AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON November 4, 1998
Registration No. 333-48165
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2 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 Industrial Identification
of incorporation Classification Code Number)
or organization) 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 J. Brescia, Esq.
Lawrence S. Jackier, Esq. Doros & Brescia, P.C.
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 MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH SERIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
OF SECURITIES REGISTERED SHARE (1) PRICE (1) REGISTRATION FEE (1)
- --------------------- ------------- ------------------ ------------------ ----------------------
<S> <C> <C> <C> <C>
Series A 6%, Par 1,000,000 $10 $10,000,000 $2,950
Value $.001 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 THE FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
<PAGE>
AWG, Ltd.
CROSS REFERENCE SHEET SHOWING LOCATION IN
PROSPECTUS OF PART I OF FORM SB-1
<TABLE>
<CAPTION>
HEADING CAPTION OR LOCATION IN PROSPECTUS
------- ---------------------------------
<S> <C>
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 . . . . . . . . . . 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
</TABLE>
<PAGE>
AWG, LTD.
1,000,000 Shares of Series A Preferred Stock
Of the 1,000,000 shares (the "Shares") of Series A 6% Preferred
Stock (the "Preferred Stock") offered hereby, 500,000 shares are being
offered by the Underwriters with the net proceeds payable to AWG, Ltd.
("AWG" or the "Company"). An additional 500,000 shares of Preferred Stock are
being registered on behalf of a single stockholder who cannot sell his shares
for a period of 13 months subsequent to the effective date of this
offering. It is currently estimated that the initial public offering price
per share of Series A 6% Preferred Stock will be $10. Any ultimate sale of
the additional 500,000 shares of Preferred Stock may depress the price of the
Preferred Stock as it is offered into the Market, whether or not all of such
shares are actually sold.
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. Other than with respect to
shares held by officers, directors and affiliates, the Preferred Stock and
the Common Stock will be freely transferrable. The Preferred Stock will
entitle the holders thereof to a Cumulative 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. The Company may
not redeem the Preferred Stock except 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. No sinking fund has or will be
established to fund the Company's redemption obligations. 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 Apink sheets" under the trading symbol "VINE".
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 Underwriters 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.
The Company intends on offering the securities in the states of California,
Connecticut, Florida, New Jersey, New York and Ohio.
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>
1Underwriting
Price To Public Discounts and Commissions 2Proceeds To Company
--------------- ------------------------- --------------------
<S> <C> <C> <C>
Per Share $ 10 1 9
Total 3 $5,000,000 $500,000 $4,500,000
</TABLE>
If Shares of Preferred Stock offered hereby are offered severally by the
Underwriters, as specified herein, subject to receipt and delivery by them
and subject to their right to reject any order in whole or in part. It is
expected that certificates for the Shares will be ready for delivery in New
York, New York on or about , 1998 against payment therefore in immediately
available funds.
1 Excludes 2% non-accountable expense allowance payable by the Company to
the Underwriters. Company has agreed to indemnify the Underwriters
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 $282,000 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.
3 The Company has granted the Underwriters an option for 45 days to
purchase up to an additional 75,000 shares of Preferred Stock at the
initial public offer price per share, less the underwriting discount,
solely to cover over-allotments. If such options are exercised in full,
the total initial public offering price underwriting discount and
proceeds to the Company will be $5,750,000, $575,000 and $5,175,000. See
"Plan of Distribution."
<PAGE>
KLEIN MAUS AND SHIRE J. P. TURNER
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: Series A 6% Preferred Stock
Maximum number of securities offered on behalf of the Company: 500,000 shares
Price per security: $10 per share
Total proceeds: If maximum sold: $5,000,000
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 Series 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? [ ] Yes [x] 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
- ----- -------------- --------------
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<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 1997 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. Moreover, 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 three (3)
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). 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
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<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")
Potential Impact of Penny Stock Rules. It is possible that subsequent to
completion of the Offering, trading the Preferred Stock may become subject to
the Penny Stock Rules adopted pursuant to the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Generally, Penny Stock is defined as a
security that is priced under $5; is not traded on a national securities
exchange or on NASDAQ (the NASD's automated quotation system for actively
traded stocks) and is issued by a company that has less then $5,000,000 in
net tangible assets and has been in business less than 3 years, by a company
that has less than $2,000,000 in net tangible assets and has been in business
for at least 3 years, or by a company that has revenues of less than
$6,000,000 for 3 years. To the extent that the trading price of the Preferred
Stock falls below $5, the Preferred Stock is not traded on NASDAQ and the
Company has net tangible assets of less than $5,000,000 (reduced to
$2,000,000 in July, 1999) trading in the Company's Preferred Stock would be
subject to the Penny Stock Rules. The Penny Stock Rules require that any
broker-dealer effecting transactions in Penny Stock verify that Purchasers
are suitable for the investment and that such Purchasers receive a detailed
statement as to the risks of investing in Penny Stock. By virtue of the fact
that potential purchasers must be pre-qualified to purchase Penny Stock and
that special disclosure rules regarding investment of Penny Stocks must be
satisfied, the potential market for the Company's Preferred Stock would be
reduced and it may be more difficult to sell the Preferred Stock on a timely
basis which may further impact the ultimate trading price. Neither the
Company nor the Underwriters can predict whether the Company will become
subject to the Penny Stock Rules. However, it should be noted that the
Company does not currently meet the Company tangible net asset test nor is
the Preferred Stock registered on the NASDAQ and it is not contemplated that
such registration will take place in the immediate future. Therefore, it is
possible that at least in the initial one year period following completion of
the offering, the Company may be subject to the Penny Stock Rules.
Moreover, if the Company's Business Plan is not successful and the Company
continues to
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<PAGE>
experience cash flow deficits beyond the time period contemplated herein,
it is possible that the Company could be subject to the Penny Stock Rules
for an indefinite period of time.
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 Underwriters and management of the Company, and should not
be considered as an indication of the actual value of the Company.
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. Purchasers of the Preferred Stock will 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 June 30, 1998, plus the net proceeds of the
500,000 shares of Preferred Stock offered hereby ($4,118,000), each share
would be entitled to approximately $4.26 per share. This would result in an
immediate loss to Purchasers of the Preferred Stock of $5.74 per share and an
immediate gain to the Bridge Lender of $4.26 per share or an aggregate of Two
Million One Hundred Thirty Thousand Dollars ($2,130,000).
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
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<PAGE>
party grape suppliers, the Company maintains a quality control program by
maintaining a presence in the growers' vineyard 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.
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 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
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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.
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."
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 forward-looking statements that are subject to risks
and uncertainties. Statements indicating that the Company "believes,"
"expects," "anticipates," or "estimates" are forward-looking as are all other
statements regarding future financial results, market conditions, product
offerings or other events that have not yet occurred. There are many
important risk factors set forth herein that could cause actual results or
events to differ materially and/or adversely from those anticipated by the
forward-looking statements contained in this Prospectus. Actual events or the
actual future results of the Company may differ materially from any
forward-looking statement due to such risks and uncertainties. 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.
Underwriting Agreement. Pursuant to the Underwriting Agreement between the
Company, Klein Maus and Shire and J. P. Turner ("Underwriters"), except for
fair market value the Company cannot issue any shares of capital stock,
options, warrants or any other securities into which shares of capital stock
are issuable or any other debt or equity
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security for a period of 3 years from the effective date of the Registration
Statement without the express written consent of the Underwriters except for
a maximum of 1,962,500 shares of common stock pursuant to the Company's
existing stock option plans nor, during such 3 year period, effect a reverse
split or reclassification of shares of capital stock. Notwithstanding the
foregoing, the Company shall not issue any shares of preferred stock or
securities convertible into Preferred Stock during such 3 year period without
the express written consent of the Underwriters. (See "Management
Relationships, Transactions and Remuneration"). 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 Underwriters
to the transaction. Moreover, the Underwriters will have the right of first
refusal, for a period of 5 years from the effective date of the Registration
Statement, to purchase for their account or to sell for the account of the
Company or any of its present or future subsidiary, any securities of the
Company or any of its present or future subsidiary, with respect to which the
Company or any of its present or future subsidiary may seek a public or
private sale. The Company will offer, or cause any of its present or future
subsidiary to offer, to the Underwriters, 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. In addition to the
foregoing, the Underwriters have the right to select one Member of the
Board of Directors for a period of 3 years following the effective date of
the Registration Statement. Alternatively the Underwriters may elect to have
a representative attend Board Meetings. However, the ability to designate one
Board Member will not allow the Underwriters 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 out of a total of 8,173,635
issued and outstanding shares of Common Stock inclusive of options to acquire
37,500 shares issued pursuant the Company's stock option plans (leaving a
balance of 1,962,500 shares of Common Stock which may be issued pursuant to
the Company's stock option plans). This represents 55.23% 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.
Risks of Leverage. As of December 31, 1997, the Company had indebtedness
outstanding in the principal amount of $3,119,400. Through June 30, 1998,
the principal amount of indebtedness has increased by $455,000. Of this
amount, $1,909,000 is represented by either demand notes or notes which
become due and payable during fiscal year 1998. It is anticipated that from
the proceeds of the Offering as well as a proposed refinancing of the
Company's Indebtedness (See "Business and Properties - Company Indebtedness")
that the Company will be able to reduce its long term debt to $2,500,000 and
a short term debt to $335,000, subject to approval by the Underwriters.
However, it is believed that as the Company expands, it may need to have the
ability to obtain additional indebtedness. It should be noted that a
significant portion of the current indebtedness provided to the Company is
guaranteed by the Company's Chairman, Joseph E. Antonini and the Company's
ability to obtain additional indebtedness may be dependent in large part on
the ability of Mr. Antonini to continue to provide his financial assistance.
Moreover, pursuant to the Underwriting Agreement, commencing for an 18 month
period from the effective date of the Registration Statement, the Company may
not without the consent of the Underwriters, make payment of principal or
interest on outstanding loans made to the Company by affiliated persons of
the Company except that $500,000 in outstanding loans to the Company
including interest thereon from affiliated persons and no more may be repaid
at any time and the Bridge Loan made by the Bridge Lender in the principal
sum of $50,000 plus accumulated interested thereon is being repaid out of the
proceeds of this offering.
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. The Preferred Stock issued to the Bridge Lender will not be
offered for a period of at least 13 months from the effective date of the
Offering. Finally, the Underwriters 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. The Company intends to apply for
listing on the NASDAQ Small Cap Market no later than the conclusion of this
Offering. However, there can be no assurance that such application will be
approved.
The ultimate sale of the additional 500,000 shares Preferred Stock issued to
the Bridge Lender may depress the price of the Preferred Stock as it is
offered into the Market, whether or not all of such shares are actually sold.
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.
The Company's Common Stock is currently listed on the "Pink Sheets" under the
trading symbol "Vine", and the trading market is not active.
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:
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 facilityv;
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.
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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 $1,400,000 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 of which approximately $81,600 has been paid. 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.
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
11
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 was conditioned upon the completion
of the winery at a level required by Napa County. This was accomplished
during the second quarter by the Company completing the following
improvements: (a) the refurbishment of an existing structure to become a
barrel storage room/tasting room facility; and (b) the construction of a new
road to the winery from the main artery leading to the property from Big
Ranch Road. The Company still needs to complete construction of a concrete
pad and storage/crush facility and the completion of a septic system which
will be paid from the proceeds of the Offering. The remaining construction
does not effect the permit. Funds for the entire 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. 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.
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.
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.
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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.
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 $700,000 to $800,000 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, Trader Joe's, a California chain of food and liquor
stores. During the first six months of 1998, 33% of sales were made to one
customer (Beverages and More!). This was a one time bulk sale and no future
sales to this customer are anticipated in 1998. Moreover, the expected gross
revenues set forth above do not reflect any further sales to this customer.
The results for the six (6) month period ended June 30, 1998, reflect
total revenues of approximately $390,550. The six (6) month period results
represent only a small portion of forecasted revenues primarily because sales
are cyclical in the wine industry with sales in the first half of the
calendar year significantly lower then during the remainder of the year.
Typically, revenues will be highest in the fourth quarter, reflecting sales
for the holiday season. Based on the level of sales in the first half of
calendar year 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 $700,000 to $800,000
for the year ended December 31, 1998.
Further impacting the Company's performance for the six (6) month
period ended June 30, 1998, was a temporary shortage of wine inventory caused
by cash flow shortages which will be addressed from the proceeds of this
13
<PAGE>
offering. However, during the balance of the 1998 calendar year, the Company
will bottle and/or purchase an additional 6,000 cases of wine of which
approximately 4,000 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 are anticipated to be made at an
average price of $240 per case (which approximates the California suggested
retail 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. It is customary that wine sales made at wineries or
through special promotions are priced at the California suggested retail
price and AWG intends to price retail sales consistent with this practice.
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 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, 6 acres will yield Merlot grapes, and
the balance of 6 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
sold a Napa Valley winery approximately 6,800 gallons of 1997 Chardonnay for
approximately $74,000. The Company will retain the balance of the Chardonnay
yield and has bottled approximately 1,900 cases of wine for sale in calendar
year 1998 and calendar year 1999.
(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.
14
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 1996. 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;
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
15
<PAGE>
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
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
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 (San Antonio) Multicarte, Dean Wilson Block Distributing
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>
16
<PAGE>
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, v 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 5 employees which consist of its chief
executive officer, Mr. Mack Jennings; and 4 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; and (c) one (1) cellar worker/maintenance person.
Grapes are harvested through independent contractors and seasonal
employees.
(g) Describe generally the principal properties the Company owns
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.
17
<PAGE>
(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.
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 OCCURRENCE RECEIPT OF PROCEEDS WHEN MILESTONE
EVENT OR MILESTONE OR METHOD OF ACHIEVEMENT SHOULD BE ACCOMPLISHED
- ------------------ ------------------------ ----------------------
<S> <C> <C>
Increase of inventory production The Company will need to initially The Company has already entered
buy wine in bulk from third parties into modest contracts with existing
in order to establish a position in grape growers. As soon as
the marketplace. In addition, the additional funds are available, the
Company will have to obtain short Company believes that it would be
term and long term contracts with able to immediately begin entering
the growers to acquire grapes which into additional inventory
can be crushed, fermented and production contracts with grape
stored and ultimately bottled. growers 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 maintenance. It is expected that the Company Replanting of the remaining acreage
will replant the entire vineyard. will be accomplished in the Fall of
Replanting will cover a three year 1998 and Fall of 1999.
period as follows: 12 acres in 1997
which has been accomplished; 16
acres in 1998 and 15 acres in
1999.
Winery construction and refurbishing The Company already has commenced Construction is substantially
program. construction of a barrel storage completed.
facility, a tasting room and a
refurbished hospitality center.
<FN>
(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
</TABLE>
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
18
<PAGE>
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 Aestate" 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.
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 November 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 $550,000.
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 $60,000 from Mack Jennings, the
President and Chief Executive Officer of the Company and $35,000 from Robert
Pepi, Sr., the father of Robert Pepi, Jr., the Company's winemaker. Each of
the Notes provides for interest payments of 9% per annum payable monthly and
permits the holder to call the Notes at any time. There are two (2) Notes in
favor of Mr. Jennings which were executed on August 18, 1997 ($35,000) and
August 1, 1998 ($25,000) with the Note in favor of Robert Pepi, Sr. executed
on August 19, 1997. These notes will be repaid from the proceeds of this
Offering and from an anticipated refinancing described below.
Term Notes. The Company has borrowed the sum of $95,000 from Mario Andretti,
the Vice Chairman of the Company and $60,000 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. One (1) note was executed by the Company on August 25, 1997,
two (2) notes on September 23, 1997 and two (2) notes on April 23, 1998.
These notes will be repaid from the proceeds of the Offering and from the
anticipated refinancing described below. In addition, the Company has
borrowed $300,000 from Joseph E. Antonini, Chairman of the Company through a
personal line of credit he has with Comerica Bank, Detroit, Michigan. This
loan bears interest at the prime rate of Comerica Bank (which is the rate
19
charged Mr. Antonini under his line of credit) and matures in March, 1999. It
is anticipated that this note will be repaid in full from the refinancing
described below.
Proposed Refinancing With Comerica Bank. The Company has obtained a loan
commitment from Comerica Bank in Detroit, Michigan to provide term loans in
the aggregate amount of $2,500,000 to the Company to permit the Company to
refinance a significant portion of its indebtedness. The term loans will be
divided into two (2) separate obligations. The first in the principal amount
of $1,650,000 will have a term of seven (7) years with the principal repaid
based on a fifteen (15) year amortization. Interest will accrue either at the
prime rate of Comerica or at a fixed rate agreed to by Comerica and the
Company. The second term loan in the amount of $850,000 will have a seven (7)
year term with repayment based on a seven (7) year amortization with a fixed
rate of interest to be determined at the time of closing. However, it is
anticipated that the fixed rate will be below Comerica's prime rate of
interest. Each of the term loans will be guaranteed by Joseph E. Antonini and
Mario Andretti. Each individual's guaranty is limited to fifty percent (50%)
to the loan balance. The loans will be secured by a first secured interest in
all of the assets of the Company. In addition, the commitment provides for a
line of credit in the amount of $200,000 with a one (1) year term. Interest
will accrue on the amount outstanding under the line of credit at one quarter
point above Comerica's prime rate of interest. This loan will also be secured
by the assets of the Company and will be guaranteed by Messrs. Antonini and
Andretti. The loan commitment is contingent upon, among other things,
completion of the Offering. Assuming a closing on the Comerica loan after
completion of the Offering, the Company will have outstanding long term debt
to Comerica Bank in the amount of $2,500,000 and the remaining principal
balance outstanding to Bank of Bloomfield Hills in the amount of $335,000.
