AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 30, 1998
Registration No. 333-48165
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO FORM SB-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AWG, Ltd.
(Name of small business issuer in its charter)
NEVADA 2084 38-0685631
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification
incorporation or organization) Code Number Number)
4162 Big Ranch Road
Napa, CA 94558
(707) 259-6777
(Address and telephone number of principal executive offices and
principal place of business)
JOSEPH E. ANTONINI
CHAIRMAN
AWG, Ltd.
1800 West Maple Road
Troy, MI 48084
(248) 614-3880
(Name, address and telephone number of agent for service)
COPIES TO:
Michael J. Eizelman, Esq. Ronald Brescia, Esq.
Lawrence S. Jackier, Esq. Doros & Brescia
Jackier, Gould, Bean, 1140 Avenue of the Americas
Upfal & Eizelman Penthouse 22nd Floor
1533 North Woodward New York, NY 10036
Suite 250 (212) 921-0550
Bloomfield Hills, MI 48304
(248) 642-0500
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / X /
If the Form is filed to register additional securities for an Offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same Offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list Securities Act
registration statement number of the earlier effective registration statement
for the same Offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. / /
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH OFFERING AGGREGATE AMOUNT OF
SERIES OF AMOUNT TO BE PRICE PER OFFERING REGISTRATION
SECURITIES REGISTERED SHARE (1) PRICE (1) FEE (1)
---------- ---------- --------- --------- -------------
<S> <C> <C> <C> <C>
Series A 6%, No 1,000,000 $10 $10,000,000 $2,950
Par Value
Preferred Stock
<FN>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act.
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8(A), MAY DETERMINE.
<PAGE>
AWG, Ltd.
CROSS REFERENCE SHEET SHOWING LOCATION IN
PROSPECTUS OF PART I OF FORM SB-1
HEADING CAPTION OR LOCATION IN PROSPECTUS
------- ---------------------------------
1. Inside Front and Outside
Back Cover Pages of Prospectus ......................Inside Front Cover
Page; Outside
Back Cover Page
2. Significant Parties ...................................Prospectus Summary;
The Company;
Risk Factors
3. Relationship with Issuer of Experts Named in
Registration Statement ............................N/A
4. Selling Security Holders...............................Principal
Stockholders
5. Changes in and Disagreements with Accountants
Not Applicable.....................................N/A
6. Disclosure of Commission Position on
Indemnification for Securities
Act Liabilities .................................Management
Relationships,
Transactions and
Remuneration
7. Executive Compensation.................................Management
Relationships,
Transactions
and
Remuneration
8. Financial Statements...................................Consolidated
Financial
Statements
<PAGE>
AWG, LTD.
1,000,000 Shares of Series A Preferred Stock
This is a Minimum/Maximum Offering
500,000 shares (the "Shares") of Series A 6% Preferred Stock (the
"Preferred Stock") offered hereby is being offered for sale on a best efforts
basis by AWG, Ltd. ("AWG" or the "Company"). An additional 500,000 shares of
Preferred Stock are being registered on behalf of a single shareholder who
intends on selling his shares over a period of months subsequent to
completion of the Company offering. It is currently estimated that the
initial public offering price per share of Series A 6% Preferred Stock will
be $10.
The Company has two classes of stock, the Preferred Stock which is
offered hereby and Common Stock. Holders of the Preferred Stock do not have
voting rights except as may be required by applicable law. The holders of the
Common Stock are entitled to 1 vote per share. The Preferred Stock and the
Common Stock will be freely transferrable. The Preferred Stock will entitle
the holders thereof to a Preferred Annual Return of 6% per annum payable in
additional shares of Preferred Stock in an amount equivalent to 6% of the
number of shares of Preferred Stock registered in the name of each of the
holders as of the close of business on December 31 of each year (the"Record
Date"), which shall be issued to each holder within thirty (30) days after
the Record Date and will have a preference upon liquidation of the Company in
the amount of $10 per share. Other than for the foregoing, the Preferred
Stock will not share in any profits of the Company. INVESTORS SHOULD BE AWARE
THAT AS A RESULT OF THE FOREGOING, THEY WILL NOT BE ENTITLED TO ANY CASH
DISTRIBUTIONS WHATSOEVER FROM THE COMPANY UNTIL SUCH TIME AS THE COMPANY IS
LIQUIDATED, SOLD OR THE SHARES OF PREFERRED STOCK ARE REDEEMED BY THE
COMPANY.
Prior to this Offering, there has been no public market for the
Preferred Stock of the Company. The Common Stock of the Company is traded in
the "pink sheets" under the trading symbol "VINE".
The offering will terminate on , 1998,
[30 days after the date of this Prospectus unless extended for an additional
thirty (30) day period by the underwriter.] Until such time as a minimum of
300,000 shares of Preferred Stock are sold on behalf of the Company, all
investor funds will be held in escrow at Chase Manhattan Bank whose address
and telephone number is . In the event that at least 300,000
shares of Preferred Stock are not sold by the termination date, all funds
will be returned to investors without deduction and without interest.
All expenses of this Offering including the expenses of the selling
security holder will be borne by the Company other than any commissions
payable to the underwriter with respect to shares sold by the selling
security holder.
SEE "RISK FACTORS" beginning on page 5 for a discussion of certain risks that
should be considered by prospective purchasers of the Preferred Stock.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE>
<TABLE>
<CAPTION>
SUBJECT TO COMPLETION, DATED ____________ , 1998
(1)Underwriting
Discounts and (2)Proceeds To
Price To Public Commissions Company
--------------- ---------------- --------------
<S> <C> <C> <C>
Per Share $ 10 1 9
Total Minimum $3,000,000 $300,000 $2,700,000
Total Maximum $5,000,000 $500,000 $4,500,000
<CAPTION>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any state in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such state.
<FN>
1 Excludes 2% non-accountable expense allowance payable by the Company
to the underwriter. Company has agreed to indemnify the underwriter
against certain liabilities, including liabilities under the
Securities Act of 1933. See "Plan of Distribution."
2 Before deducting offering expenses payable by the Company
estimated to be at $175,000 including, among other expenses, legal
and accounting fees, printing, mailing, and marketing expenses.
This is in addition to fees and expenses payable to the
underwriters as set forth in Footnote 1 above.
</TABLE>
<PAGE>
KLEIN MAUS AND SHIRE
The date of this prospectus is _________________ , 1998.
<PAGE>
AWG, Ltd. is not a reporting company pursuant to the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). However, the Company
will become subject to Section 15(d) of the Exchange Act for at least one (1)
year following the Effective Date of the Offering and will be required to
provide security holders with such annual and quarterly reports as required
under the Exchange Act.
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a registration statement on Form SB-1 pursuant to the rules
and regulations under the Securities Act of 1933, as amended, in connection
with the shares offered hereby. This prospectus omits certain information
contained in the registration statement and reference is hereby made to the
registration statement and exhibits thereto for further information with
respect to the Company and the shares to which the prospectus relates. A copy
of the registration statement may be obtained from the public reference
section of the Commission at: Judiciary Plaza, 450 5th Street, N.W.,
Washington, D.C. 20549; and at the Commission's Regional Office located at:
1400 Citicorp Center, 500 West Madison Street, Chicago, IL 60661 upon payment
of prescribed fees. In addition, the Commission maintains a web site on the
Internet at the address http://www.sec.gov that contains reports, proxy
information statements and other information regarding registrants that file
electronically with the Commission.
2
<PAGE>
AWG, LTD.
(Exact name of Company as set forth in Charter)
Type of securities offered: Class A 6% Preferred Stock
Maximum number of securities offered on behalf of the Company: 500,000 shares
Minimum number of securities offered on behalf of the Company: 300,000 shares
Price per security: $10 per share
Total proceeds: If maximum sold: $5,000,000
If minimum sold: $3,000,000
In addition to the foregoing, 500,000 shares will be registered for the
account of a single shareholder who currently owns 500,000 shares of Class A
6% Preferred Stock. (See Question 37)
(See Questions 9 and 10)
Is a commissioned selling agent selling the securities in this offering?
[x] Yes [ ] No
If yes, what percent is commission of price to public? 10%.
Is there other compensation to selling agent(s)? [x] Yes [ ] No
Is there a finder's fee or similar payment to any person? [ ] Yes [x] No
(See Question No. 22)
Is there an escrow of proceeds until minimum is obtained? [x] Yes [ ] No (See
Question No. 26)
Is this offering limited to members of a special group, such as employees of
the Company or individuals? [ ] Yes [x] No (See Question No. 25)
Is transfer of the securities restricted? [ ] Yes [x] No (See Question No. 25)
INVESTMENT IN SMALL BUSINESSES INVOLVES A HIGH DEGREE OF RISK, AND INVESTORS
SHOULD NOT INVEST ANY FUNDS IN THIS OFFERING UNLESS THEY CAN AFFORD TO LOSE
THEIR INVESTMENT IN ITS ENTIRETY. SEE QUESTION NO. 2 FOR THE RISK FACTORS
THAT MANAGEMENT BELIEVES PRESENT THE MOST SUBSTANTIAL RISKS TO AN INVESTOR IN
THIS OFFERING.
INVESTORS SHOULD BE AWARE THAT UNDER PRIOR MANAGEMENT, THE COMPANY SOLD
SECURITIES IN VIOLATION OF FEDERAL AND STATE SECURITIES LAWS. AS A RESULT, IT
IS POSSIBLE THAT PROCEEDS FROM THIS OFFERING COULD BE USED TO SATISFY ANY
COMPANY LIABILITIES THAT MAY ARISE AS A RESULT OF SUCH VIOLATIONS. AS OF THE
DATE OF THIS PROSPECTUS, NO INVESTOR HAS INSTITUTED ANY ACTION AGAINST THE
COMPANY NOR HAS ANY SUCH THREAT BEEN COMMUNICATED TO THE COMPANY.
IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION
OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS
INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE
SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING
AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF
THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE U.S. SECURITIES AND EXCHANGE COMMISSION DOES NOT PASS UPON THE MERITS OF
ANY SECURITIES OFFERED OR THE TERMS OF THE OFFERING, NOR DOES IT PASS UPON
THE ACCURACY OR COMPLETENESS OF ANY OFFERING CIRCULAR OR SELLING LITERATURE.
THESE SECURITIES ARE OFFERED UNDER AN EXEMPTION FROM REGISTRATION; HOWEVER,
THE COMMISSION HAS NOT MADE AN INDEPENDENT DETERMINATION THAT THESE
SECURITIES ARE EXEMPT FROM REGISTRATION.
This Company:
[ ] Has never conducted operations.
[ ] Is in the development stage.
[x] Is currently conducting operations.
[ ] Has shown a profit in the last fiscal year
[ ] Other (Specify):---------------------------
(Check at least one, as appropriate)
3
<PAGE>
This offering has been registered for offer and sale in the following states:
State State File No. Effective Date
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
<PAGE>
THE COMPANY
1. Exact corporate name: AWG, Ltd.
State and date of incorporation: Nevada, June 7, 1995
Street address of principal office: 4162 Big Ranch Road
Napa, California 94558
Company Telephone Number: (707) 259-6777 or (248) 614-3880
Fiscal year: December 31
-------- ----
(month) (day)
Person(s) to contact at Company
with respect to offering: Joseph E. Antonini
Mack H. Jennings
Telephone Number (if different from above): ( ) _________
RISK FACTORS
2. List in order of importance the factors which the Company considers to be
the most substantial risks to an investor in this Offering in view of all of
the facts and circumstances or which otherwise make the Offering one of high
risk or speculative
Lack of Profitability; Receipt of Going Concern Emphasis Paragraph From
Deloitte & Touche, LLP. As of the date of this Offering, the Company has not
yet realized a profit from operations. Moreover, the Company's auditors,
Deloitte & Touche, LLP issued an opinion with an emphasis paragraph in
connection with its audit of the Company related to the Company's ability to
continue as a going concern based upon working capital deficiency, limited
capital resources, ongoing cash flow deficits and violations of federal and
state securities laws which occurred under prior management. (See Question
45) While the Company believes that it will eventually achieve profitability,
it expects to realize additional near-term losses as it attempts to expand
its operations. There can be no assurance that the Company will ever succeed
in expanding its operations and sales or in limiting its expenses to the
extent necessary to achieve profitability.
Dependence Upon Offering. Wine making is a capital intensive business and the
Company presently has limited working capital. As the Company expands its
product lines and sales according to its development plan, the Company can
expect to incur additional expenses and capital costs to replant vineyards,
build inventory and acquire equipment and facilities for products which may
not reach the market for one to three years. If only the minimum number of
Shares are sold under this Offering, the Company may require additional
capital to fulfill its operating plan. Moreover, even if the maximum offering
amount is achieved, the Company may require additional capital as cash flow
deficits may continue beyond expected time periods. There is no assurance the
Company will be able to obtain financing when required or that such financing
will be available on terms acceptable to the Company. Should the necessary
additional financing not be available, the Company may elect to: (i) reduce
expansion to a level consistent with the net proceeds from this Offering; or
(ii) seek additional capital from alternative sources.
Possible Violations of Federal and State Securities Laws By Prior Management.
Under prior management, during the period from March 5, 1996 through November
27, 1996, the Company sold shares of its Common Stock to certain consultants
retained by the Company as well as to approximately seven (7) investors not
affiliated with the Company. The aggregate amount raised from such sales was
approximately One Million Three Hundred Sixty Thousand Dollars
($1,360,000.00). The securities were not registered. Moreover, it appears
that no federal exemption was available for such sales and that such sales
may have also violated the laws of one or more states including, California.
The Company is not currently able to determine what exposure, if any, the
Company has in connection with such sales. Any potential liabilities to
investors who acquired the shares of the stock of the Company could result in
a significant portion of the proceeds of this Offering being utilized to
satisfy such liabilities. As of the date of this Prospectus, no investor has
instituted any action against the Company nor has any such threat been
communicated to the Company. (See Question 45)
Distribution of Product. The Company currently sells its product principally
to distributors for resale to retail outlets and restaurants. These channels
of distribution have recently gone through rapid change including the
consolidation of many of the distributors. This decrease in distributors
lessens the number of distribution alternatives and decreases
4
<PAGE>
individual distributor's attention to smaller brand names. The Company has no
written contracts with any of its distributors. There can be no assurance
that the Company's distributors and retailers will continue to purchase the
Company's products or provide the Company's products with adequate levels of
promotional support.
Dram Shop Liability. The serving of alcoholic beverages to a person known to
be intoxicated may, under certain circumstances, result in the server being
held liable to third parties for injuries caused by the intoxicated customer.
The Company will serve wine to customers. If an intoxicated customer is
served wine and subsequently injures someone, the Company may be held liable
for damages to the injured persons. The Company has host liquor liability
insurance coverage as part of its General Liability Insurance and will
maintain such coverage as long as the premiums remain financially reasonable.
The aggregate limit under such insurance is $5,000,000. However, the Company
is unable to make any prediction as to whether the premiums will remain
financially reasonable in the future. A large damage award against the
Company, if not adequately covered by insurance, could adversely affect the
Company's financial position and, perhaps, jeopardize its ability to operate.
Dependence on Key Personnel. The Company's success will be heavily dependent
upon the efforts of Mr. Mario Andretti and Mr. Joseph Antonini, both of whom
are contributing their efforts at modest compensation. The Company's
marketing strategy is dependent in large part on Mr. Andretti and his
continued association with the Company. In the event that Mr. Andretti left
the Company for any reason, it would have a materially adverse impact on the
Company's marketing strategy and its ability to sell its products. Mr.
Antonini has been instrumental in designing the Company's current financial,
operational and marketing strategy and is instrumental in its ongoing
implementation. In the event that Mr. Antonini for any reason discontinued
his relationship with the Company, it would have a materially adverse impact
on the ability of the Company to achieve its stated goals. Finally, the
Company is dependent to a certain degree on its wine maker Robert Pepi. While
the Company believes that other wine makers are available at similar
compensation and at relatively similar levels of competence, the loss of Mr.
Pepi would have a material short term adverse impact on the Company. The
Company currently has a Licensing Agreement in place with Mr. Andretti.
However, the Company does not have written Agreements with Mr. Antonini or
Mr. Pepi. (See Questions 39 and 40)
Lack of Director and Officer Liability Insurance. The Company has provisions
in its Bylaws providing indemnification by the Company to all directors and
officers to the maximum extent permitted under applicable law, including the
advancement of expenses incurred by a director or officer in any law suit in
which they may be involved. In addition, the Company's Bylaws contain
provisions limiting a director's liability for monetary damages for breach of
fiduciary duty, except in circumstances involving certain wrongful acts. The
cost associated with indemnifying a director or officer could be significant
and, if not covered by insurance, could adversely affect the Company's
financial performance. Furthermore, should the Company advance litigation
expenses to a director or officer and the director or officer is required to
repay the advanced expenses because it is ultimately adjudged that the
director or officer is not entitled to indemnification, the director or
officer may not have sufficient cash or assets to repay the expenses
advanced. The Company does not currently maintain officers and directors
liability insurance. (See "MANAGEMENT RELATIONSHIPS, TRANSACTIONS AND
REMUNERATION")
Arbitrary Offering Price. There has been no public trading market for any of
the Company's Preferred Stock. The per share price in this Offering bears no
relationship to the assets, book value, or net worth of the Company, or to
any other recognized criteria of value. Share value has been determined
arbitrarily by the underwriter and management of the Company, and should not
be considered as an indication of the actual value of the Company.
<PAGE>
Bridge Loan Financing. One investor, Colin Frank Riseam ("Bridge Lender") has
provided Fifty Thousand Dollars ($50,000) in bridge loan financing to help
the Company maintain its operations pending completion of this Offering. As
partial consideration for the financing, the Bridge Lender has received
500,000 shares of Preferred Stock with a liquidation value of $10 per share
or Five Million Dollars ($5,000,000). As a result of this financing
transaction, to the extent the Company were sold or liquidated, the initial
Five Million Dollars ($5,000,000) worth of value (assuming Five Million
Dollars ($5,000,000) of value could be obtained) would be payable solely to
the Bridge Lender. To the extent that all 500,000 shares of Preferred Stock
offered hereby are sold, such Purchasers would share in such liquidation or
sales proceeds on a pro rata basis with the Bridge Lender. Since it is highly
unlikely that the Company could generate proceeds of Ten Million Dollars
($10,000,000) in the event of a sale or liquidation in the next twelve (12)
months, the Bridge Lender will have obtained a disproportionate benefit in
the event of the sale or liquidation of the Company. If the Company were
liquidated at an amount equal to the shareholder's equity as of March 31,
1998, plus the net proceeds if all 500,000 shares of Preferred Stock offered
hereby were sold ($4,120,000), each share would be entitled to approximately
$4.54 per share. This would result in an immediate loss to Purchasers of the
Preferred Stock of $5.46 per share and an immediate gain to the Bridge Lender
of $4.54 per share or an aggregate of Two Million Two Hundred Seventy
Thousand Dollars ($2,270,000).
5
<PAGE>
Agricultural Risks. Wine grape production is subject to many risks common to
agriculture that can materially and adversely affect the quality and quantity
of grapes produced. These hazards include, among other things, adverse
weather such as drought, frost, excessive rain, excessive heat or prolonged
periods of cold weather. These weather conditions can materially and
adversely affect the quality and quantity of grapes produced by the Company
and its profitability.
Vineyards are also susceptible to certain diseases, insects and pests, which
can increase operating expenses, reduce yields or kill vines. In recent years
phylloxera, a louse that feeds on the roots of grape vines, has infested many
vineyards in the wine grape producing regions of California and caused grape
yields to decrease. Within a few years of the initial infestation, phylloxera
can leave a vine entirely unproductive. Phylloxera infestation has been
widespread in California, particularly in Napa County. As a result of this
widespread problem, thousands of vineyard acres throughout the State of
California have been or in the case of the Company, will be replanted with
phylloxera-resistant rootstock. It takes approximately 4 to 5 years for a
replanted vineyard to bear grapes in quantities sufficient for profitable
operations. The Company estimates that it currently costs approximately
$11,200 per acre to replant vineyards. All of the Company's approximately 43
net vine acres (i.e., excluding acreage devoted to roads, storage areas,
equipment yards or uses other than vineyards) were infested and will be
planted with rootstock believed to be resistant to phylloxera. Currently,
approximately 12 acres have been replanted. (See "BUSINESS")
Other pests that may infest vineyards include leafhoppers, thrips, nematodes,
mites, insects, orange tortrix, twigbore, microflora and various grapevine
diseases. Pesticides and the selection of resistant rootstocks reduce losses
from these pests, but do not eliminate the risk of such loss. Gophers,
rabbits, deer, wild hogs and birds can also pose a problem for vineyards, and
wine grape vines are also susceptible to certain virus infections which may
cause reduction of yields. None of these currently poses a major threat to
the Company's vineyard, although they could do so in the future and, at that
time, will have the potential to subject the vineyard to severe damage.
The Company does not currently insure against general agricultural risks,
since root stock has to be planted for a period of 3 years before the
plantings are eligible for coverage. Since the Company is in the process of
replanting its entire vineyard, such coverage will not be available for
several years.
Grape Supply. While the Company believes that it can secure an adequate
supply of grapes from its own vineyards and from available suppliers to meet
its forecasted production needs, there can be no assurance that grape
shortages will not occur. A shortage in the supply of wine grapes could
result in an increase in the price of such grapes and, therefore, increase
the cost to the Company of its wine production. This would have a
particularly adverse effect on the Company since the Company will be
dependent, for the next several years, on significant third-party sources for
its grape needs. Moreover, while the Company does have contracts to acquire
wine grapes, such contracts are all short term and can be terminated by the
supplier at any time. In 1997, approximately 58% of the Company's wine
production represented bulk wine and wine grapes purchased from independent
growers and wineries. When dealing with third party grape suppliers, the
Company maintains a quality control program by maintaining a presence in the
growers' vineyard and by supervising and controlling irrigation, pest
control, and harvest method and timing. (See "BUSINESS")
Fixed Costs and Revenue Fluctuations; Uncertainty of Profitability. The
Company incurs annual farming costs averaging approximately $1,500 to $2,500
per acre in production, depending upon the specific characteristics of the
vineyards, including vine spacing and the viticultural characteristics of
specific varieties, among other factors. These costs are incurred throughout
the year preceding harvest and are relatively fixed. Vineyard productivity
varies from year to year depending upon a number factors, and significant
variations in annual yields should be expected from time to time.
Furthermore, grape prices have fluctuated significantly in the past and
should be expected to continue to fluctuate from year to year and to increase
at times in the future. Because production costs are not significantly
adjustable in light of productivity or revenue levels, weak harvests and
higher grape prices cannot be mitigated by cost reductions and could have
significant adverse effects upon profitability. Since the Company intends on
purchasing a significant amount of grapes from third party growers in order
to bottle additional wine, a drop in grape prices may in fact, increase
profitability to the Company with respect to wine production which is made
from grapes purchased from third parties. Assuming that the Company was able
to fully utilize its wine production permit of 42,000 cases per year,
approximately 2/3 of the wine produced by the Company would be from grapes
acquired from third parties.
<PAGE>
Competition; Industry Fragmentation. The wine industry is extremely
competitive. Many of the Company's current and prospective competitors have
substantially greater financial, production, personnel and other resources
than the Company. The Company competes with many other producers of premium
wine in California, including many small independent producers. This is in
addition to seven wineries, E and J Gallo, Canandaigua, The Wine Group,
Sutter Home, Sebastiani, Robert Mondavi and Heublein which accounted for
approximately 77 percent of the total California wine shipments of 1996.
Because of higher production costs in the United States and the high prices
of grapes in
6
<PAGE>
California, especially in comparison to the prices of years past, some
wineries can achieve significant cost savings, even after taking into account
shipping costs, by importing wine from abroad. Some countries, such as
France, have launched marketing campaigns to increase their sales in the
United States. Foreign competition can be expected to continue and increase.
Moreover, to a significant extent, wines of a particular variety are
fungible, and the ability of foreign producers to compete with the Company on
the basis of price due to their lower production costs may have a negative
impact upon the Company's profitability.
The Company will compete against other wineries on the basis of market
pricing for similar quality wine produced. The Company has a distribution
system that is based on wholesalers who are well established in their market.
In addition, the Company will maintain a presence in the market by using
periodic visits by its CEO and its wine maker and will oversee specific
promotion programs to educate the sales staff about the wines produced by the
Company.
Dependence on Consumer Demand. In recent years there has been substantial
publicity regarding the possible health benefits of moderate wine
consumption. Some studies suggest that moderate consumption of wine (or other
alcoholic beverages) could result in decreased mortality and other health
benefits. Other studies have suggested that alcohol consumption does not have
any health benefits and may, in fact, increase the risk of stroke, cancer and
other illnesses. Anti-alcohol groups have, in the past, successfully
advocated more stringent labeling requirements and other regulations designed
to discourage consumption of alcoholic beverages, including wine. More
restrictive regulations, negative publicity regarding alcohol consumption,
publication of studies that indicate a significant health risk from moderate
consumption of alcohol or changes in consumer perceptions of the relative
healthfulness or safety of wine generally could adversely affect the sale and
consumption of wine and the demand for wine and wine grapes and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Trends in consumer spending have a substantial impact on the wine industry
and the Company's business. Factors that influence consumer spending include
the general condition of the economy, federal, state and local taxation, the
deductibility of business entertainment expenses under federal and state tax
laws and general levels of consumer confidence. Imposition of excise or other
taxes on wine could negatively impact the wine industry by increasing wine
prices for consumers. These factors are especially relevant to premium wines,
which constitute the majority of wines for which the Company produces grapes.
The wine industry is also subject to changes in consumer tastes and
preferences. To the extent wine consumers reduce consumption of wine in favor
of other beverages, demand for wine grapes could decrease. Similarly, to the
extent wine consumers shift their preferences to different varieties of wines
or imports, the Company and other producers of certain grape varieties may
experience reduced demand for their grape production. Increasing demand for
wine products, and therefore wine grapes, may depend on advertising
expenditures and expanded new product introductions by the wineries.
Government Regulation; Taxes. The Company is subject to a broad range of
federal and state regulatory requirements regarding its operations and
practices. The Company's current operations and future expansion are subject
to regulations governing the storage and use of fertilizers, fungicides,
herbicides, pesticides, fuels, solvents and other chemicals. These
regulations are subject to change and conceivably could have a significant
impact on operating practices, chemical usage, and other aspects of the
Company's business. There can be no assurance that new or revised regulations
pertaining to the wine grape production industry will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
Wine production and sales are subject to extensive regulation by the Federal
Bureau of Alcohol, Tobacco and Firearms ("BATF"), the California Department
of Alcohol Beverage Control and other state and federal government
authorities that regulate licensing, trade and pricing practices, labeling,
advertising and other activities. In recent years, federal and state
authorities have required warning labels on beverages containing alcohol.
Restrictions imposed by government authorities on the sale of wine could
increase the retail price of wine, which could have an adverse effect on
demand for wine in general. There can be no assurance that there will not be
new or revised laws or regulations pertaining to the wine industry which
could have an negative impact on the Company's business. On January 1, 1991,
the federal excise tax on table wine increased by over 500% from $0.41 per
case to $2.55 per case. Various states, including California, also impose
excise taxes on wine. Further increases in excise taxes on wine, if enacted,
could reduce demand for wine and wine grapes, which could materially and
adversely affect the Company's business, financial condition and results of
operations.
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Broad Management Discretion Over Use of Proceeds. Management of the Company
will have broad discretion with respect to the use of the proceeds derived
from the Offering and there can be no assurance that management's actual use
of the proceeds will correlate exactly with the Company's intended use of
proceeds. See "Use of Proceeds."
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No Payment of Dividends. The Company currently intends to retain its future
earnings, if any, to fund the development and growth of its business and,
therefore, does not anticipate paying any cash dividends in the foreseeable
future. See "Dividends, Distributions and Redemptions."
Important Factors Related to Forward-Looking Statements and Associated Risks.
This Prospectus contains certain forward-looking statements. These
forward-looking statements include the plans and objectives of management for
future operations, including plans and objectives relating to the business
and future economic performance of the Company. The forward-looking
statements and associated risks set forth in this Prospectus may include or
relate to, among other things, (i) planting and harvesting of the Company's
vineyards, (ii) general health and social concerns regarding consumption of
wine and spirits, (iii) the size and growth rate of the California wine
industry, (iv) increases or changes in government regulations regarding
environmental impact, water use, labor or consumption of alcoholic beverages,
(v) competition from other producers and wineries and (vi) proposed expansion
of the Company's wine business.
"Blank Check" Preferred Stock. In addition to the Preferred Shares offered
hereby , the Board of Directors of the Company has the authority to issue up
to 10,000,000 additional shares of Preferred Stock and to determine the
price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock and the existing
Preferred Stock will be subject to, and may be adversely affected by, the
rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party
to acquire a majority of the outstanding voting stock of the Company. The
Company has no present plans to issue any additional series of Preferred
Stock other than the Preferred Stock offered herein.
Environmental Risks. Ownership of real property creates a potential for
environmental liability on the part of the Company. If hazardous substances
are discovered on or emanating from any of the Company's vineyard and the
release of hazardous substances (including fuels and chemicals kept by the
Company on its properties for use in its business) presents a threat of harm
to public health or the environment, the Company may be held strictly liable
for the cost of remediation of these hazardous substances.
Best Efforts Offering. The Offering is being done by the Underwriter on a
"Best Efforts Basis". As a result, there can be no assurance that the
Underwriter will be able to sell, on behalf of the Company, all 500,000
shares of Preferred Stock offered hereby. In the event that only the minimum
number of shares (300,000) are sold pursuant to this Offering, the Company
may require additional capital to achieve its operating plan. See Risk Factor
"Dependence Upon Offering" above.
Underwriting Agreement. Pursuant to the Underwriting Agreement between the
Company and Klein Maus and Shire ("Underwriter"), the Company cannot issue
any capital stock other than pursuant to the Company's existing stock option
plans or in connection with compensation to the Board of Directors (See
"Management Relationships, Transactions and Remuneration") without the
written consent of the Underwriter. In the event the Company needs to obtain
additional equity financing, the ability of the Company to do so will be
dependent, in part, on obtaining the consent of the Underwriter to the
transaction. Moreover, the Underwriter will have the right of first refusal
to participate in any such financing. In addition to the foregoing, the
Underwriter has the right to select a designee to the Board of Directors for
a period of 3 years following the Offering or alternatively to have a
representative attend Board Meetings. However, the ability to designate one
Board Member will not allow the Underwriter to control, in any manner, the
Board of Directors.
Voting Control of Management: Common Stock and Preferred Stock. The Company
has two classes of stock: Common Stock, which is entitled to one vote per
share and the Preferred Stock offered hereby, which has no voting rights
other than as provided by law. In addition, the Directors of the Company
currently own 4,478,791 shares of Common Stock, which represents 56.17% of
the total issued and outstanding shares of Common Stock of the Company.
Therefore, the existing Board of Directors will be able to continue to elect
all of the Company's Board of Directors and, as a result, continue to direct
the business, policies and management of the Company.
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Risks of Leverage. As of December 31, 1997, the Company had indebtedness
outstanding in the principal amount of $3,119,400. Subsequent to December 31,
1997, the principal amount of indebtedness has increased by $200,000. Of this
amount, $1,604,000 is represented by either demand notes or notes which
become due and payable during fiscal year 1998. Moreover, pursuant to the
underwriting agreement, the Company may not, without the prior written
consent of the underwriter, utilize the offering proceeds to repay more than
$550,000 of indebtedness until the expiration of 18 months from the
completion of the offering. As a result, the Company will be forced to
renegotiate and/or extend the terms of the remaining indebtedness for an
extended period of time. All such indebtedness is either provided by
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or guaranteed by officers and/or directors of the Company. It is believed
that as long as the Company is current on its interest payments (which is not
prohibited by the underwriting agreement) that it will be able to extend the
maturities of such indebtedness. However, since a significant portion of the
indebtedness is provided by or guaranteed by the Company's Chairman, Joseph
E. Antonini, the ability of the Company to negotiate extensions of such
indebtedness will be dependent in large part on the ability of Mr. Antonini
to continue to provide his financial assistance. In the event that the
Company is unable to extend maturity dates of the indebtedness guaranteed by
Mr. Antonini, the Company will be forced to liquidate assets or request the
consent of the underwriter to use additional proceeds of this offering to
repay such debt.
Absence of Prior Public Market for Preferred Stock; Possible Volatility of
Stock Price. Prior to this Offering, there has been no public market for the
Preferred Stock. Moreover, the initial public offering price for Preferred
Stock is substantially in excess of the current liquidation value of the
Company. As a result, there can be no assurance that an active trading market
will develop or be sustained for the Preferred Stock or that the Preferred
Stock will trade in the public market at or near the initial public offering
price. In addition, the Company is registering for sale an additional 500,000
shares of Preferred Stock issued to the Bridge Lender who acquired its shares
of stock in consideration of the bridge loan financing. Trading in these
shares can be expected to further depress the initial trading price of the
Preferred Stock. Finally, the Underwriter will receive warrants to purchase
up to 10% of the number of shares of Preferred Stock sold pursuant to this
Offering on behalf of the Company. The exercise of these warrants and
potential sale of the underlying Preferred Stock have yet a further adverse
affect on the trading price of the Preferred Stock.
In addition to factors specifically affecting the Company, it should be noted
that the stock market has, during recent years, experienced extreme price and
volume volatility. In addition, the price of the Preferred Stock may be
influenced by factors including investor perception of comparable public
companies, changes in the condition or trends in the wine industry or changes
in the economy.
NOTE: In addition to the above risks, businesses are often subject to risks
not foreseen or fully appreciated by management. In reviewing this Offering
Circular potential investors should keep in mind other possible risks that
could be important.
BUSINESS AND PROPERTIES
3. With respect to the business of the Company and its properties:
(a) describe in detail what business the Company does and proposes to
do including what products or goods are or will be produced or services that
are or will be rendered.
AWG, Ltd. was formed in 1995 for the purpose of producing and
marketing wine initially under the name of Mario Andretti. The concept for
the product began in 1994 during the retirement tour of Mario Andretti, an
internationally known race car driver. During the tour, known as the
Arrivederci Mario Tour, the initial founders of the Company arranged to have
Louis Martini Winery bottle over ten thousand (10,000) cases of 1991 North
Coast Cabernet Sauvignon for sale in conjunction with the Tour under a
license agreement with Mr. Andretti. In 1995, the founders of the Company
bottled additional wine under the name of Mr. Andretti. Due to the success of
this venture, the founders formed AWG, Inc., a Delaware corporation on
November 30, 1995, which was subsequently merged into a wholly owned
subsidiary of the Company on December 14, 1995. The Company's predecessor was
incorporated in Utah on April 1, 1970 as ABC Development, Inc. Its name was
subsequently changed several times ultimately becoming American Aurum, Inc.
The predecessor company was involved in various businesses and by 1995 had
over one thousand (1,000) shareholders and no assets or liabilities. On June
7, 1995, the Company was organized under Nevada law also under the name of
American Aurum. On the same day of its organization, American Aurum of Utah
was merged into American Aurum of Nevada solely for the purpose of effecting
a change in the domicile. On December 18, 1995, the Company changed its name
to its current name, AWG, Ltd. All operations described herein are conducted
through AWG, Inc., the wholly owned subsidiary of the Company.
During 1996, the Company acquired a 53 acre vineyard and winery site
in the Napa Valley upon which the Company currently conducts its business.
During 1996 the Company bottled 5,500 cases of wine and harvested 50 tons or
8,000 gallons of Chardonnay grapes. In late 1996, the founders sold their
entire interest in the Company to Mario Andretti and Joseph Antonini who are
currently the largest shareholders of the Company. See "Directors of the
Company" and "Principal Stockholders". From the proceeds of this Offering,
the Company will repay certain indebtedness to officers and directors and
will seek to accomplish 4 specific goals:
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a. increase inventory production through the acquisition of bulk wine
until such time as grape harvest from the Company's vineyards and grape
contracts are sufficient to meet the Company's needs;
b. complete a vineyard replanting and maintenance program;
c. complete a winery construction and refurbishment program which will
result in a fully productive crush, tank and barrel storage facility, a
tasting room and a hospitality center; and
d. position itself to obtain additional capital to acquire other
wineries and vineyards. Set forth below is a more detailed discussion of
these foregoing goals of the Company.
(b) describe how these products or services are to be produced and
rendered and how and when the Company intends to carry out its activities.
Inventory Production
Until such time as the Company has completed its vineyard development
and maintenance program and its winery construction, it will purchase grapes
and bulk wine from other Napa Valley Growers with whom the Company is
developing long term grape contracts. These relationships will also supply on
a long term basis, ongoing grape requirements over and above those which can
be grown at the Company's existing facility. The Company currently has
contracts for 60-90 tons of Merlot and Cabernet Sauvignon grapes which will
enable the Company to produce 4,000 to 6,000 cases of Merlot and Cabernet
wine. Such contracts are short term and can be canceled by the supplier at
any time. In addition, the Company will purchase wine on the bulk market
through wine brokers. The quality of the bulk wines will meet the standards
set by the Company and will be used to the extent needed in order to maintain
the Company's position in the market. This will also permit the Company to
generate income throughout the vineyard replanting program. It is anticipated
that at least $600,000 (up to $1,000,000 of the maximum offering amount is
achieved) of the amount raised from this Offering will be allocated to the
inventory production program. In 1997, approximately 58% of the Company's
wine production represented bulk wine and wine grapes purchased from
independent growers and wineries.
Vineyard Replanting Program
The Company currently has a 43 acre vineyard of which 12 acres have
been recently replanted. In 1996, the 43 planted acres yielded 50 tons of
Chardonnay, which the Company used to produce approximately 3,100 cases of
1996 Andretti Chardonnay and 15 tons of Pinot Noir, which were sold to a Napa
Valley producer of a premium sparkling wine. The 65 tons of harvest in 1996
is small compared to the anticipated harvest of 270 to 290 tons when the
entire vineyard has been replanted by 1999 and reaches maturity which is not
expected to occur until 2002.
The Company anticipates completing the replanting of the entire
vineyard over the next 2 year period. The replanting is due to the fact that
the vines are 25 years old and have 3 common diseases: phylloxera, Leaf Roll
and Pierce's disease. Based upon representations from rootstock
manufacturers, the Company is planting rootstock (the root system for the
vines) believed to be resistant to the first 2 common diseases and will help
prevent the reoccurrence of these infestations. In order to avoid Pierce's
disease in the future, the Company is planting the 3 acres adjacent to the
Napa River with Sauvignon Blanc grape vines, a varietal known to be resistant
to Pierce's Disease infestations. As indicated above, the Company has already
completed the replanting of 12 acres. The Company anticipates that it will
tear out and replant an additional 16 acres in 1998 and 15 acres in 1999.
Replanting vineyards generally cost approximately $11,000 to $15,000
per acre, depending on ground cultivation requirements, irrigation systems
selection, rootstock selection, trellising (the structural support system for
the vines and irrigation system) materials and labor availability. The
Company estimates that the total vineyard replanting will cost approximately
$11,200 per acre for 43 acres or a total of $481,600 over the entire
replanting program. Once planted, it will be 2 years before the first crop is
harvested and a total of 3 to 5 years before the vines reach commercial
production levels. At that time, the Company expects to harvest about 6.5
tons of grapes per acre or 270 to 290 tons per year. This harvest will be
sufficient for about 14,000 to 15,000 cases per year. As indicated above,
notwithstanding the increased production, the Company will still need to
acquire grapes from additional sources in order to meet its long term
production goals. In this regard, controlling grapes through ownership or
long term grape contracts with third parties is a critical factor in crafting
high quality wines. The wine maker who can influence the wine from the berry
to the bottle will have an advantage over the wine maker who does not have
that control. The Company will have as high a level of control as possible
over the grapes that make up its basic varietals.
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Winery Development and Construction Plan
The Company operates under a use permit that allows for the production
of 100,000 gallons of wine annually which is equivalent to approximately
42,000 cases. Also included in this permit is the right to operate a tasting
room with full "public tours and tastings access by the public." This latter
feature is not available to new wineries which generally can only access the
public market by "appointment only." The Company hopes to ultimately have
well over 100 visitors per day during the May-October season. Typically under
the "appointments only" category, visitors are limited to 2 groups with up to
4 people per group.
There are significant economic advantages to having a tasting room.
First, wine sales from a tasting room generally are priced at twice the price
of distributor sales, the normal channel of sales. This is done to protect
the distributor and the liquor store owner from being underpriced by the
manufacturer. Second, there is an opportunity to sell wine related
merchandise and in the case of the Company, an opportunity to sell Andretti
memorabilia. Third, the Company intends to create the "Andretti Wine Club"
which will hopefully create a source of higher price retail sales throughout
the year. The tasting room will provide a source for marketing membership in
the Club. The activation of the 100,000 gallon production facility, public
tours and tasting permit is dependent upon completion of the winery at a
level required by Napa County. This will require the following construction:
(a) refurbish an existing structure to become a barrel storage room/tasting
room facility; (b) construct on a pre-existing concrete pad a tank
storage/crush facility building; (c) install a septic system; and (d)
construct a new road to the winery from the main artery leading to the
property, Big Ranch Road. The total cost of these improvements is estimated
to be $600,000 exclusive of equipment and cooperage. The construction of the
improvements (other than the tank storage/crush facility building) have been
completed. Funds for completing the construction project have been obtained
through bank financing guaranteed by Joseph E. Antonini, Chairman of the
Company. In total, when all improvements are completed, the Company will have
a tasting room with full public tours and tasting authority, a barrel storage
facility, a tank storage facility, offices, a private tasting facility, a
hospitality and event center and a 43 acre vineyard all on 53 acres of
property that the Company owns. The balance of the improvements for equipment
and cooperage will be funded from the proceeds of the Offering and is
estimated to be approximately $400,000.00. This equipment includes a
stemmer/crusher and wine press; stainless steel tanks; mobile equipment and
pumps; and additional barrels.
Products and Operations
The Company will have 4 varietals as its base of wines to be offered
to the public. The Company will bottle Napa Valley grown grapes. The Company
will venture away from the Napa Valley for grape and wine sources when
required. Set forth below is a brief description of various varietals to be
offered by the Company:
Cabernet Sauvignon. Cabernet Sauvignon is one of the world's most renowned
grapes for production of fine, long lived red wine. Of Bordeaux origin, this
grape's remarkable concentration of tannin (a soluble astringent phenolic
substance in red wines produced in the plant) pigments and flavor compounds
produce a deeply colored wine worthy of long maceration (the time during
which the red wine and grape skins are in contact with each other during the
fermentation period to enhance the color of the wine) and wood aging with a
strong affinity for french oak. Its fruit flavors are often likened to black
currant and its aroma ranges from bell peppers to ripe berries and even mint
and chocolate. It adapts well to varying wine making techniques. These grapes
will be purchased from other growers.
Merlot. Merlot is the most planted Bordeaux vine. Merlot's flavor can vary
from opulently plummy and fruitcake like to a gentler variation on the
Cabernet theme, but its texture is almost invariably astringent and fuller
bodied. The Company's vineyard soils and climate are exceptionally well
suited for production of this grape and it is anticipated that the Company
will plant approximately 60-65% of its vineyard with this varietal. Merlot is
often blended with Cabernet as a compliment to its fruit fullness. Its early
maturation and shorter oak aging time make a wine which would be released a
full year earlier than the Cabernet grapes of the same vintage.
Chardonnay. Chardonnay has a relatively high level of alcohol, which combined
with the rich fruit can often taste slightly sweet which has probably played
a part in its popularity. This varietal's flavor is found to be nebulous with
tastes of vanilla, tropical fruits, peaches, tomatoes, tobacco, tea and rose
petals in the wine. Chardonnay grapes typically have higher yields.
Approximately 30-35% of the Company's vineyard will be planted with this
varietal.
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Sauvignon Blanc. Sauvignon Blanc is another Bordeaux grape transported years
ago to regions outside of France. It is an aromatic, crisp dry wine. It is
generally described as grassy, herbaceous, musky, of green fruits and zesty
(but can also be reminiscent of tropical fruit or grapefruit). It is
extremely durable for white wine with up to 5 years in the bottle. The
Company may plant up to approximately 10% of its vineyard with this variety
of grape.
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Complimentary Varietals. Other varietals will occasionally be produced by the
Company as the Company's wine maker discovers small quantities of bulk wine
or grapes available for purchase and bottling. The extra wines will be those
which have a particular high quality and suit the theme of the winery. Some
varietals which should be common for consideration are Pinot Noir, a burgundy
grape which grows in the climate found in the southern end of the Napa Valley
and Sangiovese, an Italian varietal which forms the base of most Chianti
wines.
Wine Sources and Production
As indicated above, the Company's vineyard, when replanted, will yield
between 270 and 290 tons of Merlot, Chardonnay and Sauvignon Blanc grapes for
crushing. These grapes will enable the production of approximately
14,000-15,000 cases of wine, all of which will be eligible for "estate
designation" (a term that indicates that the wine in a bottle comes from
grapes which were grown, crushed, fermented and bottled on a property owned
by the winery) since the grapes will be crushed, fermented, stored and
bottled at the Company's own wine facility.
However, it should be realized that the grapes that the Company
harvests in 1997 will provide wine for the 1997 vintage which will be
released as early as 1998 for Chardonnay but as late as 1999 for Merlot and
2000 for Cabernet Sauvignon. In the meantime, the Company will purchase wine
on the bulk market through wine brokers. The quality of the bulk wines will
meet the standards of the Company's winemaker and it will be used only to the
extent needed to maintain its position on the market. In addition, on a more
long term basis, the Company will attempt to enter into long term grape
contracts with other Napa Valley growers to provide additional grapes for
additional wine production. As indicated earlier, while the Company's
production permit will permit it to produce 42,000 cases of wine a year at
its Big Ranch Road facility, the Company's production after the vineyard has
been totally replanted and reaches maximum maturity, will only produce
14,000-15,000 case of wine. Therefore, wine production in excess of that
produced from grapes grown by the Company's vineyard will have to come from
other sources. The Company currently has contracts for 60-90 tons of Merlot
and Cabernet grapes which will produce enough wine for approximately
4,000-5,000 cases of those varietals. It should be noted that the Company
maintains a quality control program for grapes obtained from third party
growers by maintaining a presence at the vineyard at which the grapes are
being grown. The Company will supervise and control irrigation, pest control,
harvest method and timing as well as all aspects of the farming operation.
Currently, the Company's facility requires that it harvests its own grapes
but that it crushes and ferments them at a neighboring facility. The wine is
then stored in oak barrels at the Company's winery and other warehouses and
then bottled at a neighboring facility or at the Company's location using a
mobile bottling line (a mobile bottling line consists of a large truck
equipped with bottling apparatus that drives to the winery and pumps the
wine in storage from tanks or barrels at the winery and bottles the wine). The
Company's wine maker, is present for and closely supervises all phases of the
operations. The Company uses an outside warehouse service for storage of
finished goods. Once the winery construction is complete, the Company will be
able to crush, ferment and age wines at its winery and then have a mobile
bottling line come to the winery and bottle the product. The Company believes
that such mobile bottling lines are provided by several suppliers and will be
available when needed and at a cost acceptable to the Company. The bottled
product will still be stored at a local outside warehouse for ease of
consolidation and shipping.
The Company has no current plans to install a bottling line. Though
the Company's permit allows it to produce 42,000 cases of wine, this can be
accomplished in 30-40 days per year. The under utilization of the bottling
line would be economically impractical.
Sources of Revenue
Sales revenue will come from four (4) primary areas: wholesale wine
sales, retail wine sales, wine and memorabilia merchandise sales and
hospitality/specialty events.
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Wholesale Wine Sales. This will account for the bulk of the revenue. Wines
will be sold to distributors at price ranges typical of super premium wines
from the Napa Valley. Prices are a function of quality, varietal and vintage,
with the pricing of the Company's wines to be in the upper end of the super
premium price range. Super premium price range reflects market conditions and
supply and demand influences. Generally, for purposes of pricing wines,
premium wines are generally categorized as premium and popular premium which
have an average retail sales price of approximately $7; super premium which
have an average retail price of approximately $18 and ultra premium which
have an average retail price of approximately $25. As indicated, the Company
intends to produce and distribute wines in the super premium range. These
sales are expected to generate gross revenues of $800,000 to $900,000 in 1998
based upon the anticipated sale of 7,000 to 7,500 cases at an average price
of $120 per case to distributors in the United States and Japanese wholesale
network. It should be noted that in 1997, 26% of the Company's sales were
made by one retailer,
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Trader Joe's, a California chain of food and liquor stores. However, it is
anticipated that neither this retailer nor any other entity will account for
as much as 25% of sales.
The results for the three (3) month period ended March 31, 1998,
reflect total revenues of approximately $67,000. The first quarter results
represent only a very small portion of forecasted revenues primarily because
sales are cyclical in the wine industry with sales in the first quarter of
the calendar year significantly lower then during the remainder of the year.
Typically, the revenues will be highest in the fourth quarter, reflecting
sales for the holiday season. As further evidence of the cyclical nature of
wine sales, the Company's revenues in April and May of 1998 totalled
approximately $164,000.00 resulting in total revenues for the first five (5)
months of 1998 of approximately $231,000.00. Revenues for the last two (2)
month period are more than double the revenues for the entire first quarter.
Based on the increased level of sales in April and May of 1998, historical
cyclical trends in the wine industry and the expansion of the Company's
distributor network as discussed below, the Company believes it can achieve
forecasted revenues of $800,000.00 to $900,000.00 for the year ended December
31, 1998.
Further impacting the Company's performance for the three (3) month
period ended March 31, 1998, was a temporary shortage of wine inventory
caused by cash flow shortages which will be addressed from the proceeds of
this offering. However, during the balance of the 1998 calendar year,
assuming at least the minimum offering amount is achieved, the Company will
bottle and/or purchase an additional 9,000 cases of wine of which
approximately 5,000 will be shipped in calendar year 1998. When added to the
Company's inventory of 4,000 cases at December 31, 1997, the Company believes
there will be an adequate supply of wine to supply the demand created by its
expanded distribution network (between 7,000 and 7,500 cases) as well as an
additional 1,500 to 2,000 cases through retail sales (see Retail Wine Sales
below).
Retail Wine Sales. These retail sales which are anticipated to be made at an
average price of $240 per case (double the wholesale price) will occur at the
winery, by mail order, through the Andretti Wine Club, via Internet sales and
through other channels that could be made available to the public. The
Company hopes to ultimately sell 3,000 cases or more of wine annually in this
category although this is not expected to occur for several years. Assuming
the wine is sold at prices typical of the super premium price range, this
category of sales will account for additional gross profits of up to $300,000
per year after deducting additional employee expenses of $60,000 to generate
such sales.
Wine and Memorabilia Merchandise Sales. These are products sold out of the
tasting room, through the Andretti Wine Club and Andretti Fan Club catalogue
and over the Internet. The source of revenue will not be significant and
estimated as ultimately approximately $1,000 to $2,000 per month.
Hospitality/Special Events. The winery has a 4,000 square foot hospitality
center surrounded by decks and a lawn that could be used for many types of
events for a service fee. The Company plans to have special events such as
weddings, rehearsal dinners, anniversary gatherings, gourmet food classes,
non-profit fundraisers, performances and car club events. Corporate events
such as board meetings, executive retreats, video conferencing, team
building, training, dinners, lunches and tours will also be available. In
addition, winery events such as food and wine pairings, an evening with the
wine maker, VIP and trade tours and tastings are possible. Gross profits for
the hospitality/special events could ultimately approach $300,000 per year.
However, this will not occur in 1998 and may not occur for several years
thereafter. While it was originally anticipated that the Hospitality Center
would generate revenues in the first quarter for calendar year 1998, this did
not occur due to delays in construction caused by weather conditions and
unanticipated construction delays. However, the Hospitality Center is
operational and is expected to generate revenues during the balance of the
1998 calendar year.
Bulk Wine Sales. As discussed above, under "Vineyard Replanting Program", the
Company has 43 acres of vineyards, of which 12 acres have been replanted. Of
the 12 acres which have been replanted, 4 acres will yield Pinot Noir grapes,
and the balance of 8 acres will yield Chardonnay grapes. The Company believes
that this yield will create a disproportionate amount of Chardonnay at
harvest time which the Company will not require and will be able to sell in
bulk to other wineries in the Napa Valley. In this regard, the Company has
accepted an offer from a Napa Valley winery to purchase approximately 6,800
gallons of 1997 Chardonnay for $75,000.00 which sale will occur in the second
quarter of 1998. The Company will retain the balance of the Chardonnay yield
and will bottle approximately 2,000 cases of wine for sale in calendar year
1998 and calendar year 1999.
13
<PAGE>
(c) Describe the industry in the which the Company is selling or
expects to sell its product or services and, where applicable, any recognized
trends within that industry. Describe that part of the industry and the
geographic area in which the business competes or will compete.
According to a study by Gomberg, Frederickson and Associates, a wine
consulting firm in San Francisco ("Consultant"), published in February 1998,
reflecting the results of the California wine market for the year ended 1997,
shipments of table wines increased over 1996 by approximately 3% with
revenues increasing by 12%. The increase in revenues were the result of
increased sales of premium wines including super premium wines which are
produced and sold by the Company. The revenue increase in the super premium
wine category over 1996 was approximately 13%. The Consultant also indicated
that in 1997, approximately 90% of all table wine made in the United States
was produced in California and that total California wine sales reached
approximately $4.9 billion which is an increase of approximately $600 million
over 1996. Approximately 79% of wine sales represented the premium wine
segment.
Table wines are wines usually containing less than 14% alcohol and are
generally consumed with food or as cocktails. Table wines represented 88% of
the total U.S. wine consumption in 1997, with dessert and sparkling wines
accounting for the remaining 12%. Table wines are categorized as either
non-varietal or varietal. Non-varietal, also referred to as generic, include
wines named after European regions where similar types of wines were
originally produced such as burgundy or Bordeaux as well as wines labeled
simply red or white. Varietal wines are those named for the grape that
comprises the principal component of the wine such as Chardonnay or Merlot
and are generally considered premium wines and typically retail at a
substantially greater price than non-varietal wines. The Company's grapes are
used to produce super premium varietal table wines.
As indicated above, the market for California premium varietal table
wines grew during 1997 with revenues for all premium wines increasing by 12%
and revenues for super premium wine sold by the Company increasing by 13%.
The most popular California premium wine varieties are Chardonnay, Cabernet
Sauvignon, Merlot, Sauvignon Blanc and Red Zinfandel. According to estimates
by the Consultant, case shipments for these varietal wines in 1997 were 23.6
million, 11.8 million, 7 million, 4.6 million and 2.4 million cases
respectively.
The California grape production industry is very fragmented and
consists of several thousand vineyard owners. Most wine grape producers have
small privately owned operations and sell their production to wineries. To
supplement the grapes they buy from independent producers, many wineries also
own or lease vineyards to supply some of their grape needs. There is no
published data regarding ownership or contractual relationships in the
California wine grape production industry and individual holdings of
properties are not publicly recorded. California wine is produced and
marketed by approximately 800 commercial wineries. However, 8 wineries, E and
J Gallo, Canandaigua, The Wine Group, Sutter Home, Sebastiani, Robert
Mondavi, Heublein and Beringer Wine Estates, account for approximately 79% of
the total California wine shipments in 19976. Of the 800 commercial wineries
(other than those mentioned above), approximately half produce fewer than
5,000 cases per year.
In addition to U.S. producers, there are numerous wine producers in
Europe, South America, South Africa, Australia and New Zealand. All of these
regions export wine into the United States. California grape and wine supply
shortages, especially red wines, have prompted some domestic national brand
marketers to purchase wine from foreign sources. Most imports are bottled
wines; however, some wineries have imported bulk wine for bottling and sale
in the United States. Most of the bulk wine imported for this purpose came
from Chili and France.
As indicated under question 3(d), the Company plans to market its wine
throughout the country through various distributors. It is envisioned that
the name and reputations of Mario Andretti and Robert Pepi, Jr. (the
Company's wine maker) will create unique marketing opportunities and set the
Company's wine apart from other wineries. See "Question 3(d)."
Note: because this Prospectus focuses primarily on details concerning
the Company, rather than the industry in which the Company operates or will
operate, potential investors may wish to conduct their own separate
investigation of the Company's industry to obtain broader insight in
assessing the Company's prospects.
(d) describe specifically marketing strategies the Company is
employing or will employ in penetrating its market or developing a new
market.
The Company's market plan has 3 key elements:
a. to develop and nurture relationships with distributors and
principal customers;
14
<PAGE>
b. insure placement of the product in the proper channels and
markets; and
c. educate and train the sales staff at the distributor and user
facilities.
As indicated above, there is growing demand for wines, especially in
the premium categories. Super premium wine which have an average retail sales
price of approximately $18 per bottle will be the type of wine to be produced
and distributed by the Company. However, in the case of special volume or
promotional issues, lower prices may be provided periodically. The standard
lists of varietals will include Cabernet Sauvignon, Merlot, Chardonnay and
Sauvignon Blanc. Grapes for the latter three varieties will come from the
Company's own vineyards to the extent possible. The Company will occasionally
produce other special wines as they become available on the bulk market but
will generally not arrange for a long term grape contracts or plant other
varieties on its property.
The Company will aim consumer distributorship outlets at finer
restaurants, fine wine and liquor stores, Andretti Wine Club Members and
retail sales from the Wine Tasting. As wine production grows, the Company
will also look to chain liquor stores and grocery chains for distribution.
It is anticipated that the consumer of the Company's wine will be fine
food and wine connoisseurs who enjoy dining out with a bottle of wine with
dinner. However, the Company will encourage wine by glass presentations in
the bar areas of the restaurant and will make the price concessions for that
privilege. While many Napa Valley wineries concentrate 40% to 60% of the
business in California, the Company intends to distribute not more than 25%
of its wines in California with a significant effort on heavily populated
areas on East Coast and Midwest. Large population areas and cities that host
significant racing events will also be targeted. The Company has targeted
certain areas for initial distribution based on the quality/price of the
wine, the attraction of the Andretti name and demographics. The Company also
looks to areas where fine foods are served, where cosmopolitan atmosphere
exists and where there is a certain level of disposable income for a
significant portion of the population. The Company's initially targeted
segments, by state, are:
<TABLE>
<CAPTION>
STATES BROKER DISTRIBUTOR
------ ------ -----------
<S> <C> <C>
Arizona Multicarte, Dean Wilson Arizona Beverage
Colorado Multicarte To be determined
Connecticut New England Wine Brokers Hartley & Parker
Florida Northern Florida - Mike Paden Lion Wine & Spirits
Illinois Romano Bros.
