shall be entitled upon such event to receive such
amount of securities, cash or property as would be payable to the
holders of the shares of the Common Stock of the Company into
which such shares of Preferred Stock could have been converted
immediately prior to such reclassification, consolidation,
merger, sale, transfer or share exchange. The terms of any such
consolidation, merger, sale, transfer or share exchange shall
include such terms so as to continue to give to the Holder of
Preferred Stock the right to receive the securities, cash or
property set forth in this Section 5(e)(v) upon any conversion
following such consolidation, merger, sale, transfer or share
exchange. This provision shall similarly apply to successive
reclassifications, consolidations, mergers, sales, transfers or
share exchanges.
vi. If:
(1) the Company shall declare a dividend (or any other
distribution) on its Common Stock (other than a subdivision
of the outstanding shares of Common Stock) or shall
authorize a repurchase or redemption or otherwise enter into
any other transaction (including a stock split,
recapitalization or other transaction) which would cause a
decrease in the number of its shares of Common Stock issued
and outstanding (other than transactions that similarly
decrease the number of shares of Common Stock into which
shares of Preferred Stock are convertible); or
(2) the Company shall declare a special nonrecurring cash
dividend on its then outstanding Common Stock; or
(3) the Company shall authorize the granting to all holders of
the Common Stock rights or warrants to subscribe for or
purchase any shares of capital stock of any class or of any
rights; or
7
<PAGE>
(4) the approval of any stockholders of the Company shall be required
in connection with any reclassification of the Common Stock of
the Company (other than a subdivision or combination of the
outstanding shares of Common Stock), any consolidation or merger
to which the Company is a party, any sale or transfer of all or
substantially all of the assets of the Company, or any compulsory
share exchange whereby the Common Stock is converted into other
securities, cash or property; or
(5) the Company shall authorize the voluntary or involuntary
dissolution, liquidation or winding-up of the affairs of the
Company;
then the Company shall cause to be filed at each office or agency
maintained for the purpose of conversion of Preferred Stock, and shall
cause to be mailed to the Holders of Preferred Stock at their last
respective addresses as they shall appear upon the Register, at least
30 calendar days prior to the applicable record or effective date
hereinafter specified, a notice stating (x) the date on which a record
is to be taken for the purpose of such dividend, distribution,
repurchase, redemption, rights or warrants, or if a record is not to
be taken, the date as of which the holders of Common Stock of record
to be entitled to such dividend, distribution, repurchase, redemption,
rights or warrants are to be determined, or (y) the date on which such
reclassification, consolidation, merger, sale, transfer, share
exchange, dissolution, liquidation or winding-up is expected to become
effective, and the date as of which it is expected that holders of
Common Stock of record shall be entitled to exchange their shares of
Common Stock for securities or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer, share
exchange, dissolution, liquidation or winding-up; provided, however,
that the failure to mail such notice or any defect therein or in the
mailing thereof shall not affect the validity of the corporate action
required to be specified in such notice.
f. If at any time conditions shall arise by reason of an action taken by the
Company which in the opinion of the Board of Directors are not adequately
covered by the other provisions hereof and which might materially and
adversely affect the rights of the Holders of Preferred Stock (different
than or distinguished from the effect generally on rights of holders of any
class of the Company's capital stock) or if at any time any such conditions
are expected to arise by reason of any action contemplated by the Company,
the Company shall, at least 30 calendar days prior to the effective date of
such action, mail a written notice to each Holder of Preferred Stock
briefly describing the action contemplated and the material adverse effects
of such action on the rights of such Holders and an Appraiser selected by
the Holders of majority in interest of the Preferred Stock shall give its
opinion as to the adjustment, if any (not inconsistent with the standards
established in this Section 5), of the Conversion Price (including, if
necessary,
8
<PAGE>
any adjustment as to the securities into which shares of Preferred
Stock may thereafter be convertible) and any distribution which is or
would be required to preserve without diluting the rights of the
Holders of shares of Preferred Stock; provided, however, that the
Company, after receipt of the determination by such Appraiser, shall
have the right to select an additional Appraiser, in which case the
adjustment shall be equal to the average of the adjustments
recommended by each such Appraiser. The Board of Directors shall make
the adjustment recommended forthwith upon the receipt of such opinion
or opinions or the taking of any such action contemplated, as the case
may be; provided, however, that no such adjustment of the Conversion
Price shall be made which in the opinion of the Appraiser(s) giving
the aforesaid opinion or opinions would result in an increase of the
Conversion Price to more than the Conversion Price then in effect.
g. The Company (i) represents and warrants that as of the Issue Date (as
defined in Section 6), it has duly reserved solely for issuance upon
conversion of Preferred Stock, as herein provided, out of its
authorized and unissued Common Stock free from preemptive rights or
any other actual or contingent purchase rights of persons other than
the Holders of Preferred Stock, the number of shares of Common Stock
as would be issuable upon conversion of all of the shares of the
Preferred Stock that are authorized for issuance hereunder as if all
such shares were issued on, and such conversion had occurred on, the
Issue Date and (ii) covenants that it will at all times reserve and
keep available out of its authorized and unissued Common Stock solely
for the purpose of issuance upon conversion of the Preferred Stock as
herein provided, free from preemptive rights or any other actual or
contingent purchase rights of persons other than the Holders of
Preferred Stock, the number of shares of Common Stock as shall be
issuable (taking into account the adjustments of Section 5(d) hereof)
upon the conversion of the aggregate of all outstanding shares of
Preferred Stock that are authorized for issuance hereunder. The
Company covenants that all shares of Common Stock that shall be so
issuable shall, upon issue, be duly and validly authorized, issued and
fully paid and nonassessable.
h. Upon a conversion hereunder the Company shall not be required to issue
stock certificates representing fractions of shares of Common Stock,
but may if otherwise permitted, make a cash payment in respect of any
final fraction of a share based on the Conversion Price. If the
Company elects not to, or is unable to, make such a cash payment, the
Holder of Preferred Stock shall be entitled to receive, in lieu of the
final fraction of a share, one whole share of Common Stock.
i. The issuance of certificates for (i) shares of Common Stock on
conversion of the Preferred Stock or (ii) shares of Common Stock paid
as dividends, shall be made without charge to the holders thereof for
any documentary stamp or similar taxes that may be payable in respect
of the issue or delivery of such certificate, provided that the
Company shall not be required to pay any tax that may be payable in
respect of any transfer involved in the issuance and delivery of any
such certificate upon conversion in a name other than that of the
Holder of such shares of Preferred Stock so converted and the Company
shall not be required to
9
<PAGE>
issue or deliver such certificates unless or until the person or
persons requesting the issuance thereof shall have paid to the Company
the amount of such tax or shall have established to the satisfaction
of the Company that such tax has been paid.
j. Shares of Preferred Stock converted into Common Stock shall be
canceled and shall have the status of authorized but unissued shares
of preferred stock.
k. Any and all notices or other communications or deliveries to be
provided by the Holder hereunder, including, without limitation, any
Conversion Notice, shall be in writing and delivered personally, by
facsimile, sent by a nationally recognized overnight courier service
or sent by certified or registered mail, postage prepaid, addressed to
the attention of the President of the Company at the facsimile
telephone number or address of the principal place of business of the
Company and if applicable to the Transfer Agent. Any and all notices
or other communications or deliveries to be provided by the Company
hereunder shall be in writing and delivered personally, by facsimile,
sent by a nationally recognized overnight courier service or sent by
certified or registered mail, postage prepaid, addressed to the Holder
at the facsimile telephone number or address of the Holder appearing
on the books of the Company, or if no such facsimile telephone number
or address appears, at the principal place of business of the Holder.
Any notice or other communication or deliveries hereunder shall be
deemed given and effective on the earliest of (i) the date of
transmission, if delivered via facsimile at the facsimile telephone
number specified in the Subscription Agreement executed by the Holder
to purchase the Preferred Stock (the "Subscription Agreement") prior
to 4:30 p.m. (New York, New York Time) on a trading day, (ii) the
trading day after the date of transmission, if delivered via facsimile
at the facsimile telephone number specified in the Subscription
Agreement later than 4:30 p.m. (New York, New York Time) on any date
and earlier than 11:59 p.m. (New York, New York Time) on such date,
(iii) the trading day following the date of mailing, if sent by
nationally recognized overnight courier service, or (iv) upon action
receipt by the party to whom such notice is required to be given.
Section 6. Definitions. For the purposes hereof, the following terms shall
-----------
have the following meanings:
a. "Business Day" shall mean any date of the year on which commercial
banks are not required or authorized to be closed in New York, New
York.
b. "Common Stock" shall mean shares now or hereafter authorized of the
class of Common Stock, $.001 par value, of the Company, stock of any
other class into which such shares may hereafter have been
reclassified or changed and any other equity securities of the Company
hereafter designated as Common Stock.
c. "Conversion Amount" shall mean, with respect to any share of Preferred
Stock surrendered for conversion hereunder, the Stated Value of such
share of Preferred
10
<PAGE>
Stock plus accrued but unpaid dividends thereon through and including
the applicable Conversion Date.
d. "Conversion Price" shall mean $5.00 per share of Common Stock, subject
to adjustment according to the provisions of this Certificate of
Designation.
e. "Issue Date" shall mean, with respect to any share of Preferred Stock,
the date of the issuance of such share of Preferred Stock regardless
of the number of transfers of such share of Preferred Stock and
regardless of the number of certificates which may be issued to
evidence such share of Preferred Stock.
f. "Junior Securities" shall mean the Common Stock and the shares of any
classes or series other than the Common Stock, that, by the terms of
the Articles of Incorporation or of the instrument by which the Board
of Directors, acting pursuant to authority granted in the Articles of
Incorporation, shall fix the relative rights, preferences and
limitations thereof, shall be subordinated to the Series B Preferred
Stock in respect of the right to receive dividends and/or to
participate in any distribution of assets other than by way of
dividends. Specifically, the Common Stock, the Series A Convertible
Preferred Stock and the Series E Convertible Redeemable Preferred
Stock of the Company shall be deemed to be Junior Securities.
g. "Person" shall mean an individual or a Company, partnership, trust,
incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or
political subdivision thereof) or other entity of any kind.
h. "Senior Securities" shall mean the shares of any classes or series
that, by the terms of the Articles of Incorporation or of the
instrument by which the Board of Directors, acting pursuant to
authority granted in the Articles of Incorporation, shall fix the
relative rights, preferences, and limitations thereof, shall be senior
to the Series B Preferred Stock in respect of the right to receive
dividends and/or to participate in any distribution of assets other
than by way of dividends. Specifically, the Series D Convertible
Redeemable Preferred Stock of the Company shall be deemed to be Senior
Securities.
[SIGNATURE PAGE FOLLOWS]
11
<PAGE>
[SIGNATURE PAGE TO CERTIFICATE OF DESIGNATION]
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by Randall K. Davis, its President, and Steven Etra, its Secretary, this
____ day of _____________, 1999.
ENVIRO-CLEAN OF AMERICA, INC.
By: _____________________________
Randall K. Davis, President
By: _____________________________
Steven Etra, Secretary
STATE OF_________________ (S)
(S)
COUNTY OF_______________ (S)
On ________, 1999, personally appeared before me, a Notary Public, RANDALL
K. DAVIS, who acknowledged that he executed the above instrument.
_____________________________________
NOTARY PUBLIC,
STATE OF ____________
12
<PAGE>
EXHIBIT 1
TO
CERTIFICATE OF DESIGNATION
===========================================
NOTICE OF CONVERSION
AT THE ELECTION OF HOLDER
(To be executed by the registered Holder to convert shares of Series B Preferred
Stock)
The undersigned hereby irrevocably elects to convert the number of shares of
Series B Cumulative Convertible Preferred Stock of the Company, par value $0.001
per share (the "Preferred Stock"), indicated below into shares of common stock,
par value $0.001 per share (the "Common Stock"), of Enviro-Clean of America,
Inc. (the "Company") according to the conditions hereof and the certificate of
designation of the Preferred Stock, as of the date written below. If shares are
to be issued in the name of a person other than undersigned, the undersigned
will pay all transfer taxes payable with respect thereto and is delivering
herewith such certificates and opinions as reasonably requested by the Company
in accordance therewith. No fee will be charged to the Holder for any
conversion, except for such transfer taxes, if any.
Conversion calculations: ______________________________________
Date to Effect Conversion
______________________________________
Number of shares of Series B Preferred
Stock to be Converted
______________________________________
Conversion Price
______________________________________
Amount of Accrued but Unpaid Dividends
due on the Preferred Stock to be
Converted
______________________________________
Number of shares of Common Stock to be
Issued
______________________________________
Signature
______________________________________
Name
______________________________________
Address
13
<PAGE>
EXHIBIT 2
TO
CERTIFICATE OF DESIGNATION
===========================================
NOTICE OF CONVERSION
AT THE ELECTION OF COMPANY
(To be executed by the Company to convert shares of Series B Preferred Stock)
The undersigned in the name and on behalf of Enviro-Clean of America, Inc. (the
"Company") hereby notices the addressee hereof that __________ shares of the
Series B Cumulative Convertible Preferred Stock of the Company, par value $0.001
per share (the "Preferred Stock"), held by the Holder will be converted into
shares of Common Stock, par value $0.001 per share (the "Common Stock"), of the
Company according to the terms of the Preferred Stock, as of the date written
below. No fee will be charged to the registered Holder for any conversion
hereunder, except for such transfer taxes, if any, which may be incurred by the
Company if shares are to be issued in the name of a person other than the person
to whom this notice is addressed:
Conversion calculations: ______________________________________
Date to Effect Conversion
______________________________________
Number of shares of Series B Preferred
Stock to be Converted
______________________________________
Conversion Price
______________________________________
Amount of Accrued but Unpaid Dividends
due on the Preferred Stock to be
Converted
______________________________________
Number of shares of Common Stock to be
Issued
______________________________________
Signature
______________________________________
Name
______________________________________
Address
14
<PAGE>
EXHIBIT 3
TO
CERTIFICATE OF DESIGNATION
===========================================
NOTICE OF AUTOMATIC CONVERSION
The undersigned in the name and on behalf of Enviro-Clean of America, Inc. (the
"Company") hereby notices the addressee hereof that __________ shares of the
Series B Cumulative Convertible Preferred Stock of the Company, par value $0.001
per share (the "Preferred Stock"), held by the Holder will be converted into
shares of Common Stock, par value $0.001 per share (the "Common Stock"), of the
Company according to the terms of the Preferred Stock, as of the date written
below. No fee will be charged to the Holder for any conversion hereunder,
except for such transfer taxes, if any, which may be incurred by the Company if
shares are to be issued in the name of a person other than the person to whom
this notice is addressed:
Conversion calculations: ______________________________________
Date to Effect Conversion
______________________________________
Number of shares of Series B Preferred
Stock to be Converted
______________________________________
Conversion Price
______________________________________
Amount of Accrued but Unpaid Dividends
due on the Preferred Stock to be
Converted
______________________________________
Number of shares of Common Stock to be
Issued
______________________________________
Signature
______________________________________
Name
______________________________________
Address
15
<PAGE>
Exhibit 3(xii)
AGREEMENT
AGREEMENT, dated as of October 1, 1999, between B2BSTORES.COM INC., a
Delaware corporation having its principal offices at 249 East Ocean Boulevard,
Long Beach, California 90802 ("B2B"), and ENVIRO-CLEAN OF AMERICA, INC., a
Nevada corporation having its principal offices at 211 Park Avenue, Hicksville,
New York 11801 ("Enviro-Clean").
WHEREAS, Enviro-Clean owns and operates a web site at www.b2bgoods.com
("EC Site");
WHEREAS, Enviro-Clean sells products in the categories set forth on
Schedule 1 hereto through the EC Site and traditional distribution channels
(collectively, the "EC Products");
WHEREAS, B2B owns and operates a web site at www.b2bstores.com ("B2B
Site") through which its provides businesses with access to product and service
offerings, auctions, community functions, and business information;
WHEREAS, EC is a principal stockholder of B2B;
WHEREAS, B2B desires to sell EC Products through the B2B Site; and
WHEREAS, EC desires to process all e-commerce transactions generated
at the EC Site through B2B's e-commerce backbone (the "E-Commerce System").
IT IS AGREED:
1. Term. Subject to earlier termination pursuant to Section 10,
----
this Agreement shall remain in force and effect until October 1, 2004.
2. Sale of EC Products through B2B Site.
------------------------------------
2.1 During the term of this Agreement, B2B shall be entitled to
offer for sale, and to sell, through the B2B Site, any and all EC Products. The
price to be charged by B2B to its customers for each EC Product sold through the
B2B Site shall be established by B2B in its sole discretion.
2.2 Enviro-Clean shall provide B2B with a full copy of its
product offerings and inventory database in electronic format, together with
weekly updates, including any EC Products that are not offered by EC through the
EC Site. Enviro-Clean shall cooperate with B2B, and take all necessary action
directed by B2B, to ensure that electronic data, including components of the EC
Site, such as HTMLs, needed to feature, depict and otherwise describe all
available EC Products are made available at the B2B Site without the need for
hyperlinking or other customer action that would take the customer outside of
the B2B Site.
2.3 All orders for EC Products placed through the B2B Site shall
be processed through the E-Commerce System and electronically transmitted to
Enviro-Clean and its vendors
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<PAGE>
immediately through an interface or interfaces to be established between the E-
Commerce System and the electronic systems of Enviro-Clean and its vendors
pursuant to Section 4.
2.4 Enviro-Clean shall supply, package and ship, or cause its
vendors to supply, package and ship, to B2B's customers all EC Products
purchased through the B2B Site and shall use its commercial best efforts to
ensure that each order is processed and shipped within one business day from the
date it is placed through the B2B Site. Enviro-Clean shall be responsible for
the payment of all costs to vendors, suppliers, packagers and carriers. Enviro-
Clean shall use (and shall instruct its vendors to use) such carriers as
directed by B2B for the delivery to customers of EC Products purchased through
the B2B Site. Enviro-Clean shall deliver to B2B written notice of any shipping
rate changes and the effective date of such changes as soon as practicable after
notification of Enviro-Clean of same by carriers. Enviro-Clean shall report lost
shipments when reported by carrier, to the extent to which said carrier notifies
Enviro-Clean. Enviro-Clean shall provide support for tracking shipments made via
carrier that has tracking capabilities (e.g. Federal Express). B2B shall obtain
title to each EC Product once it is placed in the possession of a carrier.
2.5 Notwithstanding anything to the contrary contained herein:
(i) B2B shall be responsible for additional shipping and handling costs
associated with shipments not originally delivered as a result of incorrect
customer addresses provided through the B2B Site; (ii) Enviro-Clean shall be
responsible for additional shipping and handling costs associated with
misshipments resulting from errors or omissions committed by it or its vendors
and for damaged goods; (iii) if a B2B customer cancels the order as a result of
the misshipment (other than as a result of error inputted by the customer at or
generated through the B2B Site) or damaged goods, Enviro-Clean shall be
responsible for the original shipping and handling costs; and (iv) B2B shall be
responsible for shipments lost through carrier error.