All remaining loan indebtedness of the Company will have been repaid. Since
the refinancing with Comerica Bank is a proposed commitment, and not an
obligation on the part of Comerica Bank, there can be no assurance that the
foregoing refinancing will actually be consummated, whether or not the
Offering is completed.
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) March 2, 1999; (b) closing
date of this Offering or (c) the completion of any other debt or equity
offering in the principal amount of $500,000 or more. The loan is guaranteed
by AWG, Inc., the Company's wholly owned subsidiary. In addition to the
interest payment, the Bridge Lender has received 500,000 shares of Preferred
Stock, which is being registered as part of this Offering. The bridge loan
financing was placed by Klein, Maus and Shire, Inc. who received a commission
of 10% of the proceeds of the financing together with a 3% non-accountable
expense allowance.
20
<PAGE>
OFFERING PRICE FACTORS
5. What were net, after tax earnings for the last fiscal year?
Total loss of ($ 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?
Net deficit of $361,830 or ($0.72) 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 Underwriters 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 investorsCtwo of which are directors of the
CompanyCentered 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 upon conclusion of the Offering assuming
none of the over-allotment is exercised, and approximately 53% if
exercised in full.
(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 completion of the Offering, the post offering value
implicitly attributed to the entire Company would be
$10,000,000.
It should be noted in this regard that the Company's June 30, 1998 net
tangible book value is a deficit of $361,830. Assuming completion of the
Offering, with net proceeds of $4,118,000, the net tangible book value per
share computed solely with respect to the Preferred Stock would be $3.76 per
share. This will result in immediate dilution to purchasers of the Preferred
Stock offered hereby of $6.24 (or 62.4%). The holder of the Preferred Stock
issued in connection with the bridge loan financing would have an immediate
gain of $1,880,000 upon completion of Offering. The holder of the Preferred
Stock issued in connection with the bridge and loan financing did not pay any
separate consideration for such shares.
The expected sale of the additional 500,000 shares Preferred Stock may
depress the price of the Preferred Stock as it is offered into the Market,
whether or not all of such shares are actually sold.
21
<PAGE>
USE OF PROCEEDS
9. (a) The following table sets forth the use of the proceeds from this
Offering:
<TABLE>
<S> <C>
Total Proceeds $5,000,000
Less: Offering Expenses 500,000
Commissions & Finders Fees
Legal and Accounting 257,000
Copying and Advertising 25,000
Other (Specify):
Underwriting Expenses 100,000
Net Proceeds from Offering $4,118,000
Use of Net Proceeds
Repayment of Loans3 $ 904,000
----------
Accounts Payable 500,000
----------
Inventory Production4 1,400,000
----------
Equipment5 400,000
----------
Vineyard Replanting Program 400,000
----------
Reserve for Operating Deficits6 514,000
----------
Total Use of Net Proceeds $4,118,000
----------
<FN>
(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
</TABLE>
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.
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
- ---------
3 This reflects repayment of the bridge loan financing in the principal
amount of $50,000 together with an aggregate of $854,000 in repayment of
loans to and 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 Based upon operations for the first six (6) months of 1998, the reserve
would be sufficient for at least 12 months. Proceeds not utilized to fund
operating deficits would be held in reserve for acquisition of additional
inventory.
22
<PAGE>
(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 $665,000 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 break even
cash flow by the end of 1999 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")
23
<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
12/31/97 6/30/98 As Adjusted
-------- ------- -----------
<S> <C> <C> <C>
Debt:
Short term debt (average
interest rate 9.1%) $ 1,454,000 $ 1,909,000 $ 1,229,000
----------- ----------- -----------
Long-term debt (average
interest rate 11%) 1,665,400 $ 1,665,400 1,665,400
----------- ----------- -----------
Total debt 3,119,400 $ 3,574,400 2,894,400
----------- ----------- -----------
Preferred stock-par or stated
value
Series A Preferred Stock -0- -0- 8,618,0000(A)
(1,000,000 shares outstanding, ----------- ----------- -----------
as adjusted)
Common stock - Par or stated value 7,157 7,973 7,973
----------- ----------- -----------
Additional paid in capital 2,112,473 2,266,657 2,266,657
----------- ----------- -----------
Additional capital-stock awards 155,000 -0- -0-
----------- ----------- -----------
Additional Capital-Underwriters Warrants
($.0001 per warrant) -0- -0- 5
----------- ----------- -----------
Receivable from stockholder (75,000) (75,000) (75,000)
----------- ----------- -----------
Retained earnings
(accumulated deficit) (1,559,348) (2,054,780) (6,554,780)
----------- ----------- -----------
Total stockholders equity 640,282 144,850 4,262,855
----------- ----------- -----------
Total Capitalization $ 3,759,682 $ 4,547,085 $ 7,157,255
=========== =========== ===========
<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
-------------------- ---------------- -----
-------------------- ---------------- -----
<FN>
(A) Amount represents estimated net proceeds from this offering of
$418,000,000 and includes an estimated charge of $4,500,000 (based on
a 10% discount from the offering price) related to the 500,000 shares
of Preferred Stock which are being registered on behalf of a single
shareholder.
</TABLE>
Number of common shares authorized: 50,000,000 shares. Par or stated value
per share, if any: $.001
24
<PAGE>
Number of shares reserved to meet conversion requirements or for the issuance
upon exercise of options, warrants or rights: 2,000,000 shares.
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: J.P. Turner & Co., L.L.C.
-------------------------
Address: 110 Wall Street Address:3340 Peachtree Road, Suite 450
New York, NY 10005 -------------------------------
Atlanta, GA 30326
-----------------
Telephone No (212) 785-4545 Telephone No ( )
---------------
The sole officers and directors of Klein Maus and Shire are: Asim Kahli
and Ali Mohammed Kahn.
The officers and directors of J.P. Turner are: .
25
<PAGE>
22. Klein Maus and Shire, Inc. and J.P. Turner (the "Underwriters") will
acquire the shares of Preferred Stock on a firm commitment basis for
which it will receive a sales commission equal to 10% of the proceeds
of the Offering. In addition, the Underwriters are entitled to a
non-accountable expense allowance equal to 2% of the proceeds of the
Offering ($100,000) of which $25,000 has been paid by the Company. In
addition, the Underwriters will receive warrants to purchase up to
10% of the number of shares of Preferred Stock sold by the
Underwriters 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 $16.50 per share. The Underwriters have 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 Underwriters have 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 Underwriters have 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 five (5) years after the effective date of the
registration statement, the Underwriters will have a right of first
refusal to participate in any future securities Offering conducted by
the Company. In addition, except for fair market value the Company
may not offer any equity stock other than the 2 million shares
authorized under the current Stock Option Plans, without the prior
written consent of the Underwriters. Finally, current officers and
directors of the Company including holders of shares of Common Stock
issued pursuant to the Company's Stock Option Plans cannot sell their
Common Stock for a period of 24 months after the effective date of
this registration statement without the prior written consent of the
Underwriters.
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. Mr. Riseam's
shares are subject to a Lock-Up Agreement and no shares will be sold
on behalf of Mr. Riseam by the Underwriters for a period of at least
13 months after the effective date of this Offering.
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: N/A
(b) Date which funds will be returned by escrow agent if minimum
proceeds are not raised. N/A
27. Explain the nature of any resale restrictions on presently
outstanding shares, and when those restrictions will terminate, if
this can be determined: Other than with respect to Mr. Riseam, as
discussed above, there are no restrictions on any outstanding shares
of Preferred Stock. However, shares of Common Stock held by officers
and directors including holders of shares of Common Stock issued
pursuant to the Company's stock option plans are restricted by
agreement with the Underwriters such that no officer, director or
other shareholders receiving shares issued pursuant to the stock
option plans may sell any stock for a period of twenty-four months
without the written consent of the Underwriters. 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
Underwriters.
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.
26
<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. 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.
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.
27
<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
28
<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.
29
<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 23.79 1,944,211 23.79
53 Victory Lane
Nazareth, PA 18064
(610) 759-5118
Race Car Driver;
Investor
Joseph Antonini $ .19 - .33 1,196,158 14.63 1,196,158 14.63
1800 West Maple Road.
Troy, MI 48084
(248) 614-3880
Consultant, Investor
Bruce Williams $ .19 - .33 884,211 10.82 884,211 10.82
141 West Jackson
Suite 4220-B
Chicago, IL 60604
Commodities trader;
investor
John P. Caponigro $ .19 - .27 284,211 3.48 284,211 3.48
26800 Woodward Avenue
Suite 239
Bloomfield
Hills, MI 48304
Attorney; Consultant
</TABLE>
30
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Mack Jennings $ .58 170,000 2.51 170,000 2.51
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 (55.23% 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. This
oral agreement extends through January 2002. However, this
oral agreement can be terminated by either party. 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
31
<PAGE>
product without his prior consent or the failure to maintain
product liability insurance. In addition, subject 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.
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"). The Company's Certificate of
Incorporation and the Company's Bylaws 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.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE
ACT MAY BE PERMITTED TO DIRECTORS, OFFICERS AND CONTROLLING
PERSONS OF THE COMPANY, PURSUANT TO THE FOREGOING PROVISIONS,
OR OTHERWISE, THE COMPANY 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.
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
<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>
32
<PAGE>
<TABLE>
<S> <C> <C>
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
======= ========
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. This Agreement may be terminated by
either party.
41. (a) Number of shares subject to issuance under presently
outstanding stock purchase agreements, stock options, warrants
or rights: 37,500 shares (.53% of total shares to be
outstanding after the completion
- ---------
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.
33
<PAGE>
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 37,500
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
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.
N/A
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 Underwriters 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.
34
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 three (3) 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.
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
35
<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 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, such prohibitions may
be waived 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 of time. Moreover, since the individuals who
were responsible for any securities violations are no longer employed by the
Company, there may be strong, credible arguments that no financial penalties
should be imposed on the 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.
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 these causes.
The Company has experienced losses from operations for several
reasons. First and foremost, the Company has not generated sufficient
sales of its wines. While in fiscal year 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
$200,000 in operating profits from its newly 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 of
achieving higher wine sales. The Company believes it will be able to
secure sufficient wine grapes and bulk juice inventory 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
demonstrated 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. 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.
The Company believes 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 1999.
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 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.
36
<PAGE>
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 years 1998 and 1999, 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.
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.
Moreover, since the Company is not dependent on single vendor, any
vendor who is not Year 2000 compliant could be replaced.
In March 1998, the Company entered into subscription agreements to
sell five Units, each consisting of a $10,000 promissory note and
100,000 shares of the Company's Series A Preferred Stock for
consideration of
37
<PAGE>
$10,000 per Unit. These shares were sold at a substantial discount
from the proposed offering price of $10 per share. In November 1998,
the Company received NASD approval to issue these shares of preferred
stock subject to a "lock-up" provision which restricts the Unit
holder's rights to sell these shares until 13-months after the
effective date of the proposed offering. Upon completion of the
Company's proposed offering, a non-cash charge to earnings will be
recognized for the value of these restricted shares. The registration
of these shares in addition to the 500,000 shares being offered
pursuant to the Company's proposed public offering will result in a
substantial decrease in the liquidation value available to existing
shareholders and potential shareholders.
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 24%. 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.
38
<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 June 30,
1998, Statements of Operations for the
Three and Six Months Ended June 30, 1998
and 1997, and Cash Flows for the Six Months
Ended June 30, 1998 (Unaudited)
F-17
<PAGE>
AWG, LTD.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1998 (UNAUDITED)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
CURRENT ASSETS:
<S> <C>
Cash $ 39,278
Accounts receivable 123,298
Inventories 725,486
Receivables from stockholders 93,380
Other current assets 24,340
-----------
Total current assets 1,005,782
PROPERTY, PLANT AND EQUIPMENT - Net 3,052,623
OTHER ASSETS - Net 506,680
-----------
TOTAL ASSETS $ 4,565,085
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 335,674
Accrued interest 65,373
Other accrued liabilities 334,082
Deferred hospitality revenue 26,306
Accrued litigation settlement 84,400
Current portion of long-term debt 1,584,000
Loans payable to related parties 325,000
-----------
Total current liabilities 2,754,835
LONG-TERM DEBT 1,665,400
-----------
Total liabilities 4,420,235
-----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value: 50,000,000 shares authorized;
7,973,128 shares issued and outstanding 7,973
Additional capital 2,266,657
Due from stockholder (75,000)
Accumulated deficit (2,054,780)
-----------
Stockholders' equity - net 144,850
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,565,085
===========
<FN>
See notes to consolidated financial statements.
</TABLE>
F-18
<PAGE>
AWG, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUES:
Bottled wine sales $ 213,354 $ 223,426 $ 280,056 $ 229,417
Bulk wine sales 73,744 -- 73,744 --
Hospitality sales 36,750 -- 36,750 --
--------- --------- --------- ---------
Total 323,848 223,426 390,550 229,417
COST OF SALES 283,772 159,587 325,441 185,379
--------- --------- --------- ---------
GROSS PROFIT 40,076 63,839 65,109 44,038
--------- --------- --------- ---------
OPERATING EXPENSES:
Administration 81,228 47,438 187,506 63,009
Marketing 72,996 67,639 147,424 103,390
--------- --------- --------- ---------
Total operating expenses 154,224 115,077 334,930 166,399
--------- --------- --------- ---------
OPERATING LOSS (114,148) (51,238) (269,821) (122,361)
INTEREST EXPENSE 78,145 53,730 139,174 93,321
OTHER EXPENSES:
Litigation settlement 84,400 84,400
Other 1,237 378 1,237 8,350
--------- --------- --------- ---------
LOSS BEFORE INCOME TAXES (277,930) (105,346) (494,632) (225,632)
STATE INCOME TAXES -- -- 800 800
--------- --------- --------- ---------
NET LOSS $(277,930) $(105,346) $(495,432) $(224,832)
========= ========= ========= =========
NET LOSS PER SHARE
(BASIC AND DILUTED) $ (.04) $ (.02) $ (.07) $ (.04)
========= ========= ========= =========
<FN>
See notes to consolidated financial statements.
</TABLE>
F-19
<PAGE>
AWG, LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTH ENDED JUNE 30, 1998 (UNAUDITED)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional
Capital - Due
Common Stock Additional Employee from Accumulated Stockholders'
------------------ Capital Stock Awards Stockholder Deficit Equity
Shares Amount
<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
SHARES ISSUED
815,791 816 154,184 (155,000) -- -- --
NET (LOSS)
-- -- -- -- -- (495,432) (495,432)
---------- ---------- ---------- ---------- ---------- ----------- ----------
BALANCE,
JUNE 30, 1998 7,973,128 $ 7,973 $2,266,657 $ -- $ (75,000) $(2,054,780) $ 144,850
========== ========== ========== ========== ========== =========== ==========
<FN>
See notes to consolidated financial statements.
</TABLE>
F-20
<PAGE>
AWG, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(495,432) $(224,832)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 42,568 38,916
Changes in assets and liabilities:
Accounts receivable (49,261) (13,234)
Inventories 3,043 (21,636)
Other current assets 43,166 10,660
Accounts payable - trade 174,887 57,317
Accrued interest 40,343 4,177
Deferred hospitality revenue 26,306 --
Accrued litigation settlement 84,400 --
Other accrued liabilities 175,454 (6,769)
-------- --------
Net cash provided by (used in) operating activities 45,474 (155,401)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (320,946) (104,312)
Other assets (158,577) (6,423)
-------- --------
Net cash used in investing activities (479,523) (110,735)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans to related parties 270,000
Payment on loans to related parties (250,000) --
Advances to stockholders -- (18,380)
Proceeds from long-term debt and bank line of credit 435,000 268,400
-------- --------
Net cash provided by financing activities 455,000 250,020
-------- --------
INCREASE (DECREASE) IN CASH 20,951 (16,116)
CASH AT BEGINNING OF YEAR 18,327 18,776
-------- --------
CASH AT END OF YEAR $ 39,278 $ 2,660
======== ========
OTHER CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $133,729 $ 89,144
======== ========
Income taxes $ 800 $ 800
======== ========
<FN>
See notes to consolidated financial statements.
</TABLE>
F-21
<PAGE>
AWG, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 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 six
months ended June 30, 1998, sales to one customer totaled approximately
33% 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 capital needed to enable the Company to
remain in business by raising equity capital in a public offering. The
Company has entered into a co-underwriting agreement with two
underwriters to conduct a public offering of the Company's Series A 6%
Preferred Stock ("Preferred Stock"). The Company intends to offer
500,000 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-22
<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.