Indiana Romano Bros.
Louisiana Multicarte, Dwayne Schockley Heritage House,
Reliable Lafayette
Maine New England Wine Brokers Colonial
Massachusetts New England Wine Brokers M. S. Walker
Michigan Kathi Colli AHD Vintners
New Hampshire Jet Wine & Spirits
New Jersey Fedway/Washington Select
New Mexico Multicarte, Dean Wilson Bacchus Distributors
Ohio Superior Beverage
Oklahoma Multicarte, David Messer Gold Medal Marketing
Pennsylvania Common Walker Pennsylvania
15
<PAGE>
Rhode Island New England Wine Brokers Providence Beverage
Texas (Dallas) Multicarte, Rick Sides Republic Beverages
Texas (Houston) Multicarte, Michael Benedetti Republic Beverages
(Heritage House)
Texas Multicarte, Dean Wilson Block Distributing
(San Antonio)
Vermont New England Wine Brokers Calmont Beverage
W. Virginia Leonard George Jo's Globe
Wisconsin Badger Liquor
<CAPTION>
FOREIGN MARKETS
STATES BROKER DISTRIBUTOR
------ ------ -----------
<S> <C> <C>
Japan Mikio Kakihara Sunlit
</TABLE>
The Company is fully licensed, except in the states of Colorado,
Connecticut, Maine, Oklahoma, Pennsylvania, Rhode Island and Vermont (where
applications are pending).
Secondary market states will include California, Colorado, Georgia,
New York, Oregon and Washington. Ultimately, it is the goal of the Company to
expand its distribution to all fifty states, Canada and additional foreign
markets in China and Europe. As indicated above, certain characteristics make
the Company's winery a unique opportunity and set it apart from other
wineries. The prominence of Mario Andretti and Robert Pepi has increased the
interest of distributors who will handle the Company's product. Capitalizing
on the Andretti name, the Company will seek to establish distributorship
relationships with major wholesalers in target areas. In addition, the
Company will use its wine maker and executive staff to visit major
marketplaces and trade shows. The Company will also use Mario Andretti's
continued race circuit stops to raise the level of attention to its products.
The Company will also seek to increase revenues at its hospitality
center, develop an Internet presence, establish a tie to the Andretti racing
web page; promote the product through the Andretti Fan Club and, create
greater sales through business to the wine tasting room and through mail
order techniques.
(e) State the back log of written firm orders for products and/or
services as of the recent date (within the last ninety (90) days) and compare
it with the backlog of a year ago from that date
Not applicable.
(f) State the number of the Company's present employees and the number
of the employees it anticipates it will have in the next 12 months
The Company currently has 4 employees which consist of its chief
executive officer, Mr. Mack Jennings; and 3 supporting staff members. None of
the employees of the Company are covered by any collective bargaining
contracts. In the next 12 months, the Company anticipates expanding its staff
to include the following: (a) visitor center manager; (b) 8-10 part time
visitor center tour guides; (c) one (1) cellar worker/maintenance person; and
(d) and one (1) part time accountant.
(g) Describe generally the principal properties the Company owns
16
<PAGE>
As indicated above, the Company owns a 53 acre parcel in Napa Valley,
California which consists of a 43 acre vineyard as well as a 6,000 square
foot winery, 6,000 square foot hospitality center plus the Company's offices.
(h) Indicate the extent to which the Company's operations depend or
expected to depend on patents, copy rights, trade secrets, know-how, or other
proprietary information.
While the Company's operations are not dependent upon any patents,
trademarks or form of trade secrets, the quality of the Company's products as
with other wineries is dependent upon skills of their winemaker which are
skills developed over many years of wine making. The Company has no formal
contract with its winemaker Mr. Robert Pepi, Jr. and Mr. Pepi is not under
any confidentiality agreement or covenant not to compete. While the loss of
Mr. Pepi would have an adverse short term impact on the Company, the Company
does believe it would be able to retain the services of another competent
winemaker.
(i) Impact of government regulation
The Company is subject to a broad range of federal and regulatory
requirements regarding its operations and practices. The Company's current
operations and its future operations will be subject to regulations governing
the storage and use of fertilizers, fungicides, herbicides, pesticides and
other chemicals. In addition, wine production and sales are subject to
extensive regulation by the Federal Bureau of Alcohol, Tobacco and Firearms,
the California Department of Alcohol and Beverage Control and other state and
federal government authorities that regulate licensing, trade and pricing
practices, labeling, advertising and other activities. (See "RISK FACTORS".)
(j) State the names of any subsidiaries of the Company, their business
purposes and ownership, and indicate which are included in the financial
statements attached hereto
The only subsidiary of the Company is AWG, Inc., a Delaware
corporation, which holds all of the operating assets of the business. AWG,
Ltd., the parent company, is merely a holding company. All activities of both
AWG, Ltd. and AWG, Inc. are reflected on the Company's financial statements.
(k) Summarize material events in the development of the Company during
the past five years or for whatever lesser period the Company has been in
existence
The most significant event is the Company's brief history occurred in
1996 when it acquired the winery and vineyard upon which its business is
presently located.
The second most significant event in the Company's brief history is
the investment in the Company by Messrs. Andretti and Antonini in late 1996
which has provided marketing and operational direction for the Company.
In addition, Mr. Antonini has provided financial resources to the Company.
17
<PAGE>
MILESTONES TO BE ACCOMPLISHED
4(a) If the Company was not profitable during its last fiscal year,
list below, in chronological order, the events which in Management's opinion
must or should occur or the milestones in which in Management's opinion, the
Company must or should reach in order for the Company to become profitable
and indicate the expected manner or the occurrence or the expected method by
which the Company will achieve its milestones.
<TABLE>
<CAPTION>
DATE OR NUMBER OF
MONTHS AFTER THE
EXPECTED MANNER OF RECEIPT OF PROCEEDS
OCCURRENCE OR METHOD WHEN MILESTONE SHOULD
EVENT OR MILESTONE OF ACHIEVEMENT BE ACCOMPLISHED
- ------------------ -------------- ---------------
<S> <C> <C>
Increase of inventory The Company will need to The Company has already
production initially buy wine in bulk from entered into modest contracts
third parties in order to establish with existing grape growers.
a position in the marketplace. As soon as additional funds
In addition, the Company are available, the Company
will have to obtain short and long believes that it would be able to
term contracts with the growers immediately begin entering into to
to acquire grapes which can be additional inventory production
crushed, fermented and stored contracts with grape growers
and ultimately bottled. and distributors of bulk wine.
The Company believes that such
inventory will be available in the
quality demanded by the
Company, with the only issue
being price.
Vineyard development and It is expected that the Company Replanting of the remaining
maintenance. will replant the entire vineyard. acreage will be accomplished in
Replanting will cover a three the Fall of 1998 and Fall of
year period as follows: 12 acres 1999.
in 1997 which has been
accomplished; 16 acres in 1998
and 15 acres in 1999.
Winery construction and The Company already has Construction is substantially
refurbishing program. commenced construction of a completed.
barrel storage facility, a tasting
room and a refurbished
hospitality center.
</TABLE>
(b) State the probable consequences to the Company of delays in
achieving each of the events or milestones within the above time schedule and
particularly the effect of any delays upon the Company's liquidity in view of
the Company's anticipated level of operating costs
In the event the Company is unable to achieve its first milestone of
obtaining additional inventory production, the Company would have only very
limited capability of producing wine from its own vineyard during the
replanting process. It is anticipated that during the replanting process, the
Company will only be able to produce approximately 4,000 or 5,000 cases of
wine from its own grapes which would not be sufficient to fund its ongoing
operating costs. As a result, in the event that the Company is unable to
obtain sufficient inventory production, the Company would have to utilize
proceeds from this Offering that would otherwise be utilized for inventory
production to cover operating costs.
In the event that the Company is unable to proceed with its vineyard
replanting and maintenance program on schedule, the Company would be further
dependent on its ability to obtain grapes from other sources for the
production of wine or forced to increase its acquisition of bulk wines. While
the Company operations can still be profitable without production of wine
with grapes from its own vineyard, the Company would not be able to bottle
its "estate" product which would have an impact on profitability as the
Company is anticipating to be able to produce approximately 1/3 of its
maximum production from its own vineyards.
18
<PAGE>
Finally, in the event that the Company is unable to complete
construction of the additional wine making facilities, tasting room and
hospitality center on a timely basis, the Company would be forced to utilize
other facilities for purposes of making the wine which would negatively
impact profitability and the Company would lose projected revenues on public
tours and special events which would also have a significant negative impact
on revenues.
Note: After reviewing the nature and timing of each event or
milestone, potential investors should reflect upon whether achievement of
each within the estimated time frame is realistic and should assess the
consequences of delays or failure of achievement in making an investment
decision.
COMPANY INDEBTEDNESS
Bank Indebtedness. The Company currently has indebtedness outstanding in
three (3) institutions; one of which is long term. Set forth below is a brief
description of each debt:
Indebtedness To Bar-K, Inc. In Connection With Acquisition Of Winery. In
connection with the acquisition of the winery, the Company executed a
Mortgage Note dated April 12, 1996. The current balance due on that Note is
approximately $1,665,400. The Mortgage Note bears interest at the rate of ten
percent (10%) per annum increasing one percent (1%) per year until it reaches
twelve percent (12%) in the year 2000. The Note is payable interest only
until the year 2002, at which time all principal plus accrued interest is due
and payable.
Vintage Bank. In July of 1997, the Company obtained a $200,000 line of credit
from Vintage Bank of Napa, California which is secured by the Company's
accounts receivable, inventory, supplies and general intangibles. The line of
credit requires monthly payments of interest only at the rate of 1% over the
Vintage Bank borrowing rate as adjusted from time to time. The current
interest rate on the line of credit is 9.5%. The principal portion of the
line of credit will be due and payable no later than July 15, 1998. Pursuant
to the terms of the line of credit, the Company is eligible to borrow up to
80% of eligible accounts receivable (those accounts receivable that are 90
days or less) plus 60% of the Company's inventory value, provided, however,
in no event may the line of credit exceed $200,000. Currently, the Company
has utilized $199,000 of the line of credit.
Bank of Bloomfield Hills. The Company has an outstanding loan from Bank of
Bloomfield Hills in Bloomfield Hills, Michigan, in the amount of $1,335,000.
The loan which was obtained in January 1997 bears interest at the rate of .5%
in excess of the prime rate of Citibank, N.A. per annum is payable interest
only on a monthly basis. The current rate is 9% per annum. Interest is
payable monthly with all principal due and payable no later than December 23,
1998. The loan has been guaranteed by Joseph Antonini, Chairman of the
Company.
Indebtedness To Related Parties. The Company currently has outstanding
indebtedness to various related parties in the aggregate amount of $205,000.
This indebtedness will be partially repaid from the proceeds of the Offering.
A brief description of the indebtedness is as follows:
Demand Notes. The Company has borrowed $35,000 each from Mack Jennings, the
President and Chief Executive Officer of the Company and Robert Pepi, Sr.,
the father of Robert Pepi, Jr., the Company's winemaker. Each Note provides
for interest payments of 9% per annum payable monthly and permits the holder
to call the Notes at any time. The Note in favor of Mr. Jennings was executed
on August 18, 1997 and the Note in favor of Robert Pepi, Sr. was executed on
August 19, 1997. These notes will be partially repaid from the proceeds of
this Offering.
Term Notes. The Company has borrowed the sum of $85,000 from Mario Andretti,
the Vice Chairman of the Company and $50,000 from Sports Management Network,
Inc., a company controlled by John P. Caponigro, a Director of the Company
and its Secretary and General Counsel. Each of the Notes provide for interest
payments of 9% per annum payable monthly with the principal due upon demand
of the holder. Two (2) notes were executed by the Company on August 25, 1997
and one (1) note on September 23, 1997. These notes will be partially repaid
from the proceeds of this Offering.
Bridge Loan Financing. Pursuant to a note dated March 2, 1998, Colin Frank
Riseam (hereinafter referred to as "The Bridge Lender") loaned the Company
$50,000. The note bears interest at 6% per annum which is payable quarterly
commencing June 2, 1998 and each quarter thereafter until paid. Principal and
all accrued interest is due on the earlier of (a) January 1, 1999; (b)
closing date of this Offering or (c) the completion of any other debt or
equity offering in the principal amount of $500,000 or more. The loan is
guaranteed by AWG, Inc., the Company's wholly owned subsidiary. In addition
to the interest payment, the Bridge Lender has received 500,000 shares of
Preferred Stock, which is being registered as part of this Offering. The
bridge loan financing was placed by the Underwriter who received a commission
of 10% of the proceeds of the financing together with a 3% non-accountable
expense allowance.
19
<PAGE>
OFFERING PRICE FACTORS
5. What were net, after tax earnings for the last fiscal year?
Total loss of ($ 715,405) or ($0.13) per share.
6. If the Company had profits, show offering price as a multiple of earnings.
N/A
7. (a) What is the net tangible book value of the Company?
$270,377 or $0.54 per share computed solely with regard to the 500,000
shares of Preferred Stock issued to the Bridge Lender. The per share price has
been determined arbitrarily by the underwriter and management based upon the
financial needs of the Company.
(b) State the dates on which the Company sold or otherwise issued
securities during the last twelve (12) months.
In connection with the bridge loan financing described above, the
Company issued 500,000 shares of Preferred Stock to the Bridge Lender. This
issuance was made to a single investor who has no presence in the United
States. In addition, three investors--two of which are directors of the
Company--entered into an agreement in December, 1996 pursuant to which they
contributed an aggregate of $350,000 to the Company in exchange for a
yet-to-be-authorized class of preferred stock. The three investors were:
Joseph Antonini, Bruce Williams (each of which has been a Director of the
Company) and Carl Haas an associate of Messrs. Antonini and Andretti who
declined to become a director. In November, 1997, Messrs. Antonini, Williams
and Haas decided to acquire Common Stock of the Company in lieu of Preferred
Stock in order to facilitate this Offering. Finally, Mario Andretti, a
director of the Company agreed to exchange accrued but unpaid royalty fees
for common stock in the Company. (See "MANAGEMENT RELATIONSHIPS, TRANSACTIONS
AND REMUNERATION")
8. (a) What percentage of the outstanding Preferred Shares of the
Company will the investors in this Offering have?
Investors will own an aggregate of 50% of the issued and outstanding
shares of Preferred Stock assuming all of the shares of Preferred
Stock offered hereby are sold. If only the minimum amount is sold,
Investors will own 37.5% of issued and outstanding Preferred Stock.
(b) What post-offering value has management implicitly attributing to
the entire Company by establishing the price per security set
forth herein? Based solely on the Preferred Stock and assuming
all 500,000 shares of Preferred Stock are sold, the post offering
value implicitly attributed to the entire Company would be
$10,000,000 (ten million dollars). Assuming only the minimum
offering amount is sold, such value would be $8,000,000 (eight
million dollars).
It should be noted in this regard that the current book value of the
Company is only $422,780. Assuming all 500,000 shares of Preferred
Stock offered hereby are sold with net proceeds of $4,120,000, the net
tangible book value per share computed solely with respect to the
Preferred Stock would be $4.54 per share. This will result in
immediate dilution to purchasers of the Preferred Stock offered hereby
of $5.46 (or 54.6%). In the event that only the minimum offering
amount is sold with net proceeds of $2,380,000, the net tangible book
value per share would be $3.50, which would result in immediate
dilution to the holders of the Preferred Stock purchased thereby of
$6.50 (or 65.0%) per share. The holder of the Preferred Stock issued
in connection with the bridge loan financing would have an immediate
gain of $2,270,000 in the event that the maximum amount offered is
sold, and an immediate gain of $1,750,000 in the event that the
minimum offering amount is sold. The holder of the Preferred Stock
issued in connection with the bridge and loan financing did not pay
any separate consideration for such shares.
20
<PAGE>
USE OF PROCEEDS
9. (a) The following table sets forth the use of the proceeds from this
Offering:
<TABLE>
<CAPTION>
If Minimum Sold If Maximum Sold
--------------- ---------------
<S> <C> <C>
Total Proceeds $3,000,000 $5,000,000
Less: Offering Expenses 300,000 500,000
Commissions & Finders Fees
Legal and Accounting 205,000 205,000
Copying and Advertising 25,000 25,000
Other (Specify):
Underwriting Miscellaneous Expenses 90,000 150,000
Net Proceeds from Offering $2,380,000 $4,120,000
Use of Net Proceeds
Repayment of Loans(3) $ 550,000 $ 550,000
Inventory Production(4) 600,000 1,000,000
Equipment(5) 400,000 400,000
Reserve for Operating Deficits(6) 830,000 2,170,000
Total Use of Net Proceeds $2,380,000 $4,120,000
<CAPTION>
(b) If there is no minimum amount of proceeds that must be raised
before the Company may use the proceeds of the Offering, describe
the order of priority in which the proceeds set forth above in
the column "If Maximum Sold" will be used. N/A
NOTE: After reviewing the portion of the Offering allocated to the payment of
Offering expenses, and to the immediate payment to management and promoters
of any fees, reimbursements, past salaries or similar payments, a potential
investor should consider whether the remaining portion of his investment,
which would be that part available for future development of the Company's
business and operations, would be adequate.
<FN>
- --------
3 This reflects repayment of the bridge loan financing in the
principal amount of $50,000 together with an aggregate of
$500,000 in repayment of loans guaranteed by related parties.
4 Reflects acquisition of wine grapes and bulk juice.
5 Reflects acquisition of crush pad, fermentation tanks and storage
barrels.
6 Assuming cash flow deficits were equal to those incurred in
fiscal year 1997, the reserve would be sufficient for
approximately an 18 month period if the minimum offering amount
is achieved and for a significantly greater period of time than
if the maximum offering amount if achieved. Proceeds not utilized
to fund operating deficit would be held in reserve for the
acquisition of additional vineyards.
</TABLE>
21
<PAGE>
10. (a) If material amounts of funds from sources other than this
Offering are to be used in conjunction with the proceeds from
this Offering, state the amounts and sources of such other funds,
and whether funds are firm or contingent. If contingent, explain.
N/A
(b) If any material part of the proceeds is to be used to discharge
indebtedness, describe the terms of such indebtedness, including
interest rates. If the indebtedness to be discharged was incurred
within the current or previous fiscal year, describe the use of
the proceeds of such indebtedness.
See Question 4 "Company Indebtedness". The proceeds of the
indebtedness was used to fund ongoing operations and to fund a
portion of the construction of improvements to the winery.
(c) If any material amount of the proceeds is to be used to acquire
assets, other than in the ordinary course of business, briefly
describe and state the cost of the assets and other material
terms of the acquisitions. If the assets are to be acquired from
officers, directors, employees or principal stockholders of the
Company or their associates, give the names of the persons from
whom the assets are to be acquired and set forth the cost to the
Company, the method followed in determining the cost, and any
profit to such persons. N/A
(d) If any amount of the proceeds is to be used to reimburse any
officer, director, employee or stockholder for services already
rendered, assets previously transferred, or monies loaned or
advanced, or otherwise, explain:
Approximately $500,000 of the proceeds of the Offering will be
utilized to pay loans made by, or guaranteed by the Directors of
the Company.
11. Indicate whether the Company is having or anticipates having within
the next 12 months any cash flow or liquidity problems and whether or
not it is in default or in breach of any note, loan, lease or other
indebtedness or financing arrangement requiring the Company to make
payments. Indicate if a significant amount of the Company's trade
payables have not been paid within the stated trade term. State
whether the Company is subject to any unsatisfied judgements, liens or
settlement obligations and the amounts thereof. Indicate the Company's
plans to resolve any such problems.
The Company anticipates that, upon completion of this Offering, the
Company will have sufficient funds to allow it to achieve
profitability by the end of 1998 and will have a sufficient reserve
for cash flow deficits to cover any losses. The Company is currently
not in default or in breach of any note, loan or lease, and it is not
anticipated that any default will occur assuming successful completion
of this Offering. In this regard, the Company secured cooperation of
its vendors who will be paid in full from the proceeds of this
Offering. In addition, indebtedness to related parties have either
been extended or have been termed demand notes for which no demand for
payment has been made. (See "MANAGEMENT, DISCUSSION AND ANALYSIS OF
CERTAIN FACTORS")
12. Indicate whether proceeds from this Offering will satisfy the
Company's cash requirements for the next 12 months and whether it will
be necessary to raise additional funds. State the source of additional
funds, if known.
(See "MANAGEMENT, DISCUSSION AND ANALYSIS OF CERTAIN FACTORS")
22
<PAGE>
CAPITALIZATION
13. Indicate the capitalization of the Company as of the most recent
balance sheet date (adjusted to reflect any subsequent stock splits,
stock dividends, recapitalization or refinancing) and as adjusted to
reflect the sale of the minimum and maximum amount of securities in
this Offering and the use of the net proceeds therefrom:
<TABLE>
<CAPTION>
Amount Outstanding
As of As of As Adjusted As Adjusted
12/31/97) 3/31/98 Minimum Maximum
--------- ------- ----------- -----------
<S> <C> <C> <C> <C>
Debt:
Short term debt (average
interest rate 9.1%) $ 1,454,000 $ 1,789,000 $ 1,239,000 $ 1,239,000
----------- ----------- ----------- -----------
Long-term debt (average
interest rate 10%) 1,665,400 $ 1,665,400 1,665,400 1,665,400
----------- ----------- ----------- -----------
Total debt 3,119,400 $ 3,454,400 2,904,400 2,904,400
----------- ----------- ----------- -----------
Preferred stock-par or stated
value
Series A Preferred Stock -0- -0- 2,380,000 4,120,000
----------- ----------- ----------- -----------
Common stock - Par or stated value 7,157 7,157 7,157 7,157
----------- ----------- ----------- -----------
Additional paid in capital 2,112,473 2,112,473 2,112,473 2,112,473
----------- ----------- ----------- -----------
Additional capital-stock awards 155,000 155,000 155,000 155,000
----------- ----------- ----------- -----------
Additional Capital-Underwriter Warrants
($.0001 per warrant) -0- -0- 3 5
----------- ----------- ----------- -----------
Receivable from stockholder (75,000) (75,000) (75,000) (75,000)
----------- ----------- ----------- -----------
Retained earnings (deficit) (1,559,348) (1,776,850) (1,776,850) (1,776,850)
----------- ----------- ----------- -----------
Total stockholders equity (deficit) 640,282 442,780 2,802,783 4,542,785
----------- ----------- ----------- -----------
Total Capitalization $ 3,759,682 $ 3,877,180 $ 5,707,183 $ 7,447,185
=========== =========== =========== ===========
<CAPTION>
Number of Preferred shares
authorized to be outstanding:
Number of Par Value
Class of Preferred Shares Authorized Per Share
------------------ ----------------- ---------
<S> <C> <C>
Series A 6% Preferred 1,600,000 $.001
1,600,000
</TABLE>
Number of common shares authorized: 50,000,000 shares. Par or stated value
per share, if any: $.001
Number of shares reserved to meet conversion requirements or for the issuance
upon exercise of options, warrants or rights: 2,000,000 shares.
23
<PAGE>
DESCRIPTION OF SECURITIES
14. The securities being offered hereby are:
[ ] Common Stock
[ x ] Preferred or Preference Stock
[ ] Notes or Debentures
[ ] Units of two or more types of securities, composed of:
______________________________________________________
[ ] Other: __________________________________________________
15. These securities have:
Common Stock
Yes No
[ ] [ x ] Cumulative voting rights
[ ] [ x ] Other special voting rights
[ ] [ x ] Preemptive rights to purchase in new issues of shares
[ x ] [ ] Preference as to dividends or interest--Preferred
[ x ] [ ] Preference upon liquidation--Preferred
[ ] [ ] Other special rights or preferences___________________
(specify):
16. Are the securities convertible? [ ] Yes [x] No
If so, state the conversion price or formula. ________________.
Date when conversion becomes effective:__/__/___
Date when conversion expires: __/__/___
17. (a) If securities are notes or other types of debt securities: N/A
18. If securities are Preference or Preferred Stock: Are unpaid dividends
cumulative? [x] Yes [ ] No
Are securities callable? [x] Yes [ ] No Explain: The Company may
redeem the Preferred Stock at such price and upon such terms as may be
agreed upon by the Company and shareholders owning a majority of the
outstanding shares of Preferred Stock.
NOTE: Attached to this prospectus are copies of the Articles of
Incorporation of the Company that give rise to the rights of
holders of the Preferred stock being offered.
19. If securities are capital stock of any type, indicate restrictions on
dividends under loan or other financing arrangements or otherwise:
N/A
20. Current amount of assets available for payment of dividends (if
deficit must be first made up, show deficit in parenthesis): Not
applicable as dividends are payable solely with shares of Preferred
Stock.
PLAN OF DISTRIBUTION
21. The selling agents (that is, the persons selling the securities as
agent for the Company for a commission or other compensation) in this
Offering are:
Name: Klein Maus and Shire, Inc. Name:___________________________
Address: 110 Wall Street Address:________________________
New York, NY 10005 ________________________________
Telephone No (212) 785-4545 Telephone No ( )______________
The sole officers and directors of the underwriter are: Asim Kahli and
Ali Mohammed Kahn.
22. Klein Maus and Shire, Inc. (the "Underwriter") will offer the shares
of Preferred Stock on a best efforts basis for which it will receive a
sales commission equal to 10% of the proceeds of the Offering,
$300,000 in the event the minimum amount is sold, and $500,000 in the
event the maximum offering amount is sold. In addition, the
24
<PAGE>
Underwriter is entitled to a non-accountable expense allowance equal
to 2% of the proceeds of the Offering ($90,000 in the event the
minimum Offering is sold, and $150,000 in the event the maximum
Offering is sold) of which $25,000 has been paid by the Company. In
addition, the Underwriter will receive warrants to purchase up to 10%
of the number of shares of Preferred Stock sold by the Underwriter at
a price of $.0001 per warrant. The warrants may be exercised at any
time during the four (4) year period commencing one year after the
issuance of the Preferred Stock offered hereby at an exercise price of
$16 per share. The Underwriter has the right to have the warrants and
the underlying shares of Preferred Stock registered any time the
Company files a registration statement and, in addition, may demand
one additional registration at any time at their discretion.
The Underwriter has the right to designate one person to be a member
of the Board of Directors for up to three (3) years after the
effective date of this registration statement or, alternatively, the
right to designate an individual to attend all board meetings. As of
the date of this Prospectus, the Underwriter has not designated an
individual to be a member of the Board of Directors or be a
representative to attend board meetings.
For a period of three (3) years after the effective date of the
registration statement, the Underwriter will have a right of first
refusal to participate in any future securities Offering conducted by
the Company. In addition, the Company may not offer any equity stock
other than the 2 million shares authorized under the current Stock
Option Plans and such additional stock as is necessary to compensate
the Board of Directors, without the prior consent of the Underwriter.
Finally, current officers and directors of the Company cannot sell
their Common Stock for a period of 24 months after the effective date
of this registration statement without the consent of the Underwriter.
500,000 shares are also being registered for the account of Colin
Frank Riseam who is currently the sole holder of Preferred Stock of
the Company. Mr. Riseam has never held any office or other position
with the Company nor has he had any other relationship with the
Company other than in connection with loaning the Company funds as
disclosed under Question 4 - Company Indebtedness. No shares will be
sold on behalf of Mr. Riseam by the underwriter until the Company
Offering has been completed.
23. Describe any material relationships between any of the selling agents
or finders and the Company or its management. N/A
24. If this Offering is not being made through selling agents, the names
of persons at the Company through which this Offering is being made:
Name: N/A
25. If this Offering is limited to a special group, such as employees of
the Company, or is limited to a certain number of individuals (as
required to qualify under Subchapter S of the Internal Revenue Code)
or is subject to any other limitations, describe the limitations and
any restrictions on resale that apply: N/A
26. (a) Name, address and telephone number of independent bank or savings
and loan association or other similar depository institution acting as
escrow agent if proceeds are escrowee until minimum proceeds are
raised: Until such time as a minimum offering amount is achieved, all
investor funds will be held in escrow at Chase Manhattan Bank whose
address and telephone number is _________________________________.
(b) Date which funds will be returned by escrow agent if minimum
proceeds are not raised. In the event the Minimum Offering Amount is
not achieved by _____________________, [30 days after effective date
of registration statement] as such date may be extended by an
additional 30 days, all funds will be returned to investors without
interest.
<PAGE>
27. Explain the nature of any resale restrictions on presently outstanding
shares, and when those restrictions will terminate, if this can be
determined: There are no restrictions on any outstanding shares of
Preferred Stock. However, shares of Common Stock held by officers and
directors are restricted by agreement with the Underwriter such that
no officer or director may sell any stock for a period of twenty-four
months without the written consent of the Underwriter. Moreover any
common stock issuable pursuant to the Company Stock Option Plans will
be non-registered stock and, therefore, will be restricted by
applicable securities laws. In addition, any common stock to be sold
through Rule 144 under the Securities Act of 1933, as amended, or
otherwise by the holders of the common stock shall be executed through
the underwriter.
NOTE: Equity investors should be aware that unless the Company is able
to complete a further public offering or the Company is able to be
sold for cash and merged with a public company that their investment
in the Company may be illiquid indefinitely.
25
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND REDEMPTIONS
28. If the Company has within the last five (5) years paid dividends, made
distributions upon its stock or redeemed any securities, explain how
much and when: N/A
NOTE: After reviewing the amount of compensation to the selling agents or
finders for selling the securities, and the nature of any relationship
between the selling agents or finders and the Company, a potential investor
should assess the extent to which it may be inappropriate to rely upon the
recommendation by the selling agents or finders to buy the securities.
OFFICERS AND KEY PERSONNEL OF THE COMPANY
29. Chief Executive Officer: Title: President
Name: Mack H. Jenning Age: 55
Office Street Address: 4162 Big Ranch Road, Napa, CA 94558
Telephone No.: (707) 259-6777
Name of employers, titles and dates of positions held during past five
years with an indication of job responsibilities:
President of the Company - 1996 to Present
Stags' Leap Winery - Controller - 1996
Pokka Beverages, Inc., General Manager, Executive Vice President,
Director 1989-1996
Education (degrees, schools, and dates):
B.A. Westminster College, Fulton, MO 1964
M.B.A. (with honors) University of Oregon, 1970
Also a Director of the Company : [x] Yes [ ] No
Indicate amount of time to be spent on Company matters if less than
full time.
30. Chief Operating Officer: N/A Title:_________________
Name: Age:
Office Street Address: Telephone No.:
( ) -
31. Chief Financial Officer Title: President
Name: Mack H. Jennings Age: 55
Office Street Address: 4162 Big Ranch Road, Napa, CA 94558
Telephone No.: (707) 259-6777
Name of employers, titles and dates of positions held during past five
years with an indication of job responsibilities:
President of the Company - 1996 to Present
Stags' Leap Winery - Controller - 1996
Pokka Beverages, Inc., General Manager, Executive Vice President,
Director 1989-1996
Education (degrees, schools, and dates):
B.A. Westminster College, Fulton, MO 1964
M.B.A. (with honors) University of Oregon, 1970
Also a Director of the Company : [x] Yes [ ] No
Indicate amount of time to be spent on Company matters if less than
full time.
26
<PAGE>
32. Other Key Personnel:
(a) Name: John P. Caponigro Age: 41
Title: Secretary, General
Counsel
Office Street Address: 36800 Woodward Ave.,Suite 239,
Bloomfield Hills, MI 48304
Telephone No.: (248) 647-6860
Names of employers, titles and dates of positions held during past
five years with an indication of job responsibilities:
Principal of The Law Firm of Frasco and Caponigro, P.C. from 1989 to
present.
President and CEO of Sports Management Network, a sports and
entertainment legal and marketing firm based in Bloomfield Hills,
Michigan; from 1989 to present.
Education (degrees, schools, and dates):
BBA University of Toledo 1978
MBA University of Toledo 1982
JD University of Toledo 1982
Also a Director of Company? [X] Yes [ ] No
Indicate amount of time to be spent on Company matters if less than
full time:
As needed, less than 10 hours per week.
(b) Name: Robert L. Pepi, Jr Age: 47
Title: Winemaker
Office Street Address: 4162 Big Ranch Road, Napa, CA 94558
Telephone No.: (707) 259-6777
Names of employers, titles and dates of positions held during
past five years with an indication of job responsibilities:
Winery Consultant - 1995 - Present
Stinson Lane, Ltd. (winery) - General Manager of
California Operations - 1991-1995
Robert Pepi Winery - General Partner and General Manager -
1980-1991
Education (degrees, schools, and dates):
B.A. Pomona College 1972
University of California at San Francisco 1975-1976 - Bus/Acctg.
Courses
University of California at Davis - 1980-1983 -
Enology and Vitacultural Courses
The Wine Lab - 1981-1984 - Enology Courses
Also a Director of Company? [ ] Yes [x] No
Indicate amount of time to be spent on Company matters if less
than full time:
Approximately 1/2 time.
DIRECTORS OF THE COMPANY
33. Number of Directors: 5. If Directors are not elected annually, or are
elected under a voting trust or other arrangement, explain:
34. Information concerning outside or other Directors (i.e. those not
described above):
(a)Name: Joseph E. Antonini Age: 56
Office Street Address: 1800 West Maple Road, Troy, MI 48084
Telephone No.: (248) 614-3880
27
<PAGE>
Names of employers, titles and dates of positions held during past
five years with an indication of job responsibilities:
Consultant and Private Investor
Former Chairman, President and CEO of Kmart Corporation - 1986 - 1995
held various positions at Kmart Corporation - 1964-1986
Chairman of the Board - AWG, Ltd. - 1996 - Present
Director - Shell Oil Company
- Ziebart
- American Speedy Printing
Education (degrees, schools, and dates):
B.S. in Business Administration from West Virginia University in 1964
(b)Name: Mario Andretti Age: 58
Office Street Address: 53 Victory Lane, Nazareth, PA 18064
Telephone No.: (610) 759-5118
Names of employers, titles and dates of positions held during past
five years with an indication of job responsibilities:
Race car driver: 1956 - present
Consultant and private investor: 1996 - Present
Education (degrees, schools, and dates):
N/A
(c)Name: Bruce Williams Age: 37
Office Street Address: 141 West Jackson, Suite 4220-B,
Chicago, IL 60604
Telephone No.: (312) 341-7370
Names of employers, titles and dates of positions held during past
five years with an indication of job responsibilities:
Since 1982, Mr. Williams has been a market maker at the Chicago Board
of Trade and specializes in agricultural products. Since 1988, he has
been a full member of the Chicago Board of Trade and a principal of
Williams Trading, a commodities trading company.
Vice Chairman of Chicago Board of Trade, Membership Committee
(1996 - present)
Chairman of the Dow Jones Futures Committee (1997-1998)
Education (degrees, schools, and dates):
N/A
35. (a) Have any of the Officers or Directors ever worked for or managed a
company (including a separate subsidiary or division of a larger enterprise)
in the same business as the Company?
[x] Yes [ ] No
Explain: Mr. Jennings previously served as General Manager, Executive Vice
President and Director of Pokka Beverages, Inc. from 1989 to 1996 and was
Controller of Stags' Leap Winery during a portion of 1996.
(b) If any of the Officers, Directors or other key personnel have ever
worked for or managed a company in the same business or industry as the
Company or in a related business or industry, describe what precautions, if
any, (including the obtaining of releases or consents from prior employers)
have been taken to preclude claims by prior employers for conversion or theft
of trade secrets, know-how or other proprietary information.
28
<PAGE>
Mr. Jennings is not subject to any noncompetition Agreement. The
Company is not using any proprietary information obtained from his prior
employers.
(c) If the Company has never conducted operations or is otherwise in
the development stage, indicate whether any of the Officers or Directors has
ever managed any other company in the start up or development stage and
described the circumstances, including relevant dates. N/A
(d) If any of the Company's key personnel are not employees but are
consultants or other independent contractors, state the details of their
engagement by the Company.
Robert Pepi is an independent contractor who is working without a
written contract. He is compensated at the rate of $2,000 per month. He has
also been awarded 25,000 shares of the Company's Common Stock.
(e) If the Company has key man life insurance policies on the any of
its Officers, Directors or key personnel, explain, including the names of the
persons insured, the amount of insurance, whether the insurance proceeds are
payable to the Company and whether there are arrangements that require the
proceeds to be used to redeem securities or pay benefits to the estate of the
insured person or a surviving spouse. N/A
36. If a petition under the Bankruptcy Act or any State insolvency law was
filed by or against the Company or its Officers, Directors or other key
personnel, or a receiver, fiscal agent or similar officer was appointed by a
court for the business or property of any such persons, or any partnership in
which any of such persons was a general partner at or within the past five
years, or any corporation or business association of which any such person
was an executive officer at or within the past five years, set forth below
the name of such persons, and the nature and date of such actions. N/A
PRINCIPAL STOCKHOLDERS
37. Principal owners of the Company (those who beneficially own directly
or indirectly 10% or more of the common and Preferred Stock presently
outstanding) starting with the largest Common Stockholder. Include
separately all Common Stock issuable upon conversion of convertible
securities (identifying them by asterisk) and show average price per
share as if conversion has occurred. Indicate by footnote if the price
paid was for a consideration other than cash and the nature of any
such consideration.
<TABLE>
<CAPTION>
COMMON STOCK
Name Average No. of Shares
Office Street Address Price Held After
Telephone Number Per Shares % of Offering if % of
Principal Occupation Share Now Held Total All Securities Sold Total
- -------------------- ------- -------- ----- ------------------- -----
<S> <C> <C> <C> <C> <C>
Mario Andretti $ .19-.33 1,944,211 24.38 1,944,211 24.38
53 Victory Lane
Nazareth, PA 18064
(610) 759-5118
Race Car Driver; Investor
Joseph Antonini $ .19-.33 1,196,158 15 1,196,158 15
1800 West Maple Road.
Troy, MI 48084
(248) 614-3880
Consultant, Investor
Bruce Williams $ .19-.33 884,211 11.09 884,211 11.09
141 West Jackson
Suite 4220-B
Chicago, IL 60604
Commodities trader; investor
John P. Caponigro $ .19-.27 284,211 3.56 284,211 3.56
26800 Woodward Avenue
Suite 239
Bloomfield Hills, MI 48304
Attorney; Consultant
29
<PAGE>
Mack Jennings $.58 170,000 2.57 170,000 2.57
4162 Big Ranch Road $.25* 35,000 35,000
Napa, CA 94558
President of the Company
<FN>
*Assumes exercise of options to purchase 35,000 shares at $0.25 per share.
</TABLE>
<TABLE>
<CAPTION>
PREFERRED STOCK
Name Average No. of Shares
Office Street Address Price Held After
Telephone Number Per Shares % of Offering if % of
Principal Occupation Share Now Held Total All Securities Sold Total
- -------------------- ------- -------- ----- ------------------- -----
<S> <C> <C> <C> <C> <C>
Colin Frank Riseam -0- 500,000 100 500,000 50
110 Park Road
Hampton Hill
England TW 12 1HR
</TABLE>
38. Number of shares beneficially owned by Officers and Directors as a
group: Before Offering: 4,478,791 (56.17% of total outstanding)
MANAGEMENT RELATIONSHIPS, TRANSACTIONS AND REMUNERATION
39. (a) If any of the Officers, key personnel or principal stockholders
are related by blood or marriage, please describe. N/A
(b) In connection with their initial acquisition of stock in the
Company, Messrs. Antonini and Andretti are currently indebted to
the Company in the amount of $84,190 each. The loan from Mr.
Antonini is recorded in the Company's financial statements as a
receivable recorded in equity. The other note is included in
amounts due from stockholders.
The Company has entered into an informal oral consulting
agreement with Joseph Antonini pursuant to which Mr. Antonini has
agreed to provide consulting services to the Company.
Compensation for such consulting services shall be $50,000 per
year payable in Common Stock of the Company as of the end of each
calendar year. The stock will be valued based on the trading
price of the stock as of December 31, of each year. Subject to
election by the Shareholders on an annual basis, Mr. Antonini has
also agreed to serve as Chairman of the Board of the Company at
no additional compensation. There is no minimum or maximum amount
of time in which Mr. Antonini has agreed to devote to the
Company's business. Currently, Mr. Antonini and the Company
estimate that he devotes approximately 20 hours per week to
Company affairs. There is no assurance that he will continue to
devote this amount of time to the Company and he is under no
obligation to do so.
In addition, in 1998 the Company entered into a revised licensing
agreement with Mario Andretti to utilize the name and image of
Mr. Andretti in connection with the marketing of the Company's
products. The term of the License Agreement is indefinite unless
otherwise terminated for cause (as defined below). The License is
exclusive as to the business and products of the Company and the
territory is world wide. Pursuant to the License Agreement, Mr.
Andretti has agreed to participate in advertising and promotional
activities on behalf of the Company including, but not limited
to, radio, television and print media advertising spots, trade
relations activities and personal appearances. The Company will
pay all expenses of Mr. Andretti including, if requested by Mr.
Andretti, the expenses of his personal aircraft. Mr. Andretti
will make himself available at various auto race venues and will
provide the Company with his traveling itinerary so that the
Company can coordinate promotional activities.
In addition, Mr. Andretti shall receive a royalty equal to 5% of
the gross revenues and sales of all products bearing his name or
likeness. As to all other products sold by the Company, Mr.
Andretti shall be entitled to the lesser of 2% of Company profits
on all other wine sales or $150,000 per year. In the event of the
death of Mr. Andretti, the Company can either negotiate similar
agreements with his son, Michael or at its option, reduce royalty
payments by 25%.
Mr. Andretti may terminate the Agreement for cause which is
defined to include failure to make royalty payments, solvency of
the Company, breach of Agreement, use of Mr. Andretti's likeness
or name on any product without his prior consent or the failure
to maintain product liability insurance. In addition, subject
30
<PAGE>
to approval by the shareholders on a yearly basis, Mr. Andretti
shall be entitled during the term of the Agreement to a position
on the Company's Board of Directors and to be compensated at the
same rate as other Directors.
Finally, in exchange for legal consulting services, Mr. Caponigro
has been granted 100,000 shares of the Company's Common Stock at
no cost. Mr. Caponigro is under no obligation to continue to
provide legal services for the Company in connection with the
grant of the stock.
(c) If any of the Company's Officers, Directors, key personnel or 10%
stockholders has guaranteed or co- signed any of the Company's
bank debt or other obligations, including any indebtedness to be
retired from the proceeds of this Offering, explain and state the
amounts involved.
Joseph Antonini, the Chairman of the Board of the Company has
guaranteed $950,000 of the Company's indebtedness to Bank of
Bloomfield Hills, Michigan.
In December 1996, Messrs. Joseph Antonini, Bruce Williams (each
of whom are Directors of the Company) and Carl Haas loaned the
Company an aggregate amount of $350,000 in exchange for the right
to receive Convertible Preferred Stock of the Company at such
time as such stock was authorized by the shareholders. Such
Preferred Stock would have been Convertible into Common Stock of
the Company at any time the Company conducted a public offering
of its Common Stock at a price equal to eighty (80%) percent of
the contemplated Offering price per share. Since the Company has
no plans to offer its Common Stock and in order to alleviate the
debt burden of the Company, Messrs. Antonini, Williams and Haas
agreed to convert their debt into Common Stock at a price of $.33
per share which approximated the trading price of the stock at
the time of the conversion in early December 1997.
In addition, Mario Andretti, a Director of the Company, exchanged
his right to receive $220,000 worth of royalties for the years
1995 and 1996 for Common Stock of the Company at $.33 per share
in early December 1997.
40. (a) List all remuneration by the Company to Officers, Directors and
key personnel for the last fiscal year:
<TABLE>
<CAPTION>
Cash Other
---- -----
<S> <C> <C>
Chief Executive Officer: Mack Jennings $65,000 $ 58,000(1)
Key Personnel: Robert Pepi, Jr. $24,000 $ 6,750(1)
Others: Joseph Antonini $ -0- $ 50,000(2)
-------
Mario Andretti $ -0- $ 35,000(2)
-------
John P. Caponigro $ -0- $ 62,000(2)
-------
Bruce Williams $ -0- $ 35,000(2)
-------
Total $89,000 $246,750(2)
======= ==========
<FN>
1 Estimated fair market value of 100,000 shares granted to Mack
Jennings and 25,000 shares granted to Robert Pepi. On January 13,
1998, Mr. Jennings' salary was increased to $75,000 per annum and
he was granted a bonus of $20,000 contingent upon the Company
reaching profitability during 1998. In addition, in 1998 Mr.
Jennings was granted options to purchase 35,000 shares of the
Company's Common Stock at an exercise price of $0.25 per share.
2 All the Directors are paid in Common Stock of the Company.
Payment is made as of December 31st of each year based on the
fair market value of the Common Stock of the Company as of that
time. In addition, in exchange for legal consultation services
provided during 1997, Mr. Caponigro was issued 100,000 shares of
the Company's Common Stock. Such stock was valued at $27,000.
</TABLE>
31
<PAGE>
<TABLE>
<S> <C> <C>
Officers, Directors and Key Personnel as
a group (6 persons) $65,000 $246,750
</TABLE>
(b) The Company currently has an Employment Agreement with Mack
Jennings as its President and Chief Executive Officer. The
Employment Agreement which was executed on January 1, 1997 is
for a term of 1 year renewable annually thereafter. In calendar
year 1998, Mr. Jennings is entitled to a base salary of $75,000
per annum plus a bonus of $20,000 which is contingent upon the
Company achieving profitability in 1998. As a result, if the
Company achieves profitability as determined by the Company's
financial statements for the year ended December 31, 1998, Mr.
Jennings will be entitled to a bonus without regard to the
amount of profitability. Bonus arrangements, if any, for future
years will be determined by negotiation between Mr. Jennings and
the Company's Board of Directors. In addition to a salary, Mr.
Jennings will be entitled to participate in any health insurance
provided to employees of the Company, of which none is currently
available. Mr. Jennings shall be entitled to 1 week of vacation
during his first year of employment, 2 weeks of vacation during
years 2-5, and 3 weeks of vacation thereafter. Pursuant to the
terms of the Employment Agreement, Mr. Jennings was granted
100,000 shares of the Common Stock which vested immediately. In
the event that the contract is terminated for any reason other
than for breach of the contract by the Company, Mr. Jennings
shall be restricted for a period of 6 months from competing with
the Company. It should be noted that the enforceability of
non-competition clauses are dependent in large part on the facts
and circumstances surrounding the need for such a provision. The
Company believes that due to the relatively short duration of
the covenant that it would be enforceable. However, any
challenge by Mr. Jennings would be determined by arbitration (as
set forth below).
In the event that the contract is terminated without cause, Mr.
Jennings shall be entitled to a severance payment equal to the
greater of the balance of the 1 year term remaining on the
contract or 6 months. There will be no severance payments in the
event that the Agreement is terminated for cause. Pursuant to the
terms of the Employment Contract, for cause is defined to include
(1) employee's willful material and irreparable breach of the
Employment Agreement; (2) employee's gross negligence on the
performance or intentional non-performance of his material duties
and responsibilities; (3) employee's willful dishonesty, fraud or
misconduct with respect to the business or affairs of the Company
which conduct materially and adversely affects the operations or
reputation of the Company; (4) employee's conviction of a felony;
or (5) chronic alcohol abuse or illegal drug abuse. Finally, the
Company and employee have agreed to settle any disputes under the
Agreement by means of binding arbitration.
In addition to his Employment Agreement, in January of 1998, Mr.
Jennings was granted options to purchase 35,000 shares of the
Company's Common Stock with an exercise price of $.25 per share
exercisable any time through January 13, 2008, assuming
continuous employment with the Company.
The Company has an oral consulting agreement with its winemaker
Robert Pepi, Jr. who manages the Company's wine making
operations. Mr. Pepi is being paid at the rate of $2,000 per
month. In addition, Mr. Pepi has been granted 25,000 shares of
the Company's Common Stock at no cost. The Company has also
agreed to issue an additional 75,000 shares to Mr. Pepi in the
event he terminates consulting activities with other wineries.
41. (a) Number of shares subject to issuance under presently
outstanding stock purchase agreements, stock options, warrants or
rights: 42,500 shares (.53% of total shares to be outstanding
after the completion of the Offering if all securities sold,
assuming exercise of options and conversion of convertible
securities).
Indicate which have been approved by shareholders. State the
expiration dates, exercise prices and other basic terms for these
securities:
The Company currently has options outstanding for 42,500 shares
under its Incentive Stock Option Plan. The options were granted
on January 13, 1998 and expire on January 13, 2008. The options
are exercisable at $0.25 per share as long as each of the
recipients remain in the employ of the Company. As of the date of
this Prospectus, no options have been exercised. The Company has
outstanding The AWG, Inc. Incentive Stock Option Plan (
"Incentive Stock Option Plan") and The AWG, Inc. Nonqualified
Stock Option Plan ("Nonqualified Plan"). These plans were adopted
by the Board of Directors of the Company in November, 1997 and
were approved by the shareholders of the Company on January 13,
1998. Employees, directors and consultants of the Company are
eligible for the grant of options under the Nonqualified Stock
Option Plan. Only employees are eligible for the grant of options
under the Incentive Stock Option Plan. A total of 1,500,000
shares have been reserved for the Nonqualified Stock Option Plan,
and 500,000 shares for the Incentive Stock Option Plan. Under
each plan, the Board of Directors determines the recipients and
the number of options granted to such recipients. Each plan is
intended to comply with Rule 16b-3 of the Securities Exchange Act
of 1934, as amended ("Exchange Act"). The consideration for each
option granted under each plan will be established by the Board
of Directors. The shares issued under the Nonqualified Stock
Option Plan will have such terms and be
32
<PAGE>
exercisable at such times as the Board of Directors may
determine. Each option plan provides that, in the event of a
merger or reorganization of the Company, outstanding options
shall be subject to the Agreement of Merger or reorganization.
(b) Number of common shares subject to issuance under existing stock
purchase or option plans but not yet covered by outstanding
purchase agreements, options or warrants: 0 shares.
(c) Describe the extent to which future stock purchase agreements,
stock options, warrants or rights must be approved by
shareholders.
Any amendments to the existing stock option plans or the adoption
of any future stock option plans will be subject to shareholder
approval as required in order to comply with the provisions of
Rule 16b-3 of the Exchange Act.
42. If the business is highly dependent on the services of certain key
personnel, describe any arrangement to assure that these persons will
remain with the Company and not compete upon any termination:
See description of Employment Agreement of Mack Jennings in Question
40 (b).
LITIGATION
43. Describe any past, pending or threatened litigation or administrative
action which has held or may have a material effect upon the Company's
business, financial condition, or operations, including any litigation
or action involving the Company's Officers, Directors or other key
personnel. State the names of the principal parties, the nature and
current status of the matters, and the amounts involved. Give an
evaluation by management or counsel, to the extent feasible, of the
merits of the proceedings or litigation and the potential impact on
the Company's business, financial condition or operations.
Below is a brief description of the only current litigation matter affecting
the Company. This litigation matter relates to events which set forth below
occurred under prior management.
Claim by Richard Gladstone. Richard Gladstone, an investor in the Company,
has made a claim for stock allegedly due and owing him in exchange of cash
payments and bartered services for and on behalf of the Company. Mr.
Gladstone has retained legal counsel and is in communication with the Company
for resolution of this issue. He seeks 500,000 shares of the Company's Common
Stock. The Company disputes the claim as a substantial portion of the
proceeds to which Mr. Gladstone claims to have been received by the Company
were, in fact, never received by the Company. The Company anticipates further
discussions with Mr. Gladstone's legal counsel with a view towards settlement
of this dispute.
LEGAL MATTERS
The validity of the Preferred Stock offered hereby and certain other legal
matters will be passed upon for the Company by Jackier, Gould, Bean, Upfal &
Eizelman, 1533 North Woodward Avenue, Suite 250, Bloomfield Hills, MI
48304-2863. Certain legal matters in connection with this Offering will be
passed upon for the underwriter by Doros & Brescia, 1140 Avenue of the
Americas, Penthouse 22nd Floor, New York, NY 10036.
FEDERAL TAX ASPECTS
44. This provision is not applicable as the Company is not a Subchapter S
Corporation.
33
<PAGE>
MISCELLANEOUS FACTORS
45. Describe any other material factors, either adverse or favorable, that
will or could affect the Company or its business (for example, discuss
any defaults under major contracts, any breach of bylaw provisions,
etc.) or which are necessary to make any other information in this
Prospectus not misleading or incomplete.
Sales of Unregistered Securities
THE FOLLOWING DESCRIBES EVENTS WHICH OCCURRED UNDER PRIOR MANAGEMENT.
From March 5, 1996 through November 27, 1996, the Company sold shares
of its Common Stock to certain consultants retained by the Company
("Consultants") as well as to approximately seven (7) investors not
affiliated with the Company ("Investors"). It appears that approximately
$860,000 was raised from Investors and approximately $500,000 was raised from
the Consultants. The securities sold were not registered. According to
Company records, sales of the securities to Investors were sold pursuant to
the registration exemption afforded by Rule 504 under Regulation D adopted by
the Securities and Exchange Commission ("SEC") pursuant to the Securities Act
of 1933, as amended (the "Act"). Although Company records do not discuss the
sale of securities to the Consultants, it is presumed that such sales were
made pursuant to the exemption afforded by Rule 701 adopted by the SEC
pursuant to the Act.
Rule 504 exempts an offering of securities from federal registration
requirements if an issuer meets certain requirements including, among other
things, (1) that the Offering does not exceed $1,000,000 within a 12 month
period (less sales of certain other exempt securities but not including sales
pursuant to Rule 701); and the issuer is not a reporting company pursuant to
the Securities Exchange Act of 1934, as amended ("Exchange Act"). Rule 701
provides an exemption from the registration provisions under the Act for
sales of securities to, among others, consultants of an issuer if, among
other things, the issuer is not a reporting company; aggregate sales do not
exceed the greater of $500,000 or 15% of the outstanding Common Stock of the
issuer; and sales are made pursuant to a plan or an agreement with the
consultant. It appears from the Company records that approximately $500,000
in securities were sold to Consultants during the period in question. This
amount did not exceed the 15% limitation required by Rule 701. It further
appears that the sales to the consultants were pursuant to a consulting and
stock option agreement between the Company and the Consultants dated March
10, 1996.
It should be noted that with respect to the Rule 504 Offering, no Form
D was filed in connection therewith. The primary effect of failure to file
this form would not be to necessarily invalidate the Offering. Such failure
may prevent the Company from using certain exemptions for an indefinite time
in the future. In connection with the sales pursuant to Section 701, such
securities are restricted and cannot be resold by a party without an
applicable exemption from registration. It appears from the Company's stock
records that many of the shares of stock sold to the Consultants were in fact
resold shortly after the initial sale to such persons. As a result, it can be
argued that the exemption afforded by Rule 701 may not be available for those
sales. In the event that Rule 701 is not available, such shares would have
been issued without registration and without an applicable exemption
therefrom. Such shares, could in turn be added to the aggregate Offering
amount pursuant to the Rule 504 Offering thereby increasing the aggregate
Offering amount under Rule 504 beyond $1,000,000 and therefore potentially
invalidating the Rule 504 Offering.
In the event that the entire Offering is found to be invalid as a
result of the failure to qualify for an applicable exemption from
registration under the Act, the sale of such securities would violate Section
12(a)(1) of the Act. Section 12(a)(1) of the Act provides that any person who
offers or sells a security in violation of Section 5 [Registration Provisions
of the Act] is liable to the person purchasing such security for an amount
equal to the consideration paid for such security together with interest
thereon. Pursuant to Section 13 of the Act, no action may be brought to
enforce a liability under Section 12(a)(1) unless such action is brought
within one (1) year after the violation upon which it is based. Since the
last sale of the securities occurred on November 19, 1996, the statute of
limitations with respect to any registration violations terminated on
November 19, 1997.
<PAGE>
Section 12(a)(2) of the Act prohibits the use of a prospectus or oral
communication which includes an untrue statement of material fact or omits to
state a material fact necessary in order to make the statements, in light of
the circumstances under which they were made, not misleading. As in the case
of a violation of 12(a)(1), in the event of a violation of 12(a)(2), a
purchaser would be entitled to seek the consideration for his or her
investment plus interest thereon. Such an action must be brought within one
(1) year of the date Purchaser discovered the untrue statement or omission
(or should have been discovered by the exercise of reasonable diligence) but
in no event beyond three (3) years after the sale. It is unclear from Company
records what information was given to Purchasers of the stock. However, it
appears that a business plan was prepared and was distributed. A copy of the
business plan is not available from the Company. Moreover, the Company did
have information in the marketplace pursuant to Rule 15c-2-11 under the
Exchange Act. Since it cannot be determined what information was provided
each investor, no determination can be made as to whether the information
provided an investor was misleading or whether any material information was
omitted. However, the Company has represented that no Investor or Consultant
has instituted any action against the Company nor has any such threat been
communicated to the Company. In connection with any securities offering, a
threat always exists, that a purchaser can bring an action under Section
12(a)(2) alleging that the information (whether
34
<PAGE>
written or oral) provided to such investor is misleading or omits to
statement of material fact. However, in absence of any shareholder complaints
nor any evidence that misleading information was provided to an investor, the
Company has no current liability under Section 12(a)(2).
Based on the Company records, compliance with applicable state
securities laws is unclear. However, to the extent sales were made to the
State of California, it does not appear that any applicable exemption from
registration has been satisfied. In the event that the Company has been found
to violate the registration provisions of the California securities laws, any
action must be brought within two (2) years after the violation or one (1)
year after the discovery of the facts constituting such violation.
Notwithstanding the Company's possible exposure under California securities
laws, it should be noted that the Company believes that each of the
Consultants who acquired their shares in the Company are no longer
shareholders and are believed to have sold their stock at or above the prices
at which they were acquired. As to the other Investors who purchased stock in
the Company, most are believed to have sold their shares and the remaining
purchasers are not believed to be California residents or entities.