2.6 Enviro-Clean shall track and report product return
information to B2B electronically through the E-Commerce System in order that
B2B may appropriately credit accounts and communicate with its customers. For
each return of a product for any reason to Enviro-Clean (other than for reasons
of defect or late delivery), B2B will be subject to a restocking fee of 1% of
the Stocking Cost for such product.
2.7 B2B shall be responsible for all credit authorizations for
its customers. B2B shall be responsible for all invoicing and collections,
including collection of applicable sales tax, and credit fraud, with respect to
its customers.
2.8 Enviro-Clean shall deliver to B2B within 10 days of the end
of each month an invoice in an amount equal to the Enviro-Clean Costs (as
defined below) setting forth for each of the categories of EC Products listed on
Schedule 1 ("Categories") (i) the quantities of products in such Category
ordered through the B2B Site and actually supplied and shipped by Enviro-Clean
and its vendors during such month, and (ii) the amounts paid by Enviro-Clean
(i.e., Enviro-Clean's actual per-unit cost, giving effect to any discounts ) to
(A) vendors for such products ("Stocking Cost"), (B) packagers for the packaging
of such products and (C) carriers for the delivery of such products to customers
(collectively, the "Enviro-Clean Costs"). B2B shall pay Enviro-Clean within 10
days of receipt of each invoice an amount equal to the Enviro-Clean Costs. Upon
reasonable request by B2B, Enviro-Clean shall give B2B's officers and
2
<PAGE>
accountants access to the books and records of Enviro-Clean to confirm the
information contained in any such statement.
2.9 B2B shall deliver to Enviro-Clean within 45 days of the end
of each calendar quarter a statement setting forth the revenues collected by B2B
from the sale of EC Products in each Category through the B2B Site during such
quarter, net of all returns and uncollected customer payments which have not yet
been credited ("Category Revenues"). At the time each quarterly statement is
delivered to Enviro-Clean, B2B shall also deliver a payment equal to (x) the
Category Revenues generated during the quarter, multiplied by (y) the
corresponding percentage set forth on Schedule 1. Upon reasonable request by
Enviro-Clean, B2B shall give Enviro-Clean's officers and accountants access to
the books and records of B2B to confirm the information contained in any
invoice.
3. Vendor Management Services.
--------------------------
4.1 During the term of this Agreement, B2B will provide Enviro-
Clean with vendor management and order processing services for the EC Site
("Vendor Management Services"), pursuant to which all orders for EC Products
placed through the EC Site shall be routed to the E-Commerce System. The E-
Commerce System will then process all such orders, process customer credit
authorizations, electronically forward orders to the appropriate vendors and
create customer invoicing. B2B and Enviro-Clean will mutually agree upon all
detailed final specifications and subsequent modifications (the
"Specifications") for the Vendor Management Services. All such Specifications
shall be in writing and set forth on Schedule 2 hereto, as amended from time to
time, and incorporated by reference into this Agreement.
4.2 The E-Commerce System, as it exists today and at any time in
the future, including any general enhancements to the E-Commerce System and/or
the Vendor Management Services, as well as new features that B2B incorporates
into the E-Commerce System, Vendor Management Service and/or other portions of
its e-commerce processing or vendor management systems, regardless of whether
they are initiated by B2B or any other party or developed by B2B or any other
party at the request of Enviro-Clean or any vendor or other third party, shall
remain the exclusive proprietary property of B2B.
4.3 The Vendor Management Services will be available to Enviro-
Clean twenty-four (24) hours a day, seven (7) days a week. Notwithstanding the
foregoing, B2B reserves the right upon reasonable notice to Enviro-Clean to
limit or curtail holiday or weekend availability of the Vendor Management
Services when necessary for system upgrades, adjustments, maintenance or other
operational considerations.
4.4 B2B shall provide such onsite training and other assistance
as the parties reasonably deem necessary to assure that Enviro-Clean's personnel
are able to make effective use of the Vendor Management Services. On-site
training shall take place at such times and places as are mutually agreeable to
the parties. All costs associated with such training (including travel and
materials) shall be shared equally between the parties.
4.5 Enviro-Clean will timely supply B2B, in a form acceptable to
B2B, with all data necessary for B2B to perform the Vendor Management Services.
It is the sole
3
<PAGE>
responsibility of Enviro-Clean to insure the completeness and accuracy of such
data. B2B acknowledges that all records, data, files and other input material
relating to Enviro-Clean are confidential and shall take reasonable steps to
protect the confidentiality of such records, data, files and other materials.
B2B will provide reasonable security safeguards to limit access to Enviro-
Clean's files and records to Enviro-Clean and other authorized parties. B2B will
take reasonable steps to protect against the loss or alteration of Enviro-
Clean's files, records and data retained by B2B, but Enviro-Clean recognizes
that events beyond the control of B2B may cause such loss or alteration. B2B
will maintain backup file(s) containing all the data, files and records related
to Enviro-Clean. Enviro-Clean's file(s), records and data shall, at no cost to
Enviro-Clean, be released to Enviro-Clean on an occurrence that renders B2B
unable to perform hereunder, or upon the termination of this Agreement as
provided herein. B2B acknowledges that all records, data, files and other input
material relating to Enviro-Clean and its customers are the exclusive property
of Enviro-Clean. Notwithstanding the foregoing, B2B may use such information for
the compilation of general demographic statistics that it may use to attract
other vendor management services clients or advertisers.
4.6 Enviro-Clean shall be responsible for the payment of all
federal, state or local sales, use, excise, ad valorem or personal property
taxes assessed in connection with purchases by its customers through the EC
Site. Enviro-Clean shall be responsible for all collections, including
collection of applicable sales tax, with respect to its customers. Enviro-Clean
shall be responsible for all credit fraud perpetrated through the EC Site.
4.7 Enviro-Clean shall comply at all times with all applicable
laws and regulations relating to the provision of e-commerce, content,
information or other products or services over the Internet. Enviro-Clean
acknowledges that B2B exercises no control whatsoever over the content contained
in or passing through the EC Site, and that it is the sole responsibility of
Enviro-Clean to ensure that the information it transmits and receives complies
with all applicable laws and regulations.
4.8 Within 20 business days of the date hereof (the last day of
this period being referred to as the "Insurance Due Date"), Enviro-Clean shall
obtain (and keep in full force and effect during the term of this Agreement):
(i) comprehensive general liability insurance in an amount not less than $3
million per occurrence for bodily injury and property damage; (ii) employer's
liability insurance in an amount not less than $1 million per occurrence; and
(iii) workers' compensation insurance in an amount not less than that required
by applicable law. On or prior to the Insurance Due Date, Enviro-Clean will
furnish B2B with certificates of insurance which evidence the minimum levels of
insurance set forth above, and will notify B2B in writing in the event that any
such insurance policies are canceled. Enviro-Clean agrees that on or prior to
the Insurance Due Date, Enviro-Clean will cause its insurance provider(s) to
name B2B as an additional insured and notify B2B in writing of the effective
date thereof.
4.9 Enviro-Clean shall deliver to B2B within 45 days of the end
of each calendar quarter a statement setting forth the amount of (i) "EC Site
Revenues" and (ii) "Gross Profits." "EC Site Revenues" shall mean any and all
revenues generated by Enviro-Clean through the EC Site during such quarter,
including the sale of products and services through the EC Site, the placement
of advertising on the EC Site, and the implementation of "click-through"
features. "Gross Profits" shall mean EC Site Revenues, less the costs of
purchasing products
4
<PAGE>
sold on the EC Site during the quarter from primary vendors and packaging and
delivering such products to customers. At the time each quarterly statement is
delivered to B2B, Enviro-Clean shall also deliver a payment equal to the greater
of (A) 10% of the EC Site Revenues and (B) 50% of the Gross Profits. Upon
reasonable request by B2B, Enviro-Clean shall give B2B's officers and
accountants access to the books and records of Enviro-Clean to confirm the
information contained in any such statement.
4. Technology Integration.
----------------------
4.1 B2B shall pay for, oversee and supervise the design,
implementation and installation of all software, protocols and interfaces
necessary to integrate the E-Commerce System, the B2B Site, the EC Site and the
related e-commerce, electronic ordering, inventory management, processing
systems and other systems of B2B, Enviro-Clean and Enviro-Clean's vendors to
ensure that the services to be rendered under this Agreement can be rendered as
contemplated.
4.2 Enviro-Clean shall cooperate with B2B, and take all necessary
actions directed by B2B, to ensure that all systems of B2B, Enviro-Clean and
Enviro-Clean's vendors are properly integrated and interconnected as necessary
to render the services contemplated under this Agreement.
4.3 All interfaces and other integrating technologies,
adaptations and improvements and related software, protocols and codes designed,
created or authored by B2B or any of its contractors shall be the sole property
of B2B.
4.4 Enviro-Clean shall be responsible for obtaining, at its cost
and expense, all consents of its primary vendors necessary for the integration
of systems and for the transactions contemplated by this Agreement.
4.5 Both parties shall strive for maximum security of transaction
information being transferred through electronic interfaces. Neither party shall
use transaction information for any purpose except to render the services
contemplated by this Agreement.
4.6 The parties shall retain electronic transaction data for a
minimum of twelve (12) months from the date it is first generated.
5. Confidential Information.
------------------------
5.1 Each party acknowledges that it will have access to certain
confidential information of the other party concerning the other party's
business, plans, customers, technology and products, including the terms and
conditions of this Agreement ("Confidential Information"). Confidential
Information will include, but not be limited to, each party's proprietary
software and customer information. Each party agrees that it will not use in
any way, for its own account or the account of any third party, except as
expressly permitted by this Agreement, nor disclose to any third party (except
as required by law or to that party's attorneys, accountants and other advisors
on a need to know basis), any of the other party's Confidential Information and
will take reasonable precautions to protect the confidentiality of such
Confidential Information.
5
<PAGE>
5.2 Information will not be deemed Confidential Information hereunder
if such information: (i) is known to the receiving party prior to receipt from
the disclosing party directly or indirectly from a source other than one having
an obligation of confidentiality to the disclosing party; (ii) becomes known
(independently of disclosure by the disclosing party) to the receiving party
directly or indirectly from a source other than one having an obligation of
confidentiality to the disclosing party; (iii) becomes publicly known or
otherwise ceases to be secret or confidential, except through a breach of this
Agreement by the receiving party; or (iv) is independently developed by the
receiving party.
6. Representations and Warranties.
------------------------------
6.1 Enviro-Clean represents and warrants that:
(a) The EC Products and EC's delivery of the services
contemplated by Section 2 and use of the services
contemplated by Section 3 of this Agreement do not and
will not, during the term of this Agreement, violate any
applicable laws or regulations.
(b) Enviro-Clean owns or has the right to use all material
contained in the EC Site, including all text, graphics,
sound, video, programming, scripts and applets; and
(c) The production, distribution and transmission of the EC
Site, or any information or materials contained in it does
not: (A) infringe or misappropriate any copyright, patent,
trademark, trade secret or any other proprietary rights of
a third party; or (B) constitute false advertising, unfair
competition, defamation, an invasion of privacy or violate
a right of publicity.
6.2 B2B represents and warrants that:
(a) B2B's use of the services contemplated by Section 2 and
delivery of the services contemplated by Section 3 of this
Agreement do not and will not, during the term of this
Agreement, violate any applicable laws or regulations.
(b) B2B owns or has the right to use the E-Commerce System for
the delivery of the services contemplated by this
Agreement.
(c) The production, distribution and transmission of the B2B
Site, or any information or materials contained in it does
not: (A) infringe or misappropriate any copyright, patent,
trademark, trade secret or any other proprietary rights of
a third party; or (B) constitute false advertising, unfair
competition, defamation, an invasion of privacy or violate
a right of publicity.
6
<PAGE>
7. Non-Competition.
---------------
7.1 During the term of this Agreement, neither Enviro-Clean nor any
of its subsidiaries or affiliates (other than B2B) either directly or through
other persons or entities shall sell any products or services through the
Internet or any proprietary online service other than products in the Categories
set forth on Schedule 1.
7.2 During the term of this Agreement, neither Enviro-Clean nor any
of its subsidiaries or affiliates (other than B2B) either directly or through
other persons or entities shall sell any EC Products through the Internet or any
proprietary online service other than through the EC Site and the B2B Site
pursuant to this Agreement.
7.3 During the term of this Agreement, neither Enviro-Clean nor any
of its subsidiaries or affiliates (other than B2B) either directly or through
other persons or entities shall create, design, establish or operate any web
site or any proprietary online channel or other interactive service the primary
purpose of which is to provide businesses with integrated online availability of
product and service offerings, business information and content and community
functions, such as chat rooms and bulletin boards.
7.4 During the term of this Agreement, both parties' agree not to
directly solicit for employment any employee of the other party. It is
acknowledged by both parties that Richard Kandel is an employee of each party.
8. Indemnification.
---------------
8.1 Enviro-Clean shall indemnify and hold harmless B2B and its
officers, directors and employees ("B2B Indemnitees") from and against, and
shall reimburse them for, any losses, claims, damages and liabilities (including
costs and expenses attendant thereto, including reasonable attorneys' fees)
which may be sustained, suffered or incurred by the B2B Indemnitees, arising
from or in connection with (i) the breach of any of Enviro-Clean's
representations, warranties or covenants contained in this Agreement, (ii) any
content presented on the EC Site, except to the extent such content was provided
by B2B or (iii) the operation of the EC Site, including without limitation,
improper use of software and infringement of patents or other intellectual
property.
8.2 B2B shall indemnify and hold harmless Enviro-Clean and its
officer, directors and employees (the " EC Indemnitees") from and against, and
shall reimburse them for, any losses, claims, damages and liabilities (including
costs and expenses attendant thereto, including reasonable attorneys' fees)
which may be sustained, suffered or incurred by the EC Indemnitees, arising from
or in connection with (i) the breach of any of B2B's representations, warranties
or covenants contained in this Agreement, and (ii) any content presented on the
B2B Site, except to the extent such content was provided by Enviro-Clean or its
vendors.
8.3 A party required to make an indemnification payment pursuant to
this Section ("Indemnifying Party") shall have no liability to make such payment
unless the party or parties entitled to receive such indemnification payment
(each an "Indemnified Party") gives notice to the Indemnifying Party specifying
(i) the covenant, representation or warranty contained herein which it asserts
has been breached, (ii) in reasonable detail, the nature and
7
<PAGE>
dollar amount of any claim the Indemnified Party may have against the
Indemnifying Party by reason thereof under this Agreement, and (iii) whether the
claim is a third-party claim or a direct claim of the Indemnified Party against
the Indemnifying Party.
8.4 If an Indemnified Party becomes aware of a third-party claim
for which an Indemnifying Party would be liable to an Indemnified Party
hereunder, the Indemnified Party shall, with reasonable promptness, notify in
writing the Indemnifying Party of such claim, identifying the basis for such
claim and the amount or the estimated amount thereof to the extent then
determinable which estimate shall not be conclusive of the final amount of such
claim (the "Claim Notice"); provided, however, that any failure to give such
Claim Notice will not be deemed a waiver of any rights of the Indemnified Party
except to the extent the rights of the Indemnifying Party are actually
prejudiced by such failure. The Indemnifying Party, upon request of the
Indemnified Party, shall retain counsel (who shall be reasonably acceptable to
the Indemnified Party) to represent the Indemnified Party and shall pay the
reasonable fees and expenses of such counsel with regard thereto; provided
further, however, that any Indemnified Party is hereby authorized, prior to the
date on which it receives written notice from the Indemnifying Party designating
such counsel, to retain counsel, whose reasonable fees and expenses shall be at
the expense of the Indemnifying Party, to file any motion, answer or other
pleading and take such other action which it reasonably shall deem necessary to
protect its interests or those of the Indemnifying Party until the date on which
the Indemnified Party receives such notice from the Indemnifying Party. After
the Indemnifying Party shall retain such counsel, the Indemnified Party shall
have the right to retain its own counsel, but the fees and expenses of such
counsel shall be at the expense of such Indemnified Party unless (i) the
Indemnifying Party and the Indemnified Party shall have mutually agreed to the
retention of such counsel or (ii) the named parties of any such proceeding
(including any impleaded parties) included both the Indemnifying Party and the
Indemnified Party and representation of both parties by the same counsel would
be inappropriate due to actual or potential differing interests between them. If
requested by the Indemnifying Party, the Indemnified Party agrees to cooperate
with the Indemnifying Party and its counsel in contesting any claim or demand
which the Indemnifying Party defends. A claim or demand may not be settled by
any party without the prior written consent of the other party (which consent
will not be unreasonably withheld) unless, as part of such settlement, the
Indemnified Party shall receive a full and unconditional release reasonably
satisfactory to the Indemnifying Party. Notwithstanding the foregoing, the
Indemnifying Party shall not settle any claim without the prior written consent
of the Indemnified Party if such claim is not exclusively for monetary damages.
9. Late Payments and Resolution of Payment Disputes.
------------------------------------------------
9.1 Each party shall be entitled to charge the other party interest
at the rate of 10% per annum for any late payments due under the terms of this
Agreement. Each party shall be entitled to offset amounts owed to it by the
other party under the terms of this Agreement against amounts it owes to such
other party.
9.2 For purposes of the procedures set forth in this section, a
"dispute" is a disagreement regarding amounts and timing of payments due under
this Agreement that the parties have been unable to resolve by the normal and
routine channels ordinarily used for such
8
<PAGE>
matters. In order to resolve a dispute, the parties shall first follow the
informal and escalating procedures set forth below.
(a) The complaining party's representative will notify the
other party's representative in writing of the dispute, and
the non-complaining party will exercise good faith efforts
to resolve the matter as expeditiously as possible.
(b) In the event that such matter remains unresolved thirty
(30) days after the delivery of the complainant party's
written notice , a senior representative of each party
shall meet or confer within ten (10) business days of a
request for such a meeting or conference by either party to
resolve such matter.
(c) In the event that the meeting or conference specified in
(ii) above does not resolve such matter, the senior officer
of each party shall meet or confer within ten (10) business
days of a request for such a meeting or conference by
either party to resolve such matter.
(d) If the parties are unable to reach a resolution of the
dispute after following the above procedure, or if either
party fails to participate when requested, the parties may
proceed in accordance with paragraphs (c)-(e) below.
9.3 Any dispute shall, after utilizing the procedures in this
section, be resolved by final and binding arbitration in New York, New York,
before a single arbitrator selected by, and in accordance with, the rules of
commercial arbitration of the American Arbitration Association. Each party shall
bear its own costs in the arbitration, including reasonable attorneys' fees, and
each party shall bear one-half of the cost of the arbitrator.
9.4 The arbitrator shall have the authority to award such damages as
are not prohibited by this Agreement and may, in addition and in a proper case,
declare rights and order specific performance, but only in accordance with the
terms of this Agreement.
9.5 Any party may apply to a court of general jurisdiction to enforce
an arbitrator's award, and if enforcement is ordered, the party against which
the order is issued shall pay the costs and expenses of the other party in
obtaining such order, including reasonable attorneys' fees.
10. Early Termination.
-----------------
10.1 At any time when Enviro-Clean owns less than 10% of the
outstanding voting stock of B2B, based on the aggregate number of votes carried
by shares of common and preferred stock of B2B outstanding, each party shall
have the right to terminate this Agreement by giving 30 days written notice of
its election to terminate to the other party.