In March 1998, the Company entered into subscription agreements to sell
an additional 500,000 shares of the Company's Series A Preferred Stock
subject to approval by the National Association of Securities Dealers,
Inc. ("NASD") in connection with the Company's proposed offering. The
registration of these shares in addition to the 500,000 shares being
offered pursuant to the Company's proposed public offering will result
in substantial decrease in the liquidation value available to existing
shareholders and potential shareholders (see Note 12).
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 and six months ended
June 30, 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 and
six months ended June 30, 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 six months ended June 30,
1998 totaled $34,898.
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 at June 30,
1998 also include costs of $183,130 incurred in connection with the
Company's planned preferred stock offering. Such amounts will be charged
to stockholders' equity at the completion of offering.
Asset Impairment - Management periodically reviews long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying value of an asset might not be recoverable.
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. Revenue from the
Company's hospitality center is recognized as the events occur and the
related costs are incurred. Deposits received on future events are
recorded as Deferred Hospitality Revenue.
F-23
<PAGE>
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 7,565,233 and 5,221,996 for the six
months ended June 30, 1998 and 1997, respectively, and $7,973,128 and
$5,221,996 for the three months ended June 30, 1998 and 1997,
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 June 30, 1998 consist of the following:
<TABLE>
<S> <C>
Bulk wine $ 387,382
Bottled wine 247,963
Deferred farming costs 90,141
----------
Total $ 725,486
==========
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at June 30, 1998 consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Land $1,445,880
Vineyards 137,140
Buildings and improvements 492,165
Construction in progress 931,783
Machinery and equipment $ 112,607
----------
Total 3,119,575
Less accumulated depreciation (66,952)
----------
Property and equipment, net $3,052,623
==========
</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
F-24
<PAGE>
with the remaining acreage replanted in 1999. No replanting occurred
during the six months ended June 30, 1998.
5. OTHER ASSETS
Other assets at June 30, 1998 consist of the following:
<TABLE>
<S> <C>
Licensing rights $ 337,320
Organization costs 30,301
Printing dies 21,631
Deferred stock issuance costs 183,130
Other 34,338
---------
Total 606,720
Less accumulated amortization (100,040)
---------
Other assets - net $ 506,680
=========
</TABLE>
6. LONG-TERM DEBT
Long-term debt at June 30, 1998 consists of the following:
<TABLE>
<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 November 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>
7. LOANS PAYABLE TO RELATED PARTIES
Loans payable to related parties of $325,000 at June 30, 1998 consists
of $225,000 in interest only (at 9%) notes payable to stockholders,
officers and affiliates of the Company. The notes are due on demand. In
addition, the Company obtained an additional $100,000 from the Company's
Chairman of
F-25
<PAGE>
the Board through a line of credit he has with Comercia Private Banking.
The line matures in March 1999 and bears interest at the Bank's Prime.
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 was 10 years, and could 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 for the six months ended June 30,
1998, and 1997 totaled $13,997 and $11,416, respectively, and $27,281
was payable at June 30, 1998.
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 six month periods ended June 30, 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
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 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
F-27
<PAGE>
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 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.
F-28
<PAGE>
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.
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. During the three months ended June 30, 1998,
5,000 of these shares were forfeited.
10. INCOME TAXES
Deferred tax assets and liabilities at June 30, 1998 are as follows:
<TABLE>
Assets:
<S> <C>
Operating loss carryforwards $ 788,145
Inventory costs 33,984
Intangibles 18,841
Other 1,154
Valuation allowance (760,680)
---------
Total 81,363
---------
Liabilities:
Accelerated depreciation (23,968)
Other (57,395)
---------
Total 81,363
---------
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
June 30, 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 six months ended June 30, 1998
and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Current - state $800 $800
Deferred -- --
---- ----
Total $800 $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 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>
The net operating loss carryforwards do not include the losses generated
through June 30, 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 six months ended June 30, 1998, certain prior claims against
the Company were dismissed, or settled. Amounts provided in the prior
two 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 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 disputed the claim alleging that a substantial
portion of the proceeds allegedly paid to the Company were never
received.
Subsequent to June 30, 1998, the claim was settled for 200,000 shares of
common stock. An accrued liability of $84,400 was recorded as of June
30, 1998 based on the trading price of the stock on the date of
settlement.
12. CONTINGENCIES
In March 1998, the Company entered into subscription agreements to sell
five Units, each consisting of a $10,000 promissory note and 10,000
shares of the Company's Series A Preferred Stock for consideration of
$10,000 per Unit. The Company had a period of 30 days to redeem the
units at cost should the Company's proposed offering fail to occur prior
to August 25, 1998. This right was not exercised by the Company.
Issuance of these shares of Preferred Stock is also contingent upon the
Company obtaining approval from the NASD in connection with the
Company's proposed public offering (see Note 2). These shares were sold
at a substantial discount from the proposed offering price of $10 per
share. In October 1998, the Company received preliminary NASD approval
to issue these shares of preferred stock subject to a "lock-up"
provision which restricts the Unit holder's rights to sell these shares
until 13 months after the effective date of the proposed offering. Upon
completion of the
F-30
<PAGE>
Company's proposed offering, a non-cash charge to earnings will be
recognized for the value of these restricted shares. The registration of
these shares in addition to the 500,000 shares being offered pursuant to
the Company's proposed public offering will result in a substantial
decrease in the liquidation value available to existing shareholders and
potential shareholders.
******
F-31
<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 shall
3
<PAGE>
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.....................................................10
OFFERING PRICE FACTORS.................................................21
USE OF PROCEEDS........................................................22
CAPITALIZATION........................................................24
DESCRIPTION OF SECURITIES.............................................25
PLAN OF DISTRIBUTION..................................................25
DIVIDENDS, DISTRIBUTIONS AND REDEMPTIONS..............................27
OFFICERS AND KEY PERSONNEL OF THE COMPANY.............................27
DIRECTORS OF THE COMPANY..............................................28
PRINCIPAL STOCKHOLDERS................................................30
MANAGEMENT RELATIONSHIPS, TRANSACTIONS AND REMUNERATION...............31
LITIGATION............................................................34
LEGAL MATTERS.........................................................34
FEDERAL TAX ASPECTS...................................................34
MISCELLANEOUS FACTORS.................................................35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CERTAIN RELEVANT FACTORS..............................................36
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 ................................................. 25,000
Accounting fees and expenses ............................................... 50,000
Legal fees and expenses .................................................... 150,000
Printing and engraving expenses ............................................ 20,000
Registrar and Transfer Agent's fees ........................................ 2,000
Miscellaneous fees and expenses ............................................ 5,000
--------
Total ...................................................................... $256,450
========
</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. Mr. Riseam is an accredited investor as
that term is defined in Section 2(15) 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. Mr. Jennings received one hundred thousand
(100,000) shares of Common Stock which were valued at $.58 per
share. These were granted to Mr. Jennings as an inducement to become
the chief executive officer of the Company. Mr. Caponigro received
one hundred thousand (100,000) shares of Common Stock valued at $.27
per share in exchange for legal consulting services performed on
behalf of the Company. Finally, Mr. Pepi was granted twenty-five
thousand (25,000) shares valued at $.27 per share as partial
consideration for services performed as the Company's winemaker.
<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 and
Warrant Agreement (New)
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
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
6.3.1 Amendment to 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
6.5.1 Second Promissory Note in favor of Mack Jennings
<PAGE>
6.6* Promissory Note in favor of Robert Pepi
6.7* Two (2) Promissory Notes in favor of Mario
Andretti
6.7.1 Third Promissory Note in favor of Mario Andretti
6.8* Promissory Note in favor of Sports Management
Network, Inc.
6.8.1 Second Promissory Note in favor of Sports
Management Network, Inc.
6.10* Promissory Note and Registration Rights Agreement
in favor of Colin Frank Riseam
6.10.1 Lock-Up Agreement between Colin Frank Riseam, AWG,
Ltd. and Klein, Maus and Shire, Inc.
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
(ANon-Qualified Plan")
6.16 Promissory Note in favor of Joseph Antonini
6.17 Loan Commitment from Comerica 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
<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 November 4, 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 November 4, 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 November 4, 1998
Bruce Williams Director
John Caponigro
John Caponigro Secretary, General Counsel
and Director November 4, 1998
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
1. Form of Underwriters Agreement and Warrant Agreement
6.3.1 Amendment to Line of Credit Agreement by and between the
Company and Vintage Bank
6.5.1 Second Promissory Note in favor of Mack Jennings
6.7.1 Third Promissory Note in favor of Mario Andretti
6.8.1 Second Promissory Note in favor of Sports Management
Network, Inc.
6.10.1 Lock-Up Agreement between Colin Frank Riseam, AWG, Ltd.
and Klein, Maus and Shire, Inc.
6.16 Promissory Note in favor of Joseph Antonini
6.17 Loan Commitment from Comerica Bank
10.1 Consent of Deloitte & Touche
1. Form of Underwriters Agreement and Warrant Agreement
<PAGE>
Form of Underwriting Agreement
--------------------------------------------
1,000,000 Shares of Series A Preferred Stock
--------------------------------------------
AWG, LTD.
UNDERWRITING AGREEMENT
New York, New York
, 1998
----------- ---
- -----------------
[address]
Klein Maus and Shire, Inc.
110 Wall Street
New York, New York 10005
As Representatives of the
Several Underwriters listed on Schedule A hereto
Ladies and Gentlemen:
AWG, Ltd., a Nevada corporation (the "Company"), confirms its
agreement (the "Agreement") with J. P. Turner & Co., L.L.C. ("Turner") and
Klein Maus and Shire, Inc., (collectively, the "Underwriters," which term
shall also include any underwriter substituted as hereinafter provided in
Section 11), for whom Turner and KMS are acting as representatives (in such
capacity, Turner and KMS shall hereinafter be collectively referred to as
"you" or the "Representatives"), with respect to the sale (the "Offering") by
the Company and the purchase by the Underwriters, acting severally and not
jointly, of the respective numbers of securities set forth
<PAGE>
in Schedule A consisting of 500,000 shares (the "Shares") of the Company's
Series A 6% Preferred Stock, $.001 par value per share (the "Preferred Stock"
or the "Securities"). Such 500,000 shares of Preferred Stock are hereinafter
also referred to as the "Firm Securities." Upon your request, as provided in
Section 2(b) of this Agreement, the Company shall also issue and sell to you
up to an additional 75,000 shares of Preferred Stock for the purpose of
covering over-allotments, if any, in the sale of the Firm Securities. Such
additional 75,000 shares of Preferred Stock are hereinafter referred to as
the "Option Securities." The Firm Securities and the Option Securities are
hereinafter collectively referred to as the "Securities." The Company also
proposes to issue and sell to the Underwriters warrants (the
"Representatives' Warrants") pursuant to the Representatives' Warrant
Agreement (as defined in Section (xxxii) hereof) to purchase an aggregate of
50,000 shares of Preferred Stock (and additionally up to 11,250 shares of
Preferred Stock if the over-allotment is exercised). The 50,000 shares of
Preferred Stock (or up to 61,250 shares if the over-allotment is exercised)
issuable upon exercise of the Representatives' Warrants are hereinafter
referred to as the "Representatives' Securities" or the "Warrant Shares". The
Securities, the Representatives' Warrants and the Representatives' Securities
are more fully described in the Registration Statement and the Prospectus
referred to below. Additionally, 500,000 shares of Preferred Stock are being
registered on behalf of a single shareholder.
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,
each of the Underwriters' as of the date hereof, and as of the Closing Date
(hereinafter defined) and the Option Closing Date (hereinafter defined), if
any, as follows:
-2-
<PAGE>
(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 Preferred Stock, the Representatives' Warrants and the
Representatives' 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 Underwriters and will not file any other
amendment thereto to which the Underwriters 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 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
-3-
<PAGE>
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 Prospectus, the Registration Statement or Prospectus at the time
of filing thereof contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein and necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading, except that this representation and warranty does not
apply to statements made in reliance upon and in conformity with written
information furnished to the Company with respect to the Underwriters by or
on behalf of the Underwriters expressly for use in such Preliminary
Prospectus, Registration Statement or Prospectus or any amendment or
supplement thereto.
(iii) When the Registration Statement becomes effective and at
all times subsequent thereto up to the Closing Date (hereinafter defined) and
each Option Closing Date (hereinafter defined), if any, and during such
longer period as the Prospectus may be required to be delivered in connection
with sales by the Underwriters 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
-4-
<PAGE>
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 any
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 each 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 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,
-5-
<PAGE>
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, warrants, options or other securities, except for this
Agreement and as described in the Prospectus. The Securities, the
Representatives' Warrants and the Representatives' Securities (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
-6-
<PAGE>
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, 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 Company hereunder, the Underwriters or the Representatives, as the case
may be, 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 consolidated financial statements of the Company
together with the related notes and schedules thereto, included in the
Registration Statement, each Preliminary Prospectus and the Prospectus fairly
present the financial position, income, changes in cash flow, changes in
stockholders' equity and the results of operations of the Company and the
Subsidiary at the respective dates and for the respective periods to which
they apply and the pro forma financial
-7-
<PAGE>
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) have each 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 Underwriters in connection with (A) the
issuance by the Company of the Securities,
-8-
<PAGE>
(B) the purchase by the Underwriters of the Securities and the purchase by
the Representatives of the Representatives' Warrants from the Company, (C)
the consummation by the Company of any of its obligations under this
Agreement, or (D) resales of the Securities in connection with the
distribution contemplated hereby.
(ix) The Company and its Subsidiary maintain 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) do 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) have 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
-9-
<PAGE>
Subsidiary or this Agreement, the Representatives' Warrant Agreement, (as
defined in Section 1(xxxii) below) or of any action taken or to be taken by
the Company or its Subsidiary pursuant to or in connection with this
Agreement or the Representatives' Warrant Agreement, (B) is required to be
disclosed in the Registration Statement which is not so disclosed (and such
proceedings as are summarized in the Registration Statement are accurately
summarized in all material respects), or (C) if adversely determined, might
materially and adversely affect the condition, financial or otherwise, or the
business affairs or business prospects, earnings, liabilities, prospects,
stockholders' equity, value, properties, business or assets of the Company
and its Subsidiary.
(xi) The Company has full legal right, power and authority to
authorize, issue, deliver and sell the IPO Securities, enter into this
Agreement and the Representatives' Warrant Agreement and to consummate the
transactions provided for herein and therein; and each of this Agreement and
the Representatives' Warrant Agreement have been duly and properly
authorized, executed and delivered by the Company. This Agreement and the
Representatives' 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 Representatives' 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
-10-
<PAGE>
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 are a party or by which
they are or may be bound or by which their properties or assets (tangible or
intangible) are or may be subject, or any indebtedness, or (C) any statute,
judgment, decree, order, rule or regulation applicable to the Company or its
Subsidiary by any arbitrator, court, regulatory body or administrative agency
or other governmental agency or body (including, without limitation, those
having jurisdiction over environmental or similar matters), domestic or
foreign, having jurisdiction over the Company or its Subsidiary or any of
their activities or properties, in each case except as described in the
Prospectuses and except for conflicts, breaches, violations, defaults,
creations or impositions which do not and would not have a material adverse
effect on the condition, financial or otherwise, or the earnings, business
affairs, position, shareholder's equity, value, operation, properties,
business or results of operations of the Company and its Subsidiary.
(xii) No consent, approval, authorization or order of, and no
filing with, any court, regulatory body, government agency or other body,
domestic or foreign which has not theretofore been obtained, is required for
the issuance of the IPO Securities pursuant to the Prospectus and the
Registration Statement, the issuance of the Representatives' Warrants, the
execution, delivery or performance of this Agreement and the Representatives'
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
-11-
<PAGE>
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 Underwriters' purchase and distribution of the
Securities and the Representatives' purchase of the Representatives' 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 are
a party or by which they may be bound or to which their 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 agreements of the Company and its Subsidiary, enforceable
against the Company and its Subsidiary, in accordance with their respective
terms. The descriptions in the Registration Statement of agreements,
contracts and other documents and statutes and regulations are accurate and
fairly present the information required to be shown with respect thereto by
Form 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,
neither the Company nor its Subsidiary has (A) issued any securities or
incurred any liability or obligation, direct or contingent, for borrowed
money, (B) entered into any
-12-
<PAGE>
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 Prospectuses 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 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,
-13-
<PAGE>
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 the 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 "multiemployer plan" as such terms are
defined in Sections 3(2), 3(1) and 3(37), respectively, of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") ("ERISA Plans").
The Company and/or its Subsidiary does not maintain or contribute, now or at
any time previously, to a defined benefit plan, as defined in Section 3(35)
of ERISA. No ERISA Plan (or any trust created thereunder) has engaged in a
"prohibited transaction" within the meaning of Section 406 of ERISA or
Section 4975 of the Code, which could subject the Company or the Subsidiary
to any tax penalty on prohibited transactions and which has not adequately
been corrected. Each ERISA Plan is in compliance with all material reporting,
disclosure and other requirements of the Code and ERISA as they relate to any
-14-
<PAGE>
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
ever completely or partially withdrawn from a "multiemployer plan."
(xviii) The Company and the Subsidiary has not taken, and will
not take, directly or indirectly, and the Company and the Subsidiary will use
their best efforts to ensure that, any of their employees, directors, nor any
of its 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 or are in any conflict with the right of any other person or entity.