In addition to investor actions, there is an issue as to potential
penalties the Company could incur either from the SEC or from an applicable
state regulatory agency. In this regard, various ecemptions from registration
adopted by the SEC well as by various states do procvide that such exemptions
may be unavailable to companies as a result of prior violations of securities
laws and for financial penalitoes. However, such pohibitions may be wavied
upon application by the Company for good cause. The Company would argue that
since each of the potential violations alleged to have occurred happened
under former management and since current management has endeavored to comply
with the securities laws, the Company should not be prohibited from use of
various exemptive provisions under applicable federal and state laws.
However, there can be no assurance that any such prohibitions would be waived
and it is very possible that such exemptions would not be available to the
Company for an extended period time. Moreover, since the individuala who were
responsible for any securities violations are no longer employed by the
Company, there may be strong, credible arguments that no financial penalities
should be imposed on the Company for any violations. There is no financial
civil liabilty under the Act. Under California law, a $2,500 fine can be
imposed for any violation.
MANAGEMENT'S DISCUSSIoN AND ANALYSIS OF CERTAIN RELEVANT FACTORS
46. If the Company's financial statements show losses from operations,
explain the causes underlying these losses and what steps the Company
has taken to address thwese causes.
The Company has experiences losses from operations for several
reasons. first and foremost, the Company has not generated sufficient
sales of its wines. While in fiscal 1997, the Company sold 7,300
cases of its wine as compared to 250 cases in 1996, the Company must
sell a minimum of 15,000 cases of wine and generate approximately
$100,000 in operating profits from its newely constructed tasting
room and hospitality center in order to break even in operations from
a cash flow standpoint. The Company did not derive any revenue from
the tasting room and hospitality center in 1997. To the extent that
the Company does generate revenue from the tasting room and
hospitality center, this will have the effect of reducing the
pressure og achieving higher wine sales. Assuming at least the
Minimum Offering Amount is achieved, the Company believes it will be
able to secure suffcinet wine grape and bulk juice inventory to
permit it to permit it to produce sufficient wine to meet the 15,000
case threshold. Moreover, the Company believes that its expanding
distributor network will help in achieving desired sales levels. This
strategy has been demonstrted by the increase in sales and revenues
from fiscal year 1996 to fiscal year 1997.
In addition to insufficient sales, the Company also experienced
unusual legal and accounting expenses incurred as a result of a lack
of experience and organization of prior management and in connection
with the preparation of this offering. In future years, these expenses
are expected to be reduced from in excess of $150,000 in fiscal year
1997 to less than one third of that in fiscal year 1998.
Finally, as a result of a lack of capital for operations, the Company
was forced to obtain a significant amount of debt financing to cover
ongoing cash flow deficits. This in turn has resulted in the Company
incurring excessive interest expenses, which expenses represented
approximately 30% of the negative cash flow experienced by the
Company. Assuming at least the Minimum Offering Amount is achieved,
the Company believes it will be able to refinance its existing
indebtedness, reducing a portion of the principal amount of the debt
and reducing the interest rate resulting in an overall savings of
approximately $70,000 per year.
<PAGE>
The Company believes that assuming at least the Minimum Offering
Amount is obtained that through increased production capability, an
increased distribution network together with the operation of the wine
tasting room and the hospitality center, it will be able to achieve a
break even cash flow prior to debt service by the end of fiscal year
1998.
47. Describe any trends in the Company's historical operating results.
Indicate any changes now occurring in the underlying economics of the
industry or the Company's business which, in the opinion of
Management, will have
35
<PAGE>
a significant impact (either favorable or adverse) upon the Company's
results of operations within the next 12 months, and give a rough
estimate of the probable extent of the impact, if possible.
Due to the fact that the Company has only minimal operating history,
any trends in the Company's historical operating results are not
meaningful. While the Company made great strides in fiscal year 1997
as compared to fiscal year 1996, the difference in management and
operations are so different as to make any comparison meaningless.
During fiscal year 1996, the Company's management was very
inexperienced and exhibited serious operational and organizational
problems. In the fiscal year 1997, the Company, upon the acquisition
of a controlling interest by Messrs. Andretti and Antonini together
with the retention of Messrs. Jennings and Pepi experienced a
turnaround on several levels. First, the Company began a program of
replanting its vineyard which is a necessary prerequisite in order for
the Company to achieve its long term goals. Second, the Company began
the process of securing sources for the acquisition of wine grapes and
bulk juice to enable it to produce wines and to enable it to establish
long term relationships with wine grape growers to assure a supply of
wine grapes in the future. This is a necessary component to enable the
Company to grow even after its vineyard is mature since the vineyard
will not produce enough wine grapes to allow the Company to produce
all of the wine it may produce under its permit. Third, the Company
has established a distributor network in over 20 states and in Japan
to not only sell the modest amount of wine that the Company is
currently producing but to establish a larger and more formidable
distribution network which will be able to handle the Company's wine
production as it increases over the next several years. Finally, the
Company has established what it believes is a strong organizational
and administrative structure which will support the Company through
its growth phases.
The Company's accomplishments during the 1997 fiscal year will, in the
opinion of management, have a favorable and significant impact on the
Company's results of operations during the fiscal year 1998 and
beyond. The development of the tasting room and hospitality facility
will create new avenues of revenue for the Company that were
previously non-existent . The Company believes that gross profits from
the wine tasting room and hospitality center could ultimately reach
$600,000 per year, thereby providing a potential significant
contribution to the profitability of the Company. This is based upon
two events per week averaging 150 people per event at an average of
$40 per person. The Company is one of the few facilities in Napa
Valley which can accommodate this size of event. However, since the
Company has had no prior experience with the wine tasting room or the
hospitality center, it is uncertain as to the results the Company will
achieve in fiscal year 1998 or in the future years. Moreover, it is
not likely that the Company would achieve the gross revenues stated
above in fiscal year 1998 and it is possible that the Company will not
achieve such gross revenues for several years. Through the Company's
efforts in establishing its expanded distribution network, the Company
believes that it is in a position to significantly increase its sales
assuming that it is able to increase its wine production levels. As
indicated above, the Company now has a presence in almost half of the
United States as well as in Japan. In addition, the Company intends on
expanding its distributorship network to the States of California,
Colorado, Georgia, New York, Oregon and Washington during fiscal year
1998, which, if achieved, would result in the Company penetrating
markets in over half of the United States and more specifically, in
the largest wine consuming states. Finally, the Company believes that
through the work of Robert Pepi, that it has made significant progress
in both the replanting of its vineyard and in increasing its potential
inventory of wine grapes and bulk juice. The Company has replanted
approximately one third (1/3) of its vineyard and will complete the
replanting of the remaining vineyard during fiscal years 1998 and
1999. However, as indicated under "Business", the vineyard will not
achieve maturity until approximately three (3) to five (5) years after
the replanting is complete. Until such time, the Company will be
dependent upon its ability to obtain wine grapes at the harvest level
as well as bulk juice. It is hoped that the need to obtain bulk juice
will decrease as the replanted vineyard matures and as the Company's
ability to obtain grapes at the harvest level increases. In this
connection, it is expected that an improvement in the Company's profit
margin will occur when the Company moves the production of wine from
bulk juice to purchase grapes. In addition, a further increase in
profit margin is expected when the Company produces wine from grapes
harvested in its own vineyard as opposed to grapes purchased from
third party sources. While the Company will attempt to acquire as many
grapes as possible at the harvest levels as opposed to bulk juice, it
can be anticipated that for the next several years, the Company will
continue to need to acquire bulk juice and therefore it will continue
to produce a significant amount of wine at lower profit margins.
However, as the Company's vineyard matures and the Company is able to
enter into longer term contracts with grape growers, the Company will
be able to increase its profit margin on its wine production. It is
likely that during fiscal year 1998, the Company will make only modest
progress in this regard.
Assuming at least the Minimum Offering Amount is met, the Company
intends on purchasing necessary equipment in order to produce wine at
its Big Ranch Road facility. This equipment would include a crush
tank, fermentation equipment and storage barrels. This equipment will
serve the Company's needs as the newly planted vineyard matures. The
Company's management information system is very modest and is not
utilized to communicate electronically either with its suppliers or
distributors. As a result, the Company does not need to update its
operating systems to address many of the complex year 2000 issues.
While the Company's current software used internally is not fully year
2000 compliant, the Company believes that software that is fully
compliant is available for purchase on reasonable terms and such
software can be implemented with only minor expenditures.
36
<PAGE>
48. If the Company sells a product or products and has had significant
sales during its last fiscal year, state the existing gross margin
(net sales less cost of such sales as presented in accordance with
generally accepted accounting principles) as a percentage of sales for
the last fiscal year: 29%. What is the anticipated gross margin for
next year of operations? Approximately 29%. If this is expected to
change, explain. Also, if reasonably current gross margin figures are
available for the industry, indicate these figures and the source or
sources from which they are obtained.
The Company is currently operating on a gross profit margin of
approximately 29%. As indicated in the discussion under Question 48,
the Company's long term goal is to obtain wine grapes first from its
own vineyard and secondarily from grapes at the harvest level from
third party growers. Assuming that the Company is able to produce
42,000 cases of wine per year (which is the maximum allowed under its
production permit at the Big Ranch Road facility) and to the extent
the grapes utilizing such production come from its own vineyard and
from third party growers, the Company's profit margin could increase
over time. This further assumes the overall market for super premium
wines remains stable. However, it should be noted that such a level of
gross profit margin, if ever achieved, will not occur for
approximately five (5) years. It is hoped, however, that the Company
will continue to move in this direction commencing in fiscal year 1998
and each year thereafter such that the Company will become more
dependent on its own vineyard and from grapes grown from third party
sources and that profit margins in each year will increase from
current levels. However, the Company is unable to project any specific
increases in profit margins over the next several years and
anticipates that due to the fact that the Company is still in the
process of replanting its vineyard, that profit margins will not
increase in the short term.
49. Foreign sales as a percent of total sales for last fiscal year: 0.5%
Domestic government sales as a percent of total domestic sales for
last fiscal year: 0%. Explain the nature of these sales, including any
anticipated changes:
While the Company does have a distributor in Japan, sales in Japan
during the last fiscal year were insignificant and not expected to be
material in fiscal year 1998.
37
<PAGE>
AWG, LTD.
Consolidated Financial Statements for the
Years Ended December 31, 1997 and 1996
and Independent Auditors' Report
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of AWG, Ltd.
We have audited the accompanying consolidated balance sheets of AWG, Ltd. (a
Nevada corporation) and its subsidiary (the "Company") as of December 31,
1997 and 1996, and the consolidated related statements of operations,
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the accompanying consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of
December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note
10, claims may be made against the Company resulting from the sale of
unregistered stock. The Company has a working capital deficiency and limited
capital resources, has had negative cash flow from operations, and is having
difficulty sustaining its operations and meeting its obligations as they come
due, as discussed in Note 2. These circumstances raise substantial doubt
about the Company's ability to continue as a going concern. Management's
plans concerning these matters are also described in Notes 2 and 10. The
financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Oakland, California
January 28, 1998
(February 23, 1998 as to the last paragraph of Note 13)
F-2
<PAGE>
AWG, LTD.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 18,327 $ 18,776
Accounts receivable 74,037 3,427
Inventories 728,529 448,728
Receivables from stockholders 93,380 150,000
Other current assets 67,506 14,978
----------- -----------
Total current assets 981,779 635,909
PROPERTY, PLANT AND EQUIPMENT - Net 2,734,443 2,037,685
OTHER ASSETS - Net 369,905 352,814
----------- -----------
TOTAL ASSETS $ 4,086,127 $ 3,026,408
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 160,787 $ 78,726
Other accrued liabilities 165,658 83,745
Payable to stockholder -- 220,000
Current portion of long-term debt 1,149,000 14,600
Loans payable to related parties 305,000 350,000
----------- -----------
Total current liabilities 1,780,445 747,071
LONG-TERM DEBT 1,665,400 1,665,400
----------- -----------
Total liabilities 3,445,845 2,412,471
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value: 50,000,000 shares authorized;
7,157,337 and 5,222,337 shares issued and outstanding 7,157 5,222
Additional capital 2,112,473 1,452,658
Additional capital - employee stock awards 155,000 --
Due from stockholder (75,000) --
Accumulated deficit (1,559,348) (843,943)
----------- -----------
Stockholders' equity - net 640,282 613,937
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,086,127 $ 3,026,408
=========== ===========
<FN>
See notes to consolidated financial statements.
</TABLE>
F-3
<PAGE>
AWG, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
REVENUE:
Wine sales $ 513,676 $ 27,853
Cost of wine sold (363,929) (46,621)
Provision for loss on wine inventory -- (73,925)
--------- ---------
Gross profit (loss) 149,747 (92,693)
--------- ---------
OPERATING EXPENSES:
Administration 408,916 199,573
Marketing 239,346 120,197
--------- ---------
Total operating expenses 648,262 319,770
--------- ---------
OPERATING LOSS (498,515) (412,463)
OTHER EXPENSES (INCOME):
Abandoned acquisition costs -- 299,675
Interest (net of interest capitalized of $15,181 in 1997) 222,304 107,620
Other (6,214) 13,385
--------- ---------
LOSS BEFORE INCOME TAXES (714,605) (833,143)
STATE INCOME TAXES 800 800
--------- ---------
NET LOSS $(715,405) $(833,943)
========= =========
NET LOSS PER SHARE (BASIC AND DILUTED) $ (0.13) $ (0.21)
========= =========
<FN>
See notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
AWG, LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional
Common Stock Capital - Due
------------------------- Additional Employee from Accumulated Stockholders'
Shares Amount Capital Stock Awards Stockholder Deficit Equity
----------- ----------- ----------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
DECEMBER 31, 1995 2,600,000 $ 2,600 $ 7,400 $ (10,000) $ --
ISSUANCE OF STOCK 2,622,337 2,622 1,445,258 1,447,880
NET (LOSS) (833,943) (833,943)
----------- ----------- ----------- ----------- -----------
BALANCE,
DECEMBER 31, 1996 5,222,337 5,222 1,452,658 (843,943) 613,937
EMPLOYEE STOCK
AWARDS $ 246,750 246,750
ISSUANCE OF STOCK:
Stock awards 225,000 225 91,525 (91,750) -- --
Settlement of
liabilities 1,710,000 1,710 568,290 $ (75,000) 495,000
NET (LOSS) (715,405) (715,405)
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE,
DECEMBER 31, 1997 7,157,337 $ 7,157 $ 2,112,473 $ 155,000 $ (75,000) $(1,559,348) $ 640,282
=========== =========== =========== =========== =========== =========== ===========
<FN>
See notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
AWG, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (715,405) $ (833,943)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 81,254 62,554
Compensation expense - employee stock awards 240,000
Provision for loss on wine inventory -- 73,925
Changes in assets and liabilities:
Accounts receivable (70,610) (3,427)
Inventories (273,051) (522,653)
Other current assets (113,101) (14,978)
Accounts payable - trade 81,913 78,726
Other accrued liabilities 82,061 83,745
----------- -----------
Net cash used in operating activities (686,939) (1,076,051)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (734,530) (2,061,582)
Other assets -- (171,471)
----------- -----------
Net cash used in investing activities (734,530) (2,233,053)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from related party borrowings 305,000 350,000
Proceeds from long-term debt and bank line of credit 1,149,000 1,680,000
Proceeds from sale of stock -- 1,447,880
Payment of long-term debt (14,600) --
Advances to stockholders (18,380) (150,000)
----------- -----------
Net cash provided by financing activities 1,421,020 3,327,880
----------- -----------
INCREASE (DECREASE) IN CASH (449) 18,776
CASH AT BEGINNING OF YEAR 18,776 --
----------- -----------
CASH AT END OF YEAR $ 18,327 $ 18,776
=========== ===========
OTHER CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 232,585 $ 100,800
=========== ===========
Income taxes $ 800 $ 800
=========== ===========
Liability assumed upon acquisition of licensing agreement $ -- $ 220,000
=========== ===========
Loans payable to related parties cancelled in exchange for
issuance of common stock $ 570,000 $ --
=========== ===========
<FN>
See notes to consolidated financial statements.
</TABLE>
F-6
<PAGE>
AWG, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
- -----------------------------------------------------------------------------
1. ORGANIZATION AND OPERATIONS
AWG, Ltd. (the "Company") acquired property, plant and equipment
comprised of a 53-acre vineyard and winery site and began production of
premium wines in the Napa Valley of California in 1996. Wine is
currently produced at another facility on a contract basis.
Approximately 58% of 1997's production represents bulk wine and grapes
purchased from independent growers and wineries. The Company generally
markets and sells its wines through independent distributors located on
the East Coast, in the Midwest and in the Southwest. During 1997, sales
to one retailer totaled approximately 26% of total sales.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The Company's financial statements are prepared
using the accrual method of accounting in accordance with generally
accepted accounting principles and have been prepared on a going
concern basis which contemplates the realization of assets and the
settlement of liabilities in the normal course of business. The Company
is currently building its brand name and is in the process of
establishing contracts with distributors and grape growers. Management
has and expects to continue to incur substantial expenditures to
complete construction of a winery building and replant Phylloxera
infested vineyards. The Company has a working capital deficiency and
limited capital resources, has had negative cash flow from operations,
and is having difficulty sustaining its operations and meeting its
obligations as they come due. In addition, the Company expects that
operating expenses will again significantly exceed revenues in 1998.
The Company also faces potential claims from stockholders due to
violations of securities laws resulting from the sale of approximately
$1,360,000 of unregistered stock (see Note 10). These issues raise
substantial doubt about the Company's ability to continue as a going
concern. The accompanying financial statements do not include any
adjustments that may result from the outcome of these uncertainties.
Management plans to obtain the needed capital to enable the Company to
remain in business by raising equity capital in a public offering. The
Company has entered into a letter of intent with an underwriter to
conduct a "best efforts" public offering of the Company's proposed
Series A 6% Preferred Stock ("Preferred Stock"). The Company intends to
offer a maximum of 500,000 shares, and a minimum of 300,000 shares, of
Preferred Stock. The net proceeds from this public offering assuming it
is successful, after payment of underwriting commissions and offering
expenses, will be utilized to:
a. increase inventory production through the acquisition of bulk
wine until such time as grapes harvested from the Company's
vineyards and grape contracts are sufficient to meet the
Company's needs,
b. complete a vineyard replanting and maintenance program,
c. complete a winery construction and refurbishment program which
will result in a fully productive crush, tank and barrel storage
facility, a tasting room and a hospitality center
F-7
<PAGE>
d. position itself to obtain additional capital to acquire other
wineries and vineyards, and
e. repay certain indebtedness to officers and directors and a bank
loan guaranteed by a Director.
There are no assurances that management will be able to raise this
capital, and further, there can be no assurance, assuming the Company
successfully raises additional funds, that the Company will ultimately
achieve profitability and positive cash flow.
Principles of Consolidation - The consolidated financial statements
include AWG Ltd. and its wholly owned subsidiary AWG, Inc. All
significant intercompany balances and transactions have been
eliminated.
Inventories are recorded at lower of cost or market. Wine inventory is
determined by specific cost by vintage and variety. Costs include
grapes, purchased wine, winemaking and bottling costs. Wine inventories
are classified as current assets in accordance with industry practice
although some wine will be aged for periods longer than one year. Costs
associated with the next year's harvest are deferred and included in
wine inventory when the crop is harvested in the following year.
Property and equipment is stated at cost. Depreciation is computed by
the straight-line method over estimated useful lives of 3 to 20 years
for vineyards, 40 years for buildings and improvements, and 5 to 10
years for machinery and equipment. Interest capitalized during
construction of the winery facility totaled $15,181 in 1997.
Other assets consist primarily of licensing rights, organization and
label design costs that are amortized using the straight-line method
over the 10-year term of the agreement for licensing rights and 5 years
for organization costs and label design costs. Other assets also
include costs of $42,011 incurred in connection with the Company's
planned preferred stock offering. Such amounts will be charged to
stockholders' equity at the completion of offering.
Revenue Recognition - The Company recognizes wine sales at the time of
shipment. The Company evaluates customer credit terms on an ongoing
basis and provides for estimated credit losses.
Abandoned Acquisition Costs - During 1996, the Company incurred certain
due diligence and other costs in an attempt to acquire another winery.
The planned acquisition was unsuccessful and the related costs incurred
were charged to expense at the time the potential acquisition was
abandoned.
Income Taxes - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes, ("FAS 109"). Under FAS 109, deferred income taxes are
provided for the temporary differences between the tax basis of assets
and liabilities and their related financial statement amounts using
current income tax rates. A valuation allowance is recorded, if, based
on the weight of available evidence, it is more likely than not that
some portion of the deferred tax assets will not be realized.
Use of Estimates - Preparation of the financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect amounts
reported in the financial statements and related notes. Actual results
could differ from those estimates.
Earnings Per Share - Earnings per share is computed by dividing the net
loss by the weighted average number of common shares outstanding during
each year. The weighted average number of shares outstanding used to
calculate earnings per share were 5,383,246 and 4,055,673 in 1997 and
1996,
F-8
<PAGE>
respectively. Diluted earnings per share have not been adjusted for the
effect of employee stock awards and convertible debt as their impact is
antidilutive.
3. INVENTORIES
Inventories at December 31, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Bulk wine $ 414,257 $ 185,964
Bottled wine 272,558 299,541
Merchandise inventory 41,714 37,148
Inventory valuation reserve -- (73,925)
--------- ---------
Total $ 728,529 $ 448,728
========= =========
</TABLE>
During 1996, the Company made a provision of $73,925 to reduce certain
wine inventories to their estimated net realizable value. These wines
were sold in 1997.
4. OTHER CURRENT ASSETS
Other current assets at December 31, 1997 and 1996 consist of the
following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Prepaid expenses $24,961 $ 5,144
Deferred farming costs 42,545 9,834
------- -------
Total $67,506 $14,978
======= =======
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1997 and 1996 consist of
the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land $ 1,445,880 $ 1,445,880
Vineyards 122,567 46,452
Buildings and improvements 492,164 492,164
Construction in progress 620,002 31,242
Machinery and equipment 100,015 45,844
----------- -----------
Total 2,780,628 2,061,582
Less accumulated depreciation (46,185) (23,897)
----------- -----------
Property and equipment, net $ 2,734,443 $ 2,037,685
=========== ===========
</TABLE>
Certain portions of the Company's vineyards are approximately 25 years
old and are infested with Phylloxera, leaf roll and Pierce's disease.
As a result, these vineyards will be replanted in order to remain
commercially productive. During 1997, approximately 15 acres were
removed from production
F-9
<PAGE>
and 12 were replanted using rootstalk management believes will be
resistant to these infestations in the future. It is expected that half
of the remaining vineyard acreage will be replanted in 1998 with the
remaining acreage replanted in 1999.
6. OTHER ASSETS
Other assets at December 31, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Licensing rights $ 337,320 $ 337,320
Organization costs 30,301 30,301
Printing dies 18,950 18,950
Deferred stock issuance costs 42,011
Other 19,561 4,900
--------- ---------
Total 448,143 391,471
Less accumulated amortization (78,238) (38,657)
--------- ---------
Other assets - net $ 369,905 $ 352,814
========= =========
</TABLE>
7. LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Mortgage note dated April 12, 1996, renegotiated in 1997. Monthly interest
only payments at the rate of 9%, 10%, and 11% for the first
three years increasing to 12% until maturity in 2002 $ 1,665,400 $ 1,680,000
Bank line of credit agreement, dated January 28, 1997. Monthly
interest only payments at the rate of .5% in excess of the prime rate
of Citibank, N.A. (9% at December 31, 1997), maturing December 23,
1998, guaranteed by the Company's Chairman of the Board 950,000 --
Bank line of credit agreement, dated July 15, 1997. Monthly interest
only payments at 1% over the Vintage Bank borrowing rate (9.5% at December
31, 1997), borrowings collateralized by accounts receivable, inventory,
supplies, and general intangibles, principal
due and payable no later than July 15,1998 199,000 --
----------- -----------
Total 2,814,400 1,680,000
Less current portion (1,149,000) (14,600)
----------- -----------
Long-term portion $ 1,665,400 $ 1,665,400
=========== ===========
</TABLE>
The long-term portion of debt as of December 31, 1997 matures in 2002.
F-10
<PAGE>
8. LOANS PAYABLE TO RELATED PARTIES
Loans payable to related parties at December 31, 1997 and 1996 consist
of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Loans payable to stockholders - loaned to the Company in exchange for the
right to receive Convertible Preferred Stock of the Company,
noninterest-bearing through April 1997, interest at 9%, thereafter
converted to common stock in December 1997 $ -- $350,000
Notes payable to stockholders, officers and affiliates of the
Company - interest only at 9%, principal due upon demand 205,000 --
Second mortgage note payable to the Chairman of the Board, dated
December 24, 1997. Borrowings available of up to $500,000. Monthly
installments of interest only at 9%, principal due July 1, 1998 100,000 --
-------- --------
Total $305,000 $350,000
======== ========
</TABLE>
In December 1996, three of the Company's stockholders loaned the
Company an aggregate amount of $350,000 in exchange for the right to
receive Convertible Preferred Stock at such time as the stock was
authorized by the stockholders. In December 1997, these stockholders
agreed to cancel their loan in exchange for the issuance of 1,050,000
shares of common stock, valued at $.33 per share, the approximate
trading price of the stock at the time of the conversion.
9. RELATED PARTY TRANSACTIONS
Loans Receivable from Stockholders - In 1996, the Company loaned its
two principal stockholders each $75,000 from proceeds obtained from the
three stockholder loans totaling $350,000. These loans receivable are
due on demand. As discussed in Note 8, in 1997, the $350,000 in
stockholder loans were canceled in exchange for the issuance of common
stock. One of the receivables from a stockholder who received stock in
the exchange was reclassified and shown as a reduction in stockholder's
equity in 1997.
Licensing Rights - The Company has acquired and subsequently
renegotiated a License Agreement with Mario Andretti, a Director of the
Company, to utilize his name and image in conjunction with the
packaging, distribution and promotion of the Company's products. The
initial term of the License Agreement is 10 years, and may be extended
for two additional terms of 5 years, each at the option of the Company.
Pursuant to the License Agreement, Mr. Andretti has agreed to
participate in advertising and promotional activities on behalf of the
Company including, but not limited to, radio, television and print
media advertising spots, trade relations activities and personal
appearances.
As compensation for his services under the License Agreement, Mr.
Andretti receives a royalty equal to 5% of the gross revenues and sales
of all products bearing his name or likeness. As to all other products
sold by the Company, Mr. Andretti shall be entitled to the lesser of 2%
of Company profits on all other wine sales or $150,000 per year.
Licensing fees owed to Mr. Andretti in 1997 totaled $25,225, and
$13,286 of this amount was payable at December 31, 1997.
During 1997, Mr. Andretti exchanged $220,000 in royalties due him under
the License Agreement and assumed by the Company on the date of
acquisition for 660,000 shares of common stock, valued at $.33 per
share, which approximated the trading price of the stock at the time of
the exchange in December 1997.
F-11
<PAGE>
Consulting and Employment Contracts- The Company's Chairman of the
Board provides consulting services to the company pursuant to an
agreement effective as of January 1, 1997. Compensation for such
consulting services in 1997 was $50,000 payable in common stock. The
Company has also agreed to pay certain Company Directors $35,000 each
for services provided during 1997, payable in common stock. The number
of shares of stock to be issued to these Directors is based on the
trading price of the stock as of December 31, 1997. Compensation
expense of $155,000 was recognized in 1997 relating to these
agreements. The shares are expected to be issued in the first quarter
of 1998.
The Company has a one-year renewable employment contract with its Chief
Executive Officer. In addition to his base salary, he was issued
100,000 shares of Company common stock at no cost in December 1997.
Such shares became fully vested by action of the Board of Directors in
1997. As a result, compensation expense of $58,000 was recognized in
1997 based on the stock price on the date the contract was approved by
the Board.
In exchange for legal consultation services provided during 1997, a
Company Director was issued 100,000 shares of the Company's common
stock at no cost in December 1997. This Director is under no obligation
to continue to provide any additional legal services to the Company in
connection with this stock grant. Compensation expense of $27,000 was
recognized in 1997 as a result of this stock grant based on the stock
price at the date the stock was issued.
The Company has an unwritten agreement with its winemaker, who manages
the Company's wine making operations. In addition, to a fixed monthly
salary, the winemaker was issued 25,000 shares of the Company's common
stock at no cost in December 1997. As a result of this stock award,
compensation cost of $6,750 was recognized in 1997 based on the stock
price at the date the stock was issued.
10. STOCKHOLDERS' EQUITY
From March 5, 1996 through November 27, 1996, the Company sold shares
of its common stock to certain consultants retained by the Company
("Consultants") as well as to approximately seven investors not
affiliated with the Company ("Investors"). Approximately $860,000 was
raised from Investors and approximately $500,000 was raised from the
Consultants. In December 1996, the Company management was replaced in
connection with the acquisition of stock by two major stockholders. The
shares sold by former management were not registered, but, according to
Company records, sales to Investors were made pursuant to the
registration exemption afforded by Rule 504 under Regulation D adopted
by the Securities Exchange Commission ("SEC") pursuant to the
Securities Act of 1933 (the "Act"). Although Company records are not
clear with respect to the sale of securities to Consultants, the
Company believes that such sales may have been made pursuant to the
exemption afforded by Rule 701 adopted by the SEC pursuant to the Act.
Rule 504 exempts an offering of securities from federal registration
requirements if an issuer meets certain requirements including, among
other things, that (1) the offering does not exceed $1,000,000 within a
12-month period (less sales of certain other exempt securities but not
including sales pursuant to Rule 701); and (2) the issuer is not a
reporting company pursuant to the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Rule 701 provides an exemption from the
registration provisions under the Act for sales of securities to, among
others, consultants of an issuer if, among other things, the issuer is
not a reporting company; aggregate sales do not exceed the greater of
$500,000 or 15% of the outstanding common stock of the issuer; and
sales are made pursuant to a plan or an agreement with the consultant.
Company records indicate that approximately $500,000 in
F-12
<PAGE>
securities were sold to Consultants during the period in question. This
amount did not exceed the 15% limitation required by Rule 701. In
addition, sales to the Consultants were pursuant to a consulting and
stock option agreement between the Company and the Consultants dated
March 10, 1996.
With respect to the Rule 504 offering, no Form D was filed with the
SEC. The primary effect of failure to file this form would not
necessarily be to invalidate the offering. Such failure may prevent the
Company from using certain exemptions for an indefinite time in the
future. In connection with the sales pursuant to Section 701, such
securities are restricted and cannot be resold by a party without an
applicable exemption from registration. Company stock records indicate
that many of the shares of stock sold to the Consultants were in fact
resold shortly after the initial sale to such persons. As a result, the
exemption afforded by Rule 701 may not be available for those sales. In
the event that Rule 701 is not available, such shares would have been
issued without registration and without an applicable exemption
therefrom. Such shares would, in turn, be added to the aggregate
offering amount pursuant to the Rule 504 offering, thereby increasing
the aggregate offering amount under Rule 504 beyond $1,000,000 and
therefore potentially invalidating the Rule 504 offering.
In the event that the entire offering is found to be invalid as a
result of the failure to qualify for an applicable exemption from
registration under the Act, the sale of such securities would violate
Section 12(a) of the Act. Section 12(a)(1) of the Act provides that any
person who offers or sells a security in violation of Section 5
[Registration Provisions of the Act] is liable to the person purchasing
such security, for an amount equal to the consideration paid for such
security together with interest thereon. Pursuant to Section 13 of the
Act, no action may be brought to enforce a liability under Section
12(a)(1) unless such action is brought within one (1) year after the
violation upon which it is based. Since the last sale of the securities
occurred on November 19, 1996, the statute of limitations with respect
to any registration violations terminated on November 19, 1997.
Additionally, Section 12(a)(2) of the Act prohibits the use of a
prospectus or oral communication which includes an untrue statement of
material fact or omits to state a material fact necessary in order to
make the statements, in light of the circumstances under which they
were made, not misleading. As in the case of a violation of 12(a)(1),
in the event of a violation of 12(a)(2), a purchaser would be entitled
to seek the consideration for his or her investment plus interest
thereon. Such an action must be brought within one (1) year of the date
Purchaser discovered any untrue statement or possible omission (or
should have been discovered by the exercise of reasonable diligence)
but in no event beyond three (3) years after the sale. It is unclear
from Company records what information was given to Purchasers of the
stock. However, management believes that a business plan was prepared
and was distributed. A copy of the business plan is not available from
the Company. Moreover, the Company did have information in the
marketplace pursuant to Rule 15c-2-11 under the Exchange Act. Since it
cannot be determined what information was provided each investor, no
determination can be made as to whether the information provided an
investor was misleading or whether any material information was
omitted. However, no investor or Consultant has instituted any action
against the Company nor has any such threat been communicated to the
Company. In connection with any securities offering, a threat always
exists that a purchaser can bring an action under Section 12(a)(2)
alleging that the information (whether written or oral) provided to
such investor is misleading or omits to state a material fact. However,
in absence of any shareholder complaints nor any evidence that
misleading information was provided to an investor, management believes
the Company has no current liability under Section 12(a)(2).
Based on the Company's records, compliance with applicable state
securities laws is unclear. However, to the extent sales were made in
the State of California, it does not appear that any applicable
exemption from registration has been satisfied. In the event that the
Company is found to have violated
F-13
<PAGE>
the registration provisions of the California securities laws, any
action must be brought within two years after the violation or one year
after the discovery of the facts constituting such violation.
Notwithstanding the Company's possible exposure under California
securities laws, the Company believes that each of the Consultants who
acquired their shares in the Company are no longer shareholders and are
believed to have sold their stock at or above the prices at which they
were acquired. As to the other investors who purchased stock in the
Company, most are believed to have sold their shares and the remaining
purchasers are not believed to be California residents or entities.
In addition to investor actions, there is an issue as to potential
penalties the Company could incur either from the SEC or from an
applicable state regulatory agency. In this regard, various exemptions
from registration adopted by the SEC as well as by various states do
provide that such exemptions may be unavailable to companies as a
result of prior violations of securities laws and for financial
penalties. However, in most cases, such prohibitions can be waived upon
application by the Company for good cause. In this case, since each of
the potential violations alleged to have occurred happened under former
management and since current management has endeavored to comply with
the securities laws, management believes that the Company would not be
prohibited from use of various exemptive provisions under applicable
federal and state laws. Moreover, since the individuals who were
responsible for any securities violations are no longer within the
Company, there may be strong credible arguments that no financial
penalties should be imposed on a Company for any violations. There is
no financial civil liability under the Act. Under California law, a
$2,500 fine can be imposed for any violation. The full financial impact
which may result from these potential violations is unknown at this
time but could include actions requiring the Company to return funds to
certain stockholders, along with interest and brokerage fees.
11. INCOME TAXES
Deferred tax assets and liabilities at December 31, 1997 and 1996 are
as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Assets:
Operating loss carryforwards $ 579,983 $ 309,878
Inventory costs 24,419
Intangibles 13,244
Other 1,154
Valuation allowance (597,559) (304,181)
--------- ---------
Total 21,241 5,697
--------- ---------
Liabilities:
Accelerated depreciation (17,542) (5,697)
Other (3,699) --
--------- ---------
Total (21,241) (5,697)
--------- ---------
Deferred tax assets - net $ -- $ --
========= =========
</TABLE>
Due to current and expected future operating losses, a valuation
allowance equal to the net deferred tax assets has been recorded as of
December 31, 1997 and 1996 as it is more likely than not that such net
deferred tax assets will not be realized.
F-14
<PAGE>
The provision for income taxes for the years ended December 31, 1997
and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current - state $800 $800
Deferred -- --
---- ----
Total $800 $800
==== ====
</TABLE>
A reconciliation of the statutory federal income tax rate with the
Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Statutory rate 34% 34%
State income taxes, net of federal benefit 5 5
Other 2 (2)
Valuation allowance (41) (37)
--- ---
Effective tax rate 0% 0%
=== ===
</TABLE>
As of December 31, 1997, the Company had federal net operating loss
carryforwards which expire in taxable years ended December 31 as
follows:
<TABLE>
<S> <C>
2011 $ 716,678
2012 733,279
----------
Total $1,449,957
==========
</TABLE>
12. LEGAL PROCEEDINGS
As of December 31, 1997, two consultants allege that the Company owes
them certain amounts for services provided to the Company in 1996. The
Company is in settlement discussions with respect to one claim for
$28,000 and has a verbal agreement to settle the matter for $22,000.
This amount has been recognized as an expense in 1996. With respect to
the other claim, for $67,000, the Company believes it has no obligation
to the consultant and will dispute such claims. In addition, a
shareholder has made a claim for approximately 500,000 shares allegedly
due him in exchange for cash payments made and services provided to the
Company. The Company disputes the claim alleging that a substantial
portion of the proceeds allegedly paid to the Company were never
received. No amounts have been accrued with respect to the latter two
claims. The Company believes that the ultimate outcome of all these
matters will not have a material adverse effect on the Company's
financial condition, results of operations or cash flows.
13. SUBSEQUENT EVENTS
In January 1998, the Company's shareholders approved an amendment to
the Company's Articles of Incorporation to authorize the issuance of up
to 1,600,000 shares of Series A, 6% preferred stock and up to
10,000,000 shares of an additional class of preferred stock in
contemplation of the Company's planned public stock offering in 1998.
In addition, the shareholders approved the Company's adoption of an
incentive stock option plan and a nonqualified stock option plan.
Pursuant to these plans, 42,500
F-15
<PAGE>
options, exercisable at $.25 per share, were granted to certain
employees on January 13, 1998. These options are exercisable through
January 13, 2008.
Also in January 1998, the Company borrowed an additional $150,000 on
its second mortgage note payable to the Chairman of the Board (see Note
8).
On February 23, 1998, the Company received $50,000 in bridge loan
financing to help the Company maintain its operations pending the
completion of the public offering referred to in Note 1. The terms of
this financing have been agreed to in principle. As partial
consideration for the financing, the lender will receive 500,000 shares
of Preferred Stock with a liquidation preference of $10.00 per share
($5,000,000 in total). This resulted in a substantial decrease in the
liquidation value available to other investors and potential investors.
Completion of the final loan documents is expected in the first quarter
of 1998.
******
F-16
<PAGE>
AWG, LTD.
Consolidated Balance Sheet as of March 31,
1998 and Statements of Operations and Cash
Flows for the Three-Month Periods Ended
March 31, 1998 and 1997 (Unaudited)
F-17
<PAGE>
AWG, LTD.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
MARCH 31, 1998 (UNAUDITED)
- --------------------------------------------------------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash $ 14,355
Accounts receivable 25,512
Inventories 818,795
Receivables from stockholders 93,380
Other current assets 24,749
-----------
Total current assets 976,791
PROPERTY, PLANT AND EQUIPMENT - Net 2,927,859
OTHER ASSETS - Net 459,464
-----------
TOTAL ASSETS $ 4,364,114
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 231,669
Other accrued liabilities 255,265
Current portion of long-term debt 1,584,000
Loans payable to related parties 205,000
-----------
Total current liabilities 2,275,934
LONG-TERM DEBT 1,665,400
-----------
Total liabilities 3,941,334
-----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value: 50,000,000
shares authorized; 7,157,337 shares issued
and outstanding 7,157
Additional capital 2,112,473
Additional capital - employee stock awards 155,000
Due from stockholder (75,000)
Accumulated deficit (1,776,850)
-----------
Stockholders' equity - net 422,780
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,364,114
===========
<FN>
See notes to consolidated financial statements.
</TABLE>
F-18
<PAGE>
AWG, LTD.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE-MONTH PERIODS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
- -------------------------------------------------------------------
1998 1997
---- ----
<S> <C> <C>
REVENUE:
Wine sales $ 66,702 $ 5,991
Cost of wine sold 41,669 5,263
--------- --------
Gross profit 25,033 728
--------- --------
OPERATING EXPENSES:
Administration 106,278 15,571
Marketing 74,428 35,751
--------- --------
Total operating expenses 180,706 51,322
--------- --------
OPERATING LOSS (155,673) (50,594)
INTEREST EXPENSE (Net of interest
capitalized of $18,000 and $15,181 in
1998 and 1997, respectively) 61,029 39,591
OTHER EXPENSES -- 8,772
--------- --------
LOSS BEFORE INCOME TAXES (216,702) (98,957)
STATE INCOME TAXES 800 800
--------- --------
NET LOSS $(217,502) $(99,757)
========= ========
NET LOSS PER SHARE (BASIC AND DILUTED) $ (0.03) $ (0.02)
========= ========
<FN>
See notes to consolidated financial statements.
</TABLE>
F-19
<PAGE>
AWG, LTD.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE-MONTH PERIOD ENDED MARCH 31, 1998 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------
Additional
Common Stock Capital - Due
----------------- Additional Employee from Accumulated Stockholders'
Shares Amount Capital Stock Awards Stockholder Deficit Equity
------ ------ ------- ------------ ----------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1998 7,157,337 $7,157 $2,112,473 $155,000 $(75,000) $(1,559,348) $640,282
NET (LOSS) (217,502) (217,502)
--------- ------ ---------- -------- -------- ----------- --------
BALANCE,
MARCH 31, 1998 7,157,337 $7,157 $2,112,473 $155,000 $(75,000) $(1,776,850) $422,780
========= ====== ========== ======== ======== =========== ========
<FN>
See notes to consolidated financial statements.
</TABLE>
F-20
<PAGE>
AWG, LTD.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE-MONTH PERIODS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
- ------------------------------------------------------------------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(217,502) $ (99,757)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 21,279 17,091
Changes in assets and liabilities:
Accounts receivable 48,525 (1,402)
Inventories (90,266) (100,312)
Other current assets 42,757 4,373
Accounts payable - trade 70,882 49,278
Other accrued liabilities 89,607 (3,476)
--------- ---------
Net cash used in operating activities (34,718) (134,205)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (203,799) (9,834)
Other assets (100,455) 2,124
--------- ---------
Net cash used in investing activities (304,254) (7,710)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt and bank
line of credit 335,000 139,420
--------- ---------
Net cash provided by financing activities 335,000 139,420
--------- ---------
DECREASE IN CASH (3,972) (2,495)
CASH AT BEGINNING OF YEAR 18,327 18,776
--------- ---------
CASH AT END OF YEAR $ 14,355 $ 16,281
========= =========
OTHER CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 72,846 $ 39,591
========= =========
Income taxes $ 800 $ 800
========= =========
Liability assumed upon acquisition
of licensing agreement $ -- $ 220,000
========= =========
<FN>
See notes to consolidated financial statements.
</TABLE>
F-21
<PAGE>
AWG, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE-MONTH PERIOD ENDED MARCH 31, 1998 (UNAUDITED)
=============================================================================
1. ORGANIZATION AND OPERATIONS
AWG, Ltd. (the "Company") acquired property, plant and equipment
comprised of a 53-acre vineyard and winery site and began production of
super-premium wines in the Napa Valley of California in 1996. Wine is
currently produced at another facility on a contract basis.
Approximately 58% of 1997's production represents bulk wine and grapes
purchased from independent growers and wineries. The Company generally
markets and sells its wines through independent distributors located on
the East Coast, in the Midwest and in the Southwest. During the three
months ended March 31, 1998, sales to one retailer totaled
approximately 19% of total sales.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The Company's financial statements are prepared
using the accrual method of accounting in accordance with generally
accepted accounting principles and have been prepared on a going
concern basis which contemplates the realization of assets and the
settlement of liabilities in the normal course of business. The Company
is currently building its brand name and is in the process of
establishing contracts with distributors and grape growers. Management
has incurred substantial expenditures to complete construction of a
winery building and expects to continue to incur substantial
expenditures to replant Phylloxera infested vineyards. The Company has
a working capital deficiency and limited capital resources, has had
negative cash flow from operations, and is having difficulty sustaining
its operations and meeting its obligations as they come due. In
addition, the Company expects that operating expenses will
significantly exceed revenues during the remaining months of 1998. The
Company also faces potential claims from stockholders due to violations
of securities laws resulting from the sale of approximately $1,360,000
of unregistered stock (see Note 10). These issues raise substantial
doubt about the Company's ability to continue as a going concern. The
accompanying financial statements do not include any adjustments that
may result from the outcome of these uncertainties.
Management plans to obtain the needed capital to enable the Company to
remain in business by raising equity capital in a public offering. The
Company has entered into a letter of intent with an underwriter to
conduct a "best efforts" public offering of the Company's proposed
Series A 6% Preferred Stock ("Preferred Stock"). The Company intends to
offer a maximum of 500,000 shares, and a minimum of 300,000 shares, of
Preferred Stock. The net proceeds from this public offering assuming it
is successful, after payment of underwriting commissions and offering
expenses, will be utilized to:
a. increase inventory production through the acquisition of bulk
wine until such time as grapes harvested from the Company's
vineyards and grape contracts are sufficient to meet the
Company's needs,
b. complete a vineyard replanting and maintenance program,
c. complete a winery construction and refurbishment program which
will result in a fully productive crush, tank and barrel storage
facility, a tasting room and a hospitality center
d. position itself to obtain additional capital to acquire other
wineries and vineyards, and
F-22
<PAGE>
e. repay certain indebtedness to officers and directors and a bank
loan guaranteed by a Director.
There are no assurances that management will be able to raise this
capital, and further, there can be no assurance, assuming the Company
successfully raises additional funds, that the Company will ultimately
achieve profitability and positive cash flow.
Principles of Consolidation - The consolidated financial statements
include AWG Ltd. and its wholly owned subsidiary AWG, Inc. All
significant intercompany balances and transactions have been
eliminated.
Unaudited Interim Information - In the opinion of management, the
financial information with respect to the quarters ended March 31, 1997
and 1998 contains all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of such
periods. The results of operations for the quarter ended March 31, 1998
are not necessarily indicative of the results to be expected for the
full year.
Inventories are recorded at lower of cost or market. Wine inventory is
determined by specific cost by vintage and variety. Costs include
grapes, purchased wine, winemaking and bottling costs. Wine inventories
are classified as current assets in accordance with industry practice
although some wine will be aged for periods longer than one year. Costs
associated with the next year's harvest are deferred and included in
wine inventory when the crop is harvested in the following year.
Property and equipment is stated at cost. Depreciation is computed by
the straight-line method over estimated useful lives of 3 to 20 years
for vineyards, 40 years for buildings and improvements, and 5 to 10
years for machinery and equipment. Interest capitalized during
construction of the winery facility for the three months ended March
31, 1998 and 1997, totaled $18,000 and $15,181, respectively.
Other assets consist primarily of licensing rights, organization and
label design costs that are amortized using the straight-line method
over the 10year term of the agreement for licensing rights and 5 years
for organization costs and label design costs. Other assets at March
31, 1998 also include costs of $146,877 incurred in connection with the
Company's planned preferred stock offering. Such amounts will be
charged to stockholders' equity at the completion of offering.
Revenue Recognition - The Company recognizes wine sales at the time of
shipment. The Company evaluates customer credit terms on an ongoing
basis and provides for estimated credit losses.
Income Taxes - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes, ("FAS 109"). Under FAS 109, deferred income taxes are
provided for the temporary differences between the tax basis of assets
and liabilities and their related financial statement amounts using
current income tax rates. A valuation allowance is recorded, if, based
on the weight of available evidence, it is more likely than not that
some portion of the deferred tax assets will not be realized.
Use of Estimates - Preparation of the financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect amounts
reported in the financial statements and related notes. Actual results
could differ from those estimates.
Earnings Per Share - Earnings per share is computed by dividing the net
loss by the weighted average number of common shares outstanding during
each year. The weighted average number of shares outstanding used to
calculate earnings per share were 7,157,337 and 5,383,246 in 1998 and
1997,
F-23
<PAGE>
respectively. Diluted earnings per share have not been adjusted
for the effect of employee stock awards and convertible debt as their
impact is antidilutive.
3. INVENTORIES
Inventories at March 31, 1998 consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Bulk wine $ 529,856
Bottled wine 225,389
Deferred farming costs 63,550
-----------
Total $ 818,795
===========
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at March 31, 1998 consist of the
following:
<TABLE>
<CAPTION>
<S> <C>
Land $ 1,445,880
Vineyards 122,567
Buildings and improvements 492,165
Construction in progress 801,561
Machinery and equipment 122,254
-----------
Total 2,984,427
Less accumulated depreciation (56,568)
-----------
Property and equipment, net $ 2,927,859
===========
</TABLE>
Certain portions of the Company's vineyards are approximately 25 years
old and are infested with Phylloxera, leaf roll and Pierce's disease.
As a result, these vineyards will be replanted in order to remain
commercially productive. During 1997, approximately 15 acres were
removed from production and 12 acres were replanted using rootstalk
management believes will be resistant to these infestations in the
future. It is expected that half of the remaining vineyard acreage will
be replanted in 1998 with the remaining acreage replanted in 1999. No
replanting occurred during the three months ended March 31, 1998.
F-24
<PAGE>
5. OTHER ASSETS
Other assets at March 31, 1998 consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Licensing rights $ 337,320
Organization costs 30,301
Printing dies 18,950
Deferred stock issuance costs 146,877
Other 15,150
-----------
Total 548,598
Less accumulated amortization (89,134)
-----------
Other assets - net $ 459,464
===========
</TABLE>
6. LONG-TERM DEBT
Long-term debt at March 31, 1998 consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Mortgage note dated April 12, 1996, renegotiated in
1997. Monthly interest only payments at the rate of
9%, 10%, and 11% for the first three years increasing
to 12% until maturity in 2002. $ 1,665,400
Bank line of credit agreement, dated January 28, 1997.
Monthly interest only payments at the rate of .5% in
excess of the prime rate of Citibank, N.A. (9% at
December 31, 1997), maturing December 23, 1998,
guaranteed by the Company's Chairman of the Board. 1,335,000
Bank line of credit agreement, dated July 15, 1997.
Monthly interest only payments at 1% over the Vintage
Bank borrowing rate (9.5% at December 31, 1997),
borrowings collateralized by accounts receivable,
inventory, supplies, and general intangibles,
principal due and payable no later than July 15,1998 199,000
Promissory note, dated March 2, 1998. Quarterly
principal and interest payments at 6%, maturing
January 1, 1999, guaranteed by the Company 50,000
-----------
Total 3,249,400
Less current portion (1,584,000)
-----------
Long-term portion (matures in 2002) $ 1,665,400
===========
</TABLE>
Terms of the $50,000 promissory note include provisions for the lender
to receive 500,000 shares of preferred stock with a liquidation
preference of $10.00 per share ($5,000,000 in total). This resulted in
a substantial decrease in the liquidation value available to other
investors and potential investors.
F-25
<PAGE>
7. LOANS PAYABLE TO RELATED PARTIES
Loans payable to related parties of $205,000 at March 31, 1998 consist
of interest only (at 9%) notes payable to stockholders, officers and
affiliates of the Company. The notes are due on demand.
8. RELATED PARTY TRANSACTIONS
Loans Receivable from Stockholders - In 1996, the Company loaned its
two principal stockholders each $75,000 from proceeds obtained from
three stockholder loans totaling $350,000. These loans receivable are
due on demand. In 1997, these stockholder loans were canceled in
exchange for the issuance of common stock. One of the receivables from
a stockholder who received stock in the exchange was reclassified and
shown as a reduction in stockholder's equity in 1997.
Licensing Rights - The Company has acquired and subsequently
renegotiated a License Agreement with Mario Andretti, a Director of the
Company, to utilize his name and image in conjunction with the
packaging, distribution and promotion of the Company's products. The
initial term of the License Agreement is 10 years, and may be extended
for two additional terms of 5 years, each at the option of the Company.
Pursuant to the License Agreement, Mr. Andretti has agreed to
participate in advertising and promotional activities on behalf of the
Company including, but not limited to, radio, television and print
media advertising spots, trade relations activities and personal
appearances. In March 1998, the License Agreement was amended to
provide for an indefinite term unless otherwise terminated for cause as
described in the License Agreement.
As compensation for his services under the License Agreement, Mr.
Andretti receives a royalty equal to 5% of the gross revenues and sales
of all products bearing his name or likeness. As to all other products
sold by the Company, Mr. Andretti shall be entitled to the lesser of 2%
of Company profits on all other wine sales or $150,000 per year.
Licensing fees owed to Mr. Andretti in 1997 and for the three months
ended March 31, 1998 totaled $25,225 and $3,335, respectively, and
$13,286 and $16,621 of these amounts were payable at December 31, 1997
and March 31, 1998, respectively.
During 1997, Mr. Andretti exchanged $220,000 in royalties due him under
the License Agreement and assumed by the Company on the date of
acquisition for 660,000 shares of common stock, valued at $.33 per
share, which approximated the trading price of the stock at the time of
the exchange in December 1997.
Consulting and Employment Contracts The Company's Chairman of the Board
provides consulting services to the company pursuant to an agreement
effective as of January 1, 1997. Compensation for such consulting
services in 1997 was $50,000 payable in common stock. The Company has
also agreed to pay certain Company Directors $35,000 each for services
provided during 1997, payable in common stock. The number of shares of
stock to be issued to these Directors is based on the trading price of
the stock as of December 31, 1997.
The Company has a one-year renewable employment contract with its Chief
Executive Officer. In addition to his base salary, he was issued
100,000 shares of Company common stock at no cost in 1997. Such shares
became fully vested by action of the Board of Directors in 1997.
In exchange for legal consultation services provided during 1997, a
Company Director was issued 100,000 shares of the Company's common
stock at no cost in 1997. This Director is under no obligation to
continue to provide any additional legal services to the Company in
connection with this stock grant.
F-26
<PAGE>
The Company has an unwritten agreement with its winemaker, who manages
the Company's wine making operations. In addition, to a fixed monthly
salary, the winemaker was issued 25,000 shares of the Company's common
stock at no cost in 1997.
There was no stock compensation cost recognized pursuant to these
agreements during the three-month periods ended March 31, 1998 or 1997.
9. STOCKHOLDERS' EQUITY
From March 5, 1996 through November 27, 1996, the Company sold shares
of its common stock to certain consultants retained by the Company
("Consultants") as well as to approximately seven investors not
affiliated with the Company ("Investors"). Approximately $860,000 was
raised from Investors and approximately $500,000 was raised from the
Consultants. In December 1996, the Company management was replaced in
connection with the acquisition of stock by two major stockholders. The
shares sold by former management were not registered, but, according to
Company records, sales to Investors were made pursuant to the
registration exemption afforded by Rule 504 under Regulation D adopted
by the Securities Exchange Commission ("SEC") pursuant to the
Securities Act of 1933 (the "Act"). Although Company records are not
clear with respect to the sale of securities to Consultants, the
Company believes that such sales may have been made pursuant to the
exemption afforded by Rule 701 adopted by the SEC pursuant to the Act.
Rule 504 exempts an offering of securities from federal registration
requirements if an issuer meets certain requirements including, among
other things, that (1) the offering does not exceed $1,000,000 within a
12month period (less sales of certain other exempt securities but not
including sales pursuant to Rule 701); and (2) the issuer is not a
reporting company pursuant to the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Rule 701 provides an exemption from the
registration provisions under the Act for sales of securities to, among
others, consultants of an issuer if, among other things, the issuer is
not a reporting company; aggregate sales do not exceed the greater of
$500,000 or 15% of the outstanding common stock of the issuer; and
sales are made pursuant to a plan or an agreement with the consultant.
Company records indicate that approximately $500,000 in securities were
sold to Consultants during the period in question. This amount did not
exceed the 15% limitation required by Rule 701. In addition, sales to
the Consultants were pursuant to a consulting and stock option
agreement between the Company and the Consultants dated March 10, 1996.
With respect to the Rule 504 offering, no Form D was filed with the
SEC. The primary effect of failure to file this form would not
necessarily be to invalidate the offering. Such failure may prevent the
Company from using certain exemptions for an indefinite time in the
future. In connection with the sales pursuant to Section 701, such
securities are restricted and cannot be resold by a party without an
applicable exemption from registration. Company stock records indicate
that many of the shares of stock sold to the Consultants were in fact
resold shortly after the initial sale to such persons. As a result, the
exemption afforded by Rule 701 may not be available for those sales. In
the event that Rule 701 is not available, such shares would have been
issued without registration and without an applicable exemption
therefrom. Such shares would, in turn, be added to the aggregate
offering amount pursuant to the Rule 504 offering, thereby increasing
the aggregate offering amount under Rule 504 beyond $1,000,000 and
therefore potentially invalidating the Rule 504 offering.
In the event that the entire offering is found to be invalid as a
result of the failure to qualify for an applicable exemption from
registration under the Act, the sale of such securities would violate
Section 12(a) of the Act. Section 12(a)(1) of the Act provides that any
person who offers or sells a security in violation of Section 5
[Registration Provisions of the Act] is liable to the person purchasing
F-27
<PAGE>
such security, for an amount equal to the consideration paid for such
security together with interest thereon. Pursuant to Section 13 of the
Act, no action may be brought to enforce a liability under Section
12(a)(1) unless such action is brought within one (1) year after the
violation upon which it is based. Since the last sale of the securities
occurred on November 19, 1996, the statute of limitations with respect
to any registration violations terminated on November 19, 1997.
Additionally, Section 12(a)(2) of the Act prohibits the use of a
prospectus or oral communication which includes an untrue statement of
material fact or omits to state a material fact necessary in order to
make the statements, in light of the circumstances under which they
were made, not misleading. As in the case of a violation of 12(a)(1),
in the event of a violation of 12(a)(2), a purchaser would be entitled
to seek the consideration for his or her investment plus interest
thereon. Such an action must be brought within one (1) year of the date
Purchaser discovered any untrue statement or possible omission (or
should have been discovered by the exercise of reasonable diligence)
but in no event beyond three (3) years after the sale. It is unclear
from Company records what information was given to Purchasers of the
stock. However, management believes that a business plan was prepared
and was distributed. A copy of the business plan is not available from
the Company. Moreover, the Company did have information in the
marketplace pursuant to Rule 15c211 under the Exchange Act. Since it
cannot be determined what information was provided each investor, no
determination can be made as to whether the information provided an
investor was misleading or whether any material information was
omitted. However, no investor or Consultant has instituted any action
against the Company nor has any such threat been communicated to the
Company. In connection with any securities offering, a threat always
exists that a purchaser can bring an action under Section 12(a)(2)
alleging that the information (whether written or oral) provided to
such investor is misleading or omits to state a material fact. However,
in absence of any shareholder complaints nor any evidence that
misleading information was provided to an investor, management believes
the Company has no current liability under Section 12(a)(2).