10.2 Enviro-Clean may terminate this Agreement upon ten days prior
written notice if it experiences Repeated Unavailability of the Vendor
Management Services. "Repeated
9
<PAGE>
Unavailability" shall mean the unavailability of the Vendor Management Services
to process orders placed through the EC Site for a sustained period of four or
more hours on three or more occasions during any one calendar month, excluding
unavailability as a result of regularly scheduled system maintenance, failures
wholly related to error or omission by Enviro-Clean, web hosts, system
integrators or communications service providers other than B2B or entities hired
or contracted by B2B or Enviro-Clean in connection with the Vendor Management
Services, and regional or national Internet or communications outages outside
the control of B2B. In no event will B2B be liable to any third party for any
claims arising out of or related to Repeated Unavailability for any lost
revenue, lost profits, replacement goods, loss of technology, rights or
services, incidental, punitive, indirect or consequential damages, loss of data,
or interruption or loss of use of service or Enviro-Clean's business, even if
advised of the possibility of such damages, whether under theory of contract,
tort (including negligence), strict liability or otherwise.
11. General Provisions.
------------------
11.1 Neither party shall assign or otherwise transfer this
Agreement in whole or in part, or any of the rights and obligations hereunder,
either voluntarily or by operation of law, without the other's written consent.
11.2 Neither party shall be deemed to be in default or have
breached any provision of this Agreement solely as a result of any delay,
failure in performance or interruption of service resulting directly or
indirectly from any act of God, civil or military authority, civil disturbance,
war, laws, regulations, acts or orders of any government or agency or official
thereof, or any other occurrences beyond the party's reasonable control.
11.3 No waiver of any provision of this Agreement or of any rights
or obligations of either party hereunder shall be effective unless in writing
and signed by the party or parties waiving compliance, and any such waiver shall
be effective only in the specific instance and for the specific purpose stated
in such writing.
11.4 The execution and delivery of this Agreement shall not be
deemed to confer any rights or remedies upon, nor obligate any of the parties
hereto, to any person or entity other than such parties. Nothing in this
Agreement shall cause or be deemed to cause the parties to be partners or joint
venturers with, or agent or employees of, each other. The parties are
independent contractors, and neither party shall have any right or power to
create any obligation or responsibility on behalf of the other party.
11.5 B2B shall not be liable to Enviro-Clean or to any third party
for any loss or damage, whether direct or indirect, resulting from delays or
interruptions of service due to mechanical electrical or wire defects or
difficulties, storms, strikes, walk-outs, equipment or systems failures, or
other causes over which B2B, its affiliates, employees, officers, or agents have
no reasonable control, or for loss or damage, direct or indirect, resulting from
inaccuracies, erroneous statements, errors of facts, omissions or errors in the
transmission or delivery of Vendor Management Services, or any data provided as
a part of the Vendor Management Services pursuant to this Agreement, except to
the extent caused by the gross negligence or willful misconduct of B2B.
10
<PAGE>
11.6 All notices and other communications given or made pursuant
hereto shall be in writing and shall be deemed to have been duly given or made
as of the date delivered if delivered personally or by nationally recognized
overnight courier or by facsimile to the parties at the following addresses and
numbers (or at such other address or number for a party as shall be specified by
like notice):
If to B2B:
b2bstores.com Inc. Corporation
249 East Ocean Boulevard
Long Beach, California 90802
Attention: Chief Executive Officer
(Facsimile No: 562/901-2014)
with a copy to:
Graubard Mollen & Miller
600 Third Avenue
New York, New York 10016
Attention: David Alan Miller, Esq.
(Facsimile No: 212/818-8881)
If to Enviro-Clean:
Enviro-Clean of America, Inc.
211 Park Avenue
Hicksville, New York 11801
Attention: Chairman of the Board
(Facsimile No: 516/931-3530)
with a copy to:
Akin, Gump, Strauss, Hauer & Feld LLP
300 Convent Street, Suite 1500
San Antonio, Texas 78205
Attention: Alan Schoenbaum, Esq.
(Facsimile No: 210/224-2035)
11.7 This Agreement shall be governed by and construed under the
law of the State of New York, disregarding any principles of conflicts of law
that would otherwise provide for the application of the substantive law of
another jurisdiction. Each of B2B and Enviro-Clean (i) agrees that any legal
suit, action or proceeding arising out of or relating to this Agreement (except
arbitrations under Section 9) shall be instituted exclusively in New York State
Supreme Court, County of New York, or in the United States District Court for
the Southern District of New York, (ii) waives any objection to the venue of any
such suit, action or proceeding and the right to assert that such forum is not a
convenient forum, and (iii) irrevocably consents to the jurisdiction of the New
York State Supreme Court, County of New York, and the United States
11
<PAGE>
District Court for the Southern District of New York in any such suit, action or
proceeding. Each of B2B and Enviro-Clean further agrees to accept and
acknowledge service of any and all process which may be served in any such suit,
action or proceeding in the New York State Supreme Court, County of New York, or
in the United States District Court for the Southern District of New York and
agrees that service of process upon it mailed by certified mail to its address
shall be deemed in every respect effective service of process upon it in any
such suit, action or proceeding.
11.8 No representations, warranties or agreements, oral or written,
express or implied, have been made to any party hereto, except as expressly
provided herein. This Agreement shall be binding upon the respective parties
hereto and their permitted successors and permitted assigns. In the event that
any provision hereof is found invalid or unenforceable pursuant to judicial
decree or decision, the remainder of this Agreement shall remain valid and
enforceable according to its terms. This Agreement constitutes the entire
understanding and agreement between the parties regarding the subject matter of
this Agreement, and supersedes all other prior written and oral communications
regarding this transaction, and may not be altered, modified or amended except
by a written amendment executed by both parties.
IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
officers to execute this Agreement as of the date set forth below.
B2BSTORES.COM INC.
By: ________________________________
Woo Jin Kim
Chief Executive Officer
ENVIRO-CLEAN OF AMERICA CORP.
By: ________________________________
Randall K. Davis
President
12
<PAGE>
EXHIBIT 3(XIII)
IMPORTANT: PLEASE READ CAREFULLY BEFORE SIGNING; SIGNIFICANT
-------------------------------------------------
REPRESENTATIONS ARE CALLED FOR HEREIN.
-------------------------------------
ENVIRO-CLEAN OF AMERICA, INC.
SUBSCRIPTION AGREEMENT
----------------------
CONFIDENTIAL
- ------------
Enviro-Clean of America, Inc.
1023 Morales
San Antonio, Texas 78207
Phone (210) 227-9161
1. SUBSCRIPTION. Capitalized and defined terms used in this Subscription
------------
Agreement shall have the meanings given such terms in the Confidential Private
Placement Memorandum (the "Memorandum") dated October 26,1999 of Enviro-Clean of
America, Inc. (the "Company"). Those persons who execute a Subscription
Agreement and whose subscriptions are accepted will be contributing cash to the
Company and will be issued the number of Units, each Unit containing 100 Shares
of Series B Cumulative Convertible Preferred Stock (the "Series B Stock") and
1,000 Common Stock Purchase Warrants (the "Warrants") (collectively, the
"Units") as set forth on the signature page hereof. The undersigned hereby
agrees to subscribe for the Units in the amount set forth on the Signature Page
hereof.
I acknowledge that I have received and reviewed to my satisfaction the
Memorandum and all exhibits and supplements thereto.
I acknowledge that I am not acting on the basis of any promotional sales
materials, or other information other than the Memorandum or other documents or
information furnished by the Company upon request by me or my advisors. I
further acknowledge that all matters relating to the Memorandum have been
explained to me to my satisfaction and that I understand the speculative nature
and risks involved in the proposed investment.
I agree to be bound by all of the terms and provisions of the offering of
the Units as described in the Memorandum, and the exhibits thereto, and
acknowledge that the Company will be relying on the information and
representations with respect to me set forth herein in determining whether an
investment in the Units is suitable for me and whether I otherwise qualify to
acquire the Units. I represent and warrant that such information is true and
correct as of the date of this Subscription Agreement.
THERE CAN BE NO ASSURANCE THAT THE COMPANY WILL BE PROFITABLE.
<PAGE>
2. AMOUNT. The amount of the undersigned's subscription is set forth
------
below, and the undersigned has enclosed all Subscription Documents and, if
applicable, a check in the amount of $10,000 for each Unit subscribed for.
3. PROCEDURE FOR ACCEPTANCE. The undersigned understands that if this
------------------------
application is accepted, the Company will return to the undersigned a copy of
the signature page of this Subscription Agreement with the acceptance form
filled out below.
4. TERMS AND CONDITIONS. The undersigned hereby agrees to be bound by
--------------------
all of the terms and conditions contained in the Memorandum.
5. REPRESENTATIONS AND WARRANTIES. The undersigned hereby warrants and
------------------------------
represents to the Company that the following statements are true (if a statement
is not true, please strike any untrue portion and initial):
(a) The undersigned is an "accredited investor" within the meaning of
Regulation D promulgated by the Securities and Exchange Commission pursuant
to the Securities Act of 1933 (the "Securities Act") insofar as the
undersigned:
(1) is a natural person whose individual net worth, or joint net
worth with his or her spouse, exceeds $1,000,000;
(2) is a natural person who had an individual income (not
including his or her spouse's income) in excess of $200,000
in each of the two most recent years, or joint income with
his or her spouse in excess of $300,000 in each of those
years, and who reasonably expects reaching the same income
level in the current year;
(3) is a trust with total assets in excess of $5,000,000 not
formed for the specific purpose of acquiring the Units, whose
purchase is directed by a person who has such knowledge and
experience in financial and business matters that he is
capable of evaluating the merits and risks of an investment
in the Units;
(4) is a bank as defined in section 3(a)(2) of the Securities Act
or other institution as defined in section 3(a)(5)(A) of the
Securities Act, whether acting in its individual or fiduciary
capacity; broker or dealer registered pursuant to section 15
of the Securities Exchange Act of 1934; an insurance company
as defined in section 2(13) of the Securities Act; an
investment company registered under the Investment Company
Act of 1940 or a business development company as defined in
section 2(a)(48) of that Act; a Small Business Investment
Company licensed by the U.S. Small Business Administration
under section 301(c) or (d) of the Small Business Investment
Act of 1958; a plan established and maintained by a state,
its political subdivisions, or any agency or instrumentality
of a state or its political subdivisions for the benefit of
its employees, if such plan has total assets in
<PAGE>
excess of $5,000,000; employee benefit plan within the
meaning of the Employee Retirement Income Security Act of
1974 ("ERISA"), if the investment decision is made by a plan
fiduciary, as defined in section 3(21) of ERISA, which is
either a bank, savings and loan association, insurance
company, or registered investment adviser, or if the employee
benefit plan has total assets in excess of $5,000,000; or, if
a self-directed plan, with investment decisions made solely
by persons that are accredited investors;
(5) is a private business development company as defined in
section 202(a)(22) of the Investment Advisers Act of 1940;
(6) is a non-profit organization described in Section 501(c)(3)
of the Internal Revenue Code, corporation, Massachusetts or
similar business trust, or Company, not formed for the
specific purpose of acquiring the securities offered, with
total assets in excess of $5,000,000;
(7) is a director or executive officer of the Company; or
(8) is an entity in which all of the equity owners are accredited
investors under subparagraphs (1) through (7) above.
(b) If applicable: The undersigned acknowledges that (i) the person
identified in the Purchaser Representative Letter, is his "Purchaser
Representative," as defined in Rule 501 of Regulation D promulgated under
the Securities Act, as amended, (ii) he has relied upon the advice of such
Purchaser Representative as to the merits of an investment in the Company
and the suitability of that investment for the undersigned, and (iii) such
Purchaser Representative has heretofore confirmed to the undersigned in
writing (a true and correct copy of which is furnished to you herewith)
during the course of this transaction any past, present or future material
relationship, actual or contemplated, between the Purchaser Representative
and his or its affiliates and the Company and its affiliates, or any
compensation received or to be received as a result thereof.
(c) The undersigned has such knowledge and experience in financial and
business matters that he is capable of evaluating the merits and risks of
an investment in the Company or (if applicable) the undersigned and his
Purchaser Representative together have such knowledge and experience in
financial and business matters that they are capable of evaluating the
merits and risks of the prospective investment.
(d) The undersigned has received and read and is familiar with the
Memorandum, including the documents and exhibits annexed thereto and any
amendments thereof, and understands that the form of any such document or
exhibit may be modified prior to its execution, and he confirms that, if
requested, all
<PAGE>
documents, records and books pertaining to his proposed investment have
been made available to him and (if applicable) his Purchaser
Representative.
(e) The undersigned and, if applicable, his Purchaser Representative
have had, if requested, an opportunity to ask questions of and receive
satisfactory answers from the officers of the Company concerning the
Company and its business and the terms and conditions of an investment in
the Company, and all such questions have been answered to the full
satisfaction of the undersigned.
(f) The securities for which the undersigned hereby subscribes will be
acquired for his own account for investment and not with a view to, or for
resale in connection with, any distribution of the securities within the
meaning of the Securities Act and he does not now have any reason to
anticipate any change in his circumstances or other particular occasion or
event which would cause him to sell or transfer his securities.
(g) The undersigned represents that it has been called to his
attention by those individuals with whom he has dealt in connection with
his investment in the Company, that the Company was only recently organized
and that his investment in the Company involves a high degree of risk which
may result in the loss of the entire amount of his investment.
(h) The undersigned is presently a bona fide resident of the state set
forth on the signature page hereof as his "Address" and the address and
Social Security number or federal tax identification number set forth
herein are his true and correct residence and Social Security number or
federal tax identification number. The undersigned has no present
intention of becoming a resident of any other state or jurisdiction. If
the undersigned is a corporation, partnership, trust or other form of
business, it represents and warrants that its principal place of business
is within such state.
(i) The undersigned represents that he has made other investments and,
by reason of his business and financial experience and of the business and
financial experience of those persons he has retained to advise him with
respect to his investment in the Company, has acquired the capacity to
protect his own interest in investments of this nature. In reaching the
conclusion that he desires to acquire the Units, the undersigned has
carefully evaluated his financial resources and investment position, and
the risks associated with this investment and acknowledges that he is able
to bear the economic risks of this investment. The undersigned represents
and warrants that the investment being made does not exceed twenty percent
(20%) of the undersigned's net worth.
(j) The undersigned understands that no Commissioner of Securities of
any state has made any finding or determination relating to the fairness
for investment in the Units, that no Commissioner of Securities of any
state has endorsed the Units, and that the undersigned recognizes that he
must bear the economic risk of an investment in the Units for an indefinite
period of time because neither the Units, nor the
<PAGE>
components of the Units, nor the securities into which the Series B Stock
and the Warrants are exercisable, have been registered under any securities
laws and therefore cannot be sold without registration under applicable
securities laws or an exemption from such registration is available.
(k) The undersigned, if a corporation, partnership, association, joint
stock company, trust or incorporated organization, represents and warrants
that such entity was not organized for the specific purpose of acquiring
the Units subscribed to herein and has other investment or business
activities or will make other investments or engage in other business
activities, unless the undersigned has indicated the contrary to the
Company and specified the number of beneficial owners thereof, and the
Company has consented in writing thereto, and the undersigned, if an
individual, represents and warrants that he is not acquiring the Units as
nominee, trustee, agent or representative for any other person, unless the
undersigned has indicated the contrary to the Company and specified the
number of beneficial owners thereof, and the Company has consented in
writing thereto.
(l) The information provided to the Company herein is true and correct
in all respects as of the date hereof. The undersigned agrees to notify
the Company immediately if any of the statements made herein shall become
untrue.
6. RETURN OF FUNDS UPON REJECTION. The Company shall have the right to
------------------------------
accept or reject this subscription, in whole or in part, and this subscription
shall be deemed to be accepted by the Company only when a copy of the signature
page of this Subscription Agreement is executed by a duly authorized officer of
the Company. Subscriptions need not be accepted in the order received by the
Company. Should this subscription be rejected, in whole or in part, or should
the offering of the Units not be consummated for any reason, the Company shall
promptly return, without interest, that portion of the investment which is not
accepted, together with all subscription documents.
7. INDEMNIFICATION. The undersigned acknowledges that he understands the
---------------
meaning and legal consequences of the representations and warranties in
Paragraph 5 hereof and that the Company has relied upon such representations and
warranties, and the undersigned hereby agrees to indemnify and hold harmless the
Company, and all officers, directors, employees agents and representatives
thereof, from and against any and all claims, demands, losses, damages, expenses
or liabilities (including attorneys' fees) due to or arising out of a breach of
any such representations or warranties. Notwithstanding the foregoing, however,
no representation, warranty, acknowledgment or agreement made herein by the
undersigned shall in any manner be deemed to constitute a waiver of any rights
granted to him under federal or state securities laws.
8. RESTRICTIONS ON TRANSFER. The undersigned acknowledges that he is
------------------------
aware that there are substantial restrictions on the transferability of the
Units, the Series B Stock, the Warrants, and the underlying Common Stock
available by conversion of the Series B Stock (the "Conversion Shares") or
exercise of the Warrants (the "Underlying Shares"). Since the Units will not
be, and since the undersigned has no right to require that said securities be,
registered under the Securities Act, the Units, the Series B Stock, the
Warrants,
<PAGE>
the Conversion Shares, and the Underlying Shares may not become so registered.
The undersigned agrees that the Units, the Series B Stock, the Warrants, the
Conversion Shares, and the Underlying Shares may not be sold in the absence of
registration unless such sale is exempt from registration under such Act and any
applicable state securities laws. The undersigned also acknowledges that he
shall be responsible for compliance with all conditions on transfer imposed by
any Commissioner of Securities of any state and for any expenses incurred by the
Company for legal or accounting services in connection with reviewing such a
proposed transfer or issuing legal opinions in connection therewith.
I wish to subscribe for the securities shown on the following page. The
securities subscribed for hereby were offered and purchased in the state
indicated on the following page.
(THE FOLLOWING SIGNATURE PAGE SHOULD BE EXECUTED. MAIL OR DELIVER THE
ENTIRE EXECUTED SUBSCRIPTION AGREEMENT TO ENVIRO-CLEAN OF AMERICA, INC.,
C/O RANDALL K. DAVIS, AT 1023 MORALES, SAN ANTONIO, TEXAS 78207.)
<PAGE>
SIGNATURE PAGE FOR SUBSCRIPTION AGREEMENT FOR
ENVIRO-CLEAN OF AMERICA, INC. CONFIDENTIAL
PRIVATE PLACEMENT MEMORANDUM (THE "MEMORANDUM")
The undersigned has subscribed and paid for __________ Units.
The undersigned represents that he has read the above Subscription
Agreement and the Memorandum.
IN WITNESS WHEREOF, the undersigned has executed this Subscription
Agreement as of the ____ day of ___________, 199__.
-----------------------------------
Signature
-----------------------------------
SSN or Tax ID Number
-----------------------------------
Name(s) typed or printed
-----------------------------------
Address
-----------------------------------
City, State and Zip Code
------------------------------------------------------------
SUBSCRIPTION ACCEPTED
ENVIRO-CLEAN OF AMERICA, INC.