The Company and its Subsidiary (i) own or have the license or other right to
use, free and clear of all liens, charges, claims, encumbrances, pledges,
security interests, defects or other restrictions or equities of any kind
whatsoever, all patents, trademarks, service marks, trade names and
copyrights, technology and licenses and rights with respect to the foregoing,
used in the conduct of their business as now conducted or proposed to be
conducted without infringing upon or otherwise acting adversely to the right
or claimed right of any person, corporation or other entity
15
<PAGE>
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 or 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 them
free and clear of all liens, charges, claims, encumbrances, pledges, security
interest, 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
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shares or preferred shares and/or any other securities of the Company,
including common shares issued pursuant to the Company's two Stock Option
Plans, has agreed or shall agree prior to issuance as the case may be, not
to, directly or indirectly, offer to 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
Representatives except only with respect to 3,495,000 shares of common stock
of the Company 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 Representatives shall only
be sold or otherwise disposed of through the Representatives. 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
commencing from the effective date of the Registration Statement 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
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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 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 its officers,
directors, stockholders, partners, employees or affiliates that may affect
the Underwriters' 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 KMS and the Company is aware that the Representatives
and each of the Underwriters shall compensate any of their respective
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 SmallCap 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
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the Subsidiary in connection with any actual or proposed transaction) which
(A) might subject the Company or the Subsidiary, or any other such person to
any damage or penalty in any civil, criminal or governmental litigation or
proceeding (domestic or foreign), (B) if not given in the past, might have
had a materially adverse effect on the assets, business or operations of the
Company or the Subsidiary, or (C) if not continued in the future, might
adversely affect the assets, business, operations or prospects of the Company
or the Subsidiary. The Company's and the Subsidiary's internal accounting
controls are sufficient to cause the Company to comply with the Foreign
Corrupt Practices Act of 1977, as amended.
(xxvii) Except as set forth in the Prospectus, no officer,
director, or stockholder of the Company or the Subsidiary, or any Aaffiliate"
or Aassociate" (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 ACertain
Transactions," there are no existing agreements, arrangements, understandings
or transactions, or proposed agreements, arrangements, understandings or
transactions, between or among the Company or any Subsidiary, and any
officer, director, and 50% or more stockholders (as such term is defined in
the Prospectus) of the Company or any Subsidiary, or any partner, affiliate
or associate of any of the foregoing persons or entities.
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(xxviii) Any certificate signed by any officer of the Company
and delivered to the Underwriters or to Underwriters' Counsel (as defined
herein) shall be deemed a representation and warranty by the Company to the
Underwriters as to the matters covered thereby.
(xxix) The minute books of the Company and the Subsidiary have
been made available to the Underwriters 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 have
the right to include any securities issued by the Company or the Subsidiary
in the Registration Statement or any registration statement under the Act and
no person or entity holds any anti-dilution rights with respect to any
securities of the Company or the Subsidiary.
(xxxi) The Company has as of the effective date of the
Registration Statement (a) entered into employment agreements with its
President Mack H. Jennings and a consulting agreement with its Chairman,
Joseph E. Antonini, on terms and conditions satisfactory to the
Representatives, 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 Representatives.
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(xxxii) The Company has entered into a Representatives' Warrant
Agreement with respect to the Representatives' Warrants in the form filed as
Exhibit ____ to the Registration Statement, with American Stock Transfer and
Trust Company in form and substance satisfactory to the Underwriters.
(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 or
such equivalent securities, issuable upon the exercise of options, warrants
and other contract rights, and (c) securities convertible directly or
indirectly into Common Stock or 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) 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 Representatives 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
Representatives. Notwithstanding the foregoing, the Company shall not issue
any shares of
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preferred stock or securities convertible into preferred stock during such
three (3) year period without the express written consent of the
Representatives.
(xxxv) 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 representations, warranties, covenants and agreements herein
contained, but subject to the terms and conditions herein set forth, the
Company agrees to sell to each Underwriter, and each Underwriter, severally
and not jointly, agrees to purchase from the Company at a price of $9.00 per
share of Preferred Stock that number of Firm Securities set forth in Schedule
A opposite the name of such Underwriter, subject to such adjustment as the
Underwriters in their sole discretion shall make to eliminate any sales or
purchases of fractional shares, plus any additional number of Firm Securities
which such Underwriters may become obligated to purchase pursuant to the
provisions of Section 11 hereof.
(b) In addition, on the basis of the representations, warranties,
covenants and agreements, herein contained, but subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
Underwriters, severally and not jointly, to purchase all or any part of an
additional 75,000 shares of Preferred Stock at a price of $9.00 per share.
The option granted hereby will expire 45 days after (i) the date the
Registration Statement becomes effective, if the Company has elected not to
rely on Rule 430A under the Rules and Regulations, or (ii) the date of this
Agreement if the Company has elected to rely upon Rule 430A under the Rules
and Regulations,
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and may be exercised in whole or in part from time to time only for the
purpose of covering over-allotments which may be made in connection with the
offering and distribution of the Firm Securities upon notice by the
Underwriters to the Company setting forth the number of Option Securities as
to which the several Underwriters are then exercising the option and the time
and date of payment and delivery for any such Option Securities. Any such
time and date of delivery (an "Option Closing Date") shall be determined by
the Underwriters, but shall not be later than seven full business days after
the exercise of said option, nor in any event prior to the Closing Date
(hereinafter defined), unless otherwise agreed upon in writing by the
Underwriters and the Company. Nothing herein contained shall obligate the
Underwriters to make any over-allotments. No Option Securities shall be
delivered unless the Firm Securities shall be simultaneously delivered or
shall theretofore have been delivered as herein provided.
(c) Payment of the purchase price for, and delivery of certificates
evidencing the Firm Securities shall be made at the offices of Klein Maus and
Shire, Inc., at 110 Wall Street, New York, New York 10005, or at such other
place as shall be agreed upon in writing by the Underwriters and the Company.
Such delivery and payment shall be made at 10:00 a.m. (New York City time) on
___________________, 1998 or at such other time and date as shall be agreed
upon by the Underwriters and the Company, but not less than five (5) nor more
than ten (10) full business days after the effective date of the Registration
Statement (such time and date of payment and delivery being herein called the
"Closing Date"). In addition, in the event that any or all of the Option
Securities are purchased by the Underwriters, payment of the purchase price
for, and delivery of certificates for, such Option Securities shall be made
at the above mentioned office of the Underwriters or at such other place as
shall be agreed upon by the Underwriters and the Company
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<PAGE>
on each Option Closing Date as specified in the notice from the
Representatives to the Company. Delivery of the certificates for the Firm
Securities and the Option Securities if any, shall be made to the
Underwriters against payment by the Underwriters, severally and not jointly,
of the purchase price for the Firm Securities and the Option Securities if
any, to the order of the Company by New York Clearing House Funds. In the
event such option is exercised, each of the Underwriters, acting severally
and not jointly, shall purchase that proportion of the total number of Option
Securities then being purchased which the number of Firm Securities set forth
in Schedule A hereto opposite the name of such Underwriter bears to the total
number of Firm Securities, subject in each case to such adjustments as the
Underwriters in their discretion shall make to eliminate any sales or
purchases of fractional shares. Certificates for the Firm Securities and the
Option Securities if any, shall be in definitive, fully registered form,
shall bear no restrictive legends and shall be in such denominations and
registered in such names as the Underwriters may request in writing at least
two (2) business days prior to the Closing Date or the relevant Option
Closing Date, as the case may be. The certificates for the Firm Securities
and the Option Securities if any, shall be made available to the Underwriters
at such office or such other place as the Underwriters may designate for
inspection, checking and packaging no later than 9:30 a.m. on the last
business day prior to the Closing Date or the relevant Option Closing Date,
as the case may be.
(d) On the Closing Date, the Company shall issue and sell to the
Representatives the Representatives' Warrants at a purchase price of $.0001
per warrant, which warrants shall entitle the holders thereof to purchase an
aggregate of 50,000 shares of Preferred Stock. The Representatives' Warrants
shall be exercisable for a period of four (4) years commencing one (1) year
from the Closing Date at a price equal to 165% of the initial public offering
price of one (1)
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<PAGE>
share of the Preferred Stock. The Representatives' Warrant Agreement and
Warrant Certificate shall be substantially in the form filed as Exhibit
_______ to the Registration Statement. Payment for the Representatives'
Warrants shall be made on the Closing Date.
3. Public Offering of the Securities. As soon after the Registration
Statement becomes effective as the Underwriters deem advisable, the
Underwriters shall make a public offering of the Firm Securities and such of
the Option Securities as they may determine (other than to residents of or in
any jurisdiction in which qualification of the Securities is required and has
not become effective) at the price and upon the other terms set forth in the
Prospectus. The Underwriters may enter into one or more agreements as the
Underwriters, in each of their sole discretion, deem advisable with one or
more broker-dealers who shall act as dealers in connection with such public
offering.
4. Covenants and Agreements of the Company. The Company covenants
and agrees with each of the Underwriters as follows:
(a) The Company shall use its best efforts to cause the Registration
Statement and any amendments thereto to become effective as promptly as
practicable (such Registration Statement to be in form and substance
satisfactory to the Representatives and their 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 Underwriters of which
the Representatives shall not previously have been advised and furnished with
a copy, or to which
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<PAGE>
the Representatives 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 Representatives and confirm the notice in
writing, (I) when the Registration Statement, as amended, becomes effective,
if the provisions of Rule 430A promulgated under the Act will be relied upon,
when the Prospectus has been filed in accordance with said Rule 430A and when
any post-effective amendment to the Registration Statement becomes effective,
(ii) of the issuance by the Commission of any stop order or of the
initiation, or the threatening, of any proceeding, suspending the
effectiveness of the Registration Statement or any order preventing or
suspending the use of the Preliminary Prospectus or the Prospectus, or any
amendment or supplement thereto, or the institution of proceedings for that
purpose (iii) of the issuance by the Commission or by any state securities
commission of any proceedings for the suspension of the qualification of any
of the Securities for offering or sale in any jurisdiction or of the
initiation, or the threatening, of any proceeding for that purpose, (iv) of
the receipt of any comments from the Commission; and (v) of any request by
the Commission for any amendment to the Registration Statement or any
amendment or supplement to the Prospectus or for additional information. If
the Commission or any state securities commission authority shall enter a
stop order or suspend such qualification at any time, the Company will make
every effort to obtain promptly the lifting of such order.
(c) The Company shall file the Prospectus (in form and substance
satisfactory to
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the Representatives and their 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 Representatives,
pursuant to Rule 424 (b)(47) not later than the Commission's close of
business on the earlier of (i) the second business day following the
execution and delivery of this Agreement and (ii) the fifth business day
after the effective date of the Registration Statement.
(d) The Company will give the Representatives notice of its
intention to file or prepare any amendment to the Registration Statement
(including any post-effective amendment) or any amendment or supplement to
the Prospectus (including any revised prospectus which the Company proposes
for use by the Underwriters in connection with the offering of the 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 Representatives
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 Representatives or Doros & Brescia, P.C.
("Underwriters' 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
Underwriters, 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 Underwriters 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
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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
Underwriters agree that such action is not at the time necessary or
advisable, use all reasonable efforts to file and make such statements or
reports at such times as are or may reasonably be required by the laws of
such jurisdiction to continue such qualification. It is agreed that
Underwriters' 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 Underwriters' Counsel, the
Prospectus, as then amended or supplemented, includes an untrue statement of
a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the Act and the
Rules and Regulations, the Company will notify the Representatives promptly
and prepare and file with the Commission an appropriate amendment or
supplement in accordance with Section 10 of the Act, each such amendment or
supplement to be reasonably satisfactory to Underwriters' Counsel, and the
Company will furnish to the Underwriters copies of such amendment or
supplement as soon as available and in such quantities as the
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Underwriters 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 Underwriters 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 Underwriters, 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 the
Representatives 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 the Representatives 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 Representatives' 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 Representatives' Warrants to be furnished with a current prospectus in
the event and at such time as the Representatives' 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 Representatives' Warrants become exercisable) and to keep the
same effective so long as the Representatives' Warrants are outstanding. The
Company will deliver a draft of each such post-effective amendment or new
registration statement to the Representatives at least ten days prior to the
filing of such post-effective amendment or registration statement.
(j) So long as any of the Representatives' 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
Representatives' Warrants where such Prospectus delivery is by law required
to be made.
(k) So long as any of the Representatives' Warrants remain
outstanding, the Company shall continue to employ the services of a firm of
independent certified public accountants reasonably acceptable to the
Representatives in connection with the preparation of the financial
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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 Representatives in connection with all legal work of the
Company, including the preparation of a registration statement to be filed by
the Company hereunder, or any amendment or supplement thereto.
(l) So long as any of the Representatives' Warrants remain
outstanding, the Company shall continue to appoint a Warrant Agent for the
Representatives' Warrants, who shall be reasonably acceptable to the
Representatives.
(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 Underwriters, 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
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Underwriters:
(i) concurrently with furnishing such quarterly reports to its
stockholders, statements of income of the Company for each quarter in the
form furnished to the Company's stockholders and certified by the Company's
principal financial or accounting officer;
(ii) concurrently with furnishing such annual reports to its
stockholders, a balance sheet of the Company as at the end of the preceding
fiscal year, together with statements of operations, stockholders' equity,
and cash flows of the Company for such fiscal year, accompanied by a copy of
the certificate thereon of independent certified public accountants;
(iii) as soon as they are available, copies of all reports
(financial or other) mailed to stockholders;
(iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, the NASD or
any securities exchange;
(v) every press release and every material news item or article
of interest to the financial community in respect of the Company or its
affairs which was released or prepared by or on behalf of the Company; and
(vi) any additional information of a public nature concerning
the Company (and any future Subsidiary) or its businesses which the
Underwriters may reasonably
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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 a Transfer Agent, designated American
Stock Transfer and Trust Company, counsel, accounting firm, financial printer
and, if necessary under the jurisdiction of incorporation of the Company, a
Registrar (which shall be the same entity as the Transfer Agent) for its
Common Stock and Preferred Stock all of whom shall be reasonably acceptable
to the Underwriters. Such Transfer Agent shall, for a period of two years
following the Closing Date, deliver to the Underwriters 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 Representatives or on the
Representatives' order, without charge, at such place as the Representatives
may designate, copies of each Preliminary Prospectus, the Registration
Statement, any pre-effective or post-effective amendments thereto (two of
which copies will be signed and will include all financial statements and
exhibits), the Prospectus, and all amendments and supplements thereto,
including any Prospectus prepared after the effective date of the
Registration Statement, in each case as soon as available and in such
quantities as the Representatives may reasonably request.
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(q) On or before the effective date of the Registration Statement,
the Company shall provide the Representatives 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 issued under the Company's stock
option plans after the effective date of the Registration Statement and
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 Representatives (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 Representatives, 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 of 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
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
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Company's ledgers.
(r) The Company and the Subsidiary have not taken and will not take,
directly or indirectly, and the Company and the Subsidiary will use their
best efforts to ensure that any of their 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 or the Subsidiary.
(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
AUse 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
or the Subsidiary 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 Underwriters as early as
practicable prior to each of the date hereof, the Closing Date and each
Option Closing Date, if any, but no later than two (2) full business days
prior thereto, a copy of the latest available unaudited interim financial
statements of the Company (which in no event shall be as of a date more than
thirty (30) days prior
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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
Nasdaq SmallCap 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 Underwriters at the Underwriters' 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 Underwriters
and Underwriters' Counsel, issue,
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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 Representatives, jointly, 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 Representatives shall not have designated such
individual at the time of any meeting of the Board or such person is
unavailable to serve, the Company shall notify the Representatives of each
meeting of the Board and an individual designated by the Representatives
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 and the Subsidiary hereby grant to the
Representatives a right of first refusal on the terms and subject to the
conditions set forth in this paragraph, for a period of five 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 Subsidiary,
any securities of the company or any of its present or future Subsidiary,
with respect to which the Company or any of its present or
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future Subsidiary 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 Subsidiary to consult
with the Representatives with regard to any such offering or placement and
will offer, or cause any of its present or future Subsidiary to offer, to the
Representatives 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 Representatives fail to accept
in writing such proposal made by the Company or any of its present or future
Subsidiary within fifteen business days after receipt of a notice containing
such proposal, then the Representatives 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 Representatives in
connection with such modification and shall in all respects have the same
obligations and adopt the same procedures with respect to such proposal as
are provided hereinabove with respect to the original proposal.
(bb) For a period equal to the lesser of (i) seven (7) years from
the date hereof, and (ii) the date of the sale to the public of the
securities issuable upon exercise of the Representatives' Warrants and the
Representatives' 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
Representatives' Warrants and the Representatives' 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 Underwriters,
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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 Underwriters'
Counsel, except as provided in (iv) below) incident to the performance of the
obligations of the Company under this Agreement and the Representatives'
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, the Representatives' Warrant Agreement, and related
documents, including the cost of all copies thereof and of the Preliminary
Prospectuses and of the Prospectus and any amendments thereof or supplements
thereto supplied to the Underwriters and such dealers as the Underwriters 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 Underwriters of the IPO Securities and
the purchase by the Representatives of the Representatives' Warrants from the
Company, (y) the consummation by the Company of any of its obligations under
this Agreement, and the Representatives' Warrant Agreement and (z) resale of
the IPO Securities by the Underwriters in connection with the distribution
contemplated hereby to the extent that expenses relate to the
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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 then in connection therewith, (v) advertising costs and expenses,
(not to exceed $5,000) 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, (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, warrant 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, Nasdaq and the NASD, and (x) the
fees and expenses incurred in connection with the listing of the IPO
Securities on the Nasdaq SmallCap Market, the BSE and any other exchange.