Based on the Company's records, compliance with applicable state
securities laws is unclear. However, to the extent sales were made in
the State of California, it does not appear that any applicable
exemption from registration has been satisfied. In the event that the
Company is found to have violated the registration provisions of the
California securities laws, any action must be brought within two years
after the violation or one year after the discovery of the facts
constituting such violation. Notwithstanding the Company's possible
exposure under California securities laws, the Company believes that
each of the Consultants who acquired their shares in the Company are no
longer shareholders and are believed to have sold their stock at or
above the prices at which they were acquired. As to the other investors
who purchased stock in the Company, most are believed to have sold
their shares and the remaining purchasers are not believed to be
California residents or entities.
In addition to investor actions, there is an issue as to potential
penalties the Company could incur either from the SEC or from an
applicable state regulatory agency. In this regard, various exemptions
from registration adopted by the SEC as well as by various states do
provide that such exemptions may be unavailable to companies as a
result of prior violations of securities laws and for financial
penalties. However, in most cases, such prohibitions can be waived upon
application by the Company for good cause. In this case, since each of
the potential violations alleged to have occurred happened under former
management and since current management has endeavored to comply with
the securities laws, management believes that the Company would not be
prohibited from use of various exemptive provisions under applicable
federal and state laws. Moreover, since the individuals who were
responsible for any securities violations are no longer within the
Company, there may be strong credible arguments that no financial
penalties should be imposed on a Company for any violations. There is
no financial civil liability under the Act. Under California law, a
$2,500 fine can be imposed for any violation. The full financial impact
which may result from these potential violations is unknown at this
F-28
<PAGE>
time but could include actions requiring the Company to return funds to
certain stockholders, along with interest and brokerage fees.
In January 1998, the Company's shareholders approved an amendment to
the Company's Articles of Incorporation to authorize the issuance of up
to 1,600,000 shares of Series A, 6% preferred stock and up to
10,000,000 shares of an additional class of preferred stock in
contemplation of the Company's planned public stock offering in 1998.
In addition, the shareholders approved the Company's adoption of an
incentive stock option plan and a nonqualified stock option plan.
Pursuant to these plans, 42,500 options, exercisable at $.25 per share,
were granted to certain employees on January 13, 1998. These options
are exercisable through January 13, 2008.
10. INCOME TAXES
Deferred tax assets and liabilities at March 31, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Assets:
Operating loss carryforwards $ 709,818
Inventory costs 29,161
Intangibles 16,042
Other 1,134
Valuation allowance (684,102)
---------
Total 72,053
---------
Liabilities:
Accelerated depreciation (20,735)
Other (51,318)
---------
Total (72,053)
Deferred tax assets - net $ --
=========
</TABLE>
Due to current and expected future operating losses, a valuation
allowance equal to the net deferred tax assets has been recorded as of
March 31, 1998 as it is more likely than not that such net deferred tax
assets will not be realized.
The provision for income taxes for the three-month periods ended March
31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current - state $ $800
Deferred --
----- ----
Total $ $800
===== ====
</TABLE>
F-29
<PAGE>
A reconciliation of the statutory federal income tax rate with the
Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Statutory rate 34% 34%
State income taxes, net of
federal benefit 5 5
Other - 2
Valuation allowance (39) (41)
--- ---
Effective tax rate 0 % 0 %
=== ===
</TABLE>
As of March 31, 1998, the Company had federal net operating loss
carryforwards which expire in taxable years ended December 31 as
follows:
<TABLE>
<CAPTION>
<S> <C>
2011 $ 716,678
2012 733,279
----------
Total $1,449,957
==========
</TABLE>
The net operating loss carryforwards do not include the losses
generated through March 31, 1998. To the extent the Company incurs a
tax loss for the year ending December 31, 1998, such amount would
represent additional net operating loss carryforwards which would
expire in 2013.
11. LEGAL PROCEEDINGS
During the three months ended March 31, 1998, certain prior claims
against the Company were dismissed, or settled. Amounts provided in
prior years for these matters were adequate to cover the settlement
amounts and related legal costs and no additional amounts were expensed
during the period.
A shareholder has made a claim for approximately 500,000 shares
allegedly due him in exchange for cash payments made and services
provided to the Company. The Company disputes the claim alleging that a
substantial portion of the proceeds allegedly paid to the Company were
never received. No amounts have been accrued with respect to this
claim. The Company believes that the ultimate outcome of this matter
will not have a material adverse effect on the Company's financial
condition, results of operations or cash flows.
******
F-30
<PAGE>
EXHIBIT A
<PAGE>
DESCRIPTION OF PREFERRED STOCK
I. Series A 6% Preferred Stock. The Corporation shall have the authority
to issue one million six hundred thousand (1,600,000) shares of Series A 6%
Preferred Stock each having a par value of one-tenth of one cent ($0.001). A
statement of all or any of the relative rights, preferences and limitations
of the shares of the Series A 6% Preferred Stock is as follows:
A. Dividends. The holders of the Series A 6% Preferred Stock
are entitled to and shall receive Dividends as follows:
Cumulative, annual dividends at the rate of six percent
(6%) per annum, payable on or before January 30 of each
year that any Series A 6% Preferred Stock shall be
outstanding. The Corporation will pay Dividends to the
person who is the holder of record on the preceding
December 31. Dividends shall begin to accrue on the date a
written subscription for shares of Series A 6% Preferred
Stock is accepted by the Corporation. The Dividend shall be
payable in additional shares of Series A 6% Preferred Stock
only.
B. Redemption.
(1) The Corporation may, at any time and at the option of the
Board of Directors, and subject to the approval of the
holders of a majority of the issued and outstanding shares
of Series A 6% Preferred Stock, redeem all or part of the
outstanding shares of the Series A 6% Preferred Stock for
such consideration as the Company and the holders of Series
A 6% Preferred Stock may agree (the "Redemption Price").
The Corporation shall give written notice by mail, postage
prepaid, to the holders of the Series A 6% Preferred Stock
to be redeemed at least sixty (60) days prior to the date
specified for redemption (the "Redemption Date"). Such
notice shall be addressed to each such shareholder at the
address of such holder appearing on the books of the
Corporation or given by such holder to the Corporation for
the purpose of notice, or if no such address appears or is
so given, at the place where the principal office of the
Corporation is located. Such notice shall state the
proposed Redemption Date, the Redemption Price and the
number of shares of Series A 6% Preferred Stock of such
holder proposed to be redeemed and the date, time and place
of a meeting of the holders of the Series A 6% Preferred
Stock for purposes of approving such redemption, which date
shall be no less than twenty (20) days following the
mailing of the notice. On or after the Redemption Date, if
such redemption is approved by the holders of the Series A
6% Preferred Stock in the manner specified herein, each
holder of shares of Series A 6% Preferred Stock called for
redemption shall surrender the certificate evidencing such
shares to the Corporation at the place designated in such
2
<PAGE>
notice and shall thereupon be entitled to receive payment
of the Redemption Price. If less than all of the
outstanding shares of Series A 6% Preferred Stock are to be
redeemed, then the Corporation shall redeem a pro rata
portion from each holder of Series A 6% Preferred Stock
according to the respective number of shares of Series A 6%
Preferred Stock held by such holder.
(2) From and after the Redemption Date (unless default shall be
made by the Corporation in duly paying the Redemption Price
in which case all the rights of the holders of such shares
shall continue) the holders of the shares of the Series A
6% Preferred Stock called for redemption shall cease to
have any rights as stockholders of the Corporation except
the right to receive, without interest, the Redemption
Price thereof upon surrender of certificates representing
the shares of Series A 6% Preferred Stock, and such shares
shall not thereafter be transferred (except with the
consent of the Corporation) on the books of the Corporation
and shall not be deemed outstanding for any purpose
whatsoever. Any money deposited for the redemption of
shares of Series A 6% Preferred Stock thereafter converted
shall be returned to the Corporation upon such conversion.
Any money so deposited which is unclaimed by a holder of
Series A 6% Preferred Stock for two (2) years after the
Redemption Date thereof shall be returned to this
Corporation.
(3) There shall be no redemption of any shares of Series A 6%
Preferred Stock of the Corporation where such action would
be in violation of applicable law.
C. Liquidation.
(1) In the event of any voluntary or involuntary liquidation,
dissolution, or winding up of the Company, the holders of
shares of the Series A 6% Preferred Stock then outstanding
shall be entitled to be paid, out of the assets of the
Company available for distribution to its stockholders,
whether from capital, surplus or earnings, before any
payment shall be made in respect of the Company's Common
Stock an amount equal to ten dollars ($10.00) per share,
plus all accumulated but unpaid dividends thereon to the
date fixed for distribution. After setting apart or paying
in full the preferential amounts due the holders of the
Series A 6% Preferred Stock, the remaining assets of the
Company available for distribution to stockholders, if any,
shall be distributed exclusively to the holders of Common
Stock, each such issued and outstanding share of Common
Stock entitling the holder thereof to receive an equal
proportion of said remaining assets. If upon liquidation,
dissolution, or winding up of the Company, the assets of
the Company available for distribution to its shareholders
shall be insufficient to pay the holders of the Series A 6%
Preferred Stock the full amounts to which they respectively
shall be entitled, the holders of the Series A 6% Preferred
Stock
3
<PAGE>
shall share ratably in any distribution of assets according
to the respective amounts which would be payable in respect
of the shares held by them upon such distribution if all
amounts payable on or with respect to said shares were paid
in full.
(2) In the event of any voluntary or involuntary liquidation,
dissolution, or winding up of the Corporation, the
Corporation shall within ten (10) days after the date the
Board of Directors approves such action, or within twenty
(20) days prior to any shareholder's meeting called to
approve such action, or within twenty (20) days after the
commencement of any involuntary proceeding, whichever is
earlier, give each holder of shares of Series A 6%
Preferred Stock initial written notice of the proposed
action. Such initial written notice shall describe the
material terms and conditions of such proposed action,
including a description of the stock, cash, and property to
be received by the holders of shares of Series A 6%
Preferred Stock upon consummation of the proposed action,
and the date of delivery thereof. If any material change in
the facts set forth in the initial notice shall occur, the
Corporation shall promptly given written notice to each
holder of shares of Series A 6% Preferred Stock of such
material change.
The Corporation shall not consummate any voluntary or
involuntary liquidation, dissolution, or winding up of the
Corporation before the expiration of thirty (30) days after
the mailing of the initial notice or ten (10) days after
the mailing of any subsequent written notice, whichever is
later.
(3) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation which will
involve the distribution of assets other than cash, the
Corporation shall promptly engage competent independent
appraisers to determine the value of the assets to be
distributed to the holders of shares of Series A 6%
Preferred Stock and the holders of shares of Common Stock
(it being understood that with respect to the valuation of
securities, the Corporation shall engage such appraiser as
shall be approved by the holders of a majority of shares of
the Corporation's outstanding Series A 6% Preferred Stock).
The Corporation shall, upon receipt of such appraiser's
valuation, give prompt written notice to each holder of
shares of Series A 6% Preferred Stock of the appraiser's
valuation.
D. Voting. Except as otherwise expressly provided herein or in
the Nevada Revised Statutes, the holders of the Series A 6%
Preferred Stock shall have no voting powers and no holder thereof
shall be entitled to receive notice of any meeting of the
shareholders.
E. Seniority. The dividend and liquidation rights of the Series
A 6% Preferred Stock shall be senior and superior to those of the
Common Stock. Unless and until all accumulated but unpaid dividends
on the Series A 6% Preferred Stock shall be
4
<PAGE>
paid in full, (a) no cash or stock dividends, or other distributions
of any kind, may be paid or declared or set aside for payment upon
the Common Stock, and (b) the Company may not redeem, purchase, or
otherwise acquire any shares of Common Stock, for any consideration
whatsoever.
II. Additional Preferred Stock. The Corporation shall have the authority
to issue ten million (10,000,000) shares of Additional Preferred Stock each
having a par value of one-tenth of one cent ($0.001). The Directors shall
have the power to designate the Additional Preferred Stock as being of one or
more series, to issue any such series, to fix the terms, preferences, voting
powers, restrictions and qualifications of any such series, and, without
limiting the generality of the foregoing, to fix, as to each series: (a) the
designation of the series and the number of the shares to constitute the
series, which number of shares may, from time to time, be increased (except
as otherwise provided by resolution of the Board of Directors providing for
the issue of the series) or decreased (to a number not less than the number
of shares then outstanding) by resolution of the Board of Directors; (b) the
dividend rate of the series, the conditions and dates upon which the
dividends shall be payable, the relation which the dividend shall bear to the
dividends payable on any other class or on any other series of any class of
shares, and whether the dividend shall be cumulative or non-cumulative; (c)
whether the shares of the series shall be redeemable by the Company and, if
subject to redemption, the times, prices and other terms and conditions of
the redemption and whether shares which have been redeemed may be reissued or
must be canceled; (d) the terms and amount of any sinking fund provided for
the purchase or redemption of the shares of the series; (e) whether or not
the shares of the series shall be convertible into or exchangeable for shares
of any other class or any other series of any other class of shares of the
Company, and, if provision is made for conversion or exchange, the times,
prices, rates of exchange, adjustment and other terms and conditions of the
conversion or exchange; (f) the extent of the voting powers, if any,
including shares entitled to more than one vote per share, of the shares of
the series; (g) whether, and if so the extent to which, shares of the series
may participate with the Common Shares or with any other series in any other
dividends in excess of the preferential dividend fixed for shares of the
series; (h) the rights of the holders of shares of the series upon the
dissolution of, or upon the distribution of the assets of, the Company, and
whether, and if so the extent to which, shares of a series may participate
with the Common Shares or with any other series in any dissolution of, or
upon the distribution of the assets of, the Company, in excess of the
preferential amount fixed per shares of a series; and (i) any other
preferences and any relative optional or other special rights, and any
qualifications, limitations or restrictions of the preferences or rights of
shares of the series.
5
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
TABLE OF CONTENTS
THE COMPANY........................................................... 4
RISK FACTORS.......................................................... 4
BUSINESS AND PROPERTIES............................................... 9
OFFERING PRICE FACTORS............................................... 20
USE OF PROCEEDS...................................................... 21
CAPITALIZATION....................................................... 23
DESCRIPTION OF SECURITIES............................................ 24
PLAN OF DISTRIBUTION................................................. 24
DIVIDENDS, DISTRIBUTIONS AND REDEMPTIONS............................. 26
OFFICERS AND KEY PERSONNEL OF THE COMPANY............................ 26
DIRECTORS OF THE COMPANY............................................. 27
PRINCIPAL STOCKHOLDERS............................................... 29
MANAGEMENT RELATIONSHIPS, TRANSACTIONS AND REMUNERATION.............. 30
LITIGATION........................................................... 33
LEGAL MATTERS.........................................................33
FEDERAL TAX ASPECTS.................................................. 33
MISCELLANEOUS FACTORS................................................ 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CERTAIN RELEVANT FACTORS..... 35
CONSOLIDATED FINANCIAL STATEMENTS.................................... F-1
EXHIBITS:
A - Description of Preferred Stock
THIS PROSPECTUS CONTAINS ALL OF THE REPRESENTATIONS BY THE COMPANY CONCERNING
THIS OFFERING, AND NO PERSON SHALL MAKE DIFFERENT OR BROADER STATEMENTS THAN
THOSE CONTAINED HEREIN. INVESTORS ARE CAUTIONED NOT TO RELY UPON ANY
INFORMATION NOT EXPRESSLY SET FORTH IN THIS PROSPECTUS.
This Prospectus, together with Financial Statements and other
Attachments, consists of a total of ________ pages.
UNTIL ________ , 1998, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 1. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 78.751 of the Nevada Revised Statutes provides for the
indemnification of officers, directors, and other corporate agents for
actions taken by reason of the fact that such person is or was an officer,
director or other corporate agent, if such person acted in good faith and in
a manner reasonably believed to be in, or not opposed to the best interests
of the Corporation and had no reasonable cause to believe such conduct was
unlawful. These terms are sufficiently broad to indemnify such persons under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the "Act").
Article XI of the Company's Certificate of Incorporation (Exhibit 2.2 hereto)
and Article IV, Section 10 of the Company's Bylaws (Exhibit 2.3 hereto)
provide for indemnification of the Company's directors, officers, employees
and other agents to the extent and under the circumstances permitted by the
Nevada Revised Statutes.
The Underwriting Agreement (Exhibit 1) provides for indemnification by the
Underwriters of the Company, its directors and officers, and by the Company
of the Underwriters, for certain liabilities, including liabilities arising
under the Act, and affords certain rights of contribution with respect
thereto.
Item 2. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses expected to be incurred
by the Company in connection with the sale and distribution of the securities
being registered hereby, other than underwriting discounts and commissions.
All amounts are estimated except for the Securities and Exchange Commission
registration fee, and the National Association of Securities Dealers, Inc.
filing fee.
<TABLE>
<CAPTION>
PAYABLE BY
COMPANY
-----------
<S> <C>
SEC registration fee ............................................. $ 2,950
National Association of Securities Dealers, Inc. filing fee ...... 1,500
Blue Sky fees and expenses ....................................... 5,000
Accounting fees and expenses ..................................... 30,000
Legal fees and expenses .......................................... 120,000
Printing and engraving expenses .................................. 20,000
Registrar and Transfer Agent's fees .............................. 2,000
Miscellaneous fees and expenses .................................. 5,000
---------
Total ............................................................ $ 186,450
=========
</TABLE>
<PAGE>
Item 3. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Company in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Company will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned Company hereby undertakes that it will provide to the
underwriters at the closing(s) specified in the underwriting agreement
certificates in such denomination and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(a) To include any Prospectus required by Section 10(a)(3) of
The Securities Act of 1933;
(b) To reflect in any Prospectus any facts or events which,
individually or together represent a fundamental change in
information in the Registration Statement; and
(c) To include any additional or changed material information
on the Plan of Distribution.
(2) For determining liability under The Securities Act of 1933, to treat
each post-effective amendment as a new Registration Statement of the
securities offered, and the offering of the securities at that time
to be the initial bona fide offering.
(3) To file a post-effective amendment to renew from registration any of
the securities that remain unsold at the end of the Offering.
<PAGE>
Item 4. UNREGISTERED SECURITIES ISSUED OR SOLD WITHIN ONE YEAR
Since March 1997, the issuer has sold and issued the following unregistered
securities:
(a) In February 1998, the Company issued 500,000 shares of preferred
stock in connection with bridge loan financing provided by a single
investor who has no presence in the United States. This investor is
Colin Frank Riseam. The Company relied on the exemption provided by
Section 4(2) of the Act.
(b) In December 1997, three investors who previously contributed an
aggregate of $350,000 to the Company in exchange for yet to be
authorized class of preferred stock elected to acquire common stock
of the Company in lieu of the preferred stock in order to facilitate
this offering. Three investors, Joseph Antonini, Bruce Williams
(each of which is a director of the Company) and Carl Haas, an
associate of Messrs. Antonini and Mario Andretti received an
aggregate of 1,050,000 shares of the common stock of the Company.
The Company relied on the exemption provided by Section 4(2) of the
Act.
(c) In December 1997, Mario Andretti, a director of the Corporation,
exchanged $220,000 of royalties due and payable to him for 660,000
shares of common stock in the Company. The Company relied on the
exemption provided by Section 4(2) of the Act.
(d) In 1997, securities were issued to John Caponigro, Mack Jennings and
Robert Pepi without consideration and without deduction from any
compensation under any employment or other agreement. To the extent
that any of the shares could be deemed issued in exchange for
services, the Company relied on the exemption provided by Section
4(2) of the Act.
<PAGE>
The recipients of the above-described securities received certificates which
are restricted as to sale. All recipients had adequate access, through
employment or other relationships, to information about the Company.
Item 5. INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
1. Form of Underwriters Agreement, Warrant Agreement
and Lock-up Agreement
2.1* Certificate of Incorporation
2.2* Certificate of Amendment to Articles of Incorporation as
filed with the Secretary of State of the State of Nevada
on May 4, 1995, December 15, 1995 and February 12,
1998.
2.3* Bylaws of the Company as amended to date.
3. Form of Preferred Stock Certificate
4.** Form of Subscription Agreement
6.1* License Agreement Between Mario Andretti and the
Company
6.2 Note and Mortgage dated April 12, 1996 by and
between the Company and Bar K, Inc. in connection
with the acquisition of the Company's winery
6.3 Line of Credit Agreement by and between the Company
and Vintage Bank
6.4 Line of Credit Agreement between the Company and
Bank of Bloomfield Hills, Michigan
6.5* Promissory Note on the Company in favor of Mack
Jennings
6.6* Promissory Note in favor of Robert Pepi
6.7* Two (2) Promissory Notes in favor of Mario Andretti
<PAGE>
6.8* Promissory Note in favor of Sports Management
Network, Inc.
6.10 Promissory Note and Registration Rights Agreement in
favor of Colin Frank Riseam
6.11* Employment Agreement by and between AWG, Ltd.
and Mack Jennings
6.12* Amendment to Employment Agreement by and between
AWG, Ltd. and Mack Jennings
6.13* AWG, Ltd. Incentive Stock Option Plan (ISO Plan)
6.14* Form of Incentive Stock Option Agreement under the
ISO Plan
6.15* AWG, Ltd. Non-Qualified Stock Option Plan ("Non-
Qualified Plan")
9. Escrow Agreement by and between the Company, the
Underwriter and Chase Manhattan Bank
10.1 Consent of Deloitte and Touche, LLP
10.2 Consent of Jackier, Gould, Bean, Upfal & Eizelman
(contained in Legal Opinion filed as Exhibit 11)
10.3** Consent of Underwriter
11. Legal Opinion of Jackier, Gould, Bean, Upfal &
Eizelman
27. Financial Data Schedule Required By Item 601(b)(27)
of Regulation S-B
* previously filed
** to be filed by Amendment
<PAGE>
Item 6. DESCRIPTION OF EXHIBITS
See Item 5.
In accordance with the requirements of the Securities Act of 1933, the
Company certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing Form SB-1 and authorizes this Amendment to
Registration Statement to be signed on its behalf by the undersigned in the
City of Napa, State of California on June 30, 1998.
AWG, LTD.
By: /s/ Mack Jennings
---------------------
Mack Jennings
Its: President
In accordance with the requirements of the Securities Act of 1933, this
Amendment to Registration Statement was signed by the following persons in
the capacities and on the dates stated:
NAME TITLE DATE
- ---- ----- ----
Joseph Antonini
Joseph Antonini Chairman of the Board June 30, 1998
Mario Andretti Vice Chairman of the Board
Mack Jennings
Mack Jennings President, Chief Executive
Officer (Its Principal Executive
Officer; Principal Financial
Officer and Principal
Accounting Officer) and
Director June 30, 1998
Bruce Williams Director
John Caponigro
John Caponigro Secretary, General Counsel
and Director June 30, 1998
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
1. Form of Underwriters Agreement, Warrant Agreement
and Lock-up Agreement
3. Form of Preferred Stock Certificate
6.2 Note and Mortgage dated April 12, 1996 by and
between the Company and Bar K, Inc. in connection
with the acquisition of the Company's winery
6.3 Line of Credit Agreement by and between the
Company and Vintage Bank
6.4 Line of Credit Agreement between the Company and
Bank of Bloomfield Hills, Michigan
6.10 Promissory Note and Registration Rights Agreement
in favor of Colin Frank Riseam
9 Escrow Agreement by and between the Company, the
Underwriter and Chase Manhattan Bank
10.1 Consent of Deloitte and Touche LLP
10.2 Consent of Jackier, Gould, Bean, Upfal & Eizelman
(contained in Legal Opinion filed as Exhibit 11)
11. Legal Opinion of Jackier, Gould, Bean, Upfal &
Eizelman
27. Financial Data Schedule Required By Item 601(b)(27)
of Regulation S-B
1. FORM OR UNDERWRITERS AGREEMENT, WARRANT
AGREEMENT AND LOCK-UP AGREEMENT
<PAGE>
Form of Underwriting Agreement
--------------------------------------------
1,000,000 Shares of Series A Preferred Stock
--------------------------------------------
AWG, LTD.
UNDERWRITING AGREEMENT
New York, New York
______________, 1998
Klein Maus and Shire, Inc.
110 Wall Street
New York, New York 10005
Ladies and Gentlemen:
AWG, Ltd., a Nevada corporation (the "Company"), confirms
its agreement with Klein Maus and Shire, Inc., ("you", the "Underwriter" or
"KMS") as follows: The Company retains KMS as its exclusive agent to sell
(the "Offering"), on a best efforts basis, a minimum of 300,000 shares (the
"Shares") of the Company's Series A 6% Preferred Stock, $.001 par value per
share (the "Preferred Stock" or the "Securities") and a maximum of 500,000
shares of Preferred Stock, at a price to the public of $10.00 per share of
Preferred Stock during an offering period commencing on the date hereof and
expiring on _______________________, 1998, unless extended by the mutual
consent of the Company and the Underwriter for up to an additional thirty
(30) days (such period, as same may be extended, being hereinafter referred
to as the "Offering Period"). The Company also proposes to issue and sell to
you warrants (the "Underwriter's Warrants") at a
<PAGE>
purchase price of $.0001 per Underwriter's Warrant pursuant to the
Underwriter's Warrant Agreement entitling the holder to purchase an aggregate
of 50,000 shares of Preferred Stock exercisable for a period of four years
from ______________, 1999 until ___________________, 2003 at an initial
exercise price of $16.00 per share, subject to adjustment in amount pro rata
in the event all of the Preferred Stock is not sold in the Offering. The
Underwriter's Warrants and the Preferred Stock issuable upon exercise of the
Underwriter's Warrants are hereinafter referred to as the "Underwriter's
Securities." The Underwriter's Securities are more fully described in the
Registration Statement and the Prospectus referred to below.
1. Representations and Warranties. (a) The Company, a
Nevada corporation, which has one wholly-owned subsidiary, AWG, Inc., a
Delaware corporation (the "Subsidiary"), represents and warrants to, and
agrees with, the Underwriter as of the date hereof, and as of the Closing
Date (hereinafter defined) and the Option Closing Date (hereinafter defined),
if any, as follows:
(i) The Company has prepared and filed with the
Securities and Exchange Commission (the "Commission") a registration
statement, and an amendment or amendments thereto, on Form SB-1 (No.
333-48165), including any related preliminary prospectus ("Preliminary
Prospectus"), for the registration of the Shares of Preferred Stock and the
Underwriter's Securities under the Securities Act of 1933, as amended (the
"Act"), which registration statement and amendment or amendments have been
prepared by the Company in conformity with the requirements of the Act, and
the Rules and Regulations of the Commission thereunder. The Company will
promptly file a further amendment to said registration statement in the form
heretofore delivered to the Underwriter and will not file any other amendment
thereto to which the Underwriter shall have objected in writing after having
been furnished with a copy thereof. Except as the context may otherwise
require, such registration statement, as amended, on file with
-2-
<PAGE>
the Commission at the time the registration statement becomes effective
(including the Prospectus, financial statements, schedules, exhibits and all
other documents or information incorporated by reference therein and all
information deemed to be a part thereof as of such time pursuant to paragraph
(b) of Rule 430(A) of the rules and regulations), is hereinafter called the
"Registration Statement", and the form of prospectus in the form first filed
with the Commission pursuant to Rule 424(b) of the rules and regulations, is
hereinafter called the "Prospectus". For purposes hereof, "Rules and
Regulations" mean the rules and regulations adopted by the Commission under
either the Act or the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as applicable.
(ii) Neither the Commission nor any state
regulatory authority has issued any order preventing or suspending the use of
any Preliminary Prospectus, the Registration Statement or Prospectus or any
part of any thereof and no proceedings for a stop order suspending the
effectiveness of the Registration Statement or any of the Company's
securities have been instituted or are pending or threatened. Each of the
Preliminary Prospectus, the Registration Statement and Prospectus at the time
of filing thereof conformed with the requirements of the Act and the Rules
and Regulations, and none of the Preliminary Prospectuses, the Registration
Statement or Prospectus at the time of filing thereof contained an untrue
statement of a material fact or omitted to state a material fact required to
be stated therein and necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, except that
this representation and warranty does not apply to statements made in
reliance upon and in conformity with written information furnished to the
Company with respect to the Underwriter by or on behalf of the Underwriter
expressly for use in such Preliminary Prospectus, Registration Statement or
Prospectus or any amendment or supplement thereto.
(iii) When the Registration Statement becomes
effective and at all times
-3-
<PAGE>
subsequent thereto up to the Closing Date (hereinafter defined) and each
Option Closing Date (hereinafter defined), if any, and during such longer
period as the Prospectus may be required to be delivered in connection with
sales by the Underwriter or a dealer, the Registration Statement and the
Prospectus will contain all statements which are required to be stated
therein in accordance with the Act and the Rules and Regulations, and will
conform to the requirements of the Act and the Rules and Regulations; neither
the Registration Statement nor the Prospectus, nor any amendment or
supplement thereto, contains or will contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein and necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, provided, however,
that this representation and warranty does not apply to statements made or
statements omitted in reliance upon and in conformity with information
furnished to the Company in writing by or on behalf of the Underwriter (as
set forth in paragraph 1(a)(ii) hereof) expressly for use in the Preliminary
Prospectus, Registration Statement or Prospectus or any amendment thereof or
supplement thereto.
(iv) The Subsidiary is a wholly-owned subsidiary
of the Company. Each of the Company and the Subsidiary has been duly
organized and is validly existing as a corporation in good standing under the
laws of the state of its incorporation. Except as set forth in the
Prospectus, neither the Company nor the Subsidiary own an equity interest in
any corporation, partnership, trust, joint venture or other business entity.
Each of the Company and the Subsidiary is duly qualified and licensed and in
good standing as a foreign corporation in each jurisdiction in which its
ownership or leasing of any properties or the character of its operations
require such qualification or licensing except where the failure(s) to be so
qualified, licensed and in good standing, individually or in the aggregate,
would not materially and adversely affect the condition, financial or
otherwise, or the earnings, business affairs, position, prospects, value,
operation, properties, business or results of operations of the Company and
the Subsidiary. Each of the
-4-
<PAGE>
Company and the Subsidiary has all requisite power and authority (corporate
and other), and has obtained any and all authorizations, approvals, orders,
licenses, certificates, franchises and permits of and from all governmental
or regulatory officials and bodies (including, without limitation, those
having jurisdiction over environmental or similar matters), necessary to own
or lease its properties and conduct its business as described in the
Prospectus, or is subject to no material liability or disability by reason of
the failure to obtain such authorizations, approvals, orders, licenses,
certificates, franchises and permits; each of the Company and the Subsidiary
is and has been doing business in compliance with all such authorizations,
approvals, orders, licenses, certificates, franchises and permits and all
federal, state, local and foreign laws, rules and regulations and neither the
Company nor the Subsidiary have received any notice of proceedings relating
to the revocation or modification of any such authorization, approval, order,
license, certificate, franchise, or permit which, singly or in the aggregate,
if the subject of an unfavorable decision, ruling or finding, would
materially and adversely affect the condition, financial or otherwise, or the
earnings, business affairs, position, prospects, value, operations,
properties, business, or results of operations of the Company and the
Subsidiary. The disclosures in the Registration Statement concerning the
effects of federal, state, local, and foreign laws, rules and regulations on
the business of the Company and the Subsidiary as currently conducted and as
contemplated are correct in all material respects and do not omit to state a
material fact necessary to make the statements contained therein not
misleading in light of the circumstances in which they were made.
(v) The Company has a duly authorized, issued and
outstanding capitalization as set forth in the Prospectus, and will have the
adjusted capitalization set forth therein on the Closing Date (hereinafter
defined) and the Option Closing Date (hereinafter defined), if any, based
upon the assumptions set forth therein, and the Company is not a party to or
bound by any instrument, agreement or other arrangement providing for it to
issue any capital stock, rights,
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warrants, options or other securities, except for this Agreement and as
described in the Prospectus. The Preferred Stock, the Underwriter's Warrants
and the Preferred Stock into which the Underwriter's Warrants are exercisable
(collectively, hereinafter sometimes referred to as the "IPO Securities") and
all other securities issued or issuable by the Company conform or, when
issued and paid for, will conform, in all material respects to all statements
with respect thereto contained in the Registration Statement and the
Prospectus. All issued and outstanding securities of the Company and its
Subsidiary have been duly authorized and validly issued and are fully paid
and non-assessable and the holders thereof have no rights of rescission with
respect thereto except as disclosed in the Registration Statement, and are
not subject to personal liability by reason of being such holders; and none
of such securities were issued in violation of the preemptive rights of any
holders of any security of the Company or the Subsidiary or similar
contractual rights granted by the Company or the Subsidiary. The IPO
Securities are not and will not be subject to any preemptive or other similar
rights of any stockholder, have been duly authorized and, when issued, paid
for and delivered in accordance with the terms hereof, will be validly
issued, fully paid and non-assessable and will conform to the description
thereof contained in the Prospectus; the holders thereof will not be subject
to any liability solely as such holders; all corporate action required to be
taken for the authorization, issue and sale of the IPO Securities has been
duly and validly taken; and the certificates representing the IPO Securities
are in due and proper form. Upon the issuance and delivery pursuant to the
terms hereof of the IPO Securities to be sold by the Underwriter hereunder,
the purchasers of the IPO Securities, will acquire good and marketable title
to such IPO Securities free and clear of any lien, charge, claim,
encumbrance, pledge, security interest, defect or other restriction or equity
of any kind whatsoever.
(vi) The financial statements of the Company
together with the related notes and schedules thereto, included in the
Registration Statement, each Preliminary Prospectus and
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the Prospectus fairly present the financial position, income, changes in cash
flow, changes in stockholders' equity and the results of operations of the
Company and the Subsidiary at the respective dates and for the respective
periods to which they apply and the pro forma financial information included
in the Registration Statement, each Preliminary Prospectus and the Prospectus
presents fairly on a basis consistent with that of the audited financial
statements included therein, the Company's and the Subsidiary's pro forma net
income or loss per share, as the case may be, pro forma net tangible book
value, and the pro forma capitalization and such financial statements have
been prepared in conformity with generally accepted accounting principles and
the Rules and Regulations, consistently applied throughout the periods
involved. There has been no material adverse change or development involving
a material change in the condition, financial or otherwise, or in the
earnings, business affairs, position, prospects, value, operation,
properties, business or results of operation of the Company or the Subsidiary
whether or not arising in the ordinary course of business, since the date of
the financial statements included in the Registration Statement and the
Prospectus, and the outstanding debt, the property, both tangible and
intangible, and the business of the Company and the Subsidiary conforms in
all material respects to the descriptions thereof contained in the
Registration Statement and the Prospectus.
(vii) The Company and its Subsidiary (A) has paid
all federal, state, local, and foreign taxes for which it is liable,
including, but not limited to, withholding taxes and amounts payable under
Chapters 21 through 24 of the Internal Revenue Code of 1986, as amended (the
"Code"), and has furnished all information returns it is required to furnish
pursuant to the Code, (B) has established adequate reserves for such taxes
which are not due and payable, and (C) does not have any tax deficiency or
claims outstanding, proposed or assessed against it.
(viii) No transfer tax, stamp duty or other
similar tax is payable by or on behalf of the purchasers of the IPO
Securities in connection with (A) the purchase of and the
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issuance and transfer by the Company of the IPO Securities and (B) the
consummation by the Company of any of its obligations under this Agreement.
(ix) The Company and its Subsidiary each maintains
insurance policies, including, but not limited to, general liability, product
liability if applicable and property insurance, which insures the Company and
its Subsidiary and their employees, against such losses and risks generally
insured against by comparable businesses. The Company and its Subsidiary (A)
have not failed to give notice or present any insurance claim with respect to
any matter, including but not limited to the Company's or the Subsidiary's
business, property or employees, under the insurance policy or surety bond in
a due and timely manner, (B) does not have any disputes or claims against any
underwriter of such insurance policies or surety bonds or has not failed to
pay any premiums due and payable thereunder, and (C) has not failed to comply
with all conditions contained in such insurance policies and surety bonds. To
the Company's knowledge there are no facts or circumstances under any such
insurance policy or surety bond which would relieve any insurer of its
obligation to satisfy in full any valid claim of the Company and/or its
Subsidiary.
(x) There is no action, suit, proceeding, inquiry,
arbitration, investigation, litigation or governmental proceeding (including,
without limitation, those having jurisdiction over environmental or similar
matters), domestic or foreign, pending or threatened against (or
circumstances that may give rise to the same), or involving the properties or
business of the Company or its Subsidiary which (A) questions the validity of
the capital stock of the Company, its Subsidiary or this Agreement, or of any
action taken or to be taken by the Company pursuant to or in connection with
this Agreement or the Underwriter's Warrant Agreement, (B) is required to be
disclosed in the Registration Statement which is not so disclosed (and such
proceedings as are summarized in the Registration Statement are accurately
summarized in all material respects), or (C) if adversely determined, might
materially and adversely affect the condition, financial or otherwise,
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<PAGE>
or the business affairs or business prospects, earnings, liabilities,
prospects, stockholders' equity, value, properties, business or assets of the
Company and its Subsidiary.
(xi) The Company has full legal right, power and
authority to authorize, issue, deliver and sell the IPO Securities, enter
into this Agreement and the Underwriter's Warrant Agreement and to consummate
the transactions provided for herein and therein; and each of this Agreement
and the Underwriter's Warrant Agreement have been duly and properly
authorized, executed and delivered by the Company. This Agreement and the
Underwriter's Warrant Agreement each constitute a legal, valid and binding
agreement of the Company enforceable against the Company in accordance with
its terms, and neither the Company's issue and sale of the IPO Securities or
execution or delivery of this Agreement and the Underwriter's Warrant
Agreement or its performance hereunder and thereunder, its consummation of
the transactions contemplated herein and therein, or the conduct of its
business as described in the Registration Statement, the Prospectus, and any
amendments or supplements thereto, conflicts with or will conflict with or
results or will result in any breach or violation of any of the terms or
provisions of, or constitutes or will constitute a default under, or result
in the creation or imposition of any lien, charge, claim, encumbrance,
pledge, security interest, defect or other restriction or equity of any kind
whatsoever upon, any property or assets (tangible or intangible) of the
Company or its Subsidiary pursuant to the terms of, (A) the certificate of
incorporation or by-laws of the Company or its Subsidiary (B) any license,
contract, indenture, mortgage, deed of trust, voting trust agreement,
stockholders agreement, note, loan or credit agreement or any other agreement
or instrument to which the Company or its Subsidiary is a party or by which
it is or may be bound or by which its properties or assets (tangible or
intangible) are or may be subject, or any indebtedness, or (C) any statute,
judgment, decree, order, rule or regulation applicable to the Company or its
Subsidiary by any arbitrator, court, regulatory body or administrative agency
or other governmental agency or body (including, without limitation,
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<PAGE>
those having jurisdiction over environmental or similar matters), domestic or
foreign, having jurisdiction over the Company or its Subsidiary or any of
their activities or properties, in each case except as described in the
Prospectuses and except for conflicts, breaches, violations, defaults,
creations or impositions which do not and would not have a material adverse
effect on the condition, financial or otherwise, or the earnings, business
affairs, position, shareholder's equity, value, operation, properties,
business or results of operations of the Company and its Subsidiary.
(xii) No consent, approval, authorization or order
of, and no filing with, any court, regulatory body, government agency or
other body, domestic or foreign which has not theretofore been obtained, is
required for the issuance of the IPO Securities pursuant to the Prospectus
and the Registration Statement, the issuance of the Underwriter's Warrants,
the execution, delivery or performance of this Agreement, the Underwriter's
Warrant Agreement and the transactions contemplated hereby and thereby,
including, without limitation, any waiver of any preemptive, first refusal or
other rights that any entity or person may have for the issue and/or sale of
any of the IPO Securities, except such as have been or may be obtained under
the Act or may be required under state securities or Blue Sky laws in
connection with the purchase and distribution of the IPO Securities and the
Underwriter's purchase of the Underwriter's Warrants to be sold by the
Company hereunder and thereunder.
(xiii) All executed agreements, contracts or other
documents or copies of executed agreements, contracts or other documents
filed as exhibits to the Registration Statement to which the Company and/or
its Subsidiary is a party or by which it may be bound or to which its assets,
properties or business may be subject have been duly and validly authorized,
executed and delivered by the Company and/or its Subsidiary and constitute
the legal, valid and binding agreement of the Company and its Subsidiary,
enforceable against the Company and its Subsidiary, in accordance with its
terms. The descriptions in the Registration Statement of agreements,
contracts
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<PAGE>
and other documents and statutes and regulations are accurate and fairly
present the information required to be shown with respect thereto by Form
SB-1, and there are no contracts or other documents which are required by the
Act to be described in the Registration Statement or filed as exhibits to the
Registration Statement which are not described or filed as required, and the
exhibits which have been filed are complete and correct copies of the
documents of which they purport to be copies.
(xiv) Subsequent to the respective dates as of
which information is set forth in the Registration Statement and Prospectus,
and except as may otherwise be indicated or contemplated herein or therein,
the Company nor its Subsidiary have (A) issued any securities or incurred any
liability or obligation, direct or contingent, for borrowed money, (B)
entered into any transaction other than in the ordinary course of business,
or (C) declared or paid any dividend or made any other distribution on or in
respect of its capital stock of any class, and there has not been any change
in the capital stock, or any change in the debt (long or short term) or
liabilities or material change in or affecting the business affairs or
prospects, management, stockholders' equity, properties, business, financial
operations or assets of the Company and its Subsidiary.
(xv) Except as described in the final Prospectus
no default exists in the due performance and observance of any term, covenant
or condition of any license, contract, indenture, mortgage, installment sale
agreement, lease, deed of trust, voting trust agreement, stockholders
agreement, partnership agreement, note, loan or credit agreement, purchase
order, or any other material agreement or instrument evidencing an obligation
for borrowed money, or any other material agreement or instrument to which
the Company or its Subsidiary is a party or by which the Company or its
Subsidiary may be bound or to which the property or assets (tangible or
intangible) of the Company or its Subsidiary is subject or affected, which
default would have a material adverse effect on the condition, financial or
otherwise, earnings, business affairs, position, stockholder's
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<PAGE>
equity, value, operation, properties, business or results of operations of
the Company and the Subsidiary.
(xvi) Each of the Company and its Subsidiary has
generally enjoyed a satisfactory employer-employee relationship with its
employees and is in compliance in all material respects with all federal,
state, local, and foreign laws and regulations respecting employment and
employment practices, terms and conditions of employment and wages and hours.
There are no pending investigations involving the Company or the Subsidiary
by the U.S. Department of Labor, or any other governmental agency responsible
for the enforcement of such federal, state, local, or foreign laws and
regulations. There is no unfair labor practice charge or complaint against
the Company or the Subsidiary pending before the National Labor Relations
Board or any strike, picketing, boycott, dispute, slowdown or stoppage
pending or threatened against or involving the Company or the Subsidiary, or
any predecessor entity, and none has ever occurred. No representation
question exists respecting the employees of the Company or the Subsidiary and
no collective bargaining agreement or modification thereof is currently being
negotiated by the Company or its Subsidiary. No grievance or arbitration
proceeding is pending under any expired or existing collective bargaining
agreements of the Company or its Subsidiary. No labor dispute with the
employees of the Company or its Subsidiary exists, or, to the knowledge of
the Company is imminent.
(xvii) Except as described in the Prospectus, each
of the Company and its Subsidiary does not maintain, sponsor or contribute to
any program or arrangement that is an "employee pension benefit plan", an
"employee welfare benefit plan" or a "multi employer plan" as such terms are
defined in Sections 3(2), 3(1) and 3(37), respectively, of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") ("ERISA Plans").
The Company and/or its Subsidiary does not maintain or contribute, now or at
any time previously, to a defined benefit plan,
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<PAGE>
as defined in Section 3(35) of ERISA. No ERISA Plan (or any trust created
thereunder) has engaged in a "prohibited transaction" within the meaning of
Section 406 of ERISA or Section 4975 of the Code, which could subject the
Company or the Subsidiary to any tax penalty on prohibited transactions and
which has not adequately been corrected. Each ERISA Plan is in compliance
with all material reporting, disclosure and other requirements of the Code
and ERISA as they relate to any such ERISA Plan. Determination letters have
been received from the Internal Revenue Service with respect to each ERISA
Plan which is intended to comply with Code Section 401(a), stating that such
ERISA Plan and the attendant trust are qualified thereunder. Neither the
Company or the Subsidiary has never completely or partially withdrawn from a
"multi employer plan".
(xviii) The Company and its Subsidiary have not
taken and will not take, directly or indirectly, and the Company and its
Subsidiary will use their best efforts to ensure that any of their employees,
directors, stockholders or affiliates (within the meaning of the Rules and
Regulations) of any of the foregoing has not taken or will not take, directly
or indirectly, any action designed to or which has constituted or which might
be expected to cause or result in, under the Exchange Act, or otherwise,
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the IPO Securities or otherwise.
(xix) None of the patents, patent applications,
trademarks, service marks, trade names and copyrights, and licenses and
rights to the foregoing presently owned or held by the Company or its
Subsidiary are in dispute, to the Company's knowledge, or are in any conflict
with the right of any other person or entity. The Company and its Subsidiary
(i) own or have the license or other right to use, free and clear of all
liens, charges, claims, encumbrances, pledges, security interests, defects or
other restrictions or equities of any kind whatsoever, all patents,
trademarks, service marks, trade names and copyrights, technology and
licenses and rights with respect to the foregoing, used in the conduct of
their business as now conducted or proposed to be conducted
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<PAGE>
without infringing upon or otherwise acting adversely to the right or claimed
right of any person, corporation or other entity under or with respect to any
of the foregoing, except as set forth in the Prospectuses and (ii) except as
set forth in the Prospectus, are not obligated or under any liability
whatsoever to make any payments by way of royalties, fees or otherwise to any
owner or licensee of, or other claimant to, any patent, trademark, service
mark, tradename, copyright, know-how, technology or other intangible asset,
with respect to the use thereof or in connection with the conduct of their
business or otherwise.
(xx) Neither the Company nor its Subsidiary have
received any notice of infringement of or conflict with asserted rights of
others with respect to any trademark, service mark, trade name or copyright
or other intangible asset used or held for use by it in connection with the
conduct of its business which, singly or in the aggregate, if the subject of
an unfavorable decision, ruling or finding, might have a material adverse
effect on the condition, financial or otherwise, or the business affairs,
position, properties, results of operations or net worth of the Company and
its Subsidiary
(xxi) The Company and its Subsidiary have good and
marketable title to, or valid and enforceable leasehold estates in, all items
of real and personal property stated in the Prospectus, to be owned or leased
by it free and clear of all liens, charges, claims, encumbrances, pledges,
security interests, defects, or other restrictions or equities of any kind
whatsoever, other than those referred to in the Prospectus and liens for
taxes not yet due and payable.
(xxii) The Company has caused to be duly executed
legally binding and enforceable agreements pursuant to which each of its
officers, directors or any person or entity deemed to be an affiliate of the
Company and any stockholders, noteholders and any other parties holding, or
in the future holding, securities, instruments or contract rights convertible
into common shares or preferred shares and/or any other securities of the
Company, including common shares
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<PAGE>
issued pursuant to the Company's Stock Option Plan, has agreed, or shall
agree prior to issuance as the case may be, not to, directly or indirectly,
offer to sell, sell, grant any option for the sale of, assign, transfer,
pledge, hypothecate or otherwise encumber or dispose of any securities issued
by the Company (either pursuant to Rule 144 of the Rules and Regulations or
otherwise) or dispose of any beneficial interest therein for a period of not
less than 24 months following the effective date of the Registration
Statement without the prior written consent of the Underwriter except only
with respect to 3,495,000 shares of common stock held by unaffiliated persons
which constitute the tradeable "public float" on the NASD Electronic Bulletin
Board, and that for a period of 2 years following the Effective Date of the
Registration Statement any such security which has been issued and is
outstanding on the effective date of the Registration Statement and is to be
sold or otherwise disposed of pursuant to such Rule 144 with the consent of
the Underwriter shall only be sold or otherwise disposed of through the
Underwriter. The Company will cause the Transfer Agent, as defined below, to
mark an appropriate legend on the face of stock certificates representing all
of such securities and to place "stop transfer" orders on the Company's stock
ledgers.
(xxiii) The Company has caused to be duly executed
binding and enforceable agreements with respect to all of the outstanding
loans made to the Company from time to time from affiliated persons wherein
the Company and each such lender has agreed that the Company will not make
payment of principal or accumulated interest thereon for an eighteen (18)
month period from the completion of the Offering except that $500,000 in
presently outstanding loans to the Company including interest thereon from
affiliated persons and no more may be repaid at any time and a Bridge Loan in
the principal sum of $50,000 plus accumulated interest thereon which is being
repaid to a Bridge Lender out of the proceeds of the Offering.
(xxiv) There are no claims, payments, issuances,
arrangements or understandings, whether oral or written, for services in the
nature of a finder's or origination fee with
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<PAGE>
respect to the sale of the IPO Securities hereunder or any other
arrangements, agreements, understandings, payments or issuance with respect
to the Company, the Subsidiary or any of their officers, directors,
stockholders, partners, employees or affiliates that may affect the
Underwriter's compensation, as determined by the National Association of
Securities Dealers, Inc. ("NASD"), except for the sum of $25,000 previously
paid by the Company to the Underwriter and the Company is aware that the
Underwriter shall compensate any of its personnel who may have acted in such
capacities as they shall determine in their sole discretion.
(xxv) The Preferred Stock has been approved for
quotation on the Nasdaq Small Cap Market and upon notice of issuance, listing
on the Boston Stock Exchange ("BSE").
(xxvi) Neither the Company, the Subsidiary nor any
of their respective officers, employees, agents or any other person acting on
behalf of the Company or the Subsidiary has, directly or indirectly, given or
agreed to give any money, gift or similar benefit (other than legal price
concessions to customers in the ordinary course of business) to any customer,
supplier, employee or agent of a customer or supplier, or official or
employee of any governmental agency (domestic or foreign) or instrumentality
of any government (domestic or foreign) or any political party or candidate
for office (domestic or foreign) or other person who was, is, or may be in a
position to help or hinder the business of the Company or the Subsidiary (or
assist the Company or the Subsidiary in connection with any actual or
proposed transaction) which (A) might subject the Company or the Subsidiary,
or any other such person to any damage or penalty in any civil, criminal or
governmental litigation or proceeding (domestic or foreign), (B) if not given
in the past, might have had a materially adverse effect on the assets,
business or operations of the Company or the Subsidiary, or (C) if not
continued in the future, might adversely affect the assets, business,
operations or prospects of the Company or the Subsidiary. The Company's and
the Subsidiary's internal accounting controls are sufficient to cause the
Company to comply with the Foreign Corrupt
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Practices Act of 1977, as amended.
(xxvii) Except as set forth in the Prospectus, no
officer, director, or stockholder of the Company or the Subsidiary, or any
"affiliate" or "associate" (as these terms are defined in Rule 405
promulgated under the Rules and Regulations) of any of the foregoing persons
or entities has or has had, either directly or indirectly, (A) an interest in
any person or entity which (1) furnishes or sells services or products which
are furnished or sold or are proposed to be furnished or sold by the Company
or the Subsidiary, or (2) purchases from or sells or furnishes to the Company
or the Subsidiary any goods or services, or (B) a beneficiary interest in any
contract or agreement to which the Company or the Subsidiary is a party or by
which it may be bound or affected. Except as set forth in the Prospectus
under "Certain Transactions", there are no existing agreements, arrangements,
understandings or transactions, or proposed agreements, arrangements,
understandings or transactions, between or among the Company or the
Subsidiary, and any officer, director, and 5% or more stockholders (as such
term is defined in the Prospectus) of the Company or the Subsidiary, or any
partner, affiliate or associate of any of the foregoing persons or entities.
(xxviii) Any certificate signed by any officer of
the Company and delivered to the Underwriter or to Underwriter's Counsel (as
defined herein) shall be deemed a representation and warranty by the Company
to the Underwriter as to the matters covered thereby.
(xxix) The minute books of the Company and the
Subsidiary have been made available to the Underwriter and contains a
complete summary of all meetings and actions of the directors and
stockholders of the Company and the Subsidiary since the time of its
incorporation, and reflects all transactions referred to in such minutes
accurately in all material respects
(xxx) Except and to the extent described in the
Prospectus, no holders of any securities of the Company or the Subsidiary or
of any options, warrants or other convertible or exchangeable securities of
the Company or the Subsidiary have the right to include any securities
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<PAGE>
issued by the Company or the Subsidiary in the Registration Statement or any
registration statement under the Act and no person or entity holds any
anti-dilution rights with respect to any securities of the Company or the
Subsidiary.
(xxxi) The Company has as of the effective date of
the Registration Statement (a) entered into an employment agreement with its
President, Mack H. Jennings, and a consulting agreement with its Chairman,
Joseph E. Antonini, on terms and conditions satisfactory to the Underwriter,
and (ii) purchased "Key-Man" insurance on the life of Mack H. Jennings in the
sum of $1,000,000 which names the Company as the sole beneficiary on terms
and conditions satisfactory to the Underwriter.
(xxxii) The Company has entered into an
Underwriter's Warrant Agreement with respect to the Underwriter's Warrants
substantially in the form filed as Exhibit _______ to the Registration
Statement, with American Stock Transfer and Trust Company in form and
substance satisfactory to the Underwriter.
(xxxiii) Immediately prior to the effective date
of the Registration Statement there shall be no more than an aggregate of
7,973,635 shares of Common Stock and 500,000 shares of Preferred Stock issued
and outstanding (including any and all (a) securities with equivalent rights
as the Common Stock or Preferred Stock, (b) Common Stock or Preferred Stock
such equivalent securities, issuable upon the exercise of options, warrants
and other contract rights, and (c) Securities convertible directly or
indirectly into Common Stock or Preferred Stock or such equivalent
securities, but excluding a maximum of ___________ shares of Common Stock
which are issuable upon exercise of options which may be granted pursuant to
the Company's two Stock Option Plans.
(xxxiv) Subsequent to the date hereof and prior to
any Closing Date or Option Closing Date except as otherwise described in or
contemplated by the Prospectuses, the
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Company will not issue or acquire any debt or equity securities.
(xxxv) Except for fair market value the Company
shall not issue any shares, options, warrants or any other equity or debt
security within three (3) years following the Effective Date of the
Registration Statement without the express written consent of the Underwriter
except for a maximum of 1,957,500 shares of common stock which may be issued
pursuant to the Company's stock option plans nor shall the Company, during
such three (3) year period, effect a reverse split or reclassification of
shares of its capital stock without the express written consent of the
Underwriter. Notwithstanding the foregoing, the Company shall not issue any
shares of preferred stock or securities convertible into preferred stock
during such three (3) year period without the express written consent of the
Underwriter.
(xxxvi) Services currently being provided to the
Company by affiliated companies, if any, shall continue to be provided to the
Company without charge except for reasonable disbursements incurred on behalf
of the Company.
2. Purchase, Sale and Delivery of the Securities.
(a) On the basis of the warranties,
representations and agreements herein contained, and subject to the
satisfaction of all the terms and conditions of this Agreement, the Company
agrees to engage the Underwriter, and the Underwriter agrees to serve as the
Company's exclusive agent to sell, on a best efforts basis, a minimum of
300,000 shares of Preferred Stock (the "Minimum Offering") and a maximum of
500,000 shares of Preferred Stock (the "Maximum Offering"), less, in the case
of each such security, an underwriting commission of ten percent (10%) of the
gross sale price of each such security sold in the Offering by deduction from
the proceeds of the Offering. The Underwriter may allow a concession not
exceeding $_______ per share of Preferred Stock to Selected Dealers who are
members of the NASD, and to certain foreign dealers, and such dealers may
reallow to NASD members and to certain foreign dealers a concession not
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exceeding $_____ per share of Preferred Stock.
(b) The proceeds from the sale of the Securities
shall be deposited by the Underwriter upon receipt thereof in an escrow
account (the "Escrow Account") at The Chase Manhattan Bank. The proceeds from
the sale of the Securities shall be deposited by the Underwriter upon receipt
thereof in an escrow account (the "Escrow Account") at The Chase Manhattan
Bank, a New York state charted bank with offices at 450 West 33rd Street, New
York, New York 10001 until the Minimum Offering amount of 300,000 shares of
Preferred Stock and $3,000,000 is deposited in the Escrow Account. If the
Minimum Offering amount is not sold and the proceeds thereof deposited into
the Escrow Account prior to the expiration of the Offering Period, the
Offering proceeds received from investors will be promptly refunded to the
investors in full without interest thereon and/or deduction of any kind
therefrom.
(c) Delivery of the Securities and payment
therefore shall be made at 10:00 a.m., New York time on each Closing Date and
Option Closing Date, if any, as hereinafter defined, at the offices of the
Underwriter or such other location as may be agreed upon by you and the
Company. Delivery of certificates for the Preferred Stock (in definitive form
and registered in such names and in such denominations as you shall request
by written notice to the Company delivered at least four business days' prior
to the Closing Date or Option Closing Date, if any), shall be made to you for
the account of the purchasers of the Securities against payment of the
purchase price therefor by certified or bank check or wire transfer payable
in New York Clearing House funds to the order of the Company. The Company
will make such certificates available for inspection at least one business
day prior to the Closing Date and Option Closing Date, if any, at such place
as you shall designate.
3. Closing Date
The "Closing Date" shall be not later than the fourth
business day following receipt
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of the Minimum Offering amount in cleared funds and thereafter as additional
funds are received up to the Maximum Offering amount at such times as you
shall determine (the "Option Closing Date") and advise the Company by at
least three full business days' notice.
4. Covenants and Agreements of the Company. The
Company covenants and agrees with the Underwriter as follows:
(a) The Company shall use its best efforts to cause the
Registration Statement and any amendments thereto to become effective as
promptly as practicable (such Registration Statement to be in form and
substance satisfactory to the Underwriter and its counsel) and will not at
any time, whether before or after the effective date of the Registration
Statement, file any amendment to the Registration Statement or supplement to
the Prospectus or file any document under the Act or Exchange Act before
termination of the Offering of the Securities by the Underwriter of which the
Underwriter shall not previously have been advised and furnished with a copy,
or to which the Underwriter shall have objected unless required under the
Act, the Exchange Act or the Rules and Regulations thereunder or which is not
in compliance with the Act, the Exchange Act or the Rules and Regulations.