By:
-------------------------
Name:
-----------------------
Title:
----------------------
Date:
-----------------------
<PAGE>
Exhibit 3(xiv)
[FORM OF WARRANT CERTIFICATE]
[FACE]
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ISSUED TO THE
REGISTERED OWNER IN RELIANCE UPON WRITTEN REPRESENTATION THAT THESE SECURITIES
HAVE BEEN TAKEN FOR INVESTMENT. THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD TRANSFERRED OR
ASSIGNED UNLESS AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY SHALL HAVE
BEEN RECEIVED BY THE COMPANY TO THE EFFECT THAT SUCH SALE, TRANSFER OR
ASSIGNMENT WILL NOT BE IN VIOLATION OF THE SECURITIES ACT OF 1933, AS AMENDED,
AND THE RULES AND REGULATIONS THEREUNDER, AND OTHER APPLICABLE STATE SECURITIES
LAWS.
THE STOCK ISSUABLE UPON EXERCISE OF THIS CERTIFICATE HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED
OR ASSIGNED UNLESS AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY SHALL HAVE
BEEN RECEIVED BY THE COMPANY TO THE EFFECT THAT SUCH SALE, TRANSFER OR
ASSIGNMENT WILL NOT BE IN VIOLATION OF THE SECURITIES ACT OF 1933, AS AMENDED,
AND THE RULES AND REGULATIONS THEREUNDER AND OTHER APPLICABLE SECURITIES LAWS.
No. [ ] [ ] Warrants
CALLABLE WARRANT CERTIFICATE
ENVIRO-CLEAN OF AMERICA, INC.
This Warrant Certificate certifies that [ ], or registered
assigns, is the registered holder of [ ] Warrants (the "Warrants")
to purchase shares of Common Stock, par value $.001 per share (the "Common
Stock"), of ENVIRO-CLEAN OF AMERICA, INC., a Nevada corporation (the "Company").
Each Warrant entitles the holder to purchase from the Company at any time on or
after [_______________________, 1999] until [________________, 2004] (the
"Expiration Date"), one fully paid and non-assessable share of Common Stock (a
"Share", or, if adjusted, the "Shares", which may also include any other
securities or property purchasable upon exercise of a Warrant, such adjustment
and inclusion each as provided in the Warrant Agreement) at the exercise price
as may be adjusted as provided in the Warrant Agreement (initially $5.00 per
Warrant) (the "Exercise Price") upon surrender of this Warrant Certificate and
payment of the Exercise Price at any office or agency maintained for that
purpose by the Company (the "Warrant Agent Office"), subject to the conditions
set forth herein and in the Warrant Agreement.
The Exercise Price shall be payable by cash, certified check or official
bank check or by such other means as is acceptable to the Company in the lawful
currency of the United States of America which as of the time of payment is
legal tender for payment of public or private debts. The number
1
<PAGE>
of Shares issuable upon exercise of the Warrants ("Exercise Rate") is subject to
adjustment upon the occurrence of certain events set forth in the Warrant
Agreement.
Any Warrants not exercised on or prior to [_________________, 2004] shall
thereafter be void.
Reference is hereby made to the further provisions, including the call
provision, on the reverse hereof which provisions shall for all purposes have
the same effect as though fully set forth at this place. Capitalized terms used
in this Warrant Certificate but not defined herein shall have the meanings
ascribed thereto in the Warrant Agreement.
This Warrant Certificate shall not be valid unless authenticated by the
Warrant Agent, term is used in the Warrant Agreement.
THIS WARRANT CERTIFICATE SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PROVISIONS
THEREOF.
WITNESS the facsimile seal of the Company and facsimile signatures of its
duly authorized officers.
Dated:
ENVIRO-CLEAN OF AMERICA, INC.
[Seal] By:
-----------------------------------
Name:
Title:
Attest:
By:
-----------------------------------
Name:
Title:
Certificate of Authentication:
This is one of the Warrants
referred to in the within
mentioned Warrant Agreement:
INTERWEST TRANSFER CO., INC.
as Warrant Agent
By:
-----------------------------------
Authorized Signatory
2
<PAGE>
[FORM OF WARRANT CERTIFICATE]
[REVERSE]
ENVIRO-CLEAN OF AMERICA, INC.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants, each of which represents the right to purchase at
any time on or after [________________, 1999], until [______________________,
2004], one share of Common Stock of the Company, subject to adjustment as set
forth in the Warrant Agreement. The Warrants are issued pursuant to a Warrant
Agreement dated as of [_______________, 1999] (the "Warrant Agreement"), duly
executed and delivered by the Company to Interwest Transfer Co., Inc. as Warrant
Agent (the "Warrant Agent"), which Warrant Agreement is hereby incorporated by
reference in and made a part of this instrument and is hereby referred to for a
description of the rights, limitation of rights, obligations, duties and
immunities thereunder of the Warrant Agent, the Company and the holders (the
words "holders" or "holder" meaning the registered holders or registered holder)
of the Warrants. Warrants may be exercised by (i) surrendering at any Warrant
Agent Office this Warrant Certificate with the form of Election to Exercise set
forth hereon duly completed and executed and (ii) paying in full the Warrant
Exercise Price for each such Warrant exercised and any other amounts required to
be paid pursuant to the Warrant Agreement.
If all of the items referred to in the last sentence of the preceding
paragraph are received by the Warrant Agent at or prior to 2:00 p.m., New York,
New York time, on a Business Day, the exercise of the Warrant to which such
items relate will be effective on such Business Day. If any items referred to
in the last sentence of the preceding paragraph are received after 2:00 p.m.,
New York, New York time, on a Business Day, the exercise of the Warrants to
which such item relates will be deemed to be effective on the next succeeding
Business Day. Notwithstanding the foregoing, in the case of an exercise of
Warrants on the Expiration Date, if all of the items referred to in the last
sentence of the preceding paragraph are received by the Warrant Agent at or
prior to 5:00 p.m., New York, New York time, on such Expiration Date, the
exercise of the Warrants to which such items relate will be effective on the
Expiration Date.
Subject to the terms of the Warrant Agreement, as soon as practicable after
the exercise of any Warrant or Warrants, the Company shall issue or cause to be
issued to or upon the written order of the registered holder of this Warrant
Certificate, a certificate or certificates evidencing the Share or such holder
pursuant to the Election to Exercise, as set forth on the reverse of this
Warrant Certificate. Such certificate or certificates evidencing the Share or
Shares shall be deemed to have been issued and any persons who are designated to
be named therein shall be deemed to have become the holder of record of such
Share or Shares as of the close of business on the date upon which the exercise
of this Warrant was deemed to be effective as provided in the preceding
paragraph.
The Company, at its option, may provide the holder of this Warrant written
notice (the "Call Notice") that this Warrant shall terminate on the 20th day
following the date of delivery of the Call Notice (such date being the "Early
Termination Date"), as described in the Warrant
3
<PAGE>
Agreement, at any time: (i) the Closing Per Share Market Price of the Common
Stock has been equal to or greater than 200% of the Warrant Exercise Price on
the date of delivery of the Call Notice and the 19 consecutive Trading Days
immediately preceding the date delivery of the Call Notice (the "Call Notice
Period") and (ii) after the Registration Statement has been declared effective
and has been effective for the Call Notice Period. In the event that the Warrant
is not exercised by the holder of this Warrant on or before the Early
Termination Date, this Warrant shall expire at 5:00 p.m., New York, New York
time, on the Early Termination Date, and the Company will remit to the holder of
the Warrant $.10 per Warrant upon such holder tendering to the Company the
expired Warrant Certificate.
Upon due presentment for registration of transfer of this Warrant
Certificate at any office or agency maintained by the Company for that purpose,
a new Warrant Certificate evidencing in the aggregate a like number of Warrants
shall be issued to the transferee in exchange for this Warrant Certificate,
subject to the limitations provided in the Warrant Agreement, without charge
except for any tax or other governmental charge imposed in connection therewith.
The Company and the Warrant Agent may deem and treat the registered holder
hereof as the absolute owner of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone) for the purpose of
any exercise hereof and for all other purposes, and neither the Company nor the
Warrant Agent shall be affected by any notice to the contrary.
The term "Business Day" shall mean any day on which (i) banks in New York,
New York, (ii) the principal national securities exchange or market on which the
Common Stock is listed or admitted to trading and (iii) the principal national
securities exchange or market on which the Warrants are listed or admitted to
trading are open for business.
4
<PAGE>
(FORM OF ELECTION TO EXERCISE)
(To be executed upon exercise of Warrants on the Exercise Date)
The undersigned hereby irrevocably elects to exercise __________ of the Warrants
represented by this Warrant Certificate and purchase the whole number of Shares
issuable upon the exercise of such Warrants and herewith tenders payment for
such Shares in the amount of $______________ in cash or by certified or
official bank check, in accordance with the terms hereof. The undersigned
requests that a certificate representing such Shares be registered in the name
of _________________________ whose address is ______________________________ and
that such certificate be delivered to ___________________________ whose address
is ____________________________________. Any cash payments to be paid in lieu
of a fractional Share should be made to ______________________________ whose
address is ____________________________________ and the check representing
payment thereof should be delivered to ________________________ whose address is
___________________________ ____________________________________.
Dated ________________,_____
Name of holder of
Warrant Certificate:
(Please Print)
Tax Identification or
Social Security Number:
Address:
Signature:
Note: The above signature must correspond with the name as
written upon the face of this Warrant Certificate in
every particular, without alteration or enlargement
or any change whatever.
Dated ________________,_____
5
<PAGE>
[FORM OF ASSIGNMENT]
For value received __________________ hereby sells, assigns and transfers
unto ______________________________ the within Warrant Certificate, together
with all right, title and interest therein, and does hereby irrevocably
constitute and appoint ____________________________ attorney, to transfer said
Warrant Certificate on the books of the within-named Company, with full power of
substitution in the premises.
Dated ________________,_____
Signature:
Note: The above signature must correspond with the name as
written upon the face of this Warrant Certificate in
every particular, without alteration or enlargement
or any change whatever.
6
<PAGE>
EXHIBIT 3(XV)
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement is entered into as of __________, 1999
by and among Enviro-Clean of America, Inc., a Nevada corporation (the
"Company"), and the new investors who execute a counterpart of this Agreement
(the "Investors"):
WHEREAS, effective as of the date hereof, the Company is entering into an
offering of units ("Offering"), each unit containing 100 shares of Series B
Cumulative Convertible Stock ("Series B Stock") and 1,000 Common Stock Purchase
Warrants ("Warrants") (collectively, the "Units"); and
WHEREAS, pursuant to the terms of the Offering, it is a condition of the
obligations of the Investors and the Company that they enter into a registration
rights agreement providing for certain rights to the Investors relative to the
registration of certain shares of the Company's common stock, par value $.001
per share (the "Common Stock") reserved for issuance under shares of the
Company's Series B Stock and Warrants:
NOW, THEREFORE, the parties hereto in consideration of the mutual promises
contained herein and intending to be legally bound do hereby agree as follows:
1. Piggy-back Registration.
(a) So long as the Investors are the holders of any shares of Common
Stock received upon the conversion of the Series B Stock or the exercise of the
Warrants (such shares of Common Stock being referred to herein as the
"Registrable Securities"), if the Company shall register any of its securities
for sale pursuant to any appropriate registration statement under the Securities
Act of 1933, as amended (the "Securities Act"), the Company shall be required to
offer to such Investors the opportunity to register any or all the Registrable
Securities, without cost to the Investors thereof. In connection with these
piggy-back registration rights, the Company shall give all of the Investors
notice by certified mail at least thirty (30) business days prior to the filing
of such Registration Statement under the Act. The Investors shall then have
twenty-five (25) days to elect to include all or a portion of its Registrable
Securities for sale in the Registration Statement.
(b) The registration requirement shall not apply to a Registration
Statement filed by the Company pursuant to Form S-8 or S-4 or any successor form
or forms with the sole and express purpose of registering shares in connection
with acquisition transactions or for employees or for stock incentive plans, or
any other inappropriate form.
(c) If the registration statement as to which the Company gives notice
to the Investors under Paragraph 1(a), above, is to be a registered public
offering involving an underwriter, these registration rights shall be subject to
the underwriter's discretion. To the extent the underwriter elects to exclude
any Registrable Securities from any registration statement, the number of shares
to be registered will be allocated among the holders of Series B Stock and
Warrants requesting registration on a pro rata basis in accordance with their
relative holdings. In the event any Registrable Securities are so excluded, the
Series B Stock and
1
<PAGE>
Warrant holders "piggy-back" registration rights shall be exercisable with
respect to the Company's next registration statement. Any subsequent
registration statements underwritten shall be subject to the same limitations in
the discretion of any underwriter.
(d) This Agreement shall terminate with respect to any Investor and
his Registrable Securities upon the earliest of (i) the first such instance as
such Investor ceases to own any Registrable Securities or such Investor
beneficially owns (as contemplated by the Securities Exchange Act) less than 1%
of the issued and outstanding Common Stock, and (ii) with respect to Investors
that beneficially own (as contemplated by the Securities Exchange Act) less than
5% of the issued and outstanding Common Stock (other than with respect to any
such Investor that is an affiliate (as contemplated by the Exchange Act) of the
Company), the second anniversary (or if the holding period for non-affiliates
contemplated by Rule 144(d)(1) under the Securities Act is amended, such amount
of time) of the date such Investor purchased the last Registrable Security that
such Investor purchased from the Company. Notwithstanding the foregoing, the
Company's and Investors' rights, duties and obligations under Section 6 of this
agreement shall survive the termination of this Agreement.
2. Covenants of the Company.
In the case of registration effected by the Company pursuant to this
Registration Rights Agreement, the Company will keep each Investor advised in
writing as to the initiation, progress, and declaration of effectiveness of each
registration and as to the completion thereof. At its expense, the Company
will:
(a) Keep such registration effective until the earliest to occur of
(i) the date upon which the Investor or Investors have completed the
distribution described in the registration statement relating thereto or (ii)
the date the Company receives a Rule 144 Opinion. In the case of any
registration of Registrable Securities on Form S-3 which are intended to be
offered on a continuous or delayed basis, applicable rules under the Securities
Act governing the obligation to file a post-effective amendment, permit, in lieu
of filing a post-effective amendment which (1) includes any prospectus required
by Section 10(a)(3) of the Securities Act, or (2) reflects facts or events
representing a material or fundamental change in the information set forth in
the registration statement, the incorporation by reference of information
required to be included in (1) and (2) above to be contained in periodic reports
filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act') in the registration statement; and
(b) Furnish such number of prospectuses and other documents incident
thereto as an Investor from time to time may reasonably request; and
(c) Furnish the Investors with copies of all correspondence with the
Commission; and
(d) In connection with any underwritten offering, the Company and the
Investors will enter into any underwriting agreement reasonably necessary to
effect the offer and sale of Registrable Securities, provided such agreement
contains customary underwriting provisions.
2
<PAGE>
3. Blue Sky Registration.
(a) In the event that the Company registers the Registrable
Securities, the Company will register or qualify the Registrable Securities
covered by any registration statement under the Securities Act and under such
securities or blue sky laws in such jurisdictions within the United States as
the Investors may reasonably request; provided, however, that the Company
reserves the right, in its sole discretion, not to register or qualify such
shares of Common Stock in any jurisdiction in which such shares of Common Stock
do not satisfy the requirements of such jurisdiction, or in which such
registration would submit the Company to consent to service of process in any
state in which it would not otherwise be subject to such service of process.
(b) The Company shall (i) advise the Investors promptly after
obtaining knowledge thereof, and, if requested by the Investors, confirm such
advice in writing, of the issuance by the Commission or any state securities
commission of any stop order suspending the qualification or exemption from
qualification of the Registrable Securities for offer or sale in any
jurisdiction, or the initiation of any proceeding for such purpose by the
Commission or by any state securities commission or other regulatory authority,
(ii) use its best efforts to prevent the issuance of any stop order or order
suspending the qualification or exemption from qualification of the Registrable
Securities under any state securities or Blue Sky laws, and (iii) if at any time
the Commission or any state securities commission or other regulatory authority
shall issue an order suspending the qualification or exemption from
qualification of the Registrable Securities under any such laws, use its best
efforts to obtain the withdrawal or lifting of such order at the earliest
possible time.
4. Deregistration.
In the event the Investors have not sold all of the Registrable
Securities included in the registration statement prior to the second
anniversary of the effective date of such registration statement, the Investors
hereby agree that the Company may deregister by post-effective amendment any
Registrable Securities covered by the registration statement but not sold on or
prior to such date.
5. Post-Effective Amendments.
The Company agrees that it will notify the Investors of the filing and
effective date of each such post-effective amendment.
6. Indemnification.
(a) By the Company:
--------------
The Company will indemnify each Investor with respect to whom
registration has been effected hereunder against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any prospectus, offering statement, notification or the like incident to any
such registration, qualification or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, or any violation by
the Company of the Securities
3
<PAGE>
Act or any rule or regulation thereunder applicable to the Company and relating
to action or inaction required of the Company in connection with any such
registration, qualification or compliance, and will reimburse each such
Investor, each of its officers, directors and partners, and each person
controlling such Investor, each such underwriter and each person who controls
any such underwriter, for any legal and any other expenses reasonably incurred
in connection with investigating and defending any such claim, loss, damage,
liability or action, provided that the Company will not be liable in any such
case to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue statement or omission based upon written
information furnished to the Company by such Investor or underwriter and stated
to be specifically for use therein.
(b) By the Investors:
----------------
Each Investor will, if Registrable Securities or other securities
held by him are included in the securities as to which such registration,
qualification, or compliance is being effected, indemnify the Company, each of
its directors and officers and each underwriter, if any, of the Company's
securities covered by such a registration statement, each person who controls
the Company or such underwriter within the meaning of the Securities Act and the
rules and regulations thereunder, each other such Investor and each of their
officers, directors, and partners, and each person controlling such Investor,
for a period of one (1) year from the effective date of such registration
statement, against all claims, losses, damages and liabilities (or actions in
respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any such registration
statement, prospectus, offering, circular or other document, or an), omission
(or alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and will
reimburse the Company and such Investors, directors, officers, partners,
persons, underwriters or control persons for any legal or any other expenses
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability or action, in each case to the extent, but only
to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by such Investor
and stated to be specifically for use therein; provided, however, that the
obligations of such Investors hereunder shall be limited to an amount equal to
the proceeds to each such Investor of securities sold pursuant to a registration
statement required by this Registration Rights Agreement.
(c) Notice of Indemnity and Defense:
-------------------------------
Each party entitled to indemnification under this Paragraph 6 (the
"Indemnified Party") shall give notice to the party requiring to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not
be unreasonably withheld), and the Indemnified Party may participate in such
defense at such party's expense, and provided further that the failure of any
Indemnified Party to give notice as
4
<PAGE>
provided herein shall not relieve the Indemnified Party of its obligations under
this Registration Rights Agreement. No Indemnifying Party, in the defense of any
such claim or litigation, shall, except with the consent of each Indemnified
Party, consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
to such claim or litigation. Each Indemnified Party shall furnish such
information regarding itself or the claim in question as an Indemnifying Party
may reasonably request in writing and as shall be reasonably required in
connection with the defense of such claim and litigation resulting therefrom.