(b) If this Agreement is terminated by the Underwriters in
accordance with the provisions of Section 6, Section 10(a) or Section 12, the
Company shall reimburse and indemnify the Underwriters for all of their
actual out-of-pocket expenses, including the fees and disbursements of
Underwriters' Counsel (and in addition to fees and expenses of Underwriters'
Counsel incurred pursuant to Section 5(a)(iv) above for which the Company
shall remain liable), 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.
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(c) The Company further agrees that, in addition to the expenses
payable pursuant to subsection (a) of this Section 5, it will pay to the
Underwriters on the Closing Date by certified or bank cashier's check or, at
the election of the Underwriters, by deduction from the proceeds of the
Offering a non-accountable expense allowance equal to two percent (2%) of the
gross proceeds of the Offering less the amount of $25,000 previously paid by
the Company to KMS. In the event the Underwriters elect to exercise the
over-allotment option described in Section 2(b) hereof, the Company further
agrees to pay to the Underwriters on the Option Closing Date (by certified or
bank cashier's check or, at the Underwriters' election, by deduction from the
proceeds of the Offering) a non-accountable expense allowance equal to two
percent (2%) of the gross proceeds of this Offering in connection with the
sale of the Option Securities.
(d) The Underwriters 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 Underwriters' Obligations. The obligations of
the Underwriters 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
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Option Closing Date, if any, of its covenants and obligations hereunder and
to the following further conditions:
(a) The Registration Statement, which shall be in form and substance
satisfactory to the Representatives and Underwriters' 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 Representatives, 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 Underwriters'
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 Underwriters of such timely filing, or
a post-effective amendment providing such information shall have been
promptly filed and declared effective in accordance with the requirements of
Rule 430A of the Rules and Regulations.
(b) The Representatives shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue
statement of fact which, in the Representatives' opinion, is material, or
omits to state a fact which, in the Underwriters' opinion, is material and is
required to be stated therein or is necessary to make the statements therein,
in light
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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 Representatives' 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 Representatives shall have
received from Underwriters' Counsel, such opinion or opinions with respect to
the organization of the Company and its Subsidiary, the validity of the IPO
Securities, the Representatives' Warrants, the Registration Statement, the
Prospectus and other related matters as the Representatives may request and
Underwriters' 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 Underwriters shall have received the
favorable opinion of Jackier, Gould, Bean, Upfal & Eiselman, counsel to the
Company, dated as of the Closing Date, addressed to the Underwriters and in
form and substance satisfactory to Underwriters' 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, 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),
to own or lease its properties and conduct its
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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. The disclosures in the
Registration Statement concerning the effects of federal, state and local
laws, rules and regulations on the Company's or the Subsidiary's business as
currently conducted and as contemplated are correct in all material respects
and do not omit to state a fact necessary to make the statements contained
therein not misleading in light of the circumstances in which they were made:
(ii) to such counsel's knowledge, except as set forth in the
Prospectus neither the Company nor the Subsidiary owns an equity interest in
any other corporation, partnership, joint venture, trust or other business
entity except with respect to the Company the Subsidiary;
(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, neither the Company nor the Subsidiary is a
party to or bound by any instrument, agreement or other arrangement
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providing for it to issue any capital stock, rights, warrants, options or
other securities, except for this Agreement, the Representatives' 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. 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 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 Representatives'
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 has been
duly and validly taken; and the certificates representing the IPO Securities
are in due and proper form. The Representatives' 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 the issuance and delivery pursuant to this
Agreement of the IPO Securities to be sold by the Company, the Underwriters
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. No transfer tax is
payable by or on behalf of the Underwriters in connection with (A) the
issuance by the Company of
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the IPO Securities, (B) the purchase by the Underwriters of the IPO
Securities from the Company, (C) consummation by the Company of any of its
obligations under this Agreement, or (D) resales of the Securities in
connection with the distribution contemplated hereby;
(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 correct copies of the documents of which they purport to be
copies; (B) the descriptions in the Registration Statement and the Prospectus
and
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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 Representatives' 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 Representatives' Warrant Agreement or which in
any
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manner draws into question the validity or enforceability of this
Agreement or the Representatives' Warrant Agreement;
(vii) the Company has full legal right, power and authority to
enter into this Agreement and the Representatives' Warrant Agreement and to
consummate the transactions provided for herein and therein; and this
Agreement and the Representatives' Warrant Agreement have been duly
authorized, executed and delivered by the Company. Each of this Agreement,
the Representatives' 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 Representatives' Warrant Agreement, its performance
hereunder or thereunder, its consummation of the transactions contemplated
herein or therein, or the conduct of their 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
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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 which the Company or the
Subsidiary is a party or by which it is or may be bound or to which any of
its properties or assets (tangible or intangible) is or may be subject, or
any indebtedness, or (C) any statute, judgment, decree, order, rule or
regulation applicable to the Company or the Subsidiary of any arbitrator,
court, regulatory body or administrative agency or other governmental agency
or body (including, without limitation, those having jurisdiction over
environmental or similar matters), 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 Representatives'
Warrants, the performance of this Agreement and the Representatives' Warrant
Agreement and the transactions contemplated hereby and thereby;
(ix) the properties and business of the Company and the
Subsidiary
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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 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 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 except as described in
the Prospectus each of 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
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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) except as described in the Prospectus, neither the
Company nor the Subsidiary (A) maintains, sponsors, or contributes to any
ERISA Plans, (B) maintains or contributes now or at any time previously, to a
defined benefit plan, as defined in Section 3(35) of ERISA, and (C) has ever
completely or partially withdrawn from a "multiemployer plan";
(xiii) the IPO Securities have been approved for listing on the
Nasdaq SmallCap Market and the BSE, and the Company's Registration Statement
on Form 8-A under the Exchange Act has become effective;
(xiv) to such counsel's knowledge, the persons listed caption
"PRINCIPAL SHAREHOLDERS" in the Prospectus are the respective Abeneficial
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;
(xv) 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
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register any securities of the Company or the Subsidiary in the Registration
Statement, require the Company or the Subsidiary to file any registration
statement or, if filed, to include any security in such registration
statement;
(xvi) 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 Underwriters' compensation, as
determined by the NASD;
(xvii) 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
Such counsel shall state that such counsel has participated in
conferences including telephone conferences with officers and other
representatives of the Company, the Subsidiary and representatives of the
independent public accountants for the Company and the Subsidiary, at which
conferences such counsel made inquiries of such officers, representatives and
accountants and discussed the contents of the Preliminary Prospectus, the
Registration Statement, the Prospectus, and related matters were discussed
and, although such counsel is not passing upon and does not assume
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any responsibility for the accuracy, completeness or fairness of the
statements contained in the Preliminary Prospectus, the Registration
Statement and Prospectus, on the basis of the foregoing, no facts have come
to the attention of such counsel which lead them to believe that either the
Registration Statement or any amendment thereto, at the time such
Registration Statement or amendment became effective or the Preliminary
Prospectus or Prospectus or amendment or supplement thereto as of the date of
such opinion contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading (it being understood that such counsel need
express no opinion with respect to the financial statements and schedules and
other financial and statistical data included in the Preliminary Prospectus,
the Registration Statement or Prospectus).
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 Underwriters'
Counsel) of other counsel acceptable to Underwriters' Counsel, familiar with
the applicable laws; (B) as to matters of fact, to the extent they deem
proper, on certificates and written statements of responsible officers of the
Company or the Subsidiary 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 Underwriters' Counsel if requested. The opinion of such
counsel for the Company shall state that the opinion of any such other
counsel is in form satisfactory to such counsel and that the Representatives
and the Underwriters are justified in relying thereon.
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At each Option Closing Date, if any, the Underwriters shall have
received the favorable opinion of Jackier, Gould, Bean, Upfal & Eiselman,
counsel to the Company, dated the Option Closing Date, addressed to the
Underwriters and in form and substance satisfactory to Underwriters' 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, Underwriters' Counsel shall have been furnished such documents,
certificates and opinions as they may reasonably require for the purpose of
enabling them to review or pass upon the matters referred to in subsection
(c) of this Section 6, or in order to evidence the accuracy, completeness or
satisfaction of any of the representations, warranties or conditions of the
Company, or herein contained.
(f) Prior to each Closing Date and each Option Closing Date, if any,
(i) there shall have been no adverse change nor development involving a
prospective change in the condition, financial or otherwise, prospects,
stockholders' equity or the business activities of the Company and the
Subsidiary taken as a whole, whether or not in the ordinary course of
business, from the latest dates as of which such condition is set forth in
the Registration Statement and Prospectus; (ii) there shall have been no
transaction, not in the ordinary course of business, entered into by the
Company or the Subsidiary, (iii) neither the Company nor the Subsidiary shall
be in default under any provision of any instrument relating to any
outstanding indebtedness; (iv) neither the Company nor any of the Subsidiary
shall have issued any securities (other than the IPO Securities and the
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Representatives' 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 the 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 Closing Date and each Option Closing Date, if any, the
Underwriters 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 are true and correct, as if made on and as of the Closing Date or the
Option Closing Date, as the case may be, and the Company has complied with
all agreements and covenants and satisfied all
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conditions contained in this Agreement on its part to be performed or
satisfied at or prior to such Closing Date or Option Closing Date, as the
case may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement 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
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must not have sustained any material loss or interference with its business
from any court or from legislative or other governmental action, order or
decree, whether foreign or domestic, or from any other occurrence, not
described in the Registration Statement and Prospectus; (D) there must not
have occurred any event that makes untrue or incorrect in any material
respect any statement or information contained in the Registration Statement
or Prospectus or that is not reflected in the Registration Statement or
Prospectus but should be reflected therein in order to make the statements or
information therein, in light of the circumstances in which they were made,
not misleading in any material respect; (E) the Company and the Subsidiary
must not have incurred up to and including the Closing Date or the Option
Closing Date, as the case may be, other than in the ordinary course of its
business, any material liabilities or obligations, direct or contingent; (F)
the Company and the Subsidiary must not have paid or declared any dividends
or other distributions on its capital stock; (G) the Company and the
Subsidiary must not have entered into any transactions not in the ordinary
course of business; (H) there has not been any change in the capital stock or
long-term debt or any increase in the short-term borrowings (other than any
increase in the short-terms 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 Underwriters will have received
clearance from the
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NASD as to the amount of compensation allowable or payable to the
Underwriters, as described in the Registration Statement.
(i) At the time this Agreement is executed, the Underwriters shall
have received a letter, dated such date, addressed to the Underwriters 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 Underwriters and Underwriters' Counsel, from ________________:
(i) confirming that they are independent accountants with
respect to the Company and the Subsidiary within the meaning of the Act and
the applicable Rules and Regulations;
(ii) stating that it is their opinion that the financial
statements of the Company and the Subsidiary included in the Registration
Statement comply as to form in all material respects with the applicable
accounting requirements of the Act and the Rules and Regulations thereunder
and that the Representatives 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
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committees of the boards of directors of the Company and the Subsidiary,
consultations with officers and other employees of the Company and the
Subsidiary responsible for financial and accounting matters and other
specified procedures and inquiries, nothing has come to their attention which
would lead them to believe that (A) the unaudited financial statements, if
any, of the Company and the Subsidiary included in the Registration Statement
do not comply as to form in all material respects with the applicable
accounting requirements of the Act and the Rules and Regulations or are not
fairly presented in conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the audited
financial statements of the Company and the Subsidiary included in the
Registration Statement, or (B) at a specified date not more than five (5)
days prior to the effective date of the Registration Statement, there has
been any change in the capital stock or long-term debt of the Company and the
Subsidiary, or any decrease in the stockholders' equity or net current assets
or net assets of the Company and the Subsidiary as compared with amounts
shown in the __________________ 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
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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 or the Subsidiary's management any "weakness," as defined in
Statement of Auditing Standard No. 60 "Communication of Internal Control
Structure Related Matters Noted in an Audit," in any of the Company's
internal controls; and
(viii) statements as to such other matters incident to the
transaction contemplated hereby as the Representatives may reasonably
request.
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(j) At the Closing Date and each Option Closing Date, if any, the
Underwriters 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 letter referred to 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 Representative 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 the Option Closing Date, if any,
there shall have been duly tendered to the several Underwriters' accounts the
appropriate number of IPO Securities.
(l) No order suspending the sale of the IPO Securities in any
jurisdiction designated by the Underwriters pursuant to subsection (e) of
Section 4 hereof shall have been issued on either the Closing Date or the
Option Closing Date, if any, and no proceedings for that purpose shall have
been instituted or shall be contemplated.
(m) On or before Closing Date, the Preferred Stock shall have been
approved for
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quotation on the Nasdaq SmallCap Market and shall have been authorized upon
official notice of issuance for trading on the BSE.
(n) On or before the Closing Date, three shall have been delivered
to the Underwrites the Lock-up Agreements in form and substance satisfactory
to Underwriters' Counsel.
(o) On or before the Closing Date, the Company shall have executed
and delivered to the Underwriters, (i) the Representatives' Warrant Agreement
substantially in the form filed as Exhibit _______ to the Registration
Statement in final form and substance satisfactory to the Underwriters, and
(ii) the Representatives' Warrants in such denominations and to such
designees as shall have been provided to the Company.
If any condition to the Underwriters' obligations hereunder to be
fulfilled prior to or at the Closing Date or the relevant Option Closing
Date, as the case may be, is not so fulfilled, the Underwriters may terminate
this Agreement or, if the Underwriters so elect, they 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, agree to indemnify and hold harmless each of the Underwriters (for
purposes of this Section 7 "Underwriters" shall include the officers,
directors, partners, employees, agents and counsel of the Underwriters,
including specifically each person who may be substituted for an Underwriters
as provided in Section 11 hereof), and each person, if any, who controls the
Underwriters ("controlling person") within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act, from and
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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
Underwriters or such controlling person may become subject under the Act, the
Exchange Act, or any other statute or at common law or otherwise or under the
laws of foreign countries, arising out of or based upon any untrue statement
or alleged untrue statement of a material fact contained (i) in any
Preliminary Prospectus, the Registration Statement or the Prospectus (as from
time to time amended and supplemented); (ii) in any post-effective amendment
or amendments or any 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, NASDAQ, 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
any Underwriter by or on behalf of such Underwriter expressly for use in any
Preliminary Prospectus, the Registration Statement or Prospectus, or any
amendment thereof or supplement thereto, or in any Application, as the case
may be.
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The indemnity agreement in this subsection (a) shall be in addition
to any liability which the Company may have at common law or otherwise.
(b) Each of the Underwriters agrees severally, but not jointly, to
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the Registration Statement, and each other person, if
any, who controls the Company within the meaning of the Act, to the same
extent as the foregoing indemnity from the Company to the Underwriters but
only with respect to statements or omissions, if any, made in any Preliminary
Prospectus, the Registration Statement or Prospectus or any amendment thereof
or supplement thereto or in any Application made in reliance upon, and in
strict conformity with, written information furnished to the Company with
respect to any Underwriter by such Underwriter expressly for use in such
Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment thereof or supplement thereto or in any 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 Underwriters in connection with
this offering.
(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
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against any indemnified party, and it notifies an indemnifying party or
parties of the commencement thereof, the indemnifying party or parties will
be entitled to participate therein, and to the extent it may elect by written
notice delivered to the indemnified party promptly after receiving the
aforesaid notice from such indemnified party, to assume the defense thereof
with counsel reasonably satisfactory to such indemnified party.
Notwithstanding the foregoing, the indemnified party or parties shall have
the right to employ its or their own counsel in any such case but the fees
and expenses of such counsel shall be at the expense of such indemnified
party or parties unless (i) the employment of such counsel shall have been
authorized in writing by the indemnifying parties in connection with the
defense of such action at the expense of the indemnifying party, (ii) the
indemnifying parties shall not have employed counsel reasonably satisfactory
to such indemnified party to have charge of the defense of such action within
a reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded that there may
be defenses available to it or them which are different from or additional to
those available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses of one additional counsel shall be borne by 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.