(b) As soon as the Company is advised or obtains knowledge
thereof, the Company will advise the Underwriter and confirm the notice in
writing, (i) when the Registration Statement, as amended, becomes effective,
if the provisions of Rule 430A promulgated under the Act will be relied upon,
when the Prospectus has been filed in accordance with said Rule 430A and when
any post-effective amendment to the Registration Statement becomes effective,
(ii) of the issuance by the Commission of any stop order or of the
initiation, or the threatening, of any proceeding, suspending the
effectiveness of the Registration Statement or any order preventing or
suspending the use of the Preliminary Prospectus or the Prospectus, or any
amendment or supplement thereto, or the institution of proceedings for that
purpose (iii) of the issuance by the
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Commission or by any state securities commission of any proceedings for the
suspension of the qualification of any of the Securities for offering or sale
in any jurisdiction or of the initiation, or the threatening, of any
proceeding for that purpose, (iv) of the receipt of any comments from the
Commission; and (v) of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the Prospectus or
for additional information. If the Commission or any state securities
commission authority shall enter a stop order or suspend such qualification
at any time, the Company will make every effort to obtain promptly the
lifting of such order.
(c) The Company shall file the Prospectus (in form and
substance satisfactory to the Underwriter and its counsel) or transmit the
Prospectus by a means reasonably calculated to result in filing with the
Commission pursuant to Rule 424 (b) (or, if applicable and if consented to by
the Underwriter, pursuant to Rule 424 (b)(47).
(d) The Company will give the Underwriter notice of its
intention to file or prepare any amendment to the Registration Statement
(including any post-effective amendment) or any amendment or supplement to
the Prospectus (including any revised prospectus which the Company proposes
for use by the Underwriter in connection with the Offering of the IPO
Securities which differs from the corresponding prospectus on file at the
Commission at the time the Registration Statement becomes effective, whether
or not such revised prospectus is required to be filed pursuant to Rule
424(b) of the Rules and Regulations), and will furnish the Underwriter with
copies of any such amendment or supplement a reasonable amount of time prior
to such proposed filing or use, as the case may be, and will not file any
such prospectus to which the Underwriter or Doros & Brescia, P.C.
("Underwriter's Counsel"), shall reasonably object unless required under the
Act or the Rules and Regulations thereunder.
(e) The Company shall take all action, in cooperation with
the
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Underwriter, at or prior to the time the Registration Statement becomes
effective, to qualify the IPO Securities for offering and sale under the
securities laws of such jurisdictions as the Underwriter may designate to
permit the continuance of sales and dealings therein for as long as may be
necessary to complete the distribution, and shall make such applications,
file such documents and furnish such information as may be required for such
purpose; provided, however, the Company shall not be required to qualify as a
foreign corporation or file a general or limited consent to service of
process in any such jurisdiction. In each jurisdiction where such
qualification shall be effected, the Company will, unless the Underwriter
agrees that such action is not at the time necessary or advisable, use all
reasonable efforts to file and make such statements or reports at such times
as are or may reasonably be required by the laws of such jurisdiction to
continue such qualification. It is agreed that Underwriter's Counsel (or its
designees) shall perform all such required Blue Sky legal services.
(f) During the time when a prospectus is required to be
delivered under the Act, the Company shall use all reasonable efforts to
comply with all requirements imposed upon it by the Act and the Exchange Act,
as now and hereafter amended and by the Rules and Regulations, as from time
to time in force, so far as necessary to permit the continuance of sales of
or dealings in the IPO Securities in accordance with the provisions hereof
and the Prospectus, or any amendments or supplements thereto. If at any time
when a prospectus relating to the IPO Securities is required to be delivered
under the Act, any event shall have occurred as a result of which, in the
reasonable opinion of counsel for the Company or Underwriter's Counsel, the
Prospectus, as then amended or supplemented, includes an untrue statement of
a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the Act and the
Rules and Regulations, the Company will notify the Underwriter promptly and
prepare and file with the Commission an appropriate
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amendment or supplement in accordance with Section 10 of the Act, each such
amendment or supplement to be reasonably satisfactory to Underwriter's
Counsel, and the Company will furnish to the Underwriter copies of such
amendment or supplement as soon as available and in such quantities as the
Underwriter may reasonably request.
(g) During the time when a prospectus relating to the IPO
Securities is required to be delivered under the Act, the Company will use
its best efforts to comply with all requirements imposed upon it by the Act
and the Securities Exchange Act of 1934 (the "Exchange Act"), as now and
hereafter amended and by the Regulations, as from time to time in force, as
necessary to permit the continuance of sales of or dealings in the IPO
Securities in accordance with the provisions hereof and the Prospectus and
the Company shall use its best efforts to keep the Registration Statement
current and effective so long as a Prospectus is required to be delivered in
connection with the sale of the IPO Securities by the Underwriter or by
dealers effecting transactions therein in connection with the initial public
offering thereof. If at any time when a prospectus relating to the IPO
Securities is required to be delivered under the Act, any event shall have
occurred as a result of which, in the reasonable opinion of counsel for the
Company or counsel for the Underwriter, the Prospectus as then amended or
supplemented (or the prospectus contained in a new registration statement
filed by the Company pursuant to Paragraph 4(x), includes an untrue statement
of a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if, in the
reasonable opinion of either such counsel, it is necessary at any time to
amend the Prospectus (or the prospectus contained in such new registration
statement) to comply with the Act, the Company will notify you promptly and
prepare and file with the Commission an appropriate amendment or supplement
in accordance with Section 10 of the Act and will furnish to you copies
thereof.
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(h) The Company will reserve and keep available for
issuance that maximum number of its authorized but unissued shares of
Preferred Stock which are issuable upon exercise of the Underwriter's
Warrants (including the underlying securities) outstanding from time to time.
(i) The Company will timely prepare and file at its sole
cost and expense one or more post-effective amendments to the Registration
Statement or a new registration statement as required by law as will permit
holders of the Underwriter's Warrants to be furnished with a current
prospectus in the event and at such time as the Underwriter's Warrants are
exercised, and the Company will use its best efforts and due diligence to
have the same be declared effective (with the intent that the same be
declared effective as soon as the Underwriter's Warrants become exercisable)
and to keep the same effective so long as the Underwriter's Warrants are
outstanding. The Company will deliver a draft of each such post-effective
amendment or new registration statement to the Underwriter at least ten days
prior to the filing of such post-effective amendment or registration
statement.
(j) So long as any of the Underwriter's Warrants remain
outstanding, the Company will timely deliver and supply to its Warrant Agent
sufficient copies of the Company's current Prospectus, as will enable such
Warrant agent to deliver a copy of such Prospectus to any holder of the
Underwriter's Warrants where such Prospectus delivery is by law required to
be made.
(k) So long as any of the Underwriter's Warrants remain
outstanding, the Company shall continue to employ the services of a firm of
independent certified public accountants reasonably acceptable to the
Underwriter in connection with the preparation of the financial statements to
be included in any registration statement to be filed by the Company
hereunder, or any amendment or supplement thereto. During the same period,
the Company shall employ the services of a law firm(s) reasonably acceptable
to the Underwriter in connection with all legal work of the
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Company, including the preparation of a registration statement to be filed by
the Company hereunder, or any amendment or supplement thereto.
(l) So long as any of the Underwriter's Warrants remain
outstanding, the Company shall continue to appoint a Warrant Agent for the
Underwriter's Warrants, who shall be reasonably acceptable to the
Underwriter.
(m) As soon as practicable, but in any event not later than
45 days after the end of the 12-month period beginning on the day after the
end of the fiscal quarter of the Company during which the effective date of
the Registration Statement occurs (90 days in the event that the end of such
fiscal quarter is the end of the Company's fiscal year), the Company shall
make generally available to its security holders, in the manner specified in
Rule 158(b) of the Rules and Regulations, and to the Underwriter, an earnings
statement which will be in the detail required by, and will otherwise comply
with, the provisions of Section 11(a) of the Act and Rule 158(a) of the Rules
and Regulations, which statement need not be audited unless required by the
Act, covering a period of at least 12 consecutive months after the effective
date of the Registration Statement.
(n) During a period of seven years after the date hereof,
the Company will furnish to its stockholders, as soon as practicable, annual
reports (including financial statements audited by independent public
accountants) and unaudited quarterly reports of earnings, and will deliver to
the Underwriter:
(i) concurrently with furnishing such quarterly
reports to its stockholders, statements of income of the Company for each
quarter in the form filed on Form 10-Q with the Commission and certified by
the Company's principal financial or accounting officer
(ii) concurrently with furnishing such annual reports
to its stockholders, a balance sheet of the Company as at the end of the
preceding fiscal year, together with statements of operations, stockholders'
equity, and cash flows of the Company for such fiscal year,
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accompanied by a copy of the certificate thereon of independent certified
public accountants;
(iii) as soon as they are available, copies of all
reports (financial or other) mailed to stockholders;
(iv) as soon as they are available, copies of all
reports and financial statements furnished to or filed with the Commission,
the NASD or any securities exchange;
(v) every press release and every material news item
or article of interest to the financial community in respect of the Company
or its affairs which was released or prepared by or on behalf of the Company;
and
(vi) any additional information of a public nature
concerning the Company (and any future subsidiaries) or its businesses which
the Underwriter may reasonably request.
During such seven-year period, if the Company has active
subsidiaries, the foregoing financial statements will be on a consolidated
basis to the extent that the accounts of the Company and its subsidiaries are
consolidated, and will be accompanied by similar financial statements for any
significant subsidiary which is not so consolidated.
(o) The Company will maintain American Stock Transfer and
Trust Company as its Transfer Agent and Registrant (the "Transfer Agent") and
counsel, accounting firm and financial printer for its Common Stock and
Preferred Stock all of whom shall be reasonably acceptable to the
Underwriter. Such Transfer Agent shall, for a period of two years following
the Closing Date, deliver to the Underwriter the daily securities position of
the Company's stockholders of record and for a period of three (3) years
thereafter the monthly securities position.
(p) The Company will furnish to the Underwriter or on the
Underwriter's order, without charge, at such place as the Underwriter may
designate, copies of each Preliminary Prospectus, the Registration Statement,
any pre-effective or post-effective amendments thereto (two
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of which copies will be signed and will include all financial statements and
exhibits), the Prospectus, and all amendments and supplements thereto,
including any Prospectus prepared after the effective date of the
Registration Statement, in each case as soon as available and in such
quantities as the Underwriter may reasonably request.
(q) On or before the effective date of the Registration
Statement, the Company shall provide the Underwriter with true copies of duly
executed, legally binding and enforceable agreements pursuant to which for a
period of not less than 24 months after the effective date of the
Registration Statement, (except only with respect to 3,495,000 shares of
common stock held by unaffiliated persons which constitute the tradeable
"public float" on the NASD Electronic Bulletin Board) each holder of
securities issued by the Company and outstanding at the effective date of the
Registration Statement (including securities convertible into Common Stock or
Preferred Stock of the Company) agrees that it or he or she will not,
directly or indirectly, issue, offer to sell, sell, grant an option for the
sale of, assign, transfer, pledge, hypothecate or otherwise encumber or
dispose of any of such securities (either pursuant to Rule 144 of the Rules
and Regulations or otherwise) or dispose of any beneficial interest therein
without the prior written consent of the Underwriter (collectively, the
"Lock-up Agreements"). During the two (2) year period commencing with the
effective date of the Registration Statement, the Company shall not issue any
securities under Regulation S and will not, without the prior written consent
of the Underwriter, sell, contract or offer to sell, issue, transfer, assign,
pledge, distribute, or otherwise dispose of, directly or indirectly, any debt
security of the Company or any shares of Common Stock or Preferred Stock or
any options, rights or warrants with respect to any shares of Common Stock or
Preferred Stock (other than upon exercise of options or warrants referred to
in the Registration Statement, or with respect to transactions between the
Company and its lenders and purchasers of mortgage backed securities). On or
before the Closing Date, the Company shall deliver instructions to the
Transfer
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Agent authorizing it to place appropriate legends on the certificates
representing the securities subject to the Lock-up Agreements and to place
appropriate stop transfer orders on the Company's ledgers.
(r) The Company has not taken and will not take, directly
or indirectly, and the Company will use their its efforts to ensure that any
of its employees, officers, directors, stockholders or affiliates (within the
meaning of the Rules and Regulations) will take, directly or indirectly, any
action designed to, or which might in the future reasonably be expected to
cause or result in, stabilization or manipulation of the price of any
securities of the Company.
(s) The Company shall apply the net proceeds from the sale
of the IPO Securities in the manner, and subject to the conditions, set forth
under "Use of Proceeds" in the Prospectus. No portion of the net proceeds
will be used, directly or indirectly, to acquire any securities issued by the
Company except as described in the Prospectuses.
(t) The Company shall timely file all such reports, forms
or other documents as may be required (including, but not limited to, a Form
SR as may be required pursuant to Rule 463 under the Act) from time to time,
under the Act, the Exchange Act and the Rules and Regulations, and all such
reports, forms and documents filed will comply as to form and substance with
the applicable requirements under the Act, the Exchange Act and the Rules and
Regulations.
(u) The Company shall furnish to the Underwriter as early
as practicable prior to each of the date hereof, the Closing Date and each
Option Closing Date, if any, but no later than two (2) full business days
prior thereto, a copy of the latest available unaudited interim financial
statements of the Company (which in no event shall be as of a date more than
thirty (30) days prior to the date of the Registration Statement) which have
been read by the Company's independent public accountants, as stated in their
letters to be furnished pursuant to Section 6(j) hereof.
(v) The Company shall cause the Preferred Stock to be
listed on the
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Nasdaq Small Cap Market and on the BSE, and for a period of seven (7) years
from the date hereof, use its best efforts to maintain such listings of the
Preferred Stock to the extent outstanding.
(w) For a period of five (5) years from the Closing Date,
the Company shall furnish to the Underwriter at the Underwriter's request and
at the Company's sole expense, (i) the list of holders of all of the
Company's securities, (ii) a Blue Sky "Trading Survey" for secondary sales of
the Company's securities prepared by counsel to the Company, and (iii) daily
consolidated transfer sheets relating to the Preferred Stock but not more
than six (6) times per year.
(x) As soon as practicable, (i) but in no event more than
five business days before the effective date of the Registration Statement,
file a Form 8-A with the Commission providing for the registration under the
Exchange Act of the Securities and (ii) but in no event more than 30 days
from the effective date of the Registration Statement, take all necessary and
appropriate actions to be included in Standard and Poor's Corporation Records
Service in order to satisfy the requirements for "manual exemption" in those
states where available and to maintain such inclusion for as long as the IPO
Securities are outstanding.
(y) Until the completion of the distribution of the IPO
Securities, the Company shall not without the prior written consent of the
Underwriter and Underwriter's Counsel, issue, directly or indirectly any
press release or other communication or hold any press conference with
respect to the Company or its activities or the offering contemplated hereby,
other than trade releases issued in the ordinary course of the Company's
business consistent with past practices with respect to the Company's
operations.
(z) For a period of three (3) years after the effective
date of the Registration Statement, the Underwriter shall have the right to
designate, one (1) individual for election to the Company's Board of
Directors ("Board") and the Company shall cause such individual to be elected
to the Board. In the event the Underwriter shall not have designated such
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individual at the time of any meeting of the Board or such person is
unavailable to serve, the Company shall notify the Underwriter of each
meeting of the Board and an individual designated by the Underwriter shall be
permitted to attend all meetings of the Board and to receive all notices and
other correspondence and communications sent by the Company to members of the
Board. Such individual shall be reimbursed for all out-of-pocket expenses
incurred in connection with his or her service on, or attendance at meetings
of, the Board. The Company shall provide its outside directors with
compensation in the form of cash and/or options on its Common Stock and/or
Preferred Stock as deemed appropriate and similar for similar companies.
(aa) The Company hereby grants to the Underwriter a right
of first refusal on the terms and subject to the conditions set forth in this
paragraph, for a period of three years from the effective date of the
Registration Statement, to purchase for its account or to sell for the
account of the Company or its present or future subsidiaries, any securities
of the Company or any of its present or future subsidiaries, with respect to
which the Company or any of its present or future subsidiaries may seek a
public or private sale. The Company, for a period of five years from the
effective date of the Registration Statement, will consult, and will cause
such present or future subsidiaries to consult with the Underwriter with
regard to any such offering or placement and will offer, or cause any of its
present or future subsidiaries to offer, to the Underwriter the opportunity,
on terms not more favorable to the Company or such present or future
subsidiary than they can secure elsewhere, to purchase or sell any such
securities. If the Underwriter fails to accept in writing such proposal made
by the Company or any of its present or future subsidiaries within fifteen
business days after receipt of a notice containing such proposal, then the
Underwriter shall have no further claim or right with respect to the proposal
contained in such notice. If, thereafter, such proposal is materially
modified, the Company shall again consult, and cause each present or future
subsidiary to consult, with the Underwriter in connection with such
modification and shall in all
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respects have the same obligations and adopt the same procedures with respect
to such proposal as are provided hereinabove with respect to the original
proposal.
(bb) For a period equal to the lesser of (i) seven (7)
years from the date hereof, and (ii) the date of the sale to the public of
the securities issuable upon exercise of the Underwriter's Warrants and the
Underwriter's Securities, the Company will not take any action or actions
which may prevent or disqualify the Company's use of Form SB-1 for the
registration under the Act of the securities issuable upon exercise of the
Underwriter's Warrants and the Underwriter's Securities.
(cc) On or before the effective date of the Registration
Statement, the Company shall have retained a financial public relations firm
reasonably satisfactory to the Underwriter, which shall be continuously
engaged from such engagement date to a date twelve (12) months from the
Closing Date.
5. Payment of Expenses.
(a) The Company hereby agrees to pay on each of the Closing
Date and the Option Closing Date (to the extent not paid at the Closing Date)
all expenses and fees (other than fees of Underwriter's Counsel, except as
provided in (iv) below) upon presentation of an itemized schedule of expenses
incident to the performance of the obligations of the Company under this
Agreement and the Underwriter's Warrant Agreement including, without
limitation, (i) the fees and expenses of accountants and counsel for the
Company, (ii) all costs and expenses incurred in connection with the
preparation, duplication, printing, (including mailing and handling charges)
filing, delivery and mailing (including the payment of postage with respect
thereto) of the Registration Statement and the Prospectus and any amendments
and supplements thereto and the printing, mailing (including the payment of
postage with respect thereto) and delivery of this Agreement and the
Underwriter's Warrant Agreement and related documents, including the cost of
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all copies thereof and of the Preliminary Prospectuses and of the Prospectus
and any amendments thereof or supplements thereto supplied to the Underwriter
and such dealers as the Underwriter may reasonably request, in quantities as
hereinabove stated, (iii) the printing, engraving, issuance and delivery of
the IPO Securities, including, but not limited to, (x) the purchase by the
Underwriter of the Underwriter's Warrants from the Company, (y) the
consummation by the Company of any of its obligations under this Agreement
and the Underwriter's Warrant Agreement and (z) the sale of the IPO
Securities by the Underwriter in connection with the distribution
contemplated hereby to the extent that expenses relate to the printing,
engraving, issuance and delivery of the IPO Securities, (iv) the
qualification of the IPO Securities under state or foreign securities or
"Blue Sky" laws and determination of the status of such securities under
legal investment laws, including the costs of printing and mailing the
"Preliminary Blue Sky Memorandum", the "Supplemental Blue Sky Memorandum" and
"Legal Investments Survey", if any, and legal fees of counsel Doros &
Brescia, P.C., of $75,000 less $20,000 heretofore paid plus disbursements
incurred by them in connection therewith, (v) advertising costs and expenses,
including but not limited to costs and expenses in connection with the "road
show", information meetings and presentations, bound volumes and prospectus
memorabilia and "tomb-stone" advertisement expenses (not to exceed $5,000),
(vi) costs, fees and expenses in connection with due diligence
investigations, including but not limited to the costs of background checks
on key management and/or personnel of the Company, (vii) fees and expenses of
the transfer agent, and registrar, (viii) applications for assignments of a
rating of the IPO Securities by qualified rating agencies, (ix) the fees
payable to the Commission, and the NASD, and (x) the fees and expenses
incurred in connection with the listing of the IPO Securities on the NASD
Electronic Bulletin Board, the BSE and any other exchange.
(b) If this Agreement is terminated by the Underwriter in
accordance with the provisions of Section 6, Section 10(a) or Section 12, the
Company shall reimburse and indemnify
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the Underwriter for all of its actual out-of-pocket expenses, including the
fees and disbursements of Underwriters' Counsel (and in addition to fees and
expenses of Underwriter's Counsel incurred pursuant to Section 5(a)(iv) above
for which the Company shall remain liable) less any amounts previously paid,
provided, however, that in the event of a termination pursuant to Section
10(a) hereof such obligation of the Company shall not exceed $50,000.
(c) The Company further agrees that, in addition to the
expenses payable pursuant to subsection (a) of this Section 5, it will pay to
the Underwriter by certified or bank cashier's check or, at the election of
the Underwriter, by deduction from the proceeds of the Offering on the
initial Closing Date and each Option Closing Date a non-accountable expense
allowance equal to two percent (2%) of the gross proceeds of the Offering
less the amount of $25,000 which was previously paid by the Company to the
Underwriter.
(d) The Underwriter shall not be responsible for any
expense of the Company or others or for any charge or claim related to the
Offering in the event that the sale of the IPO Securities as contemplated
hereunder is not consummated.
6. Conditions of the Underwriter's Obligations. The
obligations of the Underwriter hereunder shall be subject to the continuing
accuracy of the representations and warranties of the Company and its
Subsidiary herein as of the date hereof and as of the Closing Date and each
Option Closing Date, if any, as if they had been made on and as of the
Closing Date or each Option Closing Date, as the case may be; the accuracy on
and as of the Closing Date or Option Closing Date, if any, of the statements
of the officers of the Company made pursuant to the provisions hereof; and
the performance by the Company on and as of the Closing Date and each Option
Closing Date, if any, of its covenants and obligations hereunder and to the
following further conditions:
(a) The Registration Statement, which shall be in form and
substance
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<PAGE>
satisfactory to Underwriter's Counsel, shall have become effective no later
than 12:00 p.m., New York time, on the date of this Agreement or such later
date and time as shall be consented to in writing by the Underwriter, and, at
the Closing Date and each Option Closing Date, if any, no stop order
suspending the effectiveness of the Registration Statement shall have been
issued and no proceedings for that purpose shall have been instituted or
shall be pending or contemplated by the Commission and any request on the
part of the Commission for additional information shall have been complied
with to the reasonable satisfaction of Underwriter's Counsel. If the Company
has elected to rely upon Rule 430A of the Rules and Regulations, the price of
the IPO Securities and any price-related information previously omitted from
the effective Registration Statement pursuant to such Rule 430A shall have
been transmitted to the Commission for filing pursuant to Rule 424(b) of the
Rules and Regulations within the prescribed time period, and prior to the
Closing Date the Company shall have provided evidence satisfactory to the
Underwriter of such timely filing, or a post-effective amendment providing
such information shall have been promptly filed and declared effective in
accordance with the requirements of Rule 430A of the Rules and Regulations.
(b) The Underwriter shall not have advised the Company that
the Registration Statement, or any amendment thereto, contains an untrue
statement of fact which, in the Underwriter's opinion, is material, or omits
to state a fact which, in the Underwriter's opinion, is material and is
required to be stated therein or is necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading, or
that the Prospectus, or any supplement thereto, contains an untrue statement
of fact which, in the Underwriter's opinion, is material and is required to
be stated therein or is necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(c) On or prior to the Closing Date, the Underwriter shall
have received from Underwriter's Counsel, such opinion or opinions with
respect to the organization of the
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Company and its Subsidiary, the validity of the IPO Securities, the
Underwriter's Warrants, the Registration Statement, the Prospectus and other
related matters as the Underwriter may request and Underwriter's Counsel
shall have received such papers and information as they request to enable
them to pass upon such matters.
(d) At the Closing Date, the Underwriter shall have
received the favorable opinion of Jackier, Gould, Bean, Upfal & Eizelman,
counsel to the Company, dated as of the Closing Date, addressed to the
Underwriter and in form and substance satisfactory to Underwriter's Counsel,
to the effect that:
(i) each of the Company and the Subsidiary (A) has been
duly organized and is validly existing as a corporation in good standing
under the laws of its jurisdiction; (B) to such counsel's knowledge has all
requisite corporate power and authority to own or lease its properties and
conduct its business as described in the Prospectus; (C) to such counsel's
knowledge is duly qualified and licensed and in good standing as a foreign
corporation in each jurisdiction in which its ownership or leasing of any
properties or the character of its operations requires such qualification or
licensing; and (D) to such counsel's knowledge, has not received any notice
of proceedings relating to the revocation or modification of any such
authorization, approval, order, license, certificate, franchise, or permit
which, singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would materially adversely affect the business,
operations, condition, financial or otherwise, or the earnings, business
affairs or prospects, properties, business, assets or results of operations
of the Company and the Subsidiary taken as a whole. To the knowledge of such
counsel the disclosures in the Registration Statement concerning the effects
of federal, state and local laws, rules and regulations on the Company's or
the Subsidiary's business as currently conducted and as contemplated are
correct in all material respects and do not omit to state a fact necessary to
make the statements contained therein not misleading in light of the
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circumstances in which they were made:
(ii) to such counsel's knowledge, except as set forth
in the Prospectus, the Company nor the Subsidiary does not own an equity
interest in any other corporation, partnership, joint venture, trust or other
business entity;
(iii) to such counsel's knowledge the Company has a
duly authorized, issued and outstanding capitalization as set forth in the
Prospectus, and any amendment or supplement thereto, under "Capitalization",
and, to such counsel's knowledge, the Company nor the Subsidiary is not a
party to or bound by any instrument, agreement or other arrangement providing
for it to issue any capital stock, rights, warrants, options or other
securities, except for this Agreement and the Underwriter's Warrant Agreement
and as described in the Prospectus. The IPO Securities, and all other
securities issued or issuable by the Company, conform in all material
respects to all statements with respect thereto contained in the Registration
Statement and the Prospectus. To the knowledge of such counsel all issued and
outstanding securities of the Company and the Subsidiary have been duly
authorized and validly issued and are fully paid and non-assessable; the
holders thereof have no contractual rights of rescission with respect
thereto, and are not subject to personal liability under the laws of the
State of Nevada as currently in effect by reason of being such holders; and
none of such securities were issued in violation of the preemptive rights of
any holders of any security of the Company. The IPO Securities to be sold by
the Company hereunder and under the Underwriter's Warrant Agreement are not
and will not be subject to any preemptive or other similar rights of any
stockholder, have been duly authorized and, when issued, paid for and
delivered in accordance with the terms hereof, will be validly issued, fully
paid and non-assessable and conform to the description thereof contained in
the Prospectus; the holders thereof will not be subject to any liability
solely as such holders; all corporate action required to be taken for the
authorization, issue and sale of the IPO Securities when issued will be duly
and validly taken;
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and the certificates representing the IPO Securities are in due and proper
form. The Underwriter's Warrants constitute valid and binding obligations of
the Company to issue and sell, upon exercise thereof and payment therefore
the number and type of securities of the Company called for thereby. Upon
payment the issuance and delivery pursuant to this Agreement of the IPO
Securities to be sold by the Company hereunder, the purchasers thereof, will
acquire good and marketable title to the IPO Securities free and clear of any
pledge, lien, charge, claim, encumbrance, pledge, security interest, or other
restriction or equity of any kind whatsoever;
(iv) the Registration Statement is effective under the
Act, and, if applicable, filing of all pricing information has been timely
made in the appropriate form under Rule 430A, and, to such counsel's
knowledge, no stop order suspending the use of the Preliminary Prospectus,
the Registration Statement or Prospectus or any part of any thereof or
suspending the effectiveness of the Registration Statement has been issued
and no proceedings for that purpose have been instituted or are pending,
threatened or contemplated under the Act;
(v) each of the Preliminary Prospectus, the
Registration Statement, and the Prospectus and any amendments or supplement
thereto (other than the financial statements and other financial and
statistical data included therein, as to which no opinion need be rendered)
comply as to form in all material respects with the requirements of the Act
and the Rules and Regulations;
(vi) to the best of such counsel's knowledge, (A) there
are no agreements, contracts or other documents required by the Act to be
described in the Registration Statement and the Prospectus and filed as
exhibits to the Registration Statement other than those described in the
Registration Statement (or required to be filed under the Exchange Act if
upon such filing they would be incorporated, in whole or in part, by
reference therein) and the Prospectus and filed as exhibits thereto, and the
exhibits which have been filed are substantially correct copies of
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the documents of which they purport to be copies; (B) the descriptions in the
Registration Statement and the Prospectus and any supplement or amendment
thereto of contracts and other documents to which the Company or the
Subsidiary is a party or by which it is bound, including any document to
which the Company or the Subsidiary is a party or by which it is bound,
incorporated by reference into the Prospectus and any supplement or amendment
thereto, are accurate in all material respects and fairly represent the
information required to be shown by Form SB-1; (C) there is not pending or
threatened against the Company or the Subsidiary any action, arbitration,
suit, proceeding, inquiry, investigation, litigation, governmental or other
proceeding (including, without limitation, those having jurisdiction over
environmental or similar matters), domestic or foreign, pending or threatened
against (or circumstances that may give rise to the same), or involving the
properties or business of the Company or the Subsidiary which (1) is required
to be disclosed in the Registration Statement which is not so disclosed (and
such proceedings as are summarized in the Registration Statement are
accurately summarized in all respects), (2) questions the validity of the
capital stock of the Company or the Subsidiary or this Agreement or the
Underwriter's Warrant Agreement or of any action taken or to be taken by the
Company pursuant to or in connection with any of the foregoing; (D) no
statute or regulation or legal or governmental proceeding required to be
described in the Prospectus is not described as required; and (E) except as
disclosed in the Prospectus, there is no action, suit or proceeding pending,
or threatened, against or affecting the Company or the Subsidiary before any
court or arbitrator or governmental body, agency or official (or any basis
thereof known to such counsel) in which an adverse decision which may result
in a material adverse change in the condition, financial or otherwise, or the
earnings, position, prospects, stockholders' equity, value, operation,
properties, business or results of operations of the Company and the
Subsidiary taken as a whole, which could adversely affect the present or
prospective ability of the Company to perform its obligations under this
Agreement or the Underwriter 's Warrant Agreement
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or which in any manner draws into question the validity or enforceability of
this Agreement or the Underwriter's Warrant Agreement;
(vii) the Company has full legal right, power and
authority to enter into this Agreement and the Underwriter's Warrant
Agreement and to consummate the transactions provided for herein and therein;
and this Agreement and the Underwriter's Warrant Agreement has been duly
authorized, executed and delivered by the Company. Each of this Agreement and
the Underwriter's Warrant Agreement assuming due authorization, execution and
delivery by each other party hereto constitutes a legal, valid and binding
agreement of the Company enforceable against the Company in accordance with
its terms (except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of general
application relating to or affecting enforcement of creditors' rights and the
application of equitable principles in any action, legal or equitable, and
except as rights to indemnity or contribution may be limited by applicable
law), and neither the Company's execution or delivery of this Agreement and
the Underwriter's Warrant Agreement, its performance hereunder or thereunder,
its consummation of the transactions contemplated herein or therein, or the
conduct of its business as described in the Registration Statement, the
Prospectus, and any amendments or supplements thereto, conflicts with or will
conflict with or results or will result in any breach or violation of any of
the terms or provisions of, or constitutes or will constitute a default
under, or result in the creation or imposition of any lien, charge, claim,
encumbrance, pledge, security interest, defect or other restriction or equity
of any kind whatsoever upon, any property or assets (tangible or intangible)
of the Company or the Subsidiary pursuant to the terms of, (A) the
certificate of incorporation or by-laws of the Company or the Subsidiary, (B)
any license, contract, indenture, mortgage, deed of trust, voting trust
agreement, stockholders agreement, note, loan or credit agreement or any
other agreement or instrument to known to such counsel which the Company or
the Subsidiary is a party or by which
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it is or may be bound or to which any of its properties or assets (tangible
or intangible) is or may be subject, or any indebtedness, or (C) any statute,
judgment, decree, order, rule or regulation applicable to the Company or the
Subsidiary of any arbitrator, court, regulatory body or administrative agency
or other governmental agency or body domestic or foreign, having jurisdiction
over the Company or the Subsidiary or any of its activities or properties,
except for conflicts, breaches, violations, defaults, creations or
impositions which do not and would not have a material adverse effect on the
condition, financial or otherwise, or the earnings, business affairs,
position, shareholder's equity, value, operations, properties, business or
results of operations of the Company and the Subsidiary taken as a whole;
(viii) except as described in the Prospectus, no
consent, approval, authorization or order, and no filing with, any court,
regulatory body, government agency or other body (other than such as may be
required under Blue Sky laws, as to which no opinion need be rendered) is
required in connection with the issuance of the IPO Securities pursuant to
the Prospectus and the Registration Statement, the issuance of the
Underwriter's Warrants, the performance of this Agreement and the
Underwriter's Warrant Agreement and the transactions contemplated hereby and
thereby;
(ix) the properties and business of the Company and the
Subsidiary conform to the description thereof contained in the Registration
Statement and the Prospectus;
(x) to such counsel's knowledge and except as described
in the Prospectus neither the Company nor the Subsidiary is in breach of, or
in default under, any term or provision of any license, contract, indenture,
mortgage, installment sale agreement, deed of trust, lease, voting trust
agreement, stockholders' agreement, partnership agreement, note, loan or
credit agreement or any other agreement or instrument evidencing an
obligation for borrowed money, or any other agreement or instrument to which
the Company or the Subsidiary is a party or by which
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the Company or the Subsidiary may be bound or to which the property or assets
(tangible or intangible) of the Company or the Subsidiary is subject or
affected, which could materially adversely affect the Company or of the
Subsidiary; and neither the Company nor the Subsidiary is in violation of any
term or provision of its Certificate of Incorporation or By-Laws, or in
violation of any franchise, license, permit, judgment, decree, order,
statute, rule or regulation the result of which would materially and
adversely affect the condition, financial or otherwise, or the earnings,
business affairs, position, shareholders' equity, value, operation,
properties, business or results of operations of the Company and the
Subsidiary taken as a whole;
(xi) to the knowledge of such counsel and except as
described in the Prospectus the Company and the Subsidiary owns or possesses,
free and clear of all liens or encumbrances and rights thereto or therein by
third parties, the requisite licenses or other rights to use all trademarks,
service marks, copyrights, service names, trade names, patents, patent
applications and licenses necessary to conduct its business (including,
without limitation any such licenses or rights described in the Prospectus as
being owned or possessed by the Company or the Subsidiary), and to the best
of such counsel's knowledge after reasonable investigation, there is no claim
or action by any person pertaining to, or proceeding, pending, or threatened,
which challenges the exclusive rights of the Company or the Subsidiary with
respect to any trademarks, service marks, copyrights, service names, trade
names, patents, patent applications and licenses used in the conduct of the
Company's or the Subsidiary's business (including, without limitations, any
such licenses or rights described in the Prospectus as being owned or
possessed by the Company or the Subsidiary);
(xii) the IPO Securities have been approved for listing
on the Nasdaq Small Cap Market and the Company's Registration Statement on
Form 8-A under the Exchange Act has become effective;
(xiii) to such counsel's knowledge, the persons listed
under the
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caption "PRINCIPAL STOCKHOLDERS" in the Prospectus are the respective
"beneficial owners" (as such phrase is defined in Regulation 13d-3 under the
Exchange Act) of the securities set forth opposite their respective names
thereunder as and to the extent set forth therein;
(xiv) to such counsel's knowledge, except as described
in the Prospectus, no person, corporation, trust, partnership, association or
other entity has the right to include and/or register any securities of the
Company in the Registration Statement, require the Company to file any
registration statement or, if filed, to include any security in such
registration statement;
(xv) to such counsel's knowledge, except as described
in the Prospectus, there are no claims, payments, issuances, arrangements or
understandings for services in the nature of a finder's or origination fee
with respect to the sale of the IPO Securities hereunder or the financial
consulting arrangement or any other arrangements, agreements, understandings,
payments or issuances that may affect the Underwriter's compensation, as
determined by the NASD;
(xvi) the Lock-up Agreements are legal, valid and
binding obligations of the parties thereto, enforceable against each such
party and any subsequent holder of the securities subject thereto in
accordance with its terms (except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws
of general application relating to or affecting enforcement of creditors'
rights and the application of equitable principles in any action, legal or
equitable); and
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws other than the laws of the United
States and jurisdictions in which they are admitted, to the extent such
counsel deems proper and to the extent specified in such opinion, if at all,
upon an opinion or opinions (in form and substance satisfactory to
Underwriter's Counsel) of other counsel acceptable to Underwriter's Counsel,
familiar with the applicable laws; (B) as to
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matters of fact, to the extent they deem proper, on certificates and written
statements of responsible officers of the Company and certificates or other
written statements of officers of departments of various jurisdictions having
custody of documents respecting the corporate existence or good standing of
the Company or the Subsidiary, provided that copies of any such statements or
certificates shall be delivered to Underwriter's Counsel if requested. The
opinion of such counsel for the Company shall state that the opinion of any
such other counsel is in form satisfactory to such counsel.
At each Option Closing Date, if any, the Underwriter shall
have received an opinion letter from Jackier, Gould, Bean, Upfal & Eizelman,
counsel to the Company, dated the Option Closing Date, addressed to the
Underwriter and in form and substance satisfactory to Underwriter's Counsel
confirming as of such Option Closing Date the statements made in its opinion
delivered on the Closing Date.
(e) On or prior to each of the Closing Date and the Option
Closing Date, if any, Underwriter's Counsel shall have been furnished such
documents, certificates and opinions as they may reasonably require for the
purpose of enabling them to review or pass upon the matters referred to in
subsection (c) of this Section 6, or in order to evidence the accuracy,
completeness or satisfaction of any of the representations, warranties or
conditions of the Company and its Subsidiary, or herein contained.
(f) Prior to each Closing Date and each Option Closing
Date, if any, (i) there shall have been no adverse change nor development
involving a prospective change in the condition, financial or otherwise,
prospects, stockholders' equity or the business activities of the Company and
the Subsidiary taken as a whole, whether or not in the ordinary course of
business, from the latest dates as of which such condition is set forth in
the Registration Statement and Prospectus; (ii) there shall have been no
transaction, not in the ordinary course of business, entered into by the
Company
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or the Subsidiary, (iii) neither the Company nor the Subsidiary shall be in
default under any provision of any instrument relating to any outstanding
indebtedness; (iv) neither the Company nor the Subsidiary shall have issued
any securities (other than the IPO Securities and the Underwriter's Warrants)
or declared or paid any dividend or made any distribution in respect of its
capital stock of any class and there has not been any change in the capital
or any change in the debt (long or short term) or liabilities or obligations
of the Company or the Subsidiary (contingent or otherwise); (v) no material
amount of the assets of the Company or the Subsidiary shall have been pledged
or mortgaged, except as set forth in the Registration Statement and
Prospectus; (vi) no action, suit or proceeding, at law or in equity, shall
have been pending or threatened (or circumstances giving rise to same)
against the Company or any Subsidiary, or affecting any of its properties or
business before or by any court or federal, state or foreign commission,
board or other administrative agency wherein an unfavorable decision, ruling
or finding may adversely affect the business, operations, management
prospects or financial condition or assets of the Company or the Subsidiary
taken as a whole, except as set forth in the Registration Statement and
Prospectus: and (vii) no stop order shall have been issued under the Act and
no proceedings therefor shall have been initiated, threatened or contemplated
by the Commission.
(g) At each of the Closing Date and each Option Closing
Date, if any, the Underwriter shall have received a certificate of the
principal executive officer and the chief financial or chief accounting
officer of the Company, dated the Closing Date or Option Closing Date, as the
case may be, to the effect that each of such persons has carefully examined
the Registration Statement, the Prospectus and this Agreement, and that:
(i) The representations and warranties in this
Agreement of the Company and its Subsidiary are true and correct, as if made
on and as of the Closing Date or the Option Closing Date, as the case may be,
and the Company and its Subsidiary have complied with all
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agreements and covenants and satisfied all conditions contained in this
Agreement on their part to be performed or satisfied at or prior to such
Closing Date or Option Closing Date, as the case may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued, and no
proceedings for that purpose have been instituted or are pending or are
contemplated or threatened under the Act;
(iii) The Registration Statement and the Prospectus
and, if any, each amendment and each supplement thereto, contain all
statements and information required to be included therein, and none of the
Registration Statement, the Prospectus nor any amendment or supplement
thereto includes any untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading and neither the Preliminary Prospectus or
any supplement thereto included any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which
they were made, not misleading; and
(iv) Since the dates as of which information is given
in the Registration Statement and the Prospectus, (A) there must not have
been any material change in the shares of Common Stock, Preferred Stock or
liabilities of the Company or the Subsidiary except as set forth in or
contemplated by the Prospectus; (B) there must not have been any material
adverse change in the general affairs, management, business, financial
condition or results of operations of the Company or the Subsidiary, whether
or not arising from transactions in the ordinary course of business, as set
forth in or contemplated by the Prospectus; (C) the Company and the
Subsidiary must not have sustained any material loss or interference with its
business from any court or from legislative or other governmental action,
order or decree, whether foreign or domestic, or from any other occurrence,
not described in the Registration Statement and Prospectus; (D) there must
not
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have occurred any event that makes untrue or incorrect in any material
respect any statement or information contained in the Registration Statement
or Prospectus or that is not reflected in the Registration Statement or
Prospectus but should be reflected therein in order to make the statements or
information therein, in light of the circumstances in which they were made,
not misleading in any material respect; (E) the Company and the Subsidiary
must not have incurred up to and including the Closing Date or the Option
Closing Date, as the case may be, other than in the ordinary course of its
business, any material liabilities or obligations, direct or contingent; (F)
the Company and the Subsidiary must not have paid or declared any dividends
or other distributions on its capital stock; (G) the Company and the
Subsidiary must not have entered into any transactions not in the ordinary
course of business; (H) there has not been any change in the capital stock or
long-term debt or any increase in the short-term borrowings (other than any
increase in the short-term borrowings in the ordinary course of business) of
the Company or the Subsidiary; (i) the Company and the Subsidiary must not
have sustained any material loss or damage to its property or assets, whether
or not insured; and (J) there has occurred no event required to be set forth
in an amended or supplemented Prospectus which has not been set forth.
References to the Registration Statement and the Prospectus
in this subsection (g) are to such documents as amended and supplemented at
the date of such certificate.
(h) By the Closing Date, the Underwriter will have received
clearance from the NASD as to the amount of compensation allowable or payable
to the Underwriter, as described in the Registration Statement.
(i) At the time this Agreement is executed, the Underwriter
shall have received a letter, dated such date, addressed to the Underwriter
in form and substance satisfactory (including the non-material nature of the
changes or decreases, if any, referred to in clause (iii) below) in all
respects to the Underwriter and Underwriter's Counsel, from ____________:
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(i) confirming that they are independent
accountants with respect to the Company and the Subsidiary within the meaning
of the Act and the applicable Rules and Regulations;
(ii) stating that it is their opinion that the
financial statements of the Company and the Subsidiary included in the
Registration Statement comply as to form in all material respects with the
applicable accounting requirements of the Act and the Rules and Regulations
thereunder and that the Underwriter may rely upon the opinion of
________________ with respect to the financial statements and supporting
schedules included in the Registration Statement;
(iii) stating that, on the basis of a limited
review which included a reading of the latest available unaudited interim
financial statements of the Company and the Subsidiary (with an indication of
the date of the latest available unaudited interim financial statements), a
reading of the latest available minutes of the stockholders and board of
directors and the various committees of the boards of directors of the
Company and the Subsidiary, consultations with officers and other employees
of the Company and the Subsidiary responsible for financial and accounting
matters and other specified procedures and inquiries, nothing has come to
their attention which would lead them to believe that (A) the unaudited
financial statements, if any, of the Company and the Subsidiary included in
the Registration Statement do not comply as to form in all material respects
with the applicable accounting requirements of the Act and the Rules and
Regulations or are not fairly presented in conformity with generally accepted
accounting principles applied on a basis substantially consistent with that
of the audited financial statements of the Company and the Subsidiary
included in the Registration Statement, or (B) at a specified date not more
than five (5) days prior to the effective date of the Registration Statement,
there has been any change in the capital stock or long-term debt of the
Company and the Subsidiary, or any decrease in the stockholders' equity or
net current assets or net assets of the Company and the Subsidiary as
compared with
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amounts shown in the ________________, 19__ balance sheet included in the
Registration Statement, other than as set forth in or contemplated by the
Registration Statement, or, if there was any change or decrease, setting
forth the amount of such change or decrease;
(iv) setting forth, at a date not later than five
(5) days prior to the date of the Registration Statement, the amount of
liabilities of the Company and the Subsidiary (including a breakdown of
commercial paper and notes payable to banks);
(v) stating that they have compared specific
dollar amounts, numbers of shares, percentages of revenues and earnings,
statements and other financial information pertaining to the Company and the
Subsidiary set forth in the Prospectus in each case to the extent that such
amounts, numbers, percentages, statements and information may be derived from
the general accounting records, including work sheets, of the Company and the
Subsidiary and excluding any questions requiring an interpretation by legal
counsel, with the results obtained from the application of specified
readings, inquiries and other appropriate procedures (which procedures do not
constitute an examination in accordance with generally accepted auditing
standards) set forth in the letter and found them to be in agreement;
(vi) stating that they have in addition carried
out certain specified procedures, not constituting an audit, with respect to
certain pro forma financial information which is included in the Registration
Statement and the Prospectus and that nothing has come to their attention as
a result of such procedures that caused them to believe such unaudited pro
forma financial information does not comply in form in all respects with the
applicable accounting requirements of Rule 11-02 of Regulation S-X or that
the pro forma adjustments have not been properly applied to the historical
amounts in the compilation of that information;
(vii) stating that they have not during the
immediately preceding five (5) year period brought to the attention of any of
the Company's management any "weakness", as
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defined in Statement of Auditing Standard No. 60 "Communication of Internal
Control Structure Related Matters Noted in an Audit", in any of the Company's
internal controls; and
(viii) statements as to such other matters
incident to the transaction contemplated hereby as the Underwriter may
reasonably request.
(j) At the Closing Date and each Option Closing Date, if
any, the Underwriter shall have received from _____________________, a
letter, dated as of the Closing Date or the Option Closing Date, as the case
may be, to the effect that they reaffirm the statements made in the letter
furnished pursuant to subsection (i) of this Section, except that the
specified date in the referred to letter shall be a date not more than five
days prior to the Closing Date or the Option Closing Date, as the case may
be, and, if the Company has elected to rely on Rule 430A of the Rules and
Regulations, to the further effect that they have carried out procedures as
specified in clause (v) of subsection (i) of this Section with respect to
certain amounts, percentages and financial information as specified by the
Underwriter and deemed to be a part of the Registration Statement pursuant to
Rule 430A(b) and have found such amounts, percentages and financial
information to be in agreement with the records specified in such clause (v).
(k) On each of the Closing Date and Option Closing Date, if
any, there shall have been duly tendered to the Underwriter the appropriate
number of IPO Securities.
(l) No order suspending the sale of the IPO Securities in
any jurisdiction designated by the Underwriter pursuant to subsection (e) of
Section 4 hereof shall have been issued on either the Closing Date or the
Option Closing Date, if any, and no proceedings for that purpose shall have
been instituted or shall be contemplated.
(m) On or before the Closing Date, the Preferred Stock
shall have been approved for quotation on the Nasdaq Small Cap Market and
shall have been authorized upon official notice of issuance for trading on
the BSE.
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(n) On or before the Closing Date, there shall have been
delivered to the Underwriter the Lock-up Agreements, in form and substance
satisfactory to Underwriter's Counsel.
(o) On or before the Closing Date, the Company shall have
executed and delivered to the Underwriter, (i) the Underwriter's Warrant
Agreement substantially in the form filed as Exhibit _____ to the
Registration Statement in final form and substance satisfactory to the
Underwriter, and (ii) the Underwriter's Warrants in such denominations and to
such designees as shall have been provided to the Company.
If any condition to the Underwriter's obligations hereunder
to be fulfilled prior to or at the Closing Date or the relevant Option
Closing Date, as the case may be, is not so fulfilled, the Underwriter may
terminate this Agreement or, if the Underwriter so elects, it may waive any
such conditions which have not been fulfilled or extend the time for their
fulfillment.
7. Indemnification.
(a) The Company and its Subsidiary, jointly and
severally, agrees to indemnify and hold harmless the Underwriter (for
purposes of this Section 7 "Underwriter" shall include the officers,
directors, partners, employees, agents and counsel of the Underwriter, and
each person, if any, who controls the Underwriter ("controlling person")
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, from and against any and all losses, claims, damages, expenses or
liabilities, joint or several (and actions in respect thereof), whatsoever
(including but not limited to any and all expenses whatsoever reasonably
incurred in investigating, preparing or defending against any litigation,
commenced or threatened, or any claim whatsoever), as such are incurred, to
which the Underwriter or such controlling person may become subject under the
Act, the Exchange Act, or any other statute or at common law or otherwise or
under the laws of foreign countries, arising out of or based upon any untrue
statement or alleged untrue statement of a material fact contained (i) in any
Preliminary Prospectus, the Registration Statement or the
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Prospectus (as from time to time amended and supplemented); (ii) in any
post-effective amendment or amendments or any time new registration statement
and prospectus in which is included securities of the Company issued or
issuable upon exercise of the IPO Securities; or (iii) in any application or
other document or written communication (in this Section 7 collectively
called "Application") executed by the Company or based upon written
information furnished by the Company in any jurisdiction in order to qualify
the IPO Securities under the securities laws thereof or filed with the
Commission, any securities commission or agency, the NASD, the BSE or any
securities exchange; or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the
statements therein not misleading (in the case of the Prospectus, in the
light of the circumstances under which they were made), unless such statement
or omission was made in reliance upon and in conformity with written
information furnished to the Company with respect to the Underwriter by or on
behalf of such Underwriter expressly for use in any Preliminary Prospectus,
the Registration Statement or Prospectus, or any amendment thereof or
supplement thereto, or in any Application, as the case may be.
The indemnity agreement in this subsection (a) shall be in
addition to any liability which the Company may have at common law or
otherwise.
(b) The Underwriter agrees to indemnify and hold
harmless the Company, each of its directors, each of its officers who has
signed the Registration Statement, and each other person, if any, who
controls the Company within the meaning of the Act, to the same extent as the
foregoing indemnity from the Company to the Underwriter but only with respect
to statements or omissions, if any, made in any Preliminary Prospectus, the
Registration Statement or Prospectus or any amendment thereof or supplement
thereto or in any Application made in reliance upon, and in strict conformity
with, written information furnished to the Company with respect to the
Underwriter by such Underwriter expressly for use in such Preliminary
Prospectus, the Registration Statement
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or Prospectus or any amendment thereof or supplement thereto or in any such
Application, provided that such written information or omissions only pertain
to disclosures in the Preliminary Prospectus, the Registration Statement or
Prospectus directly relating to the transactions effected by the Underwriter
in connection with this offering. The Company acknowledges that the
statements with respect to the public offering of the IPO Securities set
forth under the heading "Plan of Distribution" and the stabilization legend
in the Prospectus have been furnished by the Underwriter expressly for use
therein.
(c) Promptly after receipt by an indemnified party
under this Section 7 of notice of the commencement of any action, suit or
proceeding, such indemnified party shall, if a claim in respect thereof is to
be made against one or more indemnifying parties under this Section 7, notify
each party against whom indemnification is to be sought in writing of the
commencement thereof (but the failure so to notify an indemnifying party
shall not relieve it from any liability which it may have under this Section
7 except to the extent that it has been prejudiced in any material respect by
such failure or from any liability which it may have otherwise). In case any
such action is brought against any indemnified party, and it notifies an
indemnifying party or parties of the commencement thereof, the indemnifying
party or parties will be entitled to participate therein, and to the extent
it may elect by written notice delivered to the indemnified party promptly
after receiving the aforesaid notice from such indemnified party, to assume
the defense thereof with counsel reasonably satisfactory to such indemnified
party. Notwithstanding the foregoing, the indemnified party or parties shall
have the right to employ its or their own counsel in any such case but the
fees and expenses of such counsel shall be at the expense of such indemnified
party or parties unless (i) the employment of such counsel shall have been
authorized in writing by the indemnifying parties in connection with the
defense of such action at the expense of the indemnifying party, (ii) the
indemnifying parties shall not have employed counsel reasonably satisfactory
to such
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<PAGE>
indemnified party to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded that there may
be defenses available to it or them which are different from or additional to
those available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses of one additional counsel shall be borne by the
indemnifying parties. In no event shall the indemnifying parties be liable
for fees and expenses of more than one counsel (in addition to any local
counsel) separate from their own counsel for all indemnified parties in
connection with any one action or separate but similar or related actions in
the same jurisdiction arising out of the same general allegations or
circumstances. Anything in this Section 7 to the contrary notwithstanding, an
indemnifying party shall not be liable for any settlement of any claim or
action effected without its written consent; provided, however, that such
consent was not unreasonably withheld.
(d) In order to provide for just and equitable
contribution in any case in which (i) an indemnified party makes claim for
indemnification pursuant to this Section 7, but it is judicially determined
(by the entry of a final judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or the denial of the last
right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that the express provisions of this Section 7
provide for indemnification in such case, or (ii) contribution under the Act
may be required on the part of any indemnified party, then each indemnifying
party shall contribute to the amount paid as a result of such losses, claims,
damages, expenses or liabilities (or actions in respect thereof) (A) in such
proportion as is appropriate to reflect the relative benefits received by
each of the contributing parties, on the one hand, and the party to be
indemnified on the other hand, from the offering of the IPO Securities or (B)
if the allocation provided by clause (A) above is not permitted by applicable
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law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of each
of the contributing parties, on the one hand, and the party to be indemnified
on the other hand in connection with the statements or omissions that
resulted in such losses, claims, damages, expenses or liabilities, as well as
any other relevant equitable considerations. In any case where the Company is
a contributing party and the Underwriter is the indemnified party, the
relative benefits received by the Company, on the one hand, and the
Underwriter, on the other, shall be deemed to be in the same proportion as
the total net proceeds from the offering of the Securities (before deducting
expenses) bear to the total underwriting discounts received by the
Underwriter hereunder, in each case as set forth in the Prospectus. Relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact necessary to make the statements
made, in light o the circumstances under which they were made, not misleading
relates to information supplied by the Company, or by the Underwriter, and
the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, expenses or liabilities (or actions in respect thereof)
referred to above in this subdivision (d) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subdivision (d) the Underwriter shall
not be required to contribute any amount in excess of the underwriting
discount applicable to the IPO Securities sold by the Underwriter hereunder.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. For purposes of this
Section 7, each person, if any, who controls the Company within the meaning
of the Act, each officer of the Company who has signed the
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Registration Statement, and each director of the Company shall have the same
rights to contribution as the Company, subject in each case to this
subparagraph (d), Any party entitled to contribution will, promptly after
receipt of notice of commencement of any action, suit or proceeding against
such party in respect to which a claim for contribution may be made against
another party or parties under this subparagraph (d), notify such party or
parties from whom contribution may be sought, but the omission so to notify
such party or parties shall not relieve the party or parties from whom
contribution may be sought from any obligation it or they may have hereunder
or otherwise than under this subparagraph (d), or to the extent that such
party or parties were not adversely affected by such omission. The
contribution agreement set forth above shall be in addition to any
liabilities which any indemnifying party may have at common law or otherwise.
8. Representations and Agreements to Survive Delivery. All
representations, warranties and agreements contained in this Agreement or
contained in certificates of officers of the Company submitted pursuant
hereto, shall be deemed to be representations, warranties and agreements at
the Closing Date and any Option Closing Date, as the case may be, and such
representations, warranties and agreements of the Company and its
Subsidiaries and the respective indemnity agreements contained in Section 7
hereof, shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of the Underwriter, the Company, any
controlling person of the Underwriter or the Company, and shall survive
termination of this Agreement or the issuance and delivery of the IPO
Securities to the Underwriter.
9. Effective Date. This Agreement shall become effective at
10:00 a.m., New York City time, on the first full business day following the
day on which the Registration Statement becomes effective.
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10. Termination.
(a) Subject to subsection (b) of this Section 10,
the Underwriter shall have the right to terminate this Agreement, (i) if any
domestic or international event or act or occurrence has materially
disrupted, or in the Underwriter's opinion will in the immediate future
materially disrupt the financial markets; or (ii) any material adverse change
in the financial markets shall have occurred; or (iii) if trading on the New
York Stock Exchange, the American Stock Exchange, or in the over-the-counter
market shall have been suspended, or minimum or maximum prices for trading
shall have been fixed, or maximum ranges for prices for securities shall have
been required on the over-the-counter market by the NASD or by order of the
Commission or any other government authority having jurisdiction; or (iv) if
the United States shall have become involved in a war or major hostilities,
or if there shall have been an escalation in an existing war or major
hostilities or a national emergency shall have been declared in the United
States; or (v) if a banking moratorium has been declared by a state or
federal authority; or (vi) if a moratorium in foreign exchange trading has
been declared; or (vii) if the Company and/or any of its Subsidiaries, shall
have sustained a loss material or substantial to the Company by fire, flood,
accident, hurricane, earthquake, theft, sabotage or other calamity or
malicious act which, whether or not such loss shall have been insured, will,
in the Underwriter's opinion, make it inadvisable to proceed with the
delivery of the IPO Securities; or (vii) if there shall have been such a
material adverse change in the condition (financial or otherwise), business
affairs or prospects of the Company and/or any of its Subsidiaries, whether
or not arising in the ordinary course of business, which would render, in the
Underwriter's judgment, either of such parties unable to perform
satisfactorily its respective obligations as contemplated by this Agreement
or the Registration Statement, or such material adverse change in the general
market, political or economic conditions, in the United States or elsewhere
as in the Underwriter's judgment would make it inadvisable to proceed with
the offering, sale and/or delivery of the IPO Securities.