7. Miscellaneous Provisions.
(a) Amendment and Modification. Subject to applicable law, this
--------------------------
Agreement may only be amended, modified and supplemented by written agreement of
a majority of the Series B Stock and Warrant holders and the Company.
(b) Waiver of Compliance. Any failure of the Investors or the Company
--------------------
to comply with any obligation, covenant, agreement or condition herein may be
expressly waived in writing by the Investors or the Company, but such waiver or
failure to insist upon strict compliance with such obligation, covenant,
agreement or condition shall not operate as waiver of, or estoppel with respect
to, any subsequent or other failure.
(c) Notices. All notices, requests, demands and other communications
-------
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given if delivered by hand or mailed, certified or registered mail
with postage prepaid:
If to the Company, to: Enviro-Clean of America, Inc.
211 Park Avenue
Hicksville, New York 11801-1408
Attn: Richard Kandel, Chairman/CEO
Phone: (516) 931-4455
Fax: (516) 931-3530
(with a copy to:) Akin, Gump, Strauss, Hauer & Feld, L.L.P.
300 Convent, Suite 1500
San Antonio, Texas 78205
Attn: Alan Schoenbaum
Phone: (210) 281-7000
Fax: (210) 224-2035
If to the Investors, to the address and facsimile number of each
Investor as set forth on Exhibit A of this Registration Rights
Agreement, or to such other person or address as the Investor
shall furnish to the Company in writing.
(d) Assignment. This Agreement and all of the provisions hereof shall
----------
be binding upon and inure to the benefit of the parties hereto and their
respective successors and
5
<PAGE>
permitted assigns, but neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned by any of the parties hereto without
the prior written consent of the other parties, except by operation of law and
except that the Company may assign its rights and its obligations under this
Agreement to any successor to the business of the Company.
(e) Governing Law. This Agreement and the legal relations among the
-------------
parties hereto shall be governed by and construed in accordance with the laws of
the State of New York without regard to its conflicts of law doctrine.
(f) Counterparts. This Agreement may be executed simultaneously in two
------------
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
(g) Headings. The headings used in this Agreement are inserted for
--------
convenience only and shall not constitute a part hereof or affect in any way the
meaning or interpretation of this Agreement.
(h) Third Parties. Except as specifically set forth or referred to
-------------
herein, nothing herein expressed or implied is intended or shall be construed to
confer upon or give to any person or corporation other than the parties hereto
and their permitted successors or assigns, any rights or remedies under or by
reason of this Agreement.
(i) Severability. Should any provision of this Agreement be held by a
------------
court or arbitration panel of competent jurisdiction to be enforceable only if
modified, such holding shall not affect the validity of the remainder of this
Agreement, the balance of which shall continue to be binding, upon the parties
hereto with any such modification to become a part hereof and treated as though
originally set forth in this Agreement. The parties further agree that any such
court or arbitration panel is expressly authorized to modify any such
unenforceable provision of this Agreement in lieu of severing such unenforceable
provision from this Agreement in its entirety, whether by rewriting the
offending provision, deleting any or all of the offending provision, adding
additional language to this Agreement, or by making such other modifications as
it deems warranted to carry out the intent and agreement of the parties as
embodied herein to the maximum extent permitted by law. The parties expressly
agree that this Agreement as modified by the court or the arbitration panel
shall be binding upon and enforceable against each of them. In any event, should
one or more of the provisions of this Agreement be held to be invalid, illegal
or unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision hereof, and if such provision or provisions
are not modified as provided above, this Agreement shall be construed as if such
invalid, illegal or unenforceable provisions had never been set forth herein.
IN WITNESS WHEREOF, the parties have caused this agreement to be duly
executed and delivered as of the day and year first above written.
(Signature Page Follows)
6
<PAGE>
[COMPANY SIGNATURE PAGE TO
REGISTRATION RIGHTS AGREEMENT]
ENVIRO-CLEAN OF AMERICA, INC.
BY:
--------------------------------
Randall K. Davis,
President
[INVESTORS SIGNATURE PAGES FOLLOW]
7
<PAGE>
[INVESTOR SIGNATURE PAGE TO
REGISTRATION RIGHTS AGREEMENT]
The Investors:
------------------------------------------
Name of Investor if Entity or Signature if
Individual
By:
---------------------------------------
Title:
------------------------------------
------------------------------------------
Please type or print name
8
<PAGE>
EXHIBIT 3(XVI)
===============================================================================
WARRANT AGREEMENT
Dated as of December 15, 1999
Between
ENVIRO-CLEAN OF AMERICA, INC.
and
INTERWEST TRANSFER CO., INC.,
as Warrant Agent
----------------------------------------------
Warrants to Purchase Shares of Common Stock
Par Value $.001 Per Share
===============================================================================
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
ISSUANCE, FORM. EXECUTION, DELIVERY AND
REGISTRATION OF WARRANT CERTIFICATES
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 1.01. Issuance of Warrants................................. 1
SECTION 1.02. Execution of Warrant Certificates.................... 1
SECTION 1.03. Authentication and Delivery.......................... 2
SECTION 1.04. Temporary Warrant Certificates....................... 3
SECTION 1.05. Separation of Warrants and Series B Stock............ 3
SECTION 1.06. Registration......................................... 3
SECTION 1.07. Registration of Transfers and Exchanges.............. 4
SECTION 1.08. Lost, Stolen, Destroyed, Defaced or Mutilated
Warrant Certificates................................. 6
</TABLE>
ARTICLE II
DURATION, EXERCISE OF WARRANTS AND EXERCISE PRICE
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 2.01. Duration of Warrants................................. 6
SECTION 2.02. Exercise, Exercise Price, Settlement and Delivery.... 7
SECTION 2.03. Call................................................. 8
SECTION 2.04. Cancellation of Warrant Certificates................. 8
</TABLE>
ARTICLE III
OTHER PROVISIONS RELATING TO
RIGHTS OF HOLDERS OF WARRANTS
SECTION 3.01. Enforcement of Rights................................ 9
ARTICLE IV
CERTAIN COVENANTS OF THE COMPANY
SECTION 4.01. Payment of Taxes .................................... 9
i
<PAGE>
ARTICLE V
ADJUSTMENTS
<TABLE>
<S> <C> <C>
SECTION 5.01. Adjustment of Exercise Price and Number of Shares
Issuable ................................................. 9
SECTION 5.02. When Adjustment Not Required.............................. 11
SECTION 5.03. Challenge to Good Faith Determination..................... 12
SECTION 5.04. Treasury Stock............................................ 12
SECTION 5.05. Notices to Warrant Holders................................ 12
</TABLE>
ARTICLE VI
CONCERNING THE WARRANT AGENT
<TABLE>
<S> <C> <C>
SECTION 6.01. Warrant Agent............................................. 13
SECTION 6.02. Conditions of Warrant Agent's Obligations................. 13
SECTION 6.03. Resignation and Appointment of Successor.................. 16
</TABLE>
ARTICLE VII
MISCELLANEOUS
<TABLE>
<S> <C> <C>
SECTION 7.01. Amendment................................................. 18
SECTION 7.02. Notices and Demands to the Company and Warrant Agent...... 18
SECTION 7.03. Addresses for Notices to Parties and for Transmission
of Documents.............................................. 18
SECTION 7.04. Notices to Holders........................................ 19
SECTION 7.05. Applicable Law............................................ 19
SECTION 7,06. Obtaining of Governmental Approvals....................... 20
SECTION 7.07. Persons Having Rights Under Agreement..................... 20
SECTION 7.08. Headings.................................................. 20
SECTION 7.09. Counterparts.............................................. 20
SECTION 7.10. Inspection of Agreement................................... 20
SECTION 7.11. Successors................................................ 20
</TABLE>
EXHIBIT A - Form of Warrant Certificate
EXHIBIT B - Certificate To Be Delivered upon Exchange or Registration of
Transfer of Warrants
EXHIBIT C - Transferee Letter of Representation
ii
<PAGE>
INDEX OF DEFINED TERMS
----------------------
<TABLE>
<CAPTION>
Defined Term Section
- ------------ -------
<S> <C>
Agreement................................................ Recitals
Business Day............................................. 2.01
Call Notice.............................................. 2.03
Call Notice Period....................................... 2.03
Common Stock............................................. Recitals
Company.................................................. Recitals
Early Termination Date................................... 2.03
Effective Date........................................... Recitals
Election to Exercise..................................... 2.02(b)
Exercisability Date...................................... 2.02(a)
Exercise Date............................................ 2.02(d)
Exercise Price........................................... 2.02(a)
Expiration Date.......................................... 2.01
Majority Holders......................................... 5.03
Offering................................................. Recitals
Registrar................................................ 1.06
Related Parties.......................................... 6.02(e)
Securities Act........................................... 1.07(a)
Series B Stock........................................... Recitals
Shares................................................... 1.01
Units.................................................... Recitals
Warrant Agent............................................ Recitals
Warrant Certificates..................................... Recitals
Warrant Register......................................... 1.06
Warrants................................................. Recitals
</TABLE>
iii
<PAGE>
WARRANT AGREEMENT
WARRANT AGREEMENT ("Agreement"), dated as of December 15, 1999 (the
"Effective Date") by Enviro-Clean of America, Inc., a Nevada corporation
(together with any successor thereto, the "Company"), and Interwest Transfer
Co., Inc., a Utah corporation as warrant agent (with any successor Warrant
Agent, the "Warrant Agent").
WHEREAS, the Company has entered into a private placement of securities
(the "Offering") in which the Company has agreed, among other things, to sell to
Investors (A) 200 to 800 units (the "Units") consisting in the aggregate of (i)
20,000 to 80,000 shares of Series B Cumulative Convertible Preferred Stock (the
"Series B Stock"), and (ii) 200,000 to 800,000 Warrants to purchase an aggregate
of 200,000 to 800,000 shares of common stock, $.001 par value per share (the
"Common Stock "), of the Company (the "Warrants"), and the certificates
evidencing the Warrants (being hereinafter referred to as "Warrant
Certificates"), in each case subject to adjustment in accordance with the terms
hereof, and
WHEREAS, the Warrants and the Series B Stock comprising part of the Units
shall be separately transferable immediately; and
WHEREAS, the Company desires the Warrant Agent as warrant agent to assist
the Company in connection with the issuance, exchange, cancellation, replacement
and exercise of the Warrants, and in this Agreement wishes to set forth, among
other things, the terms and conditions on which the Warrants may be issued,
exchanged, canceled, replaced and exercised;
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
ISSUANCE, FORM, EXECUTION, DELIVERY AND
REGISTRATION OF WARRANT CERTIFICATES
------------------------------------
SECTION 1.01. Issuance of Warrants. Each Warrant Certificate shall
--------------------
evidence the number of Warrants specified therein, each Warrant evidenced
thereby shall represent the right, subject to the provisions contained herein
and therein, to purchase from the Company (and the Company shall issue and sell
to such holder of the Warrant) one fully paid and non-assessable share of the
Company's Common Stock (the shares of Common Stock purchasable upon exercise of
a Warrant being hereinafter referred to as the "Shares" and, where appropriate,
such term shall also mean the other securities or property purchasable and
deliverable upon exercise of a Warrant as provided in Article V) at the price
specified herein and therein, in each case subject to adjustment as provided
herein and therein.
SECTION 1.02. Execution of Warrant Certificates. The Warrant Certificates
---------------------------------
shall be executed on behalf of the Company by the chairman of its Board of
Directors, its president or any vice president and attested by its secretary or
assistant secretary, under its corporate seal. Such signatures may be the
manual or facsimile signatures of the present or any future such
2
<PAGE>
officers. The seal of the Company may be in the form of a facsimile thereof and
may be impressed, affixed, imprinted or otherwise reproduced on the Warrant
Certificates. Typographical and other minor errors or defects in any such
reproduction of the seal or any such signature shall not affect the validity or
enforceability of any Warrant Certificate that has been duly countersigned and
delivered by the Warrant Agent.
In case any officer of the Company who shall have signed any of the Warrant
Certificates shall cease to be such officer before the Warrant Certificate so
signed shall be countersigned and delivered by the Warrant Agent or disposed of
by the Company, such Warrant Certificate nevertheless may be countersigned and
delivered or disposed of as though the person who signed such Warrant
Certificate had not ceased to be such officer of the Company; and any Warrant
Certificate may be signed on behalf of the Company by such persons as, at the
actual date of the execution of such Warrant Certificate, shall be the proper
officers of the Company, although at the date of the execution and delivery of
this Agreement any such person was not such an officer.
SECTION 1.03. Authentication and Delivery. Subject to the immediately
---------------------------
following paragraph, Warrant Certificates shall be authenticated by manual
signature and dated the date of authentication by the Warrant Agent and shall
not be valid for any purpose unless so authenticated and dated. The Warrant
Certificates shall be numbered and shall be registered in the Warrant Register
(as defined in Section 1.06 hereof).
------------
Upon the receipt by the Warrant Agent of a written order of the Company,
which order shall be signed by the chairman of its Board of Directors, its
president or any vice president and attested by its secretary or assistant
secretary, and shall specify the amount of Warrants to be authenticated, the
date of such Warrants and such other information as the Warrant Agent may
reasonably request, without any further action by the Company, the Warrant Agent
is authorized, upon receipt from the Company at any time and from time to time
of the Warrant Certificates, duly executed as provided in Section 1.02 hereof,
------------
to authenticate the Warrant Certificates and deliver them. Such authentication
shall be by a duly authorized signatory of the Warrant Agent (although it shall
not be necessary for the same signatory to sign all Warrant Certificates).
In case any authorized signatory of the Warrant Agent who shall have
authenticated any of the Warrant Certificates shall cease to be such authorized
signatory before the warrant Certificate shall be disposed of by the Company,
such Warrant Certificate nevertheless may be delivered or disposed of as though
the person who authenticated such Warrant Certificate had not ceased to be such
authorized signatory of the Warrant Agent; and any Warrant Certificate may be
authenticated on behalf of the Warrant Agent by such persons as, at the actual
time of authentication of such Warrant Certificates, shall be the duly
authorized signatories of the Warrant Agent, although at the time of the
execution and delivery of this Agreement any such person is not such an
authorized signatory.
The Warrant Agent's authentication on all Warrant Certificates shall be in
substantially the form set forth in Exhibit A hereto.
---------
SECTION 1.04. Temporary Warrant Certificates. Pending the preparation of
------------------------------
definitive Warrant Certificates, the Company may execute, and, upon receipt of
an authentication order in
3
<PAGE>
accordance with Section 1.03 hereof, the Warrant Agent shall authenticate and
------------
deliver, temporary Warrant Certificates, which are printed, lithographed,
typewritten or otherwise produced, substantially of the tenor of the definitive
Warrant Certificates in lieu of which they are issued and with such appropriate
insertions, omissions, substitutions and other variations as the officers
executing such Warrant Certificates may determine, as evidenced by their
execution of such Warrant Certificates.
If temporary Warrant Certificates are issued, the Company will cause
definitive Warrant Certificates to be prepared without unreasonable delay.
After the preparation of definitive Warrant Certificates, the temporary Warrant
Certificates shall be exchangeable for definitive Warrant Certificates upon
surrender of the temporary Warrant Certificates at any office or agency
maintained by the Company for that purpose pursuant to Section 1.08 hereof.
------------
Subject to the provisions of Section 4.01 hereof, such exchange shall be without
------------
charge to the holder. Upon surrender for cancellation of any one or more
temporary Warrant Certificates, the Company shall execute, and, upon receipt of
an authentication order in accordance with Section 1.03 hereof, the Warrant
------------
Agent shall authenticate and deliver in exchange therefor, one or more
definitive Warrant Certificates representing in the aggregate a like number of
Warrants. Until so exchanged, the holder of a temporary Warrant Certificate
shall in all respects be entitled to the same benefits under this Agreement as a
holder of a definitive Warrant Certificate.
SECTION 1.05. Separation of Warrants and Series B Stock. The Series B
-----------------------------------------
Stock and Warrants will be separately transferable immediately.
SECTION 1.06. Registration. The Company will keep, at the office or
------------
agency maintained by the Company for such purpose, a register or registers in
which, subject to such reasonable regulations as it may prescribe, the Company
shall provide for the registration of, and registration of transfer and exchange
of, Warrants as provided in this Article. Each person designated by the Company
from time to time as a person authorized to register the transfer and exchange
of the Warrants is hereinafter called, individually and collectively, the
"Registrar." The Company hereby initially appoints the Warrant Agent as
Registrar. Upon written notice to the Warrant Agent and any acting Registrar,
the Company may appoint a successor Registrar for such purposes.
The Company will at all times designate one person (who may be the Company
and who need not be a Registrar) to act as repository of a master list of names
and addresses of the holders of Warrants (the "Warrant Register"). The Warrant
Agent will act as such repository unless and until some other person is, by
written notice from the Company to the Warrant Agent and the Registrar,
designated by the Company to act as such. The Company shall cause each
Registrar to furnish to such repository, on a current basis, such information as
to all registrations of transfer and exchanges effected by such Registrar, as
may be necessary to enable such repository to maintain the Warrant Register on
as current a basis as is practicable.
4
<PAGE>
SECTION 1.07. Registration of Transfers and Exchanges.
---------------------------------------
(a) Transfer of Warrants. When Warrants are presented to the Warrant Agent
--------------------
with a request to register the transfer of the Warrants, the Warrant Agent shall
register the transfer as requested if the requirements under this Warrant
Agreement as set forth in this Section 1.07 hereof for such transactions are
------------
met; provided, however, that the Warrants presented or surrendered for
registration of transfer:
(x) shall be duly endorsed or accompanied by a written instruction of
transfer in form satisfactory to the Company and the Warrant
Agent, duly executed by the holder thereof or by his attorney,
duly authorized in writing; and
(y) in the case of Warrants the offer and sale of which have not been
registered under the Securities Act of 1933, as amended, (the
"Securities Act"), such Warrants shall be accompanied, in the
sole discretion of the Company, by the following additional
information and documents, as applicable:
(A) if such Warrant is being transferred to a qualified
institutional buyer (as defined in Rule 144A under the
Securities Act) in accordance with Rule 144A under the
Securities Act or pursuant to an exemption from registration
in accordance with Rule 144 or Regulation S under the
Securities Act, a certification to that effect (in
substantially the form of Exhibit B hereto); or
---------
(B) if such Warrant is being transferred to an institutional
"accredited investor" within the meaning of subparagraphs
(a)(1), (a)(2), (a)(3) or (a)(7) of Rule 501 under the
Securities Act, delivery of certificate of the transfer (in
substantially the form of Exhibit B hereto) along with a
---------
Transferee Letter of Representation in the form of Exhibit C
---------
hereto and an opinion of counsel and/or other information
satisfactory to the Company to the effect that such transfer
is in compliance with the Securities Act; or
(C) if such Warrant is being transferred in reliance on another
exemption from the registration requirements of the
Securities Act, a certification to that effect (in
substantially the form of Exhibit B hereto) and an opinion of
---------
counsel reasonably acceptable to the Company to the effect
that such transfer is in compliance with the Securities Act.