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(d) In order to provide for just and equitable contribution in any
case in which (i) an indemnified party makes claim for indemnification
pursuant to this Section 7, but it is judicially determined (by the entry of
a final judgment or decree by a court of competent jurisdiction and the
expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the
fact that the express provisions of this Section 7 provide for
indemnification in such case, or (ii) contribution under the Act may be
required on the part of any indemnified party, then each indemnifying party
shall contribute to the amount paid as a result of such losses, claims,
damages, expenses or liabilities (or actions in respect thereof) (A) in such
proportion as is appropriate to reflect the relative benefits received by
each of the contributing parties, on the one hand, and the party to be
indemnified on the other hand, from the offering of the IPO Securities or (B)
if the allocation provided by clause (A) above is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of each
of the contributing parties, on the one hand, and the party to be indemnified
on the other hand in connection with the statements or omissions that
resulted in such losses, claims, damages, expenses or liabilities, as well as
any other relevant equitable considerations. In any case where the Company is
a contributing party and the Underwriters are the indemnified party, the
relative benefits received by the Company, on the one hand, and the
Underwriters, on the other, shall be deemed to be in the same proportion as
the total net proceeds from the offering of the Securities (before deducting
expenses) bear to the total underwriting discounts received by the
Underwriters 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
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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 Underwriters, and the parties'
relative intent, knowledge, access to information and opportunity to correct
or prevent such untrue statement or omission. The amount paid or payable by
an indemnified party as a result of the losses, claims, damages, expenses or
liabilities (or actions in respect thereof) referred to above in this
subdivision (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subdivision (d) the Underwriters shall not be required to
contribute any amount in excess of the underwriting discount applicable to
the IPO Securities purchased by the Underwriters hereunder. No person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. For purposes of this Section 7, each
person, if any, who controls the Company within the meaning of the Act, each
officer of the Company who has signed the Registration Statement, and each
director of the Company shall have the same rights to contribution as the
Company, subject in each case to this subparagraph (d). Any party entitled to
contribution will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such 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
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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 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 any Underwriter, the Company, any controlling person of any
Underwriter or the Company, and shall survive termination of this Agreement
or the issuance and delivery of the IPO Securities to the Underwriters.
9. Effective Date. This Agreement shall become effective at 10:00
a.m., New York City time, on the next full business day following the date
hereof, or at such earlier time after the Registration Statement becomes
effective as the Underwriters, in they discretion, shall release the
Securities for the sale to the public; provided, however, that the provisions
of Sections 5, 7 and 10 of this Agreement shall at all times be effective.
For purposes of this Section 9, the Securities to be purchased hereunder
shall be deemed to have been so released upon the earlier of dispatch by the
Underwriters of telegrams to securities dealers releasing such shares for
offering or the release by the Underwriters for publication of the first
newspaper advertisement which is subsequently published relating to the
Securities.
10. Termination. (a) Subject to subsection (b) of this Section 10,
the
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Underwriters shall have the right to terminate this Agreement, (i) if any
domestic or international event or act or occurrence has disrupted, or in the
Underwriters' opinion will in the immediate future 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, 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 Underwriters' 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 the Subsidiary, whether
or not arising in the ordinary course of business, which would render, in the
Underwriters' 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 Underwriters' 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 Underwriters in
accordance with the provisions of Section 10(a), the Company shall promptly
reimburse and indemnify the Underwriters for all of their actual
out-of-pocket expenses, including the fees and disbursements of counsel for
the Underwriters 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
Underwriters, 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
Underwriters for all of their actual out-of-pocket expenses, including the
fees and disbursements of counsel for the Underwriters (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, 10, 11 and 12
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. Substitution of the Underwriters. If one or more of the
Underwriters shall fail (otherwise than for a reason sufficient to justify
the termination of this Agreement under the provisions of Section 6, Section
10 or Section 12 hereof) to purchase the Securities which it or they are
obligated to purchase on such date under this Agreement (the "Defaulted
Securities"), the remaining Underwriters shall have the right, within 24
hours thereafter, to make arrangement for one
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or more of the non-defaulting Underwriters, or any other underwriters, to
purchase all, but not less than all, of the Defaulted Securities in such
amounts as may be agreed upon and upon the terms herein set forth; if,
however, the remaining Underwriters shall not have completed such
arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the
total number of Firm Securities to be purchased on such date, the
non-defaulting Underwriters shall be obligated to purchase the full amount
thereof in the proportions that their respective underwriting obligations
hereunder bear to the underwriting obligations of all non-defaulting
Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the total
number of Firm Securities, this Agreement shall terminate without liability
on the part of any non-defaulting Underwriters.
No action taken pursuant to this Section shall relieve any
defaulting Underwriter from liability in respect of any default by such
Underwriter under this Agreement.
In the event of any such default which does not result in a
termination of this Agreement, the remaining Underwriters shall have the
right to postpone the Closing Date for a period not exceeding seven days in
order to effect any required changes in the Registration Statement or
Prospectus or in any other documents or arrangements.
12. Default by the Company. If the Company shall fail at the Closing
Date or any Option Closing Date, as applicable, to sell and deliver the
number of Securities which it is
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obligated to sell hereunder on such date, then this Agreement shall terminate
(or, if such default shall occur with respect to any Option Securities to be
purchased on an Option Closing Date, the Underwriters may at their option, by
notice from the Underwriters to the Company, terminate the Underwriters'
obligation to purchase Option Securities from the Company on such date)
without any liability on the part of any non-defaulting party other than
pursuant to Section 5, Section 7 and Section 10 hereof. No action taken
pursuant to this Section shall relieve the Company from liability, if any, in
respect of such default.
13. Notices. All notices and communications hereunder, except as
herein otherwise specifically provided, shall be in writing and shall be
deemed to have been duly given if mailed or transmitted by any standard form
of telecommunication. Notices to the Underwriters shall be directed to the
Representatives at Klein Maus and Shire, Inc., 110 Wall Street, New York, New
York 10005, Attention: Mohammad Ali Khan, President, with a copy to Doros &
Brescia, P.C., 1140 Avenue of the Americas, New York, New York 10036,
Attention: Ronald J. Brescia, Esq. Notices to the Company 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 &
Eiselman, 1533 North Woodward, Suite 250, Bloomfield Hills, Michigan 48304,
Attention: Michael J. Eiselman, Esq.
14. Parties. This Agreement shall inure solely to the benefit of and
shall be binding upon, the Underwriters, the Company and the controlling
persons, directors and officers referred to in Section 7 hereof, and their
respective successors, legal representatives and assigns and no other person
shall have or be construed to have any legal or equitable right, remedy or
claim
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under or in respect of or by virtue of this Agreement or any provisions
herein contained. No purchaser of Securities from any Underwriter shall be
deemed to be a successor by reason merely of such purchase.
15. Construction. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of New York without
giving effect to the choice of law or conflict of laws principles.
15. 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.
17. Entire Agreement; Amendments. This Agreement and the
Representatives' 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
Underwriters and the Company.
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If the foregoing correctly sets forth the understanding between the
Underwriters and the Company, please so indicate in the space provided below
for that purpose, whereupon this letter shall constitute a binding agreement
among us.
Very truly yours,
AWG, LTD.
By:
----------------------------
Mack H. Jennings, President
Confirmed and accepted as of
the date first above written
For themselves and as Representatives
of the several Underwriters named in
Schedule A hereto
J. P. TURNER & CO., L.L.C.
By:
--------------------------
Name:
Title:
KLEIN MAUS AND SHIRE, INC.
By:
-------------------------
Name: Mohammad Ali Khan
Title: President
<PAGE>
SCHEDULE A
Number of Firm Securities
Name of Underwriters to be purchased
-------------------- -------------------------
Klein Maus and Shire, Inc.
J.P. Turner & Co., L.L.C.
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<PAGE>
AWG, LTD.
AND
J. P. TURNER & CO., L.L.C. and
KLEIN MAUS AND SHIRE, INC.
REPRESENTATIVES'
WARRANT AGREEMENT
Dated as of _______________, 1998
<PAGE>
REPRESENTATIVES' WARRANT AGREEMENT dated as of
__________, 1998 (the "Agreement") between AWG, LTD., a Nevada corporation
(the "Company") and J. P. TURNER & CO., L.L.C. ("Turner") and KLEIN MAUS AND
SHIRE, INC. ("KMS"), their successors, designees and assigns (hereinafter
referred to collectively as the "Representatives" or the "Underwriters").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to Turner and
Klein Maus and Shire, Inc. (collectively the "Representatives" or the
"Underwriters") warrants (the "Representatives' Warrants") entitling the
holder(s) to purchase up to an aggregate of 50,000 shares (or up to 61,250
shares if the over-allotment is exercised), of the Company's Series A
Preferred Stock, $.001 par value per share (the "Preferred Stock"), at a
purchase price of $.0001 per Representatives' Warrant ($5.00 in aggregate)
(the Representatives' Warrants and Preferred Stock into which the
Representatives' Warrants are exercisable being collectively referred to as
the "Warrant Securities"); and
WHEREAS, the Representatives have agreed pursuant to the
underwriting agreement (the "Underwriting Agreement") dated as of the date
hereof among the underwriters named therein and the Company to act as the
representatives of such underwriters, in connection with the Company's
proposed public offering of 500,000 shares of Preferred Stock at a public
offering price of $10.00 per share of Preferred Stock (the "Public
Offering"); and
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WHEREAS, the Representatives' Warrants to be issued
pursuant to this Agreement will be issued on the Closing Date and each Option
Closing Date (s), if any, (as such terms are defined in the Underwriting
Agreement) by the Company to the Underwriters in consideration for, and as
part of the Underwriters' compensation in connection with, and pursuant to
the Underwriting Agreement;
NOW, THEREFORE, in consideration of the premises, the
payment by the Underwriters 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 Underwriters are 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 $16.50 per share of Preferred
Stock subject to the terms and conditions of this Agreement. Except as set
forth herein, the shares of Preferred Stock issuable upon exercise of the
Representatives' Warrants are in all respects identical to the shares of
Preferred Stock being purchased by the Underwriters for resale 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,
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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 Representatives' Warrants
initially are exercisable at an aggregate initial exercise price (subject to
adjustment as provided in Section 8 hereof) per share of Preferred Stock as
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 shares of Preferred Stock 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
shares of Preferred Stock 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
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Representatives' Warrants shall have the right at any time and from time to
time to exercise the Representatives' 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 Representatives' 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 Representatives' Warrants
are exercised multiplied by the Exercise Price (as hereinafter defined) and
the denominator of which shall be the Market Price.
3.3 Definition of Market Price. As used herein, the
phrase "Market Price" at any date shall be deemed to be (i) when referring to
the 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
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<PAGE>
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
Representatives' Warrants, the issuance of certificates for shares of
Preferred Stock and/or other securities, properties or rights underlying such
Representatives' Warrants, shall be made forthwith (and in any event within
five (5) business days thereafter) without charge to the Holder thereof
including, without limitation, any tax which may be payable in respect of the
issuance thereof, and such certificates shall (subject to the provisions of
Sections 5 and 7 hereof) be issued in the name of, or in such names as may be
directed by, the Holder thereof; provided, however, that the Company shall
not be required to pay any tax which may be payable in respect of any
transfer involved in the issuance and delivery of any such certificates in a
name other than that of the Holder and the Company shall not be required to
issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that
such tax has been paid.
The Warrant Certificates and the certificates
representing the shares of Preferred Stock (and/or other securities, property
or rights issuable upon the exercise of the Representatives' 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
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<PAGE>
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
Representatives' Warrants are being acquired as an investment and not with a
view to the distribution thereof; that the Representatives' 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.
6. Exercise Price.
6.1 Initial and Adjusted Exercise Price. Except as
otherwise provided in Section 8 hereof, the initial exercise price of each
Underwriters Warrant shall be $16.50 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 Representatives' Warrants and the shares of Preferred Stock
issuable upon exercise of the Representatives' Warrants
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<PAGE>
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 effective date of the Registration Statement, the
Representatives' and other Holders shall have, commencing the date of any
such occasion, the contingent registration rights ("Registration Rights") set
forth in Sections 7.3 and 7.4 hereof.
7.3 Piggyback Registration. (1) If, at any time
commencing after the effective date of the Registration Statement and
expiring on the seventh (7th) anniversary of the effective date of the
Registration Statement, the Company proposes to register any of its
securities under the Act, either for its own account or the account of any
other security holder or holders of the Company possessing registration
rights ("Other Stockholders") (other than pursuant to Form S-4, Form S-8 or
comparable registration statement), it shall give written notice, at least
thirty (30) days prior to the filing of each such registration statement, to
the Representatives and to all other Holders of Representatives' Warrants
and/or shares of Preferred Stock issuable upon exercise of the
Representatives' Warrants (collectively the "Registrable Securities") of its
intention to do so. If the Representatives 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
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<PAGE>
such proposed registration statement, the Company shall afford the
Representatives and such other Holders of such securities the opportunity to
have any such securities registered under such registration statement.
(2) If the registration of which the Company gives
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Representatives and such other Holders as part of
the written notice given pursuant to Section 7.3(a) hereof. The right of the
Representatives 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 Representatives and all
other Holders proposing to distribute their securities through such
underwriting shall (together with the Company and any officers, directors or
other stockholders distributing their securities through such underwriting)
enter into an underwriting agreement in customary form with the
representatives of the underwriter or underwriters selected by the Company.
Notwithstanding any other provision of this Section 7.3, if the
representatives 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 representatives 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 Representatives 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 Representatives
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.
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<PAGE>
(3) Notwithstanding the provisions of this Section
7.3, the Company shall have the right at any time after it shall have given
written notice pursuant to Section 7.3(a) hereof (irrespective of whether a
written request for inclusion of any such securities shall have been made) to
elect not to file any such proposed registration statement, or to withdraw
the same after the filing but prior to the effective date thereof.
7.4 Demand Registration. (1) At any time commencing
after the effective date of the Registration Statement and ending on the
fifth (5th) anniversary of the effective date of the Registration Statement,
the Holders of Registrable Securities representing a "Majority" (as
hereinafter defined) of such securities (assuming the exercise of all of the
Representatives' Warrants) (the "Initiating Holders") shall have the right
(which right is in addition to the registration rights under Section 7.3
hereof), exercisable by written notice to the Company, to have the Company
prepare and file with the Commission, on one occasion, a registration
statement and such other documents, including a prospectus, as may be
necessary in the opinion of both counsel for the Company and counsel for the
Holders, in order to comply with the provisions of the Act, so as to permit a
public offering and sale of their respective Registrable Securities for up to
two hundred and seventy (270) days by such Holders and any other Holders of
Registrable Securities, as well as any other security holders possessing
similar registration rights, who notify the Company within twenty-one (21)
days after receiving notice from the Company of such request.
(2) The Company covenants and agrees to give written
notice of any registration request under this Section 7.4 by any Holder or
Holders to all other registered Holders of Registrable Securities, as well as
any other security holders possessing similar registration rights, within ten
(10) days after the date of the receipt of any such registration request.
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<PAGE>
(3) If the Initiating Holders intend to distribute
the Registrable Securities covered by their request by means of an
underwriting, they shall so advise the Company as a part of their request
made pursuant to Section 7.4(a) hereof. The right of any Holder to
registration pursuant to this Section 7.4 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting to the extent and subject
to the limitations provided herein. A Holder may elect to include in such
underwriting all or a part of the Registrable Securities it holds.
(4) The Company shall (together with all Holders,
officers, directors and other stockholders proposing to distribute their
securities through such underwriting) enter into an underwriting agreement in
customary form with the representatives of the underwriters selected for such
underwriting by the Initiating Holders, which underwriter(s) shall be
reasonably acceptable to the Representatives. Notwithstanding any other
provision of this Section 7.4, if the representatives 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 representatives 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
Representatives 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 Representatives 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
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<PAGE>
elect to withdraw its securities therefrom by written notice to the Company,
the Representatives 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.
(5) In the event that the Initiating Holders are
unable to sell all of the Registrable Securities for which they have
requested registration due to the provisions of Section 7.4(d) hereof and if,
at that time, the Initiating Holders are not permitted to sell Registrable
Securities under Rule 144(k), the Initiating Holders shall be entitled to
require the Company to afford the Initiating Holders an opportunity to effect
one additional demand registration under this Section 7.4.
(6) In addition to the registration rights under
Section 7.3 and subsection (a) of Section 7.4 hereof, at any time commencing
on the date hereof and expiring five (5) years thereafter any Holder of
Registrable Securities shall have the right, exercisable by written request
to the Company, to have the Company prepare and file, on one occasion, with
the Commission a registration statement so as to permit a public offering and
sale for 270 days by any such Holder of its Registrable Securities provided,
however, that the provisions of Section 7.5(b) hereof, shall not apply to any
such registration request and registration and all costs incident thereto
shall be at the expense of the Holder or Holder's making such request.
(7) Notwithstanding anything to the contrary
contained herein, if the Company shall not have filed a registration
statement for the Registrable Securities of the Initiating
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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 Representatives' Warrants at such Market
Price less the Exercise Price of such Representatives' Warrant. Such
repurchase shall be in immediately available funds and shall close within
five (5) business days after the expiration of the period specified in
Section 7.5(a).
7.5 Covenants of the Company With Respect to
Registration. In connection with any registration under Sections 7.3 and 7.4
hereof, the Company covenants and agrees as follows:
(1) The Company shall use its best efforts to file a
registration statement within sixty (60) days of receipt of any demand
therefor, shall use its best efforts to have any registration statements
declared effective at the earliest possible time, and shall furnish each
Holder desiring to sell Registrable Securities such number of prospectuses as
shall reasonably be requested.