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(b) If this Agreement is terminated by the
Underwriter in accordance with the provisions of Section 10(a), the Company
shall promptly reimburse and indemnify the Underwriter for all of its actual
out-of-pocket expenses, including the fees and disbursements of counsel for
the Underwriter in an amount not to exceed $50,000 (less amounts previously
paid pursuant to Section 5(c) above). Notwithstanding any contrary provision
contained in this Agreement, if this Agreement shall not be carried out
within the time specified herein, or any extension thereof granted to the
Underwriter, by reason of any failure on the part of the Company to perform
any undertaking or satisfy any condition of this Agreement by it to be
performed or satisfied (including, without limitation, pursuant to Section 6
or Section 12) then, the Company shall promptly reimburse and indemnify the
Underwriter for all of their actual out-of-pocket expenses, including the
fees and disbursements of counsel for the Underwriter (less amounts
previously paid pursuant to Section 5 (c) above). In addition, the Company
shall remain liable for all Blue Sky counsel fees and expenses and Blue Sky
filing fees. Notwithstanding any contrary provision contained in this
Agreement, any election hereunder or any termination of this Agreement
(including, without limitation, pursuant to Sections 6 and 10 hereof), and
whether or not this Agreement is otherwise carried out, the provisions of
Section 5 and Section 7 shall not be in any way affected by such election or
termination or failure to carry out the terms of this Agreement or any part
hereof.
11. Notices. All notices and communications hereunder,
except as herein otherwise specifically provided, shall be in writing and
shall be deemed to have been duly given if mailed or transmitted by any
standard form of telecommunication. Notices to the Underwriter shall be
directed to the Underwriter at 110 Wall Street, New York, New York 10005,
Attention: Mohammed Ali Khan, President, with a copy to Doros & Brescia,
P.C., 1140 Avenue of the Americas, New York, New York 10036, Attention:
Ronald J. Brescia, Esq. Notices to the Company
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shall be directed to the Company at 4162 Big Ranch Road, Napa, California
94558, Attention: Mack H. Jennings, President, with a copy to Jackier, Gould,
Bean, Upfal & Eizelman, 1533 North Woodward, Suite 250, Bloomfield Hills,
Michigan 48304, Attention: Michael J. Eizelman.
12. Parties. This Agreement shall inure solely to the
benefit of and shall be binding upon, the Underwriter, the Company and the
controlling persons, directors and officers referred to in Section 7 hereof,
and their respective successors, legal Underwriters and assigns and no other
person shall have or be construed to have any legal or equitable right,
remedy or claim under or in respect of or by virtue of this Agreement or any
provisions herein contained. No purchaser of Securities from the Underwriter
shall be deemed to be a successor by reason merely of such purchase.
13. Construction. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of New York
without giving effect to the choice of law or conflict of laws principles.
14. Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original, and
all of which taken together shall be deemed to be one and the same
instrument.
15. Entire Agreement; Amendments. This Agreement, the
Underwriter's Warrant Agreement and the Warrant Agreement constitute the
entire agreement of the parties hereto and supersede all prior written or
oral agreements, understandings and negotiations with respect to the subject
matter hereof. This Agreement may not be amended except in a writing, signed
by the Underwriter and the Company.
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If the foregoing correctly sets forth the understanding
between the Underwriter and the Company, please so indicate in the space
provided below for that purpose, whereupon this letter shall constitute a
binding agreement among us.
Very truly yours,
AWG, LTD.
By: ___________________________
Mack H. Jennings, President
Confirmed and accepted as of
the date first above written
KLEIN MAUS & SHIRE, INC.
By: __________________________________
Name: Mohammad Ali Khan
Title: President
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<PAGE>
AWG. LTD
AND
KLEIN MAUS AND SHIRE, INC.
--------------------------
UNDERWRITER'S
WARRANT AGREEMENT
Dated as of ________________, 1998
<PAGE>
UNDERWRITER'S WARRANT AGREEMENT dated as of __________,
1998 between AWG, LTD., a Nevada corporation (the "Company") and KLEIN MAUS
AND SHIRE, INC., its successors, designees and assigns (hereinafter referred
to as the "Underwriter").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to Klein Maus and
Shire, Inc. warrants (the "Underwriter's Warrants") entitling the holder to
purchase up to an aggregate of 50,000 shares of the Company's Series A
Preferred Stock, $.001 par value per share (the "Preferred Stock"), at a
purchase price of $.0001 per Underwriter's Warrant (the Underwriter's
Warrants and the underlying Preferred Stock being collectively referred to as
the "Warrant Securities"); and
WHEREAS, the Underwriter has agreed pursuant to the
underwriting agreement (the "Underwriting Agreement") dated as of the date
hereof among the Underwriter and the Company to act as to act as the
exclusive agent for the Company, on a best efforts basis, in connection with
the Company's proposed public offering of up to 500,000 shares of Series A
Preferred Stock at a public offering price of $10.00 per share of Preferred
Stock (the "Public Offering"); and
WHEREAS, the Underwriter's Warrants to be issued pursuant
to this Agreement will be issued on the Closing Date and Option Closing Date
(s) (as such term's are defined in the Underwriting Agreement) by the Company
to the Underwriter in consideration for, and as part of the Underwriter's
compensation in connection with, and pursuant to the Underwriting Agreement;
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NOW, THEREFORE, in consideration of the premises, the
payment by the Underwriter to the Company of an aggregate five dollars
($5.00), the agreements herein set forth and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto agree as follows:
1. Grant. The Underwriter is hereby granted the right to
purchase, at any time from ____________, 1999 until 5:00 P.M., New York time,
on _______________, 2003, up to an aggregate of 50,000 shares of Preferred
Stock (the "Shares") at an initial exercise price (subject to adjustment as
provided in Section 8 hereof) of $16.00 per share of Preferred Stock subject
to the terms and conditions of this Agreement. Except as set forth herein,
the Shares issuable upon exercise of the Underwriter's Warrants are in all
respects identical to the shares of Preferred Stock being sold by the
Underwriter to the public pursuant to the terms and provisions of the
Underwriting Agreement.
2. Warrant Certificates. The warrant certificates (the
"Warrant Certificates") delivered and to be delivered pursuant to this
Agreement shall be in the form set forth in Exhibit A, attached hereto and
made a part hereof, with such appropriate insertions, omissions,
substitutions, and other variations as required or permitted by this
Agreement.
3. Exercise of Warrant.
3.1 Method of Exercise. The Underwriter's Warrants
initially are exercisable at an aggregate initial exercise price (subject to
adjustment as provided in Section 8 hereof) per share
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<PAGE>
of Preferred Stock set forth in Section 6 hereof payable by certified or
official bank check in New York Clearing House funds, subject to adjustment
as provided in Section 8 hereof. Upon surrender of a Warrant Certificate with
the annexed Form of Election to Purchase duly executed, together with payment
of the Exercise Price (as hereinafter defined) for the Warrant Securities
purchased at the Company's principal offices (presently located at 4162 Big
Ranch Road, Napa, California 94558) the registered holder of a Warrant
Certificate ("Holder" or "Holders") shall be entitled to receive a
certificate or certificates for the shares of Preferred Stock so purchased.
The purchase rights represented by each Warrant Certificate are exercisable
at the option of the Holders thereof, in whole or part (but not as to
fractional shares of the Preferred Stock). In the case of the purchase of
less than all of the Preferred Stock purchasable under any Warrant
Certificate, the Company shall cancel said Warrant Certificate upon the
surrender thereof and shall execute and deliver a new Warrant Certificate of
like tenor for the balance of the Warrant Securities purchasable thereunder.
3.2 Exercise by Surrender of Warrant. In addition to the
method of payment set forth in Section 3.1 and in lieu of any cash payment
required thereunder, the Holder(s) of the Underwriter's Warrants shall have
the right at any time and from time to time to exercise the Underwriter's
Warrants in full or in part by surrendering the Warrant Certificate in the
manner specified in Section 3.1. The number of shares of Preferred Stock to
be issued pursuant to this Section 3.2 shall be equal to the difference
between (a) the number of shares of Preferred Stock in respect of which the
Underwriter's Warrants are exercised and (b) a fraction, the numerator of
which shall be the number of shares of Preferred Stock in respect of which
the Underwriter's Warrants are exercised multiplied by the Exercise Price (as
hereinafter defined) and the denominator of which shall be the Market Price.
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<PAGE>
3.3 Definition of Market Price. As used herein, the phrase
"Market Price" at any date shall be deemed to be (i) when referring to the
Preferred Stock, the last reported sale price, or, in case no such reported
sale takes place on such day, the average of the last reported sale prices
for the last three (3) trading days, in either case as officially reported by
the principal securities exchange on which the Preferred Stock is listed or
admitted to trading or by the Nasdaq National Market ("NNM"), or, if the
Preferred Stock is not listed or admitted to trading on any national
securities exchange or quoted by NNM, the average closing bid price as
furnished by the National Association of Securities Dealers, Inc. ("NASD")
through Nasdaq or similar organization including the NASD Electronic Bulletin
Board if Nasdaq is no longer reporting such information, or if the Preferred
Stock is not quoted on Nasdaq, or such similar organization as determined in
good faith by resolution of the Board of Directors of the Company, based on
the best information available to it. Notwithstanding the foregoing, for
purposes of Section 8, the Market Price of a share of Preferred Stock shall
be determined by reference to the relevant information set forth above during
the thirty (30) trading days immediately preceding the date of the event
requiring the determination of the Market Price (except that, in the event of
a public offering of shares of Preferred Stock, the Market Price of a share
of Preferred Stock shall be determined by reference to the trading day
immediately preceding the effective date of the public offering and not such
thirty (30) trading day period).
4. Issuance of Certificates. Upon the exercise of the
Underwriter's Warrants, the issuance of certificates for shares of Preferred
Stock and/or other securities, properties or rights underlying such
Underwriter's Warrants, shall be made forthwith (and in any event within five
(5) business days thereafter) without charge to the Holder thereof including,
without limitation, any tax which may be payable in respect of the issuance
thereof, and such certificates shall (subject to the
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<PAGE>
provisions of Sections 5 and 7 hereof) be issued in the name of, or in such
names as may be directed by, the Holder thereof; provided, however, that the
Company shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of any such
certificates in a name other than that of the Holder and the Company shall
not be required to issue or deliver such certificates unless or until the
person or persons requesting the issuance thereof shall have paid to the
Company the amount of such tax or shall have established to the satisfaction
of the Company that such tax has been paid.
The Warrant Certificates and the certificates representing
the Shares (and/or other securities, property or rights issuable upon the
exercise of the Underwriter's Warrants) shall be executed on behalf of the
Company by the manual or facsimile signature of the then present Chairman or
Vice Chairman of the Board of Directors or President or Vice President of the
Company under its corporate seal reproduced thereon, attested to by the
manual or facsimile signature of the then present Secretary or Assistant
Secretary of the Company. Warrant Certificates shall be dated the date of
execution by the Company upon initial issuance, division, exchange,
substitution or transfer.
5. Restriction On Transfer of Warrants. The Holder of a
Warrant Certificate, by its acceptance thereof, covenants and agrees that the
Underwriter's Warrants are being acquired as an investment and not with a
view to the distribution thereof; that the Underwriter's Warrants may not be
sold, transferred, assigned, hypothecated or otherwise disposed of, in whole
or in part, for a period of one (1) year from the date hereof, except to
officers of the Underwriters.
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<PAGE>
6. Exercise Price.
6.1 Initial and Adjusted Exercise Price. Except as
otherwise provided in Section 8 hereof, the initial exercise price of each
Underwriter Warrant shall be $16.00 per share of Preferred Stock. The
adjusted exercise price shall be the price which shall result from time to
time from any and all adjustments of the initial exercise price in accordance
with the provisions of Section 8 hereof.
6.2 Exercise Price. The term "Exercise Price" herein shall
mean the initial exercise price or the adjusted exercise price, depending
upon the context.
7. Registration Rights.
7.1 Current Registration Under the Securities Act of 1933.
The Underwriter's Warrants and the Shares of Preferred Stock issuable upon
exercise of the Underwriter's Warrants have been registered under the
Securities Act of 1933, as amended (the "Act"), pursuant to the Company's
Registration Statement on Form SB-1 (Registration No. 333-48165) (the
"Registration Statement"). The Company covenants and agrees to use its best
efforts to maintain the effectiveness of the Registration Statement for a
period of five (5) years from its effective date.
7.2 Contingent Registration Rights. In the event that, for
any reason whatsoever, the Company shall fail to maintain the effectiveness
of the Registration Statement for a period of five (5) years from its
effective date and, in any event, from and after the fifth (5th) anniversary
of the
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<PAGE>
effective date of the Registration Statement, the Underwriter and other
Holders shall have, commencing the date of any such occasion, the contingent
registration rights ("Registration Rights") set forth in Sections 7.3 and 7.4
hereof.
7.3 Piggyback Registration. (a) If, at any time commencing
after the effective date of the Registration Statement and expiring on the
seventh (7th) anniversary of the effective date of the Registration
Statement, the Company proposes to register any of its securities under the
Act, either for its own account or the account of any other security holder
or holders of the Company possessing registration rights ("Other
Stockholders") (other than pursuant to Form S-4, Form S-8 or comparable
registration statement), it shall give written notice, at least thirty (30)
days prior to the filing of each such registration statement, to the
Underwriter and to all other Holders of Underwriter's Warrants and/or Shares
of Preferred Stock issuable upon exercise of the Underwriter's Warrants
(collectively the "Registrable Securities") of its intention to do so. If the
Underwriter or other Holders of Registrable Securities notify the Company
within twenty-one (21) days after the receipt of any such notice of its or
their desire to include any such securities in such proposed registration
statement, the Company shall afford the Underwriter and such other Holders of
such securities the opportunity to have any such securities registered under
such registration statement.
(b) If the registration of which the Company gives
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Underwriter and such other Holders as part of the
written notice given pursuant to Section 7.3(a) hereof. The right of the
Underwriter or any such other Holders to registration pursuant to this
Section 7.3 shall be conditioned upon their participation in such
underwriting and the inclusion of their Registrable Securities in the
underwriting to the extent hereinafter provided. The Underwriter and all
other
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<PAGE>
Holders proposing to distribute their securities through such underwriting
shall (together with the Company and any officers, directors or other
Stockholders distributing their securities through such underwriting) enter
into an underwriting agreement in customary form with the Underwriter of the
underwriter or underwriters selected by the Company. Notwithstanding any
other provision of this Section 7.3, if the Underwriter of the underwriter or
underwriters advises the Company in writing that marketing factors require a
limitation or elimination of the number of shares of Preferred Stock or other
securities to be underwritten, the Underwriter may limit the number of shares
of Preferred Stock or other securities to be included in the registration and
underwriting. The Company shall so advise the Underwriter and all other
Holders of Registrable Securities requesting registration, and the number of
shares of Preferred Stock or other securities that are entitled to be
included in the registration and underwriting shall be allocated among the
Underwriter and other Holders requesting registration, in each case, in
proportion, as nearly as practicable, to the respective amounts of securities
which they had requested to be included in such registration at the time of
filing the registration statement.
(c) Notwithstanding the provisions of this Section
7.3, the Company shall have the right at any time after it shall have given
written notice pursuant to Section 7.3(a) hereof (irrespective of whether a
written request for inclusion of any such securities shall have been made) to
elect not to file any such proposed registration statement, or to withdraw
the same after the filing but prior to the effective date thereof.
7.4 Demand Registration. (a) At any time commencing after
the effective date of the Registration Statement and ending on the fifth
(5th) anniversary of the effective date of the Registration Statement, the
Holders of Registrable Securities representing a "Majority" (as
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<PAGE>
hereinafter defined) of such securities (assuming the exercise of all of the
Underwriter's Warrants) (the "Initiating Holders") shall have the right
(which right is in addition to the registration rights under Section 7.3
hereof), exercisable by written notice to the Company, to have the Company
prepare and file with the Commission, on one occasion, a registration
statement and such other documents, including a prospectus, as may be
necessary in the opinion of both counsel for the Company and counsel for the
Holders, in order to comply with the provisions of the Act, so as to permit a
public offering and sale of their respective Registrable Securities for up to
two hundred and seventy (270) days by such Holders and any other Holders of
Registrable Securities, as well as any other security holders possessing
similar registration rights, who notify the Company within twenty-one (21)
days after receiving notice from the Company of such request
(b) The Company covenants and agrees to give
written notice of any registration request under this Section 7.4 by any
Holder or Holders to all other registered Holders of Registrable Securities,
as well as any other security holders possessing similar registration rights,
within ten (10) days after the date of the receipt of any such registration
request.
(c) If the Initiating Holders intend to distribute
the Registrable Securities covered by their request by means of an
underwriting, they shall so advise the Company as a part of their request
made pursuant to Section 7.4(a) hereof. The right of any Holder to
registration pursuant to this Section 7.4 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting to the extent and subject
to the limitations provided herein. A Holder may elect to include in such
underwriting all or a part of the Registrable Securities it holds.
(d) The Company shall (together with all Holders,
officers, directors and other stockholders proposing to distribute their
securities through such underwriting) enter into an
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<PAGE>
underwriting agreement in customary form with the Underwriter of the
underwriters selected for such underwriting by the Initiating Holders, which
underwriter(s) shall be reasonably acceptable to the Underwriter.
Notwithstanding any other provision of this Section 7.4, if the Underwriter
of the underwriter or underwriters advises the Initiating Holders in writing
that marketing factors require a limitation or elimination of the number of
shares of Preferred Stock or other securities to be underwritten, the
Underwriter may limit the number of shares of Preferred Stock or other
securities to be included in the registration and underwriting. The Company
shall so advise the Underwriter and all Holders of Registrable Securities
requesting registration, and the number of shares of Preferred Stock or other
securities that are entitled to be included in the registration and
underwriting shall be allocated among the Underwriter and other Holders
requesting registration, in each case, in proportion, as nearly as
practicable, to the respective amounts of securities which they had requested
to be included in such registration at the time of filing the registration
statement. If the Company or any Holder of Registrable Securities who has
requested inclusion in such registration as provided above disapproves of the
terms of any such underwriting, such person may elect to withdraw its
securities therefrom by written notice to the Company, the underwriter and
the Initiating Holders. Any securities so excluded shall be withdrawn from
such registration. No securities excluded from such registration by reason of
such underwriters' marketing limitations shall be included in such
registration. To facilitate the allocation of shares in accordance with this
Section 7.4(d), the Company or underwriter or underwriters selected as
provided above may round the number of securities of any holder which may be
included in such registration to the nearest 100 shares.
(e) In the event that the Initiating Holders are
unable to sell all of the Registrable Securities for which they have
requested registration due to the provisions of Section 7.4(d) hereof and if,
at that time, the Initiating Holders are not permitted to sell Registrable
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<PAGE>
Securities under Rule 144(k), the Initiating Holders shall be entitled to
require the Company to afford the Initiating Holders an opportunity to effect
one additional demand registration under this Section 7.4.
(f) In addition to the registration rights under
Section 7.3 and subsection (a) of Section 7.4 hereof, at any time commencing
on the date hereof and expiring five (5) years thereafter any Holder of
Registrable Securities shall have the right, exercisable by written request
to the Company, to have the Company prepare and file, on one occasion, with
the Commission a registration statement so as to permit a public offering and
sale for 270 days by any such Holder of its Registrable Securities provided,
however, that the provisions of Section 7.5(b) hereof, shall not apply to any
such registration request and registration and all costs incident thereto
shall be at the expense of the Holder or Holder's making such request.
(g) Notwithstanding anything to the contrary
contained herein, if the Company shall not have filed a registration
statement for the Registrable Securities of the Initiating Holders or the
Holder(s) referred to in Section 7.5(f) above (the "Paying Holders"), within
the time period specified in Section 7.5(a) below, the Company shall upon the
written notice of election of the Initiating Holders or the Paying Holders,
as the case may be, repurchase (i) any and all Shares of Preferred Stock at
the higher of the Market Price per share of Preferred Stock on (x) the date
of the notice sent to the Company under Section 7.4(a) or (f), as the case
may be, or (y) the expiration of the period specified in Section 7.5(a) and
(ii) any and all Warrants at such Market Price less the Exercise Price of
such Warrant. Such repurchase shall be in immediately available funds and
shall close within five (5) business days after the expiration of the period
specified in Section 7.5(a).
7.5 Covenants of the Company With Respect to Registration.
In connection with
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any registration under Sections 7.3 and 7.4 hereof, the Company covenants and
agrees as follows:
(a) The Company shall use its best efforts to file
a registration statement within sixty (60) days of receipt of any demand
therefor, shall use its best efforts to have any registration statements
declared effective at the earliest possible time, and shall furnish each
Holder desiring to sell Registrable Securities such number of prospectuses as
shall reasonably be requested.
(b) The Company shall pay all costs (excluding
fees and expenses of Holder(s)' counsel and any underwriting or selling
commissions), fees and expenses in connection with all registration
statements filed pursuant to Sections 7.3 and 7.4 hereof including, without
limitation, the Company's legal and accounting fees, printing expenses, blue
sky fees and expenses. If the Company shall fail to comply with the
provisions of Section 7.5(a), the Company shall, in addition to any other
equitable or other relief available to the Holder(s), extend the exercise
period of the Underwriter's Warrants by such number of days as shall equal
the delay caused by the Company's failure.
(c) The Company will take all necessary action
which may be required in qualifying or registering the Registrable Securities
included in a registration statement for offering and sale under the
securities or blue sky laws of such states as reasonably are requested by the
Holder(s); provided that the Company shall not be obligated to execute or
file any general consent to service of process or to qualify as a foreign
corporation to do business under the laws of any such jurisdiction.
(d) The Company shall indemnify the Holder(s) of
the Registrable Securities to be sold pursuant to any registration statement
and each person, if any, who controls such Holders within the meaning of
Section 15 of the Act or Section 20(a) of the Securities Exchange Act of
1934, as amended ("Exchange Act"), against all loss, claim, damage, expense
or
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liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which any of them may
become subject under the Act, the Exchange Act or otherwise, arising from
such registration statement but only to the same extent and with the same
effect as the provisions pursuant to which the Company has agreed to
indemnify the Underwriter contained in Section 7 of the Underwriting
Agreement.
(e) The Holder(s) of the Registrable Securities to
be sold pursuant to a registration statement, and their successors and
assigns, shall severally, and not jointly, indemnify the Company, its
officers and directors and each person, if any, who controls the Company
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, against all loss, claim, damage or expense or liability (including all
expenses reasonably incurred in investigating, preparing or defending against
any claim whatsoever) to which they may become subject under the Act, the
exchange Act or otherwise, arising from information furnished by or on behalf
of such Holders, or their successors or assigns, for specific inclusion in
such registration statement to the same extent and with the same effect as
the provisions contained in Section 7 of the Underwriting Agreement pursuant
to which the Underwriter has agreed to indemnify the Company.
(f) For a period of one hundred eighty (180) days
after the effectiveness of any registration statement filed pursuant to
Section 7.4 hereof, the Company shall not permit any other registration
statement (other than (1) a registration statement relating to the securities
for which the Company has granted demand registration rights, as described in
the Prospectus included in the Registration Statement, (2) a registration
statement relating to the securities for which the Company has granted
piggyback registration rights, as described in the Prospectus included in the
Registration Statement and (3) a registration statement filed on Forms S-4 or
S-8 to be or remain effective during the effectiveness of a registration
statement filed pursuant to Section 7.4 hereof, without the prior
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written consent of the Holders of the Registrable Securities representing a
Majority of such securities.
(g) The Company shall furnish upon request to each
Holder participating in the offering and to each underwriter, if any, a
signed counterpart, addressed to such Holder or underwriter, of (i) an
opinion of counsel to the Company, dated the effective date of such
registration statement (and, if such registration includes an underwritten
public offering, an opinion dated the date of the closing under the
underwriting agreement), and (ii) a "cold comfort" letter dated the effective
date of such registration statement (and, if such registration includes an
underwritten public offering, a letter dated the date of the closing under
the underwriting agreement) signed by the independent public accountants who
have issued a report on the Company's financial statements included in such
registration statement, in each case covering substantially the same matters
with respect to such registration statement (and the prospectus included
therein) and, in the case of such accountants' letter, with respect to events
subsequent to the date of such financial statements, as are customarily
covered in opinions of issuer's counsel and in accountants' letters delivered
to underwriters in underwritten public offerings of securities.
(h) The Company shall as soon as practicable after
the effective date of any registration statement filed pursuant to Sections
7.3 and 7.4 hereof, and in any event within 15 months thereafter, make
"generally available to its security holders" (within the meaning of Rule 158
under the Act) an earnings statement (which need not be audited) complying
with Section 11(a) of the Act and covering a period of at least 12
consecutive months beginning after the effective date of the registration
statement.
(i) The Company shall deliver promptly to each
Holder participating in the offering requesting the correspondence and
memoranda described below and to the managing
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underwriters, copies of all written correspondence between the Commission and
the Company, its counsel or auditors and all memoranda relating to
discussions with the Commission or its staff with respect to the registration
statement and permit each Holder and underwriters to do such investigation,
upon reasonable advance notice, with respect to information contained in or
omitted from the registration statement as it deems reasonably necessary to
comply with applicable securities laws or rules of the NASD. Such
investigation shall include access to books, records and properties and
opportunities to discuss the business of the Company with its officers and
independent auditors, all to such reasonable extent and at such reasonable
times and as often as any such Holder or underwriter shall reasonably
request
(j) With respect to any registration under Section
7.4 hereof, the Company shall enter into an underwriting agreement with the
managing underwriter selected for such underwriting by the Initiating Holders
or the Paying Holders, as the case may be. Such agreement shall be
satisfactory in form and substance to the Company, each Holder and such
managing underwriters, and shall contain such representations, warranties and
covenants by the Company and such other terms as are customarily contained in
agreements of that type used by the managing underwriter. The Holders shall
be parties to any underwriting agreement relating to an underwritten sale of
their Registrable Securities and may, at their option, require that any or
all the representations, warranties and covenants of the Company to or for
the benefit of such underwriters shall also be made to and for the benefit of
such Holders. Such Holders shall not be required to make any representations
or warranties to or agreements with the Company or the underwriters, except
as they may relate to such Holders and their intended methods of
distribution.
(k) For purposes of this Agreement, the term
"Majority" in reference to the Holders of Registrable Securities, shall mean
in excess of fifty percent (50%) of the then
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outstanding Underwriter's Warrants and/or Shares of Preferred Stock issued
upon exercise of the Underwriter's Warrants that (i) are not held by the
Company, an affiliate, officer, creditor, employee or agent thereof or any of
their respective affiliates, members of their family, persons acting as
nominees or in conjunction therewith and (ii) have not been resold to the
public pursuant to a registration statement filed with the Commission under
the Act.
(l) Nothing contained in this Agreement shall be
construed as requiring the Holder(s) to exercise their Underwriter's Warrants
prior to the initial filing of any registration statement or the
effectiveness thereof.
(m) In addition to the Registrable Securities,
upon the written request therefor, by any Holder(s), the Company shall
include in the registration statement any other securities of the Company
held by such Holder(s) as of the date of filing of such registration
statement, including without limitation restricted shares of Preferred Stock,
options, warrants or any other securities convertible into shares of
Preferred Stock.
7.6 Restrictive Legends. In the event that the Company
fails to maintain the effectiveness of the Registration Statement, such that
the exercise, in part or in whole, of the Underwriter's Warrants are not, at
the time of such exercise, registered under the Act, any certificates
representing the Shares underlying the Underwriter's Warrants, the Underlying
Warrants and any of the other securities issuable upon exercise of the
Underwriter's Warrants shall bear the following restrictive legend:
The securities represented by this certificate have not
been registered under the Securities Act of 1933, as amended ("Act"), and may
not be offered or sold except pursuant to (i) an effective registration
statement under the Act, (ii) to the extent applicable, Rule 144 under the
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Act (or any similar rule under such Act relating to the disposition of
securities), or (iii) an opinion of counsel, if such opinion shall be
reasonably satisfactory to counsel to the issuer, that an exemption from
registration under such Act is available.
8. Adjustments to Exercise Price and Number of Securities.
8.1 Computation of Adjusted Exercise Price. Except as
hereinafter provided, in the event the Company shall at any time after the
date hereof issue or sell any shares of Preferred Stock (other than the
issuances or sales referred to in Section 8.7 hereof), including shares held
in the Company's treasury and shares of Preferred Stock issued upon the
exercise of any options, rights or warrants to subscribe for shares of
Preferred Stock and shares of Preferred Stock issued upon the direct or
indirect conversion or exchange of securities for shares of Preferred Stock,
for a consideration per share less than the Market Price in effect
immediately prior to the issuance or sale of such shares, or without
consideration, then forthwith upon such issuance or sale, the Exercise Price
shall (until another such issuance or sale) be reduced to the price
(calculated to the nearest full cent) equal to the quotient derived by
dividing (i) an amount equal to the sum of (a) the total number of shares of
Preferred Stock outstanding immediately prior to the issuance or sale of such
shares, multiplied by the Exercise Price in effect immediately prior to such
issuance or sale, and (b) the aggregate of the amount of all consideration,
if any, received by the Company upon such issuance or sale, by (ii) the total
number of shares of Preferred Stock outstanding immediately after such
issuance or sale; provided, however, that in no event shall the Exercise
Price be adjusted pursuant to this computation to an amount in excess of the
Exercise Price in effect immediately prior to such computation, except in the
case of a combination of outstanding shares of Preferred Stock, as provided
by Section 8.3 hereof.
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For the purposes of this Section 8 the term Exercise Price
shall mean the Exercise Price per share of Preferred Stock set forth in
Section 6 hereof, as adjusted from time to time pursuant to the provisions of
this Section 8.
For the purposes of any computation to be made in
accordance with this Section 8.1, the following provisions shall be
applicable:
(i) In case of the issuance or sale of shares of
Preferred Stock for a consideration part or all of which shall be cash, the
amount of the cash consideration therefor shall be deemed to be the amount of
cash received by the Company for such shares (or, if shares of Preferred
Stock are offered by the Company for subscription, the subscription price,
or, if either of such securities shall be sold to underwriters or dealers for
public offering without a subscription offering, the initial public offering
price) before deducting therefrom any compensation paid or discount allowed
in the sale, underwriting or purchase thereof by underwriters or dealers or
other performing similar services, or any expenses incurred in connection
therewith.
(ii) In case of the issuance or sale (other than
as a dividend or other distribution on any stock of the Company) of shares of
Preferred Stock for a consideration part or all of which shall be other than
cash, the amount of the consideration therefor other than cash shall be
deemed to be the value of such consideration as determined in good faith by
the Board of Directors of the Company and shall include any amounts payable
to security holders or any affiliates thereof, including without limitation,
pursuant to any employment agreement, royalty, consulting agreement, covenant
not to compete, earnout or contingent payment right or similar arrangement,
agreement or understanding, whether oral or written; all such amounts being
valued for the purposes hereof at the aggregate amount payable thereunder,
whether such payments are absolute or contingent, and irrespective of the
period or uncertainty of payment, the rate of interest, if any, or
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the contingent nature thereof; provided, however, that if any Holder(s) does
not agree with such evaluation, a mutually acceptable independent appraiser
shall make such evaluation, the cost of which shall be borne by the Company.
(iii) Shares of Preferred Stock issuable by way of
dividend or other distribution on any stock of the Company shall be deemed to
have been issued immediately after the opening of business on the day
following the record date for the determination of stockholders entitled to
receive such dividend or other distribution and shall be deemed to have been
issued without consideration.
(iv) The reclassification of securities of the
Company other than shares of Preferred Stock into securities including shares
of Preferred Stock shall be deemed to involve the issuance of such shares of
Preferred Stock for a consideration other than cash immediately prior to the
close of business on the date fixed for the determination of security holders
entitled to receive such shares, and the value of the consideration allocable
to such shares of Preferred Stock shall be determined as provided in
subsection (ii) of this Section 8.1.
(v) The number of shares of Preferred Stock at any
one time outstanding shall include the aggregate number of shares issued or
issuable (subject to readjustment upon the actual issuance thereof) upon the
exercise of options, rights, warrants and upon the conversion or exchange of
convertible or exchangeable securities.
8.2 Options, Rights, Warrants and Convertible and
Exchangeable Securities. In case the Company shall at any time after the date
hereof issue options, rights or warrants to subscribe for shares of Preferred
Stock, or issue any securities convertible into or exchangeable for shares of
Preferred Stock, for a consideration per share less than the Market Price in
effect immediately prior
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to the issuance of such options, rights or warrants, or such convertible or
exchangeable securities, or without consideration, the Exercise Price in
effect immediately prior to the issuance of such options, rights or warrants,
or such convertible or exchangeable securities, as the case may be, shall be
reduced to a price determined by making a computation in accordance with the
provisions of Section 8.1 hereof, provided that:
(a) The aggregate maximum number of shares of
Preferred Stock, as the case may be, issuable under such options, rights or
warrants shall be deemed to be issued and outstanding at the time such
options, rights or warrants were issued, and for a consideration equal to the
minimum purchase price per share provided for in such options, rights or
warrants at the time of issuance, plus the consideration (determined in the
same manner as consideration received on the issue or sale of shares in
accordance with the terms of the Underwriter's's Warrants), if any, received
by the Company for such options, rights or warrants.
(b) The aggregate maximum number of shares of
Preferred Stock issuable upon conversion or exchange of any convertible or
exchangeable securities shall be deemed to be issued and outstanding at the
time of issuance of such securities, and for a consideration equal to the
consideration (determined in the same manner as consideration received on the
issue or sale of shares of Preferred Stock in accordance with the terms of
the Underwriter's Warrants) received by the Company for such securities, plus
the minimum consideration, if any, receivable by the Company upon the
conversion or exchange thereof.
(c) If any change shall occur in the price per
share provided for in any of the options, rights or warrants referred to in
subsection (a) of this Section 8.2, or in the price per share at which the
securities referred to in subsection (b) of this Section 8.2 are convertible
or exchangeable, such options, rights or warrants or conversion or exchange
rights, as the case may be,
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shall be deemed to have expired or terminated on the date when such price
change became effective in respect of shares not theretofore issued pursuant
to the exercise or conversion or exchange thereof, and the Company shall be
deemed to have issued upon such date new options, rights or warrants or
convertible or exchangeable securities at the new price in respect of the
number of shares issuable upon the exercise of such options, rights or
warrants or the conversion or exchange of such convertible or exchangeable
securities.
8.3 Subdivision and Combination. In case the Company shall
at any time subdivide or combine the outstanding shares of Preferred Stock,
the Exercise Price shall forthwith be proportionately decreased in the case
of subdivision or increased in the case of combination.
8.4 Adjustment in Number of Securities. Upon each
adjustment of the Exercise Price pursuant to the provisions of this Section
8, the number of Warrant Securities issuable upon the exercise at the
adjusted exercise price of each Underwriter's Warrant shall be adjusted to
the nearest full amount by multiplying a number equal to the Exercise Price
in effect immediately prior to such adjustment by the number of Warrant
Securities issuable upon exercise of the Underwriter's Warrants immediately
prior to such adjustment and dividing the product so obtained by the adjusted
Exercise Price.
8.5 Definition of Preferred Stock. For the purpose of this
Agreement, the term "Preferred Stock" shall mean those shares of Series A
Preferred Stock, $.001 par value per share (the "Preferred Stock") of the
Company authorized for issuance in the Company's Certification of
Incorporation by the Company's Board of Directors, which do not have voting
rights except as
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may be required by applicable law, entitles the holders thereof to a
Preferred Annual Return of 6% per annum payable in Preferred Stock in an
amount equivalent to 6% of the number of shares of Preferred Stock registered
in the name of each of the holders as of the close of business on December 31
of each year and will have a preference upon liquidation of the Company in
the amount of $10.00 per share.
8.6 Merger or Consolidation. In case of any consolidation
of the Company with, or merger of the Company with, or merger of the Company
into, another corporation (other than a consolidation or merger which does
not result in any reclassification or change of the outstanding Preferred
Stock), the corporation formed by such consolidation or merger shall execute
and deliver to the Holder a supplemental warrant agreement providing that the
holder of each Underwriter's Warrant then outstanding or to be outstanding
shall have the right thereafter (until the expiration of such Underwriter's
Warrant) to receive, upon exercise of such warrant, the kind and amount of
shares of stock and other securities and property receivable upon such
consolidation or merger, by a holder of the number of shares of Preferred
Stock of the Company for which such Underwriter's Warrant might have been
exercised immediately prior to such consolidation, merger, sale or transfer.
Such supplemental warrant agreement shall provide for adjustments which shall
be identical to the adjustments provided in Section 8. The above provision of
this subsection shall similarly apply to successive consolidations or
mergers.
8.7 No Adjustment of Exercise Price in Certain Cases. No
adjustment of the Exercise Price shall be made:
(a) Upon the issuance or sale of the Underwriter's
Warrants or the shares
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of Preferred Stock issuable upon the exercise of the Underwriter's Warrants; or
(b) If the amount of said adjustment shall be less
than two cents (2(cent)) per Warrant Security, provided, however, that in
such case any adjustment that would otherwise be required then to be made
shall be carried forward and shall be made at the time of and together with
the next subsequent adjustment which, together with any adjustment so carried
forward, shall amount to at least two cents (2(cent)) per Warrant Security.
8.8 Dividends and Other Distributions. In the event that
the Company shall at any time prior to the exercise of all Underwriter's
Warrants declare a dividend (other than a dividend consisting solely of
shares of Preferred Stock) or otherwise distribute to its stockholders any
assets, property, rights, evidences of indebtedness, securities (other than
shares of Preferred Stock), whether issued by the Company or by another, or
any other thing of value, the Holders of the unexercised Underwriter's
Warrants shall thereafter be entitled, in addition to the shares of Preferred
Stock or other securities and property receivable upon the exercise thereof,
to receive, upon the exercise of such Underwriter's Warrants, the same
property, assets, rights, evidences of indebtedness, securities or any other
thing of value that they would have been entitled to receive at the time of
such dividend or distribution as if the Underwriter's Warrants had been
exercised immediately prior to such dividend or distribution. At the time of
any such dividend or distribution, the Company shall make appropriate
reserves to ensure the timely performance of the provisions of this
subsection 8.8.
9. Exchange and Replacement of Warrant Certificates. Each
Warrant Certificate is exchangeable without expense, upon the surrender
thereof by the registered Holder at the principal
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executive office of the Company, for a new Warrant Certificate of like tenor
and date representing in the aggregate the right to purchase the same number
of Warrant Securities in such denominations as shall be designated by the
Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of any
Warrant Certificate, and, in case of loss, theft or destruction, of indemnity
or security reasonably satisfactory to it, and reimbursement to the Company
of all reasonable expenses incidental thereto, and upon surrender and
cancellation of the Underwriter's Warrants, if mutilated, the Company will
make and deliver a new Warrant Certificate of like tenor, in lieu thereof.
10. Elimination of Fractional Interests. The Company shall
not be required to issue fractional shares of Preferred Stock upon the
exercise of Underwriter's Warrants. Underwriter's Warrants may only be
exercised in such multiples as are required to permit the issuance by the
Company of one or more whole shares of Preferred Stock. If one or more
Underwriter's Warrants shall be presented for exercise in full at the same
time by the same Holder, the number of whole shares of Preferred Stock which
shall be issuable upon such exercise thereof shall be computed on the basis
of the aggregate number of shares of Preferred Stock purchasable on exercise
of the Underwriter's Warrants so presented. If any fraction of a share of
Preferred Stock would, except for the provisions provided herein, be issuable
on the exercise of any Underwriter's Warrant (or specified portion thereof),
the Company shall pay an amount in cash equal to such fraction multiplied by
the then current market value of a share of Preferred Stock, determined as
follows:
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(1) If the Preferred Stock is listed or admitted to
unlisted trading privileges on the NYSE or the AMEX, or is traded on the NNM,
the current market value of a share of Preferred Stock shall be the closing
sale price of the Preferred Stock at the end of the regular trading session
on the last business day prior to the date of exercise of the Underwriter's
Warrants on whichever of such exchanges or NNM had the highest average daily
trading volume for the Preferred Stock on such day; or
(2) If the Preferred Stock is not listed or admitted to
unlisted trading privileges, on either the NYSE or the AMEX and is not traded
on NNM, but is quoted or reported on Nasdaq, the current market value of a
share of Preferred Stock, shall be the average of the Underwriter closing bid
and asked prices (or the last sale price, if then reported by Nasdaq) of the
Preferred Stock at the end of the regular trading session on the last
business day prior to the date of exercise of the Underwriter's Warrants as
quoted or reported on Nasdaq, as the case may be; or
(3) If the Preferred Stock is not listed, or admitted to
unlisted trading privileges, on either of the NYSE or the AMEX, and is not
traded on NNM or quoted or reported on Nasdaq, but is listed or admitted to
unlisted trading privileges on the BSE or another national securities
exchange (other than the NYSE or the AMEX), the current market value of a
share of Preferred Stock shall be the closing sale price of the Preferred
Stock at the end of the regular trading session on the last business day
prior to the date of exercise of the Underwriter's Warrants on whichever of
such exchanges has the highest average daily trading volume for the Preferred
Stock on such day; or
(4) If the Preferred Stock is not listed or admitted to
unlisted trading privileges on any national securities exchange, or listed
for trading on NNM or quoted or reported on Nasdaq, but is traded in the
over-the-counter market, the current market value of a share of Preferred
Stock
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shall be the average of the last reported bid and asked prices of the
Preferred Stock reported by the National Quotation Bureau, Inc. on the last
business day prior to the date of exercise of the Underwriter's Warrants; or
(5) If the Preferred Stock is not listed, admitted to
unlisted trading privileges on any national securities exchange, or listed
for trading on NNM or quoted or reported on Nasdaq, and bid and asked prices
of the Preferred Stock are not reported by the National Quotation Bureau,
Inc., the current market value of a share of Preferred Stock shall be an
amount, not less than the book value thereof as of the end of the most
recently completed fiscal quarter of the Company ending prior to the date of
exercise, determined in accordance with generally acceptable accounting
principles, consistently applied.
11. Reservation and Listing of Securities. The Company
shall at all times reserve and keep available out of its authorized shares of
Preferred Stock, solely for the purpose of issuance upon the exercise of the
Underwriter's Warrants, such number of shares of Preferred Stock or other
securities, properties or rights as shall be issuable upon the exercise
thereof. The Company covenants and agrees that, upon exercise of the
Underwriter's Warrants and payment of the Exercise Price therefor, all shares
of Preferred Stock and other securities, if any, issuable upon such exercise
shall be duly and validly issued, fully paid, non-assessable and not subject
to the preemptive rights of any stockholder. As long as the Underwriter's
Warrants shall be outstanding, the Company shall use its best efforts to
cause all shares of Preferred Stock issuable upon the exercise of the
Underwriter's Warrants to be listed (subject to official notice of issuance)
on all securities exchanges on which the Preferred Stock issued to the public
in connection herewith may then be listed and/or quoted.
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<PAGE>
12. Notices to Warrant Holders. Nothing contained in this
Agreement shall be construed as conferring upon the Holders the right to vote
or to consent or to receive notice as a stockholder in respect of any
meetings of stockholders for the election of directors or any other matter,
or as having any rights whatsoever as a stockholder of the Company. If,
however, at any time prior to the expiration of the Underwriter's Warrants
and their exercise, any of the following events shall occur:
(a) the Company shall take a record of the holders of its
shares of Preferred Stock for the purpose of entitling them to receive a
dividend or distribution payable other than in cash, or a cash dividend or
distribution payable other than out of current or retained earnings, as
indicated by the accounting treatment of such dividend or distribution on the
books of the Company; or
(b) the Company shall offer to all the holders of its
Preferred Stock any additional shares of capital stock of the Company or
securities convertible into or exchangeable for shares of capital stock of
the Company, or any option, right or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business as an entirety shall
be proposed; then, in any one or more of said events, the Company shall give
written notice of such event at least fifteen (15) days prior to the date
fixed as a record date or the date of closing the transfer books for the
determination of the stockholders entitled to such dividend, distribution,
convertible or exchangeable securities or subscription rights, or entitled to
vote on such proposed dissolution, liquidation, winding up or sale. Such
notice shall specify such record date or the date of closing the transfer
book, as the case may be. Failure to give such notice or any defect therein
shall not affect the validity of any action taken in connection with the
declaration or payment of any such dividend, or the issuance of any
convertible or exchangeable
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securities, or subscription rights, options or warrants, or any proposed
dissolution, liquidation, winding up or sale.
13. Underwriter's Warrants.
The form of the certificate representing Underwriter's
Warrants (and the form of election to purchase shares of Preferred Stock upon
the exercise of Underwriter's Warrants and the form of assignment printed on
the reverse thereof) shall be substantially as set forth in Exhibit "A" to
the Warrant Agreement. Each Underwriter's Warrant shall entitle the Holder to
purchase one fully paid and non-assessable share of Preferred Stock at an
initial purchase price of $16.00 per share from ______________, 1999 until
5:00 P.M. New York time on _____________, 2003 at which time the
Underwriter's Warrants shall expire. The exercise price of the Underwriter's
Warrants and the number of shares of Preferred Stock issuable upon the
exercise of the Underwriter's Warrants are subject to adjustment, whether or
not the Underwriter's Warrants have been exercised, in the manner and upon
the occurrence of the events set forth in Section 8 of the Warrant Agreement,
which is hereby incorporated herein by reference and made a part hereof as if
set forth in its entirety herein. Subject to the provisions of this Agreement
and upon issuance of the Underwriter's Warrants, each registered holder of
such Underwriter's Warrant shall have the right to purchase from the Company
(and the Company shall issue to such registered holders) up to the number of
fully paid and non-assessable shares of Preferred Stock (subject to
adjustment as provided herein and in the Warrant Agreement), free and clear
of all preemptive rights of stockholders, provided that such registered
holder complies with the terms governing exercise of the Underwriter's
Warrant set forth in the Warrant Agreement, and pays the applicable exercise
price, determined in accordance with the terms of the Warrant Agreement. Upon
exercise of the Underwriter's Warrants, the Company
- 28 -
<PAGE>
shall forthwith issue to the registered holder of any such Underwriter's
Warrant in his name or in such name as may be directed by him, certificates
for the number of shares of Preferred Stock so purchased. Except as otherwise
provided herein and in Section 6.1 hereof, the Underwriter's Warrants shall
be governed in all respects by the terms of the Warrant Agreement. The
Underwriter's Warrants shall be transferable in the manner provided in the
Warrant Agreement, and upon any such transfer, a new Underwriter's Warrant
Certificate shall be issued promptly to the transferee. The Company covenants
to, and agrees with, the Holder(s) that without the prior written consent of
the Holder(s), which will not be unreasonably withheld, the Warrant Agreement
will not be modified, amended, canceled, altered or superseded, and that the
Company will send to each Holder, irrespective of whether or not the
Underwriter's Warrants have been exercised, any and all notices required by
the Warrant Agreement to be sent to holders of the Underwriter's Warrants.
14. Notices.
All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made and
sent when delivered, or mailed by registered or certified mail, return
receipt requested:
(a) If to the registered Holder of the Underwriter's
Warrants, to the address of such Holder as shown on the books of the Company;
or
(b) If to the Company, to the address set forth in Section
3 hereof or to such other address as the Company may designate by notice to
the Holders.
15. Supplements and Amendments. The Company and the
Underwriter may from time to time supplement or amend this Agreement without
the approval of any Holders of Warrant
- 29 -
<PAGE>
Certificates in order to cure any ambiguity, to correct or supplement any
provision contained herein which may be defective or inconsistent with any
provisions herein, or to make any other provisions in regard to matters or
questions arising hereunder which the Company and the Underwriter may deem
necessary or desirable and which the Company and the Underwriter deem shall
not adversely affect the interests of the Holders of Warrant Certificates.
16. Successors. All the covenants and provisions of this
Agreement shall be binding upon and inure to the benefit of the Company, the
Holders and their respective successors and assigns hereunder.
17. Termination. This Agreement shall terminate at the
close of business on ___________, 2003. Notwithstanding the foregoing, the
indemnification provisions of Section 7 shall survive such termination until
the close of business on ___________, 2008.
18. Governing Law; Submission to Jurisdiction. This
Agreement and each Warrant Certificate issued hereunder shall be deemed to be
a contract made under the laws of the State of New York and for all purposes
shall be construed in accordance with the laws of said State of New York
without giving effect to the rules of said State of New York governing the
conflicts of laws.
The Company, the Underwriter and any other registered
Holders hereby agree that any action, proceeding or claim against it arising
out of, or relating in any way to, this Agreement shall be brought and
enforced in the courts of the State of New York or of the United States of
America for the Southern District of New York, and irrevocably submits to
such jurisdiction, which
- 30 -
<PAGE>
jurisdiction shall be exclusive. The Company, the Underwriter and any other
registered Holders hereby irrevocably waive any objection to such exclusive
jurisdiction or inconvenient forum. Any such process or summons to be served
upon any of the Company, the Underwriter and the Holders (at the option of
the party bringing such action, proceeding or claim) may be served by
transmitting a copy thereof, by registered or certified mail, return receipt
requested, postage prepaid, addressed to it at the address set forth in
Section 14 hereof. Such mailing shall be deemed personal service and shall be
legal and binding upon the party so served in any action, proceeding or
claim. The Company, the Underwriter and any other registered Holders agree
that the prevailing party(ies) in any such action or proceeding shall be
entitled to recover from the other party(ies) all of its their reasonable
legal costs and expenses relating to such action or proceeding and/or
incurred in connection with the preparation therefor.
19. Entire Agreement; Modification. This Agreement
(including the Underwriting Agreement and the Warrant Agreement to the extent
portions thereof are referred to herein) contains the entire understanding
between the parties hereto with respect to the subject matter hereof and may
not be modified or amended except by a writing duly signed by the party
against whom enforcement of the modification or amendment is sought.
20. Severability. If any provision of this Agreement shall
be held to be invalid or unenforceable, such invalidity or unenforceability
shall not affect any other provision of this Agreement.
21. Captions. The caption headings of the Sections of this
Agreement are for
- 31 -
<PAGE>
convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive
effect.
22. Benefits of this Agreement. Nothing in this Agreement
shall be construed to give to any person or corporation other than the
Company and the Underwriter and any other registered Holder(s) of the Warrant
Certificates or Warrants Securities any legal or equitable right, remedy or
claim under this Agreement; and this Agreement shall be for the sole benefit
of the Company and the Underwriter and any other registered Holders of
Warrant Certificates or Warrant Securities.
23. Counterparts. This Agreement may be executed in any
number of counterparts and each of such counterparts shall for all purposes
be deemed to be an original, and such counterparts shall together constitute
but one and the same instrument.
- 32 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.
[SEAL] AWG, LTD.
By: ___________________________
Mack H. Jennings, President
Attest:
______________, Secretary
KLEIN MAUS AND SHIRE, INC.
By: ____________________________
Mohammed Ali Khan, President
- 33 -
<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES
ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO
(i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933,
(ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE
UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN
OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO
COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS
AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS
CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT
REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:00 P.M., NEW YORK TIME, _______________, 2003
No. RW-101 Warrants to Purchase
50,000 Shares of Series A Preferred Stock
- 34 -
<PAGE>
WARRANT CERTIFICATE
This Warrant Certificate certifies that Klein Maus and
Shire, Inc., or registered assigns, is the registered holder of Warrants to
purchase initially, at any time from _________, 1999 until 5:00 p.m. New York
time on ___________, 2003 (the "Expiration Date"), up to 50,000 fully-paid
and non-assessable shares of Series A Preferred Stock, $.001 par value per
share ("Preferred Stock") of AWG, Ltd., a Nevada corporation (the "Company"),
at the initial exercise price, subject to adjustment in certain events (the
"Exercise Price"), of $16.00 per share of Preferred Stock upon surrender of
this Warrant Certificate and payment of the Exercise Price at an office or
agency of the Company, but subject to the conditions set forth herein and in
the Underwriter's Warrant Agreement dated as of ________________, 1998
between the Company and Klein Maus and Shire, Inc. (the "Underwriter's
Warrant Agreement"). Payment of the Exercise Price shall be made by certified
or official bank check in New York Clearing House funds payable to the order
of the Company or by surrender of this Warrant Certificate.
No Warrant may be exercised after 5:00 p.m., New York time,
on the Expiration Date, at which time all Warrants evidenced hereby, unless
exercised prior thereto, hereby shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part
of a duly authorized issue of Warrants issued pursuant to the Underwriter's
Warrant Agreement, which Underwriter's Warrant Agreement is hereby
incorporated by reference in and made a part of this instrument and is hereby
referred to for a description of the rights, limitation of rights,
obligations, duties and immunities thereunder of the Company and the holders
(the words "holders" or "holder" meaning the registered holders or registered
holder) of the Warrants.
The Underwriter's Warrant Agreement provides that upon the
occurrence of certain events the Exercise Price and the type and/or number of
the Company's securities issuable thereupon may, subject to certain
conditions, be adjusted. In such event, the Company will, at the request of
the holder, issue a new Warrant Certificate evidencing the adjustment in the
Exercise Price and the number and/or type of securities issuable upon the
exercise of the Warrants; provided, however, that the failure of the Company
to issue such new Warrant Certificates shall not in any way change, alter, or
otherwise impair, the rights of the holder as set forth in the Underwriter's
Warrant Agreement.
Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Underwriter's Warrant Agreement, without any charge except
for any tax or other governmental charge imposed in connection with such
transfer.
Upon the exercise of less than all of the Warrants
evidenced by this Warrant Certificate, the Company shall forthwith issue to
the holder hereof a new Warrant Certificate representing such numbered
unexercised Warrants.
- 35 -
<PAGE>
The Company may deem and treat the registered holder(s)
hereof as the absolute owner(s) of this Warrant Certificate (notwithstanding
any notation of ownership or other writing hereon made by anyone), for the
purpose of any exercise hereof, and of any distribution to the holder(s)
hereof, and for all other purposes, and the Company shall not be affected by
any notice to the contrary.
All terms used in this Warrant Certificate which are
defined in the Underwriter's Warrant Agreement shall have the meanings
assigned to them in the Underwriter's Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated as of ____________, 1998
[SEAL] AWG, LTD.
By: ________________________________
Mack H. Jennings, President
Attest:
__________________________________
______________, Secretary
- 36 -
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.1]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase:
_______________________ Warrant Securities
and herewith tenders in payment for such securities a certified or official
bank check payable in New York Clearing House Funds to the order of AWG, Ltd.
in the amount of $______, all in accordance with the terms of Section 3.1
of the Underwriter's Warrant Agreement dated as of ___________________, 1998
between AWG, Ltd. and Klein Maus and Shire, Inc. The undersigned request that
a certificate for such Warrant Securities be registered in the name of
_________________ whose address is and that such Certificate be delivered to
_________________ whose address is __________________.
Signature ________________________________
(Signature must conform in all respects to
name of holder as specified on the face
of the Warrant Certificate)
_________________________________________
(Insert Social Security or Other
Identifying Number of Holder)
- 37 -
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED ___________________________ hereby sells, assigns and
______________ unto
___________________________________________________
(Please print name and address of transferee)
Warrant Certificate, together with all right, title and interest
therein, and does hereby reasonably constitute and appoint ____________ ,
as Attorney, to transfer the within Warrant Certificate on the books of
the within-named Company, with full power of substitution.
Date: ___________________________ Signature: ____________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate)
_______________________________________
(Insert Social Security or Other
Identifying Number of Assignee)
- 38 -
<PAGE>
___________, 1998
Klein Maus and Shire, Inc.
110 Wall Street
New York, New York 10005
AWG, Ltd.
4162 Big Ranch Road
Napa, California 94558
Gentlemen:
The undersigned shareholder of common stock and or holder
of warrants issuable into shares of common stock of AWG, Ltd., a Nevada
corporation (the "Company"), in consideration of the underwriting of a public
offering (the "Public Offering") of securities of the Company by Klein Maus
and Shire, Inc. ("KMS" or the "Underwriter"), hereby agrees that, without the
prior written consent of KMS, for a period of twenty-four (24) months from
the effective date (the "Effective Date") of the Company's Registration
Statement on Form SB-1 (File No. ___________) which relates to the Offering
of its securities by KMS, on a best efforts basis, the undersigned will not
offer, sell, transfer or otherwise depose of any shares of Common Stock of
the Company now owned or hereafter acquired, whether beneficially(1) or of
record, by the undersigned, including, but not limited to shares of Common
Stock acquired upon exercise of options or warrants or acquired upon
conversion of any other securities owned by the undersigned (collectively,
the "Securities"), except by means of a private transaction in connection
with which the proposed transferee agrees in writing to be bound by all of
the provisions of this agreement prior to the
- --------
(1) It is agreed that, for purposes of this letter, the undersigned
beneficially owns, among other shares, any shares owned by any
person or entity controlled by the undersigned or under common
control with the undersigned.
<PAGE>
-2-
___________, 1998
consummation of such private transaction; provided that the foregoing shall
not apply to shares of Common Stock acquired by the undersigned in the Public
Offering or to Securities acquired by the undersigned in the after market
after the closing date of the Public Offering.
The undersigned acknowledges that it will cause:
1. A copy of this Agreement to be available from the
Company or the Company's transfer agent upon
request and without charge;
2. A notice to be placed on the face of each
certificate for the Securities stating that the
transfer of the Securities is restricted in
accordance with the conditions set forth on the
reverse side of the certificate; and
3. A typed legend to be placed on the reverse side of
each certificate representing the Securities which
states that the sale or transfer of the Securities
is subject to certain restrictions pursuant to an
agreement between the shareholder, the Company and
Worthington, which agreement is on file with the
Company and the stock transfer agent, from which a
copy is available upon request and without charge.
Notwithstanding anything to the contrary in this Agreement,
this Agreement shall terminate upon termination of the letter of intent dated
November 25, 1997 between the Company and the Underwriter relating to the
Public Offering in accordance with the provisions of the letter of intent or,
if the Company and the Underwriter enter into an underwriting agreement with
respect to the Public Offering, upon termination of the underwriting
agreement without consummation of the Public Offering.