(b) Legends. Each Warrant Certificate evidencing the Warrants (and all
-------
Warrants issued in exchange therefor or substitution thereof) shall bear a
legend substantially to the following effect:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ISSUED TO THE
REGISTERED OWNER IN RELIANCE UPON WRITTEN
5
<PAGE>
REPRESENTATION THAT THESE SECURITIES HAVE BEEN TAKEN FOR INVESTMENT.
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND MAY NOT BE SOLD TRANSFERRED OR ASSIGNED UNLESS AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY SHALL HAVE BEEN RECEIVED
BY THE COMPANY TO THE EFFECT THAT SUCH SALE, TRANSFER OR ASSIGNMENT
WILL NOT BE IN VIOLATION OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
THE RULES AND REGULATIONS THEREUNDER, AND OTHER APPLICABLE STATE
SECURITIES LAWS.
THE STOCK ISSUABLE UPON EXERCISE OF THIS CERTIFICATE HAS NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
SOLD, TRANSFERRED OR ASSIGNED UNLESS AN OPINION OF COUNSEL SATISFACTORY
TO THE COMPANY SHALL HAVE BEEN RECEIVED BY THE COMPANY TO THE EFFECT
THAT SUCH SALE, TRANSFER OR ASSIGNMENT WILL NOT BE IN VIOLATION OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND THE RULES AND REGULATIONS
THEREUNDER AND OTHER APPLICABLE SECURITIES LAWS.
(c) Obligations with Respect to Transfers and Exchanges of Warrants.
---------------------------------------------------------------
(i) To permit registrations of transfers and exchanges, the Company
shall execute, at the Warrant Agent's request, and the Warrant
Agent shall, upon receipt of an authentication order in
accordance with Section 1.03 hereof, authenticate Warrants.
------------
(ii) All Warrants issued upon any registration, transfer or exchange
of Warrants shall be the valid obligations of the Company,
entitled to the same benefits under this Warrant Agreement as
the Warrants surrendered upon the registration of transfer or
exchange.
(iii) Prior to due presentment for registration of transfer of any
Warrant, the Warrant Agent and the Company may deem and treat
the person in whose name any Warrant is registered as the
absolute owner of such Warrant, and neither the Warrant Agent
nor the Company shall be affected by notice to the contrary.
(d) Payment of Taxes. The Company will pay all documentary stamp taxes
----------------
attributable to the initial issuance of the Shares upon the exercise of
Warrants; provided, however, that the Company shall not be required to pay any
-------- -------
tax or taxes which may be payable in respect of any transfer involved in the
issue of any Warrant Certificates or any certificates for the Shares in a name
other than that of the registered holder of a Warrant Certificate surrendered
upon the exercise of a Warrant, and the Company shall not be required to issue
or deliver such Warrant Certificates unless or until the person or persons
requesting the issuance thereof shall
6
<PAGE>
have paid to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.
SECTION 1.08. Lost, Stolen, Destroyed, Defaced or Mutilated Warrant
-----------------------------------------------------
Certificates. Upon receipt by the Company and the Warrant Agent (or any agent
- ------------
of the Company or the Warrant Agent, if requested by the Company) of evidence
satisfactory to them of the loss, theft, destruction, defacement, or mutilation
of any Warrant Certificate and of indemnity reasonably satisfactory to them and,
in the case of mutilation or defacement, upon surrender thereof to the Warrant
Agent for cancellation, then, in the absence of notice to the Company or the
Warrant Agent that such Warrant Certificate has been acquired by a bona fide
---- ----
purchaser or holder in due course, the Company shall execute, and, upon receipt
of an authentication order in accordance with Section 1.03 hereof, an authorized
------------
signatory of the Warrant Agent shall manually authenticate and deliver, in
exchange for or in lieu of the lost, stolen, destroyed, defaced or mutilated
Warrant Certificate, a new Warrant Certificate representing a like number of
Warrants. bearing a number or other distinguishing symbol not contemporaneously
outstanding. Upon the issuance of any new Warrant Certificate under this
Section, the Company may require the payment from the holder of such Warrant
Certificate of a sum sufficient to cover any tax, stamp tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Warrant Agent and the
Registrar) in connection therewith. Every substitute Warrant Certificate
executed and delivered pursuant to this Section in lieu of any lost, stolen or
destroyed Warrant Certificate shall constitute an additional contractual
obligation of the Company, whether or not the lost, stolen or destroyed Warrant
Certificate shall be at any time enforceable by anyone, and shall be entitled to
the benefits of (but shall be subject to all the limitations of rights set forth
in) this Agreement equally and proportionately with any and all other Warrant
Certificates duly executed and delivered hereunder. The provisions of this
Section 1.08 are exclusive with respect to the replacement of lost, stolen,
- ------------
destroyed, defaced or mutilated Warrant Certificates and shall preclude (to the
extent lawful) any and all other rights or remedies notwithstanding any law or
statute existing or hereafter enacted to the contrary with respect to the
replacement of lost, stolen, destroyed, defaced or mutilated Warrant
Certificates.
The Warrant Agent is hereby authorized to authenticate in accordance with
the provisions of this Agreement, and deliver the new Warrant Certificates
required pursuant to the provisions of this Section.
ARTICLE II
DURATION, EXERCISE OF WARRANTS AND EXERCISE PRICE
-------------------------------------------------
SECTION 2.01. Duration of Warrants. Subject to the terms and conditions
--------------------
established herein, the Warrants shall expire 5 years from the date of issuance
(the "Expiration Date"). Each Warrant may be exercised on any Business Day (as
defined below) on or after the Exercisability Date (as defined below) and on or
prior to the Expiration Date. The Company will give notice of expiration not
less than 90 days nor more than 120 days prior to the Expiration Date to the
registered holders of the then-outstanding Warrants.
7
<PAGE>
Any Warrant not exercised on or prior to the Expiration Date relating to
such Warrant shall become void, and all rights of the holder under the Warrant
Certificate evidencing such Warrant and under this Agreement shall cease.
"Business Day" shall mean any day on which (i) banks in New York, New York,
(ii) the principal national securities exchange or market on which the Common
Stock is listed or admitted to trading and (iii) the principal national
securities exchange or market, if any, on which the Warrants are listed or
admitted to trading are open for business.
SECTION 2.02. Exercise; Exercise Price; Settlement and Delivery. (a)
-------------------------------------------------
Subject to the provisions of this Agreement, (i) a holder of Warrants shall have
the right to purchase from the Company on or after the Effective Date (the
"Exercisabilty Date") and on or prior to the Expiration Date one fully paid,
registered and non-assessable Shares, subject to adjustment in accordance with
Article V hereof, at the purchase price of $5.00 for each Warrant exercised (the
"Exercise Price").
(b) Warrants may be exercised on or after the Exercisability Date by (i)
surrendering to the Warrant Agent the Warrant Certificate evidencing such
Warrants with the form of election to purchase Shares set forth on the reverse
side of the Warrant Certificate (the "Election to Exercise") duly completed and
signed by the registered holder or holders thereof or by the duly appointed
legal representative thereof or by a duly authorized attorney, and (ii) paying
in full the Exercise Price for each such Warrant exercised and any other amounts
required to be paid pursuant to Section 1.07(d) hereof. Each Warrant may be
---------------
exercised only in whole.
(c) Simultaneously with the exercise of each Warrant, payment in full of
the Exercise Price shall be made in cash or by certified or official bank check
to be delivered to the office or agency where the Warrant Certificate is being
surrendered. No payment or adjustment shall be made on account of any dividends
on the Shares issued upon exercise of a Warrant.
(d) The "Exercise Date" for a Warrant shall be the date when all of the
items referred to in the first sentence of paragraphs (b) and (c) of this
Section 2.02 are received by the Warrant Agent at or prior to 2:00 p.m., New
- ------------
York, New York time, on a Business Day and the exercise of the Warrants will be
effective as of such Exercise Date. If any items referred to in the first
sentence of paragraphs (b) and (c) are received after 2:00 p.m., New York, New
York time, on a Business Day, the exercise of the Warrants to which such item
relates will be effective on the next succeeding Business Day. Notwithstanding
the foregoing, in the case of an exercise of Warrants on the Expiration Date (as
defined in Section 2.01), if all of the items referred to in the first sentence
------------
of paragraphs (b) and (c) are received by the Warrant Agent at or prior to 5:00
p.m., New York, New York time, on such Expiration Date, the exercise of the
Warrants to which such items relate will be effective on the Expiration Date.
(e) Upon the exercise of a Warrant in accordance with the terms hereof, the
receipt of a Warrant Certificate and payment of the Exercise Price, the Warrant
Agent shall: (i) cause an amount equal to the Exercise Price to be paid to the
Company by crediting the same to the account designated by the Company in
writing to the Warrant Agent for that purpose; (ii) advise the Company
immediately by telephone of the amount so deposited to the Company's account
8
<PAGE>
and promptly confirm such telephonic advice in writing and (iii) as soon as
practicable, advise the Company in writing of the number of Warrants (giving
effect to Section 5.01(e) below) exercised in accordance with the terms and
---------------
conditions of this Agreement and the Warrant Certificates, the instructions of
each exercising holder of the Warrant Certificates with respect to delivery of
the Shares to which such holder is entitled upon such exercise, and such other
information as the Company shall reasonably request.
(f) As soon as practicable after the exercise of any Warrant or Warrants in
accordance with the terms hereof, the Company shall issue or cause to be issued
to or upon the written order of the registered holder of the Warrant Certificate
evidencing such exercised Warrant or Warrants, a certificate or certificates
evidencing the Shares to which such holder is entitled, in fully registered
form, registered in such name or names as may be directed by such holder
pursuant to the Election to Exercise, as set forth on the reverse of the Warrant
Certificate. The Warrant Agent shall have no obligation to ascertain the number
of Shares to be issued with respect to the exercised Warrant or Warrants. Such
certificate or certificates evidencing the Shares shall be deemed to have been
issued and any persons who are designated to be named therein shall be deemed to
have become the holder of record of such Shares as of the close of business on
the Exercise Date. After such exercise of any Warrant or Warrants, the Company
shall also issue or cause to be issued to or upon the written order of the
registered holder of such Warrant Certificate, a new Warrant Certificate,
countersigned by the Warrant Agent pursuant to the Company's written
instruction, evidencing the number of Warrants, if any, remaining unexercised
unless such Warrants shall have expired.
SECTION 2.03 Call. The Company, at its option, may provide the holder of
----
this Warrant written notice pursuant to Section 7.04 (the "Call Notice") that
------------
this Warrant shall terminate on the 20th day following the date of delivery of
the Call Notice (such date being the "Early Termination Date") at any time: (i)
the Closing Per Share Market Price of the Common Stock has been equal to or
greater than 200% of the Warrant Exercise Price on the date of delivery of the
Call Notice and the 19 consecutive Trading Days immediately preceding the date
delivery of the Call Notice (the "Call Notice Period") and (ii) after a
registration statement has been declared effective under the Securities Act (the
"Registration Statement") and has been effective for the Call Notice Period. In
the event that the Warrant is not exercised by the holder of this Warrant on or
before the Early Termination Date, this Warrant shall expire at 5:00 p.m., New
York, New York time, on the Early Termination Date, and the Company will remit
to the holder of the Warrant $.10 per Warrant upon such holder tendering to the
Company the expired Warrant Certificate.
SECTION 2.04. Cancellation of Warrant Certificates. In the event the
------------------------------------
Company shall purchase or otherwise acquire Warrants, the Warrant Certificates
evidencing such Warrants may thereupon be delivered to the Warrant Agent, and if
so delivered, shall be canceled by it and retired. The Warrant Agent shall
cancel all Warrant Certificates properly surrendered for exchange, substitution,
transfer or exercise. The Warrant Agent shall destroy canceled Warrant
Certificates held by it and deliver a certificate of destruction to the Company.
The Warrant Agent shall account promptly to the Company with respect to Warrants
exercised and concurrently pay to the Company all monies received by the Warrant
Agent for the purchase of Warrant Shares through the exercise of such Warrants.
9
<PAGE>
ARTICLE III
OTHER PROVISIONS RELATING TO
RIGHTS OF HOLDERS OF WARRANTS
-----------------------------
SECTION 3.01. Enforcement of Rights. (a) Notwithstanding any of the
---------------------
provisions of this Agreement, any holder of any Warrant Certificate, without the
consent of the Warrant Agent, the holder of any Shares or the holder of any
other Warrant Certificate, may, in and for his own behalf, enforce, and may
institute and maintain any suit, action or proceeding against the Company
suitable to enforce, his right to exercise the Warrant or Warrants evidenced by
his Warrant Certificate in the manner provided in such Warrant Certificate and
in this Agreement.
(b) Neither the Warrants nor any Warrant Certificate shall entitle the
holders thereof to any of the rights of a holder of Shares, including, without
limitation, the right to vote or to receive any dividends or other payments or
to consent or to receive notice as stockholders in respect of the meetings of
stockholders or for the election of directors of the Company or to share in the
assets of the Company in the event of the liquidation, dissolution or winding up
of the Company's affairs or any other matter, or any rights whatsoever as
stockholders of the Company.
ARTICLE IV
CERTAIN COVENANTS OF THE COMPANY
--------------------------------
SECTION 4.01. Payment of Taxes. The Company will pay all documentary stamp
------------------
taxes attributable to the initial issuance of Warrants and of the Shares upon
the exercise of Warrants or to the separation of the Warrants and Series B Stock
as described in Section 1.05; provided, however, that the Company shall not be
------------ -----------------
required to pay any tax or other governmental charge which may be payable in
respect of any transfer or exchange of any Warrant Certificates or any
certificates for Shares in a name other than the registered holder of a Warrant
Certificate surrendered upon the exercise of a Warrant. In any such case, no
transfer or exchange shall be made unless or until the person or persons
requesting issuance thereof shall have paid to the Company the amount of such
tax or other governmental charge or shall have established to the satisfaction
of the Company that such tax or other governmental charge has been paid or an
exemption is available therefrom.
ARTICLE V
ADJUSTMENTS
-----------
SECTION 5.01. Adjustment of Exercise Price and Number of Shares Issuable.
----------------------------------------------------------
The number and kind of Shares purchasable upon the exercise of Warrants and the
Exercise Price shall be subject to adjustment from time to time as follows:
10
<PAGE>
(a) Stock Splits, Combinations. etc. In case the Company shall hereafter
-------------------------------
(A) pay a dividend or make a distribution on its Common Stock in shares of its
capital stock (whether shares of Common Stock or of capital stock of any other
class), (B) subdivide its outstanding shares of Common Stock or (C) combine its
outstanding shares of Common Stock into a smaller number of shares, the number
of Shares purchasable upon exercise of each Warrant immediately prior thereto
shall be adjusted so that the holder of any Warrant thereafter exercised shall
be entitled to receive the number of Shares which such holder would have owned
immediately following such action had such Warrant been exercised immediately
prior thereto. An adjustment made pursuant to this paragraph shall become
effective immediately after the record date in the case of a dividend and shall
become effective immediately after the effective date in the case of a
subdivision, combination or reclassification. If, as a result of an adjustment
made pursuant to this paragraph, the holder of any Warrant thereafter exercised
shall become entitled to receive shares of two or more classes of capital stock
of the Company, the Board of Directors of the Company (whose determination shall
be conclusive) shall determine the allocation of the adjusted Exercise Price
between or among shares of such classes of capital stock.
(b) Reclassification, Combinations, Mergers, etc. In case of any
--------------------------------------------
reclassification or change of outstanding shares of Common Stock (other than as
set forth in Section 5.01(a) above and other than a change in par value, or from
---------------
par value to no par value, or from no par value to par value, or in case of any
consolidation or merger of the Company with or into another corporation (other
than a merger in which the Company is the continuing corporation and which does
not result in any reclassification or change of the then outstanding shares of
Common Stock or other capital stock of the Company (other than a change in par
value, or from par value to no par value, or from par value to par value or as a
result of a subdivision or combination)) or in case of any sale or conveyance to
another corporation of all or substantially all of the assets of the Company,
then, as a condition of such reclassification, change, consolidation, merger,
sale or conveyance, the Company or such a successor or purchasing corporation,
as the case may be, shall forthwith make lawful and adequate provision whereby
the holder of such Warrant then outstanding shall have the right thereafter to
receive on exercise of such Warrant the kind and amount of shares of stock and
other securities and property receivable upon such reclassification, change,
consolidation, merger, sale or conveyance by a holder of the number of shares of
Common Stock issuable upon exercise of such Warrant immediately prior to such
reclassification, change, consolidation, merger, sale or conveyance and enter
into a supplemental warrant agreement so providing. Such provisions shall
include provision for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Article V. If the issuer of
securities deliverable upon exercise of Warrants under the supplemental warrant
agreement is an affiliate of the formed, surviving or transferee corporation,
that issuer shall join in the supplemental warrant agreement. The above
provisions of this paragraph (b) shall similarly apply to successive
reclassifications; and changes of shares of Common Stock and to successive
consolidations, mergers, sales or conveyances.
In case of any such reclassification, merger, consolidation or disposition
of assets, the successor or acquiring corporation (if other than the Company)
shall expressly assume the due and punctual observance and performance of each
and every covenant and condition of this Warrant Agreement to be performed and
observed by the Company and all the obligations and liabilities hereunder,
subject to such modifications as may be deemed appropriate (as determined
11
<PAGE>
by resolution of the Board of Directors of the Company) in order to provide for
adjustments of shares of the Common Stock for which this Warrant is exercisable
which shall be as nearly equivalent as practicable to the adjustments provided
for in this Article V. The foregoing provisions shall similarly apply to
successive reorganizations, reclassifications, mergers, consolidations or
disposition of assets.
(c) Subdivision or Combination of Shares. If the Company, at any time
------------------------------------
while the Warrant is outstanding, shall subdivide or combine any shares of
Common Stock, (i) in case of subdivision of shares, the Warrant Exercise Price
shall be proportionately reduced (as at the effective date of such subdivision
or, if the Company shall take a record of holders of its Common Stock for the
purpose of such subdividing, as at the applicable record date, whichever is
earlier) to reflect the increase in the total number of shares of Common Stock
outstanding as a result of such subdivision, or (ii) in the case of a
combination of shares, the Warrant Exercise Price shall be proportionately
increased (as at the effective date of such combination or, if the Company shall
take a record of holders of its Common Stock for the purpose of so combining, as
at the applicable record date, whichever is earlier) to reflect the reduction in
the total number of shares of Common Stock outstanding as a result of such
combination.
(d) Certain Dividends and Distributions. If the Company, at any time while
-----------------------------------
the Warrant is outstanding, shall pay a dividend in, or make any other
distribution to its stockholders (without consideration therefor) of, shares of
Common Stock, the Warrant Exercise Price shall be adjusted, as at the date the
Company shall take a record of the holders of the Common Stock for the purpose
of receiving such dividend or other distribution (or if no such record is taken
as at the date of such payment or other distribution), to that price determined
by multiplying the Warrant Exercise Price in effect immediately prior to such
record date (or if no such record is taken, then immediately prior to such
payment or other distribution), by a fraction (1) the numerator of which shall
be the total number of shares of Common Stock outstanding immediately prior to
such dividend or distribution, and (2) the denominator of which shall be the
total number of shares of Common Stock outstanding immediately after such
dividend or distribution (plus in the event that the Company's paid cash for
fractional shares the number of additional shares which would have been
outstanding had the Company issued fractional shares in connection with said
dividends).