(2) The Company shall pay all costs (excluding fees
and expenses of Holder(s)' counsel and any underwriting or selling
commissions), fees and expenses in connection with all registration
statements filed pursuant to Sections 7.3 and 7.4 hereof including, without
limitation, the Company's legal and accounting fees, printing expenses, blue
sky fees and expenses. If the Company shall fail to comply with the
provisions of Section 7.5(a), the Company shall, in addition to any other
equitable or other relief available to the Holder(s), extend the exercise
period of the Representatives' Warrants by such number of days as shall equal
the delay caused by the
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Company's failure.
(3) The Company will take all necessary action which
may be required in qualifying or registering the Registrable Securities
included in a registration statement for offering and sale under the
securities or blue sky laws of such states as reasonably are requested by the
Holder(s); provided that the Company shall not be obligated to execute or
file any general consent to service of process or to qualify as a foreign
corporation to do business under the laws of any such jurisdiction.
(4) The Company shall indemnify the Holder(s) of the
Registrable Securities to be sold pursuant to any registration statement and
each person, if any, who controls such Holders within the meaning of Section
15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as
amended ("Exchange Act"), against all loss, claim, damage, expense or
liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which any of them may
become subject under the Act, the Exchange Act or otherwise, arising from
such registration statement but only to the same extent and with the same
effect as the provisions pursuant to which the Company has agreed to
indemnify each of the Underwriters contained in Section 7 of the Underwriting
Agreement.
(5) The Holder(s) of the Registrable Securities to
be sold pursuant to a registration statement, and their successors and
assigns, shall severally, and not jointly, indemnify the Company, its
officers and directors and each person, if any, who controls the Company
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, against all loss, claim, damage or expense or liability (including all
expenses reasonably incurred in investigating, preparing or defending against
any claim whatsoever) to which they may become subject under the Act, the
exchange Act or otherwise, arising from information furnished by or on behalf
of such Holders, or
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<PAGE>
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
Underwriters have agreed to indemnify the Company.
(6) For a period of one hundred eighty (180) days
after the effectiveness of any registration statement filed pursuant to
Section 7.4 hereof, the Company shall not permit any other registration
statement (other than (1) a registration statement relating to the securities
for which the Company has granted demand registration rights, as described in
the Prospectus included in the Registration Statement, (2) a registration
statement relating to the securities for which the Company has granted
piggyback registration rights, as described in the Prospectus included in the
Registration Statement and (3) a registration statement filed on Forms S-4 or
S-8 to be or remain effective during the effectiveness of a registration
statement filed pursuant to Section 7.4 hereof, without the prior written
consent of the Holders of the Registrable Securities representing a Majority
of such securities.
(7) The Company shall furnish upon request to each
Holder participating in the offering and to each underwriter, if any, a
signed counterpart, addressed to such Holder or underwriter, of (i) an
opinion of counsel to the Company, dated the effective date of such
registration statement (and, if such registration includes an underwritten
public offering, an opinion dated the date of the closing under the
underwriting agreement), and (ii) a "cold comfort" letter dated the effective
date of such registration statement (and, if such registration includes an
underwritten public offering, a letter dated the date of the closing under
the underwriting agreement) signed by the independent public accountants who
have issued a report on the Company's financial statements included in such
registration statement, in each case covering substantially the same matters
with
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respect to such registration statement (and the prospectus included therein)
and, in the case of such accountants' letter, with respect to events
subsequent to the date of such financial statements, as are customarily
covered in opinions of issuer's counsel and in accountants' letters delivered
to underwriters in underwritten public offerings of securities.
(8) The Company shall as soon as practicable after
the effective date of any registration statement filed pursuant to Sections
7.3 and 7.4 hereof, and in any event within 15 months thereafter, make
Agenerally 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.
(9) The Company shall deliver promptly to each
Holder participating in the offering requesting the correspondence and
memoranda described below and to the managing underwriters, copies of all
written correspondence between the Commission and the Company, its counsel or
auditors and all memoranda relating to discussions with the Commission or its
staff with respect to the registration statement and permit each Holder and
underwriters to do such investigation, upon reasonable advance notice, with
respect to information contained in or omitted from the registration
statement as it deems reasonably necessary to comply with applicable
securities laws or rules of the NASD. Such investigation shall include access
to books, records and properties and opportunities to discuss the business of
the Company with its officers and independent auditors, all to such
reasonable extent and at such reasonable times and as often as any such
Holder or underwriter shall reasonably request.
(10) With respect to any registration under Section
7.4 hereof, the Company shall enter into an underwriting agreement with the
managing underwriter selected for
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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.
(11) For purposes of this Agreement, the term
"Majority" in reference to the Holders of Registrable Securities, shall mean
in excess of fifty percent (50%) of the then outstanding Representatives'
Warrants and/or Shares of Preferred Stock issued upon exercise of the
Representatives' Warrants that (i) are not held by the Company, an affiliate,
officer, creditor, employee or agent thereof or any of their respective
affiliates, members of their family, persons acting as nominees or in
conjunction therewith and (ii) have not been resold to the public pursuant to
a registration statement filed with the Commission under the Act.
(12) Nothing contained in this Agreement shall be
construed as requiring the Holder(s) to exercise their Representatives'
Warrants prior to the initial filing of any registration statement or the
effectiveness thereof.
(13) In addition to the Registrable Securities, upon
the written request therefor, by any Holder(s), the Company shall include in
the registration statement any other securities of the Company held by such
Holder(s) as of the date of filing of such registration
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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 Representatives' Warrants are not,
at the time of such exercise, registered under the Act, any certificates
representing the shares of Preferred Stock underlying the Representatives'
Warrants and any of the other securities issuable upon exercise of the
Representatives' Warrants shall bear the following restrictive legend:
The securities represented by this certificate have not
been registered under the Securities Act of 1933, as amended ("Act"), and may
not be offered or sold except pursuant to (i) an effective registration
statement under the Act, (ii) to the extent applicable, Rule 144 under the
Act (or any similar rule under such Act relating to the disposition of
securities), or (iii) an opinion of counsel, if such opinion shall be
reasonably satisfactory to counsel to the issuer, that an exemption from
registration under such Act is available.
8. Adjustments to Exercise Price and Number of
Securities.
8.1 Computation of Adjusted Exercise Price. Except as
hereinafter provided, in the event the Company shall at any time after the
date hereof issue or sell any shares of 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
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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.
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
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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 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
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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 to the issuance of such options, rights or warrants,
or such convertible or exchangeable securities, or without consideration, the
Exercise Price in effect immediately prior to the issuance of such options,
rights or warrants, or such convertible or exchangeable securities, as the
case may be, shall be reduced to a price determined by making a computation
in accordance with the provisions of Section 8.1 hereof, provided that:
(1) The aggregate maximum number of shares of
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 Representatives' Warrants), if any,
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received by the Company for such options, rights or warrants.
(2) 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 Representatives' Warrants) received by the Company for such securities,
plus the minimum consideration, if any, receivable by the Company upon the
conversion or exchange thereof.
(3) If any change shall occur in the price per share
provided for in any of the options, rights or warrants referred to in
subsection (a) of this Section 8.2, or in the price per share at which the
securities referred to in subsection (b) of this Section 8.2 are convertible
or exchangeable, such options, rights or warrants or conversion or exchange
rights, as the case may be, shall be deemed to have expired or terminated on
the date when such price change became effective in respect of shares not
theretofore issued pursuant to the exercise or conversion or exchange
thereof, and the Company shall be deemed to have issued upon such date new
options, rights or warrants or convertible or exchangeable securities at the
new price in respect of the number of shares issuable upon the exercise of
such options, rights or warrants or the conversion or exchange of such
convertible or exchangeable securities.
8.3 Subdivision and Combination. In case the Company
shall at any time subdivide or combine the outstanding shares of 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
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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
Representatives' 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 Representatives' 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 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 Representatives' Warrant then
outstanding or to be outstanding shall have the right thereafter (until the
expiration of
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such Representatives' 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 Representatives'
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:
(1) Upon the issuance or sale of the
Representatives' Warrants or the shares of Preferred Stock issuable upon the
exercise of the Representatives' Warrants; or
(2) If the amount of said adjustment shall be less
than two cents (2 cents) 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 cents) 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 Representatives'
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
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the unexercised Representatives' 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
Representatives' 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 Representatives' 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 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 Representatives' 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 Representatives' Warrants.
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Representatives' 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 Representatives' 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 Representatives' 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
Representatives' 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:
(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
Representatives' 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 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 Representatives' Warrants
as quoted or reported on Nasdaq, as the case may be; or
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(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 Representatives' 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 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 Representatives' 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
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reserve and keep available out of its authorized shares of Preferred Stock,
solely for the purpose of issuance upon the exercise of the Representatives'
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 Representatives'
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 Representatives'
Warrants shall be outstanding, the Company shall use its best efforts to
cause all shares of Preferred Stock issuable upon the exercise of the
Representatives' 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.
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 Representatives' Warrants
and their exercise, any of the following events shall occur:
(1) the Company shall take a record of the holders of
its shares of Preferred Stock for the purpose of entitling them to receive a
dividend or distribution payable other than in cash, or a cash dividend or
distribution payable other than out of current or retained earnings, as
indicated by the accounting treatment of such dividend or distribution on the
books of the Company; or
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(2) 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
(3) a dissolution, liquidation or winding up of the
Company (other than in connection with a consolidation or merger) or a sale
of all or substantially all of its property, assets and business as an
entirety shall be proposed; then, in any one or more of said events, the
Company shall give written notice of such event at least fifteen (15) days
prior to the date fixed as a record date or the date of closing the transfer
books for the determination of the stockholders entitled to such dividend,
distribution, convertible or exchangeable securities or subscription rights,
or entitled to vote on such proposed dissolution, liquidation, winding up or
sale. Such notice shall specify such record date or the date of closing the
transfer book, as the case may be. Failure to give such notice or any defect
therein shall not affect the validity of any action taken in connection with
the declaration or payment of any such dividend, or the issuance of any
convertible or exchangeable securities, or subscription rights, options or
warrants, or any proposed dissolution, liquidation, winding up or sale.
130 Representatives' Warrants.
The form of the certificate representing the
Representatives' Warrants (and the form of election to purchase shares of
Preferred Stock upon the exercise of Representatives' Warrants and the form
of assignment printed on the reverse thereof) shall be substantially as set
forth in Exhibit "A" to the Representatives' Warrant Agreement. Each
Representatives' Warrant shall entitle the Holder to purchase one fully paid
and non-assessable share of Preferred Stock at an initial purchase price of
$16.50 per share from ______________, 1999 until 5:00 P.M. New York time on
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_____________, 2003 at which time the Representatives' Warrants shall expire.
The exercise price of the Representatives' Warrants and the number of shares
of Preferred Stock issuable upon the exercise of the Representatives'
Warrants are subject to adjustment, whether or not the Representatives'
Warrants have been exercised, in the manner and upon the occurrence of the
events set forth in Section 8 of this Agreement. Subject to the provisions of
this Agreement and upon issuance of the Representatives' Warrants, each
registered holder of such Representatives' Warrants 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
Representatives' Warrants 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 Representatives' Warrants, the
Company shall forthwith issue to the registered holder of any such
Representatives' 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
Representatives' Warrants shall be governed in all respects by the terms of
the Warrant Agreement. The Representatives' Warrants shall be transferable in
the manner provided in the Warrant Agreement, and upon any such transfer, a
new 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 Representatives' Warrants have been exercised, any and all
notices required by the Warrant Agreement to be sent to holders of the
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Representatives' Warrants.
140 Notices.
All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made and
sent when delivered, or mailed by registered or certified mail, return
receipt requested:
(1) If to the registered Holder of the Representatives'
Warrants, to the address of such Holder as shown on the books of the Company;
or
(2) If to the Company, to the address set forth in
Section 3 hereof or to such other address as the Company may designate by
notice to the Holders.
150 Supplements and Amendments. The Company and the
Representatives may from time to time supplement or amend this Agreement
without the approval of any Holders of Warrant Certificates in order to cure
any ambiguity, to correct or supplement any provision contained herein which
may be defective or inconsistent with any provisions herein, or to make any
other provisions in regard to matters or questions arising hereunder which
the Company and the Underwriters may deem necessary or desirable and which
the Company and the Representatives deem shall not adversely affect the
interests of the Holders of Warrant Certificates.
160 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.
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170 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.
180 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 Representatives 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 District Court
of the United States of America for the Southern District of New York, and
irrevocably submits to such jurisdiction, which jurisdiction shall be
exclusive. The Company, the Representatives 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 Representatives 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 Representatives 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
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relating to such action or proceeding and/or incurred in connection with the
preparation therefor.
190 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.
200 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.
210 Captions. The caption headings of the Sections of
this Agreement are for convenience of reference only and are not intended,
nor should they be construed as, a part of this Agreement and shall be given
no substantive effect.
220 Benefits of this Agreement. Nothing in this
Agreement shall be construed to give to any person or corporation other than
the Company and the Representatives 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 Representatives and any other registered
Holders of Warrant Certificates or Warrant Securities.
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230 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.
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
J. P. TURNER & CO., L.L.C.
By:
_________________, President
KLEIN MAUS AND SHIRE, INC.
By: ____________________________-
Mohammed Ali Khan, President
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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-______ ______ Warrants to Purchase
________ Shares of Series A Preferred Stock
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WARRANT CERTIFICATE
This Warrant Certificate certifies that
_________________, 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
___________ 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 $16.50 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 Representatives' Warrant Agreement
dated as of ________________, 1998 between the Company and _______________
and Klein Maus and Shire, Inc. (the "Representatives' 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
Representatives' Warrant Agreement, which Representatives' 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 Representatives' 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
Representatives' 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 Representatives' 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
-35-
<PAGE>
representing such numbered unexercised Warrants.
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 Representatives' Warrant Agreement shall have the meanings
assigned to them in the Representatives' 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 Representatives' Warrant Agreement dated as of ___________________, 1998
between AWG, Ltd., J. P. Turner & Co., L.L.C., 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-
6.3.1 Amendment to 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 11-15-1998 30590301 2 3059 7
<FN>
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.
</TABLE>
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 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 June 30,
1998.
BORROWER:
AWG LTD., A NEVADA CORPORATION
BY: /S/ Mack Jenning
-------------------------
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) 1998 CFI ProServices,
Inc. All right reserved.[CA-121 AWG.LNC1OVL]
6.5.1 Second Promissory Note in favor of Mack Jennings
<PAGE>
PROMISSORY NOTE
$25,000.00 No. _______ Date August 1, 1998
AWG, Ltd., without grace, a corporation organized and existing under the laws
of the State of Nevada with the principal office for the transaction of its
business located in Napa, County of Napa, State of California, promises to
pay to Mack H. Jennings or order, at Napa, California the sum of Twenty-Five
Thousand Dollars, payable only in lawful money of the United States of
America, for value received, with interest thereon in like lawful money at
the rate of nine percent (9%) per annum from date until paid, interest
payable monthly.
/s/ Mack Jennings
- ------------------------ ------------------------
Secretary President
This document is only a general form which may be proper for use in simple
transaction and in no way acts, or is intended to act, as a substitute for
the advice of an attorney. The publisher does not make any warranty, either
express or implied, as to the legal validity of any provision or the
suitability of these forms in any specific transaction.
6.7.1 Third Promissory Note in favor of Mario Andretti
<PAGE>
PROMISSORY NOTE
$10,000.00
53 Victory Lane
Nazareth, PA 18064
April 23, 1998
FOR VALUE RECEIVED, the undersigned, AWG, Ltd. ("Obligor") promises to pay to
the order of Mario Andretti, ("Payee"), the principal amount of Ten Thousand
and 00/100 Dollars ($10,000.00) and interest on the unpaid principal balance
at a rate of nine percent (9%) per annum from the date of this note. Interest
only shall be payable monthly with the first interest only payment commencing
on May 1, 1998.
The principal of this note and the accrued interest on this note shall
be paid in full either upon the acquisition of capital funding by Obligor or
by January 1, 1999, whichever shall first occur. Obligor may prepay all or
part of the principal on this note at any time without penalty of any kind.
Each payment upon this note shall be made at the Payee's address as set
forth above or at such other place as the holder of this note may direct in
writing.
If default occurs in the payment of any principal or interest and if the
default continues for thirty (30) days after Payee gives Obligor written
notice specifying the basis of the default, or if a voluntary or involuntary
case in bankruptcy, receivership, or insolvency is at any time instituted by
or against Obligor, then the indebtedness evidenced by this note shall, at
the option of the holder, become immediately due and payable, without notice
or demand.
Obligor agrees to pay any and all expenses, including reasonable
attorney fees and legal expense paid or incurred by the holder in attempting
to collect this note.
This note shall be governed by and interpreted according to the law of
the State of Michigan.
OBLIGOR:
AWG, Ltd.
By: /s/ Mack Jennings
---------------------
Mack Jennings
President
Dated: April 23, 1998
6.8.1 Second Promissory Note in favor of Sports Management Network, Inc.
<PAGE>
PROMISSORY NOTE
$10,000.00
1668 Telegraph Road
Suite 200
Bloomfield Hills, Michigan 48302
April 23, 1998
FOR VALUE RECEIVED, the undersigned, AWG, Ltd. ("Obligor") promises to pay to
the order of Sports Management Network, Inc. ("Payee"), the principal amount
of Ten Thousand and 00/100 Dollars ($10,000.00) and interest on the unpaid
principal balance at a rate of nine percent (9%) per annum from the date of
this note. Interest only shall be payable monthly with the first interest
only payment commencing on May 1, 1998.