Very truly yours,
By: ________________________
Name:
Title: (if applicable)
<PAGE>
-3-
___________, 1998
Acknowledged and Agreed:
KLEIN MAUS AND SHIRE, INC.
By:__________________________________
Mohammad Ali Khan, President
AWG, LTD.
By: _________________________________
Mack H. Jennings, President
3. FORM OF PREFERRED STOCK
<PAGE>
Number ________ Shares ________
AWG, LTD.
Incorporated Under the Laws of the State of Nevada
PREFERRED STOCK
TOTAL AUTHORIZED CAPITAL:
50,000,000 SHARES OF COMMON STOCK; $.001 Par Value
1,600,000 SHARES OF Series A 6% PREFERRED STOCK;
$10.00 Par Value
Additional provisions of this Certificate are on the
reverse side hereof.
This certifies that ________________ is the owner of ________ shares
of Series A 6% Preferred Stock of AWG, Ltd., fully paid and nonassessable,
transferable only on the books of the Corporation in person or by duly
authorized attorney upon the surrender of this Certificate properly endorsed,
and subject to the designations, rights, preferences, and the other special
rights and the restrictions thereof.
The authorized capital stock of the Corporation consists of common
and preferred stock. Upon request, the Corporation will provide to any
stockholder, without charge, a full statement of the designation, relative
rights, preferences, and the limitations of the shares of each class
authorized to be issued.
Dated: _______________, 1998
AWG, LTD.
By: _____________________________
Mack H. Jennings, President
By: _____________________________
John P. Caponigro, Secretary
<PAGE>
AWG, LTD.
SERIES A 6%
PREFERRED STOCK
1. Dividends.
The holders of the Series A 6% Preferred Stock ("Preferred
Stock") are entitled to and shall receive, annually, a stock dividend
issuable in shares of Preferred Stock in the amount equivalent to six percent
(6%) of the number of shares of Preferred Stock registered in the name of
each holder as of the close of business on December 31st of each year (the
"Record Date"), which shall be issued to each holder within thirty (30) days
after the Record Date.
2. Redemption.
The Corporation may, at any time of at option of the Board
of Directors and subject to the approval of the holders of the majority of
the issued and outstanding shares of Preferred Stock, redeem all or part of
the outstanding shares of the Preferred Stock for such consideration at the
Company and the holders of Preferred Stock may agree.
3. Seniority.
The liquidation rights of the Preferred Stock, as set forth
herein, shall be senior and superior to those of the Common Stock. In the
event of any voluntary or involuntary liquidation, dissolution, or winding up
of the Corporation, the holders of the shares of Preferred Stock then
outstanding shall be entitled to be paid, out of the assets of the Company
available for distribution to its stockholders, whether from capital, surplus
or earnings, before any payment shall be made in respect to the Company's
Common Stock in an amount equal to Ten Dollars ($10.00) per share. Unless and
until all accumulated but unpaid dividends on the Preferred Stock shall be
paid in full, (a) no cash or stock dividends, or other distributions of any
kind, may be paid or declared or set aside for payment upon the Common Stock,
and (b) the Corporation may not redeem, purchase, or otherwise acquire any
shares of Common Stock, for any consideration whatsoever.
4. Articles of Incorporation.
The Certificate is subject to the terms of the
Corporation's Articles of Incorporation, as amended, which contain all of the
relative rights, preferences and limitations of the Preferred Stock and the
terms of this Certificate include those stated therein.
2
<PAGE>
5. Amendment and Waiver.
The provisions relating to the Preferred Stock contained in
the Articles of Incorporation of the Corporation may only be amended with the
consent of the holders of a fifty-one percent (51%) majority of the issued
and outstanding Preferred Stock.
6. Abbreviations.
Customary abbreviations may be used in the name of a holder
or an assignee, such as: TEN COM (=tenants in common), TEN ENT (=tenants by
the entireties), JT TEN (=joint tenants with right of survivorship and not as
tenants in common), CUST (=custodian), and U/G/M/A/ (=Uniform Gifts to Minors
Act).
3
<PAGE>
ASSIGNMENT
FOR VALUE RECEIVED, __________________________ hereby sells, assigns
and transfers unto ____________________________, ____________________
(______) shares, represented by the within Certificate, and does hereby
irrevocably constitute and appoint ___________________________________
Attorney to transfer the said shares on the books of the within named
Corporation with full power of substitution in the premises.
WITNESS:
_________________________ ______________________________
Signature of Holder
_________________________ Please print name and address and
Social Security Number or
identifying number of Holder:
______________________________
______________________________
______________________________
Dated: _________________ ______________________________
NOTICE: The signature to this Assignment must correspond with the name as
written upon the face of the Certificate in every particular,
without alteration or enlargement or any change whatsoever.
6.2 NOTE AND MORTGAGE DATED APRIL 12, 1996 BY AND BETWEEN THE COMPANY
AND BAR K, INC. IN CONNECTION WITH THE ACQUISITION OF THE COMPANY'S
WINERY
<PAGE>
- -----------------------------------------------------------------------------
NOTE SECURED BY DEED OF TRUST
(This Note Contains An Acceleration Clause)
- -----------------------------------------------------------------------------
Straight Note-Interest Only Installments
San Leandro, California
$1,680,000.00 Date: April 12, 1996
In installments as herein states, for value received, the undersigned,
promise to pay to BAR K, INC. a California corporation, or order ("Lender"),
at 432 Estudillo Avenue, San Leandro, CA 94577, or other place that may be
designated by Lender through written notice to the undersigned, the sum of:
$1,680,000.00 (ONE MILLION SIX HUNDRED EIGHTY THOUSAND DOLLARS)
with interest from the date of funding (which is April 15, 1996) on the
unpaid principal balance outstanding from time to time at the rate of
interest stated below, payable in interest only monthly installments in the
amount stated below, due on the 15th day of each month, beginning on May 15,
1996 and continuing monthly thereafter until maturity, April 15, 2002, at
which time all sums of principal and interest then remaining unpaid shall be
due and payable in full.
The rate of interest for the first year of the term of this promissory note
shall be NINE per cent (9%) per annum;
The rate of interest for the second year of the term of this promissory note
shall be TEN per cent (10%) per annum;
The rate of interest for the third year of the term of this promissory note
shall be ELEVEN per cent (11%) per annum;
The rate of interest for the fourth through sixth years of the term of this
promissory note shall be TWELVE per cent (12%) per annum.
The monthly installments for the first year of the term of this promissory
note shall be $12,600.00 per month (subject to adjustment based upon
adjustments to the principal balance from time to time). The monthly
installments for the second year of the term of this promissory note shall be
$14,000.00 per month (subject to adjustment based upon adjustments to the
principal balance from time to time). The monthly installments for the third
year of the term of this promissory note shall be $15,400.00 per month
(subject to adjustment based upon adjustments to the principal balance from
time to time). The monthly installments for the fourth through sixth years of
the term of this promissory note shall be $16,800.00 per month (subject to
adjustment based upon adjustments to the principal balance from time to
time).
The undersigned shall make a principal payment of at least $200,000.00 on or
before October 15,1996.
Each payment shall be credited first to interest then due and payable and the
remainder on principal and interest shall thereupon cease upon the principal
so credited. Upon default in any payment of any installment, then the balance
of this obligation shall become due immediately at the option of the Lender
hereof. Principal and interest is payable in lawful money of the United
States of America.
PROMISSORY NOTE Page 1 of 3
<PAGE>
- -----------------------------------------------------------------------------
NOTE SECURED BY DEED OF TRUST
(This Note Contains An Acceleration Clause)
- -----------------------------------------------------------------------------
If this note is not paid when due, the undersigned promise to pay, in
addition to the principal and interest due under this note, all costs of
collection and any reasonable attorney's fees incurred by the Lender thereof
on account of such collection, whether or not suit is filed hereon. The
undersigned consents to renewals, replacements and extensions of time for
payment hereof before, at, or after maturity; consents to acceptance of
security for this Note and waives demand, protest and any applicable statute
of limitations.
If any installment due hereunder is delinquent more than 10 days, the
undersigned agrees to pay a late charge on each such installment of 10% of
the delinquent payment. All late payment charges are to be paid immediately
upon demand.
In addition, if any balloon payment is delinquent more than 10 days, the
undersigned agrees to pay a late charge equivalent to the maximum late charge
which could be assessed on the largest single regular installment due under
this note. This late charge on the balloon payment is to continue to be
assessed for each subsequent period of time equal to the regular installment
period under this note until the balloon payment and other fees, interest and
charges due under this note are paid in full.
The undersigned and Lender agree that it would be difficult to determine the
actual damages to the Beneficiary or Beneficiaries agent for the return of an
unpaid check provided by undersigned. It is hereby agreed the undersigned
will pay one per cent (1%) or $25.00, whichever is greater. Such amount is in
addition to any late charge or default interest which may be applicable. This
amount is in lieu of any statutory monetary penalty, if any. However, Lender
does not waive any other rights that may be awarded under any statute.
The principal and accrued interest on this loan may be prepaid in whole or in
part at any time without penalty. In the event that the undersigned prepays a
portion of the principal on this note, then the monthly interest installments
due under this note shall also be changed to reflect the new principal
amount.
The Note is secured by a Deed of Trust of even date herewith which
contains the following provision:
In the event of sale, transfer, conveyance or alienation of said
property, or any part thereof, or any interest therein, whether
voluntary or involuntary, Beneficiary shall have the right of
acceleration, at its option, to declare the note secured by this
Deed of Trust, irrespective of the maturity date expressed therein,
and without demand or notice, immediately due and payable. No waiver
of this right shall be effective unless it is in writing. Consent by
Beneficiary to one such transaction shall not constitute waiver of
the right to require such consent in succeeding transactions.
THIS NOTE IS SUBJECT TO SECTION 2966 OF THE CIVIL CODE, WHICH PROVIDES THAT
THE HOLDER OF THIS NOTE SHALL GIVE WRITTEN NOTICE TO THE TRUSTOR, OR HIS
SUCCESSOR IN INTEREST, OF PRESCRIBED INFORMATION AT LEAST 90 AND NOT MORE
THAN 150 DAYS BEFORE ANY BALLOON PAYMENT IS DUE.
PROMISSORY NOTE Page 2 of 3
<PAGE>
- -----------------------------------------------------------------------------
NOTE SECURED BY DEED OF TRUST
- -----------------------------------------------------------------------------
ANY INTEREST WHICH BECOMES DUE UNDER THIS NOTE WHICH REMAINS DUE FOR MORE
THAN ONE MONTH SHALL ACQUIRE INTEREST AT THE SAME RATE AND UPON THE SAME
TERMS AS THE PRINCIPAL UNDER THIS NOTE. IF THIS NOTE IS IN DEFAULT FOR MORE
THAN ONE MONTH, THEN THE INTEREST RATE OF THIS NOTE SHALL BE INCREASED TO AN
AMOUNT EQUAL TO THE INTEREST RATE THEN DUE AS STATED ON THE FIRST PAGE OF
THIS NOTE PLUS FIVE PER CENT (5%). ANY PRINCIPAL BALANCE OUTSTANDING PAST THE
DUE DATE OF THIS NOTE SHALL BEAR INTEREST EQUAL TO THE HIGHEST INTEREST RATE
STATED IN THIS NOTE PLUS FIVE PER CENT (5%).
Executed on 17th of April, 1996 by (the "Undersigned").
A.W.G., LTD.,
/S/ Darla Perkins
- --------------------------
By: Darla Perkins
Its: President
This Note is secured by a Deed of Trust
PROMISSORY NOTE Page 3 of 3
<PAGE>
BAR-K INC. 1996 009448
432 Estudillo Avenue OFFICIAL RECORDS OF
San Leandro, CA 94577 NAPA COUNTY
AT REQUEST OF:
H. KATHLEEN BONDS
04/19/1996 12:01 PM
Fee: $ 35.00 Pgs: 8
TT: $ .00
Loan No: A0060 (This space for recorders use only)
- -----------------------------------------------------------------------------
DEED OF TRUST WITH ABSOLUTE ASSIGNMENT OF RENTS RIDER
(This Deed of Trust contains an Acceleration Clause)
This DEED OF TRUST made April 12, 1996 between:
A W G, LTD., _____________________________ a Nevada corporation
herein call Trustor, whose address is: 1370 TRANCAS STREET #218,
NAPA, CA 94558
and Bar-K Inc., a California corporation herein called
TRUSTEE, and
BAR-K INC., a California corporation
herein called BENEFICIARY;
WITNESSETH: The Trustor irrevocably GRANTS, TRANSFERS, AND ASSIGNS TO
TRUSTEE, in Trust, with POWER OF SALE, that promptly in the State of
California, in the City of NAPA , County of NAPA described as:
SEE EXHIBIT "A" ATTACHED HERETO AND MADE A PART HEREOF FOR COMPLETE
LEGAL DESCRIPTION. A.P.N.: 036-170-035 AND 036-170-034
Property commonly known as: 4162 BIG RANCH ROAD, NAPA, CA
Any advances made by beneficiary or other entities to protect their
interest in this Deed of Trust shall earn interest at the rate of
interest on the Note that secures this Deed of Trust and can be
added to the principal balance of said note.
Together with all rights and interest of Trustor to all appurtenances,
easements, community interests and licenses, and to oil, mineral, gas, water,
water certificates, and hydrocarbon rights, leases and overriding royalties
therein, and all of these, whether appurtenant, riparian or appropriative.
Generated by Golden Omega Software (408)748-9961 Page 1 of 4
<PAGE>
FOR THE PURPOSE OF SECURING:
(1) Performance of each agreement of Trustor incorporated be reference or
contained herein;
(2) Payment of the indebtedness evidenced by ONE PROMISSORY NOTE of even date
herewith and any amounts that may become due thereunder, and all extensions,
modifications, or renewals thereof, in the principal sum of $ 1,680,000.00,
executed by Trustor and payable to Beneficiary or order;
(3) Payment of all sums of money, with interest thereon, which may be paid
out or advanced by or may otherwise be due to Trustee or Beneficiary under
any provision of this Deed of Trust.
In the event of sale, transfer, conveyance or alienation of said property, or
any part thereof, or any interest therein, whether voluntary or involuntary,
Beneficiary shall have the right of acceleration, at it's option, to declare
the note secured by this Deed of Trust, irrespective of the maturity date
expressed therein, and without demand or notice, immediately due and payable.
No waiver of this right shall be effective unless it is in writing. Consent
by Beneficiary to one such transaction shall not constitute waiver of the
right to require such consent in succeeding transactions.
To protect the security of this Deed of Trust, and with respect to the
property described above, Trustor expressly makes each of all of the
agreements, and adopts and agrees to perform and be bound by each and all of
the terms and provisions set forth as follows:
(1) To keep said property in good condition and repair; not to remove or
demolish any building thereon; to complete or restore promptly and in good
and workmanlike manner any building which may be constructed, damaged or
destroyed thereon; to keep al buildings, structures and other improvements
now or hereafter situated on the above described property at all times
entirely free of dry rot, fungus, rust, decay, termites, and any other
destructive insects or elements to pay when due all claims for labor
performed and materials furnished therefore to comply with all laws affecting
said property or requiring any alterations or improvements to be made
thereon; not to commit waste or permit waste thereof, not to commit, suffer
or permit any act upon said property in violation of law; to conju, irrigate,
fertilize, fumigate, prune and do all other acts which from the character or
use of said property may be reasonably necessary, the specific enumerations
herein not excluding the general. Either Beneficiary or Trustee, or both, at
any time during the continuation of the Deed of Trust, may enter upon and
inspect said property provided such entry is reasonable as to time and
manner.
(2) To provide, maintain and deliver to Beneficiary fire insurance
satisfactory and with loss payable to Beneficiary. The amount collected under
any fire or other insurance policy may be applied by Beneficiary upon any
indebtedness secured hereby and in such order as Beneficiary may determine,
or at option of Beneficiary the entire amount so collected or any part
thereof may be released to Trustor. Such application or release shall not
cure or waive any Default or Notice of Default hereunder or invalidate any
act done pursuant to such notice.
(3) To appear in and defend any action or proceeding purporting to affect the
security hereof or the rights or powers of Beneficiary, or Trustee: and to
pay all costs and expenses, including cost of evidence of title and
attorney's fees in a reasonable sum, in any such action or proceeding
instituted by Beneficiary or Trustee to protect or enforce the security of
this Deed of Trust or the obligations secured hereby.
(4) To pay at least ten days before delinquency all taxes and assessments
affecting said property, including assessments on appurtenant water stock;
when due, all encumbrances, charges and liens, with interest, on said
property or any part appear to be prior or superior hereto; all costs, fees
and expenses of this Trust.
(5) Should Trustor fall to make any payments or to do any acts as herein
provided, then Beneficiary or Trustee, but without obligation to do so and
without notice to or demand upon Trustor and without releasing Trustor from
any obligation hereof, may make or do the same in such manner and to such
extent as either may does necessary to protect the security thereof.
Beneficiary or Trustee being authorized to enter upon said property for such
purposes; appear in and defend any action or proceeding purporting to affect
the security hereof or the rights or powers of Beneficiary of Trustor, pay,
purchase, contest or compromise any encumbrance, charge or lien which in the
judgment of either appears to be prior or superior thereto; and in exercising
any such powers, pay necessary expenses, employ counsel and pay his
reasonable fees.
(6) To pay immediately and without demand all sums so expended by Beneficiary
or Trustee, with incorrect from the date of expenditure at the rate
prescribed in the Note. Should any additional funds be advanced on any not
secured by a Trust Deed now of record, or should any charge be made in the
time or manner of paying such note, or should any other action be taken by
the undersigned with respect to such note whereby the security herein
provided for shall be impaired in any manner whatsoever, then the Note
secured hereby shall, at the option of the lender, immediately becomes due
and payable.
(7) Any award of damages or sums received in settlement in connection with
any condemnation for public use of or any injury to said property or any part
thereof from any cause, is hereby assigned and shall be paid to Beneficiary
who may apply or release such moneys received by him in the same manner and
with the same effect as above provided for disposition of proceeds of fire or
other insurance.
(8) If the security for this Deed of Trust is a leasehold estate, Trustor
agrees not to amend, change or modify his leasehold interest, or may of the
terms thereof or agree to do it, without the written consent of the
Beneficiary being first obtained. In the event of a violation of this
provision, Beneficiary shall have the right, at its option, to declare all
sums secured hereby immediately due and payable.
(9) By accepting payment of any sum secured hereby after its due date,
Beneficiary does not waive his right either to require prompt payment when
due of all sums so secured or to declare default for failure to so pay.
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<PAGE>
Notwithstanding any provision herein or in the Note secured hereby to the
contrary, Beneficiary or Trustee shall have the absolute right to direct
manner, order and amount in which payments shall be applied upon or allocated
among the various items composing Trustor's indebtedness secured hereby.
In the event of default in the payment of any of the moneys to be paid under
the terms of the Note secured hereby or in the performance of any of the
covenants and obligations of this Deed of Trust, then any funds in the
possession of the Beneficiary, or other credits to which the Trustor would
otherwise be entitled may, at the option of the Beneficiary, be applied to
the payment of any obligation secured hereby in such order as the Beneficiary
may, in its sole discretion determine.
(10) At any time or from time to time, without liability therefore and
without notice upon written request of Beneficiary and presentation of this
Deed and said Note for endorsement, and without affecting the personal
liability of any person for payment of the indebtedness secured hereby,
Trustee may reconvey any part of said property; consent to the making of any
map or plat thereof, join in granting any easement thereon; or join in any
extension agreement or any agreement subordinating the lien or charge
thereof. Trustee may, but shall be under no obligation or duty to, appear in
or defend any action or proceeding purporting to affect said property or the
title thereto, or purporting to affect the security hereof or the rights or
powers of Beneficiary or Trustee.
(11) Upon written request of Beneficiary stating that all sums secured hereby
have been paid, and upon surrender of this Deed and said Note to Trustee for
cancellation and retention and upon payment of its fees, Trustee shall
reconvey, without warranty, the property then held hereunder. The recitals in
such reconveyance of any matters or facts shall be conclusive proof of the
truthfulness thereof. The grantee in such reconveyance may be described as
the "person or persons legally entitled thereto". The Trustee may destroy
said Note, this Deed of Trust (and any other documents related thereto) upon
the first to occur of the following: 5 years after issuance of a full
reconveyance; or, recordation or the Note and Deed of Trust in a form or
medium which permits their reproduction for 5 years following issuance of a
full reconveyance.
(12) The Deed applies to, inures to the benefit of, and binds all parties
hereto, their heirs, legatees, devises, administrators, executors, successors
and assigns. The term Beneficiary shall mean, the owner or holder, including
pledges, of the Note secured hereby, whether or not named as Beneficiary
herein. In this Deed, whenever the context so requires, the masculine gender
includes the feminine and/or neuter, and the singular number includes the
plural. As used herein, "fixtures" includes but is not limited to carpeting,
built-in appliances, draperies and drapery rods, shrubs, water tanks,
plumbing, machinery, air conditioners, ducts, and the like.
(13) Trustee accepts this Trust when this Deed, duly executed and
acknowledged, is made a public record as provided by law. Trustee is not
obligated to notify any party hereto of pending sale under any other Deed of
Trust or of any action or proceeding in which Trustor, Beneficiary or Trustee
shall be a party unless brought by Trustee.
(14) Trustor agrees to pay Beneficiary or his agent, the maximum legal charge
for a statement regarding the Trust Deed obligation herein. A statement
includes but is not limited to a Beneficiary Statement, Credit Statement and
any statement evidencing the debt.
(15) Acceptance by Beneficiary of a partial payment on account, after Notice
of Default has been recorded, shall not be construed as curing the default
nor as a waiver of past or future delinquencies of Trust Deed payment.
(16) Upon default by Trustor in payment of any indebtedness secured hereby or
in performances of any agreement hereunder, Beneficiary may declare all sums
secured hereby immediately due and payable by delivery to Trustee of written
declaration of default and demand for sale and of written Notice of Default
and of election to cause to be sold said property, which notice Trustee shall
cause to be filed for record. Trustee shall be entitled to rely upon the
correctness of such notice. Beneficiary also shall deposit with Trustee this
Deed, said Note and all documents evidencing expenditures secured hereby.
After the lapse of such time as then may be required by law following the
recordation of said Notice of Default and Notice of Sale having been given as
than required by law, Trustee, without demand on Trustor, shall sell said
property at the time and place fixed by it in said Notice of Sale, either as
a whole or in separate parcels and in such order as it may determine (but
subject to any statutory right of Trustor to direct the order in which said
property, if consisting of several lots or parcels, shall be sold), at public
auction to the highest bidder for cash in lawful money of the United States,
payable at time of sale. Trustee may postpone sale of all or any portion of
said property by public announcement at such time and place of sale, and from
time to time thereafter may postpone such sale by public announcement at such
time and place of sale, and from time to time thereafter, may postpone such
sale by public announcement at the time fixed by the preceding postponement.
Trustee shall deliver to such purchaser its deed conveying the property so
sold, but without any covenant or warranty, expressed or implied. The
recitals in such deed of any matters or facts shall be conclusive proof of
the truthfulness thereof. Any person including the Trustor, Trustee, or
Beneficiary as hereinafter defined, may purchase at such sale.
After deducting all costs, fees and expenses of Trustee and of this Trust,
including cost of evidence of title in connection with sale, Trustee shall
apply the proceeds of sale to payment of all sums expended under the terms
hereof, not then repaid, with accrued interest at the rate prescribed in the
Note; all other sums then secured thereby; and the remainder, if any, to the
person or persons legally entitled thereto.
(17) Beneficiary, or any successor in ownership of any indebtedness secured
hereby, may from time to time, by instrument in writing, substitute a
successor or successors to any Trustee named herein or acting hereunder,
which instrument, executed by the Beneficiary and duly acknowledged and
recorded in the office of the recorder of the county or counties where said
property is situated, shall be conclusive proof of proper substitution of
such successor Trustee or Trustees, who shall, without conveyance from the
Trustee predecessor, succeed to all its title, estate, rights, powers and
duties.
Said instrument must contain the name of the original Trustor, Trustee and
Beneficiary hereunder, the book and page where this Deed is recorded and the
name and address of the new Trustee. If Notice of Default shall have been
recorded, this power of substitution cannot be exercised until after the
costs, fees and expenses of the then acting Trustee shall have been paid to
such Trustee, who shall endorse receipt thereof upon such instrument of
substitution. The procedure herein provided for substitution of Trustees
shall not be exclusive of other provisions for substitution provided by law.
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<PAGE>
(18) If the security under this Deed of Trust is a condominium or a community
apartment or planned development project, Trustor agrees to perform each and
every obligation of the owner of such condominium or interest in such project
under the declaration of covenants, conditions and restrictions or bylaws or
regulations pertaining to such condominium or project. Upon the request of
Beneficiary, Trustor agrees to enforce against other owners in such
condominium or protect each and every obligation to be performed by them, if
the same have not been performed or if valid legal steps have not been taken
to enforce such performance within ninety (90) days after such request is
made.
IT IS AGREED BY THE UNDERSIGNED THRUSTOR THAT THE ATTACHED 'ABSOLUTE
ASSIGNMENT OF RENTS RIDER' IS INCORPORATED HERETO AND IS MADE A PART HEREOF.
This undersigned Trustor(s), requests that a copy of any Notice of Default
and any Notice of Sale hereunder be mailed to him at his address hereinbefore
set forth.
SIGNATURE OF TRUSTOR SIGNATURE OF TRUSTOR
By: /S/ Darla Perkins
----------------------------- ---------------------------------
A W G , LTD., a Nevada Corporation
By: DARLA PERKINS PRESIDENT
State of California }
}ss.
County of NAPA }
On April 17, 1996 before me, Brenda K. Flannery ,
Notary Public, personally appeared:
Darla Perkins, President
- -------------------------------
[ ] personally known to me; or
[ X ] proved to me on the basis of satisfactory evidence
to be the person(s) whose name(s) IS/HER/THEIR autorized capacity(ies), and
that by HIS/HER/THEIR signature(s) on the instrument the person or entity
upon behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
Brenda K. Flannery
- -------------------------------
Notary Signature
BRENDA K. FLANNERY
COMM. #1071068
NOTARY PUBLIC - CALIFORNIA
NAPA COUNTY
My Comm. Expires SEPT. 4, 1999
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<PAGE>
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ABSOLUTE ASSIGNMENT OF RENTS RIDER
- -----------------------------------------------------------------------------
This ABSOLUTE ASSIGNMENT OF RENTS made April 12, 1996 between:
A W G , a ______________________ Nevada corporation
hereinafter referred to as "Assignor" (also known as Trustor under the Deed
of Trust of same date of which this document is a rider thereto)and:
BAR-K INC., a California corporation
hereinafter referred to as "Assingee" (also known as Beneficiary under the
Deed of Trust of same date of which this document is a rider thereto) hereby
agree to the following:
A. Assignor is the record fee owner of the certain real property (the
"Property" hereinafter), consisting of an improved multiple rental unit
building located in the County of NAPA , State of California described as:
SEE EXHIBIT "A" ATTACHED HERETO AND MADE A PART HEREOF FOR COMPLETE
LEGAL DESRIPTION. A.P.N.: 036-170-035 AND 036-170-034
Property commonly known as: 4162 BIG RANCH ROAD, NAPA, CA
Any advances made by beneficiary or other entities to protect their interest
in this Deed of Trust shall earn interest at the rate of interest on the Note
that secures this Deed of Trust and can be added to the principal balance of
said note.
B. Assignor, as Trustor, has executed a Deed of Trust in favor of Assignee,
as Beneficiary, to secure a loan made by Assignee to Assignor. Said Deed of
Trust incorporates this document by reference.
NOW THEREFORE, FOR VALUABLE CONSIDERATION, the parties hereto agree as
follows:
1. Assignor grants, transfers and assigns to Assignee all rents, ussues and
profits from the Property, as well as Assignor's interest in all leases, oral
or written, now in effect or hereinafter entered into concerning the
Property.
2. Assignor reserves the right to collect the rents, issues and profits from
the Property only for so long as Assignor is not in default under the terms
of the Deed of Trust.
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<PAGE>
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ABSOLUTE ASSIGNMENT OF RENTS RIDER (continued)
- -----------------------------------------------------------------------------
3. In the event of a default by Assignor under the terms of the Deed of
Trust, Assignee shall be entitled to accelerate all sums due under the loan
secured said Deed of Trust in accordance with the terms thereof and is
authorized to enter into and upon the Property, by itself or through an
agent, for the purpose of collecting the rents, issues and profits from the
Property. In such event Assignee may, in its sole discretion, take and hold
possession of the Property, operate and manage the Property and take such
other action as it may deem necessary to protect its security interest in the
Property and its rents, issues and profits. Assignor appoints Assignee its
true, lawful and irrevocable attorney to demand, receive and enforce payment,
to give receipts, releases and satisfactions, and to sue, either in the name
of Assignor or in the name of the Assignee, for all such rents.
4. In addition to the rights set forth in paragraph 3 above, Assignee may
exercise any other remedy it has at law or pursuant to the terms of the Deed
of Trust. Without in any way limiting the foregoing, Assignee shall have the
right, in its sole discretion, to seek the appointment of a receiver to take
possession of the property, manage same, and collect the rents, issues and
profits on behalf of Assignee.
5. Assignor agree not to collect any rent, issues or profits occurring under
the leases, rental agreements or otherwise from the Property in advance of
the time when they shall become due without the prior written consent of
Assignee.
6. Assignee does not assume any of the Assignor's obligations under any lease
or any other agreement assigned hereunder, and Assignor agrees to keep and
perform all obligations thereunder and to save Assignee harmless from the
consequences of any failure to do so.
7. Assignor agree that it will not assign any interest in any lease, or any
other agreement to pay any rent assigned hereunder, and that notice of this
Agreement may be given to any lessee or party to any such agreement at any
time at Assignee's option.
8. This Assignment is intended by Assignor and Assignee to create an absolute
assignment to Assignee, rather than an assignment for security purpose only.
Any sums collected by or on behalf of Assignee pursuant to the provisions of
this Assignment shall be applied first to the payment of any costs incurred
for management of the property and collection of rents (including, but not
limited to receiver's fees, premiums on receiver's bonds and reasonable
attorney's fees), and then to other sums secured by the Deed of Trust. All
notices, requests, demands and other communications hereunder shall be deemed
to have been duly given if delivered in person or by United States mail,
certified or registered, return receipt requested, or otherwise actually
delivered to the corresponding notice address listed below.
Notice Address for Assignor: Notice Address for Assignee:
A W G , LTD. BAR-K INC.
432 Estudillo Avenue
San Leandro, CA 94577
SIGNATURE OF ASSIGNOR (Trustor)
/S/ Darla Perkins
- -------------------------------- ------------------------------
A W G , LTD., a
Nevada corporation
By: DARLA PERKINS, PRESIDENT
- --------------------------------
SEE NEXT PAGE FOR NOTARY
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<PAGE>
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ABSOLUTE ASSIGNMENT OF RENTS RIDER (continued)
- -----------------------------------------------------------------------------
State of California }
}ss.
County of NAPA }
On April 17, 1996 before me, Brenda K. Flannery,
Notary Public, personally appeared:
Darla Perkinks, President
- --------------------------------------
[ ] personally known to me; or
[ X ] proved to me on the basis of satisfactory evidence
to be the person(s) whose name(s) IS/ARE/ subscribed to the within
instrument, and acknowledged to me that HE/SHE/THEY executed the same in
HIS/HER/THEIR authorized capacity(ies), and that by HIS/HER/THEIR
signature(s) on the instrument the person or entity upon behalf of which the
person(s) acted, executed the instrument.
WITNESS my hand and official seal. BRENDA K. FLANNERY
COMM. #1071068
Brenda K. Flannery NOTARY PUBLIC - CALIFORNIA
Notary Signature NAPA COUNTY
My Comm. Expires SEPT. 4, 1998
State of California }
}ss.
County of _______________ }
On _____________ before me, ____________________________________________ ,
Notary Public, personally appeared:
- -----------------------------------------------------------------------------
[ ] personally known to me; or
[ ] proved to me on the basis of satisfactory evidence
to be the person(s) whose name(s) IS/ARE subscribed to the within instrument,
and acknowledged to me that HE/SHE/THEY executed the same in HIS/HER/THEIR
authorized capacity(ies), and that by HIS/HER/THEIR signatures(s) on the
instrument the person or entity upon behalf of which the person(s) acted,
executed the instrument.
WITNESS my hand and official seal.
- -----------------------------
Notary Signature
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<PAGE>
END OF DOCUMENT Page 1
Escrow No. 71097 - 74
LEGAL DESCRIPTION EXHIBIT "A"
COMMENCING AT A POINT ON THE NORTHEASTERN LINE OF THE COUNTY ROAD COMMONLY
KNOWN AS THE "BIG RANCH ROAD", WHERE THE SAME IS INTERSECTED BY THE CENTER
LINE OF A CERTAIN STONE DITCH RUNNING THROUGH LOT 12 AS SAID LOT IS SHOWN
UPON THE MAP HEREINAFTER REFERRED TO, SAID POINT OF COMMENCEMENT BEING
FURTHER DESCRIBED AS BEING THE POINT OF INTERSECTION OF SAID NORTHEASTERN
LINE OF THE "BIG RANCH ROAD" WITH THE SOUTHEASTERN LINE OF THE 39.25 ACRE
TRACT HERETOFORE CONVEYED TO L.L. JORDAN BY DEED OF RECORD IN BOOK 112 OF
DEEDS, AT PAGE 18. RECORDS OF SAID NAPA COUNTY AND RUNNING THENCE FROM SAID
POINT OF COMMENCEMENT, AND ALONG THE NORTHEASTERN LINE OF SAID COUNTY ROAD
SOUTH 30 30' EAST 849.5 FEET TO THE SOUTHEASTERN LINE OF SAID LOT 12, THENCE
NORTH 55 EAST AND ALONG THE SOUTHEASTERN LINE SAID LOT 12, A DISTANCE OF
46.90 CHAINS, MORE OR LESS. TO THE CENTER OF NAPA RIVER; THENCE UP SAID RIVER
AND FOLLOWING MEANDERINGS OF THE CENTER LINE THEREOF TO THE SOUTHEASTERN LINE
OF THE 33 ACRE TRACT CONVEYED TO E.C. GADDINI BY DEED OF RECORD IN BOOK 110
OF DEEDS, AT PAGE 362, SAID NAPA COUNTY RECORDS, THENCE WESTERLY ALONG THE
SOUTHEASTERN LINE OF SAID 33 ACRE TRACT TO A LARGE OAK TREE AND THENCE SOUTH
55 3/4 WEST AND ALONG THE SOUTHEASTERN LINE OF SAID GADDINI AND THE
SOUTHEASTERN LINE OF PREMISES CONVEYED TO JORDAN HEREINABOVE REFERRED TO,
1967 FEET TO THE POINT OF COMMENCEMENT. BEING A PORTION OF LOT 12, AS SHOWN
ON THAT CERTAIN MAP, DUPLICATE PLAT OF THE SAUSAL RANCHO, RECORDED NOVEMBER
21, 1864 IN BOOK 1 OF DEEDS AT PAGE 99, NAPA COUNTY RECORDS, AND BEING THE
SAME AS SET FORTH ON RECORD OF SURVEY MAP NO. 3998, FILED FEBRUARY 2, 1987 IN
BOOK 25 OF SURVEYS, PAGE 62, NAPA COUNTY RECORDS.
EXCEPTING THEREFROM THOSE LANDS DESCRIBED IN THE DEED TO KAREN M. VILLAREAL,
RECORDED SEPTEMBER 9, 1993, INSTRUMENT NO. 1993-031422, NAPA COUNTY RECORDS.
PARCEL TWO:
THOSE LANDS DESCRIBED IN THE DEED TO KAREN M. VILLAREAL, RECORDED SEPTEMBER
29,1993, INSTRUMENT NO. 1993-031422, NAPA COUNTY RECORDS, WHICH IS DESCRIBED
AS FOLLOWS:
BEGINNING AT THE POINT FORMED BY THE INTERSECTION OF THE EASTERN LINE OF THE
COUNTY ROAD COMMONLY KNOWN AS BIG RANCH ROAD WITH THE SOUTHERN LINE OF THE 55
ACRE TRACT OF LAND DESCRIBED AS PARCEL ONE, FIRST TRACT, IN THE DECREE IN THE
ESTATE OF THOMAS MAXWELL, DECEASED, AND RECORDED OCTOBER 10, 1950, IN VOLUME
346 OF OFFICIAL RECORDS, PAGE 446, NAPA COUNTY RECORDS; RUNNING THENCE ALONG
THE EASTERN LINE OF SAID BIG RANCH ROAD NORTH 30 30' WEST 325.57 FEET; THENCE
NORTH 55 52' EAST 258.83 FEET AND NORTH 32 33' WEST 79.82 FEET TO THE TRUE
POINT OF COMMENCEMENT OF THE TRACT OF LAND HEREIN DESCRIBED: RUNNING THENCE
FROM SAID POINT OF COMMENCEMENT NORTH 56 07' EAST 400.00 FEET: THENCE SOUTH
32 33' EAST 230.00 FEET; THENCE SOUTH 56 07' WEST 400.00 FEET; THENCE NORTH
32 33' WEST 230.00 FEET TO THE POINT OF COMMENCEMENT.
BEING A PORTION OF LOT NO. 12 AS SAID LOT IS SHOWN ON THAT CERTAIN MAP
ENTITLED "DUPLICATE PLAT OF THE SAUSAL RANCHO, NAPA, COUNTY, CALIFORNIA"
RECORDED NOVEMBER 21, 1864, IN VOLUME "1" OF DEEDS, PAGE 99, SAID NAPA COUNTY
RECORDS.
ALSO A RIGHT-OF-WAY FOR ROAD PURPOSES, 20.00 FEET WIDE. THE CENTERLINE OF
WHICH IS DESCRIBED AS FOLLOWS:
COMMENCING AT A POINT ON THE EASTERN LINE OF SAID BIG RANCH ROAD, SAID POINT
BEING DISTANT THEREON NORTH 30 30' WEST 325.57 FEET FROM THE INTERSECTION
THEREOF WITH THE SOUTHERN LINE OF THE 55 ACRE TRACT HEREINABOVE REFERRED TO;
RUNNING THENCE NORTH 55 52' EAST 258.83 FEET TO A POINT ON THE WESTERN LINE
OF THE 2.11 ACRE TRACT HEREINABOVE DESCRIBED; SAID POINT BEING SOUTH 32 33'
EAST 79.82 FEET DISTANT THEREON FROM THE NORTHWESTERN CORNER OF SAID 2.11
ACRE TRACT.
<PAGE>
MODIFICATION OF PROMISSORY NOTE AND LOAN AGREEMENT
The undersigned parties to this agreement intend to modify that
certain promissory note dated April, 12, 1996 executed by A W G, Ltd., a
Nevada corporation, as Payee, in favor of Bar-K, Inc., a California
corporation, as Lender, in the amount of $1,680,000.00 (the "promissory
note"). As consideration for such modification of promissory note, A W G ,
Ltd., a Nevada corporation, agrees to pay to Bar-K, Inc., a California
corporation, a modification of promissory note fee of $10,750.00 and A W G,
Ltd., a Nevada corporation agrees to pay the amounts stated in Section 2 and
3 below.
The parties agree to modify the promissory note as follows:
1. The principal balance due under the promissory note as of
September 15, 1997 was $1,666,139.27.
2. A payment of $14,000.00 was due on October 15, 1997 and a payment
of $14,000.00 is due on November 15, 1997.
3. A late charge of $1,400.00 is due for the payment which was due
on October 15, 1997.
4. The requirement to pay the $200,000.00 payment on October 15,
1996 is waived.
This Modification of Promissory Note and Loan Agreement shall not be
effective until and unless (a) Bar K, Inc. receives from Chicago Title
Insurance Company a 110.5 endorsement which insures the priority of this
Modification of Promissory Note and Loan Agreement, and (b) promissory note
shall be null and void unless these conditions are performed on or before
November 14, 1997.
Upon this modification of promissory note becoming effective, the
promissory note shall be current and all other provisions of the promissory
note shall remain the same.
A W G , Ltd., a Nevada corporation Bar K, Inc., a California corporation
/S/ Mack H. Jennings /S/ Kelly Ng
- ----------------------------------- -------------------------------------
By: Mack H. Jennings By: Kelly NG
Its: President Its: Vice President
Dated: 12/01/97 Dated: 11/10/97
MODIFICATION AGREEMENT
6.3 LINE OF CREDIT AGREEMENT BY AND BETWEEN THE COMPANY AND VINTAGE BANK
<PAGE>
NOTICE OF FINAL AGREEMENT
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan Date Call Collateral Account Officer Initials
- --------- --------- -------- --------- ---- ---------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$200,000.00 07-15-1997 07-15-1998 30590301 2 3059 7
</TABLE>
- ----------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
BORROWER: AWG LTD., A NEVADA CORPORATION LENDER: THE VINTAGE BANK
4162 Big Ranch Road Main Office
Napa, CA 94558 1500 Soscol Avenue
PO Box 2200
Napa, CA 94558
=============================================================================
BY SIGNING THIS DOCUMENT EACH PARTY REPRESENTS AND AGREES THAT: (A) THE
WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES,
(B) THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES, AND (C) THE
WRITTEN LOAN AGREEMENT MAY NOT BE CONTRADICTED BY EVIDENCE OF ANY PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OR UNDERSTANDINGS OF THE
PARTIES.
- -----------------------------------------------------------------------------
As used in this Notice, the following terms have the following meanings:
Loan. The term "loan" means the following described loan: a Variable
Rate (1.000% over VINTAGE BANK BASE COMMERCIAL BORROWING RATE,
making an initial rate of 9.500%), Nondisclosable Revolving Line of
Credit Loan to a Corporation for $200,000.00 due on July 15, 1998.
Parties. The term "Parties" means THE VINTAGE BANK and any entities
or individuals who are obligated to repay the loan or have pledged
property as security for the Loan, including without limitation the
following:
Borrower: AWG LTD., A NEVADA CORPORATION
Loan Agreement. The term "Loan Agreement" means one or more
promises, promissory notes, agreements, undertakings, security
agreements, deed of trust or other documents, or commitments, or any
combination of those actions or documents, relating to the Loan,
including without limitation the following:
NECESSARY FORMS
Corporate Resolution to Borrow Loan Agreement/Negative Pledge
Promissory Note/Change in Terms Agr. Security Agreement
UCC - 1 Agreement to Provide Insurance
Disbursement Request and Authorization Notice of Final Agreement
OPTIONAL FORMS
Notice of Insurance Requirements
- -----------------------------------------------------------------------------
Each Party who signs below, other than THE VINTAGE BANK, acknowledges,
represents, and warrants to THE VINTAGE BANK that it has received, read and
understood this Notice of Final Agreement . This Notice is dated July 15,
1997.
BORROWER:
AWG LTD., A NEVADA CORPORATION
BY: /S/ Mack Jennings
-----------------------------
Mack Jennings, President
LENDER:
THE VINTAGE BANK
BY: /S/ DN
-----------------------------
Authorized Officer
=============================================================================
LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.23 (c) 1997 CFI ProServices,
Inc. All right reserved.[CA-121 AWG.LNC1OVL]
<PAGE>
CORPORATE RESOLUTION TO BORROW
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan Date Call Collateral Account Officer Initials
- --------- --------- -------- --------- ---- ---------- ------- ------- --------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
$200,000.00 07-15-1997 07-15-1998 30590301 2 3059 7
</TABLE>
- ----------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
Borrow: AWG LTD., A NEVADA CORPORATOIN Lender: THE VINTAGE BANK
4162 BIG RANCH ROAD MAIN OFFICE
NAPA, CA 94558 1500 SOSCOL AVENUE
PO BOX 2200
NAPA, CA 94558
I, the undersigned Secretary of Assistant Secretary of AWG LTD., A NEVADA
CORPORATION (the "Corporation"), HEREBY CERTIFY that the Corporation is
organized and existing under and by virtue of the laws of the State of Nevada
as a corporation for profit, with its principal office at 4162 BIG RANCH
ROAD, NAPA, CA 94558, and is duly authorized to transact business in the
State of California.
I FURTHER CERTIFY that a meeting of the Directors of the Corporation, duly
called and held on 7/10/97, at which a quorum was present and voting, or by
other duly authorized corporate action in lieu of a meeting, the following
resolutions were adopted:
BE IT RESOLVED, that any one (1) of the following named officers, employees,
or agents of this Corporation, whose actual signatures are shown below:
NAMES POSITIONS ACTUAL SIGNATURES
----- --------- -----------------
MACK JENNINGS PRESIDENT X /S/ Mack Jennings
-------------------
JOHN CAPONIGRO SECRETARY X /S/ John Caponigro
-------------------
acting for and on behalf of the Corporation and as its act and deed be, and
they hereby are, authorized and empowered:
Borrow Money. To borrow from time to time from THE VINTAGE BANK ("Lender"),
on such terms as may be agreed upon between the Corporation and Lender, such
sum or sums of money as in their judgement should be borrowed, without
limitation.
Execute Notes. To execute and deliver to Lender the promissory note or notes,
or other evidence of credit accommodations of the Corporation, on Lender's
forms, at such rates of interest and on such terms as may be agreed upon,
evidencing the sums of money so borrowed or any indebtedness of the
Corporation to Lender, and also to execute and deliver to Lender one or more
renewals, extensions, modifications, refinancing, consolidations, or
substitutions for one or more of the notes, any portion of the notes, or any
other evidence of credit accommodations.
Grant Security. To Mortgage, pledge, transfer, endorse, hypothecate, or
otherwise encumber and deliver to Lender, as security for the payment of any
loans or credit accommodations so obtained, any promissory notes so executed
(including any amendments to or modifications, renewals, and extensions of
such promissory notes), or any other or further indebtedness of the
Corporation to Lender at any time owing, however the same may be evidenced,
any property now or hereafter belonging to the Corporation or in which the
Corporation now or hereafter may have an interest, including without
limitation all real property and all personal property (tangible or
intangible) to the Corporation. Such property may be mortgaged, pledged,
transferred, endorsed, hypothecated, or encumbered at the time such loans are
obtained or such indebtedness is incurred, or at any other time or times, and
may be either in addition to or in lieu of any property theretofore
mortgaged, pledged, transferred, endorsed, hypothecated, or encumbered.
Execute Security Documents. To execute and deliver to Lender the forms of
mortgage, deed of trust, pledge agreement, hypothecation agreement, and other
security agreements and financing statements which may be required by Lender,
and which shall evidence the terms and conditions under and pursuant to which
such liens and encumbrances, or any of them, are given; and also to execute
and deliver to Lender any other written instruments, any chattel paper, or
any other collateral, of any kind or nature, which Lender may deem necessary
or proper in connection with or pertaining to the giving of the liens and
encumbrances.
Negotiable Items. To draw, endorse, and discount Lender all drafts, trade
acceptances, promissory notes, or other evidences of indebtedness payable to
or belonging to the Corporation in which the Corporation may have an
interest, and either to receive cash for the same or to cause such proceeds
to be credited to the account of the Corporation with Lender, or to cause
other disposition of the proceeds derived therefrom as they any deem
advisable.
Further Acts. In the case of lines of credit, to designate additional or
alternate individuals as being authorized to request advances thereunder, and
in all cases, to do and perform such other acts and things, to pay any and
all fees and costs, and to execute and deliver such other documents and
agreements as they may in their discretion deem reasonably necessary or
proper in order to carry into effect the provisions of these Resolutions. The
following person or persons currently are authorized to request advances and
authorize payments under the line of credit until Lender receives written
notice of revocation of their authority: MACK JENNINGS, PRESIDENT; and JOHN
CAPONIGRO, SECRETARY.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
Resolutions and performed prior to the passage of these Resolutions are
hereby ratified and approved, that these Resolutions shall remain in full
force and effect and Lender may rely on these Resolutions until written
notice of their revocation shall have been delivered to and received by
Lender. Any such notice shall not affect any of the Corporation's agreements
or commitments in effect at the time notice is given.
BE IT FURTHER RESOLVED, that the Corporation will notify Lender in writing at
Lender's address shown above (or such other address as Lender may designate
from time to time) prior to any (a) change in the name of the Corporation,
(b) change in the assumed business name(s) of the Corporation, (c) change in
the management of the Corporation,, (d) change in the authorized signer(s),
(e) conversion of the Corporation to a new or different type of business
entity, or (f) change in any other aspect of the Corporation that directly or
indirectly relates to any agreements between the Corporation and Lender. No
change in the name of the Corporation will take effect until after Lender has
been notified.
I FURTHER CERTIFY that the officers, employees, and agents named above are
duly elected, appointed, or employed by or for the Corporation, as the case
may be, and occupy the positions set opposite their respective names; that
the foregoing Resolutions now stand of record on the books of the
Corporation; and that the Resolutions are in full force and effect and have
not been modified or revoked in any manner whatsoever. The Corporation has no
corporate seal, and therefore, no seal is affixed to this certificate.
<PAGE>
07-10-1997 CORPORATE RESOLUTION TO BORROW Page 2
Loan No 30590301 (Continued)
=============================================================================
IN TESTIMONY WHEREOF, I have hereunto set my hand on July 15, 1997 and attest
that the signature set opposite the names listed above are their genuine
signatures.
CERTIFIED TO AND ATTESTED BY:
x /S/ Mack Jennings
-------------------------
x /S/ John Caponigro
-------------------------
Note: In case the Secretary or other certifying officer is designated by the
foregoing resolutions as one of the signing officer, It is advisable to have
this certificate signed by a second Officer or Director of the Corporation.
=============================================================================
LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.23 (c)1997 CFI ProServices,
Inc. All rights reserved. [CA-C10 AWG.LN C1.OVL]
6.4 LINE OF CREDIT AGREEMENT BETWEEN THE COMPANY AND BANK OF BLOOOMFIELD
HILLS, MICHIGAN
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
AWG, LTD. The Bank of Bloomfield Hills Loan Number
4162 Big Ranch Road 505 North Woodward Suite 1300 ------------------
Napa, CA 94558 Bloomfield Hills, MI 48304 Date December 23, 1997
--------------------------
Maturity Date December 23, 1998
-----------------
Borrower's Name & Address Lender's Name & Address Loan Amount $950,000.00
"I" includes each borrower above, "You" means the lender, its -------------------
joint and severally successors and assigns. Renewal Of 9094000
--------------------
SSN/TIN: 33-0685631
</TABLE>
- -----------------------------------------------------------------------------
For the value received, I promise to pay to you, or your address listed above
the PRINCIPAL sum of NINE HUNDRED FIFTY THOUSAND AND
NO/100************************************* Dollars $950,000.00
/ / Single Advance: I will receive all of this principal sum on
________________. No additional advances are contemplated under this note.
/X/ Multiple Advance: The principal sum shown above is the maximum amount of
principal I can borrow under this note. On ______________________ I will
receive the amount of $_____________ and further a principal advances are
contemplated. Conditions: The conditions for future advances are UPON THE
REQUEST AND AUTHORIZATION OF JEA ENTERPRISES, L.L.C. AND YOUR APPROVAL
/X/ Open End Credit: You and I agree that I may borrow up to the maximum
amount of principal more than one time. This feature is subject to all other
conditions and expires on DECEMBER 23, 1997 at the rate of 9.000 % per year
until FIRST CHANGE DATE.
/X/ Variable Rate: This rate may then change as stated below.
/X/ Index Rate: The future rate will be 0.500% OVER the following index
rate: THE PRIME OR BASE RATE AS ACCOUNTED FROM TIME TO TIME BY CITIBANK, N.A.
/ / No Index: The future rate will not be subject to any internal or external
index. It will be entirely in your control.
/X/ Frequency and Timing: The rate on this note may change as often as DAILY.
A change in the interest rate will take effect ON THE SAME DAY.
/X/ Limitations: During the term of this loan, the applicable annual interest
rate will not be more than 25.000% or less than 7.000%. The rate may not
change more than _________% each _________________________.
Effect of Variable Rate: A change in the interest rate will have the
following effect on the payments:
/X/ The amount of each scheduled payment will change.
/X/ The amount of the final payment will change.
/ / _________________________________________________ .
ACCRUAL METHOD: Interest will be calculated on a ACTUAL/360 basis.
POST MATURITY RATE: I agree to pay interest on the unpaid balance of this
note owing after maturity, and until paid in full, as stated below:
/ / on the same fixed or variable rate basis in effect before maturity (as
indicated above).
/X/ at a rate equal to FOUR PERCENT (4%) GREATER THAN THE VARIABLE RATE
OTHERWISE APPLICABLE.
/X/ LATE CHARGES: If a payment is made more than 10 days after it is due, I
agree to pay a late charge of $50.00.
/ / ADDITIONAL CHARGES: In addition to interest, I agree to pay the following
charges which o are o are not included in the principal amount
above:_________________________________________________________.
PAYMENTS: I agree to pay this note as follows:
/X/ Interest: I agree to pay accrued interest ON THE 23RD DAY OF EACH MONTH
BEGINNING JANUARY 23, 1998.
/X/ Principal: I agree to pay the principal DECEMBER 23, 1998
/ / Installments: I agree to pay this note in ________ payments. The first
payment will be in the amount $_______ and will be due
____________________________. A payment will be in the amount of $________
will be due _________________________________________________thereafter. The
final payment of the entire unpaid balance of principal and interest will be
due ___________________________________________.
ADDITIONAL TERMS:
/ / SECURITY: This note is separately
secured by (describe separate document
by type and date):
(This section is for your informal use. Failure to lieu a separate security
documentd does not mean the agreement will not secure this note.)
PURPOSE: The purpose of this loan is BUSINESS; RENEW NOTE NO. 9094000;
WORKING CAPITAL.
SINGATURES: I AGREE TO THE TERMS OF THE THIS NOTE (INCLUDING THOSE ON
PAGE 2). I have received a copy on today's date.
Signature for Lender
x /S/ Ann M. Deering BY: /S/ Mack H. Jennings
- ------------------------------ --------------------------------
ANN M. DEERING, VICE PRESIDENT MACK H. JENNINGS, PRESIDENT/CEO
BY: /S/ John P. Caponigro
- ------------------------------ --------------------------------
JOHN P. CAPONIGRO, SECRETARY
Universal Note (page 1 of 2)
<PAGE>
DEFINITIONS: As used on page 1. "/X/" means terms apply to this loan. "I,"
"me" or "my" means each Borrower who signs this note and each other person or
legal entity (including guarantors, endorsers, and surotics) who agrees to
pay this note (together referred to as "us"). "You" or "your" means the
Lender and its successors and assigns.
APPLICABLE LAW: The law of the state in which you are located will govern
this note. Any term of this note which is contrary to applicable law will not
be effective, unless the law permits you and me to agree to such a variation.
If any provision of this agreement cannot be enforced according to its terms,
this fact will not affect the enforceability of the remainder of this
agreement. No modification of this agreement may be made without your express
written consent. Time is of the essence in this agreement.
PAYMENTS: Each payment I make on this note will first reduce the amount I owe
you for charges which are neither interest not principal. The remainder of
each payment will then reduce accrued unpaid interest, and then unpaid
principal. If you and I agree to a different application of payments, we will
describe our agreement on this note. Any partial prepayment will not excuse
or reduce any later scheduled payment until this note is paid in full
(unless, when I make the prepayment, you and I agree in writing to the
contrary).
INTEREST: Interest accrues on the principal remaining unpaid from time to
time, until paid in full. If I receive the principal in more than one
advance, each advance will start to earn interest only when I receive the
advance. The interest rate in effect on this note at any given time will
apply to the entire principal advanced at that time. Notwithstanding anything
to the contrary, I do not agree to pay and you do not intend to charge any
rate of interest that is higher than the maximum rate of interest you could
charge under applicable law for the extension of credit that is agreed to
here (either before or after maturity). If any notice of interest accrual is
sent and is in error, we mutually agree to correct it and if you actually
collect more interest than {See original cut off}
INDEX RATE: The index will serve only as a device for setting the rate on
this note. You do not guarantee by selecting this index, or the margin, that
the rate on this note will be the same rate you charge on any other loans or
class of loans to me or other borrowers.
ACCRUAL METHOD: The amount of interest that I will pay on this loan will be
calculated using the Interest rate and accrual method stated on page 1 of
this note. For the purpose of interest calculation, the accrual method will
determine the number of days in a "year." If no accrual method is stated,
then you may use any reasonable accrual method for calculating interest.
POST MATURITY RATE: For purpose of deciding when the "Post Maturity Rate"
(shown on page 1) applies, the term "maturity" means the date of the last
scheduled payment indicated on page 1 of this note or the date you accelerate
payment on the note, whichever is earlier.
SINGLE ADVANCE LOANS: If this is a single advance loan, you and I expect that
you will make only one advance of principal. However if you make any payments
described in the "PAYMENTS BY LENDER" paragraph below.
MULTIPLE ADVANCE LOANS: If this is a multiple advance loan, you and I expect
that you will make more than one advance to principal. If this is closed and
credit, repaying a part of the principal will not entitle me to additional
credit.
PAYMENTS BY LENDER: If you are authorized to pay, on by behalf, charges I am
obligated to pay (such as property insurance premiums), then you may treat
those payments made by you as advances and them to the unpaid principal under
this note, or you may demand immediate payment of the charges.
SET-OFF: I agree that you may set off any amount due and payable under this
note against any right I have to receive money from you.
"Right to receive money from you" means: (1) any deposit account balance
I have with you; (2) any money owed to me on an item presented to you or in
your possession for collection or exchange: and (3) any repurchase agreement
or other nondeposit obligation.
"Any amount due and payable under this note" means the total amount of
which you are entitled to demand payment under the terms of this note at the
time you set off. This total includes any balance the due date for which you
properly accelerate under this note.
If my right to receive money from you is also owned by someone who has
not agreed to pay this note, your right of set-off will apply to my interest
in the obligation and to any other amounts I could withdraw on my sole
request or endorsement. Your right of set-off does not apply to an account or
other obligation where my rights are only as a representative. It also does
not apply to any Individual Retirement Account or other tax-deferred
retirement account.
You will not be liable for the dishonor of any check when the dishonor
occurs because you set off this debt against any of my accounts. I agree to
hold you harmless from any such claims arising as a result of your exercise
of your right of set-off.