(e) Statement of Warrants. Irrespective of any adjustment in the number or
---------------------
kind of Shares issuable upon the exercise of the Warrants, Warrants theretofore
or thereafter issued shall continue to express the same number and kind of
shares as are stated in the Warrants initially issuable pursuant to this
Agreement.
SECTION 5.02. When Adjustment Not Required. If the Company shall take a
----------------------------
record of the holders of its Common Stock for the purpose of entitling them to
receive a dividend or distribution or subscription or purchase rights and shall,
thereafter and before the distribution to stockholders thereof, legally abandon
its plan to pay or deliver such dividend, distribution, subscription or purchase
rights, then thereafter no adjustment shall be required by reason of the taking
of such record and any such adjustment previously made in respect thereof shall
be rescinded and annulled.
12
<PAGE>
SECTION 5.03. Challenge to Good Faith Determination. Whenever the Board
-------------------------------------
of Directors of the Company shall be required to make a determination in good
faith of the fair value of any item under this Article V, such determination may
be challenged in good faith by holders holding a majority of the outstanding
Warrants (the "Majority Holders"), and any dispute shall be resolved by an
investment banking firm of national standing selected by the Company. The fee of
such investment banking firm shall be paid by the Company, unless such fair
market value as determined by the investment banking firm is more than 95% of
the fair market value determined by the Board of Directors of the Company, in
which case the challenging holders shall be jointly and severally liable for
such fee.
SECTION 5.04. Treasury Stock. The sale or other disposition of any issued
--------------
shares of Common Stock owned or held by or for the account of the Company shall
be deemed an issuance thereof and a repurchase thereof and designation of such
shares as treasury stock shall be deemed to be a redemption thereof for the
purposes of this Agreement.
SECTION 5.05. Notices to Warrant Holders. In connection with any
--------------------------
adjustment pursuant to this Article V, the Company shall (i) promptly after such
adjustment cause to be filed with the Warrant Agent a certificate of an officer
of the Company setting forth the number of shares (or portion thereof) issuable
after such adjustment, upon exercise of a Warrant, which certificate shall be
conclusive evidence of the correctness of the matters set forth therein, and
(ii) promptly after such adjustment cause to be given to each of the registered
holders of the Warrant Certificates at his address appearing on the Warrant
Register written notice of such adjustments by first class mail, postage
prepaid. The Warrant Agent shall be entitled to conclusively rely on the above
referenced officer's certificate and shall be under no duty or responsibility
with respect to any such certificate, except to exhibit the same from time to
time to any holder desiring an inspection thereof during normal business hours
upon reasonable notice. The Warrant Agent shall not at any time be under any
duty or responsibility to any holder to determine whether any facts exist that
may require any adjustment of the number of Shares issuable on exercise of the
Warrants or the Exercise Price, or with respect to the nature or extent of any
such adjustment when made, or with respect to the method employed in making such
adjustment or the validity or value (or the kind or amount) of any Shares which
may be issuable on exercise of the Warrants. The Warrant Agent shall not be
responsible for any failure of the Company to make any cash payment or to issue,
transfer or deliver any shares of Common Stock or stock certificates or other
common stock or property upon the exercise of any Warrant.
The Company shall, in addition, promptly notify the holders of the Warrants
of any determination of its Board of Directors pursuant to Section 5.01(e) that
---------------
any actions affecting its Common Stock will not require an adjustment to the
number of Shares for which a Warrant is exercisable, and shall specify in such
notice the reasons for such determination. In the event that the Majority
holders shall challenge any of the calculations set forth in such notice within
20 days after the Company's delivery thereof, the Company shall retain a firm of
independent certified public accountants or law firm of national standing
selected by the Company to prepare and execute a certificate verifying that no
adjustment is required. The Company shall promptly cause a signed copy of any
certificate prepared pursuant to this Section 5.05 to be delivered to each
------------
holder at his address appearing in the Warrant Register. The Company shall keep
at its office, at the office of the Warrant Agent, or another designated agency,
copies of all such
13
<PAGE>
certificates and cause the same to be available for inspection at said office
during normal business hours upon reasonable notice by any holder or any
prospective purchaser of a Warrant designated by a holder thereof.
ARTICLE VI
CONCERNING THE WARRANT AGENT
----------------------------
SECTION 6.01. Warrant Agent. The Company hereby appoints Interwest
-------------
Transfer Co., Inc., as warrant agent (and in all capacities in this Agreement,
the "Warrant Agent") of the Company in respect of the Warrants and the Warrant
Certificates upon the terms and subject to the conditions herein and in the
Warrant Certificates set forth; and Interwest Transfer Co., Inc. hereby accepts
such appointment. The Warrant Agent shall have the powers and authority
specifically granted to and conferred upon it in the Warrant Certificates and
hereby and such further powers and authority to act on behalf of the Company as
the Company may hereafter grant to or confer upon it and it shall accept in
writing. All of the terms and provisions with respect to such powers and
authority contained in the Warrant Certificates are subject to and governed by
the terms and provisions hereof.
SECTION 6.02. Conditions of Warrant Agent's Obligations. The Warrant
-----------------------------------------
Agent accepts its obligations herein set forth upon the terms and conditions
hereof and in the Warrant Certificates, including the following, to all of which
the Company agrees and to all of which the rights hereunder of the holders from
time to time of the Warrant Certificates shall be subject:
(a) The Warrant Agent shall be entitled to compensation to be agreed upon
with the Company in writing for all services rendered by it and the Company
agrees promptly to pay such compensation and to reimburse the Warrant Agent for
its reasonable out-of-pocket expenses (including reasonable fees and expenses of
counsel) incurred without gross negligence or willful misconduct on its part in
connection with the services rendered by it hereunder. The Company also agrees
to indemnify the Warrant Agent, each predecessor Warrant Agent, and their
respective directors, officers, affiliates, agents and employees for, and to
hold it and its directors, officers, affiliates, agents and employees harmless
against, any loss, liability or expense of any nature whatsoever (including,
without limitation, fees and expenses of counsel) incurred without gross
negligence or willful misconduct on the part of the Warrant Agent or predecessor
Warrant Agent, arising out of or in connection with its acting as such Warrant
Agent hereunder and its exercise or failure to exercise of its rights and
performance of its obligations hereunder. The obligations of the Company under
this Section 6.02 shall survive the exercise and the expiration of the Warrant
------------
Certificates and the resignation and removal of the Warrant Agent.
(b) In acting under this Agreement and in connection with the Warrant
Certificates, the Warrant Agent is acting solely as agent of the Company and
does not assume any obligation or relationship of agency or trust for or with
any of the owners or holders of the Warrant Certificates.
(c) The Warrant Agent may consult with counsel and any advice or written
opinion of such counsel shall be full and complete authorization and protection
in respect of any action
14
<PAGE>
taken, suffered or omitted by it hereunder in good faith and in accordance with
such advice or opinion.
(d) The Warrant Agent shall be fully protected and shall incur no liability
for or in respect of any action taken or omitted to be taken or thing suffered
by it in reliance upon any Warrant Certificate, notice, direction, consent,
certificate, affidavit, opinion of counsel, instruction, statement or other
paper or document reasonably believed by it, in the absence of bad faith, to be
genuine and to have been presented or signed by the proper parties.
(e) The Warrant Agent, and its officers, directors, affiliates and
employees ("Related Parties"), may become the owners of, or acquire any interest
in, Warrant Certificates, shares or other obligations of the Company with the
same rights that it or they would have it if were not the Warrant Agent
hereunder and, to the extent permitted by applicable law, it or they may engage
or be interested in any financial or other transaction with the Company and may
act on, or as depositary, trustee or agent for, any committee or body of holders
of shares or other obligations of the Company as freely as if it were not the
Warrant Agent hereunder. Nothing in this Agreement shall be deemed to prevent
the Warrant Agent or such Related Parties from acting in any other capacity for
the Company.
(f) The Warrant Agent shall not be under any liability for interest on, and
shall not be required to invest, any monies at any time received by it pursuant
to any of the provisions of this Agreement or of the Warrant Certificates.
(g) The Warrant Agent shall not be under any responsibility in respect of
the validity of this Agreement (or any term or provision hereof) or the
execution and delivery hereof (except the due execution and delivery hereof by
the Warrant Agent) or in respect of the validity or execution of any Warrant
Certificate (except its authentication thereof).
(h) The recitals and other statements contained herein and in the Warrant
Certificates (except as to the Warrant Agent's authentication thereon) shall be
taken as the statements of the Company and the Warrant Agent assumes no
responsibility for the correctness of the same. The Warrant Agent does not make
any representation as to the validity or sufficiency of this Agreement or the
Warrant Certificates, except for its due execution and delivery of this
Agreement; provided, however, that the Warrant Agent shall not be relieved of
-----------------
its duty to authenticate the Warrant Certificates as authorized by this
Agreement. The Warrant Agent shall not be accountable for the use or
application by the Company of the proceeds of the exercise of any Warrant.
(i) Before the Warrant Agent acts or refrains from acting with respect to
any matter contemplated by this Warrant Agreement, it may require:
(1) an officers' certificate executed by a duly authorized officer of
the Company stating that, in the opinion of the signers, all conditions
precedent, if any, provided for in this Warrant Agreement relating to the
proposed action have been complied with; and
15
<PAGE>
(2) if reasonably necessary in the sole judgment of the Warrant Agent,
an opinion of counsel for the Company stating that, in the opinion of such
counsel, all such conditions precedent have been complied with.
Each officers' certificate or, if requested, an opinion of counsel with
respect to compliance with a condition or covenant provided for in this Warrant
Agreement shall include:
(1) a statement that the person making such certificate or opinion has
read such covenant or condition;
(2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of such person, he or she has
made such examination or investigation as is necessary to enable him or her
to express an informed opinion as to whether or not such covenant or
condition has been complied with; and
(4) a statement as to whether or not, in the opinion of such person,
such condition or covenant has been complied with.
(j) The Warrant Agent shall be obligated to perform such duties as are
herein and in the Warrant Certificates specifically set forth and no implied
duties or obligations shall be read into this Agreement or the Warrant
Certificates against the Warrant Agent. The Warrant Agent shall not be
accountable or under any duty or responsibility for the use by the Company of
any of the Warrant Certificates authenticated by the Warrant Agent and delivered
by it to the Company pursuant to this Agreement. The Warrant Agent shall have
no duty or responsibility in case of any default by the Company in the
performance of its covenants or agreements contained in the Warrant Certificates
or in the case of the receipt of any written demand from a holder of a Warrant
Certificate with respect to such default, including, without limiting the
generality of the foregoing, any duty or responsibility to initiate or attempt
to initiate any proceedings at law or otherwise or, except as provided in
Section 7.02 hereof, to make any demand upon the Company. The Warrant Agent
- ------------
shall not be obligated to perform any duty to the extent prohibited by law.
(k) Unless otherwise specifically provided herein, any order, certificate,
notice, request, direction or other communication from the Company made or given
under any provision of this Agreement shall be sufficient if signed by its
chairman of the Board of Directors, its president, its treasurer, its controller
or any vice president or its secretary or any assistant secretary.
(l) The Warrant Agent shall have no responsibility in respect of any
adjustment pursuant to Article V hereof.
(m) The Company agrees that it will perform, execute, acknowledge and
deliver, or cause to be performed, executed, acknowledged and delivered, all
such further and other acts.
16
<PAGE>
instruments and assurances as may reasonably be required by the Warrant Agent
for the carrying out or performing by the Warrant Agent of the provisions of
this Agreement.
(n) The Warrant Agent is hereby authorized and directed to accept written
instructions with respect to the performance of its duties hereunder from any
one of the chairman of the Board of Directors, the president, the treasurer, the
controller, any vice president or the secretary of the Company or any other
officer or official of the Company reasonably believed to be authorized to give
such instructions and to apply to such officers or officials for advice or
instructions in connection with its duties, and it shall not be liable for any
action taken or suffered to be taken by it in good faith in accordance with
instructions with respect to any matter arising in connection with the Warrant
Agent's duties and obligations arising under this Agreement. Such application
by the Warrant Agent for written instructions from the Company may, at the
option of the Warrant Agent, set forth in writing any action proposed to be
taken or omitted by the Warrant Agent with respect to its duties or obligations
under this Agreement and the date on or after which such action shall be taken
and the Warrant Agent shall not be liable for any action taken or omitted in
accordance with a proposal included in any such application on or after the date
specified therein (which date shall be not less than ten Business Days after the
Company receives such application unless the Company consents to a shorter
period), provided that (i) such application includes a statement to the effect
that it is being made pursuant to this paragraph (n) and that unless objected to
prior to such date specified in the application, the Warrant Agent will not be
liable for any such action or omission to the extent set forth in such
application and (ii) prior to taking or omitting any such action, the Warrant
Agent has not received written instructions objecting to such proposed action or
omission.
(o) 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, such 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 any one of the chairman of the Board of
Directors, the president, the treasurer, the controller, any vice president or
the secretary of the Company or any other officer or official of the Company
reasonably believed to be authorized to give such instructions and delivered to
the Warrant Agent; and such 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 such certificate.
(p) The Warrant Agent shall not be required to risk or expend its own funds
in the performance of its obligations and duties hereunder.
SECTION 6.03. Resignation and Appointment of Successor. (a) The Company
----------------------------------------
agrees, for the benefit of the holders from time to time of the Warrant
Certificates, that there shall at all times be a Warrant Agent hereunder.
(b) The Warrant Agent may at any time resign as Warrant Agent by giving
written notice to the Company of such intention on its part, specifying the date
on which its desired resignation shall become effective, provided that such date
shall be at least 30 days after the date on which such notice is given unless
the Company agrees to accept less notice. Upon
17
<PAGE>
receiving such notice of resignation, the Company shall promptly appoint a
successor Warrant Agent, qualified as provided in Section 6.03(c) hereof, by
---------------
written instrument in duplicate signed on behalf of the Company, one copy of
which shall be delivered to the resigning Warrant Agent and one copy to the
successor Warrant Agent. As provided in Section 6.03(c) hereof, such resignation
---------------
shall become effective upon the earlier of (x) the acceptance of the appointment
by the successor Warrant Agent or (y) 30 days after receipt by the Company of
notice of such resignation. The Company may, at any time and for any reason, and
shall, upon any event set forth in the next succeeding sentence, remove the
Warrant Agent and appoint a successor Warrant Agent by written instrument in
duplicate, specifying such removal and the date on which it is intended to
become effective, signed on behalf of the Company, one copy of which shall be
delivered to the Warrant Agent being removed and one copy to the successor
Warrant Agent. The Warrant Agent shall be removed as aforesaid if it shall
become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a
receiver of the Warrant Agent or of its property shall be appointed, or any
public officer shall take charge or control of it or of its property or affairs
for the purpose of rehabilitation, conservation or liquidation. Any removal of
the Warrant Agent and any appointment of a successor Warrant Agent shall become
effective upon acceptance of appointment by the successor Warrant Agent as
provided in Section 6.03(c). As soon as practicable after appointment of the
---------------
successor Warrant Agent, the Company shall cause written notice of the change in
the Warrant Agent to be given to each of the registered holders of the Warrants
in the manner provided for in Section 7.04 hereof.
------------
(c) Upon resignation or removal of the Warrant Agent, if the Company shall
fail to appoint a successor Warrant Agent within a period of 30 days after
receipt of such notice of resignation or removal, then the holder of any Warrant
Certificate or the Warrant Agent may apply to a court of competent jurisdiction
for the appointment of a successor to the Warrant Agent. Pending appointment of
a successor to the Warrant Agent, either by the Company or by such a court, the
duties of the Warrant Agent shall be carried out by the Company.
(d) Any successor Warrant Agent, whether appointed by the Company or by a
court, shall be in good standing and incorporated under the laws of the United
States of America or any State thereof. Such successor Warrant Agent shall
execute and deliver to its predecessor and to the Company an instrument
accepting such appointment hereunder and all the provisions of this Agreement,
and thereupon such successor Warrant Agent, without any further act, deed or
conveyance, shall become vested with all the rights, powers, duties and
obligations of its predecessor hereunder, with like effect as if originally
named as Warrant Agent hereunder, and such predecessor shall thereupon become
obligated to (i) transfer and deliver, and such successor Warrant Agent shall be
entitled to receive, all securities, records or other property on deposit with
or held by such predecessor as Warrant Agent hereunder and (ii) upon payment of
the amounts then due it pursuant to Section 6.02(a) hereof, pay over, and such
---------------
successor Warrant Agent shall be entitled to receive, all monies deposited with
or held by any predecessor Warrant Agent hereunder.
(e) Any corporation or bank into which the Warrant Agent hereunder may be
merged or converted, or any corporation or bank with which the Warrant Agent may
be consolidated, or any corporation or bank resulting from any merger,
conversion or consolidation to which the Warrant Agent shall be a party, or any
corporation or bank to which the Warrant Agent shall sell
18
<PAGE>
or otherwise transfer all or substantially all of its corporate trust business,
shall be the successor to the Warrant Agent under this Agreement (provided that
such corporation or bank shall be qualified as aforesaid) without the execution
or filing of any document or any further act on the part of any of the parties
hereto.
(f) No Warrant Agent under this Warrant Agreement shall be personally
liable for any action or omission of any successor Warrant Agent or of the
Company.
ARTICLE VII
MISCELLANEOUS
-------------
SECTION 7.01. Amendment. This Agreement and the terms of the Warrants may
---------
be amended by the Company and the Warrant Agent, without the consent of the
holder of any Warrant Certificate, for the purpose of curing any ambiguity, or
of curing, correcting or supplementing any defective or inconsistent provision
contained herein or therein or in any other manner which the Company may deem
necessary or desirable and which shall not adversely affect in any material
respect the interests of the holders of the Warrant Certificates.
The Company and the Warrant Agent may modify this Agreement and the terms
of the Warrants with the consent of not less than a majority in number of the
then outstanding Warrants for the purpose of adding any provision to or
changing in any manner or eliminating any of the provisions of this Agreement or
modifying in any manner the rights of the holders of the outstanding Warrants;
provided, however, that no such modification that decreases the Exercise Rate,
- -----------------
reduces the period of time during which the Warrants are exercisable hereunder,
otherwise materially and adversely affects the exercise rights of the holders of
the Warrants, reduces the percentage required for modification, or effects any
change to this Section 7.01 may be made with respect to an outstanding Warrant
------------
without the consent of the holder of such Warrant.
Any modification or amendment made in accordance with this Agreement will
be conclusive and binding on all present and future holders of Warrant
Certificates whether or not they have consented to such modification or
amendment or waiver and whether or not notation of such modification or
amendment is made upon such Warrant Certificates. Any instrument given by or on
behalf of any holder of a Warrant Certificate in connection with any consent to
any modification or amendment will be conclusive and binding on all subsequent
holders of such Warrant Certificate.