The principal of this note and the accrued interest on this note shall
be paid in full either upon the acquisition of capital funding by Obligor or
by January 1, 1999, whichever shall first occur. Obligor may prepay all or
part of the principal on this note at any time without penalty of any kind.
Each payment upon this note shall be made at the Payee's address as set
forth above or at such other place as the holder of this note may direct in
writing.
If default occurs in the payment of any principal or interest and if the
default continues for thirty (30) days after Payee gives Obligor written
notice specifying the basis of the default, or if a voluntary or involuntary
case in bankruptcy, receivership, or insolvency is at any time instituted by
or against Obligor, then the indebtedness evidenced by this note shall, at
the option of the holder, become immediately due and payable, without notice
or demand.
Obligor agrees to pay any and all expenses, including reasonable
attorney fees and legal expense paid or incurred by the holder in attempting
to collect this note.
This note shall be governed by and interpreted according to the law of
the State of Michigan.
OBLIGOR:
AWG, Ltd.
By: /s/ Mack Jennings
---------------------
Mack Jennings
Its: President
Dated: April 23, 1998
6.10.1 Lock-Up Agreement between Colin Frank Riseam, AWG, Ltd. and
Klein, Maus and Shire, Inc.
November ______, 1998
Klein Maus and Shire, Inc.
110 Wall Street
New York, New York 10005
J.P. Turner & Company, L.L.C.
3340 Peachtree Road, Suite 450
Atlanta, Georgia 30326
AWG, Ltd.
4162 Big Ranch Road
Napa, California 94558
Gentlemen:
The undersigned holder of five hundred thousand (500,000)
shares of the Series A 6% Preferred Stock, $.001 par value per share (the
"Preferred Stock"), of AWG, Ltd., a Nevada corporation (the "Company"), which
shall in addition also include any shares of Preferred Stock issuable to the
holder upon the exercise of options or warrants, or acquired upon conversion
of any other securities owned by the undersigned holder, in consideration of
the underwriting of a public offering (the "Public Offering") of securities
of the Company by J.P. Turner & Company, L.L.C. and Klein Maus and Shire,
Inc. (the "Underwriters"), hereby irrevocably agrees that for a period
commencing as of the date hereof and thereafter for a continuous period
expiring thirteen (13) months (the "Lock-up Period") from the effective date
(the "Effective Date") of the Company's Registration Statement on Form SB-1
(Registration No. 333-48165) which relates to the Public Offering of its
securities by the Underwriters, the undersigned holder will not offer, sell,
transfer, hypothecate or otherwise depose of any shares of Preferred Stock of
the Company now owned or hereafter acquired, whether beneficially or of
record, by the undersigned holder, including, but not limited to shares of
Preferred Stock acquired upon exercise of options or warrants or acquired
upon conversion of any other securities owned by the undersigned holder
(collectively, the "Securities"), except by means of a private
<PAGE>
-2- November ___, 1998
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
consummation of such private transaction; provided that the foregoing shall
not apply to shares of Preferred 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 he 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 a Lock-up Agreement
between the shareholder, the Company and the
Underwriters, which agreement is on file with the
Company and the stock transfer agent, from which a copy
is available upon request and without charge.
4. A copy of this Agreement to be filed with NASD
Regulation, Inc., Corporate Financing Department.
It is further understood and agreed by the undersigned that
the 500,000 shares of Preferred Stock being included for registration in the
Public Offering will not be offered for sale during the Lock-up Period.
Upon the expiration of the Lock-up Period any NASD member
acquiring the released shares of Preferred Stock shall notify the NASD of the
Lock-up release and disclose the purchase price and other material terms of
the sale of such released shares.
Notwithstanding anything to the contrary in this Agreement,
this Agreement shall terminate upon the termination of the Letter of Intent
dated November 25, 1997 between the Company and the Underwriters relating to
the Public Offering in accordance with the provisions of the Letter of Intent
or, if the Company
<PAGE>
-3- November ___, 1998
and the Underwriters enter into an underwriting agreement with respect to the
Public Offering, upon termination of the underwriting agreement without
consummation of the Public Offering.
This Agreement may be executed in multiple counterparts and on
facsimile paper and by facsimile transmission as necessary. When each of the
parties has signed and delivered at least one such counterpart, each
counterpart will be deemed an original and, when taken together with the
other signed counterpart(s), shall constitute one fully executed copy of this
Agreement, which shall be binding upon and effective as to the parties
according to its terms.
Very truly yours,
----------------------------
Name: Colin Frank Riseam
Address: 110 Park Road
Hampton Hill
England TW 12 1 HR
<PAGE>
-4- November ___, 1998
Acknowledged and Agreed:
KLEIN MAUS AND SHIRE, INC.
By:
---------------------------------
Mohammad Ali Khan, President
J.P. TURNER & COMPANY, L.L.C.
By:
-------------------------------
Patrick Power, Director of
Investment Banking
AWG, LTD.
By:
- -----------------------------------
Mack H. Jennings, President
6.16 Promissory Note in favor of Joseph Antonini
<PAGE>
PROMISSORY NOTE
up to $300,000.00
1800 West Maple Road Troy, MI
48084 August 1, 1998
FOR VALUE RECEIVED, the undersigned, AWG, Ltd. ("Obligor") promises to pay to
the order of Joseph E. Antonini, ("Payee"), the principal amount of Three
Hundred Thousand and 00/100 Dollars ($300,000.00) or so much of such amount
as may be outstanding from time to time and interest on the unpaid principal
balance at a rate equal to the Prime Rate of Comerica Bank as in effect from
time to time. Interest only shall be payable monthly with the first interest
only payment commencing on September 1, 1998.
The principal of this note and the accrued interest on this note shall
be paid in full either upon the acquisition of capital funding by Obligor or
by March 1, 1999, whichever shall first occur. Obligor may prepay all or part
of the principal on this note at any time without penalty of any kind.
Each payment upon this note shall be made at the Payee's address as set
forth above or at such other place as the holder of this note may direct in
writing.
If default occurs in the payment of any principal or interest and if the
default continues for thirty (30) days after Payee gives Obligor written
notice specifying the basis of the default, or if a voluntary or involuntary
case in bankruptcy, receivership, or insolvency is at any time instituted by
or against Obligor, then the indebtedness evidenced by this note shall, at
the option of the holder, become immediately due and payable, without notice
or demand.
Obligor agrees to pay any and all expenses, including reasonable
attorney fees and legal expense paid or incurred by the holder in attempting
to collect this note.
This note shall be governed by and interpreted according to the law of
the State of Michigan.
OBLIGOR:
AWG, Ltd.
By: /s/ Mack Jennings
---------------------
Mack Jennings
Its: President
Dated: August 1, 1998
6.17 Loan Commitment from Comerica Bank
<PAGE>
- -----------------------------------------------------------------------
Comerica Bank
Comerica Private Banking
1400 N. Woodward Ave.
Suite 255
Bloomfield Hills, MI 48304
248-901-4603
Lora McEachern
Vice President
Tuesday, July 28, 1998
Joseph Antonini
J.E.A. Enterprises, L.L.C.
1800 West Maple Road
Suite 100
Troy, MI 48084
Dear Mr. Antonini:
Thank you for giving us the opportunity to discuss your investment in
Andretti Wine Group. I am pleased to confirm that Comerica Bank (Comerica)
has approved the following secured term loans and line of credit ("the Loan")
in the name of AWG, Ltd. The following shall evidence the terms and
understanding in relation thereto (collectively the "Commitment"):
LOAN #1
Borrower AWG, Ltd.
- -------- ---------
Purpose To refinance the current mortgage and other debt obligations.
Amount $1,650,000
Term Up to a seven year term with 15 year amortization
Interest Rate Interest will be calculated at your option based on the
following:
A) A variable rate based on Comerica's Prime Rate. The
interest rate changes are effective as and when Comerica's
Prime Rate changes. As of today, Comerica's Prime Rate is
equivalent to 8.50%.
B) A fixed interest rate as quoted by the Bank and accepted by
the Borrower, to be determined at the time of closing. As of
today, the fixed interest rate is equivalent to 7.60%.
<PAGE>
Late Fee In addition, a late charge equal to 5% of each late
payment will be charged within 10 calendar days after the
payment due date.
Repayment The loan will be repaid in monthly installments of
approximately $15,293 inclusive of interest (based on a fixed
interest rate of 7.60%). In the event of a change in the
variable rate of interest applicable to the loan, this payment
amount may be recalculated from time to time at Comerica's
option to provide for proper amortization within the loan
term. Additionally, all payments are to be automatically
deducted from a Comerica Bank checking account, otherwise a
$10.00 monthly fee will be added to the monthly payment
amount.
Prepayment The note will contain a prepayment premium,
but the calculation will be determined by the rate of
interest selected by the Borrower. If Borrower selects a
variable rate, option A is applicable; if Borrower
selects a fixed rate, option B is applicable.
A) No prepayment premium. Borrower may prepay the principal in
whole or in part at any time.
B) Upon five (5) days written notice to Comerica, or at any
time upon any voluntary or involuntary payment (whether by
acceleration of the note or otherwise), Borrower may prepay
the note in whole or in part in an amount of at least
$10,000.00 upon payment of the prepayment premium as
outlined in the note.
Collateral A first real state mortgage on property located at 4162 Big
Ranch Road, Napa, California. Subject to a Phase I
environmental audit satisfactory to the Bank. Maximum loan to
value of 75%. To be cross-collateralized with Loans #2 and #3
below.
Guaranties The loan will be supported by the unsecured personal
guaranties of Joseph Antonini and Mario Andretti, each limited
to 50% of the loan balance.
Commitment Fee One-half percent (1/2%) of the loan amount, plus out of pocket
fees, payable at closing.
Other Fees Borrower agrees to pay all out-of-pocket fees and closing
costs, including, but not limited to, appraisal, filing,
recording, title, and attorney fees.
<PAGE>
Insurance Borrower must maintain hazard insurance naming Comerica as
mortgagee or loss payee on any assets taken as collateral by
Comerica.
LOAN #2
Borrower AWG, Ltd.
- -------- ---------
Purpose To refinance the current mortgage and other debt obligations
Amount $850,000
Term Seven year term with 7 year amortization
Interest Rate Interest will be calculated at your option based on the
following:
A) A variable rate based on Comerica's Prime Rate. The
interest rate changes are effective as and when Comerica's
Prime Rate changes. As of today, Comerica's Prime Rate is
equivalent to 8.50%.
B) A fixed interest rate as quoted by the Bank and accepted by
the Borrower, to be determined at the time of closing. As of
today, the fixed interest rate is equivalent to 7.60%.
Late Fee In addition, a late charge equal to 5% of each late payment
will be charged within 10 calendar days after the payment due
date.
Repayment The loan will be repaid in monthly installments of
approximately $12,997 inclusive of interest (based on a fixed
interest rate of 7.60%). In the event of a change in the
variable rate of interest applicable to the loan, this payment
amount may be regulated from time to time at Comerica's option
to provide for proper amortization within the loan term.
Additionally, all payments are to be automatically deducted
from a Comerica Bank checking account, otherwise a $10.00
monthly fee will be added to the monthly payment amount.
Prepayment The note will contain a prepayment premium but the calculation
will be determined by the rate of interest selected by the
Borrower. If Borrower selects a variable rate, option A is
applicable; if Borrower selects a fixed rate, option B is
applicable.
A) No prepayment premium. Borrower may prepay the principal in
whole or in part at any time.
B) Upon five (5) days written notice to Comerica, or at any
time upon any voluntary or involuntary prepayment (whether
by
<PAGE>
acceleration of her note or otherwise), Borrower may prepay
the note in whole or in part in an amount of at least
$10,000.00 upon payment of the prepayment premium as
outlined in the note.
Collateral A first security interest on the following business assets:
*Machinery and Equipment
*Vines
*Winery Permit
To be cross-collateralized with Loan #1 above and Loan #3
below.
Guaranties The loan will be supported by the unsecured personal
guaranties of Joseph Antonini and Mario Andretti, each limited
to 50% of the loan balance.
Commitment One-half percent (1/2%) of the loan amount,
Fee plus out of pocket fees, payable at closing.
Other Fees Borrower agrees to pay all out-of-pocket fees and closing
costs, including, but not limited to, appraisal, filing,
recording, title, and attorney fees.
Insurance Borrower must maintain hazard insurance naming Comerica as
mortgagee or loss payee on any assets taken as collateral by
Comerica.
LOAN #3
Borrower AWG, Ltd.
- -------- ---------
Purpose To provide a working capital line of credit
Amount $200,000
Term One year term; to mature on April, 1999.
Interest Rate Interest will be calculated at a variable rate based on
Comerica's Prime Rate plus .25%. The interest rate changes are
effective as and when Comerica's Prime Rate changes. As of
today, Comerica's Prime Rate is equivalent to 8.50%.
Late Fee In addition, a late charge equal to 5% of each late
payment will be charged within 10 calendar days after the
payment due date.
Advances Borrower may request advances via telephone or in writing up
until 3:00 pm each business day. Verbal requests must be
followed up in
<PAGE>
writing (letter or fax) within three business days. Advances
may be made via direct deposit to Borrowers Comerica account,
cashier check, or Fed wire. Requests for wires must be in
writing. Comerica is not obligated to make any advances under
this credit facility.
Repayment Interest charges are to be paid on a monthly basis.
Additionally, all payments are to be automatically deducted
from a Comerica Bank checking account, otherwise a $10.00
monthly fee will be added to the monthly payment amount.
Collateral A first security interest on the following business assets:
* Accounts Receivable
* Inventory
To be cross-collateralized with Loans #2 and #3 above.
Guaranties The loan will be supported by the unsecured personal
guaranties of Joseph Antonini and Mario Andretti, each limited
to 50% of the loan balance.
Other Fees Borrower agrees to pay all out-of-pocket fees and closing
costs, including, but not limited to, appraisal, filing,
recording, title, and attorney fees.
Insurance Borrower must maintain hazard insurance naming Comerica as
mortgagee or loss payee on any assets taken as collateral by
Comerica.
Financial Borrower agrees to provide such financial information as
Information Comerica Information shall reasonably request from time to
time, including annual financial statements and complete
federal tax returns for the Borrower and Guarantor(s).
Conditions As a condition to funding these loans, the following
requirements must be met:
* Completion of the initial public offering of the preferred
stock under SEC Registration No. 333 with a minimum capital
raise of $3,000,000
* Copies of invoices of equipment purchased since December 31,
1997 and to be purchased over the next six months
* Details of 12/31/96 and 12/31/97 operating expenses
* Completion of construction for clear title
* Title insurance coverage satisfactory to the Bank
* A survey satisfactory to the Bank
* Flood insurance coverage if required by the Flood Disaster
<PAGE>
Protection Act of 1973
* Re-certification of appraisal satisfactory to the Bank
* Receipt of satisfactory Phase I environmental audit
* Receipt of complete copies of last two years federal tax
returns of Joseph Antonini
* Evidence of debt repayment for refinances
* Opening of depository accounts at Comerica Bank
* Corporate papers and such documentation as required by the
Bank's legal counsel in the closing of these loans
Documentation AS A CONDITION TO FUNDING THIS CREDIT FACILITY, COMERICA MUST
BE PROVIDED WITH ALL DOCUMENTS AND INFORMATION REQUIRED BY
COMERICA, IN FORM AND IN SUBSTANCE, SATISFACTORY TO COMERICA.
A FURTHER CONDITION OF ADVANCING UNDER THIS CREDIT FACILITY IS
COMERICA'S CONTINUED SATISFACTION WITH THE BORROWERS FINANCIAL
CONDITION, OPERATIONS, AND ECONOMIC ENVIRONMENT WHICH MAY BE
REVIEWED BY COMERICA AT ANY TIME.
If the foregoing terms and conditions are agreeable to Borrower, please
indicate your acceptance of this Commitment by signing below where indicated
and return this letter to my attention within 30 days from the date of this
letter. If your written acceptance is not received by me within said period
of time, this Commitment shall automatically become null and void. This
Commitment may only be accepted as drawn, and may not be accepted in part,
conditionally or subject to modification. The loan must be fully closed, if
at all, on or before October 31, 1998. Neither this Commitment nor any rights
under the Commitment are assignable, in whole or in part, voluntarily by
operation of law or otherwise.
I appreciate this opportunity to enhance your banking relationship with
Comerica Bank's Private Banking division. Please call me at 248-901-4603 if
you have any questions regarding the terms of this Commitment or the closing
of this transaction.
Sincerely,
/s/ Lora McEachern
- ------------------
Lora McEachern
ACCEPTANCE
The undersigned hereby accept(s) this Commitment and agree(s) to be fully
bound by the terms and conditions set forth therein.
Dated 7/31 , 1998.
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For AWG, Ltd.
By: /s/ Joseph Antonini Its: Chairman
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Joseph Antonini
10.1 CONSENT OF DELOITTE & TOUCHE
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 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
October 30, 1998