REAL ESTATE OR RESIDENCE SECURITY: If this note is secured by real estate or
a residence that is personal property, the existence of a default and your
remedies for such a default will be determined by applicable law, by the
terms of any separate instrument creating the security interest and, to the
extent not prohibited by law and not contrary to the Terms of the separate
security instrument, by the "Default" and "Remedies" paragraphs herein.
DEFAULT: I will be in default if any one or more of the following occur; (1)
I fail to make a payment on time or in the amount due; (2) I fail to keep the
property insured. If required; (3) I fail to pay, or keep any promise, on any
debt or agreement I have with you; (4) any other creditor of mine attempts to
collect any debt I owe him through court proceedings; (5) I die, am declared
incompetent, make an assignment for the benefit of creditors, or become
insolvent (either because my liabilities exceed my assets or I am unable to
pay my debts as they become due); (6) I make any written statement or provide
any financial information that is untrue or inaccurate at the time it was
provided; (7) I do or fail to do something which causes you to believe that
you will have difficulty collecting the amount I owe you; (8) any collateral
securing this note is used in a manner or for a purpose which threatens
confiscation by a legal authority; (9) I change my name or assume an
additional name without first notifying you before making such a change; (10)
I fail to plant cultivate and harvest crops in due season if I am a producer
of crops; (11) any loan proceeds are used for a purpose that will contribute
to excessive erosion of highly erodible land or the conversion of wetlands to
produce an agricultural commodity, as further explained in 7 C.F.R. Part
1940, Subpart G, Exhibit M.
REMEDIES: I am in default on this note you have, but are not limited to, the
following remedies:
(1) You may demand immediate payment of all I owe you under this note,
(principal, accrued unpaid interest and other accrued charges).
(2) You may set off this debt against any right I have to the payment of
money from you, subject to the terms of the "Set off" paragraph
hereonin.
(3) You may demand security, additional security, or addition parties as
a condition for not using any other remedy.
(4) You may refuse to make advances to me or allow purchases on credit
by me.
(5) You may use any remedy you have under state or federal law.
By selecting any one or more of these remedies you do not give up your right
to later use any other remedy. By waiving your right to declare an event to
be a default, you do not waive your right to later consider the event as if
it continues or happens again.
COLLECTION COSTS AND ATTORNEY'S FEES: I agree to pay all costs of collection,
replevin or any other or similar type of cost if I am in default. In
addition, if you hire an attorney to collect this note, I also agree to pay
any fee you incur with such attorney plus court costs (except where
prohibited by law). To the extent permitted by the United States Bankruptcy
Code. I also agree to pay the reasonable attorney's fees and costs you incur
to collect this debt as awarded by any court exercising jurisdiction under
the Bankruptcy Code.
WAIVER: I give up my rights to require you to do certain things. I will not
require you to:
(1) demand payment of amounts due (presentment):
(2) obtain official certification of nonpayment (protest): or
(3) give notice that amount due have not been paid (notice of dishonor).
I waive any I have based on suretyship or impairment of collateral.
OBLIGATIONS INDEPENDENT: I understand that I must pay this note even if
someone else has also agreed to pay it (by, for example, signing this form or
a separate guarantee or endorsement). You may sue me alone, or anyone else
who is obligated on this note. You may do so without any notice that it has
not been paid (notice of dishonor). You may without notice release any party
to this agreement without releasing any other party. If you up any of your
rights, with or without notice, it will not affect my duty o pay this note.
Any extension of new credit to any of us, or renewal of this note by all or
less than all of us will not release me from my duty to pay it. (Of course,
you are entitled to only one payment in full.) I agree that you may at your
option extend this note or the debt from time to time without limit or notice
and for any term without affecting my liability for payment of the note. I
will not assign my obligation under this agreement without your prior written
approval.
CREDIT INFORMATION: I agree and authorize you to obtain credit information
about me from time to time (for example, by requesting a credit report) and
to report to others your credit experience with me (such as credit reporting
agency). I agree to provide you, upon request, any financial statement or
information you may deem necessary. I warrant that the financial statements
and information I provide to you are or will be accurate, correct and
complete.
NOTICE: Unless otherwise required by law, any notice to me shall be given by
delivering it or by mailing it by first class mail addressed to me at my last
known address. My current address is on page 1. I agree to inform you in
writing of any change in my address. I will give any notice to you by mailing
it first class to your address stated on page 1 of this agreement, or to any
other address that you have designated.
<TABLE>
<CAPTION>
Interest
Date of Principal Borrower's Initials Principal Principal Interest Interest Paid
Transaction Advance (not required) Payments Balance Rate Payments Through:
- ----------- --------- ------------------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Interest
Date of Principal Borrower's Initials Principal Principal Interest Interest Paid
Transaction Advance (not required) Payments Balance Rate Payments Through:
- ----------- --------- ------------------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
</TABLE>
Page 2 of 3
(C) 1984, 1991 Bankers Systems, Inc., ST. Cloud, MN (1-800-397-2341)
Form UN 1/17/96
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
AWG, LTD. THE BANK OF BLOOMFIELD HILLS
4162 BIG RANCH ROAD 505 NORTH WOODWARD
NAPA, CA 94558 SUITE 1300
__________________________ Line of Credit No. 9094000
Borrower's Name and Address Lender's Name and Address ---------
"I" includes each borrower above, "You" mean the lender, its Date December 23, 1997
jointly and severally. successors and assigns. -----------------------
Max. Credit Amy. $950,000.00
-----------
Loan Ref. No.
</TABLE>
- ----------------------------------------------------------------------------
You have extended to me a line of credit in the AMOUNT of NINE HUNDRED FIFTY
THOUSAND AND NO/100 $950,000.00.
You will make loans to me from time to time until 12:01 A.M. on December 23,
1998. Although the line of credit expires on that date. I will remain
obligated to perform all my duties under this agreement as long as I owe you
any money advanced according to the terms of this agreement, as evidenced by
any note or notes I have signed promising to repay these amounts.
This line of credit is an agreement between you and me. It is not
intended that any third party receive any benefit form this agreement, wether
by direct payment, reliance for future payment or in any other manner. This
agreement is not a letter of credit.
1. AMOUNT: This line of credit is:
/ / OBLIGATORY: You may not refuse to make a loan to me under this
line of credit unless one of the following occurs:
a. I have borrowed the maximum amount available to me;
b. This line of credit has expired;
c. I have defaulted on the note (or notes) which show my indebtedness
under this line of credit;
d. I have violated any term of this line of credit or any note or
other agreement entered into connection with this line of credit;
e. ____________________________________________________________ .
/X/ DISCRETIONARY: You may refuse to make a loan to me under this line of
credit once the aggregate outstanding advances equal or exceed ZERO AND
NO/100 $_________________________________.
Subject to the obligatory or discretionary limitations above, this line of
credit is:
/X/ OPEN-END (business or Agricultural only): I may borrow up to the
maximum amount of principal more than one time.
/ / CLOSED-END: I may borrow up to the maximum only one time.
2. PROMISSORY NOTE: I will repay any advances made according to this
line of credit agreement as set out in the promissory note, I signed
on DECEMBER 23, 1997, or any note(s) I sign at a later time which
represent advances under this agreement. The note(s) set(s) out the
terms relating to maturity, interest rate, repayment and advances.
If indicated on the promissory note, the advances will be made as
follows: ___________________________________________________________
___________________________________________________________________ .
3. RELATED DOCUMENTS: I have signed the following documents in
connection with this line of credit and note(s) entered into in
accordance with this line of credit:
/ / security agreement dated _______________ / / ___________________
/ / mortgage dated _______________ / / ___________________
/ / guaranty dated _______________ / / ___________________
4. REMEDIES: If I am in default on the note(s) you may:
a.take any action as provided in the related documents;
b.without notice to me, terminate this line of credit;
By selecting any of these remedies you do not give up your
right to later use any other remedy. By deciding not to use any
remedy should I default, you do not waive your right to later
consider the event a default, if it happens again.
5. COSTS AND FEES: If you hire an attorney to enforce this agreement I
will pay your reasonable attorney's fees, where permitted by law. I
will also pay your court costs and costs of collection, where
permitted by law.
6. COVENANTS: For as long as this line of credit is in effect or I owe
you money for advances made in accordance with the line of credit, I
will do the following:
a. maintain books and records of my operations relating to the need
for this line of credit;
b. permit you or any of your representatives to inspect and/or copy
these records;
c. provide to you any documentation requested by you which support
the reason for making any advance under this line of credit;
d. permit you to make any advance payable to the seller (or seller
and me) of any items being purchased with that advance;
e. ____________________________________________________________ .
_______________________________________________________________ .
7. NOTICES: All notices or other correspondence with me should be sent
to my address state above. The notice or correspondence shall be
effective when deposited in the mail, first class, or delivered to
me in person.
8. MISCELLANEOUS: This line of credit may not be changed except by a
written agreement signed by you and me. The law of the state in
which you are located will govern this agreement. Any term of this
agreement which is contrary to applicable law will not be effective,
unless the law permits you and me to agree to such a variation.
FOR THE LENDER SIGNATURE: I AGREE TO THE TERMS
OF THIS LINE OF CREDIT.
HAVE RECEIVED A COPY ON TODAY'S DATE.
/S/ Ann M. Deering AWG, Ltd.
- ------------------------------------ -------------------------------------
Title ANN M. DEERING, VICE PRESIDENT BY: /S/ Mack H. Jennings
---------------------------------
MACK H. JENNINGS, PRESIDENT/CEO
BY: /S/ John P. Caponigro
---------------------------------
JOHN P. CAPONIGRO, SECRETARY
Page 1 of 1
(C) 1986 Bankers Systems, Inc., ST. Cloud, MN (1-800-397-2341) Form LCN 5/2/91
<PAGE>
THE BANK OF BLOOMFIELD HILLS
505 N. Woodward
Suite 1300
Bloomfield Hills, MI 48304
Date 02/06/98
Name Mack Jennings
Company AWG, LTD
Pages Faxed 4 Including Cover Sheet
From: Stuart G. Butler
Direct Phone (248)540-0352
Fax Phone (248)644-7107
Toll-Free (800)562-624 Ext. 352
Message: PER YOUR REQUEST, A COPY OF THE RENEWED NOTE. IF YOU NEED
ANYTHING ELSE, PLEASE GIVE ME A CALL. ____________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
__________________________________________________________
________________________________________________ .
6.10 PROMISSORY NOTE AND REGISTRATION RIGHTS
AGREEMENT IN FAVOR OF COLIN FRANK RISEAM
<PAGE>
This Note has not been registered under the Securities Act of 1933, as
amended (the "1933 Act"), or under the provisions of any applicable state
securities laws, but has been acquired by the registered holder hereof for
purposes of investment and in reliance on statutory exemptions under the 1933
Act, and under any applicable state securities laws. This Note may not be
sold, pledged, transferred or assigned except in a transaction which is
exempt under provisions of the 1933 Act and any applicable state securities
laws or pursuant to an effective registration statement; and in the case of
an exemption, only if the Company has received an opinion of counsel
satisfactory to the Company that such transaction does not require
registration of this Note.
AWG, LTD.
$50,000 March 2, 1998
6% PROMISSORY NOTE
DUE January 1, 1999
ON March 2, 1998, FOR VALUE RECEIVED, the undersigned, AWG,
Ltd., a Nevada corporation having an office at 4162 Big Ranch Road, Napa,
California 94558 (the "Company" or "Maker"), hereby promises to pay to the
order of Frank Colin Riseam his heirs, representatives and permitted assigns
(the "Holder"), at 110 Park Road, Hampton Hill, England TW 12 1 H R or at
such other place as the Holder of this Note may designate in writing from
time to time, in currency of the United States of America as at the time of
payment shall be legal tender for the payment of public and private debts,
the principal sum of Fifty Thousand ($50,000.00) (the "Note Amount") together
with interest thereon at the rate of six percent (6%) per annum payable
quarterly commencing three (3) months from the date hereof and at the end of
each three (3) month period thereafter. In the event that for any reason
whatsoever any interest or other consideration payable with respect to this
Note shall be deemed to be usurious by a court of competent jurisdiction
under the laws of the State of Nevada or the laws of any other state
governing the repayment hereof, then so much of such interest or other
consideration as shall be deemed to be usurious shall be held by the Holder
as security for the repayment of the principal amount hereof and shall
otherwise be waived.
1. Transfers of Note to Comply with the 1933 Act
The Holder agrees that this Note may not be sold,
transferred, pledged, hypothecated or otherwise disposed of except as
follows: (i) to a person who, in the opinion of counsel to the Company, is a
person to whom the Note may legally be transferred without registration and
without the delivery of a current prospectus under the 1933 Act with respect
thereto and then only against receipt of an agreement of such
<PAGE>
person to comply with the provisions of this Section 1 with respect to any
resale or other disposition of the Note; or (ii) to any person who complies
with the provisions of this Section 1 with respect to any resale or other
disposition of the Note; or (iii) to any person upon delivery of a prospectus
then meeting the requirements of the 1933 Act relating to such securities and
the offering thereof for such sale or disposition, and thereafter to all
successive assignees.
2. Payment
(a) This Note, together will all accrued but unpaid
interest thereon, shall be payable on the earliest to occur of the following:
(i) Twelve (12) months from the date of
issuance of this Note; or
(ii) The date of closing of any debt or equity
financing, public or otherwise, which results in gross proceeds to the
Company of not less than $500,000.
(b) The principal amount of this Note may be prepaid
by the Company, in whole or in part, without premium or penalty, at any time,
together with all accrued, but unpaid, interest thereon.
3. Covenants of Company
The Company covenants and agrees that, so long as
this Note shall be Outstanding it will:
(i) Promptly pay and discharge all lawful
taxes, assessments and governmental charges or levies imposed upon the
Company or upon its income and profits, or upon any of its property, before
the same shall become in default, as well as all lawful claims for labor,
materials and supplies which, if unpaid, might become a lien or charge upon
such properties or any part thereof; provided, however, that the Company
shall not be required to pay and discharge any such tax, assessment, charge,
levy or claim so long as the validity thereof shall be contested in good
faith by appropriate proceedings and the Company shall set aside on its books
adequate reserves with respect to any such tax, assessment, charge, levy or
claim so contested;
(ii) Do or cause to be done all things
necessary to preserve and keep in full force and effect its corporate
existence, rights and franchises and comply with all laws applicable to the
Company as its counsel may advise;
(iii) At all times maintain, preserve, protect
and keep its property used and useful in the conduct of its business in good
repair, working order and condition, and from time to time make all needful
and proper repairs, renewals, replacements, betterments and improvements
thereto, so that the business carried on in
<PAGE>
connection therewith may be properly and advantageously conducted at all times;
(iv) Keep adequately insured by financially
sound insurers, all property of a character usually insured by similar
corporations and carry such other insurance as is usually carried by similar
corporations; and
(v) At all times keep true and correct books
records and accounts.
4. Events of Default
(a) This Note shall become due and payable upon
written demand made by the Holder if one or more of the following events,
herein called events of default, shall happen and be continuing:
(i) Default in the payment of the principal
and accrued interest on this Note, when and as the same shall become due and
payable, and such default not being cured within fifteen (15) days of written
notice of said default being provided to the Company, whether by acceleration
or otherwise;
(ii) Default in the due observance or
performance of any covenant, condition or agreement on the part of the
Company to be observed or performed pursuant to the terms hereof, if such
default shall continue uncured for 15 days after written notice, specifying
such default, shall have been given to the Company by the Holder;
(iii) Application for, or consent to, the
appointment of a receiver, trustee or liquidator for the Company or of its
property under either federal, state or local laws;
(iv) Admission in writing of the Company's
inability to pay its debts as they mature;
(v) General assignment by the Company for the
benefit of creditors;
(vi) Filing by the Company of a voluntary
petition in bankruptcy or a petition or an answer seeking reorganization, or
an arrangement with creditors;
(vii) Entering against the Company of a court
order approving a petition filed against it under the federal bankruptcy
laws, which order shall not have been vacated or set aside or otherwise
terminated within 60 days; or
<PAGE>
(viii) The Company selling, assigning or
otherwise transferring all or substantially all of its assets.
(b) The Company agrees that notice of the occurrence
of any event of default, other than a default for non-payment under Section
2(a)(i) herein, will be promptly given by the Company to the Holder at his or
her registered address by certified mail.
(c) In case any one or more of the events of default
specified above shall happen or be continuing, the Holder may proceed to
protect and enforce his right by suit in the specific performance of any
covenant or agreement contained in this Note or in aid of the exercise of any
power granted in this Note or may proceed to enforce the payment of this Note
or to enforce any other legal or equitable rights as such Holder
5. This Note is guaranteed as to repayment of the Note
Amount and interest thereon, by AWG, Inc., a Delaware corporation and
wholly-owed subsidiary of the Company.
6. The undersigned hereby waives presentment for payment,
demand, notice of non-payment and dishonor, protest and notice of protest;
waives trial by jury in any action or proceeding arising on, out of, under or
by reason of this Note; consents to any renewals, extensions and partial
payments of this Note or the indebtedness for which it is given without
notice to it, and consents that no such renewals, extensions or partial
payments or release or modification of any collateral securing this Note or
the indebtedness for which it is given shall discharge the Maker from
liability herein in whole or in part. If this Note be not paid when due and
if it be placed with an attorney for collection, the Maker, Makers, endorsers
and guarantors agree to pay all costs of collection, including reasonable
attorney's fees, together with any disbursements incurred, which is hereby
agreed to be just and reasonable and which shall be added to the amount due
under this Note and recoverable with the amount due under this Note.
7. Miscellaneous
(a) This Note has been issued by the Company
pursuant to authorization of the Board of Directors of the Company.
(b) The Company may consider and treat the person in
whose name this Note shall be registered as the absolute owner thereof for
all purposes whatsoever (whether or not this Note shall be overdue) and the
Company shall not be affected by any notice to the contrary. Subject to the
limitations herein stated, the registered owner of this Note shall have the
right to transfer this Note by assignment, and the transferee thereof shall,
upon his registration as owner of this Note, become vested with all the
powers and rights of the transferor. Registration of any new owner shall take
place upon presentation of this Note to the Company at its principal offices,
together with a duly authenticated assignment. In case of transfer by
operation of law, the transferee
<PAGE>
agrees to notify the Company of such transfer and of his address, and to
submit appropriate evidence regarding the transfer so that this Note may be
registered in the name of the transferee. This Note is transferable only on
the books of the Company by the holder hereof, in person or by attorney, on
the surrender hereof, duly endorsed. Communications sent to any registered
owner shall be effective as against all holders or transferees of the Note
not registered at the time of sending the communication.
(c) Payments of interest shall be made as specified
above to the registered owner of this Note. Payment of principal shall be
made to the registered owner of this Note upon presentation of this Note on
or after maturity. No interest shall be due on this Note for such period of
time that may elapse between the maturity of this Note and its presentation
for payment.
(d) This Note may not be changed, modified or
terminated orally, nor may any of its provisions be waived, except by an
agreement in writing signed by the party against whom enforcement of such
change, modification or termination is sought.
(e) If any covenant or other provision of this Note
is invalid, illegal, or incapable of being enforced, by reason of any rule or
law or public policy, all other covenants and provisions of this Note shall
nevertheless remain in full force and effect, and no covenant or provision
shall be deemed dependent upon any other covenant or provision.
(f) The Holder shall not, by virtue hereof, be
entitled to any rights of a stockholder in the Company, either at law or in
equity, and the rights of the Holder are limited to those expressed in this
Note.
(g) Upon receipt by the Company of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation
of this Note, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Note, if mutilated, the Company shall execute and deliver a new Note of like
tenor and date. Any such new Note executed and delivered shall constitute an
additional contractual obligation on the part of the Company, whether or not
this Note so lost, stolen, destroyed or mutilated shall be at any time
enforceable by anyone.
(h) This Note shall be construed and enforced in
accordance with the laws of the State of Nevada without regard to the
principles of conflict of law and shall be enforced only in the State or
Federal Courts located in the State of Nevada. All parties
<PAGE>
hereto hereby consent and submit themselves to the in personam jurisdiction
thereof and waive any claims of forum non conviens.
IN WITNESS WHEREOF, AWG, LTD. has caused this Note to be
signed in its name by its President on the date first written above.
AWG, LTD.
By: /s/ Mack H. Jennings
---------------------------
Mack H. Jennings, President
STATE OF _______________________________)
) ss.:
COUNTY OF ______________________________)
On the ________ day of ________________ , 1998, before me
personally came Mack H. Jennings to be known, who, being by me duly sworn,
did depose and say that he resides at ____________ ; that he is the President
of AWG, Ltd., a Nevada corporation, the corporation described in and which
executed the foregoing instrument; that he knows the seal of said
corporation; that the seal affixed to said instrument is such corporate seal;
that it was so affixed by order of the board of directors of said
corporation, and that he signed his name thereto by like order.
__________________________
Notary Public
<PAGE>
GUARANTEE
In order to induce the Holder to make a loan of the Note
Amount to AWG, Ltd., a Nevada corporation (the "Company") and in
consideration of such loan which is to be evidenced by a Note dated March 2,
1998 by the Company to Colin Frank Riseam (the "Holder") in the sum of
$50,000.00, the undersigned, AWG, Inc., a Delaware corporation (the
"Guarantor") hereby agrees to unconditionally and irrevocably guarantee to
the Holder, his successors and assigns, the repayment of the Note Amount,
plus accrued interest, plus all costs, charges, advances, expenses, and
attorneys' fees reasonably incurred or paid by the Holder in protecting or
enforcing his rights under the Note.
The undersigned Guarantor hereby acknowledges and confirms
that the debt of $50,000.00 and interest, evidenced by the Note is justly
owing by the Company to the Holder without any defense(s), counterclaim(s) or
offset(s) of any kind.
The undersigned Guarantor hereby waives (1) notice of, and
acknowledge due notice of, acceptance of this guaranty by the Holder; (2)
notice of, and acknowledge due notice of, the reliance of the Holder on this
guaranty; (3) demand for payment from the Company or any person indebted in
any manner on or for any of the liabilities or obligations hereby guaranteed;
(4) presentment for payment of the Note or any instrument of the Company or
any other person, protest, notice of protest, notice of dishonor or notice of
any kind to any party thereto and to the undersigned Guarantor.
This guaranty shall continue in full force and be binding
upon the undersigned Guarantor and the successors and/or assigns of the
undersigned Guarantor. Any one or more of the undersigned Guarantors, or any
other party liable upon or in respect of any obligation hereby guaranteed may
be released without affecting the liability of the undersigned Guarantor not
so released.
IN WITNESS WHEREOF, the undersigned has executed this
instrument this 2nd day of March, 1998.
AWG, Inc.
By: _____________________________
Mack H. Jennings, President
<PAGE>
STATE OF ________________________________)
) ss.:
COUNTY OF _______________________________)
On the ________ day of ________________ , 1998, before me
personally came Mack H. Jennings to be known, who, being by me duly sworn,
did depose and say that he resides at____________________ ; that he is the
President of AWG, Inc., a Delaware corporation, the corporation described in
and which executed the foregoing instrument; that he knows the seal of said
corporation; that the seal affixed to said instrument is such corporate seal;
that it was so affixed by order of the board of directors of said corporation,
and that he signed his name thereto by like order.
_______________________
Notary Public
<PAGE>
EXHIBIT B
REGISTRATION RIGHTS AGREEMENT
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of March 2,
1998, by and between AWG. Ltd., a Nevada corporation (the "Company"), and the
person whose name appears on the signature page attached hereto (individually
a "Holder" and collectively, with the holders of other Units issued in the
Offering, the "Holders").
WHEREAS, pursuant to a Subscription Agreement dated
February 2, 1998, between the Company and the Holders (the "Subscription
Agreement"), the Company has offered (the "Offering"), to accredited
investors only as that term is defined in Rule 501 of Regulation D as
promulgated under the Securities Act of 1933, as amended (the "1933 Act"), up
to five (5) units (the "Units"), each Unit consisting of the Company's one
(1) year six percent (6%) promissory note (collectively the "Promissory
Notes") in the principal amount of $10,000 and 100,000 shares of the
Company's Series A 6% Preferred Stock, $.001 par value per share (the
"Preferred Stock" or the "Shares").
WHEREAS, pursuant to the terms of and in order to induce
the Holders to enter into the Subscription Agreement to purchase the Units,
the Company and the Holders have agreed to enter into this Agreement;
WHEREAS, it is intended by the Company and the Holders that
this Agreement shall become effective immediately upon the acquisition by the
Holders of the Common Stock;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants contained herein and in the Subscription Agreement, the
Company hereby agrees as follows:
A. REGISTRATION RIGHTS.
1. Registration Rights
(a) "Piggyback Registration". If the Company at any time
proposes to register any of its securities under the Securities Act of 1933,
as amended (the "1933 Act") (other than in connection with a merger or
pursuant to Form S-8 or other comparable form), the Company shall request
that the managing underwriter (if any) of such underwritten offering include
the Preferred Stock (collectively referred to as the "Registerable
Securities") in such registration. If such managing underwriter agrees to
include any of the Registerable Securities in the underwritten offering, the
Company shall at such time give prompt written notice to all Holders of its
intention to effect such registration and of such Holders' rights under such
proposed registration, and upon the request of any Holder delivered to the
Company within twenty (20) days after giving of such notice (which request
shall specify the Registerable Securities intended to be disposed of by such
Holder and the intended method of disposition thereof), the Company shall
include such Registerable Securities held by each such Holder requested to be
<PAGE>
included in such registration; provided, however, that:
(i) If, at any time after giving such written
notice of the Company's intention to register any of the Holder's
Registerable Securities and prior to the effective date of the
registration statement filed in connection with such registration,
the Company shall determine for any reason not to register or to
delay the registration of such Registerable Securities, at its sole
election, the Company may give written notice of such determination
to each Holder and thereupon shall be relieved of its obligation to
register any Registerable Securities issued or issuable in
connection with such registration (but not from its obligation to
pay registration expenses in connection therewith or to register the
Registerable Securities in a subsequent registration); and in the
case of a determination to delay a registration shall thereupon be
permitted to delay registering any Registerable Securities for the
same period as the delay in respect of securities being registered
for the Company's own account.
(ii) If the managing underwriter in such
underwritten offering shall advise the Company that it declines to
include a portion or all of the Registerable Securities requested by
the Holders to be included in the registration statement, then all
or a specified portion of the Registerable Securities shall be
excluded from such registration statement (in case of an exclusion
as to a portion of such Registerable Securities, such portion shall
be allocated among such Holders in proportion to the respective
numbers of Registerable Securities requested to be registered by
each such Holder). In such event the Company shall give the Holder
prompt notice of the number of Registerable Securities excluded.
(b) Option to Include Registerable Securities in Offering.
The Holders, subject to the provisions of Section 1, shall have the option to
include their Registerable Securities in the Company's initial public
offering (the "IPO") underwritten by Klein Maus and Shire, Inc. ("KMS"). The
Company shall not be required to include any of the Holders' Registerable
Securities in an underwritten offering of the Company's securities unless
such Holders accept the terms of the underwriting as agreed upon between the
Company and KMS (provided such terms are usual and customary for selling
stockholders) and the Holders agree to execute and/or deliver such documents
in connection with such registration as the Company or KMS may reasonably
request.
(c) Mandatory Registration. In the event the Holders have
not sold all of their Registerable Securities in connection with a
registration statement pursuant to Section 1.a, the Company will use its best
efforts to effect the registration of all remaining Registerable Securities
as soon as practicable, but not later than 180 days after the effective date
of such registration statement; provided, however, that such period may be
extended or delayed by the Company for one period of up to 90 days if, upon
the advice of counsel at the time such registration is required to be filed,
or at the time the Company
- 2 -
<PAGE>
is required to exercise its best efforts to cause such registration statement
to become effective, such delay is advisable and in the best interests of the
Company because of the existence of non-public material information, or to
allow the Company to complete any pending audit of its financial statements.
(d) Cooperation with Company. Holders will cooperate with
the Company in all respects in connection with this Agreement, including,
timely supplying all information reasonably requested by the Company and
executing and returning all documents reasonably requested in connection with
the registration and sale of the Registerable Securities.
2. Registration Procedures. If and whenever the Company is required
by any of the provisions of this Agreement to use its best efforts to effect
the registration of any of the Registerable Securities under the 1933 Act,
the Company shall (except as otherwise provided in this Agreement), as
expeditiously as possible:
(a) prepare and file with the Securities and Exchange
Commission (the "Commission") a registration statement and shall use its best
efforts to cause such registration statement to become effective until the
earlier of when all the Registerable Securities are sold or become capable of
being publicly sold without registration under the 1933 Act;
(b) prepare and file with the Commission such amendments
and supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration statement
effective and to comply with the provisions of the 1933 Act with respect to
the sale or other disposition of all securities covered by such registration
statement whenever the Holder or Holders of such securities shall desire to
sell or otherwise dispose of the same (including prospectus supplements with
respect to the sales of securities or the exercise of warrants from time to
time in connection with a registration statement pursuant to Rule 415 of the
Commission);
(c) furnish to each Holder such numbers of copies of a
summary prospectus or other prospectus, including a preliminary prospectus or
any amendment or supplement to any prospectus, in conformity with the
requirements of the 1933 Act, and such other documents, as such Holder may
reasonably request in order to facilitate the public sale or other
disposition of the securities owned by such Holder;
(d) use its best efforts to register and qualify the
securities covered by such registration statement under such other securities
or blue sky laws of such jurisdictions as each Holder shall request, and do
any and all other acts and things which may be necessary or advisable to
enable such Holder to consummate the public sale or other disposition in such
jurisdictions of the securities owned by such Holder, except that
- 3 -
<PAGE>
the Company shall not for any such purpose be required to qualify to do
business as a foreign corporation in any jurisdiction wherein it is not so
qualified or to file therein any general consent to service of process;
(e) use its best efforts to list such securities on any
securities exchange on which any securities of the Company is then listed, if
the listing of such securities is then permitted under the rules of such
exchange;
(f) enter into and perform its obligations under an
underwriting agreement, if the offering is an underwritten offering, in usual
and customary form, with the managing underwriter or underwriters of such
underwritten offering;
(g) notify each Holder of Registerable Securities covered
by such registration statement, at any time when a prospectus relating
thereto covered by such registration statement is required to be delivered
under the 1933 Act, of the happening of any event of which it has knowledge
as a result of which the prospectus included in such registration statement,
as then in effect, includes an untrue statement of a material fact or omits
to state a material fact required to be stated therein or necessary to make
the statements therein not misleading in the light of the circumstances then
existing;
(h) furnish, at the request of any Holder on the date such
Registerable Securities are delivered to the underwriters for sale pursuant
to such registration or, if such Registerable Securities are not being sold
through underwriters, on the date the registration statement with respect to
such Registerable Securities becomes effective, (i) an opinion, dated such
date, of the counsel representing the Company for the purpose of such
registration, addressed to the underwriters, if any, and to the Holder making
such request, covering such legal matters with respect to the registration in
respect of which such opinion is being given as the Holder of such
Registerable Securities may reasonably request and are customarily included
in such an opinion and (ii) letters, dated, respectively, (1) the effective
date of the registration statement and (2) the date such Registerable
Securities are delivered to the underwriters, if any, for sale pursuant to
such registration, from a firm of independent certified public accountants of
recognized standing selected by the Company, addressed to the underwriters,
if any, and to the Holder making such request, covering such financial,
statistical and accounting matters with respect to the registration in
respect of which such letters are being given as the Holder of such
Registerable Securities may reasonably request and are customarily included
in such letters: and
(i) take such other actions as shall be reasonably
requested by any Holder to facilitate the registration and sale of the
Registerable Securities; provided, however, that the Company shall not be
obligated to take any actions not specifically required elsewhere herein
which in the aggregate would cost in excess of $5,000.
- 4 -
<PAGE>
3. Restrictions on Transfer of Registerable Securities. The Holder
agrees that without the prior written consent of KMS he will not sell or
transfer any of the Registerable Securities for a period of twenty-four (24)
months from the date hereof or, if the Registerable Securities are included
in a Registration Statement, eighteen (18) from the effective date of the
Registration Statement, whichever is earlier.
4. Expenses. All expenses incurred in any registration of the
Holders' Registerable Securities under this Agreement shall be paid by the
Company, including, without limitation, printing expenses, fees and
disbursements of counsel for the Company, expenses of any audits to which the
Company shall agree or which shall be necessary to comply with governmental
requirements in connection with any such registration, all registration and
filing fees for the Holders' Registerable Securities under federal and state
securities laws, and expenses of complying with the securities or blue sky
laws of any jurisdictions pursuant to Section 2(h)(i); provided, however, the
Company shall not be liable for (a) any discounts or commissions to any
underwriter; (b) any stock transfer taxes incurred with respect to
Registerable Securities sold in the Offering or (c) the fees and expenses of
counsel for any Holder.
5. Indemnification. In the event any Registerable Securities are
included in a registration statement pursuant to this Agreement:
(a) Company Indemnity. Without limitation of any other
indemnity provided to any Holder, either in connection with the Offering or
otherwise, to the extent permitted by law, the Company shall indemnify and
hold harmless each Holder, the affiliates, officers, directors and partners
of each Holder, any underwriter (as defined in the 1933 Act) for such Holder,
and each person, if any, who controls such Holder or underwriter (within the
meaning of the 1933 Act or the Securities Exchange Act of 1934 (the "Exchange
Act"), against any losses, claims, damages or liabilities (joint or several)
to which they may become subject under the 1933 Act, the Exchange Act or
other federal or state law, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon
any of the following statements, omissions or violations (collectively a
"Violation"): (i) any untrue statement or alleged untrue statement of a
material fact contained in such registration statements including any
preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading, (iii) any violation or alleged violation by the
Company of the 1933 Act, the Exchange Act, or (iv) any state securities law
or any rule or regulation promulgated under the 1933 Act, the Exchange Act or
any state securities law, and the Company shall reimburse each such Holder,
affiliate, officer or director or partner, underwriter or controlling person
for any legal or other expenses incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the Company shall not be liable to any Holder in any
such case
- 5 -
<PAGE>
for any such loss, claim, damage, liability or action to the extent that it
arises out of or is based upon a Violation which occurs in reliance upon and
in conformity with written information furnished expressly for use in
connection with such registration by any such Holder or any other officer,
director or controlling person thereof.
(b) Holder Indemnity. Each Holder shall indemnify and hold
harmless the Company, its affiliates, its counsel, officers, directors,
shareholders and representatives, any underwriter (as defined in the 1933
Act) and each person, if any, who controls the Company or the underwriter
(within the meaning of the 1933 Act or the Exchange Act), against any losses,
claims, damages, or liabilities (joint or several) to which they may become
subject under the 1933 Act, the Exchange Act or any state securities law, and
the Holder shall reimburse the Company and each such affiliate, officer or
director or partner, underwriter or controlling person for any legal or other
expenses incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; insofar as such losses,
claims, damages or liabilities (or actions with respect thereof) arise out of
or are based upon any statements or information provided by such Holder to
the Company in connection with the offer or sale of Registerable Securities.
(c) Notice; Right to Defend. Promptly after receipt by an
indemnified party under this Section 5 of notice of the commencement of any
action (including any governmental action), such indemnified party shall, if
a claim in respect thereof is to be made against any indemnifying party under
this Section 5, deliver to the indemnifying party a written notice of the
commencement thereof and the indemnifying party shall have the right to
participate in and if the indemnifying party agrees in writing that it will
be responsible for any costs, expenses, judgments, damages and losses
incurred by the indemnified party with respect to such claim, jointly with
any other indemnifying party similarly noticed, to assume the defense thereof
with counsel mutually satisfactory to the parties; provided, however, that an
indemnified party shall have the right to retain its own counsel, with the
fees and expenses to be paid by the indemnifying party, if the indemnified
party reasonably believes that representation of such indemnified party by
the counsel retained by the indemnifying party would be inappropriate due to
actual or potential differing interests between such indemnified party and
any other party represented by such counsel in such proceeding. The failure
to deliver written notice to the indemnifying party within a reasonable time
of the commencement of any such action shall relieve such indemnifying party
of any liability to the indemnified party under this Agreement only if and to
the extent that such failure is prejudicial to its ability to defend such
action, and the omission so to deliver written notice to the indemnifying
party will not relieve it of any liability that it may have to any
indemnified party otherwise than under this Agreement.
(d) Contribution. If the indemnification provided for in
this Agreement is held by a court of competent jurisdiction to be unavailable
to an indemnified party with respect to any loss, liability, claim, damage or
expense referred to therein, then the
- 6 -
<PAGE>
indemnifying party, in lieu of indemnifying such indemnified party
thereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage or
expense in such proportion as is appropriate to reflect the relative fault of
the indemnifying party on the one hand and of the indemnified party on the
other hand in connection with the statements or omissions which resulted in
such loss, liability, claim, damage or expense as well as any other relevant
equitable considerations. The relevant fault of the indemnifying party and
the indemnified party shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or
the omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative
intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. Notwithstanding the foregoing, the amount
any Holder shall be obligated to contribute pursuant to the Agreement shall
be limited to an amount equal to the proceeds to such Holder of the
Registerable Securities sold pursuant to the registration statement which
gives rise to such obligation to contribute (less the aggregate amount of any
damages which the Holder has otherwise been required to pay in respect of
such loss, claim, damage, liability or action or any substantially similar
loss, claim, damage, liability or action arising from the sale of such
Registerable Securities).
(e) Survival of Indemnity. The indemnification provided by
this Agreement shall be a continuing right to indemnification and shall
survive the registration and sale of any Registerable Securities by any
person entitled to indemnification hereunder and the expiration or
termination of this Agreement.
6. Assignment of Registration Rights. The rights of the Holders
under this Agreement, including the rights to cause the Company to register
Registerable Securities may not be assigned without the written prior consent
of the Company.
7. Limitations on Other Registration Rights. Except as otherwise set
forth in this Agreement, the Company shall not, without the prior written
consent of the Holders of Registerable Securities representing a majority
thereof held by all the Holders, file any registration statement filed on
behalf of any person (including the Company) other than a Holder to become
effective during any period when the Company is not in compliance with this
Agreement.
8. Remedies.
(a) Time is of Essence. The Company agrees that time is of
the essence of each of the covenants contained herein and that, in the event
of a dispute hereunder, this Agreement is to be interpreted and construed in
a manner that will enable the Holders to sell their Registerable Securities
as quickly as possible after such Holders have indicated to the Company that
they desire their Registerable Securities to be registered.
- 7 -
<PAGE>
Any delay on the part of the Company not expressly permitted under this
Agreement, whether material or not, shall be deemed a material breach of this
Agreement.
(b) Remedies Upon Default or Delay. The Company
acknowledges the breach of any part of this Agreement may cause irreparable
harm to a Holder and that monetary damages alone may be inadequate. The
Company therefore agrees that the Holder shall be entitled to injunctive
relief or such other applicable remedy as a court of competent jurisdiction
may provide. Nothing contained herein will be construed to limit a Holder's
right to any remedies at law, including recovery of damages for breach of any
part of this Agreement.
9. Notices.
(a) All communications under this Agreement shall be in
writing and shall be mailed by first class mail, postage prepaid, or
telegraphed or telexed with confirmation of receipt or delivered by hand or
by overnight delivery service:
(i) if to the Company, at:
AWG, Ltd.
4162 Big Ranch Road
Napa, California 94558
or at such other address as it may have furnished in writing to the
Holders of Registerable Securities at the time outstanding; or
(ii) if to any Holder of any Registerable
Securities, to the address of such Holder as it appears in the stock or
warrant ledger of the Company.
(b) Any notice so addressed, when mailed by registered or
certified mail shall be deemed to be given three days after so mailed, when
telegraphed or telexed shall be deemed to be given when transmitted, or when
delivered by hand or overnight shall be deemed to be given when delivered.
10. Successors and Assigns. Except as otherwise expressly provided
herein, this Agreement shall inure to the benefit of and be binding upon the
successors and permitted assigns of the Company and each of the Holders.
11. Amendment and Waiver. This Agreement may be amended, and the
observance of any term of this Agreement may be waived, but only with the
written consent of the Company and the Holders of securities representing a
majority of the Registerable Securities; provided, however, that no such
amendment or waiver shall take away any registration right of any Holder of
Registerable Securities or reduce the amount of
- 8 -
<PAGE>
reimbursable costs to any Holder of Registerable Securities in connection
with any registration hereunder without the consent of such Holder; further
provided, however, that without the consent of any other Holder of
Registerable Securities, any Holder may from time to time enter into one or
more agreements amending, modifying or waiving the provisions of this
Agreement if such action does not adversely affect the rights or interest of
any other Holder of Registerable Securities. No delay on the part of any
party in the exercise of any right, power or remedy shall operate as a waiver
thereof, nor shall any single or partial exercise by any party of any right,
power or remedy preclude any other or further exercise thereof, or the
exercise of any other right, power or remedy.
12. Counterparts. One or more counterparts of this Agreement may be
signed by the parties, each of which shall be an original but all of which
together shall constitute one and the same instrument.
13. Governing Law. This Agreement shall be construed in accordance
with and governed by the internal laws of the State of Nevada, without giving
effect to conflicts of law principles.
14. Invalidity of Provisions. If any provision of this Agreement is
or becomes invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained herein
shall not be affected thereby.
15. Headings. The headings in this Agreement are for convenience of
reference only and shall not be deemed to alter or affect the meaning or
interpretation of any provisions hereof.
IN WITNESS WHEREOF, the undersigned have executed this
Agreement as of the 2nd day of March, 1998.
AWG, LTD.
/s/ Colin Frank Riseam
----------------------------
Signature of Holder
By: /s/ Mack H. Jennings Colin Frank Riseam
--------------------------- ----------------------------
Mack H. Jennings, President Print Name of Holder
110 Park Road, Hampton Hill,
----------------------------
England TW 12 1 HR
----------------------------
Print Address of Holder
- 9 -
9. ESCROW AGREEMENT BY AND BETWEEN THE
COMPANY, THE UNDERWRITER AND CHASE MANHATTAN BANK
<PAGE>
ESCROW AGREEMENT
Escrow Agreement dated as of ____________, 1998 by and
among The Chase Manhattan Bank, a New York state chartered bank with offices
at 450 West 33rd Street, New York, New York 10001, AWG, Ltd., a Nevada
corporation with offices at 4162 Big Ranch Road, Napa, California 94558 and
Klein Maus and Shire, Inc., an Indiana corporation with offices at 110 Wall
Street, New York, New York 10005.
W I T N E S S E T H
WHEREAS, AWG, Ltd. (the "Issuer-Corporation") has filed a
registration statement on Form SB-1 under the Securities Act of 1933, as
amended, with the Securities and Exchange Commission, File No. 333-48165 (the
"Registration Statement"), relating to the subscription for and sale of a
maximum of 500,000 shares (the "Shares") of Series A 6% Preferred Stock (the
"Preferred Stock") in the Issuer-Corporation, with a minimum investment
required of 300,000 shares of Preferred Stock at a price of $10.00 per Share;
and
WHEREAS, Klein Maus and Shire, Inc. (the "Depositor-
Agent") has been named as the Underwriter in connection with the
proposed offering of the Preferred Stock in accordance with the
<PAGE>
terms of the Underwriting Agreement dated as of _____________,
1998 among the Issuer-Corporation and the Depositor-Agent (the
"Underwriting Agreement"); and
WHEREAS, in compliance with Rule 15c2-4 under the
Securities Exchange Act of 1934, as amended, the Issuer-Corporation and the
Depositor-Agent propose to establish an escrow fund with The Chase Manhattan
Bank (the "Bank-Escrowee"); and
WHEREAS, the offering of Preferred Stock will terminate no
later than sixty (60) days of the date the Registration Statement is declared
effective by the Securities and Exchange Commission (the "Effective Date")
unless extended by the Issuer- Corporation for an additional thirty (30) days
(the "Offering Termination Date"). If subscriptions for at least 300,000
shares of Preferred Stock ($3,000,000) have not been received by the Offering
Termination Date, no Preferred Stock will be sold; and
WHEREAS, the Bank-Escrowee has agreed to act as escrow
agent in connection with the proposed fund;
NOW, THEREFORE, it is agreed as follows:
1. For a period commencing on the Effective Date and
-2-
<PAGE>
terminating at the latest of the Offering Termination Date, Closing Date or
the Option Closing Date, as the latter two terms are defined in the
Underwriting Agreement and as the same is set forth in the Registration
Statement of the Issuer-Corporation, the Bank-Escrowee shall act as escrow
agent and agrees to receive and disburse the proceeds from the sale of the
Preferred Stock in accordance herewith. The Depositor-Agent and the Issuer-
Corporation agree to notify the Bank-Escrowee (a) promptly after the
Registration Statement has been declared effective by the Securities and
Exchange Commission, (b) if the proposed offering of the Preferred Stock is
extended as provided in the Underwriting Agreement, (c) of the Offering
Termination Date and (d) of the Closing Date and each Option Closing Date.
2. All moneys received by the Depositor-Agent and the
Issuer-Corporation in connection with the sale of the Preferred Stock shall
be deposited by the Depositor-Agent and the Issuer-Corporation in a
non-interest escrow account to be established for this purpose by the
Bank-Escrowee.
3. If at least 300,000 shares of Preferred Stock have been
subscribed for and any funds remain in the escrow account on the later of the
Closing Date, Option Closing Date or the Offering Termination Date, such
funds will be promptly paid to or credited
-3-
<PAGE>
to the account of, or otherwise transferred to the Issuer-Corporation less
expenses (as specified in written instructions from the Issuer-Corporation
and the Depositor-Agent, signing jointly).
4. Upon receipt by the Bank-Escrowee of appropriate written
instructions at the Closing Date and Option Closing Date as the case may be,
from the Issuer-Corporation and the Depositor-Agent, jointly, giving notice
of the events described herein, the Bank-Escrowee shall pay to or credit to
the account of, or otherwise transfer (as specified in such instructions) to,
the Issuer-Corporation and other instructed parties such portion of the
deposited funds then held in escrow as specified in such instructions.
5. If at least 300,000 shares of Preferred Stock have not
been subscribed for by the Offering Termination Date, then the
Depositor-Agent and the Issuer-Corporation promptly shall so advise the
Bank-Escrowee, shall furnish to the Bank-Escrowee a list containing the name
and address of, the amount received from each subscriber whose funds have
been deposited and shall authorize the Bank-Escrowee to return the
subscription funds theretofore received, without interest, to the subscribers
as named.
-4-
<PAGE>
6. In the event of either (a) the occurrence of all the
events contemplated by Sections 3 and 4 hereof, or (b) at least 300,000
shares of Preferred Stock not having been subscribed for by the Offering
Termination Date and the repayment to the subscribers of the amounts provided
in Section 5 hereof, the Bank-Escrowee shall be relieved of all liabilities
in connection with the escrow deposits provided for herein.
7. The Issuer-Corporation hereby agrees to (i) pay the
Bank-Escrowee upon execution of this Agreement reasonable compensation for
the services to be rendered hereunder, as described on Schedule I attached
hereto, and (ii) pay or reimburse the Bank-Escrowee upon request for all
expenses, disbursements and advances, including reasonable attorney's fees,
incurred or made by it in connection with this agreement.
8. It is understood and agreed, further, that the Bank-
Escrowee shall:
(a) be under no duty to enforce payment of any
subscription which is to be paid to and held by it
hereunder;
(b) be under no duty to accept funds, checks,
-5-
<PAGE>
drafts or instructions for the payment of money from anyone
other than the Depositor-Agent and the Issuer-Corporation
or to give any receipt therefor except to the
Depositor-Agent and the Issuer-Corporation;
(c) be protected in acting under any notice,
request, certificate, approval, consent or other paper
believed by it to be genuine, signed by the proper party or
parties and in accordance with the terms of this Agreement;
(d) be deemed conclusively to have given and
delivered any notice required to be given or delivered
hereunder if the same is in writing, signed by any one of
its authorized officers, and mailed by registered or
certified mail, or delivered by hand, to the Depository-
Agent, 110 Wall Street, New York, New York 10005, Attn:
Asim Kohli and the Issuer-Corporation, 4162 Big Ranch Road,
Napa, California 94558, Attn.: Mack H. Jennings with a copy
to Doros & Brescia, P.C., 1140 Avenue of the Americas, New
York, New York 10036, Attn.: Ronald J. Brescia and with a
copy to Jackier, Gould, Bean, Upfal & Eizelman, 1533 North
Woodward, Suite 250, Bloomfield Hills, Michigan 48304,
Attn: Michael J. Eizelman and be
-6-
<PAGE>
deemed conclusively to have received any notice required to
be given or delivered hereunder if the same is in writing,
signed by any one of the authorized officers of the
Depositary-Agent and the Issuer-Corporation, and mailed, by
registered or certified mail, or delivered by hand, to the
Bank-Escrowee's Corporate Trust Department, 450 West 33rd
Street, New York, New York 100001, Attn.: Escrow
Administration: 15th Floor.
(e) be indemnified by the Depositor-Agent and the
Issuer-Corporation against any claim made against it by
reason of its action or failing to act in connection with
any of the transactions contemplated hereby and against any
loss it may sustain in carrying out the terms of this
Agreement, except such claims which are occasioned by its
bad faith, gross negligence or willful misconduct. Anything
in this agreement to the contrary notwitstanding, in no
event shall the Bank-Escrowee be liable for special,
indirect or consequential loss or damage of any kind
whatsoever (including but not limited to lost profits),
even if the Bank-Escrowee has been advised of the
likelihood of such loss or damage and regardless of the
form of action;
-7-
<PAGE>
(f) promptly notify the Depositor-Agent and the
Issuer-Corporation of any discrepancy between the amounts
set forth on any statement delivered by the Depositor-
Agent or the Issuer-Corporation, as the case may be, and
the sum or sums delivered to the Bank-Escrowee therewith;
(g) have no duty to inquire into the terms and
conditions of this Agreement, such duties being purely
ministerial in nature;
(h) be permitted to consult with counsel of its
choice, including in-house counsel, and shall not be liable
for any action taken, suffered or omitted by it in
accordance with the advice of such counsel, provided,
however that nothing in this subsection (h), nor any action
taken by the Bank-Escrowee, or suffered or omitted by it in
accordance with the advice of any counsel, shall relieve
the Bank-Escrowee from liability for any claims that are
occasioned by its bad faith, gross negligence or willful
misconduct, all as provided in subsection (e) above;
(i) not be bound by any modification, amendment,
termination, cancellation, recision or supersession of
-8-
<PAGE>
this Agreement, unless the same shall be in writing and
signed by all parties hereto;
(j) have no liability for following the
instructions herein or expressly provided for, or written
instructions given by the Depositor-Agent or the Issuer-
Corporation; and
(k) have the right, at any time, to resign
hereunder by given written notice of its resignation to
take effect, and upon the effective date of such
resignation all cash and other payments and all other
property then held by the Bank-Escrowee hereunder shall be
delivered by it to such person as may be designated in
writing by the other parties executing this Agreement,
whereupon the Bank-Escrowee's obligations hereunder shall
cease and terminate. If no such person has been designated
by such date, all obligations of the Bank-Escrowee
hereunder shall, nevertheless, cease and terminate. The
Bank-Escrowee's sole responsibility thereafter shall be to
keep safely all property then held by it and to deliver the
same to a person designated by the other parties executing
this Agreement or in accordance with the directions of a
final order or
-9-
<PAGE>
judgment of a court of competent jurisdiction.
9. If any checks or other instruments deposited in the
escrow account established hereunder prove uncollectible, the
Issuer-Corporation shall deliver the returned checks or other instruments to
the Issuer-Corporation.
10. Nothing in this Agreement is intended to or shall
confer upon anyone other than the parties hereto any legal right, remedy or
claim. This Agreement shall be construed in accordance with the laws of the
State of New York and may be modified only in writing.
11. (a) In the event funds transfer instructions are given
(other than in writing at the time of execution of the Agreement), whether in
writing, by telecopier or otherwise the Bank-Escrowee is authorized to seek
confirmation of such instructions by telephone call-back to person or persons
designed on Schedule 1 hereto, and the Bank-Escrowee may rely upon the
confirmations of anyone purporting to be the person or persons so designated.
The persons and telephone numbers for call-backs may be changed only in a
writing actually received and acknowledged by the Bank-Escrowee. The parties
to this Agreement acknowledge that such security procedure is commercially
reasonable.
-10-
<PAGE>
(b) It is understood that the Bank-Escrowee and
the beneficiary's bank in any funds transfer may rely solely upon any account
numbers or similar identifying number provided by either of the other parties
hereto identify (i) the beneficiary, (ii) the beneficiary's bank, or (iii) an
intermediary bank. The Bank-Escrowee may apply any of the escrowed funds for
any payment order it executes using any such identifying number, even where
its use may result in a person other than the beneficiary being paid, or the
transfer of funds to a bank other than the beneficiary's bank or an
intermediary bank designated.
IN WITNESS WHEREOF, the parties hereto have duly executed
this Agreement as of the day and year first above written.
THE CHASE MANHATTAN BANK
By: ____________________________
AWG, LTD.
By: ____________________________
Mack H. Jennings, President
KLEIN MAUS AND SHIRE, INC.
By: _____________________________
Mohammad Ali Khan, President
-11-
<PAGE>
Schedule 1
o $2,500 per annum, or any part thereof, without proration
for partial years.
o $5.00 per check.
-12-
<PAGE>
Schedule 2
Telephone Number(s) for Call-Backs and
Person(s) Designated to Confirm Funds Transfer Instructions
If to Issuer-Corporation:
Name Telephone Number
- ----------------------------------- ----------------------------------
1. Mack H. Jennings 707-259-6777
2. Joseph Antonini 248-614-3880
If to Depositor-Agent:
Name Telephone Number
- ----------------------------------- ----------------------------------
1. Asim Kohli 212-785-4545
-13-
10.1 CONSENT DELOITTE AND TOUCHE LLP
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-48165 of AWG, Ltd. on Form SB-1 of our report dated January 28, 1998
(February 23, 1998) as to the last paragraph of Note 13, which report
expresses an unqualified opinion and includes an explanatory paragraph
relating to substantial doubt about the Company's ability to continue as a
going concern) with respect to the consolidated financial statements of AWG,
Ltd for the years ended December 31, 1997 and 1996, appearing in the
Prospectus, which is part of this Registration Statement.
Deloitte & Touche LLP
San Francisco, California
June 29, 1998
10.2 CONSENT OF JACKIER, GOULD, BEAN, UPFAL & EIZELMAN
(CONTAINED IN LEGAL OPINION FILED AS EXHIBIT 11)
11. LEGAL OPINION OF JACKIER, GOULD, BEAN, UPFAL & EIZELMAN
<PAGE>
[Letterhead of Jackier, Gould, Bean, Upfal & Eizelman]
June 30, 1998
To the Board of Directors of AWG, Ltd.
4162 Big Ranch Road
Napa, CA 94558
Dear Sirs:
We refer to the Registration Statement on Form SB-1 (the
"Registration Statement"), to be filed by AWG, Ltd. (the "Company") with the
Securities Exchange Commission under the Securities Act of 1933, as amended,
relating to 500,000 shares of Series A Preferred Stock (the "Shares") to be
sold on behalf of the Company and 500,000 Shares to be sold on behalf of the
selling stockholder named in the Registration Statement.
As counsel for the Company, we have examined such corporate records,
documents and such questions of law as we have considered necessary or
appropriate for purposes of this opinion and, upon the basis of such
examination, advise you that in our opinion the Shares to be sold by the
Company and the selling stockholder have been duly and validly authorized and
are legally issued, fully paid and non-assessable.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and the reference to this firm under the caption
"Legal Matters" in the prospectus contained therein and elsewhere in the
Registration Statement and prospectus. This consent is not to be construed as
an admission that we are a party whose consent is required to be filed with
the Registration Statement under the provisions of the Securities Act of
1933, as amended.
Very truly yours,
/s/ Jackier, Gould, Bean, Upfal & Eizelman, P.C.
-----------------------------------------------
Jackier, Gould, Bean, Upfal & Eizelman, P.C.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
FINANCIAL DATA SCHEDULE REQUIRED BY ITEM 601(b)(27) OF REGULATION S-B
</LEGEND>
<CIK> 1057013
<NAME> AWG, Ltd.
<MULTIPLIER> 1
<CURRENCY> Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 18,327
<SECURITIES> 0
<RECEIVABLES> 74,037
<ALLOWANCES> 0
<INVENTORY> 728,529
<CURRENT-ASSETS> 981,779
<PP&E> 2,780,628
<DEPRECIATION> 46,185
<TOTAL-ASSETS> 4,086,127
<CURRENT-LIABILITIES> 1,780,445
<BONDS> 1,665,400
0
0
<COMMON> 7,157
<OTHER-SE> 633,125
<TOTAL-LIABILITY-AND-EQUITY> 4,086,127
<SALES> 513,676
<TOTAL-REVENUES> 513,676
<CGS> 363,929
<TOTAL-COSTS> 648,262
<OTHER-EXPENSES> (6,214)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 222,304
<INCOME-PRETAX> (714,605)
<INCOME-TAX> 800
<INCOME-CONTINUING> (715,405)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (715,405)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
FINANCIAL DATA SCHEDULE REQUIRED BY ITEM 601(b)(27) OF REGULATION S-B
</LEGEND>
<CIK> 1057013
<NAME> AWG, Ltd.
<MULTIPLIER> 1
<CURRENCY> Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 18,776
<SECURITIES> 0
<RECEIVABLES> 3,427
<ALLOWANCES> 0
<INVENTORY> 448,728
<CURRENT-ASSETS> 635,909
<PP&E> 2,061,582
<DEPRECIATION> 23,897
<TOTAL-ASSETS> 3,026,408
<CURRENT-LIABILITIES> 747,071
<BONDS> 1,665,400
0
0
<COMMON> 5,222
<OTHER-SE> 608,715
<TOTAL-LIABILITY-AND-EQUITY> 3,026,408
<SALES> 27,853
<TOTAL-REVENUES> 27,853
<CGS> 120,546
<TOTAL-COSTS> 319,770
<OTHER-EXPENSES> 313,060
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 107,620
<INCOME-PRETAX> (833,143)
<INCOME-TAX> 800
<INCOME-CONTINUING> (833,943)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (833,943)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