SECTION 7.02. Notices and Demands to the Company and Warrant Agent. If
----------------------------------------------------
the Warrant Agent shall receive any notice or demand addressed to the Company by
the holder of a Warrant Certificate pursuant to the provisions hereof or of the
Warrant Certificates, the Warrant Agent shall promptly forward such notice or
demand to the Company.
SECTION 7.03. Addresses for Notices to Parties and for Transmission of
--------------------------------------------------------
Documents. All notices hereunder to the parties hereto shall be deemed to have
- ---------
been given when sent by certified or registered mail, postage prepaid, or by
telex or telecopy, confirmed by first class mail, postage prepaid, addressed to
any party hereto as follows:
19
<PAGE>
To the Company:
Enviro-Clean of America, Inc.
211 Park Avenue
Hicksville, New York 11801-1408
Attention: Chief Executive Officer
Telephone: (516) 931-4455
Facsimile: (516) 931-3530
with copies to:
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
300 Convent Street
Suite 1500
San Antonio, Texas 78205
Attention: Alan Schoenbaum
Telephone: (210) 270-0800
Facsimile: (210) 224-2035
To the Warrant Agent:
Interwest Transfer Co., Inc.
1981 East 4800 South
Suite 100
Salt Lake City, Utah 84117
Attention: Kurtis Hughes
Telephone: (801) 272-9294
Facsimile: (801) 277-3147
or at any other address of which either of the foregoing shall have notified the
other in writing.
SECTION 7.04. Notices to Holders. Notices to holders of Warrants shall be
------------------
mailed to such holders at the addresses of such holders as they appear in the
Warrant Register. Any such notice shall be sufficiently given if sent by first-
class mail, postage prepaid.
SECTION 7.05. APPLICABLE LAW. THE VALIDITY, INTERPRETATION AND
--------------
PERFORMANCE OF THIS AGREEMENT AND EACH WARRANT CERTIFICATE ISSUED HEREUNDER AND
OF THE RESPECTIVE TERMS AND PROVISIONS THEREOF SHALL BE GOVERNED BY THE LAWS OF
THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PROVISIONS
THEREOF.
20
<PAGE>
SECTION 7.06. Obtaining of Governmental Approvals. The Company will from
-----------------------------------
time to time take all action required to be taken by it which may be necessary
to obtain and keep effective any and all permits, consents and approvals of
governmental agencies and authorities and securities acts filings under United
States Federal and State laws, and the rules and regulations of all stock
exchanges on which the Warrants are listed which may be or become requisite in
connection with the issuance. sale, transfer, and delivery of the Warrant
Certificates, the exercise of the Warrants or the issuance, sale, transfer and
delivery of the shares issued upon exercise of the Warrants.
SECTION 7.07. Persons Having Rights Under Agreement. Nothing in this
-------------------------------------
Agreement expressed or implied and nothing that may be inferred from any of the
provisions hereof is intended. or shall be construed, to confer upon, or give
to, any person or corporation other than the Company, the Warrant Agent and the
holders of the Warrant Certificates any right, remedy or claim under or by
reason of this Agreement or of any covenant, condition, stipulation, promise or
agreement hereof, and all covenants, conditions, stipulations, promises and
agreements in this Agreement contained shall be for the sole and exclusive
benefit of the Company and the Warrant Agent and their successors and of the
holders of the Warrant Certificates.
SECTION 7.08 Headings. The descriptive headings of the several Articles
--------
and Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
SECTION 7.09. Counterparts. This Agreement may be executed in any number
------------
of counterparts, each of which so executed shall be deemed to be an original;
but such counterparts shall together constitute but one and the same instrument.
SECTION 7.10. Inspection of Agreement. A copy of this Agreement shall be
-----------------------
available at all reasonable times at the principal corporate trust office of the
Warrant Agent, for inspection by the holder of any Warrant Certificate. The
Warrant Agent may require such holder to submit his Warrant Certificate for
inspection by it.
SECTION 7.11. Successors. 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.
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto as of the day and year first above written.
ENVIRO-CLEAN OF AMERICA, INC.
By:
----------------------------------
Name: Randall K. Davis
Title: President
21
<PAGE>
[Warrant Agent signature page to the Warrant Agreement dated December 15,
1999 between Interwest Transfer Co., Inc. and Enviro-Clean of America, Inc.]
INTERWEST TRANSFER CO., INC.
as Warrant Agent
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
22
<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
[FACE]
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ISSUED TO THE
REGISTERED OWNER IN RELIANCE UPON WRITTEN REPRESENTATION THAT THESE SECURITIES
HAVE BEEN TAKEN FOR INVESTMENT. THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD TRANSFERRED OR
ASSIGNED UNLESS AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY SHALL HAVE
BEEN RECEIVED BY THE COMPANY TO THE EFFECT THAT SUCH SALE, TRANSFER OR
ASSIGNMENT WILL NOT BE IN VIOLATION OF THE SECURITIES ACT OF 1933, AS AMENDED,
AND THE RULES AND REGULATIONS THEREUNDER, AND OTHER APPLICABLE STATE SECURITIES
LAWS.
THE STOCK ISSUABLE UPON EXERCISE OF THIS CERTIFICATE HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED
OR ASSIGNED UNLESS AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY SHALL HAVE
BEEN RECEIVED BY THE COMPANY TO THE EFFECT THAT SUCH SALE, TRANSFER OR
ASSIGNMENT WILL NOT BE IN VIOLATION OF THE SECURITIES ACT OF 1933, AS AMENDED,
AND THE RULES AND REGULATIONS THEREUNDER AND OTHER APPLICABLE SECURITIES LAWS.
No. [ ] [ ]Warrants
CALLABLE WARRANT CERTIFICATE
ENVIRO-CLEAN OF AMERICA, INC.
This Warrant Certificate certifies that [ ], or
registered assigns, is the registered holder of [ ]
Warrants (the "Warrants") to purchase shares of Common Stock, par value $.001
per share (the "Common Stock"), of ENVIRO-CLEAN OF AMERICA, INC., a Nevada
corporation (the "Company"). Each Warrant entitles the holder to purchase from
the Company at any time on or after [_______________________, 1999] until
[________________, 2004] (the "Expiration Date"), one fully paid and non-
assessable share of Common Stock (a "Share", or, if adjusted, the "Shares",
which may also include any other securities or property purchasable upon
exercise of a Warrant, such adjustment and inclusion each as provided in the
Warrant Agreement) at the exercise price as may be adjusted as provided in the
Warrant Agreement (initially $5.00 per Warrant) (the "Exercise Price") upon
surrender of this Warrant Certificate and payment of the Exercise Price at any
office or agency maintained for that purpose by the Company (the "Warrant Agent
Office"), subject to the conditions set forth herein and in the Warrant
Agreement.
The Exercise Price shall be payable by cash, certified check or official
bank check or by such other means as is acceptable to the Company in the lawful
currency of the United States of America which as of the time of payment is
legal tender for payment of public or private debts. The number
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of Shares issuable upon exercise of the Warrants ("Exercise Rate") is subject to
adjustment upon the occurrence of certain events set forth in the Warrant
Agreement.
Any Warrants not exercised on or prior to [_________________, 2004] shall
thereafter be void.
Reference is hereby made to the further provisions, including the call
provision, on the reverse hereof which provisions shall for all purposes have
the same effect as though fully set forth at this place. Capitalized terms used
in this Warrant Certificate but not defined herein shall have the meanings
ascribed thereto in the Warrant Agreement.
This Warrant Certificate shall not be valid unless authenticated by the
Warrant Agent, term is used in the Warrant Agreement.
THIS WARRANT CERTIFICATE SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PROVISIONS
THEREOF.
WITNESS the facsimile seal of the Company and facsimile signatures of its
duly authorized officers.
Dated:
ENVIRO-CLEAN OF AMERICA, INC.
[Seal] By:
----------------------------------
Name:
Title:
Attest:
By:
---------------------------
Name:
Title:
Certificate of Authentication:
This is one of the Warrants
referred to in the within
mentioned Warrant Agreement:
INTERWEST TRANSFER CO., INC.
as Warrant Agent
By:
---------------------------
Authorized Signatory
24
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[FORM OF WARRANT CERTIFICATE]
[REVERSE]
ENVIRO-CLEAN OF AMERICA, INC.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants, each of which represents the right to purchase at
any time on or after [________________, 1999], until [______________________,
2004], one share of Common Stock of the Company, subject to adjustment as set
forth in the Warrant Agreement. The Warrants are issued pursuant to a Warrant
Agreement dated as of [_______________, 1999] (the "Warrant Agreement"), duly
executed and delivered by the Company to Interwest Transfer Co., Inc. as Warrant
Agent (the "Warrant Agent"), which Warrant Agreement is hereby incorporated by
reference in and made a part of this instrument and is hereby referred to for a
description of the rights, limitation of rights, obligations, duties and
immunities thereunder of the Warrant Agent, the Company and the holders (the
words "holders" or "holder" meaning the registered holders or registered holder)
of the Warrants. Warrants may be exercised by (i) surrendering at any Warrant
Agent Office this Warrant Certificate with the form of Election to Exercise set
forth hereon duly completed and executed and (ii) paying in full the Warrant
Exercise Price for each such Warrant exercised and any other amounts required to
be paid pursuant to the Warrant Agreement.
If all of the items referred to in the last sentence of the preceding
paragraph are received by the Warrant Agent at or prior to 2:00 p.m., New York,
New York time, on a Business Day, the exercise of the Warrant to which such
items relate will be effective on such Business Day. If any items referred to
in the last sentence of the preceding paragraph are received after 2:00 p.m.,
New York, New York time, on a Business Day, the exercise of the Warrants to
which such item relates will be deemed to be effective on the next succeeding
Business Day. Notwithstanding the foregoing, in the case of an exercise of
Warrants on the Expiration Date, if all of the items referred to in the last
sentence of the preceding paragraph are received by the Warrant Agent at or
prior to 5:00 p.m., New York, New York time, on such Expiration Date, the
exercise of the Warrants to which such items relate will be effective on the
Expiration Date.
Subject to the terms of the Warrant Agreement, as soon as practicable after
the exercise of any Warrant or Warrants, the Company shall issue or cause to be
issued to or upon the written order of the registered holder of this Warrant
Certificate, a certificate or certificates evidencing the Share or such holder
pursuant to the Election to Exercise, as set forth on the reverse of this
Warrant Certificate. Such certificate or certificates evidencing the Share or
Shares shall be deemed to have been issued and any persons who are designated to
be named therein shall be deemed to have become the holder of record of such
Share or Shares as of the close of business on the date upon which the exercise
of this Warrant was deemed to be effective as provided in the preceding
paragraph.
The Company, at its option, may provide the holder of this Warrant written
notice (the "Call Notice") that this Warrant shall terminate on the 20th day
following the date of delivery of the Call Notice (such date being the "Early
Termination Date"), as described in the Warrant
25
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Agreement, at any time: (i) the Closing Per Share Market Price of the Common
Stock has been equal to or greater than 200% of the Warrant Exercise Price on
the date of delivery of the Call Notice and the 19 consecutive Trading Days
immediately preceding the date delivery of the Call Notice (the "Call Notice
Period") and (ii) after the Registration Statement has been declared effective
and has been effective for the Call Notice Period. In the event that the Warrant
is not exercised by the holder of this Warrant on or before the Early
Termination Date, this Warrant shall expire at 5:00 p.m., New York, New York
time, on the Early Termination Date, and the Company will remit to the holder of
the Warrant $.10 per Warrant upon such holder tendering to the Company the
expired Warrant Certificate.
Upon due presentment for registration of transfer of this Warrant
Certificate at any office or agency maintained by the Company for that purpose,
a new Warrant Certificate evidencing in the aggregate a like number of Warrants
shall be issued to the transferee in exchange for this Warrant Certificate,
subject to the limitations provided in the Warrant Agreement, without charge
except for any tax or other governmental charge imposed in connection therewith.
The Company and the Warrant Agent may deem and treat the registered holder
hereof as the absolute owner of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone) for the purpose of
any exercise hereof and for all other purposes, and neither the Company nor the
Warrant Agent shall be affected by any notice to the contrary.
The term "Business Day" shall mean any day on which (i) banks in New York,
New York, (ii) the principal national securities exchange or market on which the
Common Stock is listed or admitted to trading and (iii) the principal national
securities exchange or market on which the Warrants are listed or admitted to
trading are open for business.
26
<PAGE>
(FORM OF ELECTION TO EXERCISE)
(To be executed upon exercise of Warrants on the Exercise Date)
The undersigned hereby irrevocably elects to exercise __________ of the Warrants
represented by this Warrant Certificate and purchase the whole number of Shares
issuable upon the exercise of such Warrants and herewith tenders payment for
such Shares in the amount of $______________ in cash or by certified or
official bank check, in accordance with the terms hereof. The undersigned
requests that a certificate representing such Shares be registered in the name
of _________________________ whose address is ______________________________ and
that such certificate be delivered to ___________________________ whose address
is ____________________________________. Any cash payments to be paid in lieu
of a fractional Share should be made to ______________________________ whose
address is ____________________________________ and the check representing
payment thereof should be delivered to ________________________ whose address is
___________________________ ____________________________________.
Dated
-------------------------- , -----
Name of holder of
Warrant Certificate:
(Please Print)
Tax Identification or
Social Security Number:
Address:
Signature:
Note: The above signature must correspond with the name as
written upon the face of this Warrant Certificate in
every particular, without alteration or enlargement
or any change whatever.
Dated
--------------------, ----
27
<PAGE>
[FORM OF ASSIGNMENT]
For value received _______________ hereby sells, assigns and transfers unto
______________________________ the within Warrant Certificate, together with all
right, title and interest therein, and does hereby irrevocably constitute and
appoint ________________ attorney, to transfer said Warrant Certificate on the
books of the within-named Company, with full power of substitution in the
premises.
Dated
-------------------, ----
Signature:
Note: The above signature must correspond with the name
as written upon the face of this Warrant
Certificate in every particular, without
alteration or enlargement or any change whatever.
28
<PAGE>
EXHIBIT B
CERTIFICATE TO BE DELIVERED UPON REGISTRATION
OF TRANSFER OF WARRANTS
Re: Warrants to Purchase Common Stock (the "Warrants") of Enviro-Clean of
America, Inc.
This Certificate relates to ____________ Warrants held in certificated form by
_______________ (the "Transferor").
The Transferor has requested the Warrant Agent by written order to register the
transfer of a Warrant or Warrants.
In connection with such request and in respect of each such Warrant,
the Transferor does hereby certify that the Transferor is familiar with the
Warrant Agreement relating to the above captioned Warrants and the restrictions
on transfers thereof as provided in Section 1.07 of such Warrant Agreement, and
------------
that the transfer of this Warrant does not require registration under the
Securities Act of 1933, as amended (the "Act") because[*]:
[ ] Such Warrant is being transferred to a qualified institutional buyer
(as defined in Rule 144A under the Act), in reliance on Rule 144A or in
accordance with Regulation S under the Act.
[ ] Such Warrant is being transferred in accordance with Rule 144 under
the Act.
[ ] Such Warrant is being transferred in reliance on and in compliance
with an exemption from the registration requirements of the Act, other than Rule
144A or Rule 144 or Regulation S under the Act. An opinion of counsel to the
effect that such transfer does not require registration under the Act
accompanies this Certificate.
[INSERT NAME OF TRANSFEROR]
By:
Date:
*Check applicable box.
29
<PAGE>
EXHIBIT C
Transferee Letter of Representation
Enviro-Clean of America, Inc.
211 Park Avenue
Hicksville, New York 11801-1408
Ladies and Gentlemen:
In connection with our proposed purchase of warrants to purchase Common
Stock, par value $.001 per share (the "Securities"), of Enviro-Clean of America,
Inc. (the "Company") we confirm that:
1. We understand that the Securities have not been registered under the
Securities Act of 1933, as amended (the "Securities Act") and, unless so
registered, may not be sold except as permitted in the following sentence. We
agree on our own behalf and on behalf of any investor account for which we are
purchasing Securities to offer, sell or otherwise transfer such Securities prior
to the date which is two years after the later of the date of original issue and
the last date on which the Company or any affiliate of the Company was the owner
of such Securities, or any predecessor thereto (the "Resale Restriction
Termination Date") only (a) to the Company, (b) pursuant to a registration
statement which has been declared effective under the Securities Act, (c) so
long as the Securities are eligible for resale pursuant to Rule 144A, under the
Securities Act, to a person we reasonably believe is a qualified institutional
buyer under Rule 144A (a "QIB") that purchases for its own account or for the
account of a QIB and to whom notice is given that the transfer is being made in
reliance on Rule 144A, (d) pursuant to offers and sales that occur outside the
United States within the meaning of Regulation S under the Securities Act, (e)
to an institutional "accredited investor" within the meaning of subparagraph
(a)(1), (2), (3) or (7) of Rule 501 under the Securities Act that is purchasing
for his own account or for the account of such an institutional "accredited
investor, or (f) pursuant to any other available exemption from the registration
requirements of the Securities Act, subject in each of the foregoing cases to
any requirement of law that the disposition of our property or the property of
such investor account or accounts be at all times within our or their control
and to compliance with any applicable state securities laws. The foregoing
restrictions on resale will not apply subsequent to the Resale Restriction
Termination Date. If any resale or other transfer of the Securities is proposed
to be made pursuant to clause (e) above prior to the Resale Restriction
Termination Date, the transferor shall deliver a letter from the transferee
substantially in the form of this letter to the warrant agent under the Warrant
Agreement pursuant to which the Securities were issued (the "Warrant Agent")
which shall provide, among other things, that the transferee is an institutional
"accredited investor" within the meaning of subparagraph (a)(1), (2), (3) or (7)
of Rule 501 under the Securities Act and that it is acquiring such Securities
for investment purposes and not for distribution in violation of the Securities
Act. The Warrant Agent and the Company reserve the right prior to any offer,
sale or other transfer prior to the Resale Restriction Termination Date of the
Securities pursuant to clause (e) or (f) above to require the delivery of a
30
<PAGE>
written opinion of counsel, certifications, and or other information
satisfactory to the Company and the Warrant Agent.
2. We are an institutional "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) purchasing
for our own account or for the account of such an institutional "accredited
investor." and we are acquiring the Securities for investment purposes and not
with a view to, or for offer or sale in connection with, any distribution in
violation of the Securities Act and we have such knowledge and experience in
financial and business matters as to be capable of evaluating the merits and
risks of our investment in the Securities, and we and any accounts for which we
are acting are each able to bear the economic risk of our or its investment for
an indefinite period.
3. We are acquiring the Securities purchased by us for our own account or
for one or more accounts as to each of which we exercise sole investment
discretion.
4. You, the Warrant Agent and your respective counsel are entitled to
rely upon this letter and you are irrevocably authorized to produce this letter
or a copy hereof to any interested party in any administrative or legal
proceeding or official inquiry with respect to the matters covered hereby.
Very truly yours,
(Name of Purchaser)
By:
Date:
Upon transfer the Securities would be registered in the name of the new
beneficial owner as follows:
Name:
Address:
Taxpayer ID Number:
31
